PROSPECTUS FILING
Filed Pursuant to Rule 424(b)(4)
Registration
No. 333-135574
462(b) Registration
No. 333-138779
20,000,000 Shares
First Solar, Inc.
Common Stock
This is the initial public offering of shares of our common
stock. We are selling 13,250,000 shares and the selling
stockholders named in this prospectus are selling
6,750,000 shares of our common stock. We will not receive
any of the proceeds from the sale of shares by the selling
stockholders.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price of our common
stock is $20.00 per share. Our common stock has been approved
for listing on The Nasdaq Global Market under the symbol
FSLR.
Investing in our common stock involves risks. See Risk
Factors beginning on page 7.
PRICE $20.00 A SHARE
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Underwriting | |
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Proceeds to | |
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Price to | |
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Discounts and | |
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Proceeds to | |
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Selling | |
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Public | |
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Commissions | |
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First Solar, Inc. | |
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Stockholders | |
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Per Share
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$20.00 |
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$1.24 |
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$18.76 |
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$18.76 |
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Total
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$400,000,000 |
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$24,800,000 |
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$248,570,000 |
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$126,630,000 |
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We have granted the underwriters the right to purchase up to an
additional 2,942,500 shares of common stock to cover
over-allotments.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved of these securities
or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares to purchasers on
November 22, 2006.
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Credit Suisse |
Morgan Stanley |
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Piper Jaffray |
Cowen and Company |
First Albany Capital |
ThinkEquity Partners LLC |
November 16, 2006
TABLE OF CONTENTS
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F-1 |
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You should rely only on information contained in this
prospectus or to which we have referred you. We have not
authorized anyone to provide you with information that is
different. We are not making an offer of these securities in any
state where the offer is not permitted. The information in this
prospectus may only be accurate as of the date on the front of
this prospectus.
Dealer Prospectus Delivery Obligation
Until December 11, 2006 (25 days after the commencement of
the offering), all dealers that effect transactions in these
securities, whether or not participating in this offering, may
be required to deliver a prospectus. This is in addition to the
dealers obligation to deliver a prospectus when acting as
an underwriter and with respect to unsold allotments or
subscriptions.
PROSPECTUS SUMMARY
This summary highlights information about First Solar, Inc.
and the offering contained elsewhere in this prospectus and is
qualified in its entirety by the more detailed information and
financial statements included elsewhere in this prospectus. You
should carefully read the entire prospectus before making an
investment decision, especially the information presented under
the heading Risk Factors and the financial
statements and notes thereto included elsewhere in this
prospectus. In this prospectus, except as otherwise indicated or
as the context may otherwise require, all references to
First Solar, we, us and
our refer to First Solar, Inc. and its
subsidiaries.
First Solar
We design and manufacture solar modules using a proprietary thin
film semiconductor technology that has allowed us to reduce our
average solar module manufacturing costs to among the lowest in
the world. Our average manufacturing costs were $1.59 per
Watt in 2005 and $1.50 per Watt in the first nine months of
2006, which we believe were significantly less than those of
traditional crystalline silicon solar module manufacturers. We
are the first company to integrate non-silicon thin film
technology into high volume low cost production. Our
manufacturing process transforms an inexpensive 2ft x 4ft (60cm
x 120cm) sheet of glass into a complete solar module in less
than three hours, using approximately 1% of the semiconductor
material used to produce traditional crystalline silicon solar
modules. Our ability to attract customers with competitive
pricing, in combination with our replicable low cost
manufacturing process, afforded us a gross margin of 35% both in
2005 and in the first nine months of 2006. By continuing to
expand production and improve our technology and manufacturing
process, we believe that we can further reduce our manufacturing
costs per Watt and improve our cost advantage over traditional
crystalline silicon solar module manufacturers. Our objective is
to become, by 2010, the first solar module manufacturer to offer
a solar electricity solution that competes on a non-subsidized
basis with the price of retail electricity in key markets in the
United States, Europe and Asia.
Our net sales grew from $3.2 million in 2003 to
$48.1 million in 2005 and from $34.5 million in the
first nine months of 2005 to $82.3 million in the first
nine months of 2006, although we have incurred net losses in
each year since inception. Historically, almost all of our net
sales have been to project developers and system integrators
headquartered in Germany, who then resell our solar modules to
end-users. Strong market demand, a positive customer response to
our solar modules and our ability to expand production without
raw material constraints present us with the opportunity to
expand sales rapidly and increase market share.
We recently entered into long-term solar module supply contracts
(the Long Term Supply Contracts) with six project
developers and system integrators headquartered in Germany that
allow for approximately
1.2 billion
($1.4 billion at an assumed exchange rate of
$1.20/1.00) in
sales from 2006 to 2011. These Long Term Supply Contracts
contemplate the manufacture and sale of a total of 745MW of
solar modules. Under each of our Long Term Supply Contracts, we
have a unilateral option, exercisable until December 31,
2006, to increase the sales volumes and extend such contract
through 2012. We plan to exercise each option promptly following
the completion of this offering, after which these contracts
will allow for approximately
1.9 billion
($2.3 billion at an assumed exchange rate of
$1.20/1.00) in
sales from 2006 to 2012 for a total of 1,270MW of solar modules.
The sales contemplated by the Long Term Supply Contracts
increase year over year through 2008 and remain constant
thereafter. The Long Term Supply Contracts require a 6.5% annual
decline in sales price and an approximately 5% annual increase
from 2007 to 2009 in the minimum average sellable Watts per
module. As a result, to maintain our historical gross margins we
must reduce our average manufacturing cost per Watt by at least
the same rate at which our contractual prices decrease. In
addition, these contracts can be terminated by our customers if
we are unable to meet the minimum average annual number of Watts
per module required in a given year. The information in this
paragraph is designed to summarize the financial terms of our
Long Term Supply Contracts and is not intended to provide
guidance on our future operating results, including revenues or
profitability.
In order to satisfy our contractual requirements and to address
additional market demand, we are expanding our annual
manufacturing capacity from 75MW to 175MW by the second half of
2007. Currently, we operate three 25MW production lines. We
refer to the original 25MW production line in our Ohio facility
as our base plant. In August 2006, we completed an expansion of
our Ohio facility, adding two 25MW production lines. We refer to
these two new 25MW production lines as our Ohio expansion. With
the completion of our Ohio expansion, we have an annual
manufacturing capacity of 75MW, and have become the largest thin
film solar module manufacturer in the world. We are currently
building four 25MW production lines in Germany, which we refer
to as our German plant. After our German plant reaches full
capacity, estimated for the second half of 2007, we will have an
annual manufacturing capacity of 175MW. We are also in the
planning stage for a new manufacturing plant in Asia.
1
Market Opportunity
We operate in a large, rapidly growing market that is widely
untapped and highly elastic at certain price points. Global
demand for electricity is expected to increase from
14.8 trillion kilowatt hours in 2003 to 27.1 trillion
kilowatt hours in 2025, according to the Energy Information
Administration. However, supply constraints, rising prices,
dependence on foreign countries for fuel feedstock and
environmental concerns could limit the ability of many
conventional sources of electricity to supply the rapidly
expanding global demand. These challenges create a unique growth
opportunity for the renewable energy industry, especially solar
energy. According to the Department of Energy, solar energy is
the only source of renewable power with a large enough resource
base to supply a significant percentage of the worlds
electricity needs. Worldwide, annual installations by the
photovoltaic industry grew from 0.3GW in 2001 to 1.5GW in 2005,
representing an average annual growth rate of over 43%. In 2005,
the cumulative installed capacity of solar modules surpassed 5GW.
Competitive Strengths
We believe that we possess a number of competitive strengths
that position us to become a leader in the solar energy industry
and compete in the broader electric power industry:
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Cost-per-Watt advantage. Our proprietary thin film
semiconductor technology allowed us to achieve an average
manufacturing cost per Watt of $1.59 in 2005 and $1.50 per Watt
in the first nine months of 2006, which we believe were among
the lowest in the world and significantly less than the per Watt
manufacturing cost of producing crystalline silicon solar
modules. |
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Continuous and scalable production process. We
manufacture our solar modules on high-throughput production
lines that complete all manufacturing steps, from semiconductor
deposition to final assembly and testing, in an automated,
continuous process. |
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Replicable production facilities. We use a
systematic replication process to build new production lines
with operating metrics that are comparable to the performance of
our base plant, as recently demonstrated with the completion of
our Ohio expansion. By expanding production, we believe we can
take advantage of economies of scale and accelerate development
cycles, enabling further reductions in the price per Watt of our
solar modules. |
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Stable supply of raw materials. We are not
currently constrained by and do not foresee a shortage of
cadmium telluride, our most critical semiconductor material. In
addition, because of the relatively small amount of
semiconductor material we use, we believe our exposure to
cadmium telluride price increases is limited. By contrast,
Solarbuzz estimates that a shortage of silicon feedstock will
constrain the production of certain crystalline silicon solar
module manufacturers until 2008. |
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Pre-sold capacity through Long Term Supply
Contracts. Our Long Term Supply Contracts provide us
with predictable net sales and will enable us to realize
economies of scale from capacity expansions quickly, as we
utilize and sell most of our production capacity upon the
qualification of a new production line. By pre-selling the solar
modules to be produced on future production lines, we minimize
the customer demand risk of our rapid expansion plans. |
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Favorable system performance. Under real-world
conditions, including variation in the ambient temperature and
intensity of sunlight, we believe systems incorporating our
solar modules generate more kilowatt hours of electricity per
Watt of rated power than systems incorporating crystalline
silicon solar modules, increasing our end-users return on
investment. |
Strategies
Our goal is to create a sustainable market for our solar modules
by utilizing our proprietary thin film semiconductor technology
to develop a solar electricity solution that, by 2010, competes
on a non-subsidized basis with the price of retail electricity
in key markets in the United States, Europe and Asia. We intend
to pursue the following strategies to attain this goal:
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Penetrate key markets rapidly. Upon completion of
our German plant and contemplated Asian plant, we expect to
become a global fully-integrated solar module manufacturer. Our
new production lines will enable us to diversify our customer
base, gain market share in key solar module markets and reduce
our dependence on any individual countrys subsidy programs. |
2
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Further reduce manufacturing cost. We deploy
continuous improvement systems and tools to increase the
throughput of our production lines and the efficiency of our
workforce and to reduce our capital intensity and raw material
requirements. In addition, as we expand production, we believe
we can absorb fixed costs over higher production volumes,
negotiate volume-based discounts on certain raw material and
equipment purchases and gain production and operational
experience that translates into improved process and product
performance. |
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Increase sellable Watts per module. We are
implementing several programs designed to increase the number of
sellable Watts per solar module, which is driven primarily by
conversion efficiency. From 2003 to the end of the first nine
months of 2006, we increased the average conversion efficiency
of our solar modules from approximately 7%, or approximately 49
Watts per module, to approximately 9%, or approximately
64 Watts per module. |
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Enter the mainstream market for electricity. We
believe that our ability to enter the non-subsidized, mainstream
market for electricity will require system development and
optimization, new system financing options and the development
of new market channels. As part of these activities, we are
developing solar electricity solutions beyond the solar module
that we plan to offer in select market segments. |
Challenges
Before you invest in our stock, you should carefully consider
all the information in this prospectus, including matters set
forth under the heading Risk Factors. We believe
that the following are some of the major risks and uncertainties
that may affect us:
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Thin film technology has a limited operating
history. The oldest solar module manufactured during the
qualification of our pilot line has only been in use since 2001,
and we do not have a large amount of data to validate our
estimates of useful life and degradation. If our thin film
technology and solar modules perform below expectations, we
could lose customers and face high warranty expenses. |
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Failure to achieve anticipated operating metrics at new
production lines. To satisfy our contractual
requirements, we must expand our production capacity. If our
systematic replication process does not yield new production
lines with operating metrics that are comparable to the
performance of our base plant, we would be unable to produce the
MW volume required to satisfy our contractual requirements and
could lose customers. |
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Failure to increase sellable Watts per module and reduce
manufacturing costs. Our Long Term Supply Contracts
require an approximately 5% annual increase from 2007 to 2009 in
the minimum average sellable Watts per module and a 6.5% annual
decline in sales price. Failure to achieve these specified
metrics could reduce our gross profit and gross margin or allow
our customers to terminate the contracts. |
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Reduction or elimination of government subsidies.
The reduction or elimination of government subsidies before we
achieve our goal of cost-competitiveness with conventional
sources of electricity could significantly limit our customer
base and reduce our net sales. |
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Intense competition from providers of conventional and
renewable sources of electricity. We face intense
competition from providers of conventional and renewable
electricity, including solar module manufacturers using
crystalline silicon and other thin film technologies. Other
sources of electricity could prove to be more cost competitive
or desirable than our thin film technology. |
Corporate Information
First Solar, Inc., a Delaware corporation, was incorporated on
February 22, 2006. We operated as a Delaware limited
liability company from 1999 until 2006. Our corporate
headquarters are located at 4050 East Cotton Center Boulevard,
Building 6, Suite 68, Phoenix, Arizona 85040 and our
telephone number is
(602) 414-9300. We
maintain a website at www.firstsolar.com. The information
contained in or connected to our website is not a part of this
prospectus.
3
The Offering
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Common stock offered by us |
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13,250,000 shares |
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Common stock offered by the selling stockholders |
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6,750,000 shares |
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Common stock to be outstanding after this offering |
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69,387,276 shares |
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Use of Proceeds |
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We estimate that we will receive net proceeds from our offering
of common stock, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, of
approximately $247.7 million, or approximately
$302.9 million if the underwriters exercise their
over-allotment option in full. |
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Of the net proceeds we receive from this offering, we intend to
use: |
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approximately $150.0 million to build a manufacturing
facility in Asia and approximately $30.0 million to fund
the associated ramp-up
costs; |
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approximately $26.0 million to repay related party debt; and |
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the remainder for working capital and general corporate
purposes, including potential acquisitions and vertical
integration. |
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We will not receive any proceeds from the sale of our common
stock by the selling stockholders. See Use of
Proceeds. |
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Dividend Policy |
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We do not currently intend to pay any cash dividends on our
common stock. See Dividend Policy and
Description of Capital StockCommon Stock. |
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Listing |
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Our common stock has been approved for listing on The Nasdaq
Global Market under the symbol FSLR. |
All information in this prospectus, unless otherwise indicated
or the context otherwise requires:
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assumes that the underwriters will not exercise the
over-allotment option granted to them by us; |
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gives effect to the 4.85-to-1 stock split of our common stock on
November 1, 2006; |
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does not give effect to up to 1,500,000 options, with an
exercise price equal to the price per share set forth on the
cover of this prospectus, we plan to grant recent hires,
directors and certain employees upon the consummation of this
offering; and |
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gives effect to the dissolution of our majority stockholder,
JWMA Partners, LLC, or JWMA, whereby the members of JWMA will
become direct stockholders of First Solar, Inc. See
Principal and Selling Stockholders. |
4
Summary Historical Consolidated Financial and Operating
Data
The following table provides a summary of our historical
consolidated financial information for the periods and at the
dates indicated. The summary historical consolidated financial
information for the fiscal years ended December 27, 2003,
December 25, 2004 and December 31, 2005 and as of
December 31, 2005 have been derived from our audited
consolidated financial statements included elsewhere in this
prospectus. The summary historical consolidated financial
information for the nine months ended September 24, 2005
and September 30, 2006 and as of September 30, 2006
have been derived from our unaudited consolidated financial
statements included elsewhere in this prospectus. In the opinion
of management, the unaudited consolidated financial statements
have been prepared on the same basis as our audited consolidated
financial statements, and include all adjustments, consisting
only of normal recurring adjustments, that are considered
necessary for a fair presentation of our financial position and
operating results. The results for any interim period are not
necessarily indicative of the results that may be expected for a
full year.
The information presented below should be read in conjunction
with Use of Proceeds, Capitalization,
Selected Historical Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and related notes thereto included
elsewhere in this prospectus.
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Nine | |
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Years Ended | |
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Months Ended | |
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Dec 27, | |
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Dec 25, | |
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Dec 31, | |
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Sept 24, | |
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Sept 30, | |
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2003 | |
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2004 | |
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2005 | |
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2005 | |
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2006 | |
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(as restated) | |
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(as restated) | |
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(dollars in thousands) | |
Statement of Operations:
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Net sales
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$ |
3,210 |
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$ |
13,522 |
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$ |
48,063 |
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$ |
34,482 |
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$ |
82,279 |
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Cost of sales
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11,495 |
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18,851 |
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31,483 |
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21,672 |
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53,650 |
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Gross profit (loss)
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(8,285 |
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(5,329 |
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16,580 |
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12,810 |
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28,629 |
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Research and development
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3,841 |
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1,240 |
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2,372 |
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910 |
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4,712 |
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Selling, general and administrative |
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11,981 |
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9,312 |
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15,825 |
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8,834 |
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22,398 |
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Production start-up
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900 |
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3,173 |
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1,410 |
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7,750 |
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Operating income (loss)
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(24,107 |
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(16,781 |
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(4,790 |
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1,656 |
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(6,231 |
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Foreign currency gain (loss)
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116 |
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(1,715 |
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(1,052 |
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2,792 |
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Interest expense
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(3,974 |
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(100 |
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(418 |
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(146 |
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(866 |
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Other income (expense), net
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38 |
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(6 |
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372 |
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195 |
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422 |
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Income tax expense
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181 |
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Cumulative effect of change in accounting for share-based
compensation
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89 |
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89 |
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Net income (loss)
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$ |
(28,043 |
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$ |
(16,771 |
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$ |
(6,462 |
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$ |
742 |
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$ |
(4,064 |
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Other Financial Data:
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Net cash from (used in) operating activities |
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$ |
(22,228 |
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$ |
(15,185 |
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$ |
5,040 |
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$ |
(2,099 |
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$ |
(13,903 |
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Capital expenditures
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$ |
14,854 |
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$ |
7,733 |
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$ |
42,481 |
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$ |
23,424 |
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$ |
98,049 |
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5
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Actual | |
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As Adjusted | |
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Balance Sheet Data: |
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Dec 31, | |
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Sept 30, | |
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Sept 30, | |
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2005 | |
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2006 | |
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2006(1) | |
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(dollars in thousands) | |
Cash and cash equivalents
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$ |
16,721 |
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$ |
31,373 |
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$ |
253,043 |
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Property, plant and equipment, net
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73,778 |
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156,799 |
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156,799 |
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Related party debt
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28,700 |
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26,000 |
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Other current and long-term debt
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20,023 |
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45,017 |
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45,017 |
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Total stockholders equity
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13,129 |
|
|
|
121,258 |
|
|
|
368,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Nine Months | |
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Ended | |
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|
Year Ended | |
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| |
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|
Dec 31, | |
|
Sept 24, | |
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Sept 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
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|
| |
|
| |
|
| |
Other Operating Data (unaudited):
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|
|
|
|
|
|
|
|
|
|
|
|
Solar modules produced (in MW)(2)
|
|
|
21.4 |
|
|
|
15.1 |
|
|
|
35.2 |
|
Cost per Watt(3)
|
|
$ |
1.59 |
|
|
$ |
1.53 |
|
|
$ |
1.50 |
|
(1) Reflects the sale of 13,250,000 shares of our
common stock by us in this offering at an initial public
offering price of $20.00 per share and the application of
the net proceeds to the Company to repay $26.0 million of
related party debt as described further under Use of
Proceeds.
(2) Solar modules produced (in MW) includes solar modules
held in inventory.
(3) We define average cost per Watt as the total
manufacturing costs incurred during the period, including
stock-based compensation expense relating to our adoption of
SFAS 123(R), divided by the total Watts produced during the
period. Excluding stock-based compensation expense relating to
our adoption of SFAS 123(R) of $822,000 for the year ended
December 31, 2005 and $76,000 and $3,409,000 for the nine
months ended September 24, 2005 and September 30,
2006, respectively, our average cost per Watt would have been
$1.55 for the year ended December 31, 2005 and $1.52 and
$1.41 for the nine months ended September 24, 2005 and
September 30, 2006, respectively.
6
RISK FACTORS
An investment in our stock involves a high degree of risk.
You should carefully consider the following information,
together with the other information in this prospectus, before
buying shares of our stock. If any of the following risks or
uncertainties occur, our business, financial condition and
results of operations could be materially and adversely
affected, the trading price of our stock could decline and you
may lose all or a part of the money you paid to buy our
stock.
Risks Relating to Our Business
Our limited operating history may not serve as an adequate
basis to judge our future prospects and results of
operations.
We have a limited operating history. Although we began
developing our predecessor technology in 1987, we did not
complete the qualification of our pilot manufacturing line until
January 2002 and our base plant until November 2004. From our
launch of commercial operations in January 2002 through the end
of 2005, we sold approximately 28MW of solar modules. Relative
to the entire solar energy industry, which had a worldwide
installed capacity of 5GW, or 5,000MW, at the end of 2005, we
have sold only a small percentage of the installed solar
modules. As such, our historical operating results may not
provide a meaningful basis for evaluating our business,
financial performance and prospects. While our net sales grew
from $3.2 million in 2003 to $48.1 million in 2005, we
may be unable to achieve similar growth, or to grow at all, in
future periods. Accordingly, you should not rely on our results
of operations for any prior period as an indication of our
future performance.
We have incurred losses since our inception and may be
unable to generate sufficient net sales in the future to achieve
and then sustain profitability.
We incurred a net loss of $28.0 million in 2003,
$16.8 million in 2004, $6.5 million in 2005 and
$4.1 million in the first nine months of 2006, and had an
accumulated deficit of $153.4 million at September 30,
2006. We may continue to incur losses in the future. For
example, we expect our net loss to increase significantly in
2006 because of production
start-up expenses
related to the Ohio expansion and German plant, stock-based
compensation expense relating to our adoption of
SFAS 123(R) and expenses related to becoming a public
company. In addition, we expect our operating expenses to
increase as we expand our operations. Our ability to reach and
then sustain profitability depends on a number of factors,
including the growth rate of the solar energy industry, the
continued market acceptance of solar modules, the
competitiveness of our solar modules and services and our
ability to increase production volumes. If we are unable to
generate sufficient net sales to become profitable and have a
positive cash flow, we could be unable to satisfy our
commitments and may have to discontinue operations.
Thin film technology has a short history, and our thin
film technology and solar modules may perform below
expectations.
Researchers began developing thin film semiconductor technology
over 20 years ago, but were unable to integrate the
technology into a production line until recently. In addition,
the oldest solar module manufactured during the qualification of
our pilot line has only been in use since 2001. As a result, our
thin film technology and solar modules do not have a sufficient
operating history to confirm how our solar modules will perform
over their estimated 25 year useful life. If our thin film
technology and solar modules perform below expectations, we
could lose customers and face substantial warranty expense.
Our failure to further refine our technology and develop
and introduce improved photovoltaic products could render our
solar modules uncompetitive or obsolete and reduce our sales and
market share.
We will need to invest significant financial resources in
research and development to keep pace with technological
advances in the solar energy industry. However, research and
development activities are inherently uncertain, and we could
encounter practical difficulties in commercializing our research
results. Our significant expenditures on research and
development may not produce corresponding benefits. Other
companies are developing a variety of competing photovoltaic
technologies, including copper indium gallium diselenide and
amorphous silicon, that could produce solar modules that prove
more cost-effective or have better performance than our solar
modules. As a result, our solar modules may be rendered obsolete
by the technological advances of others, which could reduce our
net sales and market share.
7
If photovoltaic technology is not suitable for widespread
adoption, or if sufficient demand for solar modules does not
develop or takes longer to develop than we anticipate, our net
sales may flatten or decline, and we may be unable to achieve
and then sustain profitability.
The solar energy market is at a relatively early stage of
development, and the extent to which solar modules will be
widely adopted is uncertain. If photovoltaic technology proves
unsuitable for widespread adoption or if demand for solar
modules fails to develop sufficiently, we may be unable to grow
our business or generate sufficient net sales to achieve and
then sustain profitability. In addition, demand for solar
modules in our targeted markets, including Germany, may not
develop or may develop to a lesser extent than we anticipate.
Many factors may affect the viability of widespread adoption of
photovoltaic technology and demand for solar modules, including
the following:
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cost-effectiveness of solar modules compared to conventional and
other non-solar renewable energy sources and products; |
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performance and reliability of solar modules and thin film
technology compared to conventional and other non-solar
renewable energy sources and products; |
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availability and substance of government subsidies and
incentives to support the development of the solar energy
industry; |
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success of other renewable energy generation technologies, such
as hydroelectric, wind, geothermal, solar thermal, concentrated
photovoltaic and biomass; |
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fluctuations in economic and market conditions that affect the
viability of conventional and non-solar renewable energy
sources, such as increases or decreases in the prices of oil and
other fossil fuels; |
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fluctuations in capital expenditures by end-users of solar
modules, which tend to decrease when the economy slows and
interest rates increase; and |
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deregulation of the electric power industry and the broader
energy industry. |
Our future success depends on our ability to build new
manufacturing plants and add production lines in a
cost-effective manner, both of which are subject to risks and
uncertainties.
Our future success depends on our ability to significantly
increase both our manufacturing capacity and production
throughput in a cost-effective and efficient manner. If we
cannot do so, we may be unable to expand our business, decrease
our cost per Watt, maintain our competitive position, satisfy
our contractual obligations or become profitable. Our ability to
expand production capacity is subject to significant risks and
uncertainties, including the following:
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the need to raise significant additional funds to build
additional manufacturing facilities, which we may be unable to
obtain on reasonable terms or at all; |
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delays and cost overruns as a result of a number of factors,
many of which may be beyond our control, such as our inability
to secure successful contracts with equipment vendors; |
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our custom-built equipment may take longer and cost more to
engineer than expected and may never operate as designed; |
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delays or denial of required approvals by relevant government
authorities; |
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diversion of significant management attention and other
resources; and |
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failure to execute our expansion plans effectively. |
If our future production lines do not achieve operating
metrics similar to our base plant, our solar modules could
perform below expectations and cause us to lose
customers.
Currently, our 25MW base plant is our only production line that
has a meaningful history of operating at full capacity. We
recently added two 25MW production lines in our Ohio expansion;
however, they did not operate at full volume capacity until
August 2006. While our two new production lines produced some
solar modules during the qualification phase, they do not have a
sufficient operating history for us to determine whether we were
successful in replicating the base plant. The production lines
in our Ohio expansion and future production lines
8
could produce solar modules that have lower efficiencies, higher
failure rates and higher rates of degradation than solar modules
from our base plant, and we could be unable to determine the
cause of the lower operating metrics or develop and implement
solutions to achieve similar operating metrics as our base
plant. The Ohio expansion represents a standard building
block that we intend to replicate in future production
facilities and expansions of our existing production facilities,
including the German plant and the contemplated Asian plant. Our
replication risk in connection with building the German plant,
the contemplated Asian plant and other future manufacturing
plants could be higher than our replication risk in the Ohio
expansion because we expect new lines to be located
internationally, which could raise other factors that will lower
the operating metrics. If we are unable to systematically
replicate our production lines and achieve and sustain similar
operating metrics in our Ohio expansion and future production
lines as our base plant, our manufacturing capacity could be
substantially constrained, our manufacturing costs per Watt
could increase and we could lose customers, causing lower net
sales and net income than we anticipate.
Some of our manufacturing equipment is customized and sole
sourced. If our manufacturing equipment fails or if our
equipment suppliers fail to perform under their contracts, we
could experience production disruptions and be unable to satisfy
our contractual requirements.
Some of our manufacturing equipment is customized to our
production line based on designs or specifications that we
provide the equipment manufacturer. Following construction, each
piece of equipment is qualified to ensure it meets our
production standards. As a result, such equipment is not readily
available from multiple vendors and would be difficult to repair
or replace if it were to become damaged or stop working. If any
piece of equipment fails, production along the entire production
line could be interrupted and we could be unable to produce
enough solar modules to satisfy our contractual requirements. In
addition, the failure of our equipment suppliers to supply
equipment in a timely manner or on commercially reasonable terms
could delay our expansion plans and otherwise disrupt our
production schedule or increase our manufacturing costs.
We may be unable to manage the expansion of our operations
effectively.
We expect to expand our business significantly in order to meet
our contractual obligations, satisfy demand for our solar
modules and increase market share. Recently, we expanded our
manufacturing capacity from the existing 25MW at our base plant
to an aggregate of 75MW with the completion of our Ohio
expansion, and we expect to continue expanding our manufacturing
capacity to an aggregate of 175MW by the second half of 2007. To
manage the expansion of our operations, we will be required to
improve our operational and financial systems, procedures and
controls, increase manufacturing capacity and throughput and
expand, train and manage our growing employee base. Our
management will also be required to maintain and expand our
relationships with customers, suppliers and other third parties
as well as attract new customers and suppliers. In addition, our
current and planned operations, personnel, systems and internal
procedures and controls might be inadequate to support our
future growth. If we cannot manage our growth effectively, we
may be unable to take advantage of market opportunities, execute
our business strategies or respond to competitive pressures.
We depend on a limited number of third-party suppliers for
key raw materials, and their failure to perform could cause
manufacturing delays and impair our ability to deliver solar
modules to customers in the required quality, quantities and at
a price that is profitable to us.
Our failure to obtain raw materials and components that meet our
quality, quantity and cost requirements in a timely manner could
interrupt or impair our ability to manufacture our solar modules
or increase our manufacturing cost. Most of our key raw
materials are either sole-sourced or sourced by a limited number
of third-party suppliers. As a result, the failure of any of our
suppliers to perform could disrupt our supply chain and impair
our operations. In addition, many of our suppliers are small
companies that may be unable to supply our increasing demand for
raw materials as we implement our planned rapid expansion. We
may be unable to identify new suppliers or qualify their
products for use on our production lines in a timely manner and
on commercially reasonable terms. Raw materials from new
suppliers may also be less suited for our technology and yield
solar modules with lower conversion efficiencies than solar
modules manufactured with the raw materials from our current
suppliers.
A disruption in our supply chain for cadmium telluride,
the key component of our semiconductor layer, could interrupt or
impair our ability to manufacture solar modules.
The primary raw material we use in our production process is
cadmium telluride, with the tellurium component of cadmium
telluride being the most critical. Currently, we purchase all of
our cadmium telluride in
9
manufactured form from two manufacturers. If any of our current
or future suppliers is unable to perform under its contracts or
purchase orders, our operations could be interrupted or
impaired. In addition, because each supplier must undergo a
lengthy qualification process, we may be unable to replace a
lost supplier in a timely manner and on commercially reasonable
terms. Our supply of cadmium telluride could also be limited if
our suppliers are unable to acquire an adequate supply of
tellurium in a timely manner or at commercially reasonable
prices. If our suppliers cannot obtain sufficient tellurium,
they could substantially increase their prices or be unable to
perform under their contracts. We may be unable to pass
increases in the cost of our raw materials through to our
customers because our customer contracts do not adjust for raw
material price increases and are generally for a longer term
than our raw material supply contracts.
We currently depend on six customers for substantially all
of our net sales. The loss of, or a significant reduction in
orders from, any of these customers could significantly reduce
our net sales and harm our operating results.
We currently sell substantially all of our solar modules to six
customers headquartered in Germany. In 2005, sales to our
largest customer accounted for approximately 45% of our total
net sales. In the first nine months of 2006, the same customer
accounted for 20% of our net sales, while two other customers
accounted for 23% and 20% of our net sales. The loss of any of
our customers or their default in payment could significantly
reduce our net sales and harm our operating results. In
addition, our Long Term Supply Contracts extend for six years
and we expect them to allocate a significant majority of our
production capacity to a limited number of customers. As a
result, we do not expect to have a significant amount of excess
production capacity to identify and then build relationships
with new customers that could replace any lost customers. We
anticipate that our dependence on a limited number of customers
will continue for the foreseeable future because we have
pre-sold a significant majority of the planned capacity of our
base plant, Ohio expansion and German plant through 2011, or
2012 if we exercise our option under each of the six contracts
to extend each such contract for an additional year. As a
result, we will have to rely on future expansions to attract and
service new customers. In addition, our customer relationships
have been developed over a relatively short period of time, and
we cannot guarantee that we will have good relations with our
customers in the future. Several of our competitors have more
established relationships with our customers and may gain a
larger share of our customers business over time.
If we are unable to further increase the number of
sellable Watts per solar module and reduce our manufacturing
cost per Watt, we will be in default under our Long Term Supply
Contracts and our gross profit and gross margin could
decrease.
Our Long Term Supply Contracts require us to deliver solar
modules that, in total, meet or exceed a specified minimum
average number of Watts per module for the year. Beginning in
2007, we are required to increase the minimum average number of
Watts per module by approximately 5% annually between 2007 and
2009. If we are unable to meet the minimum average annual number
of Watts per module in a given year, we will be in default under
the agreements, entitling our customers to certain remedies,
potentially including the right to terminate. In addition, our
Long Term Supply Contracts specify a sales price per Watt that
declines 6.5% each year. Our gross profit and gross margin could
decline if we are unable to reduce our manufacturing cost per
Watt by at least the same rate at which our contractual prices
decrease.
The reduction or elimination of government subsidies and
economic incentives for on-grid solar electricity applications
could reduce demand for our solar modules, lead to a reduction
in our net sales and harm our operating results.
The reduction, elimination or expiration of government subsidies
and economic incentives for on-grid solar electricity may result
in the diminished competitiveness of solar energy relative to
conventional and non-solar renewable sources of energy, and
could materially and adversely affect the growth of the solar
energy industry and our net sales. We believe that the near-term
growth of the market for on-grid applications, where solar
energy is used to supplement the electricity a consumer
purchases from the utility network, depends significantly on the
availability and size of government and economic incentives.
Currently, the cost of solar electricity substantially exceeds
the retail price of electricity in every significant market in
the world. As a result, federal, state and local governmental
bodies in many countries, most notably Germany, Italy, Spain,
South Korea, Japan and the United States, have provided
subsidies in the form of feed-in tariffs, rebates, tax
write-offs and other incentives to
end-users,
distributors, systems integrators and manufacturers of
photovoltaic products. For example, Germany, which accounted for
99.6% of our net sales in 2005, has been a strong supporter of
photovoltaic products and systems, and political changes in
Germany could result in significant reductions or the
elimination of incentives. Many of these government incentives
expire, phase out over time, exhaust the allocated funding or
require renewal by the applicable
10
authority. For example, German subsidies decline at a rate of
5.0% to 6.5% per year (based on the type and size of the
photovoltaic system) and discussions are currently underway
about modifying the German Renewable Energy Law, or the EEG. If
the German government reduces or eliminates the subsidies under
the EEG, demand for photovoltaic products could decline in
Germany. In addition, the Emerging Renewables Program in
California has finite funds that may not last through the
current program period. California subsidies declined from $2.80
to $2.50 per Watt in March 2006, and will continue to
decline as cumulative installations exceed stated thresholds.
Net metering policies in California, which currently only
require each investor owned utility to provide net metering up
to 2.5% of its aggregate customer peak demand, could also limit
the amount of solar power installed within California.
In addition, if any of these statutes or regulations is found to
be unconstitutional, or is reduced or discontinued for other
reasons, sales of our solar modules in these countries could
decline significantly, which could have a material adverse
effect on our business and results of operations. For example,
the predecessor to the German EEG was challenged in Germany on
constitutional grounds and in the European Court of Justice as
impermissible state aid. Although the German Federal High Court
of Justice dismissed these constitutional concerns and the
European Court of Justice held that the purchase requirement at
minimum feed-in tariffs did not constitute impermissible state
aid, new proceedings challenging the Renewable Energies Act or
comparable minimum price regulations in other countries in which
we currently operate or intend to operate may be initiated.
Electric utility companies could also lobby for a change in the
relevant legislation in their markets to protect their revenue
streams. The reduction or elimination of government subsidies
and economic incentives for on-grid solar energy applications,
especially those in our target markets, could cause our net
sales to decline and materially and adversely affect our
business, financial condition and results of operations.
Currency translation and transaction risk may negatively
affect our net sales, cost of sales and gross margins, and could
result in exchange losses.
Although our reporting currency is the U.S. dollar, we
conduct our business and incur costs in the local currency of
most countries in which we operate. As a result, we are subject
to currency translation risk. For example, 99.6% and 97.9% of
our net sales were outside the United States and denominated in
Euros for the year ended December 31, 2005 and the nine
months ended September 30, 2006, respectively, and we
expect a large percentage of our net sales to be outside the
United States and denominated in foreign currencies in the
future. Changes in exchange rates between foreign currencies and
the U.S. dollar could affect our net sales and cost of
sales, and could result in exchange losses. In addition, we
incur currency transaction risk whenever one of our operating
subsidiaries enters into either a purchase or a sales
transaction using a different currency from our reporting
currency. For example, our Long Term Supply Contracts specify
fixed pricing in Euros for the next six years, or seven years if
we exercise our option under each of the contracts to extend for
an additional year, and do not adjust for changes in the
U.S. dollar to Euro exchange rate. We cannot accurately
predict the impact of future exchange rate fluctuations on our
results of operations. Currently, we do not engage in any
exchange rate hedging activities and, as a result, any
volatility in currency exchange rates may have an immediate
adverse effect on our financial condition and results of
operations.
We could also expand our business into emerging markets, many of
which have an uncertain regulatory environment relating to
currency policy. Conducting business in such emerging markets
could cause our exposure to changes in exchange rates to
increase.
An increase in interest rates could make it difficult for
end-users to finance the cost of a photovoltaic system and could
reduce the demand for our solar modules.
Many of our end-users depend on debt financing to fund the
initial capital expenditure required to purchase and install a
photovoltaic system. As a result, an increase in interest rates
could make it difficult for our end-users to secure the
financing necessary to purchase and install a photovoltaic
system on favorable terms, or at all, and thus lower demand for
our solar modules and reduce our net sales. In addition, we
believe that a significant percentage of our end-users install
photovoltaic systems as an investment, funding the initial
capital expenditure through a combination of equity and debt. An
increase in interest rates could lower an investors return
on investment in a photovoltaic system, or make alternative
investments more attractive relative to photovoltaic systems,
and, in each case, could cause these end-users to seek
alternative investments.
11
We face intense competition from manufacturers of
crystalline silicon solar modules, thin film solar modules and
solar thermal and concentrated photovoltaic systems.
The solar energy and renewable energy industries are both highly
competitive and continually evolving as participants strive to
distinguish themselves within their markets and compete with the
larger electric power industry. We believe that our main sources
of competition are crystalline silicon solar module
manufacturers, other thin film solar module manufacturers and
companies developing solar thermal and concentrated photovoltaic
technologies.
At the end of 2005, the global photovoltaic industry consisted
of over 100 manufacturers of photovoltaic cells and solar
modules. Within the photovoltaic industry, we face competition
from crystalline silicon photovoltaic cell and solar module
manufacturers, including BP Solar, Evergreen Solar, Kyocera,
Motech, Q-Cells, Renewable Energy Corporation, Sanyo, Schott
Solar, Sharp, SolarWorld, Sunpower and Suntech. We also face
competition from thin film solar module manufacturers, including
Antec, Kaneka, Mitsubishi Heavy Industries, Shell Solar, United
Solar and several crystalline silicon manufacturers who are
developing thin film technologies. We may also face competition
from semiconductor manufacturers and semiconductor equipment
manufacturers, or their customers, several of which have already
announced their intention to start production of photovoltaic
cells, solar modules or turnkey production lines. In addition to
manufacturers of photovoltaic cells and solar modules, we face
competition from companies developing solar thermal and
concentrated photovoltaic technologies.
Many of our existing and potential competitors have
substantially greater financial, technical, manufacturing and
other resources than we do. Our competitors greater size
in some cases provides them with a competitive advantage because
they can realize economies of scale and purchase certain raw
materials at lower prices. Many of our competitors also have
greater brand name recognition, more established distribution
networks and larger customer bases. In addition, many of our
competitors have well-established relationships with our current
and potential distributors and have extensive knowledge of our
target markets. As a result of their greater size, some of our
competitors may be able to devote more resources to the
research, development, promotion and sale of their products or
respond more quickly to evolving industry standards and changes
in market conditions than we can. In addition, a significant
increase in the supply of silicon feedstock or a significant
reduction in the manufacturing cost of crystalline silicon solar
modules could lead to pricing pressures for solar modules. Our
failure to adapt to changing market conditions and to compete
successfully with existing or new competitors may materially and
adversely affect our financial condition and results of
operations.
We identified several significant deficiencies in our
internal controls that were deemed to be material weaknesses. If
we are unable to successfully address the material weaknesses in
our internal controls, our ability to report our financial
results on a timely and accurate basis may be adversely
affected.
In connection with the audit of our financial statements for the
years ended December 25, 2004 and December 31, 2005
and the preparation of this registration statement for our
initial public offering, we identified several significant
deficiencies in our internal controls that were deemed to be
material weaknesses, as defined in standards
established by The Public Company Accounting Oversight Board.
See Managements Discussion and Analysis of Financial
Condition and Results of OperationsControls and
Procedures.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.
As of December 31, 2005, we did not maintain effective
controls over the preparation, review and presentation and
disclosure of our consolidated financial statements due to a
lack of personnel with experience in financial reporting and
control procedures necessary for SEC registrants. This failure
caused several significant deficiencies, four of which had a
large enough impact on our operating results to individually
constitute material weaknesses. These material weaknesses were:
(i) we did not maintain effective controls to ensure that
the appropriate labor and overhead expenses were included in the
cost of our inventory and that intercompany profits in inventory
were completely and accurately eliminated as part of the
consolidation process; (ii) we did not maintain effective
controls to ensure the complete and accurate capitalization of
interest in connection with our property, plant and equipment
additions; (iii) we did not maintain effective controls to
properly accrue for warranty obligations; and (iv) we did
not maintain effective controls to properly record the formation
of First Solar US Manufacturing, LLC in 1999 and the
subsequent liquidation of minority membership units in 2003.
These control deficiencies resulted in the restatement of our
2004 and 2003 annual consolidated financial statements as well
as audit adjustments to our 2005 annual consolidated financial
statements and to each of the 2005 interim consolidated
financial statements. These control deficiencies could result in
more than a remote likelihood
12
that a material misstatement to our annual or interim financial
statements would not be prevented or detected. Accordingly, we
have concluded that each of these control deficiencies
constitutes a material weakness.
We are in the process of adopting and implementing several
measures to improve our internal controls. If the remedial
procedures we have adopted and implemented are insufficient to
address our material weakness and significant deficiencies, we
may fail to meet our future reporting obligations, our financial
statements may contain material misstatements and our operating
results may be harmed.
We cannot assure you that additional significant deficiencies or
material weaknesses in our internal control over financial
reporting will not be identified in the future. Any failure to
maintain or implement required new or improved controls, or
difficulties we encounter in their implementation, could result
in additional significant deficiencies or material weaknesses,
cause us to fail to meet our future reporting obligations or
cause our financial statements to contain material
misstatements. Any such failure could also adversely affect the
results of the periodic management evaluations and annual
auditor attestation reports regarding the effectiveness of our
internal control over financial reporting that are required
under Section 404 of the Sarbanes-Oxley Act of 2002, and
which will become applicable to us beginning with the required
filing of our Annual Report on
Form 10-K for
fiscal 2007 in the first quarter of 2008. Internal control
deficiencies could also result in a restatement of our financial
statements in the future or cause investors to lose confidence
in our reported financial information, leading to a decline in
our stock price.
Our substantial international operations subject us to a
number of risks, including unfavorable political, regulatory,
labor and tax conditions in foreign countries.
We have significant marketing and distribution operations
outside the United States and expect to continue to have
significant manufacturing operations outside the United States
in the near future. In 2005, 99.6% of our net sales were
generated from customers headquartered in Germany. In the
future, we expect to have operations in other European countries
and Asia and, as a result, we will be subject to the legal,
political, social and regulatory requirements and economic
conditions of many jurisdictions. Risks inherent to
international operations, include, but are not limited to, the
following:
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difficulty in enforcing agreements in foreign legal systems; |
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foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, impose tariffs or adopt other
restrictions on foreign trade and investment, including currency
exchange controls; |
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fluctuations in exchange rates may affect product demand and may
adversely affect our profitability in U.S. dollars to the
extent the price of our solar modules and cost of raw materials
and labor is denominated in a foreign currency; |
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inability to obtain, maintain or enforce intellectual property
rights; |
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risk of nationalization of private enterprises; |
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changes in general economic and political conditions in the
countries in which we operate; |
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unexpected adverse changes in foreign laws or regulatory
requirements, including those with respect to environmental
protection, export duties and quotas; |
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difficulty with staffing and managing widespread operations; |
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trade barriers such as export requirements, tariffs, taxes and
other restrictions and expenses, which could increase the prices
of our solar modules and make us less competitive in some
countries; and |
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difficulty of and costs relating to compliance with the
different commercial and legal requirements of the overseas
markets in which we offer and sell our solar modules. |
Our business in foreign markets requires us to respond to rapid
changes in market conditions in these countries. Our overall
success as a global business depends, in part, on our ability to
succeed in differing legal, regulatory, economic, social and
political conditions. We may not be able to develop and
implement policies and strategies that will be effective in each
location where we do business. In addition, each of the
foregoing risks is likely to take on increased significance as
we implement our plans to expand our foreign manufacturing
operations.
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Problems with product quality or performance may cause us
to incur warranty expenses, damage our market reputation and
prevent us from maintaining or increasing our market
share.
Our solar modules are sold with a five year materials and
workmanship warranty for technical defects and a ten year and
twenty-five year warranty against declines of more than 10% and
20% of their initial rated power, respectively. As a result, we
bear the risk of extensive warranty claims long after we have
sold our solar modules and recognized net sales. As of
September 30, 2006, our accrued warranty expense amounted
to $2.5 million.
Because of the limited operating history of our solar modules,
we have been required to make assumptions regarding the
durability and reliability of our solar modules. Our assumptions
could prove to be materially different from the actual
performance of our solar modules, causing us to incur
substantial expense to repair or replace defective solar modules
in the future. For example, our glass-on-glass modules could
break, delaminate or experience power degradation in excess of
expectations. Any widespread product failures may damage our
market reputation and cause our sales to decline.
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If our estimates regarding the future cost of reclaiming
and recycling our solar modules are incorrect, we could be
required to accrue additional expenses from the time we realize
our estimates are incorrect and also face a significant
unplanned cash burden at the time our end-users return their
solar modules. |
We pre-fund the estimated future obligation for reclaiming and
recycling our solar modules based on the present value of the
expected future cost of such reclaiming and recycling. This cost
includes the cost of packaging the solar module for transport,
the cost of freight from the solar modules installation
site to a recycling center and the material, labor and capital
costs of the recycling process, as well as an estimated
third-party profit margin and risk rate for such services.
Currently, we base our estimates on our experience reclaiming
and recycling solar modules that do not pass our quality control
tests and modules returned under our warranty, as well as on our
expectations about future developments in recycling technologies
and processes and about economic conditions at the time the
solar modules will be reclaimed and recycled. If our estimates
prove incorrect, we could be required to accrue additional
expenses from the time we realize our estimates are incorrect
and also face a significant unplanned cash burden at the time
our end-users return their solar modules, which could harm our
operating results. In addition, our end-users can return their
solar modules at any time by paying a small penalty. As a
result, we could be required to reclaim and recycle our solar
modules earlier than we expect and before recycling technologies
and processes improve.
Our future success depends on our ability to retain our
key employees and to successfully integrate them into our
management team.
We are dependent on the services of Michael J. Ahearn, our
President and Chief Executive Officer, George A.
(Chip) Hambro, our Chief Operating Officer, Jens
Meyerhoff, our Chief Financial Officer, and other members of our
senior management team. The loss of Messrs. Ahearn, Hambro,
Meyerhoff or any other member of our senior management team
could have a material adverse effect on us. There is a risk that
we will not be able to retain or replace these key employees.
Several of our current key employees, including Messrs. Ahearn,
Hambro and Meyerhoff, are subject to employment conditions or
arrangements that contain post-employment non-competition
provisions. However, these arrangements permit the employees to
terminate their employment with little or no notice. We recently
added several members to our senior management team. Integrating
them into our management team could prove disruptive to our
daily operations, require a disproportionate amount of resources
and management attention and prove unsuccessful.
If we are unable to attract, train and retain technical
personnel, our business may be materially and adversely
affected.
Our future success depends, to a significant extent, on our
ability to attract, train and retain technical personnel.
Recruiting and retaining capable personnel, particularly those
with expertise in the photovoltaic industry, thin film
technology and cadmium telluride, are vital to our success.
There is substantial competition for qualified technical
personnel, and we cannot assure you that we will be able to
attract or retain our technical personnel. In addition, a
significant percentage of our current technical personnel have
options that vest in 2008, and it may be more difficult to
retain these individuals after their options vest. If we are
unable to attract and retain qualified employees, our business
may be materially and adversely affected.
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Our failure to protect our intellectual property rights
may undermine our competitive position, and litigation to
protect our intellectual property rights or defend against
third-party allegations of infringement may be costly.
Protection of our proprietary processes, methods and other
technology, especially our proprietary vapor transport
deposition process and laser scribing process, is critical to
our business. Failure to protect and monitor the use of our
existing intellectual property rights could result in the loss
of valuable technologies. We rely primarily on patents,
trademarks, trade secrets, copyrights and other contractual
restrictions to protect our intellectual property. As of
September 30, 2006, we held 26 patents in the United States
and 16 patents in foreign jurisdictions. A majority of our
patents expire at various times between 2007 and 2023. Our
existing patents and future patents could be challenged,
invalidated, circumvented or rendered unenforceable. We have
15 pending patent applications in the United States and
37 pending patent applications in foreign jurisdictions.
Our pending patent applications may not result in issued
patents, or if patents are issued to us, such patents may not
provide meaningful protection against competitors or against
competitive technologies.
We also rely upon unpatented proprietary manufacturing
expertise, continuing technological innovation and other trade
secrets to develop and maintain our competitive position. While
we generally enter into confidentiality agreements with our
employees and third parties to protect our intellectual
property, such confidentiality agreements are limited in
duration and could be breached, and may not provide meaningful
protection for our trade secrets or proprietary manufacturing
expertise. Adequate remedies may not be available in the event
of unauthorized use or disclosure of our trade secrets and
manufacturing expertise. In addition, others may obtain
knowledge of our trade secrets through independent development
or legal means. The failure of our patents or confidentiality
agreements to protect our processes, equipment, technology,
trade secrets and proprietary manufacturing expertise, methods
and compounds could have a material adverse effect on our
business. In addition, effective patent, trademark, copyright
and trade secret protection may be unavailable or limited in
some foreign countries. In some countries we have not applied
for patent, trademark or copyright protection.
Third parties may infringe or misappropriate our proprietary
technologies or other intellectual property rights, which could
have a material adverse effect on our business, financial
condition or operating results. Policing unauthorized use of
proprietary technology can be difficult and expensive. Also,
litigation may be necessary to enforce our intellectual property
rights, protect our trade secrets or determine the validity and
scope of the proprietary rights of others. We cannot assure you
that the outcome of such potential litigation will be in our
favor. Such litigation may be costly and may divert management
attention and other resources away from our business. An adverse
determination in any such litigation will impair our
intellectual property rights and may harm our business,
prospects and reputation. In addition, we have no insurance
coverage against litigation costs and would have to bear all
costs arising from such litigation to the extent we are unable
to recover them from other parties.
We may be exposed to infringement or misappropriation
claims by third parties, which, if determined adversely to us,
could cause us to pay significant damage awards or prohibit us
from the manufacture and sale of our solar modules or the use of
our technology.
Our success depends largely on our ability to use and develop
our technology and know-how without infringing or
misappropriating the intellectual property rights of third
parties. The validity and scope of claims relating to
photovoltaic technology patents involve complex scientific,
legal and factual questions and analysis and, therefore, may be
highly uncertain. We may be subject to litigation involving
claims of patent infringement or violation of intellectual
property rights of third parties. The defense and prosecution of
intellectual property suits, patent opposition proceedings and
related legal and administrative proceedings can be both costly
and time consuming and may significantly divert the efforts and
resources of our technical and management personnel. An adverse
determination in any such litigation or proceedings to which we
may become a party could subject us to significant liability to
third parties, require us to seek licenses from third parties,
which may not be available on reasonable terms, or at all, pay
ongoing royalties or redesign our solar module, or subject us to
injunctions prohibiting the manufacture and sale of our solar
modules or the use of our technologies. Protracted litigation
could also result in our customers or potential customers
deferring or limiting their purchase or use of our solar modules
until resolution of such litigation.
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Existing regulations and policies and changes to these
regulations and policies may present technical, regulatory and
economic barriers to the purchase and use of photovoltaic
products, which may significantly reduce demand for our solar
modules.
The market for electricity generation products is heavily
influenced by foreign, federal, state and local government
regulations and policies concerning the electric utility
industry, as well as policies promulgated by electric utilities.
These regulations and policies often relate to electricity
pricing and technical interconnection of customer-owned
electricity generation. In the United States and in a number of
other countries, these regulations and policies have been
modified in the past and may be modified again in the future.
These regulations and policies could deter end-user purchases of
photovoltaic products and investment in the research and
development of photovoltaic technology. For example, without a
mandated regulatory exception for photovoltaic systems, utility
customers are often charged interconnection or standby fees for
putting distributed power generation on the electric utility
grid. These fees could increase the cost to our end-users of
using photovoltaic systems and make them less desirable, thereby
harming our business, prospects, results of operations and
financial condition. In addition, electricity generated by
photovoltaic systems mostly competes with expensive peak hour
electricity, rather than the less expensive average price of
electricity. Modifications to the peak hour pricing policies of
utilities, such as to a flat rate, would require photovoltaic
systems to achieve lower prices in order to compete with the
price of electricity.
We anticipate that our solar modules and their installation will
be subject to oversight and regulation in accordance with
national and local ordinances relating to building codes,
safety, environmental protection, utility interconnection and
metering and related matters. It is difficult to track the
requirements of individual states and design equipment to comply
with the varying standards. Any new government regulations or
utility policies pertaining to our solar modules may result in
significant additional expenses to us, our resellers and their
customers and, as a result, could cause a significant reduction
in demand for our solar modules.
Environmental obligations and liabilities could have a
substantial negative impact on our financial condition, cash
flows and profitability.
Our operations involve the use, handling, generation,
processing, storage, transportation and disposal of hazardous
materials and are subject to extensive environmental laws and
regulations at the national, state, local and international
level. Such environmental laws and regulations include those
governing the discharge of pollutants into the air and water,
the use, management and disposal of hazardous materials and
wastes, the cleanup of contaminated sites and occupational
health and safety. We have incurred, and will continue to incur,
significant costs and capital expenditures in complying with
these laws and regulations. In addition, violations of, or
liabilities under, environmental laws or permits may result in
restrictions being imposed on our operating activities or in our
being subjected to substantial fines, penalties, criminal
proceedings, third party property damage or personal injury
claims, cleanup costs or other costs. While we believe we are
currently in substantial compliance with applicable
environmental requirements, future developments such as more
aggressive enforcement policies, the implementation of new, more
stringent laws and regulations, or the discovery of unknown
environmental conditions may require expenditures that could
have a material adverse effect on our business, results of
operations or financial condition.
In addition, certain components of our products contain cadmium
telluride and cadmium sulfide. Elemental cadmium and certain of
its compounds are regulated as hazardous due to the adverse
health effects that may arise from human exposure. Although the
risks of exposure to cadmium telluride are not believed to be as
serious as those relating to the exposure of elemental cadmium,
the chemical, physical and toxicological properties of cadmium
telluride have not been thoroughly investigated and reported. We
maintain engineering controls to minimize employee exposure to
cadmium and require our employees who handle cadmium compounds
to follow certain safety procedures, including the use of
personal protective equipment such as respirators, chemical
goggles and protective clothing. In addition, we believe the
risk of exposure to cadmium or cadmium compounds from our
end-products is limited by the fully encapsulated nature of such
materials in our products, as well as the implementation in 2005
of our end of life recycling program for our solar modules.
While we believe that such factors and procedures are sufficient
to protect our employees,
end-users and the
general public from cadmium exposure, we cannot assure you that
human or environmental exposure to cadmium or cadmium compounds
used in our products will not occur. Any such exposure could
result in future third-party claims against us, as well as
damage to our reputation and heightened regulatory scrutiny of
our products. The occurrence of such future events could have a
material adverse effect on our business, financial condition or
results of operations.
The use of cadmium in various products is also coming under
increasingly stringent governmental regulation. Future
regulation in this area could impact the manufacture and sale of
cadmium-containing solar modules and could require us to make
unforeseen environmental expenditures. For example, the European
Union
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Directive 2002/96/ EC on Waste Electrical and Electronic
Equipment, or the WEEE Directive, requires
manufacturers of certain electrical and electronic equipment to
be financially responsible for the collection, recycling,
treatment and disposal of specified products placed on the
market in the European Union. In addition, European Union
Directive 2002/95/ EC on the Restriction of the use of Hazardous
Substances in electrical and electronic equipment, or the
RoHS Directive, restricts the use of certain
hazardous substances, including cadmium, in specified products.
Other jurisdictions are considering adopting similar
legislation. Currently, our solar modules are not subject to the
WEEE or RoHS Directives; however, the Directives allow for
future amendments subjecting additional products to the
Directives requirements. If, in the future, our solar
modules become subject to such requirements, we may be required
to apply for an exemption. If we were unable to obtain an
exemption, we would be required to redesign our solar modules in
order to continue to offer them for sale within the European
Union, which would be impractical. Failure to comply with the
Directives could result in the imposition of fines and
penalties, the inability to sell our solar modules in the
European Union, competitive disadvantages and loss of net sales,
all of which could have a material adverse effect on our
business, financial condition and results of operations.
We have limited insurance coverage and may incur losses
resulting from product liability claims, business interruptions
or natural disasters.
We are exposed to risks associated with product liability claims
in the event that the use of our solar modules results in
personal injury or property damage. Since our solar modules are
electricity-producing devices, it is possible that users could
be injured or killed by our solar modules, whether by product
malfunctions, defects, improper installation or other causes. We
commenced commercial shipment of our solar modules in 2002 and,
due to our limited historical experience, we are unable to
predict whether product liability claims will be brought against
us in the future or the effect of any resulting adverse
publicity on our business. Moreover, we may not have adequate
resources and insurance to satisfy a judgment in the event of a
successful claim against us. The successful assertion of product
liability claims against us could result in potentially
significant monetary damages and require us to make significant
payments. Any business disruption or natural disaster could
result in substantial costs and diversion of resources.
The Estate of John T. Walton and its affiliates will
control us after this offering, and their interests may conflict
with or differ from your interests as a stockholder.
Upon the consummation of this offering and the dissolution of
JWMA Partners, LLC, our current majority stockholder, the Estate
of John T. Walton and its affiliates, including
JCL Holdings, LLC, will beneficially own a majority of our
outstanding common stock. Although we intend to have an
independent board upon the consummation of this offering, the
Estate of John T. Walton and its affiliates will have
substantial influence over all matters requiring stockholder
approval, including the election of our directors and the
approval of significant corporate transactions such as mergers,
tender offers and the sale of all or substantially all of our
assets. In addition, our amended and restated certificate of
incorporation and by-laws provide that unless and until JWMA
Partners, LLC, the Estate of John T. Walton, JCL Holdings, LLC,
John T. Waltons surviving spouse, descendants, any entity
(including a trust) that is for the benefit of John T.
Waltons surviving spouse or descendants or any entity
(including a trust) over which any of John T. Waltons
surviving spouse, descendants or siblings has voting or
dispositive power (collectively, the Estate)
collectively owns less than 40% of our common stock then
outstanding, stockholders holding 40% or more of our common
stock then outstanding may call a special meeting of the
stockholders, at which our stockholders could replace our board
of directors. In addition, unless and until the Estate
collectively owns less than 40% of our common stock then
outstanding, stockholder action may be taken by written consent.
See Description of Capital Stock. The interests of
the Estate could conflict with or differ from your interests as
a holder of our common stock. For example, the concentration of
ownership held by the Estate could delay, defer or prevent a
change of control of our company or impede a merger, takeover or
other business combination which you may otherwise view
favorably.
We are a controlled company within the meaning
of the NASD rules and, as a result, will qualify for exemptions
from certain corporate governance requirements.
Upon the consummation of this offering, the Estate of John T.
Walton and its affiliates will continue to control a majority of
our outstanding common stock. Under the NASD rules, a company of
which more than 50% of
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the voting power is held by an individual, group or another
company is a controlled company and may elect not to
comply with certain corporate governance requirements, including:
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the requirement that a majority of the board of directors
consist of independent directors; |
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the requirement that we have a nominating committee that is
composed entirely of independent directors with a formal written
charter or board resolution addressing the committees
purpose and responsibilities; |
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the requirement that we have a compensation committee that is
composed entirely of independent directors with a formal written
charter or board resolution addressing the committees
purpose and responsibilities; and |
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the requirement for an annual performance evaluation of the
nominating and compensation committees. |
We do not intend to utilize these exemptions upon the
consummation of this offering. However, we could decide to
utilize one or more of these exceptions in the future. If we
decide to utilize any of these exceptions, you would not have
the same protections afforded to stockholders of companies that
are subject to all of these corporate governance requirements.
Risks Relating to This Offering
No market currently exists for our common stock. We cannot
assure you that an active trading market will develop for our
common stock.
Prior to this offering, there has been no public market for
shares of our common stock. We cannot predict the extent to
which investor interest in our company will lead to the
development of a trading market on The Nasdaq Global Market or
otherwise or how liquid that market might become. The initial
public offering price for the shares of our common stock is, or
will be determined by, negotiations between us, the selling
stockholders and the underwriters, and may not be indicative of
prices that will prevail in the open market following this
offering.
If our stock price fluctuates after this offering, you
could lose a significant part of your investment.
The market price of our stock may be influenced by many factors,
some of which are beyond our control, including those described
above under Risks Relating to Our Business and
the following:
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the failure of securities analysts to cover our common stock
after this offering or changes in financial estimates by
analysts; |
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the inability to meet the financial estimates of analysts who
follow our common stock; |
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announcements by us or our competitors of significant contracts,
productions, acquisitions or capital commitments; |
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variations in quarterly operating results; |
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general economic conditions; |
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terrorist acts; |
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future sales of our common stock; and |
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investor perception of us and the renewable energy industry. |
As a result of these factors, investors in our common stock may
not be able to resell their shares at or above the initial
offering price. These broad market and industry factors may
materially reduce the market price of our common stock,
regardless of our operating performance.
Public investors will experience immediate and substantial
dilution as a result of this offering.
Existing investors have paid substantially less per share for
our common stock than the assumed initial public offering price
in this offering. Accordingly, if you purchase common stock in
this offering, you will experience immediate and substantial
dilution of your investment. Based upon the issuance and sale of
13,250,000 shares of common stock by us at an initial
public offering price of $20.00 per share, you will incur
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immediate dilution of approximately $14.68 in the net tangible
book value per share if you purchase shares in this offering.
We also have approximately 5,094,000 outstanding stock options
to purchase common stock with exercise prices that are below the
assumed initial public offering price of the common stock. To
the extent that these options are exercised, there will be
further dilution.
Shares eligible for future sale may cause the market price
of our common stock to drop significantly, even if our business
is doing well.
The market price of our common stock could decline as a result
of sales of a large number of shares of our common stock in the
market after this offering or the perception that these sales
could occur. These sales, or the possibility that these sales
may occur, also might make it more difficult for us to sell
equity securities in the future at a time and at a price that we
deem appropriate.
After the consummation of this offering, there will be
69,387,276 shares of our common stock
(72,329,776 shares if the underwriters exercise their
over-allotment option in full). The 20,000,000 shares of
common stock sold in this offering (22,942,500 shares if
the underwriters exercise their over-allotment option in full)
will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended, by
persons other than our affiliates within the meaning of
Rule 144 under the Securities Act.
We will incur increased costs as a result of being a
public company.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company.
In addition, the Sarbanes-Oxley Act of 2002, as well as new
rules subsequently implemented by the SEC and The Nasdaq Stock
Market, have required changes in corporate governance practices
of public companies. We expect these new rules and regulations
to increase our legal and financial compliance costs and to make
some activities more time-consuming and costly. In addition, we
will incur additional costs associated with our public company
reporting requirements. We also expect these new rules and
regulations to make it more difficult and more expensive for us
to obtain director and officer liability insurance and we may be
required to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to
attract and retain qualified persons to serve on our board of
directors or as executive officers. We are currently evaluating
and monitoring developments with respect to these new rules, and
we cannot predict or estimate the amount of additional costs we
may incur or the timing of such costs.
Failure to achieve and maintain effective internal
controls in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our
business and stock price.
As a public company, we will be required to document and test
our internal control procedures in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act,
which will require annual management assessments of the
effectiveness of our internal control over financial reporting
and a report by our independent registered public accounting
firm that both addresses managements assessment of the
effectiveness of internal control over financial reporting and
the effectiveness of internal control over financial reporting.
During the course of our testing, we may identify deficiencies
which we may not be able to remediate in time to meet our
deadline for compliance with Section 404. Testing and
maintaining internal control can divert our managements
attention from other matters that are important to our business.
We also expect the new regulations to increase our legal and
financial compliance cost, make it more difficult to attract and
retain qualified officers and members of our board of directors,
particularly to serve on our audit committee, and make some
activities more difficult, time consuming and costly. We may not
be able to conclude on an ongoing basis that we have effective
internal control over financial reporting in accordance with
Section 404 or our independent registered public accounting
firm may not be able or willing to issue an unqualified report
on the effectiveness of our internal control over financial
reporting. If we conclude that our internal control over
financial reporting is not effective, we cannot be certain as to
the timing of completion of our evaluation, testing and
remediation actions or their effect on our operations since
there is presently no precedent available by which to measure
compliance adequacy. If either we are unable to conclude that we
have effective internal control over financial reporting or our
independent auditors are unable to provide us with an
unqualified report as required by Section 404, then
investors could lose confidence in our reported financial
information, which could have a negative effect on the trading
price of our stock. See Risks Relating to Our
BusinessWe identified several significant deficiencies in
our internal controls that were deemed to be material
weaknesses. If we are unable to successfully address the
material weaknesses in our internal controls, our ability to
report our financial results on a timely and accurate basis may
be adversely affected.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements
that involve risks and uncertainties. Forward-looking statements
include statements concerning our plans, objectives, goals,
strategies, future events, future net sales or performance,
capital expenditures, financing needs, plans or intentions
relating to acquisitions, business trends and other information
that is not historical information and, in particular, appear
under the headings Prospectus Summary,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Industry
and Business. When used in this prospectus, the
words estimates, expects,
anticipates, projects,
plans, intends, believes,
forecasts, foresees, likely,
may, should, goal,
target and variations of such words or similar
expressions are intended to identify forward-looking statements.
All forward-looking statements are based upon information
available to us on the date of this prospectus.
These forward-looking statements are subject to risks,
uncertainties and other factors, many of which are outside of
our control, that could cause actual results to differ
materially from the results discussed in the forward-looking
statements, including, among other things, the matters discussed
in this prospectus in the sections captioned Risk
Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Factors you should consider that could cause these differences
are:
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the worldwide demand for electricity and the market for
renewable energy, including solar energy; |
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the ability or inability of conventional fossil fuel-based
generation technologies to meet the worldwide demand for
electricity; |
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our competitive position and our expectation regarding key
competitive factors; |
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government subsidies and policies supporting renewable energy,
including solar energy; |
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our expenses, sources of net sales and international sales and
operations; |
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future pricing of our solar modules and the photovoltaic systems
in which they are incorporated; |
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the performance, features and benefits of our solar modules and
plans for the enhancement of solar modules; |
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the possibility of liability for pollution and other damage that
is not covered by insurance or that exceeds our insurance
coverage; |
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the supply and price of components and raw materials, including
tellurium; |
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our ability to expand our manufacturing capacity in a timely and
cost-effective manner; |
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our ability to attract new customers and to develop and maintain
existing customer and supplier relationships; |
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our ability to retain our current key executives, integrate new
key executives and to attract and retain other skilled
managerial, engineering and sales marketing personnel; |
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elements of our marketing, growth and diversification strategies
including our strategy to reduce dependence on government
subsidies; |
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our intellectual property and our continued investment in
research and development; |
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changes in the status of legal proceedings or the commencement
of new material legal proceedings; |
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changes in, or the failure to comply with, government
regulations and environmental, health and safety requirements; |
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interest rate fluctuations and both our and our end-users
ability to secure financing on commercially reasonable terms or
at all; |
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foreign currency fluctuations and devaluations and political
instability in our foreign markets; and |
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general economic and business conditions including those
influenced by international and geopolitical events such as the
war in Iraq and any future terrorist attacks. |
There may be other factors that could cause our actual results
to differ materially from the results referred to in the
forward-looking statements. We undertake no obligation to
publicly update or revise forward-looking statements to reflect
events or circumstances after the date made or to reflect the
occurrence of unanticipated events, except as required by law.
20
USE OF PROCEEDS
We estimate that we will receive net proceeds from our offering
of our common stock, after deducting underwriting discounts and
commissions and other estimated offering expenses payable by us,
of approximately $247.7 million, or approximately
$302.9 million if the underwriters exercise their
over-allotment option in full. Of the net proceeds we receive
from this offering, we intend to use approximately
$150.0 million to build a manufacturing facility in Asia
and approximately $30.0 million to fund the associated
ramp-up costs,
approximately $26.0 million to repay debt to the Estate of
John T. Walton, our majority stockholder upon the
completion of this offering, and the remainder for working
capital and general corporate purposes, including potential
acquisitions and vertical integration.
The debt that we intend to redeem with the net proceeds of this
offering bears interest at the commercial prime lending rate and
is due upon the earlier of the completion of this offering and
January 18, 2008. We incurred this debt on July 26,
2006, and used $8.7 million of the proceeds to repay the
principal of our loan from Kingston Properties LLC and the
remainder to fund capital expenditures for the German plant.
We will not receive any proceeds from the sale of our common
stock by the selling stockholders.
DIVIDEND POLICY
We have never paid, and it is our present intention for the
foreseeable future not to pay, dividends on our common stock.
The declaration and payment of dividends is subject to the
discretion of our Board of Directors and depends on various
factors, including our net income, financial conditions, cash
requirements, future prospects and other factors deemed relevant
by our Board of Directors.
21
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
our capitalization as of September 30, 2006 (i) on an
actual consolidated basis for First Solar, Inc. and (ii) on
an as adjusted basis after giving further effect to this
offering, including the application of the net proceeds. You
should read this table in conjunction with Selected
Historical Financial Data, Use of Proceeds,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and all of the
financial statements and the related notes thereto included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006 | |
|
|
| |
|
|
Actual | |
|
As Adjusted | |
|
|
| |
|
| |
|
|
(in thousands, except par value) | |
Debt:
|
|
|
|
|
|
|
|
|
|
IKB credit facility
|
|
$ |
24,986 |
|
|
$ |
24,986 |
|
|
Related party debt
|
|
|
26,000 |
|
|
|
|
|
|
Debt with the State of Ohio
|
|
|
20,000 |
|
|
|
20,000 |
|
|
Capital lease obligations
|
|
|
31 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
Total debt:
|
|
|
71,017 |
|
|
|
45,017 |
|
|
|
|
|
|
|
|
Common Stock and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per share (actual:
242,500,000 shares authorized, 56,137,276 shares
issued and outstanding; as adjusted: 242,500,000 shares
authorized, 69,387,276 shares issued and outstanding)
|
|
|
56 |
|
|
|
69 |
|
|
Additional paid-in-capital
|
|
|
274,707 |
|
|
|
522,364 |
|
|
Accumulated deficit
|
|
|
(153,441 |
) |
|
|
(153,441 |
) |
|
Accumulated other comprehensive income
|
|
|
(64 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
121,258 |
|
|
|
368,928 |
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
192,275 |
|
|
$ |
413,945 |
|
|
|
|
|
|
|
|
22
DILUTION
If you invest in our common stock, your interest will be diluted
to the extent of the difference between the initial public
offering price per share of our common stock and the pro forma
net tangible book value per share of our common stock
immediately after the completion of this offering.
Dilution results from the fact that the per share offering price
of our common stock is substantially in excess of the book value
per share attributable to the existing stockholders for our
presently outstanding stock. Our net tangible book value as of
September 30, 2006 was $121.3 million, or
$2.16 per share of common stock. Assuming that the
13,250,000 shares of our common stock offered by us under
this prospectus are sold at a public offering price of
$20.00 per share, after deducting the underwriting
discounts and commissions and estimated offering expenses
payable by us, our pro forma net tangible book value as of
September 30, 2006, would have been approximately
$368.9 million, or $5.32 per share. This represents an
immediate increase in pro forma net tangible book value of
$3.16 per share to existing stockholders and an immediate
dilution of $14.68 per share to new investors purchasing
shares of our common stock in this offering.
The following table illustrates this substantial and immediate
per share dilution to new investors:
|
|
|
|
|
|
|
|
|
|
|
|
Per Share | |
|
|
| |
Initial public offering price
|
|
|
|
|
|
$ |
20.00 |
|
|
Net tangible book value as of September 30, 2006
|
|
$ |
2.16 |
|
|
|
|
|
|
Increase in net tangible book value attributable to new
investors purchasing shares in this offering
|
|
|
3.16 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value after this offering
|
|
|
|
|
|
|
5.32 |
|
|
|
|
|
|
|
|
Dilution to new investors
|
|
|
|
|
|
$ |
14.68 |
|
|
|
|
|
|
|
|
If the underwriters exercise their over-allotment option in
full, the increase in net tangible book value attributable to
new investors purchasing shares in this offering would be
$302.9 million, the pro forma net tangible book value per
share of common stock would be $5.86 and the dilution to new
investors would be $14.14.
The following table summarizes, as of September 30, 2006,
on a pro forma basis after giving effect to this offering, the
total number of shares of common stock purchased from us, the
total consideration paid to us (before deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us in this offering), and the average price
per share paid by existing stockholders and by new investors
purchasing shares in this offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased | |
|
Total Consideration | |
|
|
|
|
| |
|
| |
|
Average Price | |
|
|
Number | |
|
Percent | |
|
Amount | |
|
Percent | |
|
Per Share | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Existing stockholders
|
|
|
56,137,276 |
|
|
|
80.9 |
% |
|
$ |
264,861,000 |
|
|
|
50.0 |
% |
|
$ |
4.72 |
|
New investors(1)
|
|
|
13,250,000 |
|
|
|
19.1 |
% |
|
|
265,000,000 |
|
|
|
50.0 |
% |
|
$ |
20.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
69,387,276 |
|
|
|
100.0 |
% |
|
$ |
529,861,000 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Excludes 6,750,000 shares or of our common stock
to be sold by the selling stockholders to the new investors in
this offering, and for which we will not receive any net
proceeds. See Principal and Selling Stockholders.
23
If the underwriters exercise their over-allotment option in
full, the number of shares held by new investors will increase
to 16,192,500 shares, or 22.4% of the total number of
shares of our common stock outstanding after this offering.
Except as otherwise noted, the discussion and tables above
assume no exercise of the 5,093,780 outstanding stock
options as of September 30, 2006, with a weighted average
exercise price of $3.11 per share, all of which are
in-the-money, compared
to the price set forth on the cover page of this prospectus. To
the extent any of these options are exercised, there will be
further dilution to new investors. If all of our outstanding
stock options are exercised, you will experience additional
dilution of $0.15 per share.
24
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth our selected historical
consolidated financial information for the periods and at the
dates indicated. First Solar US Manufacturing, LLC
cancelled substantially all of its minority membership units in
January 2003, leaving it as a single-member limited liability
company. In the Selected Historical Financial Data,
Predecessor refers to First Solar pre-cancellation
of minority interests and Successor refers to First
Solar post-cancellation of minority interests.
The selected historical consolidated financial information for
the fiscal years ended December 27, 2003, December 25,
2004 and December 31, 2005 and as of December 25, 2004
and December 31, 2005 have been derived from the audited
consolidated financial statements of the Successor included
elsewhere in this prospectus. The selected historical
consolidated financial information as of December 27, 2003
have been derived from the audited consolidated financial
statements of the Successor not included in this prospectus. The
selected historical consolidated financial information for the
years ended December 29, 2001 and December 28, 2002
and as of December 29, 2001 and December 28, 2002 have
been derived from the unaudited consolidated financial
statements of the Predecessor not included in this prospectus.
The selected historical consolidated financial information for
the nine months ended September 24, 2005 and
September 30, 2006 and as of September 30, 2006 have
been derived from the unaudited consolidated financial
statements of the Successor included elsewhere in this
prospectus. In the opinion of management, the unaudited
consolidated financial statements have been prepared on the same
basis as our audited consolidated financial statements, and
include all adjustments, consisting only of normal recurring
adjustments, that are considered necessary for a fair
presentation of our financial position and operating results.
The results for any interim period are not necessarily
indicative of the results that may be expected for a full year.
The information presented below should be read in conjunction
with Use of Proceeds, Capitalization,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and related notes thereto included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(1) | |
|
|
Successor(1) | |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
Nine Months | |
|
|
Years Ended | |
|
|
Years Ended | |
|
Ended | |
|
|
| |
|
|
| |
|
| |
|
|
Dec 29, | |
|
Dec 28, | |
|
|
Dec 27, | |
|
Dec 25, | |
|
Dec 31, | |
|
Sept 24, | |
|
Sept 30, | |
|
|
2001 | |
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(as restated) | |
|
(as restated) | |
|
|
(as restated) | |
|
(as restated) | |
|
|
|
|
|
|
|
|
(dollars in thousands, except per unit/share amounts) | |
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
|
|
|
$ |
490 |
|
|
|
$ |
3,210 |
|
|
$ |
13,522 |
|
|
$ |
48,063 |
|
|
$ |
34,482 |
|
|
$ |
82,279 |
|
Cost of sales
|
|
|
14,271 |
|
|
|
7,007 |
|
|
|
|
11,495 |
|
|
|
18,851 |
|
|
|
31,483 |
|
|
|
21,672 |
|
|
|
53,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(14,271 |
) |
|
|
(6,517 |
) |
|
|
|
(8,285 |
) |
|
|
(5,329 |
) |
|
|
16,580 |
|
|
|
12,810 |
|
|
|
28,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,766 |
|
|
|
6,029 |
|
|
|
|
3,841 |
|
|
|
1,240 |
|
|
|
2,372 |
|
|
|
910 |
|
|
|
4,712 |
|
Selling, general and administrative
|
|
|
7,570 |
|
|
|
9,588 |
|
|
|
|
11,981 |
|
|
|
9,312 |
|
|
|
15,825 |
|
|
|
8,834 |
|
|
|
22,398 |
|
Production start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900 |
|
|
|
3,173 |
|
|
|
1,410 |
|
|
|
7,750 |
|
Facility closure and relocation
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(25,726 |
) |
|
|
(22,134 |
) |
|
|
|
(24,107 |
) |
|
|
(16,781 |
) |
|
|
(4,790 |
) |
|
|
1,656 |
|
|
|
(6,231 |
) |
Foreign currency gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116 |
|
|
|
(1,715 |
) |
|
|
(1,052 |
) |
|
|
2,792 |
|
Interest expense
|
|
|
(1,408 |
) |
|
|
(4,158 |
) |
|
|
|
(3,974 |
) |
|
|
(100 |
) |
|
|
(418 |
) |
|
|
(146 |
) |
|
|
(866 |
) |
Other income (expense), net
|
|
|
|
|
|
|
68 |
|
|
|
|
38 |
|
|
|
(6 |
) |
|
|
372 |
|
|
|
195 |
|
|
|
422 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
(27,134 |
) |
|
|
(26,224 |
) |
|
|
|
(28,043 |
) |
|
|
(16,771 |
) |
|
|
(6,551 |
) |
|
|
653 |
|
|
|
(4,064 |
) |
Cumulative effect of change in accounting for share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(27,134 |
) |
|
$ |
(26,224 |
) |
|
|
$ |
(28,043 |
) |
|
$ |
(16,771 |
) |
|
$ |
(6,462 |
) |
|
$ |
742 |
|
|
$ |
(4,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per unit/share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per unit/share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per unit/share
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.78 |
) |
|
$ |
(0.39 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.01 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units/shares
|
|
|
|
|
|
|
|
|
|
|
|
36,028 |
|
|
|
43,198 |
|
|
|
48,846 |
|
|
|
48,462 |
|
|
|
53,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per unit/share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per unit/share
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.78 |
) |
|
$ |
(0.39 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.01 |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units/shares
|
|
|
|
|
|
|
|
|
|
|
|
36,028 |
|
|
|
43,198 |
|
|
|
48,846 |
|
|
|
50,015 |
|
|
|
53,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(1) | |
|
|
Successor(1) | |
|
|
| |
|
|
| |
|
|
|
|
|
|
|
Nine Months | |
|
|
Years Ended | |
|
|
Years Ended | |
|
Ended | |
|
|
| |
|
|
| |
|
| |
|
|
Dec 29, | |
|
Dec 28, | |
|
|
Dec 27, | |
|
Dec 25, | |
|
Dec 31, | |
|
Sept 24, | |
|
Sept 30, | |
|
|
2001 | |
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(as restated) | |
|
(as restated) | |
|
|
(as restated) | |
|
(as restated) | |
|
|
|
|
|
|
|
|
(dollars in thousands) | |
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$ |
(15,420 |
) |
|
$ |
(22,128 |
) |
|
|
$ |
(22,228 |
) |
|
$ |
(15,185 |
) |
|
$ |
5,040 |
|
|
$ |
(2,099 |
) |
|
|
(13,903 |
) |
Net cash from (used in) investing activities
|
|
|
(2,855 |
) |
|
|
(3,833 |
) |
|
|
|
(15,224 |
) |
|
|
(7,790 |
) |
|
|
(43,832 |
) |
|
|
(24,658 |
) |
|
|
(103,556 |
) |
Net cash from (used in) financing activities
|
|
|
18,876 |
|
|
|
26,450 |
|
|
|
|
39,129 |
|
|
|
22,900 |
|
|
|
51,663 |
|
|
|
29,305 |
|
|
|
132,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(1) | |
|
|
Successor(1) | |
|
|
| |
|
|
| |
|
|
Dec 29, | |
|
Dec 28, | |
|
|
Dec 27, | |
|
Dec 25, | |
|
Dec 31, | |
|
Sept 30, | |
|
|
2001 | |
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
| |
|
|
(as restated) | |
|
(as restated) | |
|
|
(as restated) | |
|
(as restated) | |
|
|
|
|
|
|
(dollars in thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
1,560 |
|
|
$ |
2,050 |
|
|
|
$ |
3,727 |
|
|
$ |
3,465 |
|
|
$ |
16,721 |
|
|
$ |
31,373 |
|
Accounts receivable, net
|
|
|
374 |
|
|
|
201 |
|
|
|
|
1,907 |
|
|
|
4,393 |
|
|
|
1,098 |
|
|
|
26,433 |
|
Inventories
|
|
|
307 |
|
|
|
2,058 |
|
|
|
|
1,562 |
|
|
|
3,686 |
|
|
|
6,917 |
|
|
|
10,526 |
|
Property, plant and equipment, net
|
|
|
7,158 |
|
|
|
9,842 |
|
|
|
|
23,699 |
|
|
|
29,277 |
|
|
|
73,778 |
|
|
|
156,799 |
|
Total assets
|
|
|
9,634 |
|
|
|
14,377 |
|
|
|
|
31,575 |
|
|
|
41,765 |
|
|
|
101,884 |
|
|
|
255,146 |
|
Total liabilities
|
|
|
27,048 |
|
|
|
58,005 |
|
|
|
|
11,019 |
|
|
|
19,124 |
|
|
|
63,490 |
|
|
|
108,944 |
|
Accrued recycling
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
917 |
|
|
|
2,762 |
|
Current debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,142 |
|
|
|
35,448 |
|
Long-term debt
|
|
|
23,550 |
|
|
|
50,000 |
|
|
|
|
8,700 |
|
|
|
13,700 |
|
|
|
28,581 |
|
|
|
35,569 |
|
Total stockholders equity (deficit)
|
|
|
(17,414 |
) |
|
|
(43,628 |
) |
|
|
|
20,556 |
|
|
|
22,641 |
|
|
|
13,129 |
|
|
|
121,258 |
|
|
|
(1) |
In January 2003, First Solar US Manufacturing, LLC
cancelled substantially all of its minority membership units,
leaving it as a single-member limited liability company. The
cancellation of substantially all of First Solar US
Manufacturing, LLCs minority membership units in January
2003 did not affect the results of operations, financial
condition and cash flows of the Successor. As a result, we
believe that the Predecessor and Successor financial statements
are comparable. |
26
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis summarizes the
significant factors affecting our results of operations and
financial condition during the three year period ended
December 31, 2005 and the nine month periods ended
September 24, 2005 and September 30, 2006. This
discussion contains forward-looking statements that involve
known and unknown risks and uncertainties. Our actual results
could differ significantly from those anticipated by the
forward-looking statements for many reasons, including those
described in Cautionary Statement Concerning
Forward-Looking Statements, Risk Factors and
elsewhere in this prospectus. You should read the following
discussion with Selected Historical Financial Data
and all the historical financial statements and related notes
thereto included elsewhere in this prospectus.
Overview
We design and manufacture solar modules using a proprietary thin
film semiconductor technology that has established us as one of
the lowest cost solar module manufacturers in the world. Each
solar module employs a thin layer of cadmium telluride
semiconductor material to convert sunlight into electricity. We
manufacture our solar modules on a high-throughput production
line and we perform all manufacturing steps ourselves in an
automated, continuous process. In 2005 and during the first nine
months of 2006, we sold almost all of our solar modules to solar
project developers and system integrators headquartered in
Germany.
Currently, we manufacture our solar modules and conduct our
research and development activities at our Perrysburg, Ohio
manufacturing facility. We completed the qualification of our
base plant in Perrysburg, Ohio for high volume production in
November 2004. During 2005, the first full year our base plant
operated at high volume production, we reduced our average
manufacturing cost per Watt to $1.59, from $2.94 in 2004. Our
average manufacturing cost per Watt decreased from $1.53 in the
first nine months of 2005 to $1.50 in the first nine months of
2006. Our average manufacturing cost per Watt in the first nine
months of 2006 includes stock-based compensation expense
relating to our adoption of SFAS 123(R) of $0.09 per Watt
compared to $0.01 per Watt in the first nine months of 2005.
During the three months ended September 30, 2006, we
produced approximately 18MW of solar modules at a manufacturing
cost per Watt of $1.42, including stock-based compensation
expense relating to our adoption of SFAS 123(R) of
$0.07 per Watt. We define average manufacturing cost per
Watt as the total manufacturing cost incurred during the period,
including stock-based compensation expense relating to our
adoption of SFAS 123(R), divided by the total Watts
produced during the period. By continuing to expand production
and improve our technology and manufacturing process, we believe
that we can further reduce our manufacturing costs per Watt. Our
objective is to become, by 2010, the first solar module
manufacturer to offer a solar electricity solution that competes
on a non-subsidized basis with the price of retail electricity
in key markets in the United States, Europe and Asia. To
approach the price of retail electricity in such markets, we
believe that we will need to reduce our manufacturing costs by
an additional 40-50% per Watt, assuming prices for traditional
energy sources remain flat on an inflation adjusted basis.
First Solar was founded in 1999 to bring an advanced thin film
semiconductor process into commercial production through the
acquisition of predecessor technology and the initiation of a
research, development and production program that allowed us to
improve upon the predecessor technology and launch commercial
operations in January 2002. From January 2002 to the end of
2005, we sold approximately 28MW of solar modules. During the
three months and nine months ended September 30, 2006, we
sold approximately 17MW and approximately 34MW of solar modules,
respectively.
We converted, on February 22, 2006, from a Delaware limited
liability company to a Delaware corporation. Prior to
February 22, 2006, we operated as a Delaware limited
liability company.
Our fiscal year ends on the Saturday before December 31.
All references to fiscal year 2005 relate to the 53 weeks
ended December 31, 2005, all references to fiscal year 2004
relate to the 52 weeks ended December 25, 2004 and all
references to fiscal year 2003 refer to the 52 weeks ended
December 27, 2003. References to fiscal year 2006 and years
thereafter relate to our fiscal years for such periods. We use a
13 week fiscal quarter. All references to the first nine
months of 2006 relate to the 39 weeks ended
September 30, 2006 and all references to the first nine
months of 2005 relate to the 39 weeks ended
September 24, 2005.
We commenced low volume commercial production of solar modules
with our pilot production line in Perrysburg, Ohio in January
2002. During 2003 and 2004, while continuing to sell solar
modules manufactured on our pilot line, we designed the base
plant, a replicable, high-throughput production line. We
ultimately merged most of the equipment from the pilot line into
the base plant, completing the qualification of the base plant
for full volume
27
production in November 2004. The base plant has an expected
annual capacity of 25MW. In February 2005, we commenced
construction of two additional 25MW production lines at our
Perrysburg, Ohio facility in our Ohio expansion. We completed
the qualification of the Ohio expansion for full volume
production in August 2006. During the construction of the Ohio
expansion, we improved certain aspects of the base plant,
including the building design and layout and the design and
manufacture of certain production equipment. Our two-line Ohio
expansion represents a standard building block for
building future production facilities or expansions of our
existing production facilities.
In February 2006, we commenced construction of our German plant,
a new manufacturing facility located in Frankfurt (Oder), in the
State of Brandenburg, Germany that will house four 25MW
production lines. We anticipate completing the qualification of
the German plant for full volume production during the second
half of 2007. We are also in the planning stage for a new
manufacturing plant in Asia.
The following table summarizes our current and in-process
production capacity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Production Capacity of | |
|
|
|
|
|
|
Manufacturing Facility(1) | |
|
Date Qualification | |
|
|
Number of | |
|
| |
|
Completed for | |
|
|
Production | |
|
Number of Solar | |
|
|
|
Full Volume | |
Manufacturing Facility |
|
Lines | |
|
Modules | |
|
Watts | |
|
Production | |
|
|
| |
|
| |
|
| |
|
| |
Base plant
|
|
|
1 |
|
|
|
400,000 |
|
|
|
25MW |
|
|
|
November 2004 |
|
Ohio expansion
|
|
|
2 |
|
|
|
800,000 |
|
|
|
50MW |
|
|
|
August 2006 |
|
German plant
|
|
|
4 |
|
|
|
1,600,000 |
|
|
|
100MW |
|
|
|
Second half of 2007 (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current and Planned
|
|
|
7 |
|
|
|
2,800,000 |
|
|
|
175MW |
|
|
|
|
|
|
|
(1) |
The annual capacity of our manufacturing facilities is based on
an annual run rate of 400,000 solar modules per production line
and a power rating of approximately 62 Watts per solar module. |
(2) |
Anticipated. |
Each production line currently has an annual production capacity
of 400,000 solar modules, representing 25MW. We anticipate that
we will be able to increase both the run rate and MW volume of
our existing production lines through our continuous improvement
processes. For example, we increased the average conversion
efficiency of our solar modules from approximately 7% in 2003 to
approximately 9% at the end of the first nine months of 2006,
thereby increasing the number of sellable Watts per solar module
from approximately 49 Watts to approximately 64 Watts over
the same period.
Financial Operations Overview
The following describes certain line items in our statement of
operations and some of the factors that affect our operating
results.
We generate substantially all of our net sales from the sale of
solar modules. Over the past three years and during the first
nine months of 2006, the main constraint limiting our sales has
been production capacity as customer demand has exceeded the
number of solar modules we could produce. We price and sell our
solar modules per Watt of power. For example, our average sales
price was $2.40 per Watt during the three months ended
September 30, 2006. As a result, our net sales can
fluctuate based on our output of sellable Watts. We currently
sell almost all of our solar modules to solar project developers
and system integrators headquartered in Germany, which then
resell our solar modules to end-users who receive government
subsidies. Our net sales could be negatively impacted if
legislation reduces the current subsidy programs in the United
States, Europe or Asia or interest rates increase, which could
impact our end-users ability to either meet their target
return on investment or finance their projects.
In April 2006, we entered into contracts for the purchase and
sale of our solar modules with six European project developers
and system integrators, or the Long Term Sales Contracts. These
contracts account for a significant portion of our planned
production over the period of fiscal 2006 to 2011, and therefore
will significantly affect our overall financial performance. The
Long Term Sales Contracts allow for approximately
1.2 billion
($1.4 billion at an assumed exchange rate of
$1.20/1.00) of
sales from 2006 to 2011 for 745MW of solar modules. We estimate
that the total sales volume will account for a significant
majority of our planned production volumes from the base plant,
Ohio expansion and German plant. We have spent
$69.5 million and committed an additional $1.7 million
in capital expenditures for the Ohio expansion. We are
committing $150.0 million for the build-out of our German
plant through 2007 and anticipate that the build-out of our
contemplated Asian plant will require
28
approximately $150.0 million through 2008. Under each of
our Long Term Sales Contracts, we have a unilateral option,
exercisable until December 31, 2006, to increase the sales
volumes and extend each contract through 2012. We plan to
exercise each option promptly following the completion of this
offering, after which the contracts will allow for approximately
1.9 billion
($2.3 billion at an assumed exchange rate of
$1.20/1.00) of
sales from 2006 to 2012 for 1,270MW of solar modules. We have
additional unilateral options to increase 2006 sales volumes by
a total of 14MW with approximately 10 weeks notice to our
customers. After giving effect to expected sales under the Long
Term Sales Contracts, we expect that no single customer will
account for more than 25% of our net sales in 2006.
Our Long Term Supply Contracts require us to deliver solar
modules each year that, in total, meet or exceed a specified
minimum average number of Watts per module for the year.
Beginning in 2007, we are required to increase the minimum
average number of Watts by approximately 5% annually between
2007 and 2009. If we are unable to meet the minimum average
annual number of Watts per module in a given year, we will be in
breach of the agreements, entitling our customers to certain
remedies, potentially including the right to terminate their
Long Term Supply Contracts. In addition, our Long Term Supply
Contracts specify a sales price per Watt that declines each
year. Our gross profit and gross margin could decline if we are
unable to reduce our manufacturing cost per Watt by at least the
same rate as which our contractual prices decrease.
Sales prices under our Long Term Sales Contracts are fixed, with
a built-in decline of 6.5% each year. As a result, we cannot
pass along any increases in manufacturing costs to those
customers. Although we believe that our total manufacturing
costs per Watt will decline at the same rate or more rapidly
than our prices under the Long Term Sales Contracts, our failure
to achieve our manufacturing cost per Watt targets could result
in a reduction of our gross margin. The annual 6.5% decline in
the sales price under the Long Term Sales Contracts will reduce
our net sales by approximately 5-6% each year, assuming that
rated power of our solar modules remains flat, and will impact
our cash flow accordingly. In addition, sales prices under the
Long Term Sales Contracts are denominated in Euros, exposing us
to risks related to currency exchange rate fluctuation.
Under the Long Term Sales Contracts, starting in April 2006, we
transfer title and risk of loss to the customer, and recognize
revenue upon shipment. Under our previous customer contracts, we
did not transfer title or risk of loss, or recognize revenue,
until the solar modules arrived and were received by our
customers. Our customers do not have extended payment terms or
rights of return under these contracts.
We retain the right to terminate the Long Term Sales Contracts
upon 12 months notice and the payment of a termination fee
if we determine that any of the following material adverse
changes have occurred: new laws, rules or regulations with
respect to our production, distribution, installation or
reclamation and recycling program have a substantial adverse
impact on our business; unanticipated technical or operational
issues result in our experiencing widespread, persistent quality
problems or the inability to achieve stable conversion
efficiencies at planned levels; or extraordinary events beyond
our control substantially increase the cost of our labor,
materials or utility expense or significantly reduce our
throughput. The average termination fee under those agreements
is 2.8 million
($3.3 million at an assumed exchange rate of
$1.20/1.00)
under the base volume
and 3.8 million
($4.6 million at an assumed exchange rate of
$1.20/1.00) if
the option is exercised.
Our customers are entitled to certain remedies in the event of
missed deliveries of the total kilowatt volume. Such delivery
commitments are established through a rolling four quarter
forecast and define the specific quantities to be purchased on a
quarterly basis and schedules the individual shipments to be
made to our customers. In the case of a late delivery, our
customers are entitled to a maximum charge of up to 6% of the
delinquent revenue. If we do not meet our annual minimum volume
shipments or the minimum average Watt per module, our customers
also have the right to terminate these contracts on a
prospective basis.
Our cost of sales includes the cost of raw materials, such as
tempered back glass, TCO coated front glass, cadmium telluride,
EVA laminate, connector assemblies and laminate edge seal. Our
total material cost per solar module has been stable over the
past three years, even though the cost of tellurium, a component
of cadmium telluride, increased by approximately five to six
times from 2003 to 2005. The increase in the cost of tellurium
did not have a significant impact on our total raw material cost
per solar module because raw tellurium represents a relatively
small portion of our overall material and manufacturing costs.
Historically, we have not entered into long term supply
contracts with fixed prices for our raw materials. In 2006,
however, we entered into a multi-year tellurium supply contract
in order to mitigate potential cost volatility and secure raw
material supplies. We expect our raw material cost per Watt to
decrease over the next several years as costs per solar module
remain stable and sellable Watts per solar module increase.
Other items contributing to our cost of sales are direct labor,
manufacturing overhead such as engineering expense, equipment
maintenance, environmental health and safety, quality and
production control and procurement.
29
Cost of sales also includes depreciation of manufacturing plant
and equipment and facility related expenses. In addition, we
accrue for warranty and end of life reclamation and recycling
expenses in our cost of sales.
We implemented a program in 2005 to reclaim and recycle our
solar modules after use. Under our reclamation and recycling
program, we enter into an agreement with the end-users of the
photovoltaic systems that employ our solar modules. In the
agreement we commit, at our expense, to remove the solar modules
from the installation site at the end of use and transport them
to a processing center where the solar module materials and
components will be recycled, and the owner agrees not to dispose
of the solar modules except through our program or another
program that we approve. The photovoltaic system owner is
responsible for disassembling the solar modules and packaging
them in containers that we provide. At the time we sell a solar
module, we record an expense in cost of sales equal to the
present value of the estimated future end of life obligation. We
record the accretion expense on this future obligation annually
in selling, general and administrative expense.
Overall, we expect our cost of sales per Watt to decrease over
the next several years due to an increase of sellable Watts per
solar module and more efficient absorption of fixed costs driven
by economies of scale.
Gross profits are affected by a number of factors, including our
average selling prices, foreign exchange rates, our actual
manufacturing costs and the effective utilization of our
production facilities. As a result, gross profits may vary from
quarter to quarter.
Research and development expense consists primarily of salaries
and personnel-related costs and the cost of products, materials
and outside services used in our process and product development
activities. In 2006, we began adding equipment for further
process developments and recording the depreciation of such
equipment as research and development expense. We may also
allocate a portion of the annual operating cost of the Ohio
expansion to research and development expense.
We maintain a number of programs and activities to improve our
technology in order to enhance the performance of our solar
modules and manufacturing processes. As of September 30,
2006, we had a total of 33 employees working on these
developmental activities. In addition, we maintain active
collaborations with the National Renewable Energy Laboratory, a
division of the Department of Energy, Brookhaven National
Laboratory and several universities. We report our research and
development expense net of grant funding. During the past three
years, we received grant funding that we applied towards our
development programs. We received $1.4 million in research
and development grants during fiscal year 2003,
$1.0 million during fiscal year 2004, $0.9 million in
fiscal year 2005 and $0.4 million during the first nine
months of 2006. We expect our research and development expense
to increase in absolute terms in the future as we increase
personnel and research and development activity. Over time, we
expect research and development expense to decline as a
percentage of net sales and on a cost per Watt basis as a result
of economies of scale.
|
|
|
Selling, general and administrative |
Selling, general and administrative expense consists primarily
of salaries and other personnel-related costs, professional
fees, insurance costs, travel expense and other selling
expenses. We expect these expenses to increase in the near term,
both in absolute dollars and as a percentage of net sales, in
order to support the growth of our business as we expand our
sales and marketing efforts, improve our information processes
and systems and implement the financial reporting, compliance
and other infrastructure required for a public company. Over
time, we expect selling, general and administrative expense to
decline as a percentage of net sales and on a cost per Watt
basis as our net sales and our total Watts sold increase.
Production start-up
expense consists primarily of salaries and personnel-related
costs and the cost of operating a production line before it has
been qualified for full production, including the cost of raw
materials for solar modules run through the production line
during the qualification phase. It also includes all expenses
related to the selection of a new site and the related legal and
regulatory costs and the costs to maintain our plant replication
program, to the extent we cannot capitalize the expenditure. We
incurred production
start-up expenses of
$3.2 million in fiscal year 2005 and $7.8 million
during the first nine months of 2006 in connection with the
qualification of the Ohio expansion and the planning of the
German plant. We also expect to incur production
start-up expenses in
fiscal year 2006 and fiscal year 2007 in connection with the
German plant and the contemplated manufacturing facility in
Asia. As a result of these production
start-up expenses, we
expect our net loss to increase significantly in fiscal year
2006. In general, we expect production
start-up expenses per
production line to be higher
30
when we build an entire new manufacturing facility compared to
the addition of a new production line at an existing
manufacturing facility, primarily due to the additional
infrastructure investment required. Over time, we expect
production start-up
expenses to decline as a percentage of net sales and on a cost
per Watt basis as a result of economies of scale.
Interest expense is associated with various debt financings. See
Description of Certain Indebtedness.
|
|
|
Foreign currency gain (loss) |
Foreign currency gain (loss) consists of gains and losses
resulting from holding assets and liabilities and conducting
transactions denominated in currencies other than our functional
currency, the U.S. dollar.
Other income (expense), net consists primarily of interest
earned on our cash and cash equivalents.
Income Taxes
First Solar, Inc., a Delaware corporation, was incorporated on
February 22, 2006. As a Delaware corporation, we are
subject to federal and state income taxes. Prior to
February 22, 2006, we operated as a Delaware limited
liability company and were not subject to state or federal
income taxes. As a result, the annual historical financial data
included in this prospectus does not reflect what our financial
position and results of operations would have been, had we been
a taxable corporation for a full fiscal year.
On December 31, 2005, we had
non-U.S. net
operating loss carry-forwards of $3.4 million, which will
begin expiring in 2008. On September 30, 2006, we had
non-U.S. net
operating loss carry-forwards of $6.8 million, which will
begin expiring in 2008. Our ability to use the net operating
loss carry-forwards is dependent on our ability to generate
taxable income in future periods and subject to certain
restrictions under the Internal Revenue Code and certain
international tax laws.
Certain of our
non-U.S. subsidiaries
are subject to income taxes in their foreign jurisdictions. We
expect the tax consequences of our
non-U.S. subsidiaries
will become significant as we expand our
non-U.S. production
capacity.
We recognize deferred tax assets and liabilities for differences
between financial statement and income tax bases of assets and
liabilities. Valuation allowances are provided against deferred
tax assets when management cannot conclude that it is more
likely than not that some portion or all of the deferred tax
asset will be realized. As of December 31, 2005, we had a
deferred tax asset of $1.9 million consisting primarily of
non-U.S. net operating
loss carry-forwards and plant start-up cost. As of
September 30, 2006, we had a net deferred tax asset of
$54.7 million consisting primarily of tax-basis goodwill
and property, plant and equipment. We have recorded a full
valuation allowance against our net deferred tax assets, because
we determined that it is more likely than not that our net
deferred tax assets will not be realized.
Critical Accounting Policies and Estimates
In preparing our financial statements in conformity with
generally accepted accounting principles in the United States
(GAAP), we have to make estimates and assumptions about future
events that affect the amounts of reported assets, liabilities,
revenues and expenses, as well as the disclosure of contingent
liabilities in our financial statements and the related notes
thereto. Some of our accounting policies require the application
of significant judgment by management in the selection of
appropriate assumptions for determining these estimates. By
their nature, these judgments are subject to an inherent degree
of uncertainty. As a result, we cannot assure you that actual
results will not differ significantly from estimated results. We
base our judgments and estimates on our historical experience,
on our forecasts and on other available information, as
appropriate. Our significant accounting policies are further
described in Note 2 to our audited consolidated financial
statements included elsewhere in this prospectus.
31
Our most significant accounting policies, which reflect
significant management estimates and judgment in determining
amounts reported in our audited consolidated financial
statements included elsewhere in this prospectus are as follows:
Revenue recognition. We recognize revenue when persuasive
evidence of an arrangement exists, delivery of the product has
occurred and title and risk of loss has passed to the customer,
the sales price is fixed or determinable and collectibility of
the resulting receivable is reasonably assured. In accordance
with this policy, we record a trade receivable for the selling
price of our product and reduce inventory for the cost of goods
sold when delivery occurs in accordance with the terms of the
respective sales contracts. Our only significant revenue
generating activity is the sale of our single type of solar
module. We are able to determine that the criteria for revenue
recognition have been met by examining objective data, and the
only estimates that we generally have to make regarding revenue
recognition pertain to the collectibility of the resulting
receivable. We have not experienced significant variability in
our collections because we have historically sold our solar
modules primarily to six well-established customers.
End of life recycling and reclamation. At the time of
sale, we recognize an expense for the estimated fair value of
our future obligation for reclaiming and recycling the solar
modules that we have sold once they have reached the end of
their useful lives. We base our estimate of the fair value of
our reclamation and recycling obligations on the present value
of the expected future cost of reclaiming and recycling the
solar modules, which includes the cost of packaging the solar
module for transport, the cost of freight from the solar
modules installation site to a recycling center and the
material, labor and capital costs of the recycling process and
an estimated third-party profit margin and risk rate for such
services. We based this estimate on our experience reclaiming
and recycling our solar modules and on our expectations about
future developments in recycling technologies and processes and
about economic conditions at the time the solar modules will be
reclaimed and recycled. In the periods between the time of our
sales and our settlement of the reclamation and recycling
obligations, we accrete the carrying amount of the associated
liability by applying the discount rate used in its initial
measurement. We charged $0.9 million and $1.5 million
to cost of sales for the fair value of our reclamation and
recycling obligation for solar modules sold during the year
ended December 31, 2005 and the nine months ended
September 30, 2006, respectively. During both the year
ended December 31, 2005 and the nine months ended
September 30, 2006, the accretion expense on our
reclamation and recycling obligations was insignificant. We
performed a sensitivity analysis on the cost we charged to cost
of sales in the year ended December 31, 2005 for the
reclamation and recycling of solar modules that we sold during
that year and determined that an increase of 10% or a decrease
of 10% in our estimate of the future cost of reclaiming and
recycling each solar module would result in a 10% increase or
decrease, respectively, in our reclamation and recycling cost
accrual for the year ended December 31, 2005; a 10%
increase in the rate we use to discount the future estimated
cost would result in a 9% decrease in our estimated costs; and a
10% decrease in the rate would result in a 10% increase in the
cost.
Product warranties. We provide a limited warranty to the
original purchasers of our solar modules for five years
following delivery for defects in materials and workmanship
under normal use and service conditions. We also warrant to the
original purchasers of our solar modules that solar modules
installed in accordance with agreed-upon specifications will
produce at least 90% of their initial power output rating during
the first 10 years following their installation and at
least 80% of their initial power output rating during the
following 15 years. Our warranties may be transferred from
the original purchaser of our solar modules to a subsequent
purchaser. We accrue warranty costs when we recognize sales,
using amounts estimated based on our historical experience with
warranty claims, our monitoring of field installation sites and
in-house testing. During the year ended December 31, 2005,
we reduced our estimate of our product warranty liability by
$1.0 million because lower manufacturing costs reduced the
replacement cost of our solar modules under warranty.
Stock-based compensation. In December 2004, the FASB
issued SFAS 123 (revised 2004), Share-Based
Payments, which requires companies to recognize compensation
expense for all stock-based payments to employees, including
grants of employee stock options, in their statements of
operations based on the fair value of the awards, and we adopted
SFAS 123(R) during the first quarter of the year ended
December 31, 2005 using the modified
retrospective method of transition. In March 2005, the
Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. (SAB) 107, which provides
guidance regarding the implementation of SFAS 123(R). In
particular, SAB 107 provides guidance regarding calculating
assumptions used in stock-based compensation valuation models,
the classification of stock-based compensation expense, the
capitalization of stock-based compensation costs and disclosures
in managements discussion and analysis in filings with the
SEC.
Determining the appropriate fair-value model and calculating the
fair value of stock-based awards at the date of grant using any
valuation model requires judgment. We use the Black-Scholes
option pricing model to
32
estimate the fair value of employee stock options, consistent
with the provisions of SFAS No. 123(R). Option pricing
models, including the Black-Scholes model, require the use of
input assumptions, including expected volatility, expected term,
expected dividend rate and expected risk-free rate of return.
Because our stock is not currently publicly traded, we do not
have an observable share-price volatility; therefore, we
estimate our expected volatility based on that of similar
publicly-traded companies and expect to continue to do so until
such time as we might have adequate historical data from our own
traded share price. We estimated our options expected
terms using our best estimate of the period of time from the
grant date that we expect the options to remain outstanding. If
we determine another method to estimate expected volatility or
expected term was more reasonable than our current methods, or
if another method for calculating these input assumptions is
prescribed by authoritative guidance, the fair value calculated
for stock-based awards could change significantly. Higher
volatility and expected terms result in a proportional increase
to stock-based compensation determined at the date of grant. The
expected dividend rate and expected risk-free rate of return are
not as significant to the calculation of fair value.
In addition, SFAS No. 123(R) requires us to develop an
estimate of the number of stock-based awards which will be
forfeited due to employee turnover. Quarterly changes in the
estimated forfeiture rate can have a significant effect on
reported stock-based compensation. If the actual forfeiture rate
is higher than the estimated forfeiture rate, then an adjustment
is made to increase the estimated forfeiture rate, which will
result in a decrease to the expense recognized in the financial
statements during the quarter of the change. If the actual
forfeiture rate is lower than the estimated forfeiture rate,
then an adjustment is made to decrease the estimated forfeiture
rate, which will result in an increase to the expense recognized
in the financial statements. These adjustments affect our cost
of sales, research and development expenses and selling, general
and administrative expenses. Through the first nine months ended
September 30, 2006, the effect of forfeiture adjustments on
our financial statements has been insignificant. The expense we
recognize in future periods could differ significantly from the
current period and/or our forecasts due to adjustments in the
assumed forfeiture rates.
Valuation of Long-Lived Assets. Our long-lived assets
include manufacturing equipment and facilities. Our business
requires significant investment in manufacturing facilities that
are technologically advanced, but may become obsolete through
changes in our industry or the fluctuations in demand for our
solar modules. We account for our long-lived tangible assets and
definite-lived intangible assets in accordance with
SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. As a result, we assess long-lived assets
classified as held and used, including our property,
plant and equipment, for impairment whenever events or changes
in business circumstances arise that may indicate that the
carrying amount of the long-lived asset may not be recoverable.
These events would include significant current period operating
or cash flow losses combined with a history of such losses,
significant changes in the manner of use of assets and
significant negative industry or economic trends. We evaluated
our long-lived assets for impairment during 2005 and concluded
that the carrying values of these assets were recoverable.
Accounting for Income Taxes. First Solar Holdings, LLC
was formed as a limited liability company and, accordingly, was
not subject to U.S. federal or state income taxes, although
certain of its foreign subsidiaries were subject to income taxes
in their local jurisdictions. However, upon incorporation during
the first quarter of 2006, First Solar, Inc. became subject to
U.S. federal and state income taxes. We account for income
taxes using the asset and liability method, in accordance with
SFAS 109, Accounting for Income Taxes. We operate in
multiple taxing jurisdictions under several legal forms. As a
result, we are subject to the jurisdiction of a number of U.S.
and non-U.S. tax
authorities and to tax agreements and treaties among these
governments. Our operations in these different jurisdictions are
taxed on various bases, including income before taxes calculated
in accordance with jurisdictional regulations. Determining our
taxable income in any jurisdiction requires the interpretation
of the relevant tax laws and regulations and the use of
estimates and assumptions about significant future events,
including the following: the amount, timing and character of
deductions; permissible revenue recognition methods under the
tax law; and the sources and character of income and tax
credits. Changes in tax laws, regulations, agreements and
treaties, currency exchange restrictions or our level of
operations or profitability in each taxing jurisdiction could
have an impact on the amount of income tax assets, liabilities,
expenses and benefits that we record during any given period.
Controls and Procedures
We have restated our consolidated financial statements for the
years ended December 27, 2003 and December 25, 2004
and as of December 25, 2004 in order to correct errors that
we identified during the preparation of this registration
statement in connection with our initial public offering and the
performance of the associated audits for our years ended
December 25, 2004 and December 31, 2005. We identified
several significant deficiencies in our internal controls that
were deemed to be material weaknesses in our
internal controls as
33
defined in standards established by the Public Company
Accounting Oversight Board (PCAOB). A material
weakness is defined by the PCAOB as a significant deficiency, or
combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected. A significant deficiency is a control
deficiency, or combination of control deficiencies, that
adversely affects the companys ability to initiate,
authorize, record, process or report external financial data
reliably in accordance with generally accepted accounting
principles such that there is more than a remote likelihood that
a misstatement of the companys annual or interim financial
statements that is more than inconsequential will not be
prevented or detected. A control deficiency exists
when the design or operation of a control does not allow
management or employees, in the normal course of performing
their assigned functions, to prevent or detect misstatements on
a timely basis.
As of December 31, 2005, we did not maintain effective
controls over the preparation, review and presentation and
disclosure of our consolidated financial statements due to a
lack of personnel with experience in financial reporting and
control procedures necessary for SEC registrants. This failure
caused several significant deficiencies, four of which had a
large enough impact on our operating results to individually
constitute a material weakness. These material weaknesses were:
(i) we did not maintain effective controls to ensure that
the appropriate labor and overhead expenses were included in the
cost of our inventory and that intercompany profits in inventory
were completely and accurately eliminated as part of the
consolidation process; (ii) we did not maintain effective
controls to ensure the complete and accurate capitalization of
interest in connection with our property, plant and equipment
additions; (iii) we did not maintain effective controls to
properly accrue for warranty obligations; and (iv) we did
not maintain effective controls to properly record the formation
of First Solar US Manufacturing, LLC in 1999 and the
subsequent liquidation of minority membership units in 2003.
These control deficiencies led to the restatement of our
financial statements for the years ended December 27, 2003
and December 25, 2004, resulting in a $2.6 million
increase in our net loss for the year ended December 27,
2003 and a $2.0 million increase in our net loss for the
year ended December 25, 2004. See note 19 to the
audited consolidated financial statements included elsewhere in
this prospectus for further details. These control deficiencies
could result in more than a remote likelihood that a material
misstatement to our annual or interim financial statements would
not be prevented or detected. Accordingly, we have concluded
that each of these control deficiencies constitute a material
weaknesses.
To improve our financial accounting organization and processes,
we have hired a new chief financial officer, are creating an
audit committee comprised entirely of independent directors,
have appointed a new independent director to be the chairman of
the audit committee and have hired a new corporate controller.
We are in the process of adding ten new positions in the areas
of finance, tax, treasury, internal controls and internal audit.
We are adopting and implementing additional policies and
procedures to strengthen our financial reporting capability
including investments into further enhancements of our
enterprise resource planning system. However, the process of
designing and implementing an effective financial reporting
system is a continuous effort that requires us to anticipate and
react to changes in our business and the economic and regulatory
environments and to expend significant resources to maintain a
financial reporting system that is adequate to satisfy our
reporting obligations. See Risk Factors Risks
Relating to Our Business We identified several
significant deficiencies in our internal controls that were
deemed to be material weaknesses. If we are unable to
successfully address the material weaknesses in our internal
controls, our ability to report our financial results on a
timely and accurate basis may be adversely affected.
34
Results of Operations
The following table sets forth our consolidated statements of
operations for the periods indicated as a percentage of net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
December 27, | |
|
December 25, | |
|
December 31, | |
|
September 24, | |
|
September 30, | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net sales
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
Cost of sales |
|
|
358.1% |
|
|
|
139.4% |
|
|
|
65.5% |
|
|
|
62.9% |
|
|
|
65.2% |
|
Gross profit (loss) |
|
|
(258.1)% |
|
|
|
(39.4)% |
|
|
|
34.5% |
|
|
|
37.1% |
|
|
|
34.8% |
|
Research and
development |
|
|
119.7% |
|
|
|
9.2% |
|
|
|
5.0% |
|
|
|
2.6% |
|
|
|
5.7% |
|
Selling, general
and administrative |
|
|
373.2% |
|
|
|
68.9% |
|
|
|
32.9% |
|
|
|
25.6% |
|
|
|
27.2% |
|
Production start-up expense |
|
|
0.0% |
|
|
|
6.6% |
|
|
|
6.6% |
|
|
|
4.1% |
|
|
|
9.5% |
|
Operating income (loss) |
|
|
(751.0)% |
|
|
|
(124.1)% |
|
|
|
(10.0)% |
|
|
|
4.8% |
|
|
|
(7.6)% |
|
Foreign currency gain (loss) |
|
|
0.0% |
|
|
|
0.9% |
|
|
|
(3.6)% |
|
|
|
(3.0)% |
|
|
|
3.4% |
|
Interest expense |
|
|
(123.8)% |
|
|
|
(0.8)% |
|
|
|
(0.9)% |
|
|
|
(0.5)% |
|
|
|
(1.0)% |
|
Other income (expense) |
|
|
1.2% |
|
|
|
(0.0)% |
|
|
|
0.9% |
|
|
|
0.6% |
|
|
|
0.5% |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2% |
|
Cumulative effect of change in accounting for share-based
compensation |
|
|
|
|
|
|
|
|
|
|
0.2% |
|
|
|
0.3% |
|
|
|
|
|
Net income (loss) |
|
|
(873.6)% |
|
|
|
(124.0)% |
|
|
|
(13.4)% |
|
|
|
2.2% |
|
|
|
(4.9)% |
|
|
|
|
Nine Months Ended September 30, 2006 and
September 24, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
September 24, 2005 | |
|
September 30, 2006 | |
|
Nine Month Period Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
34,482 |
|
|
$ |
82,279 |
|
|
|
$47,797 |
|
|
|
139% |
|
Net sales increased by $47.8 million, or 139%, from
$34.5 million during the first nine months of 2005 to
$82.3 million during the first nine months of 2006. The
increase in our net sales was due primarily to a 149% increase
in the MW volume of solar modules sold in the first nine months
of 2006 compared to the first nine months of 2005. We were able
to increase the MW volume of solar modules sold primarily as a
result of higher throughput, our conversion from a five day to a
seven day production week and the full production ramp of our
Ohio expansion. Net sales in the first nine months of 2006 also
benefited from a change in our shipping terms from delivered
duty paid to carriage and insurance paid, which became effective
in the second quarter of 2006. This change affected revenue
recognition by $5.4 million of
in-transit inventory
during the first half of 2006. In addition, we increased the
average number of sellable Watts per solar module from
approximately 59 Watts in the first nine months of 2005 to
approximately 64 Watts in the first nine months of 2006.
The increase in net sales was partially offset by a decrease in
the average selling price per Watt from $2.46 in the first nine
months of 2005 to $2.35 in the first nine months of 2006. Strong
demand from other customers allowed us to reduce our dependence
on our largest customer from 53% of net sales in the first
nine months of 2005 to 23% of net sales in the first nine
months of 2006. In both periods, almost all of our net sales
resulted from sales of solar modules to customers headquartered
in Germany.
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
September 24, 2005 | |
|
September 30, 2006 | |
|
Nine Month Period Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$ |
21,672 |
|
|
$ |
53,650 |
|
|
$ |
31,978 |
|
|
|
148 |
% |
% of Net sales
|
|
|
62.9 |
% |
|
|
65.2 |
% |
|
|
|
|
|
|
|
|
Cost of sales increased by $32.0 million, or 148%, from
$21.7 million in the first nine months of 2005 to
$53.7 million in the first nine months of 2006. Direct
material expense increased $12.6 million, warranty and end
of life costs relating to the reclamation and recycling of our
solar modules increased $2.6 million, direct labor expense
increased $2.4 million and sales freight and other costs
increased $0.7 million, in each case, primarily as a result
of higher production volumes during the first nine months of
2006 compared to the same period in 2005. In addition,
manufacturing overhead costs increased by $13.6 million,
which was primarily comprised of an increase in salaries and
personnel related expenses of $3.8 million resulting from
the conversion from a five day to a seven day production week
and the overall infrastructure build-out of our Ohio expansion,
an increase in stock-based compensation expense of
$3.3 million, an increase in facility related expenses of
$2.8 million and an increase in depreciation expense of
$3.7 million, primarily as a result of additional equipment
becoming operational at our Ohio expansion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
September 24, 2005 | |
|
September 30, 2006 | |
|
Nine Month Period Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$ |
12,810 |
|
|
$ |
28,629 |
|
|
$ |
15,819 |
|
|
|
123 |
% |
% Gross margin
|
|
|
37.1 |
% |
|
|
34.8 |
% |
|
|
|
|
|
|
|
|
Gross profit increased by $15.8 million, or 123%, from
$12.8 million in the first nine months of 2005 to
$28.6 million in the first nine months of 2006, reflecting
an increase in net sales. In contrast, our gross margin
percentage decreased from 37% in the first nine months of 2005
to 35% in the first nine months of 2006. The decrease in our
gross margin percentage is attributable to $1.1 million in
expenses for the ramp of our Ohio expansion during the first
nine months of 2006 and increased stock-based compensation
expense of $3.3 million, which alone reduced our gross
margin by 4.0 percentage points during the first nine
months of 2006 compared to the first nine months of 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
September 24, 2005 | |
|
September 30, 2006 | |
|
Nine Month Period Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$ |
910 |
|
|
$ |
4,712 |
|
|
$ |
3,802 |
|
|
|
418% |
|
% of Net sales
|
|
|
2.6 |
% |
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
Research and development expense increased by $3.8 million,
or 418%, from $0.9 million in the first nine months of 2005
to $4.7 million in the first nine months of 2006. The
increase in research and development expense was primarily the
result of a $2.8 million increase in personnel related
expense, which included stock-based compensation expense of
$1.8 million in the first nine months of 2006 compared to
$0.1 million for the same period in 2005, as well as
increased headcount and additional option awards. Consulting and
other expenses also increased by $0.5 million and grant
revenue declined by $0.5 million during the first nine
months of 2006 compared to the first nine months of 2005.
36
|
|
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
September 24, 2005 | |
|
September 30, 2006 | |
|
Nine Month Period Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$ |
8,834 |
|
|
$ |
22,398 |
|
|
$ |
13,564 |
|
|
|
154 |
% |
% of Net sales
|
|
|
25.6 |
% |
|
|
27.2 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expense increased by
$13.6 million, or 154%, from $8.8 million in the first
nine months of 2005 to $22.4 million in the first nine
months of 2006. Selling, general and administrative expense
increased primarily as a result of an increase in salaries and
personnel-related expenses of $9.6 million, due to increased
headcount and an increase in stock-based compensation from
$0.5 million in the first nine months of 2005 to
$3.0 million in the first nine months of 2006. In addition,
legal and professional service fees increased by $3.4 million
and other expenses increased by $0.6 million during the first
nine months of 2006 primarily resulting from expenses incurred,
directly and indirectly, in connection with this offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
September 24, 2005 | |
|
September 30, 2006 | |
|
Nine Month Period Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production start-up
|
|
$ |
1,410 |
|
|
$ |
7,750 |
|
|
$ |
6,340 |
|
|
|
450 |
% |
% of Net sales
|
|
|
4.1 |
% |
|
|
9.5 |
% |
|
|
|
|
|
|
|
|
During the first nine months of 2006, we incurred
$7.8 million of production start-up expenses to qualify our
Ohio expansion and to select the site for our German plant,
including related legal and regulatory costs and increased
headcount, compared to $1.4 million of production start-up
expenses for our Ohio expansion during the first nine months of
2005.
|
|
|
Foreign exchange gain (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
September 24, 2005 | |
|
September 30, 2006 | |
|
Nine Month Period Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss)
|
|
$ |
(1,052 |
) |
|
$ |
2,792 |
|
|
$ |
3,844 |
|
|
|
N.M. |
|
Foreign exchange gain increased by $3.8 million from first
nine months of 2005 to the first nine months of 2006 primarily
as a result of favorable currency translation between the
U.S. Dollar and the Euro.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
September 24, 2005 | |
|
September 30, 2006 | |
|
Nine Month Period Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$ |
(146 |
) |
|
$ |
(866 |
) |
|
$ |
(720 |
) |
|
|
N.M. |
|
Interest expense increased by $0.7 million from the first
nine months of 2005 to the first nine months of 2006 primarily
as a result of increased borrowings. In the first nine months of
2006 we capitalized $2.4 million of interest expense to
construction in progress compared to $0.2 million in the
first nine months of 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
September 24, 2005 | |
|
September 30, 2006 | |
|
Nine Month Period Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
$ |
195 |
|
|
$ |
422 |
|
|
$ |
227 |
|
|
|
116 |
% |
37
Other income (expense) increased by $0.2 million in the
first nine months of 2006 compared to the first nine months of
2005 primarily as a result of increased interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
|
|
|
|
| |
|
|
|
|
September 24, 2005 |
|
September 30, 2006 | |
|
Nine Month Period Change | |
|
|
|
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
|
|
|
$ |
181 |
|
|
$ |
181 |
|
|
|
N.M. |
|
Due to our net operating losses and the valuation allowance on
our net deferred tax assets, we had no income tax expense during
the nine months ended September 24, 2005. During the nine
months ended September 30, 2006, we had taxable earnings in
one of the jurisdictions in which we operate.
Cumulative
effect of change in accounting for share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
|
September 24, 2005 | |
|
September 30, 2006 |
|
Nine Month Period Change | |
|
|
| |
|
|
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect
|
|
$ |
89 |
|
|
$ |
|
|
|
$ |
(89 |
) |
|
|
N.M. |
|
The adoption of SFAS 123(R) required a change in the method
used to estimate forfeitures of employee stock options, and
resulted in a one-time cumulative effect of $0.1 million in the
first quarter of 2005.
|
|
|
Fiscal Years Ended December 31, 2005 and
December 25, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 25, 2004 | |
|
December 31, 2005 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
$13,522 |
|
|
|
$48,063 |
|
|
|
$34,541 |
|
|
|
255% |
|
Net sales increased by $34.5 million, or 255%, from
$13.5 million in fiscal year 2004 to $48.1 million in
fiscal year 2005. Of the increase in our net sales,
$26.8 million was due to an increase in the MW volume of
solar modules sold from fiscal year 2004 to fiscal year 2005. We
were able to increase the MW volume of solar modules sold
primarily because of increases in production capacity and
sellable Watts per solar module. In November 2004, we completed
the qualification of our base plant for full volume production
and then operated the base plant at a high-throughput production
rate for all of fiscal year 2005. In addition, we increased the
average number of sellable Watts per solar module from
approximately 55 Watts in 2004 to approximately 59 Watts in
2005, resulting in an increase of $3.5 million in net
sales. As a result of strong customer demand and the increased
number of sellable Watts per solar module, we increased the
average sales price per Watt from $2.22 in fiscal year 2004 to
$2.43 in fiscal year 2005, which increased net sales by
$4.2 million. Strong demand from our other customers also
allowed us to reduce our dependence on our largest customer from
68.1% of net sales in fiscal year 2004 to 45.1% of net sales in
fiscal year 2005. In fiscal year 2005, 99.6% of our net sales
resulted from shipments of solar modules to Germany, compared to
94.7% of our net sales in fiscal year 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 25, 2004 | |
|
December 31, 2005 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
$18,851 |
|
|
|
$31,483 |
|
|
|
$12,632 |
|
|
|
67% |
|
% of Net sales
|
|
|
139.4% |
|
|
|
65.5% |
|
|
|
|
|
|
|
|
|
Cost of sales increased by $12.6 million, or 67%, from
$18.9 million in fiscal year 2004 to $31.5 million in
fiscal year 2005. The increase in our cost of sales was due
primarily to higher raw material costs required to support the
higher production volumes from the base plant. Direct materials
increased by $7.3 million from fiscal year 2004 to fiscal
year 2005. On a cost per solar module and cost per Watt basis,
raw material costs declined slightly from
38
fiscal year 2004 to fiscal year 2005, primarily because of
improved manufacturing yields and conversion efficiency. In
addition, direct labor increased by $0.6 million and
manufacturing overhead costs increased by $4.7 million from
fiscal year 2004 to fiscal year 2005. This increase was driven
by higher engineering expense, increased equipment maintenance
and infrastructure build-out and stock-based compensation
expense. Manufacturing overhead included $0.8 million of
stock-based compensation expense in 2005 compared to
$0.1 million in fiscal year 2004. Depreciation expense also
increased by $1.4 million from fiscal year 2004 to fiscal
year 2005 as a result of depreciating the base plant for the
entire fiscal year. We expensed $1.5 million less warranty
and end of life program expenses in fiscal year 2005 than in
fiscal year 2004, as a result of corrective actions implemented
against production material defects encountered in 2004 and
lower overall unit production costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 25, 2004 | |
|
December 31, 2005 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
$(5,329) |
|
|
|
$16,580 |
|
|
|
$21,909 |
|
|
|
N.M. |
|
% Gross margin
|
|
|
(39.4)% |
|
|
|
34.5% |
|
|
|
|
|
|
|
|
|
Gross profit increased by $21.9 million, from a loss of
$5.3 million in fiscal year 2004 to a gross profit of
$16.6 million in fiscal year 2005, primarily as a result of
increased sales volumes. Our gross margin improved from a
negative 39.4% in fiscal year 2004 to a positive 34.5% in fiscal
year 2005, because of improvements in our average sales price
per Watt, an increase in overall sellable Watts due to
efficiency gains and the economies of scale we realized from
operating the base plant at full volume production through most
of 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 25, 2004 | |
|
December 31, 2005 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
$1,240 |
|
|
|
$2,372 |
|
|
|
$1,132 |
|
|
|
91% |
|
% of Net sales
|
|
|
9.2% |
|
|
|
5.0% |
|
|
|
|
|
|
|
|
|
Research and development expense increased by $1.1 million,
or 91%, from $1.2 million in fiscal year 2004 to
$2.4 million in fiscal year 2005. Of that increase
$0.4 million was due to increases in our development
staffing during 2005, $0.5 million due to higher
stock-based compensation expense and $0.2 million due to an
increase in consulting fees offset by a reduction of
$0.1 million in facility expense. In addition, our grant
revenue declined by $0.1 million in fiscal year 2005,
compared to fiscal year 2004. Research and development expenses
included stock-based compensation expense of $0.6 million
and $0.1 million in fiscal year 2005 and fiscal year 2004,
respectively.
|
|
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 25, 2004 | |
|
December 31, 2005 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
$9,312 |
|
|
|
$15,825 |
|
|
|
$6,513 |
|
|
|
70% |
|
% of Net sales
|
|
|
68.9% |
|
|
|
32.9% |
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense increased by
$6.5 million, or 70%, from $9.3 million in fiscal year
2004 to $15.8 million in fiscal year 2005. Our selling,
general and administrative expenses increased by
$2.2 million as a result of increased staffing levels,
primarily in sales and marketing, to support higher sales
volumes in Germany. In addition, spending for professional
services increased by $1.0 million, travel expenses
increased by $0.4 million and facilities expense increased
by $0.5 million in fiscal year 2005 compared to fiscal year
2004. Stock-based compensation expense increased by
$2.4 million, from $1.0 million in fiscal year 2004 to
$3.4 million in fiscal year 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 25, 2004 | |
|
December 31, 2005 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production start-up
|
|
|
$900 |
|
|
|
$3,173 |
|
|
|
$2,273 |
|
|
|
253% |
|
% of Net sales
|
|
|
6.6% |
|
|
|
6.6% |
|
|
|
|
|
|
|
|
|
39
Production start-up
expenses increased from $0.9 million in fiscal year 2004 to
$3.2 million in fiscal year 2005 as we began the build-out
of our Ohio expansion in fiscal year 2005. These expenses are
primarily attributable to the cost of labor and material to run
and qualify the line, related facility expenses and the
documentation of our replication process.
|
|
|
Foreign exchange gain (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 25, 2004 | |
|
December 31, 2005 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss)
|
|
|
$116 |
|
|
|
$(1,715) |
|
|
|
$(1,831) |
|
|
|
N.M. |
|
Foreign exchange losses increased by $1.8 million during
fiscal year 2005 as the U.S. Dollar strengthened against
the Euro.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 25, 2004 | |
|
December 31, 2005 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
$(100) |
|
|
|
$(418) |
|
|
|
$(318) |
|
|
|
N.M. |
|
Interest expense increased in fiscal year 2005 by
$0.3 million compared to fiscal year 2004 due to increased
borrowings under various notes totaling $28.7 million at
the end of fiscal year 2005 compared to $13.7 million at
the end of fiscal year 2004. In fiscal year 2005 we capitalized
$0.4 million of interest expense in construction in
progress compared to $0.3 million in fiscal year 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 25, 2004 | |
|
December 31, 2005 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
$(6) |
|
|
|
$372 |
|
|
|
$378 |
|
|
|
N.M. |
|
Other income increased by $0.4 million during fiscal year
2005 due to an increase in interest income earned.
|
|
|
Cumulative effect of change in accounting for share-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 25, 2004 | |
|
December 31, 2005 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect
|
|
|
$ |
|
|
|
$89 |
|
|
|
$89 |
|
|
|
N.M. |
|
The adoption of SFAS 123(R) requires a change in the method used
to estimate forfeitures of employee stock options, resulting in
a one-time cumulative effect of $0.1 million in the first
quarter of 2005.
Fiscal Years Ended December 25, 2004 and
December 27, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 27, 2003 | |
|
December 25, 2004 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
$3,210 |
|
|
|
$13,522 |
|
|
|
$10,312 |
|
|
|
321% |
|
Net sales increased by $10.3 million, or 321%, from
$3.2 million in fiscal year 2003 to $13.5 million in
fiscal year 2004. The increase in our net sales was due
primarily to a 241% increase in the MW volume of solar modules
sold from fiscal year 2003 to fiscal year 2004 increasing net
sales by $6.7 million. We were able to increase the MW volume of
solar modules sold in fiscal year 2004 because of an increase in
production capacity and sellable Watts per solar module. From
2003 to 2004, we increased the average number of sellable Watts
per solar module from
40
approximately 49 Watts to approximately 55 Watts
increasing net sales by $1.0 million. Net sales also
increased by $2.6 million due to higher average sales price
per Watt. Our largest customer accounted for 68.1% of our net
sales in fiscal year 2004 compared to 58.9% of our net sales in
fiscal year 2003. In fiscal year 2004, 94.7% of our net sales
resulted from sales of solar modules to Germany, compared to
62.5% of our net sales in fiscal year 2003. The increase in the
concentration of our net sales in Germany was primarily
attributable to the favorable market conditions in Germany
created by government subsidies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 27, 2003 | |
|
December 25, 2004 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
$11,495 |
|
|
|
$18,851 |
|
|
|
$7,356 |
|
|
|
64% |
|
% of Net sales
|
|
|
358.1% |
|
|
|
139.4% |
|
|
|
|
|
|
|
|
|
Cost of sales increased by $7.4 million, or 64%, from
$11.5 million in fiscal year 2003 to $18.9 million in
fiscal year 2004. The increase in our cost of sales was due
primarily to a $2.6 million increase in manufacturing
overhead expense as a result of continued infrastructure
build-out and an increase in production volume. Depreciation
costs increased by $0.5 million from fiscal year 2003 to
fiscal year 2004, as a result of depreciating certain equipment
from the base plant for the entire year. Warranty and end of
life program expenses increased by $1.7 million due to
production material defects discovered in certain products
shipped. We also experienced $1.5 million in higher raw
material costs required to support the higher production
volumes. On a cost per solar module and a cost per Watt basis,
raw material costs declined slightly from fiscal year 2003 to
fiscal year 2004, primarily because of improved manufacturing
yields and higher conversion efficiencies. Direct labor
increased by $1.2 million from fiscal year 2003 to fiscal
year 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 27, 2003 | |
|
December 25, 2004 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
$(8,285) |
|
|
|
$(5,329) |
|
|
|
$2,956 |
|
|
|
N.M. |
|
% Gross margin
|
|
|
(258.1)% |
|
|
|
(39.4)% |
|
|
|
|
|
|
|
|
|
Gross profit increased by $3.0 million from a loss of
$8.3 million in fiscal year 2003 to a loss of
$5.3 million in fiscal year 2004. In addition, our gross
margin improved from negative 258.1% in fiscal year 2003 to
negative 39.4% in fiscal year 2004. Our gross profit and gross
margin increased primarily because of higher net sales,
improvements in yield and conversion efficiency and the
economies of scale we realized from our increases in production
partially offset by higher warranty expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 27, 2003 | |
|
December 25, 2004 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
$3,841 |
|
|
|
$1,240 |
|
|
|
$(2,601) |
|
|
|
(68%) |
|
% of Net sales
|
|
|
119.7% |
|
|
|
9.2% |
|
|
|
|
|
|
|
|
|
Research and development expense decreased by $2.6 million
from $3.8 million in fiscal year 2003 to $1.2 million
in fiscal year 2004. Our research and development expense
decreased during 2004 as employees moved out of the research and
development function into manufacturing engineering, where their
costs are recorded as cost of sales, to support production in
the base plant. In addition, grant revenue during fiscal year
2004 declined by $0.4 million compared to fiscal year 2003.
41
|
|
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 27, 2003 | |
|
December 25, 2004 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
$11,981 |
|
|
|
$9,312 |
|
|
|
$(2,669) |
|
|
|
(22)% |
|
% of Net sales
|
|
|
373.2% |
|
|
|
68.9% |
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense decreased by
$2.7 million, or 22%, from $12.0 million in fiscal
year 2003 to $9.3 million in fiscal year 2004. Stock-based
compensation was $1.1 million in fiscal year 2003 and
$1.0 million in fiscal year 2004. The decrease was
primarily due to a non-recurring settlement charge of
$3.0 million in fiscal year 2003 made to certain former
investors and employees of First Solar US Manufacturing, LLC in
conjunction with the liquidation of their membership units and
termination of certain employees in exchange for a release of
First Solar US Manufacturing, LLC and its owners, employees, and
affiliates from all present and possible future claims. This was
partially offset by a $0.3 million increase in personnel
expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 27, 2003 | |
|
December 25, 2004 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production start-up
|
|
|
$ |
|
|
|
$900 |
|
|
|
$900 |
|
|
|
N.M. |
|
Production start-up costs were first incurred in fiscal year
2004 as preparation to replicate plants and production lines
began.
|
|
|
Foreign exchange gain (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 27, 2003 | |
|
December 25, 2004 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss)
|
|
|
$ |
|
|
|
$116 |
|
|
|
$116 |
|
|
|
N.M. |
|
Foreign exchange gains increased during fiscal year 2004 due to
favorable exchange rates between the U.S. Dollar and the Euro.
During 2003, we did not have significant transaction volumes in
currencies other than the U.S. Dollar.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 27, 2003 | |
|
December 25, 2004 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
$(3,974) |
|
|
|
$(100) |
|
|
|
$3,874 |
|
|
|
N.M. |
|
Interest expense decreased from $3.9 million in fiscal year
2003 to $0.1 million in fiscal year 2004 due to the
conversion of outstanding debt into equity in July of 2003. In
2004 we capitalized $0.3 million of interest expense in
construction in progress compared to $0.5 million in fiscal
year 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
|
|
|
December 27, 2003 | |
|
December 25, 2004 | |
|
Year over Year Change | |
|
|
| |
|
| |
|
| |
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
$38 |
|
|
|
$(6) |
|
|
|
$(44) |
|
|
|
N.M. |
|
Other income represents the interest earned on the
companys bank accounts. No significant changes occurred
from fiscal year 2003 to fiscal year 2004.
42
Quarterly Results of Operations
The following table presents our unaudited quarterly results of
operations for the last seven quarters in the period ended
September 30, 2006. You should read the following table in
conjunction with the consolidated financial statements and
related notes contained elsewhere in this prospectus. In the
opinion of management, the unaudited financial information
presented below has been prepared on the same basis as our
audited consolidated financial statements, and includes all
adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of our
financial position and operating results for the quarters
presented. Operating results for any quarter are not necessarily
indicative of the results for any future quarters or for a full
year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended | |
|
|
| |
|
|
Mar 26, | |
|
June 25, | |
|
Sept 24, | |
|
Dec 31, | |
|
Apr 1, | |
|
July 1, | |
|
Sept 30, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(dollars in thousands) | |
|
|
Net sales
|
|
$ |
8,530 |
|
|
$ |
9,367 |
|
|
$ |
16,585 |
|
|
$ |
13,581 |
|
|
$ |
13,624 |
|
|
$ |
27,861 |
|
|
$ |
40,794 |
|
Cost of sales
|
|
|
6,158 |
|
|
|
5,510 |
|
|
|
10,004 |
|
|
|
9,811 |
|
|
|
10,352 |
|
|
|
18,761 |
|
|
|
24,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
2,372 |
|
|
|
3,857 |
|
|
|
6,581 |
|
|
|
3,770 |
|
|
|
3,272 |
|
|
|
9,100 |
|
|
|
16,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
197 |
|
|
|
287 |
|
|
|
426 |
|
|
|
1,462 |
|
|
|
1,519 |
|
|
|
1,536 |
|
|
|
1,657 |
|
Selling, general and administrative
|
|
|
2,639 |
|
|
|
2,889 |
|
|
|
3,306 |
|
|
|
6,991 |
|
|
|
5,872 |
|
|
|
8,133 |
|
|
|
8,393 |
|
Production start-up
|
|
|
204 |
|
|
|
286 |
|
|
|
920 |
|
|
|
1,763 |
|
|
|
2,579 |
|
|
|
4,062 |
|
|
|
1,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,040 |
|
|
|
3,462 |
|
|
|
4,652 |
|
|
|
10,216 |
|
|
|
9,970 |
|
|
|
13,731 |
|
|
|
11,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(668 |
) |
|
|
395 |
|
|
|
1,929 |
|
|
|
(6,446 |
) |
|
|
(6,698 |
) |
|
|
(4,631 |
) |
|
|
5,098 |
|
Foreign currency gain (loss)
|
|
|
(127 |
) |
|
|
(642 |
) |
|
|
(283 |
) |
|
|
(663 |
) |
|
|
900 |
|
|
|
2,190 |
|
|
|
(298 |
) |
Interest and other income (expense), net
|
|
|
(30 |
) |
|
|
7 |
|
|
|
72 |
|
|
|
(95 |
) |
|
|
(74 |
) |
|
|
(43 |
) |
|
|
(327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(825 |
) |
|
|
(240 |
) |
|
|
1,718 |
|
|
|
(7,204 |
) |
|
|
(5,872 |
) |
|
|
(2,484 |
) |
|
|
4,473 |
|
Income tax (benefit) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
(23 |
) |
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle |
|
|
(825 |
) |
|
|
(240 |
) |
|
|
1,718 |
|
|
|
(7,204 |
) |
|
|
(5,895 |
) |
|
|
(2,461 |
) |
|
|
4,292 |
|
Cumulative effect of change in accounting for share-based
compensation |
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(736 |
) |
|
$ |
(240 |
) |
|
$ |
1,718 |
|
|
$ |
(7,204 |
) |
|
$ |
(5,895 |
) |
|
$ |
(2,461 |
) |
|
$ |
4,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased sequentially in each of the quarters ended
March 26, 2005 through September 24, 2005, primarily
because of a 95% increase in the MW volume of solar modules sold
during that period. We were able to increase the MW volume sold
primarily as a result of the production ramp of our base plant.
For the quarter ended December 31, 2005, net sales declined
from the previous quarter because of a build out of inventory to
support the anticipated production ramp of the Ohio expansion
independent of demand. Net sales for the quarters ended
April 1, 2006 through September 30, 2006 increased as
a result of higher throughput of our base plant, the full
production ramp of our Ohio expansion and a change in our
shipping terms from delivered duty paid to carriage and
insurance paid, which became effective in the quarter ended
July 1, 2006 and added $5.4 million to net sales for
that quarter.
Gross profit increased $2.7 million, or 71%, between the
quarters ended June 25, 2005 and September 24, 2005,
reflecting an increase in net sales. Between the quarters ended
September 24, 2005 and April 1, 2006, gross profit
declined primarily as a result of increased stock based
compensation charges and, during the quarter ended April 1,
2006, the conversion from a five day to a seven day production
week in advance of production. Gross profit increased in each of
the quarters ending July 1, 2006 and September 30,
2006 because of an increase in net sales.
Operating expenses increased in each of the quarters ended
March 26, 2005 through July 1, 2006, except for the
quarter ended April 1, 2006, reflecting the combination of
increased staffing to support our overall business growth,
increased spending on research and development to continue to
improve and develop new technologies, increased management and
infrastructure spending to support our growth, increased stock
based compensation expenses and increased production start-up
expense as we continued to increase our production capacity. For
the quarter ended April 1, 2006, an increase in operating
expenses in absolute dollars was offset by a decline in stock
based compensation expense attributable to the full vesting of
certain grants. For the quarter ended September 30, 2006,
operating expenses declined reflecting a reduction in production
start-up costs due to the completion of our Ohio expansion.
43
Our quarterly results have been impacted by foreign exchange
gains and losses due to fluctuations between the U.S. Dollar and
the Euro.
Liquidity and Capital Resources
Historically, our principal sources of liquidity have been cash
provided by operations, borrowings from JWMA Partners, LLC, or
JWMA, and its affiliates, borrowings from Goldman,
Sachs & Co., equity contributions from JWMA and
borrowings from local governments and other sources to fund
plant expansions. As of September 30, 2006, we had
$31.4 million in cash and cash equivalents. One of our
strategies is to expand our manufacturing capacity by building
new manufacturing plants and production lines, such as the
German plant currently under construction and a new
manufacturing plant in Asia currently in the planning phase. We
expect that each four line manufacturing facility will require a
capital expenditure of approximately $150.0 million to
complete. We believe that our current cash and cash equivalents,
government grants and low interest debt financings for our
German plant, and the proceeds of this offering will be
sufficient to meet our working capital and capital expenditures
needs for at least the next 12 months. However, if our
financial results or operating plans change from our current
assumptions, we may not have sufficient resources to support our
business plan. As a result, we may be required to engage in one
or more debt or equity financings in the future that would
result in increased expenses or additional dilution to our
stockholders. If we are unable to obtain debt or equity
financing on reasonable terms we may be unable to execute our
expansion strategy. See Risk FactorsRisks Relating
to Our BusinessOur future success depends on our ability
to build new manufacturing plants and add production lines in a
cost-effective manner, both of which are subject risks and
uncertainties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in): |
|
Years Ended | |
|
Nine Months Ended | |
|
|
| |
|
| |
|
|
Dec 27, | |
|
Dec 25, | |
|
Dec 31, | |
|
Sept 24, | |
|
Sept 30, | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(dollars in thousands) | |
Operating activities
|
|
$ |
(22,228 |
) |
|
$ |
(15,185 |
) |
|
$ |
5,040 |
|
|
$ |
(2,099 |
) |
|
$ |
(13,903 |
) |
Investing activities
|
|
|
(15,224 |
) |
|
|
(7,790 |
) |
|
|
(43,832 |
) |
|
|
(24,658 |
) |
|
|
(103,556 |
) |
Financing activities
|
|
|
39,129 |
|
|
|
22,900 |
|
|
|
51,663 |
|
|
|
29,305 |
|
|
|
132,221 |
|
Effect of exchange rates on cash flows
|
|
|
|
|
|
|
(187 |
) |
|
|
385 |
|
|
|
266 |
|
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
$ |
1,677 |
|
|
$ |
(262 |
) |
|
$ |
13,256 |
|
|
$ |
2,814 |
|
|
$ |
14,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
Operating activities used cash of $13.9 million in the
first nine months of 2006 compared to $2.1 million used
during the first nine months of 2005. The increased usage of
$11.8 million was primarily driven by an increase in cash
paid to our suppliers and employees as a result of an increase
in spending across all functions due to the ramp-up in capacity
and production volume and increases in inventory. This increase
was partially offset by increased cash received from our
customers as a result of higher net sales, which in turn was
offset in part by an increase in accounts receivable.
Operating activities provided cash of $5.0 million in
fiscal year 2005 and used cash of $15.2 million and
$22.2 million in fiscal years 2004 and 2003, respectively.
The increase of $20.2 million in cash provided by operating
activities from fiscal year 2004 to fiscal year 2005 was
primarily a result of an increase in cash received from our
customers. The cash we received from our customers increased
because our net sales increased by $34.5 million from
fiscal year 2004 to fiscal year 2005 and our accounts receivable
decreased by $3.3 million during the same period. These
factors were partially offset by an increase in cash paid to our
suppliers and employees as a result of higher production volumes
and an increase in inventory.
From fiscal year 2003 to fiscal year 2004 cash used by operating
activities decreased by $7.0 million primarily due to an
increase in cash received from our customers resulting from a
$10.3 million increase in net sales, in part offset by an
increase in accounts receivable of $2.5 million and cash
paid to our suppliers and employees relating to an increase in
inventory of $2.1 million as a result of a planned
inventory build-up to
meet anticipated demand. Cash used by operating activities in
fiscal year 2003 also included a $3.0 million non-recurring
settlement payment.
Investing activities
Cash used in investing activities was $103.6 million in the
first nine months of 2006 compared to $24.7 million during
the first nine months of 2005. The increase of
$78.9 million was primarily due to increased capital
expenditures for our German plant and the Ohio expansion. Our
cash outlays for the German plant were
44
partially recovered through the receipt of $8.1 million of
economic development funding from various German governmental
entities, which we classify as a cash flow from financing
activities.
Cash used in investing activities was $43.8 million in
fiscal year 2005, $7.8 million in fiscal year 2004 and
$15.2 million in fiscal year 2003. Cash used in investing
activities in fiscal year 2005 was composed of
$42.5 million used to complete our Ohio expansion,
$1.3 million deposited with an insurance company as part of
our solar module recycling and reclamation program and
$0.1 million used for other capital expenditures. In fiscal
year 2004, cash used in investing activities was composed of
$7.7 million used to purchase equipment for the base plant
and $0.1 million used for investments into other long term
assets. In fiscal year 2003, cash used in investing activities
was composed of $6.2 million used to purchase machinery and
equipment for the base plant and $8.7 million in cash used
to purchase land and a building and $0.4 million used for
investments into other long term assets.
Financing activities
Cash provided by financing activities was $132.2 million in
the first nine months of 2006 compared to $29.3 million
during the first nine months of 2005. The increase of
$102.9 million was due to proceeds of $36.0 million
from loans from the Estate of John T. Walton, an increase in
equity contributions by JWMA of $13.3 million, net proceeds
of $73.3 million from the issuance of convertible senior
subordinated notes, draws totaling $25.0 million on a
credit facility agreement with a consortium of banks led by IKB
Deutsche Industriebank AG, and receipt of $8.1 million of
economic development funding from various German governmental
entities. Partially offsetting this increase was the repayment
of a $30.0 million loan from the Estate of John T. Walton
and the repayment of a $8.7 million loan from Kingston
Properties, LLC, an affiliate of our majority stockholder, in
the first nine months of 2006, loan proceeds during the first
nine months of 2005 of $7.6 million from the Director of
Development of the State of Ohio and $5.0 million from the
Estate of John T. Walton, and $1.5 million of debt issuance
costs incurred during the nine months ended September 30,
2006.
On February 22, 2006, we issued $74 million aggregate
principal amount of convertible senior subordinated notes due
2011 to Goldman, Sachs & Co. On May 10, 2006, we
extinguished these notes by payment of 4,261,457 shares of our
common stock. See Principal and Selling Stockholders.
Cash generated from financing activities was $51.7 million
in fiscal year 2005 compared to $22.9 million in fiscal
year 2004 and $39.1 million in fiscal year 2003. In fiscal
year 2005, cash provided by financing activities was primarily
the result of a $20.0 million loan from the Estate of John
T. Walton, a $15.0 million loan from the Director of
Development of the State of Ohio and a $16.7 million cash
equity contribution by JWMA. In fiscal year 2004, cash provided
by financing activities was primarily a result of a
$5.0 million loan from the Director of Development of the
State of Ohio and a $17.9 million cash equity contribution
by JWMA. In fiscal year 2003, cash provided by financing
activities was primarily a result of $21.9 million of loans
from JWMA, a $8.7 million loan from Kingston Properties,
LLC and a $8.5 million equity contribution from JWMA.
On October 24, 2006, we amended our articles of
incorporation to authorize us to issue up to
500,000,000 shares of common stock at a par value of $0.001
and up to 30,000,000 shares of preferred stock at a par
value of $0.001. These amended and restated articles of
incorporation permit our board of directors to establish the
voting powers, preferences, and other rights of any series of
preferred stock that we issue. On October 30, 2006, our
board of directors approved a 4.85 to 1 stock split of our
common shares, which is effective November 1, 2006; the par
value of our common shares will remain $0.001 per share. All
share and per share amounts have been retroactively adjusted to
reflect the stock split.
The following table presents our contractual obligations as of
December 31, 2005 and September 30, 2006, which
consist of legal commitments requiring us to make fixed or
determinable cash payments, regardless of contractual
requirements with the vendor to provide future goods or
services. We purchase raw materials for inventory, services and
manufacturing equipment from a variety of vendors. During the
normal course of business,
45
in order to manage manufacturing lead times and help assure
adequate supply, we enter into agreements with suppliers that
either allow us to procure goods and services when we choose or
that establish purchase requirements.
Our contractual obligations as of December 31, 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Year |
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
More than |
Contractual Obligations |
|
Total |
|
1 Year |
|
1 - 3 Years |
|
3 - 5 Years |
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
Long-term debt obligations(1)
|
|
$32,144 |
|
$858 |
|
$8,021 |
|
$14,737 |
|
$8,528 |
Capital lease obligations
|
|
33 |
|
9 |
|
16 |
|
8 |
|
|
Operating lease obligations
|
|
876 |
|
290 |
|
350 |
|
140 |
|
96 |
Purchase obligations(2)
|
|
36,186 |
|
36,122 |
|
64 |
|
|
|
|
Recycling obligations
|
|
917 |
|
|
|
|
|
|
|
917 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$70,156 |
|
$37,279 |
|
$8,451 |
|
$14,885 |
|
$9,541 |
|
|
|
|
|
|
|
|
|
|
|
Our contractual obligations as of September 30, 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Year | |
|
|
|
|
| |
|
|
|
|
Less than | |
|
|
|
More than | |
Contractual Obligations |
|
Total |
|
1 Year | |
|
1 - 3 Years | |
|
3 - 5 Years | |
|
5 Years | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
(dollars in thousands) | |
Long-term debt obligations(1)
|
|
$44,143 |
|
|
$462 |
|
|
|
$12,912 |
|
|
|
$14,276 |
|
|
|
$16,493 |
|
Capital lease obligations
|
|
48 |
|
|
3 |
|
|
|
28 |
|
|
|
17 |
|
|
|
|
|
Operating lease obligations
|
|
992 |
|
|
109 |
|
|
|
488 |
|
|
|
298 |
|
|
|
97 |
|
Purchase obligations(2)
|
|
61,792 |
|
|
29,727 |
|
|
|
23,593 |
|
|
|
6,508 |
|
|
|
1,964 |
|
Recycling obligations
|
|
2,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$109,737 |
|
|
$30,301 |
|
|
|
$37,021 |
|
|
|
$21,099 |
|
|
|
$21,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes estimated cash interest to be paid over the remaining
terms of the debt. |
|
(2) |
Purchase obligations are agreements to purchase goods or
services that are enforceable and legally binding on us and that
specify all significant terms, including fixed or minimum
quantities to be purchased, fixed minimum, or variable price
provisions and the approximate timing of transactions. |
On July 27, 2006, First Solar Manufacturing GmbH, a wholly
owned indirect subsidiary of First Solar, Inc., entered into a
credit facility agreement with a consortium of banks led by IKB
Deutsche Industriebank AG, under which we can draw up to
102.0 million
($122.4 million at an assumed exchange rate of
$1.20/1.00) to
fund costs of constructing our German plant. This credit
facility consists of a term loan of up to
53.0 million
($63.6 million at an assumed exchange rate of
$1.20/1.00) and
a revolving credit facility of
27.0 million
($32.4 million at an assumed exchange rate of
$1.20/1.00). The
facility also provides for a bridge loan, which we can draw
against to fund construction costs that we later expect to be
reimbursed through funding from the Federal Republic of Germany
under the Investment Grant Act of 2005
(Investitionszulagen), of up to
22.0 million
($26.4 million at an assumed exchange rate of
$1.20/1.00). We
can make drawdowns against the term loan and the bridge loan
until December 30, 2007, and we can make drawdowns against
the revolving credit facility until September 30, 2012. We
have incurred costs related to the credit facility totaling
$1.9 million as of September 30, 2006, which we will
recognize as interest and other financing expenses over the time
that borrowings are outstanding under the credit facility. We
also pay an annual commitment fee of 0.6% of any amounts not
drawn down on the credit facility. At September 30, 2006,
we had outstanding borrowings of $18.2 million under the
term loan and $6.8 million under the bridge loan. At
October 28, 2006, we had outstanding borrowings of
28.2 million
($33.8 million at an assumed exchange rate of
$1.20/1.00)
under the term loan and
10.4 million
($12.5 million at an assumed exchange rate of
$1.20/1.00)
under the bridge loan. We had no outstanding borrowings under
the revolving credit facility.
We must repay the term loan in twenty quarterly payments
beginning on March 31, 2008 and ending on December 30,
2012. We must repay the bridge loan with any funding we receive
from the Federal Republic of Germany under the Investment Grant
Act of 2005, but in any event, the bridge loan must be paid in
full by December 30, 2008. Once repaid, we may not draw
again against term loan or bridge loan facilities. The revolving
credit facility expires on and must be repaid by
December 30, 2012. In certain circumstances, we must also
use proceeds from fixed asset sales or insurance claims to make
additional principal payments, and during 2009 we will also be
required to make a one-time principal repayment equal to 20% of
any surplus cash flow of First Solar Manufacturing
GmbH during 2008. Surplus cash flow is a term defined in the
credit facility agreement that is approximately equal to cash
flow from operating activities less required payments on
indebtedness.
46
We must pay interest at the annual rate of the Euro interbank
offered rate (Euribor) plus 1.6% on the term loan, Euribor plus
2.0% on the bridge loan, and Euribor plus 1.8% on the revolving
credit facility. Each time we make a draw against the term loan
or the bridge loan, we may choose to pay interest on that
drawdown every three or six months; each time we make a draw
against the revolving credit facility, we may choose to pay
interest on that drawdown every one, three, or six months. The
credit facility requires us to mitigate our interest rate risk
on the term loan by entering into pay-fixed, receive-floating
interest rate swaps covering at least 75% of the balance
outstanding under the loan.
The Federal Republic of Germany is guaranteeing 48% of our
combined borrowings on the term loan and revolving credit
facility and the State of Brandenburg is guaranteeing another
32%. We pay an annual fee, not to exceed
0.5 million
($0.6 million at an assumed exchange rate of
$1.20/1.00) for
these guarantees. In addition, we must maintain a debt service
reserve of
3.0 million
($3.6 million at an assumed exchange rate of
$1.20/1.00) in a
restricted bank account, which the lenders may access if we are
unable to make required payments on the credit facility.
Substantially all of our assets in Germany, including the German
plant, have been pledged as collateral for the credit facility
and the government guarantees.
The credit facility contains various financial covenants with
which we must comply. First Solar Manufacturing GmbHs cash
flow available for debt service must be at least 1.1 times its
required principal and interest payments for all its
liabilities, and the ratio of its total noncurrent liabilities
to earnings before interest, taxes, depreciation and
amortization may not exceed 3.0:1 from January 1, 2008
through December 31, 2008, 2.5:1 from January 1, 2009
through December 31, 2009 and 1.5:1 from January 1,
2010 through the remaining term of the credit facility.
The credit facility also contains various non-financial
covenants with which we must comply. We must submit various
financial reports, financial calculations and statistics,
operating statistics and financial and business forecasts to the
lender. We must adequately insure our German operation, and we
may not change the type or scope of its business operations.
First Solar Manufacturing GmbH must maintain adequate accounting
and information technology systems. Also, First Solar
Manufacturing GmbH cannot open any bank accounts (other than
those required by the credit facility), enter into any financial
liabilities (other than intercompany obligations or those
liabilities required by the credit facility), sell any assets to
third parties outside the normal course of business, make any
loans or guarantees to third parties, or allow any of its assets
to be encumbered to the benefit of third parties without the
consent of the lenders and government guarantors.
Our ability to withdraw cash from First Solar Manufacturing GmbH
for use in other parts of our business is restricted while we
have outstanding obligations under the credit facility and
associated government guarantees. First Solar Manufacturing
GmbHs cash flows from operations must generally be used
for the payment of loan interest, fees, and principal before any
remainder can be used to pay intercompany charges, loans, or
dividends. Furthermore, First Solar Manufacturing GmbH generally
cannot make any payments to affiliates if doing so would cause
its cash flow available for debt service to fall below
1.3 times its required principal and interest payments for
all its liabilities for any one year period or cause the amount
of its equity to fall below 30% of the amount of its total
assets. First Solar Manufacturing GmbH also cannot pay
commissions of greater than 2% to First Solar affiliates that
sell or distribute its products. Also, we may be required under
certain circumstances to contribute more funds to First Solar
Manufacturing GmbH, such as if project-related costs exceed our
plan, we do not recover the expected amounts from governmental
investment subsidies, or all or part of the government
guarantees are withdrawn. If there is a decline in the value of
the assets pledged as collateral for the credit facility, we may
also be required to pledge additional assets as collateral.
On July 26, 2006, we were approved to receive taxable
investment incentives
(Investitionszuschuesse) of approximately
21.5 million
($25.8 million at an assumed exchange rate of
$1.20/1.00) from
the State of Brandenburg, Germany. These funds will reimburse us
for certain costs we will incur building our plant in
Frankfurt (Oder), Germany, including costs for the
construction of buildings and the purchase of machinery and
equipment. Receipt of these incentives is conditional upon the
State of Brandenburg, Germany having sufficient funds allocated
to this program to pay the reimbursements we claim. In addition,
we are required to operate our facility for a minimum of five
years and employ a specified number of employees during this
period. Our incentive approval expires on December 31,
2009. As of September 30, 2006, we had received
$8.1 million under this program, and we had accrued an
additional $3.7 million that we are eligible to receive
under this program based on qualifying expenditures that we had
incurred through that date.
We are eligible to recover up to approximately
23.8 million
($28.6 million at an assumed exchange rate of
$1.20/1.00) of
expenditures related to the construction of our plant in
Frankfurt (Oder), Germany under the German Investment Grant
Act of 2005 (Investitionszulagen). This Act
permits us to claim tax-exempt reimbursements for certain costs
we will incur building our plant in Frankfurt (Oder),
Germany, including costs for
47
the construction of buildings and the purchase of machinery and
equipment. Tangible assets subsidized under this program have to
remain in the region for at least 5 years. We plan to claim
reimbursement under the Act in conjunction with the filing of
our tax returns with the local German tax office. Therefore we
do not expect to receive funding from this program until we file
our annual tax return for fiscal 2006 in 2007. This program
expires on December 31, 2006, and we can claim only
reimbursement for investments completed by this date. We expect
to have the majority of our buildings and structures and a
portion of our investment in machinery and equipment completed
by this date. As of September 30, 2006, we had accrued
$13.0 million that we are eligible to receive under this
program based on qualifying expenditures that we had incurred to
that date.
On July 26, 2006, we entered into a loan agreement, which
we amended and restated on August 7, 2006, with the Estate
of John T. Walton, an affiliate of JWMA, under which we can draw
up to $34.0 million. Interest is payable monthly at the
annual rate of the commercial prime lending rate and principal
payments are due at the earlier of January 18, 2008 or the
completion of an initial public offering of our stock. This loan
does not have any collateral requirements. As a condition of
obtaining this loan, we were required to use a portion of the
proceeds to repay the principal of our loan from Kingston
Properties, LLC, an affiliate of JWMA. During July 2006, we drew
$26.0 million against this loan, $8.7 million of which
we used to repay the Kingston Properties, LLC note. At
September 30, 2006, $26.0 million was outstanding
under this loan agreement.
On July 1, 2005, First Solar US Manufacturing, LLC and
First Solar Property, LLC, both wholly owned subsidiaries of
First Solar, Inc., entered into a loan agreement with the
Director of Development of the State of Ohio for
$15.0 million, all of which was outstanding at September
30, 2006. The interest rate on the note is 2% per annum,
plus a monthly service fee equal to 0.021%, payable monthly in
arrears on the first day of each month. Principal payments
commence on December 1, 2006 and end on July 1, 2015,
and we may pre-pay the note in whole or in part at any time. The
note is secured by a first-priority lien on our land and
building in Perrysburg, Ohio and guaranteed by First Solar, Inc.
The loan requires us to comply with non-financial covenants that
primarily provide information rights to the lender.
On December 1, 2003, First Solar US Manufacturing, LLC and First
Solar Property, LLC entered into a loan agreement with The
Director of the State of Ohio for $5.0 million, all of
which was outstanding on September 30, 2006. The interest
rate on the note was 0.25% per annum for the first year the
loan is outstanding, 1.25% during the second and third years,
2.25% during the fourth and fifth years and 3.25% for the
remaining term of the note. In addition, we pay a monthly
service fee equal to 0.021%. Interest is payable monthly, on the
first day of each month. Principal payments commence on
January 1, 2007 and end on December 1, 2009, and we
may pre-pay the note in whole or in part at any time after
January 1, 2007. The note is secured by a first-priority
lien on the accounts receivable, inventory, and machinery and
equipment in our Perrysburg, Ohio manufacturing plant and
guaranteed by First Solar, Inc. The loan requires us to comply
with non-financial covenants that primarily provide information
rights to the lender. Due to the preparation of our registration
statement, we did not meet the non-financial covenant to furnish
our audited financial statements for the year ended
December 31, 2005 to the lender within 120 days after
our fiscal year end, and we received a waiver on June 5,
2006 for that requirement from the lender. We have subsequently
provided these financial statements to the lender.
On May 14, 2003, First Solar Property, LLC issued a
$8.7 million promissory note due June 1, 2010 to
Kingston Properties, LLC. The interest rate of the note is
3.70% per annum. We pre-payed this note in full in July
2006.
On February 22, 2006, we received $73.3 million from the
issuance of $74.0 million of convertible senior
subordinated notes, less $0.7 million of issuance costs, to
Goldman, Sachs & Co. On May 10, 2006, we extinguished
these notes by payment of 4,261,457 shares of our common
stock.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30,
2006.
Quantitative and Qualitative Disclosures About Market Risk
Our international operations accounted for approximately 99.6%
of our net sales in fiscal year 2005 and 94.7% of our net sales
in fiscal year 2004. In fiscal year 2005 and fiscal year 2004,
all of our international sales were denominated in Euros. As a
result, we have exposure to foreign exchange risk with respect
to almost all of our net sales. Fluctuations in exchange rates,
particularly in the U.S. Dollar to Euro exchange rate,
affect our gross and net profit margins and could result in
foreign exchange and operating losses. Our exposure to foreign
exchange risk primarily relates to currency gains and losses
from the time we sign and settle our sales contracts. For
example, we recently entered into our Long Term Supply
Contracts. These contracts obligate us to deliver solar modules
at a fixed
48
price in Euros per Watt, and do not adjust for fluctuations in
the U.S. Dollar to Euro exchange rate. In 2005, a 10%
change in foreign currency exchange rates would have impacted
our net sales by $4.8 million.
In the past, exchange rate fluctuations have had an impact on
our business and results of operations. For example, exchange
rate fluctuations positively impacted our cash flows by
$0.4 million in fiscal year 2005 and negatively impacted
our cash flows by $0.2 million in fiscal year 2004.
Although we cannot predict the impact of future exchange rate
fluctuations on our business or results of operations, we
believe that we may have increased risk associated with currency
fluctuations in the future. Currently, we do not engage in
hedging activities; however, our expenditures denominated in
Euros are increasing due to the construction of our German plant
and capital equipment purchases from German suppliers. Most of
the German plants operating expenses will be in Euros
creating further opportunities for some natural hedge against
the currency risk in our net sales. In addition, we may decide
to enter into other hedging activities in the future.
We are exposed to interest rate risk because many of our
end-users depend on debt financing to purchase and install a
photovoltaic system. Although the useful life of a photovoltaic
system is approximately 25 years, end-users of our solar
modules must pay the entire cost of the photovoltaic system at
the time of installation. As a result, many of our end-users
rely on debt financing to fund the up-front capital expenditure.
An increase in interest rates could make it difficult for our
end-users to secure the financing necessary to purchase and
install a PV system on favorable terms, or at all, and thus
lower demand for our solar modules and reduce our net sales. In
addition, we believe that a significant percentage of our
end-users install photovoltaic systems as an investment, funding
the initial capital expenditure through a combination of equity
and debt. An increase in interest rates could lower an
investors return on investment in a photovoltaic system or
make alternative investments more attractive relative to
photovoltaic systems, which, in each case, could cause these
end-users to seek alternative investments that promise higher
returns.
During July 2006, we entered into the loan agreement with the
Estate of John T. Walton, which bears interest at the
commercial prime lending rate. Also, during July 2006, we
entered into the IKB credit facility, which bears interest
at Euribor plus 1.6% for the term loan, Euribor plus 2.0% for
the bridge loan and Euribor plus 1.8% for the revolving credit
facility.
We entered into an interest rate swap agreement to convert the
variable interest on the IKB term loan of Euribor plus 1.6%
to a fixed interest rate of 3.96%. At September 30, 2006,
the notional value of this interest rate swap was
14.3 million
($17.2 million at an assumed exchange rate of
$1.20/1.00).
We are exposed to price risks associated with raw material
purchases, most significantly tellurium. Currently, we purchase
all of our cadmium telluride in manufactured form from two
qualified manufacturers, but we plan to qualify additional
manufacturers. We have a three year written contract with one of
our two qualified suppliers, which provides for quarterly price
adjustments based on the cost of tellurium. We purchase cadmium
telluride from our other qualified supplier under quarterly
purchase orders. In 2006, we entered into a multi-year tellurium
supply contract in order to mitigate potential cost volatility
and secure raw material supplies. We acquire the remainder of
our raw materials under quarterly or annual purchase orders, at
prices based on annual volumes. Because the sale prices of solar
modules in our Long Term Supply Contracts do not adjust for raw
material price increases and are generally for a longer term
than our supply contracts, we may be unable to pass on increases
in the cost of our raw materials to our customers.
In addition, most of our key raw materials are either
sole-sourced or sourced by a limited number of third-party
suppliers. As a result, the failure of any of our suppliers to
perform could disrupt our supply chain and impair our
operations. If our existing suppliers fail to perform, we will
be required to identify and qualify new suppliers, a process
that can take between one and twelve months depending on the raw
material. We might be unable to identify new suppliers or
qualify their products for use on our production line in a
timely basis and on commercially reasonable terms.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123 (revised 2004),
Share-Based Payments, which revises SFAS 123,
Accounting for Stock-Based Compensation, supersedes
APB 25, Accounting for Stock Issued to Employees,
and SFAS 148, Accounting for Stock-Based
Compensation Transition and Disclosure, and
amends SFAS 95, Statement of Cash Flows. Generally,
the requirements of SFAS 123(R) are similar to those of
SFAS 123. However, SFAS 123(R) requires companies to
recognize compensation expense in their statements of operations
for
49
all stock-based payments to employees, including grants of
employee stock options, based on the fair value of the awards.
We adopted SFAS 123(R) during the first quarter of the year
ended December 31, 2005 using the modified
retrospective method of transition.
In March 2005, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. (SAB) 107,
Share-Based Payment, which provides guidance regarding the
implementation of SFAS 123(R). In particular, SAB 107
provides guidance regarding calculating assumptions used in
stock-based compensation valuation models, the classification of
stock-based compensation expense, the capitalization of
stock-based compensation costs, the classification of redeemable
financial instruments, and disclosures in managements
discussion and analysis in filings with the SEC. We have applied
SAB 107 in our adoption of SFAS 123(R).
In November 2004, the FASB issued SFAS 151, which clarifies
the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and spoilage. SFAS 151 also
requires the allocation of fixed production overhead costs based
on normal production capacity. We adopted this statement in
2005, and the adoption did not have a material effect on our
financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS 153, Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29.
APB 29, Accounting for Nonmonetary Transactions,
applies the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets
exchanged. SFAS 153 amends APB 29 by eliminating the
exception to fair value accounting for nonmonetary changes of
similar productive assets and replacing it with a general
exception to fair value accounting for nonmonetary exchanges
that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the
exchange. We adopted this statement in 2005, and the adoption
did not have a material effect on our financial position,
results of operations or cash flows.
In March 2005, the FASB issued Interpretation No. (FIN) 47,
Accounting for Conditional Asset Retirement Obligations.
Conditional asset retirement obligations are legal
obligations to perform an asset retirement activity in which the
timing and/or method of settlement are conditional on a future
event that may or may not be within the entitys control.
FIN 47 clarifies that an entity must record a liability for
a conditional asset retirement obligation if the fair value of
the obligation can be reasonably estimated and establishes when
an entity would have sufficient information to reasonably
estimate that fair value. We adopted FIN 47 during 2005,
and it did not have a material effect on our financial position,
results of operations or cash flows.
In May 2005, the FASB issued SFAS 154, Accounting
Changes and Error Corrections, which supersedes APB 20,
Accounting Changes, and SFAS 3, Reporting
Accounting Changes in Interim Financial Statements.
SFAS 154 changes the method for reporting an accounting
change. Under SFAS 154, accounting changes must be
retrospectively applied to all prior periods whose financial
statements are presented, unless the change in accounting
principle is due to a new pronouncement that provides other
transition guidance or unless application of the retrospective
method is impracticable. Under the retrospective method,
companies will no longer present the cumulative effect of a
change in accounting principle in their statement of operations
for the period of the change. SFAS 154 carries forward
unchanged APB 20s guidance for reporting corrections
of errors in previously issued financial statements and for
reporting changes in accounting estimates. We adopted this
statement in 2006, and the adoption did not have a material
effect on our financial position, results of operations or cash
flows.
In January 2006, the FASB issued SFAS 155, Accounting for
Certain Hybrid Financial Instruments. SFAS 155 amends SFAS
133, Accounting for Derivative Instruments and Hedging
Activities and SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 155 also resolves issues addressed in SFAS
133 Implementation Issue No. D1, Application of
Statement 133 to Beneficial Interests in Securitized
Financial Assets. SFAS 155 eliminates the exemption from
applying SFAS 133 to interests in securitized financial assets
so that similar instruments are accounted for in the same manner
regardless of the form of the instruments. SFAS 155 allows
a preparer to elect fair value measurement at acquisition, at
issuance, or when a previously recognized financial instrument
is subject to a remeasurement (new basis) event, on an
instrument-by-instrument basis. SFAS 155 is effective for all
financial instruments acquired or issued after the beginning of
an entitys first fiscal year that begins after
September 15, 2006. The fair value election provided for in
paragraph 4(c) of SFAS 155 may also be applied upon
adoption of SFAS 155 for hybrid financial instruments that had
been bifurcated under paragraph 12 of SFAS 133 prior to the
adoption of this Statement. Earlier adoption is permitted as of
the beginning of an entitys fiscal year, provided the
entity has not yet issued financial statements, including
financial statements for any interim period for that fiscal
year. Provisions of SFAS 155 may be applied to instruments that
an entity holds at the date of adoption on an
instrument-by-instrument basis. We will adopt SFAS 155 during
2007 and do not expect this to have a material impact on our
financial position, results of operations, or cash flows.
50
In February 2006, the FASB issued FSP
FAS 123R-4,
Classification of Options and Similar Instruments Issued as
Employee Compensation That Allow for Cash Settlement upon the
Occurrence of a Contingent Event. The guidance in FSP
FAS 123R-4 amends
paragraphs 32 and A229 of SFAS 123(R) to incorporate the
concept articulated in footnote 19 of SFAS 123(R). That is,
a cash settlement feature that can be exercised only upon the
occurrence of a contingent event that is outside the
employees control does not meet the condition in
paragraphs 32 and A229 until it becomes probable that the
event will occur. Originally under SFAS 123(R), a provision in a
stock-based payment plan that required an entity to settle
outstanding options in cash upon the occurrence of any
contingent event required classification and accounting for the
share based payment as a liability. This caused an issue for
certain awards that require or permit, at the holders
election, cash settlement of the option or similar instrument
upon (a) a change in control or other liquidity event of
the entity or (b) death or disability of the holder. With
this new FSP, these types of cash settlement features will not
require liability accounting so long as the feature can be
exercised only upon the occurrence of a contingent event that is
outside the employees control (such as an initial public
offering) until it becomes probable that event will occur. We
applied the guidance in this FSP in our adoption of SFAS 123(R).
In March 2006, the FASB issued SFAS 156, Accounting for
Servicing of Financial Assets an Amendment of FASB
Statement No. 140. SFAS 156 provides guidance on the
accounting for servicing assets and liabilities when an entity
undertakes an obligation to service a financial asset by
entering into a servicing contract. This statement is effective
for all transactions in fiscal years beginning after
September 15, 2006. We do not expect the adoption of SFAS
156 to have a material effect on our financial position, results
of operations or cash flows.
In July 2006, the FASB issued FIN 48, Accounting for
Uncertainty in Income Taxes. Tax law is subject to
significant and varied interpretation, so an enterprise may be
uncertain whether a tax position that it has taken will
ultimately be sustained when it files its tax return.
FIN 48 establishes a more-likely-than-not
threshold that must be met before a tax benefit can be
recognized in the financial statements and, for those benefits
that may be recognized, stipulates that enterprises should
recognize the largest amount of the tax benefit that has a
greater than 50 percent likelihood of being realized upon
ultimate settlement with the taxing authority. FIN 48 also
addresses changes in judgments about the realizability of tax
benefits, accrual of interest and penalties on unrecognized tax
benefits, classification of liabilities for unrecognized tax
benefits, and related financial statement disclosures. We will
adopt FIN 48 during 2007 and do not expect this to have a
material effect on our financial position, results of
operations, or cash flows.
In September 2006, the SEC issued SAB 108, Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, which
provides interpretive guidance on the consideration of the
effects of prior year misstatements when quantifying current
year misstatements during a materiality assessment. SAB 108 is
effective for companies with fiscal years ending after
November 15, 2006. We have applied SAB 108 during the
preparation of our financial statements, and the application of
SAB 108 did not have a material effect on our financial
position, results of operations or cash flows.
In September 2006, the FASB issued SFAS 157, Fair Value
Measurements. SFAS 157 establishes a framework for measuring
fair value and expands disclosures about fair value
measurements. The changes to current practice resulting from the
application of SFAS 157 relate to the definition of fair value,
the methods used to measure fair value, and expanded disclosures
about fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007 and interim periods
within those fiscal years. We do not expect the adoption of SFAS
157 to have a material effect on our financial position, results
of operations or cash flows.
In September 2006, the FASB issued SFAS 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106, and 132(R). SFAS 158 requires an employer to
recognize the over-funded or under-funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as
an asset or liability in its statement of financial position and
to recognize changes in that funded status through comprehensive
income in the year in which the changes occur. SFAS 158 also
requires additional disclosures of defined benefit
postretirement plans. SFAS 158 is effective for fiscal years
ending after December 15, 2006. We do not expect the
adoption of SFAS 158 to have a material effect on our financial
position, results of operations or cash flows.
51
INDUSTRY AND MARKET DATA
This prospectus includes industry and market data that we
obtained from periodic industry publications, third-party
studies and surveys, filings of public companies in our industry
and internal company surveys. These sources include Datamonitor,
the Energy Information Administration, the International Energy
Agency, Photon International, Solarbuzz, Sun & Wind
Energy and the World Bank. Industry publications and surveys
generally state that the information contained therein has been
obtained from sources believed to be reliable. Unless otherwise
noted, statements as to our market position relative to our
competitors are approximated and based on the above-mentioned
third-party data and internal analysis and estimates as of the
latest available date. Although we believe the industry and
market data and statements as to market position to be reliable
as of the date of this prospectus, this information could prove
inaccurate. Industry and market data could be wrong because of
the method by which sources obtained their data and because
information cannot always be verified with complete certainty
due to the limits on the availability and reliability of raw
data, the voluntary nature of the data gathering process and
other limitations and uncertainties. In addition, we do not know
all of the assumptions regarding general economic conditions or
growth that were used in preparing the forecasts from sources
cited herein.
52
INDUSTRY
Electric Power Industry
Global demand for electric power is expected to increase from
14.8 trillion kilowatt hours in 2003 to 27.1 trillion kWh by
2025, according to the Energy Information Administration, or the
EIA. To meet this demand, the International Energy Agency, or
the IEA, estimates that investments in generation, transmission
and distribution of electricity must reach approximately $10
trillion by 2030. According to the IEA, fossil fuels such as
coal, oil and natural gas generated approximately 66% of the
worlds electricity in 2003. However, fossil fuels face a
number of challenges that will limit their ability to supply the
expanding global demand for energy:
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Limited supply and rising cost of fossil fuels.
Limited fossil fuel supply and escalating electricity
consumption are causing wholesale electricity prices to
increase. For example, from 2000 to 2005, the average cost of
all fossil fuels used to generate electricity globally increased
by 67%, according to the IEA. The rising cost of fossil fuels
has resulted in higher electricity costs for consumers and
highlighted the need to develop new technologies for electricity
generation. |
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Dependence on energy from foreign regions. Many
countries depend on foreign energy for a majority of their
domestic energy needs. For example, the World Bank estimates
that, in 2003, Italy, Japan and Korea imported over 80% of their
energy requirements, Germany and Spain imported over 60% of
their energy requirements and the United States imported
approximately 28% of its energy requirements. Political and
economic instability in some of the leading energy producing
regions of the world have induced many countries to explore
domestic energy alternatives, including renewable energy, in
order to reduce foreign energy dependence. |
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Environmental concerns. Environmental concerns
over the by-products of fossil fuels have led to a global search
for environmentally friendly solutions to the worlds
growing electricity needs. By the end of 2005, approximately 165
countries signed the Kyoto Protocol, agreeing to reduce
emissions of carbon dioxide and other gasses by 5.2% from 1990
levels between 2008 and 2012. Many countries have since taken
pro-active steps to reduce emissions, such as adopting subsidies
to encourage the commercialization of renewable energy. |
Renewable Energy Industry
The same challenges facing fossil fuels are creating a growth
opportunity for renewable energy. Renewable energy sources for
electric power generation include hydroelectric, biomass,
geothermal, wind and solar. Within the renewable energy
industry, hydroelectric power currently generates the most
electricity. According to the EIA, hydroelectric power accounted
for approximately 6.5% of electricity generated in the United
States in 2004, compared to just 2.3% for all other sources of
renewable energy combined. While hydroelectric power generation
currently has the largest installed base within renewable
energy, the future growth of hydroelectric power will likely be
limited due to environmental concerns and a lack of suitable
sites.
Among renewable sources of electricity, solar energy has the
most potential to meet the worlds growing electricity
needs. According to the Department of Energy, the sun is the
only source of renewable energy that has a large enough resource
base to meet a significant portion of the worlds
electricity needs. A study commissioned by the Department of
Energy estimates that, on average, 120,000 trillion Watts, or
TW, of solar energy strike the Earth per year, far exceeding the
global electricity consumption rate of 14.3TW in 2002. At a
typical latitude for the United States, a net 10% efficient
solar energy farm covering 1.6% of the
U.S. land area could theoretically meet the countrys
entire domestic electricity needs. In contrast, the same study
estimates that the remaining global, practically exploitable
hydroelectric resource is less than 0.5TW, the cumulative energy
in all the tides and ocean currents in the world amounts to less
than 2TW, the total geothermal energy at the surface of the
Earth, integrated over all the land area of all seven
continents, is 12TW, of which only a small fraction could be
practically extracted, and the total amount of globally
extractable wind power is between 2TW and 4TW. Wind is a
commercially viable and scalable source of renewable energy, but
it also faces environmental challenges and many of the most
attractive high wind resource areas have already been developed.
Solar electricity is generated using either photovoltaic or
solar thermal technology to extract energy from the sun.
Photovoltaic electricity generating systems directly convert the
suns energy into electricity, whereas solar thermal
systems heat water or other fluids that are then used as sources
of energy. Photovoltaic systems are either
53
grid-connected systems or off-grid systems. Grid-connected
systems are connected to the electricity transmission and
distribution grid and feed solar electricity into the
end-users electrical system and/or the grid. Such systems
are commonly mounted on the rooftops of buildings, integrated
into building facades or installed on the ground using support
structures, and range in size from
2-3 kilowatts to
multiple megawatts, or MW. Off-grid photovoltaic systems are
typically much smaller and are frequently used in remote areas
where they may be the only source of electricity for the
end-user.
Photovoltaic systems are currently the most widely used method
of transforming sunlight into electricity. Annual installations
by the photovoltaic industry grew from 0.3GW in 2001 to 1.5GW in
2005, representing an average annual growth rate of over 43%.
Cumulative installed capacity surpassed 5GW during 2005.
In 2005, Germany was the world-leader in MW volume of
photovoltaic installations with 57%, followed by Japan with 20%
and the United States with 7%, according to Solarbuzz.
Germanys and Japans historical dominance is
attributable to their government incentive programs, which were
designed to stimulate market demand for photovoltaic systems.
Other European countries have adopted or are adopting similar
laws and policies, as are countries in Asia and several states
in the United States, including California. The recently
announced California Solar Initiative commits $2.9 billion
in incentives over 10 years with the goal of supporting
installations of 3GW new installed capacity by 2017.
Solar energy generated through photovoltaic systems has several
advantages compared to conventional and other renewable sources
of electricity, including the following:
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Solar energy is distributive. Photovoltaic systems
achieve economies of scale at small sizes and are modular, and
thus can be installed at or near the sites where the solar
electricity is consumed. By contrast, most methods of
electricity generation are centrally generated and delivered to
consumers over a transmission and distribution grid. As a
result, solar generation can mitigate the cost and distribution
and transmission constraints often faced by centrally generated
energy sources. |
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Solar energy systems require minimal operating
expense. Once installed, photovoltaic systems typically
require very little maintenance and no fuel, minimizing the
operating expense of a photovoltaic system over the 25 year
life of key system elements. As a result, the cost of
electricity generated by a photovoltaic system is substantially
fixed at the time of installation and is subject to minimal
increase or volatility over the life of the system. By contrast,
other methods of electricity generation require higher amounts
of maintenance and replacement costs over the life of the
system. In addition, fossil fuel and biomass power plants face
volatility in fuel supply and cost. These maintenance,
replacement and fuel costs can be unpredictable and cause the
cost of electricity generated by these systems to increase over
the systems useful life. |
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Solar modules can be installed at a variety of
locations. Photovoltaic systems can generate electricity
anywhere sunlight hits the Earths surface. By contrast,
relatively fewer locations have the natural resources and grid
access necessary to support hydroelectric, wind or geothermal
electricity generating systems. While power plants using fossil
fuels, biomass and nuclear technology are not restricted by
natural conditions, their development is often constrained by
long lead times for permitting and construction, availability of
fuel, infrastructure requirements and environmental concerns. |
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Solar energy generation typically coincides with the times
of peak energy demand. Photovoltaic systems generate
most of their electricity during the afternoon hours, when the
energy from the sun is strongest. In many areas and times of the
year, the greatest demand for electricity is also during these
same afternoon hours. Consumers can therefore replace peak time
conventional electricity, which can be more expensive and less
reliable than electricity purchased during non-peak times, with
distributed solar electricity. |
Challenges Facing the Photovoltaic Industry
Despite the advantages of solar energy generated through
photovoltaic systems, the photovoltaic industry must overcome a
number of challenges to grow and achieve widespread
commercialization of its products, including the following:
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Current high cost of solar electricity. Currently,
solar electricity is not competitive with conventional sources
of electricity on a cost basis without government subsidies. The
demand for |
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solar modules may decline if government subsidies are reduced or
eliminated before solar electricity can compete with
conventional sources of electricity on a cost basis. See
BusinessGovernment Subsidies. |
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Limited availability of semiconductor materials.
Solar modules require a semiconductor material to convert solar
energy into electricity. Over 94% of the MW volume of solar
modules sold in 2005 used crystalline silicon as their
semiconductor material, according to Solarbuzz. High demand from
the photovoltaic and microelectronics industries has led to a
shortage of silicon feedstock, which currently limits the growth
of many solar module manufacturers. While manufacturers of
silicon feedstock are building new manufacturing plants to
increase supply, the construction of such plants is time
consuming and requires substantial capital expenditures. |
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Intermittent source of power. Photovoltaic systems
require sunlight to generate electricity and are less effective
in climates of low sunlight and extreme hot and cold
temperatures. As a result, photovoltaic systems generally cannot
be used as a sole source of electricity and must be combined
with a storage solution (such as a battery) or other source of
electricity (such as grid electricity or diesel generation) in
order to provide a complete solution to the end-user. |
The Cost and Operating Metrics of a Photovoltaic System
Electricity is generated by photovoltaic systems, which are
comprised of solar modules, mounting structures and electrical
components. Solar module manufacturers price and sell solar
modules per Watt of rated power, which is the rated power under
standard test conditions. Power is a rating of a solar
modules capacity to produce electricity and is measured in
Watts, where one thousand Watts equals one kilowatt and one
thousand equals one MW. Electricity is measured in kilowatt
hours, and is the quantity of power produced for a given period
of time. For example, a photovoltaic system producing
1 kilowatt of power for three hours generates
3 kilowatt hours of electricity. Retail electricity is
generally discussed in terms of kilowatt hours. According to the
EIA, in 2001, the average U.S. household consumed
approximately 10,600 kilowatt hours of electricity.
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Cost of a Photovoltaic System |
The manufacturing cost per Watt of a solar module equals the
cost to produce a solar module divided by the modules
number of sellable Watts. Sellable Watts per module is a
function of, among other things, the conversion efficiency of
the solar module. The conversion efficiency of a solar module is
primarily a function of the type of semiconductor material, the
device structure and optimization of the manufacturing process.
Manufacturers of solar modules are divided into two broad
categories based on the type of semiconductor technology they
utilize to convert sunlight into electricity: crystalline
silicon technology or thin film technology. Crystalline silicon
modules generally have higher conversion efficiencies than thin
film solar modules. However, crystalline silicon production
processes use approximately 100 times more semiconductor
material and are more expensive than the best performing thin
film production processes. By lowering the cost to produce a
solar module, thin film solar modules manufactured in high
volume commercial production can have a lower manufacturing cost
per Watt than crystalline silicon solar modules, even though
crystalline silicon solar modules have higher conversion
efficiencies.
While solar modules are sold based on their rated power, the
amount of electricity a solar module can generate and the
effective cost of that electricity are also relevant to a
purchasing decision. The cost per kilowatt hour of solar
electricity can be derived by dividing the solar electricity
generated over the life of the photovoltaic system into the
total cost of the system. Solar modules, which have a useful
life of approximately 25 years, generally represent
approximately half of the cost of a photovoltaic system.
Mounting structures, equipment and electrical components
generally comprise the other half of the cost of a photovoltaic
system. In calculating the cost per kilowatt hour of solar
electricity, many customers also consider the time
value of the capital required to purchase and install the
system.
The price of conventional energy varies considerably by region
based on, among other things, the cost of producing and
importing energy. To become competitive with conventional
sources of electricity, the price per kilowatt hour of
distributive solar electricity must approach the retail price of
conventional electricity displaced by solar electricity in a
given region. For solar power to serve as a source of on-grid
generation, it must compete with the average wholesale price of
electricity in a given region, as well as the price per kilowatt
hour of other sources of renewable energy.
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Operating Metrics of a Photovoltaic system |
The photovoltaic industry uses a widely accepted set of standard
measurement procedures and test conditions for the direct
comparison of each solar module. These conditions, called
Standard Test Conditions, specify a standard temperature, solar
irradiance level and angle of the sun, and are used to determine
the power rating and conversion efficiency of each solar module.
On average, at noon on a cloudless day, sunlight provides about
1 kilowatt of power to each square meter of the
Earths surface. A solar module operating at a 10%
conversion efficiency under these sunlight conditions will
provide 100 Watts of direct current power per square meter
(kilowatt of sunlight power x 10% conversion efficiency =
100 Watts of solar power). If these sunlight conditions
persist for one hour, the solar module will generate
100 Watt hours, or 0.1 kilowatt hour, of solar
electricity (100 Watts solar power x 1 hour duration =
0.1 kilowatt hour of solar electricity). Crystalline
silicon solar modules in commercial production had average
conversion efficiencies of approximately 14% in 2005. Thin film
solar modules in high volume commercial production (over 20MW
per year) had average conversion efficiencies that ranged from
approximately 6% to approximately 9% in 2005. The conversion
efficiency of our solar modules averaged approximately 9% in the
third quarter of 2006. In order to reach a comparable level of
installed power, a photovoltaic system that employs solar
modules with relatively lower conversion efficiencies must
employ more solar modules than a photovoltaic generation system
that uses solar modules with higher conversion efficiencies.
Under real-world operating conditions, a typical photovoltaic
system operates outside of Standard Test Conditions for much of
the time. For example, the location and design of a photovoltaic
system, time of day and year, temperature and angle of the sun
impact the performance of a photovoltaic system, and the
conversion efficiencies of solar modules generally reduce when
operating outside Standard Test Conditions. In order to
determine the solar electricity that a photovoltaic system will
generate, it is therefore necessary to understand not only the
Standard Test Conditions power rating of a solar module, but
also the design of the photovoltaic system, real world
conditions under which the system will operate and performance
characteristics of the solar modules and electrical components
outside Standard Test Conditions.
Photovoltaic Technology
Historically, crystalline silicon has been the most common
semiconductor material used in solar modules. In 2005, 94% of
the MW volume of solar modules sold employed crystalline silicon
technology, while thin film technology accounted for only 6% the
MW volume of solar modules sold. Thin film solar modules
generally employ one of three different semiconductor materials
to convert solar energy into electricity: cadmium telluride;
copper indium gallium diselenide; or amorphous silicon.
Thin film technology offers several cost and performance
advantages over crystalline silicon technology, including the
following:
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Fundamental cost advantage. Thin film technology
employs semiconductor materials that are efficient absorbers of
energy from the solar spectrum. As a result, thin film
technology enables manufacturers to produce solar modules with
approximately 1% of the semiconductor material used to produce
crystalline silicon solar modules, potentially providing a
fundamental material cost advantage. Recent increases in the
price of silicon feedstock have heightened the cost advantage
opportunity of thin film technology. The price of silicon
feedstock increased from $28-$32/kg for 2004 delivery to
$45-$50/kg for 2006 delivery, and spot prices have been reported
to exceed $100/kg in 2006. Over the same period, the price of
cadmium telluride semiconductor material also increased;
however, the exposure of cadmium telluride thin film
manufacturers to these price increases was limited because of
the relatively small amount of semiconductor material they
employ to manufacture a solar module. |
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Integrated production process. Certain thin film
technologies enable manufacturers to deposit semiconductor
materials directly on large inexpensive superstrates with a
continuous manufacturing process that increases production
throughput over a fixed asset and operating expense base. While
many thin film manufacturers can perform all manufacturing steps
in a continuous process, few crystalline silicon manufacturers
are able to perform every step in the batch manufacturing
process employed to construct a crystalline silicon solar module. |
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Superior product performance. Certain types of
thin-film solar modules, such as cadmium telluride, generate
more electricity across a variety of environments, including
high temperature |
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and low light, than crystalline silicon solar modules with the
same power rating. Modules that generate more kilowatt hours per
rated killowatt under real-world conditions increases the
end-users return on investment. |
Thin film technology also faces a number of disadvantages
relative to crystalline silicon, including the following:
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Limited operating history. No thin film solar
module has been in service for its entire estimated useful life,
limiting the data available to validate estimates of the useful
life and rate of degradation of thin film solar modules. In
contrast, historical operating data validates the useful life
and performance of crystalline silicon solar modules.
Additionally, few thin film manufacturers have been able to
achieve the production throughput rates, yields and product
performance necessary to commercialize their solar modules and
achieve many of the benefits of thin film technology. |
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Lower conversion efficiency. The average
conversion efficiency of thin film solar modules in high volume
commercial production (over 20MW per year) currently ranges from
6% to 9%. By comparison, the average conversion efficiency of
crystalline silicon solar modules in commercial production is
approximately 13%. Because cost per Watt is a function of
conversion efficiency and manufacturing cost, low conversion
efficiencies could make it difficult for some thin film
manufacturers to achieve a low cost per Watt. In addition, the
higher conversion efficiencies of crystalline silicon solar
modules, even at a higher cost per Watt, could be attractive to
end-users who want to generate a certain amount of electricity
in a fixed amount of space. |
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Difficulty in customizing solar modules. To build
a crystalline silicon solar module, a manufacturer connects a
series of independently manufactured photovoltaic cells. As a
result, crystalline silicon manufacturers are able to customize
the size and shape of their solar modules by connecting a larger
or smaller number of photovoltaic cells in a pattern. In
contrast, cadmium telluride thin film manufacturers often
produce only a single product by depositing the semiconductor
material directly on superstrates, and are unable to customize
their product. Because crystalline silicon solar modules can be
customized and have higher conversion efficiencies, they are
currently better suited for distribution in certain residential
markets than cadmium telluride thin film solar modules. |
Government Subsidies and Incentives
Many countries in Europe and Asia and several states in the
United States have adopted a variety of government subsidies and
incentives to allow renewable energy sources to compete with the
currently less expensive conventional sources of energy, such as
fossil fuels. Government subsidies and incentives generally
focus on grid-connected systems and take several forms,
including feed-in tariffs, net metering programs, renewable
portfolio standards, rebates, tax incentives and low interest
loans. See Business Government Subsidies.
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BUSINESS
Overview
We design and manufacture solar modules using a proprietary thin
film semiconductor technology that has allowed us to reduce our
average solar module manufacturing costs to among the lowest in
the world. In 2005, our average manufacturing costs were
$1.59 per Watt, which we believe is significantly less than
those of traditional crystalline silicon solar module
manufacturers. By continuing to expand production and improve
our technology and manufacturing process, we believe that we can
further reduce our manufacturing costs per Watt and improve our
cost advantage over traditional crystalline silicon solar
modules manufacturers. Our objective is to become, by 2010, the
first solar module manufacturer to offer a solar electricity
solution that competes on a non-subsidized basis with the price
of retail electricity in key markets in the United States,
Europe and Asia.
We manufacture our solar modules on a high-throughput production
line and perform all manufacturing steps ourselves in an
automated, continuous process. Our solar modules employ a thin
layer of cadmium telluride semiconductor material to convert
sunlight into electricity. We are the first company to integrate
non-silicon thin film technology into high volume low-cost
production. In less than three hours, we transform an
inexpensive 2ft x 4ft (60cm x 120cm) sheet of glass into a
complete solar module, using approximately 1% of the
semiconductor material used to produce crystalline silicon solar
modules. Our manufacturing process eliminates the multiple
supply chain operators and expensive and time consuming batch
processing steps that are used to produce a crystalline silicon
solar module. Producing low cost solar modules without
crystalline silicon has allowed us to grow rapidly to meet
market demand during a period of time when silicon feedstock
supply shortages and price volatility are limiting the growth of
many of our competitors.
Our net sales grew from $3.2 million in 2003 to
$48.1 million in 2005. Strong market demand, a positive
customer response to our solar modules and our ability to expand
production without raw material constraints present us with the
opportunity to expand sales rapidly and increase market share.
We recently entered into long-term solar module supply contracts
(the Long Term Supply Contracts) with six European
project developers and system integrators, which allow for
approximately
1.2 billion
($1.4 billion at an assumed exchanged rate of
$1.20/1.00) in
sales from 2006 to 2011. These Long Term Supply Contracts
contemplate the manufacture and sale of a total of 745
Megawatts, or MW, of solar modules. Under each of our Long Term
Supply Contracts, we have a unilateral option, exercisable until
December 31, 2006, to increase the sales volumes and extend
each contract through 2012. We plan to exercise each option
promptly following the completion of this offering, after which
the contracts will allow for approximately
1.9 billion
($2.3 billion at an assumed exchange rate of
$1.20/1.00) in
sales from 2006 to 2012 for the manufacture and sale of a total
of 1,270MW of solar modules. The information in this paragraph
is designed to summarize the financial terms of our Long Term
Supply Contracts and is not intended to provide guidance on our
future operating results, including revenues or profitability.
In order to satisfy our contractual requirements and address
additional market demand, we are in the process of expanding our
manufacturing capacity to 175MW by the second half of 2007. In
August 2006, we completed our Ohio expansion, adding two 25MW
production lines to our existing 25MW base plant. With the
completion of our Ohio expansion, we have an annual
manufacturing capacity of 75MW and are the largest thin film
solar manufacturer in the world. We are also building a four
line 100MW German plant. After our German plant reaches full
capacity, estimated for the second half of 2007, we will have an
annual manufacturing capacity of 175MW. We are also in the
planning stage for a new manufacturing plant in Asia. To
complete each new production line, we plan to use a systematic
replication process designed to enable us to add production
lines rapidly and efficiently and achieve operating metrics in
new plants that are comparable to the performance of our base
plant.
Competitive Strengths
We believe that we possess a number of competitive strengths
that position us to become a leader in the solar energy industry
and compete in the broader electric power industry:
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Cost-per-Watt advantage. Our proprietary thin
film semiconductor technology has allowed us to reduce our
average solar module manufacturing costs to among the lowest in
the world. In 2005, our average manufacturing costs were
$1.59 per Watt, which we believe is significantly less than
those of crystalline silicon solar module manufacturers. |
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Our low manufacturing cost per Watt is derived from our low
material, capital and direct labor costs, and enabled us to
achieve a gross margin of 35% in 2005. Because our technology is
less mature than crystalline silicon technology, we have a
substantial opportunity for continued process improvement and
cost reduction. |
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Continuous and scalable production
process. We manufacture our solar modules on a
high-throughput production line where we perform all
manufacturing steps, from semiconductor deposition to final
assembly and testing, ourselves in an automated, continuous
process that turns a sheet of glass into a solar module in less
than three hours. Our proprietary thin film semiconductor
technology reduces our semiconductor material requirements to
approximately 1% of the semiconductor material used to produce
crystalline silicon solar modules. We have implemented a number
of continuous improvement systems and tools to improve
scalability and increase operating leverage. |
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Replicable production facilities. To complete
each new production line, we plan to use a systematic
replication process designed to enable us to add production
lines rapidly and efficiently and achieve operating metrics in
new plants that are comparable to the performance of our base
plant. The Ohio expansion demonstrated our ability to replicate
a single 25MW production line by creating two new 25MW
production lines, and will serve as a standard building
block for building manufacturing lines in Germany and
Asia. By expanding production, we believe we can take advantage
of economies of scale and accelerate development cycles,
enabling further reductions in the price per Watt of our solar
modules. |
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Stable supply of raw materials. We are not
currently constrained by, and do not foresee a shortage of,
cadmium telluride, our most critical semiconductor material. In
addition, because of the relatively small amount of
semiconductor material we use, we believe our exposure to
cadmium telluride price increases is limited. By contrast,
Solarbuzz estimates that the current shortage of silicon
feedstock will constrain the production of certain crystalline
silicon solar module manufacturers until 2008. |
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Pre-sold capacity through Long Term Supply
Contracts. Our Long Term Supply Contracts provide
us with predictable net sales and will enable us to ramp
production and realize economies of scale from capacity
expansions quickly, as we utilize and sell most of our
production capacity upon the qualification of a new production
line. By pre-selling the solar modules to be produced on future
production lines, we minimize the customer demand risk of our
rapid expansion plans. |
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Favorable system performance. Solar modules
usually produce less power than their rated power because of
environmental conditions, including variation in the ambient
temperature and intensity of sunlight. We believe that in
real-world conditions, systems incorporating our solar modules
operate more closely to their rated power than systems
incorporating crystalline silicon solar modules. Such
performance results in more kilowatt hours of electricity per
Watt of rated power and increases our end-users return on
investment, which we believe will result in greater demand for
our solar modules. |
Strategies
Our goal is to utilize our proprietary thin film semiconductor
technology to create a sustainable market for our solar modules
by lowering the price of solar electricity to a level that is
competitive with the price of retail electricity on a
non-subsidized basis by 2010 in key markets in the United
States, Europe and Asia. We intend to pursue the following
strategies to attain this goal:
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Penetrate key markets rapidly. Upon
completion of our German plant and contemplated Asian plant, we
expect to become a global fully-integrated solar module
manufacturer with substantial production capacity. Our new
production lines will enable us to diversify our customer base,
gain market share in key solar module markets and reduce our
dependence on any individual countrys subsidy programs. In
addition, we are exploring new customer relationships in Spain
and the United States, and have allocated a portion of our
planned manufacturing capacity to be available for sale in these
and other markets. On June 7, 2006 we entered into our
first such agreement, a purchase order to sell 2.5MW of solar
power generation kits to the State of California during the
third and fourth quarters of 2006. |
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Further reduce manufacturing cost. We deploy
continuous improvement systems and tools to increase the
throughput of our production lines and the efficiency of our
workforce and reduce our capital intensity and raw material
requirements. In addition, by absorbing fixed costs over higher
production volumes, we believe we can realize economies of scale
and continue to lower our manufacturing cost per Watt. Higher
production volumes should also enable volume-based |
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discounts on certain raw material and equipment purchases and
provide production and operational experience that translates
into improved process and product performance. |
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Increase sellable Watts per module. We are
implementing several development programs designed to increase
the number of sellable Watts per solar module, which is driven
primarily by conversion efficiency. From 2003 to the end of the
third quarter of 2006, we increased the average conversion
efficiency of our solar modules from approximately 7% to
approximately 9%, which increased the rated power of our solar
modules from approximately 49 Watts to approximately 64 Watts
over the same period. |
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We expect to continue to increase the conversion efficiency of
our solar modules. Our researchers have created small-scale
cadmium telluride cells with a conversion efficiency as high as
14.5%. Independent researchers have achieved a 16.5% conversion
efficiency in the laboratory with small-scale cadmium telluride
cells. As a result, we believe significant net increases in
conversion efficiency are available in full volume production.
We expect some decline in conversion efficiency when producing
solar modules in full scale production because individual
small-scale cells may utilize economically non-feasible
materials and be manufactured using processes that may not scale
to volume manufacturing. In addition, variation among cells is
compounded at the module level where performance is defined by
the weakest performing cell. |
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Enter the mainstream market for
electricity. Although we currently sell all of our
solar modules into subsidized markets, our goal is to identify,
enable and enter non-subsidized markets not currently served by
the solar industry. Cost reductions and performance improvements
in our solar modules will be critical to realizing this goal. In
addition, we believe that our ability to enter the
non-subsidized, mainstream market for electricity will require
system development and optimization, new system financing
options and the development of new market channels. We have
formed a dedicated group to identify the requirements of future
non-subsidized markets for large scale solar generation (1MW and
larger) and to develop the solutions to address them. As part of
our development activities, we anticipate providing solutions
beyond the solar module, ranging from solar system kits to
turnkey financed solar generation projects, in selected market
segments. For example, on June 7, 2006 we entered into an
agreement to sell 2.5MW of solar generation kits, which include
solar modules, mounting systems and electrical interconnection
subsystems, to the State of California during the third and
fourth quarters of 2006. A California authority will then
install and operate our proprietary, low cost photovoltaic
electricity generating system for commercial and industrial
rooftops. We began to generate revenue under this agreement in
September 2006. |
History
First Solar US Manufacturing, LLC was founded in 1999 to bring
an advanced thin film semiconductor process into commercial
production through the acquisition of predecessor technology and
the initiation of a research, development and production program
that allowed us to improve upon the predecessor technology and
launch commercial operations in January 2002. In 2003, a
previous owner forfeited its equity interests in First Solar
US Manufacturing, LLC. Later in 2003, the sole remaining
owner formed First Solar Holdings, LLC, and contributed its
equity interest in First Solar US Manufacturing, LLC and
First Solar Property, LLC to First Solar Holdings, LLC. On
February 22, 2006, First Solar Holdings, LLC converted from
a Delaware limited liability company to a Delaware corporation
and on June 28, 2006 changed its name to First Solar, Inc.
Products
Each solar module is approximately 2ft x 4ft (60cm x 120cm) and
had an average rated power of approximately 64 Watts at the end
of the third quarter of 2006. Our solar module is a
single-junction polycrystalline thin film structure that employs
cadmium telluride as the absorption layer and cadmium sulfide as
the window layer. Cadmium telluride has absorption properties
that are highly matched to the solar spectrum and has the
potential to deliver competitive conversion efficiencies with
approximately 1% of the semiconductor material used by
traditional crystalline silicon solar modules. Cadmium telluride
also performs well in a variety of non-optimal environments,
such as low light and hot temperature.
60
We have participated, or are currently participating, in
laboratory and field tests with the National Renewable Energy
Laboratory, the Arizona State University Photovoltaic Testing
Laboratory, the Fraunhofer Institute for Solar Energy, TÜV
Immissionsschutz und Engergiesysteme GmbH and the Institut
für Solar Energieversorgungstechnik. Currently, we have
approximately 10,000 solar modules installed worldwide at test
sites designed to collect data for field performance validation.
Using data logging equipment, we also monitor approximately
102,000 solar modules, representing approximately 6MW of
installed photovoltaic systems in use by the end-users that have
purchased systems using our solar modules. The modules in these
monitored systems represent approximately 20% of all solar
modules shipped by us from 2002 to 2005.
We maintain all certifications required to sell solar modules in
the markets we serve or expect to serve, including UL 1703,
IEC 61646, TÜV Safety Class II and CE.
We provide a limited warranty to the original purchasers of our
solar modules for five years following delivery for defects in
materials and workmanship under normal use and service
conditions. We also warrant to the original purchasers of our
solar modules that solar modules installed in accordance with
agreed-upon specifications will produce at least 90% of their
power output rating during the first 10 years following
their installation and at least 80% of their power output rating
during the following 15 years. In resolving claims under
both the defects and power output warranties, we have the option
of either repairing or replacing the covered solar module or,
under the power output warranty, providing additional solar
modules to remedy the power shortfall. Our warranties may be
transferred from the original purchaser of our solar modules to
a subsequent purchaser. As of September 30, 2006, our
accrued warranty expense amounted to $2.5 million.
We believe we are the first company in the photovoltaic industry
to implement a reclamation and recycling program for our solar
modules. Under the Long Term Supply Contracts and other customer
contracts we enter into with project developer and system
integrator customers, we agree to enter into a solar module
reclamation and recycling agreement with each end-user, and our
customers agree to present the solar module reclamation and
recycling agreement to the end-user and provide us with contact
information for such end-user. If our customers resell our solar
modules, we enter into the solar module reclamation and
recycling agreement directly with the end-user. Beginning in
2005, we conditioned the enforceability of our product
warranties on the end-user entering into the solar module
reclamation and recycling agreement to ensure that our end-users
enter into the solar module reclamation and recycling agreement.
End-users can return their solar modules to us at no cost at any
time. We estimate that our solar modules have a service life of
approximately 20 years. We pre-fund the estimated recycling
expense at the time of sale. In addition to achieving
substantial environmental benefits, our solar module recycling
program may provide us the opportunity to recuperate certain raw
materials and components for reuse in our manufacturing process.
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Manufacturing
We have integrated our manufacturing processes into a single
production line with three stages: the deposition
stage; the cell definition stage; and the
assembly and test stage. Except for operators
performing quality control and monitoring functions, the only
stage requiring manual processing is the final assembly and test
stage. As a result, we employ 20 people per production line for
each of our four shifts, or a total of 80 people per production
line for 24 hour per day, seven day per week production.
The diagram below illustrates the three stages of our production
line:
The deposition process begins with the robotic loading of 2ft x
4ft (60cm x 120cm) sheets of low-cost tin oxide-coated soda lime
glass on to the production line where they are cleaned and
chamfered to produce the strong, defect free edges necessary for
subsequent processing steps. Following cleaning, the glass
panels move automatically into a vacuum chamber where they are
heated to near the softening point and coated with a layer of
cadmium sulfide followed by a layer of cadmium telluride using
our proprietary vapor transport deposition technology. Each
layer takes less than 45 seconds to deposit, and combined uses
approximately 1% of the semiconductor material used in
crystalline silicon solar modules. Our ability to deposit the
semiconductor materials quickly and uniformly is critical to
producing low cost, high quality solar modules. Next, we cool
the semiconductor-coated plate rapidly to increase strength. The
deposition stage concludes with a re-crystallization step that
reduces defects within the crystals and minimizes the
recombination that occurs between grain boundaries.
In our cell definition stage, we utilize a series of lasers to
transform the large single semiconductor-coated plate into a
series of interconnected cells that deliver the desired current
and voltage output. Our proprietary laser scribing technology is
capable of accomplishing accurate and complex scribes at high
speeds.
Last, in the assembly and test stage, we apply busbars, EVA
laminate, a rear glass cover sheet and termination wires, seal
the joint box and then subject each solar module to a solar
simulator and current leakage test. The final assembly stage is
the only stage in our production line that requires manual
processing.
All of our solar modules are produced at our Perrysburg, Ohio
facility, which has received both an ISO 9001-2000 quality
system certification and ISO 14001 environmental system
certification.
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Manufacturing Capacity Expansion |
We are in the process of expanding our manufacturing capacity to
175MW by the second half of 2007. In August 2006, we completed
our Ohio expansion adding two 25MW production lines to our
existing 25MW base plant, and increasing our annual
manufacturing capacity to 75MW. We are also building a four line
100MW manufacturing plant in Germany. After our German plant
reaches full capacity, estimated for the second half of 2007, we
will have an annual manufacturing capacity of 175MW. We are also
in the planning stage for a new manufacturing plant in Asia. To
complete each new production line, we plan to use a systematic
replication process
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designed to enable us to add production lines rapidly and
efficiently and achieve operating metrics in new plants that are
comparable to the performance of our base plant.
Our manufacturing process uses approximately twenty raw
materials to construct a complete solar module. Of those raw
materials, the following nine are critical to our manufacturing
process: TCO coated front glass, cadmium sulfide, cadmium
telluride, photo resist, EVA laminate, tempered back glass, cord
plate/cord plate cap, lead wire (UL and TÜV) and solar
connectors. Before we use these materials in our manufacturing
process, a supplier must undergo a qualification process that
can last from one to twelve months, depending on the type of raw
material. Although we continually evaluate new suppliers and
currently are qualifying several new suppliers, most of our
critical materials are supplied by only one or two sources.
The most critical raw material in our production process is
cadmium telluride. Currently, we purchase all of our cadmium
telluride in manufactured form from two manufacturers. We have a
three year written contract with one of our suppliers, that
provides for quarterly price adjustments based on the cost of
tellurium. We purchase cadmium telluride from our other supplier
under quarterly purchase orders. We acquire the remainder of our
raw materials under quarterly purchase orders, at prices based
on annual volumes. Because the sales prices in our Long Term
Customer Contracts do not adjust for raw material price
increases and these contracts are for a longer term than our raw
material supply contracts, we may be unable to pass on increases
in the cost of our raw materials to these customers.
Marketing and Distribution
We launched the marketing and sale of our solar modules in
Germany in 2003 because Germany has attractive feed-in tariffs,
a high forecasted growth rate for renewable energy and market
segments that we believe our product serves well. Since 2003,
our focus has remained on grid-connected photovoltaic systems in
Germany because, similar to other solar module manufacturers, we
currently cannot compete with conventional sources of
electricity on a cost basis unless end-users receive government
subsidies. While our goal is to reduce the cost of solar
electricity to levels that can compete with fossil fuels and
other conventional sources of electricity, we believe that most
of our distribution in the immediate future will be for use in
grid-connected photovoltaic systems with some form of government
subsidies.
As of September 30, 2006, our direct sales force, customer
service and support network consisted of 8 employees in the
United States and 2 employees in Europe.
Customers
Recently we entered into Long Term Supply Contracts for the
manufacture and sale of a total of 745MW with our six principal
customers: Blitzstrom GmbH, Conergy AG, Gehrlicher
Umweltschonende Energiesysteme GmbH, Juwi Solar GmbH,
Phönix Sonnenstrom AG and Reinecke + Pohl Sun Energy AG.
Our customers are project developers and system integrators and
are headquartered in Germany. Under these Long Term Supply
Contracts, our customers have committed to purchase and we have
committed to sell an annual volume of solar modules at firm
prices that reduce each year in connection with the increasing
volumes. These contracts allow for approximately
1.2 billion
($1.4 billion at an assumed exchange rate of
$1.20/1.00) of
sales from 2006 to 2011. Under each of our Long Term Supply
Contracts, we have a unilateral option, exercisable until
December 31, 2006, to increase the sales volumes and extend
each contract through 2012. If we exercise our option under each
of the six contracts, the contracts will allow for approximately
1.9 billion
($2.3 billion at an assumed exchange rate of
$1.20/1.00) of
sales from 2006 to 2012 for the manufacture and sale of a total
of 1,270MW of solar modules. The information in this paragraph
is designed to summarize the financial terms of our Long Term
Supply Contracts and is not intended to provide guidance on our
future operating results, including revenues or profitability.
In 2005 and for the first nine months of 2006, our principal
customers were Blitzstrom GmbH, Conergy AG, Gehrlicher
Umweltschonende Energiesysteme GmbH, Juwi Solar GmbH,
Phönix Sonnenstrom AG and Reinecke + Pohl Sun Energy AG.
Our largest customer accounted for approximately 45% of our net
sales in 2005. In the first nine months of 2006, the same
customer accounted for 20% of our net sales, while two different
customers accounted for 23% and 20% of our net sales. We
anticipate our dependence on a single customer will be reduced
as a result of our Long Term Supply Contracts; however, the loss
of any of our major customers could have an adverse effect on
our business. As we expand our manufacturing capacity, we
anticipate developing additional customer relationships in
Germany and in other markets and regions, which will reduce our
customer and geographic concentration and dependence.
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Our customers sell turnkey solar systems to end-users that
include individual owners of agricultural buildings, owners of
commercial warehouses, offices and industrial buildings, public
agencies and municipal government authorities that own buildings
suitable for solar system deployment, owners of land designated
as former agricultural land, waste land or conversion land, such
as former military bases or industrial areas, and financial
investors that desire to own large scale solar projects.
Government Subsidies
Countries in Europe and Asia and several states in the United
States have adopted a variety of government subsidies to allow
renewable sources of electricity to compete with conventional
sources of electricity, such as fossil fuels. Government
subsidies and incentives generally focus on grid-connected
systems and take several forms, including feed-in tariffs, net
metering programs, renewable portfolio standards, rebates, tax
incentives and low interest loans.
Under a feed-in tariff subsidy, the government sets prices that
regulated utilities are required to pay for renewable
electricity generated by end-users. The prices are set above
market rates and may be differentiated based on system size or
application. Net metering programs enable end-users to sell
excess solar electricity to their local utility in exchange for
a credit against their utility bills. Net metering programs are
usually combined with rebates, and do not provide cash payments
if delivered solar electricity exceeds their utility bills.
Under a renewable portfolio standard, the government requires
regulated utilities to supply a portion of their total
electricity in the form of renewable electricity. Some programs
further specify that a portion of the renewable energy quota
must be from solar electricity.
Tax incentive programs exist in the United States at both the
federal and state level, and can take the form of investment tax
credits, accelerated depreciation and property tax exemptions.
Several governments also facilitate low interest loans for
photovoltaic systems, either through direct lending, credit
enhancement or other programs.
The following table details several government subsidy programs:
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Europe
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Germany
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Feed-in tariff |
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Solar system operators receive a fixed rate feed-in tariff for
20 years ranging from
0.4060/kWh to
0.5180/kWh in
2006, depending on the size of the system and installation type
(e.g., ground mounted or building mounted). For systems
installed after 2006, the tariff rate for ground mounted systems
is reduced by 6.5% each year and the tariff rates for building
facade and roof mounted arrays are reduced by 5% each year. |
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Spain
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Feed-in tariff |
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Solar system operators receive a feed-in tariff equal to
0.42/kWh in 2006
for the first 25 years of system operation for system sizes
up to 100kW. For systems larger than 100kW, the tariff rate is
0.22/kWh. The
tariff is indexed to the average electricity reference tariff
for electricity generated in Spain, adjusted annually using a
575% multiplier (Tarifa Media de Referencia or
TMR). After 25 years, the tariff reduces to
460% of the TMR. Spains tariff program is capped at a
cumulative installed capacity of 400MW through 2010. |
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Italy
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Feed-in tariff |
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Solar system operators receive a feed-in tariff based on the
size of the photovoltaic system for 20 years, ranging from
0.445/kWh to
0.490/kWh in
2006, with systems larger than 50kW receiving the highest
tariff. Italys tariff program is capped at a cumulative
installed capacity of 500MW through 2015, with 360MW for systems
sized under 50kW and 140MW for systems sized between 50kW and
1MW. For systems installed after 2007, the tariffs will be
adjusted annually. |
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Type of |
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Incentive |
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Description |
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United States
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California
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Rebate |
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Under the California Solar Initiative, or CSI, approved by the
California Public Utilities Commission in January 2006, solar
system operators receive a rebate of $2.50/Watt of solar
generation capacity installed, for systems up to a maximum of
1MW. The 2006 funding level for solar rebates is
$340 million, with 2007-2011 CPUC program funds approved
for a total of $2.9 billion. Solar rebate levels are
scheduled to decline by approximately 10% annually under the CSI
program starting in 2007. On August 24, 2006, the
California Public Utilities Commission refined the details of
the CSI program to provide for monthly incentives for solar
systems greater than 100kW and up-front incentives for solar
systems less than 100kW. It also determined that one-third of
the CSI funds will be reserved for residential solar
installations. |
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New Jersey
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Rebate; Grants; Low Interest Loans; Renewable Portfolio Standard |
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The New Jersey Clean Energy Program, or NJCEP, targets 90MW of
installed solar generation capacity by 2009 and provides rebates
ranging from $3.80/Watt to $2.00/Watt to private sector
operators of solar systems in 2006 based on the size of the
system, up to a maximum of 700kW, and is dependent upon
availability of program funds. Under the Renewable Energy
Project Grants & Financing Program, a 20% grant and
long term low interest project financing are offered for
projects up to 1MW. The NJCEP program also provides a means for
Solar Renewable Energy Certificates to be created, verified and
sold to electric suppliers who are required to invest in solar
energy purchase under New Jerseys Renewable Portfolio
Standard. |
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Nevada
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Rebate; Renewable Portfolio Standard |
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The Nevada Solar Generations Program provides rebates of
$3.00/Watt for solar systems up to 30kW in size for a maximum
solar capacity of 3MW in 2006. The 2005 Nevada Legislature
increased Nevadas Renewable Portfolio Standard to 20% by
2015, and for 2006 not less than 6% of the electricity generated
by regulated utilities must come from renewable sources or
energy efficiency measures. Of the Renewable Portfolio Standard
total, not less than 5% must come from solar renewable energy
systems. |
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Asia
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South Korea
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Feed-in tariff; Low Interest Loan; Rebate |
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Solar system operators receive a 15 year feed-in tariff of
716.40 KRW/kWh (approximately $0.74/kWh). The government of
South Korea has established a target of 1,300MW of installed
solar generation capacity by 2012. The government also offers
loans at a 3.50% floating interest rate with a five year grace
period and ten year repayment period with a special rebate of
2,100 KRW for the installation of a 3kW solar rooftop system. |
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Regulations and policies relating to electricity pricing and
interconnection also encourage distributive generation.
Photovoltaic systems generate most of their electricity during
the afternoon hours when the demand for and cost of electricity
is highest. As a result, electricity generated by photovoltaic
systems mostly competes with expensive peak hour electricity,
rather than the less expensive average price of electricity.
Modifications to the peak hour pricing policies of utilities,
such as to a flat rate, would require photovoltaic systems to
achieve lower prices in order to compete with the price of
electricity. In addition, interconnection policies often enable
the owner of a photovoltaic system to feed solar electricity
into the power grid without interconnection costs or standby
fees.
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Research and Development
We continue to devote a substantial amount of resources to
research and development with the objective of lowering the per
Watt cost of solar electricity generated by photovoltaic systems
using our solar modules to a level that competes on a
non-subsidized basis with the price of retail electricity in key
markets in the United States, Europe and Asia by 2010. To reduce
the per Watt cost of electricity generated by photovoltaic
systems using our solar modules, we focus our research and
development on the following areas:
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Increase the conversion efficiency of our solar
modules. We believe the most promising ways of
increasing the conversion efficiency of our solar modules are
maximizing the number of photons that reach the absorption layer
of the semiconductor material so they can be converted into
electrons, maximizing the number of electrons that reach the
surface of the cadmium telluride and minimizing the electrical
losses between the semiconductor layer and the back metal
conductor. We have already developed small-scale solar cells
using our technology with conversion efficiencies as high as
14.5%, compared to our modules average conversion
efficiency of approximately 9% achieved in full production in
the first nine months of 2006. |
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We believe that our ability to achieve higher module
efficiencies is primarily a function of transferring technology
that we have demonstrated in the laboratory and in pilot
production into high-throughput module production by making
incremental improvements to the solar module and the
manufacturing process. Our process development activities
encompass laboratory level research and development, device
modeling, process optimization and the qualification of process
improvements in high-throughput production. In the second half
of 2006, we plan to add equipment for further process
developments at our Perrysburg, Ohio facility. In addition, we
reserve a portion of the production capacity of our base plant
to conduct structured experiments related to our process
development. |
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System optimization. We also are working to
reduce the cost and optimize the effectiveness of the other
components in a photovoltaic system. We maintain a substantial
effort to collect and analyze actual field performance data from
photovoltaic systems that use our modules. We collect real
time data from internal test sites totaling approximately
10,000 modules installed in varying climates and applications.
We also monitor approximately 102,000 solar modules,
representing approximately 6MW of installed photovoltaic
systems, in use by the end-users that have purchased
photovoltaic systems using our modules. We use the data
collected from these sources to correlate field performance to
various manufacturing and laboratory level metrics, identify
opportunities for module and process improvement and improve the
performance of systems that use our modules. In addition, we use
this data to enhance predictive models and simulations for the
end-users. |
As of September 30, 2006, we had a total of 51 employees
working on these and related process developmental activities.
We intend to qualify process and product improvements for full
production on our Ohio expansion production lines, and then
integrate them into our other production lines. Our scientists
and engineers will collaborate across all manufacturing plants
to drive improvement. We intend to implement, validate and
qualify such improvements at the Ohio expansion before we deploy
them to all of our production lines. We believe that this
systematic approach to research and development will provide
continuous improvements and ensure uniform adoption across our
production lines.
We maintain active collaborations with the National Renewable
Energy Laboratory, a division of the U.S. Department of
Energy, Brookhaven National Laboratory and several universities.
Since 2004, we have invested in excess of $8.3 million into
our research and development expenses and received
$2.3 million of grant funding during that time frame.
Intellectual Property
We rely primarily on a combination of patents, trademarks and
trade secrets, as well as employee and third party
confidentiality agreements to safeguard our intellectual
property. As of September 30, 2006, in the United States we
held 26 patents, which will expire at various times between 2007
and 2023, and had 15 patent applications pending. We also held
16 patents and had 37 patent applications pending in foreign
jurisdictions. Our patent applications, and any future patent
applications, might not result in a patent being issued with the
scope of the claims we seek, or at all, and any patents we may
receive may be challenged, invalidated or declared
unenforceable. We continually assess appropriate occasions for
seeking patent protection for those aspects of our technology,
designs and methodologies and processes that we believe provide
significant competitive advantages. A majority of our patents
relate to our vapor transport deposition process in which
semiconductor material is deposited on glass
66
substrates and our laser scribing process of transforming a
large semiconductor-coated plate into a series of interconnected
cells.
As of May 1, 2006, we held 2 trademarks, First
Solar and First Solar and Design, in the
United States. We have also registered our First Solar and
Design mark in China, Japan and the European Union, and
are seeking registration in India.
With respect to, among other things, proprietary know-how that
is not patentable and processes for which patents are difficult
to enforce, we rely on trade secret protection and
confidentiality agreements to safeguard our interests. We
believe that many elements of our photovoltaic manufacturing
process involve proprietary know-how, technology or data that
are not covered by patents or patent applications, including
technical processes, equipment designs, algorithms and
procedures. We have taken security measures to protect these
elements. All of our research and development personnel have
entered into confidentiality and proprietary information
agreements with us. These agreements address intellectual
property protection issues and require our employees to assign
to us all of the inventions, designs and technologies they
develop during the course of employment with us. We also require
our customers and business partners to enter into
confidentiality agreements before we disclose any sensitive
aspects of our solar cells, technology or business plans.
We have not been subject to any material intellectual property
claims.
Competition
The solar energy and renewable energy industries are both highly
competitive and continually evolving as participants strive to
distinguish themselves within their markets and compete within
the larger electric power industry. We believe that our main
sources of competition are crystalline silicon solar module
manufacturers, other thin film solar module manufacturers and
companies developing solar thermal and concentrated photovoltaic
technologies. Among photovoltaic module and cell manufacturers,
the principal methods of competition are price per Watt,
production capacity, conversion efficiency and reliability. We
believe that we compete favorably with respect to these factors.
At the end of 2005, the global photovoltaic industry consisted
of over 100 manufacturers of photovoltaic cells and solar
modules. Within the PV industry, we face competition from
crystalline silicon photovoltaic cell solar module
manufacturers, including BP Solar, Evergreen Solar, Kyocera,
Motech, Q-Cells,
Renewable Energy Corporation, Sanyo, Schott Solar, Sharp,
SolarWorld, Sunpower and Suntech. We also face competition from
thin film solar module manufacturers, including Antec, Kaneka,
Mitsubishi Heavy Industries, Shell Solar and United Solar. With
the completion of our Ohio expansion, we have an annual
manufacturing capacity of 75MW and are the largest thin film
manufacturer in the world. According to Photon International,
United Solar and Kaneka are the second and third largest thin
film manufacturers, with estimated 2006 manufacturing capacities
of 30MW and 29MW, respectively. Our current conversion
efficiency of approximately 9% also compares favorably to other
thin film manufacturers, according to estimates by
Sun & Wind Energy: Antec (6.9%); Kaneka (6.3%);
Mitsubishi Heavy Industries (6.3%); Shell Solar (9.3%); and
United Solar (6.3%). Finally, our solar module comes in one size
measuring 2ft x 4ft (60cm x 120cm). In
contrast, some of our thin film competitors, such as United
Solar, have developed solar products that are flexible and can
be tailored to a customers specifications.
In addition, we expect to compete with future entrants to the
photovoltaic industry that offer new technological solutions. We
may also face competition from semiconductor manufacturers and
semiconductor equipment manufacturers, or their customers,
several of which have already announced their intention to start
production of photovoltaic cells, solar modules or turnkey
production lines. Some of our competitors are larger, have
greater financial resources, larger production capacities and
greater brand name recognition than we do, and may, as a result,
be better positioned to adapt to changes in the industry or the
economy as a whole.
In addition to manufacturers of PV cells and solar modules, we
face competition from companies developing solar thermal and
concentrated PV technologies.
Environmental
Our operations include the use, handling, storage,
transportation, generation and disposal of hazardous materials.
We are subject to various federal, state, local and foreign laws
and regulations relating to the protection of the environment,
including those governing the discharge of pollutants into the
air and water, the use, management and disposal of hazardous
materials and wastes, occupational health and safety and the
cleanup of contaminated sites. Thus, we could incur substantial
costs, including cleanup costs, fines and civil or criminal
sanctions and costs
67
arising from third party property damage or personal injury
claims, as a result of violations of or liabilities under
environmental laws or non-compliance with environmental permits
required at our facilities. We believe we are currently in
substantial compliance with applicable environmental
requirements and do not expect to incur material capital
expenditures for environmental controls in this or the
succeeding fiscal year. However, future developments such as
more aggressive enforcement policies, the implementation of new,
more stringent laws and regulations or the discovery of unknown
environmental conditions may require expenditures that could
have a material adverse effect on our business, results of
operations or financial condition. See Risk
FactorsRisks Relating to Our BusinessEnvironmental
obligations and liabilities could have a substantial negative
impact on our financial condition, cash flows and
profitability.
Legal Proceedings
In the ordinary conduct of our business, we are subject to
periodic lawsuits, investigations and claims, including, but not
limited to, routine employment matters. Although we cannot
predict with certainty the ultimate resolution of lawsuits,
investigations and claims asserted against us, we do not believe
that any currently pending legal proceeding to which we are a
party will have a material adverse effect on our business,
results of operations, cash flows or financial condition.
Properties
Our corporate headquarters are located in Phoenix, Arizona,
where we occupy approximately 10,342 square feet under a
lease expiring on March 31, 2007. We also own an
approximately 431,700 square foot manufacturing facility in
Perrysburg, Ohio, which constitutes our base plant and Ohio
expansion. In February 2006, we purchased approximately
89,000 square meters of land in Frankfurt (Oder), Germany,
which will be the site of our future German manufacturing plant.
We also maintain small satellite offices in Mainz, Germany,
Berlin, Germany, Brussels, Belgium and Denver, Colorado.
Employees
On September 30, 2006, we had 634 employees, including
491 in manufacturing, 33 in research and development, 10 in
sales and marketing and 100 in general and administrative. Of
these employees, 21 are located in Phoenix, Arizona, 582 are
located in Perrysburg, Ohio, 14 are located in Mainz, Germany, 2
are located in Berlin, Germany, 2 are located in Brussels,
Belgium, 12 are located in Frankfurt (Oder), Germany and 1 is
located in Denver, Colorado. None of our employees are
represented by labor unions or covered by a collective
bargaining agreement. As we expand domestically and
internationally, however, we may encounter employees who desire
union representation. We believe that relations with our
employees are good.
68
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their ages and
positions upon the expected completion of this offering, are as
follows:
|
|
|
|
|
Name |
|
Age |
|
Position |
|
|
|
|
|
Michael J. Ahearn
|
|
49 |
|
President, Chief Executive Officer, Chairman |
George A. (Chip) Hambro
|
|
43 |
|
Chief Operating Officer |
Jens Meyerhoff
|
|
42 |
|
Chief Financial Officer |
Kenneth M. Schultz
|
|
43 |
|
Vice President, Sales & Marketing |
I. Paul Kacir
|
|
40 |
|
Vice President, General Counsel |
James F. Nolan
|
|
74 |
|
Director |
J. Thomas Presby
|
|
66 |
|
Director |
Bruce Sohn
|
|
45 |
|
Director |
Michael Sweeney
|
|
48 |
|
Director |
Michael J. Ahearn has served as the President, CEO and Chairman
of First Solar since August 2000. Since 1996, he has been
Partner and President of the equity investment firm, JWMA
(formerly True North Partners, L.L.C.), the majority stockholder
of First Solar. Prior to joining JWMA, Mr. Ahearn practiced
law as a partner in the firm of Gallagher & Kennedy. He
received both a B.A. in Finance and a J.D. from Arizona State
University.
George A. (Chip) Hambro joined First Solar in June
2001 as Vice President of Engineering, was named Vice President
and General Manager in February 2003 and assumed the role of
Chief Operating Officer in February 2005. Prior to joining First
Solar, he held the positions of Vice President of
Engineering & Business Development for Goodrich
Aerospace from May 1999 to June 2001 and Vice President of
Operations for ITT Industries from February 1997 to May 1999.
Mr. Hambro graduated from the University of California at
Berkeley with a B.A. in Physical Science (Applied Physics).
Jens Meyerhoff joined First Solar in May 2006 as Chief Financial
Officer. Prior to joining First Solar, Mr. Meyerhoff was
the Chief Financial Officer of Virage Logic Corporation, a
leader in embedded infrastructure intellectual property, from
January 2006 to May 2006. Mr. Meyerhoff was employed by
FormFactor, Inc., a manufacturer of advanced wafer probe cards,
as Chief Operating Officer from April 2004 to July 2005, Senior
Vice President of Operations from January 2003 to April 2004 and
Chief Financial Officer from August 2000 to March 2005. Prior to
joining FormFactor, Inc., Mr. Meyerhoff was the Chief
Financial Officer and Senior Vice President of Materials at
Siliconix Incorporated, a manufacturer of power and analog
semiconductor devices, from March 1998 to August 2000.
Mr. Meyerhoff holds a German Wirtschaftsinformatiker
degree, which is the equivalent of a Finance and Information
Technology degree, from Daimler Benzs Executive Training
Program.
Kenneth M. Schultz joined First Solar in November 2002 as Vice
President of Sales & Marketing. Prior to joining First
Solar, he was a Vice President at Intersil Corporation, a high
performance analog semiconductor company, where he was
responsible for commercializing various communications
technologies, from October 2000 to June 2002. Mr. Schultz
was Vice President and General Manager at SiCOM, Inc. prior to
the acquisition of SiCOM by Intersil Corporation in 2000. He
holds a B.S. in electrical engineering from the University of
Pittsburgh and received his M.B.A. degree from Robert Morris
University.
I. Paul Kacir joined First Solar in October 2006 as Vice
President, General Counsel. Prior to joining First Solar,
Mr. Kacir was a partner with the law firm of Gowling
Lafleur Hender LLP in 2006. From 2000 to 2005, Mr. Kacir
was general counsel for Creo Inc., a manufacturer of digital
pre-press equipment. Before joining Creo, Mr. Kacir
practiced with Lang Michener Lawrence and Shaw. Mr. Kacir
holds a B.A. in economics from the University of Western
Ontario, an L.L.B. (equivalent to a J.D. in the U.S.) from the
University of New Brunswick and his M.B.A. from the University
of British Columbia.
James F. Nolan was elected a director of First Solar in February
2003. Mr. Nolan served as the Vice President of Operations
with Solar Cells, Inc., the predecessor to First Solar, and was
responsible for research, development and manufacturing
operations. He designed and built early prototype equipment for
First Solars pilot manufacturing line and led the team
that developed the process for producing large area thin film
cadmium telluride solar modules. Mr. Nolan has worked as a
part-time consultant for First Solar since November 2000.
Mr. Nolan has over 35 years of experience in physics,
engineering, research and development, manufacturing and process
design with companies such as Westinghouse, Owens Illinois,
Glasstech and Photonics Systems. Mr. Nolan holds more
69
than 10 patents in areas of flat panel electronic displays and
photovoltaic devices and processes. Mr. Nolan earned his
B.S. in Physics from the University of Scranton (Pennsylvania)
and a doctorate in Physics from the University of Pittsburgh.
J. Thomas Presby was elected a director of First Solar in August
2006. Mr. Presby retired in 2002 from a
30-year career with
Deloitte Touche Tohmatsu. At Deloitte, Mr. Presby held
numerous positions in the United States and abroad, including
the posts of Deputy Chairman and Chief Operating Officer.
Mr. Presby serves as a director, the audit committee chair
and a member of the compensation committee of American Eagle
Outfitters, Inc. and as a director, the audit committee chair
and a member of the governance committee of World Fuel Services,
Inc. Mr. Presby also serves as a director and the auditor
committee chair of AMVESCAP Plc, Tiffany & Co. and TurboChef
Technologies, Inc. Mr. Presby is a Certified Public
Accountant. Mr. Presby is a graduate of Rutgers University
and holds a masters degree in Industrial Administration from
Carnegie Mellon University.
Bruce Sohn was elected a director of First Solar in July 2003.
Mr. Sohn held the position Program Manager for Intel
Corporation from June 1999 to October 2001 and has held the
position of Fab 11 Plant Manager for Intel Corporation since
October 2001. Mr. Sohn serves on the boards of the
International Symposium on Semiconductor Manufacturing, the
University of Texas Pan Am Engineering School, the Texas
Christian University MJ Neeley Business School and the New
Mexico Museum of Natural History and is a member of the
IEEE-Electron Devices Society Manufacturing Technology
Committee. He is a guest lecturer at several universities,
including Massachusetts Institute of Technology and Stanford
University. Mr. Sohn holds a degree in Materials
Science & Engineering from the Massachusetts Institute
of Technology.
Michael Sweeney was elected a director of First Solar in July
2003. Mr. Sweeney joined Goldner Hawn Johnson &
Morrison (GHJM) as a Managing Director in 2000 and was
elected Managing Partner in November 2001. He had previously
served as President of Starbucks Coffee Company (UK) Ltd.
in London and held various operating management and corporate
finance roles. After starting his career with Merrill Lynch in
New York and Phoenix, he built and sold an investment banking
boutique. Subsequently, Mr. Sweeney developed and sold
franchise companies in the Blockbuster and Papa Johns
systems. Mr. Sweeney serves on the boards of GHJM portfolio
companies, including Allen-Edmonds Shoe Corporation, Transport
Corporation of America, Inc. and Vitality Foodservice, Inc.
Mr. Sweeney graduated from Swarthmore College.
Board Committees
Our board of directors is currently composed of
five directors. We plan to add two independent members
within one year of the offering. After giving effect to these
additions, we expect our board of directors to consist of seven
members.
Our board of directors is not currently classified, nor will it
be immediately after the consummation of the offering.
Upon the consummation of this offering, the standing committees
of our board of directors will consist of an audit committee and
a compensation committee.
Audit Committee
The audit committee will oversee our financial reporting process
on behalf of the board of directors and report to the board of
directors the results of these activities, including the systems
of internal controls established by management and the board of
directors, our audit and compliance process and financial
reporting. The audit committee, among other duties, will engage
the independent registered public accounting firm, pre-approve
all audit and non-audit services provided by the independent
registered public accounting firm, review with the independent
registered public accounting firm the plans and results of the
audit engagement, consider the compatibility of any non-audit
services provided by the independent registered public
accounting firm with the independence of such independent
registered public accounting firm and review the independence of
the independent registered public accounting firm.
J. Thomas Presby (Chairman) and Bruce Sohn serve on our
audit committee. The board of directors has determined that
audit committee members must meet the independence standards for
audit committees of companies listed on The Nasdaq Global Market.
Each member of the audit committee meets the standards for
financial knowledge for companies listed on The Nasdaq Global
Market. In addition, the board of directors has determined that
J. Thomas Presby is qualified as an audit committee
financial expert within the meaning of SEC regulations.
70
Nominating and Governance Committee
We intend to establish a nominating and governance committee
after the consummation of this offering. The nominating and
governance committee will be responsible for identifying and
recommending director nominees, recommending directors to serve
on our various committees, implementing our corporate governance
guidelines and developing self-evaluation methodology to be used
by our board of directors and its committees to assess board
effectiveness.
Compensation Committee
The compensation committee will review and recommend
compensation and benefit plans for our officers and directors,
including non-employee directors, review the base salary and
incentive compensation for each executive officer, review and
approve corporate goals and objectives relevant to our
CEOs compensation, administer our incentive compensation
program for key executive and management employees and review
and approve employee benefit plans. Michael Sweeney (Chairman)
serves on our compensation committee.
Compensation Committee Interlocks and Insider
Participation
None of the members that will constitute our compensation
committee will have been an executive officer or employee of our
company during our last completed fiscal year. During our last
completed fiscal year, none of our executive officers served as
a member of the compensation committee of any entity that has
one or more executive officers serving on our compensation
committee.
Code of Business Conduct and Ethics
We have a Code of Business Conduct and Ethics that applies to
all employees, including our Chief Executive Officer and senior
financial officers. These standards are designed to deter
wrongdoing and to promote the honest and ethical conduct of all
employees. Excerpts from the Code of Business Conduct and
Ethics, which address the subject areas covered by the
SECs rules, will be posted on our website:
www.firstsolar.com under Investor Relations. Any
substantive amendment to, or waiver from, any provision of the
Code of Business Conduct and Ethics with respect to any director
or executive officer will be posted on this website. The
information contained on our website is not part of this
prospectus.
Director Compensation
Directors receive annual compensation of a $50,000 cash retainer
(payable quarterly) and $50,000 stock grant (payable quarterly).
The Chairman of the Audit Committee also receives an annual
$25,000 stock grant (payable quarterly). We also reimburse all
directors for reasonable and necessary expenses they incur in
performing their duties as directors of our company. Directors
who are officers or employees of our company do not receive any
additional compensation for serving as directors, except for
reimbursement of their expenses in fulfilling their duties.
71
Executive Compensation
The following table sets forth information with respect to
compensation earned by our Chief Executive Officer and our other
executive officers for the period indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term | |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation | |
|
|
|
|
|
|
|
|
|
|
|
|
Awards | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
Annual Compensation | |
|
Other | |
|
Securities | |
|
|
|
|
| |
|
Annual | |
|
Underlying | |
|
All Other | |
Name and Principal Position |
|
Year | |
|
Salary ($) | |
|
Bonus ($) | |
|
Compensation ($) | |
|
Options (#) | |
|
Compensation ($) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Michael J. Ahearn
|
|
|
2005 |
|
|
|
400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President, Chief Executive Officer, Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George A. (Chip) Hambro
|
|
|
2005 |
|
|
|
275,367 |
|
|
|
35,000 |
|
|
|
|
|
|
|
48,500 |
|
|
|
|
|
|
Chief Operating Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert H. Williams(1)
|
|
|
2005 |
|
|
|
201,058 |
|
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth M. Schultz
|
|
|
2005 |
|
|
|
195,266 |
|
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President, Sales & Marketing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Robert H. Williams served as our Chief Financial Officer
from January 2005 through December 2005. |
Option/ SAR Grants in the Last Completed Fiscal Year
The following table sets forth information regarding grants of
options to purchase shares of our common stock to our named
executive officers during the fiscal year ended
December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Grants | |
|
|
| |
|
|
Number of | |
|
Percent of Total | |
|
|
|
|
Securities | |
|
Options | |
|
|
|
|
Underlying | |
|
Granted to | |
|
Exercise | |
|
|
|
Grant Date | |
|
|
Options | |
|
Employees in | |
|
Price | |
|
Expiration | |
|
Present | |
Name |
|
Granted | |
|
Fiscal Year | |
|
($/Share) | |
|
Date | |
|
Value(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Michael J. Ahearn
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George A. (Chip) Hambro
|
|
|
48,500 |
|
|
|
1.8 |
% |
|
$ |
4.54 |
|
|
|
12/15/2015 |
|
|
|
$739,100 |
|
Robert H. Williams(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth M. Schultz
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Values per option, calculated using the Black-Scholes-Merton
closed-form option valuation model, using an expected volatility
of 80%, risk free interest rates ranging from 4.36% to 4.38%,
times to exercise ranging from 5.5 to 7.0 years and a 0.00%
dividend yield. |
|
(2) |
Robert H. Williams served as our Chief Financial Officer from
January 2005 through December 2005. |
72
Fiscal Year-End Option Values
The following table provides information concerning exercisable
and unexercisable options held by our named executive officers
for the year ended December 31, 2005. There were no option
exercises by the named executive officers during the year ended
December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities | |
|
Value of Unexercised | |
|
|
Underlying Unexercised | |
|
In-the-Money Options | |
|
|
Options at Fiscal Year-End | |
|
at Fiscal Year-End | |
|
|
| |
|
| |
Name |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable(1) | |
|
Unexercisable(1) | |
|
|
| |
|
| |
|
| |
|
| |
Michael J. Ahearn
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George A. (Chip) Hambro
|
|
|
729,440 |
|
|
|
230,860 |
|
|
$ |
13,084,800 |
|
|
$ |
4,021,200 |
|
Robert H. Williams(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth M. Schultz
|
|
|
547,080 |
|
|
|
364,720 |
|
|
$ |
9,813,600 |
|
|
$ |
6,542,400 |
|
|
|
(1) |
Calculated by determining the difference between the fair market
value of $20.00 per share (the offering price set forth on
the cover page of this prospectus) of our common stock
underlying the options and the exercise prices of the options
held by each of the named executive officers in the Summary
Compensation Table above. |
|
(2) |
Robert H. Williams served as our Chief Financial Officer from
January 2005 through December 2005. |
2003 Unit Option Plan
First Solar adopted the 2003 Unit Option Plan (which we refer to
as the 2003 Unit Option Plan or, in this section,
the Plan) as an additional means to attract,
motivate, retain and reward directors, officers, employees and
other eligible persons through the grant of options for high
levels of individual performance and the improved financial
performance of First Solar. In connection with our conversion
from a limited liability company to a corporation on
February 22, 2006, we converted each outstanding option to
purchase one limited liability membership unit into an option to
purchase one share of our common stock, in each case, at the
same exercise price and subject to the other terms and
conditions of such outstanding option. These equity-based awards
are also intended to further align the interests of award
recipients and First Solars stockholders.
A total of 6,847,060 shares of First Solars common
stock is available for awards granted under the Plan. At
September 30, 2006, there were options to purchase
5,093,780 shares of our common stock outstanding under the
Plan at a weighted average exercise price of $3.11 per
share, including options held by Messrs. Hambro and Schultz.
The Plan is administered by a committee of our Board (the
Committee), which is authorized to, among other
things, select the officers and other employees who will receive
grants and determine the exercise price and vesting schedule of
the options.
Upon the occurrence of a change of control (as defined in the
Plan) or dissolution or liquidation of First Solar, the
Committee may, subject to the terms and conditions of the Plan,
(i) substitute options awarded under the Plan for options
to purchase the appropriate common stock of the entity surviving
such merger or consolidation; (ii) exchange options for
shares for stock of the surviving entity with a fair market
value equal to the excess of the merger consideration
attributable to such options over the exercise price; or
(iii) declare and provide written notice to each optionee
15 days in advance of such event that each outstanding option
previously granted will be cancelled at the time of the event.
In the event of cancellation, the Committee may, but will not be
obligated to, cause cash payment to be made to such optionees
within fifteen days after the event giving rise to such
cancellation.
In the event of any reorganization merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend,
stock split, combination or exchange of shares, rights offering,
extraordinary dividend or divestiture (including a spin-off) or
any other change in the corporate structure or capitalization of
First Solar, the Committee (or if the Company does not survive
such transaction, a comparable committee of the board of
managers or directors of the surviving company) may, but will
not be obligated to, without the consent of any holder of an
option, make such adjustment as it determines in its discretion
to be appropriate as to (i) the number and kind of
securities subject to the Plan and (ii) the number and kind
of securities issuable upon exercise of outstanding options and
the exercise price of such options.
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Upon the termination of an option holders employment, all
unvested options will immediately terminate and vested options
will generally remain exercisable for a period of 180 days
after the date of termination.
The Board may at any time and for any reason amend, suspend or
terminate the Plan; provided, however, that no amendment to the
Plan may, without the consent of the holder of the option,
adversely alter or impair any option previously granted under
the Plan. However, the grant of any option under the Plan does
not affect in any way the right or power of First Solar to make
adjustments, reclassifications, reorganizations, or changes to
its capital structure.
The Plan will remain in effect until the latest of: (i) the
time that such shares subject to it are distributed;
(ii) the Plan is terminated by our Board; and
(iii) December 1, 2013.
Options granted under the Plan may not be transferred, except in
certain limited circumstances.
2006 Omnibus Incentive Compensation Plan
We adopted our 2006 Omnibus Incentive Compensation Plan, or the
2006 Plan, in October 2006. The purpose of the 2006 Plan is to
promote our interests and the interests of our stockholders by
(i) attracting and retaining exceptional directors,
officers, employees and consultants (including prospective
directors, officers, employees and consultants) and
(ii) enabling such individuals to participate in our
long-term growth and financial success.
Types of Awards. The 2006 Plan provides for the grant of
options intended to qualify as incentive stock options, or ISOs,
under Section 422 of the Code, nonqualified stock options,
or NSOs, stock appreciation rights, or SARs, restricted share
awards, restricted stock units, or RSUs, performance units, cash
incentive awards and other equity-based or equity-related awards.
Plan Administration. The 2006 Plan is administered by the
compensation committee of our board of directors or such other
committee as our board may designate to administer the 2006
Plan. Subject to the terms of the 2006 Plan and applicable law,
the committee has sole authority to administer the 2006 Plan,
including, but not limited to, the authority to
(1) designate plan participants, (2) determine the
type or types of awards to be granted to a participant,
(3) determine the number of shares of our common stock to
be covered by, or with respect to which payments, rights or
other matters are to be calculated in connection with, awards,
(4) determine the terms and conditions of awards,
(5) determine the vesting schedules of awards and, if
certain performance criteria must be attained in order for an
award to vest or be settled or paid, establish such performance
criteria and certify whether, and to what extent, such
performance criteria have been attained, (6) determine
whether, to what extent and under what circumstances awards may
be settled or exercised in cash, shares of our common stock,
other securities, other awards or other property, or cancelled,
forfeited or suspended and the method or methods by which awards
may be settled, exercised, cancelled, forfeited or suspended,
(7) determine whether, to what extent and under what
circumstances cash, shares of our common stock, other
securities, other awards, other property and other amounts
payable with respect to an award will be deferred either
automatically or at the election of the holder thereof or of the
committee, (8) interpret, administer, reconcile any
inconsistency in, correct any default in and supply any omission
in, the 2006 Plan and any instrument or agreement relating to,
or award made under, the 2006 Plan, (9) establish, amend,
suspend or waive such rules and regulations and appoint such
agents as it shall deem appropriate for the proper
administration of the 2006 Plan, (10) accelerate the
vesting or exercisability of, payment for or lapse of
restrictions on, awards, (11) amend an outstanding award or
grant a replacement award for an award previously granted under
the 2006 Plan if, in its sole discretion, the committee
determines that the tax consequences of such award to us or the
participant differ from those consequences that were expected to
occur on the date the award was granted or that clarifications
or interpretations of, or changes to, tax law or regulations
permit awards to be granted that have more favorable tax
consequences than initially anticipated and (12) make any
other determination and take any other action that the committee
deems necessary or desirable for the administration of the 2006
Plan.
Shares Available For Awards. Subject to adjustment for
changes in capitalization and giving effect to our anticipated
stock split, the aggregate number of shares of our common stock
that may be delivered pursuant to awards granted under the 2006
Plan is 5,820,000, of which the maximum number of shares that
may be delivered pursuant to ISOs granted under the 2006 Plan is
5,820,000 and the maximum number of shares that may be
delivered as restricted share awards under the 2006 Plan is
2,910,000. If an award granted under the 2006 Plan is forfeited,
or otherwise expires, terminates or is cancelled without the
delivery of shares, then the shares covered by the forfeited,
expired, terminated or cancelled award will again be available
to be delivered pursuant to awards under the 2006 Plan. If
shares of the Company are surrendered or tendered to the Company
in payment of the exercise price of an award or any taxes
required to be withheld in respect of an award, the maximum
number of shares of our common stock with respect to which
awards may be granted to any participant in the 2006 Plan in any
fiscal year is 679,000. The maximum aggregate amount of cash and
other property (valued at fair market value) that may be paid or
delivered pursuant to awards under the 2006 Plan to any
participant in any fiscal year is $20.0 million.
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In the event of any extraordinary dividend or other
extraordinary distribution, recapitalization, stock split,
reverse stock split,
split-up or spin-off
affecting the shares of our common stock, the committee will
make adjustments and other substitutions to awards under the
2006 Plan in order to preserve the value of the awards. In the
event of any reorganization, merger, consolidation, combination,
repurchase or exchange of shares of the Company or other similar
corporate transactions, the committee in its discretion may make
such adjustments and other substitutions to the 2006 Plan and
awards under the 2006 Plan as it deems equitable or desirable in
its sole discretion.
The committee may grant awards in assumption of, or in
substitution for, outstanding awards previously granted by us or
any of our affiliates or a company that we acquire or with which
we combine. Any shares issued by us through the assumption of or
substitution for outstanding awards granted by a company that we
acquire will not reduce the aggregate number of shares of our
common stock available for awards under the 2006 Plan, except
that awards issued in substitution for ISOs will reduce the
number of shares of our common stock available for ISOs under
the 2006 Plan.
Any shares of our common stock issued under the 2006 Plan may
consist, in whole or in part, of authorized and unissued shares
of our common stock or of treasury shares of our common stock.
Eligible Participants. Any of our or our affiliates
directors, officers, employees or consultants (including any
prospective directors, officers, employees or consultants) is
eligible to participate in the 2006 Plan.
Stock Options. The committee may grant both ISOs and NSOs
under the 2006 Plan. Except as otherwise determined by the
committee in an award agreement, the exercise price for options
cannot be less than the fair market value (as defined in the
2006 Plan) of our common stock on the grant date. In the case of
ISOs granted to an employee who, at the time of the grant of
such option, owns stock representing more than 10% of the voting
power of all classes of our stock or the stock of any of our
affiliates, the exercise price cannot be less than 110% of the
fair market value of a share of our common stock on the grant
date. All options granted under the 2006 Plan will be NSOs
unless the applicable award agreement expressly states that the
option is intended to be an ISO. All terms and conditions of all
grants of ISOs will be subject to and comply with
Section 422 of the Code and the regulations promulgated
thereunder. All ISOs and NSOs are intended to qualify as
performance-based compensation under
Section 162(m) of the Code.
Subject to the applicable award agreement, options will vest and
become exercisable with respect to one-fourth of the shares of
our common stock subject to such options on each of the first
four anniversaries of the grant date. Except as otherwise set
forth in the applicable award agreement, each option will expire
upon the earlier of (i) the tenth anniversary of the date
the option is granted and (ii) either
(x) 180 days after the participant who is holding the
option ceases to be a director, officer, employee or consultant
of us or one of our affiliates for any reason other than the
participants death or (y) six months after the
date the participant who is holding the option ceases to be a
director, officer, employee or consultant of us or one of our
affiliates by reason of the participants death. The
exercise price may be paid with cash (or its equivalent) or, in
the sole discretion of the committee, with previously acquired
shares of our common stock or through delivery of irrevocable
instructions to a broker to sell our common stock otherwise
deliverable upon the exercise of the option (provided that there
is a public market for our common stock at such time), or a
combination of any of the foregoing, provided that the combined
value of all cash and cash equivalents and the fair market value
of any such shares so tendered to us as of the date of such
tender is at least equal to such aggregate exercise price and
the amount of any federal, state, local or foreign income or
employment taxes required to be withheld.
Stock Appreciation Rights. The committee may grant SARs
under the 2006 Plan either alone or in tandem with, or in
addition to, any other award permitted to be granted under the
2006 Plan. SARs granted in tandem with, or in addition to, an
award may be granted either at the same time as the award or at
a later time. Subject to the applicable award agreement, the
exercise price of each share of our common stock covered by a
SAR cannot be less than the fair market value of such share on
the grant date. Upon exercise of a SAR, the holder will receive
cash, shares of our common stock, other securities, other
awards, other property or a combination of any of the foregoing,
as determined by the committee, equal in value to the excess
over the exercise price, if any, of the fair market value of the
common stock subject to the SAR at the exercise date. All SARs
are intended to qualify as performance-based
compensation under Section 162(m) of the Code.
Subject to the provisions of the 2006 Plan and the applicable
award agreement, the committee will determine, at or after the
grant of a SAR, the vesting criteria, term, methods of exercise,
methods and form of settlement and any other terms and
conditions of any SAR.
Restricted Shares and Restricted Stock Units. Subject to
the provisions of the 2006 Plan, the committee may grant
restricted shares and RSUs. Restricted shares and RSUs may not
be sold, assigned, transferred, pledged or otherwise encumbered
except as provided in the 2006 Plan or the applicable award
agreement, except that the committee may determine that
restricted shares and RSUs may be transferred by the
participant. Upon the grant
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of a restricted share, a certificate will be issued and
registered in the name of the participant and deposited by the
participant, together with a stock power endorsed in blank, with
us or a custodian designated by the committee or us. Upon the
lapse of the restrictions applicable to such restricted share,
we or the custodian, as applicable, will deliver such
certificate to the participant or his or her legal
representative.
An RSU will be granted with respect to one share of our common
stock or have a value equal to the fair market value of one such
share. Upon the lapse of restrictions applicable to an RSU, the
RSU may be paid in cash, shares of our common stock, other
securities, other awards or other property, as determined by the
committee, or in accordance with the applicable award agreement.
The committee may, on such terms and conditions as it may
determine, provide a participant who holds restricted shares or
RSUs with dividends or dividend equivalents, payable in cash,
shares of our common stock, other securities, other awards or
other property. If a restricted share or RSU is intended to
qualify as performance-based compensation under
Section 162(m) of the Code, the requirements described
below in Performance Compensation Awards
must be satisfied.
Performance Units. Subject to the provisions of the 2006
Plan, the committee may grant performance units to participants.
Performance units are awards with an initial value established
by the committee (or that is determined by reference to a
valuation formula specified by the committee) at the time of the
grant. In its discretion, the committee will set performance
goals that, depending on the extent to which they are met during
a specified performance period, will determine the number and/or
value of performance units that will be paid out to the
participant. The committee, in its sole discretion, may pay
earned performance units in the form of cash, shares of our
common stock or any combination thereof that has an aggregate
fair market value equal to the value of the earned performance
units at the close of the applicable performance period. The
determination of the committee with respect to the form and
timing of payout of performance units will be set forth in the
applicable award agreement. The committee may, on such terms and
conditions as it may determine, provide a participant who holds
performance units with dividends or dividend equivalents,
payable in cash, shares of our common stock, other securities,
other awards or other property. If a performance unit is
intended to qualify as performance-based
compensation under Section 162(m) of the Code, the
requirements below described in Performance
Compensation Awards must be satisfied.
Cash Incentive Awards. Subject to the provisions of the
2006 Plan, the committee may grant cash incentive awards payable
upon the attainment of performance goals. If a cash incentive
award is intended to qualify as performance-based
compensation under Section 162(m) of the Code, the
requirements described below in Performance
Compensation Awards must be satisfied.
Other Stock-Based Awards. Subject to the provisions of
the 2006 Plan, the committee may grant to participants other
equity-based or equity-related compensation awards, including
vested stock. The committee may determine the amounts and terms
and conditions of any such awards provided that they comply with
applicable laws.
Performance Compensation Awards. The committee may
designate any award granted under the 2006 Plan (other than
ISOs, NSOs and SARs) as a performance compensation award in
order to qualify such award as performance-based
compensation under Section 162(m) of the Code. The
committee will, in its sole discretion, designate within the
first 90 days of a performance period (or, if shorter,
within the maximum period allowed under Section 162(m) of the
Code) the participants who will be eligible to receive
performance compensation awards in respect of such performance
period. The committee will also determine the length of
performance periods, the types of awards to be issued, the
performance criteria that will be used to establish the
performance goals, the kinds and levels of performance goals and
any performance formula used to determine whether a performance
compensation award has been earned for the performance period.
The performance criteria will be limited to the following:
(1) net income before or after taxes, (2) earnings
before or after taxes (including earnings before interest,
taxes, depreciation and amortization), (3) operating
income, (4) earnings per share, (5) return on
stockholders equity, (6) return on investment or
capital, (7) return on assets, (8) level or amount of
acquisitions, (9) share price, (10) profitability and
profit margins, (11) market share (in the aggregate or by
segment), (12) revenues or sales (based on units or
dollars), (13) costs, (14) cash flow,
(15) working capital, (16) cost per Watt,
(17) megawatts produced, (18) Watts per module,
(19) conversion efficiency, (20) modules produced,
(21) produced production throughput rates, (22) bill
of material costs, (23) production yields,
(24) production expansion build and ramp times,
(25) module field performance, (26) average sales
price, (27) budgeted expenses (operating and capital),
(28) inventory turns and (29) accounts receivable
levels. These performance criteria may be applied on an absolute
basis and/ or be relative to one or more of our peer companies
or indices or any combination thereof. The performance goals and
periods may vary from participant to participant and from time
to time. To the extent required under Section 162(m) of the
Code, the committee will, within the first
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90 days of the applicable performance period (or, if
shorter, within the maximum period allowed under Section162(m)
of the Code), define in an objective manner the method of
calculating the performance criteria it selects to use for the
performance period.
The committee may adjust or modify the calculation of
performance goals for a performance period in the event of, in
anticipation of, or in recognition of, any unusual or
extraordinary corporate item, transaction, event or development
or any other unusual or nonrecurring events affecting us, any of
our affiliates, subsidiaries, divisions or operating units (to
the extent applicable to such performance goal) or our financial
statements or the financial statements of any of our affiliates,
or changes in applicable rules, rulings, regulations or other
requirements of any governmental body or securities exchange,
accounting principles, law or business conditions, so long as
that adjustment or modification does not cause the performance
compensation award to fail to qualify as performance-based
compensation under Section162(m) of the Code. In order to
be eligible for payment in respect of a performance compensation
award for a particular performance period, participants must be
employed by us on the last day of the performance period (unless
otherwise determined in the discretion of the compensation
committee), the performance goals for such period must be
satisfied and certified by the committee and the performance
formula must determine that all or some portion of the
performance compensation award has been earned for such period.
The committee may, in its sole discretion, reduce or eliminate
the amount of a performance compensation award earned in a
particular performance period, even if applicable performance
goals have been attained. In no event will any discretionary
authority granted to the committee under the 2006 Plan be used
to grant or provide payment in respect of performance
compensation awards for which performance goals have not been
attained, increase a performance compensation award for any
participant at any time after the first 90 days of the
performance period (or, if shorter, within the maximum period
allowed under Section 162(m) of the Code) or increase a
performance compensation award above the maximum amount payable
under the underlying award.
Amendment and Termination of the 2006 Plan. Subject to
any applicable law or government regulation, to any requirement
that must be satisfied if the 2006 Plan is intended to be a
stockholder approved plan for purposes of Section 162(m) of
the Code and to the rules of NASDAQ, the 2006 Plan may be
amended, modified or terminated by our Board of Directors
without the approval of our stockholders, except that
stockholder approval will be required for any amendment that
would (i) increase the maximum number of shares of our
common stock available for awards under the 2006 Plan,
(ii) increase the maximum number of shares of our common
stock that may be delivered pursuant to ISOs granted under the
2006 Plan or (iii) change the class of employees or other
individuals eligible to participate in the 2006 Plan. No
modification, amendment or termination of the 2006 Plan that is
adverse to a participant will be effective without the consent
of the affected participant, unless otherwise provided by the
committee in the applicable award agreement.
The committee may waive any conditions or rights under, amend
any terms of, or alter, suspend, discontinue, cancel or
terminate any award previously granted, prospectively or
retroactively. However, unless otherwise provided by the
committee in the applicable award agreement or in the 2006 Plan,
any such waiver, amendment, alteration, suspension,
discontinuance, cancellation or termination that would
materially and adversely impair the rights of any participant to
any award previously granted will not to that extent be
effective without the consent of the affected participant.
The committee is authorized to make adjustments in the terms and
conditions of awards in the event of any unusual or nonrecurring
corporate event (including the occurrence of a change of control
of First Solar) affecting us, any of our affiliates or our
financial statements or the financial statements of any of our
affiliates, or of changes in applicable rules, rulings,
regulations or other requirements of any governmental body or
securities exchange, accounting principles or law whenever the
committee, in its discretion, determines that those adjustments
are appropriate or desirable, including providing for the
substitution or assumption of awards, accelerating the
exercisability of, lapse of restrictions on, or termination of,
awards or providing for a period of time for exercise prior to
the occurrence of such event and, in its discretion, the
committee may provide for a cash payment to the holder of an
award in consideration for the cancellation of such award.
Change of Control. The 2006 Plan provides that, unless
otherwise provided in an award agreement, in the event of a
change of control of First Solar, unless provision is made in
connection with the change of control for assumption of, or
substitution for, awards previously granted:
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any options and SARs outstanding as of the date the change of
control is determined to have occurred will become fully
exercisable and vested, as of immediately prior to the change of
control; |
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all performance units and cash incentive awards will be paid out
as if the date of the change of control were the last day of the
applicable performance period and target performance
levels had been attained; and |
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all other outstanding awards will automatically be deemed
exercisable or vested and all restrictions and forfeiture
provisions related thereto will lapse as of immediately prior to
such change of control. |
Unless otherwise provided pursuant to an award agreement, a
change of control is defined to mean any of the following
events, generally:
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during any period of twenty-four consecutive months, a change in
the composition of a majority of our board of directors that is
not supported by a majority of the incumbent board of directors; |
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the consummation of a merger, reorganization or consolidation or
sale or other disposition of all or substantially all of our
assets; |
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the approval by our stockholders of a plan of our complete
liquidation or dissolution; or |
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an acquisition by any individual, entity or group of beneficial
ownership of a percentage of the combined voting power of our
then outstanding voting securities entitled to vote generally in
the election of directors that is equal to or greater than
(a) 20% and (b) the percentage of the combined voting
power of the outstanding voting securities owned by certain
specified shareholders, including our current major shareholder,
the Estate of John T. Walton, its beneficiaries, Michael Ahearn
and his family at the time of such acquisition. |
Term of the 2006 Plan. No award may be granted under the
2006 Plan after the tenth anniversary of the date the 2006 Plan
was approved by our stockholders.
IPO Option Grants
Upon consummation of this offering, we expect to grant options
under the 2006 Plan to certain of our executive officers and
employees. Options to purchase up to 1,500,000 shares of
common stock at the public offering price will be granted to our
executive officers, directors and employees. Of this total,
Mr. Meyerhoff will receive options to purchase
187,500 shares of common stock, and Mr. Kacir will
receive options to purchase 82,450 shares of common
stock, in each case, at the public offering price. The options
to be granted to Messrs. Meyerhoff and Kacir will have a term of
seven years and a per share exercise price equal to the public
offering price of our common stock. The options granted to
Messrs. Meyerhoff and Kacir will generally vest with
respect to 20% of the underlying shares on the first anniversary
of their respective dates of hire, and for the 48 month
period thereafter, will vest ratably in equal monthly
installments, subject to their continued employment with us. If
Messrs. Meyerhoff and Kacir are terminated without cause,
their options will continue to vest for 12 months after
such termination. After such 12-month period, their vested
options will generally be exercisable for a 90 day period.
The options granted to Messrs. Meyerhoff and Kacir will
also vest upon termination of their employment, under certain
circumstances. See Change in Control Severance
Agreements below. The stock options will be subject to the
other terms and conditions of our 2006 Plan, which is described
above.
Employment/Severance Agreements
Michael J. Ahearn. On October 19, 2006, we entered
into an employment agreement with Mr. Michael J.
Ahearn, which was amended and restated on October 31, 2006.
Under the terms of his employment agreement, Mr. Ahearn is
entitled to an annual base salary of $450,000 (subject to annual
review) and standard health and vacation benefits.
Mr. Ahearn is also eligible to receive a discretionary
annual bonus. Our employment agreement with Mr. Ahearn
provides for a severance payment in the amount equal to one year
of his annual base salary, continued medical benefits for 12
months and continued vesting of equity awards for 12 months
after termination of employment (and the ability to exercise
vested equity awards for 90 days after such 12-month period) in
the event Mr. Ahearns employment is terminated
without cause. Mr. Ahearn is also subject to a separate
confidentiality agreement and a separate non-competition and
non-solicitation agreement, which provides that Mr. Ahearn
will not compete with the Company or solicit Company employees
for two years after termination of his employment.
George A. (Chip) Hambro. On May 30,
2001, we entered into an employment agreement with
Mr. George A. (Chip) Hambro. Under the terms of
his employment agreement, Mr. Hambro is entitled to an
annual base salary of $175,000 (subject to annual review) and
standard health and vacation benefits. In addition,
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Mr. Hambro holds 960,300 options to purchase First Solar
common shares pursuant to separate award agreements, which
provide that upon certain specified events, including a change
of control (as defined in the award agreement) and related
termination of employment, the shares issuable pursuant to such
options will be subject to a put option held by Mr. Hambro,
which would allow him to require the Company to repurchase such
shares at the imputed transaction value per unit. Effective
January 2, 2006, Mr. Hambros annual salary was
increased to $300,000. Mr. Hambro is also eligible to
receive an annual performance-based bonus equal to an amount
between 20% and 40% of his annual base salary. On
February 5, 2003, we amended our employment agreement with
Mr. Hambro to provide for a severance payment in the event
of termination without cause. Subject to certain conditions,
Mr. Hambro is entitled to severance pay in the amount of
his highest base salary for a period of 24 months following
the termination of his employment (less any amounts earned by
Mr. Hambro through self-employment or subsequent
employment) plus a lump sum payment of $300,000.
Subject to certain conditions, JWMA has agreed to guarantee
First Solars obligations to Mr. Hambro under the
employment agreement. The guarantee applies only to claims for
payment which arise and are asserted by December 31, 2007.
Under the terms of the employment agreement, Mr. Hambro has
agreed not to disclose any confidential information concerning
our business, including without limitation our confidential
designs and processes. In addition, Mr. Hambro has agreed
not to compete with us or solicit or hire any of our employees
during the three year period following the termination of his
employment.
Robert H. Williams. On November 30, 2005, the
Company entered into a termination letter agreement with
Mr. Robert H. Williams, whereby Mr. Williams
employment with First Solar terminated on December 31,
2005. Under the terms of the termination letter agreement,
Mr. Williams provided transition services as an independent
contractor from January 1, 2006 to February 28, 2006
for which the Company compensated him based on his base salary
prior to termination. In addition, the Company agreed to pay
Mr. Williams a lump sum payment of $205,000 by
February 28, 2006 and to continue to pay
Mr. Williams medical insurance through
August 31, 2006, provided he is not insured through another
program.
Kenneth M. Schultz. On November 1, 2002, we
entered into an employment agreement with Mr. Kenneth M.
Schultz. Under the terms of his employment contract,
Mr. Schultz is entitled to receive an annual base salary of
$175,000 (subject to annual review) and standard health and
vacation benefits. If Mr. Schultz elects to forego medical
benefits, his base salary will be increased an additional
$7,500. In addition, Mr. Schultz holds 911,800 options to
purchase First Solar common shares pursuant to a separate award
agreement, which provides that upon certain specified events,
including a change of control (as defined in the award
agreement) and related termination of employment, the shares
issuable pursuant to such options will be subject to a put
option held by Mr. Schultz, which would allow him to
require the Company to repurchase such shares at the imputed
transaction value per unit. Effective January 2, 2006,
Mr. Schultzs annual salary was increased to $240,000.
Mr. Schultz is also eligible for an annual
performance-based bonus. The employment agreement provides for a
severance payment in an amount equal to one year of his annual
base salary in the event Mr. Schultz is terminated for any
reason other than cause or if Mr. Schultz terminates his
employment for good reason.
Under the terms of the employment agreement, Mr. Schultz
has agreed not to disclose any confidential information
concerning our business, including without limitation our
confidential designs and processes. In addition,
Mr. Schultz has agreed not compete with us or solicit or
hire any of our employees during the period of one year
following the termination of his employment. If we default on
any severance payments owed to Mr. Schultz under the terms
of the agreement and fail to cure such default upon five days
written notice specifying such default, the obligation of
Mr. Schultz not to compete with us expires.
Jens Meyerhoff. On October 31, 2006, we entered into
an employment agreement with Mr. Jens Meyerhoff. Under the
terms of his employment agreement, Mr. Meyerhoff is
entitled to an annual base salary of $300,000 (subject to annual
review) and standard health and vacation benefits. In lieu of
standard health benefits, Mr. Meyerhoff may elect to
receive separate medical insurance benefits, with costs
reimbursed by us. Mr. Meyerhoff is also eligible to receive
an annual bonus of up to 50% of his annual base salary.
Mr. Meyerhoff also receives certain relocation benefits in
connection with his employment. Our employment agreement with
Mr. Meyerhoff provides for a severance payment in the
amount equal to 18 months of his annual base salary,
continued medical benefits for 18 months, certain relocation
benefits and continued vesting of equity awards for
12 months after termination of employment (and the ability
to exercise vested equity awards for 90 days after such
12-month period) in the event Mr. Meyerhoffs
employment is terminated without cause. Effective immediately
after this offering, we will grant Mr. Meyerhoff options to
purchase 187,500 shares of our common stock, exercisable at the
price set forth on the cover of this prospectus. The options
will vest with respect to 20% of the underlying shares on
May 22, 2007, the first anniversary of
Mr. Meyerhoffs date of hire, and for the
48 month period thereafter, the options will
79
vest ratably in equal monthly installments, subject to
Mr. Meyerhoffs continued employment with us. The
options will be subject to the 2006 Plan and the terms of an
option award agreement. Mr. Meyerhoff is also subject to a
separate confidentiality agreement and a separate
non-competition and non-solicitation agreement, which provides
that Mr. Meyerhoff will not compete with the Company or
solicit Company employees for 18 months after termination
of his employment.
I. Paul Kacir. On October 19, 2006, we entered into
an employment agreement with Mr. I. Paul Kacir which
was amended and restated on October 31, 2006. Under the terms of
his employment agreement, Mr. Kacir is entitled to an
annual base salary of $300,000 (subject to annual review) and
standard health and vacation benefits. Mr. Kacir is also
eligible to receive a discretionary annual bonus of up to 35% of
his annual base salary. Mr. Kacir also receives certain
relocation benefits in connection with his employment. Our
employment agreement with Mr. Kacir provides for a
severance payment in the amount equal to one year of his annual
base salary, continued medical benefits for 12 months and
continued vesting of equity awards for 12 months after
termination of employment (and the ability to exercise vested
equity awards for 90 days after such 12-month period) in the
event Mr. Kacirs employment is terminated without
cause. Effective immediately after this offering, we will grant
Mr. Kacir options to purchase 82,450 shares of our
common stock, exercisable at the price set forth on the cover of
this prospectus. The options will vest with respect to 20% of
the underlying shares on the October 2, 2007, the first
anniversary of Mr. Kacirs date of hire, and for the
48 month period thereafter, the options will vest ratably
in equal monthly installments, subject to Mr. Kacirs
continued employment with us. The options will be subject to the
2006 Plan and the terms of an option award agreement.
Mr. Kacir is also subject to a separate confidentiality
agreement and a separate non-competition and non-solicitation
agreement, which provides that Mr. Kacir will not compete
with the Company or solicit Company employees for 12 months
after termination of his employment.
Change in Control Severance Agreements
First Solar has entered into a change in control severance
agreement, referred to as the Change in Control Severance
Agreements, with each of Messrs. Ahearn, Hambro, Kacir,
Meyerhoff and Schultz. Under the Change in Control Severance
Agreements, if a change in control (substantially as defined in
the 2006 Plan) occurs, the executive would become immediately
entitled to accelerated vesting of all equity-based, long-term
incentive and cash incentive compensation awards (other than
awards which by their express terms do not accelerate under the
Change in Control Severance Agreements).
Executives who are party to a Change in Control Severance
Agreement will also be entitled to additional benefits if the
executives employment is terminated under certain
circumstances. An executive is entitled to those severance
benefits if the executives employment with First Solar is
terminated in anticipation of a change in control or if, during
the two-year period after a change in control, the executive is
terminated without cause or resigns for good reason (which
includes material changes in an executives duties,
responsibilities or reporting relationships, failure to provide
equivalent compensation and benefits and being required to
relocate 50 or more miles). If terminated or separated from
First Solar under those circumstances, the executive would be
entitled to the following additional benefits under the Change
in Control Severance Agreement:
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a lump-sum cash severance payment equal to two times the sum of
(i) the greater of the executives base salary in
effect immediately prior to the date of termination and the
executives base salary in effect immediately prior to the
change in control, and (ii) the greater of the average
annual cash bonuses for the previous three calendar years and
the target annual bonus for the year of termination; |
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a prorated target annual bonus; |
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the continuation of welfare and fringe benefits for the earlier
of (i) two years after executing a release of claims
agreement and (ii) eighteen months after termination of
employment; and |
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reimbursement for the cost of executive-level outplacement
services (subject to a $20,000 ceiling). |
In order to obtain severance benefits under a Change of Control
Severance Agreement, an executive must first execute a
separation agreement with First Solar that includes a waiver and
release of any and all claims against First Solar. In addition
to the foregoing, in accordance with the Change in Control
Severance Agreements, First Solar will make certain tax
gross-up payments to address taxes that may be
imposed under applicable tax laws in connection with golden
parachute payments (including the acceleration of equity-based,
long-term incentive and cash compensation upon a change in
control) unless the value of the payments and benefits in
connection with the change in control does not exceed 10% of the
maximum amount payable without triggering any such taxes, in
which case the payments and benefits will be reduced to such
maximum amount.
80
PRINCIPAL AND SELLING STOCKHOLDERS
The following table shows information regarding the beneficial
ownership of our common stock as of September 30, 2006, as
adjusted to give effect to this offering by:
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each person or group who is known by us to own beneficially more
than 5% of our common stock; |
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each member of our board of directors and each of our named
executive officers; and |
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all members of our board of directors and our executive officers
as a group. |
Currently JWMA Partners, LLC, or JWMA, is the beneficial owner
of 51,827,319 shares of our common stock, representing
92.32% of our shares of common stock prior to this offering. The
Estate of John T. Walton, JCL Holdings, LLC and Michael J.
Ahearn are the significant members of JWMA. Information with
respect to JWMA and its members and their material relationships
with us is provided under Certain Relationships and
Related Party Transactions. Immediately prior to the
consummation of this offering, the members of JWMA will dissolve
JMWA and become direct stockholders of First Solar, Inc. JWMA
will dissolve pursuant to a formula, which includes the
valuation of First Solar, Inc. stock based on the public
offering price per share, on the dissolution date.
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes any shares over which a person
exercises sole or shared voting or investment power. Shares of
common stock subject to options or warrants that are currently
exercisable or exercisable within 60 days of the date of
this prospectus are considered outstanding and beneficially
owned by the person holding the options for the purpose of
computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the
percentage ownership of any other person.
Unless otherwise indicated, each of the stockholders listed
below has sole voting and investment power with respect to the
shares beneficially owned. Except as indicated below, the
address for each stockholder, director or named executive
officer is First Solar, Inc., 4050 East Cotton Center Boulevard,
Building 6, Suite 68, Phoenix, Arizona 85040.
81
This table assumes 56,137,276 shares of common stock
outstanding as of September 30, 2006, assuming no exercise
of outstanding options.
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Shares Beneficially | |
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Shares Beneficially | |
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Owned After this | |
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Owned After this | |
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Shares to | |
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Offering, Assuming | |
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Offering, Assuming | |
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Shares Beneficially | |
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be Sold in | |
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No Exercise of the | |
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Full Exercise of the | |
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Owned Prior to this | |
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this | |
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Over-Allotment | |
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Over-Allotment | |
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Offering | |
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Offering | |
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Option | |
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Option | |
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Number | |
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Percent | |
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Number | |
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Number | |
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Percent | |
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Number | |
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Percent | |
Name of Beneficial Owner |
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Beneficial Owners of 5% or More
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Estate of John T. Walton(1)
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45,730,276 |
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81.5 |
% |
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6,140,296 |
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39,589,980 |
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57.1 |
% |
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39,589,980 |
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54.7 |
% |
Michael J. Ahearn(2)
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6,097,043 |
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10.9 |
% |
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609,704 |
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5,487,339 |
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7.9 |
% |
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5,487,339 |
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7.6 |
% |
Goldman, Sachs & Co.(3)
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4,261,457 |
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7.6 |
% |
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4,261,457 |
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6.1 |
% |
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4,261,457 |
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5.9 |
% |
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Directors and Named Executive Officers
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Michael J. Ahearn(2)
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6,097,043 |
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10.9 |
% |
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609,704 |
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5,487,339 |
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7.9 |
% |
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5,487,339 |
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7.6 |
% |
George A. (Chip) Hambro(4)
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960,300 |
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1.7 |
% |
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960,300 |
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1.4 |
% |
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960,300 |
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1.3 |
% |
Jens Meyerhoff
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Kenneth M. Schultz(5)
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911,800 |
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1.6 |
% |
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911,800 |
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1.3 |
% |
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911,800 |
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1.2 |
% |
I. Paul Kacir
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Robert H. Williams(6)
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James F. Nolan(7)
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72,750 |
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* |
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72,750 |
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* |
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72,750 |
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J. Thomas Presby
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Bruce Sohn(8)
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97,000 |
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* |
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97,000 |
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* |
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97,000 |
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Michael Sweeney(9)
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97,000 |
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* |
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97,000 |
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* |
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97,000 |
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All Directors and Executive Officers as a group
(10 persons)(10)
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8,235,893 |
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14.1 |
% |
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609,704 |
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7,626,189 |
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10.7 |
% |
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7,626,189 |
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10.2 |
% |
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* |
Less than one percent |
(1) |
The Estate of John T. Walton and its affiliates, including JCL
Holdings, LLC, collectively hold a total of
45,730,276 shares. The Estate of John T. Walton holds
a total of 32,925,641 shares, and S. Robson Walton,
Jim C. Walton and Alice L. Walton share voting and
dispositive power with respect to all shares held by the Estate.
Following termination of the Estate, the shares will be held by
trusts for the benefit of John T. Waltons wife and
his descendents, and Jim C. Walton and Alice L. Walton will
share voting and dispositive power with respect to all shares
held by these trusts. The address of the Estate of John T.
Walton is and the address of these trusts will be P.O.
Box 1860, Bentonville, Arkansas 72712. JCL Holdings, LLC
holds a total of 12,102,002 shares for the benefit of John
T. Waltons wife and his decedents. S. Robson Walton, Jim
C. Walton and Alice L. Walton share voting and dispositive power
with respect to all shares held by JCL Holdings, LLC. The
address of JCL Holdings, LLC is P.O. Box 1860, Bentonville,
Arkansas 72712. |
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(2) |
Michael J. Ahearn holds a total of 609,704 shares in his
individual capacity. Michael J. Ahearn 2006 GRAT holds a total
of 5,487,339 shares, and Michael J. Ahearn is the sole trustee
and has sole voting and dispositive power with respect to all
shares held by the Michael J. Ahearn 2006 GRAT. |
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(3) |
On May 10, 2006, Goldman, Sachs & Co. converted
all of our convertible senior subordinated notes into
4,261,457 shares of our common stock. The address of
Goldman, Sachs & Co. is 85 Broad Street, New York, New
York 10004. |
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(4) |
Includes 960,300 shares of common stock issuable upon the
exercise of stock options. |
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(5) |
Includes 911,800 shares of common stock issuable upon the
exercise of stock options. |
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(6) |
Robert H. Williams served as our Chief Financial Officer from
January 2005 through December 2005, and was no longer employed
by us as of September 30, 2006. |
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(7) |
Includes 72,750 shares of common stock issuable upon the
exercise of stock options. |
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(8) |
Includes 72,750 shares of common stock issuable upon the
exercise of stock options. |
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(9) |
Includes 72,750 shares of common stock issuable upon the
exercise of stock options. |
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(10) |
Includes 2,090,350 shares of common stock issuable upon the
exercise of stock options. Does not include 271,669 shares
of common stock issuable upon the exercise of stock options that
we plan to grant to certain of our executive officers and
directors upon the consummation of this offering. Does not
include Robert H. Williams, who served as our Chief Financial
Officer from January 2005 through December 2005, and was no
longer employed by us as of September 30, 2006. |
82
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Related Party Debt
On July 26, 2005, we entered into a $5.0 million loan
agreement with Walton Enterprises II, L.P., an affiliate of
JWMA, with interest payable at a rate equal to the short term
Applicable Federal Rate (AFR) per annum from the date
thereof until paid. This loan agreement was cancelled in
connection with entering into a second loan agreement with
Walton Enterprises II, L.P. on September 30, 2005. This new
loan agreement was for $20.0 million, with interest payable
monthly at the rate equal to the lesser of (i) the AFR and
(ii) the highest lawful rate. The entire $20.0 million
under this loan agreement was outstanding at December 31,
2005. During January and February 2006, we borrowed an
additional $3.0 million and $7.0 million,
respectively, from the Estate of John T. Walton, taking the
place of Walton Enterprises II, L.P. These notes were unsecured,
the balance was payable on demand and interest was payable
monthly at a rate equal to the lesser of (i) the AFR and
(ii) the highest lawful rate. We repaid the entire
$30.0 million in February 2006.
On August 7, 2006, we entered into an amended and restated
loan agreement with the Estate of John T. Walton to provide for
advances up to $34.0 million. Interest is payable monthly
at the annual rate of the commercial prime lending rate and
principal payments are due at the earlier of January 18,
2008 or the completion of an initial public offering of our
stock. This loan does not have any collateral requirements. A
condition of obtaining this loan was to refinance our loan from
Kingston Properties, LLC, an affiliate of JWMA. During July
2006, we drew $26.0 million against this loan, of which
$8.7 million was used to repay the Kingston Properties, LLC
note.
On May 14, 2003, First Solar Property, LLC issued a
$8.7 million promissory note due June 1, 2010 to
Kingston Properties, LLC, an affiliate of JWMA. Interest was
payable monthly at an annual rate of 3.70%. We repaid the note
in its entirety in July 2006 with a portion of the proceeds from
the borrowings under the revolving loan agreement with the
Estate of John T. Walton.
Related Party Equity Contributions
In 2003, a previous owner forfeited its entire interest in First
Solar US Manufacturing, LLC, in connection with a settlement of
claims, including matters subject to on-going arbitration and
pending litigation, in exchange for a cash payment of
$3.0 million from First Solar US Manufacturing, LLC and
resulting in the retirement of 27,432,000 membership units. Also
during 2003, JWMA, the sole remaining owner of First Solar US
Manufacturing, LLC, formed First Solar, Inc. (formerly First
Solar Holdings, LLC), and contributed all of its equity interest
in First Solar US Manufacturing, LLC and First Solar
Property, LLC into First Solar, Inc. We also converted the
outstanding principal of $72.0 million and accrued interest
of $10.6 million on our promissory note and loan agreement
with JWMA into an equity contribution. The 2003 equity interest
and debt contributions occurred at the same time, and JWMA
received a total of 28,736,000 membership units for those
transactions. Also in 2003, JWMA made an additional cash
contribution of $8.5 million and received
4,123,000 shares. In fiscal year 2004, fiscal year 2005 and
the first nine months of 2006, we sold to JWMA
8,681,000 shares, 3,674,000 shares and
6,613,000 shares, respectively, for $17.9 million,
$16.7 million and $30.0 million, respectively.
Convertible Debt
On February 22, 2006, we issued $74.0 million in
convertible senior subordinated notes due in 2011 to Goldman,
Sachs & Co. On May 10, 2006, we extinguished these
notes by payment of 4,261,000 shares of our common stock.
This extinguishment took place under the terms of a negotiated
extinguishment agreement and not under the conversion terms of
the original note purchase agreement; however, the settlement
terms of the negotiated extinguishment agreement were, in
substance, similar to, but not identical to, the terms of the
original note purchase agreement.
Registration Rights
First Solar will enter into a registration rights agreement
concurrently with this offering with JWMA, our current majority
shareholder, and the members of JWMA. The registration rights
agreement provides that JWMA has, and, its members following the
dissolution of JWMA will have, piggyback registration rights if
we register equity securities under the Securities Act, subject
to certain lock-up provisions and exceptions. In addition, prior
to the dissolution of JWMA, the registration rights agreement
has unlimited demand rights for JWMA, subject to certain lock-up
provisions and exceptions, provided that JWMA may only exercise
one such demand right within any 365 day period. Following
the dissolution of JWMA, subject to certain lock-up provisions
and exceptions, Michael J.
83
Ahearn will have three demand rights, JCL Holdings, LLC will
have five demand rights and the Estate of John T. Walton
will have unlimited demand rights, provided that the Estate of
John T. Walton may only exercise one such demand right
within any 365 day period. Following the termination of the
Estate of John T. Walton, the registration rights held by
the Estate will be held collectively by trusts for the benefit
of John T. Waltons wife and his descendants.
First Solar entered into a registration rights agreement with
Goldman, Sachs & Co., the purchaser of the convertible
senior subordinated notes. The registration rights agreement
provides that, upon the completion of this offering and subject
to certain lock-up provisions and exceptions, Goldman,
Sachs & Co. has two demand rights and piggyback
registration rights if we register equity securities under the
Securities Act. The registration rights and related provisions
are transferable with respect to the shares issued upon
conversion of the notes on May 10, 2006.
Other
In connection with entering into the IKB credit facility,
Michael J. Ahearn, our Chief Executive Officer, provided a
500,000 personal
guarantee. We have indemnified Mr. Ahearn for the amount of
his guarantee.
In November 2000, we entered into a consulting agreement with
James Nolan, a director of the Company. Pursuant to the terms of
our agreement, Mr. Nolan provides part-time consulting
services for a consulting fee of $7,500 per month plus
travel and other expenses.
84
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of the material provisions of the
instruments evidencing our material indebtedness. It does not
include all of the provisions of the documents evidencing our
material indebtedness, copies of which have been filed as
exhibits to our registration statement in connection with this
offering.
IKB Credit Facility
On July 27, 2006, First Solar Manufacturing GmbH, a wholly
owned indirect subsidiary of First Solar, Inc., entered into a
credit facility agreement with a consortium of banks led by IKB
Deutsche Industriebank AG under which we can draw up to
102.0 million
($122.4 million at an assumed exchange rate of
$1.20/1.00) to
fund costs of constructing our German plant. This credit
facility consists of a term loan of up to
53.0 million
($63.6 million at an assumed exchange rate of
$1.20/1.00) and
a revolving credit facility of
27.0 million
($32.4 million at an assumed exchange rate of
$1.20/1.00). The
facility also provides for a bridge loan, which we can draw
against to fund construction costs that we later expect to be
reimbursed through funding from the Federal Republic of Germany
under the Investment Grant Act of 2005
(Investitionszulagen), of up to
22.0 million
($26.4 million at an assumed exchange rate of
$1.20/1.00). We
can make drawdowns against the term loan and the bridge loan
until December 30, 2007, and we can make drawdowns against
the revolving credit facility until September 30, 2012. We
have incurred costs related to the credit facility totaling
$1.9 million as of September 30, 2006, which we will
recognize as interest and other financing expenses over the time
that borrowings are outstanding under the credit facility. We
also pay an annual commitment fee of 0.6% of any amounts not
drawn down on the credit facility. At September 30, 2006,
we had outstanding borrowings of $18.2 million under the
term loan and $6.8 million under the bridge loan. At
October 28, 2006, we had outstanding borrowings of
28.2 million
($33.8 million at an assumed exchange rate of
$1.20/1.00)
under the term loan and
10.4 million
($12.5 million at an assumed exchange rate of
$1.20/1.00)
under the bridge loan. We had no outstanding borrowings under
the revolving credit facility.
We must repay the term loan in twenty quarterly payments
beginning on March 31, 2008 and ending on December 30,
2012. We must repay the bridge loan with any funding we receive
from the Federal Republic of Germany under the Investment Grant
Act of 2005, but in any event, the bridge loan must be paid in
full by December 30, 2008. Once repaid, we may not draw
again against term loan or bridge loan facilities. The revolving
credit facility expires on and must be completely repaid by
December 30, 2012. In certain circumstances, we must also
use proceeds from fixed asset sales or insurance claims to make
additional principal payments, and during 2009 we will also be
required to make a one-time principal repayment equal to 20% of
any surplus cash flow of First Solar Manufacturing
GmbH during 2008. Surplus cash flow is a term defined in the
credit facility agreement that is approximately equal to cash
flow from operating activities, less required payments on
indebtedness.
We must pay interest at the annual rate of the Euro interbank
offered rate (Euribor) plus 1.6% on the term loan, Euribor plus
2.0% on the bridge loan, and Euribor plus 1.8% on the revolving
credit facility. Each time we make a draw against the term loan
or the bridge loan, we may choose to pay interest on that
drawdown every three or six months; each time we make a draw
against the revolving credit facility, we may choose to pay
interest on that drawdown every one, three, or six months. The
credit facility requires us to mitigate our interest rate risk
on the term loan by entering into pay-fixed, receive-floating
interest rate swaps covering at least 75% of the balance
outstanding under the loan.
The Federal Republic of Germany is guaranteeing 48% of our
combined borrowings on the term loan and revolving credit
facility and the State of Brandenburg is guaranteeing another
32%. We pay an annual fee, not to exceed
0.5 million
($0.6 million at an assumed exchange rate of
$1.20/1.00) for
these guarantees. In addition, we must maintain a debt service
reserve of
3.0 million
($3.6 million at an assumed exchange rate of
$1.20/1.00) in a
restricted bank account, which the lenders may access if we are
unable to make required payments on the credit facility.
Substantially all of our assets in Germany, including the German
plant, have been pledged as collateral for the credit facility
and the government guarantees.
The credit facility contains various financial covenants with
which we must comply. First Solar Manufacturing GmbHs cash
flow available for debt service must be at least 1.1 times its
required principal and interest payments for all its
liabilities, and the ratio of its total noncurrent liabilities
to earnings before interest, taxes, depreciation, and
amortization may not exceed 3.0:1 from January 1, 2008
through December 31, 2008, 2.5:1 from January 1, 2009
through December 31, 2009, and 1.5:1 from January 1,
2010 through the remaining term of the credit facility.
The credit facility also contains various non-financial
covenants with which we must comply. We must submit various
financial reports, financial calculations and statistics,
operating statistics, and financial and business forecasts to
the lender. We must adequately insure our German operation, and
we may not change the type or scope of its business operations.
First Solar Manufacturing GmbH must maintain adequate accounting
and information
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technology systems. Also, First Solar Manufacturing GmbH cannot
open any bank accounts (other than those required by the credit
facility), enter into any financial liabilities (other than
intercompany obligations or those liabilities required by the
credit facility), sell any assets to third parties outside the
normal course of business, make any loans or guarantees to third
parties, or allow any of its assets to be encumbered to the
benefit of third parties without the consent of the lenders and
government guarantors.
Our ability to withdraw cash from First Solar Manufacturing GmbH
for use in other parts of our business is restricted while we
have outstanding obligations under the credit facility and
associated government guarantees. First Solar Manufacturing
GmbHs cash flows from operations must generally be used
for the payment of loan interest, fees, and principal before any
remainder can be used to pay intercompany charges, loans, or
dividends. Furthermore, First Solar Manufacturing GmbH generally
cannot make any payments to affiliates if doing so would cause
its cash flow available for debt service to fall below
1.3 times its required principal and interest payments for
all its liabilities for any one year period or cause the amount
of its equity to fall below 30% of the amount of its total
assets. First Solar Manufacturing GmbH also cannot pay
commissions or distributor margins of greater than 2% to First
Solar affiliates that sell or distribute its products. Also, we
may be required under certain circumstances to contribute more
funds to First Solar Manufacturing GmbH, such as if
project-related costs exceed our plan, we do not recover the
expected amounts from governmental investment subsidies, or all
or part of the government guarantees are withdrawn. If there is
a decline in the value of the assets pledged as collateral for
the credit facility, we may also be required to pledge
additional assets as collateral.
Revolving Loan Agreement
On July 26, 2006, we entered into a loan agreement, which
we amended and restated on August 7, 2006, with the Estate
of John T. Walton, an affiliate of JWMA, under which we can draw
up to $34.0 million. Interest is payable monthly at the
annual rate of the commercial prime lending rate and principal
payments are due at the earlier of January 18, 2008 or the
completion of an initial public offering of our stock. This loan
does not have any collateral requirements. As a condition of
obtaining this loan, we were required to use a portion of the
proceeds to repay the principal of our loan from Kingston
Properties, LLC, an affiliate of JWMA. During July 2006, we drew
$26.0 million against this loan, of which $8.7 million
was used to repay the Kingston Properties, LLC note.
$15,000,000 Loan from the State of Ohio
On July 1, 2005, First Solar US Manufacturing, LLC and
First Solar Property, LLC entered into a loan agreement with the
Director of Development of the State of Ohio for
$15.0 million, all of which was outstanding at
September 30, 2006. The interest rate on the note is
2% per annum, plus a monthly service fee equal to 0.021%,
payable monthly in arrears on the first day of each month.
Principal payments commence on December 1, 2006 and end on
July 1, 2015, and we may pre-pay the loan in whole or in
part at any time. The note is secured by a first-priority lien
on our land and building in Perrysburg, Ohio and guaranteed by
First Solar, Inc.
$5,000,000 Loan from the State of Ohio
On December 1, 2003, First Solar US Manufacturing, LLC and
First Solar Property, LLC entered into a loan agreement with the
Director of Development of the State of Ohio for
$5.0 million, all of which was outstanding at
September 30, 2006. The interest rate on the note was 0.00%
per annum for the first year the loan is outstanding, 1.00%
during the second and third years, 2.00% during the fourth and
fifth years and 3.00% for the remaining term of the note. In
addition, we pay a monthly service fee equal to 0.021%. Interest
is payable monthly, on the first day of each month. Principal
payments commence on January 1, 2007 and end on
December 1, 2009, and we may pre-pay the note in whole or
in part at any time after January 1, 2007. The note is
secured by a first-priority lien on the accounts receivable,
inventory, and machinery and equipment in our Perrysburg, Ohio
manufacturing plant and guaranteed by First Solar, Inc.
86
DESCRIPTION OF CAPITAL STOCK
The following is a description of the material provisions of our
capital stock, as well as other material terms of our amended
and restated certificate of incorporation and bylaws as they
will be in effect as of the consummation of the offering. This
description is only a summary. You should read it together with
our amended and restated certificate of incorporation and
bylaws, which are included as exhibits to the registration
statement of which this prospectus is part.
General
Effective October 24, 2006, our authorized capital stock
consists of 500,000,000 shares of common stock, par value
$0.001 per share, of which 69,387,276 shares will be
issued and outstanding upon completion of the offering, and
30,000,000 shares of preferred stock, par value
$0.001 per share, none of which will be issued and
outstanding. Currently, we have four stockholders. Immediately
prior to the consummation of this offering, JWMA Partners, LLC,
our current majority stockholder, will dissolve, and its members
will become direct holders of our common stock.
Common Stock
The holders of our common stock are entitled to dividends as our
board of directors may declare from time to time at its absolute
discretion from funds legally available therefor. See
Dividend Policy.
The holders of our common stock are entitled to one vote for
each share held of record on any matter to be voted upon by
stockholders. Our amended and restated certificate of
incorporation does not provide for cumulative voting in
connection with the election of directors. Accordingly, upon the
dissolution of JWMA Partners, LLC, the Estate of John T. Walton
and its affiliates, including JCL Holdings, LLC, as holders
of more than 50% of the shares voting, will be able to elect all
of our directors. There are no preemptive, conversion,
redemption or sinking fund provisions applicable to our common
stock.
Upon any voluntary or involuntary liquidation, dissolution or
winding up of our affairs, the holders of our common stock are
entitled to share ratably in all assets remaining after payment
to creditors and subject to prior distribution rights of any
outstanding shares of preferred stock. All the outstanding
shares of common stock are, and the shares offered by us will
be, fully paid and non-assessable.
Registration Rights
First Solar will enter into a registration rights agreement
concurrently with this offering with JWMA, our current majority
shareholder, and the members of JWMA. The registration rights
agreement provides that JWMA has, and its members following the
dissolution of JWMA will have, piggyback registration rights if
we register equity securities under the Securities Act, subject
to certain lock-up
provisions and exceptions. In addition, prior to the dissolution
of JWMA, the registration rights agreement has unlimited demand
rights for JWMA, subject to certain
lock-up provisions and
exceptions, provided that JWMA may only exercise one such demand
right within any 365 day period. Following the dissolution
of JWMA, subject to certain lock-up provisions and exceptions,
Michael J. Ahearn will have three demand rights, JCL Holdings,
LLC will have five demand rights and the Estate of John T.
Walton will have unlimited demand rights, provided that the
Estate of John T. Walton may only exercise one such demand right
within any 365 day period. Following the termination of the
Estate of John T. Walton, the registration rights held by
the Estate will be held collectively by trusts for the benefit
of John T. Waltons wife and his descendants.
First Solar entered into a registration rights agreement with
Goldman, Sachs & Co., the purchaser of the convertible
senior subordinated notes. The registration rights agreement
provides that, upon the completion of this offering and subject
to certain lock-up
provisions and exceptions, Goldman, Sachs & Co. has two
demand rights and piggyback registration rights if we register
equity securities under the Securities Act. The registration
rights and related provisions are transferable with respect to
the shares issued upon conversion of the notes on May 10,
2006.
Action by Written Consent; Special Meetings of
Stockholders
Our amended and restated certificate of incorporation and bylaws
provide that unless and until JWMA Partners, LLC, the Estate of
John T. Walton, JCL Holdings, LLC, John T. Waltons
surviving spouse, descendants,
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any entity (including a trust) that is for the benefit of John
T. Waltons surviving spouse or descendants or any entity
(including a trust) over which any of John T. Waltons
surviving spouse, descendants or siblings has voting or
dispositive power (collectively, the Estate),
collectively own less than 40% of our common stock then
outstanding, stockholder action may be taken at an annual or
special meeting of stockholders or by written consent.
Thereafter, stockholder action may only be taken at an annual or
special meeting of the stockholders and may not be taken by
written consent. In addition, our amended and restated
certificate of incorporation and bylaws provide that unless and
until the Estate collectively owns less than 40% of our common
stock then outstanding, either the board of directors or
stockholders owning 40% or more of our common stock then
outstanding may call a special meeting of stockholders at any
time and for any purpose or purposes. Thereafter, only our board
of directors may call a special meeting of stockholders.
Anti-Takeover Effects of Various Provisions of Delaware Law
and Our Amended and Restated Certificate of Incorporation and
Bylaws
Provisions of the Delaware General Corporation Law, or the DGCL
could make it more difficult to acquire us by means of a tender
offer, a proxy contest or otherwise, or to remove incumbent
officers and directors. These provisions, summarized below, are
expected to discourage types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to
acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the
disadvantages of discouraging takeover or acquisition proposals
because, among other things, negotiation of these proposals
could result in an improvement of their terms.
Delaware Anti-Takeover Statute. We have elected not to be
subject to Section 203 of the DGCL, an anti-takeover
statute. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a business
combination with an interested stockholder for
a period of three years following the time the person became an
interested stockholder, unless (with certain exceptions) the
business combination or the transaction in which the person
became an interested stockholder is approved in a prescribed
manner. Generally, a business combination includes a
merger, asset or stock sale, or other transaction resulting in a
financial benefit to the interested stockholder. Generally, an
interested stockholder is a person who, together
with affiliates and associates, owns (or within three years
prior to the determination of interested stockholder status did
own) 15 percent or more of a corporations voting
stock. The existence of this provision would be expected to have
an anti-takeover effect with respect to transactions not
approved in advance by the board of directors, including
discouraging attempts that might result in a premium over the
market price for the shares of common stock held by stockholders.
No Cumulative Voting. The DGCL provides that stockholders
are denied the right to cumulate votes in the election of
directors unless our amended and restated certificate of
incorporation provides otherwise. Our amended and restated
certificate of incorporation does not provide for cumulative
voting.
Limitations on Liability and Indemnification of Officers and
Directors. The DGCL authorizes corporations to limit or
eliminate the personal liability of directors to corporations
and their stockholders for monetary damages for breaches of
directors fiduciary duties as directors. Our
organizational documents include provisions that indemnify, to
the fullest extent allowable under the DGCL, the personal
liability of directors or officers for monetary damages for
actions taken as a director or officer of our company, or for
serving at our request as a director or officer or another
position at another corporation or enterprise, as the case may
be. Our organizational documents also provide that we must
indemnify and advance reasonable expenses to our directors and
officers, subject to our receipt of an undertaking from the
indemnitee as may be required under the DGCL. We are also
expressly authorized to carry directors and officers
insurance to protect our company, our directors, officers and
certain employees for some liabilities. In addition, we have
entered into an agreement with each of our directors and
officers whereby we have agreed to indemnify them substantially
in accordance with the indemnification provisions applicable to
our officers and directors in our bylaws.
The limitation of liability and indemnification provisions in
our amended and restated certificate of incorporation and our
bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty. These
provisions may also have the effect of reducing the likelihood
of derivative litigation against directors and officers, even
though such an action, if successful, might otherwise benefit us
and our stockholders. In addition, your investment may be
adversely affected to the extent that, in a class action or
direct suit, we pay the costs of settlement and damage awards
against directors and officers pursuant to these indemnification
provisions. There is currently no pending material litigation or
proceeding involving any of our directors, officers or employees
for which indemnification is sought.
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Authorized but Unissued Shares of Common Stock. Our
authorized but unissued shares of common stock will be available
for future issuance without your approval. We may use additional
shares for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate
acquisitions and employee benefit plans and as consideration for
future acquisitions, investments or other purposes. The
existence of authorized but unissued shares of common stock
could render more difficult or discourage an attempt to obtain
control of us by means of a proxy contest, tender offer, merger
or otherwise.
Undesignated Preferred Stock. Our amended and restated
certificate of incorporation and bylaws authorizes undesignated
preferred stock. As a result, our board of directors may,
without stockholder approval, issue preferred stock with super
voting, special approval, dividend or other rights or
preferences on a discriminatory basis that could impede the
success of any attempt to acquire us. These and other provisions
may have the effect of deferring, delaying or discouraging
hostile takeovers, or changes in control or management of our
company.
Amendments to Organizational Documents. The DGCL provides
generally that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a
corporations certificate of incorporation or bylaws.
Because the Estate owns more than 50% of our shares, the Estate
may amend our organizational documents without your approval and
may refuse to amend our organizational documents despite your
wishes to the contrary.
Options With Repurchase Rights
During 2003 and 2005, we issued a total of 1,872,100 stock
options to certain employees that had a provision allowing such
employee or his estate or successor, as the case may be, to sell
any equity securities obtained as a result of exercising the
options back to us upon such employees death, disability
or termination other than for cause or good reason or upon
change of control with an employment termination. The price to
be paid for the shares is equal to the fair value of the shares
on the date we receive a put notice, which shall be within
180 days of such event. These repurchase rights do not
expire upon the consummation of an initial public offering.
Listing
Our common stock has been approved for listing on The Nasdaq
Global Market under the trading symbol FSLR.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is
Computershare.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for
our common stock, and we cannot predict what effect, if any,
market sales of shares or the availability of shares for sale
will have on the market price of our common stock. Nevertheless,
sales of substantial amounts of common stock in the public
market, or the perception that such sales could occur, could
materially and adversely affect the market price of our common
stock and could impair our future ability to raise capital
through the sale of our equity-related securities at a time and
price that we deem appropriate.
Upon completion of this offering, 69,387,276 shares of our
common stock will be outstanding. All of the shares of common
stock expected to be sold in this offering will be freely
tradable without restriction or further registration under the
Securities Act, unless held by our affiliates, as
that term is defined in Rule 144 under the Securities Act.
The remaining outstanding shares of common stock will be deemed
restricted securities as that term is defined under
Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption
from registration under Rules 144 or 701 under the
Securities Act, which are summarized below. Upon completion of
this offering, 38,464,319 shares will be eligible for
resale pursuant to Rule 144 as of 90 days after the
date of this prospectus, however, all of these shares are
subject to the lock-up agreements described below.
We may issue shares of common stock from time to time for a
variety of corporate purposes, including future public offerings
to raise additional capital, employee benefit plans and as
consideration for future acquisitions, investments or other
purposes. In the event any such offering, employee benefit plan,
acquisition, investment or other transaction is significant, the
number of shares of common stock that we may issue may in turn
be significant. In addition, we may also grant registration
rights covering those shares of common stock issued in
connection with any such offering, employee benefit plan,
acquisition, investment or other transaction.
Lock-Up Agreements
We have agreed that we will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or file
with the Securities and Exchange Commission a registration
statement under the Securities Act relating to, any shares of
our common stock or any securities convertible into or
exchangeable or exercisable for any such shares, or publicly
disclose the intention to make any offer, sale, pledge,
disposition or filing, without the prior written consent of
Credit Suisse Securities (USA) LLC and Morgan
Stanley & Co. Incorporated for a period of
180 days after the date of this prospectus, subject to
specified exceptions.
Our officers, directors and existing stockholders have agreed
that they will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of our
common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, enter into a
transaction that would have the same effect, or enter into any
swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our
common stock, whether any of these transactions are to be
settled by delivery of our common stock or other securities, in
cash or otherwise, or publicly disclose the intention to make
any offer, sale, pledge or disposition, or to enter into any
transaction, swap, hedge or other arrangement, without, in each
case, the prior written consent of Credit Suisse Securities
(USA) LLC and Morgan Stanley & Co. Incorporated
for a period of 180 days after the date of this prospectus.
The lock-up restriction does not, however, restrict transfers of
common stock (or any securities convertible into or exercisable
or exchangeable for common stock) to any of the following
transferees who agree to be bound in writing by the terms of the
lock-up and who receive such securities in a
transfer not involving a disposition for value: (i) any
donee(s) of one or more bona fide gifts of common stock;
(ii) any trust for the direct or indirect benefit of the
locked-up party or of any familial relation thereof not more
remote than first cousin, whether by blood, marriage or
adoption; (iii) any beneficiary of the locked-up party
pursuant to a will or other testamentary document or applicable
laws of descent; (iv) if the locked-up party is an
investment fund entity that is a limited partnership, limited
liability company or equivalent foreign entity (an
Investment Fund Entity), to any other
Investment Fund Entity under the control of the locked-up
party or under the control of the general partner or managing
member of the locked-up party; or (v) as a distribution to
partners, members or stockholders of the locked-up party.
The 180-day restricted
period described in the two preceding paragraphs will be
automatically extended if: (1) during the last 17 days
of the 180-day
restricted period we issue an earnings release or announce
material news or a material event; or (2) prior to the
expiration of the
180-day restricted
period, we announce that we will release earnings results during
the 16-day period
beginning on the last day of the
180-day period, in
which case the
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restrictions described in the preceding paragraph will continue
to apply until the expiration of the
18-day period beginning
on the issuance of the earnings release of the announcement of
the material news or material event.
Credit Suisse Securities (USA) LLC and Morgan
Stanley & Co. Incorporated have advised us that they
have no present intent or arrangement to release any shares
subject to a lock-up, and will consider the release of any
lock-up on a
case-by-case basis. Upon a request to release any shares subject
to a lock-up, Credit Suisse Securities (USA) LLC and Morgan
Stanley & Co. Incorporated would consider the
particular circumstances surrounding the request, including, but
not limited to, the length of time before the
lock-up expires, the
number of shares requested to be released, reasons for the
request, the possible impact on the market or our common stock
and whether the holder of our shares requesting the release is
an officer, director or other affiliate of ours.
Registration Rights
First Solar will enter into a registration rights agreement
concurrently with this offering with JWMA, our current majority
shareholder, and the members of JWMA. The registration rights
agreement provides that JWMA has, and its members following the
dissolution of JWMA will have, piggyback registration rights if
we register equity securities under the Securities Act, subject
to certain lock-up provisions and exceptions. In addition, prior
to the dissolution of JWMA, the registration rights agreement
has unlimited demand rights for JWMA, subject to certain lock-up
provisions and exceptions, provided that JWMA may only exercise
one such demand right within any 365 day period. Following
the dissolution of JWMA, subject to certain lock-up provisions
and restrictions, Michael J. Ahearn will have three demand
rights, JCL Holdings, LLC will have five demand rights and the
Estate of John T. Walton will have unlimited demand
rights, provided that the Estate of John T. Walton may
only exercise one such demand right within any 365 day
period. Following the termination of the Estate of John T.
Walton, the registration rights held by the Estate will be held
collectively by trusts for the benefit of John T.
Waltons wife and his descendants.
First Solar entered into a registration rights agreement with
Goldman, Sachs & Co., the purchaser of the convertible
senior subordinated notes. The registration rights agreement
provides that, upon the completion of this offering and subject
to certain lock-up provisions and exceptions, Goldman,
Sachs & Co. has two demand rights and piggyback
registration rights if we register equity securities under the
Securities Act. The registration rights and related provisions
are transferable with respect to the shares issued upon
conversion of the notes on May 10, 2006.
Rule 144
In general, under Rule 144, as currently in effect,
beginning 90 days after the date of this prospectus, any
person, including an affiliate, who has beneficially owned
shares of our common stock for a period of at least one year is
entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of:
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one percent of the then-outstanding shares of common stock or
approximately 693,873 shares immediately after this
offering; and |
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the average weekly trading volume in the common stock on The
Nasdaq Global Market during the four calendar weeks preceding
the date on which the notice of the sale is filed with the SEC. |
Sales under Rule 144 are also subject to provisions
relating to notice, manner of sale, volume limitations and the
availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at any time during the 90 days
preceding a sale, and who has beneficially owned the shares for
at least two years, including the holding period of any prior
owner other than an affiliate, is entitled to sell
the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of
Rule 144.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS
The following discussion is a general summary of the material
U.S. federal income tax consequences of the ownership and
disposition of our common stock applicable to
Non-U.S. Holders.
As used herein, a
Non-U.S. Holder
means a beneficial owner of our common stock that is neither a
U.S. person nor a partnership for U.S. federal income
tax purposes, and that will hold shares of our common stock as
capital assets. For U.S. federal income tax purposes, a
U.S. person includes:
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an individual who is a citizen or resident of the United States; |
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a corporation (or other business entity treated as a corporation
for U.S. federal income tax purposes) created or organized
in the United States or under the laws of the United States, any
state thereof or the District of Columbia; |
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an estate the income of which is includible in gross income
regardless of source; or |
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a trust that (A) is subject to the primary supervision of a
court within the United States and the control of one or more
U.S. persons, or (B) otherwise has validly elected to
be treated as a U.S. domestic trust. |
If a partnership (including an entity treated as a partnership
for U.S. federal income tax purposes) holds shares of our
common stock, the U.S. federal income tax treatment of the
partnership and each partner generally will depend on the status
of the partner and the activities of the partnership and the
partner. Partnerships acquiring our common stock, and partners
in such partnerships, should consult their own tax advisors with
respect to the U.S. federal income tax consequences of the
ownership and disposition of our common stock.
This summary does not consider specific facts and circumstances
that may be relevant to a particular
Non-U.S. Holders
tax position and does not consider U.S. state and local or
non-U.S. tax
consequences. It also does not consider
Non-U.S. Holders
subject to special tax treatment under the U.S. federal
income tax laws (including partnerships or other pass-through
entities, banks and insurance companies, dealers in securities,
holders of our common stock held as part of a
straddle, hedge, conversion
transaction or other risk-reduction transaction,
controlled foreign corporations, passive foreign investment
companies, companies that accumulate earnings to avoid
U.S. federal income tax, foreign tax-exempt organizations,
former U.S. citizens or residents, persons who hold or
receive common stock as compensation and persons subject to the
alternative minimum tax). This summary is based on provisions of
the U.S. Internal Revenue Code of 1986, as amended (the
Code), applicable Treasury regulations,
administrative pronouncements of the U.S. Internal Revenue
Service (IRS) and judicial decisions, all as in
effect on the date hereof, and all of which are subject to
change, possibly on a retroactive basis, and different
interpretations.
This summary is included herein as general information only.
Accordingly, each prospective
Non-U.S. Holder is
urged to consult its own tax advisor with respect to the
U.S. federal, state, local and
non-U.S. income,
estate and other tax consequences of owning and disposing of our
common stock.
U.S. Trade or Business Income
For purposes of this discussion, dividend income and gain on the
sale or other taxable disposition of our common stock will be
considered to be U.S. trade or business income
if such income or gain is (i) effectively connected with
the conduct by a
Non-U.S. Holder of
a trade or business within the United States and (ii) in
the case of a
Non-U.S. Holder
that is eligible for the benefits of an income tax treaty with
the United States, attributable to a permanent establishment
(or, for an individual, a fixed base) maintained by the
Non-U.S. Holder in
the United States. Generally, U.S. trade or business income
is not subject to U.S. federal withholding tax (provided
the
Non-U.S. Holder
complies with applicable certification and disclosure
requirements); instead, U.S. trade or business income is
subject to U.S. federal income tax on a net income basis at
regular U.S. federal income tax rates in the same manner as
a U.S. person. Any U.S. trade or business income
received by a corporate
Non-U.S. holder
may be subject to an additional branch profits tax
at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
Dividends
Distributions of cash or property that we pay will constitute
dividends for U.S. federal income tax purposes to the
extent paid from our current or accumulated earnings and profits
(as determined under U.S. federal income tax principles). A
Non-U.S. Holder
generally will be subject to U.S. federal withholding tax
at a 30% rate, or, if the
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Non-U.S. Holder is
eligible, at a reduced rate prescribed by an applicable income
tax treaty, on any dividends received in respect of our common
stock. If the amount of a distribution exceeds our current and
accumulated earnings and profits, such excess first will be
treated as a tax-free return of capital to the extent of the
Non-U.S. Holders
tax basis in our common stock (with a corresponding reduction in
such
Non-U.S. Holders
tax basis in our common stock), and thereafter will be treated
as capital gain. In order to obtain a reduced rate of
U.S. federal withholding tax under an applicable income tax
treaty, a
Non-U.S. Holder
will be required to provide a properly executed IRS
Form W-8BEN certifying under penalties of perjury its
entitlement to benefits under the treaty. Special certification
requirements and other requirements apply to certain
Non-U.S. Holders
that are entities rather than individuals. A
Non-U.S. Holder of
our common stock that is eligible for a reduced rate of
U.S. federal withholding tax under an income tax treaty may
obtain a refund or credit of any excess amounts withheld by
filing an appropriate claim for a refund with the IRS on a
timely basis. A
Non-U.S. Holder
should consult its own tax advisor regarding its possible
entitlement to benefits under an income tax treaty and the
filing of a U.S. tax return for claiming a refund of
U.S. federal withholding tax.
The U.S. federal withholding tax does not apply to
dividends that are U.S. trade or business income, as
defined above, of a
Non-U.S. Holder
who provides a properly executed IRS Form W-8ECI,
certifying under penalties of perjury that the dividends are
effectively connected with the
Non-U.S. Holders
conduct of a trade or business within the United Sates.
Dispositions of Our Common Stock
A Non-U.S. Holder
generally will not be subject to U.S. federal income or
withholding tax in respect of any gain on a sale or other
disposition of our common stock unless:
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the gain is U.S. trade or business income, as defined above; |
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the
Non-U.S. Holder is
an individual who is present in the United States for 183 or
more days in the taxable year of the disposition and meets other
conditions; or |
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we are or have been a U.S. real property holding
corporation (a USRPHC) under section 897
of the Code at any time during the shorter of the five-year
period ending on the date of disposition and the
Non-U.S. Holders
holding period for our common stock. |
In general, a corporation is a USRPHC if the fair market value
of its U.S. real property interests (as defined
in the Code and applicable Treasury regulations) equals or
exceeds 50% of the sum of the fair market value of its worldwide
real property interests and its other assets used or held for
use in a trade or business. If we are determined to be a USRPHC,
the U.S. federal income and withholding taxes relating to
interests in USRPHCs nevertheless will not apply to gains
derived from the sale or other disposition of our common stock
by a
Non-U.S. Holder
whose shareholdings, actual and constructive, at all times
during the applicable period, amount to 5% or less of our common
stock, provided that our common stock is regularly traded on an
established securities market. We are not currently a USRPHC,
and we do not anticipate becoming a USRPHC in the future.
However, no assurance can be given that we will not be a USRPHC,
or that our common stock will be considered regularly traded,
when a
Non-U.S. Holder
sells its shares of our common stock.
Information Reporting and Backup Withholding Requirements
We must annually report to the IRS and to each
Non-U.S. Holder
any dividend income that is subject to U.S. federal
withholding tax, or that is exempt from such withholding tax
pursuant to an income tax treaty. Copies of these information
returns also may be made available under the provisions of a
specific treaty or agreement to the tax authorities of the
country in which the
Non-U.S. Holder
resides. Under certain circumstances, the Code imposes a backup
withholding obligation (currently at a rate of 28%) on certain
reportable payments. Dividends paid to a
Non-U.S. Holder of
our common stock generally will be exempt from backup
withholding if the
Non-U.S. Holder
provides a properly executed IRS Form W-8BEN or otherwise
establishes an exemption.
The payment of the proceeds from the disposition of our common
stock to or through the U.S. office of any broker,
U.S. or foreign, will be subject to information reporting
and possible backup withholding unless the holder certifies as
to its
non-U.S. status
under penalties of perjury or otherwise establishes an
exemption, provided that the broker does not have actual
knowledge or reason to know that the holder is a
U.S. person or that the conditions of any other exemption
are not, in fact, satisfied. The payment of the proceeds from
the disposition of our common stock to or through a
non-U.S. office of
a non-U.S. broker
will not be subject to information reporting or backup
withholding unless the
non-U.S. broker
has certain types of relationships with the United States (a
U.S. related
93
person). In the case of the payment of the proceeds from
the disposition of our common stock to or through a non-U.S
office of a broker that is either a U.S. person or a
U.S. related person, the Treasury regulations require
information reporting (but not the backup withholding) on the
payment unless the broker has documentary evidence in its files
that the holder is a
Non-U.S. Holder
and the broker has no knowledge to the contrary.
Non-U.S. Holders
should consult their own tax advisors on the application of
information reporting and backup withholding to them in their
particular circumstances (including upon their disposition of
our common stock).
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from a payment to a
Non-U.S. Holder
will be refunded or credited against the
Non-U.S. Holders
U.S. federal income tax liability, if any, if the
Non-U.S. Holder
provides the required information to the IRS on a timely basis.
Non-U.S. Holders
should consult their own tax advisors regarding the filing of a
U.S. tax return for claiming a refunded of such backup
withholding.
94
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement dated November 16, 2006, we and the
selling stockholders have agreed to sell to the underwriters
named below, for whom Credit Suisse Securities (USA) LLC and
Morgan Stanley & Co. Incorporated are acting as
representatives, the following respective numbers of shares of
common stock:
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Number | |
Underwriter |
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of Shares | |
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Credit Suisse Securities (USA) LLC
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7,500,000 |
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Morgan Stanley & Co. Incorporated
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7,500,000 |
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Piper Jaffray & Co.
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1,600,000 |
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Cowen and Company, LLC
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1,400,000 |
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First Albany Capital Inc.
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1,000,000 |
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ThinkEquity Partners LLC
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1,000,000 |
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Total
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20,000,000 |
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The underwriting agreement provides that the underwriters are
obligated to purchase all the shares of common stock in the
offering if any are purchased, other than those shares covered
by the over-allotment option described below. The underwriting
agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be
increased or the offering may be terminated.
We have granted to the underwriters a
30-day option to
purchase on a pro rata basis up to 2,942,500 additional
shares from us at the initial public offering price less the
underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock
initially at the public offering price on the cover page of this
prospectus and to selling group members at that price less a
selling concession of $0.7440 per share. After the initial
public offering, the representatives may change the public
offering price and concession.
The following table summarizes the compensation we and the
selling stockholders will pay:
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Per Share | |
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Total | |
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Without | |
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With | |
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Without | |
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With | |
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Over-allotment | |
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Over-allotment | |
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Over-allotment | |
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Over-allotment | |
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Underwriting Discounts and Commissions paid by us |
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$1.24 |
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$1.24 |
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$16,430,000 |
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$20,078,700 |
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Underwriting Discounts and Commissions paid by the selling
stockholders |
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$1.24 |
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$ |
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$ 8,370,000 |
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$ 8,370,000 |
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The representatives have informed us that they do not expect
sales to accounts over which the underwriters have discretionary
authority to exceed 5% of the shares of common stock being
offered. The expenses of this offering, not including
underwriting discounts and commissions, are estimated to be
approximately $4,400,000. Included in the offering expenses is a
structuring fee to Credit Suisse Securities (USA) LLC in the
amount of $900,000. We will be reimbursed by the underwriters
for certain of our out-of-pocket expenses.
We have agreed that we will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or file
with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933 (the Securities
Act) relating to, any shares of our common stock or
securities convertible into or exchangeable or exercisable for
any shares of our common stock, or publicly disclose the
intention to make any offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse
Securities (USA) LLC and Morgan Stanley & Co.
Incorporated for a period of 180 days after the date of
this prospectus except that we may (i) issue shares of our
common stock in the offering; (ii) issue shares of our
common stock pursuant to the exercise of options or other equity
awards, or grant options or other equity awards pursuant to
option plans, in each case existing on the date of this
prospectus; or (iii) file with the SEC one or more
registration statements on
Form S-8
registering the shares of our common stock issuable under our
equity compensation plans in effect on the date of this
prospectus, in the case of (ii) and (iii) above subject to no
further transfer during the lock-up period. However,
in the event that either (1) during the last 17 days
of the lock-up period, we release earnings results
or material news
95
or a material event relating to us occurs or (2) prior to
the expiration of the lock-up period, we announce
that we will release earnings results during the
16-day period beginning
on the last day of the lock-up period, then in
either case the expiration of the lock-up will be
extended until the expiration of the
18-day period beginning
on the date of the release of the earnings results or the
occurrence of the material news or event, as applicable, unless
Credit Suisse Securities (USA) LLC and Morgan
Stanley & Co. Incorporated waive, in writing, such an
extension.
Our officers, directors and existing stockholders have agreed
that they will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of our
common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, enter into a
transaction that would have the same effect, or enter into any
swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our
common stock, whether any of these transactions are to be
settled by delivery of our common stock or other securities, in
cash or otherwise, or publicly disclose the intention to make
any offer, sale, pledge or disposition, or to enter into any
transaction, swap, hedge or other arrangement, without, in each
case, the prior written consent of Credit Suisse Securities
(USA) LLC and Morgan Stanley & Co. Incorporated
for a period of 180 days after the date of this prospectus.
However, in the event that either (1) during the last
17 days of the lock-up period, we release
earnings results or material news or a material event relating
to us occurs or (2) prior to the expiration of the
lock-up period, we announce that we will release
earnings results during the
16-day period beginning
on the last day of the lock-up period, then in
either case the expiration of the lock-up will be
extended until the expiration of the
18-day period beginning
on the date of the release of the earnings results or the
occurrence of the material news or event, as applicable, unless
Credit Suisse Securities (USA) LLC and Morgan
Stanley & Co. Incorporated waive, in writing, such an
extension. The lock-up restriction does not, however, restrict
transfers of common stock (or any securities convertible into or
exercisable or exchangeable for common stock) to any of the
following transferees who agree to be bound in writing by the
terms of the lock-up and who receive such securities
in a transfer not involving a disposition for value:
(i) any donee(s) of one or more bona fide gifts of common
stock; (ii) any trust for the direct or indirect benefit of
the locked-up party or of any familial relation thereof not more
remote than first cousin, whether by blood, marriage or
adoption; (iii) any beneficiary of the locked-up party
pursuant to a will or other testamentary document or applicable
laws of descent; (iv) if the locked-up party is an
investment fund entity that is a limited partnership, limited
liability company or equivalent foreign entity (an
Investment Fund Entity), to any other
Investment Fund Entity under the control of the locked-up
party or under the control of the general partner or managing
member of the locked-up party; or (v) as a distribution to
partners, members or stockholders of the locked-up party.
Credit Suisse Securities (USA) LLC and Morgan
Stanley & Co. Incorporated have advised us that they
have no present intent or arrangement to release any shares
subject to a lock-up, and will consider the release of any
lock-up on a
case-by-case basis. Upon a request to release any shares subject
to a lock-up, Credit Suisse Securities (USA) LLC and Morgan
Stanley & Co. Incorporated would consider the
particular circumstances surrounding the request, including, but
not limited to, the length of time before the
lock-up expires, the
number of shares requested to be released, reasons for the
request, the possible impact on the market for our common stock
and whether the holder of our shares requesting the release is
an officer, director or other affiliate of ours.
The underwriters have reserved for sale at the initial public
offering price up to 875,000 shares of the common stock for
employees, directors and other persons associated with us who
have expressed an interest in purchasing common stock in the
offering. The number of shares available for sale to the general
public in the offering will be reduced to the extent these
persons purchase the reserved shares. Any reserved shares not so
purchased will be offered by the underwriters to the general
public on the same terms as the other shares.
We and the selling stockholders have agreed to indemnify the
underwriters against liabilities under the Securities Act, or
contribute to payments that the underwriters may be required to
make in that respect.
Our common stock has been approved for listing on The Nasdaq
Global Market under the symbol FSLR.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State) an offer to the public of any
common stock which is the subject of the offering contemplated
by this prospectus may not be made in that Relevant Member State
once the prospectus has been approved by the competent authority
in such Member State and published and passported in accordance
with the Prospectus Directive as implemented in such Member
State except that an offer to the public in the Relevant
96
Member State of any Securities may be made at any time under the
following exemptions under the Prospectus Directive, if they
have been implemented in that Relevant Member State:
(a) to legal entities which are authorised or regulated to
operate in the financial markets or, if not so authorised or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than
43,000,000 and
(3) an annual net turnover of more than
50,000,000, as
shown in its last annual or consolidated accounts;
(c) by the Managers to fewer than 100 natural or legal
persons (other than qualified investors as defined in the
Prospectus Directive) subject to obtaining the prior consent of
International Manager for any such offer; or
(d) in any other circumstances falling within
Article 3(2) of the Prospectus Directive.
For the purposes of this provision, the expression an
offer to the public in relation to any common stock
in any Relevant Member State means the communication in any form
and by any means of sufficient information on the terms of the
offer and any common stock to be offered so as to enable an
investor to decide to purchase the common stock, as the same may
be varied in that Member State by any measure implementing the
Prospectus Directive in that Member State and the expression
Prospectus Directive means Directive 2003/71/ EC and
includes any relevant implementing measure in each Relevant
Member State.
The offering has not been notified to the Belgian Banking,
Finance and Insurance Commission (Commission bancaire,
financière et des assurances) pursuant to Article 18
of the Belgian law of 22 April 2003 on the public offering of
securities (the Law on Public Offerings) nor has
this prospectus been, or will it be, approved by the Belgian
Banking, Finance and Insurance Commission pursuant to
Article 14 of the Law on Public Offerings. Accordingly, the
offering may not be advertised, the common stock may not be
offered or sold, and this prospectus nor any other information
circular, brochure or similar document may not be distributed,
directly or indirectly, to any person in Belgium other than
(i) institutional investors referred to in Article 3,
2° of the Belgian Royal Decree of 7 July 1999 on the public
character of financial transactions (the Royal
Decree), acting for their own account or
(ii) investors wishing to acquire the common stock for an
amount of at least EUR 250,000 (or its equivalent in
foreign currencies) per transaction, as specified in
Article 3, 1° of the Royal Decree.
The common stock is offered in Finland solely to investors who
are qualified investors. This prospectus has neither been filed
with nor approved by the Finnish Financial Supervision Authority
and it does not constitute a prospectus under the Prospectus
Directive (2003/71/ EC), the Finnish Securities Market Act
(495/1989, as amended) or the Finnish Investment Funds Act
(48/1999, as amended).
The common stock which is the object of this prospectus is
neither registered for public distribution with the Federal
Financial Supervisory Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht - BaFin)
according to the German Investment Act nor listed on a German
exchange. No sales prospectus pursuant to the German Securities
Prospectus Act or German Sales Prospectus Act or German
Investment Act has been filed with the BaFin. Consequently, the
common stock must not be distributed within the Federal Republic
of Germany by way of a public offer, public advertisement or in
any similar manner and this prospectus and any other document
relating to the common stock, as well as information or
statements contained therein, may not be supplied to the public
in the Federal Republic of Germany or used in connection with
any offer for subscription of the common stock to the public in
the Federal Republic of Germany or any other means of public
marketing.
No offer of shares to the public in Ireland shall be made at any
time except:
(a) to legal entities which are authorised or regulated to
operate in the financial markets or, if not so authorised or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than
43,000,000 and
(3) an annual turnover of more than
50,000,000 as
shown in its last annual or consolidated accounts; or
(c) in any other circumstances which do not require the
publication by the Company of a prospectus pursuant to the
Prospectus (Directive 2003/71/EC) Regulations 2005.
The offering of the common stock has not been registered with
the Commissione Nazionale per le Società e la Borsa
(CONSOB) (the Italian securities and exchange
commission) pursuant to the Italian securities legislation and,
accordingly, each Manager represents and agrees that it has not
offered, sold or delivered any common stock nor distributed any
copies of the prospectus or any other document relating to the
common stock, and will not offer,
97
sell or deliver any shares nor distribute any copies of the
prospectus or any other document relating to the common stock in
the Republic of Italy (Italy) in a solicitation to
the public at large (sollecitazione allinvestimento), and
that the common stock in Italy shall only be:
(i) offered or sold to professional investors (operatori
qualificati) as defined in Article 31, second paragraph of
CONSOB Regulation No 11522 of 1 July 1998 (the
Regulation No 11522), as amended; or
(ii) offered or sold in circumstances where an exemption
from the rules governing solicitations to the public at large
applies, pursuant to Article 100 of Legislative Decree No
58 of 24 February 1998 (the Financial Services Act)
and Article 33, first paragraph, of CONSOB
Regulation No 11971 of 14 May 1999 (the
Regulation No 11971), as amended,
and shall in any event be effected in accordance with all
relevant Italian securities, tax and exchange control and other
applicable laws and regulations.
Moreover and subject to the foregoing, each Manager represents
and agrees that the common stock may not be offered, sold or
delivered and neither the prospectus nor any other material
relating to the common stock may be distributed or made
available in Italy unless such offer, sale or delivery of shares
or distribution or availability of copies of the prospectus or
any other material relating to the common stock in Italy:
(i) is in compliance with Article 129 of Legislative
Decree No 385 of 1 September 1993 (the Italian
Banking Act) and the implementing guidelines of the Bank
of Italy, pursuant to which the issue or the offer of shares in
Italy may need to be followed by an appropriate notice to be
filed with the Bank of Italy depending, inter alia, on the
aggregate value of the securities issued or offered in Italy and
their characteristics; and
(ii) is made by investment firms, banks or financial
intermediaries permitted to conduct such activities in Italy in
accordance with the Financial Services Act, the Italian Banking
Act, the Regulation No 11522, the Regulation No 11971
and other applicable laws and regulations.
Insofar as the requirements above are based on laws which are
superseded at any time pursuant to the implementation of the
Prospectus Directive, such requirements shall be replaced by the
applicable requirements under the Prospectus Directive.
The offer of common stock has not been registered with the
Portuguese Securities Market Commission (the CMVM).
Each Manager has represented, warranted and agreed, and each
further Manager appointed will be required to represent, warrant
and agree that it has not offered or sold, and it will not offer
or sell any common stock in Portugal or to residents of Portugal
otherwise than in accordance with applicable Portuguese Law.
No action has been or will be taken that would permit a public
offering of any of the common stock in Portugal. Accordingly, no
common stock may be offered, sold or delivered except in
circumstances that will result in compliance with any applicable
laws and regulations. In particular, each Manager has
represented, warranted and agreed that no offer has been
addressed to more than 200 non-institutional Portuguese
investors; no offer has been preceded or followed by promotion
or solicitation to unidentified investors, or followed by
publication of any promotional material. The offer of common
stock is intended for Institutional Investors. Institutional
Investors within the meaning of Article 30 of the
Securities Code (Código dos Valores Mobiliários)
includes credit institutions, investment firms, insurance
companies, collective investment institutions and their
respective managing companies, pension funds and their
respective pension fund-managing companies, other authorised or
regulated financial institutions, notably securitisation funds
and their respective management companies and all other
financial companies, securitisation companies, venture capital
companies, venture capital funds and their respective management
companies.
The prospectus in respect of the common stock has not been
registered with the Comisión Nacional del Mercado de
Valores (the CNMV). Accordingly, the common stock
may only be offered in Spain to qualified investors under
pursuant to and in compliance with Law 24/1988, as amended and
Royal Decree 1310/2005.
Each of the Managers severally represents, warrants and agrees
as follows: (1) it has only communicated or caused to be
communicated and will only communicate or cause to be
communicated an invitation or inducement to engage in investment
activity (within the meaning of Section 21 of the Financial
Services and Markets Act 2000 (the FSMA)) received
by it in connection with the issue or sale of the securities in
circumstances in which Section 21(1) of FSMA does not
apply; and (2) it has complied and will comply with all
applicable provisions of the FSMA with respect to anything done
by it in relation to the securities in, from or otherwise
involving the United Kingdom.
98
The underwriters and their respective affiliates may, from time
to time, provide various investment banking, financial advisory
and lending services for us and our affiliates, for which they
will receive customary compensation.
Prior to this offering, there has been no public market for the
common stock. The initial public offering price was determined
by negotiations among us, the selling stockholders and the
underwriters. Among the factors considered in determining the
initial public offering price were the future prospects of our
company and our industry in general, sales, earnings and certain
other financial and operating information of our company in
recent periods, and the price-earnings ratios, comparable sales,
market prices of our securities and certain financial and
operating information of companies engaged in activities similar
to those of our company.
In connection with the offering the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions, and penalty bids in accordance with
Regulation M under the Securities Exchange Act of 1934 (the
Exchange Act).
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum. |
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Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option.
In a naked short position, the number of shares involved is
greater than the number of shares in the over-allotment option.
The underwriters may close out any covered short position by
either exercising their over-allotment option and/or purchasing
shares in the open market. |
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Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked
short position, the position can only be closed out by buying
shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there could
be downward pressure on the price of the shares in the open
market after pricing that could adversely affect investors who
purchase in the offering. |
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Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions. |
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In passive market making, market makers in the common stock who
are underwriters or prospective underwriters may, subject to
limitations, make bids for or purchases of our common stock
until the time, if any, at which a stabilizing bid is made. |
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result
the price of our common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on The Nasdaq Global Market or otherwise and, if
commenced, may be discontinued at any time.
A prospectus in electronic format will be made available on the
web sites maintained by one or more of the underwriters, or
selling group members, if any, participating in this offering
and one or more of the underwriters participating in this
offering may distribute prospectuses electronically. The
representatives may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the underwriters and selling group members that
will make Internet distributions on the same basis as other
allocations.
99