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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 000-31687

EVERGREEN SOLAR, INC.

259 Cedar Hill Street
Marlboro, Massachusetts 01752
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(508) 357-2221
(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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  [X]  No  [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  [X]  No  [  ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of April 25, 2003 there were 11,411,646 shares of common stock outstanding.

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EVERGREEN SOLAR, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Evergreen Solar, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)

The accompanying notes are an integral part of these financial statements.

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Evergreen Solar, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

The accompanying notes are an integral part of these financial statements.

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Evergreen Solar, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

The accompanying notes are an integral part of these financial statements.

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1. Basis of Presentation

The accompanying condensed consolidated interim financial statements of Evergreen Solar, Inc. (“Evergreen Solar” or the “Company”) are unaudited and have been prepared on a basis substantially consistent with the Company’s audited financial statements for the year ended December 31, 2002. The condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Consequently, these statements do not include all disclosures normally required by generally accepted accounting principles for annual financial statements. These condensed consolidated interim financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2002, which are contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, which was filed with the Securities and Exchange Commission on March 27, 2003. The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position at March 31, 2003, the results of operations for the three month period ended March 31, 2003 and 2002, and the cash flows for the three month period ended March 31, 2003 and 2002. The balance sheet at December 31, 2002 has been derived from audited financial statements as of that date. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any other interim period or for the full fiscal year ending December 31, 2003.

The Company has historically financed operations and met capital expenditures requirements primarily through sales of capital stock and, to a lesser extent, research and product revenues. The first of the Marlboro facility’s two manufacturing lines became operational in 2001. During the first part of 2002, the Company began engineering and authorized capital expenditures for equipment for a second manufacturing line. The Company has also entered into agreements to purchase some of the longer-lead time equipment that is planned for the second manufacturing line. The Company will fund its current capital commitments with the proceeds from its initial public offering, which closed in November 2000. In addition to the current capital commitments, substantial further capital expenditures will be required over the next twelve months to increase the total capacity at the Company’s manufacturing facility to its target level of 10 to 14 megawatts for both lines. However, the Company’s current cash, cash equivalents and short-term investments will not be sufficient to fund this capacity expansion or its operations through fiscal year 2003 and, as a result, the Company will need to raise significant additional financing in order to successfully build out its manufacturing capacity and fund its operations. As more fully described in Part I of this report under the heading “Financing Transaction,” on March 21, 2003, the Company entered into a definitive purchase agreement with certain investors to raise $29,475,000 through the issuance of up to approximately 43,200,000 shares of series A convertible preferred stock and the sale of a warrant to purchase 2,400,000 shares of our common stock. Consummation of the transactions contemplated by the purchase agreement is subject to the Company obtaining stockholder approval and other closing conditions. If the Company is able to complete this financing in a timely matter, the Company expects the second manufacturing line to become operational in late 2003 and in 2004. If the Company is not able to complete a financing in a timely manner, the Company will need to implement fundamental changes to its business and operations which will likely include substantially reducing, suspending, or terminating its capacity expansion and substantially reducing its daily operating expenditures from current levels, in which case the Company believes its cash, cash equivalents and short-term investments will then be sufficient to fund its operations through the end of fiscal year 2003.

In addition, the Company may need additional financing to execute its business plan sooner if the company needs to respond to business contingencies such as the need to enhance its operating infrastructure, respond to competitive pressures and acquire complementary businesses or necessary technologies. The Company does not know whether it will be able to raise additional financing or favorable financing terms. If adequate funds are not available or are not available on acceptable terms, the Company’s ability to fund its operations, develop and expand its manufacturing operations and distribution network, or otherwise respond to competitive pressures would be significantly limited.

2. Net Income (Loss) per Common Share

The Company computes net loss per common share in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS 128 and SAB 98, basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. The calculation of diluted net loss per common share for the three month period ended March 31, 2002 and 2003 does not include 1,528,401 and 1,160,225 potential shares of common stock equivalents outstanding at March 31, 2002 and 2003, respectively, as their inclusion would be antidilutive.

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3. Inventory

A summary of inventories is as follows:

4. Guarantor Arrangements

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”) “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34.” FIN 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. The accounting requirements for the initial recognition of guarantees are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for all guarantees outstanding, regardless of when they were issued or modified, during the first quarter of fiscal 2003. The adoption of FIN 45 did not have a material effect on the Company’s consolidated financial statements. The following is a summary of the Company’s agreements that we have determined are within the scope of FIN 45.

Product warranty

The Company provides for the estimated cost of product warranties at the time revenue is recognized. Given the Company’s limited operating history, the Company uses historical industry solar panel failure rates as the basis for the accrued warranty costs during the period. While the Company engages in product quality programs and processes, including monitoring and evaluating the quality of component suppliers, its warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. If the Company’s actual product failure rates, material usage or service delivery costs differ from these estimates, accrued warranty costs would be adjusted in the period that such events or costs become known. Since the Company has a limited operating history and its manufacturing process differs from industry standards, their experience may be different from the industry data used as a basis for its estimate. While the Company’s methodology takes into account these uncertainties, adjustments in future periods may be required as its products mature. The following table summarizes the activity regarding the Company’s warranty accrual during the first quarter of 2003:

Indemnification agreements

The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our business partners, customers, directors and officers. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. Furthermore, the Company has a Director and Officer insurance policy that limits its exposure with indemnification agreements specifically with its directors and officers, which enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company believes the estimated fair value of agreements with parties other than its directors and officers is minimal as well.

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The Company has agreed to indemnify, defend and hold harmless each of the purchasers participating in the Company’s pending Series A private placement financing transaction, their affiliates and their respective officers, directors, agents, employees, subsidiaries, partners, members and controlling persons to the fullest extent permitted by law from and against any and all losses, claims or written threats thereof, damages, expenses (including reasonable fees, disbursements and other charges of counsel) resulting from or arising out of the Company’s breach of any representation or warranty, covenant or agreement in the purchase agreement. The Company believes the estimated fair value of this indemnification agreement is minimal.

5. Deferred Compensation and Equity Related Charges

Prior to December 31, 2000, the Company recorded total cumulative deferred compensation of approximately $1.3 million representing the difference between the fair market value of the Company’s common stock and the exercise price on the option grant date. These amounts were presented as a reduction of stockholders’ equity and are being amortized ratably over the vesting period of the options, which is generally four years. The amortization resulted in charges to operations of $71,000 and $69,000 for the three months ended March 31, 2002 and 2003, respectively.

6. Stock Based Compensation

The Company applies the accounting provisions of Accounting Principles Board (“APB”) Opinion 25 and related interpretations and has elected the disclosure-only alternative permitted under Statement of Financial Accounting Standards Board (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” The Company has disclosed herein pro forma net income (loss) in the footnotes using the fair value based method. All stock-based awards to non-employees are accounted for at their fair market value, as calculated using the Black-Scholes model in accordance with SFAS No. 123.

The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan. Had compensation expense for the employee stock option plan been determined based on the fair value at the grant dates for options granted under the plan consistent with the method of SFAS No. 123, net loss would have been as follows (in thousands, except per share data):

7. Segment Information

The Company operates as one operating segment. The following table summarizes the Company’s concentration of total revenue:

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8. Financing Transaction

On March 21, 2003 the Company entered into a Stock and Warrant Purchase Agreement with Perseus 2000, LLC, Nth Power Technologies Fund II, LP, Nth Power Technologies Fund II-A, LP, RockPort Capital Partners, LP, RP Co-Investment Fund I, LP, Micro-Generation Technology Fund, LLC, UVCC Fund II, UVCC II Parallel Fund, LP, Caisse de dépôt et placement du Québec, CDP Capital – Technology Ventures U.S. Fund 2002 LP, Beacon Power Corporation, Massachusetts Technology Park Corporation, Zero Stage Capital VII, LP, Zero Stage Capital (Cayman) VII, LP, Zero Stage Capital SBIC VII, LP, IMPAX Environmental Markets plc, Merrill Lynch New Energy Technology Fund, MLIIF New Energy Fund, PNE Invest Limited, Odyssey Fund, SAM Private Equity Energy Fund LP, SAM Sustainability Private Equity LP and SAM Smart Energy pursuant to which the Company has agreed to issue, and the purchasers have agreed to purchase from the Company, $29,375,000 of Series A convertible preferred stock at a per share purchase price to be calculated as of the closing date. The per share purchase price to be paid for the shares of Series A convertible preferred stock will be 85% of the 60-trading day average closing price of the Company’s common stock for the period ending two trading days prior to the closing date of the private placement. However, in no event will the per share price exceed $1.12 (which is 85% of the 60-trading day average of the closing bid prices of the Company’s common stock for the period ending on March 17, 2003), or be less than $0.68. Additionally, the Company agreed to issue, and Beacon Power Corporation agreed to purchase for a purchase price of $100,000, a warrant to purchase 2,400,000 shares of common stock at an exercise price equal to the per share price of the Series A convertible preferred stock paid by the purchasers, plus $2.25. The shares of Series A convertible preferred stock will be initially convertible into shares of common stock on a 1-to-1 basis (subject to adjustment to account for the payment of dividends, to take into account certain changes to the Company’s capital structure and to account for future dilutive issuances). Depending upon the final per share price paid by the purchasers for such shares, the Series A convertible preferred stock will, when issued, represent between 70% and 79% of the currently issued and outstanding shares of the Company’s capital stock. The closing of the transactions contemplated by the purchase agreement is subject to certain conditions, including, among other things, stockholder approval. Stockholders will vote on the proposals relating to the transactions contemplated by the purchase agreement at our annual meeting of stockholders to be held on May 15, 2003. If approved by stockholders, it is anticipated that the closing of the private placement would occur as soon as practicable thereafter.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We caution readers that statements in this Quarterly Report on Form 10-Q that are not strictly historical statements, including, but not limited to: statements reflecting our expectations regarding the timing, cost, and success of our manufacturing scale-up at our facility in Marlboro, Massachusetts and future manufacturing expansion and production, as well as related financing requirements; future financial performance; our technology and product development, cost and performance; our current and future strategic relationships and future market opportunities; our ability to complete the proposed Series A private placement financing; and our other business and technology strategies and objectives, constitute forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may be identified with such words as “we expect”, “we believe”, “we anticipate” or similar indications of future expectations. These statements are neither promises nor guarantees and involve risks and uncertainties, which could cause our actual results to differ materially from such forward-looking statements. Such risks and uncertainties may include, among other things, those risks and uncertainties described in this Quarterly Report and in our other filings with the Securities and Exchange Commission, copies of which may be accessed through the SEC’s Web Site at http://www.sec.gov. We caution readers not to place undue reliance on any forward-looking statements contained in this Quarterly Report, which speak only as of the date of this Quarterly Report. We disclaim any obligation to publicly update or revise any such statements to reflect any change in our expectations, or events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in such forward-looking statements.

Overview

We develop, manufacture and market solar power products for the global marketplace. Solar cells are semiconductor devices that convert sunlight into electricity and form the building block for all solar power products. To date, our product sales have been primarily solar panels, which have been used to generate electricity for on-grid and off-grid applications. Off-grid applications have included the electrification of rural homes, lighting for small, rural schools and power supplies for water pumping. More recently, the majority of our products have been used by on-grid customers as a clean, renewable source of alternative or supplemental electricity.

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Financing Transaction

On March 21, 2003 the we entered into a Stock and Warrant Purchase Agreement with Perseus 2000, LLC, Nth Power Technologies Fund II, LP, Nth Power Technologies Fund II-A, LP, RockPort Capital Partners, LP, RP Co-Investment Fund I, LP, Micro-Generation Technology Fund, LLC, UVCC Fund II, UVCC II Parallel Fund, LP, Caisse de dépôt et placement du Québec, CDP Capital – Technology Ventures U.S. Fund 2002 LP, Beacon Power Corporation, Massachusetts Technology Park Corporation, Zero Stage Capital VII, LP, Zero Stage Capital (Cayman) VII, LP, Zero Stage Capital SBIC VII, LP, IMPAX Environmental Markets plc, Merrill Lynch New Energy Technology Fund, MLIIF New Energy Fund, PNE Invest Limited, Odyssey Fund, SAM Private Equity Energy Fund LP, SAM Sustainability Private Equity LP and SAM Smart Energy pursuant to which we have agreed to issue, and the purchasers have agreed to purchase from us, $29,375,000 of Series A convertible preferred stock at a per share purchase price to be calculated as of the closing date. The per share purchase price to be paid for the shares of Series A convertible preferred stock will be 85% of the 60-trading day average closing price of our common stock for the period ending two trading days prior to the closing date of the private placement. However, in no event will the per share price exceed $1.12 (which is 85% of the 60-trading day average of the closing bid prices of our common stock for the period ending on March 17, 2003), or be less than $0.68. Additionally, we agreed to issue, and Beacon Power Corporation agreed to purchase for a purchase price of $100,000, a warrant to purchase 2,400,000 shares of common stock at an exercise price equal to the per share price of the Series A convertible preferred stock paid by the purchasers, plus $2.25. The shares of Series A convertible preferred stock will be initially convertible into shares of common stock on a 1-to-1 basis (subject to adjustment to account for the payment of dividends, to take into account certain changes to our capital structure and to account for future dilutive issuances). Depending upon the final per share price paid by the purchasers for such shares, the Series A convertible preferred stock will, when issued, represent between 70% and 79% of the currently issued and outstanding shares of our capital stock. The closing of the transactions contemplated by the purchase agreement is subject to certain conditions, including, among other things, stockholder approval. Stockholders will vote on the proposals relating to the transactions contemplated by the purchase agreement at our annual meeting of stockholders to be held on May 15, 2003. If approved by stockholders, it is anticipated that the closing of the private placement would occur as soon as practicable thereafter.

Interest of Certain Persons in the Matter to Be Acted Upon

Micro-Generation Technology Fund, LLC, UVCC Fund II, and UVCC II Parallel Fund, LP, each of which is an investment entity affiliated with Dr. Robert W. Shaw, Jr., the chairman of our board of directors, have agreed to invest $3.5 million in the aggregate in the private placement in return for shares of Series A convertible preferred stock on terms identical to those afforded to each other purchaser, except that Arete Corporation, as one of the five purchasers who signed the initial term sheet with respect to the private placement, will have the right to designate a member of our board of directors and will be eligible to receive a break-up fee under certain circumstances if the private placement does not close. Dr. Shaw is the President of Arete Corporation, which is the manager of Micro-Generation Technology Fund, LLC. Dr. Shaw is a general partner of Arete Venture Investors II, LP, which is the general partner of UVCC Fund II. Dr. Shaw is also a general partner of Arete Ventures III, LP, which is the general partner of UVCC II Parallel Fund, LP As of March 1, 2003, these entities and others affiliated with Dr. Shaw owned an aggregate of 840,453 shares of our common stock and Dr. Shaw, together with his wife, owned an aggregate of 112,699 additional shares of our common stock in their individual capacities. If the private placement is approved by our stockholders, and if the private placement is consummated, Arete Corporation intends to designate Dr. Shaw as its designee to our board of directors.

Dr. Shaw is a limited partner of Nth Power Management II, LP, the general partner of Nth Power Technologies Fund II, LP, and in such capacity provides advice as requested to this entity. Dr. Shaw does not serve on this entity’s investment committee nor does he have any decision making authority with respect thereto. Dr. Shaw has also agreed to become a member of, and perform comparable services for, Nth Power Management II-A, LLC, the general partner of Nth Power Technologies Fund II-A, LP, and will have a similar advisory role with that entity. As of March 1, 2003, Nth Power Technologies Fund I, LP, an investment entity affiliated with Nth Power, LLC owned 1,016,914 shares of our common stock. Nth Power Technologies Fund II, LP and Nth Power Technologies Fund II-A, LP, each of which is an investment entity affiliated with Nth Power Management II, LP and Nth Power Management II-A, LLC, have agreed to invest $4 million in the aggregate in the private placement in return for shares of Series A convertible preferred stock on terms identical to those afforded to each other purchaser, except that Nth Power Technologies Fund II, LP, as one of the five purchasers who signed the initial term sheet with respect to the private placement, will have the right to designate a member of our board of directors and will be eligible to receive a break-up fee under certain circumstances if the private placement does not close. Dr. Shaw did not participate in the decision of either of the two Nth Power-related entities to invest in the private placement. Nth

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Power Technologies Fund II, LP intends to designate Timothy Woodward, a Managing Director of Nth Power, LLC, as its designee to our board of directors.

Dr. Shaw serves as a member of the investment committee of SAM Private Equity Energy Fund LP and SAM Sustainability Private Equity Fund LP and he has a limited partnership interest in SAM Private Equity Energy Fund LP These entities and another affiliated entity, SAM Smart Energy, have agreed to invest $3.25 million in the aggregate in the private placement in return for shares of Series A convertible preferred stock on terms identical to those afforded to each other purchaser. Dr. Shaw recused himself and did not participate in the SAM investment committee decisions to invest in the private placement.

Dr. Shaw has no voting power or dispositive power over any Evergreen shares held by the Nth Power investment entities or the SAM investment entities.

Dr. Shaw, as a result of his relationships with investors in the private placement as described above, may have interests in the private placement that are different from those of other Evergreen stockholders. Dr. Shaw was not a member of, and did not participate in any meetings of our financing committee that negotiated the private placement and did not participate in any discussions with the purchasers concerning the terms of the private placement.

Mason Willrich, one of our directors, was previously affiliated with Nth Power, LLC. From 1996 through December 1999, Mr. Willrich served as a Principal of Nth Power, LLC, a managerial role that entails reviewing investment candidates and participating in day-to-day operations management, and from January 2000 through February 2002, he was a Special Limited Partner of Nth Power, LLC, an advisory role that entailed reviewing investment candidates and providing insights into market trends and opportunities. As of March 1, 2003, Mr. Willrich, together with his wife and a trust entity of which he is the sol