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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 30, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-33156
First Solar, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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20-4623678
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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4050 East Cotton Center Boulevard,
Building 6, Suite 68,
Phoenix, Arizona 85040
(Address of principal executive
offices, including zip code)
(602) 414-9300
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common stock, $0.001 par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The registrant completed the initial public offering of its
common stock in November 2006. Accordingly, there was no public
market for the registrants common stock on July 1,
2006, the last day of the registrants most recently
completed second quarter.
The number of shares of the registrants common stock, par
value $0.001 per share, outstanding as of March 9, 2007 was
72,363,218 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report
on
Form 10-K,
to the extent not set forth herein, is incorporated by reference
from the registrants definitive proxy statement relating
to the Annual Meeting of Shareholders to be held in 2007, which
will be filed with the Securities and Exchange Commission within
120 days after the end of the fiscal year to which this
Annual Report on
Form 10-K
relates.
FIRST
SOLAR, INC.
Form 10-K
for the Fiscal Year Ended December 30, 2006
Index
Throughout this Annual Report on
Form 10-K,
we refer to First Solar, Inc. and its consolidated subsidiaries
as First Solar, the Company,
we, us, and our. Our fiscal
years end on the last Saturday in December. Our last three
fiscal years ended December 25, 2004, December 31,
2005 and December 30, 2006.
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NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934 and the Securities Act of 1933,
which are subject to risks, uncertainties and assumptions that
are difficult to predict. All statements in this Annual Report
on
Form 10-K,
other than statements of historical fact, are forward-looking
statements. These forward-looking statements are made pursuant
to safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The forward-looking statements include
statements, among other things, concerning our business
strategy, including anticipated trends and developments in and
management plans for, our business and the markets in which we
operate; future financial results, operating results, revenues,
gross margin, operating expenses, products, projected costs and
capital expenditures; research and development programs; sales
and marketing initiatives; and competition. In some cases, you
can identify these statements by forward-looking words, such as
estimate, expect,
anticipate, project, plan,
intend, believe, forecast,
foresee, likely, may,
should, goal, target,
might, will, could,
predict and continue, the negative or
plural of these words and other comparable terminology. The
forward-looking statements are only predictions based on our
current expectations and our projections about future events.
All forward-looking statements included in this Annual Report on
Form 10-K
are based upon information available to us as of the filing date
of this Annual Report on
Form 10-K.
You should not place undue reliance on these forward-looking
statements. We undertake no obligation to update any of these
forward-looking statements for any reason. These forward-looking
statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of
activity, performance, or achievements to differ materially from
those expressed or implied by these statements. These factors
include the matters discussed in the section entitled
Item 1A: Risk Factors and elsewhere in this
Form 10-K.
You should carefully consider the risks and uncertainties
described under this section.
PART I
Item 1: Business
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 2006, our average manufacturing costs were
$1.40 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 module
manufacturers.
We manufacture our solar modules on high-throughput production
lines 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 × 4ft
(60cm × 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 $13.5 million in 2004 to
$135.0 million in 2006. 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.
During 2006, we entered into long-term solar module supply
contracts (the Long Term Supply Contracts) with six
European project developers and system integrators, which
initially allowed for approximately 1.2 billion
($1.6 billion at an assumed exchanged rate of
$1.30/1.00)
in sales from 2006 to 2011 for the manufacture and sale of a
total of 795 MW of solar modules. In December 2006, we
exercised our option under each of our Long Term Supply
Contracts to increase the sales volumes and extend each contract
through 2012. We also amended the contracts with four of our
customers in January 2007 to further increase the sales volumes
over the duration of each contract. As a result of the
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option exercises and amendments as of January 9, 2007, our
long term supply contracts allowed for approximately
2.3 billion ($3.0 billion at an assumed exchange
rate of
$1.30/1.00)
in sales from 2006 to 2012 for the manufacture and sale of a
total of 1,554MW of solar modules, of which 50MW was sold in
2006. The information in this paragraph is designed to summarize
the financial terms of the Long Term Supply Contracts and is not
intended to provide guidance about 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 name plate capacity to 175MW annually 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. We describe our production capacity with a
nameplate rating which means minimum expected annual
production. Currently, we assign each production line a 25 MW
nameplate rating. In reality, we expect actual annual production
per line to exceed 25 MW over time as a result of continuous
improvement in module throughput and watts per module (or
conversion efficiency). 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 plant in Germany. After our
German plant reaches full capacity, which we expect to occur
during the second half of 2007, we will have an annual
manufacturing capacity of 175MW. On January 25, 2007, we
announced that we will begin building a 100MW plant in Malaysia
that is scheduled to begin production in the second half of
2008. When the Malaysian plant is completed, we expect to have
annual manufacturing capacity of 275 MW. To complete each
new production line, we will continue to use a systematic
replication process that is 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.
Products
Solar
Modules
Each solar module is approximately 2ft × 4ft
(60cm × 120cm) and had an average rated power of
approximately 64 watts for 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. Our thin film
technology also has relatively high energy performance in low
light and high temperature environments compared to traditional
crystalline silicon solar modules.
Certifications
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 Energiesysteme GmbH and the Institute
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
172,000 solar modules, representing approximately 10MW 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 10% of all solar
modules shipped by us from 2002 through 2006.
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.
Solar
Module Warranty
We provide a limited warranty to the owner 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 owner 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,
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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
December 30, 2006, our accrued warranty expense was
$2.8 million.
Recycling
Program
We believe we are the first company in the photovoltaic industry
to implement a reclamation and recycling program for our solar
modules that will provide full product life cycle stewardship.
Under the Long Term Supply Contracts and other customer
contracts that 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 transfer the solar module reclamation and
recycling agreement to the end-user and provide us with contact
information for each end-user. If our customers resell our solar
modules, we enter into the solar module reclamation and
recycling agreement directly with the end-user.
End-users can return their solar modules to us for reclamation
and recycling at no cost at any time. We pre-fund the estimated
recycling cost at the time of sale, assuming for this purpose a
service life of approximately 20 years for our solar
modules. In addition to achieving substantial environmental
benefits, our solar module recycling program may provide us the
opportunity to recover certain raw materials and components for
reuse in our manufacturing process.
Customers
During 2006, we entered into Long Term Supply Contracts with our
six principal customers for the manufacture and sale of solar
modules. These customers are Blitzstrom GmbH, Conergy AG,
Gehrlicher Umweltschonende Energiesysteme GmbH, Juwi Solar GmbH,
Phönix Sonnenstrom AG and Reinecke + Pohl Sun
Energy AG. These customers are project developers and system
integrators and are headquartered in Germany. The contracts
initially allowed for approximately 1.2 billion
($1.6 billion at an assumed exchanged rate of
$1.30/1.00
in effect as of December 30, 2006) in sales from 2006 to
2011 for the manufacture and sale of a total of 795 MW of solar
modules. In December 2006, we exercised our option under each of
our Long Term Supply Contracts to increase the sales volumes and
extend each contract through 2012. We also amended the contracts
with four of our customers in January 2007 to further increase
the sales volumes over the duration of each contract. As a
result of the option exercises and amendments as of
January 9, 2007, our long term supply contracts allowed for
approximately 2.3 billion ($3.0 billion at an
assumed exchange rate of
$1.30/1.00)
in sales from 2006 to 2012 for the manufacture and sale of a
total of 1,554MW of solar modules, of which 50MW was sold in
2006. The information in this paragraph is intended to summarize
the financial terms of the Long Term Supply Contracts and is not
intended to provide guidance about our future operating results,
including revenues or profitability.
In 2005 and 2006, our principal customers were Blitzstrom GmbH,
Conergy AG, Gehrlicher Umweltschonende Energiesystem GmbH, Juwi
Solar GmbH, Phönix Sonnenstrom AG and Reinecke + Pohl Sun
Energy AG. During 2006, five of our customers each accounted for
between 16% to 19% of our net sales; all other customers
individually accounted for less than 10% of our net sales. 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.
Our customers sell turnkey solar systems to end-users that
include owners of land designated as former agricultural land,
waste land or conversion land 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 and financial investors that desire to own large
scale solar projects.
Manufacturing
Manufacturing
Process
We have integrated our manufacturing processes into a single
production line with the following three stages: the
deposition stage; the cell definition
stage; and the assembly and test stage. Except for
operators
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performing quality control and monitoring functions, the only
stage requiring manual processing is the final assembly and test
stage. As a result of our automated production process, we
employ 20 people per production line for each of our four
shifts, or a total of 80 people per production line for
24 hours per day, seven days per week production.
The deposition process begins with the robotic loading of
2ft × 4ft (60cm × 120cm) panels 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 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
its 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 use 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.
Finally, in the assembly and test stage, we apply busbars, EVA
(Ethyl Vinyl Acetate) laminate, a rear glass cover sheet and
termination wires, seal the joint box and subject each solar
module to a solar simulator and current leakage tests. 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.
Manufacturing
Capacity Expansion
We are in the process of expanding our name plate manufacturing
capacity to 175MW by the end of 2007. In August 2006, we
completed our Ohio expansion by adding two 25MW production lines
to our existing 25MW base plant, which increased 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, which we expect to occur by the end of
2007, we will have an annual manufacturing capacity of 175MW. On
January 24, 2007 we entered into a land lease for a site in
the Kulim Hi-Tech Park in the State of Kadah, Malaysia that can
accommodate up to two 100MW plants and includes an option
exercisable over 6 years for an adjacent land site that
could accommodate up to another eight lines and we expect
construction of the 100MW Malaysia plant to begin in the second
quarter of 2007. 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.
Raw
Materials
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. Presently, we purchase all of our cadmium
telluride in compounded form from one manufacturer. We have a
three year written contract with one of our suppliers, that
provides for quarterly price adjustments based on the cost of
tellurium. As other suppliers become qualified, we will 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.
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Because the sales prices in our Long Term Supply Contracts with
our customers 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 any increases in
the cost of our raw materials to these customers.
Research,
Development and Engineering
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 that 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 9.5% achieved in full production
during 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. During 2007, we plan
to add more 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 comprising
approximately 10,000 modules installed in varying climates and
applications. We also monitor approximately 172,000 solar
modules, representing approximately 10MW 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.
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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
$12.7 million into our research and development expenses
and received $2.8 million of grant funding.
Sales and
Marketing
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 are well
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served by our product. Since 2003, our focus has remained on
grid-connected ground or roof mounted 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.
Government
Subsidies
Countries in Europe, Canada 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 differ 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 allows end-users to
get full value for the electricity generated by
renewable sources, rather than receiving a less desirable rate.
The policies governing net metering vary by state and utility;
some utilities pay the end-user upfront, while others credit the
end-users bill. Net metering is currently offered in
40 states and the District of Columbia. 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.
Regulations and policies relating to electricity pricing and
interconnection also encourage distributive generation with
photovoltaic systems. 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 mainly 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.
Environmental
Matters
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. Therefore, we could incur
substantial costs, including cleanup costs, fines and civil or
criminal sanctions and costs 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
and/or
financial condition. See Item 1A: Risk Factors
Environmental obligations and liabilities could have a
substantial negative impact on our financial condition, cash
flows and profitability.
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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. Within the renewable energy
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 2006, 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 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 and
United Solar. Finally, our solar module comes in one size
measuring 2ft × 4ft
(60cm × 120cm). In contrast, some of our thin
film competitors have developed solar products that 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 and 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. One of our customers, Conergy AG, commenced
construction of a plant in Germany that will manufacture
traditional crystalline silicone photovoltaic solar cells and
modules.
In addition to manufacturers of PV cells and solar modules, we
face competition from companies developing solar thermal and
concentrated PV technologies.
Intellectual
Property
Our success depends, in part, on our ability to maintain and
protect our proprietary technology and to conduct our business
without infringing on the proprietary rights of others. 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
December 30, 2006, in the United States we held 26 patents,
which will expire at various times between 2007 and 2023 and had
18 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 substrates and our laser scribing
process of transforming a large semiconductor-coated plate into
a series of interconnected cells.
As of December 30, 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 we 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
9
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.
Employees
As of December 30, 2006, we had 723 employees, including
545 in manufacturing and the rest in research and development,
sales and marketing, and general and administration positions.
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.
Available
Information
We maintain a website at http://www.firstsolar.com. We make
available free of charge on our website our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
proxy statement and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, as soon as reasonably practicable after we
electronically file these materials with, or furnish them to,
the SEC. The information contained in or connected to our
website is not incorporated by reference into this report.
The public may also read and copy any materials that we file
with the SEC at the SECs Public Reference Room at 100 F
Street, NE, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet website that contains reports
and other information regarding issuers, such as First Solar,
that file electronically with the SEC. The SECs Internet
website is located at http://www.sec.gov.
Executive
Officers of the Registrant
Our executive officers and their ages and positions are as
follows:
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Name
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Age
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Position
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Michael J. Ahearn
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50
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President, Chief Executive
Officer, Chairman
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Bruce Sohn(1)
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45
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President, Director
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George A. (Chip) Hambro
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43
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Chief Operating Officer
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Jens Meyerhoff
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42
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Chief Financial Officer
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Kenneth M. Schultz
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44
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Vice President, Sales &
Marketing
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I. Paul Kacir
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41
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Vice President, General Counsel
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(1) |
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On March 1, 2007, First Solar announced the appointment of
Bruce Sohn as President of First Solar. |
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. On March 12, 2007 Mr. Ahearn no longer served
as President of the Company, having transferred that title to
Mr. Sohn.
Bruce Sohn was elected a director of First Solar in July 2003.
On March 1, 2007, First Solar, Inc. announced the
appointment of Mr. Sohn as President of First Solar. He was with
Intel Corporation for 24 years where he most recently served as
Plant Manager. Mr. Sohn serves on the boards of the
International Symposium on Semiconductor Manufacturing, the
IEEE-Electron Devices Society Manufacturing Technology Committee
and the New Mexico Museum of Natural History Foundation. He is a
senior member of IEEE and a certified Jonah. Mr. Sohn has
been a guest lecturer at several universities, including the
Massachusetts Institute of Technology and Stanford. He graduated
from the Massachusetts Institute of Technology with a degree in
Materials Science and Engineering.
10
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
provider of embedded memory intellectual property for the design
of integrated circuits, 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, an
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.
Item 1A: Risk
Factors
An investment in our stock involves a high degree of risk. You
should carefully consider the following risk factors, as well as
the other information in this Annual Report on
Form 10-K,
in evaluating First Solar and our business. If any of the
following risks actually occur, our business, financial
condition and results of operations could be materially and
adversely affected. Accordingly, the trading price of our common
stock could decline and you may lose all or part of your
investment in our common stock. The risks and uncertainties
described below are not the only ones we face. Additional risks
that we currently do not know about or that we currently believe
to be immaterial may also impair our business operations.
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 2006, we sold approximately 84MW 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 $13.5 million in 2004 to $135.0 million in 2006,
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.
11
We
have incurred losses since our inception and may be unable to
generate sufficient net sales in the future to sustain
profitability.
We incurred a net loss of $16.8 million in 2004 and
$6.5 million in 2005. Although we had net income of
$4.0 million in 2006, we still had an accumulated deficit
of $145.4 million at December 30, 2006 and we may
incur losses in the future. In addition, we expect our operating
expenses to increase as we expand our operations. Our ability to
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 sustain profitability and positive cash flows, 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 modules manufactured during the qualification
of our pilot line have 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 net 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.
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 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 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.
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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 sustain profitability. 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.
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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 added
two 25MW production lines in our Ohio expansion in August 2006;
however, 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 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
Malaysian plant. Our replication risk in connection with
building the German plant, the Malaysian plant and other future
manufacturing plants could be higher than our replication risk
in the Ohio expansion because we expect the new lines to be
located internationally, which could entail 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, who then undertakes a
specialized production process to manufacture the custom
equipment. As a result, the 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
13
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. In August 2006, 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. We expect to continue expanding our manufacturing
capacity to an aggregate of 175MW by the second half of 2007,
upon the anticipated qualification of our German plant and
275 MW by the second half of 2008, upon the anticipated
completion of our Malaysian plant. 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 and 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 and 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 key raw material we use in our production process in the
active semiconductor layer is a cadmium telluride compound, with
the tellurium component of cadmium telluride compound being the
most critical. Currently, we purchase all of our cadmium
telluride in manufactured form from one manufacturer. 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. During 2006, our largest customers accounted for
between 16% and 19% of our net sales. The loss of any of our
customers or their default in payment could significantly reduce
our net sales and adversely impact our operating results. In
addition, our Long
14
Term Supply Contracts extend through 2012 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 approximately
two-thirds of the planned capacity of our base plant, Ohio
expansion, German plant and Malaysian plant through 2012. 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, and then by an additional 3% for modules delivered in
2012. 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 the contracts. In
addition, our Long Term Supply Contracts specify a sales price
per watt that declines approximately 6.5% each year through the
expiration date of the contract in 2012. 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 adversely impact 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,
France, South Korea, Japan, Canada 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 95.0% of our net sales
in 2006, 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
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 (EEG). If the
German government reduces or eliminates the subsidies under the
EEG, demand for photovoltaic products could significantly
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
15
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 or generators of electricity from
fossil fuels or other renewable energy sources 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 95.0% of
our net sales were outside the United States and denominated in
euros for the years ended December 31, 2005 and
December 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 through 2012 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. As of
December 30, 2006, we did 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.
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.
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At the end of 2006, 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. One of our
customers, Conergy AG, commenced construction of a plant in
Germany that will manufacture traditional crystalline silicone
photovoltaic solar cells and modules. 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.
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 2006, 95.0% of our net sales were
generated from customers headquartered in Germany. In the
future, we expect to have operations in other European
countries, Malaysia and other Asian countries 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, cost of raw materials and
labor and equipment 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.
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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.
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
December 30, 2006, our accrued warranty expense amounted to
$2.8 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. In addition, once our modules are
installed and connected, but before they are connected to a
power grid or there is a load otherwise put on the modules, the
modules are in an open circuit condition. We are continuing to
collect data on the long term effects on reliability and service
life that results from extended periods of the modules being in
an open circuit condition, particularly in high ambient
temperature conditions. Although the data available to us to
date does not suggest significant deterioration in long term
performance of modules that are left in prolonged open circuit
condition, it may become apparent with future experience that
long term performance and service life is affected by the
modules being kept in an open circuit condition for prolonged
periods of time. Any widespread product failures may damage our
market reputation and cause our sales to decline and require us
to repair or replace the defective modules, which could have a
material adverse effect on our financials results.
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 we could also face a significant unplanned cash
burden from the time we realize our estimates are incorrect or
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 the reclaiming and recycling process.
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; the related expense
that we recognize in our financial statements also includes 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
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. 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 we realize our estimates are incorrect or 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. 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.
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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 Chief
Executive Officer, Bruce Sohn, our President, George A.
(Chip) Hambro, our Chief Operating Officer, Jens
Meyerhoff, our Chief Financial Officer, Ken Schultz, our
VP of Sales and Marketing and other members of our senior
management team. The loss of Messrs. Ahearn, Sohn, Hambro,
Meyerhoff, Schultz 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, Sohn, Schultz 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 us upon little or no notice. We recently added several
members to our senior management team, including Bruce Sohn, our
new President. 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 stock 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.
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. We have
received patents in the United States and select foreign
jurisdictions and we have pending applications in such
jurisdictions as well. Our existing patents and future patents
could be challenged, invalidated, circumvented, or rendered
unenforceable. We have pending patent applications in the United
States and in foreign jurisdictions. Our pending patent
applications may not result in issued patents, or if patents are
issued to us, such patents may not be sufficient to 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 and operating results. Policing unauthorized use of
proprietary technology can be difficult and expensive. Also,
litigation may be necessary to
19
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 considerations 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) or pay ongoing royalties, require
us to redesign our solar modules, 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
the litigation.
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
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and international level. These 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
presently unknown environmental conditions may require
expenditures that could have a material adverse effect on our
business, results of operations and 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
these 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 these 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,
which could limit or impair our ability to sell and distribute
our products. The occurrence of future events such as these
could have a material adverse effect on our business, financial
condition and 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 or to limit our ability to
sell and distribute our products. For example, the European
Union Directive
2002/96/EC
on Waste Electrical and Electronic Equipment (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 (the RoHS
Directive) restricts the use of certain hazardous
substances, including cadmium, in specified products. Other
jurisdictions are considering adopting similar legislation.
Currently, photovoltaic solar modules in general are not subject
to the WEEE or RoHS Directives; however, these directives allow
for future amendments subjecting additional products to their
requirements and the scope, applicability and the products
included in the WEEE and RoHS directives are currently being
considered and may change. If, in the future, our solar modules
become subject to requirements such as these, 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 these
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. Our solar modules are
electricity-producing devices, and it is possible that users
could be injured or killed by our solar modules due to product
malfunctions, defects, improper installation, or other causes.
We commenced commercial shipment of our solar modules in 2002
and, due to our limited historical
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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 control us and their
interests may conflict with or differ from your interests as a
stockholder.
Our current majority stockholder, the Estate of John T. Walton
and its affiliates, including JCL Holdings, LLC, beneficially
owns a majority of our outstanding common stock. The Estate of
John T. Walton and its affiliates 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 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.
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
view favorably.
We are
a controlled company within the meaning of the NASD
rules and, as a result, qualify for exemptions from certain
corporate governance requirements.
The Estate of John T. Walton and its affiliates control a
majority of our outstanding common stock. Under the NASD rules,
a company of which more than 50% of 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 the following:
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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, or, if a nominating committee is
not formed, the independent directors nominate any director
nominees;
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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.
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With the appointment of Mr. Sohn as President of the
Company, he is no longer considered an independent director and
accordingly we no longer have a majority of our board consisting
of independent directors. Other than the current composition of
the Board pending our search for additional independent
directors, we do not presently intend to use these exemptions.
However, we could decide to use one or more of these exceptions
in the future. If we decide to use 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.
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If our
stock price fluctuates, 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 and the following:
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the failure of securities analysts to cover our common stock 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.
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As a result of these factors, investors in our common stock may
not be able to resell their shares at or above the price they
paid for the common stock. These broad market and industry
factors may materially reduce the market price of our common
stock, regardless of our operating performance.
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 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.
We are
incurring and will continue to incur costs as a result of being
a public company that we did not incur when we were a private
company.
As a newly public company, we are incurring and will continue to
incur significant legal, accounting and other expenses that we
did not incur when we were a private company. In addition, the
Sarbanes-Oxley Act of 2002, as well as rules subsequently
implemented by the SEC and The Nasdaq Global Market, have
required changes in corporate governance practices of public
companies. We expect these 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 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 rules and we cannot predict
or estimate the amount of additional costs we may incur or the
timing of such costs.
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,
we identified several significant deficiencies in our internal
controls that were deemed to be material weaknesses
in our internal controls, as defined in standards established by
The Public Company Accounting Oversight Board
(PCAOB). See Item 9A:
Controls and Procedures in this Annual Report on
Form 10-K.
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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.
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
consolidated financial statements for 2004 and audit adjustments
to our 2005 consolidated financial statements and to the
consolidated financial statements of each interim period in
2005. 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 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 adversely affected.
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.
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 are 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 controls
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
24
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 Item 1A: Risk
Factors 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.
Item 1B: Unresolved
Staff Comments
None.
Item 2: Properties
The following is information concerning our principal properties
as of December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
|
|
|
Location
|
|
Principal Use
|
|
Footage
|
|
|
Ownership
|
|
|
Phoenix, Arizona
|
|
Corporate headquarters
|
|
|
10,342
|
|
|
|
Leased
|
|
Perrysburg, Ohio
|
|
Manufacturing, product design,
engineering, research and development, distribution
|
|
|
383,917
|
|
|
|
Owned
|
|
Perrysburg, Ohio
|
|
Warehouse
|
|
|
10,000
|
|
|
|
Leased
|
|
Frankfurt (Oder), Germany
|
|
Manufacturing
|
|
|
957,665
|
|
|
|
Owned
|
|
Mainz, Germany
|
|
Sales and customer support
|
|
|
8,214
|
|
|
|
Leased
|
|
Berlin, Germany
|
|
Government relations
|
|
|
1,213
|
|
|
|
Leased
|
|
On January 24, 2007, we entered into a land lease agreement
on a 17.8 hectare lot in Kulim, Malaysia. We plan to construct a
new 100MW solar module manufacturing plant on the leased land.
Item 3: 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.
Item 4: Submission
of Matters to a Vote of Security Holders
None.
25
PART II
|
|
Item 5:
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock has been listed on The Nasdaq Global Market
under the symbol FSLR since November 17, 2006.
Prior to this time, there was no public market for our common
stock. The following table sets forth the range of high and low
sales prices per share as reported on The Nasdaq Global Market
for the periods indicated.
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
Second Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
$
|
30.00
|
|
|
$
|
23.50
|
|
The closing sales price of our common stock on The Nasdaq Global
Market was $52.06 per share on March 9, 2007. As of
March 9, 2007, there were approximately 10 record
holders of our common stock. This figure does not reflect the
beneficial ownership of shares held in nominee names.
Dividend
Policy
We have never declared or paid cash dividends on our common
stock. We currently expect to retain all available funds and any
future earnings for use in the operation and development of our
business. Accordingly, we do not anticipate declaring or paying
cash dividends on our common stock in the foreseeable future.
Use of
Proceeds from Initial Public Offering
On November 16, 2006, our registration statements on
Form S-1
covering the offering of 22,942,500 shares of our common
stock, commission file numbers
333-135574
and
333-138779,
were declared effective. 6,750,000 of these shares were
registered on behalf of certain of our stockholders. The
offering closed on November 22, 2006. As of the date of
filing this Annual Report on
Form 10-K,
the offering has terminated and all of the securities registered
pursuant to the offering have been sold.
Credit Suisse Securities (USA) LLC and Morgan Stanley &
Co. were the managing underwriters for the offering. The total
price to the public for the 16,192,500 shares that we
offered and sold was $323.9 million and our net proceeds
were $302.7 million after deducting underwriting discounts
and commissions of $16.6 million and other expenses of
$4.6 million. From November 23, 2006 through
December 30, 2006, we used $3.8 million of the net
proceeds for capital expenditures, primarily for manufacturing
equipment at our Ohio plant. In November 2006, we also repaid a
loan in the amount of $26.0 million to the Estate of John.
T. Walton, a related party. We intend to primarily fund the
construction of our Malaysia plant with the proceeds of our
initial public offering. The total price to the public for the
6,750,000 shares offered by the selling shareholders was
$135.0 million.
26
Equity
Compensation Plans
The following table sets forth certain information, as of
December 30, 2006, concerning securities authorized for
issuance under all equity compensation plans of our company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available
|
|
|
|
to be Issued
|
|
|
Weighted-Average
|
|
|
for Future Issuance
|
|
|
|
Upon Exercise of
|
|
|
Price of
|
|
|
Under Equity Compensation
|
|
|
|
Outstanding Options
|
|
|
Outstanding Options
|
|
|
Plans (Excluding Securities
|
|
Plan Category
|
|
and Rights(a)
|
|
|
and Rights(b)
|
|
|
Reflected in Column(a))(c)
|
|
|
Equity Compensation plans approved
by our stockholders(1)
|
|
|
6,529,476
|
|
|
$
|
7.18
|
|
|
|
6,089,084
|
|
Equity compensation plans not
approved by our stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
6,529,476
|
|
|
$
|
7.18
|
|
|
|
6,089,084
|
|
|
|
|
(1) |
|
Includes our 2003 Unit Option Plan and 2006 Omnibus Incentive
Compensation Plan. |
27
Stock
Price Performance Graph
The following graph shows the total stockholder return of an
investment of $100 in cash on November 17, 2006, the date
our common stock began to trade on the Nasdaq Global Market,
through December 30, 2006, for (1) our common stock,
(2) the S&P 500 Index and (3) the Russell 2000
Index. All values assume reinvestment of the full amount of all
dividends. No cash dividends have been declared on shares of our
common stock. This performance graph is not soliciting
material, is not deemed filed with the SEC and is not to
be incorporated by reference in any filing by us under the
Securities Act of 1933, as amended (the Securities
Act), or the Exchange Act, whether made before or after
the date hereof and irrespective of any general incorporation
language in any such filing. The stock price performance shown
on the graph represents past performance and should not be
considered an indication of future price performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/17/06
|
|
|
11/06
|
|
|
12/06
|
First Solar,
Inc.
|
|
|
|
100.00
|
|
|
|
|
114.39
|
|
|
|
|
120.61
|
|
S & P 500
|
|
|
|
100.00
|
|
|
|
|
101.90
|
|
|
|
|
103.33
|
|
Russell 2000
|
|
|
|
100.00
|
|
|
|
|
102.63
|
|
|
|
|
102.97
|
|
NASDAQ Clean Edge
U.S.
|
|
|
|
100.00
|
|
|
|
|
102.03
|
|
|
|
|
99.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Sales of Unregistered Securities
During 2006, we sold unregistered securities to a limited number
of persons, as described below. None of these transactions
involved any underwriters or any public offerings and we believe
that each of these transactions was exempt from registration
requirements. The recipients of the securities in these
transactions represented their intention to acquire the
securities for investment only and not with a view to or for
sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and
instruments issued in these transactions.
In February 2006, we issued an aggregate total of
6,613,635 shares of its common stock to JWMA Holdings,
LLC, an accredited investor, at a price of $4.54 per share.
The transactions were conducted in reliance upon the available
exemptions from the registration requirements of the Securities
Act, including those contained in Section 4(2).
Upon our change in corporate organization on February 22,
2006, we issued an aggregate of 51,827,318 shares of common
stock to holders of our membership units, each of which was an
accredited investor, in exchange for the contribution to us of
all such membership units. In each case, these transactions were
conducted in reliance upon the available exemptions from the
registration requirements of the Securities Act, including those
contained in Section 4(2).
On February 22, 2006, we issued $74.0 million
aggregate principal amount of convertible senior subordinated
notes due February 22, 2011 to Goldman,
Sachs &Co. On May 10, 2006, Goldman, Sachs &
Co. converted all of the
28
convertible senior subordinated notes into 4,261,457 shares
of common stock and is now a stockholder. These transactions
were conducted in reliance upon the available exemptions from
the registration requirements of the Securities Act, including
those contained in Section 4(2).
Purchases
of Equity Securities by the Issuer and Affiliate
Purchases
None.
Item 6: Selected
Consolidated Financial Data
The following table sets forth our selected consolidated
financial data 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 table,
Predecessor refers to First Solar before
cancellation of the minority interests and Successor
refers to First Solar after cancellation of the minority
interests.
The selected consolidated financial information for the fiscal
years ended December 25, 2004, December 31, 2005 and
December 30, 2006 and as of December 31, 2005 and
December 30, 2006 have been derived from the audited
consolidated financial statements of the Successor included
elsewhere in this Annual Report on
Form 10-K.
The selected consolidated financial data for the fiscal year
ended December 27, 2003 and as of December 27, 2003
and December 25, 2004 have been derived from the audited
consolidated financial statements of the Successor not included
in this Annual Report on
Form 10-K.
The selected consolidated financial data for the year ended and
as of December 28, 2002 have been derived from the
unaudited consolidated financial statements of the Predecessor
not included in this Annual Report on
Form 10-K.
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 information presented below should be read in conjunction
with Item 7: Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and the related notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(1)
|
|
|
|
Successor(1)
|
|
|
|
Years Ended
|
|
|
|
Years Ended
|
|
|
|
Dec 28,
|
|
|
|
Dec 27,
|
|
|
Dec 25,
|
|
|
Dec 31,
|
|
|
Dec 30,
|
|
|
|
2002
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(Dollars in thousands, except per unit/share amounts)
|
|
Statement of
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
490
|
|
|
|
$
|
3,210
|
|
|
$
|
13,522
|
|
|
$
|
48,063
|
|
|
$
|
134,974
|
|
Cost of sales
|
|
|
7,007
|
|
|
|
|
11,495
|
|
|
|
18,851
|
|
|
|
31,483
|
|
|
|
80,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(6,517
|
)
|
|
|
|
(8,285
|
)
|
|
|
(5,329
|
)
|
|
|
16,580
|
|
|
|
54,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,029
|
|
|
|
|
3,841
|
|
|
|
1,240
|
|
|
|
2,372
|
|
|
|
6,361
|
|
Selling, general and administrative
|
|
|
9,588
|
|
|
|
|
11,981
|
|
|
|
9,312
|
|
|
|
15,825
|
|
|
|
33,348
|
|
Production
start-up
|
|
|
|
|
|
|
|
|
|
|
|
900
|
|
|
|
3,173
|
|
|
|
11,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(22,134
|
)
|
|
|
|
(24,107
|
)
|
|
|
(16,781
|
)
|
|
|
(4,790
|
)
|
|
|
2,810
|
|
Foreign currency gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
(1,715
|
)
|
|
|
5,544
|
|
Interest expense
|
|
|
(4,158
|
)
|
|
|
|
(3,974
|
)
|
|
|
(100
|
)
|
|
|
(418
|
)
|
|
|
(1,023
|
)
|
Other income (expense), net
|
|
|
68
|
|
|
|
|
38
|
|
|
|
(6
|
)
|
|
|
372
|
|
|
|
1,849
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of change in accounting principle
|
|
|
(26,224
|
)
|
|
|
|
(28,043
|
)
|
|
|
(16,771
|
)
|
|
|
(6,551
|
)
|
|
|
3,974
|
|
Cumulative effect of change in
accounting for share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(26,224
|
)
|
|
|
$
|
(28,043
|
)
|
|
$
|
(16,771
|
)
|
|
$
|
(6,462
|
)
|
|
$
|
3,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units/shares
|
|
|
|
|
|
|
|
36,028
|
|
|
|
43,198
|
|
|
|
48,846
|
|
|
|
56,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per
unit/share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per unit/share
|
|
|
|
|
|
|
$
|
(0.78
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units/shares
|
|
|
|
|
|
|
|
36,028
|
|
|
|
43,198
|
|
|
|
48,846
|
|
|
|
58,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(1)
|
|
|
|
Successor(1)
|
|
|
|
Years Ended
|
|
|
|
Years Ended
|
|
|
|
Dec 28,
|
|
|
|
Dec 27,
|
|
|
Dec 25,
|
|
|
Dec 31,
|
|
|
Dec 30,
|
|
|
|
2002
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
(22,128
|
)
|
|
|
$
|
(22,228
|
)
|
|
$
|
(15,185
|
)
|
|
$
|
5,040
|
|
|
$
|
(576
|
)
|
Net cash used in investing
activities
|
|
|
(3,833
|
)
|
|
|
|
(15,224
|
)
|
|
|
(7,790
|
)
|
|
|
(43,832
|
)
|
|
|
(159,994
|
)
|
Net cash provided by financing
activities
|
|
|
26,450
|
|
|
|
|
39,129
|
|
|
|
22,900
|
|
|
|
51,633
|
|
|
|
451,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(1)
|
|
|
|
Successor(1)
|
|
|
|
|
|
|
Dec 28,
|
|
|
|
Dec 27,
|
|
|
Dec 25,
|
|
|
Dec 31,
|
|
|
Dec 30,
|
|
|
|
|
|
|
2002
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,050
|
|
|
|
$
|
3,727
|
|
|
$
|
3,465
|
|
|
$
|
16,721
|
|
|
$
|
308,092
|
|
|
|
|
|
Accounts receivables, net
|
|
|
201
|
|
|
|
|
1,907
|
|
|
|
4,393
|
|
|
|
1,098
|
|
|
|
27,966
|
|
|
|
|
|
Inventories
|
|
|
2,058
|
|
|
|
|
1,562
|
|
|
|
3,686
|
|
|
|
6,917
|
|
|
|
16,510
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
9,842
|
|
|
|
|
23,699
|
|
|
|
29,277
|
|
|
|
73,778
|
|
|
|
178,868
|
|
|
|
|
|
Total assets
|
|
|
14,377
|
|
|
|
|
31,575
|
|
|
|
41,765
|
|
|
|
101,884
|
|
|
|
578,510
|
|
|
|
|
|
Total liabilities
|
|
|
58,005
|
|
|
|
|
11,019
|
|
|
|
19,124
|
|
|
|
63,490
|
|
|
|
116,844
|
|
|
|
|
|
Accrued recycling
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
917
|
|
|
|
3,724
|
|
|
|
|
|
Current debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,142
|
|
|
|
19,650
|
|
|
|
|
|
Long-term debt
|
|
|
50,000
|
|
|
|
|
8,700
|
|
|
|
13,700
|
|
|
|
28,581
|
|
|
|
61,047
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
(43,628
|
)
|
|
|
|
20,556
|
|
|
|
22,641
|
|
|
|
13,129
|
|
|
|
411,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
Item 7: Managements
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with our consolidated financial statements and the
related notes included elsewhere in this Annual Report on
Form 10-K.
In addition to historical consolidated financial information,
the following discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions as
described under the Note Regarding Forward-Looking
Statements that appears earlier in this Annual Report on
Form 10-K.
Our actual results could differ materially from those
anticipated by these forward-looking statements as a result of
many factors, including those discussed under
Item 1A: Risk Factors and elsewhere in this
Annual Report on
Form 10-K.
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. Each solar module uses 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 2006, we
sold almost all of our solar modules to solar project developers
and system integrators headquartered in Germany.
30
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 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 further to $1.40 in 2006.
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 globally 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 per watt by an
additional
40-50%,
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 technologies and the initiation of a
research, development and production program that allowed us to
improve upon the predecessor technologies and launch commercial
operations in January 2002. From January 2002 to the end of
2005, we sold approximately 28MW of solar modules. During 2006,
we sold approximately 56MW of solar modules.
We converted, on February 22, 2006, from a Delaware limited
liability company to a Delaware corporation. Prior that date, we
operated as a Delaware limited liability company.
Our fiscal year ends on the Saturday on or before
December 31. All references to fiscal year 2006 relate to
the 52 weeks ended December 30, 2006, all references
to fiscal year 2005 relate to the 53 weeks ended
December 31, 2005 and all references to fiscal year 2004
relate to the 52 weeks ended December 25, 2004. We use
a 13 week fiscal quarter.
Manufacturing
Capacity
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 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, which we refer to as 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 for a total of 100 MW name plate capacity.
We anticipate completing the qualification of the German plant
for full volume production during the second half of 2007. On
January 24, 2007, we entered into a lease for a site in the
Kulim Hi-Tech Park in Kadah State, Malaysia where we plan to
start construction of a four line 100MW plant in the second
quarter of 2007.
31
The following table summarizes our current and in-process
production capacity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Production Capacity of
|
|
|
Date Qualification
|
|
|
|
Number of
|
|
|
Manufacturing Facility(1)
|
|
|
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)
|
Malaysia plant
|
|
|
4
|
|
|
|
1,600,000
|
|
|
|
100MW
|
|
|
|
Second half of 2008
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current and Planned
|
|
|
11
|
|
|
|
4,400,000
|
|
|
|
275MW
|
|
|
|
|
|
|
|
|
(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
program. For example, we increased the average conversion
efficiency of our solar modules from approximately 7% in 2003 to
approximately 9% at the end of 2006, thereby increasing the
number of sellable watts per solar module from approximately 49
watts to approximately 64 Watts.
Financial
Operations Overview
The following describes certain line items in our statement of
operations and some of the factors that affect our operating
results.
Net
Sales
We generate substantially all of our net sales from the sale of
solar modules. Over the past three years, 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 $2.39 per watt
during the 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 Europe, the United States,
or Asia or if 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. We refer to these as our Long Term
Sales Contracts. These contracts account for a significant
portion of our planned production over the period from 2006
through 2012 and therefore will significantly affect our overall
financial performance. The initial terms of the Long Term Sales
Contracts allowed us to deliver 795MW of solar modules from 2006
through 2011, which would generate 1.2 billion
($1.6 billion at an assumed exchange rate of
$1.30/1.00)
of sales over that period based on the contractual pricing.
In December 2006, we exercised our option under each of the Long
Term Sales Contracts to increase the sales volumes that we can
deliver, starting in 2008 and to extend each contract through
2012. We also amended the Long Term Sales Contracts with four of
our customers in January 2007 to further increase the sales
volumes that we can deliver over the duration of each contract.
As a result of the option exercises and amendments as of
January 9, 2007 our long term supply contracts allowed for
approximately 2.3 billion ($3.0 billion at an
assumed exchange rate of
$1.30/1.00)
in sales from 2006 to 2012 for the manufacture and sale of a
total of 1,554MW of solar modules, of which 50MW was sold 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. We are
required to increase the minimum
32
average number of watts per module by approximately 5% annually
between 2007 and 2009, and then by an additional 3% for modules
delivered in 2012. 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 by
approximately 6.5% each year through the expiration date of the
contract in 2012. Because these sales prices under our Long Term
Sales Contracts are fixed and have the built-in decline each
year, we cannot pass along any increases in manufacturing costs
to our 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. As a
result, 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 the contractual prices decrease. Furthermore,
the sales prices under the Long Term Sales Contracts are
denominated in Euros, exposing us to risks from currency
exchange rate fluctuations.
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 customer contracts in effect
prior to April 1, 2006, we did not transfer title or risk
of loss, or recognize revenue, until the solar modules 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 expenses or significantly reduce our
throughput. The average termination fee under those agreements
was 2.8 million ($3.6 million at an assumed
exchange rate of
$1.30/1.00)
under the initial contracts and is now 3.8 million
($4.9 million at an assumed exchange rate of
$1.30/1.00)
following our exercise of the option to increase our volume
commitments.
Our customers are entitled to certain remedies in the event of
missed deliveries of kilowatt volume. These delivery commitments
are established through rolling four quarter forecasts to be
negotiated with each of the customers and define the specific
quantities to be purchased on a quarterly basis and the
schedules of the individual shipments to be made to the
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.
We estimate that the total sales volume under our Long Term
Sales Contracts will account for approximately two-thirds of our
planned production volumes from our base plant in Ohio, Ohio
expansion plant and German plant and also some of our planned
production from our Malaysian plant. We spent $70.1 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
Malaysian plant will require approximately $150.0 million
through 2008.
The information about our Long Term Supply Contracts in the
preceding paragraphs is intended to summarize the financial
terms of the Long Term Supply Contracts and is not intended to
provide guidance about our future operating results, including
revenues or profitability.
No single customer accounted for more than 20% of our net sales
in 2006.
Cost
of sales
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
33
module has been stable over the past three years, even though
the cost of tellurium, a component of cadmium telluride,
increased by approximately three times from 2003 to 2006. 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
and manufacturing overhead such as engineering expense,
equipment maintenance, environmental health and safety, quality
and production control and procurement. Cost of sales also
includes depreciation of manufacturing plant and equipment and
facility related expenses. In addition, we accrue warranty and
end of life reclamation and recycling expenses to our cost of
sales.
We implemented a program in 2005 to reclaim and recycle our
solar modules after their use. Under our reclamation and
recycling program, we enter into an agreement with the end-users
of the photovoltaic systems that use our solar modules. In the
agreement, we commit, at our expense, to remove the solar
modules from the installation site at the end of their 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 to 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, an increase in unit output per line, geographic
diversification 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. For example, our long term customer
contracts specify a sales price per watt that declines 6.5% each
year. Another factor impacting gross profits is the ramp of
production due to a lesser absorption of fixed cost until full
production volumes are reached. As a result, gross profits may
vary from quarter to quarter and year to year.
Research
and development
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 research
and 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 December 30,
2006, we had a total of 34 employees working on these
research and development 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 research and development programs. We received
$1.0 million in research and development grants during 2004
and $0.9 million each during 2005 and 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.
34
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
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 these expenditures.
We incurred production
start-up
expenses of $3.2 million in fiscal year 2005 and
$11.7 million during fiscal year 2006 in connection with
the qualification of the Ohio expansion and the planning and
preparation for operation of the German plant. We also expect to
incur significant production
start-up
expenses in fiscal year 2007 in connection with the German plant
and the Malaysian plant. In general, we expect production
start-up
expenses per production line to be higher 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
Interest expense is associated with various debt financings. See
Debt and Credit Sources.
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)
Other income (expense), net consists primarily of interest
earned on our cash and cash equivalents and short-term
investments.
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 Annual Report on
Form 10-K
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 30, 2006, we had
non-U.S. net
operating loss carry-forwards of $6.4 million, which have
an unlimited expiration period, compared to $3.4 million on
December 31, 2005. Our ability to use these net operating
loss carry-forwards is dependent on our ability to generate
taxable income in future periods and subject to 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. We provide valuation allowances against deferred
tax assets when we cannot conclude
35
that it is more likely than not that some portion or all of the
deferred tax assets will be realized. As of December 30,
2006, we had net deferred tax assets of $54.9 million,
consisting primarily of tax-basis goodwill, property, plant and
equipment, economic development funding and share-based
compensation. 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. 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 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 consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
Our critical accounting policies and estimates, which require
the most significant management estimates and judgment in
determining amounts reported in our consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K
are as follows:
Revenue recognition. We recognize revenue when
persuasive evidence of an arrangement exists, delivery of the
product has occurred, 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 reclamation and recycling. 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 return on 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 $2.5 million to cost of sales for the fair value of our
reclamation and recycling obligation for solar modules sold
during the years ended December 31, 2005 and
December 30, 2006, respectively. During both the years
ended December 31, 2005 and December 30, 2006, the
accretion expense on our reclamation and recycling obligations
was insignificant. 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 annual reclamation and recycling cost
accrual; 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.
36
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 our estimate of the cost required to
replace our solar modules under warranty. During the year ended
December 30, 2006, no further significant adjustment to
this estimate was required.
Stock-based compensation. In December 2004,
the FASB issued SFAS 123(R), 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 the
valuation model requires judgment. We use the
Black-Scholes-Merton valuation formula to estimate the fair
value of employee stock options, which is consistent with the
provisions of SFAS No. 123(R). Option pricing models,
including the Black-Scholes-Merton formula, require the use of
input assumptions, including expected volatility, expected term,
expected dividend rate and expected risk-free rate of return.
Because our stock has only recently become publicly traded, we
do not have a meaningful 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 is 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 future stock-based awards could change
significantly from those used for past awards, even if the
critical terms of the awards are similar. Higher volatility and
expected terms result in an 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. During the year ended
December 30, 2006, the adjustments to our forfeiture rate
estimates reduced our share-based compensation expense by
$0.6 million; adjustments to our forfeiture rate estimates
did not have a significant impact on our financial statements
for any prior year. The expense we recognize in future periods
could differ significantly from the current period
and/or our
forecasts due to adjustments in the estimated 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 that 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
37
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 assets 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 2006 and did not note any triggering events
that the carrying values of these assets are not recoverable.
Accounting for 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.
Results
of Operations
The following table sets forth our consolidated statements of
operations for the periods indicated as a percentage of net
sales for the years ended December 25, 2004,
December 31, 2005 and December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Net sales
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of sales
|
|
|
139.4
|
%
|
|
|
65.5
|
%
|
|
|
59.8
|
%
|
Gross profit (loss)
|
|
|
(39.4
|
)%
|
|
|
34.5
|
%
|
|
|
40.2
|
%
|
Research and development
|
|
|
9.2
|
%
|
|
|
5.0
|
%
|
|
|
4.7
|
%
|
Selling, general and administrative
|
|
|
68.9
|
%
|
|
|
32.9
|
%
|
|
|
24.7
|
%
|
Production
start-up
expense
|
|
|
6.6
|
%
|
|
|
6.6
|
%
|
|
|
8.7
|
%
|
Operating income (loss)
|
|
|
(124.1
|
)%
|
|
|
(10.0
|
)%
|
|
|
2.1
|
%
|
Foreign currency gain (loss)
|
|
|
0.9
|
%
|
|
|
(3.6
|
)%
|
|
|
4.1
|
%
|
Interest expense
|
|
|
(0.8
|
)%
|
|
|
(0.9
|
)%
|
|
|
(0.8
|
)%
|
Other income (expense)
|
|
|
(0.0
|
)%
|
|
|
0.9
|
%
|
|
|
1.4
|
%
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
3.9
|
%
|
Cumulative effect of change in
accounting for share-based compensation
|
|
|
|
|
|
|
0.2
|
%
|
|
|
|
|
Net income (loss)
|
|
|
(124.0
|
)%
|
|
|
(13.4
|
)%
|
|
|
2.9
|
%
|
Fiscal
Years Ended December 30, 2006 and December 31,
2005
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2005
|
|
|
2006
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
$
|
48,063
|
|
|
$
|
134,974
|
|
|
$
|
86,911
|
|
|
|
181
|
%
|
The increase in our net sales was due primarily to a 184%
increase in the MW volume of solar modules sold in 2006 compared
to 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. In addition, we increased
the average number of sellable watts per solar module from
approximately 59 watts in 2005 to approximately 63 watts in
2006. The increase in net sales was partially offset by a
38
decrease in the average selling price per watt from $2.43 in
2005 to $2.39 in 2006. Our average selling price was positively
impacted by $0.05 due to a favorable foreign exchange rate
between the U.S. dollar and euro. Strong demand from other
customers allowed us to reduce our dependence on our largest
customer from 45% of net sales in 2005 to 19% of net sales in
2006. In both periods, almost all of our net sales resulted from
sales of solar modules to customers headquartered in Germany.
Cost of
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2005
|
|
|
2006
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of sales
|
|
$
|
31,483
|
|
|
$
|
80,730
|
|
|
$
|
49,247
|
|
|
|
156
|
%
|
% of net sales
|
|
|
65.5
|
%
|
|
|
59.8
|
%
|
|
|
|
|
|
|
|
|
Direct material expense increased $21.6 million, warranty
and end of life costs relating to the reclamation and recycling
of our solar modules increased $3.7 million, direct labor
expense increased $3.9 million and sales freight and other
costs increased $1.2 million, in each case, primarily as a
result of higher production volumes during 2006 compared to
2005. In addition, manufacturing overhead costs increased by
$18.9 million, which was primarily comprised of an increase
in salaries and personnel related expenses of $8.7 million,
including $3.3 million stock-based compensation expense,
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 facility related expenses of
$4.3 million and an increase in depreciation expense of
$5.9 million, primarily as a result of additional equipment
becoming operational at our Ohio expansion.
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2005
|
|
|
2006
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Gross profit
|
|
$
|
16,580
|
|
|
$
|
54,244
|
|
|
$
|
37,664
|
|
|
|
227
|
%
|
gross margin %
|
|
|
34.5
|
%
|
|
|
40.2
|
%
|
|
|
|
|
|
|
|
|
Gross profit increased by $37.7 million, or 227%, from
$16.6 million in 2005 to $54.2 million in 2006,
reflecting an increase in net sales. As a percentage of sales,
gross margin increased 570 basis points from 34.5% in 2005
to 40.2% in 2006, representing increased leverage of our fixed
cost infrastructure and scalability associated with our Ohio
expansion, which drove a 184% increase in the number of MW sold.
Research
and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2005
|
|
|
2006
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Research and development
|
|
$
|
2,372
|
|
|
$
|
6,361
|
|
|
$
|
3,989
|
|
|
|
168
|
%
|
% of net sales
|
|
|
5.0
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
The increase in research and development expense was primarily
the result of a $3.2 million increase in personnel related
expense, which included stock-based compensation expense of
$2.3 million in 2006 compared to $0.6 million for the
same period in 2005, due to increased headcount and additional
option awards. Consulting and other expenses also increased by
$0.7 million and grant revenue declined by
$0.1 million in 2006 compared to 2005.
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2005
|
|
|
2006
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Selling, general and administrative
|
|
$
|
15,825
|
|
|
$
|
33,348
|
|
|
$
|
17,523
|
|
|
|
111
|
%
|
% of net sales
|
|
|
32.9
|
%
|
|
|
24.7
|
%
|
|
|
|
|
|
|
|
|
39
Selling, general and administrative expense increased primarily
as a result of an increase in salaries and personnel-related
expenses of $12.0 million, due to increased headcount and
an increase in stock-based compensation from $3.4 million
in 2005 compared to $5.3 million in 2006. In addition,
legal and professional service fees increased by
$4.8 million and other expenses increased by
$0.7 million during 2006 primarily resulting from expenses
incurred in connection with being a public company.
Production
start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2005
|
|
|
2006
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Production
start-up
|
|
$
|
3,173
|
|
|
$
|
11,725
|
|
|
$
|
8,552
|
|
|
|
270
|
%
|
% of net sales
|
|
|
6.6
|
%
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
In 2006, we incurred $11.7 million of production
start-up
expenses to qualify our Ohio expansion and ramp our German
plant, including related legal and regulatory costs and
increased headcount, compared to $3.2 million of production
start-up
expenses for our Ohio expansion during 2005. Production start up
expenses are primarily attributable to the cost of labor and
material to run and qualify the line, related facility expenses
and management of our replication process.
Foreign
exchange gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2005
|
|
|
2006
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Foreign exchange gain (loss)
|
|
$
|
(1,715
|
)
|
|
$
|
5,544
|
|
|
$
|
7,259
|
|
|
|
N.M.
|
|
Foreign exchange gain increased by $7.3 million from 2005
to 2006 primarily as a result of favorable currency translation
between the U.S. dollar and the euro.
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2005
|
|
|
2006
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Interest expense
|
|
$
|
(418
|
)
|
|
$
|
(1,023
|
)
|
|
$
|
(605
|
)
|
|
|
N.M.
|
|
Interest expense increased by $0.6 million from 2005 to
2006 primarily as a result of increased borrowings associated
with our German plant financing. In 2006, we capitalized
$3.3 million of interest expense to construction in
progress compared to $0.4 million in 2005.
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2005
|
|
|
2006
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Other income (expense), net
|
|
$
|
372
|
|
|
$
|
1,849
|
|
|
$
|
1,477
|
|
|
|
397
|
%
|
The increase in other income of $1.5 million was primarily
due to increased interest income resulting from higher cash
balances resulting from our initial public offering in the
fourth quarter of 2006.
Income
tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2005
|
|
|
2006
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Income tax expense
|
|
$
|
|
|
|
$
|
5,206
|
|
|
$
|
5,206
|
|
|
|
N.M.
|
|
The increase in income tax expense was the result of a change in
corporate form from a LLC to a
C-corporation,
profitability in 2006 and continued full valuation allowance
against our deferred tax assets.
40
Cumulative
effect of change in accounting for share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2005
|
|
|
2006
|
|
|
Year 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
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2004
|
|
|
2005
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
$
|
13,522
|
|
|
$
|
48,063
|
|
|
$
|
34,541
|
|
|
|
255
|
%
|
Of the increase in our net sales, $26.8 million was due to
an increase in the MW volume of solar modules sold from 2004 to
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 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 2004 to $2.43 in 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 2004 to 45.1% of net
sales in 2005. In 2005, 99.6% of our net sales resulted from
shipments of solar modules to Germany, compared to 94.7% of our
net sales in 2004.
Cost of
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2004
|
|
|
2005
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of sales
|
|
$
|
18,851
|
|
|
$
|
31,483
|
|
|
$
|
12,632
|
|
|
|
67
|
%
|
% of net sales
|
|
|
139.4
|
%
|
|
|
65.5
|
%
|
|
|
|
|
|
|
|
|
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 2004 to 2005. On a cost per solar module
and cost per watt basis, raw material costs declined slightly
from 2004 to 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 2004 to 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 2004. Depreciation expense also
increased by $1.4 million from 2004 to 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 2005 than in 2004, as a result of corrective actions
implemented against production material defects encountered in
2004 and lower overall unit production costs.
Gross
profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2004
|
|
|
2005
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Gross profit (loss)
|
|
$
|
(5,329
|
)
|
|
$
|
16,580
|
|
|
$
|
21,909
|
|
|
|
N.M.
|
|
gross margin %
|
|
|
(39.4
|
)%
|
|
|
34.5
|
%
|
|
|
|
|
|
|
|
|
41
Gross profit increased primarily as a result of increased sales
volumes. Our gross margin improved from a negative 39.4% in 2004
to a positive 34.5% in 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.
Research
and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2004
|
|
|
2005
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Research and development
|
|
$
|
1,240
|
|
|
$
|
2,372
|
|
|
$
|
1,132
|
|
|
|
91
|
%
|
% of net sales
|
|
|
9.2
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
The increase in research and development expense was primarily
due to an increase of $0.4 million in our development
staffing during 2005, an increase of $0.5 million due to
higher stock-based compensation expense and an increase of
$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
2005, compared to 2004. Research and development expenses
included stock-based compensation expense of $0.6 million
and $0.1 million in 2005 and 2004, respectively.
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2004
|
|
|
2005
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Selling, general and administrative
|
|
$
|
9,312
|
|
|
$
|
15,825
|
|
|
$
|
6,513
|
|
|
|
70
|
%
|
% of net sales
|
|
|
68.9
|
%
|
|
|
32.9
|
%
|
|
|
|
|
|
|
|
|
$2.2 million of the increase in our selling, general and
administrative expenses was the 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 2005 compared to 2004. Stock-based
compensation expense increased by $2.4 million, from
$1.0 million in 2004 to $3.4 million in 2005.
Production
start-up
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2004
|
|
|
2005
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Production
start-up
|
|
$
|
900
|
|
|
$
|
3,173
|
|
|
$
|
2,273
|
|
|
|
253
|
%
|
% of net sales
|
|
|
6.6
|
%
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
The increase in production
start-up
expenses from $0.9 million in 2004 compared to
$3.2 million in 2005 was due to the build-out of our Ohio
expansion in 2005. Production start up expenses are primarily
attributable to the cost of labor and material to run and
qualify the line, related facility expenses and the management
of our replication process.
Foreign
exchange gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2004
|
|
|
2005
|
|
|
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
2005 as the U.S. dollar strengthened against the euro.
42
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2004
|
|
|
2005
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Interest expense
|
|
$
|
(100
|
)
|
|
$
|
(418
|
)
|
|
$
|
(318
|
)
|
|
|
N.M.
|
|
Interest expense increased due to increased borrowings under
various notes totaling $28.7 million at the end of 2005
compared to $13.7 million at the end of 2004. In 2005 we
capitalized $0.4 million of interest expense in
construction in progress compared to $0.3 million in 2004.
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2004
|
|
|
2005
|
|
|
Year Change
|
|
|
|
(Dollars in thousands)
|
|
|
Other income (expense), net
|
|
$
|
(6
|
)
|
|
$
|
372
|
|
|
$
|
378
|
|
|
|
N.M.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income increased due to an
increase in interest income earned.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting for share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over
|
|
|
|
2004
|
|
|
2005
|
|
|
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.
Liquidity
and Capital Resources
Historically, our principal sources of liquidity have been cash
provided by operations, borrowings from JWMA Partners, LLC
(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. During the year ended December 30, 2006,
we received $302.7 million as the net proceeds from an
initial public offering of our common stock and as of
December 30, 2006, we had $308.4 million in cash and
cash equivalents and short-term investments. 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 Malaysia. 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, cash flows from operating
activities and government grants and low interest debt
financings for our German plant 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 engage in one or more debt or equity financings
in the future that would result in increased expenses or
dilution to our existing stockholders. If we are unable to
obtain debt or equity financing on reasonable terms, we may be
unable to execute our expansion strategy. See Item 1A: Risk
Factors 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
risks and uncertainties.
43
Cash
Flows
Cash provided (used) was as follows for the years ended
December 25, 2004, December 31, 2005 and
December 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Operating activities
|
|
$
|
(15,185
|
)
|
|
$
|
5,040
|
|
|
$
|
(576
|
)
|
Investing activities
|
|
|
(7,790
|
)
|
|
|
(43,832
|
)
|
|
|
(159,994
|
)
|
Financing activities
|
|
|
22,900
|
|
|
|
51,663
|
|
|
|
451,550
|
|
Effect of exchange rates on cash
flows
|
|
|
(187
|
)
|
|
|
385
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
$
|
(262
|
)
|
|
$
|
13,256
|
|
|
$
|
291,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
Cash used in operating activities was $0.6 million during
2006 compared to cash provided by operating activities of
$5.0 million during 2005. During 2006 cash received from
customers increased by $60.6 million to $110.2 million
mainly due to increased accounts receivable resulting from
higher revenues. This increase was offset by cash paid to
suppliers and employees of $111.9 million during 2006,
mainly due to an increase in inventories to support revenue
growth and other costs supporting our global expansion.
Operating activities provided cash of $5.0 million during
2005 and used cash of $15.2 million during 2004. The
increase of $20.2 million in cash provided by operating
activities from 2004 to 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 2004 to 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.
Investing
activities
Cash used in investing activities was $160.0 million during
2006 compared to $43.8 million during 2005. Cash used for
investing activities during 2006 was composed of
$153.2 million in capital expenditures for our German plant
and the Ohio expansion and $6.8 million in cash placed in
restricted accounts to fund our solar module reclamation and
recycling program, to secure our construction loan for the
German plant and to secure an inventory supply contract. Our
cash outlays for the German plant were partially recovered
through the receipt of $16.8 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 during 2005 was composed of
$42.5 million in capital expenditures for our Ohio
expansion, $1.3 million deposited with an insurance company
as part of our solar module reclamation and recycling program
and $0.1 million used for other capital expenditures.
Cash used in investing activities was $43.8 million during
2005 compared to $7.8 million during 2004. During 2004,
cash used in investing activities was composed of
$7.7 million used to purchase equipment for our base plant
in Ohio and $0.1 million used for investments into other
long term assets.
Financing
activities
Cash provided by financing activities was $451.6 million
during 2006 compared to $51.7 million during 2005. During
2006, we received $302.7 million in net proceeds from an
initial public offering of our common stock, $130.8 million
in net proceeds from debt issued to third parties,
$36.0 million in loans from related parties, equity
contributions by JWMA of $30.0 million and receipt of
$16.8 million of economic development funding from various
German governmental entities. Partially offsetting these cash
receipts were the repayment of $64.7 million of loans from
related parties. On February 22, 2006, we issued
$74.0 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. During 2005, cash
provided by financing activities was
44
primarily the result of a $20.0 million loan from a related
party, 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.
Cash generated from financing activities was $51.7 million
during 2005 compared to $22.9 million during 2004. During
2004, cash provided by financing activities was primarily the
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.
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
issued and outstanding common shares, which was effective
November 1, 2006; the par value of our common shares
remained $0.001 per share and the number of authorized
shares of common and preferred stock remained the same. All
share and per share amounts presented in this Annual Report on
Form 10-K
and the accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split.
Contractual
Obligations
The following table presents our contractual obligations as of
December 30, 2006, which consists 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, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year
|
|
|
|
|
|
|
Less Than
|
|
|
1 - 3
|
|
|
3 - 5
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(Dollars in thousands)
|
|
|
Long-term debt obligations(1)
|
|
$
|
91,341
|
|
|
$
|
3,702
|
|
|
$
|
35,256
|
|
|
$
|
31,823
|
|
|
$
|
20,560
|
|
Capital lease obligations
|
|
|
24
|
|
|
|
9
|
|
|
|
13
|
|
|
|
2
|
|
|
|
|
|
Operating lease obligations
|
|
|
1,514
|
|
|
|
388
|
|
|
|
574
|
|
|
|
552
|
|
|
|
|
|
Purchase obligations(2)
|
|
|
56,938
|
|
|
|
36,366
|
|
|
|
16,452
|
|
|
|
4,120
|
|
|
|
|
|
Recycling obligations
|
|
|
3,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
153,541
|
|
|
$
|
40,465
|
|
|
$
|
52,295
|
|
|
$
|
36,497
|
|
|
$
|
24,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
Debt
and Credit Sources
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 ($132.6 million at an assumed
exchange rate of
$1.30/1.00)
to fund costs of constructing and starting up our German plant.
This credit facility consists of a term loan of up to
53.0 million ($68.9 million at an assumed
exchange rate of
$1.30/1.00)
and a revolving credit facility of 27.0 million
($35.1 million at an assumed exchange rate of
$1.30/1.00).
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 ($28.6 million at an assumed
exchange rate of
$1.30/1.00).
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
45
September 30, 2012. We have incurred costs related to the
credit facility totaling $2.0 million as of
December 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 December 30, 2006, we had outstanding
borrowings of $45.2 million under the term loan, which we
classify as long-term debt and $16.3 million under the
bridge loan, which we classify as short-term debt. We had no
outstanding borrowings under the revolving credit facility at
December 30, 2006.
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 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 term
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
($0.7 million at an assumed exchange rate of
$1.30/1.00)
for these guarantees. In addition, we must maintain a debt
service reserve of 3.0 million ($3.9 million at
an assumed exchange rate of
$1.30/1.00)
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
46
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
(Investitionszuschüsse) of approximately
21.5 million ($28.0 million at an assumed
exchange rate of
$1.30/1.00)
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 December 30, 2006, we had received
$16.8 million under this program and we had accrued an
additional $4.0 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 ($30.9 million at an assumed
exchange rate of
$1.30/1.00)
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 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. In accordance with the administrative requirements
of the Act, 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. In addition, this program expired on
December 31, 2006 and we can only claim reimbursement for
investments completed by this date. The majority of our
buildings and structures and our investment in machinery and
equipment were completed by this date. As of December 30,
2006, we had accrued $23.5 million that we are eligible to
receive under this program based on qualifying expenditures that
we had incurred through that date.
During July 2006, we entered into a loan agreement, which we
amended and restated on August 7, 2006, with the Estate of
John T. Walton under which we could draw up to
$34.0 million. Interest was payable monthly at the annual
rate of the commercial prime lending rate; principal was to be
repaid at the earlier of January 2008 or the completion of an
initial public offering of our stock. This loan did 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, a related
party. During July 2006, we drew $26.0 million against this
loan, $8.7 million of which we used to repay the Kingston
Properties, LLC loan. Upon completion of our initial public
offering in November 2006, we repaid the entire
$26.0 million loan balance.
During the year ended December 31, 2005, we received a
$15.0 million loan from the Director of Development of the
State of Ohio, $14.9 million of which was outstanding at
December 30, 2006. Interest is payable monthly at the
annual rate of 2.25%; principal payments commenced on
December 1, 2006 and end on July 1, 2015. Land and
buildings at our Ohio plant with a net book value of
$21.6 million at December 30, 2006 have been pledged
as collateral for this loan.
During the year ended December 25, 2004, we received a
$5.0 million loan from the Director of Development of the
State of Ohio, all of which was outstanding at December 30,
2006. Interest is payable monthly at annual rates starting at
0.25% during the first year the loan is outstanding, increasing
to 1.25% during the second and third years, increasing to 2.25%
during the fourth and fifth years and increasing to 3.25% for
each subsequent year; principal payments commence on
January 1, 2007 and end on December 1, 2009. Machinery
and equipment at our Ohio plant with a net book value of
$9.8 million at December 30, 2006 have been pledged as
collateral for this loan. 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
47
received a waiver for that requirement from the lender on
June 5, 2006. 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 was
3.70% per annum. We pre-paid 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 December 30,
2006.
Recent
Accounting Pronouncements
See note 2 to the consolidated financial statements filed
with this Annual Report on
Form 10-K
for a summary of recent accounting pronouncements.
|
|
Item 7A:
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Foreign
Exchange Risk
Our international operations accounted for approximately 95.0%
of our net sales in 2006 and 99.6% of our net sales in 2005. In
2006 and 2005, all of our international sales were denominated
in euro. 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 price in euros per watt and do not adjust for
fluctuations in the U.S. dollar to euro exchange rate. In
2006, a 10% change in foreign currency exchange rates would have
impacted our net sales by $13.1 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 2005 and 2006. 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. As of
December 30, 2006, we did not engage in hedging activities;
however, our expenditures denominated in euro 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 euro, creating increasing
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.
Interest
Rate Risk
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 their up-front capital
expenditure and final project. 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,
which, in each case, could cause these end-users to seek
alternative investments that promise higher returns.
48
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 three interest rate swap agreements to convert
the variable interest on the IKB term loan of Euribor plus 1.6%
to fixed interest rates. At December 30, 2006, the notional
value of our interest rate swaps were 28.8 million
($37.4 million at an assumed exchange rate of
$1.30/1.00).
Commodity
Risk
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 our
qualified supplier, which provides for quarterly price
adjustments based on the cost of tellurium. As other suppliers
become qualified, we will 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.
49
|
|
Item 8:
|
Financial
Statements and Supplementary Data
|
Consolidated
Financial Statements
The consolidated financial statements of First Solar required by
this item are included in the section entitled
Consolidated Financial Statements of this Annual
Report on
Form 10-K.
See Item 15(a)(1) for a list of our consolidated financial
statements.
Selected
Quarterly Financial Data (Unaudited)
The following selected quarterly financial date should be read
in conjunction with our consolidated financial statements and
the related notes and Item 7: Managements
Discussion and Analysis of Financial Condition and Results of
Operations. This information has been derived from our
unaudited consolidated financial statements that, in our
opinion, reflect all recurring adjustments necessary to fairly
present this information when read in conjunction with our
consolidated financial statements and the related notes
appearing in the section entitled Consolidated Financial
Statements. The results of operations for any quarter are
not necessarily indicative of the results to be expected for any
future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended
|
|
|
|
Mar 26,
|
|
|
Jun 25,
|
|
|
Sep 24,
|
|
|
Dec 31,
|
|
|
Apr 1,
|
|
|
Jul 1,
|
|
|
Sep 30,
|
|
|
Dec 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
$
|
8,530
|
|
|
$
|
9,367
|
|
|
$
|
16,585
|
|
|
$
|
13,581
|
|
|
$
|
13,624
|
|
|
$
|
27,861
|
|
|
$
|
40,794
|
|
|
$
|
52,695
|
|
Cost of sales
|
|
|
6,158
|
|
|
|
5,510
|
|
|
|
10,004
|
|
|
|
9,811
|
|
|
|
10,352
|
|
|
|
18,761
|
|
|
|
24,537
|
|
|
|
27,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,372
|
|
|
|
3,857
|
|
|
|
6,581
|
|
|
|
3,770
|
|
|
|
3,272
|
|
|
|
9,100
|
|
|
|
16,257
|
|
|
|
25,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
197
|
|
|
|
287
|
|
|
|
426
|
|
|
|
1,462
|
|
|
|
1,519
|
|
|
|
1,536
|
|
|
|
1,657
|
|
|
|
1,649
|
|
Selling, general and administrative
|
|
|
2,639
|
|
|
|
2,889
|
|
|
|
3,306
|
|
|
|
6,991
|
|
|
|
5,872
|
|
|
|
8,133
|
|
|
|
8,393
|
|
|
|
10,950
|
|
Production
start-up
|
|
|
204
|
|
|
|
286
|
|
|
|
920
|
|
|
|
1,763
|
|
|
|
2,579
|
|
|
|
4,062
|
|
|
|
1,109
|
|
|
|
3,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,040
|
|
|
|
3,462
|
|
|
|
4,652
|
|
|
|
10,216
|
|
|
|
9,970
|
|
|
|
13,731
|
|
|
|
11,159
|
|
|
|
16,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(668
|
)
|
|
|
395
|
|
|
|
1,929
|
|
|
|
(6,446
|
)
|
|
|
(6,698
|
)
|
|
|
(4,631
|
)
|
|
|
5,098
|
|
|
|
9,041
|
|
Foreign currency gain (loss)
|
|
|
(127
|
)
|
|
|
(642
|
)
|
|
|
(283
|
)
|
|
|
(663
|
)
|
|
|
900
|
|
|
|
2,190
|
|
|
|
(298
|
)
|
|
|
2,752
|
|
Interest and other income
(expense), net
|
|
|
(30
|
)
|
|
|
7
|
|
|
|
72
|
|
|
|
(95
|
)
|
|
|
(74
|
)
|
|
|
(43
|
)
|
|
|
(327
|
)
|
|
|
1,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(825
|
)
|
|
|
(240
|
)
|
|
|
1,718
|
|
|
|
(7,204
|
)
|
|
|
(5,872
|
)
|
|
|
(2,484
|
)
|
|
|
4,473
|
|
|
|
13,063
|
|
Income tax (benefit) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
(23
|
)
|
|
|
181
|
|
|
|
5,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of change in accounting principle
|
|
|
(825
|
)
|
|
|
(240
|
)
|
|
|
1,718
|
|
|
|
(7,204
|
)
|
|
|
(5,895
|
)
|
|
|
(2,461
|
)
|
|
|
4,292
|
|
|
|
8,038
|
|
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
|
|
|
$
|
8,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.08
|
|
|
$
|
0.13
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.07
|
|
|
$
|
0.12
|
|
Weighted-average number of shares
used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
46,211
|
|
|
|
49,258
|
|
|
|
49,916
|
|
|
|
49,916
|
|
|
|
50,777
|
|
|
|
54,358
|
|
|
|
56,137
|
|
|
|
63,968
|
|
Diluted
|
|
|
46,211
|
|
|
|
49,258
|
|
|
|
52,158
|
|
|
|
49,916
|
|
|
|
50,777
|
|
|
|
54,358
|
|
|
|
57,956
|
|
|
|
66,324
|
|
50
|
|
Item 9:
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A:
|
Controls and Procedures
|
We maintain disclosure controls and procedures, as
defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act), that are designed to ensure that information
required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and
Exchange Commission rules and forms and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls
and procedures, management recognized that disclosure controls
and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met.
Additionally, in designing disclosure controls and procedures,
our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure
controls and procedures. The design of any disclosure controls
and procedures also is based in part upon certain assumptions
about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its started
goals under all potential future conditions. We believe that our
disclosure controls and procedures provide reasonable assurance
that information required to be disclosed under the Securities
and Exchange Act are recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission rules and forms. Based on their evaluation
as of the end of the period covered by this Annual Report on
Form 10-K
and subject to the foregoing, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure
controls and procedures were effective.
During the period when we became an SEC registrant in November
2006 through December 30, 2006, there were no changes in
our internal controls over financial reporting that have
materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. This
annual report does not include a report of managements
assessment regarding internal control over financial reporting
or an attestation report of the companys independent
registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission
for newly public companies.
We have previously restated our consolidated financial
statements for the year ended December 25, 2004 in order to
correct errors that we identified during the preparation of our
registration statement in connection with our initial public
offering and the performance of the associated audits for the
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 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 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
51
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 consolidated
financial statements for the year ended December 25, 2004,
resulting in a $2.0 million increase in our net loss for
the year ended December 25, 2004. These control
deficiencies also led to audit adjustments to our 2005
consolidated financial statements and to the consolidated
financial statements of each interim period in 2005. 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 constitutes a material weaknesses.
During fiscal 2006, we designed and placed in operation new
controls that remediated the material weakness. Specifically, in
the first half of fiscal 2006, we hired a new Chief Financial
Officer and created an audit committee comprised entirely of
three independent directors and appointed a new independent
director to be the chairman of the audit committee. Furthermore,
we adopted and implemented additional policies and procedures to
strengthen our financial reporting capability, including
investments into further enhancements of our enterprise resource
planning system. In the second half of fiscal 2006, we hired
additional personnel to strengthen the controls put in place
during the first half of fiscal 2006. These personnel included a
Director of Internal Audit, Director Accounting, Director
Financial Planning & Analysis and a Vice President of
Tax and Trade as well as several analyst positions. 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 Item 1A: Risk
Factors 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.
|
|
Item 9B:
|
Other
Information
|
None.
PART III
|
|
Item 10:
|
Directors
and Executive Officers of the Registrant
|
Information concerning our board of directors, committees and
directors, including our audit committee and audit committee
financial expert, appear in our 2007 Proxy Statement, under the
section entitled Proposal No. 1
Election of Directors. Such information in this portion of
the Proxy Statement is incorporated herein by reference.
For information with respect to our executive officers, see
Part I, Item 1 of this Annual Report on
Form 10-K
under the heading entitled Executive Officers.
Information concerning Section 16(a) beneficial ownership
reporting compliance appears in our Proxy Statement under the
section entitled Section 16(a) Beneficial Ownership
Reporting Compliance. Such information in this portion of
the Proxy Statement is incorporated herein by reference.
We have adopted a Statement of Corporate Code of Business
Conduct and Ethics that applies to all directors, officers and
employees of First Solar. Information concerning these codes
appears in our Proxy Statement under the section entitled
Proposal No. 1 Election of
Directors Corporate Governance. Such
information in this portion of the Proxy Statement is
incorporated herein by reference.
|
|
Item 11:
|
Executive
Compensation
|
Information concerning executive compensation and related
information appears in our Proxy Statement under the section
entitled Executive Compensation and Related
Information. Such information in this portion of the Proxy
Statement is incorporated herein by reference.
52
|
|
Item 12:
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information concerning the security ownership of certain
beneficial owners and management and related stockholder
matters, including information regarding our equity compensation
plans, appears in our Proxy Statement under the section entitled
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. The
information in such portion of the Proxy Statement is
incorporated in this Annual Report on
Form 10-K
by reference.
|
|
Item 13:
|
Certain
Relationships and Related Transactions
|
Information concerning certain relationships and related party
transactions appears in our Proxy Statement under the section
entitled Certain Relationships and Related Party
Transactions. The information in such portion of the Proxy
Statement is incorporated in this Annual Report on
Form 10-K
by reference.
|
|
Item 14:
|
Principal
Accountant Fees and Services
|
Information concerning principal accountant fees and services
and the audit committees pre-approval policies and
procedures appears in our Proxy Statement under the section
entitled Proposal No. 2 Ratification
of Selection of Independent Auditor. The information in
such portion of the Proxy Statement is incorporated in this
Annual Report on
Form 10-K
by reference.
PART IV
|
|
Item 15:
|
Exhibits
and Financial Statement Schedules
|
(a) The following documents are filed as part of this
Annual Report on
Form 10-K:
(1) Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Members/Stockholders
Equity and Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
53
(2) Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts
SCHEDULE II:
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 25, 2004, December 31,
2005 and December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
at End of
|
|
Description
|
|
of Year
|
|
|
Additions
|
|
|
Deductions
|
|
|
Year
|
|
|
|
(In thousands)
|
|
|
Allowance for doubtful accounts
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 25, 2004
|
|
$
|
|
|
|
$
|
33
|
|
|
$
|
|
|
|
$
|
33
|
|
Year ended December 31, 2005
|
|
$
|
33
|
|
|
$
|
19
|
|
|
$
|
(48
|
)
|
|
$
|
4
|
|
Year ended December 30, 2006
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4
|
|
Reserve for excess and obsolete
inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 25, 2004
|
|
$
|
477
|
|
|
$
|
41
|
|
|
$
|
(487
|
)
|
|
$
|
31
|
|
Year ended December 31, 2005
|
|
$
|
31
|
|
|
$
|
60
|
|
|
$
|
(91
|
)
|
|
$
|
|
|
Year ended December 30, 2006
|
|
$
|
|
|
|
$
|
48
|
|
|
$
|
(37
|
)
|
|
$
|
11
|
|
(3) Exhibits: See Item 15(b) below.
(b) Exhibits: The exhibits listed on the accompanying Index
to Exhibits immediately following the signature page on this
Form 10-K
are filed, or incorporated into this
Form 10-K
by reference.
(c) Financial Statement Schedule: See Item 15(a) above.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Phoenix, State of
Arizona, on the 16th day of March 2007.
FIRST SOLAR, INC.
Jens Meyerhoff
Chief Financial Officer
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned
whose signature appears below constitutes and appoints Michael
J. Ahearn, Jens Meyerhoff and I. Paul Kacir and each of them,
the undersigneds true and lawful
attorneys-in-fact
and agents with full power of substitution, for the undersigned
and in the undersigneds name, place and stead, in any and
all capacities, to sign any and all amendments to this Annual
Report on
Form 10-K
and any other documents in connection therewith and to file the
same, with all exhibits thereto, with the SEC, granting unto
said
attorneys-in-fact
and agents and each of them, full power and authority to do and
perform each and every act requisite and necessary to be done
with respect to this Annual Report on
Form 10-K,
as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that
said
attorneys-in-fact
and agents, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this
Power of Attorney as of the date indicated below.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
Principal Executive Officer and
Director:
|
|
|
|
|
|
|
|
|
|
/s/ MICHAEL
J. AHEARN
Michael
J. Ahearn
|
|
Chief Executive Officer and
Director
|
|
March 16, 2007
|
|
|
|
|
|
Principal Financial Officer and
Principal Accounting Officer:
|
|
|
|
|
|
|
|
|
|
/s/ JENS
MEYERHOFF
Jens
Meyerhoff
|
|
Chief Financial Officer
|
|
March 16, 2007
|
|
|
|
|
|
Additional Directors:
|
|
|
|
|
|
|
|
|
|
/s/ JAMES
F. NOLAN
James
F. Nolan
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ J.
THOMAS
PRESBY
J.
Thomas Presby
|
|
Director
|
|
March 16, 2007
|
55
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ BRUCE
SOHN
Bruce
Sohn
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ PAUL
H. STEBBINS
Paul
H. Stebbins
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ MICHAEL
SWEENEY
Michael
Sweeney
|
|
Director
|
|
March 16, 2007
|
56
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of First Solar, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of cash
flows, and of members/stockholders equity and
comprehensive income (loss) present fairly, in all material
respects, the financial position of First Solar, Inc. and its
subsidiaries at December 30, 2006 and December 31,
2005, and the results of their operations and their cash flows
for each of the three years in the period ended
December 30, 2006 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 13 to the consolidated financial
statements, the Company changed its method of accounting for
stock-based compensation in 2005.
PricewaterhouseCoopers LLP
Phoenix, Arizona
March 15, 2007
57
FIRST
SOLAR, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
December 31,
2005 and December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except
|
|
|
|
share information)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,721
|
|
|
$
|
308,092
|
|
Short-term investments
|
|
|
312
|
|
|
|
323
|
|
Accounts receivable, net
|
|
|
1,098
|
|
|
|
27,966
|
|
Inventories
|
|
|
6,917
|
|
|
|
16,510
|
|
Economic development funding
receivable
|
|
|
|
|
|
|
27,515
|
|
Prepaid expenses and other current
assets
|
|
|
1,505
|
|
|
|
8,116
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
26,553
|
|
|
|
388,522
|
|
Property, plant and equipment, net
|
|
|
73,778
|
|
|
|
178,868
|
|
Restricted investments
|
|
|
1,267
|
|
|
|
8,224
|
|
Other noncurrent assets
|
|
|
286
|
|
|
|
2,896
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
101,884
|
|
|
$
|
578,510
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
MEMBERS/STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
|
|
|
$
|
16,339
|
|
Note payable to a related party
|
|
|
20,000
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
142
|
|
|
|
3,311
|
|
Accounts payable and accrued
expenses
|
|
|
13,771
|
|
|
|
32,083
|
|
Other current liabilities
|
|
|
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
33,913
|
|
|
|
52,073
|
|
Accrued recycling
|
|
|
917
|
|
|
|
3,724
|
|
Note payable to a related party
|
|
|
8,700
|
|
|
|
|
|
Long-term debt
|
|
|
19,881
|
|
|
|
61,047
|
|
Other noncurrent liabilities
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
63,490
|
|
|
|
116,844
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Employee stock options on
redeemable shares
|
|
|
25,265
|
|
|
|
50,226
|
|
Members/stockholders
equity:
|
|
|
|
|
|
|
|
|
Membership equity
|
|
|
162,307
|
|
|
|
|
|
Preferred stock, $0.001 par
value per share; 30,000,000 shares authorized; no shares
issued and outstanding at December 30, 2006
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par
value per share; 500,000,000 shares authorized;
72,331,964 shares issued and outstanding at
December 30, 2006
|
|
|
|
|
|
|
72
|
|
Additional paid-in capital
|
|
|
|
|
|
|
555,749
|
|
Accumulated deficit
|
|
|
(149,377
|
)
|
|
|
(145,403
|
)
|
Accumulated other comprehensive
income
|
|
|
199
|
|
|
|
1,022
|
|
|
|
|
|
|
|
|
|
|
Total
members/stockholders equity
|
|
|
13,129
|
|
|
|
411,440
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
members/stockholders equity
|
|
$
|
101,884
|
|
|
$
|
578,510
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
58
FIRST
SOLAR, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
For the
Years Ended December 25, 2004, December 31, 2005 and
December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except per
|
|
|
|
unit/share amounts)
|
|
|
Net sales
|
|
$
|
13,522
|
|
|
$
|
48,063
|
|
|
$
|
134,974
|
|
Cost of sales
|
|
|
18,851
|
|
|
|
31,483
|
|
|
|
80,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(5,329
|
)
|
|
|
16,580
|
|
|
|
54,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,240
|
|
|
|
2,372
|
|
|
|
6,361
|
|
Selling, general and administrative
|
|
|
9,312
|
|
|
|
15,825
|
|
|
|
33,348
|
|
Production
start-up
|
|
|
900
|
|
|
|
3,173
|
|
|
|
11,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,452
|
|
|
|
21,370
|
|
|
|
51,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(16,781
|
)
|
|
|
(4,790
|
)
|
|
|
2,810
|
|
Foreign currency gain (loss)
|
|
|
116
|
|
|
|
(1,715
|
)
|
|
|
5,544
|
|
Interest expense
|
|
|
(100
|
)
|
|
|
(418
|
)
|
|
|
(1,023
|
)
|
Other income (expense), net
|
|
|
(6
|
)
|
|
|
372
|
|
|
|
1,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(16,771
|
)
|
|
|
(6,551
|
)
|
|
|
9,180
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
5,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of change in accounting principle
|
|
|
(16,771
|
)
|
|
|
(6,551
|
)
|
|
|
3,974
|
|
Cumulative effect of change in
accounting for share-based compensation
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(16,771
|
)
|
|
$
|
(6,462
|
)
|
|
$
|
3,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per membership
unit/share before cumulative effect of change in accounting
principle basic and diluted
|
|
$
|
(0.39
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.07
|
|
Cumulative effect of change in
accounting principle basic and diluted
|
|
|
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per membership
unit/share basic and diluted
|
|
$
|
(0.39
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average units/shares used
to compute net income (loss) per unit/share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,198
|
|
|
|
48,846
|
|
|
|
56,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
43,198
|
|
|
|
48,846
|
|
|
|
58,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
59
FIRST
SOLAR, INC. AND SUBSIDIARIES
Consolidated
Statements of Members/Stockholders Equity and
Comprehensive Income (Loss)
For the
Years Ended December 25, 2004, December 31, 2005 and
December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Membership Equity
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
Units
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance, December 27, 2003
|
|
|
32,859
|
|
|
$
|
146,699
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(126,144
|
)
|
|
$
|
1
|
|
|
$
|
20,556
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,771
|
)
|
|
|
|
|
|
|
(16,771
|
)
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(187
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash contributions from owner
|
|
|
8,681
|
|
|
|
17,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,900
|
|
Stock-based compensation from
options
|
|
|
|
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 25, 2004
|
|
|
41,540
|
|
|
|
165,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(142,915
|
)
|
|
|
(186
|
)
|
|
|
22,641
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,462
|
)
|
|
|
|
|
|
|
(6,462
|
)
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
385
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash contributions from owner
|
|
|
3,674
|
|
|
|
16,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,663
|
|
Stock-based compensation from
options
|
|
|
|
|
|
|
5,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,167
|
|
Reclassifications to employee stock
options on redeemable shares
|
|
|
|
|
|
|
(25,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
45,214
|
|
|
|
162,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(149,377
|
)
|
|
|
199
|
|
|
|
13,129
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,974
|
|
|
|
|
|
|
|
3,974
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
803
|
|
|
|
803
|
|
Change in unrealized gain on
derivative instruments designated and qualifying as cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash contributions from owner
|
|
|
6,613
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Tax benefit from exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Conversion of membership units into
common shares
|
|
|
(51,827
|
)
|
|
|
(192,307
|
)
|
|
|
51,827
|
|
|
|
11
|
|
|
|
192,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion
of convertible notes
|
|
|
|
|
|
|
|
|
|
|
4,261
|
|
|
|
1
|
|
|
|
73,999
|
|
|
|
|
|
|
|
|
|
|
|
74,000
|
|
Common stock issued in initial
public offering, net of offering costs
|
|
|
|
|
|
|
|
|
|
|
16,193
|
|
|
|
16
|
|
|
|
302,634
|
|
|
|
|
|
|
|
|
|
|
|
302,650
|
|
Common stock issued to directors
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
Stock-based compensation from
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,623
|
|
|
|
|
|
|
|
|
|
|
|
11,623
|
|
Reclassifications to employee stock
options on redeemable shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,961
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,961
|
)
|
Effect of stock split
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 30, 2006
|
|
|
|
|
|
$
|
|
|
|
|
72,332
|
|
|
$
|
72
|
|
|
$
|
555,749
|
|
|
$
|
(145,403
|
)
|
|
$
|
1,022
|
|
|
$
|
411,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
60
FIRST
SOLAR, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
For the
Years Ended December 25, 2004, December 31, 2005, and
December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from customers
|
|
$
|
11,152
|
|
|
$
|
49,643
|
|
|
$
|
110,196
|
|
Cash paid to suppliers and
employees
|
|
|
(26,516
|
)
|
|
|
(44,674
|
)
|
|
|
(111,945
|
)
|
Interest paid, net of amounts
capitalized
|
|
|
(45
|
)
|
|
|
(322
|
)
|
|
|
(712
|
)
|
Other
|
|
|
224
|
|
|
|
393
|
|
|
|
1,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
(15,185
|
)
|
|
|
5,040
|
|
|
|
(576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(7,733
|
)
|
|
|
(42,481
|
)
|
|
|
(153,150
|
)
|
Purchases of restricted investments
|
|
|
|
|
|
|
(1,267
|
)
|
|
|
(6,804
|
)
|
Other investments in long-term
assets
|
|
|
(57
|
)
|
|
|
(84
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(7,790
|
)
|
|
|
(43,832
|
)
|
|
|
(159,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock, net of offering costs
|
|
|
|
|
|
|
|
|
|
|
302,650
|
|
Proceeds from notes payable to a
related party
|
|
|
|
|
|
|
20,000
|
|
|
|
36,000
|
|
Repayment of notes payable to a
related party
|
|
|
|
|
|
|
|
|
|
|
(64,700
|
)
|
Repayment of long-term debt
|
|
|
|
|
|
|
|
|
|
|
(135
|
)
|
Equity contributions
|
|
|
17,900
|
|
|
|
16,663
|
|
|
|
30,000
|
|
Proceeds from stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Proceeds from debt
|
|
|
5,000
|
|
|
|
15,000
|
|
|
|
132,330
|
|
Tax benefit from options
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(1,497
|
)
|
Proceeds from economic development
funding
|
|
|
|
|
|
|
|
|
|
|
16,766
|
|
Other financing activities
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
22,900
|
|
|
|
51,663
|
|
|
|
451,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(187
|
)
|
|
|
385
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(262
|
)
|
|
|
13,256
|
|
|
|
291,371
|
|
Cash and cash equivalents,
beginning of year
|
|
|
3,727
|
|
|
|
3,465
|
|
|
|
16,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
3,465
|
|
|
$
|
16,721
|
|
|
$
|
308,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
acquisitions funded by liabilities
|
|
$
|
|
|
|
$
|
5,418
|
|
|
$
|
2,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash conversion of debt and
accrued interest to equity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
74,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
61
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
|
|
Note 1.
|
First
Solar and Its Business
|
We design, manufacture and sell solar electric power modules.
First Solar Holdings, LLC was formed as a Delaware limited
liability company in May 2003 to act as the holding company for
First Solar, LLC, which was formed in 1999 and renamed First
Solar US Manufacturing, LLC in the second quarter of 2006 and
other subsidiaries formed in 2003 and later. On
February 22, 2006, First Solar Holdings, LLC was
incorporated in Delaware as First Solar Holdings, Inc. and, also
during the first quarter of 2006, was renamed First Solar, Inc.
Upon our change in corporate organization on February 22,
2006, our membership units became common stock shares and our
unit options became share options on a
one-for-one
basis. For clarity of presentation, we refer to our ownership
interests as shares or stock in the
remainder of these notes to our consolidated financial
statements, although prior to February 22, 2006 they were
membership units. First Solar, Inc. has wholly owned
subsidiaries in Ohio, Arizona and Germany.
On October 30, 2006, our board of directors approved a 4.85
to 1 stock split of our common shares, which was effective
November 1, 2006; the par value of our common shares
remains $0.001 per share. All share and per share amounts
presented in these consolidated financial statements have been
retroactively adjusted to reflect the stock split.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Principles of consolidation. These
consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States of America and include the accounts of First Solar, Inc.
and all of its subsidiaries. We eliminated all intercompany
transactions and balances during consolidation.
Fiscal periods. We report the results of our
operations using a 52 or 53 week fiscal year, which ends on
the Saturday on or before December 31. Fiscal 2006 ended on
December 30, 2006 and included 52 weeks, fiscal 2005
ended on December 31, 2005 and included 53 weeks and
fiscal 2004 ended on December 25, 2004 and included
52 weeks. Our fiscal quarters end on the Saturday closest
to the end of the applicable calendar quarter.
Use of estimates. The preparation of
consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires us
to make estimates and assumptions that affect the amounts
reported in our consolidated financial statements and the
accompanying notes. Significant estimates in these consolidated
financial statements include allowances for doubtful accounts
receivable, inventory write-downs, estimates of future cash
flows from and economic useful lives of long-lived assets, asset
impairments, certain accrued liabilities, income taxes and tax
valuation allowances, accrued warranty expenses, accrued
reclamation and recycling expense, stock-based compensation
costs and fair value estimates. Actual results could differ
materially from these estimates under different assumptions and
conditions.
Fair value estimates. The fair value of an
asset or liability is the amount at which it could be exchanged
or settled in a current transaction between willing parties. The
carrying values for cash and cash equivalents, short-term
investments and restricted investments, accounts receivable,
accounts payable and accrued liabilities and other current
assets and liabilities approximate their fair values due to
their short maturities. The carrying value of the portion of our
long term debt with stated interest rates reflects its fair
value based on current rates afforded to us on debt with similar
maturities and characteristics.
Foreign currency translation. The functional
currencies of our foreign subsidiaries are their local
currencies. Accordingly, we apply the period end exchange rate
to translate their assets and liabilities and the weighted
average exchange rate for the period to translate their
revenues, expenses, gains and losses into U.S. dollars. We
include the translation adjustments as a separate component of
accumulated other comprehensive income within stockholders
equity.
Cash and cash equivalents. We consider all
highly liquid investments with original or remaining maturities
of 90 days or less when purchased to be cash equivalents.
62
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Short-term Investments. Investments with
maturities greater than 90 days, but less than one-year at
purchase are recorded as short-term investments. Short-term
investments consist of a deposit account.
Inventories. We report our inventories at the
lower of cost or market. We determine cost on a
first-in,
first-out basis and include both the costs of acquisition and
the costs of manufacturing in our inventory costs. These costs
include direct material, direct labor and fixed and variable
indirect manufacturing costs, including depreciation and
amortization.
We also regularly review the cost of inventory against its
estimated market value and will record a lower of cost or market
write-down if any inventories have a cost in excess of estimated
market value. For example, we regularly evaluate the quantity
and value of our inventory in light of current market conditions
and market trends and record write-downs for any quantities in
excess of demand and for any product obsolescence. This
evaluation considers historic usage, expected demand,
anticipated sales price, new product development schedules, the
effect new products might have on the sale of existing products,
product obsolescence, customer concentrations, product
merchantability and other factors. Market conditions are subject
to change and actual consumption of our inventory could differ
from forecast demand. Our products have a long life cycle and
obsolescence has not historically been a significant factor in
the valuation of our inventories.
Property, plant and equipment. We report our
property, plant and equipment at cost, less accumulated
depreciation. Cost includes the price paid to acquire or
construct the assets, including interest capitalized during the
construction period and any expenditures that substantially add
to the value of or substantially extend the useful life of an
existing asset. We expense repair and maintenance costs when
they are incurred.
We compute depreciation expense using the straight-line method
over the estimated useful lives of the assets, as presented in
the table below. We amortize leasehold improvements over the
shorter of their estimated useful lives or the remaining term of
the lease.
|
|
|
|
|
Useful Lives
|
|
|
in Years
|
|
Buildings
|
|
40
|
Manufacturing machinery and
equipment
|
|
5 7
|
Furniture, fixtures, computer
hardware and computer software
|
|
3 5
|
Leasehold improvements
|
|
15
|
Long-lived assets. We account for our
long-lived, tangible assets and definite-lived intangible assets
in accordance with Statement of Financial Accounting Standards
No. (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 associated with the use of a long-lived
asset or group of assets 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 2006 and did not
note any triggering event that the carrying values of these
asset are not recoverable.
Economic development funding. We are eligible
for economic development funding from various German
governmental entities for certain of our capital expenditures.
We record a receivable for these funds when our legal right to
them exists and all criteria for receiving the funds have been
met. We deduct the amount of the funds from the acquisition
costs of the related assets, which will reduce the depreciation
expense that we otherwise would have to recognize in future
periods. See note 4 for a description of this economic
development funding.
Product warranties. We provide a limited
warranty to the original purchasers of our solar modules for
five years following the date of sale that the modules will be
free from defects in materials and workmanship under normal use
and service conditions and we provide a warranty that the
modules will produce at least 90% of their
63
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
power output rating during the first 10 years following the
date of sale 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 module or, under
the power output warranty, providing additional modules to
remedy the power shortfall. Our warranties may be transferred
from the original purchaser of our modules to a subsequent
purchaser. We accrue an estimate of the future costs of meeting
our warranty obligations when we recognize revenue from sales.
We make and revise this estimate based on the number of solar
modules under warranty at customer locations, our historical
experience with warranty claims, our monitoring of field
installation sites, our in-house testing of our solar modules
and our estimated per-module replacement cost.
Environmental remediation liabilities. We
record environmental remediation liabilities when environmental
assessments
and/or
remediation efforts are probable and the costs can be reasonably
estimated. We estimate these costs based on current laws and
regulations, existing technology and the most likely method of
remediation. We do not discount these costs and we exclude the
effects of possible inflation and other economic factors. If our
cost estimates result in a range of equally probable amounts, we
accrue the lowest amount in the range.
End of life recycling and reclamation. We
recognize an expense for the estimated fair value of certain
future obligations for reclaiming and recycling the solar
modules that we have sold once they have reached the end of
their useful lives. See note 7 for further information
about this obligation and how we account for it.
Revenue recognition. We sell our products
directly to system integrators and 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. Under 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. During 2006, we changed the
terms of our sales contracts with all of our significant
customers to provide that delivery occurs when we deliver our
products to the carrier, rather than when the products are
received by our customer, as had been our terms under our prior
contracts. This change in the terms of our sales contracts
resulted in a one-time increase to our net sales of
$5.4 million during the year ended December 30, 2006.
We do not offer extended payment terms or rights of return for
our sold products.
Shipping and handling costs. Shipping and
handling costs are classified as a component of cost of sales.
Customer payments of shipping and handling costs are recorded as
a component of net sales.
Stock-based compensation. We account for
stock-based employee compensation arrangements in accordance
with SFAS 123 (revised 2004), Share-Based Payments,
which we adopted during the first quarter of the year ended
December 31, 2005 using the modified
retrospective method of transition. SFAS 123(R)
requires us to recognize compensation cost in our financial
statements for the fair value of share-based payments as of
their grant date. We use the Black-Scholes-Merton option
valuation formula to estimate the grant date fair value of our
employee stock option awards. This formula requires us to
estimate a number of input parameters, including the expected
term of our employee stock options and the future volatility of
our stock price.
We developed our estimate of our options expected terms as
of their grant dates, which represents the period of time from
the grant date that we expect the options to remain outstanding,
as the midpoint between the options vesting dates and
expiration dates. Because our stock is newly publicly traded, we
do not have a meaningful observable share-price volatility;
therefore, we based our estimate of the expected volatility of
our future stock price on that of similar publicly-traded
companies and we expect to continue to estimate our expected
stock price volatility in this manner until such time as we
might have adequate historical data to refer to from our own
traded share prices.
The stock-based compensation expense that we recognized in our
results of operations is based on the number of awards expected
to ultimately vest, so the actual award amounts have been
reduced for estimated forfeitures. SFAS 123(R)requires us
to estimate forfeitures at the time the options are granted and
revise those estimates, if
64
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
necessary, in subsequent periods. We estimated forfeitures based
on our historical experience with forfeitures of our options,
giving consideration to whether future forfeiture behavior might
be expected to differ from past behavior.
We recognize compensation cost for awards with graded vesting
schedules on a straight-line basis over the requisite service
periods for each separately vesting portion of the awards as if
each award was, in substance, multiple awards.
Research and development expense. Research and
development costs are incurred during the process of researching
and developing new products and enhancing our existing products,
technologies and manufacturing processes and consist primarily
of compensation and related costs for personnel, materials,
supplies, equipment depreciation and consultant and laboratory
testing costs. We expense these costs as incurred until the
resulting product has been completed and tested and is ready for
commercial manufacturing.
We are party to several research grant contracts with the
U.S. federal government under which we receive
reimbursement for specified costs incurred for certain of our
research projects. We record amounts recoverable from these
grants as an offset to research and development expense when the
related research and development costs are incurred, which is
consistent with the timing of our contractual right to receive
the cost reimbursement. We have included grant proceeds of
$1.0 million, $0.9 million and $0.9 million as
offsets to research and development expense during the years
ended December 25, 2004, December 31, 2005 and
December 30, 2006, respectively.
Production
start-up
expense. 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, to the extent we cannot capitalize the
expenditure.
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 as
First Solar, Inc. during the first quarter of 2006, the company
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. Under this method, we recognize deferred tax
assets and liabilities for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and for operating loss and tax credit
carryforwards. We measure deferred tax assets and liabilities
using the enacted tax laws expected to apply to taxable income
in the years in which we expect those temporary differences to
be recovered or settled; we will recognize the effect on
deferred tax assets and liabilities of a change in tax laws in
the results of our operations during the period that includes
the enactment date. We record valuation allowances to reduce
deferred tax assets when we determine that it is more likely
than not that some or all of the deferred tax assets will not be
realized.
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 authorities. 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
65
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
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.
See note 14 for more information about the impact of income
taxes on our financial position and results of operations.
Per share data. Basic income (loss) per share
is based on the weighted effect of all common shares outstanding
and is calculated by dividing net income (loss) by the weighted
average number of common shares outstanding during the period.
Diluted income (loss) per share is based on the weighted effect
of all common shares and dilutive potential common shares
outstanding and is calculated by dividing net income (loss) by
the weighted average number of common shares and dilutive
potential common shares outstanding during the period.
Comprehensive income (loss). Our comprehensive
income (loss) consists of our net income (loss), changes in
unrealized gains or losses on derivative instruments that we
hold and that qualify as and that we have designated as cash
flow hedges and the effects on our consolidated financial
statements of translating the financial statements of our
subsidiaries that operate in foreign currencies. We present our
comprehensive income (loss) in combined consolidated statements
of members/stockholders equity and comprehensive
income (loss). Our accumulated other comprehensive income (loss)
is presented as a component of equity in our consolidated
balance sheets and consists of the cumulative amount of net
financial statement translation adjustments and unrealized gains
or losses on cash flow hedges that we have incurred since the
inception of our business.
Recent accounting pronouncements. In July
2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. (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 at the beginning of fiscal 2007. Based on our
current assessment and subject to any changes that may result
from additional technical guidance being issued, we expect the
adoption of FIN 48 to increase our reserves for uncertain
tax positions by less than $1.0 million, which we will
record as a cumulative effect adjustment to equity.
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 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 February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities.
SFAS 159 permits entities to choose to measure many
financial assets and financial liabilities at fair value and to
report unrealized gains and losses on those assets and
liabilities in earnings. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. We are currently
assessing the impact of SFAS 159 on our financial position
and results of operations.
In July 2006, the FASB issued EITF Issue No. 06-3, How
Taxes Collected from Customers and Remitted to Governmental
Authorities Should be Presented in the Income Statement (that
is, Gross versus Net Presentation). The adoption of EITF No.
06-3 did not have an impact on our consolidated financial
statements. Our accounting policy has been to present above
mentioned taxes on a net basis, excluded from revenues.
66
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 3.
|
Consolidated
Balance Sheet Details
|
Accounts
receivable, net
Accounts receivable, net consisted of the following at
December 31, 2005 and December 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Accounts receivable, gross
|
|
$
|
1,102
|
|
|
$
|
27,970
|
|
Allowance for doubtful accounts
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
1,098
|
|
|
$
|
27,966
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventories consisted of the following at December 31, 2005
and December 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Raw materials
|
|
$
|
1,675
|
|
|
$
|
8,212
|
|
Work in process
|
|
|
597
|
|
|
|
1,123
|
|
Finished goods
|
|
|
4,645
|
|
|
|
7,175
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
6,917
|
|
|
$
|
16,510
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
Property, plant and equipment consisted of the following at
December 31, 2005 and December 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Buildings and improvements
|
|
$
|
20,959
|
|
|
$
|
21,804
|
|
Machinery and equipment
|
|
|
18,596
|
|
|
|
79,803
|
|
Office equipment and furniture
|
|
|
1,496
|
|
|
|
4,428
|
|
Leasehold improvements
|
|
|
1,362
|
|
|
|
3,086
|
|
|
|
|
|
|
|
|
|
|
Gross depreciable property, plant
and equipment
|
|
|
42,413
|
|
|
|
109,121
|
|
Accumulated depreciation and
amortization
|
|
|
(8,877
|
)
|
|
|
(18,880
|
)
|
|
|
|
|
|
|
|
|
|
Net depreciable property, plant
and equipment
|
|
|
33,536
|
|
|
|
90,241
|
|
Land
|
|
|
1,047
|
|
|
|
2,836
|
|
Construction in progress
|
|
|
39,195
|
|
|
|
85,791
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
$
|
73,778
|
|
|
$
|
178,868
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment
was $1.9 million, $3.4 million and $10.2 million
for the years ended December 25, 2004, December 31,
2005 and December 30, 2006, respectively.
67
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
We incurred and capitalized interest cost (into our property,
plant and equipment) as follows during the years ended
December 25, 2004, December 31, 2005 and
December 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Interest cost incurred
|
|
$
|
447
|
|
|
$
|
773
|
|
|
$
|
4,363
|
|
Interest capitalized
|
|
|
(347
|
)
|
|
|
(355
|
)
|
|
|
(3,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
100
|
|
|
$
|
418
|
|
|
$
|
1,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
Accounts payable and accrued expenses consisted of the following
at December 31, 2005 and December 30, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Accounts payable
|
|
$
|
4,599
|
|
|
$
|
14,001
|
|
Product warranty liability
|
|
|
1,853
|
|
|
|
2,764
|
|
Income tax payable
|
|
|
|
|
|
|
5,152
|
|
Accrued compensation and benefits
|
|
|
780
|
|
|
|
2,642
|
|
Other accrued expenses
|
|
|
6,539
|
|
|
$
|
7,524
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued
expenses
|
|
$
|
13,771
|
|
|
$
|
32,083
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4.
|
Economic
Development Funding
|
On July 26, 2006, we were approved to receive taxable
investment incentives
(Investitionszuschüsse) of approximately
21.5 million ($28.0 million at an assumed
exchange rate of
$1.30/1.00)
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 December 30, 2006, we had received cash
payments of $16.8 million under this program and we had
accrued an additional $4.0 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 ($30.9 million at an assumed
exchange rate of
$1.30/1.00)
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 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. In accordance with the administrative requirements
of the Act, 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. In addition, this program expired on
December 31, 2006 and we can only claim reimbursement for
investments completed by this date. The majority of our
buildings and structures and our investment in machinery and
equipment were completed by this date. As of December 30,
2006, we had accrued $23.5 million that we are eligible to
receive under this program based on qualifying expenditures that
we had incurred through that date.
68
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 5.
|
Intangible
Assets
|
Included in other non-current assets on our consolidated balance
sheets are intangible assets, substantially all of which are
patents on technologies related to our products and production
processes. We record an asset for patents based on the legal,
filing and other costs incurred to secure them and amortize
these costs on a straight-line basis over estimated useful lives
ranging from 5 to 15 years. Amortization expense for our
patents was less than $0.1 million for each of the years
ended December 25, 2004, December 31, 2005 and
December 30, 2006. Intangible assets consisted of the
following at December 31, 2005 and December 30, 2006
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Intangible assets, gross
|
|
$
|
1,389
|
|
|
$
|
1,389
|
|
Accumulated amortization
|
|
|
(1,120
|
)
|
|
|
(1,141
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
269
|
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
|
Estimated future amortization expense for our patents is as
follows at December 30, 2006 (in thousands):
|
|
|
|
|
2007
|
|
$
|
20
|
|
2008
|
|
$
|
20
|
|
2009
|
|
$
|
20
|
|
2010
|
|
$
|
20
|
|
2011
|
|
$
|
20
|
|
Thereafter
|
|
$
|
148
|
|
|
|
Note 6.
|
Restricted
Investments
|
Our restricted investments consist of a funding arrangement for
our solar module reclamation and recycling program (see
note 7), a debt service reserve account of
$4.0 million for our credit facility with a consortium of
banks led by IKB Deutsche Industriebank AG (see
note 8) and cash held by a financial institution as
collateral for a letter of credit.
We pre-fund our estimated product reclamation and recycling
expense at the time of sale through an agreement with a
financial services company. During the years 2028 through 2045,
we may elect to commute the agreement and receive back the
amounts we have deposited plus a rate of return (computed at
5.3% for the years 2005 through 2022 and LIBOR less 0.35%
thereafter) less any cost reimbursements that we have already
received. At December 31, 2005 and December 30, 2006,
the cumulative amount of deposits made and the investment
returns earned through that date were $1.3 million and
$3.0 million, respectively, which we report as a restricted
investment on our consolidated balance sheet. We will make
additional deposits during 2007, based on our estimates made two
months before the deposits are due, of the number of modules
that we expect to ship during 2007.
During fiscal 2006 we entered into a sale and purchase agreement
with one of our suppliers which required us to deliver an
irrevocable standby letter of credit in the amount of
$1.3 million. This letter of credit has been collateralized
through a bank deposit account which we have classified as a
restricted investment.
|
|
Note 7.
|
Product
Reclamation Liability
|
Legislative initiatives in Europe hold manufacturers responsible
for the return and recycling of certain electrical products. The
legislation passed to date does not include solar modules, but
based on the progress of legislative deliberations and our
commitment to the environment, we determined in the fourth
quarter of 2004 that we should develop a program for ensuring
the reclamation and recycling of the modules that we sell in
Europe. As a result, we included a solar module reclamation and
recycling arrangement in our standard 2005 and 2006 sales
contracts, into which our customers, who are solar electricity
generation project developers and system integrators, can enroll
the eventual system owners. Under this arrangement, we agree to
provide for the reclamation and
69
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
recycling of the materials in our solar modules and the system
owners agree to notify us, disassemble their solar electricity
generation systems, package the solar modules for shipment and
revert ownership rights over the modules back to us at the end
of their expected service lives.
During the years ended December 31, 2005 and
December 30, 2006, we have recorded accrued recycling
liabilities for the estimated fair value of our obligations for
the reclamation and recycling of our solar modules and we have
made associated charges to cost of sales. We based 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 modules, which includes the cost of packaging
the module for transport, the cost of freight from the
modules installation site to a recycling center and the
material, labor and capital costs of the recycling process. 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 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. Our
module
end-of-life
reclamation and recycling liabilities totaled $0.9 million
at December 31, 2005 and $3.7 million at
December 30, 2006 and are classified as accrued recycling
with non-current liabilities on our consolidated balance sheets.
We charged $0.9 million and $2.5 million to cost of
sales for the fair value of our reclamation and recycling
obligation for modules sold during the years ended
December 31, 2005 and December 30, 2006, respectively.
During the years ended December 31, 2005 and
December 30, 2006, the accretion expense on our reclamation
and recycling obligations was insignificant.
Starting in the first quarter of 2005, we also offered
participation in the solar module reclamation and recycling
program to owners of the 164,000 modules that we sold during
2003 and 2004, at no charge to the owners. When owners enroll in
the program, we record liabilities for the estimated fair value
of our obligations for the reclamation and recycling of the
solar modules, with an associated charge to cost of sales. We
estimate the fair value of our obligation and account for the
subsequent accretion the same way as for our obligation for
solar modules sold during 2005 and 2006. During the year ended
December 31, 2005, our costs related to this program were
insignificant. During the year ended December 30, 2006, we
charged $0.3 million to cost of sales for the fair value of
the obligations incurred during that year for modules sold
during 2003 and 2004. The accretion expense on those obligations
was insignificant during the year ended December 30, 2006.
If all owners participated as of December 30, 2006, we
estimate that the fair value of our obligation would be
$0.5 million.
Current
related party debt
During the year ended December 31, 2005, we borrowed
$20.0 million from the Estate of John T. Walton, an
affiliate of our majority shareholder, under a promissory note,
all of which was outstanding at December 31, 2005. During
January 2006, we borrowed an additional $10.0 million and
subsequently repaid the entire $30.0 million in February
2006. These notes were unsecured, the balances were payable on
demand and interest was payable monthly at an annual rate equal
to the short term Applicable Federal Rate published by the
Internal Revenue Service (4.34% at December 31, 2005). We
classified these notes as a current liability on our
consolidated balance sheet at December 31, 2005.
During July 2006, we entered into a loan agreement, which we
amended and restated on August 7, 2006, with the Estate of
John T. Walton under which we could draw up to
$34.0 million. Interest was payable monthly at the annual
rate of the commercial prime lending rate; principal was to be
repaid at the earlier of January 2008 or the completion of an
initial public offering of our stock. This loan did 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, a related
party. During July 2006, we drew $26.0 million against this
loan, $8.7 million of which we used to repay the Kingston
Properties, LLC loan. Upon completion of our initial public
offering in November 2006, we repaid the entire
$26.0 million loan balance.
70
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
We had no related party debt outstanding at December 30,
2006.
Long-term
debt
Our long-term debt at December 31, 2005 and
December 30, 2006 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
Euro denominated loan, variable
interest Euribor plus 1.6%, due 2008 through 2012
|
|
$
|
|
|
|
$
|
45,216
|
|
2.25% loan, due 2006 through 2015
|
|
|
15,000
|
|
|
|
14,865
|
|
3.70% loan from a related party,
due June 1, 2010
|
|
|
8,700
|
|
|
|
|
|
0.25% 3.25% loan, due
2007 through 2009
|
|
|
5,000
|
|
|
|
5,000
|
|
Capital lease obligations
|
|
|
23
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,723
|
|
|
|
65,096
|
|
Less unamortized discount
|
|
|
|
|
|
|
(738
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
28,723
|
|
|
|
64,358
|
|
Less current portion
|
|
|
(142
|
)
|
|
|
(3,311
|
)
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
28,581
|
|
|
$
|
61,047
|
|
|
|
|
|
|
|
|
|
|
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 ($132.6 million at an assumed
exchange rate of
$1.30/1.00)
to fund costs of constructing and starting up our German plant.
This credit facility consists of a term loan of up to
53.0 million ($68.9 million at an assumed
exchange rate of
$1.30/1.00)
and a revolving credit facility of 27.0 million
($35.1 million at an assumed exchange rate of
$1.30/1.00).
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 ($28.6 million at an assumed
exchange rate of
$1.30/1.00).
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
$2.0 million as of December 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 December 30, 2006, we
had outstanding borrowings of $45.2 million under the term
loan, which we classify as long-term debt and $16.3 million
under the bridge loan, which we classify as short-term debt. We
had no outstanding borrowings under the revolving credit
facility at December 30, 2006.
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 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
71
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
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 term 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
($0.7 million at an assumed exchange rate of
$1.30/1.00)
for these guarantees. In addition, we must maintain a debt
service reserve of 3.0 million ($3.9 million at
an assumed exchange rate of
$1.30/1.00)
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.
During the year ended December 31, 2005, we received a
$15.0 million loan from the Director of Development of the
State of Ohio, $14.9 million of which was outstanding at
December 30, 2006. Interest is payable monthly at the
annual rate of 2.25%; principal payments commenced on
December 1, 2006 and end on July 1, 2015. Land and
buildings at our Ohio plant with a net book value of
$21.6 million at December 30, 2006 have been pledged
as collateral for this loan.
During the year ended December 25, 2004, we received a
$5.0 million loan from the Director of Development of the
State of Ohio, all of which was outstanding at December 30,
2006. Interest is payable monthly at annual rates starting at
0.25% during the first year the loan is outstanding, increasing
to 1.25% during the second and third years,
72
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
increasing to 2.25% during the fourth and fifth years and
increasing to 3.25% for each subsequent year; principal payments
commence on January 1, 2007 and end on December 1,
2009. Machinery and equipment at our Ohio plant with a net book
value of $9.8 million at December 30, 2006 have been
pledged as collateral for this loan. Due to the preparation of
our registration statement for our initial public offering, 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 for that requirement from the lender on
June 5, 2006. We have subsequently provided these financial
statements to the lender.
During the year ended December 27, 2003, we received an
$8.7 million loan from Kingston Properties, LLC, an
affiliate of our majority stockholder. Interest accrued at the
annual rate of 3.70% and was payable in monthly installments of
$27,000; the principal amount and any unpaid accrued interest
was due on June 1, 2010. We repaid the entire principal
balance of this loan and all accrued interest in July 2006.
At December 30, 2006, future principal payments on our
long-term debt, excluding payments related to capital leases,
which are disclosed in note 11, were due as follows (in
thousands):
|
|
|
|
|
2007
|
|
$
|
3,305
|
|
2008
|
|
|
10,120
|
|
2009
|
|
|
12,416
|
|
2010
|
|
|
10,783
|
|
2011
|
|
|
13,078
|
|
Thereafter
|
|
|
15,379
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
65,081
|
|
|
|
|
|
|
We made interest payments to related parties of
$0.3 million, $0.6 million and $1.1 million for
the years ended December 25, 2004, December 31, 2005
and December 30, 2006, respectively.
|
|
Note 9.
|
Interest
Rate Swap Agreements
|
We have interest rate swap agreements with a financial
institution that effectively convert to fixed rates the floating
variable rate of Euribor on certain drawdowns taken on the term
loan portion of our credit facility with a consortium of banks
led by IKB Deutsche Industriebank AG (see note 8). At
December 30, 2006, the notional values of the interest rate
swaps (in thousands) and their annual fixed payment rates and
maturities were as follows:
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Fixed Rate
|
|
|
Maturity
|
|
|
14,921 ($19,397 at an
assumed exchange rate of
$1.30/1.00)
|
|
|
3.96%
|
|
|
|
December 2012
|
|
9,902 ($12,873 at an assumed
exchange rate of
$1.30/1.00)
|
|
|
4.03%
|
|
|
|
December 2012
|
|
3,928 ($5,106 at an assumed
exchange rate of
$1.30/1.00)
|
|
|
4.07%
|
|
|
|
December 2012
|
|
The notional amounts of the interest rate swaps are scheduled to
decline in accordance with our scheduled principal payments on
the hedged term loan drawdowns. These derivative financial
instruments qualified for accounting as cash flow hedges in
accordance with SFAS 133, Accounting for Derivative
Instruments and Hedging Activities and we designated them as
such. As a result, we classified the aggregate fair value of the
interest rate swap agreements, which was less than of
$0.1 million, as an other current asset on our balance
sheet at December 30, 2006 and we record changes in that
fair value in other comprehensive income. We assessed the
interest rate swap agreements as highly effective as cash flow
hedges at December 30, 2006. We did not enter into any
interest rate swap agreements prior to 2006. We use interest
rate swap agreements to mitigate our exposure to interest rate
fluctuations associated with certain of our debt instruments; we
do not use interest rate swap agreements for speculative or
trading purposes.
73
FIRST
SOLAR, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
We offer a 401(k) retirement savings plan into which all of our
United States employees can voluntarily contribute a portion of
their annual salaries and wages, subject to legally prescribed
dollar limits. We also offered a SIMPLE IRA, which we terminated
during 2006, for employees in our Phoenix office. Our
contributions to our employees plan accounts are made at
the discretion of our board of directors and are based on a
percentage of the participating employees contributions.
In addition, our 401(k) plan requires a 4 year vesting
period on employer contributions. During 2006, we matched half
of the first 4% of their compensation that our employees
contributed to the 401(k) Plan and all of the first 3% of their
compensation that our Phoenix based employees contributed to the
SIMPLE IRA. Our contributions to the plans totaled
$0.1 million, $0.2 million and $0.3 million for
the years ended December 25, 2004, December 31, 2005
and December 30, 2006 respectively. None of these benefit
plans offered participants an option to invest in our common
stock.
|
|
Note 11.
|
Commitments
and Contingencies
|
Lease
commitments
We lease our headquarters in Phoenix, Arizona, a customer
service office in Mainz, Germany and a business development
office in Berlin, Germany under non-cancelable operating leases,
which expire in March 2007, April 2009 and May 2007,
respectively. The leases require us to pay property taxes,
common area maintenance and certain other costs in addition to
base rent. We also lease certain machinery and equipment and
office furniture and equipment under operating and capital
leases. Future minimum payments under all of our non-cancelable
leases are as follows as of December 30, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Total
|
|
|
2007
|
|
$
|
9
|
|
|
$
|
388
|
|
|
$
|
397
|
|
2008
|
|
|
7
|
|
|
|
290
|
|
|
|
297
|
|
2009
|
|
|
6
|
|
|
|
284
|
|
|
|
290
|
|
2010
|
|
|
2
|
|
|
|
280
|
|
|
|
282
|
|
2011
|
|
|
|
|
|
|
272
|
|
|
|
272
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
24
|
|
|
$
|
1,514
|
|
|
$
|
1,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease
payments
|
|
|
15
|
|
|
|
|
|
|
|
|
|