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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, 1998.
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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 000-23657
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ASTROPOWER, INC.
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( Exact name of registrant as specified in its charter)
DELAWARE 51-0315869
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
SOLAR PARK, NEWARK, DE 19716-2000
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(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code (302) 366-0400
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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. [X] Yes [ ] No
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. [ ]
As of March 19, 1999, 8,607,368 shares of $0.01 par value common stock were
outstanding. The aggregate market value of shares held by non-affiliates as of
March 19, 1999 was $65,752,176 based on the bid price of the Common Stock on
that date.
Documents incorporated by reference and the Part of the Form 10-K into which
the document is incorporated are as follows: Registrant's definitive proxy
statement for its 1999 Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission on or before April 30, 1999 (incorporated
by reference under Part III).
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PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements that are
made pursuant to the Safe Harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements involve risks, uncertainties and
assumptions as described from time to time in Registration Statements, Annual
Reports, and other periodic reports and filings of the Company filed with the
Securities and Exchange Commission. All statements, other than statements of
historical facts, which address the Company's expectations of sources of capital
or which express the Company's expectation for the future with respect to
financial performance or operating strategies, including statements with respect
to Year 2000 Compliance, can be identified as forward looking statements. As a
result, there can be no assurance that the Company's future results will not be
materially different from those described herein as "believe," "anticipated,"
"estimated," or "expected," which reflect the current views of the Company with
respect to future events. We caution readers that these forward looking
statements speak only as of the date hereof. The Company hereby expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any such statements to reflect any change in the Company's
expectations or any change in events, conditions or circumstances on which such
statement is based.
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 of 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 1998 worldwide solar electric power industry shipments at
153 MW, corresponding to system revenues of approximately $2.3 billion. Over the
18 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 22% from 1997 to 1998. 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. 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.
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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.
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 1998 at the module level were estimated to be approximately $610 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, 1998 industry revenue at the system level is estimated to be $2.3
billion.
SOLAR ELECTRIC POWER PRODUCTS
[GRAPH OF SOLAR ELECTRIC POWER PRODUCTS APPEARS HERE]
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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 ingot-forming
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.
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 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" by 24").
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.
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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 commenced production in a second manufacturing facility in 1998.
The Company is continuing to scale up the production volumes in this second
facility and continues to expand the capacity of its first solar cell
manufacturing line. These two expansions will approximately double the
Company's aggregate production capacity over the next 12 months. The Company is
also planning significant additional capacity expansion to come online in 2001.
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 addition strategy to diversity its customer base geographically and
across all major market segments.
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) create 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" wafers to 6" wafers, and most recently to 8" wafers;
and (ii) larger solar cells are generally more cost effective, since per-unit
handling and processing costs are spread over more watts per solar cell, and
since certain module assembly costs can be allocated over more watts.
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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.
HISTORICAL EVOLUTION OF ASTROPOWER'S SINGLE CRYSTAL SILICON SOLAR CELLS
[CHART OF HISTORICAL EVOLUTION OF ASTROPOWER SINGLE
CRYSTAL SILICON SOLAR CELLS APPEARS HERE]
<TABLE>
<CAPTION>
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<S> <C> <C> <C>
Product AP-104 AP-105 AP-106
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Introduction date 1991 1993 1995
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Nominal size 4" 5" 6"
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Nominal power (watts) 1.4 2.0 3.3
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</TABLE>
The AP-225 is the Company's first Silicon-Film(TM) solar cell to be produced in
volume. The Company has begun to supply its key solar cell customers with AP-225
Silicon-Film(TM) samples, and formally introduced this product in the first half
of 1998. The Company has introduced 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.
PLANNED EVOLUTION OF ASTROPOWER'S SILICON-FILM(TM) SOLAR CELLS
[CHART OF PLANNED EVOLUTION OF ASTROPOWER'S SILICON-FILM(TM)
SOLAR CELLS APPEARS HERE]
<TABLE>
<CAPTION>
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<S> <C> <C>
Product AP-225 Large Area Solar Cell
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Nominal size 6" 12" x 24"
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Nominal power (watts) 2.5 (approximately) 20
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</TABLE>
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
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strategy into the marketing message printed on its promotional material, which
reads: "AstroPower--The Large Solar Cell Company."
The Company plans to capitalize on the scaleability of the Silicon-
Film(TM) process by developing solar cell configurations larger than 6". The
Company has fabricated 12" by 24" 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 this 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" 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" single crystal solar cells and is rated at 120 watts. The Company
has sold 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.
PANELS. The Company has 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.
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 1998 industry shipments
into these market segments.
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<TABLE>
<CAPTION>
ESTIMATED 1998 % OF TOTAL
MARKET SEGMENT SHIPMENTS SHIPMENTS
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<S> <C> <C>
Remote Electric Power 107 MW 71%
Communications and
Transportation
Infrastructure 51 MW 34%
Village & Home 56 MW 37%
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Grid-Connected Power 38 MW 24%
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Consumer Electronics 8 MW 5%
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</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.
<TABLE>
<CAPTION>
SELECTED SOLAR ELECTRIC POWER APPLICATIONS AND USES IN THE REMOTE ELECTRIC POWER MARKET SEGMENT
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<S> <C>
Communication and Transportation . Repeater stations for line-of-sight data communication radio-links
Infrastructure . Repeater stations on fiber-optic data transmission lines
. 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 signs used at highway construction sites
. Lighting systems for compounds, streets, parking lots, billboards and signs
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Village & Home Applications . "Solar Home Systems" supplying basic services such as light, 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
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</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
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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.
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 $73 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.
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<TABLE>
<CAPTION>
NUMBER OF THIS TYPE IN THE
COMPANY'S CURRENT TOP TEN
CUSTOMER TYPE CUSTOMER DESCRIPTION CUSTOMERS
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<S> <C> <C>
MODCO Purchases solar cells from the Company and assembles them into finished 6
modules
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System Integrator Purchased finished modules from the Company and incorporates them into 2
solar electric power systems.
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Distributor Purchased finished modules from the Company and resells them to lower 2
volume users including home owners, OEMs and other professional
customers.
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</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.
Sales to the Company's ten largest product customers accounted for approximately
46.0%, 68.0%, and 73.0% of total revenues in fiscal 1996, 1997 and 1998,
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. During the year ended December 31, 1997, Solar Fabrik, an independent
MODCO based in Germany; Golden Genesis Company (formerly 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. During fiscal 1998, Atersa and Solar Fabrik accounted for 17.6%
and 14.3% of the Company's total revenues respectively. No other product
customers represented 10% or more 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 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, 1997 and 1998, the approximate
geographic breakdown of product revenue from such customers is shown in the
table below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
REGION DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
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<S> <C> <C> <C>
North America 13.2% 26.8% 21.6%
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Europe 49.4% 55.9% 62.7%
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Africa 6.6% 5.3% 9.1%
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Asia 30.7% 12.0% 6.6%
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</TABLE>
The Company anticipates that international customers will continue to account
for the majority of product sales for the foreseeable future.
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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
primarily handled by an internal sales force based in the Company's offices in
Newark, Delaware. In. 1998, the Company established a sales office in California
to assist the development of the residential on-grid system market. California
was selected as the site for this office due to state programs supporting such
systems.
MANUFACTURING AND RESEARCH FACILITIES
The Company's research and development and certain manufacturing facilities are
currently located at its Newark, Delaware headquarters. The recycled wafer solar
cell line is located at this facility. The Company's module manufacturing
operation and the Silicon-Film(TM) production line have been located in its
second manufacturing facility since the second quarter of 1998. The
manufacturing facilities include a full complement of equipment for solar cell
and module manufacturing and are continually upgraded to improve capacity and
product quality. Included in both facilities 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 coatings on solar cells, and a solar cell
tester. The Company's second facility contains tabbing/stringing, lamination and
test equipment for assembling modules.
Initial production from the new plant began in the second quarter of 1998 and is
expected to reach capacity in 1999. The Company plans additional major capacity
expansion in 2001 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 contacts;
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.
11
<PAGE>
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.
CORNING INCORPORATED. In August 1997, the Company and Corning entered into
agreements under which the Company borrowed $5.0 million and which provided that
Corning would provide research, development, engineering and manufacturing
assistance to the Company for a three year period. The two companies were to
work jointly to accelerate the implementation and ramp-up of the new
manufacturing facility for the Company to produce photovoltaic solar cells and
modules based on the Company's Silicon-Film(TM) technology.
The $5.0 million borrowed from Corning was to be used towards the engineering,
design, lease, and construction 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. As part of the research,
development, engineering, and manufacturing assistance agreement, Corning was
granted options to purchase 119,000 shares of the Company's Common Stock for
future consulting services.
Corning's investment in AstroPower was part of a strategic investment by Corning
involving several companies in the energy generation and storage fields.
Corning subsequently decided to discontinue the energy program, providing
AstroPower with an opportunity to prepay the loan. Corning advised AstroPower
that its action was based entirely on Corning's desire to focus on its core
operations and did not reflect in any way on AstroPower's proprietary Silicon-
Film(TM) technology, which Corning said consistently met or exceeded its
expected performance. Corning provided the Company with valuable advice and
assistance during the planning and fit-up stages of the new factory.
On October 9, 1998 the Company repaid the four-year note. The repayment
terminated Corning's right to convert the note into approximately
1,111,111 shares of AstroPower Common Stock and also terminated other agreements
relating to new technology, 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.
In connection with the repayment, the options to purchase 119,000 shares of the
Company's Common Stock were cancelled.
12
<PAGE>
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
installed 25 pilot systems (approximately 100 kW total) in several locations
around the country. All of these systems utilized 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 and
performance advances are developed. The Company also believes that while a
single technology (crystalline silicon) has been dominant 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 copper 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
expended for research, development and manufacturing engineering in the years
ended December 31, 1996, 1997 and 1998 were $3.3 million, $3.5 million, and $3.7
million respectively. Of those amounts, approximately $2.6 million, $2.5
million and $2.3 million respectively, were externally
13
<PAGE>
funded and are a component of contract revenue and approximately $775,000, $1.0
million and $1.4 million respectively were internally funded expenditures by the
Company.
The Company's research and development effort is divided into two areas:
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.
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
eleven U.S. patents in the field of photovoltaics and had four patents pending
as of December 31, 1998. Seven of the eleven U.S. patents that have been issued
and three of the four patents that are pending relate to the Silicon-Film(TM)
product design and manufacturing process. Of the remaining four patents that
have been issued, three 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
14
<PAGE>
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.
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.
15
<PAGE>
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, 1998 totaled $12.4
million. Backlog for the Company's research contracts as of December 31, 1998
totaled $3.6 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 19, 1999, the Company had 276 full time employees, of whom 37 were
engaged in research and development, 212 in manufacturing, 8 in sales and
marketing and 19 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.
Twelve 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.
16
<PAGE>
ITEM 2. PROPERTIES
From July 1991 through January 1998, all of 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
1998 was $209,200 and increases approximately 6% each year. See "Note 5 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 to house its 9 MW plant. This
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 was 10 years with two five year renewal options. In
January 1999, the Company entered into an agreement for an additional 20,000
square feet in this facility. The commencement date for the amended lease is
May 1, 1999. The existing lease for this facility will be extended by one year
to become coterminous with the new lease.
The annual rental payment for the first year of the amended lease for 80,300
square feet is $381,900 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 $82,800. 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.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any 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.
18
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
<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".
The following table sets forth for the periods indicated the high and low bid
prices for the Company's Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <C> <C>
1998
First Quarter (from February 13, 1998) $10.625 $6.000
Second Quarter $10.250 $7.625
Third Quarter $ 9.750 $6.125
Fourth Quarter $ 9.625 $5.875
1999
First Quarter (through March 19, 1999) $14.125 $8.500
</TABLE>
As of March 19, 1999, there were approximately 312 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.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1996, 1997 and
1998 and for each of the three years in the period ended December 31, 1998 have
been derived from the audited Financial Statements of the Company included
elsewhere in this Form 10-K. The selected financial data as of December 31,
1994 and 1995 and for each of the two years in the period ended December 31,
1995 are derived from audited financial statements not included herein. 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,
(in thousands, except per share data)
------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES
Product sales......................................... $ 3,434 $ 5,356 $ 6,237 $13,095 $20,206
Research contracts.................................... 3,676 4,589 4,346 3,512 2,953
------- ------- ------- ------- -------
Total revenues...................................... 7,110 9,945 10,583 16,607 23,159
COST OF REVENUE:
Cost of product sales................................. 2,954 4,483 6,896 9,311 14,942
Cost of research contracts............................ 2,299 3,029 2,580 2,540 2,297
------- ------- ------- ------- -------
Total cost of revenues.............................. 5,253 7,512 9,476 11,851 17,239
------- ------- ------- ------- -------
Gross profit........................................ 1,857 2,433 1,107 4,756 5,920
OPERATING EXPENSES:
Product development costs............................. 220 314 776 1,007 1,392
General and administrative expenses .................. 1,172 1,469 1,859 1,972 2,496
Selling expenses...................................... 377 444 660 854 951
------- ------- ------- ------- -------
Operating income (loss)............................. 88 206 (2,188) 923 1,081
OTHER EXPENSE (INCOME):
Interest expense...................................... 42 115 169 369 252
Other expense (income)................................ 29 (7) 6 (118) (598)
------- ------- ------- ------- -------
Income (loss) before income taxes 17 98 (2,363) 672 1427
INCOME TAX EXPENSE (BENEFIT)............................ - - - 20 (985)
------- ------- ------- ------- -------
Net income (loss)..................................... $ 17 $ 98 $(2,363) $ 652 2,412
======= ======= ======= ======= =======
Net income (loss) per share:
Basic................................................. $0.01 $0.03 $(0.64) $0.18 $0.30
Diluted............................................... $0.01 $0.02 $(0.64) $0.13 $0.28
Number of shares used in net income (loss)
per share calculation:
Basic................................................. 3,673 3,697 3,700 3,710 7,956
Diluted............................................... 5,356 5,362 3,700 6,220 9,572
December 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
BALANCE SHEET DATA: ------------ ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Working capital (deficiency)............................ $ 1,309 $ 1,420 $ (970) $ 5,608 14,839
Total assets............................................ 7,148 8,615 7,887 15,115 28,366
Short-term debt......................................... 264 812 955 316 -
Long-term debt.......................................... 250 651 528 6277 -
Total liabilities....................................... 2,657 3,894 4,948 11,356 5,103
Redeemable Convertible Preferred Stock.................. 5,798 5,798 5,798 5,798 -
Total stockholders' equity (deficit).................... (1,308) (1,077) (2,860) (2,039) 23,263
</TABLE>
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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, accounting for 87% of total revenue for the year ended December 31,
1998.
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's future plans contain significant
revenues from its Silicon-Film(TM) manufacturing and sales, 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. 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.
22
<PAGE>
For the year ended December 31, 1998, 78% 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. Although the Company has
received final written acceptance of its overhead rates through 1993, it has
been advised that the Defense Contract Audit Agency is disputing certain
elements of those submissions as well as those overhead rates for 1994 and 1995.
The dispute is centered on the effect of the Company's manufacturing operations
on its government contract overhead rates during the years of transition from a
contract research and development organization to commercial manufacturing. The
overhead rates for 1996 have been submitted, but have not yet been audited.
This dispute does not affect the Company's overhead rates for 1997 and 1998,
inasmuch as the Company revised its methodology for determining overhead rates.
It is management's opinion that adjustments to revenue, if any, will not have a
material adverse effect on the Company's business and financial condition, but
may impact future results of operations.
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.
23
<PAGE>
The following table sets forth selected financial data as a percentage of total
revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Product sales.............................. 58.9% 78.9% 87.2%
Research contracts......................... 41.1 21.1 12.8
----- ----- -----
Total revenues........................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Product sales.............................. 65.1 56.1 64.5
Research contracts......................... 24.4 15.3 9.9
----- ----- -----
Total cost of revenues................... 89.5 71.4 74.4
----- ----- -----
Gross profit................................. 10.5 28.6 25.6
Product development expenses................. 7.3 6.1 6.0
General and administrative expenses.......... 17.7 11.9 10.8
Selling expenses............................. 6.2 5.1 4.1
----- ----- -----
Income (loss) from operations................ (20.7) 5.5 4.7
Other expense (income)....................... 1.6 1.5 (1.5)
----- ----- -----
Net income (loss) before income taxes........ (22.3) 4.0 6.2
Income tax expense (benefit)................. - 0.1 (4.3)
----- ----- -----
Net income (loss)............................ (22.3)% 3.9% 10.5%
===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Total revenues for the year ended December 31, 1998 were $23.2
million, an increase of $6.6 million, or 39.5%, from $16.6 million for the year
ended December 31, 1997. Product sales for the year ended December 31, 1998
were $20.2 million, an increase of $7.1 million, or 54.3%, from $13.1 million
for the year ended December 31, 1997. The increase in product sales was
attributable to increased levels of production from the addition of a second
manufacturing facility in the first half of 1998 as well as 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, 1998 was $3.0 million, a decline of $559,000, or
15.9%, from $3.5 million for the year ended December 31, 1997. The decline in
research contract revenue, which was expected, was primarily attributable to
continued reduction of 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, 1998 was $5.9
million, an increase of $1.2 million, or 24.5% from $4.8 million for the year
ended December 31, 1997. Gross profit on product revenues for the year ended
December 31, 1998 was $5.3 million, an increase of $1.5 million from $3.8
million for the year ended December 31, 1997. Gross profit margin on product
24
<PAGE>
revenues for the year ended December 31, 1998 was 26.1%, as compared to 28.9%
for the year ended December 31, 1997. The change in product gross margin was
affected by the Company's expansion into a second manufacturing facility.
During the first half of 1998, the Company incurred start-up costs such as the
hiring and training of new employees and facility operating costs, but generated
little revenue to offset such costs. In the second half of 1998, the quantities
of product manufacturing increased and generated revenues, but the gross margins
remained below those of the Company's other manufacturing facility. The Company
expects further improvement in the product gross margins in 1999 as the
production levels in the 9 MW facility continue to increase. Product gross
margins in the fourth quarter were also affected by disruptions to the
manufacturing process caused by the installation of new manufacturing equipment,
the qualification of new vendors and the large numbers of new employees required
to be hired and trained. These issues are expected to continue to negatively
affect the Company's financial results for the first half of 1999.
Gross profit on research contract revenues for the year ended December 31, 1998
was $656,000, a decrease of $316,000, or 32.5%, from $972,000 for the year ended
December 31, 1997. Gross profit margin on research contracts revenue for the
year ended December 31, 1998 was 22.2% as compared to 27.7% for the year ended
December 31, 1997. 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 overhead expenses that were previously allocated and billed to government
contracts.
Product Development Expenses. Product development expenses for the year ended
December 31, 1998 were $1.4 million, an increase of $385,000, or 38.3%, from
$1.0 million for the year ended December 31, 1997. The increase in product
development expenses was attributable to increased levels of engineering and
manufacturing support dedicated to the development of the Silicon-Film(TM)
production process.
General and Administrative Expenses. General and administrative expenses for
the year ended December 31, 1998 were $2.5 million, an increase of $524,000 or
26.6% from $2.0 million in 1997. The increase was due to increased salary
expense due to additional positions to support the Company's growth, costs of
being a public company (legal and accounting fees, liability insurance,
printing, shareholders communications) offset by a lower level of employee
bonuses.
Selling Expenses. Selling expenses for the year ended December 31, 1998 were
$951,000, an increase of $97,000, or 11.4%, from $854,000 for the year ended
December 31, 1997. The increase in selling expenses was attributable to
increased salary, advertising and travel expenses offset by the elimination of
sales commissions paid to third parties.
Interest Expense. Interest expense for the year ended December 31, 1998 was
$252,000, a decrease of $117,000, or 31.7% from $369,000 for the year ended
December 31, 1997. The decline in interest expense was attributable to a
reduction in the Company's level of indebtedness, including the repayment of
bank debt in March 1998 and the repayment of the $5.0 million convertible
promissory note in October 1998.
Interest Income. Interest income for the year ended December 31, 1998 was
$599,000 as compared with interest income of $114,000 for the year ended
December 31, 1997. The increase was attributable to increased cash balances and
related levels of interest income as a result of the proceeds of the Company's
initial public offering.
Income Taxes. An income tax benefit of $985,000 was recorded for the year ended
December 31, 1998 as compared with $20,000 of expense for the year ended
December 31, 1997. The 1998 benefit represents the change in the valuation
25
<PAGE>
allowance pertaining to the Company's net operating loss carry forwards. The
1997 expense represents the Company's Alternative Minimun Tax Liability.
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 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 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.
26
<PAGE>
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.
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 convertible note issued to
Corning.
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.
27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $14.8 million, and $5.6 million, as of
December 31, 1998 and 1997, respectively. The Company had cash and cash
equivalents of $6.5 million and $4.9 million for the same respective periods.
Net cash provided by (used in) operating activities was ($3.1 million), $590,000
and $367,000 for the years ended December 31, 1998, 1997, and 1996
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 $5.5 million, $894,000 and $970,000
for the years ended December 31, 1998, 1997 and 1996 respectively, all of which
represented expenditures for capital equipment. The increase in expenditures
during 1998 was primarily due to the outfitting of the second manufacturing
facility. As of December 31, 1998, the Company's outstanding commitments for
capital expenditures aggregated $464,000.
Net cash provided by financing activities was $10.2 million, $5.2 million and
$599,000 for the years ended December 31, 1998, 1997 and 1996, respectively. In
February 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 net
proceeds to the Company of approximately $16.7 million after deducting
underwriting discounts and commissions and offering costs paid by the Company.
In August 1997, the Company issued a convertible note for $5 million to
Corning. On October 9, 1998 the Company repaid the $5 million convertible
promissory note. As part of this transaction, related research and development
and security agreements were terminated. Options to purchase 119,000 shares of
the Company's common stock were cancelled and rights of first refusal with
respect to financing, merger, licensing, and sales of assets were terminated.
28
<PAGE>
Approximately $4.3 million of the amount advanced by Corning was used towards
the funding of the Company's new manufacturing facility, including plant,
equipment and working capital. The cash provided by financing activities for the
year ended December 31, 1996 represented private placements of securities and
bank debt.
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 was fully credited to the customer against
shipments during the term of the agreement.
During 1998 the Company entered into an agreement with a financial institution
for a $1 million line of credit secured by accounts receivable and bearing
interest at the prime rate. In addition, the Company has established a $3
million revolving credit facility with the same financial institution that bears
interest at the prime rate and will be secured by accounts receivable,
inventory, and machinery and equipment. These facilities expire in September
2001, and there were no borrowings against these facilities at December 31,
1998.
The Company believes that cash generated from operations, its current cash
balance, 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 18 months.
INCOME TAXES
Net operating loss carryforwards (NOL's) totaling approximately $4.1 million are
available through 2012 to reduce federal and state taxable income as of December
31, 1998. During 1998 the Company made the determination that it is more likely
than not that the tax benefit of the NOL will be realized and accordingly
eliminated the valuation allowance for financial reporting purposes.
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.
29
<PAGE>
YEAR 2000
The Company's current data processing systems and certain embedded processing
systems are not year 2000 compliant. The Company has developed and is currently
executing a comprehensive risk-based plan designed to make its computer systems,
those certain embedded processing systems, applications and facilities Year 2000
ready. The plan covers four stages including (i) inventory (ii) assessment,
(iii) remediation, and (iv) testing and certification. At year end 1997, the
Company had substantially completed the inventory stage for its Company-owned
systems and applications. The assessment and remediation processes are currently
underway and the Company is utilizing both internal and external resources to
reprogram, or replace where necessary, and test the software for Year 2000
modifications. The remediation process is targeted to be largely completed by
June 30, 1999. Testing and certification of these systems and applications are
targeted for completion by September 30, 1999.
The Company's ongoing transformation from a government research and development
organization to a manufacturing company has necessitated system enhancements to
accommodate this growth. The Company is therefore addressing the Year 2000 issue
through these planned system augmentations. Total Year 2000 costs for the
Company-owned systems and applications were approximately $250,000 in 1998 and
currently estimated to be approximately $250,000 in 1999, which are expected to
be funded through operating cash flows. A majority of these costs are currently
believed to be incremental costs that will not recur in the Year 2000 or
thereafter.
The Company is initiating communications with its critical third party
relationships to determine the extent to which the Company may be vulnerable to
such parties' failure to resolve their own Year 2000 issues. Where practicable,
the Company will assess and attempt to mitigate its risks with respect to the
failure of these entities to be Year 2000 ready through the development of
appropriate contingency plans. The effect, if any, on the Company's results of
operations from the failure of such parties to be Year 2000 ready, is not
presently reasonably estimable.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company has adopted this Statement effective
January 1, 1998 and has no components of other comprehensive income to report.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). This Statement established standards for reporting information
about operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosure about
products and services, geographic areas and major customers. The Company adopted
this statement on January 1, 1998, as required. The adoption of this Statement
did not affect results of operations, financial conditions or long-term
liquidity.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Company intends to adopt
this statement in its 1999 Annual Report as required. The adoption of SOP 98-1
will not have a material impact on The Company's results of operations or
financial condition.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company
plans to adopt this statement in 2000 as required. As of December 31, 1998, the
Company had no derivative instruments or hedging activities.
30
<PAGE>
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.
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
32
<PAGE>
PART III
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Note: The information pursuant to items 10, 11, 12 and 13 is omitted from this
report (in accordance with Federal Instruction G for Form 10-K), since the
Company is filing with the Commission (by no later than April 30, 1999), a
definitive proxy statement pursuant to Regulation 14A, which involves the
election of directors at the annual shareholders' meeting of the Company,
expected to be held on June 16, 1999.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K
(a) 1. Financial Statements
- Independent Auditors' Report
- Balance Sheets - December 31, 1998 and 1997
- Statements of Operations - Years Ended December 31, 1998, 1997, and
1996.
- Statements of Stockholders' Equity (Deficit) - Years ended
December 31, 1998, 1997 and 1996.
- Statements of Cash Flows - Years ended December 31, 1998, 1997 and
1996.
- Notes to Financial Statements
2. Financial Schedules attached hereto are as follows:
- Independent Auditors' 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, the Registration Statement (No. 333-63021) on Form
S-8 filed on September 8, 1998 and the Registration Statement (No. 333-
68961) on Form S-8 filed on December 15, 1998.
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.
34
<PAGE>
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.
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.
23 Consent of KPMG LLP.*
27.1 Financial Data Schedule.*
* Filed herewith
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 31, 1999 By: /s/Allen M. Barnett
----------------- ---------------------------------
Allen M. Barnett
Chief Executive Officer,
President and Director
Date: March 31, 1999 By: /s/Thomas J. Stiner
----------------- ----------------------------------
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 31, 1999.
/s/Allen M. Barnett /s/Gilbert Steinberg
- -------------------------- Director --------------------------- Director
Allen M. Barnett Gilbert Steinberg
/s/George S. Reichenbach /s/Clare E. Nordquist
- -------------------------- Director --------------------------- Director
George S. Reichenbach Clare E. Nordquist
/s/George W. Roland /s/Charles R. Schaller
- -------------------------- Director --------------------------- Director
George W. Roland Charles R. Schaller
<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, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Wilmington, DE
February 22, 1999
F-1
<PAGE>
ASTROPOWER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
ASSETS 1998 1997
-------- --------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (including restricted cash of
$4,788,519 at December 31, 1997)................................. $ 6,545,095 4,908,177
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$70,695 in 1998 and $72,962 in 1997.............................. 6,531,144 3,326,200
Employee Receivables............................................... 84,121 10,191
Other, including amounts due from stockholder...................... 32,113 25,681
Inventories........................................................... 3,596,676 1,602,321
Prepaid expenses...................................................... 159,948 350,471
Deferred tax asset.................................................... 1,796,338 -
--------------- ---------------
Total current assets........................................ 18,745,435 10,223,041
PROPERTY AND EQUIPMENT:
Machinery and equipment............................................... 10,448,628 6,856,031
Furniture and fixtures................................................ 334,186 152,617
Leasehold improvements................................................ 917,698 205,298
Construction in progress.............................................. 1,575,163 536,370
--------------- ---------------
13,275,675 7,750,316
Less accumulated depreciation and amortization........................ (3,654,796) (2,858,195)
--------------- ---------------
9,620,879 4,892,121
--------------- ---------------
Total assets................................................ $ 28,366,314 15,115,162
============== ==============
</TABLE>
F-2
<PAGE>
ASTROPOWER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1997
- ----------------------------------------------------- ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.................................... $2,629,068 2,314,495
Note payable - stockholder.......................... - 58,000
Note payable - bank................................. - 203,357
Current maturities of long-term debt................ - 55,000
Accrued payroll and payroll taxes (includes
$185,910 in 1998 and $185,161 in 1997 due to the
Company's President and Chief Executive Officer)... 963,243 978,256
Accrued expenses.................................... 313,640 394,564
Advance from customer............................... - 610,891
---------- -----------
Total current liabilities.................. 3,905,951 4,614,563
OTHER LIABILITIES:
Long-term debt, excluding current maturities........ - 6,277,174
Deferred tax liability.............................. 801,452 -
Deferred compensation and other (including amounts
due to officers and a stockholder)................. 396,027 463,900
---------- -----------
1,197,479 6,741,074
---------- -----------
Total liabilities.......................... 5,103,430 11,355,637
---------- -----------
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series A Convertible Preferred Stock, 1,331,250
shares authorized in 1997; 1,309,626 shares issued
and outstanding in 1997, $.01 per share par value,
liquidation preference of $8,808,188,
redeemable, 8% dividend rate, non-cumulative....... - 5,798,725
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Series B Convertible Preferred Stock, 750,000 shares
authorized in 1997; 336,409 issued and outstanding
in 1997, $.01 per share par value, 8% dividend rate,
non-cumulative..................................... - 3,364
Common Stock, 25,000,000 shares authorized;
8,572,455 in 1998 and 3,769,772 in 1997 shares
issued and outstanding, $.01 per share par value... 85,725 37,698
Additional paid-in capital.......................... 25,956,474 3,288,017
Note receivable..................................... - (79,125)
Unearned compensation............................... (245,718) (343,743)
Accumulated deficit................................. (2,533,597) (4,945,411)
----------- -----------
Total stockholders' equity (deficit)......... 23,262,884 (2,039,200)
----------- -----------
Total liabilities and stockholders'
equity (deficit)........................... $28,366,314 15,115,162
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
ASTROPOWER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
REVENUES:
Product sales................................ $20,205,913 13,094,871 6,237,349
Research contracts........................... 2,953,196 3,511,898 4,346,118
----------- ---------- ----------
Total revenues...................... 23,159,109 16,606,769 10,583,467
COST OF REVENUES:
Product sales................................ 14,942,121 9,311,140 6,896,109
Research contracts........................... 2,296,895 2,539,915 2,579,994
----------- ---------- -----------
Total cost of revenues.............. 17,239,016 11,851,055 9,476,103
----------- ---------- -----------
Gross profit........................ 5,920,093 4,755,714 1,107,364
OPERATING EXPENSES:
Product development expenses................. 1,392,251 1,006,979 775,963
General and administrative expenses.......... 2,495,838 1,972,144 1,858,862
Selling expenses............................. 951,249 853,812 660,468
----------- ---------- -----------
Income (loss) from operations....... 1,080,755 922,779 (2,187,929)
OTHER EXPENSE (INCOME):
Interest expense............................. 252,200 369,233 168,782
Interest income.............................. (598,624) (113,730) (5,685)
Other expense (income)....................... (3) (4,550) 11,959
------------ ---------- ----------
Total other expense (income)........ (346,427) 250,953 175,056
NET INCOME (LOSS) BEFORE INCOME
TAXES............................................. 1,427,184 671,826 (2,362,985)
INCOME TAX EXPENSE (BENEFIT)......................... (984,632) 20,000 0
------------ --------- -----------
NET INCOME (LOSS).................................... $ 2,411,814 651,826 (2,362,985)
=========== ========== ===========
NET INCOME (LOSS) DATA:
Net income (loss) per share - basic.......... $ 0.30 0.18 (0.64)
=========== ========== ===========
Net income (loss) per share - diluted........ $ 0.28 0.13 (0.64)
=========== ========== ===========
Weighted average shares
outstanding - basic...................... 7,956,221 3,710,258 3,699,702
=========== ========== ===========
Weighted average shares
outstanding - diluted.................... 9,572,194 6,220,161 3,699,702
=========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
ASTROPOWER, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------- --------------------- Paid-in Note
Shares Amount Shares Amount Capital Receivable
---------- --------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996...................... 252,001 $ 2,520 3,697,632 $ 36,977 $2,117,529 -
Issuance of Series B Convertible
Preferred Stock, net of issuance costs... 76,908 769 - - 574,736 -
Common Stock issued........................ - - 4,143 41 5,131 -
Net loss................................... - - - - - -
------- ------- --------- -------- ----------- -------
BALANCE, DECEMBER 31, 1996.................... 328,909 3,289 3,701,775 37,018 2,697,396 -
Issuance of Series B Convertible
Preferred Stock........................ 11,250 112 - - 89,888 -
Purchase and retirement of Series B........ -
Convertible Preferred Stock................ (3,750) (37) - - (29,963) -
Common Stock issued........................ - - 67,997 680 113,471 (79,125)
Stock options granted...................... - - - - 417,225 -
Amortization of unearned compensation...... - - - - - -
Net income................................. - - - - - -
------- ------- --------- -------- ----------- -------
BALANCE, DECEMBER 31, 1997.................... 336,409 $3,364 3,769,772 $37,698 $3,288,017 ($79,125)
Conversion of Series A Convertible
Preferred Stock........................ - - 1,309,626 13,096 5,785,629 -
Conversion of Series B
Convertible Preferred Stock............ (336,409) (3,364) 336,409 3,364 -
Common Stock issued........................ - - 3,156,648 31,567 16,781,488
Amortization of unearned compensation...... - - - - - -
Stock options granted...................... - - - - 101,340 -
Repayment of note receivable............... - - - - - 79,125
Net income................................. - - - - - -
------- ------- --------- -------- ----------- -------
BALANCE, DECEMBER 31, 1998.................... - $0 8,572,455 $85,725 $25,956,474 $0
======= ======= ========= ======== =========== =======
Unearned Accumulated
Compensation Deficit Total
------------- ------------ -----------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1996......................... - (3,234,252) (1,077,226)
Issuance of Series B Convertible
Preferred Stock, net of issuance costs...... - - 575,505
Common Stock issued........................... - - 5,172
Net loss...................................... - (2,362,985) (2,362,985)
--------- ----------- -----------
BALANCE, DECEMBER 31, 1996....................... - (5,597,237) (2,859,534)
Issuance of Series B Convertible
Preferred Stock........................... - - 90,000
Purchase and retirement of Series B.............. - -
Convertible Preferred Stock................... - (30,000)
Common Stock issued........................... - - 35,026
Stock options granted......................... (417,225) -
Amortization of unearned compensation......... 73,482 - 73,482
Net Income.................................... - 651,826 651,826
--------- ----------- -----------
BALANCE, DECEMBER 31, 1997....................... ($343,743) ($4,945,411) ($2,039,200)
Conversion of Series A Convertible
Preferred Stock........................... - - 5,798,725
Conversion of Series B
Convertible Preferred Stock............... - - -
Common Stock issued........................... - - 16,813,055
Amortization of unearned compensation......... 98,025 - 98,025
Stock options granted......................... 101,340
Repayment of note receivable.................. - - 79,125
Net income.................................... 2,411,814 2,411,814
--------- ----------- -----------
BALANCE, DECEMBER 31, 1998....................... ($245,718) ($2,533,597) $23,262,884
========= =========== ===========
</TABLE>
See accompanying notes financial statements.
F-5
<PAGE>
ASTROPOWER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
- ------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss)..................................................... $2,411,814 651,826 (2,362,985)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Deferred income taxes.......................................... (994,886) - -
Depreciation and amortization.................................. 796,601 545,066 474,569
Common stock issued for services............................... - 18,500 -
Stock options issued for services.............................. 50,670 - -
Amortization of unearned compensation.......................... 98,025 73,482 -
Changes in working capital items:
Accounts receivable....................................... (3,285,306) (1,313,264) 278,164
Inventories............................................... (1,994,355) (388,133) 921,855
Prepaid expenses.......................................... 190,523 (291,201) 5,587
Accounts payable and accrued expenses..................... 223,649 719,000 595,790
Accrued payroll and payroll taxes......................... (15,013) 313,736 330,684
Advance from customer..................................... (610,891) 277,355 111,260
Other..................................................... (16,822) (16,562) 12,143
------------ ----------- -----------
Net cash provided by (used in) operating
activities................................................. (3,135,591) 589,805 367,067
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................ (5,474,689) (893,920) (970,431)
------------ ----------- -----------
Net cash used in investing activities....................... (5,474,689) (893,920) (970,431)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........................ - 6,033,076 202,097
Net borrowings (repayments) from line of credit................. (203,357) (327,843) 175,000
Repayment of long-term debt..................................... (6,390,174) (594,396) (358,200)
Proceeds from issuance of common stock- stock options........... 229,049 16,525 4,875
Proceeds from issuance of common stock- initial public offering. 16,612,080 - -
Proceeds from issuance of preferred stock....................... - 90,000 575,505
Repurchase of preferred stock................................... - (30,000) -
------------ ----------- -----------
Net cash provided by financing activities............................. 10,247,598 5,187,362 599,277
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 1,636,918 4,883,247 (4,087)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................................................. 4,908,177 24,930 29,017
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............................. $6,545,095 4,908,177 24,930
============ =========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid..................................................... $597,190 160,544 129,555
============ =========== ===========
Taxes paid........................................................ $ 31,000 - -
============ =========== ===========
</TABLE>
OTHER NONCASH FINANCING AND INVESTING ACTIVITIES:
- - 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.
- - On February 19, 1998, the Company converted all shares of its Series A and
Series B Convertible Preferred Stock into 2,194,709 shares of common stock on
a one-for-one basis.
- - During 1998, the Company issued stock options for 119,000 shares of common
stock to Corning Incorporated.
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 operates in only one business segment, as substantially all
of its combined revenues, net income (loss) and assets are derived from the
development, manufacturing, marketing and sale of 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.
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, 1998 and 1997 were
$8,175,354 and $4,776,886 respectively, 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, 1998 and 1997 and 1996, were
$828,009, $176,397, and $303,677 respectively.
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.
F-7
<PAGE>
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.
(2) INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Raw materials $2,995,166 1,199,738
Work-in-process 138,927 210,380
Finished goods 462,583 192,204
------------------- -------------------
$3,596,676 1,602,322
=================== ===================
</TABLE>
F-8
<PAGE>
(3) DEBT
A summary of the Company's long-term debt follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997
------------------- -----------------
<S> <C> <C>
Bank term loans - primary lender; initial interest to be prime
plus 1%; 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
Bank term loan, with interest at prime plus 1.5% 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
7% convertible promissory note due August 19, 2001,
collateralized by certain physical assets, as described in
Note 13 .............................................................. - 5,000,000
------------------- -----------------
- 6,332,174
Less current maturities............................................... - (55,000)
------------------- -----------------
$ - 6,277,174
=================== =================
</TABLE>
On March 19, 1998 the Company repaid the amounts outstanding under its
bank term loans amounting to $1,277,173. Accordingly, $275,000
representing the remaining 1998 payments under these term loans were
excluded from current maturities as of December 31, 1997.
During 1998, the Company entered into a $1 million line of credit
agreement with a financial institution, secured by accounts receivable and
bearing interest at the prime rate. Also during 1998, the Company entered
into a $3 million revolving line of credit facility with a financial
institution. Security for the facility, which bears interest at the prime
rate, is accounts receivable, inventory and property and equipment. These
facilities expire in September 2001. There were no borrowings against these
facitities at December 31, 1998.
(4) INCOME TAXES
An income tax provision (benefit) of ($984,632) and $20,000 was
recorded for the years ended December 31, 1998 and 1997. No income tax
provision was recorded for the year ended December 31, 1996. 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:
F-9
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).................. 485,242 228,421 (803,415)
Utilization of net operating loss carry forwards........... (205,266) (17,685) -
State income tax expense (benefit), net of federal......... (80,651) 20,761 -
Change in valuation allowance.............................. (1,809,315) 135,928 770,392
Change in tax rates........................................ 242,107 - -
Tax liability in excess (less than) in excess of provision. 185,579 (347,425) 33,023
Other...................................................... 197,672 - -
------------------ ------------------ -----------------
Actual tax expense (benefit)............................... $ (984,632) 20,000 -
================== ================== =================
</TABLE>
Income tax expense (benefit) for the years 1998, 1997 and 1996 consists of;
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Current
Federal 10,254 20,000 0
State -- -- --
Deferred
Federal (872,688) -- --
State (122,198) -- --
------------------ ------------------ -----------------
Total income tax expense (benefit) (984,632) 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,
-------------------------------------------------------------------
1998 1997 1996
------------------- ------------------ ------------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred revenue....................................... $ - 242,780 133,000
Advances from customer and accrued expenses............ 417,159 323,698 161,958
Federal and state net operating loss carry forward..... 1,301,454 2,021,628 1,750,000
Other.................................................. 77,725 - -
------------------- ------------------ ------------------
Total gross deferred tax assets........................ 1,796,338 2,588,106 2,044,958
Less valuation allowance............................... - (1,809,315) (1,673,387)
------------------- ------------------ ------------------
Net deferred tax assets ............................... 1,796,338 778,791 371,571
Deferred tax liabilities:
Plant and equipment, due to differences
in depreciation methods and basis...................... (801,452) (778,791) (371,571)
------------------- ------------------ ------------------
Net deferred amount.................................... $ 994,886 - -
=================== ================== ==================
</TABLE>
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, 1998, the Company has net
operating loss carryforwards for federal income tax purposes of
approximately $4.1 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). In January 1998, the Company entered into an
operating lease agreement for a 60,300 square foot facility for its
manufacturing expansion. In January 1999, the Company entered into an
agreement for an additional 20,000 square feet in its second manufacturing
facility. The scheduled cash payments over the next five years differ from
rental expense calculated under the straight-line method. The following
summarizes expected charges
F-10
<PAGE>
to rent expense contrasted with expected cash outflow as required by the
lease agreements for both facilities (including the additional January 1999
Lease):
<TABLE>
<CAPTION>
Expected
Annual Rent Expense Cash Payments
----------------------- ---------------------------
<S> <C> <C>
December 31, 1999.................................... $ 735,020 645,291
December 31, 2000.................................... 664,764 582,326
December 31, 2001.................................... 535,884 476,752
December 31, 2002.................................... 535,884 484,875
December 31, 2003, and thereafter.................... 2,947,362 2,422,317
</TABLE>
In addition, the Company has agreed to fund anticipated renovations to
the facility leased from the University after lease expiration. The
amounts to be paid to the University for this purpose are $26,000 annually
through 2001.
Total rent expense charged to operations for the years ended December
31, 1998, 1997 and 1996 amounted to approximately $595,940,
$242,000 and $219,000 respectively.
(6) RELATED PARTIES
At December 31, 1998 and 1997, the Company owed its President and Chief
Executive Officer $370,696 and $555,482, 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 make
voluntary contributions to the plan. The amount charged to expense for the
years ended December 31, 1998, 1997 and 1996 was $150,000, $145,000 and
$66,800, 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.
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 19, 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.
(9) EMPLOYEE STOCK OPTION PLAN
The Company adopted a Stock Option Plan ("the Plan") in 1989 under
which a total of 1,800,000 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
F-11
<PAGE>
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. Incentive stock
options generally vest over a four-year period, with vesting occurring 25%
per year on the anniversary date of the option award.
Stock option transactions during the years ended December 31, 1996,
1997 and 1998 under the 1989 Plan, are summarized below:
<TABLE>
<CAPTION>
Weighted
Exercise Average
Price Range - Exercise
Shares Per Share Price(1)
----------------- ------------------- ------------
<S> <C> <C> <C>
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
Granted........................ 720,975 $6.00-$10.00 8.57
Exercised...................... (45,730) $6.00-$10.00 3.28
Cancelled...................... (35,570) $6.00-$10.00 6.41
----------------- ------------
Balance, December 31, 1998........ 1,541,113 $5.88
================= ============
</TABLE>
____________
(1) Includes options described below.
The weighted average remaining contractural life for options
outstanding at December 31, 1998 is 7.88 years.
In 1998 the Company adopted the 1998 Non-Employee Directors' Stock
Option Plan ("Directors' Plan"), under which a total of 160,000 shares are
current reserved for issuance to non-employee directors. The Directors'
Plan is administered by a committee of the Board of Directors. The
Directors' Plan provides that the purchase price under the option shall be
the fair market value of the shares of common stock on the date of grant.
During the year ended December 31, 1998, a total of 80,000 stock options
were granted under the Directors' Plan at an exercise price of $10.25 per
share. Of these shares, 20,000 were immediately vested, and the balance
vests in equal shares on the first, second and third anniversary of the
grant, provided that the director remains a director on that date.
The following is a summary of stock options exercisable under the
Company's stock option plans as of December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED AVERAGE
SHARES RANGE PER SHARE EXERCISE PRICE
---------------- -------------------- --------------------
<S> <C> <C> <C>
December 31, 1996............................ 357,825 $0.33 - $ 4.00 $2.88
December 31, 1997............................ 416,476 $0.33 - $ 4.00 $3.39
December 31, 1998............................ 713,125 $0.33 - $10.25 $3.93
</TABLE>
Prior to the adoption of the plans, the Company had a compensatory
stock plan for the issuance of shares to employees and consultants. At
December 31, 1998, 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.
F-12
<PAGE>
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 years
ended December 31, 1998 and 1997 was $98,025 and $73,482 respectively. The
unamortized amount of unearned compensation is classified as a contra
equity account in stockholders' equity (deficit).
FASB Statement 123 requires the disclosure of certain proforma
information regarding net income and net income per share. This
information is required to be determined as if the Company had accounted
for its stock option plans under the fair value method of that statement.
The fair value of options granted in 1998 reported below has been estimated
at the date of grant, using a Black-Scholes option pricing model with the
following assumptions:
Expected life (in years) 5.0
Risk-free interest rate 5.5 %
Volatility .50
Assumed dividend yield 0.0 %
The Company's relatively limited period of time as a public company
makes the determination of volatility difficult. For purposes of the FAS
123 calculation, the estimated volatility was determined by reviewing the
volatilities of publicly traded technology companies with similar
characteristics.
As a private entity at December 31, 1997 and 1996, the Company used the
minimum value method for "valuing options" and an interest rate of 6.5%.
For purposes of proforma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's proforma information follows (in thousands, except for per share
information):
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Net income (loss) as reported $2,412 652 (2,363)
Proforma net income (loss) $1,131 464 (2,433)
Proforma basic net income (loss) per share .14 .13 (.66)
Proforma diluted net income (loss) per share .12 .07 (.66)
</TABLE>
(10) GOVERNMENT CONTRACTS
During the years ended December 31, 1998, 1997 and 1996, 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 contract 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, 1998, 1997 and 1996.
Substantially all of the Company's revenues from government contracts
are subject to audit under various federal statutes. Although the Company
has received final written acceptance of its overhead rates through 1993,
it has been advised that the Defense Contract Audit Agency is disputing
certain elements of those submissions as well as those overhead rates for
1994 and 1995. The dispute is centered on the effect of the Company's
manufacturing operations on its government contract overhead rates during
the years of transition from a contract research and development
organization to commercial manufacturing. The overhead rates for 1996 have
been submitted, but have not yet been audited. This dispute does not
affect the Company's overhead rates for 1997 and 1998, inasmuch as the
Company revised its methodology for determining overhead rates. It is
management's opinion that adjustments to revenue, if any, will not have a
material adverse effect on the Company's business and financial condition,
but may impact future results of operations.
Certain of the Company's contracts contain retainage provisions. At
December 31, 1998 and December 31, 1997, retainage amounts included in
accounts receivable were approximately $174,000 and $167,000,
respectively. The Company estimates that approximately 30% of the
retainage amounts at December 31, 1998 will be collected during 1999. At
December 31, 1998 and December 31, 1997, unbilled accounts receivable were
approximately $211,000.
F-13
<PAGE>
(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,
-------------------------------------------------------
1998 1997 1996
------------ -------------- ---------------
<S> <C> <C> <C>
Customer A........................... 13% 21% 41%
Customer B........................... 18% 12% -
Customer C........................... 14% 17% 12%
Customer D........................... - 13% -
Customer E........................... - - 13%
</TABLE>
Customer A represents the federal government. Included in the
December 31, 1998 amount is a total of 15 contracts $2,953,196 administered
by six agencies of the U.S. Government, with contract revenues ranging from
.1% to 13% of total revenues.
During the year ended December 31, 1998, the five largest product
sales customers accounted for approximately 53% of revenues and 61% of
product sales. At December 31, 1998 approximately 73% of accounts
receivable were due from the Company's six largest customers, of which 16%
represented amounts due from agencies of the U.S. government representing
Customer A and 57% represented amounts due from the Company's five largest
product sales customers in 1998. 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 condition.
(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,
----------------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Domestic:............ 22% 27% 14%
EXPORT:
Europe............... 63% 56% 49%
Asia................. 6% 12% 30%
Africa............... 9% 5% 7%
</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 would provide research, development,
engineering and manufacturing assistance to the Company for a three year
period in exchange for options to purchase shares of the Company's common
stock. 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 and granted
options for the purchase of 119,000 shares of common stock in exchagne for
future consulting services.
On October 9, 1998 the Company repaid its four-year $5 million
convertible note to Corning. The repayment terminated Corning's right to
convert the note into approximately 1,111,111 shares of AstroPower Common
Stock and also terminated the R & D Agreement and other agreements relating
to new technology, 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.
In connection with the prepayment, options to purchase 119,000 shares
of Common Stock were cancelled. The fair value of the consulting services
rendered through the date of cancellation was approximately $101,000, of
which $50,000 was charged to expense and $51,000 to property and equipment.
F-14
<PAGE>
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 is 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%, was credited to the customer
during 1997 and 1998. The customer had 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, 1998 and 1997 respectively was $0 and $610,756.
(15) NET INCOME (LOSS) PER SHARE
Basic net income per share is based on the weighted average number of
common shares outstanding. Diluted net income per share is based on the
weighted average number of common shares outstanding and potentially
dilutive shares. The dilutive effect of employee stock options is included
in the computation of Diluted net income per share.
The following table presents the computation of basic and diluted income
(loss) per share:
<TABLE>
<CAPTION>
For the Year Ended December 31
--------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ---------------------------- --------------------------------
Income Average Income Average Income (Loss) 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 $2,411,814 7,956,221 $651,826 3,710,258 $(2,362,985) 3,699,702
Dilutive Effect
Stock Options - 536,609 - 344,786 - -
Convertible Debt 239,314 885,448 157,377 518,460 -
Convertible Preferred Stock - 193,916 - 1,646,657 - -
--------------- ------------ ------------ ---------- ------------- -----------
Diluted $2,651,128 9,572,194 $809,203 6,220,161 $(2,362,985) 3,699,702
=============== ============ ============ =========== ============= ===========
</TABLE>
F-15
<PAGE>
AstroPower, Inc.
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED
CHARGED TO TO DEDUCTIONS-
BEGINNING COSTS AND OTHER ACCOUNTS ENDING
PERIOD ENDED DESCRIPTION BALANCE EXPENSES ACCOUNTS WRITTEN-OFF BALANCE
- --------------- ----------------------- ------------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dec. 31, 1998 Allowance for bad debts (72,962) (30,000) 32,267 (70,695)
Dec. 31, 1997 Allowance for bad debts (47,836) (52,052) 26,926 (72,962)
Dec. 31, 1996 Allowance for bad debts (44,683) (87,680) 84,527 (47,836)
CHARGED
CHARGED TO TO DEDUCTIONS-
BEGINNING COSTS AND OTHER ACCOUNTS ENDING
PERIOD ENDED DESCRIPTION BALANCE EXPENSES ACCOUNTS WRITTEN-OFF BALANCE
- --------------- ----------------------- ------------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Period Ended
Dec. 31, 1998 Deferred tax valuation allowance (1,809,315) 1,809,315 -
Dec. 31, 1997 Deferred tax valuation allowance (1,673,387) (135,928) (1,809,315)
Dec. 31, 1996 Deferred tax valuation allowance (902,995) (770,392) (1,673,387)
</TABLE>
F-16
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
AstroPowers, Inc.
Under date of February 22, 1999, we reported on the balance sheets of
AstroPower, Inc. as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the years
in the three-year period ended December 31, 1998, as contained in the annual
report on Form 10-K for the year 1998. In connection with our audits of the
aforementioned financial statements, we also audited the related financial
statement schedule II Valuation and Qualifying Accounts. 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 LLP
Wilmington, Delaware
February 22, 1999
F-17
<PAGE>
Exhibit 23
Consent of Independent Auditors
The Board of Directors and Stockholders
AstroPower, Inc.
We consent to incorporation by reference in the Registration Statements (No 333-
68961 and 333-63021) on Form S-8 of AstroPower, Inc. of our reports dated
February 22, 1999, relating to the balance sheets of AstroPower, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1998 and the related schedule, which
reports appear in the December 31, 1998 annual report on form 10-K of
AstroPower, Inc.
/s/ KPMG LLP
Wilmington, Delaware
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,545,095
<SECURITIES> 0
<RECEIVABLES> 6,601,839
<ALLOWANCES> 70,695
<INVENTORY> 3,596,676
<CURRENT-ASSETS> 18,745,435
<PP&E> 13,275,675
<DEPRECIATION> 3,654,796
<TOTAL-ASSETS> 28,366,314
<CURRENT-LIABILITIES> 3,905,951
<BONDS> 0
0
0
<COMMON> 85,725
<OTHER-SE> 23,177,160
<TOTAL-LIABILITY-AND-EQUITY> 28,366,314
<SALES> 20,205,913
<TOTAL-REVENUES> 23,159,109
<CGS> 14,942,121
<TOTAL-COSTS> 22,078,354
<OTHER-EXPENSES> (3)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 252,200
<INCOME-PRETAX> 1,427,184
<INCOME-TAX> (984,632)
<INCOME-CONTINUING> 2,411,814
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,411,814
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.28
</TABLE>
