<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NO. 333-86795
PROSPECTUS
2,700,000 Shares
[LOGO OF ASTRO POWER APPEARS HERE]
Common Stock
Of the 2,700,000 shares of common stock being sold in this offering,
AstroPower, Inc. is selling 2,025,000 shares and the selling stockholders are
selling 675,000 shares. We will not receive any of the proceeds from the sale
of shares by the selling stockholders.
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Our common stock is quoted on the Nasdaq National Market under the symbol
"APWR." On October 12, 1999, the last reported sale price for our common stock
on the Nasdaq National Market was $13.5625 per share. See "Price Range of
Common Stock."
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price.................................... $13.375 $36,112,500
Underwriting discounts and commissions................... $ .77 $ 2,079,000
Proceeds to AstroPower, before expenses.................. $ 12.61 $25,535,250
Proceeds to selling stockholders, before expenses........ $ 12.61 $ 8,511,750
</TABLE>
We have granted the underwriters an option for a period of 30 days to
purchase up to 405,000 additional shares of common stock. The underwriters are
severally underwriting the shares being offered. The underwriters expect to
deliver the shares against payment on October 18, 1999.
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Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 7.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
Hambrecht & Quist
CIBC World Markets
FAC/Equities
October 13, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary................................................. 3
Risk Factors....................................................... 7
Forward-Looking Statements......................................... 18
How We Intend to Use the Proceeds from this Offering............... 19
Price Range of Common Stock........................................ 19
Dividend Policy.................................................... 20
Capitalization..................................................... 20
Selected Financial Data............................................ 21
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 22
Business........................................................... 30
Management......................................................... 46
Certain Transactions............................................... 54
Principal and Selling Stockholders................................. 54
Description of Capital Stock....................................... 57
Underwriting....................................................... 59
Legal Matters...................................................... 61
Experts............................................................ 61
Where You Can Find More Information About Us....................... 61
Index to Financial Statements...................................... 62
</TABLE>
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Silicon-Film(TM) and APex(TM) are our trademarks. All other
brand names and trademarks appearing in this prospectus are the
property of their respective holders.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" and our financial statements,
before making an investment decision.
Our Company
We develop, manufacture, market and sell a range of solar electric power
products, including solar cells, modules and panels, for the global
marketplace. Solar cells are semiconductor devices which convert sunlight into
electricity and form the building block for all solar electric power products.
Historically, our products have been used primarily to generate electricity for
users not connected to the utility grid. Such applications include
electrification of rural homes and villages, and power supply for equipment in
the communications and transportation industries. More recently, our products
are also being used by customers already connected to the utility grid as a
clean, renewable source of alternative or supplemental electricity. We are
expanding our joint venture agreement with GPU International, Inc. to generate
and sell wholesale solar electric power.
The electricity industry is currently experiencing significant structural
change. Industry deregulation is promoting customer choice of electric power
provider and introducing retail competition. Additionally, while Europe and
Japan have traditionally supported clean, renewable energy policies, state
governments in the United States are now introducing legislation and
implementing various economic incentives to stimulate the use of renewable
sources of electricity, including solar power. We believe increased retail
competition and the introduction of various economic incentives in domestic and
international markets will continue to stimulate providers to differentiate
their power offerings and to include solar electric power among their power
options.
According to PV Energy Systems, an independent solar energy research firm,
the solar electric power industry shipped an estimated 153 megawatts of power
capacity in 1998, which represented approximately $2.0 billion in equipment
sales. Since 1994, industry shipments have increased at a compound annual
growth rate of 22%, which has been driven by continued worldwide demand in the
off-grid segment and accelerated growth for on-grid applications. During this
period, on-grid shipments have grown at a compound annual growth rate of 65% as
consumers are choosing to install solar systems or purchase solar electric
power. We believe that the continued global restructuring of the electric power
industry will continue to drive growth in the on-grid solar electric power
market.
While solar electric power is often the most cost-effective source of
electric power in selected applications off the utility grid, the broad
utilization of solar electric power on the utility grid has been limited by
production costs. We have optimized several stages in the solar cell
manufacturing process to progressively reduce production costs while increasing
mechanical and electrical yields:
. Silicon wafer sourcing. Our proprietary manufacturing process utilizes
recycled semiconductor wafers that allow us to reduce silicon wafer
cost.
. Equipment and process engineering. Our proprietary equipment and
processes allow us to increase our manufacturing productivity and
ultimately to generate a higher level of power output per production
asset than our competitors. For example, our Silicon-Film(TM) technology
allows us to produce large area silicon sheets in minutes.
. Product design. Our large solar cell design features allow us to
generate more power per solar cell.
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Our focus on silicon wafer sourcing, equipment and process engineering and
product design has allowed us to reduce our production cost per watt and thus
to improve our product gross margins.
Our goal is to become the leading global solar electric power technology
company. To achieve this, we intend to:
Maintain our manufacturing and technology advantage. We intend to continue
to enhance our manufacturing processes and technologies and to introduce
innovative solar electric power products in order to optimize our production
cost per watt.
Rapidly expand manufacturing capacity. We intend to expand our manufacturing
capacity to approximately 25 megawatts by the end of the year 2000 and to
approximately 75 megawatts over the next four years. We intend to capitalize on
our manufacturing expertise and replicable expansion methodology to increase
our manufacturing capacity. Since the beginning of 1998 we have increased our
manufacturing output by approximately 135%, from a rate of 5.5 megawatts per
year for the first quarter of 1998 to a rate of 12.9 megawatts per year for the
second quarter of 1999.
Capitalize on deregulation in the on-grid market. We believe that the
deregulation of the energy industry is creating a favorable environment to
market residential rooftop solar systems to domestic on-grid customers. We
intend to target states that are implementing favorable legislation,
introducing economic incentives and promoting consumer choice. We recently
opened an office in Concord, California to focus on on-grid systems sales.
Expand relationships with module assemblers. In international markets, local
module assemblers are often best positioned to deliver customized solutions and
to compete for local business. We intend to expand our relationships with
selected module assemblers and to offer additional products and services,
including factory design, equipment selection, process training and quality
assurance. We believe this strategy will allow us to broaden our international
reach and to penetrate new markets. We recently agreed to form a joint venture
with Atersa, S.A., a leading Spanish module assembler and systems integrator,
to provide these services.
Pursue strategic relationships. We intend to continue to pursue strategic
relationships to introduce new technologies and products, enter new geographic
markets, attract new customers and pursue additional revenue opportunities.
These relationships may take various forms, including cooperative marketing
agreements, joint ventures and strategic alliances. Through our GPU Solar joint
venture, we are developing capabilities to generate solar electric power in the
United States.
We were incorporated in Delaware in 1989 as a successor to a business that
was organized in 1983. Our executive offices are located at Solar Park, Newark,
Delaware 19716-2000, and our telephone number at that address is (302) 366-
0400. Our website is located at http://www.astropower.com. Information
contained on our website is not part of this prospectus.
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The Offering
<TABLE>
<S> <C>
Common stock offered by us........ 2,025,000 shares
Common stock offered by the
selling stockholders............. 675,000 shares
Common stock to be outstanding
after the offering............... 10,741,871 shares
Use of proceeds................... Expansion of manufacturing capacity,
working capital and other general corporate
purposes, including possible acquisitions.
Nasdaq National Market Symbol..... APWR
</TABLE>
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The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 1999 and does not
include the following:
. 2,182,473 shares of common stock subject to options issued at a weighted
average exercise price of $7.60 per share under our 1989 and 1999 Stock
Option Plans and 1998 Directors Stock Option Plan
. 260,012 shares of common stock reserved for issuance under our 1989 and
1999 Stock Options Plans and 1998 Directors Stock Option Plan
Please see "Capitalization" for a more complete discussion regarding the
outstanding shares of common stock and options to purchase common stock and
related matters.
Unless otherwise indicated, all information in this prospectus assumes that
the underwriters will not exercise their option to purchase additional shares
in this offering.
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Summary Financial Information
The following summary financial information should be read in conjunction
with our financial statements and their related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this prospectus. The statement of operations data for the years
ended December 31, 1996, 1997 and 1998 are derived from, and are qualified by
reference to, the audited financial statements included in this prospectus. The
statement of operations data for the years ended December 31, 1994 and 1995
have been derived from audited financial statements not included in this
prospectus. The statement of operations data for the six month periods ended
June 30, 1998 and 1999 and the balance sheet data at June 30, 1999 labeled
"Actual" are derived from, and qualified by reference to, our unaudited interim
financial statements included in this prospectus.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
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1994 1995 1996 1997 1998 1998 1999
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(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product sales................ $3,434 $5,356 $ 6,237 $13,095 $20,206 $8,895 $13,550
Research contracts........... 3,676 4,589 4,346 3,512 2,953 1,421 1,579
------ ------ ------- ------- ------- ------ -------
Total revenues.............. 7,110 9,945 10,583 16,607 23,159 10,316 15,129
Gross profit................ 1,857 2,433 1,107 4,756 5,920 2,647 4,019
Income (loss) from
operations.................. 88 206 (2,188) 923 1,081 404 987
Net income (loss)............ $ 17 $ 98 $(2,363) $ 652 $ 2,412 $ 520 $ 731
====== ====== ======= ======= ======= ====== =======
Net income (loss) per share--
basic....................... $ 0.01 $ 0.03 $ (0.64) $ 0.18 $ 0.30 $ 0.07 $ 0.09
Net income (loss) per share--
diluted..................... $ 0.01 $ 0.02 $ (0.64) $ 0.13 $ 0.28 $ 0.07 $ 0.08
Weighted average shares
outstanding--basic.......... 3,673 3,697 3,700 3,710 7,956 7,336 8,640
Weighted average shares
outstanding--diluted........ 5,356 5,362 3,700 6,220 9,572 7,336 9,543
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
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(unaudited)
(in thousands)
As
Actual Adjusted(1)
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<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................. $ 2,150 $27,277
Working capital............................................ 15,145 40,272
Total assets............................................... 30,317 55,444
Total stockholders' equity................................. 24,725 49,852
</TABLE>
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(1) The "As Adjusted" column gives effect to the receipt of the estimated net
proceeds from the sale of 2,025,000 shares of common stock offered by us
in this offering at the public offering price of $13.375 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
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RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially harm our business, results of operations and
financial condition and could result in a complete loss of your investment.
We must manage our manufacturing operations to meet changing capacity
requirements.
We currently manufacture all of our products at our Solar Park and Pencader
facilities in Newark, Delaware. Our Solar Park and Pencader facilities each
have solar cell fabrication lines. Our module assembly operation is located at
Pencader, and Silicon-Film(TM) wafers are manufactured at Solar Park. Our
facilities have a combined production capacity of 15 megawatts. We are
currently experiencing manufacturing capacity constraints and are in the
process of expanding our manufacturing capacity at these locations.
We plan to increase our production capacity to approximately 25 megawatts by
the end of the year 2000 and to approximately 75 megawatts over the next four
years by upgrading our equipment, adding selected pieces of new equipment and
improving productivity. We also plan to relocate the Solar Park solar cell
fabrication line to newly leased space at Pencader.
The successful completion of these expansion projects is subject to
significant risks, including the following:
. cost overruns and delays
. timely delivery of equipment
. hiring and training additional employees
. equipment breakdowns
. lower product quality
The failure to achieve increased levels of productivity could materially and
adversely affect our business, results of operations and financial condition.
We are dependent on the acceptance of our Silicon-Film(TM) products in the
solar electric power market.
We believe we can produce our Silicon-Film(TM) solar cells at a lower cost
per watt than other currently available competing solar cell technology because
of the continuous nature of the Silicon-Film(TM) manufacturing process, the use
of inexpensive raw materials and the elimination of costly manufacturing steps
that must be used in other competing technologies. We believe that the
anticipated lower cost per watt of solar cells produced by the Silicon-Film(TM)
process will provide us with cost advantages over current technologies. Our
ability to sell Silicon-Film(TM) products at a lower price per watt than
conventional solar cells and the market acceptance of our Silicon-Film(TM)
products may be affected by:
. our inability to produce Silicon-Film(TM) at projected costs
. a more rapid decline in prices for competing solar cells than is
currently anticipated
. the lower energy conversion efficiency and power of Silicon-Film(TM)
compared to some competing products
. the size, appearance and quality of Silicon-Film(TM) solar cells
. the acceptance of module products and systems assembled by manufacturers
over which we have no control
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The failure of our Silicon-Film(TM) products to achieve market acceptance,
price advantage or both could materially and adversely affect our business,
results of operations and financial condition.
We need to effectively manage our growth.
During 1998 and 1999, we grew rapidly, expanding our manufacturing capacity
by a factor of two and a half and nearly doubling our workforce. This growth
has placed and continues to place a strain upon our senior management team and
other resources. We have grown from 163 employees as of December 31, 1997 to
305 employees as of August 31, 1999. We currently plan to further expand our
manufacturing facility in phases. We plan to expand our sales and marketing
organizations in addition to increasing the number of manufacturing employees
and adding to our operating and financial management team. Our ability to
compete effectively and manage future growth, if any, will require us to
continue to implement and improve operational, financial and management
information systems on a timely basis and to attract, hire, train efficiently
and effectively and retain additional technical, managerial, financial, sales
and marketing and support personnel. We are implementing a new financial
accounting system which we expect to be in place by September 30, 1999. Any
failure to implement and improve our operational, financial and management
systems or to attract, hire, train or retain employees could have a material
adverse effect on our business, results of operations and financial condition.
Our success depends on protection of our intellectual property.
The success and competitiveness of our products depend in part upon our
ability to protect our current and future technology and manufacturing
processes through a combination of patent, trademark, trade secret and unfair
competition laws.
Patent applications in the United States are maintained in secrecy until
patents issue, and the publication of discoveries in the scientific literature
tends to lag behind actual discoveries. Therefore, we cannot be certain that we
were the first creator of inventions covered by pending patent applications or
the first to file patent applications on such inventions. Patent applications
filed in foreign countries are subject to laws, rules and procedures which
differ from those of the United States. We cannot ensure the following:
. patents will issue from pending or future applications
. our existing patents or any new patents will be sufficient in scope or
strength to provide meaningful protection or any commercial advantage to
us
. foreign intellectual property laws will protect our intellectual property
. others will not independently develop similar products, duplicate our
products or design around any patents issued to us
We enter into confidentiality and non-disclosure of intellectual property
agreements with our employees, consultants and certain vendors and generally
control access to and distribution of our proprietary information.
Notwithstanding these precautions, it may be possible for a third party to copy
or otherwise obtain and use our proprietary information without authorization
or to develop similar information independently.
Policing unauthorized use of intellectual property is difficult. The laws of
other countries may afford little or no effective protection of our technology.
We cannot assure you that the steps taken by us will prevent misappropriation
of our technology or that agreements entered into for that purpose will be
enforceable. In addition, litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets and to determine
the validity and scope of the proprietary rights of others. Litigation may
result in substantial costs and diversion of resources, either of which could
have a material and adverse effect on our business, results of operations and
financial condition.
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Our industry is highly competitive.
The markets for our products are intensely competitive and characterized by
changing technology. We currently experience competition from numerous
companies in each of the markets in which we participate. Our competition
consists of major electrical, oil and chemical companies, specialized
electronics firms, universities, research institutions in the United States,
Germany, Japan, Australia and other parts of Asia and Europe, and foreign
government-sponsored companies. Many of our competitors are more established,
benefit from greater market recognition and have substantially greater
financial, development, manufacturing and marketing resources than we have.
There are a variety of competing technologies currently under development,
any one of which could achieve manufacturing costs per watt lower than our
Silicon-Film(TM) technology.
We believe the principal competitive factors in the market for solar
electric power components are:
. price per watt
. long-term stability and reliability
. product performance (primarily conversion efficiency)
. ease of handling and installation
. product quality
. reputation
. environmental factors
The growth of the solar electric power market is uncertain.
The market for solar electric power products has grown steadily in the past.
PV Energy Systems, an independent solar energy market research firm, reports
that the shipment volume of solar electric power products has grown at a
compound annual rate of approximately 22% since 1994. Our strategy of
significantly increasing manufacturing capacity is based in part on the
assumption of continuing market growth. In the event that the market for solar
electric power does not experience continuing growth, or that the particular
market segments and geographic sales regions where we sell the majority of our
products do not continue to grow, this factor could have a material adverse
effect on our business, results of operations and financial condition.
We may require additional financing.
We believe that the proceeds of this offering, our cash reserves, other
existing sources of capital, cash generated from operations and existing lines
of credit will be adequate to fund our operations, including the scale up of
production capacity to approximately 25 megawatts by the end of the year 2000
and to approximately 75 megawatts over the next four years. In the event we
accelerate our manufacturing expansion plans we may need to seek additional
financing. Our inability to obtain the necessary capital or financing to fund
future expansions could materially and adversely affect our business, results
of operations and financial condition. Additional financing may not be
available when needed or may not be available on terms acceptable to us. If
additional funds are raised by issuing equity securities, stockholders may
incur dilution. If adequate funds are not available, we may be required to
delay, scale back or eliminate one or more of our development programs or
otherwise limit the development, manufacture or sale of Silicon-Film(TM) solar
cells, which could materially and adversely affect our business, results of
operations and financial condition.
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There are risks associated with international sales.
International sales accounted for approximately 78.4% and 73.9% of our
product sales for the year ended December 31, 1998 and the six months ended
June 30, 1999, respectively. We expect that international sales will continue
to represent a significant portion of our product sales. International sales
are subject to a number of risks, including the following:
. changes in foreign government regulations and technical standards
. difficulty of protecting intellectual property
. export license requirements, tariffs, taxes and other trade barriers
. requirements or preferences of foreign nations for domestic products
. fluctuations in currency exchange rates relative to the U.S. dollar
. difficulties in collecting accounts receivable
. extended accounts receivable cycles
. political and economic instability
. potentially adverse tax consequences
We cannot be certain we will be able to maintain our international sales at
current levels. If our international sales were to decline significantly, our
business, results of operations and financial condition could be materially
adversely affected.
We are dependent on a small number of customers.
Historically, it has been our strategy to market our products to a limited
number of significant customers. We have no long-term volume purchase
commitments from any of our significant customers.
Our five largest customers accounted for, in the aggregate, approximately
68.4%, 65.6% and 66.8% of our product sales in 1997, 1998 and for the six
months ended June 30, 1999, respectively. Our product sales accounted for
approximately 78.9%, 87.2% and 89.6% of total revenues in 1997, 1998 and for
the six months ended June 30, 1999, respectively. The remainder of our total
revenues for these periods was derived from government-related research and
development contracts.
We anticipate that sales of our products to a limited number of key
customers will continue to account for a significant portion of our total
revenues. Consequently, any one of the following events may have a material
adverse effect on our business, results of operations and financial condition:
. reduction, delay or cancellation of orders from one or more of our
significant customers
. development by one or more of our significant customers of other sources
of supply
. selection by one or more of our significant customers of devices
manufactured by one of our competitors for inclusion in future product
generations
. loss of one or more of our significant customers or a disruption in our
sales and distribution channels
. failure of one of our significant customers to make timely payment of our
invoices
We cannot be certain that we will retain our current customers, that we will
be able to recruit additional or replacement customers or that our current
customers will make timely payment of our invoices. At June 30, 1999, we had
approximately $1.6 million outstanding for more than 90 days from two
customers. If we were to lose one or more significant customers to a
competitor, our business, results of operations and financial condition could
be materially adversely affected.
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The loss of one or more of our customers could adversely affect our business.
Our marketing strategy has been to sell our products primarily to marketing
intermediaries selected to provide access to certain important market segments
and regions around the world. Our customers are generally not end users of our
products but are usually distributors, module assemblers or system integrators
who either resell our products to other customers or package our products into
systems for resale to end users. These marketing intermediaries are not under
our control. Therefore, we have no control over the ability of our customers to
market and sell to end users. In addition, we have no control over the
financial performance of our customers, which may affect the ability of these
customers to purchase and pay for our products.
We cannot be certain that our current customers will continue to place
orders with us, that orders by existing customers will continue at the levels
of previous periods, that existing customers will pay our invoices or that we
will be able to obtain orders from new customers. A disruption in our
relationships with our current customers may have a material adverse effect on
our business, results of operations and financial condition.
We are dependent on the availability of system financing for remote electric
power applications.
Solar electric power is used in many applications and has proven to be a
cost-effective source of electric power where the electric power grid is
unavailable. Solar electric power has also proven to be cost-effective in
competition with diesel generators and other alternative forms of off-grid
power generation. We estimate that remote electric power applications currently
comprise approximately 76% of the market for solar electric power. Because of
the high capital costs of solar electric power systems, users may not have
sufficient resources or credit to acquire such systems, particularly in
developing countries. We believe that the availability of financing, such as
loans and lease arrangements, could have a significant effect on the rate of
growth of off-grid solar electric power. Our plans for increased sales of solar
electric power products include increased sales within this market segment. The
lack of increased availability of system financing or the elimination of
existing system financing programs could have a material adverse effect on our
business, results of operations and financial condition.
We are dependent on the availability of government subsidies and economic
incentives for on-grid applications.
Approximately 24% of the market for solar electric power is for on-grid
applications, according to PV Energy Systems. Today, the cost of solar electric
power substantially exceeds the cost of power furnished by the conventional
electric utility grid. Governmental bodies in many countries, notably the
United States, Germany and Japan, have provided subsidies in the form of cost
reductions, tax write-offs and other incentives to end users, distributors,
systems integrators and manufacturers of solar electric power products to
promote the use of solar energy in on-grid applications and to reduce
dependency on other forms of energy. On-grid applications are generally
predicted by third party market research firms to be among the most rapidly
growing solar electric power market segments in the future. The growth of the
market for solar electric power products depends in part on government programs
for solar electric power subsidies and consumer incentives. Any reduction or
elimination of government subsidies may have a material adverse effect on our
business, results of operations and financial condition.
We are dependent on key suppliers of silicon wafers and other raw materials.
We manufacture all of our products using materials procured from third-party
suppliers. We purchase and recycle silicon wafers from the semiconductor
industry for use in our single crystal solar cell manufacturing process and
have generally been successful in obtaining sufficient quantities of quality
wafers from a variety of sources. Other required raw materials, including
silicon, are available in adequate quantities
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from multiple sources, although for economic and quality control reasons we
utilize single sources of supply for certain materials. Increased demand for
silicon wafers and improvements in recycling by the semiconductor industry
could reduce the supply of silicon wafers and increase their cost to us.
If we are unable to obtain a sufficient supply of raw materials from our
current sources, we could experience difficulties in obtaining alternative
sources quickly or in altering product design to use alternative materials.
Resulting delays or reductions in product shipments could damage customer
relationships. Furthermore, a significant increase in the price of one or more
of these materials could have a material adverse effect on our business,
results of operations and financial condition.
We have had prior losses and have an accumulated deficit.
We had marginal net income for each of the years ended December 31, 1994 and
1995 and a net loss of $2.4 million for the year ended December 31, 1996. For
the years ended December 31, 1997 and 1998 and the six months ended June 30,
1999, we realized net income of $652,000, $2.4 million and $731,000,
respectively, and our accumulated deficit at the end of these periods was $4.9
million, $2.5 million and $1.8 million, respectively. Still, we cannot be
certain that we can sustain these growth rates or that we will remain
profitable on a quarterly or annual basis in the future. For more information,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our future operating results are likely to fluctuate.
Our quarterly and annual operating revenues, expenses and operating results
may fluctuate due to a variety of factors, many of which are beyond our
control, including:
. the timing of orders from, and shipments to, significant customers
. the timing of new product introductions by us or our competitors
. delays in the planned Silicon-Film(TM) manufacturing expansion
. variations in the mix of products sold by us or our competitors
. the timely payment of our invoices
. possible decreases in average selling prices of our products in response
to competitive pressures
. market acceptance of new and enhanced versions of our products
. the availability and cost of key raw materials
. requirements for cost sharing on government contracts
. fluctuations in general economic conditions
. negotiation of final government contract overhead rates
Due to all of the foregoing factors, we do not believe that period-to-period
comparisons of our historical results of operations are indications of future
performance. Furthermore, it is possible that in some future quarters our
results of operations may fall below the expectations of securities analysts
and investors. In such event, the price of our stock on the Nasdaq National
Market will likely be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
more detailed analysis of our period-to-period results.
We may be unable to find appropriate strategic alliances.
We have leveraged, and plan to continue to leverage, our resources in
manufacturing technology, marketing and sales of solar electric power products
through collaborative agreements with corporate partners and customers. Such
strategic alliances may include cooperative agreements for sharing of
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information, cooperative marketing agreements, or other business relationships
such as equity investments or joint ventures. We have developed several
strategic alliances to assist in commercializing our Silicon-Film(TM)
technology.
Our current alliances with GPU International and Atersa are intended to
facilitate our entry into the grid-connected supply of bulk quantities of solar
electric power and to expand our relationships with module assemblers
worldwide, respectively.
The terms of such alliances may require us and our partners to share
revenues and expenses from certain activities or for us to grant to our
partners licenses to manufacture, market and sell products based upon our
Silicon-Film(TM) technology. Our current alliances provide for cost sharing and
technology sharing with respect to jointly developed technologies. Such terms
could be part of any future strategic alliance and could materially impact our
business, results of operations and financial condition.
We may be unable to find appropriate future strategic alliances in markets
in which we have little experience, which could prevent us from bringing our
products to these markets in a timely manner, or at all. If we do not enter
into effective alliances, our products may not achieve this significant market
penetration which could materially adversely affect our business, results of
operations and financial condition.
We must keep pace with technological changes.
The markets for our solar electric power products are characterized by
changing technology. While we believe we have developed a new technology for
solar electric power applications, our future success will depend in large part
on our ability to keep pace with advancing solar electric power technology.
In addition to our Silicon-Film(TM) technology, we believe that there are a
variety of competing technologies under active development by other companies,
including amorphous silicon, cadmium telluride and copper indium diselenide, as
well as advanced concepts for the manufacture of bulk (ingot based), ribbon and
thin film crystalline silicon. Any of these competing technologies could
achieve manufacturing costs less than the manufacturing costs expected to be
achieved by Silicon-Film(TM) products being developed by us. There is the risk
that our development efforts will be rendered obsolete by technological
advances of others or that other materials will prove more advantageous for the
commercialization of solar electric power products. We believe that to remain
competitive in the future, we will need to invest significant financial
resources in research and development. Our failure to develop and introduce new
products in a timely fashion could materially adversely affect our business,
results of operations and financial condition.
Our contracts with federal and state governments subject us to certain risks
including termination and audit.
We intend to continue our policy of selectively pursuing contract research
programs funded by various agencies of the United States government and state
governments to complement and enhance our own resources.
The percentage of our total revenues derived from government-related
contracts was approximately 21.1%, 12.8% and 10.4% for 1997 and 1998 and for
the six months ended June 30, 1999, respectively. Contracts involving the
United States government are subject to various risks, including the risk of
termination at the convenience of the government. To date, the government has
not terminated any of our contracts. Other risks include potential disclosure
of our confidential information to third parties, audits and the exercise of
"march-in" rights by the government. March-in rights refer to the right of the
United States government or a government agency to exercise its non-exclusive,
royalty-free, irrevocable worldwide license to any technology developed under
contracts funded by the government if the contractor fails to continue to
develop the technology.
13
<PAGE>
There is no certainty that the United States government will continue its
commitment to programs to which our development projects are applicable or that
we can compete successfully to obtain funding available pursuant to these
programs. A reduction or discontinuance of the government's commitment to these
programs or of our participation in these programs could have a material
adverse effect on our business, results of operations and financial condition.
Substantially all of our revenues from government contracts, including overhead
rates, are subject to audit under various federal statutes.
Although we have received final written acceptance of our overhead rates
through 1993, we have been advised that the Defense Contract Audit Agency is
disputing certain elements of those rates as well as those overhead rates for
1994 and 1995. The dispute is centered on the effect of our manufacturing
operations on our 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. We have revised our methodology for determining overhead
rates for 1997 and 1998. We believe that adjustments resulting from restitution
of this dispute, if any, would not have a material adverse effect on our
business and financial condition, but may impact future results of operations.
There are risks associated with our use of hazardous materials.
We use, generate and discharge toxic, volatile or otherwise hazardous
chemicals and wastes in our research and development and manufacturing
activities. Therefore, we are subject to a variety of federal, state and local
government regulations related to the storage, use and disposal of these
materials. Failure to comply with present or future regulations could result in
an imposition of fines on us, suspension of production or a cessation of
operations. We are not aware of any environmental investigation, proceeding or
action by federal or state agencies involving any of our facilities. However,
under certain federal and state statutes and regulations, a government agency
may seek recovery and response costs from both operators and owners of property
where releases of hazardous substances were committed by previous occupants of
the property or have occurred or are ongoing. If we fail to control the use of,
or to restrict adequately the discharge of, hazardous substances, we could be
subject to substantial financial liabilities which could have a material
adverse effect on our business, results of operations and financial condition.
We are dependent on key personnel.
Due to the nature of our business, we are highly dependent on the continued
service of, and on the ability to attract and retain, qualified engineering,
technical, manufacturing, sales, marketing and senior management personnel. The
competition for such personnel is intense. The loss of any key employees or
principal members of management could have a material adverse effect on our
business and operating results. In addition, if we are unable to hire
additional qualified personnel as needed, we may not be able to adequately
manage and implement our plans for expansion and growth. We may not be able to
continue to attract and retain the qualified personnel necessary for the
development of our business.
None of our personnel is covered by an employment contract other than Allen
M. Barnett, our President and Chief Executive Officer, and any other officer or
employee of our company can terminate his or her relationship with us at any
time. None of our employees is subject to non-competition agreements which
would survive termination of employment. We do not have "key person" insurance
coverage for the loss of any of our employees other than a $500,000 insurance
policy on the life of Dr. Barnett.
Our stock price is volatile.
The market for securities of high technology companies, including ours, has
been highly volatile. The market price of our common stock has fluctuated
between $5.875 and $18.50 from February 13, 1998 to
14
<PAGE>
October 12, 1999, and the last sale price was $13.5625 on October 12, 1999. It
is likely that the price of our common stock will continue to fluctuate widely
in the future. Factors affecting the trading price of our common stock include:
. responses to quarter-to-quarter variations in operating results
. announcements of technological innovations or new products by us or our
competitors
. failure to meet securities analysts' estimates
. changes in financial estimates by securities analysts
. conditions, trends or announcements in the solar electric power industry
. announcements of significant acquisitions, strategic alliances, joint
ventures or capital commitments by us or our competitors
. additions or departures of key personnel
. sales of common stock
. accounting pronouncements or changes in accounting rules that affect our
financial statements
. other factors and events beyond our control
In addition, the stock market in general, and the market for technology-
related stocks in particular, has experienced extreme volatility that often has
been unrelated to the operating performance of particular companies. These
broad market and industry fluctuations may adversely affect the trading price
of our common stock, regardless of our actual operating performance.
Investors may be unable to resell their shares of our common stock at or
above the offering price. In the past, companies that have experienced
volatility in the market price of their stock have been the object of
securities class action litigation. If we were the subject of securities class
action litigation, it could result in substantial costs, a diversion of
management's attention and resources and a material adverse effect on our
business and financial condition.
We may acquire other companies, product lines or technology.
We may pursue acquisitions that could provide new technologies, products or
businesses. Future acquisitions may involve the use of significant amounts of
cash, potentially dilutive issuances of equity securities, incurrence of debt
or amortization of expenses related to goodwill and other intangible assets.
In addition, acquisitions involve numerous risks, including:
. difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company
. the diversion of management's attention from other business concerns
. risks of entering markets in which we have no or limited prior experience
. the potential loss of key employees of ours or of the acquired company
We currently have no commitments with respect to any acquisition. In the
event that such an acquisition does occur and we are unable to successfully
integrate businesses, products, technologies or personnel that we acquire, our
business, results of operations and financial condition could be materially
adversely affected.
15
<PAGE>
Our management will have broad discretion over the use of proceeds of the
offering.
We intend to use a significant portion of the net proceeds from the sale of
common stock for the expansion of our manufacturing capacity, the purchase of
components and the development of new products. However, our management will
have the discretion to allocate the net proceeds to uses that stockholders may
not deem desirable. We may not be able to generate a significant return on any
investment of the proceeds.
We face risks relating to the Year 2000 Issues.
"Year 2000 Issues" refer generally to the problems that some software may
have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able
to determine whether "00" means 1900 or 2000, which may result in failures or
the creation of erroneous results.
We have defined Year 2000 compliant as the ability to:
. correctly handle the date information needed for the December 31, 1999 to
January 1, 2000 date change
. function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration
. respond to two-digit date input in a way that resolves the ambiguity as
to century in a disclosed, defined and predetermined manner
. store and provide output of date information in ways that are unambiguous
as to century if the date elements in interfaces and data storage specify
the century
. recognize the year 2000 as a leap year
We have developed and are currently executing a comprehensive risk-based
plan designed to make our computer systems and facilities Year 2000 ready. The
plan covers four stages: (i) inventory, (ii) assessment, (iii) remediation and
(iv) testing and certification. The inventory, assessment and remediation
processes were substantially completed by June 30, 1999. Testing and
certification of these systems and applications are targeted for completion by
September 30, 1999.
If we are unable to achieve Year 2000 compliance for our major systems, the
Year 2000 could have a material adverse impact on our business, results of
operations and financial condition.
We are currently requesting information concerning Year 2000 compliance
status from our customers and suppliers. Our current or future customers and
suppliers may incur significant expenses to achieve Year 2000 compliance. If
our customers are not Year 2000 compliant, they may experience material costs
to remedy problems, and face litigation. Customers may delay purchases of our
products, and suppliers may not be able to provide raw materials. Year 2000
issues could reduce or eliminate the budgets that current or potential
customers could have for purchases of our products and services. As a result,
our business, financial condition and results of operations could be materially
adversely affected.
Certain current stockholders own a large portion of our voting stock.
Following the closing of this offering, our officers, directors and
affiliated entities together will beneficially own approximately 17.3% of our
outstanding common stock (16.7% if the underwriters' over-allotment option is
exercised in full). As a result, these stockholders may be able to
substantially influence all matters requiring stockholder approval and thereby,
our management and affairs. Matters that typically require stockholder approval
include:
. election of directors
16
<PAGE>
. merger or consolidation
. sale of all or substantially all of our assets
This concentration of ownership may delay, deter or prevent acts that would
result in a change of control, which in turn could reduce the market price of
our common stock.
Anti-takeover provisions in our charter documents and Delaware law could
prevent or delay a change in control of our company.
Certain provisions of our amended and restated certificate of incorporation
and by-laws may discourage, delay or prevent a merger or acquisition that
stockholders may consider favorable, which could reduce the market price of our
common stock. Such provisions include:
. authorizing the issuance of "blank check" preferred stock
. providing for a classified board of directors with staggered, three-year
terms
. providing that directors may only be removed for cause by the affirmative
vote of 80% of the stockholders
. limiting the persons who may call special meetings of stockholders
. prohibiting stockholder action by written consent
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings
Delaware law may also discourage, delay or prevent someone from acquiring or
merging with us.
You will suffer dilution in the value of your shares.
Investors in this offering will incur immediate and substantial dilution in
the net tangible book value per share of our common stock.
We do not expect to pay cash dividends.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for use in the operation and
expansion of our business. The terms of our bank debt agreements prohibit us
from paying cash dividends without the consent of the lender. Therefore, we do
not expect to pay any cash dividends in the foreseeable future.
17
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties, which may include statements about our:
. business strategy
. expansion of our manufacturing capabilities
. plans for hiring additional personnel
. plans for entering into collaborative agreements
. anticipated sources of funds, including the proceeds from this offering,
to fund our operations for the four years following the date of this
prospectus
. plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts
When used in this prospectus, the words "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions are generally
intended to identify forward-looking statements. Because these forward-looking
statements involve risks and uncertainties, actual results could differ
materially from those expressed or implied by these forward-looking statements
for a number of reasons, including those discussed under "Risk Factors" and
elsewhere in this prospectus. We assume no obligation to update any forward-
looking statements.
18
<PAGE>
HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING
We estimate that we will receive net proceeds of $25.1 million from the sale
of the 2,025,000 shares of common stock offered by us at the public offering
price of $13.375 per share, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us. Our estimated net
proceeds will be $30.2 million if the underwriters exercise their option to
purchase additional shares from us in this offering. We will not receive any
proceeds from the sale of shares of common stock by the selling stockholders.
We currently intend to use approximately $19.0 million of the net proceeds
of the offering for the expansion of manufacturing capacity, including the
purchase of equipment, fit-up costs and training expenses. We intend to use the
remaining net proceeds from this offering for working capital and other general
corporate purposes. In addition, in the ordinary course of business we may
evaluate potential acquisitions of, or joint ventures with, complementary
businesses, products and technologies. Although we have no current commitments
or agreements with respect to any acquisition, other than our agreements with
GPU International and Atersa, we might in the future use a portion of the
remaining proceeds to pay for acquisitions.
Pending these uses, the net proceeds of this offering will be invested in
short-term, investment-grade, interest-bearing investments or accounts.
The amount we actually spend for these purposes may vary significantly and
will depend on a number of factors, including future revenue and cash generated
by operations and the other factors described under "Risk Factors." Therefore,
we will have broad discretion in the way we use the net proceeds.
PRICE RANGE OF COMMON STOCK
Our common stock began trading on the Nasdaq National Market on February 13,
1998 under the symbol "APWR." The following table sets forth for the indicated
periods, the high and low sales prices per share of our common stock as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1998
First Quarter (from February 13, 1998)......................... $10.88 $ 6.00
Second Quarter................................................. 10.25 7.63
Third Quarter.................................................. 9.75 6.13
Fourth Quarter................................................. 9.88 5.88
1999
First Quarter.................................................. $14.25 $ 8.50
Second Quarter................................................. 18.50 10.88
Third Quarter.................................................. 17.25 11.75
Fourth Quarter (through October 12, 1999)...................... 14.13 12.63
</TABLE>
On October 12, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $13.5625 per share. As of June 30, 1999, there were
approximately 322 stockholders of record of our common stock.
19
<PAGE>
DIVIDEND POLICY
We have never declared nor paid any cash dividends on shares of our stock,
and we do not anticipate that we will do so in the foreseeable future. We
currently intend to retain future earnings, if any, to finance our growth and
do not anticipate paying any cash dividends in the foreseeable future. The
terms of our bank debt agreements prohibit us from paying cash dividends
without the consent of the lender.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. on an actual basis
. as adjusted to give effect to the receipt of the estimated net proceeds
from the sale of 2,025,000 shares of common stock in this offering at
the public offering price of $13.375 per share after deducting
underwriting discounts and commissions and estimated offering expenses
payable by us.
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 1999 and does not
include the following:
. 2,182,473 shares of common stock subject to options at a weighted
average exercise price of $7.60 per share granted under our 1989 and
1999 Stock Option Plans and 1998 Directors Stock Option Plan
. 260,012 shares of common stock reserved for issuance under our 1989 and
1999 Stock Option Plans and 1998 Directors Stock Option Plan
This information is qualified by, and should be read in conjunction with,
our financial statements and the notes thereto included in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
--------------------
($ in thousands)
Actual As Adjusted
------- -----------
<S> <C> <C>
Long-term debt............................................ $ -- $ --
------- -------
Stockholders' equity:
Preferred stock, $0.01 par value: 5,000,000 shares
authorized; none issued;............................... -- --
Common stock, $0.01 par value: 25,000,000 shares
authorized; 8,716,871 shares issued and outstanding,
actual; 10,741,871 shares issued and outstanding, as
adjusted............................................... 87 107
Additional paid-in capital.............................. 26,637 51,744
Unearned compensation................................... (197) (197)
Accumulated deficit..................................... (1,802) (1,802)
------- -------
Total stockholders' equity.............................. 24,725 49,852
------- -------
Total capitalization.................................. $24,725 $49,852
======= =======
</TABLE>
20
<PAGE>
SELECTED FINANCIAL DATA
The following summary financial information should be read in conjunction
with our financial statements and their related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this prospectus. The statement of operations data for the years
ended December 31, 1996, 1997 and 1998 and the balance sheet data as of
December 31, 1997 and 1998 are derived from, and are qualified by reference to
the audited financial statements included in this prospectus. The statement of
operations data for the years ended December 31, 1994 and 1995 and the balance
sheet data as of December 31, 1994, 1995 and 1996 have been derived from
audited financial statements not included in this prospectus. The statement of
operations data for the six month periods ended June 30, 1998 and 1999 and the
balance sheet data at June 30, 1999 are derived from, and qualified by
reference to, our unaudited interim financial statements included in this
prospectus.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------- ------- ------- ------- -------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Product sales.......... $3,434 $5,356 $ 6,237 $13,095 $20,206 $ 8,895 $13,550
Research contracts..... 3,676 4,589 4,346 3,512 2,953 1,421 1,579
------ ------ ------- ------- ------- ------- -------
Total revenues........ 7,110 9,945 10,583 16,607 23,159 10,316 15,129
Cost of revenues:
Product sales.......... 2,954 4,483 6,896 9,311 14,942 6,531 9,973
Research contracts..... 2,299 3,029 2,580 2,540 2,297 1,138 1,137
------ ------ ------- ------- ------- ------- -------
Total cost of
revenues............. 5,253 7,512 9,476 11,851 17,239 7,669 11,110
------ ------ ------- ------- ------- ------- -------
Gross profit.......... 1,857 2,433 1,107 4,756 5,920 2,647 4,019
Operating expenses:
Product development
expenses.............. 220 314 776 1,007 1,392 609 1,046
General and
administrative
expenses.............. 1,172 1,469 1,859 1,972 2,496 1,184 1,393
Selling expenses....... 377 444 660 854 951 451 593
------ ------ ------- ------- ------- ------- -------
Total operating
expenses............. 1,769 2,227 3,295 3,833 4,839 2,244 3,032
------ ------ ------- ------- ------- ------- -------
Income (loss) from
operations........... 88 206 (2,188) 923 1,081 403 987
Other expense (income):
Interest expense....... 42 115 169 369 252 197 1
Other expense
(income).............. 29 (7) 6 (118) (598) (339) (58)
------ ------ ------- ------- ------- ------- -------
Income (loss) before
income taxes.......... 17 98 (2,363) 672 1427 545 1,044
Income tax expense
(benefit)............. -- -- -- 20 (985) 25 313
------ ------ ------- ------- ------- ------- -------
Net income (loss)...... $ 17 $ 98 $(2,363) $ 652 $ 2,412 $ 520 $ 731
====== ====== ======= ======= ======= ======= =======
Net income (loss) per
share--basic.......... $ 0.01 $ 0.03 $ (0.64) $ 0.18 $ 0.30 $ 0.07 $ 0.09
Net income (loss) per
share--diluted........ $ 0.01 $ 0.02 $ (0.64) $ 0.13 $ 0.28 $ 0.07 $ 0.08
Weighted average shares
outstanding--basic.... 3,673 3,697 3,700 3,710 7,956 7,336 8,640
Weighted average shares
outstanding--diluted.. 5,356 5,362 3,700 6,220 9,572 7,336 9,543
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents........... $ 77 $ 29 $ 25 $ 4,908 $ 6,545 $ 2,150
Working capital
(deficiency).......... 1,309 1,420 (970) 5,608 14,839 15,145
Total assets........... 7,148 8,615 7,887 15,115 28,366 30,317
Total debt............. 514 1,463 1,483 6,593 -- --
Total stockholders'
equity (deficit)...... (1,308) (1,077) (2,860) (2,039) 23,263 24,725
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our financial
statements and the related notes appearing at the end of this prospectus. Our
discussion contains forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus.
Overview
We develop, manufacture, market and sell a range of solar electric power
products, including solar cells, modules and panels, for the global
marketplace. Solar cells are semiconductor devices which convert sunlight into
electricity and form the building block for all solar electric power products.
Historically, our products have primarily been used to generate electricity for
users not connected to the utility grid. Such applications include
electrification of rural homes and villages, and power supply for equipment in
the communications and transportation industries. More recently our products
are also being used by customers already connected to the utility grid as a
clean, renewable source of alternative or supplemental electricity.
Additionally, we are expanding our joint venture agreement with GPU
International to generate and sell wholesale solar electric power.
We currently generate product revenues from the sale of solar cells,
modules, and panels. Although we are continuing a significant expansion of our
Silicon-Film(TM) manufacturing capacity, the predominant source of our product
revenues to date has been recycled wafer products. We recognize product sales
revenue upon shipment. Solar cell prices and manufacturing costs vary depending
upon supply and demand in the market for solar cells and modules, order size,
yields, the costs of raw materials, particularly reclaimed silicon wafers
recycled from the semiconductor industry, and other factors. Product sales
represented 89.6% of total revenues for the six months ended June 30, 1999 and
87.2% of total revenues for the year ended December 31, 1998. In addition, we
also generate revenue from contracts with various federal government agencies
to conduct research on advanced Silicon-Film(TM) products and optoelectronic
devices. Generally, these contracts last from six months to three years. We
recognize research contract revenue at the time costs benefiting the contracts
are incurred, which approximates the percentage of completion method.
Solar cells that we manufacture are sold to original equipment manufacturers
that assemble the solar cells into modules. Additionally, we assemble and sell
modules to distributors and value-added resellers. The sale of a module results
in substantially more revenue to us than the sale of solar cells due to the
value of the additional materials, labor and overhead added during the module
assembly process. Accordingly, our 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. The gross margin percentages for modules are generally
less than those of solar cells and as a result, changes in the mix of solar
cells and modules sold may affect total product gross margin.
For the six months ended June 30, 1999, approximately 73.9% of our product
revenues was generated by sales to customers located outside the United States.
We believe that international sales will continue to account for a significant
portion of our 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 our results of operations.
Substantially all of our revenues from government contracts are subject to
audit under various federal statutes. Although we have received final written
acceptance of our overhead rates through 1993, the Defense Contract Audit
Agency is now disputing certain elements of those submissions as well as the
overhead rates for 1994 and 1995. The dispute is centered on the effect of our
manufacturing operations on
22
<PAGE>
our 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 our overhead rates for 1997, 1998 and 1999,
inasmuch as we revised our methodology for determining overhead rates. We
believe that adjustments to revenue, if any, will not have a material adverse
effect on our business and financial condition, but may impact results of
operations.
We have joint ventures with GPU International and Atersa, and we intend to
seek additional joint ventures with other parties. The terms of these joint
ventures may not permit us to consolidate the financial results of the ventures
with our financial statements. In these circumstances, we will record our
proportionate share of the earnings or loss of the venture using the equity
method of accounting and will present such earnings or loss as a separate
component of our statement of income.
Results of Operations
The following table sets forth selected financial data as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
-------------------- ------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales............................. 58.9% 78.9% 87.2% 86.2% 89.6%
Research contracts........................ 41.1 21.1 12.8 13.8 10.4
----- ----- ----- ----- -----
Total revenues.......................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues:
Product sales............................. 65.1 56.1 64.5 63.3 65.9
Research contracts........................ 24.4 15.3 9.9 11.0 7.5
----- ----- ----- ----- -----
Total cost of revenues.................. 89.5 71.4 74.4 74.3 73.4
----- ----- ----- ----- -----
Gross profit............................ 10.5 28.6 25.6 25.7 26.6
Operating expenses:
Product development expenses.............. 7.3 6.1 6.0 5.9 6.9
General and administrative expenses....... 17.7 11.9 10.8 11.5 9.2
Selling expenses.......................... 6.2 5.1 4.1 4.4 3.9
----- ----- ----- ----- -----
Total operating expenses................ 31.2 23.1 20.9 21.8 20.0
----- ----- ----- ----- -----
Income (loss) from operations........... (20.7) 5.5 4.7 3.9 6.6
Other expense (income)...................... 1.6 1.5 (1.5) (1.4) (0.3)
----- ----- ----- ----- -----
Income (loss) before income taxes........... (22.3) 4.0 6.2 5.3 6.9
Income tax expense (benefit)................ -- 0.1 (4.2) 0.2 2.1
----- ----- ----- ----- -----
Net income (loss)........................... (22.3)% 3.9% 10.4% 5.1% 4.8%
===== ===== ===== ===== =====
</TABLE>
Comparison of Six Months Ended June 30, 1998 and 1999
Revenues. Our total revenues were $15.1 million for the six months ended
June 30, 1999, an increase of $4.8 million, or 46.7%, from the same period in
1998. Product sales were $13.6 million for the six months ended June 30, 1999,
an increase of $4.7 million, or 52.3%, from the same period in 1998. Our
increase in product sales was due to ongoing strong demand for our products and
improvements in manufacturing productivity and increases in capacity at both
our manufacturing plants. Contract revenues were $1.6 million for the six
months ended June 30, 1999, an increase of $158,000, or 11.1%, from the same
period in 1998. The increase is a result of incremental funding in the first
quarter of 1999 on our government contracts for the development of Silicon-
Film(TM).
23
<PAGE>
Gross profit. Our gross profit was $4.0 million for the six months ended
June 30, 1999, an increase of $1.4 million, or 51.8%, from the same period in
1998. Gross profit on product revenues for the six months ended June 30, 1999
was $3.6 million, an increase of $1.2 million, or 51.3%, from the same period
in 1998. Our gross margin on product revenues was 26.4% for the six months
ended June 30, 1999. In the similar 1998 period, the gross margin on product
revenues was 26.6%. Our 1999 gross margin on product revenues was affected in
the first quarter as a result of manufacturing productivity issues that arose
in the fourth quarter of 1998 and continued into 1999. The 1998 gross margin on
product revenues was affected by startup costs pertaining to our second
manufacturing facility. Our gross profit on research contracts for the six
months ended June 30, 1999 was $442,000, an increase of $159,000, or 56.1%,
from the same period in 1998. Our increase in gross profit on research
contracts was due to the higher level of funding on the government contracts
and to higher effective government contract overhead rates.
Product development expenses. Our product development expenses for the six
months ended June 30, 1999 were $1.0 million, up $437,000, or 71.8%, from the
same period in 1998. The increase is due to a higher level of development
activity due in part to the incremental government funding in the first quarter
of 1999 and the contribution of our resources to supplement this funding in the
six months ended June 30, 1999.
General and administrative expenses. Our general and administrative expenses
for the six months ended June 30, 1999 were $1.4 million, an increase of
$209,000, or 17.6%, from the similar 1998 period. The increase is primarily due
to higher levels of salaries as a result of additional positions to support our
growth, professional fees and insurance expenses, offset by a reduced level of
employee bonus expense. Certain of these increased expenses were incurred as a
result of our transition to being a public company through the initial public
offering of our common stock, which was completed in February 1998.
Selling expenses. Our selling expenses for the six months ended June 30,
1999 were $593,000, an increase of $142,000, or 31.5%, from the similar 1998
period. The increase is due to higher salary costs as a result of additions to
the sales and marketing staff, and higher travel costs, offset by a lower level
of employee bonus expense.
Interest expense. Our interest expense for the six months ended June 30,
1999 was $1,000, as compared with $198,000 in the similar 1998 period. The
decline is due to the paydown of debt in 1998.
Interest income. Our interest income for the six months ended June 30, 1999
was $58,000, as compared with $338,000 in the similar 1998 period. The
reduction was due to lower cash balances available for investment, as a result
of the use of cash for the funding of working capital, capital equipment, debt
reduction and the purchase of the assignment of wafer supply contracts
discussed in "Liquidity and Capital Resources" below.
Income taxes. Income taxes for the six months ended June 30, 1999 were
$313,000, as compared with $25,000 in the similar 1998 period. Our 1998 tax
provision was limited to alternative minimum tax. In the fourth quarter of
1998, we eliminated the valuation allowance pertaining to the remaining net
operating loss carryforward. As a result, our effective tax rate in 1999 has
increased to 30% from 4.6% in the similar 1998 period.
Comparison of Years Ended December 31, 1997 and 1988
Revenues. Our 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. Our increase in product sales was due 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 us to satisfy a greater
percentage of backlog orders. Research contract revenue for the year ended
December 31, 1998 was $3.0
24
<PAGE>
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 our contract
overhead rates as a result of the ongoing transformation from a government
contractor to a manufacturing company.
Gross profit. Our 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, or 39.5%, from
$3.8 million for the year ended December 31, 1997. Gross profit margin on
product 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 our expansion into a second manufacturing facility. During the
first half of 1998, we 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 our other manufacturing facility. We expect further improvement
in our product gross margins in 1999 as the production levels in the Solar Park
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 our 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 our contract overhead rates as a result of
our ongoing transition to a manufacturing company, which reduces the amount of
overhead expenses that we previously allocated and billed to government
contracts.
Product development expenses. Our 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 our Silicon-Film(TM)
production process.
General and administrative expenses. Our 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 our growth and
the costs of being a public company (legal and accounting fees, liability
insurance, printing, stockholders communications) but were offset by a lower
level of bonuses.
Selling expenses. Our 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 due 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 our 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, principally net 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 our initial public offering.
25
<PAGE>
Income taxes. We recorded an income tax benefit of $985,000 for the year
ended December 31, 1998, as compared with an expense of $20,000 for the year
ended December 31, 1997. The 1998 benefit represents the change in the
valuation allowance pertaining to our net operating loss carry forwards. The
1997 expense represents our alternative minimum tax liability.
Comparison of Years Ended December 31, 1996 and 1997
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 us 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 our 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 negative
gross profit of $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 we
significantly increased our staffing and overhead in our manufacturing
operation but did not experience a proportionate increase in manufacturing
output. For several months, our manufacturing costs exceeded the revenues
generated from the sales of such products. In addition, during the year ended
December 31, 1996, we reevaluated our ability to process certain of the silicon
wafers in our inventory, and determined that a downward adjustment in their
carrying value of $220,000 was appropriate. During 1997, we began to realize
the benefits of the costs incurred in 1996, as production capacity and output
increased significantly. As a result, we were 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 our 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. Our 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. Our general and administrative expenses
for the year ended December 31, 1997 were $2.0 million, an increase of
$113,000, or 6.1%, from $1.9 million in 1996. Reduced personnel expenses and a
reduction in the provision for bad debt expense were offset by an increase in
employee benefit costs due to increased company contributions to employee
retirement and bonus plans and increased compensation expense of stock options.
Selling expenses. Our 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 due 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.
26
<PAGE>
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 our primary lender. The increased debt levels
resulted from our 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 due 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 our alternative minimum tax liability.
Selected Quarterly Operating Results
The following table presents certain historical statement of operations data
for our six most recent quarters ended June 30, 1999. Actual results of
operations data are presented for all periods. In management's opinion, this
unaudited information has been prepared on the same basis as the audited annual
financial statements and includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the unaudited
information for the quarters presented. You should read this information in
conjunction with the financial statements, including the notes thereto,
included elsewhere in this prospectus. The results of operations for any
quarter are not necessarily indicative of results that we might achieve for any
subsequent periods.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------
Sep Jun
Mar 31, Jun 30, 30, Dec 31, Mar 31, 30,
1998 1998 1998 1998 1999 1999
------- ------- ------ ------- ------- ------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales................ $4,224 $4,671 $5,248 $6,063 $6,301 $7,250
Research contracts........... 705 716 911 621 838 740
------ ------ ------ ------ ------ ------
Total revenues............. 4,929 5,387 6,159 6,684 7,139 7,990
Cost of revenues:
Product sales................ 3,052 3,478 3,836 4,576 4,687 5,286
Research contracts........... 556 582 696 463 615 522
------ ------ ------ ------ ------ ------
Total cost of revenues..... 3,608 4,060 4,532 5,039 5,302 5,808
------ ------ ------ ------ ------ ------
Gross profit............... 1,321 1,327 1,627 1,645 1,837 2,182
Operating expenses:
Product development
expenses.................... 310 299 341 442 556 489
General and administrative
expenses.................... 520 664 692 620 654 739
Selling expenses............. 186 266 277 223 260 334
------ ------ ------ ------ ------ ------
Total operating expenses... 1,016 1,229 1,310 1,285 1,470 1,562
------ ------ ------ ------ ------ ------
Income from operations..... 305 98 317 360 367 620
Other expense (income):
Interest expense............. 114 83 86 -- -- --
Interest income.............. (135) (203) (181) (111) (42) (16)
------ ------ ------ ------ ------ ------
Income before income taxes..... 326 218 412 471 409 636
Income tax expense (benefit)... 15 10 19 (1,029) 123 191
------ ------ ------ ------ ------ ------
Net income..................... $ 311 $ 208 $ 393 $1,500 $ 286 $ 445
====== ====== ====== ====== ====== ======
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Percentage of Total Revenues
-----------------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30,
1998 1998 1998 1998 1999 1999
------- ------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales................ 85.7% 86.7% 85.2% 90.7% 88.3% 90.7%
Research contracts........... 14.3 13.3 14.8 9.3 11.7 9.3
----- ----- ----- ----- ----- -----
Total revenues............. 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- -----
Cost of revenues:
Product sales................ 61.9 64.6 62.3 68.5 65.7 66.2
Research contracts........... 11.3 10.8 11.3 6.9 8.6 6.5
----- ----- ----- ----- ----- -----
Total cost of revenues..... 73.2 75.4 73.6 75.4 74.3 72.7
----- ----- ----- ----- ----- -----
Gross profit............... 26.8 24.6 26.4 24.6 25.7 27.3
Operating expenses:
Product development
expenses.................... 6.3 5.6 5.5 6.6 7.8 6.1
General and administrative
expenses.................... 10.5 12.3 11.2 9.3 9.2 9.2
Selling expenses............. 3.8 4.9 4.5 3.3 3.6 4.2
----- ----- ----- ----- ----- -----
Total operating expenses .. 20.6 22.8 21.3 19.2 20.6 19.5
----- ----- ----- ----- ----- -----
Income from operations..... 6.2 1.8 5.2 5.4 5.1 7.8
Other expense (income):
Interest expense............. 2.3 1.5 1.4 -- -- --
Interest income.............. (2.7) (3.8) (2.9) (1.6) (0.6) (0.2)
----- ----- ----- ----- ----- -----
Income before income taxes..... 6.6 4.1 6.7 7.0 5.7 8.0
Income tax expense (benefit)... 0.3 0.2 0.3 (15.4) 1.7 2.4
----- ----- ----- ----- ----- -----
Net income .................... 6.3% 3.9% 6.4% 22.4% 4.0% 5.6%
===== ===== ===== ===== ===== =====
</TABLE>
We believe that period to period comparisons of our operating results will
not necessarily be meaningful, and you should not rely on them as an indication
of future performance. It is possible that in some future periods our operating
results may be below the expectations of public market analysts and investors.
In such event, the trading price of our common stock may decline.
Liquidity and Capital Resources
At June 30, 1999, we had cash of $2.1 million, as compared with $6.5 million
at December 31, 1998 and $4.9 million at the end of 1997. Cash used in
operating activities of $3.6 million for the six months ended June 30, 1999 was
due to increases in accounts receivable and inventory balances and to payments
totaling $700,000 for the assignment to us of wafer supply contracts. We will
be making additional payments for these contracts totaling $200,000 over the
remainder of 1999. We purchased the assignment of these contracts in order to
have more direct access to the wafer manufacturers, which has given us better
control over incoming wafers. Cash used in operating activities of $3.1 million
for the year ended December 31, 1998 was due principally to increases in
accounts receivable and inventory.
Cash used by investing activities of $1.5 million for the six months ended
June 30, 1999 related to our capital equipment expenditures to increase our
manufacturing capacity. Total 1999 expenditures are expected to total
approximately $2.5 million. In 1998, cash used in investing activities was $5.5
million and principally was due to capital expenditures relating to the fit-up
of our Pencader plant.
Net cash provided from financing activities of $682,000 for the six months
ended June 30, 1999 was due to proceeds from the exercise of stock options. For
1998, net cash provided from financing activities was $10.2 million, and was
principally comprised of $16.6 million in proceeds from our initial public
offering and reduction in debt balances of $6.6 million.
Our sources of liquidity as of June 30, 1999 consist principally of cash of
$2.1 million, and available bank credit lines of $4 million. Any borrowings
under our bank facilities will be secured by accounts receivable, inventory and
machinery and equipment.
28
<PAGE>
We expect that the proceeds of this offering, our available cash balance,
projected cash generated from operations and available bank credit lines will
be sufficient to fund our activities over the next four years. In the event we
accelerate our manufacturing expansion plans we may need to seek additional
financing.
Income Taxes
Net operating loss carryforwards totaling approximately $4.1 million are
available through 2012 to reduce federal and state taxable income as of
December 31, 1998. During 1998 we made the determination that it is more likely
than not that the tax benefit of the net operating loss carryforwards will be
realized and accordingly eliminated the valuation allowance for financing
reporting purposes.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The statement is not
expected to affect us because we do not hold any derivative instruments or
conduct any hedging activities.
In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral
of the effective date of FASB Statement No. 133 (SFAS 137). SFAS 137 delays the
implementation of SFAS No. 133 until the year 2001.
Year 2000 Readiness
Our current data processing systems and certain embedded processing systems
are not Year 2000 compliant. We have developed and are currently executing a
comprehensive risk-based plan designed to make our computer systems, those
certain embedded processing systems, applications and facilities Year 2000
ready. Our plan covers four stages including (i) inventory, (ii) assessment,
(iii) remediation and (iv) testing and certification. At year end 1997, we had
substantially completed the inventory stage for our owned systems and
applications. The assessment and remediation processes are currently underway
and we are utilizing both internal and external resources to reprogram, or
replace where necessary, and test the software for Year 2000 modifications. The
remediation process has been largely completed by June 30, 1999. Testing and
certification of these systems and applications are targeted for completion by
September 30, 1999.
Our ongoing transformation from a government research and development
organization to a manufacturing company has necessitated system enhancements to
accommodate this growth. We are therefore addressing the Year 2000 issue
through these planned system augmentations. Total Year 2000 costs for our owned
systems and applications were approximately $250,000 in 1998 and currently
estimated to be approximately $250,000 in 1999, which we expect to fund 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.
We are initiating communications with our critical third-party
relationships, consisting of both customers and suppliers, to determine the
extent to which we may be vulnerable to such parties' failure to resolve their
own Year 2000 issues. Where practicable, we will assess and attempt to mitigate
our 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 our results of operations from the failure of any of these parties to be
Year 2000 ready, is not presently reasonably estimable.
Effects of Inflation and Exchange Rates
We have not been materially affected by inflation or changes in foreign
exchange rates. We have agreed to enter into a joint venture with Atersa. Since
the financial statements of the joint venture will be denominated in a foreign
currency, we may be affected by foreign exchange rates in the future.
29
<PAGE>
BUSINESS
Overview
We develop, manufacture, market and sell a range of solar electric power
products, including solar cells, modules and panels, for the global
marketplace. Solar cells are semiconductor devices which convert sunlight into
electricity and form the building block for all solar electric power products.
Historically, our products have been used primarily to generate electricity for
users not connected to the utility grid. Such applications include
electrification of rural homes and villages, and power supply for equipment in
the communications and transportation industries. More recently, our products
are also being used by customers already connected to the utility grid as a
clean, renewable source of alternative or supplemental electricity. We are
expanding our joint venture agreement with GPU International, Inc. to generate
and sell wholesale solar electric power.
The electricity industries in the United States, Europe and Japan are
currently experiencing significant structural change. Industry deregulation is
promoting customer choice of electric power provider and introducing retail
competition. Additionally, while Europe and Japan have traditionally supported
clean, renewable energy policies, state governments in the United States are
now introducing legislation and implementing various economic incentives to
stimulate the use of renewable sources of electricity, including solar power.
We believe increased retail competition and the introduction of various
economic incentives in domestic and international markets will continue to
stimulate providers to differentiate their power offerings and to include solar
electric power among their power options.
According to PV Energy Systems, an independent solar energy research firm,
the solar electric power industry shipped an estimated 153 megawatts of power
capacity in 1998, which represented approximately $2.0 billion in equipment
sales. Since 1994, industry shipments have increased at a compound annual
growth rate of 22%, which has been driven by continued worldwide demand in the
off-grid segment and accelerated growth for on-grid applications. During this
period, on-grid shipments have grown at a compound annual growth rate of 65% as
consumers are choosing to install solar systems or purchase solar electric
power. We believe that the continued global restructuring of the electric power
industry will continue to drive growth in the on-grid solar electric power
market.
While solar electric power is often the most cost-effective source of
electric power in selected applications off the utility grid, the broad
utilization of solar electric power on the utility grid has been limited by
production costs. We have optimized several stages in the solar cell
manufacturing process to progressively reduce production costs while increasing
mechanical and electrical yields.
. Silicon wafer sourcing. Our proprietary manufacturing process utilizes
recycled semiconductor wafers that allow us to reduce silicon wafer
cost.
. Equipment and process engineering. Our proprietary equipment and
processes allow us to increase our manufacturing productivity and
ultimately to generate a higher level of power output per production
asset than our competitors. For example, our Silicon-Film(TM) technology
allows us to produce large area silicon sheets in minutes.
. Product design. Our large solar cell design features allow us to
generate more power per solar cell.
Our focus on silicon wafer sourcing, equipment and process engineering and
product design has allowed us to reduce our production cost per watt and thus
to improve our product gross margins.
The Electricity Industry
The electric power industry comprises one of the world's largest industrial
segments, with annual electricity revenues of approximately $1 trillion, of
which approximately $200 billion is spent annually on power generation and
delivery equipment. More than 90% of this equipment is utilized for centralized
power plants where electricity is generated at a large scale and distributed
through a network of conducting cables to end users.
30
<PAGE>
The source and corresponding price of electricity vary based on the
geographic location of a user and the level of existing electricity
infrastructure. Generally, customers in urban and suburban locations are served
by a central utility network and are considered on-grid customers. In contrast,
customers or applications in rural or underdeveloped areas are generally
provided electricity through various distributed, off-grid sources of
electricity, including solar power.
Structural Change of the Electricity Industry
The electricity industry is currently undergoing significant changes to its
basic structure and operating models. In particular, governments in the United
States and around the world are changing the model of vertically integrated
electric utility monopolies in favor of a deregulated, competitive industry
structure. Furthermore, new power generation technologies have expanded users'
options for procuring electricity. These developments are expected to lead to:
. Increased competition. In the United States, certain states are planning
a phased introduction of competition, starting with competition among
wholesale electricity generators, following with the establishment of
independent common-carrier bulk transmission systems and finally leading
to the introduction of true retail competition at the end-user level. At
the final stage of this process, we expect that individual customers
will have as much choice over their electricity provider as they do over
their long-distance telephone service provider.
. New entrants. As competition within the electricity business increases,
a number of new companies will emerge and focus on various elements of
electricity delivery, such as power generation and retail marketing. In
response to this shift, we expect existing electricity providers, as
well as new electricity service companies, to develop and promote a
broader array of products and services such as solar electric power as a
means of segmenting customer demand and defining differentiated brand
positioning.
. Increased customer choice of products and services. In the deregulated
environment, customers will have more direct control over the selection
of providers and the means of power generation. Consumers have already
shown a preference for clean, environmentally friendly renewable energy
sources such as solar electric power. We expect this trend to continue
as deregulation progresses.
. Economic incentives. Governments are implementing legislation and
introducing various subsidies and set-asides in order to accelerate the
commercialization of renewable energy sources such as solar electric
power. Specific state laws, subsidy programs and other variables such as
sunlight availability can have a significant combined impact on the cost
effectiveness of on-grid solar electric power.
Deregulation of the electricity industry is occurring globally, and the
rules which govern this process differ significantly among countries. In the
United States, deregulation is proceeding on a state-by-state basis. Currently,
there are four states that have passed legislation and opened their retail
electricity markets to competition (California, Massachusetts, Pennsylvania and
Rhode Island), and an additional 17 states have formal deregulation procedures
underway.
As part of the deregulation process, governments in Europe, Japan and the
United States are implementing legislation and introducing various economic
incentives. Renewable energy sources benefit from the following types of
governmental assistance:
. portfolio standards mandating the use of renewable energy sources
. direct purchase subsidies to end users to offset up-front capital costs
. net metering laws which allow end users to sell electricity back into
the grid at full retail prices
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<PAGE>
In Europe and Japan, we estimate that these programs have stimulated the
installation of more than 38,000 solar electric power residential systems from
1995 through 1998. In California, which was the first state to fully deregulate
its electricity industry, the legislature set aside $54 million in 1998 for
solar electric power programs, including a five-year direct subsidy program for
homeowners who purchase solar electric power systems.
The combination of some or all of these types of governmental assistance
provides a cost-effective market opportunity for solar electric power. We refer
to the states in which we believe solar electric power is most cost-effective
as "top tier" states. Those states in which we believe solar electric power is
currently cost-effective but may be more so in the future as deregulation
progresses we refer to as "second tier" states. Substantive deregulation has
not yet occurred in the remaining states. These tiers are illustrated in the
following chart.
[Maps of continental United States plus Alaska and Hawaii showing
Top Tier and Second Tier states.]
The Solar Electric Power Industry
A number of new technologies have emerged which can generate electricity in
a distributed or point-of-use fashion. Solar electric power is the only method
of distributed generation that utilizes a renewable energy source. Solar
electric power is highly scalable and reliable, unlike a conventional utility
grid that depends critically on economies of large scale and which is subject
to power delivery constraints or outages during periods of high demand.
Distributed generation can be more cost effective than conventional "central
station" generation in the following cases:
. users live far from urban centers
. only a small amount of electricity is required
. the capacity of the existing power delivery infrastructure prevents
incremental load growth
We also believe that the environmental aspects of the power business will
become increasingly important and that public concern about air pollution and
global warming will be gradually transformed into policies and legislation
favorable to renewable energy sources.
Solar electric power is used in three major market segments:
. On-grid. In this application, solar electric power is used as an
environmentally preferred source of alternative or supplemental
electricity for customers already connected to the utility grid.
Primarily concentrated in Europe, Japan and the United States, this
application has represented the fastest-growing segment of the solar
electric power market for the last three years.
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. Rural electrification. Many of the estimated two billion people still
without electricity live in geographic areas not conducive to
electrification by means of the utility grid. For these people, solar
electric power can be a cost effective and rapid way in which to acquire
electrical service.
. Telecommunications. Solar electric power is used for a wide variety of
applications related to the telecommunications and transportation
industries. Examples of these applications include: cellular telephone
base stations, fiber-optic and radio repeaters, telemetry and data
acquisition systems, traffic information signs, warning displays and
emergency call boxes.
PV Energy Systems, an independent solar energy research firm, estimated 1998
worldwide solar electric power industry shipments at 153 megawatts which
represents approximately $2.0 billion in equipment sales. Since 1994, industry
shipments have increased at a compound annual growth rate of 22%. During this
period, the fastest-growing solar electric power market segment has been for
on-grid applications, where consumers already connected to the utility grid are
choosing solar electric power as an alternative to conventional on-grid
sources. Since 1994, on-grid shipments have grown at a compound annual growth
rate of 65%. While off-grid shipments still account for the majority of
industry shipments, on-grid shipments accounted for 24% of the total market in
1998. We believe that growth in the on-grid market segment is being driven by
customer preference for non-polluting, carbon-free electric power technologies
and by the worldwide trend toward deregulation within the electric utility
industry.
The chart below highlights the growth and market share of worldwide, on-grid
and off-grid solar electric power shipments.
[Bar chart showing on-grid and off-grid industry-wide
solar electric power shipments in megawatts per year
for 1994 through 1998]
PV Energy Systems predicts that solar electric power shipments will continue
to increase at a compound annual growth rate of 24% through 2005, and that on-
grid shipments and off-grid shipments will grow at compound annual rates of 39%
and 15%, respectively.
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The Solar Electric Power Challenge
Solar electric power is often the most cost-effective source of electric
power in selected applications off the utility grid. While governmental
assistance and enhanced consumer choice have accelerated the use of solar
electric power for on-grid applications, the utilization of solar electric
power for widespread, multiple applications on the utility grid has been
limited by production costs. The ability to reduce the cost of solar electric
power is driven by three primary factors:
. Materials sourcing. Reducing raw materials cost must be achieved without
compromising product reliability.
. Equipment and process engineering. Increased process throughput must be
achieved while maintaining or improving product performance.
. Product design. Optimizing product design must be achieved to capture
economies of scale and lower production cost per kilowatt hour.
Most of the solar electric power technologies that have been commercialized
to date have not adequately reduced costs while maintaining the requisite
levels of performance and reliability. These technologies fall into two basic
classes--technologies based on ingots of crystalline silicon and technologies
based on thin films of semiconductors other than crystalline silicon. The
manufacture of ingot-based silicon wafers requires expensive equipment,
consumes large amounts of electricity, wastes a significant fraction of the
starting material and takes several days to complete. Although thin films
appear to offer the potential for reduced cost, low efficiency, poor stability
and high capital costs have hampered the commercialization of thin-film solar
electric power technologies to date.
Our Technology Solution
We have developed an innovative and proprietary set of technologies and
processes for the manufacture of the core building block for solar electric
power generation, solar cells. We have optimized several stages in the solar
cell manufacturing process to progressively reduce production costs while
increasing mechanical and electrical yields. We have also introduced several
solar cell design features that allow us to generate more power per solar cell
which ultimately reduces the cost per kilowatt hour. Our manufacturing and
product approaches address the primary challenges in solar cell production.
These include:
. Silicon wafer sourcing. We have developed two proprietary manufacturing
processes that allow us to effectively reduce silicon wafer cost. Our
recycled wafer technology utilizes scrap silicon wafers from the
semiconductor industry for the production of solar cells. Our Silicon-
Film(TM) technology does not require high-purity silicon and produces
large area silicon sheets in a fraction of the time of traditional
ingot-based wafer manufacturing. Both of our processes are based on
crystalline silicon and build on this material's long history of
performance and reliability.
. Equipment and process engineering. We have designed a range of
proprietary equipment and processes that allow us to increase our
manufacturing productivity and to generate a higher level of power
output per production asset. For example, our Silicon-Film(TM)
technology is a continuous, high-speed production process that produces
silicon wafers in minutes. In contrast, traditional ingot-based silicon
wafer manufacturing requires expensive wafer formation and sawing
equipment and takes several days to produce the same quantity of solar
power.
. Product design. Our technology will allow us to produce solar cells in
sizes up to 12p, with corresponding power output of up to 10 watts per
solar cell. This is approximately three times more powerful than the
largest solar cell currently available. More powerful solar cells reduce
the cost per watt for module assembly and installation, because the
fixed costs of these operations can be amortized over more watts. Our
next-generation Silicon-Film(TM) solar cell, currently under
development, also incorporates integrated circuit design concepts that
further increase functionality and reduce cost.
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Our focus on silicon wafer sourcing, equipment and process engineering and
product design has allowed us to significantly reduce our production cost per
watt and has provided us with significant operating leverage to grow our
business.
Strategy
Our goal is to become the leading global solar electric power technology
company. To achieve this, we intend to:
Maintain our manufacturing and technology advantage
We intend to continue to enhance our manufacturing processes and
technologies and to introduce innovative solar based products. We intend to
leverage our recycled semiconductor wafer and Silicon-Film(TM) technology
platform in order to reduce further solar cell manufacturing costs and increase
market share. We have consistently introduced new products to provide our
customers with improved levels of functionality, price and performance and to
access new market opportunities. We plan to build on this history of innovation
through the continued introduction of new products, including solar cells,
modules, systems and solar electric power.
Rapidly expand manufacturing capacity
We intend to capitalize on our manufacturing expertise and replicable method
of expanding manufacturing capacity. Since the beginning of 1998 we have
increased our manufacturing output by approximately 135%, from a rate of 5.5
megawatts per year for the first quarter of 1998 to a rate of 12.9 megawatts
per year for the second quarter of 1999. We plan to use a portion of the net
proceeds from this offering to further expand our manufacturing capacity.
Capitalize on deregulation in the on-grid market
We believe that the deregulation of the energy industry is creating a
favorable environment to market residential rooftop solar systems to domestic
on-grid customers. We intend to target states that are implementing favorable
legislation, introducing economic incentives and promoting consumer choice. We
recently opened an office in Concord, California to focus on on-grid systems
sales.
Expand relationships with module assemblers
In international markets, local module assemblers are often best positioned
to deliver customized solutions and to compete for local business. We intend to
expand our relationships with selected module assemblers and to offer
additional products and services, including factory design, equipment
selection, process training and quality assurance. We believe this strategy
will allow us to broaden our international reach and to penetrate new markets.
We recently agreed to form a joint venture with Atersa, S.A., a leading Spanish
module assembler and systems integrator, to provide these services.
Pursue strategic relationships
We intend to continue to pursue strategic relationships to introduce new
technologies and products, enter new geographic markets, attract new customers
and pursue additional revenue opportunities. These relationships may take
various forms, including cooperative marketing agreements, joint ventures and
strategic alliances. Through our GPU Solar joint venture, we are developing
capabilities to generate solar electric power in the United States.
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Products
We currently sell, or plan to sell in the near future, five classes of
products: solar cells, modules, panels, systems and solar electricity.
. Solar cells are semiconductor devices that convert sunlight directly
into electricity by means of a solid-state process known as the
photovoltaic effect.
. Modules are assemblies of solar cells connected together and
encapsulated in a weatherproof package.
. Panels are assemblies of several modules wired together in our factory
and mounted on a common support structure. Panels are typically used to
reduce field assembly cost in systems where hundreds or thousands of
individual modules are required.
. Systems typically include a group of modules or panels, an optional
battery and electronic equipment for power conditioning and control. Our
systems are designed for use on residential rooftops.
. Solar electricity. We have a joint venture with GPU International
through which we intend to produce and sell wholesale solar electricity
under long-term purchase agreements.
Solar cells. Solar cells are the core component inside every solar electric
power system. We sell most of the solar cells we produce to independent module
assembly companies. These customers assemble our solar cells into modules and
sell the modules under their own brand name for a variety of local market
applications. We believe that our solar cells are preferred by module assembly
company customers over other manufacturers' solar cells for several reasons:
. our solar cells are significantly thicker than most solar cells, leading
to lower rates of breakage during soldering and packaging
. our solar cells have specially prepared contacts for ease of soldering
. our solar cells are the largest and most powerful solar cells on the
market today
One of our key strategies has been to capture economies of scale by
continuously increasing the size of our solar cells. With our recycled
semiconductor wafer process, utilizing single crystal silicon wafers, we
capitalized on the movement of the computer chip industry to larger wafer
sizes. In 1993, we were one of the first companies to introduce a 5p square
single crystal solar cell, which has gradually replaced the earlier 4p solar
cell as the industry standard. In 1995, we were the first company to introduce
a 6p square single crystal solar cell, and we are still one of only two
companies offering a product of this size. In 1998, we introduced our first
solar cell made using our Silicon-Film(TM) technology which we branded under
the name APex(TM). This solar cell is identical in size and layout to our 6p
single crystal solar cell, which makes it easy for customers already tooled up
for this size to add an APex(TM) module to their product line.
We plan to continue to exploit the economies of scale inherent in the
processing and packaging of large solar cells in order to reduce costs further
and to differentiate us from our competitors. Before the end of 1999, we plan
to introduce a 4-watt single crystal solar cell that will be approximately 25%
more powerful than any other solar cell currently on the market. We also plan
to capitalize on the unique large area capability of our Silicon-Film(TM)
technology to introduce 8p and 12p square APex(TM) solar cells rated for 4.5
watts and 10 watts, respectively.
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<PAGE>
Our Product Evolution
<TABLE>
<CAPTION>
Product Power Introduction
Name Dimensions Cell Type (Watts) Date
-------- ---------- -------------- ------- ------------
<S> <C> <C> <C> <C>
AP-104* 4p square Single Crystal 1.3 1991
AP-105 5p square Single Crystal 2.1 1993
AP-106 6p square Single Crystal 3.2 1995
AP-225 6p square APex(TM) 2.5 1998
AP-108** 8p round Single Crystal 4.0 1999
AP-400 8p square APex(TM) 4.5 2001
AP-800 12p square APex(TM) 10.0 2002
</TABLE>
*This product was replaced by the subsequent products.
**This product is planned to be introduced by year end.
Modules. Modules are assemblies of solar cells that can be electrically
interconnected to achieve virtually any combination of required electricity
output. We manufacture modules with power ratings ranging from 30 to 130 watts.
Modules at the lower end of this power range are typically used individually to
provide small quantities of energy for non-electrified homes or for a variety
of small industrial applications in the telecommunications industry. Higher
power modules are typically used in larger arrays. Most of our module sales are
at the higher power ratings. These modules capitalize on our ability to make
larger and more powerful cells than our competitors.
Panels. For systems requiring hundreds or thousands of individual modules,
we sell fully assembled panels. Panels are assemblies of high-power unframed
modules adhesively bonded to a common support structure and electrically
interconnected and tested in our factory. Panels are typically shipped to the
job site in reusable shipping racks. The advantage of this product is that we
perform much of the electrical and mechanical integration in our factory under
controlled conditions, thus lowering our customer's on-site labor costs and
reducing the probability of wiring errors. We believe that we are the only
solar electric power company to offer fully assembled panels as a standard
product.
Systems. Over the past 18 months, we have developed a range of standardized
systems that we sell to homeowners. These systems are all designed to operate
in parallel with the utility grid and typically generate between 50% and 100%
of a home's yearly electricity needs. Solar electric power not consumed on the
premises is sold back into the utility grid. From January 1 through July 31,
1999, GPU Solar sold 63 of these systems. The majority of these systems also
includes a small storage battery, which allows the systems to be used during a
grid outage. We are finding significant customer interest in backup or
emergency power. We believe that this interest reflects broad concern by
customers about the reliability of the electricity network and about year 2000
problems in the near term.
Solar electricity. Through GPU Solar, we plan to construct, own, and
operate solar electric power plants. Our intent is to sell electricity on a
wholesale basis to power marketing companies for resale to end customers. In
this case, our product will be electricity, which we plan to sell under multi-
year power purchase contracts.
Contract Research and Development
We selectively pursue 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 our long-term development
strategy under conditions that permit us to retain the technology developed. We
have received substantial third-party funding from various agencies of the U.S.
government. Total sums expended for research, development and manufacturing
engineering in the years ended
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<PAGE>
December 31, 1996, 1997 and 1998 and the six months ended June 30, 1999 were
$3.3 million, $3.5 million, $3.7 million, and $2.2 million, respectively. Of
those amounts, approximately $2.6 million, $2.5 million, $2.3 million, and $1.1
million, respectively, were externally funded and are a component of contract
revenue.
Manufacturing
We currently manufacture our products in two facilities in Newark, Delaware,
one located in Solar Park and the other in nearby Pencader Corporate Center.
Since the beginning of 1998 we have increased our manufacturing output by
approximately 135%, from a rate of 5.5 megawatts per year for the first quarter
of 1998 to a rate of 12.9 megawatts per year for the second quarter of 1999.
This increase in production output was due to the addition of our new Pencader
manufacturing facility, which our manufacturing group brought on line in April
1998.
[Bar chart showing annualized historical manufacturing quarterly
output (in megawatts per year) at each of our two facilities for
1998 and the first two quarters of 1999.]
Historical Manufacturing Output (Megawatts per year rate)
We intend to expand our manufacturing capacity to approximately 25 megawatts
by the end of the year 2000 and to approximately 75 megawatts over the next
four years. We believe that our recent experience of building and operating our
Pencader plant has allowed us to develop a formal, replicable model for
capacity expansion and that this process reduces the risks associated with
further capacity expansion. Some of the key elements contributing to this low
risk approach are:
. utilization of previously proven processes and equipment
. increases in solar cell size which allow for greater power output with
existing production processes
. flexible manufacturing which enables us to run multiple product
configurations through the same line
The manufacturing facilities include a full complement of equipment for
wafer, 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, furnaces for diffusion,
printing and firing equipment for applying electrical contacts to solar cells,
equipment for applying anti-reflection coatings on solar cells and solar cell
testers. Our Pencader facility contains equipment for assembling and testing
modules.
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<PAGE>
The research and development portion of the Solar Park 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 compound semiconductor and furnaces for
diffusion, oxidation, alloying, and heat treatment, photolithography equipment,
vacuum (thermal, e-beam and magnetron sputtering) deposition for metals and
anti-reflection coatings, plating baths for obtaining low resistance contacts
and standard process evaluation equipment including a scanning electron
microscope with energy dispersive spectroscopy capability.
Sales and Marketing
We pursue both a direct and indirect sales and marketing strategy according
to the dynamics of each targeted market. We currently sell solar cells and
modules in selected international on-grid, rural and telecommunications markets
through our direct sales force. We sell complete systems and intend to sell
solar electricity in selected on-grid markets through our indirect partners,
including value added resellers, distributors, independent agents and
contractors. We currently have relationships with several indirect channel
partners which allow us to penetrate selected global markets efficiently.
Direct sales to certain customer classes and applications affords us a higher
level of control and increased participation in downstream margin
opportunities, while our cooperation with indirect partners gives us coverage
of certain international markets which would be difficult or impossible for us
to access directly. The table below explains the relationship between market
segments, product types, customer types, sales channels and applications as
they relate to our business.
Our Sales and Marketing Strategy
<TABLE>
<CAPTION>
On-Grid Off-Grid
----------------------------------------- -----------------------------------------
Market Rural
Segment Buildings Solar Power Plants Telecommunications Electrification
------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Products .Solar Cells . Wholesale Solar .Modules .Solar Cells
.Modules Electric Power .Modules
.Complete Systems Generated with our
Technology
Customer . Residential and .Power Marketers . Original Equipment . Module Assemblers
Commercial .Traditional Manufacturers and and Systems
Building Owners, Utilities Systems Integrators
Distributors and Integrators
Module Assemblers
Sales Channel . Direct Sales, .Joint Ventures . Direct Sales, .Direct Sales
Internet Sales, Agents,
Home Builders and Distributors and
Electricians Value Added
Resellers
Applications . Solar electric . Wholesale solar . Repeater stations . Solar home systems
power systems to electricity from .Monitoring and often located in
provide a solar electric telemetry systems developing
supplemental, power plants which for highways, countries to
clear power source is typically sold railroads and provide basic
that can also be to power marketers pipelines services such as
resold back into through long-term .Emergency call light, radio,
the utility grid. purchase boxes on highways television and
.Roof panels for agreements. .Portable warning communications
single family .Blended signs used at .Wireless pay
homes electricity highway telephones
.Roof panels or products construction sites .Pumps for
exterior panels drinking water
for commercial .Schools and
buildings health clinics
.Vacation cabins
</TABLE>
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<PAGE>
The domestic on-grid market. We believe that the deregulation of the energy
industry provides a favorable climate for marketing solar electric power and
solar systems to domestic on-grid customers. In order to focus our marketing
efforts, we have developed a methodology to identify promising near-term target
markets. Factors which we consider in this methodology include:
. the addition of renewable energy sources to portfolio standards
. the existence and extent of direct subsidies or tax benefits for solar
electric power systems
. the existence of net-metering laws
. local retail electricity prices
. the quality of the regional sunlight resource
We recently opened an office in Concord, California to focus on on-grid
sales. We plan to increase our direct marketing efforts to promote our sales to
homeowners in targeted regions, and we are developing a web-based on-line
shopping tool to allow customers to choose and purchase the system that meets
their requirements.
The international on-grid market. The international on-grid market has
developed more rapidly than the domestic on-grid market, particularly in Europe
and Japan. We serve the international on-grid market primarily through the sale
of solar cells, which are assembled into modules and panels by our module
assembly customers. These products are incorporated into systems and sold
directly to homeowners and building owners or sold through intermediaries such
as local electricians and homebuilders. Several of our customers have also
established subsidiaries to build, own and operate solar electric power plants
and to sell the electricity from these power plants to power marketers and end
customers.
Our on-grid module assembly customers have typically established strong
brand identity within their regional market and have in some cases developed
unique products that incorporate solar cells into building materials such as
roof tiles and curtain-wall glazing systems. These building integrated-products
are growing in popularity in Europe.
We believe that customers in Europe and Japan are strongly motivated by
environmental concerns and that their governments will continue to support
renewable energy sources. Therefore, we believe that the international on-grid
market will continue to comprise a major fraction of our product revenue for
the foreseeable future.
The rural electrification market. This market segment addresses a large
number of people throughout the world who are not yet served with electric
power. Within this market segment, we typically sell modules directly to
original equipment manufacturers who assemble their own complete systems and to
systems integrators who design and build systems for end users.
The telecommunications market. This market segment includes a wide variety
of telecommunications and related industrial applications. Within this market
segment, we typically sell modules to module assemblers who manufacture and
sell completed modules and to value added resellers and systems integrators who
design and build systems for end users.
Customers
We use a customer acquisition and growth strategy aimed at acquiring new key
customers while growing volume with existing customers. First, we target new
customers who provide access to high growth market segments while maintaining
geographical diversity. Often we enter into a new supply relationship with such
a customer as a secondary product supplier. Once a successful supply
relationship has been established, our objective is to become the primary
product supplier to each new key customer and to grow volume within each
account.
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Sales to our ten largest product customers accounted for approximately
46.0%, 68.0%, 73.0% and 76.2% of total revenues in fiscal 1996, 1997, 1998 and
the six months ended June 30, 1999, respectively. During 1996, sales to Tata BP
Solar, an Indian joint venture of British Petroleum Co. and the Tata Group,
accounted for 12.9% of our total revenues. During 1997, sales to Solar Fabrik,
an independent module assembler based in Germany, Golden Genesis Company, a
systems integrator located in Arizona, and Atersa, accounted for 17.0%, 12.6%
and 12.0% of our total revenues, respectively. During 1998, sales to Atersa and
Solar Fabrik accounted for 17.6% and 14.3% of our total revenues, respectively.
During the six months ended June 30, 1999, sales to Solar Fabrik and Atersa
accounted for 28.2% and 12.4% of our total revenues, respectively. No other
product customers represented 10% or more of our total revenues for any such
periods. We expect that sales of our products to a limited number of customers
will continue to result in a high concentration of sales for the foreseeable
future and that the loss of certain of these customers could have a material
adverse effect on our business, results of operations and financial condition.
A large percentage of our product sales are to international customers. For
the year ended December 31, 1998 and the six months ended June 30, 1999, the
approximate geographic breakdown of product sales is shown in the table below:
Regional Product Sales Distribution
<TABLE>
<CAPTION>
Year Ended Six Months Ended
Region December 31, 1998 June 30, 1999
------ ----------------- ----------------
<S> <C> <C>
North America 21.6% 26.1%
Europe 62.7% 61.6%
Africa 9.1% 2.4%
Asia 6.6% 9.9%
</TABLE>
We anticipate that international customers will continue to account for the
majority of product sales for the foreseeable future.
Strategic Alliances
GPU Solar. We are expanding the scope of GPU Solar, Inc., our joint venture
with GPU International. This venture was originally formed in July 1997 to
market residential rooftop systems. GPU International and we are planning to
jointly cooperate in the development of products and services that address the
significant business opportunities resulting from electric industry
restructuring. We both believe that electricity restructuring will create an
increasing market for clean solar electric power and will develop projects to
sell solar power into this market. Solar electricity will be sold by GPU Solar,
and we believe that this product will appeal to customers who are interested in
solar electric power, but who may not choose to or be able to install a solar
electric power system on their home. In states with retail electricity choice
programs, such customers may choose to purchase their electricity from a
supplier who offers solar electric power. GPU Solar plans to:
. identify sites where we can build solar electric power plants of between
100 kilowatts and several megawatts of capacity. These sites could
include commercial factory rooftops, parking structures or undeveloped
land.
. construct power plants based on our panels.
. enter into long-term power purchase agreements with power marketers to
buy electricity generated by the plant. The typical term for such
agreements is expected to be 15 to 20 years.
. operate the power plants using subcontracted operating and maintenance
services. Because solar electric power systems use no fuel and have no
moving parts, ongoing regular operating and maintenance service
requirements are minimal.
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On July 14, 1999, GPU Solar signed its first power purchase agreement with
Green Mountain Energy Resources, one of the leading national environmentally
friendly power marketers. The contract calls for Green Mountain Energy
Resources to take the entire electrical output of a 132 kilowatt power plant
located in Northern California for the next 15 years and to pay a flat rate of
$.30 per kilowatt hour produced during this period. Construction on this plant
is currently underway, and the plant is scheduled to be completed by September
30, 1999. It is currently expected that our commitment for the construction
cost of this plant will be limited to approximately $300,000.
Atersa. In July 1999, we and Atersa, one of our ten largest product
customers, agreed in principle to form a joint venture for the purpose of
manufacturing and supplying solar cells to module assemblers worldwide for the
off-grid market segment. Significant government subsidies are available to fund
the project, and Atersa has identified approximately $3 million in low cost
loans and grants to fund plant construction, fit-up and start-up costs. We and
Atersa have each contributed $250,000 towards the proposed venture. We
currently expect that any additional commitment would be limited to
approximately $250,000, although we can give no assurance that the transaction
will be completed and a definitive agreement will be executed in the time
period and form currently contemplated, if at all.
Atersa manufactures modules based exclusively on our solar cells, integrates
these modules into systems and markets systems primarily in Europe, Africa and
Latin America. As one of the leading systems integrators, Atersa has developed
significant expertise in designing, bidding, winning and implementing off-grid
projects and programs. Atersa also designs, manufactures and sells module
manufacturing equipment and components.
Quality Assurance
We intend to maintain our reputation as a manufacturer and supplier of
quality products and to continuously improve the quality of our products and
services. Quality testing starts with the wafer, is continued at a several
steps during solar cell and module manufacturing and is implemented at each
solar cell and module manufacturing step by the staff directly responsible for
the daily operation of the manufacturing line. Each operator is trained to
recognize and report on the quality of his or her work. Process control issues
are communicated to technicians, engineering personnel, supervisors and co-
workers and this team works together to effect an immediate corrective action
and eliminate the cause of the problem.
Quality assurance measures have enabled us to achieve international and
domestic product certifications for many of its modules. In June 1996, the
Commission of European Communities issued Qualification Certificates for
environmental stability and performance for our standard modules types AP-1106,
AP-1206, AP-6105, and AP-7105. In August 1997, we received the Underwriters
Laboratory (UL) listing for Silicon-Film(TM) module products which confirms
that representative samples of these products have been evaluated by UL and
meet applicable UL standards and requirements. We intend to submit all new
module products for such approval.
Competition
The market for solar electric power components and systems is intensely
competitive. We believe that this market will continue to be intensely
competitive, particularly if products with significant cost and performance
attributes are developed. We also believe 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 BP Solarex, Siemens Solar Industries,
Kyocera Corporation, Sanyo Electric Co., Sharp Corp., Shell Solar Energy B.V.,
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<PAGE>
ASE GmbH and Canon. All of these companies have significantly greater resources
to devote to the research, development, manufacturing and marketing than we do.
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 us.
We believe that the principal competitive factors in the market for solar
electric power components are the following:
. price per watt
. product reliability, quality and reputation
. product performance, primarily conversion efficiency
. ease of handling and installation
In addition to direct competition from other solar electric power
manufacturers, the wholesale market for solar electric power competes with
other environmentally friendly sources of power such as wind and geothermal
energy.
Patents and Proprietary Technology
Our success and ability to compete are significantly dependent on our
proprietary technology. Our policy is to protect our technologies by filing
patent applications with respect to technology considered important to business
development. We also rely upon unpatented know-how, continuing technological
innovation and the pursuit of licensing opportunities in order to develop and
maintain our competitive position. We have been awarded fourteen U.S. patents
in the field of photovoltaics and had two patent applications pending as of
August 31, 1999. Ten of the fourteen U.S. patents that have been issued and one
of the applications 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
remaining pending application covers the utilization of a unique device design
and manufacturing process that enhances the optical efficiency of opto-
electronic devices.
We decide on a case-by-case basis whether and in what countries we will file
foreign counterparts of a U.S. patent application. International counterparts
of four issued patents have been filed under the Patent Cooperation Treaty. We
will continue to file other U.S. and international patent applications to
protect technology we consider important in providing a market advantage for
our products. We believe that our patents offer us 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, we rely on the law of unfair competition
and trade secrets to protect our proprietary rights, including our proprietary
rights in our Silicon-Film(TM) technology. We consider several elements of the
Silicon-Film(TM) manufacturing process to be trade secrets. We attempt to
protect our trade secrets and other proprietary information through non-
disclosure agreements with our customers and suppliers and limit the
dissemination of information to a need-to-know basis. Although we seek to
protect our proprietary information, it is possible that others will
independently either develop the same or similar information or obtain access
to information that we believe is proprietary.
43
<PAGE>
All of our employees and consultants are required to sign confidential
information non-disclosure agreements upon the commencement of their employment
with us. Our non-disclosure agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances. These agreements also
provide that all inventions made by the individual shall be our exclusive
property. However, these agreements may not provide meaningful protection for
our trade secrets or adequate remedies in the event of unauthorized use or
disclosure of such information.
Silicon-Film(TM) and APex(TM) are our trademarks.
Environmental Regulations
We use, generate and discharge toxic, volatile or otherwise hazardous
chemicals and wastes in our research and development and manufacturing
activities. Therefore, we are subject to a variety of federal, state and local
governmental regulations related to the storage, use and disposal of these
materials. We believe we have all the permits necessary to conduct our
business. However, failure to comply with present or future regulations could
result in fines being imposed on us, suspension of production or a cessation of
operations. We believe that we have properly handled our hazardous materials
and wastes and have not contributed to any contamination at any of our
premises. We are not aware of any environmental investigation, proceeding or
action by federal or state agencies involving our premises. However, under
certain federal and state statutes and regulations, 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 us to control the use of, or to restrict adequately the discharge
of, hazardous substances could subject us to substantial financial liabilities
and could have a material adverse effect on our business, result of operations
and financial condition.
Employees
As of August 31, 1999, we had 305 full time employees, of whom 39 were
engaged in research and development, 233 in manufacturing, 10 in sales and
marketing and 23 in administration. None of our employees are covered by
collective bargaining agreements. We have experienced no work stoppages and
believe that our employee relations are good.
Eighteen of our management and professional employees have advanced degrees,
including four Ph.D.s. To date, we have been able to attract the scientific,
engineering, technical and other personnel required by our business. Such
experienced professionals are in demand, and we 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.
Facilities
From July 1991 through January 1998, all of our administrative, research and
manufacturing facilities were located in a 40,000 square foot building built by
and leased from University of Delaware, Newark, Delaware. The initial term of
the lease expires in June 2011. However, we may exercise an option to cancel
the lease beginning in July 2000. The annual cash rental payment for 1998 was
$209,200 and increases approximately 6% each year.
In January 1998, we entered into a lease with Liberty Property Limited
Partnership for a 60,300 square foot facility to house our Pencader plant. This
facility is part of a 130,000 square foot building located in Newark, Delaware,
which is approximately six miles from our present facility. The term of the
lease is 10 years with two five year renewal options. In January 1999, we
entered into an agreement for an additional 20,100 square feet in this
facility. The commencement date for the amended lease was June 15, 1999. The
existing lease for this facility was extended by one year to become coterminous
with the new lease.
44
<PAGE>
The annual rental payment for the first year of the amended lease for 80,400
square feet is $381,900 and increases an average of approximately 2% each year.
In addition, we are responsible for our share of annual operating expenses of
the building presently estimated at $82,800. The lease also provides for rights
of first refusal by us to lease additional space in the building if it becomes
available and to purchase the entire building if the owner decides to sell it.
In June 1999, our subsidiary, AstroPowerWest, LLC, entered into a lease with
Allied Investments for a 3,000 square foot facility in Concord, California for
office and warehouse space. The term of the lease is for three years commencing
July 1, 1999 at an annual rent of $28,728 and increases approximately 2.5% each
year.
Legal Proceedings
We are not a party to any material litigation.
45
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their respective ages and
positions as of August 31, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Allen M. Barnett........ 59 President, Chief Executive Officer and Director
Peter C. Aschenbrenner.. 44 Vice President, Marketing and Sales
Louis C. DiNetta........ 49 Vice President, Advanced Optoelectronic Products
Robert B. Hall.......... 58 Vice President and Chief Scientist
Richard K. McDowell..... 59 Vice President, Manufacturing
Thomas J. Stiner........ 44 Vice President, Secretary and Chief Financial Officer
George S. Reichenbach
(1).................... 69 Director
Charles R. Schaller
(1).................... 63 Director
Clare E. Nordquist (1)
(2).................... 63 Director
Gilbert H. Steinberg (1)
(2).................... 68 Director
George W. Roland........ 59 Director
</TABLE>
- ---------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Allen M. Barnett is a founder of AstroPower and has served as our President
and Chief Executive Officer and as a member of our board of directors since we
incorporated as a separate entity in 1989. From 1983 to 1989 Dr. Barnett served
as General Manager of the AstroPower Division of Astrosystems, Inc. From 1976
to 1993 Dr. Barnett was a Professor of Electrical Engineering at the University
of Delaware. From 1976 to 1979 Dr. Barnett served as Director of the Institute
of Energy Conversion at the University of Delaware. Dr. Barnett is a technical
expert in thin-film materials and devices and has been active in photovoltaic
research and development since 1975, during which time he has been awarded 21
U.S. patents, authored or co-authored numerous technical publications and
garnered several professional awards. Dr. Barnett is Chairman of the Solar
Energy Industries Association and serves on a number of national and
international committees in the field. Dr. Barnett received a B.S. and M.S. in
Electrical Engineering from the University of Illinois and a Ph.D. in
Electrical Engineering from Carnegie Institute of Technology.
Peter C. Aschenbrenner has served as our Vice President, Marketing and Sales
since 1995 and as our Director of Marketing from 1994 to 1995. From 1991 to
1994 Mr. Aschenbrenner served in a number of capacities with Siemens Solar
Industries, LP, including Director of Marketing from 1992 to 1994 and Director
of Technology Development from 1991 to 1992. From 1988 to 1990 Mr.
Aschenbrenner served as Co-Managing Director of Photovoltaic Electric GmbH, a
joint venture between Siemens AG and Arco Solar, Inc. He served in various
positions with Arco Solar from 1978 to 1988. Mr. Aschenbrenner received a B.A.
in Product Design from Stanford University.
Louis C. DiNetta has served as our Vice President, Advanced Optoelectronic
Products since 1996. He joined the AstroPower Division of Astrosystems, Inc. in
1985. Mr. DiNetta is responsible for the research and development of new
photonic energy conversion devices and related optoelectronic products. From
1976 to 1985 Mr. DiNetta worked at the Institute of Energy Conversion at the
University of Delaware, where he was responsible for planning and organization
of device fabrication, as well as process and equipment development to support
various research projects. Mr. DiNetta received a B.S.A.S. in Physics from the
University of Delaware.
46
<PAGE>
Robert B. Hall has served as our Vice President and Chief Scientist since
joining the AstroPower Division of Astrosystems, Inc. in 1983. Dr. Hall's
responsibilities include research and development of thin-film crystalline
materials and ceramic structures for thin-film polycrystalline devices. From
1974 to 1983 Dr. Hall served as Manager, Device Development at the Institute of
Energy Conversion at the University of Delaware. Dr. Hall has more than 18
years of solar cell development experience. Dr. Hall received a B.A. in Physics
from Gettysburg College and an M.S. and Ph.D. in Physics from the University of
Delaware.
Richard K. McDowell has served as our Vice President, Manufacturing since
1998 after joining us in 1996. Most of his career was spent with Unisys
Corporation in various management positions. His last assignment was Director
of Operations, Plant Manager--Huntsville. Mr. McDowell received a B.S. in
Physics from Lasalle College.
Thomas J. Stiner has served as our Secretary since August 1999, as our Chief
Financial Officer since 1997 and as a Vice President since 1995. From 1993 to
1997, Mr. Stiner served as our Controller and Treasurer. From 1984 to 1993 Mr.
Stiner served as a Senior Manager at KPMG LLP. Mr. Stiner is a Certified Public
Accountant and received a B.S. in Business Administration from Bloomsburg
University.
George S. Reichenbach has served as a member of our board of directors since
1989. Dr. Reichenbach was a Managing Director of Advent International
Corporation, a venture capital firm, from 1987 to 1998 and continues to serve
as a consultant to them. He serves as a director of Progressive Systems
Technology, a semiconductor capital equipment manufacturer. Previously, Dr.
Reichenbach worked at the Massachusetts Institute of Technology where he served
as an Assistant Professor and Associate Professor of Mechanical Engineering. In
1956 he joined the Norton Company, a manufacturer of industrial products,
initially as Director of Research and Development and subsequently was
Corporate Vice President in charge of several of Norton's worldwide businesses.
Dr. Reichenbach received a B.S. in Mechanical Engineering from Yale University
and a Sc.D. in Mechanical Engineering from the Massachusetts Institute of
Technology.
Charles R. Schaller has served as a member of our board of directors since
1989 and as our Secretary from 1989 to 1998. Mr. Schaller is a management
consultant specializing in the petrochemicals industry and a venture developer
concentrating in the area of specialty materials, and serves as founding
Chairman and a director of Medarex Inc., a publicly held biotechnology firm.
From 1985 to 1989, Mr. Schaller served as President and Chief Operating Officer
of Essex Vencap, Inc., a venture development subsidiary of Essex Chemical
Corporation. Mr. Schaller has more than 33 years of experience in sales,
marketing, management, business and venture development and management
consulting in the chemical, petrochemical and specialty materials areas. Mr.
Schaller received a B.E. in Chemical Engineering from Yale University and is a
graduate of the Harvard Business School Program for Management Development.
Clare E. Nordquist has served as a member of our board of directors since
1995. Mr. Nordquist is the Managing General Partner of Materia Ventures
Associates LP, a venture capital partnership specializing in advanced
technology materials companies, and serves as a director of Leading Edge
Ceramics, LLC, a manufacturer and distributor of ceramic powders and shapes,
and Viox Corporation, a custom producer of electronic grade, high purity glass
powders utilized primarily in electronics applications. Mr. Nordquist received
a B.S. in Ceramic Engineering from the University of Washington and an M.B.A.
from the University of Denver.
Gilbert H. Steinberg has served as a member of our board of directors since
1989. Mr. Steinberg is Vice President and Chief Financial Officer of
Astrosystems, Inc. In February 1996 its shareholders approved a plan of
liquidation. Mr. Steinberg is one of Astrosystems' officers supervising the
liquidation. Mr. Steinberg is the founder of Mentortech, Inc., a publicly held
company specializing in software development and computer training consulting.
Mr. Steinberg received a B.S. in Industrial Engineering at the Massachusetts
Institute of Technology and an M.S. in Mathematics from Adelphi College.
47
<PAGE>
George W. Roland has served as a member of our board of directors since 1997
and served as President and Chief Executive Officer of our Solar Power Business
from 1996 to December 31, 1998 at which time he retired as an officer and
employee. Dr. Roland currently is a consultant and private investor. From 1995
to 1996, Dr. Roland served as Vice President and General Manager of our Solar
Power Business. From 1993 to June 1995, Dr. Roland served as President of
Siemens Solar Industries, LP, an affiliate of Siemens Corporation (USA). Prior
to that, Dr. Roland served in various positions, including Vice President and
Division Manager of the Metalworking Systems Division, at Kennametal, Inc. Dr.
Roland began his industry career in 1968 as a research and development engineer
at Westinghouse Electric Corporation's Research and Development Center in
Pittsburgh, Pennsylvania, throughout which time he has been awarded 14 U.S.
patents.
Our board of directors is divided into three classes, with the members of
each class serving for a staggered three-year term. Our board currently
consists of two Class I directors, two Class II directors and two Class III
directors. At each annual meeting of stockholders, a class of directors will be
elected for a three-year term to succeed the directors of the same class whose
terms are then expiring. The term of the Class I directors (Messrs. Nordquist
and Schaller) expires at the annual meeting of stockholders to be held in 2002.
The term of the Class II directors (Drs. Reichenbach and Roland) expires at the
annual meeting of stockholders to be held in 2000. The term of the Class III
directors (Messrs. Steinberg and Barnett) expires at the annual meeting of
stockholders to be held in 2001.
Each officer serves at the discretion of our board of directors and holds
office until his successor is elected and qualified or until his earlier
resignation of removal. Prior to March 31, 2000, Dr. Barnett, our President and
Chief Executive Officer, can only be removed by a vote of two-thirds of the
members of the board of directors with Dr. Barnett not eligible to vote.
Committees of the Board of Directors
Our board of directors has established an audit committee and a compensation
committee. The audit committee is composed of Messrs. Nordquist and Steinberg.
The audit committee recommends the selection of our independent public
accountants, reviews the scope and results of the audit and other services
performed by our independent accountants and reviews our accounting practices
and systems of internal accounting controls. The compensation committee is
composed of Messrs. Nordquist, Reichenbach, Schaller and Steinberg. The
compensation committee makes recommendations concerning salaries and incentive
compensation for our executive officers and administers our employee benefit
plans.
Compensation of Directors
We reimburse all of our directors for their out-of-pocket expenses incurred
to attend board of directors and committee meetings. In addition, we pay each
of our directors who is not our employee $1,000 per board meeting attended in
person, $250 per meeting attended telephonically and $250 for each committee
meeting attended. Directors who are also our employees receive no additional
compensation for serving as directors.
In May 1998 we adopted the 1998 Non-Employee Directors Stock Option Plan.
Under the terms of this plan, directors who are not our employees are eligible
to receive nonstatutory options to purchase shares of our common stock. A total
of 160,000 shares of our common stock may be issued upon the exercise of
options granted under the plan. Each non-employee director was granted, or will
be granted upon election to the board, an option to purchase 20,000 shares
which vest in four equal, annual installments beginning on the date of grant.
The exercise price per share of such options is equal to the closing price per
share of our common stock as reported on the Nasdaq National Market on the date
of grant.
In May 1998 Messrs. Nordquist, Reichenbach, Schaller and Steinberg each
received an option to purchase 20,000 shares of common stock with an exercise
price of $10.25 per share. In January 1999 Dr. Roland received an option to
purchase 20,000 shares of common stock with an exercise price of $9.375 per
share.
48
<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation paid
or accrued for the years ended December 31, 1996, 1997 and 1998 to:
. our Chief Executive Officer
. our four other executive officers whose total salary, bonus and other
compensation exceeded $100,000 for the years ended December 31, 1996,
1997 and 1998
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
--------------------------- ------------
Securities
Name and Principal Underlying All Other
Position Year Salary ($) Bonus ($) Options (#) Compensation ($)(1)
- ------------------ ---- ---------- --------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Allen M. Barnett...... 1998 $189,446(2) $ -- (2) 170,000 $5,000
President and Chief
Executive 1997 191,458(2) 50,000(2) 203,250 4,750
Officer 1996 225,819(2) 25,275(2) 21,000 2,375
George W. Roland...... 1998 119,365 27,033 50,000 4,883
President and Chief
Executive 1997 151,840 50,000 -- 4,750
Officer, Solar Power
Business(3) 1996 139,034 15,000 187,500 2,375
Peter C.
Aschenbrenner........ 1998 124,996 -- 40,000 3,177(4)
Vice President,
Marketing 1997 116,449 20,000 19,875 1,353(4)
and Sales 1996 106,779 7,000 -- 1,416(4)
Thomas J. Stiner...... 1998 106,395 -- 40,000 5,000
Vice President,
Secretary and 1997 88,670 25,000 22,500 4,750
Chief Financial
Officer 1996 80,800 20,000 7,500 2,375
Robert B. Hall........ 1998 96,661 -- 15,000 5,000
Vice President and
Chief
Scientist
</TABLE>
- ---------------------
(1) Includes matching contributions under our 401(k) Plan.
(2) Dr. Barnett elected to postpone receipt of salary payments of $23,945 and
$79,047 for the years ended December 31, 1997 and 1996, respectively, as
well as all bonus amounts for the year ended December 31, 1996. These
amounts are included in the above table. At December 31, 1997 we owed Dr.
Barnett an additional $427,215 relating to the postponement of portions of
his salary, bonus and other compensation for the period July 1990 to
December 31, 1995. On December 15, 1997, we agreed that one-third of this
amount would be paid per year in each of 1998, 1999 and 2000, with interest
on the unpaid balance at 6% per annum from January 1, 1998. Accordingly we
paid Dr. Barnett $184,786 in 1998 pursuant to such agreement. This amount
is not included in the above table.
(3) Dr. Roland retired as an officer and employee effective December 31, 1998.
(4) Includes $1,200 annual expense allowance for all years.
49
<PAGE>
Option Grants in 1998 and Year-End Option Values
The following table contains information concerning grants of options to
purchase shares of common stock during the year ended December 31, 1998 to each
of our executive officers named in the Summary Compensation Table above:
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value
Percentage at Assumed Annual
of Total Rates of Stock
Number of Options Price
Securities Granted to Appreciation for
Underlying Employees Exercise Option Term (3)
Options in Fiscal Price Expiration -----------------
Name Granted (1) Year ($/share) (2) Date 5%($) 10%($)
- ---- ----------- ---------- ------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Allen M. Barnett........ 50,000 6.94% $ 8.00 3/26/08 $251,558 $637,497
120,000 16.64% 10.00 8/20/08 70,538 823,119
George W. Roland........ 50,000 6.94% 8.00 3/26/08 251,558 637,497
Peter C. Aschenbrenner.. 40,000 5.55% 8.00 3/26/08 201,200 509,998
Thomas J. Stiner........ 40,000 5.55% 8.00 3/26/08 201,200 509,998
Robert B. Hall.......... 15,000 2.08% 8.00 3/26/08 75,450 191,249
</TABLE>
- ---------------------
(1) Options awarded under the 1989 plan generally provide for vesting over a
period of four years, with vesting occurring 25% per year on the
anniversary date of the option award. The board of directors has the
discretion, subject to plan limits, to modify the terms of outstanding
options.
(2) All options were granted with an exercise price equal to or greater than
the fair market value of the common stock as determined on the date of
grant.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent our estimate of our
future common stock price growth. This table does not take into account any
appreciation in the price of the common stock to date, which exceeds the
hypothetical gains shown in the table. Actual gains, if any, will depend on
the future performance of our common stock.
The following table sets forth, for each of our executive officers named in
the Summary Compensation Table above, information regarding the exercise of
stock options during the fiscal year ended December 31, 1998 and the year-end
value of unexercised options.
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Values
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Shares Options at Fiscal Year- In-the-money Options at
Acquired End Fiscal Year End (1)
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allen M. Barnett........ -- $ -- 200,250 320,000 $1,220,753 $726,500
George W. Roland........ 10,000 54,250 222,500 65,000 1,252,675 165,950
Peter C. Aschenbrenner.. 5,000 23,150 37,468 54,907 210,945 149,126
Thomas J. Stiner........ 800 3,504 53,575 60,625 301,627 181,319
Robert B. Hall.......... -- -- 9,750 26,250 76,393 87,788
</TABLE>
- ---------------------
(1) Calculated on the basis of the fair market value of our common stock at
December 31, 1998 of $9.625 per share, minus the per share exercise price,
multiplied by the number of shares underlying the option.
50
<PAGE>
Employee Benefit Plans
1989 Stock Option Plan
Our 1989 Stock Option Plan was adopted in December 1989. The 1989 plan
authorizes the issuance of up to 1,920,000 shares of our common stock. As of
June 30, 1999, options to purchase an aggregate of 1,642,873 shares at a
weighted average exercise price of $6.25 per share were outstanding. No
additional options may be granted under the 1989 plan which will expire in
December 1999.
The 1989 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code and nonstatutory stock
options. Our officers, employees, directors, consultants and advisors are
eligible to receive awards under the 1989 plan. No employee may receive any
award for more than 500,000 shares in any calendar year.
Optionees receive the rights to purchase a specified number of shares of
common stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. We may grant
options at an exercise price greater than or equal to the fair market value of
our common stock on the date of grant or not less than 110% of the fair market
value in the case of incentive stock options granted to optionees holding more
than 10% of the voting power of the company. Optionees may generally pay the
exercise price of their options by cash, check or surrender to us of shares of
common stock. Options granted under the 1989 plan generally vest in four equal
annual installments beginning on the first anniversary of the date of grant.
Options do not become exercisable until they have vested. Termination or other
changes in employment status may affect the exercise period.
Our board of directors administers the 1989 plan and has the authority to
adopt, amend and repeal the administrative rules, guidelines and practices
relating to the plan and to interpret its provisions. Our board of directors
has delegated authority to administer the 1989 plan to the compensation
committee, including the granting of options to our executive officers. The
committee has the authority to accelerate the date on which options may be
exercised. In the event of a merger, liquidation, consolidation or other
acquisition event, the committee is authorized to make appropriate and
proportionate changes to the then outstanding options.
1999 Stock Option Plan
Our 1999 Stock Option Plan was adopted by our board of directors in April
1999 and was approved by our stockholders in June 1999. The 1999 plan
authorizes the issuance of up to 600,000 shares of our common stock. As of June
30, 1999, options to purchase an aggregate of 439,600 shares at a weighted
average exercise price of $12.09 per share were outstanding.
The 1999 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code and nonstatutory stock
options. Our officers, directors, employees and consultants, and certain
employees and consultants of our majority-owned affiliated companies, are
eligible to receive awards under the 1999 plan.
Optionees receive the rights to purchase a specified number of shares of
common stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. We may grant
options at an exercise price greater than or equal to the fair market value of
our common stock on the date of grant or not less than 110% of the fair market
value in the case of incentive stock options granted to optionees holding more
than 10% of the voting power of the company. Fair market value for purposes of
the 1999 plan is the closing market price of our common stock as reported on
the Nasdaq National Market on the relevant date. Optionees may generally pay
the exercise price of their options by cash, check or surrender to us of shares
of common stock. Generally, no portion of an incentive stock option may vest
within twelve months of the date of grant.
51
<PAGE>
Our compensation committee administers the 1999 plan. The committee has the
authority to adopt, amend and repeal the administrative rules, guidelines and
practices relating to the plan and to interpret its provisions. Our
compensation committee selects the recipients of awards and determines the
number of shares of common stock covered by the options and the dates upon
which such options become exercisable and terminate, subject to certain
provisions of the 1999 plan. Incentive stock options must terminate within ten
years of the date of grant. Nonstatutory options must terminate within fifteen
years of the date of grant. The compensation committee has the right to alter
the terms of any option when granted or while outstanding pursuant to the terms
of the 1999 plan except the option price.
All options automatically become exercisable in full in the event of a
change in control (as defined in the 1999 plan), death or disability of the
optionee or as decided by the compensation committee. Upon retirement options
held at least one year become exercisable in full. If an optionee's employment
with us is terminated for any reason, except death, disability or retirement,
the optionee has three months in which to exercise an option (but only to the
extent exercisable immediately after termination) unless the option by its
terms expires earlier. Termination or other changes in employment status may
affect the exercise period.
Compensatory Stock Plan
Prior to the adoption of the 1989 plan, we had a compensatory stock plan for
the issuance of shares to employees and consultants. At December 31, 1998, the
only remaining obligation under this plan was the reservation of 39,999 shares
for issuance to a former consultant.
401(K) Plan
We have adopted an employee savings and retirement plan qualified under
Section 401(k) of the Internal Revenue Code and covering all of our employees.
Pursuant to this plan, employees may reduce their current compensation by up to
the lessor of 15% of eligible compensation or the statutorily prescribed annual
limited ($10,000 in 1998) and have the amount of such reduction contributed to
the plan. We may, but are not required to, make matching or additional
contributions to the plan in amounts to be determined by the board of
directors.
Employment Arrangements
On April 1, 1997, Allen M. Barnett entered into an employment agreement with
us to serve as our President and Chief Executive Officer. This agreement
provides Dr. Barnett with an annual base salary of $175,000. The initial term
of the agreement ends on March 31, 2000. Prior to that date, we can only
terminate his employment by a vote of two-thirds of the members of the board of
directors with Dr. Barnett not eligible to vote. After March 31, 2000, the
agreement will continue in effect for an indefinite period until either we or
Dr. Barnett elect to terminate the agreement by written notice to the other
party at least six months prior to the effective date of termination. Other
compensation provided in the agreement included an annual bonus based upon our
financial performance and the grant of an option to purchase 187,500 shares of
common stock at an exercise price of $5.33 per share. The option vests in five
equal, annual installments, beginning on the first anniversary of the date of
grant. In 1998 we amended the agreement to eliminate the annual bonus and
instead granted Dr. Barnett an option to purchase 120,000 shares of common
stock at an exercise price of $10.00 per share. This option vests in four,
equal annual installments, beginning on the first anniversary of the date of
grant. We also provide Dr. Barnett with a monthly stipend for the use of an
automobile and repay all of his out-of-pocket expenses incurred in the
performance of his employment obligations.
Should we terminate Dr. Barnett's employment before March 31, 2000, we must
pay Dr. Barnett his base salary for the lesser of one year or the remaining
term of his employment. Should Dr. Barnett die or become disabled during the
term of his employment, we must pay him or his estate his base salary for the
lesser of two years or the remaining term of his employment plus all other
compensation due in that period.
52
<PAGE>
Should we terminate Dr. Barnett's employment upon a change of control of us, we
must pay Dr. Barnett a lump sum equal to one year's base salary and all base
salary and other compensation due for the remaining term of his employment.
Additionally, all remaining unvested stock options would vest immediately.
On May 1, 1996, George W. Roland entered into an employment agreement with
us to serve as President and Chief Executive Officer of our Solar Power
Business. The agreement provided Dr. Roland with an annual base salary of
$155,000. Other compensation included an annual bonus based on our financial
performance and the grant of an option to purchase 187,500 shares of common
stock at an exercise price of $4.00 per share. The option vested in full upon,
and is exercisable for a period of seven years from, the completion of our
initial public offering of common stock in February 1998. In June 1995, in
connection with his initial employment with us, we granted Dr. Roland an option
to purchase 60,000 shares of common stock at an exercise price of $4.00 per
share. Dr. Roland retired as an officer and employee effective as of December
31, 1998, but remains a member of our board of directors.
Our employment agreements with Drs. Barnett and Roland and our employment
arrangements with other executive officers and significant employees impose
customary confidentiality obligations and provide for the assignment to us of
all rights to any technology developed by the employee during the time of his
or her employment.
Compensation Committee Interlocks and Insider Participation
Except with respect to their compensation arrangements, Drs. Barnett and
Roland participated in executive compensation deliberations and recommendations
of the board of directors. During the year ended December 31, 1998, no
executive officer served on the board of directors or compensation committee of
another company that had an executive officer serving on our board of directors
or compensation committee.
53
<PAGE>
CERTAIN TRANSACTIONS
At December 31, 1997, we owed Allen M. Barnett, our President and Chief
Executive Officer, $555,482 in the form of salary, bonus and automobile
reimbursements. The amounts are related to the excess of his salary and bonus
and auto allowance over the amounts actually paid from July 1990 to March 1997.
On December 15, 1997, we agreed that one-third of this amount would be paid per
year in each of 1998, 1999 and 2000, with interest on the unpaid balance at 6%
per annum from January 1, 1998. Accordingly we paid Dr. Barnett $184,786 in
1998 pursuant to such agreement.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
common stock as of June 30, 1999 and as adjusted to reflect the sale of the
shares of common stock in this offering by:
. each person or entity who is known by us to own beneficially more than
five percent of our common stock including our Chief Executive Officer
. our four next most highly compensated executive officers after our Chief
Executive Officer for the year ended December 31, 1998
. each of our directors
. all directors and executive officers as a group
. all other selling stockholders
The beneficial ownership is calculated based on 8,716,871 shares of our
common stock outstanding as of June 30, 1999 and 10,741,871 shares outstanding
immediately following the completion of this offering. Beneficial ownership is
determined in accordance with the rules and regulations of the Securities and
Exchange Commission and includes shares over which the indicated beneficial
owner exercises voting and/or investment power. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of the date of this
prospectus are deemed outstanding. These shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person. Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in the table has
sole voting and investment power with respect to the shares set forth opposite
such stockholders' name. The address of each of the executive officers and
directors is care of AstroPower, Inc., Solar Park, Newark, Delaware 19716-2000.
54
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned Number of Shares Beneficially Owned
Before the Offering (1) Shares After the Offering (1)
------------------------------ Being -------------------------------
Name of Beneficial Owner Number Percentage Offered Number Percentage
- ------------------------ --------------- -------------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Allen M. Barnett (2).... 1,482,331 16.5% 61,250 1,421,081 12.9%
Wellington Management
Company LLP (3)........ 833,000 9.6% -- 833,000 7.8%
75 State Street
Boston, MA 02109
Astrosystems, Inc....... 588,750 6.8% 588,750 -- --
1220 Market Street,
Suite 603
Wilmington, DE 19801
The Dow Chemical
Company................ 560,832 6.4% -- 560,832 5.2%
2030 Dow Center
Midland, MI 48674
Greenville Capital
Management, Inc. (4)... 542,612 6.2% -- 542,612 5.1%
P.O. Box 220
Rockland, DE 19732
FMR Corporation (5)..... 426,000 5.0% -- 426,000 4.0%
82 Devonshire Street
Boston, MA 02109
Peter C. Aschenbrenner
(6).................... 49,204 ** -- 49,204 **
Robert B. Hall (7)...... 82,049 ** -- 82,049 **
Thomas J. Stiner (8).... 67,508 ** -- 67,508 **
Clare E. Nordquist (9).. 10,000 ** -- 10,000 **
George S. Reichenbach
(10)................... 10,000 ** -- 10,000 **
George W. Roland (11)... 182,500 2.1% 25,000 157,500 1.4%
Charles R. Schaller
(12)................... 15,250 ** -- 15,250 **
Gilbert H. Steinberg
(13)................... 598,750 6.9% 588,750 10,000 **
All directors and
executive officers as a
group (eleven persons)
(14)................... 2,534,117 27.0% 675,000 1,859,117 17.3%
</TABLE>
- ---------------------
** Represents less than 1 percent of our outstanding common stock.
(1) Applicable percentage of ownership is based on 8,716,871 shares of our
common stock outstanding as of June 30, 1999 and treats as outstanding all
shares issuable on exercise of options exercisable within 60 days of the
date hereof held by beneficial owners that are included in the first
column.
(2) Includes 1,181,364 shares held by a family trust of which Dr. Barnett is a
beneficiary and also 280,250 shares subject to options exercisable within
60 days from the date hereof. Dr. Barnett disclaims beneficial ownership
of the shares held by the trust except to the extent of his pecuniary
interest therein.
(3) As reported in a Schedule 13G dated December 31, 1998, Wellington
Management Company LLP has shared power to vote or to direct the vote with
respect to 713,000 shares and shared power to dispose or to direct the
disposition with respect to 833,000 shares. Wellington Management Company
LLP, a parent holding company, is a registered investment advisor.
Wellington Trust Company, NA, is a wholly-owned bank subsidiary of
Wellington Management Company LLP. Wellington Management Company LLP
disclaims beneficial ownership with respect to the shares reported in this
filing.
(4) As reported in a Schedule 13G dated January 21, 1999, Greenville Capital
Management, Inc., has sole power to dispose of or to direct the
disposition of these shares. Greenville Capital Management, Inc. is a
registered investment adviser.
(5) As reported in a Schedule 13G dated June 1, 1999, Fidelity Management &
Research Company, a wholly-owned subsidiary of FMR Corp. and a registered
investment adviser, is the beneficial owner of 200,000 shares as a result
of acting as investment adviser to various registered investment
companies,
55
<PAGE>
or the funds. Edward C. Johnson 3d, FMR Corp., through its control of
Fidelity, and the funds collectively each has sole power to dispose of the
200,000 shares owned by the funds. Neither FMR Corp., nor Edward C. Johnson
3d, Chairman of FMR Corp., has the sole power to vote or direct the voting
of the shares owned directly by the funds, which power resides with the
funds' Board of Trustees. Fidelity carries out the voting of the shares
under written guidelines established by the funds' Board of Trustees.
Fidelity Management Trust Company, a wholly-owned bank subsidiary of FMR
Corp., is the beneficial owner of 111,700 shares as a result of its serving
as investment manager of the institutional account(s). Edward C. Johnson 3d
and FMR Corp., through its control of Fidelity Management Trust Company,
each have sole dispositive power over 111,700 shares and sole power to vote
or to direct the voting of 111,700 shares. Fidelity International Limited
and various foreign-based subsidiaries provide investment advisory and
management services to a number of non-U.S. investment companies, the
international funds and certain institutional investors. Fidelity
International Limited is the beneficial owner of 115,170 shares and has
sole power to vote or direct the voting of 115,170 shares of common stock
held by the international funds.
(6) Includes 49,204 shares subject to options exercisable within 60 days from
the date hereof.
(7) Includes 13,800 shares subject to options exercisable within 60 days from
the date hereof.
(8) Includes 67,508 shares subject to options exercisable within 60 days from
the date hereof.
(9) Includes 10,000 shares subject to options exercisable within 60 days from
the date hereof.
(10) Includes 10,000 shares subject to options exercisable within 60 days from
the date hereof.
(11) Includes 182,500 shares subject to options exercisable within 60 days from
the date hereof.
(12) Includes 10,000 shares subject to options exercisable within 60 days from
the date hereof.
(13) Includes 10,000 shares subject to options exercisable within 60 days from
the date hereof and 588,750 shares held by Astrosystems, Inc. Mr.
Steinberg, a member of our board of directors, is an officer, director and
shareholder of Astrosystems, Inc. and disclaims beneficial ownership of
shares held by Astrosystems, Inc. except to the extent of his pecuniary
interest therein.
(14) Includes an aggregate of 662,887 shares held by all directors and officers
that are subject to options exercisable within 60 days from the date
hereof. See Notes (6) through (13) above.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 25,000,000 shares of common stock, par
value $.01 per share, and 5,000,000 shares of preferred stock, par value $.01
per share. Upon consummation of this offering, no shares of preferred stock and
10,741,871 shares of common stock will be outstanding. The following
description of our capital stock is based upon, and is qualified in its
entirety by reference to, our amended and restated certificate of incorporation
and amended and restated by-laws.
Common Stock
As of June 30, 1999, there were 8,716,871 shares of common stock outstanding
that were held of record by approximately 322 stockholders. As of that same
date, there were also outstanding options to purchase an aggregate of 2,182,473
shares of common stock at a weighted average exercise price of $7.60 per share.
Holders of our common stock are entitled to one vote per share of each share
held on all matters submitted to a vote of stockholders. We do not have
cumulative voting rights in the election of directors, and accordingly, holders
of a majority of the shares entitled to vote in any election of directors may
elect all of the directors standing for election. Subject to preferential
rights with respect to any outstanding preferred stock, holders of our common
stock are entitled to receive proportionately such dividends as may be declared
by our board of directors out of funds legally available. In the event of our
liquidation, dissolution or winding up, holders of our common stock are
entitled to share proportionately in our available assets, after payments of
all debts and other liabilities. Holders of our common stock have no
preemptive, subscription, redemption or conversion rights. Our outstanding
shares of our common stock are, and the shares of our common stock offered
hereby, will, upon completion of the offering, be, validly issued, fully paid
and non-assessable. The rights, preferences and privileges of holders of our
common stock are subject to and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which we may designate and
issue in the future.
Preferred Stock
Under the terms of our amended and restated certificate of incorporation,
our board of directors is authorized to issue shares of preferred stock in one
or more series without stockholder approval. Our board of directors has the
discretion to determine the rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or could discourage a third party from acquiring,
a majority of our outstanding voting stock. We have no present plans to issue
any shares of preferred stock.
Delaware Law and our Charter and By-law Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Section 203 prohibits certain publicly held Delaware
corporations from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder", unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person or entity who, together with affiliates
and associates, owns or within the three years prior to the date on which the
determination of whether such person is an interested stockholders is being
made, did own 15% or more of the corporation's voting stock. Our amended and
restated certificate of incorporation contains provisions enabling us to avoid
the statute's restrictions if the stockholders holding a majority of our voting
stock
57
<PAGE>
approve an amendment to our amended and restated certificate of incorporation
and amended and restated by-laws. These provisions may make it more difficult
for a third party to acquire, or discourage acquisition bids for us.
Our amended and restated certificate of incorporation classifies our board
of directors into three classes, with directors of each class serving for a
staggered three-year period. Our amended and restated certificate of
incorporation also provides that directors may be removed only for cause and
only upon the affirmative vote of the holders of at least 80% of the
outstanding shares of our common stock entitled to vote for such directors.
Under our amended and restated certificate of incorporation only our board of
directors, but not our stockholders, has the authority to fill vacancies and
newly created directorships on the board of directors. In addition, our amended
and restated certificate of incorporation provides that any action required or
permitted to be taken by our stockholders must be effected at an annual or
special meeting of stockholders and not by any consent in writing by our
stockholders. Only the board of directors may call special meetings of our
stockholders. Such provisions may make the removal of incumbent directors more
difficult and time-consuming and may have the effect of discouraging a tender
offer or other takeover attempt not previously approved by the board of
directors.
Our amended and restated certificate of incorporation also incorporates
certain provisions permitted under the General Corporation Law of Delaware
relating to the liability of directors. The provisions eliminate a director's
liability for monetary damages for a breach of fiduciary duty, including gross
negligence, except in circumstances involving certain wrongful acts, such as
the breach of a director's duty of loyalty or acts or omissions which involve
intentional misconduct or a knowing violation of law. These provisions do not
eliminate a director's duty of care nor do they prevent recourse against
directors through equitable remedies such as injunctive relief. Moreover, the
provisions do not apply to claims against a director for violations of certain
laws, including federal securities laws.
Our amended and restated certificate of incorporation also contains
provisions to indemnify the directors, officers, employees or other agents to
the fullest extent permitted by the General Corporation Law of Delaware. These
provisions may have the practical effect in certain cases of eliminating the
ability of our stockholders to collect monetary damages from directors. We
believe that these provisions will assist us in attracting or retaining
qualified individuals to serve as directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, its address is 40 Wall Street, New York, New York
10005, and its telephone number at this address is (212-936-5100).
Listing
Our common stock is traded on the Nasdaq National Market under the trading
symbol "APWR."
58
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Hambrecht & Quist LLC,
CIBC World Markets Corp. and FAC/Equities, a division of First Albany
Corporation, have severally agreed to purchase from AstroPower and the selling
stockholders the following respective number of shares of our common stock.
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Hambrecht & Quist LLC............................................ 1,251,820
CIBC World Markets Corp.......................................... 625,909
FAC/Equities, a division of First Albany Corporation............. 625,909
Adams Harkness & Hill, Inc. ..................................... 98,181
Brean Murray & Co., Inc. ........................................ 98,181
---------
Total.......................................................... 2,700,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and independent
auditors. The nature of the underwriters' obligation is such that they are
committed to purchase all shares of common stock offered in this offering if
any of such shares are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $0.42 per share. The underwriters may allow and such dealers may reallow a
concession not in excess of $0.10 per share to certain other dealers. After the
public offering of the shares, the offering price and other selling terms may
be changed by the representatives of the underwriters.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 405,000 additional
shares of common stock at the public offering price, less the underwriting
discount set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase approximately the same percentage of the additional shares that the
number of shares of common stock to be purchased by such underwriter shown in
the above table bears to the total number of shares of common stock offered in
this offering. We will be obligated, pursuant to the option, to sell shares to
the underwriters to the extent the option is exercised. The underwriters may
exercise the option only to cover over-allotments made in connection with the
sale of common stock offered in this prospectus.
The following table summarizes the per share and total underwriting
discounts and commissions that we and the selling stockholders will pay to the
underwriters in connection with this offering:
<TABLE>
<CAPTION>
Total
---------------------
Without
Per Over- With Over-
Share allotment allotment
----- ---------- ----------
<S> <C> <C> <C>
Underwriting discounts and commissions payable by
us............................................... $0.77 $1,559,250 $1,871,100
Underwriting discounts and commissions payable by
selling stockholders(1).......................... $0.77 $ 519,750 $ 519,750
</TABLE>
- ---------------------
(1) The selling stockholders have not granted the underwriters an option to
purchase additional shares of common stock to cover over-allotments.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
59
<PAGE>
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended, and to contribute to payments the underwriters may be
required to make in respect thereof.
Our executive officers and directors and the selling shareholders have
agreed that, with certain exceptions, they will not directly or indirectly,
without the prior written consent of Hambrecht & Quist LLC, sell, offer,
contract to sell, transfer the economic risk of ownership in, make any short
sale, pledge or otherwise dispose of any shares of our common stock or any
securities convertible into or exchangeable or exercisable for or any rights to
purchase or acquire our common stock during the 90-day period following the
effective date of the registration statement relating to this prospectus. We
have agreed that we will not, without the prior written consent of Hambrecht &
Quist LLC, offer, sell or otherwise dispose of any shares of common stock or
options to acquire shares of common stock or securities exchangeable for or
convertible into shares of common stock during the 90-day period following the
date of this prospectus, except that we may issue shares upon the exercise of
options granted prior to the date hereof, and may grant additional options
under our stock option plans, provided that, without the prior written consent
of Hambrecht & Quist LLC, the additional options shall not be exercisable
during that period. Hambrecht & Quist LLC may consent to the termination of
this agreement at any time or from time to time without notice.
In general, the rules of the Securities and Exchange Commission will
prohibit the underwriters from making a market in our common stock during the
"cooling off" period immediately preceding the commencement of sales in this
offering. The SEC has, however, adopted exemptions from these rules that permit
passive market marking under certain conditions. These rules permit an
underwriter to continue to make a market subject to the conditions, among
others, that its bid not exceed the highest bid by a market maker not connected
with the offering and that its net purchases on any one trading day not exceed
prescribed limits. Pursuant to these exemptions, certain underwriters, selling
group members (if any) or their respective affiliates intend to engage in
passive market making in our common stock during the cooling off period.
Certain persons participating in this offering may over-allot or effect
transactions that stabilize, maintain or otherwise affect the market price of
our common stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the common stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
permits the underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of common stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
60
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby is being passed
upon for us by Foreht Last Landau & Katz LLP, New York, New York. Certain legal
matters with respect to the offering are being passed upon for the underwriters
by Hale and Dorr LLP, Boston, Massachusetts. A partner of Foreht Last Landau &
Katz LLP owns 100,000 shares of our common stock.
EXPERTS
Our financial statements and schedule as of December 31, 1997 and 1998 and
for each of the years in the three-year period ended December 31, 1998 have
been included herein and in the Registration Statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
WHERE CAN YOU FIND MORE INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission in Washington,
D.C. a registration statement on Form S-1 under the Securities Act with respect
to the shares of common stock offered in this prospectus. This prospectus does
not contain all the information set forth in the registration statement and the
exhibits and schedules thereto. For further information about us and our common
stock, we refer you to the registration statement and to the exhibits and
schedules filed with it. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete; we refer you to those copies of contracts or other documents that
have been filed as exhibits to the registration statement, and statements
relating to such documents are qualified in all respects by such reference.
Anyone may inspect a copy of the registration statement without charge at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain copies of all or any portion of the registration statement by
writing to the SEC's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549, and paying prescribed fees. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0300. In
addition, the SEC maintains a Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
companies such as ours that file electronically with the SEC.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and therefore we file reports, proxy statements and
other information with the SEC. You can inspect and copy the reports, proxy
statements and other information that we file at the public reference
facilities maintained by the SEC at the Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices located
at 7 World Trade Center, Suite 1300, New York, New York, 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can also obtain copies
of such material from the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The SEC also makes
electronic filings publicly available on its Web site within 24 hours of
acceptance. Our common stock is quoted on the Nasdaq National Market under the
trading symbol "APWR." Reports, proxy and information statements and other
information about us may be inspected at the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
61
<PAGE>
ASTROPOWER, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of KPMG LLP, Independent Auditors................................... F-1
Balance Sheets............................................................. F-2
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficit)............................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AstroPower, Inc.
We have audited the accompanying balance sheets of AstroPower, Inc. as of
December 31, 1997 and 1998, 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, 1997 and 1998, 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,
------------------------ June 30,
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (including
restricted cash of $4,788,519 at
December 31, 1997)................... $ 4,908,177 $ 6,545,095 $ 2,149,598
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $72,962 in 1997, $70,695
in 1998 and $88,596 in 1999
(unaudited)......................... 3,326,200 6,531,144 8,685,613
Employee receivables................. 10,191 84,121 86,277
Other, including amounts due from
stockholder......................... 25,681 32,113 18,663
Inventories........................... 1,602,321 3,596,676 6,299,388
Prepaid expenses...................... 350,471 159,948 1,008,079
Deferred tax asset.................... -- 1,796,338 1,483,096
----------- ----------- -----------
Total current assets.............. 10,223,041 18,745,435 19,730,714
Property and equipment:
Machinery and equipment.............. 6,856,031 10,448,628 11,459,615
Furniture and fixtures............... 152,617 334,186 419,210
Leasehold improvements............... 205,298 917,698 967,568
Construction in progress............. 536,370 1,575,163 1,912,058
----------- ----------- -----------
7,750,316 13,275,675 14,758,451
Less accumulated depreciation and
amortization......................... (2,858,195) (3,654,796) (4,171,783)
----------- ----------- -----------
4,892,121 9,620,879 10,586,668
----------- ----------- -----------
Total assets...................... $15,115,162 $28,366,314 $30,317,382
=========== =========== ===========
</TABLE>
F-2
<PAGE>
ASTROPOWER, INC.
BALANCE SHEETS--(Continued)
<TABLE>
<CAPTION>
December 31,
------------------------ June 30,
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable...................... $ 2,314,495 $ 2,629,068 $ 3,490,597
Note payable -- stockholder........... 58,000 -- --
Note payable -- bank.................. 203,357 -- --
Current maturities of long-term debt.. 55,000 -- --
Accrued payroll and payroll taxes
(includes $185,161 in 1997, $185,910
in 1998 and $186,834 in 1999
(unaudited) due to the Company's
President and Chief Executive
Officer)............................. 978,256 963,243 856,933
Accrued expenses...................... 394,564 313,640 234,042
Advance from customer................. 610,891 -- 3,646
----------- ----------- -----------
Total current liabilities......... 4,614,563 3,905,951 4,585,218
Other liabilities:
Long-term debt, excluding current
maturities........................... 6,277,174 -- --
Deferred tax liability................ -- 801,452 801,452
Deferred compensation and other
(including amounts due to officers
and a stockholder)................... 463,900 396,027 205,525
----------- ----------- -----------
6,741,074 1,197,479 1,006,977
----------- ----------- -----------
Total liabilities................. 11,355,637 5,103,430 5,592,195
----------- ----------- -----------
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 shares issued and outstanding
in 1997, $.01 per share par value, 8%
dividend rate, non-cumulative........ 3,364 -- --
Common Stock, 25,000,000 shares
authorized; 3,769,772 in 1997,
8,572,455 in 1998 and 8,716,871 in
1999 (unaudited) shares issued and
outstanding, $.01 per share par
value................................ 37,698 85,725 87,169
Additional paid-in capital............ 3,288,017 25,956,474 26,637,422
Note receivable....................... (79,125) -- --
Unearned compensation................. (343,743) (245,718) (196,706)
Accumulated deficit................... (4,945,411) (2,533,597) (1,802,698)
----------- ----------- -----------
Total stockholders' equity
(deficit)........................ (2,039,200) 23,262,884 24,725,187
----------- ----------- -----------
Total liabilities and
stockholders' equity (deficit)... $15,115,162 $28,366,314 $30,317,382
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ASTROPOWER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------- -----------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales......... $ 6,237,349 $13,094,871 $20,205,913 $8,894,825 $13,550,281
Research contracts.... 4,346,118 3,511,898 2,953,196 1,421,102 1,578,840
----------- ----------- ----------- ---------- -----------
Total revenues...... 10,583,467 16,606,769 23,159,109 10,315,927 15,129,121
Cost of revenues:
Product sales......... 6,896,109 9,311,140 14,942,121 6,530,910 9,973,474
Research contracts.... 2,579,994 2,539,915 2,296,895 1,137,925 1,136,912
----------- ----------- ----------- ---------- -----------
Total cost of
revenues........... 9,476,103 11,851,055 17,239,016 7,668,835 11,110,386
----------- ----------- ----------- ---------- -----------
Gross profit........ 1,107,364 4,755,714 5,920,093 2,647,092 4,018,735
Operating expenses:
Product development
expenses............. 775,963 1,006,979 1,392,251 608,543 1,045,759
General and
administrative
expenses............. 1,858,862 1,972,144 2,495,838 1,183,655 1,392,242
Selling expenses...... 660,468 853,812 951,249 451,173 593,461
----------- ----------- ----------- ---------- -----------
Total operating
expenses........... 3,295,293 3,832,935 4,839,338 2,243,371 3,031,462
----------- ----------- ----------- ---------- -----------
Income (loss) from
operations......... (2,187,929) 922,779 1,080,755 403,721 987,273
Other expense (income):
Interest expense...... 168,782 369,233 252,200 197,589 785
Interest income....... (5,685) (113,730) (598,624) (338,387) (57,653)
Other expense
(income)............. 11,959 (4,550) (3) -- --
----------- ----------- ----------- ---------- -----------
Total other expense
(income)........... 175,056 250,953 (346,427) (140,798) (56,868)
Income (loss) before
income taxes........... (2,362,985) 671,826 1,427,182 544,519 1,044,141
Income tax expense
(benefit).............. -- 20,000 (984,632) 25,000 313,242
----------- ----------- ----------- ---------- -----------
Net income (loss)....... $(2,362,985) $ 651,826 $ 2,411,814 $ 519,519 $ 730,899
=========== =========== =========== ========== ===========
Net income (loss) data:
Net income (loss) per
share-- basic........ $ (0.64) $ 0.18 $ 0.30 $ 0.07 $ 0.09
=========== =========== =========== ========== ===========
Net income (loss) per
share-- diluted...... $ (0.64) $ 0.13 $ 0.28 $ 0.07 $ 0.08
=========== =========== =========== ========== ===========
Weighted average
shares outstanding--
basic................ 3,699,702 3,710,258 7,956,221 7,336,169 8,639,821
=========== =========== =========== ========== ===========
Weighted average
shares outstanding--
diluted.............. 3,699,702 6,220,161 9,572,194 7,336,169 9,543,149
=========== =========== =========== ========== ===========
</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 Unearned Accumulated
Shares Amount Shares Amount Capital Receivable Compensation Deficit Total
-------- ------ --------- ------- ----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................ 252,001 $2,520 3,697,632 $36,977 $ 2,117,529 $ -- $ -- $(3,234,252) $ (1,077,226)
Issuance of Series B
Convertible
Preferred Stock, net
of issuance costs.. 76,908 769 -- -- 574,736 -- -- -- 575,505
Common Stock
issued............. -- -- 4,143 41 5,131 -- -- -- 5,172
Net loss............ -- -- -- -- -- -- -- (2,362,985) (2,362,985)
-------- ------ --------- ------- ----------- -------- --------- ----------- ------------
Balance, December 31,
1996................ 328,909 3,289 3,701,775 37,018 2,697,396 -- -- (5,597,237) (2,859,534)
Issuance of Series B
Convertible
Preferred Stock..... 11,250 112 -- -- 89,888 -- -- -- 90,000
Purchase and
retirement of
Series B........... -- -- --
Convertible
Preferred Stock.... (3,750) (37) -- -- (29,963) -- -- -- (30,000)
Common Stock
issued............. -- -- 67,997 680 113,471 (79,125) -- -- 35,026
Stock options
granted............ -- -- -- -- 417,225 -- (417,225) --
Amortization of
unearned
compensation....... -- -- -- -- -- -- 73,482 -- 73,482
Net income.......... -- -- -- -- -- -- -- 651,826 651,826
-------- ------ --------- ------- ----------- -------- --------- ----------- ------------
Balance, December 31,
1997................ 336,409 $3,364 3,769,772 $37,698 $ 3,288,017 $(79,125) $(343,743) $(4,945,411) $ (2,039,200)
Conversion of Series
A Convertible
Preferred Stock.... -- -- 1,309,626 13,096 5,785,629 -- -- -- 5,798,725
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 -- -- 16,813,055
Amortization of
unearned
compensation....... -- -- -- -- -- -- 98,025 -- 98,025
Stock options
granted............ -- -- -- -- 101,340 -- 101,340
Repayment of note
receivable......... -- -- -- -- -- 79,125 -- -- 79,125
Net income.......... -- -- -- -- -- -- 2,411,814 2,411,814
-------- ------ --------- ------- ----------- -------- --------- ----------- ------------
Balance, December 31,
1998................ -- $ -- 8,572,455 $85,725 $25,956,474 $ -- $(245,718) $(2,533,597) $ 23,262,884
Common Stock
issued............. -- -- 144,416 1,444 680,948 -- -- -- 682,392
Amortization of
unearned
compensation....... -- -- -- -- -- -- 49,012 -- 49,012
Net income.......... -- -- -- -- -- -- -- 730,899 730,899
-------- ------ --------- ------- ----------- -------- --------- ----------- ------------
Balance, June 30,
1999 (unaudited).... -- $ -- 8,716,871 $87,169 $26,637,422 $ -- ($196,706) ($1,802,698) $24,725,187
======== ====== ========= ======= =========== ======== ========= =========== ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
ASTROPOWER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)....... $(2,362,985) $ 651,826 $ 2,411,814 $ 519,519 $ 730,899
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Deferred income
taxes................ -- -- (994,886) -- 313,242
Depreciation and
amortization......... 474,569 545,066 796,601 328,244 516,987
Common stock issued
for services......... -- 18,500 -- -- --
Stock options issued
for services......... -- -- 50,670 -- --
Amortization of
unearned
compensation......... -- 73,482 98,025 93,022 49,012
Changes in working
capital items:
Accounts
receivable......... 278,164 (1,313,264) (3,285,306) (1,629,210) (2,154,469)
Inventories......... 921,855 (388,133) (1,994,355) (1,407,492) (2,702,712)
Prepaid expenses.... 5,587 (291,201) 190,523 47,744 (848,131)
Accounts payable and
accrued expenses... 595,790 719,000 233,649 (266,066) 781,931
Accrued payroll and
payroll taxes...... 330,684 313,736 (15,013) (61,608) (291,096)
Advance from
customer........... 111,260 277,355 (610,891) (289,135) 3,646
Other............... 12,143 (16,562) (16,822) 64,001 5,578
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities............. 367,067 589,805 (3,135,991) (2,600,981) (3,595,113)
Cash flows from
investing activities:
Capital expenditures.. (970,431) (893,920) (5,474,689) (3,646,848) (1,482,776)
----------- ----------- ----------- ----------- -----------
Net cash used in invest-
ing activities......... (970,431) (893,920) (5,474,689) (3,646,848) (1,482,776)
----------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Proceeds from issuance
of long-term debt.... 202,097 6,033,076 -- -- --
Net borrowings
(repayments) from
line of credit....... 175,000 (327,843) (203,357) (203,357) --
Repayment of long-term
debt................. (358,200) (594,396) (6,390,174) (1,393,174) --
Proceeds from issuance
of common stock...... 4,875 16,525 229,049 118,859 682,392
Proceeds from issuance
of common stock--
initial public
offering............. -- -- 16,612,080 16,612,080 --
Proceeds from issuance
of preferred stock... 575,505 90,000 -- -- --
Repurchase of
preferred stock...... -- (30,000) -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities... 599,277 5,187,362 10,247,598 15,134,408 682,392
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (4,087) 4,883,247 1,636,918 8,886,579 (4,395,497)
Cash and cash
equivalents at
beginning of period.... 29,017 24,930 4,908,177 4,908,177 6,545,095
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 24,930 $ 4,908,177 $ 6,545,095 $13,794,756 $ 2,149,598
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid....... $ 129,555 $ 160,544 $ 597,190 $ 326,993 $ --
Taxes paid.......... -- -- 31,000 24,000 51,600
</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 of August
15, 1998.
On February 19, 1998, the Company converted all shares of 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 that convert sunlight directly into electricity. Solar electric power
is used in on-grid applications by existing electric utility customers to
provide a clean, renewable source of alternative or supplementary electric
power. Solar electric power is also used off the electric utility grid for many
applications in the communications and transportation industries and in remote
villages and homes. 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 12.
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, 1997 and 1998 were
$4,776,886 and $8,175,354 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, 1996 and 1997 and 1998 were $303,677, $176,397, and $828,009
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
F-7
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(1) Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
benefiting the contracts are incurred, which approximates the percentage of
completion method. Provisions for estimated losses are made in the period in
which losses are determined. Accounts receivable includes unbilled accounts
receivable consisting of material, labor and overhead expended on contracts.
Product Development Expenses
These expenses represent the material, labor and overhead costs incurred to
develop processes in support of the Company's Silicon-Film(TM) wafer, solar
cell and module engineering effort which are not funded by research contracts.
Income Taxes
The Company accounts for income taxes in accordance with the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues and expense, and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
(2) Interim Financial Information (Unaudited)
The interim financial statements of the Company for the six months ended
June 30, 1998 and 1999, included herein, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the SEC. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principals have been
condensed or omitted pursuant to the rules and regulations relating to interim
financial statements.
(3) Inventories
A summary of inventories is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1997 1998 1999
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Raw materials.............................. $1,199,738 $2,995,166 $4,310,905
Work-in-process............................ 210,380 138,927 179,808
Finished goods............................. 192,203 462,583 1,808,675
---------- ---------- ----------
$1,602,321 $3,596,676 $6,299,388
========== ========== ==========
</TABLE>
F-8
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(4) Debt
A summary of the Company's long-term debt follows:
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1997 1998 1999
---------- ------ -----------
(unaudited)
<S> <C> <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 facilities at
December 31, 1998 or June 30, 1999 (unaudited).
F-9
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(5) Income Taxes
No income tax provision was recorded for the year ended December 31, 1996.
An income tax provision (benefit) of $20,000 and ($984,632) was recorded for
the years ended December 31, 1997 and 1998. Income tax expense (benefit)
differed from the amounts computed by applying the U.S. federal income tax rate
of 34% to pretax income (loss) as a result of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1997 1998
--------- -------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).... $(803,415) $228,421 $ 485,242
Utilization of net operating loss
carryforwards............................... -- (17,685) (205,266)
State income tax expense (benefit), net of
federal..................................... -- 20,761 (80,651)
Change in valuation allowance................ 770,392 135,928 (1,809,315)
Change in tax rates.......................... -- -- 242,107
Tax liability in excess (less than) in excess
provision................................... 33,023 (347,425) 185,579
Other........................................ -- -- 197,672
--------- -------- ----------
Actual tax expense (benefit)................. $ -- $ 20,000 $ (984,632)
========= ======== ==========
Income tax expense (benefit) for the years 1996, 1997 and 1998 consists of:
<CAPTION>
1996 1997 1998
--------- -------- ----------
<S> <C> <C> <C>
Current:
Federal.................................... $ -- $ 20,000 $ 10,254
State...................................... -- -- --
Deferred:
Federal.................................... -- -- (872,688)
State...................................... -- -- (122,198)
--------- -------- ----------
Total tax expense (benefit).................. $ -- $ 20,000 $ (984,632)
========= ======== ==========
</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,
----------------------------------
1996 1997 1998
----------- ---------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Deferred revenue......................... $ 133,000 $ 242,780 $ --
Advances from customer and accrued
expenses................................ 161,958 323,698 417,159
Federal and state net operating loss
carry forward........................... 1,750,000 2,021,628 1,301,454
Other.................................... -- -- 77,725
----------- ---------- ---------
Total gross deferred tax assets.......... 2,044,958 2,588,106 1,796,338
Less valuation allowance................. (1,673,387) (1,809,315) --
----------- ---------- ---------
Net deferred tax assets ................... 371,571 778,791 1,796,338
Deferred tax liabilities:
Plant and equipment, due to differences
in depreciation methods and basis....... (371,571) (778,791) (801,452)
----------- ---------- ---------
Net deferred amount........................ $ -- $ -- $ 994,886
=========== ========== =========
</TABLE>
F-10
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(5) Income Taxes (continued)
The change in the valuation allowance results from management's assessment
of whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. At
December 31, 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.
(6) 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 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>
Annual Rent Expected
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,
1996, 1997 and 1998 amounted to approximately $219,000, $242,000 and $596,000,
respectively.
(7) Related Parties
At December 31, 1997 and 1998, the Company owed its President and Chief
Executive Officer $555,482 and $370,696, 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.
(8) 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
F-11
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(8) Employee Benefit Plan (continued)
ended December 31, 1996, 1997 and 1998 was $66,800, $145,000 and $150,000,
respectively. The Company does not provide any postemployment benefits.
(9) 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.
(10) Employee Stock Option Plan
1989 Stock Option Plan
The Company adopted a Stock Option Plan ("the 1989 Plan") in 1989 under
which a total of 1,920,000 shares are currently reserved for issuance to
employees including officers and directors who are employees or consultants.
Options granted pursuant to the 1989 Plan may be either incentive stock options
or non-qualified stock options. The 1989 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 1989 Plan provides that the purchase price under the
option shall be at least 100 percent of the fair market value of the shares of
the Company's Common Stock at the date of grant. The options are not
transferable. There are limitations on the amount of incentive stock options
that an employee can be granted in a single calendar year. The terms of each
option granted under the 1989 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.
1999 Stock Option Plan (unaudited)
The Board of Directors of the Company adopted the 1999 Stock Option Plan on
April 16, 1999 ("the 1999 Plan"), under which a total of 600,000 shares are
currently reserved for issuance. The 1999 Plan was approved by shareholders on
June 16, 1999. The principal provisions of the 1999 Plan are similar to those
F-12
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(10) Employee Stock Option Plan (continued)
1999 Stock Option Plan (unaudited) (continued)
described above for the 1989 Plan, except that options may be transferred under
certain limited circumstances.
Stock option transactions during the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1999 under the 1989 and 1999 Plans are
summarized below:
<TABLE>
<CAPTION>
Exercise Weighted
Price Range - Average
Shares Per Share Exercise Price
--------- ------------- --------------
<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.............................. 546,233 $ 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............. 1,088,946 4.00
Granted.............................. 720,975 $6.00-$10.00 8.57
Exercised............................ (45,730) $0.33-$10.00 3.28
Cancelled............................ (35,570) $4.00-$10.00 6.41
---------
Balance, December 31, 1998............. 1,282,621 5.88
Granted.............................. 553,233 $9.38-$17.88 11.74
Exercised............................ (113,596) $ 0.33-$9.13 3.91
Cancelled............................ (85,785) $4.00-$15.63 7.30
--------- ------
Balance, June 30, 1999 (unaudited)..... 2,082,473 $ 7.48
========= ======
</TABLE>
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. A committee of the Board of
Directors administers the Directors' Plan. 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 weighted average remaining contractual life for options outstanding at
December 31, 1998 is 7.88 years.
F-13
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(10) Employee Stock Option Plan (continued)
1999 Stock Option Plan (unaudited) (continued)
The following is a summary of stock options exercisable under all of the
Company's stock option plans as of December 31, 1996, 1997 and 1998 and June
30, 1999:
<TABLE>
<CAPTION>
Exercise Price Weighted
Range per Average
Shares 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
June 30, 1999 (unaudited).............. 909,913 $0.33-$17.88 $5.22
</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.
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, 1997 and 1998
was $73,482 and $98,025 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:
<TABLE>
<S> <C>
Expected life (in years).............................................. 5.0
Risk-free interest rate............................................... 5.5%
Volatility............................................................ .50
Assumed dividend yield................................................ 0.0%
</TABLE>
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
volatility of publicly traded technology companies with similar
characteristics.
As a private entity at December 31, 1996 and 1997, the Company used the
minimum value method for "valuing options" and an interest rate of 6.5%.
F-14
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(10) Employee Stock Option Plan (continued)
1999 Stock Option Plan (unaudited) (continued)
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>
1996 1997 1998
------- ---- ------
<S> <C> <C> <C>
Net income (loss) as reported.......................... $(2,363) $652 $2,412
Proforma net income (loss)............................. $(2,433) $464 $1,131
Proforma basic net income (loss) per share............. $ (.66) $.13 $ .14
Proforma diluted net income (loss) per share........... $ (.66) $.07 $ .12
</TABLE>
(11) Government Contracts
During the years ended December 31, 1996, 1997 and 1998, 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, 1996, 1997 and 1998.
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. The Company has revised its methodology for determining
overhead rates for 1997 and 1998. 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, 1997 and 1998, retainage amounts included in accounts receivable were
approximately $167,000 and $174,000, respectively. The Company estimates that
approximately 30% of the retainage amounts at December 31, 1998 will be
collected during 1999. At December 31, 1997 and 1998, unbilled accounts
receivable were approximately $211,000.
F-15
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(12) 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>
Six Months
Year Ended December 31, Ended
--------------------------- June 30,
1996 1997 1998 1999
------- ------- ------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Customer A............................ 41% 21% 13% 10%
Customer B............................ -- 12% 18% 12%
Customer C............................ 12% 17% 14% 28%
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 57% of revenues and 66% 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.
(13) Geographic Distribution of Product Revenues
Total product revenues are summarized as a percentage by geographic area as
follows:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended
--------------------------- June 30,
1996 1997 1998 1999
------- ------- ------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Domestic........................... 14% 27% 22% 26%
Export:
Europe........................... 49% 56% 63% 62%
Asia............................. 30% 12% 6% 10%
Africa........................... 7% 5% 9% 2%
</TABLE>
All of the Company's research contract revenues are within the United
States.
(14) 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 exchange for future consulting services.
F-16
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(14) Strategic Alliances (continued)
Corning Incorporated (continued)
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 repayment, 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.
GPU Solar, Inc.
In July 1997, the Company entered into a joint venture with GPU
International, Inc. to form GPU Solar, Inc. 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 was specified services and reduced pricing on sales to the joint
venture.
(15) 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, 1997 and
1998 was $610,756 and $0, respectively.
(16) 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.
F-17
<PAGE>
ASTROPOWER, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table presents the computation of basic and diluted income
(loss) per share:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------------
1996 1997 1998
------------------------- ------------------------ ------------------------
Income (Loss) Average Income Average Income Average
Available to Common Available to Common Available to Common
Common Shares Common Shares Common Shares
Stockholders Outstanding Stockholders Outstanding Stockholders Outstanding
------------- ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Basic................... $(2,362,985) 3,699,702 $651,826 3,710,258 $2,411,814 7,956,221
Dilutive Effect:
Stock Options........... -- -- -- 344,786 -- 536,609
Convertible Debt........ -- -- 157,377 518,460 239,314 885,448
Convertible Preferred
Stock.................. -- -- -- 1,646,657 -- 193,916
----------- --------- -------- --------- ---------- ---------
Diluted................. $(2,362,985) 3,699,702 $809,203 6,220,161 $2,651,128 9,572,194
=========== ========= ======== ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------------------
June 30, 1998 June 30, 1999
------------------------ ------------------------
(unaudited)
-------------------------------------------------
Income Average Income Average
Available to Common Available to Common
Common Shares Common Shares
Stockholders Outstanding Stockholders Outstanding
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Basic................... $519,519 7,336,169 $730,899 8,639,821
Dilutive Effect:
Stock Options........... -- -- -- 903,328
Convertible Debt........ -- -- -- --
Convertible Preferred
Stock.................. -- -- -- --
-------- --------- -------- ---------
Diluted................. $519,519 7,336,169 $730,899 9,543,149
======== ========= ======== =========
</TABLE>
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,700,000 Shares
[LOGO OF ASTROPOWER APPEARS HERE]
Common Stock
--------------
PROSPECTUS
--------------
Hambrecht & Quist
CIBC World Markets
FAC/Equities
--------------
October 13, 1999
--------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We and the selling stockholders are offering to
sell, and seeking offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of our common stock or possession or distribution of
this prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
