Chronar Corporation

Chronar Corporation For the purpose of discussing the case, put yourself in the position of an investor who is evaluating Chronar Corporations prospects in July of 1983. The following exhibits are representative of the information about Chronar that was available to investors in July of 1983. Read the exhibits and prepare responses to the questions below. Exhibits 1. "Solar Power Race at Jersey Concern", The New York Times, July 2, 1982. This article provides background information on Chronar and the photovoltaic industry during 1982. Extracts from Chronar's Annual Report for 1983. These extracts provide all the relevant financial information provided by Chronar in its 1983 annual report. They include the president's letter to shareholders, management's discussion of the 1983 results, the Statement of Operations, the Balance Sheet and selected notes to Chronar's financial statements. Chronar's fiscal year-end is March 31, 1983. The annual report was made available to investors on July 7, 1983. "Chronar Corp. to Make Solar Panels ...", The Wall Street Journal, March 31, 1983. This article summarizes a press release issued by Chronar on March 30, 1983.

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Questions 1. 2. Based on the information provided in the case, describe Chronars business strategy. What are the key success factors and the key risks of this strategy? What single item of revenue was responsible for Chronar's return to profitability in 1983? Prepare Chronar's Statement of Operations and Balance Sheet for fiscal 1983 under the assumption that Chronar's management had decided not to recognize this item of revenue. [Assume Chronar's Costs and Expenses, Other Income and Taxes on Income were not affected by the decision to recognize this item]. Based on the information provided in the case, do you think that Chronar should have recognized the item of revenue you identified in Question 2? What additional information would you like to have in order to assess whether Chronar should have recognized the item of revenue you identified in Question 2? Limit yourself to information that would have been available to Chronar's management in July of 1983. Based on the information provided in the case, estimate how long Chronar can continue its operations without additional external financing. Based on the information provided in the case, describe the valuation model that you would use to value Chronars stock, and use this valuation model to provide a rough estimate of Chronars intrinsic share price (Note: Do not spend more than ten or fifteen minutes on this question).

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Exhibit A

The New York Times July 2, 1982, Friday, Late City Final Edition

SOLAR POWER RACE AT JERSEY CONCERN

BYLINE: By ROBERT D. HERSHEY Jr., Special to the New York Times SECTION: Section D; Page 1, Column 4; Financial Desk LENGTH: 1173 words DATELINE: TRENTON The company's office doesn't look like much, just a onestory brick structure with a series of hastily built extensions tumbling out the back. Inside, Zoltan J. Kiss, a one-time professional soccer player whose preceding business venture ended in a bankruptcy filing, munches on a sandwich at his desk while explaining how his six-year-old company lost about $1 a share in the past year. Despite its losses, Mr. Kiss and his company are driven by the conviction that their field of sun-powered electricity is now capable of broad commercial use, although it is generally thought that such applications are decades away. And Mr. Kiss is also convinced that his Chronar Corporation may beat even the mighty Japanese to the punch. Mr. Kiss is president of Chronar, which has 45 employees. Mr. Kiss has developed what appears to be an important breakthrough in photovoltaics, a marriage of energy and electronics that produces electricity from sunlight. ''The manufacturing cost is already below today's conventional cost of electricity,'' he says, and he expects further advances in the field to come fast. With an initial investment of $50,000 and total outlays of about $2 million, much of it from Mr. Kiss's earlier pioneering work with digital watches, Chronar has gone on to engage Merrill Lynch, Pierce, Fenner & Smith Inc. to coordinate its marketing and capital-raising efforts. Merrill Lynch says the company may have as much as a twoyear lead over its competition. Another enthusiast is Herbert D. Levine, president of Herbert Young Securities Inc., which managed Chronar's first public stock offering last year and which owns some stock-purchase warrants. ''I've been underwriting companies for over 20 years and I don't think I've ever been more excited about an industry or a company than Chronar,'' Mr. Levine says. He describes its technology as ''a major breakthrough.'' Others are not so sure. Elliot Berman, chief scientist at Arco Solar Industries Inc. in Chatsworth, Calif., was interested enough to order some Chronar material in order to evaluate it and he says he has a high regard for Mr. Kiss's scientific ability. But Mr. Berman wonders whether Chronar is really ahead of the field. ''I still think it's a horse race,'' Mr. Berman says, with the Japanese in the lead. ''If anybody is ahead, they are,'' he says. Big Companies Involved There are several other American companies active in photovoltaics, including affiliates of such giants as the Exxon, Atlantic Richfield, Westinghouse and RCA, which once employed Mr. Kiss as director of electronic research. Most of those companies have focused on the so-called single crystal silicon technology, whose cost has been cut to $10 a peak watt from more than $1,000 a peak watt 20 years ago, but which Chronar thinks will not be made commercially competitive soon. A peak watt is the unit of electricity produced by a cell at maximum solar intensity - noontime on a clear day.

The Japanese, like Chronar, have decided to concentrate instead on amorphous silicon, a process in which the atoms are arranged at random rather than in a crystalline pattern. Mr. Kiss, who pores over Japanese technical literature, thinks Chronar has an advantage in its development of a proprietary way to inexpensively produce the semiconducting thin film that converts sunlight to electricity. This process, already used in other fields, is called chemical vapor deposition. By contrast, the Japanese use what is called glow discharge deposition, which RCA developed. Competitive Price At a trade show in Houston last month, Chronar began offering to deliver electric systems - not to be confused with other solar technologies such as passive hot water heating -for as little as $4 a peak watt. That is less than the cost of electricity from a new nuclear plant and is competitive with electricity fired by oil. By 1985, Chronar believes it will have chopped this cost to 50 cents a peak watt, and by 1990 it projects a cost of just 30 cents.If this is achieved, solar electricity could be firmly entrenched as an energy source for the nation. ''The crossover point in our opinion should occur at a module cost of approximately 70 cents per peak watt,'' Robert L. San Martin of the Department of Energy told Congress in September. At 40 cents or less, he added, sun-powered electricity could ''broadly exploit'' utility markets and prompt the installation of solar panels on today's homes. According to Joseph Lindmayer, however, the founder-president of the Solarex Corporation, now 30 percent owned by the Standard Oil Company (Indiana), ''the problem with it is that the efficiency is very low'' in amorphous silicon. A 'Research Approach' Mr. Lindmayer, whose company has worked on this technology for years, also says there is a problem of keeping the material's properties from changing when deployed. ''It can only be regarded at the moment as a research approach,'' he maintains. Mr. Kiss, a 50-year old native of Hungary who came to the United States from Canada in 1961, has a doctorate in physics from the University of Toronto and was a Rhodes Scholar at Oxford University. He left RCA in 1969 to found the Optel Corporation, one of the earliest producers of liquid crystal display technology, that by 1974 had 40 percent of the world digital watch market. As the industry moved overseas, Optel plunged into the red and, five months after Mr. Kiss resigned in 1976, was forced to file under Chapter 11 of Federal bankruptcy law. Although the technology was developed in the United States, not a single American producer of digital watches remains. ''Now that it's a multibillion-dollar business, it's all in the Far East,'' Mr. Kiss says. That may be why Mr. Kiss wants his company and perhaps others to establish themselves ahead of the Japanese. Priority in Japan ''This is the No.1 priority industry in Japan - ahead of computers, integrated circuits, everything,'' he says. Chronar wants to commercialize its technology rapidly by marketing plants to make its products to corporate partners, which would supply the estimated $15 million of capital needed to set up production. Chronar would supply expertise, and ownership would eventually be half-and-half. One large order has now been received, a $25 million one for a 20-million-watt plant in Morocco. Apparently sobered by his boom-and-bust experience at Optel, Mr. Kiss plans to husband cash and rely on the joint ventures plus Chronar's sales of other solar products to finance growth. ''The life of a small company is not easy,'' Mr. Kiss observed. ''Until the next money is clearly visible, we're not going to expand.''

TO OUR SHAREHOLDERS
We are happy to report that Chronar has shown a profit in the past fiscal year, which ended March 31, 1983. This marks a milestone not only in the Companys history but in the industry itself. Chronar becomes the first American company in the photovoltaic industry to record a profitable year. This achievement is particularly encouraging because it was realized without compromising our strong commitment to the development of our amorphous silicon technology. We have made excellent progress in the development of both manufacturing process and new products. Our profitability is primarily the result of the sale to a Swiss company, Interplastica, of our first turn-key manufacturing facility. Interplastica is involved in the planned sale of two manufacturing facilities. One is in conjunction with a French group, SOMDIAA, a subsidiary of Grands Moulins de Paris and the second with a Swiss group. The latter manufacturing facility will be located in the Canton Valais of Switzerland. We anticipate the conclusion of several additional sales of similar manufacturing facilities during the next fiscal year, both outside and within the United States. During the past fiscal year, we have delivered the first photovoltaic products to demonstrate uses in water pumping and communications. Another product development is a line of battery rechargers which we plan to market in the coming months. We anticipate significant revenues from these photovoltaic sales during the coming year. We have begun marketing higher order silane gases during the past year. These gases are used as feedstock in several processes within the electronics and photovoltaic industries. To market these products worldwide, we have concluded a marketing arrangement with AIRCO, a subsidiary of British Oxygen. AIRCO has agreed to a guaranteed minimum purchase in return for an exclusive marketing right for this product. Parallel with the introduction and marketing of these products, we have continued our strong research and development programs both in the refinement of our manufacturing process and in the achievement of progressively higher efficiencies. In the manufacturing process, we have developed an entirely software controlled laser patterning of all the thin film layers, including the aluminum, for the serially interconnected cells. In addition, machinery is now in operation for the production of our own conductive coated glass. Progress has also been made in the development of the continuous flow line manufacturing process and in the increase of manufacturing efficiencies. Using our batch process, efficiencies of 5% have now been reached at Chronar. Our materials research will continue to increase the efficiency of the devices. In particular, we are focusing on the development of multijunction cells using different materials. Since we have the capacity to prepare the novel feedstock required, our Company is especially well positioned for this area of development. To fulfill the financial needs of our continuing development, we recently concluded a private placement of equity for approximately $1.2 million. We are continuing to explore the feasibility of different financing routes, primarily to finance the

Exhibit 2

development of our flow line manufacturing process. Based on the strong performance of the stock during the past year, we are evaluating the possibility of raising additional equity funds in the public market. The past year has been an important one for Chronar. In becoming the first American company in our industry to report a profitable year, we feel that we have consolidated our position in the forefront of the photovoltaic industry. The future of this most exciting growth market continues to hold great promise and we are confident that Chronar will play an increasingly significant role in it. Zoltan J. Kiss President

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations Fiscal 1983 Compared to Fiscal 1982 The Company reported revenues of $2,211,394 in 1983, up 202% from 1982, and earnings of $8,088, against a loss of $1,598,380 in 1982. The increase in revenues primarily resulted from the first sale of solar photovoltaic technology for $1,800,000, which is reflected as an account receivable at March 31, 1983, under an agreement with a Swiss Company, Interplastica S.A., which also provides for the sale of equipment for a batch processing facility. See Note 6 of the Notes to the Financial Statements for additional information. The revenues attributable to the research and development contracts increased in the 1983 period over the comparable 1982 period by 45.3%. Revenues and costs attributable to the technical assistance contracts decreased substantially in the 1983 period from the 1982 period, reflecting the decreased level of activity under these contracts. Administrative, general and selling expenses decreased by 25.5% in the 1983 period over the 1982 period, primarily by shifting some of our marketing activities from a retainer to a commission basis. During the past year the Companys scientists and engineers focused on improving the efficiency of the amorphous silicon materials and on optimizing the batch manufacturing process. Company sponsored research and development expenses increased substantially over fiscal 1982 to $1,319,311 for fiscal 1983, primarily in order to further the development of the batch manufacturing line. Substantial resources were expended on our international marketing effort which is based on marketing our batch manufacturing facility. The negotiation process is complex, since it involves not only local partners, but also local governmental agencies. Several of these negotiations are expected to conclude in the next fiscal year. A marketing agreement was concluded with Airco Inc., a subsidiary of the British Oxygen Group, for the marketing of our higher order silanes on an exclusive basis, subject to specified minimum purchases. We recently completed designs for our photovoltaic battery rechargers for the consumer market. After completion of tooling, we expect to market these products during the next fiscal year.

STATEMENT OF OPERATIONS

Revenues (Note 6):

Solar photovoltaic Research and development contracts Technical assistance contracts Other

March 31, 1983 1,800,000 263,634 88,066

Year Ended March 31, 1982 $ -$ 181,322 551,351 $ -732,673 749,099 729,585 212,740 553,312 -2,244,736 (1,512,063) 221,989 (168,452) (139,854) (86,317) (1,598,380) -$ $ (1,598,380) (1.23) 1,295,380 $ $ $

March 31, 1981 -319,129 1,068,668 29,306 1,417,103 116,101 289,832 204,510 731,983 15,643 1,358,069 59,034 -(56,049) -(56,049) 2,985 -2,985 -761,305

$
Costs and Expenses:
Research and development Administrative, general and selling Cost of research contracts Cost of assistance contracts Other Operating income (loss)

59,694 2,211,394 1,319,113 543,353 175,845 73,243 51,070 2,162,624 48,770 147,781 (186,963) -(39,182) 9,588 1,500

Other Income (Expense):

Interest income Interest expense Watch manufacturing operations (Note 7) Income (Loss) before taxes on income Taxes on Income (Note 5) Net Income (Loss) Earnings (Loss) per Common Share Weighted Average Number of Common shares outstanding

$ $

8,088 -1,660,854

See accompanying summary of accounting policies and note to financial statements

BALANCE SHEETS March 31, 1983

Assets: Current Assets: Cash Short-term investments plus accrued interest (at cost which approximates market) Accounts receivable, trade, less allowance for doubtful accounts of $49,042 and $39,709 (Note 2) Other receivables Inventories (Notes 2 and 7) Prepaid expenses and other Total current assets Property and Equipment, less accumulated depreciation (Notes 1 & 2) Other LIABILITIES AND SHAREHOLDERS EQUITY Current Liabilities: Accounts payable and accrued expenses Current Maturities of long-term debt (Note 2) Total current liabilities Long-Term Debt, less current maturities (Note 2) Total Liabilities Shareholders Equity: (Notes 2, 3, & 4) Common stock, no par value ($.01 stated value), shares authorized 3,500,000; issued 1,755,223 and 1,621,598 Paid-in-capital Deficit Subscriptions receivable Unearned compensation Less treasury stock, at cost 36,243 and 25,180 shares Total shareholders equity

March 31, 1982

68,501 557,791 1,890,849 56,598 -49,829 2,623,568 1,128,951 78,574 3,831,093

28,211 1,874,255 132,513 33,725 15,959 87,035 2,171,698 723,592 45,961 2,941,251

552,419 100,573 622,992 730,356 1,353,348 17,552 5,412,392 (1,683,963) (951,000) (156,573) 2,638,408 (160,663)

370,373 73,601 443,974 337,869 781,843 16,216 3,965,243 (1,692,051) --2,289,408 (130,000)

2,477,745 3,831,093

2,159,408 2,941,251

See accompanying summary of accounting policies and notes to financial statements

SUMMARY OF ACCOUNTING POLICIES BUSINESS The Company is currently engaged in research and development of solar photovoltaic technology. As of February 1, 1981, an officer of the Company assigned all right, title and interest in a foreign inactive company, MODAR, S.A., to the Company. As of March 31, 1983, there were no intercompany accounts or transactions and the account balances of MODAR were nominal. SHORT-TERM INVESTMENTS Short-term investments are carried at cost, which approximates market, and consist primarily of certificates of deposits and commercial paper. INVENTORIES Inventories (purchased parts) are valued at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computer for financial reporting purposes by the straight-line method over the estimated useful lives of 20 years for building and building improvements, 5 years for machinery and equipment, 10 years for office furniture and fixtures and 4 years for vehicles. Accelerated methods and shorter lives are used for income tax purposes. REVENUE RECOGNITION Other than for long-term contracts, sales of products are generally recorded when the products are shipped to the customer. Long term contracts are those which require performance (i.e. design, construction and/or installation) over a time span which generally would overlap two or more accounting periods. The Company recognizes revenue and expense for these contracts at the completion of certain performance levels. EARNINGS (LOSS) PER SHARE Per share amounts are based on the weighted average number of shares of common stock outstanding after giving effect to stock options and warrants.

NOTES TO FINANCIAL STATEMENTS NOTE 5 Taxes on Income At March 31, 1983, the Company has federal net operating loss carryforwards totaling $1,695,195 and federal investment jobs and research and development tax credits totaling $263,663 which will expire at various times through March 31, 1998. Federal taxes on income for the years ended March 31, 1983 and March 29, 1981 have been effectively eliminated by utilization of investment and jobs tax credits. State taxes on income of $1,500 are reflected in the financial statements for the year ended March 31, 1983.

NOTE 6 Foreign Activities and Major Customers Under a contract with a foreign entity, the Company has furnished certain technology for $1,800,000 and is to provide equipment for $4,200,000. These arrangements contemplate that the Company will post a performance bond or its equivalent equal to a percentage of the total contract price of $6,000,000 and impose certain penalties if the equipment does not meet specified performance criteria. Two foreign customers accounted for approximately $1,846,000 or 83% and $528,000 or 72% of total revenue in 1983 and 1982, respectively. One foreign customer accounted for approximately $904,000 or 64% of total revenues in 1981. One domestic customer accounted for approximately $167,000 or 23% of total revenues in 1982. In 1983, two agencies of the United States Government accounted for approximately $264,000 or 12% of total revenues. In 1981, one agency of the United States Government accounted for approximately $168,000 or 12% of total revenues. In prior years, the Company derived a significant portion of its revenues from technical assistance contracts with companies in Eastern Europe countries. The schedule below shows the revenue and operating profit or (loss) from such contracts: Year Ended March 31, 1982 $527,691 $( 1,876)

Revenue Operating Profit (Loss)

March 29, 1981 $918,209 $315,059

NOTES CONTINUED NOTE 7 Watch Manufacturing Operations Due to diminishing demand for its digital watch line and managements assessment of future sales trends, the Company decided to terminate its digital watch manufacturing operations and write down its remaining inventory to estimated relizable value. This decision resulted in a non-recurring charge to income of $139,854 ($0.11 per share) for the year ended March 31, 1982.

Auditors Report
Board of Directors and Shareholders of Chronar Corp.
We have examined the balance sheets of Chronar Corp. as of March 31, 1983 and March 31, 1982 and the related statements of operations, shareholders equity and changes in financial position for each of the three years in the period ended March 31, 1983. Our examinations were made in accordance with generally accepted auditing standards, and accordingly, included such tests of the accounting record and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the financial statements mentioned present fairly the financial position of Chronar Corp. at March 31, 1983 and March 31, 1982 and the results of its operations and changes in its financial position for each of the three years in the period ended March 31, 1983 in conformity with generally accepted accounting principles applied on a consistent basis.

SEIDMAN & SEIDMAN

Chronar Corp. To Make Solar Panels In Venture with European Firms

By a Wall Street Journal Staff Reporter

PRINCETON, N.J. - Chronar Corp. said it entered into a multi-million-dollar agreement with a European syndicate to build a solar photovoltaic panel factory in Europe. The syndicate is led by a unit of Les Grands Moulins, a large French agriculture concern. Under terms of the agreement, Chronar will build a package of equipment to be shipped to a site in France. The factory will produce 1,000 kilowatts of photovoltaic panel capacity, with plans to expand capacity about 100,000 kilowatts a year during the next five years. Chronar, which will own about 20% of the joint venture, said it agreed to give the venture exclusive marketing rights for the first $100 million of panels sold in France and French-speaking Africa. Roger Urbain, executive director of Les Grands Moulins, said his company found the Chronar process of producing solar panels, which convert sunlight into electricity, to be the first low-cost commercially-available thin-film photovoltaic manufacturing technology. Chronar said it also entered into a joint venture with a Moroccan industrial family to build a manufacturing facility in Morocco. The first phase of the construction program will cost $6 million and produce 1,000 kilowatts of photovoltaic panel capacity a year. Chronar said the plant eventually will be valued at $25 million and will produce 20,000 kilowatts of panels a year. Source: Wall Street Journal March 31, 1983 Exhibit 3