e424b4
Filed
Pursuant to Rule 424(b)(4)
Registration No. 333-144714
6,500,000 Shares
First Solar, Inc.
Common Stock
We are selling 4,000,000 shares and the selling
stockholders named in this prospectus are selling
2,500,000 shares of our common stock. We will not receive
any of the proceeds from the sale of shares by the selling
stockholders.
Our common stock is listed on The Nasdaq Global Market under the
symbol FSLR. The last reported sale price of our
common stock on August 9, 2007 was $103.00 per share.
Investing in our common stock involves risks. See Risk
Factors beginning on page 7.
PRICE $95.00 A SHARE
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Underwriting
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Proceeds to
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Price to
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Discounts and
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Proceeds to
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Selling
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Public
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Commissions
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First Solar, Inc.
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Stockholders
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Per Share
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$95.00
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$3.5625
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$91.4375
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$91.4375
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Total
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$617,500,000
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$23,156,250
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$365,750,000
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$228,593,750
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A selling stockholder has granted the underwriters the right to
purchase up to an additional 975,000 shares of common stock
to cover over-allotments.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved of these securities
or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares to purchasers on
August 15, 2007.
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Credit
Suisse |
Goldman,
Sachs & Co. |
Morgan
Stanley |
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Cowen and Company
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Piper Jaffray
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Banc of America Securities
LLC
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Deutsche Bank
Securities
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Lazard Capital
Markets
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ThinkEquity Partners
LLC
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August 9, 2007
TABLE OF
CONTENTS
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Page
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1
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7
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25
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87
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F-1
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You should rely only on information contained in this
prospectus or to which we have referred you. We have not
authorized anyone to provide you with information that is
different. We are not making an offer of these securities in any
state where the offer is not permitted. The information in this
prospectus may only be accurate as of the date on the front of
this prospectus.
i
PROSPECTUS
SUMMARY
This summary highlights information about First Solar, Inc.
and the offering contained elsewhere in this prospectus and is
qualified in its entirety by the more detailed information and
financial statements included elsewhere in this prospectus. You
should carefully read the entire prospectus before making an
investment decision, especially the information presented under
the heading Risk Factors and the financial
statements and notes thereto included elsewhere in this
prospectus. In this prospectus, except as otherwise indicated or
as the context may otherwise require, all references to
First Solar, we, us and
our refer to First Solar, Inc. and its
subsidiaries.
First
Solar
We design and manufacture solar modules using a proprietary thin
film semiconductor technology that has allowed us to reduce our
average solar module manufacturing costs to among the lowest in
the world. Our average manufacturing costs were $1.40 per Watt
in 2006 and $1.38 per Watt in the first six months of 2007,
which we believe were significantly less than those of
traditional crystalline silicon solar module manufacturers. We
are the first company to integrate non-silicon thin film
technology into high volume low cost production. Our
manufacturing process transforms an inexpensive 2ft x 4ft (60cm
x 120cm) sheet of glass into a complete solar module in less
than three hours, using approximately 1% of the semiconductor
material used to produce traditional crystalline silicon solar
modules. Our ability to attract customers with competitive
pricing, in combination with our replicable low cost
manufacturing process, afforded us a gross margin of 40% in 2006
and 41% in the first six months of 2007. By continuing to expand
production and improve our technology and manufacturing process,
we believe that we can further reduce our manufacturing costs
per Watt and improve our cost advantage over traditional
crystalline silicon solar module manufacturers. Our objective is
to become, by 2010, the first solar module manufacturer to offer
a solar electricity solution that competes on a non-subsidized
basis with the price of retail electricity in key markets in
North America, Europe and Asia.
Our net sales grew from $13.5 million in 2004 to
$135.0 million in 2006 and from $41.5 million in the
first six months of 2006 to $144.2 million in the first six
months of 2007. Historically, almost all of our net sales have
been to project developers and system integrators headquartered
in Germany, who then resell our solar modules to end-users.
Strong market demand, a positive customer response to our solar
modules and our ability to expand production without raw
material constraints present us with the opportunity to expand
sales rapidly and increase market share.
To date, we have primarily engaged with our customers in
long-term solar module supply contracts. We currently have
long-term solar module supply contracts with nine project
developers, system integrators and operators of renewable energy
projects (the Long Term Supply Contracts) that, in
the aggregate, allow for approximately 3.2 billion
($4.1 billion at an assumed exchange rate of
$1.30/1.00) in sales from 2007 to 2012 for the sale of a
total of 2.2 GW of solar modules. The Long Term Supply Contracts
provide for a decline of approximately 6.5% in sales price at
the beginning of each year. As a result, we must reduce our
average manufacturing cost per Watt by at least the same rate at
which our contractual prices decline to maintain our historical
gross margins. The Long Term Supply Contracts also provide for
either a specified annual increase in the minimum average number
of Watts per module or a base number of Watts per module that
increases annually at a specified rate. Our failure to meet the
minimum average annual number of Watts per module required in a
given year would provide the basis for termination under some of
our Long Term Supply Contracts, while other Long Term Supply
Contracts apply a price adjustment per Watt if the minimum Watts
per module delivered are higher or lower than the base number of
Watts per module. 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 expanding our annual
manufacturing capacity from 90MW in the second half of 2006 to
450MW by the first half of 2009. We describe our manufacturing
capacity with a nameplate rating, which means
minimum expected annual production. We periodically review and
update the nameplate rating of our production lines to reflect
improvements in module throughput and Watts per module (or
conversion efficiency). As a result of a recent review, we
increased the nameplate rating of each production line from 25MW
to the current 30MW, thereby increasing the manufacturing
capacity rating of each of our current and future manufacturing
facilities. In August 2006, we expanded our Ohio plant from one
to three production lines, increasing our annual manufacturing
capacity to 90MW. In April 2007, we started initial production
at a 120MW manufacturing facility in Germany, which we expect to
reach full capacity by the fourth
1
quarter of 2007. In April 2007, we also began construction of
plant one of our Malaysia manufacturing center, and we plan to
begin construction of plant two in the fourth quarter of 2007.
We expect plant one to reach its full capacity of 120MW in the
second half of 2008 and plant two to reach its full capacity of
120MW in the first half of 2009. After plant two of our Malaysia
manufacturing center reaches its full capacity, we will have
fifteen production lines and an annual global manufacturing
capacity of 450MW.
Market
Opportunity
Global demand for electricity is expected to increase from 14.8
trillion kilowatt hours in 2003 to 27.1 trillion kilowatt hours
in 2025, according to the Energy Information Administration.
However, supply constraints, rising prices, dependence on
foreign countries for fuel feedstock and environmental concerns
could limit the ability of many conventional sources of
electricity to supply the rapidly expanding global demand. These
challenges create a unique growth opportunity for the renewable
energy industry, including solar energy. According to the
Department of Energy, solar energy is the only source of
renewable power with a large enough resource base to supply a
significant percentage of the worlds electricity needs.
Worldwide, annual installations by the photovoltaic industry
grew from 0.4GW in 2002 to 1.7GW in 2006, representing an
average annual growth rate of over 42%. In 2006, the cumulative
installed capacity of solar modules worldwide reached just below
7GW.
Competitive
Strengths
We believe that we possess a number of competitive strengths
that position us to become a leader in the solar energy industry
and compete in the broader electric power industry:
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Cost-per-Watt
advantage. Our proprietary thin film semiconductor
technology allowed us to achieve an average manufacturing cost
per Watt of $1.40 per Watt in 2006 and $1.38 per Watt in the
first six months of 2007, which we believe were among the lowest
in the world and significantly less than the per Watt
manufacturing cost of crystalline silicon solar modules.
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Continuous and scalable production
process. We manufacture our solar modules on
high-throughput production lines that complete all manufacturing
steps, from semiconductor deposition to final assembly and
testing, in an automated, proprietary, continuous process.
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Replicable production facilities. We use a
systematic replication process to build new production lines
with operating metrics that are comparable to the performance of
our existing production lines. By expanding production, we
believe we can take advantage of economies of scale, accelerate
development cycles and leverage our operations, enabling further
reductions in the manufacturing cost per Watt of our solar
modules.
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Stable supply of raw materials. We are not
currently constrained by and do not foresee a shortage of
cadmium telluride, our semiconductor material. In addition,
because our solar modules contain a relatively small amount of
semiconductor material, we believe our exposure to cadmium
telluride price increases is limited.
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Pre-sold capacity through Long Term Supply
Contracts. Our Long Term Supply Contracts provide
us with predictable net sales and enable us to realize economies
of scale from capacity expansions quickly. By pre-selling the
solar modules to be produced on future production lines, we
minimize the customer demand risk of our rapid expansion plans.
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Favorable system performance. Under
real-world conditions, including variation in the ambient
temperature and intensity of sunlight, we believe systems
incorporating our solar modules generate more kilowatt hours of
electricity per Watt of rated power than systems incorporating
crystalline silicon solar modules, increasing our
end-users return on investment.
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Strategies
Our goal is to create a sustainable market for our solar modules
by utilizing our proprietary thin film semiconductor technology
to develop a solar electricity solution that, by 2010, competes
on a non-subsidized basis
2
with the price of retail electricity in key markets in North
America, Europe and Asia. We intend to pursue the following
strategies to attain this goal:
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Penetrate key markets rapidly. Upon
completion of our German plant and plant one at our Malaysia
manufacturing center, we expect to be a global fully-integrated
solar module manufacturer. Our new production lines will enable
us to diversify our customer base, gain market share in key
solar module markets and reduce our dependence on any individual
countrys subsidy programs.
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Further reduce manufacturing cost. We deploy
continuous improvement systems and tools to increase the
throughput of all of our production lines and the efficiency of
our workforce and to reduce our capital intensity and raw
material requirements. In addition, as we expand production, we
believe we can absorb fixed costs over higher production
volumes, reduce fixed costs by manufacturing in low-cost regions
such as Malaysia, negotiate volume-based discounts on certain
raw material and equipment purchases and gain production and
operational experience that translates into improved process and
product performance.
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Increase sellable Watts per module. We are
implementing several programs designed to increase the number of
sellable Watts per solar module, which is driven primarily by
conversion efficiency. From 2003 to the end of the first six
months of 2007, we increased the average conversion efficiency
of our solar modules from approximately 6.8% to approximately
9.5%.
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Enter the mainstream market for
electricity. We believe that our ability to enter
the non-subsidized, mainstream market for electricity will
require system development and optimization, new system
financing options and the development of new market channels. As
part of these activities, we are developing solar electricity
solutions beyond the solar module that we plan to offer in
select market segments.
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Challenges
Before you invest in our stock, you should carefully consider
all the information in this prospectus, including matters set
forth under the heading Risk Factors. We believe
that the following are some of the major risks and uncertainties
that may affect us:
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Thin film technology has a limited operating
history. The oldest solar module manufactured
during the qualification of our pilot line has only been in use
since 2001, and we do not have a large amount of data to
validate our estimates of useful life and degradation. If our
thin film technology and solar modules perform below
expectations, we could lose customers and face high warranty
expenses.
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Failure to achieve anticipated operating metrics at new
production lines. To satisfy our contractual
requirements, we must expand our production capacity. If our
systematic replication process does not yield new production
lines that meet our committed schedules and with operating
metrics that are comparable to the performance of our existing
production lines, we would be unable to produce the MW volume
required to satisfy our contractual requirements and could lose
customers.
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Failure to increase sellable Watts per module and reduce
manufacturing costs. Our Long Term Supply Contracts
require either a specified annual increase in the minimum
average number of Watts per module or a base number of Watts per
module that increases annually at a specified rate. All of our
Long Term Supply Contracts also specify a decline of
approximately 6.5% in sales price at the beginning of each year.
Our failure to achieve these metrics could reduce our
profitability or allow some of our customers to terminate their
contracts.
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Reduction or elimination of government
subsidies. The reduction or elimination of
government subsidies before we achieve our goal of
cost-competitiveness with conventional sources of electricity
could significantly limit our customer base and reduce our net
sales.
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Intense competition from providers of conventional and
renewable sources of electricity. We face intense
competition from providers of conventional and renewable
electricity, including solar module manufacturers using
crystalline silicon and other thin film technologies. Other
sources of electricity could prove to be more cost competitive
or desirable than our thin film technology.
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3
Corporate
Information
First Solar, Inc., a Delaware corporation, was incorporated on
February 22, 2006. We operated as a Delaware limited
liability company from 1999 until 2006. Our corporate
headquarters are located at 4050 East Cotton Center Boulevard,
Building 6, Suite 68, Phoenix, Arizona 85040 and our
telephone number is
(602) 414-9300.
We maintain a website at www.firstsolar.com. The
information contained in or connected to our website is not a
part of this prospectus.
The
Offering
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Common stock offered by us |
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4,000,000 shares |
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Common stock offered by the selling stockholders |
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2,500,000 shares |
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Common stock to be outstanding after this offering |
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77,105,929 shares |
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Use of Proceeds |
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We estimate that we will receive net proceeds from our offering
of common stock, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, of
approximately $365.8 million. |
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Of the net proceeds we receive in this offering, we intend to
use: |
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approximately
$150 million to build plant two at our Malaysia
manufacturing center;
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approximately
$30 million to fund the associated production
start-up and
ramp-up
costs; and
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the
remainder for working capital and general corporate purposes,
including possible future capacity expansions.
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We will not receive any proceeds from the sale of our common
stock by the selling stockholders in this offering, including
any proceeds from the underwriters exercising their
over-allotment option. See Use of Proceeds. |
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Dividend Policy |
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We do not currently intend to pay any cash dividends on our
common stock. See Dividend Policy and
Description of Capital Stock Common
Stock. |
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The Nasdaq Global Market Symbol |
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FSLR. |
The number of shares to be outstanding after this offering is
based on 72,997,929 shares of our common stock outstanding
as of July 31, 2007 and reflects the exercise by certain
selling stockholders of options to acquire 108,000 shares
of our common stock to be sold by such selling stockholders in
this offering.
4
Summary
Historical Consolidated Financial and Operating Data
The following tables provide a summary of our historical
consolidated financial and operating data for the periods and at
the dates indicated. The summary historical consolidated
financial information for the fiscal years ended
December 25, 2004, December 31, 2005 and
December 30, 2006 and as of December 30, 2006 have
been derived from our audited consolidated financial statements
included elsewhere in this prospectus. The summary historical
consolidated financial information for the six months ended
July 1, 2006 and June 30, 2007 and as of June 30,
2007 have been derived from our unaudited consolidated financial
statements included elsewhere in this prospectus. In the opinion
of management, the unaudited consolidated financial statements
have been prepared on the same basis as our audited consolidated
financial statements, and include all adjustments, consisting
only of normal recurring adjustments, that are considered
necessary for a fair presentation of our financial position and
operating results. The results for any interim period are not
necessarily indicative of the results that may be expected for a
full year.
The information presented below should be read in conjunction
with Use of Proceeds, Capitalization,
Selected Historical Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and related notes thereto included
elsewhere in this prospectus.
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Year Ended
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Six Months Ended
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Dec 25,
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Dec 31,
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Dec 30,
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July 1,
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June 30,
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2004
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2005
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2006
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2006
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2007
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(dollars in thousands)
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Statement of
Operations:
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Net sales
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$
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13,522
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$
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48,063
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$
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134,974
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$
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41,485
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$
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144,172
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Cost of sales
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18,851
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31,483
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80,730
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29,113
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85,759
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Gross profit (loss)
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(5,329
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)
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16,580
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54,244
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12,372
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58,413
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Research and development
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1,240
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2,372
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6,361
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3,055
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6,821
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Selling, general and administrative
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9,312
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15,825
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33,348
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14,005
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30,975
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Production
start-up
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900
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3,173
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11,725
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6,641
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9,997
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Operating income (loss)
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(16,781
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(4,790
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2,810
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(11,329
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)
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10,620
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Foreign currency gain (loss)
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116
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(1,715
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5,544
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3,090
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(249
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Interest expense
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(100
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(418
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(1,023
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(708
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(1,484
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Other income (expense), net
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(6
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372
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1,849
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591
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7,286
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Income tax (expense) benefit
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(5,206
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)
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33,273
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Cumulative effect of change in
accounting for share-based compensation
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89
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Net income (loss)
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$
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(16,771
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$
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(6,462
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$
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3,974
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$
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(8,356
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)
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$
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49,446
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Other Financial Data:
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Net cash from (used in) operating
activities
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$
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(15,185
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$
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5,040
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$
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(576
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$
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(9,137
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$
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25,335
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Capital expenditures
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$
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7,733
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$
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42,481
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$
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153,150
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$
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67,804
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$
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80,388
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Actual
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As Adjusted
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Dec 30,
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June 30,
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June 30,
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Balance Sheet Data:
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2006
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2007
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2007(1)
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(dollars in thousands)
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Cash, cash equivalents and
marketable securities
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$
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308,415
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$
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315,007
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$
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680,757
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Property, plant and equipment, net
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178,868
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245,559
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245,559
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Other current and long-term debt
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80,697
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122,211
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122,211
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Total stockholders equity
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411,440
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481,304
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847,054
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5
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Year Ended
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Six Months Ended
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Dec 31,
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Dec 30,
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July 1,
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June 30,
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2005
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2006
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2006
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2007
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Other Operating Data
(unaudited):
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Solar modules produced (in MW)(2)
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21.4
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59.9
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17.2
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59.8
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Cost per Watt(3)
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$
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1.59
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$
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1.40
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$
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1.60
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$
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1.38
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(1) Reflects the sale of 4,000,000 shares of our
common stock by us in this offering at a public offering price
of $95.00 per share.
(2) Solar modules produced (in MW) includes solar modules
held in inventory.
(3) We define average cost per Watt as the total
manufacturing costs incurred during the period divided by the
total Watts produced during the period.
6
RISK
FACTORS
An investment in our stock involves a high degree of risk.
You should carefully consider the following information,
together with the other information in this prospectus, before
buying shares of our stock. If any of the following risks or
uncertainties occur, our business, financial condition and
results of operations could be materially and adversely
affected, the trading price of our stock could decline and you
may lose all or a part of the money you paid to buy our
stock.
Risks
Relating to Our Business
Our
limited operating history may not serve as an adequate basis to
judge our future prospects and results of
operations.
We have a limited operating history. Although we began
developing our predecessor technology in 1987, we did not
complete the qualification of our pilot production line until
January 2002 and the first production line at our Ohio plant
until November 2004. From our launch of commercial operations in
January 2002 through the end of 2006, we have sold approximately
84MW of solar modules. Relative to the entire solar energy
industry, which had a worldwide installed capacity of almost 7GW
at the end of 2006, we have sold only a small percentage of the
worldwide 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 grow at all, in future periods. Accordingly, you
should not rely on our results of operations for any prior
period as an indication of our future performance.
We
have incurred net losses until recently and may be unable to
generate sufficient net sales in the future to sustain
profitability.
We incurred net losses of $16.8 million in 2004 and
$6.5 million in 2005. Although we had net income of
$4.0 million in 2006 and $49.4 million in the first
six months of 2007, we had an accumulated deficit of
$96.0 million at June 30, 2007 and 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. Our oldest
active production line has only been in operation since November
2004 and 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.
7
If
photovoltaic technology is not suitable for widespread adoption,
or if sufficient demand for solar modules does not develop or
takes longer to develop than we anticipate, our net sales may
flatten or decline and we may be unable to 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 price 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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Even if demand for solar modules continues to grow, the rapid
expansion plans of many solar cell and module manufacturers
could create periods where supply exceeds demand. During any
such period, our competitors could decide to reduce their sales
price, even below their manufacturing cost, in order to generate
sales. As a result, we may be unable to sell our solar modules
at attractive prices, or for a profit, during any period of
excess supply of solar modules, which would reduce our net sales
and harm our results of operations.
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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8
If our
future production lines are not built in line with our committed
schedules or do not achieve operating metrics similar to our
existing production lines, our solar modules could perform below
expectations and cause us to lose customers.
Currently, the three production lines at our Ohio plant are our
only production lines that have a history of operating at full
capacity. Although the four production lines at our German plant
are producing some modules during the qualification phase, we do
not expect them to operate at full capacity until the fourth
quarter of 2007. These four production lines 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 existing production
lines, and we could be unable to determine the cause of the
lower operating metrics or develop and implement solutions to
improve performance. The second and third production lines at
our Ohio plant, completed in August 2006, represent a
standard building block that we replicated twice to
build the four production lines at our German plant. We plan to
use the same systematic replication process to build our
Malaysia manufacturing center and future production facilities,
including expansion of our existing production facilities. Our
replication risk in connection with building production lines at
our German plant, Malaysian manufacturing center and other
future manufacturing plants could be higher than our replication
risk was in expanding the Ohio plant because these new
production lines are located internationally, which could entail
other factors that will lower their operating metrics. If we are
unable to systematically replicate our production lines to meet
our committed schedules and achieve and sustain similar
operating metrics in our German plant, Malaysian manufacturing
center and future production lines as our existing production
lines, 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 lines based on designs or specifications that we
provide the equipment manufacturer, who then undertakes a
specialized 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 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 Ohio plant from one to three production lines, increasing
our annual manufacturing capacity to 90MW. In April 2007, we
started initial production at a 120MW manufacturing facility in
Germany, which we expect to reach full capacity by the fourth
quarter of 2007. Also in April 2007, we began construction of
plant one of our Malaysia manufacturing center and we plan to
begin construction of plant two in the fourth quarter of 2007.
Following the completion of plant two of our Malaysia
manufacturing center, estimated for the first half of 2009, we
will have grown from one production line to fifteen production
lines with an annual global manufacturing capacity of 450MW in
approximately three years.
To manage the rapid expansion of our operations, we will be
required to improve our operational and financial systems,
procedures and controls and expand, train and manage our growing
associate 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.
9
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, higher failure
rates and higher rates of degradation than solar modules
manufactured with the raw materials from our current suppliers.
A
disruption in our supply chain for cadmium telluride, our
semiconductor material, could interrupt or impair our ability to
manufacture solar modules.
The key raw material we use in our production process is a
cadmium telluride compound, with the tellurium component of the
compound being the most critical. Currently, we purchase all of
our cadmium telluride in manufactured form from two suppliers.
If our current suppliers or any of our future suppliers is
unable to perform under its contracts or purchase orders, our
operations could be interrupted or impaired. In addition,
because our suppliers 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 any of our current
suppliers or any of our future suppliers is unable to acquire an
adequate supply of tellurium in a timely manner or at
commercially reasonable prices. If our competitors begin to use
or increase their demand for cadmium telluride, supply could be
reduced and prices could increase. If our current suppliers or
any of our future suppliers cannot obtain sufficient tellurium,
it could substantially increase prices or be unable to perform
under its 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 nine customers, with six customers
accounting for substantially all of our net sales in the first
six months of 2007. 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
customers headquartered in Germany and France. During 2006, our
five largest customers each accounted for between 16% and 19% of
our net sales. In the first six months of 2007, our six largest
customers each accounted for between 14% and 22% of our net
sales. The loss of any of our large customers, their inability
to perform under their contracts or their default in payment
could significantly reduce our net sales and adversely impact
our operating results. In addition, our Long Term Supply
Contracts extend through 2012 and we expect them to allocate a
significant amount 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, and 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 certain of our Long Term Supply Contracts
and our profitability could decline.
Our Long Term Supply Contracts require either an increase in the
minimum average number of Watts per module of approximately 5%
annually from 2007 to 2009 and then by 3% in 2012 or a base
number of Watts per module that increases 3-4% annually from
2007 to 2009 and then remains fixed through 2012. Our failure to
achieve these metrics could reduce our profitability or allow
some of our customers to terminate their contracts. In addition,
all of our Long Term Supply Contracts specify a sales price per
Watt that declines by approximately 6.5% at the beginning
10
of each year through the expiration date of each contract in
2012. Our profitability 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.
Reduced
growth in or the reduction, elimination or expiration 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.
Reduced growth in or 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 99.3% of our net sales
in the first six months of 2007, has been a strong supporter of
photovoltaic products and systems and political changes in
Germany could result in significant reductions in 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 ongoing about modifying the German Renewable Energy Law, or
the EEG. The German Federal Ministry for the Environment
recently published a progress report on the EEG recommending a
gradual increase of two percentage points from 2009 through 2010
and three percentage points in 2011 in the rate at which German
subsidies decline. If the German government reduces or
eliminates the subsidies under the EEG, demand for photovoltaic
products could significantly decline in Germany. The Spanish
Royal Decree currently supports system installations of 400MW
cumulatively. If the Spanish government decides not to further
increase this limitation, the program would run out of funding
within two years. 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. Emerging subsidy
programs, such as the recently announced programs in Italy,
France, Greece and Ontario, Canada, may require an extended
period of time to attain effectiveness because the applicable
permitting and grid connection processes associated with these
programs can be lengthy and administratively burdensome.
In addition, if any of these statutes or regulations is found to
be unconstitutional, or is reduced or discontinued for other
reasons, sales of our solar modules in these countries could
decline significantly, which could have a material adverse
effect on our business and results of operations. For example,
the predecessor to the German EEG was challenged in Germany on
constitutional grounds and in the European Court of Justice as
impermissible state aid. Although the German Federal High Court
of Justice dismissed these constitutional concerns and the
European Court of Justice held that the purchase requirement at
minimum feed-in tariffs did not constitute impermissible state
aid, new proceedings challenging the Renewable Energies Act or
comparable minimum price regulations in other countries in which
we currently operate or intend to operate may be initiated.
Electric utility companies 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. Reduced growth in or the
reduction, elimination or expiration 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,
11
95.0% and 100.0% of our net sales were outside the United States
and denominated in euros for the fiscal year ended
December 30, 2006 and the six months ended June 30,
2007, 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. In addition, with the expansion of our
manufacturing operations into Germany and our current expansion
into Malaysia, our operating expenses for the plants in these
countries will be denominated in the local currency. 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.
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.
At the end of 2006, the global photovoltaic industry consisted
of over 100 manufacturers of solar cells and modules. Within the
photovoltaic industry, we face competition from crystalline
silicon solar cell and 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 solar cells, solar modules or turnkey production
lines. In addition to manufacturers of solar cells and 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. A competitors greater size
provides them with a competitive advantage because they often
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.
12
We
identified several significant deficiencies in our internal
control over financial reporting 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
fiscal years ended December 25, 2004 and December 31,
2005, we identified several significant deficiencies in our
internal control over financial reporting that were deemed to be
material weaknesses, as defined in standards
established by The Public Company Accounting Oversight Board
(PCAOB). See Managements Discussion and
Analysis of Financial Condition and Results of
OperationsControls and Procedures.
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 control over financial
reporting . 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 controls 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 controls over financial reporting that are required
under Section 404 of the Sarbanes-Oxley Act of 2002, and
which will become applicable to us beginning with the required
filing of our Annual Report on
Form 10-K
for fiscal 2007 in the first quarter of 2008. Internal control
deficiencies could also result in a restatement of our financial
statements in the future or cause investors to lose confidence
in our reported financial information, leading to a decline in
our stock price.
Our
substantial international operations subject us to a number of
risks, including unfavorable political, regulatory, labor and
tax conditions in foreign countries.
We have significant marketing and distribution operations
outside the United States and, with the completion of our German
plant and construction of our Malaysia manufacturing center, we
expect to have significant manufacturing operations outside the
United States. In the first six months of 2007, 99.3% of our net
sales were generated from customers headquartered in Germany. In
the future, we expect to expand our operations in other European
countries, Malaysia and other Asian countries and, as a result,
we will be subject to the legal, political, social and
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regulatory requirements and economic conditions of many
jurisdictions. Risks inherent to international operations,
include, but are not limited to, the following:
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difficulty in enforcing agreements in foreign legal systems;
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foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, impose tariffs or adopt other
restrictions on foreign trade and investment, including currency
exchange controls;
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fluctuations in exchange rates may affect product demand and may
adversely affect our profitability in U.S. dollars to the
extent the price of our solar modules and cost of raw materials,
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, including changes in the
government incentives we are relying on;
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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
June 30, 2007, our accrued warranty liability was $4.0
million.
While our warranty extends for twenty-five years, our oldest
solar modules manufactured during the qualification of our pilot
production line have only been in use since 2001. 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
solar modules could break, delaminate or experience power
degradation in excess of expectations. In addition, once our
solar modules are installed, connected and exposed to sunlight,
but before they are connected to a power grid or there is a load
otherwise put on them, they 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 solar 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 solar modules that are
left in a prolonged open circuit condition, it may become
apparent with future experience that the long-term performance
and service life of our solar modules is affected by remaining
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.
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If our
estimates regarding the future cost of reclaiming and recycling
our solar modules are incorrect, we could be required to accrue
additional expenses at and from the time we realize our
estimates are incorrect and face a significant unplanned cash
burden when our end-users return their solar
modules.
We pre-fund our 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 solar 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 at and 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.
Our
future success depends on our ability to retain our key
associates 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, Jens Meyerhoff,
our Chief Financial Officer, Ken Schultz, our Vice President of
Sales and Marketing, and other members of our senior management
team. The loss of Messrs. Ahearn, Sohn, 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 associates. Several of
our current key associates, including Messrs. Ahearn, Sohn,
Meyerhoff and Schultz, are subject to employment conditions or
arrangements that contain post-employment non-competition
provisions. However, these arrangements permit the associates to
terminate their employment with us upon little or no notice. We
recently added several members to our senior management team,
including Mr. 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 associates, 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. As of
June 30, 2007, we held 23 patents in the United States and
17 patents in select foreign jurisdictions. A majority of our
patents expire at various times between 2007 and 2023. Our
existing patents and future patents could be challenged,
invalidated, circumvented or rendered unenforceable. We have
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.
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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
associates 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, especially any developing countries into
which we may expand our operations. 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 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 module, or subject us to injunctions
prohibiting the manufacture and sale of our solar modules or the
use of our technologies. Protracted litigation could also result
in our customers or potential customers deferring or limiting
their purchase or use of our solar modules until the resolution
of such 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.
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We anticipate that our solar modules and their installation will
be subject to oversight and regulation in accordance with
national and local ordinances relating to building codes,
safety, environmental protection, utility interconnection and
metering and related matters. It is difficult to track the
requirements of individual states and design equipment to comply
with the varying standards. Any new government regulations or
utility policies pertaining to our solar modules may result in
significant additional expenses to us, our resellers and their
customers and, as a result, could cause a significant reduction
in demand for our solar modules.
Environmental
obligations and liabilities could have a substantial negative
impact on our financial condition, cash flows and
profitability.
Our operations involve the use, handling, generation,
processing, storage, transportation and disposal of hazardous
materials and are subject to extensive environmental laws and
regulations at the national, state, local and international
level. 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, 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 exposure to elemental cadmium, the chemical,
physical and toxicological properties of cadmium telluride have
not been thoroughly investigated and reported. We maintain
engineering controls to minimize associate exposure to cadmium
and require our associates 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 associates, 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 or results of operations.
The use of cadmium in various products is also coming under
increasingly stringent governmental regulation. Future
regulation in this area could impact the manufacture and sale of
cadmium-containing solar modules and could require us to make
unforeseen environmental expenditures or limit our ability to
sell and distribute our products. For example, the European
Union Directive 2002/96/EC on Waste Electrical and Electronic
Equipment, or the WEEE Directive, requires
manufacturers of certain electrical and electronic equipment to
be financially responsible for the collection, recycling,
treatment and disposal of specified products sold in the
European Union. In addition, European Union Directive 2002/95/EC
on the Restriction of the Use of Hazardous Substances in
electrical and electronic equipment, or the RoHS
Directive, restricts the use of certain hazardous
substances, including cadmium, in specified products. Other
jurisdictions are considering adopting similar legislation.
Currently, 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.
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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 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 have significant
control over us and their interests may conflict with or differ
from your interests as a stockholder.
Upon consummation of this offering, our largest stockholder, the
Estate of John T. Walton and its affiliates, including JCL
Holdings, LLC, will beneficially own approximately 47.9% of our
outstanding common stock, or approximately 46.6% if the
underwriters exercise their over-allotment option in full. As a
result, 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.
See Description of Capital Stock. The interests of
the Estate could conflict with or differ from your interests as
a holder of our common stock. For example, the concentration of
ownership held by the Estate could delay, defer or prevent a
change of control of our company or impede a merger, takeover or
other business combination which you may view favorably.
Risks
Relating to This Offering
If our
stock price fluctuates after this offering, you could lose a
significant part of your investment.
The market price of our stock may be influenced by many factors,
some of which are beyond our control, including those described
above under Risks Relating to Our Business and
the following:
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the failure of securities analysts to cover our common stock 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 offering
price. These broad market and industry factors may materially
reduce the market price of our common stock, regardless of our
operating performance.
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Shares
eligible for future sale may cause the market price of our
common stock to drop significantly, even if our business is
doing well.
The market price of our common stock could decline as a result
of sales of a large number of shares of our common stock in the
market after this offering or the perception that these sales
could occur. These sales, or the possibility that these sales
may occur, also might make it more difficult for us to sell
equity securities in the future at a time and at a price that we
deem appropriate.
After the consummation of this offering, there will be
77,105,929 shares of our common stock outstanding. Of these
shares, the 6,500,000 shares of common stock sold in this
offering by us and the selling stockholders
(7,475,000 shares if the underwriters exercise their
over-allotment option in full) and the 22,942,500 shares of
common stock sold in our initial public offering will be freely
tradeable without restriction or further registration under the
Securities Act of 1933, as amended, by persons other than our
affiliates within the meaning of Rule 144 under the
Securities Act. The remaining shares of common stock held by our
existing stockholders upon completion of this offering will be
restricted securities, as that phrase is defined in
Rule 144 under the Securities Act, and may be resold, in
the absence of registration under the Securities Act, pursuant
to an exemption from such registration, including among others,
the exemptions provided by Rules 144, 144(k) or 701 under
the Securities Act. Upon expiration of the
lock-up
period 90 days after the date of this prospectus,
approximately 46,326,124 shares will be available for sale
pursuant to Rules 144, 144(k) or 701.
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.
Failure
to achieve and maintain effective internal control over
financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our
business and stock price.
As a public company, we will be required to document and test
our procedures for internal control over financial reporting 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 our managements
assessment of the effectiveness of internal control over
financial reporting and the effectiveness of our 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 these regulations
to increase our legal and financial compliance cost, make it
more difficult to attract and retain qualified officers and
members of our board of directors, particularly to serve on our
audit committee, and make some activities more difficult, time
consuming and costly. We may not be able to conclude on an
ongoing basis that we have effective internal control over
financial reporting in accordance with Section 404 or our
independent registered public accounting firm may not be able or
willing to issue an unqualified report on the effectiveness of
our internal control over financial reporting. If we conclude
that our internal control over financial reporting is not
effective, we cannot be certain as to the timing of completion
of our evaluation, testing and remediation actions or their
effect on our operations since there is presently no precedent
available by which to measure compliance adequacy. If either we
are unable to conclude that we have effective internal control
over financial reporting or our independent registered public
accounting firm is 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 an adverse effect on the trading price of our stock.
See Risks Relating to Our BusinessWe
identified several significant deficiencies in our internal
control over financial reporting that were deemed to be material
weaknesses. If we are unable to successfully address the
material weaknesses in our internal control over financial
reporting, our ability to report our financial results on a
timely and accurate basis may be adversely affected.
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CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements
that involve risks and uncertainties. These forward-looking
statements are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning our
plans, objectives, goals, strategies, future events, future net
sales or performance, capital expenditures, financing needs,
plans or intentions relating to acquisitions, business trends
and other information that is not historical information and, in
particular, appear under the headings Prospectus
Summary, Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Industry and Business. When used in this
prospectus, the words estimates,
expects, anticipates,
projects, plans, intends,
believes, forecasts,
foresees, likely, may,
should, goal, target and
variations of such words or similar expressions are intended to
identify forward-looking statements. All forward-looking
statements are based upon information available to us on the
date of this prospectus.
These forward-looking statements are subject to risks,
uncertainties and other factors, many of which are outside of
our control, that could cause actual results to differ
materially from the results discussed in the forward-looking
statements, including, among other things, the matters discussed
in this prospectus in the sections captioned Risk
Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Factors you should consider that could cause these differences
are:
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the worldwide demand for electricity and the market for
renewable energy, including solar energy;
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the ability or inability of conventional fossil fuel-based
generation technologies to meet the worldwide demand for
electricity;
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our competitive position and our expectation regarding key
competitive factors;
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government subsidies and policies supporting renewable energy,
including solar energy;
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our expenses, sources of net sales and international sales and
operations;
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future pricing of our solar modules and the photovoltaic systems
in which they are incorporated;
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the performance, features and benefits of our solar modules and
plans for the enhancement of solar modules;
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the possibility of liability for pollution and other damage that
is not covered by insurance or that exceeds our insurance
coverage;
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the supply and price of components and raw materials, including
tellurium;
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our ability to expand our manufacturing capacity in a timely and
cost-effective manner;
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our ability to attract new customers and to develop and maintain
existing customer and supplier relationships;
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our ability to retain our current key executives, integrate new
key executives and to attract and retain other skilled
managerial, engineering and sales marketing personnel;
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elements of our marketing, growth and diversification strategies
including our strategy to reduce dependence on government
subsidies;
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our intellectual property and our continued investment in
research and development;
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changes in the status of legal proceedings or the commencement
of new material legal proceedings;
|
|
|
|
changes in, or the failure to comply with, government
regulations and environmental, health and safety requirements;
|
|
|
|
interest rate fluctuations and both our and our end-users
ability to secure financing on commercially reasonable terms or
at all;
|
|
|
|
foreign currency fluctuations and devaluations and political
instability in our foreign markets; and
|
|
|
|
general economic and business conditions including those
influenced by international and geopolitical events such as the
war in Iraq and any future terrorist attacks.
|
There may be other factors that could cause our actual results
to differ materially from the results referred to in the
forward-looking statements. We undertake no obligation to
publicly update or revise forward-looking statements to reflect
events or circumstances after the date made or to reflect the
occurrence of unanticipated events, except as required by law.
20
USE OF
PROCEEDS
We estimate that we will receive net proceeds from our offering
of our common stock, after deducting underwriting discounts and
commissions and other estimated offering expenses payable by us,
of approximately $365.8 million. Of the net proceeds we
receive in this offering, we intend to use approximately
$150 million to build plant two at our Malaysia
manufacturing center, which will increase the annual
manufacturing capacity of our Malaysia manufacturing center to
eight production lines and 240MW, approximately $30 million
to fund the associated production
start-up and
ramp-up
costs and the remainder for working capital and general
corporate purposes, including possible future capacity
expansions.
We will not receive any of the proceeds from the sale of shares
of our common stock by the selling stockholders in this offering.
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.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Fiscal 2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
Second Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
$
|
30.00
|
|
|
$
|
23.50
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
59.88
|
|
|
$
|
27.54
|
|
Second Quarter
|
|
$
|
91.10
|
|
|
$
|
52.08
|
|
Third Quarter (through
August 9, 2007)
|
|
$
|
123.21
|
|
|
$
|
88.60
|
|
The closing sales price of our common stock on The Nasdaq Global
Market was $103.00 per share on August 9, 2007. As of
July 31, 2007 there were approximately 15 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 paid, and it is our present intention for the
foreseeable future not to pay, dividends on our common stock.
The declaration and payment of dividends is subject to the
discretion of our Board of Directors and depends on various
factors, including our net income, financial conditions, cash
requirements, future prospects and other factors deemed relevant
by our Board of Directors.
21
CAPITALIZATION
The following table sets forth our cash, cash equivalents and
marketable securities and our capitalization as of June 30,
2007 (i) on an actual consolidated basis for First Solar,
Inc. and (ii) on an as adjusted basis after giving effect
to this offering. You should read this table in conjunction with
Use of Proceeds, Selected Historical Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and all of
the financial statements and the related notes thereto included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007
|
|
|
|
Actual
|
|
|
As Adjusted(1)
|
|
|
|
(in thousands, except par value)
|
|
|
Cash, cash equivalents and
marketable securities
|
|
$
|
315,007
|
|
|
$
|
680,757
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
IKB credit facility
|
|
$
|
103,982
|
|
|
$
|
103,982
|
|
Debt with the State of Ohio
|
|
|
18,217
|
|
|
|
18,217
|
|
Capital lease obligations
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total debt:
|
|
|
122,211
|
|
|
|
122,211
|
|
|
|
|
|
|
|
|
|
|
Common Stock and
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per
share (actual: 500,000,000 shares authorized,
72,997,929 shares issued and outstanding; as adjusted:
500,000,000 shares authorized, 77,105,929 shares
issued and outstanding)
|
|
|
73
|
|
|
|
77
|
|
Additional paid-in capital
|
|
|
575,047
|
|
|
|
940,793
|
|
Accumulated deficit
|
|
|
(96,013
|
)
|
|
|
(96,013
|
)
|
Accumulated other comprehensive
income
|
|
|
2,197
|
|
|
|
2,197
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
481,304
|
|
|
|
847,054
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
603,515
|
|
|
$
|
969,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects the sale of 4,000,000 shares of our common stock
by us in this offering at a public offering price of
$95.00 per share. |
22
SELECTED
HISTORICAL 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 data 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 prospectus. 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 prospectus. The selected
consolidated financial data for the fiscal year ended and as of
December 28, 2002 have been derived from the unaudited
consolidated financial statements of the Predecessor not
included in this prospectus. The selected historical
consolidated financial data for the six months ended
July 1, 2006 and June 30, 2007 and as of June 30,
2007 have been derived from the unaudited consolidated financial
statements of the Successor included elsewhere in this
prospectus. In the opinion of management, the unaudited
consolidated financial statements have been prepared on the same
basis as our audited consolidated financial statements, and
include all adjustments, consisting only of normal recurring
adjustments, that are considered necessary for a fair
presentation of our financial position and operating results.
The results for any interim period are not necessarily
indicative of the results that may be expected for a full year.
The information presented below should be read in conjunction
with Use of Proceeds, Capitalization,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and related notes thereto included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(1)
|
|
|
|
Successor(1)
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Years Ended
|
|
|
|
Years Ended
|
|
|
Ended
|
|
|
|
Dec 28,
|
|
|
|
Dec 27,
|
|
|
Dec 25,
|
|
|
Dec 31,
|
|
|
Dec 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
|
2002
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
(dollars in thousands, except per unit/share amounts)
|
|
Statement of
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
490
|
|
|
|
$
|
3,210
|
|
|
$
|
13,522
|
|
|
$
|
48,063
|
|
|
$
|
134,974
|
|
|
$
|
41,485
|
|
|
$
|
144,172
|
|
Cost of sales
|
|
|
7,007
|
|
|
|
|
11,495
|
|
|
|
18,851
|
|
|
|
31,483
|
|
|
|
80,730
|
|
|
|
29,113
|
|
|
|
85,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(6,517
|
)
|
|
|
|
(8,285
|
)
|
|
|
(5,329
|
)
|
|
|
16,580
|
|
|
|
54,244
|
|
|
|
12,372
|
|
|
|
58,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,029
|
|
|
|
|
3,841
|
|
|
|
1,240
|
|
|
|
2,372
|
|
|
|
6,361
|
|
|
|
3,055
|
|
|
|
6,821
|
|
Selling, general and administrative
|
|
|
9,588
|
|
|
|
|
11,981
|
|
|
|
9,312
|
|
|
|
15,825
|
|
|
|
33,348
|
|
|
|
14,005
|
|
|
|
30,975
|
|
Production
start-up
|
|
|
|
|
|
|
|
|
|
|
|
900
|
|
|
|
3,173
|
|
|
|
11,725
|
|
|
|
6,641
|
|
|
|
9,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(22,134
|
)
|
|
|
|
(24,107
|
)
|
|
|
(16,781
|
)
|
|
|
(4,790
|
)
|
|
|
2,810
|
|
|
|
(11,329
|
)
|
|
|
10,620
|
|
Foreign currency gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
(1,715
|
)
|
|
|
5,544
|
|
|
|
3,090
|
|
|
|
(249
|
)
|
Interest expense
|
|
|
(4,158
|
)
|
|
|
|
(3,974
|
)
|
|
|
(100
|
)
|
|
|
(418
|
)
|
|
|
(1,023
|
)
|
|
|
(708
|
)
|
|
|
(1,484
|
)
|
Other income (expense), net
|
|
|
68
|
|
|
|
|
38
|
|
|
|
(6
|
)
|
|
|
372
|
|
|
|
1,849
|
|
|
|
591
|
|
|
|
7,286
|
|
Income tax (expense) benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,206
|
)
|
|
|
|
|
|
|
33,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of change in accounting principle
|
|
|
(26,224
|
)
|
|
|
|
(28,043
|
)
|
|
|
(16,771
|
)
|
|
|
(6,551
|
)
|
|
|
3,974
|
|
|
|
(8,356
|
)
|
|
|
49,446
|
|
Cumulative effect of change in
accounting for share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(26,224
|
)
|
|
|
$
|
(28,043
|
)
|
|
$
|
(16,771
|
)
|
|
$
|
(6,462
|
)
|
|
$
|
3,974
|
|
|
$
|
(8,356
|
)
|
|
$
|
49,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
(0.16
|
)
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units/shares
|
|
|
|
|
|
|
|
36,028
|
|
|
|
43,198
|
|
|
|
48,846
|
|
|
|
56,310
|
|
|
|
52,567
|
|
|
|
72,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per
unit/share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per unit/share
|
|
|
|
|
|
|
$
|
(0.78
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.16
|
)
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units/shares
|
|
|
|
|
|
|
|
36,028
|
|
|
|
43,198
|
|
|
|
48,846
|
|
|
|
58,255
|
|
|
|
52,567
|
|
|
|
75,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(1)
|
|
|
|
Successor(1)
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Years Ended
|
|
|
|
Years Ended
|
|
|
Ended
|
|
|
|
Dec 28,
|
|
|
|
Dec 27,
|
|
|
Dec 25,
|
|
|
Dec 31,
|
|
|
Dec 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
|
2002
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
(22,128
|
)
|
|
|
$
|
(22,228
|
)
|
|
$
|
(15,185
|
)
|
|
$
|
5,040
|
|
|
$
|
(576
|
)
|
|
$
|
(9,137
|
)
|
|
$
|
25,335
|
|
Net cash used in investing
activities
|
|
|
(3,833
|
)
|
|
|
|
(15,224
|
)
|
|
|
(7,790
|
)
|
|
|
(43,832
|
)
|
|
|
(159,994
|
)
|
|
|
(69,461
|
)
|
|
|
(287,926
|
)
|
Net cash provided by financing
activities
|
|
|
26,450
|
|
|
|
|
39,129
|
|
|
|
22,900
|
|
|
|
51,663
|
|
|
|
451,550
|
|
|
|
83,370
|
|
|
|
61,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(1)
|
|
|
|
Successor(1)
|
|
|
|
Dec 28,
|
|
|
|
Dec 27,
|
|
|
Dec 25,
|
|
|
Dec 31,
|
|
|
Dec 30,
|
|
|
June 30,
|
|
|
|
2002
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,050
|
|
|
|
$
|
3,727
|
|
|
$
|
3,465
|
|
|
$
|
16,721
|
|
|
$
|
308,092
|
|
|
$
|
107,799
|
|
Accounts receivable, net
|
|
|
201
|
|
|
|
|
1,907
|
|
|
|
4,125
|
|
|
|
882
|
|
|
|
27,123
|
|
|
|
13,736
|
|
Inventories
|
|
|
2,058
|
|
|
|
|
1,562
|
|
|
|
3,686
|
|
|
|
6,917
|
|
|
|
16,510
|
|
|
|
26,848
|
|
Property, plant and equipment, net
|
|
|
9,842
|
|
|
|
|
23,699
|
|
|
|
29,277
|
|
|
|
73,778
|
|
|
|
178,868
|
|
|
|
245,559
|
|
Total assets
|
|
|
14,377
|
|
|
|
|
31,575
|
|
|
|
41,765
|
|
|
|
101,884
|
|
|
|
578,510
|
|
|
|
723,212
|
|
Total liabilities
|
|
|
58,005
|
|
|
|
|
11,019
|
|
|
|
19,124
|
|
|
|
63,490
|
|
|
|
116,844
|
|
|
|
181,202
|
|
Accrued recycling
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
917
|
|
|
|
3,724
|
|
|
|
6,448
|
|
Current debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,142
|
|
|
|
19,650
|
|
|
|
25,734
|
|
Long-term debt
|
|
|
50,000
|
|
|
|
|
8,700
|
|
|
|
13,700
|
|
|
|
28,581
|
|
|
|
61,047
|
|
|
|
96,477
|
|
Total stockholders equity
(deficit)
|
|
|
(43,628
|
)
|
|
|
|
20,556
|
|
|
|
22,641
|
|
|
|
13,129
|
|
|
|
411,440
|
|
|
|
481,304
|
|
|
|
|
(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. |
24
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis summarizes the
significant factors affecting our results of operations and
financial condition during the three year period ended
December 30, 2006 and the six month periods ended
July 1, 2006 and June 30, 2007. This discussion
contains forward-looking statements that involve known and
unknown risks and uncertainties. Our actual results could differ
significantly from those anticipated by the forward-looking
statements for many reasons, including those described in
Cautionary Statement Concerning Forward-Looking
Statements, Risk Factors and elsewhere in this
prospectus. You should read the following discussion with
Selected Historical Financial Data and all the
historical financial statements and related notes thereto
included elsewhere in this prospectus.
Overview
We design and manufacture solar modules using a proprietary thin
film semiconductor technology that has 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, proprietary, continuous
process. In 2006 and during the first six months of 2007, we
sold almost all of our solar modules to solar project developers
and system integrators headquartered in Germany.
Currently, we manufacture our solar modules and conduct our
research and development activities at our Perrysburg, Ohio
manufacturing facility. We completed the qualification of the
first production line at this plant for high volume production
in November 2004. During 2005, the first full year this
production line 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. In the first six months of 2007, our average
manufacturing cost per Watt was $1.38, compared to $1.60 in the
first six months of 2006. We define average manufacturing cost
per Watt as the total manufacturing cost incurred during the
period divided by the total Watts produced during the period. By
continuing to expand production globally 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 North America, 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
and the six months ended June 30, 2007, we sold
approximately 56MW and approximately 61MW of solar modules,
respectively.
On February 22, 2006, we converted from a Delaware limited
liability company to a Delaware corporation. Prior to 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. All references to the first six
months of 2007 relate to the 26 weeks ended June 30,
2007 and all references to the first six months of 2006 relate
to the 26 weeks ended July 1, 2006.
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 and built
our first replicable, high-throughput production line at the
Ohio plant. We ultimately merged most of the equipment from the
pilot line into this first production line, completing its
qualification for full
25
volume production in November 2004. In February 2005, we
commenced construction of two additional production lines at our
Ohio plant. We completed the qualification of these two
additional production lines for full volume production in August
2006. During the construction of these two production lines, we
improved certain aspects of our first production line, 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. Our Ohio plant currently has an annual
manufacturing capacity of 90MW.
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 30MW
production lines. We started initial production at the German
plant in April 2007, and we expect the plant to reach its full
capacity of 120MW by the fourth quarter of 2007. In addition, on
January 24, 2007 we entered into a land lease agreement for
a manufacturing center site in the Kulim Hi-Tech Park in the
State of Kadah, Malaysia. The Malaysia site can accommodate up
to two 120MW plants and includes an option exercisable over six
years for an adjacent land site that could accommodate up to an
additional eight production lines. In April 2007, we began
construction of plant one of our Malaysia manufacturing center,
which we expect to reach its full capacity of 120MW in the
second half of 2008. We plan to begin construction of plant two
in the fourth quarter of 2007. After plant two of our Malaysia
manufacturing center reaches its full capacity of 120MW, planned
for the first half of 2009, we will have fifteen production
lines and an annual global manufacturing capacity of 450MW.
The following table summarizes our current and in-process
production capacity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Nameplate Production
|
|
|
|
|
Number of
|
|
Capacity of Manufacturing
|
|
|
|
|
Production
|
|
Facility
|
|
|
Manufacturing
Facility
|
|
Lines
|
|
Watts
|
|
Full Volume
Production
|
|
Ohio plant
|
|
|
3
|
|
|
|
90MW
|
|
|
|
August
2006(1)
|
|
German plant
|
|
|
4
|
|
|
|
120MW
|
|
|
|
By fourth quarter of
2007(2)
|
|
Malaysia plant I
|
|
|
4
|
|
|
|
120MW
|
|
|
|
By fourth quarter of
2008(2)
|
|
Malaysia plant II
|
|
|
4
|
|
|
|
120MW
|
|
|
|
First half of
2009(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current and Planned
|
|
|
15
|
|
|
|
450MW
|
|
|
|
|
|
|
|
|
(1)
|
|
We completed the qualification for
full volume production of the first production line at our Ohio
plant in November 2004 and the second and third production lines
in August 2006.
|
|
(2)
|
|
Anticipated date for full volume
production.
|
We describe our manufacturing capacity with a
nameplate rating, which means minimum expected
annual production. In reality, we expect actual annual
production per line to exceed nameplate rating over time as a
result of continuous improvements in module throughput and Watts
per module (or conversion efficiency). For example, we increased
the number of sellable Watts per solar module from approximately
49 Watts at the end of 2003 to approximately 69 Watts at the end
of the first six months of 2007. We periodically review and
update the nameplate rating of our production lines to reflect
these improvements. As a result of a recent review, we increased
the nameplate rating of each production line from 25MW to the
current 30MW, thereby reflecting the increased manufacturing
capacity rating of each of our current and future manufacturing
facilities.
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 and during the first
six months of 2007, 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 $2.35 per Watt during the six months ended
June 30, 2007. 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 and France, which then
resell
26
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, North America 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 long-term contracts for the
purchase and sale of our solar modules with six European project
developers and system integrators, and in May and July 2007, we
entered into additional long-term contracts for the purchase and
sale of our solar modules with three European project developers
that also own and operate renewable energy projects
(collectively, the Long Term Supply 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. Our
Long Term Supply Contracts in the aggregate allow for
approximately 3.2 billion ($4.1 billion at an
assumed exchange rate of $1.30/1.00) in sales from 2007 to
2012 for the sale of a total of 2.2GW of solar modules.
Our Long Term Supply Contracts entered into in 2006 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. Under these Long Term Supply Contracts, we are
required to increase the minimum average number of Watts per
module by approximately 5% annually from 2007 to 2009 and then
by 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 applicable agreements,
entitling our customers to certain remedies, potentially
including the right to terminate their Long Term Supply
Contracts. Our Long Term Supply Contracts entered into in 2007
do not require a minimum average number of Watts per module but
provide for a base number of Watts per module that increases
3-4% annually from 2007 to 2009, and then remains fixed through
2012, and contain a price adjustment per Watt if the Watts
delivered per module are higher or lower than the base number of
Watts per module. All of our Long Term Supply Contracts specify
a sales price per Watt that declines by approximately 6.5% at
the beginning of each year through the expiration date of the
contracts in 2012. Because the sales prices under our Long Term
Supply Contracts are fixed and have the built-in decline each
year, we cannot pass along any increases in manufacturing costs
to these 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 Supply
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
Supply Contracts will reduce our net sales by approximately 5-6%
each year, assuming that the rated power of our solar modules
remains flat, and will impact our cash flow accordingly. As a
result, our profitability could decline if we are unable to
reduce our manufacturing cost per Watt by at least the same rate
as the contractual sales prices decrease. Furthermore, the sales
prices under the Long Term Supply Contracts are denominated in
euros, exposing us to risks from currency exchange rate
fluctuations.
Under our customer 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 certain material adverse changes have
occurred, including one or more of the following: 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 is 3.7 million
($4.8 million at an assumed exchange rate of
$1.30/1.00).
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, certain of our
customers are entitled to a maximum charge representing a
percentage of the delinquent revenue. If we do not meet our
annual minimum volume shipments, our customers also have the
right to terminate these contracts on a prospective basis.
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.
27
No single customer accounted for more than 19% and 22% of our
net sales in 2006 and the first six months of 2007, respectively.
We spent $70.1 million in capital expenditures for the Ohio
expansion. In addition, we spent $150.0 million for the
build-out of our German plant through 2007. We expect to spend
approximately $150.0 million to build each of the two
plants at our Malaysia manufacturing center. We anticipate that
the build-out of plant one and plant two at our Malaysia
manufacturing center will require approximately
$160.0 million through 2008 and an additional
$140.0 million through the first half of 2009.
Cost
of sales
Our cost of sales includes the cost of raw materials, such as
tempered back glass, TCO coated front glass, cadmium telluride,
laminate, connector assemblies and laminate edge seal. Our total
material cost per solar module has been stable over the past
three years, even though the cost of tellurium, a component of
cadmium telluride, increased by approximately 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 life 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 into lower-cost manufacturing regions and more
efficient absorption of fixed costs driven by economies of scale.
Gross profit is 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 Supply
Contracts specify a sales price per Watt that declines
approximately 6.5% at the beginning of each year. Another factor
impacting gross profits is the ramp of production due to a
reduced ability to absorb fixed costs 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. 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 fiscal year 2004,
$0.9 million during each of fiscal years 2005 and 2006 and
28
$0.8 million during the first six months of 2007. We expect
our research and development expense to increase in absolute
terms in the future as we increase personnel and research and
development activity. Over time, we expect research and
development expense to decline as a percentage of net sales and
on a cost per Watt basis as a result of economies of scale.
Selling,
general and administrative
Selling, general and administrative expense consists primarily
of salaries and other personnel-related costs, professional
fees, insurance costs, travel expense and other selling
expenses. We expect these expenses to increase in the near term,
both in absolute dollars and as a percentage of net sales, in
order to support the growth of our business as we expand our
sales and marketing efforts, improve our information processes
and systems and implement the financial reporting, compliance
and other infrastructure required for a public company. Over
time, we expect selling, general and administrative expense to
decline as a percentage of net sales and on a cost per Watt
basis as our net sales and our total Watts produced 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 $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
incurred production
start-up
expenses of $10.0 million during the first six months of
2007 in connection with the qualification of the German plant
and the planning and preparation for operation of plant one of
the Malaysia manufacturing center. We expect to incur
significant production
start-up
expenses in fiscal year 2007 in connection with the German plant
and plant one and plant two at the Malaysia manufacturing
center. 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
new production lines 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
Description of Certain Indebtedness.
Foreign
currency gain (loss)
Foreign currency gain (loss) consists of gains and losses
resulting from holding assets and liabilities and conducting
transactions denominated in currencies other than our functional
currency, the U.S. dollar.
Other
income (expense)
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 prospectus does not reflect what our financial
position and results of operations would have been, had we been
a taxable corporation for a full fiscal year.
On June 30, 2007, we had
non-U.S. net
operating loss carry-forwards of $6.4 million, which have
an unlimited expiration period, which is unchanged from
$6.4 million on December 30, 2006. 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.
29
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 the financial statement and income tax bases of assets
and liabilities. We provide valuation allowances against
deferred tax assets when we cannot conclude that it is more
likely than not that some portion or all of the deferred tax
assets will be realized. As of June 30, 2007, we had net
deferred tax assets of $39.2 million, consisting primarily
of tax-basis goodwill, property, plant and equipment, economic
development funding and share-based compensation. 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.
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 for the fiscal year ended December 30, 2006
included elsewhere in this prospectus.
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 prospectus 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 $2.5 million
and $2.7 million to cost of sales for the fair value of our
reclamation and recycling obligation for solar modules sold
during the fiscal year ended December 30, 2006 and the six
months ended June 30, 2007, respectively. During both the
fiscal year ended December 30, 2006 and the six months
ended June 30, 2007, the accretion expense on our
reclamation and recycling obligations was insignificant, but we
expect it to increase as production output and our installed
product base increases. 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.
30
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 within the first 10 years following their
installation and at least 80% of their initial power output
rating within 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 fiscal 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 fiscal year
ended December 30, 2006 and the six months ended
June 30, 2007, no further significant adjustments to this
estimate were required.
Stock-based compensation. In December 2004,
the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. (SFAS) 123(R),
Share-Based Payment, 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
fiscal 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. The adjustments to our forfeiture
rate estimates reduced our share-based compensation expense by
$0.6 million in the fiscal year ended December 30,
2006 and increased our share-based compensation expense by
$1.2 million in the six months ended June 30, 2007.
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 the
31
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.
Controls
and Procedures
We restated our consolidated financial statements for the fiscal
year ended and as of December 25, 2004 in order to correct
errors that we identified during the preparation of the
registration statement in connection with our initial public
offering and the performance of the associated audits for the
fiscal 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 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 reported 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 to remediate the material weakness. Specifically, in
the first half of fiscal 2006, we hired a new chief financial
officer and created an audit committee
32
comprised of three independent directors and, in August 2006,
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 additions 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 Risk FactorsRisks
Relating to Our BusinessWe identified several significant
deficiencies in our internal controls that were deemed to be
material weaknesses. If we are unable to successfully address
the material weaknesses in our internal controls, our ability to
report our financial results on a timely and accurate basis may
be adversely affected.
Results
of Operations
The following table sets forth our consolidated statements of
operations for the periods indicated as a percentage of net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Years Ended
|
|
Ended
|
|
|
December 25,
|
|
December 31,
|
|
December 30,
|
|
July 1,
|
|
June 30,
|
|
|
2004
|
|
2005
|
|
2006
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
Cost of sales
|
|
139.4%
|
|
65.5%
|
|
59.8%
|
|
70.2%
|
|
59.5%
|
Gross profit (loss)
|
|
(39.4)%
|
|
34.5%
|
|
40.2%
|
|
29.8%
|
|
40.5%
|
Research and development
|
|
9.2%
|
|
5.0%
|
|
4.7%
|
|
7.4%
|
|
4.7%
|
Selling, general and administrative
|
|
68.9%
|
|
32.9%
|
|
24.7%
|
|
33.7%
|
|
21.5%
|
Production
start-up
expense
|
|
6.6%
|
|
6.6%
|
|
8.7%
|
|
16.0%
|
|
6.9%
|
Operating income (loss)
|
|
(124.1)%
|
|
(10.0)%
|
|
2.1%
|
|
(27.3)%
|
|
7.4%
|
Foreign currency gain (loss)
|
|
0.9%
|
|
(3.6)%
|
|
4.1%
|
|
7.5%
|
|
(0.2)%
|
Interest expense
|
|
(0.8)%
|
|
(0.9)%
|
|
(0.8)%
|
|
(1.7)%
|
|
(1.1)%
|
Other income (expense)
|
|
(0.0)%
|
|
0.9%
|
|
1.4%
|
|
1.4%
|
|
5.1%
|
Income tax (expense) benefit
|
|
|
|
|
|
(3.9)%
|
|
|
|
23.1%
|
Cumulative effect of change in
accounting for share-based compensation
|
|
|
|
0.2%
|
|
|
|
|
|
|
Net income (loss)
|
|
(124.0)%
|
|
(13.4)%
|
|
2.9%
|
|
(20.1)%
|
|
34.3%
|
Six
Months Ended June 30, 2007 and July 1,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
June 30, 2007
|
|
|
Six Month Period
Change
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
41,485
|
|
|
$
|
144,172
|
|
|
$
|
102,687
|
|
|
|
248
|
%
|
Net sales increased by $102.7 million, or 248%, from
$41.5 million in the first six months of 2006 to
$144.2 million in the first six months of 2007. The
increase in our net sales was due primarily to a 241% increase
in the MW volume of solar modules sold in the first half of 2007
compared with the first half of 2006. We were able to increase
the MW volume of solar modules sold primarily as a result of the
full production ramp of our Ohio expansion, commencement of
production at our German plant, and continued improvements to
our production throughput. In addition, we increased the average
number of sellable watts per solar module from approximately 62
watts in the first six months of 2006 to approximately 67 watts
in the first six months of 2007. Our average selling price in
the first six
33
months of 2007 was $2.35 from $2.30 in the first six months of
2006. Our average selling price was positively impacted by $0.17
due to a favorable foreign exchange rate between the
U.S. dollar and euro, partially offset by a price decline.
In both periods, almost all of our net sales resulted from sales
of solar modules to customers headquartered in Germany.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
June 30, 2007
|
|
|
Six Month Period
Change
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
29,113
|
|
|
$
|
85,759
|
|
|
$
|
56,646
|
|
|
|
195
|
%
|
% of net sales
|
|
|
70.2
|
%
|
|
|
59.5
|
%
|
|
|
|
|
|
|
|
|
Cost of sales increased by $56.6 million, or 195%, from
$29.1 million in the first six months of 2006 to
$85.8 million in the first six months of 2007. Direct
material expense increased $25.2 million, warranty and end
of life costs relating to the reclamation and recycling of our
solar modules increased $2.4 million, sales freight and
other costs increased $1.3 million, in each case, primarily
as a result of higher production volumes in the first six months
of 2007 compared with the first six months of 2006. In addition,
manufacturing overhead costs increased by $27.7 million,
which was primarily composed of an increase in salaries and
personnel related expenses of $15.6 million, including a
$1.7 million share-based compensation expense resulting
from the infrastructure associated with our Ohio expansion and
German plant build-outs, facility and related expenses of
$5.7 million and depreciation expense of $6.4 million,
primarily as a result of additional equipment becoming
operational at our Ohio and German plants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
July 1, 2006
|
|
June 30, 2007
|
|
Six Month Period Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
12,372
|
|
|
$
|
58,413
|
|
|
$
|
46,041
|
|
|
|
372
|
%
|
Gross margin %
|
|
|
29.8
|
%
|
|
|
40.5
|
%
|
|
|
|
|
|
|
|
|
Gross profit increased by $46.0 million from
$12.4 million in the first six months of 2006 to
$58.4 million in the first six months of 2007, reflecting
an increase in net sales. As a percentage of sales, gross margin
increased 10.7 percentage points from 29.8% in the first
six months of 2006 to 40.5% in the first six months of 2007,
representing increased leverage of our fixed cost infrastructure
and scalability associated with our plant expansions, which
drove a 241% increase in the number of MW sold. Additionally, we
incurred $7.6 million or 5.3% of revenues of costs
associated with the ramp of our German plant in the first six
months of 2007 versus $1.1 million or 2.7% of revenues of
costs incurred in the first six months of 2006 related to the
ramp of our Ohio expansion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
July 1, 2006
|
|
June 30, 2007
|
|
Six Month Period Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
3,055
|
|
|
$
|
6,821
|
|
|
$
|
3,766
|
|
|
|
123
|
%
|
% of net sales
|
|
|
7.4
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
Research and development expense increased by $3.8 million,
or 123%, from $3.1 million in the first six months of
2006 to $6.8 million in the first six months of 2007.
The increase in research and development expense was primarily
the result of a $3.6 million increase in personnel related
expense, which included share-based compensation expense of
$2.7 million in the first six months of 2007 compared to
$1.2 million for the same period in 2006, due to increased
headcount and additional option awards. Consulting and other
expenses also increased by $0.8 million partially offset by
a $0.6 million increase in grant revenue received over the
same time period.
34
|
|
|
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
July 1, 2006
|
|
June 30, 2007
|
|
Six Month Period Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
14,005
|
|
|
$
|
30,975
|
|
|
$
|
16,970
|
|
|
|
121
|
%
|
% of net sales
|
|
|
33.7
|
%
|
|
|
21.5
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense increased by
$17.0 million, or 121%, from $14.0 million in the
first six months of 2006 to $31.0 million in the first six
months of 2007. This increase was primarily a result of an
increase in salaries and personnel-related expenses of
$11.1 million due to increased headcount and an increase in
share-based compensation expense from $2.0 million in the
first six months of 2006 compared to $5.7 million in the
first six months of 2007. In addition, legal and professional
service fees increased by $5.3 million and other expenses
increased by $0.6 million from the first six months of 2006
to the first six months of 2007 primarily resulting from
expenses incurred in connection with being a public company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
July 1, 2006
|
|
June 30, 2007
|
|
Six Month Period Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Production
start-up
|
|
$
|
6,641
|
|
|
$
|
9,997
|
|
|
$
|
3,356
|
|
|
|
51
|
%
|
% of net sales
|
|
|
16.0
|
%
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
In the first six months of 2007, we incurred $10.0 million
of production
start-up
expenses related to our German and Malaysia expansions,
including related legal and regulatory costs and increased
headcount, compared with $6.6 million of production
start-up
expenses for our Ohio and German plant expansions during the
first six months of 2006. Production
start-up
expenses are primarily attributable to the cost of labor and
material and depreciation expense to run and qualify the line,
related facility expenses and management of our replication
process.
|
|
|
Foreign
currency gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
July 1, 2006
|
|
June 30, 2007
|
|
Six Month Period Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Foreign currency gain (loss)
|
|
$
|
3,090
|
|
|
$
|
(249
|
)
|
|
$
|
(3,339
|
)
|
|
|
N.M.
|
Foreign exchange gain decreased by $3.3 million from the
six months ended July 1, 2006 to the six months ended
June 30, 2007 primarily as a result of lower euro
denominated asset balances and partially offset by the
implementation of a hedging program for certain inter-company
loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
July 1, 2006
|
|
June 30, 2007
|
|
Six Month Period Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(708
|
)
|
|
$
|
(1,484
|
)
|
|
$
|
776
|
|
|
|
N.M.
|
Interest expense, net of amounts capitalized, increased by
$0.8 million from the six months ended July 1, 2006 to
the six months ended June 30, 2007 primarily as a result of
additional draws on our credit facility with IKB.
|
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
July 1, 2006
|
|
June 30, 2007
|
|
Six Month Period Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
591
|
|
|
$
|
7,286
|
|
|
$
|
6,695
|
|
|
|
N.M.
|
35
The increase in other income of $6.7 million in the six
months ended June 30, 2007 compared with the six months
ended July 1, 2006 was primarily due to increased interest
income from higher cash balances as a result of our initial
public offering in the fourth quarter of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
July 1, 2006
|
|
June 30, 2007
|
|
Six Month Period
Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
|
|
|
$
|
33,273
|
|
|
$
|
33,273
|
|
|
|
N.M.
|
The income tax benefit of $33.3 million during the six
months ended June 30, 2007 is mainly due to the reversal of
valuation allowances of $39.2 million previously
established against U.S. deferred income tax assets, offset
by $6.0 million in current income tax provision. The
reversal was based upon our updated assessment of the future
realization of our deferred income tax asset. The available
positive evidence at June 30, 2007 included cumulative U.S.
taxable income for the previous 12 quarters and a
projection of future taxable income.
Fiscal
Years Ended December 30, 2006 and December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
48,063
|
|
|
$
|
134,974
|
|
|
$
|
86,911
|
|
|
|
181
|
%
|
Net sales increased by $86.9 million, or 181%, from
$48.1 million in 2005 to $135.0 million in 2006. 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. Net sales in 2006 also
benefited from a change in our shipping terms from delivered
duty paid to carriage and insurance paid, which became effective
in the second quarter of 2006. This change affected revenue
recognition by $5.4 million of in-transit inventory during
the first half of 2006. In addition, we increased the average
number of sellable Watts per solar module from approximately 59
Watts in 2005 to approximately 63 Watts in 2006. The increase in
net sales was partially offset by a 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
31,483
|
|
$
|
80,730
|
|
$
|
49,247
|
|
|
156%
|
% of net sales
|
|
|
65.5%
|
|
|
59.8%
|
|
|
|
|
|
|
Cost of sales increased by $49.2 million, or 156%, from
$31.5 million in 2005 to $80.7 million in 2006. 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 composed of an increase
in salaries and personnel related expenses of $8.7 million,
including $3.3 million in 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.
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Year Over 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 from 34.5% in 2005 to 40.2% in 2006,
representing increased leverage of our fixed cost infrastructure
and scalability associated with the expansion of our Ohio plant,
which drove a 184% increase in the number of MW sold.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
2,372
|
|
$
|
6,361
|
|
$
|
3,989
|
|
|
168%
|
% of net sales
|
|
|
5.0%
|
|
|
4.7%
|
|
|
|
|
|
|
Research and development expense increased by $4.0 million,
or 168%, from $2.4 million in 2005 to $6.4 million in
2006. 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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
15,825
|
|
$
|
33,348
|
|
$
|
17,523
|
|
|
111%
|
% of net sales
|
|
|
32.9%
|
|
|
24.7%
|
|
|
|
|
|
|
Selling, general and administrative expense increased by
$17.5 million, or 111%, from $15.8 million in 2005 to
$33.3 million in 2006. 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 costs incurred in connection with being a public company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Year Over 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.
37
|
|
|
Foreign
exchange gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Year Over 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Year Over 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Year Over 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 as a result of our initial public offering in the
fourth quarter of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Year Over 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 limited liability company to a
corporation, profitability in 2006 and a full valuation
allowance against our deferred tax assets.
|
|
|
Cumulative
effect of change in accounting for share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2005
|
|
2006
|
|
Year Over 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 resulting
in a one-time cumulative effect of $0.1 million in the
first quarter of 2005.
Fiscal
Years Ended December 31, 2005 and December 25,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2004
|
|
2005
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
13,522
|
|
$
|
48,063
|
|
$
|
34,541
|
|
|
255%
|
38
Net sales increased by $34.5 million, or 255%, from
$13.5 million in 2004 to $48.1 million in 2005. Of the
increase in our net sales, $26.8 million was due to an
increase in the MW volume of solar modules sold from 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 the first production line at our Ohio plant
and then operated this production line 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2004
|
|
2005
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
18,851
|
|
$
|
31,483
|
|
$
|
12,632
|
|
|
67%
|
% of net sales
|
|
|
139.4%
|
|
|
65.5%
|
|
|
|
|
|
|
Cost of sales increased by $12.6 million, or 67%, from
$18.9 million in 2004 to $31.5 million in 2005. The
increase in our cost of sales was due primarily to higher raw
material costs required to support the higher production volumes
from the first production line at our Ohio 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 first production
line at our Ohio 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2004
|
|
2005
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
$
|
(5,329)
|
|
$
|
16,580
|
|
$
|
21,909
|
|
|
N.M.
|
Gross margin%
|
|
|
(39.4)%
|
|
|
34.5%
|
|
|
|
|
|
|
Gross profit increased by $21.9 million, from a loss of
$5.3 million in 2004 to a gross profit of
$16.6 million in 2005, 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 first production line at
our Ohio plant at full volume production through most of 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2004
|
|
2005
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
1,240
|
|
$
|
2,372
|
|
$
|
1,132
|
|
|
91%
|
% of net sales
|
|
|
9.2%
|
|
|
5.0%
|
|
|
|
|
|
|
39
Research and development expense increased by $1.1 million,
or 91%, from $1.2 million in 2004 to $2.4 million in
2005. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2004
|
|
2005
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
9,312
|
|
$
|
15,825
|
|
$
|
6,513
|
|
|
70%
|
% of net sales
|
|
|
68.9%
|
|
|
32.9%
|
|
|
|
|
|
|
Selling, general and administrative expense increased by
$6.5 million, or 70%, from $9.3 million in 2004 to
$15.8 million in 2005. Of that increase, $2.2 million
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2004
|
|
2005
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Production
start-up
|
|
$
|
900
|
|
$
|
3,173
|
|
$
|
2,273
|
|
|
253%
|
% of net sales
|
|
|
6.6%
|
|
|
6.6%
|
|
|
|
|
|
|
Production
start-up
expenses increased from $0.9 million in 2004 to
$3.2 million in 2005 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2004
|
|
2005
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss)
|
|
$
|
116
|
|
$
|
(1,715
|
)
|
|
$
|
(1,831
|
)
|
|
|
N.M.
|
Foreign exchange losses increased by $1.8 million during
2005 as the U.S. dollar strengthened against the euro.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2004
|
|
2005
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(100
|
)
|
|
$
|
(418
|
)
|
|
$
|
(318
|
)
|
|
|
N.M.
|
Interest expense increased in 2005 by $0.3 million compared
to 2004 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.
40
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2004
|
|
2005
|
|
Year Over Year Change
|
(Dollars in thousands)
|
|
|
|
Other income (expense), net
|
|
$
|
(6
|
)
|
|
$
|
372
|
|
|
$378
|
|
|
N.M.
|
|
Other income increased by $0.4 million during 2005 due to
an increase in interest income earned.
Cumulative
effect of change in accounting for share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
2004
|
|
2005
|
|
Year Over 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,
resulting in a one-time cumulative effect of $0.1 million
in the first quarter of 2005.
41
Quarterly
Results of Operations
The following table presents our unaudited quarterly results of
operations for the last ten quarters in the period ended
June 30, 2007. You should read the following table in
conjunction with the consolidated financial statements and
related notes contained elsewhere in this prospectus. In the
opinion of management, the unaudited financial information
presented below has been prepared on the same basis as our
audited consolidated financial statements, and includes all
adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of our
financial position and operating results for the quarters
presented. Operating results for any quarter are not necessarily
indicative of the results for any future quarters or for a full
year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended
|
|
|
|
March 26,
|
|
|
June 25,
|
|
|
Sept 24,
|
|
|
Dec 31,
|
|
|
Apr 1,
|
|
|
Jul 1,
|
|
|
Sep 30,
|
|
|
Dec 30,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
Net sales
|
|
$
|
8,530
|
|
|
$
|
9,367
|
|
|
$
|
16,585
|
|
|
$
|
13,581
|
|
|
$
|
13,624
|
|
|
$
|
27,861
|
|
|
$
|
40,794
|
|
|
$
|
52,695
|
|
|
$
|
66,949
|
|
|
$
|
77,223
|
|
Cost of sales
|
|
|
6,158
|
|
|
|
5,510
|
|
|
|
10,004
|
|
|
|
9,811
|
|
|
|
10,352
|
|
|
|
18,761
|
|
|
|
24,537
|
|
|
|
27,080
|
|
|
|
36,907
|
|
|
|
48,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,372
|
|
|
|
3,857
|
|
|
|
6,581
|
|
|
|
3,770
|
|
|
|
3,272
|
|
|
|
9,100
|
|
|
|
16,257
|
|
|
|
25,615
|
|
|
|
30,042
|
|
|
|
28,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
197
|
|
|
|
287
|
|
|
|
426
|
|
|
|
1,462
|
|
|
|
1,519
|
|
|
|
1,536
|
|
|
|
1,657
|
|
|
|
1,649
|
|
|
|
3,058
|
|
|
|
3,763
|
|
Selling, general and administrative
|
|
|
2,639
|
|
|
|
2,889
|
|
|
|
3,306
|
|
|
|
6,991
|
|
|
|
5,872
|
|
|
|
8,133
|
|
|
|
8,393
|
|
|
|
10,950
|
|
|
|
13,690
|
|
|
|
17,285
|
|
Production
start-up
|
|
|
204
|
|
|
|
286
|
|
|
|
920
|
|
|
|
1,763
|
|
|
|
2,579
|
|
|
|
4,062
|
|
|
|
1,109
|
|
|
|
3,975
|
|
|
|
8,474
|
|
|
|
1,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,040
|
|
|
|
3,462
|
|
|
|
4,652
|
|
|
|
10,216
|
|
|
|
9,970
|
|
|
|
13,731
|
|
|
|
11,159
|
|
|
|
16,574
|
|
|
|
25,222
|
|
|
|
22,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(668
|
)
|
|
|
395
|
|
|
|
1,929
|
|
|
|
(6,446
|
)
|
|
|
(6,698
|
)
|
|
|
(4,631
|
)
|
|
|
5,098
|
|
|
|
9,041
|
|
|
|
4,820
|
|
|
|
5,800
|
|
Foreign currency gain (loss)
|
|
|
(127
|
)
|
|
|
(642
|
)
|
|
|
(283
|
)
|
|
|
(663
|
)
|
|
|
900
|
|
|
|
2,190
|
|
|
|
(298
|
)
|
|
|
2,752
|
|
|
|
(270
|
)
|
|
|
21
|
|
Interest and other income
(expense), net
|
|
|
(30
|
)
|
|
|
7
|
|
|
|
72
|
|
|
|
(95
|
)
|
|
|
(74
|
)
|
|
|
(43
|
)
|
|
|
(327
|
)
|
|
|
1,270
|
|
|
|
3,759
|
|
|
|
2,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(825
|
)
|
|
|
(240
|
)
|
|
|
1,718
|
|
|
|
(7,204
|
)
|
|
|
(5,872
|
)
|
|
|
(2,484
|
)
|
|
|
4,473
|
|
|
|
13,063
|
|
|
|
8,309
|
|
|
|
7,864
|
|
Income tax (expense) benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
23
|
|
|
|
(181
|
)
|
|
|
(5,025
|
)
|
|
|
(3,281
|
)
|
|
|
36,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of change in accounting principle
|
|
|
(825
|
)
|
|
|
(240
|
)
|
|
|
1,718
|
|
|
|
(7,204
|
)
|
|
|
(5,895
|
)
|
|
|
(2,461
|
)
|
|
|
4,292
|
|
|
|
8,038
|
|
|
|
5,028
|
|
|
|
44,418
|
|
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
|
|
|
$
|
5,028
|
|
|
$
|
44,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.08
|
|
|
$
|
0.13
|
|
|
$
|
0.07
|
|
|
$
|
0.61
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.07
|
|
|
$
|
0.12
|
|
|
$
|
0.07
|
|
|
$
|
0.58
|
|
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
|
|
|
|
72,347
|
|
|
|
72,596
|
|
Diluted
|
|
|
46,211
|
|
|
|
49,258
|
|
|
|
52,158
|
|
|
|
49,916
|
|
|
|
50,777
|
|
|
|
54,358
|
|
|
|
57,956
|
|
|
|
66,324
|
|
|
|
75,392
|
|
|
|
76,089
|
|
Net sales increased sequentially in each of the quarters ended
March 26, 2005 through September 24, 2005, primarily
due to a 95% increase in the MW volume of solar modules sold
during that period. We were able to increase the MW volume sold
primarily as a result of the production ramp of the first
production line at our Ohio plant. For the quarter ended
December 31, 2005, net sales declined from the previous
quarter because of a build out of inventory to support the
anticipated production ramp of the two additional production
lines at our Ohio plant independent of demand. Net sales for the
quarters ended April 1, 2006 through June 30, 2007
increased as a result of higher throughput of our Ohio plant,
the full production ramp of the two additional production lines
at our Ohio plant, production at our German plant and a change
in our shipping terms from delivered duty paid to carriage and
insurance paid, which became effective in the quarter ended
July 1, 2006.
42
Gross profit increased $4.2 million, or 177%, between the
quarters ended March 26, 2005 and September 24, 2005,
reflecting an increase in net sales. Between the quarters ended
September 24, 2005 and April 1, 2006, gross profit
declined primarily as a result of increased stock based
compensation charges and, during the quarter ended April 1,
2006, the conversion from a five day to a seven day production
week in advance of production. Gross profit increased in each of
the quarters ending July 1, 2006 through March 31,
2007 because of an increase in net sales. Gross profit for the
quarter ended June 30, 2007 decreased primarily due to
costs associated with the ramp of our German plant.
Operating expenses increased in each of the quarters ended
March 26, 2005 through June 30, 2007, except for the
quarters ended April 1, 2006, September 30, 2006 and
June 30, 2007, reflecting the combination of increased staffing
to support our overall business growth, increased spending on
research and development to continue to improve and develop new
technologies, increased management and infrastructure spending
to support our growth, increased stock based compensation
expenses and increased production
start-up
expense as we continued to increase our production capacity. For
the quarter ended April 1, 2006, an increase in operating
expenses in absolute dollars was offset by a decline in stock
based compensation expense attributable to the full vesting of
certain grants. For the quarter ended September 30, 2006,
operating expenses declined reflecting a reduction in production
start-up
costs due to the completion of the two additional production
lines at our Ohio plant. For the quarter ended June 30,
2007 operating expenses declined reflecting a reduction in
production
start-up
costs due to the completion of our German plant.
Our quarterly results have been impacted by foreign exchange
gains and losses due to fluctuations between the
U.S. dollar and the euro.
Liquidity
and Capital Resources
Historically, our principal sources of liquidity have been cash
provided by operations, borrowings from JWMA Partners, LLC, or
JWMA, and its affiliates, borrowings from Goldman,
Sachs & Co., equity contributions from JWMA and
borrowings from local governments and other sources to fund
plant expansions. During the fiscal year ended December 30,
2006, we received $302.7 million as the net proceeds from
an initial public offering of our common stock. As of
June 30, 2007, we had $315.0 million in cash and cash
equivalents and marketable securities, compared to
$308.4 million as of December 30, 2006. One of our
strategies is to expand our manufacturing capacity by building
new manufacturing plants and production lines, such as the
recently completed German plant and the future plants at our
Malaysia manufacturing center. 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, low interest debt financings
for our German plant and the proceeds of this offering will be
sufficient to meet our working capital and capital expenditures
needs for at least the next 12 months. However, if our
financial results or operating plans change from our current
assumptions, we may not have sufficient resources to support our
business plan. As a result, we may 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
Risk FactorsRisks Relating to Our BusinessOur
future success depends on our ability to build new manufacturing
plants and add production lines in a cost-effective manner, both
of which are subject risks and uncertainties.
Cash
Flows
Cash provided (used) was as follows for the fiscal years ended
December 25, 2004, December 31, 2005 and
December 30, 2006 and the six months ended July 1,
2006 and June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
Six Months Ended
|
|
|
|
December 25,
|
|
|
December 31,
|
|
|
December 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Operating activities
|
|
$
|
(15,185
|
)
|
|
$
|
5,040
|
|
|
$
|
(576
|
)
|
|
$
|
(9,137
|
)
|
|
$
|
25,335
|
|
Investing activities
|
|
|
(7,790
|
)
|
|
|
(43,832
|
)
|
|
|
(159,994
|
)
|
|
|
(69,461
|
)
|
|
|
(287,926
|
)
|
Financing activities
|
|
|
22,900
|
|
|
|
51,663
|
|
|
|
451,550
|
|
|
|
83,370
|
|
|
|
61,285
|
|
Effect of exchange rates on
cash flows
|
|
|
(187
|
)
|
|
|
385
|
|
|
|
391
|
|
|
|
(98
|
)
|
|
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
$
|
(262
|
)
|
|
$
|
13,256
|
|
|
$
|
291,371
|
|
|
$
|
4,674
|
|
|
$
|
(200,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Operating
activities
Cash provided by operating activities was $25.3 million
during the first six months of 2007 compared to cash used in
operating activities of $9.1 million during the same period
in 2006. Cash received from customers increased to
$157.6 million during the first six months of 2007 from
$31.4 million during the first six months of 2006 mainly
due to an increase in net sales. This increase was partially
offset by an increase in cash paid to suppliers and employees of
$118.7 million during the first six months of 2007 compared
to cash paid to suppliers and employees of $40.8 million
during the same period in 2006, mainly due to an increase in raw
materials, an increase in personnel related costs due to higher
headcount and other costs supporting our global expansion.
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 associates 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 associates as a result of
higher production volumes and an increase in inventory.
Investing
activities
Cash used in investing activities was $287.9 million during
the first six months of 2007 compared with $69.5 million
during the same period in 2006. Cash used in investing
activities resulted primarily from capital expenditures in these
periods and the net purchase of marketable securities of
$198.6 million during the second quarter of fiscal 2007.
Capital expenditures were $80.4 million during the first
six months of 2007 and $67.8 million during the same period
in 2006. The increase in capital expenditures was primarily due
to our investments related to the construction of our new plants
in Germany and Malaysia.
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 plant in
Ohio and $0.1 million used for investments into other
long-term assets.
Financing
activities
Cash provided by financing activities was $61.3 million
during the first six months of 2007 compared with
$83.4 million during the same period in 2006. During the
first six months of 2007 we received $41.3 million from
additional drawings under our IKB credit facilities. Net
proceeds from the exercise of stock options were
$2.8 million. Tax benefits related to the exercise of stock
options during the six months ended June 30, 2007 were
$14.0 million. In addition, we received $4.8 million
in taxable investment incentives
(Investitionszuschuesse) from the State of
Brandenburg related to the construction of our plant in
Frankfurt/Oder, Germany. Cash provided by financing activities
for the first six months of 2006 was primarily due to the
issuance of convertible senior subordinated notes in the
aggregate principal amount of $74.0 million (resulting in
cash of $73.3 million, net of issuance costs). We
extinguished these notes in the second quarter of 2006 by
payment of 4.3 million shares of our common stock. Also,
during the first six months of 2006, we received equity
contributions of $30.0 million from our majority
stockholder, which was partially offset by $20.0 million in
net repayments of related party debt.
44
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 was 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 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 prospectus 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 consist of legal commitments
requiring us to make fixed or determinable cash payments,
regardless of contractual requirements with the vendor to
provide future goods or services. We purchase raw materials for
inventory, services and manufacturing equipment from a variety
of vendors. During the normal course of business, 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
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual
Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1 - 3 Years
|
|
|
3 - 5 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
45
($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 may drawdown against the
term loan and the bridge loan until December 30, 2007 and
we may drawdown against the revolving credit facility until
September 30, 2012. We have incurred costs related to the
credit facility totaling $2.0 million as of June 30,
2007, 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 under the credit facility. At
June 30, 2007, we had outstanding borrowings of
$61.4 million under the term loan and $20.2 million
under the revolving credit facility, which we classify as
long-term debt, and $22.4 million under the bridge loan,
which we classify as short-term debt.
We must repay the term loan in 20 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 the 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
46
available for debt service to fall below 1.3 times its required
principal and interest payments for all its liabilities for any
one year period or cause the amount of its equity to fall below
30% of the amount of its total assets. First Solar Manufacturing
GmbH also cannot pay commissions of greater than 2% to First
Solar affiliates that sell or distribute its products. Also, we
may be required under certain circumstances to contribute more
funds to First Solar Manufacturing GmbH, such as if
project-related costs exceed our plan, we do not recover the
expected amounts from governmental investment subsidies or all
or part of the government guarantees are withdrawn. If there is
a decline in the value of the assets pledged as collateral for
the credit facility, we may also be required to pledge
additional assets as collateral.
On July 26, 2006, we were approved to receive taxable
investment incentives
(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 associates during this period. Our incentive approval
expires on December 31, 2009. As of June 30, 2007, we
had received $25.3 million under this program and we had
accrued an additional $2.2 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 this 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 June 30, 2007, we had accrued
$31.6 million that we are eligible to receive under this
program based on qualifying expenditures that we had incurred
through that date.
In 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 and 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.
In July 2005, we received a $15.0 million loan from the
Director of Development of the State of Ohio, $14.1 million
of which was outstanding at June 30, 2007. Interest is payable
monthly at the annual rate of 2.25% and 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
$21.5 million at June 30, 2007 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, $4.2 million of which was outstanding at
June 30, 2007. 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, 2.25%
during the fourth and fifth years and 3.25% for each subsequent
year. Principal payments commenced on January 1, 2007 and
end on December 1, 2009. Machinery and equipment at our
Ohio plant with a net book value of $8.0 million at
June 30, 2007 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 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.
47
On February 22, 2006, we received $73.3 million from
the issuance of $74.0 million aggregate principal amount 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 June 30,
2007.
Quantitative
and Qualitative Disclosures About Market Risk
Foreign
Exchange Risk
Our international operations accounted for 100.0% of our net
sales in the first six months of 2007 and 99.9% of our net sales
in the first six months of 2006, all of which were denominated
in euros. As a result, we have exposure to foreign exchange risk
with respect to almost all of our net sales. Fluctuations in
exchange rates, particularly in the U.S. dollar to euro
exchange rate, affect our gross and net profit margins and could
result in foreign exchange and operating losses. Historically,
most of our exposure to foreign exchange risk has related to
currency gains and losses from the time we sign and settle our
sales contracts. For example, our Long Term Supply 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 the first six months
of 2007, a 10% change in foreign currency exchange rates would
have impacted our net sales by $14.4 million. With the
expansion of our manufacturing operations into Germany and the
current expansion into Malaysia, our operating expenses for the
plants in these countries will be denominated in the local
currency.
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
$1.0 million in the first six months of 2007 and negatively
impacted our cash flows by $0.1 million in the first six
months of 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
June 30, 2007, we had one outstanding foreign exchange
forward contract to sell 20.0 million for
$26.8 million at a fixed exchange rate of $1.34/1.00.
The contract is due to settle on February 27, 2009. This
foreign exchange forward contract hedges an intercompany loan.
Most of the German plants operating expenses will be in
euros, creating increasing opportunities for natural hedges
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.
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.
As of June 30, 2007, we held six pay fixed, receive Euribor
interest rate swaps with a combined notional value of
46.0 million ($59.8 million at an assumed
exchange rate of $1.30/1.00), which hedge our interest
rate risk on the IKB term loan.
In addition, we invest some of our cash in debt and equity
securities, which exposes us to interest rate risk. The primary
objective of our investment activities is to preserve principal,
while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the
securities in which we invest may be subject to market risk.
This means that a change in prevailing interest rates may cause
the principal amount of the
48
investment to fluctuate. For example, if we hold a security
that was issued with an interest rate fixed at the
then-prevailing rate and the prevailing interest rate later
rises, the principal amount of our investment will probably
decline. To minimize this risk, we maintain our portfolio of
cash equivalents and marketable securities in a variety of
securities, including money market funds, government and
non-government debt securities and certificates of deposit. The
risk associated with fluctuating interest rates is limited to
our investment portfolio and we do not believe that a 10% change
in interest rates will have a significant impact on our
consolidated statements of operations and statements of cash
flow. As of June 30, 2007, all of our investments were in
money market accounts or tax-exempt U.S. government
securities, including obligations of states and political
subdivisions.
Commodity
Risk
We are exposed to price risks associated with raw material
purchases, most significantly tellurium. Presently, we purchase
all of our cadmium telluride in compounded form from two
qualified suppliers. We have a rolling four year written
contract with one of our qualified suppliers, which provides for
quarterly price adjustments based on the cost of tellurium. In
2006, we entered into a multi-year tellurium supply contract in
order to mitigate potential cost volatility and secure raw
material supplies. We purchase from our other qualified supplier
on a purchase order basis. 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 and many of our other
customer 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 many of our customers.
In addition, most of our key raw materials are either
sole-sourced or sourced from 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 12 months depending on the
raw material. We might be unable to identify new suppliers or
qualify their products for use on our production line on a
timely basis and on commercially reasonable terms.
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 it has taken will ultimately be sustained
when it files its tax return. FIN 48 establishes a single
model to address accounting for uncertain tax positions.
FIN 48 clarifies the accounting for income taxes by
prescribing a minimum recognition threshold that a tax position
is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition,
measurement classification, interest and penalties, accounting
in interim periods, disclosure and transition. Upon our adoption
of FIN 48 on December 31, 2006, we increased our
reserves for uncertain tax positions by $0.1 million. This
increase was recorded as a cumulative effect adjustment to
stockholders equity. In addition, we decreased deferred
tax assets and their associated valuation allowances by
$0.5 million.
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 these taxes on a net
basis, excluded from revenues.
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.
49
In March 2007, the FASB ratified Emerging Issues Task Force
Issue (EITF)
No. 06-10,
Accounting for Deferred Compensation and Post Retirement
Benefit Aspects of Collateral Assignment Split-Dollar Life
Insurance Arrangement.
EITF 06-10
provides guidance for determining a liability for the
post-retirement benefit obligation and for recognition and
measurement of the associated asset based on the terms of the
collateral assignment agreement.
EITF 06-10
is effective for fiscal years beginning after December 15,
2007. We have evaluated
EITF 06-10
and determined that its adoption is not expected to have a
material effect on our financial position or results of
operations.
In May 2007, the FASB issued FASB Staff Position, or FSP,
No. FIN 48-1,
Definition of Settlement in FASB Interpretation
No. 48, to amend FIN No. 48 by
providing that previously unrecognized tax benefits can be
recognized when the tax positions are effectively settled upon
examination by a taxing authority. According to FSP
FIN 48-1,
an enterprises tax position will be considered effectively
settled if the taxing authority has completed its examination,
the enterprise does not plan to appeal, and it is remote that
the taxing authority would reexamine the tax position in the
future. FSP
FIN 48-1
must be applied upon the initial adoption of
FIN No. 48. Enterprises that did not apply
FIN No. 48 in a manner consistent with the provisions
of FSP
FIN 48-1
would be required to retrospectively apply its provisions to the
date of the initial adoption of FIN No. 48. FSP
FIN 48-1
did not have a material impact on our initial adoption of
FIN No. 48.
In June 2007, the FASB Emerging Issues Task Force
(EITF) published Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods
or Services to Be Used in Future Research and Development
Activities. EITF
No. 07-3
requires that these payments made by an entity to third parties
be deferred and capitalized and recognized as an expense as the
related goods are delivered or the related services are
performed. Entities report the effects of applying this Issue as
a change in accounting principle through a cumulative-effect
adjustment to retained earnings as of the beginning of the year
of adoption. EITF
No. 07-3
is effective for us beginning on January 1, 2008. Earlier
application is not permitted. We do not expect that adoption of
EITF
No. 07-3
will have a material effect on our financial position or results
of operations.
50
INDUSTRY
AND MARKET DATA
This prospectus includes industry and market data that we
obtained from periodic industry publications, third-party
studies and surveys, filings of public companies in our industry
and internal company surveys. These sources include Datamonitor,
the Energy Information Administration, the International Energy
Agency, Photon International, Solarbuzz, Sun & Wind
Energy and the World Bank. Industry publications and surveys
generally state that the information contained therein has been
obtained from sources believed to be reliable. Unless otherwise
noted, statements as to our market position relative to our
competitors are approximated and based on the above-mentioned
third-party data and internal analysis and estimates as of the
latest available date. Although we believe the industry and
market data and statements as to market position to be reliable
as of the date of this prospectus, this information could prove
inaccurate. Industry and market data could be wrong because of
the method by which sources obtained their data and because
information cannot always be verified with complete certainty
due to the limits on the availability and reliability of raw
data, the voluntary nature of the data gathering process and
other limitations and uncertainties. In addition, we do not know
all of the assumptions regarding general economic conditions or
growth that were used in preparing the forecasts from sources
cited herein.
51
INDUSTRY
Electric
Power Industry
Global demand for electric power is expected to increase from
14.8 trillion kilowatt hours in 2003 to 27.1 trillion kWh by
2025, according to the Energy Information Administration, or the
EIA. To meet this demand, the International Energy Agency, or
the IEA, estimates that investments in generation, transmission
and distribution of electricity must reach approximately $10
trillion by 2030. According to the IEA, fossil fuels such as
coal, oil and natural gas generated over 80% of the worlds
electricity in 2004. However, fossil fuels face a number of
challenges that will limit their ability to supply the expanding
global demand for energy:
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Limited supply and rising cost of fossil
fuels. Limited fossil fuel supply and
escalating electricity consumption are causing wholesale
electricity prices to increase. For example, from 2000 to 2005,
the average cost of all fossil fuels used to generate
electricity globally increased by 67%, according to the IEA. The
rising cost of fossil fuels has resulted in higher electricity
costs for consumers and highlighted the need to develop new
technologies for electricity generation.
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Dependence on energy from foreign
regions. Many countries depend on foreign
energy for a majority of their domestic energy needs. For
example, the World Bank estimates that, in 2003, Italy, Japan
and Korea imported over 80% of their energy requirements,
Germany and Spain imported over 60% of their energy requirements
and the United States imported approximately 28% of its energy
requirements. Political and economic instability in some of the
leading energy producing regions of the world have induced many
countries to explore domestic energy alternatives, including
renewable energy, in order to reduce foreign energy dependence.
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Environmental concerns. Environmental
concerns over the by-products of fossil fuels have led to a
global search for environmentally friendly solutions to the
worlds growing electricity needs. By April 2007,
approximately 172 countries signed the Kyoto Protocol, agreeing
to reduce emissions of carbon dioxide and other gasses by 5.2%
from 1990 levels between 2008 and 2012. Many countries have
since taken pro-active steps to reduce emissions, such as
adopting subsidies to encourage the commercialization of
renewable energy.
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Renewable
Energy Industry
The same challenges facing fossil fuels are creating a growth
opportunity for renewable energy. Renewable energy sources for
electric power generation include hydroelectric, biomass,
geothermal, wind and solar. Within the renewable energy
industry, hydroelectric power currently generates the most
electricity. According to the EIA, hydroelectric power accounted
for approximately 6.5% of electricity generated in the United
States in 2004, compared to just 2.3% for all other sources of
renewable energy combined. While hydroelectric power generation
currently has the largest installed base within renewable
energy, the future growth of hydroelectric power will likely be
limited due to environmental concerns and a lack of suitable
sites.
Among renewable sources of electricity, solar energy has the
most potential to meet the worlds growing electricity
needs. According to the Department of Energy, the sun is the
only source of renewable energy that has a large enough resource
base to meet a significant portion of the worlds
electricity needs. A study commissioned by the Department of
Energy estimates that, on average, 120,000 trillion Watts, or
TW, of solar energy strike the Earth per year, far exceeding the
global electricity consumption rate of 14.3TW in 2002. At a
typical latitude for the United States, a net 10% efficient
solar energy farm covering 1.6% of the
U.S. land area could theoretically meet the countrys
entire domestic electricity needs. In contrast, the same study
estimates that the remaining global, practically exploitable
hydroelectric resource is less than 0.5TW, the cumulative energy
in all the tides and ocean currents in the world amounts to less
than 2TW, the total geothermal energy at the surface of the
Earth, integrated over all the land area of all seven
continents, is 12TW, of which only a small fraction could be
practically extracted, and the total amount of globally
extractable wind power is between 2TW and 4TW. Wind is a
commercially viable and scalable source of renewable energy, but
it also faces environmental challenges and many of the most
attractive high wind resource areas have already been developed.
52
Solar
Energy
Solar electricity is generated using either photovoltaic or
solar thermal technology to extract energy from the sun.
Photovoltaic electricity generating systems directly convert the
suns energy into electricity, whereas solar thermal
systems heat water or other fluids that are then used as sources
of energy. Photovoltaic systems are either grid-connected
systems or off-grid systems. Grid-connected systems are
connected to the electricity transmission and distribution grid
and feed solar electricity into the end-users electrical
system
and/or the
grid. Such systems are commonly mounted on the rooftops of
buildings, integrated into building facades or installed on the
ground using support structures, and range in size from 2-3
kilowatts to multiple megawatts, or MW. Off-grid photovoltaic
systems are typically much smaller and are frequently used in
remote areas where they may be the only source of electricity
for the end-user.
Photovoltaic systems are currently the most widely used method
of transforming sunlight into electricity. Annual installations
by the photovoltaic industry grew from 0.4GW in 2002 to 1.7GW in
2006, representing an average annual growth rate of over 42%.
Cumulative installed capacity reached just below 7GW by the end
of 2006.
In 2006, Germany was the world leader in MW volume of
photovoltaic installations with 55%, followed by Japan with 17%
and the United States with 8%, according to Solarbuzz.
Germanys and Japans historical dominance is
attributable to their government incentive programs, which were
designed to stimulate market demand for photovoltaic systems.
Other European countries have adopted or are adopting similar
government incentive programs, as are countries in Asia and
several states in the United States, including California. The
California Solar Initiative commits $2.9 billion in
incentives over 10 years with the goal of supporting
installations of 3GW new installed capacity by 2017.
Solar energy generated through photovoltaic systems has several
advantages compared to conventional and other renewable sources
of electricity, including the following:
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Solar energy is distributive. Photovoltaic
systems achieve economies of scale at small sizes and are
modular, and thus can be installed at or near the sites where
the solar electricity is consumed. By contrast, most methods of
electricity generation are centrally generated and delivered to
consumers over a transmission and distribution grid. As a
result, solar generation can mitigate the cost and distribution
and transmission constraints often faced by centrally generated
energy sources.
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Solar energy systems require minimal operating
expense. Once installed, photovoltaic systems
typically require very little maintenance and no fuel,
minimizing the operating expense of a photovoltaic system over
the expected 25 year life of the system. As a result, the
cost of electricity generated by a photovoltaic system is
substantially fixed at the time of installation and is subject
to minimal increase or volatility over the life of the system.
By contrast, other methods of electricity generation require
higher amounts of maintenance and replacement costs over the
life of the system. In addition, fossil fuel and biomass power
plants face volatility in fuel supply and cost. These
maintenance, replacement and fuel costs can be unpredictable and
cause the cost of electricity generated by these systems to
increase over the systems useful life.
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Solar modules can be installed at a variety of
locations. Photovoltaic systems can generate
electricity anywhere sunlight hits the Earths surface. By
contrast, relatively fewer locations have the natural resources
and grid access necessary to support hydroelectric, wind or
geothermal electricity generating systems. While power plants
using fossil fuels, biomass and nuclear technology are not
restricted by natural conditions, their development is often
constrained by long lead times for permitting and construction,
availability of fuel, infrastructure requirements and
environmental concerns.
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Solar energy generation typically coincides with the times of
peak energy demand. Photovoltaic systems generate
most of their electricity during the afternoon hours, when the
energy from the sun is strongest. In many areas and times of the
year, the greatest demand for electricity is also during these
same afternoon hours. Consumers can therefore replace peak time
conventional electricity, which can be more expensive and less
reliable than electricity purchased during non-peak times, with
distributed solar electricity.
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53
Challenges
Facing the Photovoltaic Industry
Despite the advantages of solar energy generated through
photovoltaic systems, the photovoltaic industry must overcome a
number of challenges to grow and achieve widespread
commercialization of its products, including the following:
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Current high cost of solar
electricity. Currently, solar electricity is not
competitive with conventional sources of electricity on a cost
basis without government subsidies. The demand for solar modules
may decline if government subsidies are reduced or eliminated
before solar electricity can compete with conventional sources
of electricity on a cost basis. See
Business Government Subsidies.
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Limited availability of semiconductor
materials. Solar modules require a semiconductor
material to convert solar energy into electricity. Over 92% of
the MW volume of solar modules sold in 2006 used crystalline
silicon as their semiconductor material, according to Solarbuzz.
High demand from the photovoltaic and microelectronics
industries has led to a shortage of silicon feedstock, which
currently limits the growth of many solar module manufacturers.
While manufacturers of silicon feedstock are building new
manufacturing plants to increase supply, the construction of
such plants is time consuming and requires substantial capital
expenditures.
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Intermittent source of power. Photovoltaic
systems require sunlight to generate electricity and are less
effective in climates of low sunlight and extreme hot and cold
temperatures. As a result, photovoltaic systems generally cannot
be used as a sole source of electricity and must be combined
with a storage solution (such as a battery) or other source of
electricity (such as grid electricity or diesel generation) in
order to provide a complete solution to the end-user.
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The Cost
and Operating Metrics of a Photovoltaic System
Electricity is generated by photovoltaic systems, which are
comprised of solar modules, mounting structures and electrical
components. Solar module manufacturers price and sell solar
modules per Watt of rated power, which is the rated power under
standard test conditions. Power is a rating of a solar
modules capacity to produce electricity and is measured in
Watts, where one thousand Watts equals one kilowatt and one
thousand kilowatts equals one MW. Electricity is measured in
kilowatt hours, and is the quantity of power produced for a
given period of time. For example, a photovoltaic system
producing 1 kilowatt of power for three hours generates 3
kilowatt hours of electricity. Retail electricity is generally
discussed in terms of kilowatt hours. According to the EIA, in
2001, the average U.S. household consumed approximately
10,600 kilowatt hours of electricity.
Cost
of a Photovoltaic System
The manufacturing cost per Watt of a solar module equals the
cost to produce a solar module divided by the modules
number of sellable Watts. Sellable Watts per module is a
function of, among other things, the conversion efficiency of
the solar module. The conversion efficiency of a solar module is
primarily a function of the type of semiconductor material, the
device structure and optimization of the manufacturing process.
Manufacturers of solar modules are divided into two broad
categories based on the type of semiconductor technology they
utilize to convert sunlight into electricity: crystalline
silicon technology or thin film technology. Crystalline silicon
modules generally have higher conversion efficiencies than thin
film solar modules. However, crystalline silicon production
processes use approximately 100 times more semiconductor
material and are more expensive than the best performing thin
film production processes. By lowering the cost to produce a
solar module, thin film solar modules manufactured in high
volume commercial production can have a lower manufacturing cost
per Watt than crystalline silicon solar modules, even though
crystalline silicon solar modules have higher conversion
efficiencies.
While solar modules are sold based on their rated power, the
amount of electricity a solar module can generate and the
effective cost of that electricity are also relevant to a
purchasing decision. The cost per kilowatt hour of solar
electricity can be derived by dividing the solar electricity
generated over the life of the photovoltaic system into the
total cost of the system. Solar modules, which have a useful
life of approximately 25 years, generally represent
approximately half of the cost of a photovoltaic system.
Mounting structures, equipment and electrical components
generally comprise the other half of the cost of a photovoltaic
system. In calculating the cost per kilowatt hour of solar
electricity, many customers also consider the time
value of the capital required to purchase and install the
system.
54
The price of conventional energy varies considerably by region
based on, among other things, the cost of producing and
importing energy. To become competitive with conventional
sources of electricity, the price per kilowatt hour of
distributive solar electricity must approach the retail price of
conventional electricity displaced by solar electricity in a
given region. For solar power to serve as a source of on-grid
generation, it must compete with the average wholesale price of
electricity in a given region, as well as the price per kilowatt
hour of other sources of renewable energy.
Operating
Metrics of a Photovoltaic System
The photovoltaic industry uses a widely accepted set of standard
measurement procedures and test conditions for the direct
comparison of each solar module. These conditions, called
Standard Test Conditions, specify a standard temperature, solar
irradiance level and angle of the sun, and are used to determine
the power rating and conversion efficiency of each solar module.
On average, at noon on a cloudless day, sunlight provides about
1 kilowatt of power to each square meter of the Earths
surface. A solar module operating at a 10% conversion efficiency
under these sunlight conditions will provide 100 Watts of direct
current power per square meter (kilowatt of sunlight power x 10%
conversion efficiency = 100 Watts of solar power). If these
sunlight conditions persist for one hour, the solar module will
generate 100 Watt hours, or 0.1 kilowatt hour, of solar
electricity (100 Watts solar power x 1 hour duration = 0.1
kilowatt hour of solar electricity). Crystalline silicon solar
modules in commercial production had average conversion
efficiencies of approximately 14% in 2006. Thin film solar
modules in high volume commercial production (over 20MW per
year) had average conversion efficiencies that ranged from
approximately 6% to approximately 10% in 2006. The conversion
efficiency of our solar modules averaged approximately 9% in
2006. In order to reach a comparable level of installed power, a
photovoltaic system that employs solar modules with relatively
lower conversion efficiencies must employ more solar modules
than a photovoltaic generation system that uses solar modules
with higher conversion efficiencies.
Under real-world operating conditions, a typical photovoltaic
system operates outside of Standard Test Conditions for much of
the time. For example, the location and design of a photovoltaic
system, time of day and year, temperature and angle of the sun
impact the performance of a photovoltaic system, and the
conversion efficiencies of solar modules generally decrease or
increase when operating outside Standard Test Conditions. In
order to determine the solar electricity that a photovoltaic
system will generate, it is therefore necessary to understand
not only the Standard Test Conditions power rating of a solar
module, but also the design of the photovoltaic system, real
world conditions under which the system will operate and
performance characteristics of the solar modules and electrical
components outside Standard Test Conditions.
Photovoltaic
Technology
Historically, crystalline silicon has been the most common
semiconductor material used in solar modules. In 2006, 92% of
the MW volume of solar modules sold employed crystalline silicon
technology, while thin film technology accounted for only 8% of
the MW volume of solar modules sold. Thin film solar modules
generally employ one of three different semiconductor materials
to convert solar energy into electricity: cadmium telluride;
copper indium gallium diselenide; or amorphous silicon.
Thin film technology offers several cost and performance
advantages over crystalline silicon technology, including the
following:
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Fundamental cost advantage. Thin film
technology employs semiconductor materials that are efficient
absorbers of energy from the solar spectrum. As a result, thin
film technology enables manufacturers to produce solar modules
with approximately 1% of the semiconductor material used to
produce crystalline silicon solar modules, potentially providing
a fundamental material cost advantage. Recent increases in the
price of silicon feedstock have heightened the cost advantage
opportunity of thin film technology. The price of silicon
feedstock increased from $28-$32/kg for 2004 delivery to
$60-$65/kg for 2007 delivery, and spot prices have been reported
as high as $300/kg in 2006. Over the same period, the price of
cadmium telluride semiconductor material also increased;
however, the exposure of cadmium telluride thin film
manufacturers to these price increases was limited because of
the relatively small amount of semiconductor material they
employ to manufacture a solar module.
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Integrated production process. Certain thin
film technologies enable manufacturers to deposit semiconductor
materials directly on large inexpensive superstrates with a
continuous manufacturing process that increases production
throughput over a fixed asset and operating expense base. While
many thin film manufacturers can perform all manufacturing steps
in a continuous process, few crystalline silicon manufacturers
are able to perform every step in the batch manufacturing
process employed to construct a crystalline silicon solar module.
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Superior product performance. Certain types of
thin-film solar modules, such as cadmium telluride, generate
more electricity across a variety of environments, including
high temperature and low light, than crystalline silicon solar
modules with the same power rating. Modules that generate more
kilowatt hours per rated kilowatt under real-world conditions
increases the end-users return on investment.
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Thin film technology also faces a number of disadvantages
relative to crystalline silicon, including the following:
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Limited operating history. No thin film solar
module has been in service for its entire estimated useful life,
limiting the data available to validate estimates of the useful
life and rate of degradation of thin film solar modules. In
contrast, historical operating data validates the useful life
and performance of crystalline silicon solar modules.
Additionally, few thin film manufacturers have been able to
achieve the production throughput rates, yields and product
performance necessary to commercialize their solar modules and
achieve many of the benefits of thin film technology.
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Lower conversion efficiency. The average
conversion efficiency of thin film solar modules in high volume
commercial production (over 20MW per year) currently ranges from
6% to 10%. By comparison, the average conversion efficiency of
crystalline silicon solar modules in commercial production is
approximately 14%. Because cost per Watt is a function of
conversion efficiency and manufacturing cost, low conversion
efficiencies could make it difficult for some thin film
manufacturers to achieve a low cost per Watt. In addition, the
higher conversion efficiencies of crystalline silicon solar
modules, even at a higher cost per Watt, could be attractive to
end-users who want to generate a certain amount of electricity
in a fixed amount of space. The added space requirements of thin
film solar modules may cause customers to incur additional costs
associated with land or space and module installation costs.
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Difficulty in customizing solar modules. To
build a crystalline silicon solar module, a manufacturer
connects a series of independently manufactured photovoltaic
cells. As a result, crystalline silicon manufacturers are able
to customize the size and shape of their solar modules by
connecting a larger or smaller number of photovoltaic cells in a
pattern. In contrast, cadmium telluride thin film manufacturers
often produce only a single product by depositing the
semiconductor material directly on superstrates, and are unable
to customize their product. Because crystalline silicon solar
modules can be customized and have higher conversion
efficiencies, they are currently better suited for distribution
in certain residential markets than cadmium telluride thin film
solar modules.
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Government
Subsidies and Incentives
Many countries in Europe and Asia and several states in the
United States have adopted a variety of government subsidies and
incentives to allow renewable energy sources to compete with the
currently less expensive conventional sources of energy, such as
fossil fuels. Government subsidies and incentives generally
focus on grid-connected systems and take several forms,
including feed-in tariffs, net metering programs, renewable
portfolio standards, rebates, tax incentives and low interest
loans. See BusinessGovernment Subsidies.
56
BUSINESS
Overview
We design and manufacture solar modules using a proprietary thin
film semiconductor technology that has allowed us to reduce our
average solar module manufacturing costs to among the lowest in
the world. In 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. 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 North America, Europe and Asia.
We manufacture our solar modules on high-throughput production
lines and perform all manufacturing steps ourselves in an
automated, proprietary, 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.
We have long-term solar module supply contracts (the Long
Term Supply Contracts) with nine European project
developers and system integrators that in the aggregate allow
for approximately 3.2 billion ($4.1 billion at
an assumed exchange rate of $1.30/1.00) in sales from 2007
to 2012 for the sale of a total of 2.2GW of solar modules. 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 expanding our annual
manufacturing capacity from 90MW to 450MW by the first half of
2009. We describe our manufacturing capacity with a
nameplate rating, which means minimum expected
annual production. We periodically review and update the
nameplate rating of our production lines to reflect improvements
in module throughput and Watts per module (or conversion
efficiency). As a result of a recent review, we increased the
nameplate rating of each production line from 25MW to the
current 30MW, thereby increasing the manufacturing capacity
rating of each of our current and future manufacturing
facilities. In August 2006, we expanded our Ohio plant from one
to three production lines, increasing our annual manufacturing
capacity to 90MW. In April 2007, we started initial production
at a 120MW manufacturing facility in Germany, which we expect to
reach its full capacity by the fourth quarter of 2007. In April
2007, we also began construction of plant one of our Malaysia
manufacturing center, and we plan to begin construction of plant
two in the fourth quarter of 2007. We expect plant one to reach
its full capacity of 120MW in the second half of 2008 and plant
two to reach its full capacity of 120MW in the first half of
2009. After plant two of our Malaysia manufacturing center
reaches its full capacity, we will have 15 production lines and
an annual global manufacturing capacity of 450MW.
Competitive
Strengths
We believe that we possess a number of competitive strengths
that position us to become a leader in the solar energy industry
and compete in the broader electric power industry:
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Cost-per-Watt
advantage. Our proprietary thin film semiconductor
technology has allowed us to reduce our average solar module
manufacturing costs to among the lowest in the world. Our
average manufacturing costs were $1.40 per Watt in 2006 and
$1.38 per Watt in the first six months of 2007, which we believe
are significantly less than those of crystalline silicon solar
module manufacturers.
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Our low manufacturing cost per Watt is derived from our low
material, capital and direct labor costs, and enabled us to
achieve a gross margin of 40% in 2006 and 41% in the first six
months of 2007. Because our technology is less mature than
crystalline silicon technology, we have an opportunity for
continued process improvement and cost reduction.
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Continuous and scalable production
process. We manufacture our solar modules on high-
throughput production lines where we perform all manufacturing
steps, from semiconductor deposition to final assembly and
testing, ourselves in an automated, proprietary, continuous
process that turns a sheet of glass into a solar module in less
than three hours. Our proprietary thin film semiconductor
technology reduces our semiconductor material requirements to
approximately 1% of the semiconductor material used to produce
crystalline silicon solar modules. We have implemented a number
of continuous improvement systems and tools to improve
scalability and increase operating leverage.
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Replicable production facilities. To complete
each new production line, we use a systematic replication
process designed to enable us to build new production lines
rapidly and efficiently that will achieve operating metrics that
are comparable to our existing production lines. The expansion
of our Ohio plant demonstrated our ability to replicate a single
production line by creating two new production lines, and served
as the standard building block for building our four
production lines in Germany. We plan to use the same systematic
replication process to build plant one and plant two of our
Malaysia manufacturing center. By expanding production, we
believe we can take advantage of economies of scale, accelerate
development cycles and leverage our operations, enabling further
reductions in the manufacturing cost per Watt of our solar
modules.
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Stable supply of raw materials. We are not
currently constrained by, and do not foresee a shortage of,
cadmium telluride, our semiconductor material. In addition,
because our modules contain a relatively small amount of
semiconductor material, we believe our exposure to cadmium
telluride price increases is limited. By contrast, Solarbuzz
estimates that the current shortage of silicon feedstock will
constrain the production of certain crystalline silicon solar
module manufacturers until 2008.
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Pre-sold capacity through Long Term Supply
Contracts. Our Long Term Supply Contracts provide
us with predictable net sales and enable us to ramp production
and realize economies of scale from capacity expansions quickly.
By pre-selling the solar modules to be produced on future
production lines, we minimize the customer demand risk of our
rapid expansion plans.
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Favorable system performance. Solar modules
usually produce less power than their rated power because of
environmental conditions, including variation in the ambient
temperature and intensity of sunlight. We believe that in
real-world conditions, systems incorporating our solar modules
operate more closely to their rated power than systems
incorporating crystalline silicon solar modules. Such
performance results in more kilowatt hours of electricity per
Watt of rated power and increases our end-users return on
investment, which we believe will result in greater demand for
our solar modules.
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Strategies
Our goal is to utilize our proprietary thin film semiconductor
technology to create a sustainable market for our solar modules
by lowering the price of solar electricity to a level that is
competitive with the price of retail electricity on a
non-subsidized basis by 2010 in key markets in North America,
Europe and Asia. We intend to pursue the following strategies to
attain this goal:
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Penetrate key markets rapidly. Upon
completion of our German plant and plant one at our Malaysia
manufacturing center, we expect to be a global fully-integrated
solar module manufacturer with substantial production capacity.
We also plan to begin construction of plant two at our Malaysia
manufacturing center in the fourth quarter of 2007. Our new
production lines will enable us to diversify our customer base,
gain market share in key solar module markets and reduce our
dependence on any individual countrys subsidy programs. In
addition, we are exploring new customer relationships in North
America and Europe, and have allocated a portion of our planned
manufacturing capacity to be available for sale in these and
other markets.
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Further reduce manufacturing cost. We deploy
continuous improvement systems and tools to increase the
throughput of our production lines and the efficiency of our
workforce and reduce our capital intensity and raw material
requirements. In addition, we are building a 240MW manufacturing
center in Malaysia, a low-cost region, that we expect will
reduce our fixed manufacturing costs relative to our production
volumes. Our German plant and Malaysia manufacturing center will
also enable us to absorb fixed costs over higher production
volumes, generating economies of scale. Higher production
volumes should also enable volume-based discounts on certain raw
material and equipment purchases and provide production and
operational experience that translates into improved process and
product performance.
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Increase sellable Watts per module. We are
implementing several development programs designed to increase
the number of sellable Watts per solar module, which is driven
primarily by conversion efficiency. From 2003 to the end of the
second quarter of 2007, we increased the average conversion
efficiency of our solar modules from approximately 6.8% to
approximately 9.5%.
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We expect to continue to increase the conversion efficiency of
our solar modules. Our researchers have created small-scale
cadmium telluride cells with a conversion efficiency as high as
14.5%. Independent researchers have achieved a 16.5% conversion
efficiency in the laboratory with small-scale cadmium telluride
cells. As a result, we believe significant net increases in
conversion efficiency are available in full volume production.
We expect some decline in conversion efficiency from laboratory
results when producing solar modules in full scale production
because individual small-scale cells may utilize economically
non-feasible materials and be manufactured using processes that
may not scale to volume manufacturing. In addition, variation
among cells is compounded at the module level where performance
is defined by the weakest performing cell, and occasionally
there is a decline in performance during the lamination process.
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Enter the mainstream market for
electricity. Although we currently sell all of our
solar modules into subsidized markets, our goal is to identify,
enable and enter non-subsidized markets not currently served by
the solar industry. Cost reductions and performance improvements
in our solar modules will be critical to realizing this goal. In
addition, we believe that our ability to enter the
non-subsidized, mainstream market for electricity will require
system development and optimization, new system financing
options and the development of new market channels. As part of
our development activities, we anticipate providing solutions
beyond the solar module, ranging from solar system kits to
turnkey financed solar generation projects, in selected market
segments.
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History
First Solar US Manufacturing, LLC was founded in 1999 to bring
an advanced thin film semiconductor process into commercial
production through the acquisition of predecessor 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.
In 2003, a previous owner forfeited its equity interests in
First Solar US Manufacturing, LLC. Later in 2003, the sole
remaining owner formed First Solar Holdings, LLC, and
contributed its equity interest in First Solar US Manufacturing,
LLC and First Solar Property, LLC to First Solar Holdings, LLC.
On February 22, 2006, First Solar Holdings, LLC converted
from a Delaware limited liability company to a Delaware
corporation and on June 28, 2006 changed its name to First
Solar, Inc. First Solars common stock began trading
publicly on November 17, 2006, and we completed the initial
public offering of our common stock on November 22, 2006.
On March 31, 2007, First Solar US Manufacturing, LLC, First
Solar Electric Company, LLC, First Solar Electric Contracting,
Inc. and First Solar Property, LLC merged into First Solar, Inc.
Products
Solar
Modules
Each solar module is approximately 2ft
× 4ft (60cm
× 120cm) and had an
average rated power of approximately 64 Watts at the end of 2006
and approximately 69 Watts at the end of the first six months of
2007. 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
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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
325,500 solar modules, representing approximately 21.2MW 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 23% 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, 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, 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 June 30, 2007, our accrued
warranty expense was $4.0 million.
Recycling
Program
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
minimum 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.
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 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.
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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,
laminate, a rear glass cover sheet and termination wires, seal
the joint box and subject each solar module to a solar simulator
and a current leakage test. The final assembly stage is the only
stage in our production line that requires manual processing.
Historically, all of our solar modules were produced at our
Perrysburg, Ohio facility, which has received both an ISO
9001:2000 quality system certification and ISO 14001:2004
environmental system certification. In April 2007, we started
initial production at a manufacturing facility in Frankfurt
(Oder), Germany.
Manufacturing
Capacity Expansion
We plan to expand our nameplate manufacturing capacity to 450MW
by the first half of 2009. In August 2006, we qualified two
additional production lines at our Ohio plant, increasing our
annual manufacturing capacity to 90MW. In April 2007, we started
initial production at a 120MW manufacturing facility in Germany,
which we expect to reach full capacity by the fourth quarter of
2007. In addition, on January 24, 2007 we entered into a
land lease agreement for a manufacturing center site in the
Kulim Hi-Tech Park in the State of Kadah, Malaysia. The Malaysia
site can accommodate up to two 120MW plants and includes an
option exercisable over six years for an adjacent land site that
could accommodate up to an additional eight production lines. In
April 2007, we began construction of plant one of our Malaysia
manufacturing center, which we expect to reach its full capacity
of 120MW in the second half of 2008. We plan to begin
construction of plant two in the forth quarter of 2007. After
plant two of our Malaysia manufacturing center reaches its full
capacity of 120MW, estimated for the first half of 2009, we will
have 15 production lines and an annual global manufacturing
capacity of 450MW.
Raw
Materials
Our manufacturing process uses approximately 20 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, 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
12 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 two suppliers. We have a
rolling four year written contract with one of our suppliers,
which provides for quarterly price adjustments based on the cost
of tellurium. We purchase from our other qualified supplier on a
purchase order basis. We acquire the remainder of our raw
materials under quarterly purchase orders, at prices based on
annual volumes. Because the sales prices in our customer
contracts do not adjust for raw material price increases and are
typically for a longer term than our raw material supply
contracts, we may be unable to pass on increases in the cost of
our raw materials to many of our customers.
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 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 generated from our products
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.
Customers
We have Long Term Supply Contracts with our nine principal
customers for the sale of solar modules. These customers are
Blitzstrom GmbH, Conergy AG, EDF EN Développement,
Gehrlicher Umweltschonende
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Energiesysteme GmbH, Juwi Solar GmbH, Phoenix Solar AG, Reinecke
+ Pohl Sun Energy AG, RIO Energie GmbH & Co. KG and
Sechilienne Sidec. These customers include project developers,
system integrators and operators of renewable energy projects,
and are headquartered in Germany and France. The Long Term
Supply Contracts in the aggregate allow for approximately
3.2 billion ($4.1 billion at an assumed exchange
rate of $1.30/1.00) in sales from 2007 to 2012 for the
sale of a total of 2.2GW of solar modules. 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 2006, our principal customers were Blitzstrom GmbH, Conergy
AG, Juwi Solar GmbH, Phoenix Solar AG and Reinecke + Pohl Sun
Energy AG. During 2006, these five customers each accounted for
between 16% and 19% of our net sales. In the first six months of
2007, these five customers, and Gehrlicher Umweltschonende
Energiesysteme GmbH, each accounted for between 14% and 22% of
our net sales. All of our other customers individually accounted
for less than 10% of our net sales in 2006 and the first six
months of 2007. 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 other markets and regions, which will
reduce our customer and geographic concentration and dependence.
Our customers develop, own and operate renewable energy power
plants or 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.
Government
Subsidies
Countries in Europe and Asia, Canada, the United States and most
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 is currently offered
in approximately 40 states and the District of Columbia,
and the policies governing net metering vary by state and
utility. Some utilities pay the end-user upfront, while others
credit the end-users bill. 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.
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 price 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 North America, Europe and
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Asia by 2010. To reduce the per Watt manufacturing 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 by
the end of the first six months of 2007.
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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 Ohio 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 325,500 solar
modules, representing approximately 21.2MW 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 at our Ohio plant 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 plant 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
$20.4 million into our research and development expenses
and received $3.6 million of grant funding.
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
June 30, 2007, in the United States we held 23 patents,
which will expire at various times between 2007 and 2023 and had
19 patent applications pending. We also held 17 patents and had
over 40 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.
As of June 30, 2007, we held two 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 and other countries.
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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 associates to assign
to us all of the inventions, designs and technologies they
develop during the course of employment with us. We also require
our customers and business partners to enter into
confidentiality agreements before we disclose any sensitive
aspects of our solar cells, technology or business plans.
We have not been subject to any material intellectual property
claims.
Competition
The solar energy and renewable energy industries are both highly
competitive and continually evolving as participants strive to
distinguish themselves within their markets and compete within
the larger electric power industry. 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 solar cells and modules. Within the
photovoltaic industry, we face competition from crystalline
silicon solar cell and 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.
In addition to manufacturers of solar cells and modules, we face
competition from companies developing solar thermal and
concentrated photovoltaic technologies.
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 Risk FactorsRisks Relating
to Our BusinessEnvironmental obligations and liabilities
could have a substantial negative impact on our financial
condition, cash flows and profitability.
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Legal
Proceedings
General
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.
NASD
Inquiry
On August 1, 2007 we received a letter from the NASD Market
Regulation Department (the NASD) requesting
certain information in connection with the NASDs review of
trading in our common stock surrounding our July 9, 2007
announcement of having entered into new long-term supply
contracts. Among other things, the NASD requested information
about all persons who possessed information about the new
long-term supply contracts prior to our public disclosure, a
chronology of all significant events leading to the execution of
the new long-term supply contracts and a description of our
procedures to ensure the confidentiality of material, non-public
information prior to its public dissemination. The letter states
that the inquiry should not be construed as an indication that
the NASD has determined that any violations of the NASD Conduct
Rules or the federal securities laws have occurred. We are
cooperating with the NASD and are not aware of any inappropriate
disclosure or improper trading.
Properties
The following is information concerning our principal properties
as of June 30, 2007:
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Location
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Principal Use
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Square Footage
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Ownership
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Phoenix, Arizona
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Corporate headquarters
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10,342
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Leased
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Perrysburg, Ohio
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Manufacturing, product design,
engineering, research and development, distribution
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383,917
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Owned
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Perrysburg, Ohio
|
|
Warehouse
|
|
|
10,000
|
|
|
Leased
|
Frankfurt (Oder), Germany
|
|
Manufacturing
|
|
|
460,699
|
|
|
Owned/Leased
|
Mainz, Germany
|
|
Sales and customer support
|
|
|
8,214
|
|
|
Leased
|
Berlin, Germany
|
|
Government relations
|
|
|
1,213
|
|
|
Leased
|
Kulim, Malaysia
|
|
Manufacturing
|
|
|
936,460
|
(1)
|
|
Owned/Leased
|
|
|
|
(1) |
|
On January 24, 2007, we entered into a land lease agreement
for the property in Kulim, Malaysia. In April 2007, we began
construction of plant one of our Malaysia manufacturing center
and we plan to begin construction of plant two in the fourth
quarter of 2007. The square footage presented above is the
approximate cumulative square footage that plant one and plant
two of our Malaysia manufacturing center are expected to have
upon their completion. |
Associates
As of June 30, 2007, we had 1,158 associates (our term for
employees), including 964 in manufacturing. The remainder of our
associates are in research and development, sales and marketing,
and general and administration positions. None of our associates
is represented by labor unions or covered by a collective
bargaining agreement. As we expand domestically and
internationally, however, we may encounter associates who desire
union representation. We believe that relations with our
associates are good.
65
MANAGEMENT
Executive
Officers and Directors
Our executive officers and directors as of July 31, 2007,
and their ages and positions, are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Michael J. Ahearn
|
|
|
50
|
|
|
Chief Executive Officer, Chairman
|
Bruce Sohn
|
|
|
46
|
|
|
President, Director
|
Jens Meyerhoff
|
|
|
43
|
|
|
Chief Financial Officer
|
Kenneth M. Schultz
|
|
|
44
|
|
|
Vice President, Sales &
Marketing
|
I. Paul Kacir
|
|
|
41
|
|
|
Vice President, General Counsel
|
James F. Nolan
|
|
|
75
|
|
|
Director
|
J. Thomas Presby
|
|
|
67
|
|
|
Director
|
Paul H. Stebbins
|
|
|
50
|
|
|
Director
|
Michael Sweeney
|
|
|
49
|
|
|
Director
|
Michael J. Ahearn has served as the CEO and Chairman of First
Solar since August 2000. Mr. Ahearn also served as
President of First Solar from August 2000 to March 2007. From
1996 until November 2006, he was a Partner and President of the
equity investment firm JWMA Partners, LLC, or JWMA (formerly
True North Partners, L.L.C.). 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.
Bruce Sohn was elected a director of First Solar in July 2003
and has served as President of First Solar since March 2007.
Prior to joining First Solar as President, Mr. Sohn worked
at 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 University.
He graduated from the Massachusetts Institute of Technology with
a degree in Materials Science and Engineering.
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 an M.B.A. from the University of
British Columbia.
James F. Nolan was elected a director of First Solar in February
2003. Mr. Nolan served as the Vice President of Operations
with Solar Cells, Inc., and was responsible for research,
development and manufacturing operations. He designed and built
early prototype equipment for First Solars pilot
production line and led the team that developed the
66
process for producing large area thin film cadmium telluride
solar modules. Mr. Nolan has worked as a part-time
consultant for First Solar since November 2000. Mr. Nolan
has over 35 years of experience in physics, engineering,
research and development, manufacturing and process design with
companies such as Westinghouse, Owens Illinois, Glasstech and
Photonics Systems. Mr. Nolan holds more than 10 patents in
areas of flat panel electronic displays and photovoltaic devices
and processes. Mr. Nolan earned his B.S. in Physics from
the University of Scranton (Pennsylvania) and a doctorate in
Physics from the University of Pittsburgh.
J. Thomas Presby was elected a director of First Solar in
August 2006. Mr. Presby retired in 2002 from a
30-year
career with Deloitte Touche Tohmatsu. At Deloitte,
Mr. Presby held numerous positions in the United States and
abroad, including the posts of Deputy Chairman and Chief
Operating Officer. Mr. Presby serves as a director and the
audit committee chair of American Eagle Outfitters, Inc. and as
a director, the audit committee chair and a member of the
governance committee of World Fuel Services Corporation.
Mr. Presby also serves as a director and the audit
committee chair of AMVESCAP Plc, Tiffany & Co. and
TurboChef Technologies, Inc. Mr. Presby is a Certified
Public Accountant. Mr. Presby is a graduate of Rutgers
University and holds a masters degree in Industrial
Administration from Carnegie Mellon University.
Paul H. Stebbins was elected a director of First Solar in
December 2006. Mr. Stebbins has served as the chairman and
chief executive officer of World Fuel Services Corporation since
July 2002 and as a director of World Fuel Services Corporation
since June 1995. Between July 2000 and 2002, Mr. Stebbins
also served as president and chief operating officer of World
Fuel Services Corporation. In 1985, Mr. Stebbins co-founded
Trans-Tec Services, a global marine fuel service company
acquired by World Fuel Services Corporation in 1995.
Michael Sweeney was elected a director of First Solar in July
2003. Mr. Sweeney joined Goldner Hawn Johnson &
Morrison (GHJM) as a Managing Director in 2000 and was elected
Managing Partner in November 2001. He had previously served as
President of Starbucks Coffee Company (UK) Ltd. in London and
held various operating management and corporate finance roles.
After starting his career with Merrill Lynch in New York and
Phoenix, he built and sold an investment banking boutique.
Subsequently, Mr. Sweeney developed and sold franchise
companies in the Blockbuster and Papa Johns systems.
Mr. Sweeney serves on the boards of GHJM portfolio
companies,
Allen-Edmonds
Shoe Corporation, Transport Corporation of America, Inc. and
Vitality Foodservice, Inc. Mr. Sweeney graduated from
Swarthmore College.
Board
Committees
Our board of directors is currently composed of six directors
and an audit committee and a compensation committee. Our board
of directors is not classified.
Audit
Committee
The audit committee oversees our financial reporting process on
behalf of the board of directors and reports to the board of
directors the results of these activities, including the systems
of internal controls established by management and the board of
directors, our audit and compliance process and financial
reporting. The audit committee, among other duties, engages the
independent registered public accounting firm, pre-approves all
audit and non-audit services provided by the independent
registered public accounting firm, reviews with the independent
registered public accounting firm the plans and results of the
audit engagement, considers the compatibility of any non-audit
services provided by the independent registered public
accounting firm with the independence of such independent
registered public accounting firm and reviews the independence
of the independent registered public accounting firm.
J. Thomas Presby (Chair), Paul H. Stebbins and Michael Sweeney
serve on our audit committee. Bruce Sohn served on our audit
committee until becoming a President of the Company in March
2007, at which time Mr. Sweeney replaced him on the audit
committee. Each member of the audit committee meets the
standards for financial knowledge for companies listed on The
Nasdaq Global Market. In addition, the board of directors has
determined that Mr. Presby is qualified as an audit
committee financial expert within the meaning of SEC regulations.
Compensation
Committee
The compensation committee reviews and recommends compensation
and benefit plans for our officers and directors, including
non-associate directors, reviews the base salary and incentive
compensation for each executive officer, reviews and approves
corporate goals and objectives relevant to our Chief Executive
Officers compensation,
67
administers our incentive compensation program for key executive
and management associates and reviews and approves employee
benefit plans.
Michael Sweeney (Chair) and Paul H. Stebbins serve on our
compensation committee.
Compensation
Committee Interlocks and Insider Participation
None of the members of our compensation committee has been an
executive officer or associate of our Company during our last
completed fiscal year. During our last completed fiscal year,
none of our executive officers served as a member of the
compensation committee of any entity that has one or more
executive officers serving on our compensation committee.
Nomination
Procedures
The board of directors has no standing nominating committee. The
Company has recently become a public company, and because of the
relatively small size of the board of directors, the board is of
the view that the key functions of a nominating committee of
assessing and recommending director candidates can be
accomplished by the independent directors without the need for a
standing nominating committee.
Code of
Business Conduct and Ethics
We have a Code of Business Conduct and Ethics that applies to
all directors and associates, including our Chief Executive
Officer and senior financial officers. These standards are
designed to deter wrongdoing and to promote the honest and
ethical conduct of all associates. The Code of Business Conduct
and Ethics is posted on our website at www.firstsolar.com. Any
substantive amendment to, or waiver from, any provision of the
Code of Business Conduct and Ethics with respect to any director
or executive officer will be posted on our website. The
information contained on our website is not part of this
prospectus.
68
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table shows information regarding the beneficial
ownership of our common stock as of July 31, 2007, as
adjusted to give effect to this offering by:
|
|
|
|
|
each person or group who is known by us to own beneficially more
than 5% of our common stock;
|
|
|
|
each member of our board of directors and each of our named
executive officers; and
|
|
|
|
all members of our board of directors and our executive officers
as a group.
|
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes any shares over which a person
exercises sole or shared voting or investment power. Shares of
common stock subject to options or warrants that are currently
exercisable or exercisable within 60 days of the date of
this prospectus are considered outstanding and beneficially
owned by the person holding the options for the purpose of
computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the
percentage ownership of any other person.
Unless otherwise indicated, each of the stockholders listed
below has sole voting and investment power with respect to the
shares beneficially owned. Except as indicated below, the
address for each stockholder, director or named executive
officer is First Solar, Inc., 4050 East Cotton Center Boulevard,
Building 6, Suite 68, Phoenix, Arizona 85040.
This table assumes 72,997,929 shares of common stock
outstanding as of July 31, 2007, assuming no exercise of
outstanding options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Owned After this
|
|
|
Shares Beneficially
|
|
|
|
|
|
|
to be
|
|
|
Offering, Assuming
|
|
|
Owned After this
|
|
|
|
Shares Beneficially
|
|
|
Sold in
|
|
|
No Exercise of the
|
|
|
Offering, Assuming
|
|
|
|
Owned Prior to this
|
|
|
this
|
|
|
Over-Allotment
|
|
|
Full Exercise of the
|
|
|
|
Offering
|
|
|
Offering
|
|
|
Option
|
|
|
Over-Allotment Option
|
|
Name of Beneficial
Owner
|
|
Number
|
|
|
Percent
|
|
|
Number
|
|
|
Number
|
|
|
Percent
|
|
|
Number
|
|
|
Percent
|
|
|
Beneficial Owners of 5% or
More
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S. Robson Walton(1)
|
|
|
38,887,347
|
|
|
|
53.3
|
%
|
|
|
1,989,000
|
|
|
|
36,898,347
|
|
|
|
47.9
|
%
|
|
|
35,923,347
|
|
|
|
46.6
|
%
|
Jim C. Walton(2)
|
|
|
38,887,347
|
|
|
|
53.3
|
%
|
|
|
1,989,000
|
|
|
|
36,898,347
|
|
|
|
47.9
|
%
|
|
|
35,923,347
|
|
|
|
46.6
|
%
|
Alice L. Walton(3)
|
|
|
38,887,347
|
|
|
|
53.3
|
%
|
|
|
1,989,000
|
|
|
|
36,898,347
|
|
|
|
47.9
|
%
|
|
|
35,923,347
|
|
|
|
46.6
|
%
|
Estate of John T. Walton(4)
|
|
|
26,785,345
|
|
|
|
36.7
|
%
|
|
|
1,989,000
|
|
|
|
24,796,345
|
|
|
|
32.2
|
%
|
|
|
23,821,345
|
|
|
|
30.9
|
%
|
JCL Holdings, LLC(5)
|
|
|
12,102,002
|
|
|
|
16.6
|
%
|
|
|
|
|
|
|
12,102,002
|
|
|
|
15.7
|
%
|
|
|
12,102,002
|
|
|
|
15.7
|
%
|
Michael J. Ahearn(6)
|
|
|
4,737,339
|
|
|
|
6.5
|
%
|
|
|
390,000
|
|
|
|
4,347,339
|
|
|
|
5.6
|
%
|
|
|
4,347,339
|
|
|
|
5.6
|
%
|
Goldman, Sachs & Co.(7)
|
|
|
4,355,305
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
4,355,305
|
|
|
|
5.6
|
%
|
|
|
4,355,305
|
|
|
|
5.6
|
%
|
Directors and Named Executive
Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Ahearn(6)
|
|
|
4,737,339
|
|
|
|
6.5
|
%
|
|
|
390,000
|
|
|
|
4,347,339
|
|
|
|
5.6
|
%
|
|
|
4,347,339
|
|
|
|
5.6
|
%
|
Bruce Sohn(8)
|
|
|
104,707
|
|
|
|
*
|
|
|
|
13,000
|
|
|
|
91,707
|
|
|
|
*
|
|
|
|
91,707
|
|
|
|
*
|
|
Jens Meyerhoff(9)
|
|
|
14,375
|
|
|
|
*
|
|
|
|
|
|
|
|
14,375
|
|
|
|
*
|
|
|
|
14,375
|
|
|
|
*
|
|
Kenneth M. Schultz(10)
|
|
|
529,440
|
|
|
|
*
|
|
|
|
95,000
|
|
|
|
434,440
|
|
|
|
*
|
|
|
|
434,440
|
|
|
|
*
|
|
I. Paul Kacir
|
|
|
1,500
|
|
|
|
*
|
|
|
|
|
|
|
|
1,500
|
|
|
|
*
|
|
|
|
1,500
|
|
|
|
*
|
|
James F. Nolan(11)
|
|
|
59,190
|
|
|
|
*
|
|
|
|
|
|
|
|
59,190
|
|
|
|
*
|
|
|
|
59,190
|
|
|
|
*
|
|
J. Thomas Presby
|
|
|
2,108
|
|
|
|
*
|
|
|
|
|
|
|
|
2,108
|
|
|
|
*
|
|
|
|
2,108
|
|
|
|
*
|
|
Paul H. Stebbins
|
|
|
3,780
|
|
|
|
*
|
|
|
|
|
|
|
|
3,780
|
|
|
|
*
|
|
|
|
3,780
|
|
|
|
*
|
|
Michael Sweeney(12)
|
|
|
73,405
|
|
|
|
*
|
|
|
|
13,000
|
|
|
|
60,405
|
|
|
|
*
|
|
|
|
60,405
|
|
|
|
*
|
|
All Directors and Executive
Officers as a group (9 persons)(13)
|
|
|
5,525,844
|
|
|
|
7.6
|
%
|
|
|
511,000
|
|
|
|
5,014,844
|
|
|
|
6.5
|
%
|
|
|
5,014,844
|
|
|
|
6.5
|
%
|
|
|
|
*
|
|
Less than one percent
|
|
(1)
|
|
The number and percentage of shares
of common stock shown in the table as beneficially owned by S.
Robson Walton represent (a) 12,102,002 shares held by
JCL Holdings, LLC, as to which S. Robson Walton, as a managing
member thereof, shares voting and dispositive power with Jim C.
Walton and Alice L. Walton, individually as managing members,
and (b) 26,785,345 shares held by the Estate of John
T. Walton, as to which S. Robson Walton, Jim C. Walton and Alice
L. Walton, as co-personal representatives, share dispositive and
voting power (such shares are also shown by the Estate of John
T. Walton and JCL Holdings, LLC as having sole voting and
dispositive power). The shares held by JCL Holdings, LLC and the
Estate of John T. Walton are for the benefit of John T.
Waltons wife and his descendants and for that reason, S.
Robson Walton disclaims beneficial ownership of the shares
listed in (a) and (b) above. The address of S. Robson
Walton is P.O. Box 1860, Bentonville, Arkansas 72712.
|
69
|
|
|
(2)
|
|
The number and percentage of shares
of common stock shown in the table as beneficially owned by Jim
C. Walton represent (a) 12,102,002 shares held by JCL
Holdings, LLC, as to which Jim C. Walton, as a managing member
thereof, shares voting and dispositive power with S. Robson
Walton and Alice L. Walton, individually as managing members,
and (b) 26,785,345 shares held by the Estate of John
T. Walton, as to which S. Robson Walton, Jim C. Walton and Alice
L. Walton, as co-personal representatives, share dispositive and
voting power (such shares are also shown by the Estate of John
T. Walton and JCL Holdings, LLC as having sole voting and
dispositive power). The shares held by JCL Holdings, LLC and the
Estate of John T. Walton are for the benefit of John T.
Waltons wife and his descendants and for that reason, Jim
C. Walton disclaims beneficial ownership of the shares listed in
(a) and (b) above. The address of Jim C. Walton is
P.O. Box 1860, Bentonville, Arkansas 72712.
|
|
(3)
|
|
The number and percentage of shares
of common stock shown in the table as beneficially owned by
Alice L. Walton represent (a) 12,102,002 shares held
by JCL Holdings, LLC, as to which Alice L. Walton, as a managing
member thereof, shares voting and dispositive power with S.
Robson Walton and Jim C. Walton, individually as managing
members, and (b) 26,785,345 shares held by the Estate
of John T. Walton, as to which S. Robson Walton, Jim C. Walton
and Alice L. Walton, as co-personal representatives, share
dispositive and voting power (such shares are also shown by the
Estate of John T. Walton and JCL Holdings, LLC as having sole
voting and dispositive power). The shares held by JCL Holdings,
LLC and the Estate of John T. Walton are for the benefit of John
T. Waltons wife and his descendants and for that reason,
Alice L. Walton disclaims beneficial ownership of the shares
listed in (a) and (b) above. The address of Alice L.
Walton is P.O. Box 1860, Bentonville, Arkansas 72712.
|
|
(4)
|
|
The number and percentage of shares
of common stock shown in the table as beneficially owned by the
Estate of John T. Walton represent 26,785,345 shares held
directly by the Estate of John T. Walton, as to which S. Robson
Walton, Jim C. Walton and Alice L. Walton, as co-personal
representatives of the Estate of John T. Walton, share voting
and dispositive power. The shares held by the Estate of John T.
Walton are held for the benefit of John T. Waltons wife
and his descendants and for that reason, S. Robson Walton, Jim
C. Walton and Alice L. Walton disclaim beneficial ownership of
such shares. The address of the Estate of John T. Walton is
P.O. Box 1860, Bentonville, Arkansas 72712.
|
|
(5)
|
|
The number and percentage of shares
of common stock shown in the table as beneficially owned by JCL
Holdings, LLC represent 12,102,002 shares held directly by
JCL Holdings, LLC as to which S. Robson Walton, Jim C. Walton
and Alice L. Walton, individually as managing members thereof,
share voting and dispositive power. The shares held by JCL
Holdings, LLC are held for the benefit of John T. Waltons
wife and his descendants and for that reason, S. Robson Walton,
Jim C. Walton and Alice L. Walton disclaim beneficial ownership
of such shares. The address of JCL Holdings, LLC is
P.O. Box 1860, Bentonville, Arkansas 72712.
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(6)
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Michael J. Ahearn 2006 GRAT holds a
total of 4,737,339 shares, and Michael J. Ahearn is the
sole trustee and has sole voting and dispositive power with
respect to all shares held by the Michael J. Ahearn 2006 GRAT.
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(7)
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Goldman, Sachs & Co. is
an indirect, wholly-owned subsidiary of The Goldman Sachs Group,
Inc., a publicly-traded company. No individual within Goldman,
Sachs & Co. has sole voting and investment power with
respect to the securities. In accordance with the Securities and
Exchange Commission Release No. 34-39538 (January 12,
1998) (the Release), this prospectus reflects the
securities beneficially owned by certain operating units
(collectively, the Goldman Sachs Reporting Units) of
The Goldman Sachs Group, Inc. and its subsidiaries and
affiliates (collectively, GSG). This prospectus does
not reflect securities, if any, beneficially owned by any
operating units of GSG whose ownership of securities is
disaggregated from that of the Goldman Sachs Reporting Units in
accordance with the Release. The Goldman Sachs Reporting Units
disclaim beneficial ownership of the securities beneficially
owned by (i) any client accounts with respect to which the
Goldman Sachs Reporting Units or their employees have voting or
investment discretion, or both, and (ii) certain investment
entities of which the Goldman Sachs Reporting Units act as the
general partner, managing general partner or other manager, to
the extent interests in such entities are held by persons other
than the Goldman Sachs Reporting Units. The address of each of
Goldman, Sachs & Co. and The Goldman Sachs Group, Inc.
is c/o Goldman, Sachs & Co., One New York Plaza, New
York, New York 10004.
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(8)
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Includes 72,750 shares of
common stock issuable upon the exercise of stock options.
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(9)
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Includes 9,375 shares of
common stock issuable upon the exercise of stock options.
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(10)
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Includes 529,440 shares of
common stock issuable upon the exercise of stock options.
Kenneth M. Schultz intends to exercise options to acquire
95,000 shares of common stock to be sold by him in this
offering.
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(11)
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Includes 58,750 shares of
common stock issuable upon the exercise of stock options.
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(12)
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Includes 72,750 shares of
common stock issuable upon the exercise of stock options.
Michael Sweeney intends to exercise options to acquire
13,000 shares of common stock to be sold by him in this
offering.
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(13)
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Includes 743,065 shares of
common stock issuable upon the exercise of stock options.
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70
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Related
Party Debt
On July 26, 2005, we entered into a $5.0 million loan
agreement with Walton Enterprises II, L.P., an affiliate of the
Estate of John T. Walton and JCL Holdings, LLC, with interest
payable at a rate equal to the short term Applicable Federal
Rate (AFR) per annum from the date thereof until paid. This loan
agreement was cancelled in connection with entering into a
second loan agreement with Walton Enterprises II, L.P. on
September 30, 2005. This new loan agreement was for
$20.0 million, with interest payable monthly at the rate
equal to the lesser of (i) the AFR and (ii) the
highest lawful rate. The entire $20.0 million under this
loan agreement was outstanding at December 31, 2005. During
January and February 2006, we borrowed an additional
$3.0 million and $7.0 million, respectively, from the
Estate of John T. Walton, taking the place of Walton Enterprises
II, L.P. These notes were unsecured, the balance was payable on
demand and interest was payable monthly at a rate equal to the
lesser of (i) the AFR and (ii) the highest lawful
rate. We repaid the entire $30.0 million in February 2006.
On July 26, 2006, we entered into a loan agreement with the
Estate of John T. Walton, which we amended and restated on
August 7, 2006, under which we could draw up to
$34.0 million. As a condition of obtaining this loan, we
were required to use $8.7 million of the proceeds to repay
the principal of our loan from Kingston Properties, LLC, an
affiliate of the Estate of John T. Walton and JCL Holdings, LLC.
During July 2006, we drew $26.0 million against this loan,
which we repaid with a portion of the proceeds from our initial
public offering of common stock.
On May 14, 2003, First Solar Property, LLC issued a
$8.7 million promissory note due June 1, 2010 to
Kingston Properties, LLC, an affiliate of the Estate of John T.
Walton and JCL Holdings, LLC. Interest was payable monthly at an
annual rate of 3.70%. We repaid the note in its entirety in July
2006 with a portion of the proceeds from the borrowings under
the revolving loan agreement with the Estate of John T. Walton.
Related
Party Equity Contributions
In fiscal year 2004, fiscal year 2005 and February 2006, we sold
to JWMA Partners, LLC, or JWMA, 8,681,000 shares,
3,674,000 shares and 6,613,000 shares, respectively,
for $17.9 million, $16.7 million and
$30.0 million, respectively. In November 2006, JWMA
dissolved and distributed these shares to its members, including
the Estate of John T. Walton, JCL Holdings, LLC and Michael J.
Ahearn.
Convertible
Debt
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. This extinguishment
took place under the terms of a negotiated extinguishment
agreement and not under the conversion terms of the original
note purchase agreement; however, the settlement terms of the
negotiated extinguishment agreement were, in substance, similar
to, but not identical to, the terms of the original note
purchase agreement.
Registration
Rights
We entered into a registration rights agreement with the Estate
of John T. Walton, JCL Holdings, LLC and Michael J. Ahearn. The
registration rights agreement provides for piggyback
registration rights if we register equity securities under the
Securities Act, subject to certain
lock-up
provisions and exceptions. In addition, subject to certain
lock-up
provisions and exceptions, Michael J. Ahearn has three demand
rights, JCL Holdings, LLC has five demand rights and the Estate
of John T. Walton has unlimited demand rights, provided that the
Estate of John T. Walton may only exercise one such demand right
within any 365 day period. Following the termination of the
Estate of John T. Walton, the registration rights held
by the Estate will be held collectively by trusts for the
benefit of John T. Waltons wife and his descendants.
We entered into a registration rights agreement with Goldman,
Sachs & Co., the purchaser of the convertible senior
subordinated notes. The registration rights agreement provides
that, subject to certain
lock-up
provisions and exceptions, Goldman, Sachs & Co. has
two demand rights and piggyback registration rights if we
register equity securities under the Securities Act. The
registration rights and related provisions are transferable with
respect to the shares issued upon conversion of the notes on
May 10, 2006.
Other
In connection with entering into the IKB credit facility,
Michael J. Ahearn, our Chief Executive Officer, provided a
500,000 personal guarantee. We have indemnified
Mr. Ahearn for the amount of his guarantee.
71
DESCRIPTION
OF CERTAIN INDEBTEDNESS
The following is a summary of the material provisions of the
instruments evidencing our material indebtedness. It does not
include all of the provisions of the documents evidencing our
material indebtedness, copies of which have been filed as
exhibits to our registration statement in connection with this
offering.
IKB
Credit Facility
On July 27, 2006, First Solar Manufacturing GmbH, a wholly
owned indirect subsidiary of First Solar, Inc., entered into a
credit facility agreement with a consortium of banks led by IKB
Deutsche Industriebank AG, under which we can draw up to
102.0 million ($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 may drawdown against the
term loan and the bridge loan until December 30, 2007 and
we may drawdown against the revolving credit facility until
September 30, 2012. We have incurred costs related to the
credit facility totaling $2.0 million as of June 30,
2007, 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 under the credit facility. At
June 30, 2007, we had outstanding borrowings of
$61.4 million under the term loan and $20.2 million
under the revolving credit facility, which we classify as
long-term debt, and $22.4 million under the bridge loan,
which we classify as short-term debt.
We must repay the term loan in 20 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 the 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
72
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.
Revolving
Loan Agreement
We entered into a loan agreement with the Estate of John T.
Walton on July 26, 2006, which we amended and restated on
August 7, 2006, under which we could draw up to
$34.0 million. As a condition of obtaining this loan, we
were required to use $8.7 million of the proceeds to repay
the principal of our loan from Kingston Properties, LLC, an
affiliate of the Estate of John T. Walton and JCL Holdings, LLC.
During July 2006, we drew $26.0 million against this loan,
which we repaid with a portion of the proceeds from our initial
public offering of common stock.
$15,000,000
Loan from the State of Ohio
On July 1, 2005, First Solar US Manufacturing, LLC and
First Solar Property, LLC entered into a loan agreement with the
Director of Development of the State of Ohio for
$15.0 million, $14.1 million of which was outstanding
at June 30, 2007. Upon the merger of First Solar US
Manufacturing, LLC and First Solar Property, LLC into First
Solar, Inc. on March 31, 2007, First Solar, Inc. became the
direct obligor under this loan agreement. The interest rate on
the note is 2% per annum, plus a monthly service fee equal to
0.021%, payable monthly in arrears on the first day of each
month. Principal payments commenced on December 1, 2006 and
end on July 1, 2015, and we may pre-pay the loan in whole
or in part at any time. The note is secured by a first-priority
lien on our land and building in Perrysburg, Ohio.
$5,000,000
Loan from the State of Ohio
On December 1, 2003, First Solar US Manufacturing, LLC and
First Solar Property, LLC entered into a loan agreement with the
Director of Development of the State of Ohio for
$5.0 million, $4.2 million of which was outstanding at
June 30, 2007. Upon the merger of First Solar US
Manufacturing, LLC and First Solar Property, LLC into First
Solar, Inc. on March 31, 2007, First Solar, Inc. became the
direct obligor under this loan agreement. The interest rate on
the note was 0.00% per annum for the first year the loan is
outstanding, 1.00% during the second and third years, 2.00%
during the fourth and fifth years and 3.00% for the remaining
term of the note. In addition, we pay a monthly service fee
equal to 0.021%. Interest is payable monthly, on the first day
of each month. Principal payments commenced on January 1,
2007 and end on December 1, 2009, and we may pre-pay the
note in whole or in part at any time. The note is secured by a
first-priority lien on the accounts receivable, inventory, and
machinery and equipment in our Perrysburg, Ohio manufacturing
plant.
73
DESCRIPTION
OF CAPITAL STOCK
The following is a description of the material provisions of our
capital stock, as well as other material terms of our amended
and restated certificate of incorporation and bylaws. This
description is only a summary. You should read it together with
our amended and restated certificate of incorporation and
bylaws, which are included as exhibits to the registration
statement of which this prospectus is part.
General
Our authorized capital stock consists of 500,000,000 shares
of common stock, par value $0.001 per share, of which
72,997,929 shares were issued and outstanding as of
July 31, 2007, and 30,000,000 shares of preferred
stock, par value $0.001 per share, none of which are issued and
outstanding.
Common
Stock
The holders of our common stock are entitled to dividends as our
board of directors may declare from time to time at its absolute
discretion from funds legally available therefor. See
Dividend Policy.
The holders of our common stock are entitled to one vote for
each share held of record on any matter to be voted upon by
stockholders. Our amended and restated certificate of
incorporation does not provide for cumulative voting in
connection with the election of directors. There are no
preemptive, conversion, redemption or sinking fund provisions
applicable to our common stock.
Upon any voluntary or involuntary liquidation, dissolution or
winding up of our affairs, the holders of our common stock are
entitled to share ratably in all assets remaining after payment
to creditors and subject to prior distribution rights of any
outstanding shares of preferred stock. All the outstanding
shares of common stock are fully paid and non-assessable.
Registration
Rights
First Solar entered into a registration rights agreement with
the Estate of John T. Walton, JCL Holdings, LLC and Michael J.
Ahearn, the members of JWMA. The registration rights agreement
provides that the members of JWMA have piggyback registration
rights if we register equity securities under the Securities
Act, subject to certain
lock-up
provisions and exceptions. In addition, subject to certain
lock-up
provisions and exceptions, Michael J. Ahearn has three demand
rights, JCL Holdings, LLC has five demand rights and the Estate
of John T. Walton has unlimited demand rights, provided that the
Estate of John T. Walton may only exercise one such demand right
within any 365 day period. Following the termination of the
Estate of John T. Walton, the registration rights held by the
Estate will be held collectively by trusts for the benefit of
John T. Waltons wife and his descendants.
First Solar entered into a registration rights agreement with
Goldman, Sachs & Co., the purchaser of the convertible
senior subordinated notes. The registration rights agreement
provides that, subject to certain
lock-up
provisions and exceptions, Goldman, Sachs & Co. has
two demand rights and piggyback registration rights if we
register equity securities under the Securities Act. The
registration rights and related provisions are transferable with
respect to the shares issued upon conversion of the notes on
May 10, 2006.
Action by
Written Consent; Special Meetings of Stockholders
Our amended and restated certificate of incorporation and bylaws
provide that unless and until 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 own less than 40% of our
common stock then outstanding, stockholder action may be taken
at an annual or special meeting of stockholders or by written
consent. Thereafter, stockholder action may only be taken at an
annual or special meeting of the stockholders and may not be
taken by written consent. In addition, our amended and restated
certificate of incorporation and bylaws provide that unless and
until the Estate collectively owns less than 40% of our common
stock then outstanding, either the board of directors or
stockholders owning 40% or more of our common stock then
outstanding may call a special meeting of stockholders at any
time and for any purpose or purposes. Thereafter, only our board
of directors may call a special meeting of stockholders.
74
Anti-Takeover
Effects of Various Provisions of Delaware Law and Our Amended
and Restated Certificate of Incorporation and Bylaws
Provisions of the Delaware General Corporation Law, or the DGCL,
could make it more difficult to acquire us by means of a tender
offer, a proxy contest or otherwise, or to remove incumbent
officers and directors. These provisions, summarized below, are
expected to discourage types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to
acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the
disadvantages of discouraging takeover or acquisition proposals
because, among other things, negotiation of these proposals
could result in an improvement of their terms.
Delaware Anti-Takeover Statute. We have
elected not to be subject to Section 203 of the DGCL, an
anti-takeover statute. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a
business combination with an interested
stockholder for a period of three years following the time
the person became an interested stockholder, unless (with
certain exceptions) the business combination or the transaction
in which the person became an interested stockholder is approved
in a prescribed manner. Generally, a business
combination includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the
interested stockholder. Generally, an interested
stockholder is a person who, together with affiliates and
associates, owns (or within three years prior to the
determination of interested stockholder status did own)
15 percent or more of a corporations voting stock.
The existence of this provision would be expected to have an
anti-takeover effect with respect to transactions not approved
in advance by the board of directors, including discouraging
attempts that might result in a premium over the market price
for the shares of common stock held by stockholders.
No Cumulative Voting. The DGCL provides that
stockholders are denied the right to cumulate votes in the
election of directors unless our amended and restated
certificate of incorporation provides otherwise. Our amended and
restated certificate of incorporation does not provide for
cumulative voting.
Limitations on Liability and Indemnification of Officers and
Directors. The DGCL authorizes corporations to
limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for
breaches of directors fiduciary duties as directors. Our
organizational documents include provisions that indemnify, to
the fullest extent allowable under the DGCL, the personal
liability of directors or officers for monetary damages for
actions taken as a director or officer of our company, or for
serving at our request as a director or officer or another
position at another corporation or enterprise, as the case may
be. Our organizational documents also provide that we must
indemnify and advance reasonable expenses to our directors and
officers, subject to our receipt of an undertaking from the
indemnitee as may be required under the DGCL. We are also
expressly authorized to carry directors and officers
insurance to protect our company, our directors, officers and
certain associates for some liabilities. In addition, we have
entered into an agreement with each of our directors and
officers whereby we have agreed to indemnify them substantially
in accordance with the indemnification provisions applicable to
our officers and directors in our bylaws.
The limitation of liability and indemnification provisions in
our amended and restated certificate of incorporation and our
bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty. These
provisions may also have the effect of reducing the likelihood
of derivative litigation against directors and officers, even
though such an action, if successful, might otherwise benefit us
and our stockholders. In addition, your investment may be
adversely affected to the extent that, in a class action or
direct suit, we pay the costs of settlement and damage awards
against directors and officers pursuant to these indemnification
provisions. There is currently no pending material litigation or
proceeding involving any of our directors, officers or
associates for which indemnification is sought.
Authorized but Unissued Shares of Common
Stock. Our authorized but unissued shares of
common stock will be available for future issuance without your
approval. We may use additional shares for a variety of
corporate purposes, including future public offerings to raise
additional capital, corporate acquisitions and employee benefit
plans and as consideration for future acquisitions, investments
or other purposes. The existence of authorized but unissued
shares of common stock could render more difficult or discourage
an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
75
Undesignated Preferred Stock. Our amended and
restated certificate of incorporation and bylaws authorizes
undesignated preferred stock. As a result, our board of
directors may, without stockholder approval, issue preferred
stock with super voting, special approval, dividend or other
rights or preferences on a discriminatory basis that could
impede the success of any attempt to acquire us. These and other
provisions may have the effect of deferring, delaying or
discouraging hostile takeovers, or changes in control or
management of our company.
Amendments to Organizational Documents. The
DGCL provides generally that the affirmative vote of a majority
of the shares entitled to vote on any matter is required to
amend a corporations certificate of incorporation or
bylaws.
Listing
Our common stock is listed on The Nasdaq Global Market under the
trading symbol FSLR.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
Computershare.
76
CERTAIN
U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR
NON-U.S.
HOLDERS
The following discussion is a general summary of the material
U.S. federal income tax consequences of the ownership and
disposition of our common stock applicable to
Non-U.S. Holders.
As used herein, a
Non-U.S. Holder
means a beneficial owner of our common stock that is neither a
U.S. person nor a partnership for U.S. federal income
tax purposes, and that will hold shares of our common stock as
capital assets. For U.S. federal income tax purposes, a
U.S. person includes:
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an individual who is a citizen or resident of the United States;
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a corporation (or other business entity treated as a corporation
for U.S. federal income tax purposes) created or organized
in the United States or under the laws of the United States, any
state thereof or the District of Columbia;
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an estate the income of which is includible in gross income
regardless of source; or
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a trust that (A) is subject to the primary supervision of a
court within the United States and the control of one or more
U.S. persons, or (B) otherwise has validly elected to
be treated as a U.S. domestic trust.
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If a partnership (including an entity treated as a partnership
for U.S. federal income tax purposes) holds shares of our
common stock, the U.S. federal income tax treatment of the
partnership and each partner generally will depend on the status
of the partner and the activities of the partnership and the
partner. Partnerships acquiring our common stock, and partners
in such partnerships, should consult their own tax advisors with
respect to the U.S. federal income tax consequences of the
ownership and disposition of our common stock.
This summary does not consider specific facts and circumstances
that may be relevant to a particular
Non-U.S. Holders
tax position and does not consider U.S. state and local or
non-U.S. tax
consequences. It also does not consider
Non-U.S. Holders
subject to special tax treatment under the U.S. federal
income tax laws (including partnerships or other pass-through
entities, banks and insurance companies, dealers in securities,
holders of our common stock held as part of a
straddle, hedge, conversion
transaction or other risk-reduction transaction,
controlled foreign corporations, passive foreign investment
companies, companies that accumulate earnings to avoid
U.S. federal income tax, foreign tax-exempt organizations,
former U.S. citizens or residents, persons who hold or
receive common stock as compensation and persons subject to the
alternative minimum tax). This summary is based on provisions of
the U.S. Internal Revenue Code of 1986, as amended (the
Code), applicable Treasury regulations,
administrative pronouncements of the U.S. Internal Revenue
Service (IRS) and judicial decisions, all as in
effect on the date hereof, and all of which are subject to
change, possibly on a retroactive basis, and different
interpretations.
This summary is included herein as general information only.
Accordingly, each prospective
Non-U.S. Holder
is urged to consult its own tax advisor with respect to the
U.S. federal, state, local and
non-U.S. income,
estate and other tax consequences of owning and disposing of our
common stock.
U.S.
Trade or Business Income
For purposes of this discussion, dividend income and gain on the
sale or other taxable disposition of our common stock will be
considered to be U.S. trade or business income
if such income or gain is (i) effectively connected with
the conduct by a
Non-U.S. Holder
of a trade or business within the United States and (ii) in
the case of a
Non-U.S. Holder
that is eligible for the benefits of an income tax treaty with
the United States, attributable to a permanent establishment
(or, for an individual, a fixed base) maintained by the
Non-U.S. Holder
in the United States. Generally, U.S. trade or business
income is not subject to U.S. federal withholding tax
(provided the
Non-U.S. Holder
complies with applicable certification and disclosure
requirements); instead, U.S. trade or business income is
subject to U.S. federal income tax on a net income basis at
regular U.S. federal income tax rates in the same manner as
a U.S. person. Any U.S. trade or business income
received by a corporate
Non-U.S. holder
may be subject to an additional branch profits tax
at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
Dividends
Distributions of cash or property that we pay will constitute
dividends for U.S. federal income tax purposes to the
extent paid from our current or accumulated earnings and profits
(as determined under U.S. federal income tax principles). A
Non-U.S. Holder
generally will be subject to U.S. federal withholding tax
at a 30% rate, or, if the
Non-U.S. Holder
is eligible, at a reduced rate prescribed by an applicable
income tax treaty, on any dividends received
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in respect of our common stock. If the amount of a distribution
exceeds our current and accumulated earnings and profits, such
excess first will be treated as a tax-free return of capital to
the extent of the
Non-U.S. Holders
tax basis in our common stock (with a corresponding reduction in
such
Non-U.S. Holders
tax basis in our common stock), and thereafter will be treated
as capital gain. In order to obtain a reduced rate of
U.S. federal withholding tax under an applicable income tax
treaty, a
Non-U.S. Holder
will be required to provide a properly executed IRS
Form W-8BEN
certifying under penalties of perjury its entitlement to
benefits under the treaty. Special certification requirements
and other requirements apply to certain
Non-U.S. Holders
that are entities rather than individuals. A
Non-U.S. Holder
of our common stock that is eligible for a reduced rate of
U.S. federal withholding tax under an income tax treaty may
obtain a refund or credit of any excess amounts withheld by
filing an appropriate claim for a refund with the IRS on a
timely basis. A
Non-U.S. Holder
should consult its own tax advisor regarding its possible
entitlement to benefits under an income tax treaty and the
filing of a U.S. tax return for claiming a refund of
U.S. federal withholding tax.
The U.S. federal withholding tax does not apply to
dividends that are U.S. trade or business income, as
defined above, of a
Non-U.S. Holder
who provides a properly executed IRS
Form W-8ECI,
certifying under penalties of perjury that the dividends are
effectively connected with the
Non-U.S. Holders
conduct of a trade or business within the United Sates.
Dispositions
of Our Common Stock
A
Non-U.S. Holder
generally will not be subject to U.S. federal income or
withholding tax in respect of any gain on a sale or other
disposition of our common stock unless:
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the gain is U.S. trade or business income, as defined above;
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the
Non-U.S. Holder
is an individual who is present in the United States for 183 or
more days in the taxable year of the disposition and meets other
conditions; or
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we are or have been a U.S. real property holding
corporation (a USRPHC) under section 897
of the Code at any time during the shorter of the five-year
period ending on the date of disposition and the
Non-U.S. Holders
holding period for our common stock.
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In general, a corporation is a USRPHC if the fair market value
of its U.S. real property interests (as defined
in the Code and applicable Treasury regulations) equals or
exceeds 50% of the sum of the fair market value of its worldwide
real property interests and its other assets used or held for
use in a trade or business. If we are determined to be a USRPHC,
the U.S. federal income and withholding taxes relating to
interests in USRPHCs nevertheless will not apply to gains
derived from the sale or other disposition of our common stock
by a
Non-U.S. Holder
whose shareholdings, actual and constructive, at all times
during the applicable period, amount to 5% or less of our common
stock, provided that our common stock is regularly traded on an
established securities market. We are not currently a USRPHC,
and we do not anticipate becoming a USRPHC in the future.
However, no assurance can be given that we will not be a USRPHC,
or that our common stock will be considered regularly traded,
when a
Non-U.S. Holder
sells its shares of our common stock.
Information
Reporting and Backup Withholding Requirements
We must annually report to the IRS and to each
Non-U.S. Holder
any dividend income that is subject to U.S. federal
withholding tax, or that is exempt from such withholding tax
pursuant to an income tax treaty. Copies of these information
returns also may be made available under the provisions of a
specific treaty or agreement to the tax authorities of the
country in which the
Non-U.S. Holder
resides. Under certain circumstances, the Code imposes a backup
withholding obligation (currently at a rate of 28%) on certain
reportable payments. Dividends paid to a
Non-U.S. Holder
of our common stock generally will be exempt from backup
withholding if the
Non-U.S. Holder
provides a properly executed IRS
Form W-8BEN
or otherwise establishes an exemption.
The payment of the proceeds from the disposition of our common
stock to or through the U.S. office of any broker,
U.S. or foreign, will be subject to information reporting
and possible backup withholding unless the holder certifies as
to its
non-U.S. status
under penalties of perjury or otherwise establishes an
exemption, provided that the broker does not have actual
knowledge or reason to know that the holder is a
U.S. person or that the conditions of any other exemption
are not, in fact, satisfied. The payment of the proceeds from
the disposition of our common stock to or through a
non-U.S. office
of a
non-U.S. broker
will not be subject to information reporting or backup
withholding unless the
non-U.S. broker
has certain types of relationships with the United States (a
U.S. related person). In the case
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of the payment of the proceeds from the disposition of our
common stock to or through a non-U.S office of a broker that is
either a U.S. person or a U.S. related person, the
Treasury regulations require information reporting (but not the
backup withholding) on the payment unless the broker has
documentary evidence in its files that the holder is a
Non-U.S. Holder
and the broker has no knowledge to the contrary.
Non-U.S. Holders
should consult their own tax advisors on the application of
information reporting and backup withholding to them in their
particular circums