10-Q 1 d10q.txt FORM 10-Q FOR ASTROPOWER UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark one) X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 for the three months ended June 30, 2002 OR ____ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ______________ Commission File Number 000-23657 AstroPower, Inc. (Exact name of registrant as specified in its charter) Delaware 51-0315869 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 300 Executive Drive Newark, Delaware 19702-3316 (Address of principal executive offices) (Zip Code) 302-366-0400 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _____ ------- (Registrant became subject to filing requirements on February 12, 1998) AstroPower, Inc. FORM 10-Q FOR THE THREE MONTHS ENDED June 30, 2002 TABLE OF CONTENTS
Page No. -------- PART I: FINANCIAL INFORMATION ----------------------------- ITEM 1. FINANCIAL STATEMENTS . Consolidated Balance Sheets - June 30, 2002 (unaudited) and December 31, 2001 ......................................... 1, 2 . Consolidated Statements of Income and Comprehensive Income (unaudited) - Three months and six months ended June 30, 2002 and 2001 ................................ 3, 4 . Consolidated Statements of Cash Flows (unaudited) - Six months ended June 30, 2002 and 2001 ................................................. 5 . Notes to Consolidated Financial Statements (unaudited) .................................. 6 - 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......................................................... 9 - 13 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK ................................................................................. 14 PART II: OTHER INFORMATION -------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......................................... 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................. 15 SIGNATURES .................................................................................. 16
Cautionary Note Regarding Forward-Looking Statements This quarterly report on Form 10-Q contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties and assumptions as described from time to time in registration statements, annual reports, and other periodic reports and filings which we file with the Securities and Exchange Commission. All statements, other than statements of historical facts, which address our expectations of sources of capital or which express our expectation for the future with respect to financial performance or operating strategies can be identified as forward-looking statements. As a result, there can be no assurance that our future results will not be materially different from those described herein as "believed", "anticipated", "estimated" or "expected", which reflect our current views with respect to future events. We caution readers that these forward-looking statements speak only as of the date hereof. We hereby expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any such statements to reflect any changes in our expectations or any change in events, conditions or circumstances on which such statement is based. ASTROPOWER, INC. CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31 ASSETS 2002 2001 ------------------------------------------------------------------------- ---------------- -------------- CURRENT ASSETS: Cash and cash equivalents ............................................... $ 39,947,669 53,850,869 Accounts receivable: Trade, net ......................................................... 33,886,586 22,498,368 Value-added tax and other .......................................... 1,389,400 1,699,530 Inventories ............................................................. 38,318,882 27,916,150 Prepaid expenses ........................................................ 3,304,818 1,063,661 Deferred tax asset ...................................................... 4,204,132 4,204,132 ---------------- -------------- Total current assets ........................................... 121,051,487 111,232,710 INVESTMENT IN AFFILIATES ................................................ 2,365,648 2,557,723 DEFERRED TAX ASSET ...................................................... 1,229,341 1,361,513 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $9,572,724 and $8,075,793 as of June 30, 2002 and 2001, respectively ........................................ 45,923,048 36,610,206 GOODWILL ................................................................ 18,332,614 16,374,783 ---------------- -------------- Total assets ................................................... $188,902,138 168,136,935 ================ ==============
See accompanying notes to consolidated financial statements. 1 ASTROPOWER, INC. CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31 2002 2001 --------------- ------------ (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------------------------------------------ CURRENT LIABILITIES: Notes payable to banks ................................................. $ 11,877,844 5,214,050 Current installments of long-term debt ................................. 887,022 630,059 Accounts payable ....................................................... 16,611,536 10,164,979 Accrued payroll and payroll taxes ...................................... 1,949,491 1,783,721 Accrued expenses ....................................................... 774,548 1,396,116 --------------- ------------ Total current liabilities .................................... 32,100,441 19,188,925 OTHER LIABILITIES: Long-term debt, excluding current installments ......................... 1,304,308 1,315,650 Other .................................................................. 1,363,168 972,454 --------------- ------------ Total liabilities ............................................ 34,767,917 21,477,029 --------------- ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock ........................................................... 217,760 216,029 Additional paid-in capital ............................................. 142,371,047 140,102,158 Retained earnings ...................................................... 9,063,985 6,700,605 Accumulated comprehensive income ....................................... 2,481,429 (358,886) --------------- ------------ Total stockholders' equity .................................. 154,134,221 146,659,906 --------------- ------------ Total liabilities and stockholders' equity ....... $188,902,138 168,136,935 =============== ============
See accompanying notes to consolidated financial statements. 2 ASTROPOWER, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended June 30 ---------------------------- (unaudited) 2002 2001 ------------ ------------ REVENUES: Product sales .................................... $ 20,101,830 15,294,686 Research contracts ............................... 336,509 771,113 ------------ ------------ Total revenues ......................... 20,438,339 16,065,799 COST OF REVENUES: Product sales .................................... 14,424,738 10,609,107 Research contracts ............................... 266,561 563,926 ------------ ------------ Total cost of revenues ................. 14,691,299 11,173,033 ------------ ------------ Gross profit ........................... 5,747,040 4,892,766 OPERATING EXPENSES: Product development expenses ..................... 1,497,671 1,196,535 General and administrative expenses .............. 1,836,895 1,209,012 Selling expenses ................................. 2,163,371 1,030,516 Litigation settlement related legal fees ......... - 8,704 ------------ ------------ Income from operations ................. 249,103 1,447,999 OTHER INCOME (EXPENSE): Interest expense ................................. (120,816) - Interest income .................................. 347,145 948,017 Other, net ....................................... 54,163 (31,629) ------------ ------------ Total other income ..................... 280,492 916,388 ------------ ------------ INCOME BEFORE INCOME TAXES ............................. 529,595 2,364,387 INCOME TAX EXPENSE ..................................... 164,175 709,320 ------------ ------------ NET INCOME ............................................. $ 365,420 1,655,067 ============ ============ COMPREHENSIVE INCOME: Net income ....................................... $ 365,420 1,655,067 Foreign currency translation adjustments ......... 3,215,336 - ------------ ------------ COMPREHENSIVE INCOME ................................... $ 3,580,756 1,655,067 ============ ============ NET INCOME DATA: Net income per share - basic ..................... $ 0.02 0.08 ============ ============ Net income per share - diluted ................... $ 0.02 0.07 ============ ============ Weighted average shares outstanding - basic ...... 21,757,319 21,101,879 ============ ============ Weighted average shares outstanding - diluted .... 23,634,781 23,351,085 ============ ============
See accompanying notes to consolidated financial statements. 3 ASTROPOWER, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Six Months Ended June 30 ------------------------------------ (unaudited) 2002 2001 ---------------- ---------------- REVENUES: Product sales ................................................. $ 40,454,794 28,875,921 Research contracts ............................................ 678,980 1,495,319 ---------------- ---------------- Total revenues ...................................... 41,133,774 30,371,240 COST OF REVENUES: Product sales ................................................. 27,831,895 20,057,590 Research contracts ............................................ 519,900 1,087,295 ---------------- ---------------- Total cost of revenues .............................. 28,351,795 21,144,885 ---------------- ---------------- Gross profit ........................................ 12,781,979 9,226,355 OPERATING EXPENSES: Product development expenses .................................. 2,914,415 2,321,220 General and administrative expenses ........................... 3,250,886 2,370,465 Selling expenses .............................................. 3,801,259 1,872,986 Litigation settlement and related legal fees .................. - 3,782,945 ---------------- ---------------- Income from operations .............................. 2,815,419 (1,121,261) OTHER INCOME (EXPENSE): Interest expense .............................................. (214,284) (8,668) Interest income ............................................... 817,292 1,368,855 Other, net .................................................... 28,060 (43,709) ---------------- ---------------- Total other income .................................. 631,068 1,316,478 ---------------- ---------------- INCOME BEFORE INCOME TAXES .......................................... 3,446,487 195,217 INCOME TAX EXPENSE .................................................. 1,083,106 58,570 ---------------- ---------------- NET INCOME .......................................................... $ 2,363,381 136,647 ================ ================ COMPREHENSIVE INCOME: Net income ...................................................... $ 2,363,381 136,647 Foreign currency translation adjustments ........................ 2,840,315 - ---------------- ---------------- COMPREHENSIVE INCOME ................................................ $ 5,203,696 136,647 ================ ================ NET INCOME DATA: Net income per share - basic .................................. $ 0.11 0.01 ================ ================ Net income per share - diluted ................................ $ 0.10 0.01 ================ ================ Weighted average shares outstanding - basic ................... 21,693,836 19,658,781 ================ ================ Weighted average shares outstanding - diluted ................. 23,619,193 21,830,616 ================ ================
See accompanying notes to consolidated financial statements. 4 ASTROPOWER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30 ------------------------------------ (unaudited) 2002 2001 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................................... $ 2,363,381 136,647 Adjustments to reconcile net income to net cash used in operating activities:-- Deferred income taxes ................................................... 1,079,929 58,570 Depreciation and amortization ........................................... 1,447,510 852,173 Equity in (income) losses of affiliates ................................. (8,953) 49,668 Amortization of unearned compensation - 43,709 Changes in working capital items: ....................................... Accounts receivable .................................................. (13,271,725) (955,725) Inventories .......................................................... (9,894,387) (4,901,673) Prepaid expenses ..................................................... (2,242,221) (680,260) Accounts payable and accrued expenses ................................ 8,221,917 4,495,277 Accrued payroll and payroll taxes .................................... 135,070 185,814 Other ................................................................ 161,433 16,070 -------------- -------------- Net cash used in operating activities ......................................... $ (12,008,046) (699,730) -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .......................................................... (9,943,910) (3,306,661) Investments in affiliates ..................................................... (38,299) (2,011,750) Distribution from affiliate ................................................... 240,000 - -------------- -------------- Net cash used in investing activities ......................................... (9,742,209) (5,318,411) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from lines of credit ........................................... 6,552,698 - Repayment of borrowings ....................................................... (128,605) - Proceeds from exercise of common stock options ................................ 1,417,825 1,806,722 Net proceeds from common stock offering ....................................... - 62,128,495 -------------- -------------- Net cash provided by financing activities ..................................... 7,841,918 63,935,217 -------------- -------------- EFFECTS ON EXCHANGE RATES ON CASH ................................................ 5,137 - NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS ............................. (13,903,200) 57,917,076 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................. 53,850,869 24,538,022 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................................... $ 39,947,669 82,455,098 ============== ==============
See accompanying notes to consolidated financial statements. 5 AstroPower, Inc. Notes to Consolidated Financial Statements June 30, 2002 (unaudited) (1) General The accompanying consolidated financial statements for the three-month and six-month periods ended June 30, 2002 and 2001 have been prepared by AstroPower, Inc. (Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary to present fairly the financial position and operating results of the Company as of and for the respective periods. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. However, management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. The accompanying financial statements should be read in conjunction with the financial statements contained in the Company's Annual Report Form 10-K for the year ended December 31, 2001. The results of operations for interim periods may not be indicative of the results that may be expected for the entire year. (2) Litigation Settlement In April 2001, the Company reached an agreement in principle with the U.S. Department of Justice to settle a civil action against the Company filed in October 2000, in the U.S. District Court for the District of Delaware seeking to recover damages and penalties with respect to the submission of invoices and Incurred Cost Submissions in connection with contracts with the U.S. Department of Defense and U.S. Department of Energy. A Release and Settlement Agreement dated June 29, 2001 was executed and the previously agreed to settlement payment of $3.5 million was made on July 9, 2001. On July 13, 2001, a Joint Stipulation of Dismissal was filed with the District Court stipulating that the action be dismissed with prejudice. (3) Inventories A summary of inventories is as follows: June 30, 2002 December 31, 2001 (unaudited) ------------------ ---------------------- Raw materials $ 33,070,961 24,511,998 Work-in-process 1,764,912 1,406,590 Finished goods 3,483,009 1,997,562 ------------------ ---------------------- $ 38,318,882 27,916,150 ================== ====================== (4) Debt On March 7, 2001, the Company increased its available revolving line of credit with a financial institution from $3 million to $6 million, which was fully utilized as of June 30, 2002. The facility bears interest at the financial institution's National Commercial Rate minus 0.25% (4.75% as of June 30, 2002), is payable on demand and is secured by accounts receivable. The Company is required to maintain a minimum working capital ratio, a minimum level of tangible net worth and a minimum total debt to net worth ratio; with which the Company is in compliance at June 30, 2002. Also, with the September 2001 acquisition of Atersa (note 5), the Company assumed obligations under existing term loans. Such Atersa obligations amounted to $1.9 million as of June 30, 2002. Additionally with the acquisition, the Company assumed lines of credit. These Atersa lines of credit outstanding amounted to $5.9 million as of June 30, 2002. 6 (5) Acquisition On September 11, 2001, the Company acquired all the outstanding stock of Aplicaciones Tecnicas de la Energia, S.A., commonly known as Atersa, a privately held company based in Valencia, Spain for $22.2 million. As part of the transaction, the Company also acquired Atersa's 50% equity stake in AstraSolar, a Spanish solar cell manufacturing joint venture between the Company and Atersa. Atersa is a leading manufacturer of solar electric power modules and balance-of-system components, as well as a provider of system design and integration services. Atersa also designs and builds a full range of module manufacturing equipment. The acquisition of Atersa is expected to provide further geographical reach to the Company. Results of operations related to the acquisition are included in the consolidated financial statements from September 11, 2001. Under the terms of the agreement, the Company acquired Atersa and Atersa's 50% stake in AstraSolar for $22.2 million in a stock and cash transaction. Atersa shareholders directly received approximately $12.8 million of the total consideration in cash. $1.5 million of direct acquisition costs were incurred by the Company. Also, certain shareholders received in aggregate, 183,984 restricted shares of the Company's common stock (valued at $7.9 million). The value of the common stock was determined based on the average market price of the Company's stock over the five-day period before and after the terms of the acquisition were agreed to and announced. Based on the preliminary allocation of the purchase price, the Company has originally estimated goodwill, at the date of acquisition to be $16.8 million ($18.3 million at June 30, 2002 after the effects of exchange rates). (6) New Accounting Pronouncements In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement No. 142. Statement No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Effective July 1, 2001, the Company adopted SFAS No. 141 and the transition provisions of SFAS No. 142 relating to non-amortization of goodwill associated with the acquisition of Atersa described in Note 5. Effective January 1, 2002 the Company fully adopted SFAS No. 142. The Company performed its transitional test for goodwill impairment prior to June 30, 2002, as required by this statement. No goodwill impairment loss was recognized. Additionally goodwill will be evaluated annually or sooner, if events or circumstances indicate that goodwill might be impaired. In August 2001, the FASB issued statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Statement No. 143 requires recognition of a liability at fair value and an increase to the carrying value of the related asset for any retirement obligation. This amount would then be amortized over the life of the asset. The liability would be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows. This statement is effective January 1, 2003. Management does not expect adoption of this statement to have a material impact on our financial condition or results of operations. In October 2001, the FASB issued statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 incorporated the disposal of a business segment into the framework of Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement also excludes goodwill that was included in statement No. 121 scope and provided refinement to cash flow estimations for defining any applicable impairment. This statement was adopted January 1, 2002 and did not have a material impact on our financial condition or results of operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This standard addresses the accounting and reporting for costs of exit activities (including restructuring) and for the disposal 7 of long-lived assets. The standard changes some of the criteria for recognizing a liability for these activities. It is effective beginning in 2003 with the liability recognition criteria under the standard applied prospectively. The Company is in the process of analyzing the potential impact of this statement on future transactions. (7) Stock Split On May 8, 2002, the Company announced a three-for-two stock split effected in the form of a dividend to shareholders of record May 20, 2002, distributed on May 31, 2002. All prior year common stock, additional paid-in capital, share and per share information have been restated in the accompanying financial statements to give effect to the stock split. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies and Estimates General Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to revenue, accounts receivable, inventories and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. Revenue Recognition Revenue from product sales is recognized when products are shipped. Revenue related to the Company's fixed price, cost-plus, cost-sharing research contracts and other agreements are recognized at the time costs benefiting the contracts are incurred, which approximates the percentage of completion method. Provisions for estimated losses are made in the period in which losses are determined. Accounts receivable includes unbilled accounts receivable consisting of material, labor and overhead. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowance for doubtful accounts is based on review of the overall condition of accounts receivable balances and review of significant past due accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory We value our inventories at the lower of cost or market. Cost is determined by using the weighted average method. Income Taxes We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" which requires that deferred tax assets and liabilities be recognized for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. We review the recoverability of any tax assets recorded on the balance sheet and provide any necessary allowances as required. Overview We develop, manufacture, market and sell a range of solar electric power generation products, including solar cells, modules, panels and our SunChoice(TM) pre-packaged systems for the global marketplace. Through our Spanish subsidiary, Atersa, acquired on September 11, 2001, we provide solar electric power modules, balance-of-system components and provide system design and integration services. Atersa also designs and builds a full range of module manufacturing equipment. Solar cells are the core component inside every solar electric power system. Our products provide an environmentally friendly, reliable energy solution at the point of use and are sold for both off-grid and on-grid applications. In off-grid applications, our products provide the primary source of electric power for rural homes and villages and supply power for equipment in the telecommunications and transportation industries. In on-grid applications, our products provide a renewable source of alternative or supplemental electric power and provide reliable back-up power in the event of a utility outage. In addition to our solar power generation product offerings, we sell wholesale solar electric power under long-term purchase agreements through a joint venture with GPU International, 9 Inc. We currently generate product revenues from the sale of solar cells, modules, pre-packaged systems and system design and integration services. While the predominant source of our product revenues to date has been recycled wafer products, we are continuing a significant expansion of our Silicon-Film manufacturing capacity. We recognize product sales revenue upon shipment. Product sales represented 98.4% of total revenues for the three months ended June 30, 2002 and 98.6% of total revenues for the six months ended June 30, 2002. 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. We also generate revenue from contracts with various federal government agencies to conduct research on advanced Silicon-Film 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. Substantially all of our revenues from government contracts are subject to audit under various federal statutes. For the three and six months ended June 30, 2002, 71.6% and 78.8%, respectively of our product revenues were generated by sales to customers located outside of the United States. We believe that international sales will continue to account for a significant portion of our product sales for the foreseeable future. Currently, sales from our US operations are denominated in U.S. dollars, and sales from our Spanish operations are generally denominated in Euros. Historically, transactions denominated in foreign currency have not had a significant impact on our results of operations. Solar cells that we manufacture are sold to original equipment manufacturers that assemble the solar cells into modules. In addition, we assemble and sell modules to distributors and value-added resellers. We also sell our SunChoice(TM) residential rooftop systems. The sale of modules and systems results in substantially more revenue to us per watt than the sale of solar cells due to the incremental value of the additional materials, labor and overhead. Accordingly, our product sales are affected not just by changes in total solar cells produced, but by changes in the sales mix among solar cells, modules and systems. The gross margin percentage for modules and systems are generally less than those of solar cells. As a result, changes in the product sales mix may also affect total product gross margin. Due to our historical manufacturing constraints, we have traditionally carried low quantities of finished goods inventory. During the second quarter of 2002, our customer product allocation process was affected by difficulties in forecasting demand, principally in the German market. As a result, we were unable to sell finished goods of approximately $2 million in the three month period ended June 30, 2002, as the configurations and certifications for this product limited its ability to be immediately sold in other markets. Additionally, we experienced some disruptions to our module manufacturing lines in the quarter as a result of changes in customer product allocation. As our busines grows and becomes more complex, we beleive that slightly higher levels of finished goods inventory are desirable to allow for more efficient scheduling for our module factories. We believe that the additional finished goods inventory accumulated during the second quarter of 2002 represents an appropriate level, and do not anticipate significant increases or reductions from this level for the balance of the year. 10 Results of Operations Three Months Ended June 30, 2002 and 2001 Revenues - Our total revenues were $20.4 million for the three months ended June 30, 2002, an increase of $4.4 million or 27.2% from 2001. Product sales were $20.1 million for the three months ended June 30, 2002, an increase of $4.8 million or 31.4% from 2001. Our increase in product sales was due to ongoing strong demand for our products and expansion of manufacturing capacity, including incremental revenues from our Spanish subsidiary Atersa, acquired in September 2001. The incremental revenues from Atersa for the three months ended June 30, 2002 amounted to less than 10% of consolidated revenues. Contract revenues were $337,000 for the three months ended June 30, 2002, a decrease of $435,000 or 56.4% from 2001. During 2001, the Company became ineligible for Small Business Innovative Research (SBIR) contracts due to the company exceeding the limit of 500 employees. Gross profit - Our gross profit was $5.7 million for the three months ended June 30, 2002, an increase of $854,000 or 17.5% from 2001. Product gross profit for the three months ended June 30, 2002 was $5.7 million, an increase of $1.0 million or 21.1% from 2001. Our product gross margin was 28.2% for the three months ended June 30, 2002. In the similar 2001 period, the product gross margin was 30.6%. Our product gross margin declined due to lower product pricing as well as slightly higher product manufacturing costs. Our gross profit on research contracts for the three months ended June 30, 2002 was $70,000, a decrease of $137,000 or 66.2% from the 2001 period. Product development costs - Our product development costs for the three months ended June 30, 2002 were $1.5 million, up $301,000 or 25.2% from 2001, as a result of increased levels of development efforts related to new products. General and administrative expenses - Our general and administrative expenses for the three months ended June 30, 2002 were $1.8 million, an increase of $628,000 or 51.9% from the similar 2001 period. The increase is primarily a result of higher levels of salaries due to additions to personnel, rents, relocation costs, professional fees and insurance expenses. Selling expenses - Our selling expenses for the three months ended June 30, 2002 were $2.2 million, an increase of $1.1 million or 109.9% from 2001. The increase is due to higher salary costs as a result of additions to the sales and marketing staff, increased rent expense, higher travel expenditures, and higher printing and advertising expenses; a large portion of which are related to our SunChoice program, and more specifically, the Home Depot expansion. Interest expense - Our interest expense for the three months ended June 30, 2002 was $121,000, as compared with $-0- in the 2001 period. Interest expense has increased primarily due to borrowings of Atersa, our Spanish subsidiary acquired in 2001, as well as increased borrowings domestically. Interest income - Our interest income for the three months ended June 30, 2002 was $347,000, as compared with $948,000 in the 2001 period. The decrease in interest income is attributable to lower average cash balances as well as lower interest rates. Income taxes - The income tax expense for the three months ended June 30, 2002 was $164,000, representing an effective rate of 31.0%, as compared with income tax expense of $709,000 in 2001, representing an effective rate of 30.0%. The increase in income tax is primarily due to the tax benefit related to the prior year $3.5 million settlement with the U.S. government. Our effective tax rate is lower than the statutory rates, principally as a result of research and experimentation tax credits and the benefit of a Foreign Sales Corporation. 11 Results of Operations Six Months Ended June 30, 2002 and 2001 Revenues - Our total revenues were $41.1 million for the six months ended June 30, 2002, an increase of $10.8 million or 35.4% from 2001. Product sales were $40.5 million for the six months ended June 30, 2002, an increase of $11.6 million or 40.1% from 2001. Our increase in product sales was due to ongoing strong demand for our products and expansion of manufacturing capacity, including incremental revenues from our Spanish subsidiary Atersa, acquired in September 2001. The incremental revenues from Atersa for the six months ended June 30, 2002 amounted to less than 10% of consolidated revenues. Contract revenues were $679,000 for the six months ended June 30, 2002, a decrease of $816,000 or 54.6% from 2001. During 2001, the Company became ineligible for Small Business Innovative Research (SBIR) contracts due to the company exceeding the limit of 500 employees. Gross profit - Our gross profit was $12.8 million for the six months ended June 30, 2002, an increase of $3.6 million or 38.5% from 2001. Product gross profit for 2002 was $12.7 million, an increase of $3.8 million or 44.2% from 2001. Our product gross margin was 31.4% for the six months ended June 30, 2002. In the similar 2001 period, the product gross margin was 30.5%. Our gross profit on research contracts for the six months ended June 30, 2002 was $159,000, a decrease of $249,000 or 61.0% from the 2001 period. Product development costs - Our product development costs for the six months ended June 30, 2002 were $2.9 million, up $600,000 or 25.6% from 2001, as a result of increased levels of development efforts related to new products. General and administrative expenses - Our general and administrative expenses for the six months ended June 30, 2002 were $3.3 million, an increase of $880,000 or 37.1% from the similar 2001 period. The increase is primarily a result of higher levels of salaries due to additions to personnel, rents, relocation expenses, professional fees and insurance expenses. Selling expenses - Our selling expenses for the six months ended June 30, 2002 were $3.8 million, an increase of $1.9 million or 103.0% from 2001. The increase is due to higher salary costs as a result of additions to the sales and marketing staff, increased rent expense, higher travel expenditures, and higher printing and advertising expenses; a large portion of which are related to our SunChoice program, and more specifically, the Home Depot expansion. Interest expense - Our interest expense for the three months ended June 30, 2002 was $214,000 as compared with $9,000 in the 2002 period. Interest expense has increased primarily due to borrowings of Atersa, our Spanish subsidiary acquired in 2002, as well as additional domestic borrowings. Interest income - Our interest income for the six months ended June 30, 2002 was $817,000, as compared with $1.4 million in the 2001 period. The decrease in interest income is attributable to lower average cash balances and lower interest rates. Income taxes - The income tax expense for the six months ended June 30, 2002 was $1.1 million, representing an effective rate of 31.4%, as compared with income tax expense of $59,000 in 2001, representing an effective rate of 30.0%. The increase in income tax is primarily due to the tax benefit related to the prior year $3.5 million settlement with the U.S. government. Our effective tax rate is lower than the statutory rates, principally as a result of research and experimentation tax credits and the benefit of a Foreign Sales Corporation. Net Income - Our net income for the six months ended June 30, 2002 was $2.4 million as compared with net income of $137,000 for the similar prior year period. The increase in net income is primarily the result of a non-recurring pre-tax charge of $3.5 million related to our litigation settlement in 2001 with the U.S. government. 12 Liquidity and Capital Resources At June 30, 2002, we had cash of $39.9 million, as compared with $53.9 million at December 31, 2001. The decrease in the cash balance is primarily due to capital expenditures, as part of our ongoing expansion of our manufacturing capacity, and changes in net working capital activities (principally an increase in accounts receivable) during the quarter. Cash flow from operations for the six months ended June 30, 2002 was negative in the amount of $12.0 million, principally as a result of an increase in accounts receivable. The Company's plans are to reduce the levels of accounts receivable so as to improve cash flows from operations. For the past several years, we have been constrained by manufacturing capacity and, in response, have been adding equipment and factory space to increase capacity. Historically, the photovoltaic industry has taken a number of years to make its new capacity fully productive. Our experience in making our new manufacturing equipment fully productive is approximately 9-18 months. At the end of 2001, we had 65 megawatts of manufacturing equipment in place. In late February 2002, we assumed occupancy of a new manufacturing and office facility. The manufacturing area of this facility contains space to allow the construction of an additional 125 megawatts over the next few years, which will bring our total installed manufacturing equipment capacity to 190 megawatts. Our sources of liquidity as of June 30, 2002 consist principally of cash of $39.9 million and remaining available bank credit lines of $2.1 million. Any borrowings under our bank facility will be secured by accounts receivable. Borrowings outstanding under the bank credit lines as of June 30, 2002 were $11.9 million. On September 11, 2001, the Company acquired all of the outstanding stock of Aplicaciones Tecnicas de la Energia, S.A., commonly known as Atersa, a privately held company based in Valencia, Spain for $22.2 million. As part of the transaction, the Company also acquired Atersa's 50% equity stake in AstraSolar, a Spanish solar cell manufacturing joint venture between the Company and Atersa. Atersa is a leading manufacturer of solar electric power modules and balance-of- system components, as well as a provider of system design and integration services. Atersa also designs and builds a full range of module manufacturing equipment. Under the terms of the agreement, the Company acquired Atersa and Atersa's 50% stake in AstraSolar for $22.2 million in a stock and cash transaction. Atersa shareholders directly received approximately $12.8 million of the total consideration in cash. $1.5 million of direct acquisition costs were incurred by the Company. Also, certain shareholders received in aggregate, 183,984 restricted shares of the Company's common stock. On May 8, 2002, the Company announced a three-for-two stock split to shareholders of record on May 20, 2002. All prior year share and per share information have been restated in the accompanying financial statements to give effect to the stock split. We expect that our available cash balance, together with projected cash generated from operations and the available bank credit lines, will be sufficient to fund our activities for at least the next 24 months. 13 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK We develop products in the United States and Spain and market our products in North America as well as in Europe, Asia, Africa and South America. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Because a significant portion of our revenues are currently denominated in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. Our September 2001 acquisition of Atersa, whose revenues are generally denominated in Euros, may mitigate a portion of this risk. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Due to the short-term nature of our investments, we believe that there is not a material risk exposure. 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Shareholders was held on May 08, 2002 for the purpose of the following: 1. To elect two directors to serve until the 2005 Annual Meeting of Shareholders. 2. To amend our 1999 Stock Option Plan so as to increase the number of shares available under the Plan. 3. To ratify the appointment of KPMG LLP as our independent accountants for the fiscal year 2002. Shareholders votes on these proposals follow: Election of Directors: Name For Against Broker Non-Votes Thomas J. Stiner 9,263,981 147,045 - Clare E. Nordquist 9,269,048 140,278 - -
For Against Abstain Broker Non-Votes Proposal to amend 1999 Stock Option 5,171,373 694,164 71,236 - Plan Proposal to ratify appointment of 9,201,981 189,794 19,351 - independent accountants
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits 99.1 Certificate of Chief Executive Officer and Chief Financial Officer (annexed hereto) There were no reports on Form 8-K filed during the quarter ended June 30, 2002 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AstroPower, Inc. Date: August 14 2002 By: /s/ Allen M. Barnett --------------------------------------------- Allen M. Barnett President and Chief Executive Officer Date: August 14 2002 By: /s/ Thomas J. Stiner --------------------------------------------- Thomas J. Stiner Senior Vice President and Chief Financial Officer (Principal Financial Officer) 16