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 $222.8 million, or approximately $267.1 million if the underwriters exercise their over-allotment option in full, in each case assuming the shares are offered at $18.00 per share, which is the mid-point of the range set forth on the cover of this prospectus.$413.9 million. Of the net proceeds we receive fromin this offering, we intend to use approximately $150.0$150 million to build aplant two at our Malaysia manufacturing facility in Asiacenter, which will increase the annual manufacturing capacity of our Malaysia manufacturing center to eight production lines and 240MW, approximately $30.0$30 million to fund the associated productionstart-up andramp-up costs approximately $26.0 million to repay debt to the Estate of John T. Walton, our majority stockholder upon the completion of this offering, and the remainder for working capital and general corporate purposes, including potential acquisitions and vertical integration.possible future capacity expansions.
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 $8.1$16.8 million of economic development funding from various German governmental entities. Partially offsetting this increasethese cash receipts was the repayment of a $30.0 million loan from the Estate of John T. Walton and the repayment of a $8.7 million loan from Kingston Properties, LLC, an affiliate of our majority stockholder, in the first nine months of 2006, loan proceeds during the first nine months of 2005 of $7.6 million from the Director of Development of the State of Ohio and $5.0 million from the Estate of John T. Walton, and $1.5$64.7 million of debt issuance costs incurred during the nine months ended September 30, 2006.
loans from related parties. On February 22, 2006, we issued $74$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. See “Principal and Selling Stockholders”.
Cash generated from financing activities was $51.7 million in fiscal year 2005 compared to $22.9 million in fiscal year 2004 and $39.1 million in fiscal year 2003. In fiscal yearDuring 2005, cash provided by financing activities was primarily the result of a $20.0 million loan from the Estate of John T. Walton,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. In fiscal year
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 athe result of a $5.0 million loan from the Director of Development of the State of Ohio and a $17.9 million cash equity contribution by JWMA. In fiscal year 2003, cash provided by financing activities was primarily a result of $21.9 million of loans from JWMA, a $8.7 million loan from Kingston Properties, LLC and a $8.5 million equity contribution from JWMA.
On October 24, 2006, we amended our articles of incorporation to authorize us to issue up to 500,000,000 shares of common stock at a par value of $0.001 and up to 30,000,000 shares of preferred stock at a par value of $0.001. These amended and restated articles of incorporation permit our board of directors to establish the voting powers, preferences and other rights of any series of preferred stock that we issue. On October 30, 2006, our board of directors approved a 4.85 to 1 stock split of our issued and outstanding common shares, which iswas effective November 1, 2006; the par value of our common shares will remainremained $0.001 per share.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 31, 2005 and September 30, 2006, which consist of legal commitments requiring us to make fixed or determinable cash payments, regardless of contractual requirements with the vendor to provide future goods or services. We purchase raw materials for inventory, services and manufacturing equipment from a variety of vendors. During the normal course of business,
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in order to manage manufacturing lead times and help assure adequate supply, we enter into agreements with suppliers that either allow us to procure goods and services when we choose or that establish purchase requirements.
Our contractual obligations as of December 31, 2005 were as follows:
| | | | | | | | | | | |
| | | | Payments Due By Year |
| | | | |
| | | | Less than | | | | More than |
Contractual Obligations | | Total | | 1 Year | | 1 - 3 Years | | 3 - 5 Years | | 5 Years |
| | | | | | | | | | |
| | (dollars in thousands) |
Long-term debt obligations(1) | | $32,144 | | $858 | | $8,021 | | $14,737 | | $8,528 |
Capital lease obligations | | 33 | | 9 | | 16 | | 8 | | — |
Operating lease obligations | | 876 | | 290 | | 350 | | 140 | | 96 |
Purchase obligations(2) | | 36,186 | | 36,122 | | 64 | | — | | — |
Recycling obligations | | 917 | | — | | — | | — | | 917 |
| | | | | | | | | | |
| Total | | $70,156 | | $37,279 | | $8,451 | | $14,885 | | $9,541 |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
Our contractual obligations as of September 30, 2006 were as follows:
| | | | | | | | | | | | | | | | | | | |
| | | | Payments Due By Year | |
| | | | | |
| | | | Less than | | | | | More than | |
Contractual Obligations | | Total | | 1 Year | | | 1 - 3 Years | | | 3 - 5 Years | | | 5 Years | |
| | | | | | | | | | | | | | |
| | (dollars in thousands) | |
Long-term debt obligations(1) | | $44,143 | | | $462 | | | | $12,912 | | | | $14,276 | | | | $16,493 | |
Capital lease obligations | | 48 | | | 3 | | | | 28 | | | | 17 | | | | — | |
Operating lease obligations | | 992 | | | 109 | | | | 488 | | | | 298 | | | | 97 | |
Purchase obligations(2) | | 61,792 | | | 29,727 | | | | 23,593 | | | | 6,508 | | | | 1,964 | |
Recycling obligations | | 2,762 | | | — | | | | — | | | | — | | | | 2,762 | |
| | | | | | | | | | | | | | |
| Total | | $109,737 | | | $30,301 | | | | $37,021 | | | | $21,099 | | | | $21,316 | |
| | | | | | | | | | | | | | |
| | |
(1) | | Includes estimated cash interest to be paid over the remaining terms of the debt. |
|
(2) | | Purchase obligations are agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed minimum, or variable price provisions and the approximate timing of transactions. |
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 €102.0 million ($122.4132.6 million at an assumed exchange rate of $1.20/$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 €53.0 million ($63.668.9 million at an assumed exchange rate of $1.20/$1.30/€1.00) and a revolving credit facility of€27.0 €27.0 million ($32.4
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($35.1 million at an assumed exchange rate of $1.20/$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 €22.0 million ($26.428.6 million at an assumed exchange rate of $1.20/$1.30/€1.00). We can make drawdownsmay drawdown against the term loan and the bridge loan until December 30, 2007 and we can make drawdownsmay drawdown against the revolving credit facility until September 30, 2012. We have incurred costs related to the credit facility totaling $1.9$2.0 million as of SeptemberJune 30, 2006,2007, 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 down onunder the credit facility. At SeptemberJune 30, 2006,2007, we had outstanding borrowings of $18.2$61.4 million under the term loan and $6.8$20.2 million under the revolving credit facility, which we classify as long-term debt, and $22.4 million under the bridge loan. We had no outstanding borrowings under the revolving credit facility.loan, which we classify as short-term debt.
We must repay the term loan in twenty20 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 must pay interest at the annual rate of the Euro interbank offered rate (Euribor) plus 1.6% on the term loan, Euribor plus 2.0% on the bridge loan and Euribor plus 1.8% on the revolving credit facility. Each time we
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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 €0.5 million ($0.60.7 million at an assumed exchange rate of $1.20/$1.30/€1.00) for these guarantees. In addition, we must maintain a debt service reserve of€3.0 €3.0 million ($3.63.9 million at an assumed exchange rate of $1.20/$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 GmbH’s 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 GmbH’s 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
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available for debt service to fall below 1.3 times its required principal and interest payments for all its liabilities for any one year period or cause the amount of its equity to fall below 30% of the amount of its total assets. First Solar Manufacturing GmbH also cannot pay commissions of greater than 2% to First Solar affiliates that sell or distribute its products. Also, we may be required under certain circumstances to contribute more funds to First Solar Manufacturing GmbH, such as if project-related costs exceed our plan, we do not recover the expected amounts from governmental investment subsidies or all or part of the government guarantees are withdrawn. If there is a decline in the value of the assets pledged as collateral for the credit facility, we may also be required to pledge additional assets as collateral.
On July 26, 2006, we were approved to receive taxable investment incentives(“Investitionszuschuesse”Investitionszuschüsse”)of approximately€21.5 €21.5 million ($25.828.0 million at an assumed exchange rate of $1.20/$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 employeesassociates during this period. Our incentive approval expires on December 31, 2009. As of SeptemberJune 30, 2006,2007, we had received $8.1$25.3 million under this program and we had accrued an additional $3.7$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 €23.8 million ($28.630.9 million at an assumed exchange rate of $1.20/$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. WeIn accordance with the administrative requirements of this Act, we plan to claim reimbursement under the Act in
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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. ThisIn addition, this program expiresexpired on December 31, 2006 and we can only claim only reimbursement for investments completed by this date. We expect to have theThe majority of our buildings and structures and a portion of our investment in machinery and equipment were completed by this date. As of SeptemberJune 30, 2006,2007, we had accrued $13.0$31.6 million that we are eligible to receive under this program based on qualifying expenditures that we had incurred tothrough that date.
On
In July 26, 2006, we entered into a loan agreement, which we amended and restated on August 7, 2006, with the Estate of John T. Walton an affiliate of JWMA, under which we cancould draw up to $34.0 million. Interest iswas payable monthly at the annual rate of the commercial prime lending rate and principal payments are duewas to be repaid at the earlier of January 18, 2008 or the completion of an initial public offering of our stock. This loan doesdid not have any collateral requirements. As a condition of obtaining this loan, we were required to use a portion of the proceeds to repay the principal of our loan from Kingston Properties, LLC, an affiliate of JWMA.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 note. At September 30,loan. Upon completion of our initial public offering in November 2006, we repaid the entire $26.0 million was outstanding under this loan agreement.balance.
On
In July 1, 2005, First Solar US Manufacturing, LLC and First Solar Property, LLC, both wholly owned subsidiaries of First Solar, Inc., entered intowe received a $15.0 million loan agreement withfrom the Director of Development of the State of Ohio, for $15.0$14.1 million all of which was outstanding at SeptemberJune 30, 2006. The interest rate on the note2007. Interest is 2% per annum, plus a monthly service fee equal to 0.021%, payable monthly in arrears onat the first dayannual rate of each month. Principal2.25% and principal payments commencecommenced on December 1, 2006 and end on July 1, 2015,2015. Land and we may pre-pay the note in whole or in partbuildings at any time. The note is secured byour Ohio plant with a first-priority lien on our land and building in Perrysburg, Ohio and guaranteed by First Solar, Inc. The loan requires us to comply with non-financial covenants that primarily provide information rights to the lender.net book value of $21.5 million at June 30, 2007 have been pledged as collateral for this loan.
On
During the year ended December 1, 2003, First Solar US Manufacturing, LLC and First Solar Property, LLC entered into25, 2004, we received a $5.0 million loan agreement with Thefrom the Director of Development of the State of Ohio, for $5.0$4.2 million all of which was outstanding on Septemberat June 30, 2006. The interest rate on the note was2007. Interest is payable monthly at annual rates starting at 0.25% per annum forduring 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 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.subsequent year. Principal payments commencecommenced on January 1, 2007 and end on December 1, 2009, and we may pre-pay the note in whole or in part at any time after January 1, 2007. The note is secured by a first-priority lien on the accounts receivable, inventory, and machinery2009. Machinery and equipment inat our Perrysburg, Ohio manufacturing plant and guaranteed by First Solar, Inc. The loan requires us to comply with non-financial covenants that primarily provide information rights to the lender.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 on June 5, 2006 for that requirement from the lender.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 iswas 3.70% per annum. We pre-payedpre-paid this note in full in July 2006.
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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 SeptemberJune 30, 2006.2007.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
Our international operations accounted for approximately 99.6%100.0% of our net sales in fiscal year 2005the first six months of 2007 and 94.7%99.9% of our net sales in fiscal year 2004. In fiscal year 2005 and fiscal year 2004,the first six months of 2006, all of our international saleswhich were denominated in Euros.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. Dollardollar to Euroeuro exchange rate, affect our gross and net profit margins and could result in foreign exchange and operating losses. OurHistorically, most of our exposure to foreign exchange risk primarily relateshas related to currency gains and losses from the time we sign and settle our sales contracts. For example, we recently entered into our Long Term Supply Contracts. These contractsContracts obligate us to deliver solar modules at a fixed
48
price in Euroseuros per Watt and do not adjust for fluctuations in the U.S. Dollardollar to Euroeuro exchange rate. In 2005,the first six months of 2007, a 10% change in foreign currency exchange rates would have impacted our net sales by $4.8$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 $0.4$1.0 million in fiscal year 2005the first six months of 2007 and negatively impacted our cash flows by $0.2$0.1 million in fiscal year 2004.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. Currently,As of June 30, 2007, we do not engage in hedging activities; however, our expenditures denominated in Euros are increasinghad 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 the construction of our German plant and capital equipment purchases from German suppliers.settle on February 27, 2009. This foreign exchange forward contract hedges an intercompany loan. Most of the German plant’s operating expenses will be in Euroseuros, creating furtherincreasing opportunities for some natural hedgehedges 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 thetheir up-front capital expenditure.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 PVphotovoltaic 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 investor’s return on investment in a photovoltaic system or make alternative investments more attractive relative to photovoltaic systems, which, in each case, could cause these end-users to seek alternative investments that promise higher returns.
During July 2006, we entered into the loan agreement with the Estate of John T. Walton, which bears interest at the commercial prime lending rate. Also, during July 2006, we entered into the IKB credit facility, which bears interest at Euribor plus 1.6% for the term loan, Euribor plus 2.0% for the bridge loan and Euribor plus 1.8% for the revolving credit facility.
We entered into an
As of June 30, 2007, we held six pay fixed, receive Euribor interest rate swap agreement to convert the variable interest on the IKB term loan of Euribor plus 1.6% toswaps with a fixed interest rate of 3.96%. At September 30, 2006, thecombined notional value of this interest rate swap was€14.3€46.0 million ($17.259.8 million at an assumed exchange rate of $1.20/$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. Currently,Presently, we purchase all of our cadmium telluride in manufacturedcompounded form from two qualified manufacturers, but we plan to qualify additional manufacturers.suppliers. We have a threerolling four year written contract with one of our two qualified suppliers, which provides for quarterly price adjustments based on the cost of tellurium. We purchase cadmium telluride from our other qualified supplier under quarterly purchase orders. In 2006, we entered into a multi-year tellurium supply contract in order to mitigate potential cost volatility and secure raw material supplies. We 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 byfrom 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 twelve12 months depending on the raw material. We might be unable to identify new suppliers or qualify their products for use on our production line inon a timely basis and on commercially reasonable terms.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123 (revised 2004),Share-Based Payments, which revises SFAS 123,Accounting for Stock-Based Compensation, supersedes APB 25,Accounting for Stock Issued to Employees, and SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure, and amends SFAS 95,Statement of Cash Flows. Generally, the requirements of SFAS 123(R) are similar to those of SFAS 123. However, SFAS 123(R) requires companies to recognize compensation expense in their statements of operations for
49
all stock-based payments to employees, including grants of employee stock options, based on the fair value of the awards. We adopted SFAS 123(R) during the first quarter of the year ended December 31, 2005 using the “modified retrospective” method of transition.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. (SAB) 107, Share-Based Payment, which provides guidance regarding the implementation of SFAS 123(R). In particular, SAB 107 provides guidance regarding calculating assumptions used in stock-based compensation valuation models, the classification of stock-based compensation expense, the capitalization of stock-based compensation costs, the classification of redeemable financial instruments, and disclosures in management’s discussion and analysis in filings with the SEC. We have applied SAB 107 in our adoption of SFAS 123(R).
In November 2004, the FASB issued SFAS 151, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and spoilage. SFAS 151 also requires the allocation of fixed production overhead costs based on normal production capacity. We adopted this statement in 2005, and the adoption did not have a material effect on our financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS 153,Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. APB 29,Accounting for Nonmonetary Transactions, applies the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS 153 amends APB 29 by eliminating the exception to fair value accounting for nonmonetary changes of similar productive assets and replacing it with a general exception to fair value accounting for nonmonetary exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. We adopted this statement in 2005, and the adoption did not have a material effect on our financial position, results of operations or cash flows.
In March 2005, the FASB issued Interpretation No. (FIN) 47,Accounting for Conditional Asset Retirement Obligations. “Conditional” asset retirement obligations are legal obligations to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the entity’s control. FIN 47 clarifies that an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated and establishes when an entity would have sufficient information to reasonably estimate that fair value. We adopted FIN 47 during 2005, and it did not have a material effect on our financial position, results of operations or cash flows.
In May 2005, the FASB issued SFAS 154,Accounting Changes and Error Corrections, which supersedes APB 20,Accounting Changes, and SFAS 3,Reporting Accounting Changes in Interim Financial Statements. SFAS 154 changes the method for reporting an accounting change. Under SFAS 154, accounting changes must be retrospectively applied to all prior periods whose financial statements are presented, unless the change in accounting principle is due to a new pronouncement that provides other transition guidance or unless application of the retrospective method is impracticable. Under the retrospective method, companies will no longer present the cumulative effect of a change in accounting principle in their statement of operations for the period of the change. SFAS 154 carries forward unchanged APB 20’s guidance for reporting corrections of errors in previously issued financial statements and for reporting changes in accounting estimates. We adopted this statement in 2006, and the adoption did not have a material effect on our financial position, results of operations or cash flows.
In January 2006, the FASB issued SFAS 155,Accounting for Certain Hybrid Financial Instruments. SFAS 155 amends SFAS 133,Accounting for Derivative Instruments and Hedging Activities and SFAS 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 also resolves issues addressed in SFAS 133 Implementation Issue No. D1,Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS 155 eliminates the exemption from applying SFAS 133 to interests in securitized financial assets so that similar instruments are accounted for in the same manner regardless of the form of the instruments. SFAS 155 allows a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement (new basis) event, on an instrument-by-instrument basis. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of SFAS 155 may also be applied upon adoption of SFAS 155 for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS 133 prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of SFAS 155 may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. We will adopt SFAS 155 during 2007 and do not expect this to have a material impact on our financial position, results of operations, or cash flows.
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In February 2006, the FASB issued FSP FAS 123R-4,Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event. The guidance in FSP FAS 123R-4 amends paragraphs 32 and A229 of SFAS 123(R) to incorporate the concept articulated in footnote 19 of SFAS 123(R). That is, a cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not meet the condition in paragraphs 32 and A229 until it becomes probable that the event will occur. Originally under SFAS 123(R), a provision in a stock-based payment plan that required an entity to settle outstanding options in cash upon the occurrence of any contingent event required classification and accounting for the share based payment as a liability. This caused an issue for certain awards that require or permit, at the holder’s election, cash settlement of the option or similar instrument upon (a) a change in control or other liquidity event of the entity or (b) death or disability of the holder. With this new FSP, these types of cash settlement features will not require liability accounting so long as the feature can be exercised only upon the occurrence of a contingent event that is outside the employees control (such as an initial public offering) until it becomes probable that event will occur. We applied the guidance in this FSP in our adoption of SFAS 123(R).
In March 2006, the FASB issued SFAS 156,Accounting for Servicing of Financial Assets — an Amendment of FASB Statement No. 140. SFAS 156 provides guidance on the accounting for servicing assets and liabilities when an entity undertakes an obligation to service a financial asset by entering into a servicing contract. This statement is effective for all transactions in fiscal years beginning after September 15, 2006. We do not expect the adoption of SFAS 156 to have a material effect on our financial position, results of operations or cash flows.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB issued FINInterpretation No. (FIN) 48,Accounting for Uncertainty in Income Taxes.Taxes. Tax law is subject to significant and varied interpretation, so an enterprise may be uncertain whether a tax position that it has taken will ultimately be sustained when it files its tax return. FIN 48 establishes a “more-likely-than-not”single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that must be met before a tax benefit can beposition is required to meet before being recognized in the financial statements and, for those benefits that may be recognized, stipulates that enterprises should recognize the largest amount of the tax benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the taxing authority.statements. FIN 48 also addresses changes in judgments about the realizability of tax benefits, accrual ofprovides guidance on derecognition, measurement classification, interest and penalties, on unrecognized tax benefits, classificationaccounting in interim periods, disclosure and transition. Upon our adoption of liabilities for unrecognized tax benefits, and related financial statement disclosures. We will adopt FIN 48 during 2007on 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 dotheir associated valuation allowances by $0.5 million.
In July 2006, the FASB issued EITF IssueNo. 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 EITFNo. 06-3 did not expect this to have a material effectan impact on our consolidated financial position, results of operations, or cash flows.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 companies with fiscal years ending after November 15, 2006. We do not expecthave applied SAB 108 during the adoptionpreparation of our financial statements and the application of SAB 108 todid not have a material effect on our financial position, results of operations or cash flows.
In September 2006,February 2007, the FASB issued SFAS 157,159,The Fair Value Measurements.Option for Financial Assets and Financial Liabilities. SFAS 157 establishes a framework for measuring159 permits entities to choose to measure many financial assets and financial liabilities at fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application ofreport unrealized gains and losses on those assets and liabilities in earnings. SFAS 157 relate to the definition of fair value, the methods used to measure fair value, and expanded disclosures about fair value measurements. SFAS 157159 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.2007. We do not expectare currently assessing the adoptionimpact of SFAS 157159 on our financial position and results of operations.
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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 evaluatedEITF 06-10 and determined that its adoption is not expected to have a material effect on our financial position or results of operations or cash flows.operations.
In September 2006,May 2007, the FASB issued SFAS 158,FASB Staff Position, or FSP,No. FIN 48-1, “Employers 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 FSPFIN 48-1, an enterprise’s 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. FSPFIN 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 FSPFIN 48-1 would be required to retrospectively apply its provisions to the date of the initial adoption of FIN No. 48. FSPFIN 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 IssueNo. 07-3, “Accounting for Defined Benefit PensionNonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Other Postretirement Plans —Development Activities.” EITFNo. 07-3 requires that these payments made by an amendment of FASB Statements No. 87, 88, 106,entity to third parties be deferred and 132(R). SFAS 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan)capitalized and recognized as an assetexpense as the related goods are delivered or liabilitythe related services are performed. Entities report the effects of applying this Issue as a change in its statementaccounting principle through a cumulative-effect adjustment to retained earnings as of financial position and to recognize changes in that funded status through comprehensive income inthe beginning of the year in which the changes occur. SFAS 158 also requires additional disclosures of defined benefit postretirement plans. SFAS 158adoption. EITFNo. 07-3 is effective for fiscal years ending after December 15, 2006.us beginning on January 1, 2008. Earlier application is not permitted. We do not expect thethat adoption of SFAS 158 toEITFNo. 07-3 will have a material effect on our financial position or results of operations or cash flows.operations.
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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.
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INDUSTRY
Electric Power Industry
Global demand for electric power is expected to increase from 14.8 trillion kilowatt hours in 2003 to 27.1 trillion kWh by 2025, according to the Energy Information Administration, or the EIA. To meet this demand, the International Energy Agency, or the IEA, estimates that investments in generation, transmission and distribution of electricity must reach approximately $10 trillion by 2030. According to the IEA, fossil fuels such as coal, oil and natural gas generated approximately 66%over 80% of the world’s electricity in 2003.2004. 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 fuelsfuels.. 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 regionsregions.. 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 concernsconcerns.. Environmental concerns over the by-products of fossil fuels have led to a global search for environmentally friendly solutions to the world’s growing electricity needs. By the end of 2005,April 2007, approximately 165172 countries signed the Kyoto Protocol, agreeing to reduce emissions of carbon dioxide and other gasses by 5.2% from 1990 levels between 2008 and 2012. Many countries have since taken pro-active steps to reduce emissions, such as adopting subsidies to encourage the commercialization of renewable energy. |
Renewable Energy Industry
The same challenges facing fossil fuels are creating a growth opportunity for renewable energy. Renewable energy sources for electric power generation include hydroelectric, biomass, geothermal, wind and solar. Within the renewable energy industry, hydroelectric power currently generates the most electricity. According to the EIA, hydroelectric power accounted for approximately 6.5% of electricity generated in the United States in 2004, compared to just 2.3% for all other sources of renewable energy combined. While hydroelectric power generation currently has the largest installed base within renewable energy, the future growth of hydroelectric power will likely be limited due to environmental concerns and a lack of suitable sites.
Among renewable sources of electricity, solar energy has the most potential to meet the world’s 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 world’s 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 country’s 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.
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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 sun’s energy into electricity, whereas solar thermal systems heat water or other fluids that are then used as sources of energy. Photovoltaic systems are either
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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-user’s electrical systemand/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 from2-3 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 0.3 GW0.4GW in 20012002 to 1.5GW1.7GW in 2005,2006, representing an average annual growth rate of over 43%42%. Cumulative installed capacity surpassed 5GW during 2005.reached just below 7GW by the end of 2006.
In 2005,2006, Germany was the world-leaderworld leader in MW volume of photovoltaic installations with 57%55%, followed by Japan with 20%17% and the United States with 7%8%, according to Solarbuzz. Germany’s and Japan’s historical dominance is attributable to their government incentive programs, which were designed to stimulate market demand for photovoltaic systems. Other European countries have adopted or are adopting similar laws and policies,government incentive programs, as are countries in Asia and several states in the United States, including California. The recently announced California Solar Initiative commits $2.9 billion in incentives over 10 years with the goal of supporting installations of 3GW new installed capacity by 2017.
Solar energy generated through photovoltaic systems has several advantages compared to conventional and other renewable sources of electricity, including the following:
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| • | Solar energy is distributive. Photovoltaic systems achieve economies of scale at small sizes and are modular, and thus can be installed at or near the sites where the solar electricity is consumed. By contrast, most methods of electricity generation are centrally generated and delivered to consumers over a transmission and distribution grid. As a result, solar generation can mitigate the cost and distribution and transmission constraints often faced by centrally generated energy sources. |
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| • | Solar energy systems require minimal operating expense. Once installed, photovoltaic systems typically require very little maintenance and no fuel, minimizing the operating expense of a photovoltaic system over the expected 25 year life of key system elements.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 system’s 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 Earth’s 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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Challenges Facing the Photovoltaic Industry
Despite the advantages of solar energy generated through photovoltaic systems, the photovoltaic industry must overcome a number of challenges to grow and achieve widespread commercialization of its products, including the following:
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| • | Current high cost of solar electricity. Currently, solar electricity is not competitive with conventional sources of electricity on a cost basis without government subsidies. The demand for |
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| | solar modules may decline if government subsidies are reduced or eliminated before solar electricity can compete with conventional sources of electricity on a cost basis. See “Business—Government Subsidies”. |
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| • | Limited availability of semiconductor materialsmaterials.. Solar modules require a semiconductor material to convert solar energy into electricity. Over 94%92% of the MW volume of solar modules sold in 20052006 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 powerpower.. Photovoltaic systems require sunlight to generate electricity and are less effective in climates of low sunlight and extreme hot and cold temperatures. As a result, photovoltaic systems generally cannot be used as a sole source of electricity and must be combined with a storage solution (such as a battery) or other source of electricity (such as grid electricity or diesel generation) in order to provide a complete solution to the end-user. |
The Cost and Operating Metrics of a Photovoltaic System
Electricity is generated by photovoltaic systems, which are comprised of solar modules, mounting structures and electrical components. Solar module manufacturers price and sell solar modules per Watt of rated power, which is the rated power under standard test conditions. Power is a rating of a solar module’s 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.
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| Cost of a Photovoltaic System |
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 module’s 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.
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The price of conventional energy varies considerably by region based on, among other things, the cost of producing and importing energy. To become competitive with conventional sources of electricity, the price per kilowatt hour of distributive solar electricity must approach the retail price of conventional electricity displaced by solar electricity in a given region. For solar power to serve as a source of on-grid generation, it must compete with the average wholesale price of electricity in a given region, as well as the price per kilowatt hour of other sources of renewable energy.
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| Operating Metrics of a Photovoltaic system |
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 Earth’s surface. A solar module operating at a 10% conversion efficiency under these sunlight conditions will provide 100 Watts of direct current power per square meter (kilowatt of sunlight power x 10% conversion efficiency = 100 Watts of solar power). If these sunlight conditions persist for one hour, the solar module will generate 100 Watt hours, or 0.1 kilowatt hour, of solar electricity (100 Watts solar power x 1 hour duration = 0.1 kilowatt hour of solar electricity). Crystalline silicon solar modules in commercial production had average conversion efficiencies of approximately 14% in 2005.2006. Thin film solar modules in high volume commercial production (over 20MW per year) had average conversion efficiencies that ranged from approximately 6% to approximately 9%10% in 2005.2006. The conversion efficiency of our solar modules averaged approximately 9% in the third quarter of 2006. In order to reach a comparable level of installed power, a photovoltaic system that employs solar modules with relatively lower conversion efficiencies must employ more solar modules than a photovoltaic generation system that uses solar modules with higher conversion efficiencies.
Under real-world operating conditions, a typical photovoltaic system operates outside of Standard Test Conditions for much of the time. For example, the location and design of a photovoltaic system, time of day and year, temperature and angle of the sun impact the performance of a photovoltaic system, and the conversion efficiencies of solar modules generally reducedecrease 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 2005, 94%2006, 92% of the MW volume of solar modules sold employed crystalline silicon technology, while thin film technology accounted for only 6%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 $45-$60-$50/65/kg for 20062007 delivery, and spot prices have been reported to exceed $100/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 |
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| | and low light, than crystalline silicon solar modules with the same power rating. Modules that generate more kilowatt hours per rated killowattkilowatt under real-world conditions increases the end-users’ return on investment. |
Thin film technology also faces a number of disadvantages relative to crystalline silicon, including the following:
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| • | Limited operating history. No thin film solar module has been in service for its entire estimated useful life, limiting the data available to validate estimates of the useful life and rate of degradation of thin film solar modules. In contrast, historical operating data validates the useful life and performance of crystalline silicon solar modules. Additionally, few thin film manufacturers have been able to achieve the production throughput rates, yields and product performance necessary to commercialize their solar modules and achieve many of the benefits of thin film technology. |
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| • | Lower conversion efficiency. The average conversion efficiency of thin film solar modules in high volume commercial production (over 20MW per year) currently ranges from 6% to 9%10%. By comparison, the average conversion efficiency of crystalline silicon solar modules in commercial production is approximately 13%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. |
Government Subsidies and Incentives
Many countries in Europe and Asia and several states in the United States have adopted a variety of government subsidies and incentives to allow renewable energy sources to compete with the currently less expensive conventional sources of energy, such as fossil fuels. Government subsidies and incentives generally focus on grid-connected systems and take several forms, including feed-in tariffs, net metering programs, renewable portfolio standards, rebates, tax incentives and low interest loans. See “Business—Government Subsidies”.
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BUSINESS
Overview
We design and manufacture solar modules using a proprietary thin film semiconductor technology that has allowed us to reduce our average solar module manufacturing costs to among the lowest in the world. In 2005,2006, our average manufacturing costs were $1.59$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 modulesmodule manufacturers. Our objective is to become, by 2010, the first solar module manufacturer to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in the United States,North America, Europe and Asia.
We manufacture our solar modules on a high-throughput production linelines 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 x× 4ft (60cm x× 120cm) sheet of glass into a complete solar module, using approximately 1% of the semiconductor material used to produce crystalline silicon solar modules. Our manufacturing process eliminates the multiple supply chain operators and expensive and time consuming batch processing steps that are used to produce a crystalline silicon solar module. Producing low cost solar modules without crystalline silicon has allowed us to grow rapidly to meet market demand during a period of time when silicon feedstock supply shortages and price volatility are limiting the growth of many of our competitors.
Our net sales grew from $3.2$13.5 million in 20032004 to $48.1$135.0 million in 2005.2006. 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 recently entered intohave long-term solar module supply contracts (the “Long Term Supply Contracts”) with sixnine European project developers and system integrators whichthat in the aggregate allow for approximately€1.2 €3.2 billion ($1.4 billion at an assumed exchanged rate of $1.20/€1.00) in sales from 2006 to 2011. These Long Term Supply Contracts contemplate the manufacture and sale of a total of 745 Megawatts, or MW, of solar modules. Under each of our Long Term Supply Contracts, we have a unilateral option, exercisable until December 31, 2006, to increase the sales volumes and extend each contract through 2012. We plan to exercise each option promptly following the completion of this offering, after which the contracts will allow for approximately€1.9 billion ($2.34.1 billion at an assumed exchange rate of $1.20/$1.30/€1.00) in sales from 20062007 to 2012 for the manufacture and sale of a total of 1,270MW2.2GW of solar modules. In additionThe information in this paragraph is designed to supplying these contracted volumes, we are insummarize the processfinancial terms of entering into new customer relationships in Spainthe Long Term Supply Contracts and the United States.
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 inexpanding our annual manufacturing capacity from 90MW to 450MW by the processfirst half of expanding2009. 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 175MWreflect 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 2007. In August 2006,2008 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 completed our Ohio expansion, adding two 25MWwill have 15 production lines to our existing 25MW base plant. With the completion of our Ohio expansion, we haveand an annual global manufacturing capacity of 75MW and are the largest thin film solar manufacturer in the world. We are also building a four line 100MW German plant. After our German plant reaches full capacity, estimated for the second half of 2007, we will have an annual manufacturing capacity of 175MW. We are also in the planning stage for a new manufacturing plant in Asia. To complete each new production line, we plan to use a systematic replication process designed to enable us to add production lines rapidly and efficiently and achieve operating metrics in new plants that are comparable to the performance of our base plant.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 advantage.. Our proprietary thin film semiconductor technology has allowed us to reduce our average solar module manufacturing costs to among the lowest in the world. In 2005, ourOur average manufacturing costs were $1.59$1.40 per Watt in 2006 and $1.38 per Watt in the first six months of 2007, which we believe isare significantly less than those of crystalline silicon solar module manufacturers.
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| | Our low manufacturing cost per Watt is derived from our low material, capital and direct labor costs, and enabled us to achieve a gross margin of 35%40% in 2005.2006 and 41% in the first six months of 2007. Because our technology is less mature than crystalline silicon technology, we have a substantialan opportunity for continued process improvement and cost reduction. |
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| • | Continuous and scalable production processprocess.. We manufacture our solar modules on a high-throughputhigh- throughput production linelines 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 facilitiesfacilities.. To complete each new production line, we plan to use a systematic replication process designed to enable us to addbuild new production lines rapidly and efficiently andthat will achieve operating metrics in new plants that are comparable to the performanceour existing production lines. The expansion of our base plant. The Ohio expansionplant demonstrated our ability to replicate a single 25MW production line by creating two new 25MW production lines, and will serveserved as athe “standard building block” for building manufacturingour four production lines in GermanyGermany. We plan to use the same systematic replication process to build plant one and Asia.plant two of our Malaysia manufacturing center. By expanding production, we believe we can take advantage of economies of scale, and accelerate development cycles and leverage our operations, enabling further reductions in the pricemanufacturing cost per Watt of our solar modules. |
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| • | Stable supply of raw materialsmaterials.. We are not currently constrained by, and do not foresee a shortage of, cadmium telluride, our most critical semiconductor material. In addition, because of theour modules contain a relatively small amount of semiconductor material, we use, we believe our exposure to cadmium telluride price increases is limited. By contrast, Solarbuzz estimates that the current shortage of silicon feedstock will constrain the production of certain crystalline silicon solar module manufacturers until 2008. |
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| • | Pre-sold capacity through Long Term Supply ContractsContracts.. Our Long Term Supply Contracts provide us with predictable net sales and will enable us to ramp production and realize economies of scale from capacity expansions quickly, as we utilize and sell most of our production capacity upon the qualification of a new production line.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 performanceperformance.. Solar modules usually produce less power than their rated power because of environmental conditions, including variation in the ambient temperature and intensity of sunlight. We believe that in real-world conditions, systems incorporating our solar modules operate more closely to their rated power than systems incorporating crystalline silicon solar modules. Such performance results in more kilowatt hours of electricity per Watt of rated power and increases our end-users’ return on investment, which we believe will result in greater demand for our solar modules. |
Strategies
Our goal is to utilize our proprietary thin film semiconductor technology to create a sustainable market for our solar modules by lowering the price of solar electricity to a level that is competitive with the price of retail electricity on a non-subsidized basis by 2010 in key markets in the United States,North America, Europe and Asia. We intend to pursue the following strategies to attain this goal:
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| • | Penetrate key markets rapidlyrapidly.. Upon completion of our German plant and contemplated Asian plant one at our Malaysia manufacturing center, we expect to becomebe 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 country’s subsidy programs. In addition, we are exploring new customer relationships in SpainNorth America and the United States,Europe, and have allocated a portion of our planned manufacturing capacity to be available for sale in these and other markets. On June 7, 2006 we entered into our first such agreement, a purchase order to sell 2.5MW of solar power generation kits to the State of California during the third and fourth quarters of 2006. |
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| • | Further reduce manufacturing costcost.. We deploy continuous improvement systems and tools to increase the throughput of our production lines and the efficiency of our workforce and reduce our capital intensity and raw material requirements. In addition, by absorbingwe 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, we believe we can realizegenerating economies of scale and continue to lower our manufacturing cost per Watt.scale. Higher production volumes should also enable volume-based |
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| | discounts on certain raw material and equipment purchases and provide production and operational experience that translates into improved process and product performance. |
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| • | Increase sellable Watts per modulemodule.. 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 thirdsecond quarter of 2006,2007, we increased the average conversion efficiency of our solar modules from approximately 7%6.8% to approximately 9%, which increased the rated power of our solar modules from approximately 49 Watts to approximately 64 Watts over the same period.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 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. |
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 electricityelectricity.. Although we currently sell all of our solar modules into subsidized markets, our goal is to identify, enable and enter non-subsidized markets not currently served by the solar industry. Cost reductions and performance improvements in our solar modules will be critical to realizing this goal. In addition, we believe that our ability to enter the non-subsidized, mainstream market for electricity will require system development and optimization, new system financing options and the development of new market channels. We have formed a dedicated group to identify the requirements of future non-subsidized markets for large scale solar generation (1MW and larger) and to develop the solutions to address them. As part of our development activities, we anticipate providing solutions beyond the solar module, ranging from solar system kits to turnkey financed solar generation projects, in selected market segments. For example, on June 7, 2006 we entered into an agreement to sell 2.5MW of solar generation kits, which include solar modules, mounting systems and electrical interconnection subsystems, to the State of California during the third and fourth quarters of 2006. A California authority will then install and operate our proprietary, low cost photovoltaic electricity generating system for commercial and industrial rooftops. We began to generate revenue under this agreement in September 2006. |
History
First Solar US Manufacturing, LLC was founded in 1999 to bring an advanced thin film semiconductor process into commercial production through the acquisition of predecessor technologytechnologies and the initiation of a research, development and production program that allowed us to improve upon the predecessor technologytechnologies 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 Solar’s 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
Products
Each solar module is approximately 2ft x× 4ft (60cm x× 120cm) and had an average rated power of approximately 64 Watts at the end of 2006 and approximately 69 Watts at the third quarterend of 2006.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. Cadmium tellurideOur thin film technology also performs wellhas relatively high energy performance in a variety of non-optimal environments, such as low light and hot temperature.high temperature environments compared to traditional crystalline silicon solar modules.
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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 EngergiesystemeEnergiesysteme GmbH and the InstitutInstitute für Solar Energieversorgungstechnik. Currently, we have approximately 10,000 solar modules installed worldwide at test sites designed to collect data for field performance validation. Using data logging equipment, we also monitor approximately 102,000325,500 solar modules, representing approximately 6MW21.2MW 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 20%23% of all solar modules shipped by us from 2002 to 2005.through 2006.
We maintain all certifications required to sell solar modules in the markets we serve or expect to serve, including UL 1703, IEC 61646, TÜV Safety Class II and CE.
Solar Module Warranty
We provide a limited warranty to the original purchasersowner 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 purchasersowner of our solar modules that solar modules installed in accordance withagreed-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 SeptemberJune 30, 2006,2007, our accrued warranty expense amounted to $2.5was $4.0 million.
We believe we are the first company in the photovoltaic industry to implement a reclamation and recycling program for our solar modules. Under the Long Term Supply Contracts and other customer contracts we enter into with project developer and system integrator customers, we agree to enter into a solar module reclamation and recycling agreement with each end-user, and our customers agree to present the solar module reclamation and recycling agreement to the end-user and provide us with contact information for such end-user. If our customers resell our solar modules, we enter into the solar module reclamation and recycling agreement directly with the end-user. Beginning in 2005, we conditioned the enforceability of our product warranties on the end-user entering into the solar module reclamation and recycling agreement to ensure that our end-users enter into the solar module reclamation and recycling agreement.
Recycling Program
End-users can return their solar modules to us for reclamation and recycling at no cost at the end of their modules’ service lives, which we estimate to be approximately 20 years.any time. We pre-fund the estimated recycling expensecost at the time of sale.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 recuperaterecover certain raw materials and components for reuse in our manufacturing process.
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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 hourhours per day, seven daydays per week production. The diagram below illustrates the three stages of our production line:
The deposition process begins with the robotic loading of 2ft x× 4ft (60cm x× 120cm) sheetspanels of low-cost tin oxide-coated soda lime glass on to the production line where they are cleaned and chamfered to produce the strong, defect free edges necessary for subsequent processing steps. Following cleaning, the glass panels move automatically into a vacuum chamber where they are heated to near the softening point and coated with a layer of cadmium sulfide followed by a layer of cadmium telluride using our proprietary vapor transport deposition technology. Each layer takes less than 45 seconds to deposit and combined uses approximately 1% of the semiconductor material used in crystalline silicon solar modules. Our ability to deposit the semiconductor materials quickly and uniformly is critical to producing low cost, high quality solar modules. Next, we cool the semiconductor-coated plate rapidly to increase 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 utilizeuse a series of lasers to transform the large single semiconductor-coated plate into a series of interconnected cells that deliver the desired current and voltage output. Our proprietary laser scribing technology is capable of accomplishing accurate and complex scribes at high speeds.
Last,
Finally, in the assembly and test stage, we apply busbars, EVA laminate, a rear glass cover sheet and termination wires, seal the joint box and then subject each solar module to a solar simulator and a current leakage test. The final assembly stage is the only stage in our production line that requires manual processing.
All
Historically, all of our solar modules arewere produced at our Perrysburg, Ohio facility, which has received both an ISO 9001-20009001:2000 quality system certification and ISO 1400114001:2004 environmental system certification. In April 2007, we started initial production at a manufacturing facility in Frankfurt (Oder), Germany.
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| Manufacturing Capacity Expansion |
Manufacturing Capacity Expansion
We are in the process of expandingplan to expand our nameplate manufacturing capacity to 175MW450MW by the secondfirst half of 2007.2009. In August 2006, we completedqualified two additional production lines at our Ohio expansion adding two 25MW production lines to our existing 25MW base plant, and increasing our annual manufacturing capacity to 75MW. We are also building90MW. In April 2007, we started initial production at a four line 100MW120MW manufacturing plantfacility in Germany. After our German plant reachesGermany, which we expect to reach full capacity estimatedby 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 2007,2008. 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 175MW. We are also in the planning stage for a new manufacturing plant in Asia. To complete each new production line, we plan to use a systematic replication process
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designed to enable us to add production lines rapidly and efficiently and achieve operating metrics in new plants that are comparable to the performance of our base plant.450MW.
Raw Materials
Our manufacturing process uses approximately twenty20 raw materials to construct a complete solar module. Of those raw materials, the following nine are critical to our manufacturing process: TCO coated front glass, cadmium sulfide, cadmium telluride, photo resist, EVA laminate, tempered back glass, cord plate/cord plate cap, lead wire (UL and TÜV) and solar connectors. Before we use these materials in our manufacturing process, a supplier must undergo a qualification process that can last from one to twelve12 months, depending on the type of raw material. Although we continually evaluate new suppliers and currently are qualifying several new suppliers, most of our critical materials are supplied by only one or two sources.
The most critical raw material in our production process is cadmium telluride. Currently,Presently, we purchase all of our cadmium telluride in manufacturedcompounded form from two manufacturers.suppliers. We have a threerolling four year written contract with one of our suppliers, thatwhich provides for quarterly price adjustments based on the cost of tellurium. We purchase cadmium telluride from our other qualified supplier under quarterlyon a purchase orders.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 Long Term Customer Contractscustomer contracts do not adjust for raw material price increases and these contracts 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 thesemany of our customers.
MarketingSales and DistributionMarketing
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 serves well.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.
As of September 30, 2006, our direct sales force, customer service and support network consisted of 8 employees in the United States and 2 employees in Europe.
Customers
Recently we entered into
We have Long Term Supply Contracts with our nine principal customers for the manufacture and sale of a total of 745MW with our six principal customers:solar modules. These customers are Blitzstrom GmbH, Conergy AG, EDF EN Développement, Gehrlicher Umweltschonende
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Energiesysteme GmbH, Juwi Solar GmbH, Phönix SonnenstromPhoenix Solar AG, and Reinecke + Pohl Sun Energy AG. OurAG, RIO Energie GmbH & Co. KG and Sechilienne Sidec. These customers areinclude project developers, and system integrators and operators of renewable energy projects, and are headquartered in Germany. Under theseGermany and France. The Long Term Supply Contracts our customers have committed to purchase and we have committed to sell an annual volume of solar modules at firm prices that reduce each year in connection with the increasing volumes. These contractsaggregate allow for approximately€1.2 €3.2 billion ($1.44.1 billion at an assumed exchange rate of $1.20/$1.30/€1.00) ofin sales from 2006 to 2011. Under each of our Long Term Supply Contracts, we have a unilateral option, exercisable until December 31, 2006, to increase the sales volumes and extend each contract through 2012. If we exercise our option under each of the six contracts, the contracts will allow for approximately€1.9 billion ($2.3 billion at an assumed exchange rate of $1.20/€1.00) of sales from 20062007 to 2012 for the manufacture and sale of a total of 1,270MW2.2GW 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 2005 and for the first nine months of 2006, our principal customers were Blitzstrom GmbH, Conergy AG, Gehrlicher Umweltschonende Energiesysteme GmbH, Juwi Solar GmbH, Phönix SonnenstromPhoenix Solar AG and Reinecke + Pohl Sun Energy AG. Our largest customerDuring 2006, these five customers each accounted for approximately 45%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 2005. In2006 and the first ninesix months of 2006, the same customer accounted for 20% of our net sales, while two different customers accounted for 23% and 20% of our net sales. We anticipate our dependence on a single customer will be reduced as a result of our Long Term Supply Contracts; however, the2007. The loss of any of our major customers could have an adverse effect on our business. As we expand our manufacturing capacity, we anticipate developing additional customer relationships in Germany and in other markets and regions, which will reduce our customer and geographic concentration and dependence.
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Our customers 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 owners of land designated as former agricultural land, waste land or conversion land, such as former military bases or industrial areas, and financial investors that desire to own large scale solar projects.
Government Subsidies
Countries in Europe and Asia, Canada, the United States and severalmost states in the United States have adopted a variety of government subsidies to allow renewable sources of electricity to compete with conventional sources of electricity, such as fossil fuels. Government subsidies and incentives generally focus on grid-connected systems and take several forms, including feed-in tariffs, net metering programs, renewable portfolio standards, rebates, tax incentives and low interest loans.
Under a feed-in tariff subsidy, the government sets prices that regulated utilities are required to pay for renewable electricity generated by end-users. The prices are set above market rates and may be differentiateddiffer based on system size or application. Net metering programs enable end-users to sell excess solar electricity to their local utility in exchange for a credit against their utility bills. Net metering programs are usually combined with rebates,is currently offered in approximately 40 states and do not provide cash payments if delivered solar electricity exceeds their utility bills.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-user’s 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.
The following table details several government subsidy programs:
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Region | | Program | | Description |
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Europe
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Germany | | Feed-in tariff | | Solar system operators receive a fixed rate feed-in tariff for 20 years ranging from€0.4060/kWh to€0.5180/kWh in 2006, depending on the size of the system and installation type (e.g., ground mounted or building mounted). For systems installed after 2006, the tariff rate for ground mounted systems is reduced by 6.5% each year and the tariff rates for building facade and roof mounted arrays are reduced by 5% each year. |
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Spain | | Feed-in tariff | | Solar system operators receive a feed-in tariff equal to€0.42/kWh in 2006 for the first 25 years of system operation for system sizes up to 100kW. For systems larger than 100kW, the tariff rate is€0.22/kWh. The tariff is indexed to the average electricity reference tariff for electricity generated in Spain, adjusted annually using a 575% multiplier (“Tarifa Media de Referencia” or “TMR”). After 25 years, the tariff reduces to 460% of the TMR. Spain’s tariff program is capped at a cumulative installed capacity of 400MW through 2010. |
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Italy | | Feed-in tariff | | Solar system operators receive a feed-in tariff based on the size of the photovoltaic system for 20 years, ranging from€0.445/kWh to€0.490/kWh in 2006, with systems larger than 50kW receiving the highest tariff. Italy’s tariff program is capped at a cumulative installed capacity of 500MW through 2015, with 360MW for systems sized under 50kW and 140MW for systems sized between 50kW and 1MW. For systems installed after 2007, the tariffs will be adjusted annually. |
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Region | | Program | | Description |
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United States
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California | | Rebate | | Under the California Solar Initiative, or CSI, approved by the California Public Utilities Commission in January 2006, solar system operators receive a rebate of $2.50/Watt of solar generation capacity installed, for systems up to a maximum of 1MW. The 2006 funding level for solar rebates is $340 million, with 2007-2011 CPUC program funds approved for a total of $2.9 billion. Solar rebate levels are scheduled to decline by approximately 10% annually under the CSI program starting in 2007. On August 24, 2006, the California Public Utilities Commission refined the details of the CSI program to provide for monthly incentives for solar systems greater than 100kW and up-front incentives for solar systems less than 100kW. It also determined that one-third of the CSI funds will be reserved for residential solar installations. |
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New Jersey | | Rebate; Grants; Low Interest Loans; Renewable Portfolio Standard | | The New Jersey Clean Energy Program, or NJCEP, targets 90MW of installed solar generation capacity by 2009 and provides rebates ranging from $3.80/Watt to $2.00/Watt to private sector operators of solar systems in 2006 based on the size of the system, up to a maximum of 700kW, and is dependent upon availability of program funds. Under the Renewable Energy Project Grants & Financing Program, a 20% grant and long term low interest project financing are offered for projects up to 1MW. The NJCEP program also provides a means for Solar Renewable Energy Certificates to be created, verified and sold to electric suppliers who are required to invest in solar energy purchase under New Jersey’s Renewable Portfolio Standard. |
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Nevada | | Rebate; Renewable Portfolio Standard | | The Nevada Solar Generations Program provides rebates of $3.00/Watt for solar systems up to 30kW in size for a maximum solar capacity of 3MW in 2006. The 2005 Nevada Legislature increased Nevada’s Renewable Portfolio Standard to 20% by 2015, and for 2006 not less than 6% of the electricity generated by regulated utilities must come from renewable sources or energy efficiency measures. Of the Renewable Portfolio Standard total, not less than 5% must come from solar renewable energy systems. |
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Asia
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South Korea | | Feed-in tariff; Low Interest Loan; Rebate | | Solar system operators receive a 15 year feed-in tariff of 716.40 KRW/kWh (approximately $0.74/kWh). The government of South Korea has established a target of 1,300MW of installed solar generation capacity by 2012. The government also offers loans at a 3.50% floating interest rate with a five year grace period and ten year repayment period with a special rebate of 2,100 KRW for the installation of a 3kW solar rooftop system. |
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Regulations and policies relating to electricity pricing and interconnection also encourage distributive generation.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 mostlymainly competes with expensive peak hour electricity, rather than the less expensive average price of electricity. Modifications to the peak hour pricing policies of utilities, such as to a flat rate, would require photovoltaic systems to achieve lower prices in order to compete with the price of electricity. In addition, interconnection policies often enable the owner of a photovoltaic system to feed solar electricity into the power grid without interconnection costs or standby fees.
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Research, Development and DevelopmentEngineering
We continue to devote a substantial amount of resources to research and development with the objective of lowering the per Watt costprice of solar electricity generated by photovoltaic systems using our solar modules to a level that competes on a non-subsidized basis with the price of retail electricity in key markets in the United States,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 modulesmodules.. 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 module’s average conversion efficiency of approximately 9%9.5% achieved in full production inby the end of the first ninesix months of 2006.2007. |
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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. In the second half of 2006, we plan to add equipment for further process developments at our Perrysburg, Ohio facility. In addition, we reserve a portion of the production capacity of our base plant to conduct structured experiments related to our process development. |
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.
| | |
| • | System optimizationoptimization.. 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 totalingcomprising approximately 10,000 modules installed in varying climates and applications. We also monitor approximately 102,000325,500 solar modules, representing approximately 6MW21.2MW 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 theend-users. |
As of September 30, 2006, we had a total of 51 employees working on these and related process developmental activities.
We intend to qualify process and product improvements for full production onat our Ohio expansion production lines,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 expansionplant 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(a division of the U.S. Department of Energy,Energy), Brookhaven National Laboratory and several universities. Since 2004, we have invested in excess of $8.3$20.4 million into our research and development expenses and received $2.3$3.6 million of grant funding during that time frame.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 SeptemberJune 30, 2006,2007, in the United States we held 2623 patents, which will expire at various times between 2007 and 2023 and had 1519 patent applications pending. We also held 1617 patents and had 37over 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. A majority of our patents relate to our vapor transport deposition process in which semiconductor material is deposited on glass
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substrates and our laser scribing process of transforming a large semiconductor-coated plate into a series of interconnected cells.
As of May 1, 2006,June 30, 2007, we held 2two 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.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 employeesassociates 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. WeWithin 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 2005,2006, the global photovoltaic industry consisted of over 100 manufacturers of photovoltaicsolar cells and solar modules. Within the PVphotovoltaic industry, we face competition from crystalline silicon photovoltaicsolar cell solarand module manufacturers, including BP Solar, Evergreen Solar, Kyocera, Motech,Q-Cells, Renewable Energy Corporation, Sanyo, Schott Solar, Sharp, SolarWorld, Sunpower and Suntech. We also face competition from thin film solar module manufacturers, including Antec, Kaneka, Mitsubishi Heavy Industries, Shell Solar and United Solar. With the completion of our Ohio expansion, we have an annual manufacturing capacity of 75MW and are the largest thin film manufacturer in the world. According to Photon International, United Solar and Kaneka are the second and third largest thin film manufacturers, with estimated 2006 manufacturing capacities of 30MW and 29MW, respectively. Our current conversion efficiency of approximately 9% also compares favorably to other thin film manufacturers, according to estimates by Sun & Wind Energy: Antec (6.9%); Kaneka (6.3%); Mitsubishi Heavy Industries (6.3%); Shell Solar (9.3%); and United Solar (6.3%). Finally, our solar module comes in one size measuring 2ft x× 4ft (60cm x× 120cm). In contrast, some of our thin film competitors such as United Solar, have developed solar products that are flexible and can be tailored to a customer’s 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 PVsolar cells and solar modules, we face competition from companies developing solar thermal and concentrated PVphotovoltaic 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. Thus,Therefore, we could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and costs
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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 operationsand/or financial condition. See “Risk Factors—Risks Relating to Our Business—Environmental 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 NASD’s 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
Our corporate headquarters are located
The following is information concerning our principal properties as of June 30, 2007:
| | | | | | | | |
Location | | Principal Use | | Square Footage | | Ownership |
|
Phoenix, Arizona | | Corporate headquarters | | | 10,342 | | | Leased |
Perrysburg, Ohio | | Manufacturing, product design, engineering, research and development, distribution | | | 383,917 | | | Owned |
Perrysburg, Ohio | | Warehouse | | | 10,000 | | | Leased |
Frankfurt (Oder), Germany | | Manufacturing | | | 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 Phoenix, Arizona, where we occupy approximately 10,342 square feet under a lease expiring on March 31, 2007. We also own an approximately 431,700 square foot manufacturing facility in Perrysburg, Ohio, which constitutes our base plant and Ohio expansion. In February 2006, we purchased approximately 89,000 square meters of land in Frankfurt (Oder), Germany, which will be the sitemanufacturing. The remainder of our future German manufacturing plant. We also maintain small satellite offices in Mainz, Germany, Berlin, Germany, Brussels, Belgium and Denver, Colorado.
Employees
On September 30, 2006, we had 634 employees, including 491 in manufacturing, 33associates are in research and development, 10 in sales and marketing, and 100 in general and administrative. Of these employees, 21 are located in Phoenix, Arizona, 582 are located in Perrysburg, Ohio, 14 are located in Mainz, Germany, 2 are located in Berlin, Germany, 2 are located in Brussels, Belgium, 12 are located in Frankfurt (Oder), Germany and 1 is located in Denver, Colorado.administration positions. None of our employees areassociates is represented by labor unions or covered by a collective bargaining agreement. As we expand domestically and internationally, however, we may encounter employeesassociates who desire union representation. We believe that relations with our employeesassociates are good.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors as of July 31, 2007, and their ages and positions, upon the expected completion of this offering, are as follows:
| | | | | | |
Name | | Age | | Position |
| | | | |
Michael J. Ahearn | | 49 | 50 | | | President, Chief Executive Officer, Chairman |
George A. (“Chip”) HambroBruce Sohn | | 43 | 46 | | | Chief Operating OfficerPresident, Director |
Jens Meyerhoff | | 42 | 43 | | | Chief Financial Officer |
Kenneth M. Schultz | | 43 | 44 | | | Vice President, Sales & Marketing |
I. Paul Kacir | | 40 | 41 | | | Vice President, General Counsel |
James F. Nolan | | 74 | 75 | | | Director |
J. Thomas Presby | | 66 | 67 | | | Director |
Bruce SohnPaul H. Stebbins | | 45 | 50 | | | Director |
Michael Sweeney | | 48 | 49 | | | Director |
Michael J. Ahearn has served as the President, CEO and Chairman of First Solar since August 2000. SinceMr. Ahearn also served as President of First Solar from August 2000 to March 2007. From 1996 until November 2006, he has beenwas a Partner and President of the equity investment firm JWMA Partners, LLC, or JWMA (formerly True North Partners, L.L.C.), the majority stockholder of First Solar.. Prior to joining JWMA, Mr. Ahearn practiced law as a partner in the firm of Gallagher & Kennedy. He received both a B.A. in Finance and a J.D. from Arizona State University.
George A. (“Chip”) Hambro joined
Bruce Sohn was elected a director of First Solar in June 2001July 2003 and has served as Vice President of Engineering, was named Vice President and General Manager in February 2003 and assumed the role of Chief Operating Officer in February 2005.First Solar since March 2007. Prior to joining First Solar as President, Mr. Sohn worked at Intel Corporation for 24 years, where he heldmost recently served as Plant Manager. Mr. Sohn serves on the positionsboards of Vice Presidentthe International Symposium on Semiconductor Manufacturing, the IEEE-Electron Devices Society Manufacturing Technology Committee and the New Mexico Museum of Engineering & Business Development for Goodrich Aerospace from May 1999 to June 2001Natural History Foundation. He is a senior member of IEEE and Vice Presidenta certified Jonah. Mr. Sohn has been a guest lecturer at several universities, including the Massachusetts Institute of Operations for ITT Industries from February 1997 to May 1999. Mr. HambroTechnology and Stanford University. He graduated from the UniversityMassachusetts Institute of California at BerkeleyTechnology with a B.A.degree in PhysicalMaterials Science (Applied Physics).
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 leader inprovider of embedded infrastructurememory 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 Benz’s Executive Training Program.
Kenneth M. Schultz joined First Solar in November 2002 as Vice President of Sales & Marketing. Prior to joining First Solar, he was a Vice President at Intersil Corporation, a high performancean 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 hisan M.B.A. from the University of British Columbia.
James F. Nolan was elected a director of First Solar in February 2003. Mr. Nolan served as the Vice President of Operations with Solar Cells, Inc., the predecessor to First Solar, and was responsible for research, development and manufacturing operations. He designed and built early prototype equipment for First Solar’s pilot manufacturingproduction line and led the team that developed the
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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
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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 a30-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 and a member of the compensation committee of American Eagle Outfitters, Inc. and as a director, the audit committee chair and a member of the governance committee of World Fuel Services Inc.Corporation. Mr. Presby also serves as a director and the auditoraudit committee chair of AMVESCAP Plc, Tiffany & Co. and TurboChef Technologies, Inc. Mr. Presby is a Certified Public Accountant. Mr. Presby is a graduate of Rutgers University and holds a masters degree in Industrial Administration from Carnegie Mellon University.
Bruce SohnPaul H. Stebbins was elected a director of First Solar in July 2003.December 2006. Mr. Sohn heldStebbins has served as the position Program Manager for Intel Corporation from June 1999 to October 2001chairman and has held the positionchief executive officer of Fab 11 Plant Manager for IntelWorld Fuel Services Corporation since October 2001.July 2002 and as a director of World Fuel Services Corporation since June 1995. Between July 2000 and 2002, Mr. Sohn serves on the boardsStebbins also served as president and chief operating officer of the International Symposium on Semiconductor Manufacturing, the University of Texas Pan Am Engineering School, the Texas Christian University MJ Neeley Business School and the New Mexico Museum of Natural History and isWorld Fuel Services Corporation. In 1985, Mr. Stebbins co-founded Trans-Tec Services, a member of the IEEE-Electron Devices Society Manufacturing Technology Committee. He is a guest lecturer at several universities, including Massachusetts Institute of Technology and Stanford University. Mr. Sohn holds a degreeglobal marine fuel service company acquired by World Fuel Services Corporation in Materials Science & Engineering from the Massachusetts Institute of Technology.
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 John’s systems. Mr. Sweeney serves on the boards of GHJM portfolio companies, including Allen-Edmonds Shoe Corporation, Transport Corporation of America, Inc. and Vitality Foodservice, Inc. Mr. Sweeney graduated from Swarthmore College.
Board Committees
Our board of directors is currently composed of five directors. We plan to add two independent members within one year of the offering. After giving effect to these additions, we expect our board ofsix directors to consist of seven members.
and an audit committee and a compensation committee. Our board of directors is not currently classified, nor will it be immediately after the consummation of the offering.
classified.
Upon the consummation of this offering, the standing committees of our board of directors will consist of an audit committee and a compensation committee.
Audit Committee
The audit committee will overseeoversees our financial reporting process on behalf of the board of directors and reportreports to the board of directors the results of these activities, including the systems of internal controls established by management and the board of directors, our audit and compliance process and financial reporting. The audit committee, among other duties, will engageengages the independent registered public accounting firm, pre-approvepre-approves all audit and non-audit services provided by the independent registered public accounting firm, reviewreviews with the independent registered public accounting firm the plans and results of the audit engagement, considerconsiders 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 reviewreviews the independence of the independent registered public accounting firm.
J. Thomas Presby (Chairman)(Chair), Paul H. Stebbins and Bruce SohnMichael Sweeney serve on our audit committee. The board of directors has determined thatBruce Sohn served on our audit committee members must meetuntil becoming a President of the independence standards forCompany in March 2007, at which time Mr. Sweeney replaced him on the audit committees of companies listed on The Nasdaq Global Market.
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 J. ThomasMr. Presby is qualified as an audit committee financial expert within the meaning of SEC regulations.
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Nominating and GovernanceCompensation Committee
We intend to establish a nominating and governance committee after the consummation of this offering. The nominating and governance committee will be responsible for identifying and recommending director nominees, recommending directors to serve on our various committees, implementing our corporate governance guidelines and developing self-evaluation methodology to be used by our board of directors and its committees to assess board effectiveness.
Compensation Committee
The compensation committee will reviewreviews and recommendrecommends compensation and benefit plans for our officers and directors, including non-employeenon-associate directors, reviewreviews the base salary and incentive compensation for each executive officer, reviewreviews and approveapproves corporate goals and objectives relevant to our CEO’sChief Executive Officer’s compensation, administer
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administers our incentive compensation program for key executive and management employeesassociates and reviewreviews and approveapproves employee benefit plans.
Michael Sweeney (Chairman) serves(Chair) and Paul H. Stebbins serve on our compensation committee.
Compensation Committee Interlocks and Insider Participation
None of the members that will constituteof our compensation committee will havehas been an executive officer or employeeassociate of our companyCompany 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 employees,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 employees. Excerpts from theassociates. The Code of Business Conduct and Ethics which address the subject areas covered by the SEC’s rules, will beis posted on our website: www.firstsolar.com under “Investor Relations”.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 thisour website.The information contained on our website is not part of this prospectus.
Director Compensationprospectus.
Directors receive annual compensation of a $50,000 cash retainer (payable quarterly) and $50,000 stock grant (payable quarterly). The Chairman of the Audit Committee also receives an annual $25,000 stock grant (payable quarterly). We also reimburse all directors for reasonable and necessary expenses they incur in performing their duties as directors of our company. Directors who are officers or employees of our company do not receive any additional compensation for serving as directors, except for reimbursement of their expenses in fulfilling their duties.
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Executive Compensation
The following table sets forth information with respect to compensation earned by our Chief Executive Officer and our other executive officers for the period indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Long-Term | | | |
| | | | | | | | | | Compensation | | | |
| | | | | | | | | | Awards | | | |
| | | | | | | | | |
| | Annual Compensation | | | Other | | | Securities | | | |
| | | | | Annual | | | Underlying | | | All Other | |
Name and Principal Position | | Year | | | Salary ($) | | | Bonus ($) | | | Compensation ($) | | | Options (#) | | | Compensation ($) | |
| | | | | | | | | | | | | | | | | | |
Michael J. Ahearn | | | 2005 | | | | 450,000 | | | | — | | | | — | | | | — | | | | — | |
| President, Chief Executive Officer, Director | | | | | | | | | | | | | | | | | | | | | | | | |
|
George A. (“Chip”) Hambro | | | 2005 | | | | 275,367 | | | | 35,000 | | | | — | | | | 48,500 | | | | — | |
| Chief Operating Officer | | | | | | | | | | | | | | | | | | | | | | | | |
|
Robert H. Williams(1) | | | 2005 | | | | 201,058 | | | | 30,000 | | | | — | | | | — | | | | — | |
| Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | |
|
Kenneth M. Schultz | | | 2005 | | | | 195,266 | | | | 30,000 | | | | — | | | | — | | | | — | |
| Vice President, Sales & Marketing | | | | | | | | | | | | | | | | | | | | | | | | |
| |
(1) | Robert H. Williams served as our Chief Financial Officer from January 2005 through December 2005. |
Option/ SAR Grants in the Last Completed Fiscal Year
The following table sets forth information regarding grants of options to purchase shares of our common stock to our named executive officers during the fiscal year ended December 31, 2005.
| | | | | | | | | | | | | | | | | | | | |
| | Individual Grants | |
| | | |
| | Number of | | | Percent of Total | | | |
| | Securities | | | Options | | | |
| | Underlying | | | Granted to | | | Exercise | | | | | Grant Date | |
| | Options | | | Employees in | | | Price | | | Expiration | | | Present | |
Name | | Granted | | | Fiscal Year | | | ($/Share) | | | Date | | | Value(1) | |
| | | | | | | | | | | | | | | |
Michael J. Ahearn | | | — | | | | — | | | | — | | | | — | | | | — | |
George A. (“Chip”) Hambro | | | 48,500 | | | | 1.8 | % | | $ | 4.54 | | | | 12/15/2015 | | | | $739,100 | |
Robert H. Williams(2) | | | — | | | | — | | | | — | | | | — | | | | — | |
Kenneth M. Schultz | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
(1) | Values per option, calculated using the Black-Scholes-Merton closed-form option valuation model, using an expected volatility of 80%, risk free interest rates ranging from 4.36% to 4.38%, times to exercise ranging from 5.5 to 7.0 years and a 0.00% dividend yield. |
|
(2) | Robert H. Williams served as our Chief Financial Officer from January 2005 through December 2005. |
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Fiscal Year-End Option Values
The following table provides information concerning exercisable and unexercisable options held by our named executive officers for the year ended December 31, 2005. There were no option exercises by the named executive officers during the year ended December 31, 2005.
| | | | | | | | | | | | | | | | |
| | Number of Securities | | | Value of Unexercised | |
| | Underlying Unexercised | | | In-the-Money Options | |
| | Options at Fiscal Year-End | | | at Fiscal Year-End | |
| | | | | | |
Name | | Exercisable | | | Unexercisable | | | Exercisable(1) | | | Unexercisable(1) | |
| | | | | | | | | | | | |
Michael J. Ahearn | | | — | | | | — | | | | — | | | | — | |
George A. (“Chip”) Hambro | | | 729,440 | | | | 230,860 | | | $ | 11,625,920 | | | $ | 3,559,480 | |
Robert H. Williams(2) | | | — | | | | — | | | | — | | | | — | |
Kenneth M. Schultz | | | 547,080 | | | | 364,720 | | | $ | 8,719,440 | | | $ | 5,812,960 | |
| |
|
(1) | Calculated by determining the difference between the fair market value of 18.00 per share (the midpoint of the estimated offering price range set forth on the cover page of this prospectus) of our common stock underlying the options and the exercise prices of the options held by each of the named executive officers in the Summary Compensation Table above. |
|
|
(2) | Robert H. Williams served as our Chief Financial Officer from January 2005 through December 2005. |
2003 Unit Option Plan
First Solar adopted the 2003 Unit Option Plan (which we refer to as the “2003 Unit Option Plan” or, in this section, the “Plan”) as an additional means to attract, motivate, retain and reward directors, officers, employees and other eligible persons through the grant of options for high levels of individual performance and the improved financial performance of First Solar. In connection with our conversion from a limited liability company to a corporation on February 22, 2006, we converted each outstanding option to purchase one limited liability membership unit into an option to purchase one share of our common stock, in each case, at the same exercise price and subject to the other terms and conditions of such outstanding option. These equity-based awards are also intended to further align the interests of award recipients and First Solar’s stockholders.
A total of 6,847,060 shares of First Solar’s common stock is available for awards granted under the Plan. At September 30, 2006, there were options to purchase 5,094,000 shares of our common stock outstanding under the Plan at a weighted average exercise price of $3.11 per share, including options held by Messrs. Hambro and Schultz.
The Plan is administered by a committee of our Board (the “Committee”), which is authorized to, among other things, select the officers and other employees who will receive grants and determine the exercise price and vesting schedule of the options.
Upon the occurrence of a change of control (as defined in the Plan) or dissolution or liquidation of First Solar, the Committee may, subject to the terms and conditions of the Plan, (i) substitute options awarded under the Plan for options to purchase the appropriate common stock of the entity surviving such merger or consolidation; (ii) exchange options for shares for stock of the surviving entity with a fair market value equal to the excess of the merger consideration attributable to such options over the exercise price; or (iii) declare and provide written notice to each optionee 15 days in advance of such event that each outstanding option previously granted will be cancelled at the time of the event. In the event of cancellation, the Committee may, but will not be obligated to, cause cash payment to be made to such optionees within fifteen days after the event giving rise to such cancellation.
In the event of any reorganization merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination or exchange of shares, rights offering, extraordinary dividend or divestiture (including a spin-off) or any other change in the corporate structure or capitalization of First Solar, the Committee (or if the Company does not survive such transaction, a comparable committee of the board of managers or directors of the surviving company) may, but will not be obligated to, without the consent of any holder of an option, make such adjustment as it determines in its discretion to be appropriate as to (i) the number and kind of securities subject to the Plan and (ii) the number and kind of securities issuable upon exercise of outstanding options and the exercise price of such options.
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Upon the termination of an option holder’s employment, all unvested options will immediately terminate and vested options will generally remain exercisable for a period of 180 days after the date of termination.
The Board may at any time and for any reason amend, suspend or terminate the Plan; provided, however, that no amendment to the Plan may, without the consent of the holder of the option, adversely alter or impair any option previously granted under the Plan. However, the grant of any option under the Plan does not affect in any way the right or power of First Solar to make adjustments, reclassifications, reorganizations, or changes to its capital structure.
The Plan will remain in effect until the latest of: (i) the time that such shares subject to it are distributed; (ii) the Plan is terminated by our Board; and (iii) December 1, 2013.
Options granted under the Plan may not be transferred, except in certain limited circumstances.
2006 Omnibus Incentive Compensation Plan
We adopted our 2006 Omnibus Incentive Compensation Plan, or the 2006 Plan, in October 2006. The purpose of the 2006 Plan is to promote our interests and the interests of our stockholders by (i) attracting and retaining exceptional directors, officers, employees and consultants (including prospective directors, officers, employees and consultants) and (ii) enabling such individuals to participate in our long-term growth and financial success.
Types of Awards. The 2006 Plan provides for the grant of options intended to qualify as incentive stock options, or ISOs, under Section 422 of the Code, nonqualified stock options, or NSOs, stock appreciation rights, or SARs, restricted share awards, restricted stock units, or RSUs, performance units, cash incentive awards and other equity-based or equity-related awards.
Plan Administration. The 2006 Plan is administered by the compensation committee of our board of directors or such other committee as our board may designate to administer the 2006 Plan. Subject to the terms of the 2006 Plan and applicable law, the committee has sole authority to administer the 2006 Plan, including, but not limited to, the authority to (1) designate plan participants, (2) determine the type or types of awards to be granted to a participant, (3) determine the number of shares of our common stock to be covered by, or with respect to which payments, rights or other matters are to be calculated in connection with, awards, (4) determine the terms and conditions of awards, (5) determine the vesting schedules of awards and, if certain performance criteria must be attained in order for an award to vest or be settled or paid, establish such performance criteria and certify whether, and to what extent, such performance criteria have been attained, (6) determine whether, to what extent and under what circumstances awards may be settled or exercised in cash, shares of our common stock, other securities, other awards or other property, or cancelled, forfeited or suspended and the method or methods by which awards may be settled, exercised, cancelled, forfeited or suspended, (7) determine whether, to what extent and under what circumstances cash, shares of our common stock, other securities, other awards, other property and other amounts payable with respect to an award will be deferred either automatically or at the election of the holder thereof or of the committee, (8) interpret, administer, reconcile any inconsistency in, correct any default in and supply any omission in, the 2006 Plan and any instrument or agreement relating to, or award made under, the 2006 Plan, (9) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the 2006 Plan, (10) accelerate the vesting or exercisability of, payment for or lapse of restrictions on, awards, (11) amend an outstanding award or grant a replacement award for an award previously granted under the 2006 Plan if, in its sole discretion, the committee determines that the tax consequences of such award to us or the participant differ from those consequences that were expected to occur on the date the award was granted or that clarifications or interpretations of, or changes to, tax law or regulations permit awards to be granted that have more favorable tax consequences than initially anticipated and (12) make any other determination and take any other action that the committee deems necessary or desirable for the administration of the 2006 Plan.
Shares Available For Awards. Subject to adjustment for changes in capitalization and giving effect to our anticipated stock split, the aggregate number of shares of our common stock that may be delivered pursuant to awards granted under the 2006 Plan is 5,820,000, of which the maximum number of shares that may be delivered pursuant to ISOs granted under the 2006 Plan is 5,820,000 and the maximum number of shares that may be delivered as restricted share awards under the 2006 Plan is 2,910,000. If an award granted under the 2006 Plan is forfeited, or otherwise expires, terminates or is cancelled without the delivery of shares, then the shares covered by the forfeited, expired, terminated or cancelled award will again be available to be delivered pursuant to awards under the 2006 Plan. If shares of the Company are surrendered or tendered to the Company in payment of the exercise price of an award or any taxes required to be withheld in respect of an award, the maximum number of shares of our common stock with respect to which awards may be granted to any participant in the 2006 Plan in any fiscal year is 679,000. The maximum aggregate amount of cash and other property (valued at fair market value) that may be paid or delivered pursuant to awards under the 2006 Plan to any participant in any fiscal year is $20.0 million.
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In the event of any extraordinary dividend or other extraordinary distribution, recapitalization, stock split, reverse stock split,split-up or spin-off affecting the shares of our common stock, the committee will make adjustments and other substitutions to awards under the 2006 Plan in order to preserve the value of the awards. In the event of any reorganization, merger, consolidation, combination, repurchase or exchange of shares of the Company or other similar corporate transactions, the committee in its discretion may make such adjustments and other substitutions to the 2006 Plan and awards under the 2006 Plan as it deems equitable or desirable in its sole discretion.
The committee may grant awards in assumption of, or in substitution for, outstanding awards previously granted by us or any of our affiliates or a company that we acquire or with which we combine. Any shares issued by us through the assumption of or substitution for outstanding awards granted by a company that we acquire will not reduce the aggregate number of shares of our common stock available for awards under the 2006 Plan, except that awards issued in substitution for ISOs will reduce the number of shares of our common stock available for ISOs under the 2006 Plan.
Any shares of our common stock issued under the 2006 Plan may consist, in whole or in part, of authorized and unissued shares of our common stock or of treasury shares of our common stock.
Eligible Participants. Any of our or our affiliates’ directors, officers, employees or consultants (including any prospective directors, officers, employees or consultants) is eligible to participate in the 2006 Plan.
Stock Options. The committee may grant both ISOs and NSOs under the 2006 Plan. Except as otherwise determined by the committee in an award agreement, the exercise price for options cannot be less than the fair market value (as defined in the 2006 Plan) of our common stock on the grant date. In the case of ISOs granted to an employee who, at the time of the grant of such option, owns stock representing more than 10% of the voting power of all classes of our stock or the stock of any of our affiliates, the exercise price cannot be less than 110% of the fair market value of a share of our common stock on the grant date. All options granted under the 2006 Plan will be NSOs unless the applicable award agreement expressly states that the option is intended to be an ISO. All terms and conditions of all grants of ISOs will be subject to and comply with Section 422 of the Code and the regulations promulgated thereunder. All ISOs and NSOs are intended to qualify as “performance-based compensation” under Section 162(m) of the Code.
Subject to the applicable award agreement, options will vest and become exercisable with respect to one-fourth of the shares of our common stock subject to such options on each of the first four anniversaries of the grant date. Except as otherwise set forth in the applicable award agreement, each option will expire upon the earlier of (i) the tenth anniversary of the date the option is granted and (ii) either (x) 180 days after the participant who is holding the option ceases to be a director, officer, employee or consultant of us or one of our affiliates for any reason other than the participant’s death or (y) six months after the date the participant who is holding the option ceases to be a director, officer, employee or consultant of us or one of our affiliates by reason of the participant’s death. The exercise price may be paid with cash (or its equivalent) or, in the sole discretion of the committee, with previously acquired shares of our common stock or through delivery of irrevocable instructions to a broker to sell our common stock otherwise deliverable upon the exercise of the option (provided that there is a public market for our common stock at such time), or a combination of any of the foregoing, provided that the combined value of all cash and cash equivalents and the fair market value of any such shares so tendered to us as of the date of such tender is at least equal to such aggregate exercise price and the amount of any federal, state, local or foreign income or employment taxes required to be withheld.
Stock Appreciation Rights. The committee may grant SARs under the 2006 Plan either alone or in tandem with, or in addition to, any other award permitted to be granted under the 2006 Plan. SARs granted in tandem with, or in addition to, an award may be granted either at the same time as the award or at a later time. Subject to the applicable award agreement, the exercise price of each share of our common stock covered by a SAR cannot be less than the fair market value of such share on the grant date. Upon exercise of a SAR, the holder will receive cash, shares of our common stock, other securities, other awards, other property or a combination of any of the foregoing, as determined by the committee, equal in value to the excess over the exercise price, if any, of the fair market value of the common stock subject to the SAR at the exercise date. All SARs are intended to qualify as “performance-based compensation” under Section 162(m) of the Code. Subject to the provisions of the 2006 Plan and the applicable award agreement, the committee will determine, at or after the grant of a SAR, the vesting criteria, term, methods of exercise, methods and form of settlement and any other terms and conditions of any SAR.
Restricted Shares and Restricted Stock Units. Subject to the provisions of the 2006 Plan, the committee may grant restricted shares and RSUs. Restricted shares and RSUs may not be sold, assigned, transferred, pledged or otherwise encumbered except as provided in the 2006 Plan or the applicable award agreement, except that the committee may determine that restricted shares and RSUs may be transferred by the participant. Upon the grant
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of a restricted share, a certificate will be issued and registered in the name of the participant and deposited by the participant, together with a stock power endorsed in blank, with us or a custodian designated by the committee or us. Upon the lapse of the restrictions applicable to such restricted share, we or the custodian, as applicable, will deliver such certificate to the participant or his or her legal representative.
An RSU will be granted with respect to one share of our common stock or have a value equal to the fair market value of one such share. Upon the lapse of restrictions applicable to an RSU, the RSU may be paid in cash, shares of our common stock, other securities, other awards or other property, as determined by the committee, or in accordance with the applicable award agreement. The committee may, on such terms and conditions as it may determine, provide a participant who holds restricted shares or RSUs with dividends or dividend equivalents, payable in cash, shares of our common stock, other securities, other awards or other property. If a restricted share or RSU is intended to qualify as “performance-based compensation” under Section 162(m) of the Code, the requirements described below in “— Performance Compensation Awards” must be satisfied.
Performance Units. Subject to the provisions of the 2006 Plan, the committee may grant performance units to participants. Performance units are awards with an initial value established by the committee (or that is determined by reference to a valuation formula specified by the committee) at the time of the grant. In its discretion, the committee will set performance goals that, depending on the extent to which they are met during a specified performance period, will determine the number and/or value of performance units that will be paid out to the participant. The committee, in its sole discretion, may pay earned performance units in the form of cash, shares of our common stock or any combination thereof that has an aggregate fair market value equal to the value of the earned performance units at the close of the applicable performance period. The determination of the committee with respect to the form and timing of payout of performance units will be set forth in the applicable award agreement. The committee may, on such terms and conditions as it may determine, provide a participant who holds performance units with dividends or dividend equivalents, payable in cash, shares of our common stock, other securities, other awards or other property. If a performance unit is intended to qualify as “performance-based compensation” under Section 162(m) of the Code, the requirements below described in “— Performance Compensation Awards” must be satisfied.
Cash Incentive Awards. Subject to the provisions of the 2006 Plan, the committee may grant cash incentive awards payable upon the attainment of performance goals. If a cash incentive award is intended to qualify as “performance-based compensation” under Section 162(m) of the Code, the requirements described below in “— Performance Compensation Awards” must be satisfied.
Other Stock-Based Awards. Subject to the provisions of the 2006 Plan, the committee may grant to participants other equity-based or equity-related compensation awards, including vested stock. The committee may determine the amounts and terms and conditions of any such awards provided that they comply with applicable laws.
Performance Compensation Awards. The committee may designate any award granted under the 2006 Plan (other than ISOs, NSOs and SARs) as a performance compensation award in order to qualify such award as “performance-based compensation” under Section 162(m) of the Code. The committee will, in its sole discretion, designate within the first 90 days of a performance period (or, if shorter, within the maximum period allowed under Section 162(m) of the Code) the participants who will be eligible to receive performance compensation awards in respect of such performance period. The committee will also determine the length of performance periods, the types of awards to be issued, the performance criteria that will be used to establish the performance goals, the kinds and levels of performance goals and any performance formula used to determine whether a performance compensation award has been earned for the performance period.
The performance criteria will be limited to the following: (1) net income before or after taxes, (2) earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization), (3) operating income, (4) earnings per share, (5) return on stockholders’ equity, (6) return on investment or capital, (7) return on assets, (8) level or amount of acquisitions, (9) share price, (10) profitability and profit margins, (11) market share (in the aggregate or by segment), (12) revenues or sales (based on units or dollars), (13) costs, (14) cash flow, (15) working capital, (16) cost per Watt, (17) megawatts produced, (18) Watts per module, (19) conversion efficiency, (20) modules produced, (21) produced production throughput rates, (22) bill of material costs, (23) production yields, (24) production expansion build and ramp times, (25) module field performance, (26) average sales price, (27) budgeted expenses (operating and capital), (28) inventory turns and (29) accounts receivable levels. These performance criteria may be applied on an absolute basis and/ or be relative to one or more of our peer companies or indices or any combination thereof. The performance goals and periods may vary from participant to participant and from time to time. To the extent required under Section 162(m) of the Code, the committee will, within the first
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90 days of the applicable performance period (or, if shorter, within the maximum period allowed under Section162(m) of the Code), define in an objective manner the method of calculating the performance criteria it selects to use for the performance period.
The committee may adjust or modify the calculation of performance goals for a performance period in the event of, in anticipation of, or in recognition of, any unusual or extraordinary corporate item, transaction, event or development or any other unusual or nonrecurring events affecting us, any of our affiliates, subsidiaries, divisions or operating units (to the extent applicable to such performance goal) or our financial statements or the financial statements of any of our affiliates, or changes in applicable rules, rulings, regulations or other requirements of any governmental body or securities exchange, accounting principles, law or business conditions, so long as that adjustment or modification does not cause the performance compensation award to fail to qualify as “performance-based compensation” under Section162(m) of the Code. In order to be eligible for payment in respect of a performance compensation award for a particular performance period, participants must be employed by us on the last day of the performance period (unless otherwise determined in the discretion of the compensation committee), the performance goals for such period must be satisfied and certified by the committee and the performance formula must determine that all or some portion of the performance compensation award has been earned for such period. The committee may, in its sole discretion, reduce or eliminate the amount of a performance compensation award earned in a particular performance period, even if applicable performance goals have been attained. In no event will any discretionary authority granted to the committee under the 2006 Plan be used to grant or provide payment in respect of performance compensation awards for which performance goals have not been attained, increase a performance compensation award for any participant at any time after the first 90 days of the performance period (or, if shorter, within the maximum period allowed under Section 162(m) of the Code) or increase a performance compensation award above the maximum amount payable under the underlying award.
Amendment and Termination of the 2006 Plan. Subject to any applicable law or government regulation, to any requirement that must be satisfied if the 2006 Plan is intended to be a stockholder approved plan for purposes of Section 162(m) of the Code and to the rules of NASDAQ, the 2006 Plan may be amended, modified or terminated by our Board of Directors without the approval of our stockholders, except that stockholder approval will be required for any amendment that would (i) increase the maximum number of shares of our common stock available for awards under the 2006 Plan, (ii) increase the maximum number of shares of our common stock that may be delivered pursuant to ISOs granted under the 2006 Plan or (iii) change the class of employees or other individuals eligible to participate in the 2006 Plan. No modification, amendment or termination of the 2006 Plan that is adverse to a participant will be effective without the consent of the affected participant, unless otherwise provided by the committee in the applicable award agreement.
The committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate any award previously granted, prospectively or retroactively. However, unless otherwise provided by the committee in the applicable award agreement or in the 2006 Plan, any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would materially and adversely impair the rights of any participant to any award previously granted will not to that extent be effective without the consent of the affected participant.
The committee is authorized to make adjustments in the terms and conditions of awards in the event of any unusual or nonrecurring corporate event (including the occurrence of a change of control of First Solar) affecting us, any of our affiliates or our financial statements or the financial statements of any of our affiliates, or of changes in applicable rules, rulings, regulations or other requirements of any governmental body or securities exchange, accounting principles or law whenever the committee, in its discretion, determines that those adjustments are appropriate or desirable, including providing for the substitution or assumption of awards, accelerating the exercisability of, lapse of restrictions on, or termination of, awards or providing for a period of time for exercise prior to the occurrence of such event and, in its discretion, the committee may provide for a cash payment to the holder of an award in consideration for the cancellation of such award.
Change of Control. The 2006 Plan provides that, unless otherwise provided in an award agreement, in the event of a change of control of First Solar, unless provision is made in connection with the change of control for assumption of, or substitution for, awards previously granted:
any options and SARs outstanding as of the date the change of control is determined to have occurred will become fully exercisable and vested, as of immediately prior to the change of control;
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| • | all performance units and cash incentive awards will be paid out as if the date of the change of control were the last day of the applicable performance period and “target” performance levels had been attained; and |
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| • | all other outstanding awards will automatically be deemed exercisable or vested and all restrictions and forfeiture provisions related thereto will lapse as of immediately prior to such change of control. |
Unless otherwise provided pursuant to an award agreement, a change of control is defined to mean any of the following events, generally:
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| • | during any period of twenty-four consecutive months, a change in the composition of a majority of our board of directors that is not supported by a majority of the incumbent board of directors; |
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| • | the consummation of a merger, reorganization or consolidation or sale or other disposition of all or substantially all of our assets; |
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| • | the approval by our stockholders of a plan of our complete liquidation or dissolution; or |
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| • | an acquisition by any individual, entity or group of beneficial ownership of a percentage of the combined voting power of our then outstanding voting securities entitled to vote generally in the election of directors that is equal to or greater than (a) 20% and (b) the percentage of the combined voting power of the outstanding voting securities owned by certain specified shareholders, including our current major shareholder, the Estate of John T. Walton, its beneficiaries, Michael Ahearn and his family at the time of such acquisition. |
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Term of the 2006 Plan. No award may be granted under the 2006 Plan after the tenth anniversary of the date the 2006 Plan was approved by our stockholders.
IPO Option Grants
Upon consummation of this offering, we expect to grant options under the 2006 Plan to certain of our executive officers and employees. Assuming the shares being offered pursuant to this prospectus are offered at $18.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), options to purchase up to 1,500,000 shares of common stock at the public offering price will be granted to our executive officers, directors and employees. Of this total, Mr. Meyerhoff will receive options to purchase 187,500 shares of common stock and Mr. Kacir will receive options to purchase 82,450 shares of common stock, in each case, at the public offering price. The options to be granted to Messrs. Meyerhoff and Kacir will have a term of seven years and a per share exercise price equal to the public offering price of our common stock. The options granted to Messrs. Meyerhoff and Kacir will generally vest with respect to 20% of the underlying shares on the first anniversary of their respective dates of hire, and for the 48 month period thereafter, will vest ratably in equal monthly installments, subject to their continued employment with us. If Messrs. Meyerhoff and Kacir are terminated without cause, their options will continue to vest for 12 months after such termination. After such 12-month period, their vested options will generally be exercisable for a 90 day period. The options granted to Messrs. Meyerhoff and Kacir will also vest upon termination of their employment, under certain circumstances. See “— Change in Control Severance Agreements” below. The stock options will be subject to the other terms and conditions of our 2006 Plan, which is described above.
Employment/Severance Agreements
Michael J. Ahearn.On October 19, 2006, we entered into an employment agreement with Mr. Michael J. Ahearn, which was amended and restated on October 31, 2006. Under the terms of his employment agreement, Mr. Ahearn is entitled to an annual base salary of $450,000 (subject to annual review) and standard health and vacation benefits. Mr. Ahearn is also eligible to receive a discretionary annual bonus. Our employment agreement with Mr. Ahearn provides for a severance payment in the amount equal to one year of his annual base salary, continued medical benefits for 12 months and continued vesting of equity awards for 12 months after termination of employment (and the ability to exercise vested equity awards for 90 days after such 12-month period) in the event Mr. Ahearn’s employment is terminated without cause. Mr. Ahearn is also subject to a separate confidentiality agreement and a separate non-competition and non-solicitation agreement, which provides that Mr. Ahearn will not compete with the Company or solicit Company employees for two years after termination of his employment.
George A. (“Chip”) Hambro. On May 30, 2001, we entered into an employment agreement with Mr. George A. (“Chip”) Hambro. Under the terms of his employment agreement, Mr. Hambro is entitled to an annual base salary of $175,000 (subject to annual review) and standard health and vacation benefits. In addition,
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Mr. Hambro holds 960,300 options to purchase First Solar common shares pursuant to separate award agreements, which provide that upon certain specified events, including a change of control (as defined in the award agreement) and related termination of employment, the shares issuable pursuant to such options will be subject to a put option held by Mr. Hambro, which would allow him to require the Company to repurchase such shares at the imputed transaction value per unit. Effective January 2, 2006, Mr. Hambro’s annual salary was increased to $300,000. Mr. Hambro is also eligible to receive an annual performance-based bonus equal to an amount between 20% and 40% of his annual base salary. On February 5, 2003, we amended our employment agreement with Mr. Hambro to provide for a severance payment in the event of termination without cause. Subject to certain conditions, Mr. Hambro is entitled to severance pay in the amount of his highest base salary for a period of 24 months following the termination of his employment (less any amounts earned by Mr. Hambro through self-employment or subsequent employment) plus a lump sum payment of $300,000.
Subject to certain conditions, JWMA has agreed to guarantee First Solar’s obligations to Mr. Hambro under the employment agreement. The guarantee applies only to claims for payment which arise and are asserted by December 31, 2007.
Under the terms of the employment agreement, Mr. Hambro has agreed not to disclose any confidential information concerning our business, including without limitation our confidential designs and processes. In addition, Mr. Hambro has agreed not to compete with us or solicit or hire any of our employees during the three year period following the termination of his employment.
Robert H. Williams. On November 30, 2005, the Company entered into a termination letter agreement with Mr. Robert H. Williams, whereby Mr. Williams’ employment with First Solar terminated on December 31, 2005. Under the terms of the termination letter agreement, Mr. Williams provided transition services as an independent contractor from January 1, 2006 to February 28, 2006 for which the Company compensated him based on his base salary prior to termination. In addition, the Company agreed to pay Mr. Williams a lump sum payment of $205,000 by February 28, 2006 and to continue to pay Mr. Williams’ medical insurance through August 31, 2006, provided he is not insured through another program.
Kenneth M. Schultz. On November 1, 2002, we entered into an employment agreement with Mr. Kenneth M. Schultz. Under the terms of his employment contract, Mr. Schultz is entitled to receive an annual base salary of $175,000 (subject to annual review) and standard health and vacation benefits. If Mr. Schultz elects to forego medical benefits, his base salary will be increased an additional $7,500. In addition, Mr. Schultz holds 911,800 options to purchase First Solar common shares pursuant to a separate award agreement, which provides that upon certain specified events, including a change of control (as defined in the award agreement) and related termination of employment, the shares issuable pursuant to such options will be subject to a put option held by Mr. Schultz, which would allow him to require the Company to repurchase such shares at the imputed transaction value per unit. Effective January 2, 2006, Mr. Schultz’s annual salary was increased to $240,000. Mr. Schultz is also eligible for an annual performance-based bonus. The employment agreement provides for a severance payment in an amount equal to one year of his annual base salary in the event Mr. Schultz is terminated for any reason other than cause or if Mr. Schultz terminates his employment for good reason.
Under the terms of the employment agreement, Mr. Schultz has agreed not to disclose any confidential information concerning our business, including without limitation our confidential designs and processes. In addition, Mr. Schultz has agreed not compete with us or solicit or hire any of our employees during the period of one year following the termination of his employment. If we default on any severance payments owed to Mr. Schultz under the terms of the agreement and fail to cure such default upon five days written notice specifying such default, the obligation of Mr. Schultz not to compete with us expires.
Jens Meyerhoff. On October 31, 2006, we entered into an employment agreement with Mr. Jens Meyerhoff. Under the terms of his employment agreement, Mr. Meyerhoff is entitled to an annual base salary of $300,000 (subject to annual review) and standard health and vacation benefits. In lieu of standard health benefits, Mr. Meyerhoff may elect to receive separate medical insurance benefits, with costs reimbursed by us. Mr. Meyerhoff is also eligible to receive an annual bonus of up to 50% of his annual base salary. Mr. Meyerhoff also receives certain relocation benefits in connection with his employment. Our employment agreement with Mr. Meyerhoff provides for a severance payment in the amount equal to 18 months of his annual base salary, continued medical benefits for 18 months, certain relocation benefits and continued vesting of equity awards for 12 months after termination of employment (and the ability to exercise vested equity awards for 90 days after such 12-month period) in the event Mr. Meyerhoff’s employment is terminated without cause. Effective immediately after this offering, we will grant Mr. Meyerhoff options to purchase 187,500 shares of our common stock, exercisable at the price set forth on the cover of this prospectus. The options will vest with respect to 20% of the underlying shares on May 22, 2007, the first anniversary of Mr. Meyerhoff’s date of hire, and for the 48 month period thereafter, the options will
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vest ratably in equal monthly installments, subject to Mr. Meyerhoff’s continued employment with us. The options will be subject to the 2006 Plan and the terms of an option award agreement. Mr. Meyerhoff is also subject to a separate confidentiality agreement and a separate non-competition and non-solicitation agreement, which provides that Mr. Meyerhoff will not compete with the Company or solicit Company employees for 18 months after termination of his employment.
I. Paul Kacir. On October 19, 2006, we entered into an employment agreement with Mr. I. Paul Kacir which was amended and restated on October 31, 2006. Under the terms of his employment agreement, Mr. Kacir is entitled to an annual base salary of $300,000 (subject to annual review) and standard health and vacation benefits. Mr. Kacir is also eligible to receive a discretionary annual bonus of up to 35% of his annual base salary. Mr. Kacir also receives certain relocation benefits in connection with his employment. Our employment agreement with Mr. Kacir provides for a severance payment in the amount equal to one year of his annual base salary, continued medical benefits for 12 months and continued vesting of equity awards for 12 months after termination of employment (and the ability to exercise vested equity awards for 90 days after such 12-month period) in the event Mr. Kacir’s employment is terminated without cause. Effective immediately after this offering, we will grant Mr. Kacir options to purchase 82,450 shares of our common stock, exercisable at the price set forth on the cover of this prospectus. The options will vest with respect to 20% of the underlying shares on the October 2, 2007, the first anniversary of Mr. Kacir’s date of hire, and for the 48 month period thereafter, the options will vest ratably in equal monthly installments, subject to Mr. Kacir’s continued employment with us. The options will be subject to the 2006 Plan and the terms of an option award agreement. Mr. Kacir is also subject to a separate confidentiality agreement and a separate non-competition and non-solicitation agreement, which provides that Mr. Kacir will not compete with the Company or solicit Company employees for 12 months after termination of his employment.
Change in Control Severance Agreements
First Solar has entered into a change in control severance agreement, referred to as the Change in Control Severance Agreements, with each of Messrs. Ahearn, Hambro, Kacir, Meyerhoff and Schultz. Under the Change in Control Severance Agreements, if a change in control (substantially as defined in the 2006 Plan) occurs, the executive would become immediately entitled to accelerated vesting of all equity-based, long-term incentive and cash incentive compensation awards (other than awards which by their express terms do not accelerate under the Change in Control Severance Agreements).
Executives who are party to a Change in Control Severance Agreement will also be entitled to additional benefits if the executive’s employment is terminated under certain circumstances. An executive is entitled to those severance benefits if the executive’s employment with First Solar is terminated in anticipation of a change in control or if, during the two-year period after a change in control, the executive is terminated without cause or resigns for good reason (which includes material changes in an executive’s duties, responsibilities or reporting relationships, failure to provide equivalent compensation and benefits and being required to relocate 50 or more miles). If terminated or separated from First Solar under those circumstances, the executive would be entitled to the following additional benefits under the Change in Control Severance Agreement:
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| • | a lump-sum cash severance payment equal to two times the sum of (i) the greater of the executive’s base salary in effect immediately prior to the date of termination and the executive’s base salary in effect immediately prior to the change in control, and (ii) the greater of the average annual cash bonuses for the previous three calendar years and the target annual bonus for the year of termination; |
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| • | a prorated target annual bonus; |
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| • | the continuation of welfare and fringe benefits for the earlier of (i) two years after executing a release of claims agreement and (ii) eighteen months after termination of employment; and |
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| • | reimbursement for the cost of executive-level outplacement services (subject to a $20,000 ceiling). |
In order to obtain severance benefits under a Change of Control Severance Agreement, an executive must first execute a separation agreement with First Solar that includes a waiver and release of any and all claims against First Solar. In addition to the foregoing, in accordance with the Change in Control Severance Agreements, First Solar will make certain tax “gross-up” payments to address taxes that may be imposed under applicable tax laws in connection with golden parachute payments (including the acceleration of equity-based, long-term incentive and cash compensation upon a change in control) unless the value of the payments and benefits in connection with the change in control does not exceed 10% of the maximum amount payable without triggering any such taxes, in which case the payments and benefits will be reduced to such maximum amount.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table shows information regarding the beneficial ownership of our common stock as of September 30, 2006,July 31, 2007, as adjusted to give effect to this offering by:
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| • | each person or group who is known by us to own beneficially more than 5% of our common stock; |
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| • | each member of our board of directors and each of our named executive officers; and |
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| • | all members of our board of directors and our executive officers as a group. |
Currently, JWMA Partners, LLC, or JWMA, is the beneficial owner of 51,827,318 shares of our common stock, representing 92.32% of our shares of common stock prior to this offering. The Estate of John T. Walton, JCL Holdings, LLC and Michael J. Ahearn are the significant members of JWMA. Information with respect to JWMA and its members and their material relationships with us is provided under “Certain Relationships and Related Party Transactions”. Immediately prior to the consummation of this offering, the members of JWMA will dissolve JMWA and become direct stockholders of First Solar, Inc. JWMA will dissolve pursuant to a formula, which includes the valuation of First Solar, Inc. stock based on the public offering price per share, on the dissolution date. The following table assumes that the shares are sold at an initial public offering price of $18.00 per share, which is the mid-point of the range set forth on the cover of this prospectus, and that the members of JWMA dissolve JWMA on November 16, 2006. Assuming the date of dissolution remains the same, a $1.00 increase (decrease) in the assumed public offering price of $18.00 per share of common stock, the mid-point of the range set forth on the cover of this prospectus, would increase (decrease) the percentage beneficial ownership after this offering as follows: Estate of John T. Walton and its affiliates, including JCL Holdings, LLC, 0.1% and Michael J. Ahearn 0.1%, assuming no exercise of theover-allotment option, and Estate of John T. Walton and its affiliates, including JCL Holdings, LLC, 0.1% and Michael J. Ahearn 0.1%, assuming full exercise of theover-allotment option. Any increase (decrease) in the assumed public offering price per share will only change the allocation of shares among JWMA’s members, not the total number of shares collectively held by JWMA’s members.
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.
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This table assumes 56,137,27672,997,929 shares of common stock outstanding as of September 30, 2006,July 31, 2007, assuming no exercise of outstanding options.
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| | | | | | | | Shares Beneficially | | | Shares Beneficially | |
| | | | | | | | Owned After this | | | Owned After this | |
| | | | Shares to | | | Offering, Assuming | | | Offering, Assuming | |
| | Shares Beneficially | | | be Sold in | | | No Exercise of the | | | Full Exercise of the | |
| | Owned Prior to this | | | this | | | Over-Allotment | | | Over-Allotment | |
| | Offering | | | Offering | | | Option | | | Option | |
| | | | | | | | | | | | |
| | Number | | | Percent | | | Number | | | Number | | | Percent | | | Number | | | Percent | |
Name of Beneficial Owner | | | | | | | | | | | | | | | | | | | | | |
Beneficial Owners of 5% or More | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Estate of John T. Walton(1) | | | 45,942,653 | | | | 81.8 | % | | | 3,767,439 | | | | 42,175,214 | | | | 60.8 | % | | | 42,175,214 | | | | 58.6 | % |
Michael J. Ahearn(2) | | | 5,884,666 | | | | 10.5 | % | | | 482,561 | | | | 5,402,105 | | | | 7.8 | % | | | 5,402,105 | | | | 7.5 | % |
Goldman, Sachs & Co.(3) | | | 4,261,457 | | | | 7.6 | % | | | — | | | | 4,261,457 | | | | 6.1 | % | | | 4,261,457 | | | | 5.9 | % |
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Directors and Named Executive Officers | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Michael J. Ahearn(2) | | | 5,884,666 | | | | 10.5 | % | | | 482,561 | | | | 5,402,105 | | | | 7.8 | % | | | 5,402,105 | | | | 7.5 | % |
George A. (“Chip”) Hambro(4) | | | 960,300 | | | | 1.7 | % | | | — | | | | 960,300 | | | | 1.4 | % | | | 960,300 | | | | 1.3 | % |
Jens Meyerhoff | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Kenneth M. Schultz(5) | | | 911,800 | | | | 1.6 | % | | | — | | | | 911,800 | | | | 1.3 | % | | | 911,800 | | | | 1.3 | % |
I. Paul Kacir | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Robert H. Williams(6) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
James F. Nolan(7) | | | 72,750 | | | | | * | | | — | | | | 72,750 | | | | * | | | | 72,750 | | | | * | |
J. Thomas Presby | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Bruce Sohn(8) | | | 97,000 | | | | | * | | | — | | | | 97,000 | | | | * | | | | 97,000 | | | | * | |
Michael Sweeney(9) | | | 97,000 | | | | | * | | | — | | | | 97,000 | | | | * | | | | 97,000 | | | | * | |
All Directors and Executive Officers as a group (10 persons)(10) | | | 8,023,516 | | | | 13.8 | % | | | 482,561 | | | | 7,540,955 | | | | 10.6 | % | | | 7,540,955 | | | | 10.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 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 | % | | | 3,700,000 | | | | 35,187,347 | | | | 45.6 | % | | | 34,047,826 | | | | 44.1 | % |
Jim C. Walton(2) | | | 38,887,347 | | | | 53.3 | % | | | 3,700,000 | | | | 35,187,347 | | | | 45.6 | % | | | 34,047,826 | | | | 44.1 | % |
Alice L. Walton(3) | | | 38,887,347 | | | | 53.3 | % | | | 3,700,000 | | | | 35,187,347 | | | | 45.6 | % | | | 34,047,826 | | | | 44.1 | % |
Estate of John T. Walton(4) | | | 26,785,345 | | | | 36.7 | % | | | 3,700,000 | | | | 23,085,345 | | | | 29.9 | % | | | 21,945,824 | | | | 28.4 | % |
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 | % | | | 725,000 | | | | 4,012,339 | | | | 5.2 | % | | | 4,012,339 | | | | 5.2 | % |
Goldman, Sachs & Co.(7) | | | 4,355,305 | | | | 6.0 | % | | | 1,000,000 | | | | 3,355,305 | | | | 4.3 | % | | | 3,047,326 | | | | 3.9 | % |
Directors and Named Executive Officers | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Michael J. Ahearn(6) | | | 4,737,339 | | | | 6.5 | % | | | 725,000 | | | | 4,012,339 | | | | 5.2 | % | | | 4,012,339 | | | | 5.2 | % |
Bruce Sohn(8) | | | 104,707 | | | | * | | | | 24,000 | | | | 80,707 | | | | * | | | | 80,707 | | | | * | |
Jens Meyerhoff(9) | | | 14,375 | | | | * | | | | — | | | | 14,375 | | | | * | | | | 14,375 | | | | * | |
Kenneth M. Schultz(10) | | | 529,440 | | | | * | | | | 176,000 | | | | 353,440 | | | | * | | | | 353,440 | | | | * | |
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 | | | | * | | | | 25,000 | | | | 48,405 | | | | * | | | | 48,405 | | | | * | |
All Directors and Executive Officers as a group (9 persons)(13) | | | 5,525,844 | | | | 7.6 | % | | | 950,000 | | | | 4,575,844 | | | | 5.9 | % | | | 4,575,844 | | | | 5.9 | % |
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* | | Less than one percent |
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(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, and its affiliates, including JCL Holdings, LLC, collectively hold a total of 45,942,653 shares. The Estate of John T. Walton holds a total of 33,078,710 shares, andas 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 with respect to allpower). The shares held by the Estate. Following termination ofJCL Holdings, LLC and the Estate the shares will be held by trustsof John T. Walton are for the benefit of John T. Walton’s wife and his descendents,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. |
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(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, willas 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. Walton’s 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. |
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(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 respect to allS. Robson Walton and Jim C. Walton, individually as managing members, and (b) 26,785,345 shares held by these trusts.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. Walton’s 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. |
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(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. Walton’s 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 and the address of these trusts will be P.O. Box 1860, Bentonville, Arkansas 72712. |
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(5) | | The number and percentage of shares of common stock shown in the table as beneficially owned by JCL Holdings, LLC holds a total of 12,158,263represent 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. Walton’s wife and his decedents.descendants and for that reason, S. Robson Walton, Jim C. Walton and Alice L. Walton share voting and dispositive power with respect to all shares held by JCL Holdings, LLC.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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(2) | Michael J. Ahearn holds a total of 588,467 shares in his individual capacity. Michael J. Ahearn2006 GRAT holds a total of 5,296,1994,737,339 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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(3) | On May 10, 2006, Goldman, Sachs & Co. converted allis an indirect, wholly-owned subsidiary of our convertible senior subordinated notes into 4,261,457 sharesThe 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 our common stock.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 85 Broad Street,c/o Goldman, Sachs & Co., One New York Plaza, New York, New York 10004. |
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(4)(8) | Includes 960,300 shares of common stock issuable upon the exercise of stock options. |
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(5) | Includes 911,800 shares of common stock issuable upon the exercise of stock options. |
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(6) | Robert H. Williams served as our Chief Financial Officer from January 2005 through December 2005, and was no longer employed by us as of September 30, 2006. |
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(7) | Includes 72,750 shares of common stock issuable upon the exercise of stock options. |
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(9) | | Includes 9,375 shares of common stock issuable upon the exercise of stock options. |
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(8)(10) | | Includes 529,440 shares of common stock issuable upon the exercise of stock options. Kenneth M. Schultz intends to exercise options to acquire 176,000 shares of common stock to be sold by him in this offering. |
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(11) | | Includes 58,750 shares of common stock issuable upon the exercise of stock options. |
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(12) | | Includes 72,750 shares of common stock issuable upon the exercise of stock options. Michael Sweeney intends to exercise options to acquire 25,000 shares of common stock to be sold by him in this offering. |
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(13) |
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(9) | Includes 72,750743,065 shares of common stock issuable upon the exercise of stock options. |
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(10) | Includes 2,090,350 shares of common stock issuable upon the exercise of stock options. Does not include up to 300,000 shares of common stock issuable upon the exercise of stock options that we plan to grant to certain of our executive officers and directors upon the consummation of this offering. Does not include Robert H. Williams, who served as our Chief Financial Officer from January 2005 through December 2005, and was no longer employed by us as of September 30, 2006. |
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Related Party Debt
On July 26, 2005, we entered into a $5.0 million loan agreement with Walton Enterprises II, L.P., an affiliate of JWMA,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 August 7,July 26, 2006, we entered into an amended and restateda loan agreement with the Estate of John T. Walton, to provide for advanceswhich we amended and restated on August 7, 2006, under which we could draw up to $34.0 million. Interest is payable monthly at the annual rate of the commercial prime lending rate and principal payments are due at the earlier of January 18, 2008 or the completion of an initial public offering of our stock. This loan does not have any collateral requirements. AAs a condition of obtaining this loan, waswe were required to refinanceuse $8.7 million of the proceeds to repay the principal of our loan from Kingston Properties, LLC, an affiliate of JWMA.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 which $8.7 million was used to repay the Kingston Properties, LLC note.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 JWMA.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 2003, a previous owner forfeited its entire interest in First Solar US Manufacturing, LLC, in connection with a settlement of claims, including matters subject to on-going arbitration and pending litigation, in exchange for a cash payment of $3.0 million from First Solar US Manufacturing, LLC and resulting in the retirement of 27,432,000 membership units. Also during 2003, JWMA, the sole remaining owner of First Solar US Manufacturing, LLC, formed First Solar, Inc. (formerly First Solar Holdings, LLC), and contributed all of its equity interest in First Solar US Manufacturing, LLC and First Solar Property, LLC into First Solar, Inc. We also converted the outstanding principal of $72.0 million and accrued interest of $10.6 million on our promissory note and loan agreement with JWMA into an equity contribution. The 2003 equity interest and debt contributions occurred at the same time, and JWMA received a total of 28,736,000 membership units for those transactions. Also in 2003, JWMA made an additional cash contribution of $8.5 million and received 4,123,000 shares. In fiscal year 2004, fiscal year 2005 and the first nine months ofFebruary 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 inaggregate principal amount of convertible senior subordinated notes due in 2011 to Goldman, Sachs & Co. On May 10, 2006, we extinguished these notes by payment of 4,261,0004,261,457 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
First Solar will enter
We entered into a registration rights agreement concurrently with this offering with JWMA, our current majority shareholder,the Estate of John T. Walton, JCL Holdings, LLC and the members of JWMA.Michael J. Ahearn. The registration rights agreement provides that JWMA has, and, its members following the dissolution of JWMA will have,for piggyback registration rights if we register equity securities under the Securities Act, subject to certainlock-up provisions and exceptions. In addition, prior to the dissolution of JWMA, the registration rights agreement has unlimited demand rights for JWMA, subject to certainlock-up provisions and exceptions, provided that JWMA may only exercise one such demand right within any 365 day period. Following the dissolution of JWMA, subject to certain lock-up provisions and exceptions, Michael J.
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Ahearn will havehas three demand rights, JCL Holdings, LLC will havehas five demand rights and the Estate of John T. Walton will havehas 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. Walton’s wife and his descendants.
First Solar
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, upon the completion of this offering and subject to certainlock-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 €500,000 personal guarantee. We have indemnified Mr. Ahearn for the amount of his guarantee.
In November 2000, we entered into a consulting agreement with James Nolan, a director of the Company. Pursuant to the terms of our agreement, Mr. Nolan provides part-time consulting services for a consulting fee of $7,500 per month plus travel and other expenses.
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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 €102.0 million ($122.4132.6 million at an assumed exchange rate of $1.20/$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 €53.0 million ($63.668.9 million at an assumed exchange rate of $1.20/$1.30/€1.00) and a revolving credit facility of€27.0 €27.0 million ($32.435.1 million at an assumed exchange rate of $1.20/$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 €22.0 million ($26.428.6 million at an assumed exchange rate of $1.20/$1.30/€1.00). We can make drawdownsmay drawdown against the term loan and the bridge loan until December 30, 2007 and we can make drawdownsmay drawdown against the revolving credit facility until September 30, 2012. We have incurred costs related to the credit facility totaling $1.9$2.0 million as of SeptemberJune 30, 2006,2007, 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 down onunder the credit facility. At SeptemberJune 30, 2006,2007, we had outstanding borrowings of $18.2$61.4 million under the term loan and $6.8$20.2 million under the revolving credit facility, which we classify as long-term debt, and $22.4 million under the bridge loan. We had no outstanding borrowings under the revolving credit facility.loan, which we classify as short-term debt.
We must repay the term loan in twenty20 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 must pay interest at the annual rate of the Euro interbank offered rate (Euribor) plus 1.6% on the term loan, Euribor plus 2.0% on the bridge loan and Euribor plus 1.8% on the revolving credit facility. Each time we make a draw against the term loan or the bridge loan, we may choose to pay interest on that drawdown every three or six months; each time we make a draw against the revolving credit facility, we may choose to pay interest on that drawdown every one, three or six months. The credit facility requires us to mitigate our interest rate risk on the term loan by entering into pay-fixed, receive-floating interest rate swaps covering at least 75% of the balance outstanding under the 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 €0.5 million ($0.60.7 million at an assumed exchange rate of $1.20/$1.30/€1.00) for these guarantees. In addition, we must maintain a debt service reserve of€3.0 €3.0 million ($3.63.9 million at an assumed exchange rate of $1.20/$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 GmbH’s 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
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operations. First Solar Manufacturing GmbH must maintain adequate accounting and information
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technology systems. Also, First Solar Manufacturing GmbH cannot open any bank accounts (other than those required by the credit facility), enter into any financial liabilities (other than intercompany obligations or those liabilities required by the credit facility), sell any assets to third parties outside the normal course of business, make any loans or guarantees to third parties, or allow any of its assets to be encumbered to the benefit of third parties without the consent of the lenders and government guarantors.
Our ability to withdraw cash from First Solar Manufacturing GmbH for use in other parts of our business is restricted while we have outstanding obligations under the credit facility and associated government guarantees. First Solar Manufacturing GmbH’s cash flows from operations must generally be used for the payment of loan interest, fees and principal before any remainder can be used to pay intercompany charges, loans or dividends. Furthermore, First Solar Manufacturing GmbH generally cannot make any payments to affiliates if doing so would cause its cash flow available for debt service to fall below 1.3 times its required principal and interest payments for all its liabilities for any one year period or cause the amount of its equity to fall below 30% of the amount of its total assets. First Solar Manufacturing GmbH also cannot pay commissions or distributor margins of greater than 2% to First Solar affiliates that sell or distribute its products. Also, we may be required under certain circumstances to contribute more funds to First Solar Manufacturing GmbH, such as if project-related costs exceed our plan, we do not recover the expected amounts from governmental investment subsidies, or all or part of the government guarantees are withdrawn. If there is a decline in the value of the assets pledged as collateral for the credit facility, we may also be required to pledge additional assets as collateral.
Revolving Loan Agreement
On July 26, 2006, we
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, with the Estate of John T. Walton, an affiliate of JWMA, under which we cancould draw up to $34.0 million. Interest is payable monthly at the annual rate of the commercial prime lending rate and principal payments are due at the earlier of January 18, 2008 or the completion of an initial public offering of our stock. This loan does not have any collateral requirements. As a condition of obtaining this loan, we were required to use a portion$8.7 million of the proceeds to repay the principal of our loan from Kingston Properties, LLC, an affiliate of JWMA.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 which $8.7 million was used to repay the Kingston Properties, LLC note.proceeds from our initial public offering of common stock.
$15,000,000 $15,000,000 Loan from the State of Ohio
On July 1, 2005, First Solar US Manufacturing, LLC and First Solar Property, LLC entered into a loan agreement with the Director of Development of the State of Ohio for $15.0 million, all$14.1 million of which was outstanding at SeptemberJune 30, 2006.2007. 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 commencecommenced on December 1, 2006 and end on July 1, 2015, and we may pre-pay the loan in whole or in part at any time. The note is secured by a first-priority lien on our land and building in Perrysburg, Ohio and guaranteed by First Solar, Inc.Ohio.
$5,000,000 $5,000,000 Loan from the State of Ohio
On December 1, 2003, First Solar US Manufacturing, LLC and First Solar Property, LLC entered into a loan agreement with the Director of Development of the State of Ohio for $5.0 million, all$4.2 million of which was outstanding at SeptemberJune 30, 2006.2007. 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 commencecommenced on January 1, 2007 and end on December 1, 2009, and we may pre-pay the note in whole or in part at any time after January 1, 2007.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 and guaranteed by First Solar, Inc.plant.
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DESCRIPTION OF CAPITAL STOCK
The following is a description of the material provisions of our capital stock, as well as other material terms of our amended and restated certificate of incorporation and bylaws as they will be in effect as of the consummation of the offering.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
Effective October 24, 2006, our
Our authorized capital stock consists of 500,000,000 shares of common stock, par value $0.001 per share, of which 69,387,27672,997,929 shares will bewere issued and outstanding upon completionas of the offering,July 31, 2007, and 30,000,000 shares of preferred stock, par value $0.001 per share, none of which will beare issued and outstanding. Currently, we have four stockholders. Immediately prior to the consummation of this offering, JWMA Partners, LLC, our current majority stockholder, will dissolve, and its members will become direct holders of our common stock.
Common Stock
The holders of our common stock are entitled to dividends as our board of directors may declare from time to time at its absolute discretion from funds legally available therefor. See “Dividend Policy”.
The holders of our common stock are entitled to one vote for each share held of record on any matter to be voted upon by stockholders. Our amended and restated certificate of incorporation does not provide for cumulative voting in connection with the election of directors. Accordingly, upon the dissolution of JWMA Partners, LLC, the Estate of John T. Walton and its affiliates, including JCL Holdings, LLC, as holders of more than 50% of the shares voting, will be able to elect all of our directors. There are no preemptive, conversion, redemption or sinking fund provisions applicable to our common stock.
Upon any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the holders of our common stock are entitled to share ratably in all assets remaining after payment to creditors and subject to prior distribution rights of any outstanding shares of preferred stock. All the outstanding shares of common stock are and the shares offered by us will be, fully paid and non-assessable.
Registration Rights
First Solar will enterentered into a registration rights agreement concurrently with this offering with JWMA, our current majority shareholder,the Estate of John T. Walton, JCL Holdings, LLC and Michael J. Ahearn, the members of JWMA. The registration rights agreement provides that JWMA has, and itsthe members following the dissolution of JWMA will have piggyback registration rights if we register equity securities under the Securities Act, subject to certainlock-up provisions and exceptions. In addition, prior to the dissolution of JWMA, the registration rights agreement has unlimited demand rights for JWMA, subject to certainlock-up provisions and exceptions, provided that JWMA may only exercise one such demand right within any 365 day period. Following the dissolution of JWMA, subject to certain lock-up provisions and exceptions, Michael J. Ahearn will havehas three demand rights, JCL Holdings, LLC will havehas five demand rights and the Estate of John T. Walton will havehas 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. Walton’s wife and his descendants.
First Solar entered into a registration rights agreement with Goldman, Sachs & Co., the purchaser of the convertible senior subordinated notes. The registration rights agreement provides that, upon the completion of this offering and subject to certainlock-up provisions and exceptions, Goldman, Sachs & Co. has two demand rights and piggyback registration rights if we register equity securities under the Securities Act. The registration rights and related provisions are transferable with respect to the shares issued upon conversion of the notes on May 10, 2006.
Action by Written Consent; Special Meetings of Stockholders
Our amended and restated certificate of incorporation and bylaws provide that unless and until JWMA Partners, LLC, the Estate of John T. Walton, JCL Holdings, LLC, John T. Walton’s surviving spouse, descendants,
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any entity (including a trust) that is for the benefit of John T. Walton’s surviving spouse or descendants or any entity (including a trust) over which any of John T. Walton’s 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.
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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 corporation’s 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 employeesassociates 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 employeesassociates for which indemnification is sought.
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Authorized but Unissued Shares of Common Stock. Our authorized but unissued shares of common stock will be available for future issuance without your approval. We may use additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans and as consideration for future acquisitions, investments or other purposes. The existence of authorized but unissued shares of common stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
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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 corporation’s certificate of incorporation or bylaws. Because the Estate owns more than 50% of our shares, the Estate may amend our organizational documents without your approval and may refuse to amend our organizational documents despite your wishes to the contrary.
Options With Repurchase Rights
During 2003 and 2005, we issued a total of 1,872,100 stock options to certain employees that had a provision allowing such employee or his estate or successor, as the case may be, to sell any equity securities obtained as a result of exercising the options back to us upon such employee’s death, disability or termination other than for cause or good reason or upon change of control with an employment termination. The price to be paid for the shares is equal to the fair value of the shares on the date we receive a put notice, which shall be within 180 days of such event. These repurchase rights do not expire upon the consummation of an initial public offering.
Listing
We have applied to list our
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.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common stock, and we cannot predict what effect, if any, market sales of shares or the availability of shares for sale will have on the market price of our common stock. Nevertheless, sales of substantial amounts of common stock in the public market, or the perception that such sales could occur, could materially and adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity-related securities at a time and price that we deem appropriate.
Upon completion of this offering, 69,387,276 shares of our common stock will be outstanding. All of the shares of common stock expected to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless held by our “affiliates”, as that term is defined in Rule 144 under the Securities Act. The remaining outstanding shares of common stock will be deemed “restricted securities” as that term is defined under Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 144(k) under the Securities Act, which are summarized below.
We may issue shares of common stock from time to time for a variety of corporate purposes, including future public offerings to raise additional capital, employee benefit plans and as consideration for future acquisitions, investments or other purposes. In the event any such offering, employee benefit plan, acquisition, investment or other transaction is significant, the number of shares of common stock that we may issue may in turn be significant. In addition, we may also grant registration rights covering those shares of common stock issued in connection with any such offering, employee benefit plan, acquisition, investment or other transaction.
Lock-Up Agreements
We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any shares of our common stock or any securities convertible into or exchangeable or exercisable for any such shares, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Incorporated for a period of 180 days after the date of this prospectus, subject to specified exceptions.
Our officers, directors and existing stockholders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Incorporated for a period of 180 days after the date of this prospectus. The lock-up restriction does not, however, restrict transfers of common stock (or any securities convertible into or exercisable or exchangeable for common stock) to any of the following transferees who agree to be bound in writing by the terms of the “lock-up” and who receive such securities in a transfer not involving a disposition for value: (i) any donee(s) of one or more bona fide gifts of common stock; (ii) any trust for the direct or indirect benefit of the locked-up party or of any familial relation thereof not more remote than first cousin, whether by blood, marriage or adoption; (iii) any beneficiary of the locked-up party pursuant to a will or other testamentary document or applicable laws of descent; (iv) if the locked-up party is an investment fund entity that is a limited partnership, limited liability company or equivalent foreign entity (an “Investment Fund Entity”), to any other Investment Fund Entity under the control of the locked-up party or under the control of the general partner or managing member of the locked-up party; or (v) as a distribution to partners, members or stockholders of the locked-up party.
The180-day restricted period described in the two preceding paragraphs will be automatically extended if: (1) during the last 17 days of the180-day restricted period we issue an earnings release or announce material news or a material event; or (2) prior to the expiration of the180-day restricted period, we announce that we will release earnings results during the16-day period beginning on the last day of the180-day period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the18-day period beginning on the issuance of the earnings release of the announcement of the material news or material event.
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Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Incorporated have advised us that they have no present intent or arrangement to release any shares subject to a lock-up, and will consider the release of anylock-up on a case-by-case basis. Upon a request to release any shares subject to a lock-up, Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Incorporated would consider the particular circumstances surrounding the request, including, but not limited to, the length of time before thelock-up expires, the number of shares requested to be released, reasons for the request, the possible impact on the market or our common stock and whether the holder of our shares requesting the release is an officer, director or other affiliate of ours.
Registration Rights
First Solar will enter into a registration rights agreement concurrently with this offering with JWMA, our current majority shareholder, and the members of JWMA. The registration rights agreement provides that JWMA has, and its members following the dissolution of JWMA will have, piggyback registration rights if we register equity securities under the Securities Act, subject to certain lock-up provisions and exceptions. In addition, prior to the dissolution of JWMA, the registration rights agreement has unlimited demand rights for JWMA, subject to certain lock-up provisions and exceptions, provided that JWMA may only exercise one such demand right within any 365 day period. Following the dissolution of JWMA, subject to certain lock-up provisions and restrictions, Michael J. Ahearn will have three demand rights, JCL Holdings, LLC will have five demand rights and the Estate of John T. Walton will have unlimited demand rights, provided that the Estate of John T. Walton may only exercise one such demand right within any 365 day period. Following the termination of the Estate of John T. Walton, the registration rights held by the Estate will be held collectively by trusts for the benefit of John T. Walton’s wife and his descendants.
First Solar entered into a registration rights agreement with Goldman, Sachs & Co., the purchaser of the convertible senior subordinated notes. The registration rights agreement provides that, upon the completion of this offering and subject to certain lock-up provisions and exceptions, Goldman, Sachs & Co. has two demand rights and piggyback registration rights if we register equity securities under the Securities Act. The registration rights and related provisions are transferable with respect to the shares issued upon conversion of the notes on May 10, 2006.
Rule 144
In general, under Rule 144, as currently in effect, beginning 90 days after the date of this prospectus, any person, including an affiliate, who has beneficially owned shares of our common stock for a period of at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:
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| • | one percent of the then-outstanding shares of common stock or approximately 693,873 shares immediately after this offering; and |
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| • | the average weekly trading volume in the common stock on The Nasdaq Global Market during the four calendar weeks preceding the date on which the notice of the sale is filed with the SEC. |
Sales under Rule 144 are also subject to provisions relating to notice, manner of sale, volume limitations and the availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares for at least two years, including the holding period of any prior owner other than an “affiliate,” is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FORNON-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, aNon-U.S. HolderHolder means a beneficial owner of our common stock that is neither a U.S. person nor a partnership for U.S. federal income tax purposes, and that will hold shares of our common stock as capital assets. For U.S. federal income tax purposes, a U.S. person includes:
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| • | an individual who is a citizen or resident of the United States; |
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| • | a corporation (or other business entity treated as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States, any state thereof or the District of Columbia; |
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| • | an estate the income of which is includible in gross income regardless of source; or |
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| • | a trust that (A) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons, or (B) otherwise has validly elected to be treated as a U.S. domestic trust. |
If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds shares of our common stock, the U.S. federal income tax treatment of the partnership and each partner generally will depend on the status of the partner and the activities of the partnership and the partner. Partnerships acquiring our common stock, and partners in such partnerships, should consult their own tax advisors with respect to the U.S. federal income tax consequences of the ownership and disposition of our common stock.
This summary does not consider specific facts and circumstances that may be relevant to a particularNon-U.S. Holder’sHolder’s tax position and does not consider U.S. state and local ornon-U.S. taxtax consequences. It also does not considerNon-U.S. HoldersHolders 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 prospectiveNon-U.S. HolderHolder is urged to consult its own tax advisor with respect to the U.S. federal, state, local andnon-U.S. income,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 aNon-U.S. HolderHolder of a trade or business within the United States and (ii) in the case of aNon-U.S. HolderHolder 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 theNon-U.S. HolderHolder in the United States. Generally, U.S. trade or business income is not subject to U.S. federal withholding tax (provided theNon-U.S. HolderHolder 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 corporateNon-U.S. holderholder 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). ANon-U.S. HolderHolder generally will be subject to U.S. federal withholding tax at a 30% rate, or, if the
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Non-U.S. HolderHolder 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 theNon-U.S. Holder’sHolder’s tax basis in our common stock (with a corresponding reduction in suchNon-U.S. Holder’sHolder’s 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, aNon-U.S. HolderHolder will be required to provide a properly executed IRSForm W-8BEN certifying under penalties of perjury its entitlement to benefits under the treaty. Special certification requirements and other requirements apply to certainNon-U.S. HoldersHolders that are entities rather than individuals. ANon-U.S. HolderHolder 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. ANon-U.S. HolderHolder 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 aNon-U.S. HolderHolder who provides a properly executed IRSForm W-8ECI, certifying under penalties of perjury that the dividends are effectively connected with theNon-U.S. Holder’sHolder’s conduct of a trade or business within the United Sates.
Dispositions of Our Common Stock
ANon-U.S. HolderHolder 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:
| | |
| • | the gain is U.S. trade or business income, as defined above; |
|
| • | theNon-U.S. HolderHolder 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 |
|
| • | 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 theNon-U.S. Holder’sHolder’s holding period for our common stock. |
In general, a corporation is a USRPHC if the fair market value of its “U.S. real property interests” (as defined in the Code and applicable Treasury regulations) equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. If we are determined to be a USRPHC, the U.S. federal income and withholding taxes relating to interests in USRPHCs nevertheless will not apply to gains derived from the sale or other disposition of our common stock by aNon-U.S. HolderHolder 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 aNon-U.S. HolderHolder sells its shares of our common stock.
Information Reporting and Backup Withholding Requirements
We must annually report to the IRS and to eachNon-U.S. HolderHolder 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 theNon-U.S. HolderHolder resides. Under certain circumstances, the Code imposes a backup withholding obligation (currently at a rate of 28%) on certain reportable payments. Dividends paid to aNon-U.S. HolderHolder of our common stock generally will be exempt from backup withholding if theNon-U.S. HolderHolder provides a properly executed IRSForm 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 itsnon-U.S. statusstatus 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 anon-U.S. officeoffice of anon-U.S. brokerbroker will not be subject to information reporting or backup withholding unless thenon-U.S. brokerbroker has certain types of relationships with the United States (a “U.S. related
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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 aNon-U.S. HolderHolder and the broker has no knowledge to the contrary.Non-U.S. HoldersHolders should consult their own tax advisors on the application of information reporting and backup withholding to them in their particular circumstances (including upon their disposition of our common stock).
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to aNon-U.S. HolderHolder will be refunded or credited against theNon-U.S. Holder’sHolder’s U.S. federal income tax liability, if any, if theNon-U.S. HolderHolder provides the required information to the IRS on a timely basis.Non-U.S. HoldersHolders should consult their own tax advisors regarding the filing of a U.S. tax return for claiming a refunded of such backup withholding.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting agreement dated , 2006,2007, we and the selling stockholders have agreed to sell to the underwriters named below, for whom Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated are acting as representatives, the following respective numbers of shares of common stock:
| | | | | |
| | Number |
|
Underwriter | | of Shares | |
| | | |
Credit Suisse Securities (USA) LLC | | | | |
Goldman, Sachs & Co. | | | | |
Morgan Stanley & Co. Incorporated | | | | |
Cowen and Company, LLC | | | | |
Piper Jaffray & Co. | | | | |
Cowen and Company,Banc of America Securities LLC | | | | |
First AlbanyDeutsche Bank Securities Inc. | | | | |
Lazard Capital Inc. Markets LLC | | | | |
ThinkEquity Partners LLC | | | | |
| | | |
| Total | | | 17,500,0009,650,000 | |
| | | | |
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.
WeCertain of the selling stockholders have granted to the underwriters a30-day option to purchase on a pro rata basis an aggregate of up to 2,625,0001,447,500 additional shares from us at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/ dealers. After the initial public offering, the representatives may change the public offering price and concession and discount to broker/ dealers.concession.
The following table summarizes the compensation we and the selling stockholders will pay:
| | | | | | | | | | | | | | | | |
| | Per Share | | | Total | |
| | | | | | |
| | Without |
| | With |
| | Without |
| | With |
|
| | Over-allotment | Over-Allotment | | Over-allotment | Over-Allotment | | Over-allotment | Over-Allotment | | Over-allotment | Over-Allotment |
| | | | | | | | | | | | |
Underwriting Discounts and Commissions paid by us | | $ | | | | $ | | | | $ | | | | $ | | |
Underwriting Discounts and Commissions paid by the selling stockholders | | $ | | | | $ | | | | $ | | | | $ | | |
The representatives have informed us that they do not expect sales to accounts over which the underwriters have discretionary authority to exceed 5% of the shares of common stock being offered.
The expenses of this offering, not including underwriting discounts and commissions, are estimated to be approximately $4,400,000. Included in the offering expenses is a structuring fee to Credit Suisse Securities (USA) LLC in the amount of $900,000.$700,000. We will be reimbursed by the underwriters for certain of our out-of-pocket expenses.
An affiliate of Goldman, Sachs & Co., a member of the National Association of Securities Dealers, Inc. (“NASD”) and an underwriter in this offering, may participate in this offering as a selling stockholder. In the event such affiliate participates as a selling stockholder, more than 10% of the net proceeds of this offering, not including underwriting compensation, may be received by such affiliate. Consequently, this offering is being conducted in compliance with NASD Conduct Rule 2710(h). Pursuant to that rule, the appointment of a qualified independent underwriter is not necessary in connection with this offering, as the offering is of a class of equity securities for which a “bona fide independent market,” as defined by the NASD, exists.
We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 (the “Securities Act”) relating to, any shares of our common stock or securities convertible into or exchangeable
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or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated for a period of 18090 days after the date of this prospectus except that we may (i) issue shares of our common stock in the offering;offering or (ii) issue shares of our common stock pursuant to the exercise of options or other equity awards, or grant options or other equity awards pursuant to option plans, in each case existing on the date of this prospectus; or (iii) file with the SEC one or more registration statements on Form S-8 registering the shares of our common stock issuable under our equity compensation plans in effect on the date of this prospectus, in the case of (ii) and (iii) above subject to no further transfer during the “lock-up”“lock-up” period. However, in the event that either (1) during the last 17 days of the “lock-up”“lock-up” period, we release earnings results or material news
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or a material event relating to us occurs or (2) prior to the expiration of the “lock-up”“lock-up” period, we announce that we will release earnings results during the16-day period beginning on the last day of the “lock-up”“lock-up” period, then in either case the expiration of the “lock-up”“lock-up” will be extended until the expiration of the18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated waive, in writing, such an extension.
Our
The selling stockholders and our officers, directors and existingcertain other stockholders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated for a period of 18090 days after the date of this prospectus. However, in the event that either (1) during the last 17 days of the “lock-up”“lock-up” period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the “lock-up”“lock-up” period, we announce that we will release earnings results during the16-day period beginning on the last day of the “lock-up”“lock-up” period, then in either case the expiration of the “lock-up”“lock-up” will be extended until the expiration of the18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated waive, in writing, such an extension. Thelock-up restriction does not, however, restrict transfers of common stock (or any securities convertible into or exercisable or exchangeable for common stock) to any of the following transferees who agree to be bound in writing by the terms of the “lock-up”“lock-up” and who receive such securities in a transfer not involving a disposition for value: (i) any donee(s) of one or more bona fide gifts of common stock; (ii) any trust for the direct or indirect benefit of thelocked-up party or of any familial relation thereof not more remote than first cousin, whether by blood, marriage or adoption; (iii) any beneficiary of thelocked-up party pursuant to a will or other testamentary document or applicable laws of descent; (iv) if thelocked-up party is an investment fund entity that is a limited partnership, limited liability company or equivalent foreign entity (an “Investment Fund Entity”), to any other Investment Fund Entity under the control of thelocked-up party or under the control of the general partner or managing member of thelocked-up party; and/or (v) as a distribution to partners, members or stockholders of thelocked-up party; provided, however, that it shall be a condition to any such transfer pursuant to clauses (i) through (v) above that no public reports, including but not limited to reports pursuant to Rule 144 of the Securities Act or pursuant to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are required to be filed by such locked-up party.party during the“lock-up” period and no such reports are voluntarily filed by suchlocked-up party during the“lock-up” period. In addition, thelock-up restriction does not restrict (i) the sale of common stock under plans or agreements existing on the date of this prospectus that establish plans meeting the requirements ofRule 10b5-1 under the Exchange Act, for the pre-arranged sale of shares of common stock (“10b5-1 Plans”) or (ii) our officers and directors from entering into 10b5-1 Plans subsequent to the date of this prospectus, in the case of (ii) above subject generally to no sales of common stock being made under such 10b5-1 Plans during the“lock-up” period.
Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated have advised us that they have no present intent or arrangement to release any shares subject to alock-up, and will consider the release of anylock-up on acase-by-case basis. Upon a request to release any shares subject to alock-up, Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated would consider the particular circumstances surrounding the request, including, but not limited to, the length of time before thelock-up expires, the number of shares requested to be released, reasons for the request, the possible impact on the market for our
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common stock and whether the holder of our shares requesting the release is an officer, director or other affiliate of ours.
The underwriters have reserved for sale at the initial public offering price up to 875,000 shares of the common stock for employees, directors and other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares.
We and the selling stockholders have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect.
We have applied to list the shares of
Our common stock is listed on The Nasdaq Global Market under the symbol “FSLR”.
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any common stock which is the subject of the offering contemplated by this prospectus may not be made in that Relevant Member State once the prospectus has been approved by the competent authority in such Member State and published and passported in accordance with the Prospectus Directive as implemented in such Member State except that an offer to the public in the Relevant
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Member State of any Securities may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
(a) to legal entities which are authorisedauthorized or regulated to operate in the financial markets or, if not so authorisedauthorized or regulated, whose corporate purpose is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than€43,000,000 €43,000,000 and (3) an annual net turnover of more than€50,000,000, €50,000,000, as shown in its last annual or consolidated accounts;
(c) by the Managers to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of International Manager for any such offer; or
(d) in any other circumstances falling within Article 3(2) of the Prospectus Directive.
For the purposes of this provision, the expression an “offer to the public” in relation to any common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any common stock to be offered so as to enable an investor to decide to purchase the common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
The offering has not been notified to the Belgian Banking, Finance and Insurance Commission (Commission bancaire, financière et des assurances) pursuant to Article 18 of the Belgian law of 22 April 2003 on the public offering of securities (the “Law on Public Offerings”) nor has this prospectus been, or will it be, approved by the Belgian Banking, Finance and Insurance Commission pursuant to Article 14 of the Law on Public Offerings. Accordingly, the offering may not be advertised, the common stock may not be offered or sold, and this prospectus nor any other information circular, brochure or similar document may not be distributed, directly or indirectly, to any person in Belgium other than (i) institutional investors referred to in Article 3, 2° of the Belgian Royal Decree of 7 July 1999 on the public character of financial transactions (the “Royal Decree”), acting for their own account or (ii) investors wishing to acquire the common stock for an amount of at least EUR 250,000 (or its equivalent in foreign currencies) per transaction, as specified in Article 3, 1° of the Royal Decree.
The common stock is offered in Finland solely to investors who are qualified investors. This prospectus has neither been filed with nor approved by the Finnish Financial Supervision Authority and it does not constitute a prospectus under the Prospectus Directive (2003/71/EC), the Finnish Securities Market Act (495/1989, as amended) or the Finnish Investment Funds Act (48/1999, as amended).
The common stock which is the object of this prospectus is neither registered for public distribution with the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - ‘BaFin’-’BaFin’) according to the German Investment Act nor listed on a German exchange. No sales prospectus pursuant to the German Securities Prospectus Act or German Sales Prospectus Act or German Investment Act has been filed with the BaFin. Consequently, the common stock must not be distributed within the Federal Republic of Germany by way of a public offer, public advertisement or in any similar manner and this prospectus and any other document relating to the common stock, as well as information or statements contained therein, may not be supplied to the public in the Federal Republic of Germany or used in connection with any offer for subscription of the common stock to the public in the Federal Republic of Germany or any other means of public marketing.
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No offer of shares to the public in Ireland shall be made at any time except:
(a) to legal entities which are authorisedauthorized or regulated to operate in the financial markets or, if not so authorisedauthorized or regulated, whose corporate purpose is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than€43,000,000 €43,000,000 and (3) an annual turnover of more than€50,000,000 €50,000,000 as shown in its last annual or consolidated accounts; or
(c) in any other circumstances which do not require the publication by the Company of a prospectus pursuant to the Prospectus (Directive 2003/71/EC) Regulations 2005.
The offering of the common stock has not been registered with the Commissione Nazionale per le Società e la Borsa (“CONSOB”) (the Italian securities and exchange commission) pursuant to the Italian securities legislation and, accordingly, each Manager represents and agrees that it has not offered, sold or delivered any common stock nor distributed any copies of the prospectus or any other document relating to the common stock, and will not offer,
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sell or deliver any shares nor distribute any copies of the prospectus or any other document relating to the common stock in the Republic of Italy (“Italy”) in a solicitation to the public at large (sollecitazione all’investimento), and that the common stock in Italy shall only be:
(i) offered or sold to professional investors (operatori qualificati) as defined in Article 31, second paragraph of CONSOB Regulation No 11522 of 1 July 1998 (the “Regulation No 11522”), as amended; or
(ii) offered or sold in circumstances where an exemption from the rules governing solicitations to the public at large applies, pursuant to Article 100 of Legislative Decree No 58 of 24 February 1998 (the “Financial Services Act”) and Article 33, first paragraph, of CONSOB Regulation No 11971 of 14 May 1999 (the “Regulation No 11971”), as amended,
and shall in any event be effected in accordance with all relevant Italian securities, tax and exchange control and other applicable laws and regulations.
Moreover and subject to the foregoing, each Manager represents and agrees that the common stock may not be offered, sold or delivered and neither the prospectus nor any other material relating to the common stock may be distributed or made available in Italy unless such offer, sale or delivery of shares or distribution or availability of copies of the prospectus or any other material relating to the common stock in Italy:
(i) is in compliance with Article 129 of Legislative Decree No 385 of 1 September 1993 (the “Italian Banking Act”) and the implementing guidelines of the Bank of Italy, pursuant to which the issue or the offer of shares in Italy may need to be followed by an appropriate notice to be filed with the Bank of Italy depending, inter alia, on the aggregate value of the securities issued or offered in Italy and their characteristics; and
(ii) is made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with the Financial Services Act, the Italian Banking Act, the Regulation No 11522, the Regulation No 11971 and other applicable laws and regulations.
Insofar as the requirements above are based on laws which are superseded at any time pursuant to the implementation of the Prospectus Directive, such requirements shall be replaced by the applicable requirements under the Prospectus Directive.
The offer of common stock has not been registered with the Portuguese Securities Market Commission (the “CMVM”). Each Manager has represented, warranted and agreed, and each further Manager appointed will be required to represent, warrant and agree that it has not offered or sold, and it will not offer or sell any common stock in Portugal or to residents of Portugal otherwise than in accordance with applicable Portuguese Law.
No action has been or will be taken that would permit a public offering of any of the common stock in Portugal. Accordingly, no common stock may be offered, sold or delivered except in circumstances that will result in compliance with any applicable laws and regulations. In particular, each Manager has represented, warranted and agreed that no offer has been addressed to more than 200 non-institutional Portuguese investors; no offer has been preceded or followed by promotion or solicitation to unidentified investors, or followed by publication of any promotional material. The offer of common stock is intended for Institutional Investors. Institutional Investors within the meaning of Article 30 of the Securities Code (Código dos Valores Mobiliários) includes credit institutions, investment firms, insurance companies, collective investment institutions and their respective managing companies,
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pension funds and their respective pension fund-managing companies, other authorisedauthorized or regulated financial institutions, notably securitisationsecuritization funds and their respective management companies and all other financial companies, securitisationsecuritization companies, venture capital companies, venture capital funds and their respective management companies.
The prospectus in respect of the common stock has not been registered with the Comisión Nacional del Mercado de Valores (the “CNMV”). Accordingly, the common stock may only be offered in Spain to qualified investors under pursuant to and in compliance with Law 24/1988, as amended and Royal Decree 1310/2005.
Each of the Managers severally represents, warrants and agrees as follows: (1) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (the “FSMA”)) received by it in connection with the issue or sale of the securities in circumstances in which Section 21(1) of FSMA does not apply; and (2) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the securities in, from or otherwise involving the United Kingdom.
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The shares may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.
The securities have not been and will not be registered under the Securities and Exchange Law of Japan (the Securities and Exchange Law) and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.
Certain of the underwriters and their respective affiliates may,have from time to time provided, and may in the future provide, various investment banking, financial advisory and lendingother services for us and our affiliates, for which they have received or will receive customary compensation.
Prior to this offering, there has been no public market for Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Incorporated acted as representatives of the common stock. Theunderwriters in connection with our initial public offering price was determined by negotiations among us, the selling stockholdersof
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common stock. Piper Jaffray & Co., Cowen and the underwriters. Among the factors consideredCompany, LLC and ThinkEquity Partners LLC acted as underwriters in determining theconnection with our initial public offering price were the future prospectsof common stock. In addition, Goldman, Sachs & Co. and its affiliates beneficially own approximately 6.0% of our companycommon stock as of July 31, 2007, and our industryan affiliate of Goldman, Sachs & Co. may participate in general, sales, earningsthis offering as a selling stockholder.
Lazard Frères & Co. LLC referred this transaction to Lazard Capital Markets LLC and certain other financial and operating information of our companywill receive a referral fee from Lazard Capital Markets LLC in recent periods, and the price-earnings ratios, comparable sales, market prices of our securities and certain financial and operating information of companies engaged in activities similar to those of our company.connection therewith.
In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions, and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934 (the “Exchange Act”).Act.
| | |
| • | Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. |
|
| • | Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment optionand/or purchasing shares in the open market. |
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| • | Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. |
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| • | Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
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| • | In passive market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchases of our common stock until the time, if any, at which a stabilizing bid is made. |
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The Nasdaq Global Market or otherwise and, if commenced, may be discontinued at any time.
A prospectus in electronic format will be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representatives may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make Internet distributions on the same basis as other allocations.
85
99
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
Resale Restrictions
The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we and the selling stockholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any resale of the common stock in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock.
Representations of Purchasers
By purchasing common stock in Canada and accepting a purchase confirmation a purchaser is representing to us, the selling stockholders and the dealer from whom the purchase confirmation is received that:
| | |
| • | the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under those securities laws, |
|
| • | where required by law, that the purchaser is purchasing as principal and not as agent, |
|
| • | the purchaser has reviewed the text above under Resale Restrictions, and |
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| • | the purchaser acknowledges and consents to the provision of specified information concerning its purchase of the common stock to the regulatory authority that by law is entitled to collect the information. |
Further details concerning the legal authority for this information is available on request.
Rights of Action—Ontario Purchasers Only
Under Ontario securities legislation, certain purchasers who purchase a security offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the common stock, for rescission against us and the selling stockholders in the event that this prospectus contains a misrepresentation without regard to whether the purchaser relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the common stock. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the common stock. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us or the selling stockholders. In no case will the amount recoverable in any action exceed the price at which the common stock was offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we and the selling stockholders will have no liability. In the case of an action for damages, we and the selling stockholders will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the common stock as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.
Enforcement of Legal Rights
All of our directors and officers as well as the experts named herein and the selling stockholders may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.
86
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and about the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation.
100
LEGAL MATTERS
The validity of the securities offered in this prospectus and certain legal matters will be passed upon for us by Cravath, Swaine & Moore LLP, New York, New York. Certain legal matters will be passed upon on behalf of the underwriters by Shearman & Sterling LLP, Menlo Park, California.
EXPERTS
The consolidated financial statements of First Solar, Inc. and subsidiaries as of December 31, 200530, 2006 and December 25, 200431, 2005 and for each of the three years in the period ended December 31, 200530, 2006 included in this prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to the restatement of the consolidated financial statements of First Solar, Inc. as described in note 19 to the consolidated financial statements) of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC with respect to this offering. This prospectus, which is part of the registration statement, does not include all of the information contained in the registration statement. You should referfilings are available to the registration statementpublic over the Internet at the SEC’s web site athttp://www.sec.gov and its exhibits and schedules for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits and schedules attached to the registration statement for copies of the actual contract, agreement or other document.
website athttp://www.firstsolar.com. You may also read and copy the registration statement, the related exhibits and schedules without chargeany document we file at the SEC’s Public Reference Roompublic reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You mayPlease call the SEC at1-800-SEC-0330 for further information on the operation of the Public Reference Room. You may obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. public reference room.
The SEC also maintains an Internet site, http://www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically withallows us to “incorporate by reference” the SEC.The other information we file with the SECthem, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is notan important part of this prospectus. We incorporate by reference our documents listed below:
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| • | Annual Report onForm 10-K for the fiscal year ended December 30, 2006; |
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| • | Definitive Proxy Statement filed April 25, 2007; |
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| • | Quarterly Reports onForms 10-Q filed May 8, 2007 and August 3, 2007; and |
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| • | Current Reports onForms 8-K filed January 16, 2007, January 31, 2007, March 1, 2007, March 2, 2007, May 3, 2007 (pursuant to Item 5.02), May 30, 2007 and July 9, 2007. |
You may request a copy of these filings at no cost, by writing or telephoning us at the registration statement of which this prospectus forms a part. Ourfollowing address:
Investor Relations
First Solar, Inc.
4050 East Cotton Center Boulevard
Building 6, Suite 68
Phoenix, Arizona 85040
Tel.:(602) 414-9315
The other reports and other information that we have filed, or may in the future file, with the SEC are not incorporated by reference into and do not constitute part of this prospectus.
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101
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | Page |
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| | | | |
Consolidated Financial Statements for First Solar, Inc. and Subsidiaries: | | | | |
Unaudited Condensed Consolidated Financial Statements as of June 30, 2007 and December 30, 2006 and for the Three and Six Months Ended June 30, 2007 and July 1, 2006 | | | | |
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 1, 2006 and June 30, 2007 | | | F-2 | |
Unaudited Condensed Consolidated Balance Sheets as of December 30, 2006 and June 30, 2007 | | | F-3 | |
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 1, 2006 and June 30, 2007 | | | F-4 | |
Notes to Unaudited Condensed Consolidated Financial Statements | | | F-5 | |
Consolidated Financial Statements as of December 30, 2006 and December 31, 2005 and for the Years Ended December 30, 2006, December 31, 2005 and December 25, 2004 | | | | |
Report of Independent Registered Public Accounting Firm | | | F-2F-15 | |
Consolidated Balance Sheets as of December 31, 2005, December 25, 2004 and September 30, 2006 (unaudited)and December 31, 2005 | | | F-3F-16 | |
Consolidated Statements of Operations for the Years Ended December 30, 2006, December 31, 2005 and December 25, 2004 and December 27, 2003 and for the Nine Months Ended September 30, 2006 (unaudited) and September 24, 2005 (unaudited) | | | F-4F-17 | |
Consolidated Statements of Members’/Stockholders’ Equity and Comprehensive Loss for the Years Ended December 30, 2006, December 31, 2005 and December 25, 2004 and December 27, 2003 and for the Nine Months Ended September 30, 2006 (unaudited) | | | F-5F-18 | |
Consolidated Statements of Cash Flows for the Years Ended December 30, 2006, December 31, 2005 and December 25, 2004 and December 27, 2003 and for the Nine Months Ended September 30, 2006 (unaudited) and September 24, 2005 (unaudited) | | | F-6F-19 | |
Notes to Consolidated Financial Statements | | | F-7F-20 | |
F-1
F-1
FIRST SOLAR, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | July 1,
| | | June 30,
| | | July 1,
| | | June 30,
| |
| | 2006 | | | 2007 | | | 2006 | | | 2007 | |
|
Net sales | | $ | 27,861 | | | $ | 77,223 | | | $ | 41,485 | | | $ | 144,172 | |
Cost of sales | | | 18,761 | | | | 48,852 | | | | 29,113 | | | | 85,759 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 9,100 | | | | 28,371 | | | | 12,372 | | | | 58,413 | |
| | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Research and development | | | 1,536 | | | | 3,763 | | | | 3,055 | | | | 6,821 | |
Selling, general and administrative | | | 8,133 | | | | 17,285 | | | | 14,005 | | | | 30,975 | |
Production start up | | | 4,062 | | | | 1,523 | | | | 6,641 | | | | 9,997 | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 13,731 | | | | 22,571 | | | | 23,701 | | | | 47,793 | |
| | | | | | | | | | | | | | | | |
Operating income (loss) | | | (4,631 | ) | | | 5,800 | | | | (11,329 | ) | | | 10,620 | |
Foreign currency gain (loss) | | | 2,190 | | | | 21 | | | | 3,090 | | | | (249 | ) |
Interest expense | | | (285 | ) | | | (1,283 | ) | | | (708 | ) | | | (1,484 | ) |
Other income (expense), net | | | 242 | | | | 3,326 | | | | 591 | | | | 7,286 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (2,484 | ) | | | 7,864 | | | | (8,356 | ) | | | 16,173 | |
Income tax benefit | | | 23 | | | | 36,554 | | | | — | | | | 33,273 | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (2,461 | ) | | $ | 44,418 | | | $ | (8,356 | ) | | $ | 49,446 | |
| | | | | | | | | | | | | | | | |
Net income (loss) per share: | | | | | | | | | | | | | | | | |
Basic | | $ | (0.05 | ) | | $ | 0.61 | | | $ | (0.16 | ) | | $ | 0.68 | |
| | | | | | | | | | | | | | | | |
Diluted | | $ | (0.05 | ) | | $ | 0.58 | | | $ | (0.16 | ) | | $ | 0.65 | |
| | | | | | | | | | | | | | | | |
Weighted-average number of shares used in per share calculations: | | | | | | | | | | | | | | | | |
Basic | | | 54,358 | | | | 72,596 | | | | 52,567 | | | | 72,472 | |
| | | | | | | | | | | | | | | | |
Diluted | | | 54,358 | | | | 76,089 | | | | 52,567 | | | | 75,740 | |
| | | | | | | | | | | | | | | | |
See accompanying notes to these condensed consolidated financial statements.
F-2
FIRST SOLAR, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
(Unaudited)
| | | | | | | | |
| | December 30,
| | | June 30,
| |
| | 2006 | | | 2007 | |
|
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 308,092 | | | $ | 107,799 | |
Short-term investments | | | 323 | | | | 207,208 | |
Accounts receivable, net | | | 27,123 | | | | 13,736 | |
Inventories | | | 16,510 | | | | 26,848 | |
Economic development funding receivable | | | 27,515 | | | | 33,757 | |
Deferred tax asset, net — current | | | — | | | | 4,816 | |
Prepaid expenses and other current assets | | | 8,959 | | | | 29,923 | |
| | | | | | | | |
Total current assets | | | 388,522 | | | | 424,087 | |
Property, plant and equipment, net | | | 178,868 | | | | 245,559 | |
Restricted investments | | | 8,224 | | | | 14,023 | |
Deferred tax asset, net — noncurrent | | | — | | | | 34,403 | |
Other noncurrent assets | | | 2,896 | | | | 5,140 | |
| | | | | | | | |
Total assets | | $ | 578,510 | | | $ | 723,212 | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Short-term debt | | $ | 16,339 | | | $ | 22,407 | |
Current portion of long-term debt | | | 3,311 | | | | 3,327 | |
Accounts payable and accrued expenses | | | 32,083 | | | | 51,394 | |
Other current liabilities | | | 340 | | | | 15 | |
| | | | | | | | |
Total current liabilities | | | 52,073 | | | | 77,143 | |
Accrued recycling | | | 3,724 | | | | 6,448 | |
Long-term debt | | | 61,047 | | | | 96,477 | |
Other noncurrent liabilities | | | — | | | | 1,134 | |
| | | | | | | | |
Total liabilities | | | 116,844 | | | | 181,202 | |
Commitments and contingencies | | | | | | | | |
Employee stock options on redeemable shares | | | 50,226 | | | | 60,706 | |
Stockholders’ equity: | | | | | | | | |
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 72,997,929 and 72,331,964 shares issued and outstanding at June 30, 2007 and December 30, 2006, respectively | | | 72 | | | | 73 | |
Additional paid-in capital | | | 555,749 | | | | 575,047 | |
Accumulated deficit | | | (145,403 | ) | | | (96,013 | ) |
Accumulated other comprehensive income | | | 1,022 | | | | 2,197 | |
| | | | | | | | |
Total stockholders’ equity | | | 411,440 | | | | 481,304 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 578,510 | | | $ | 723,212 | |
| | | | | | | | |
See accompanying notes to these condensed consolidated financial statements.
F-3
FIRST SOLAR, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)
| | | | | | | | |
| | Six Months Ended | |
| | July 1,
| | | June 30,
| |
| | 2006 | | | 2007 | |
|
Cash flows from operating activities: | | | | | | | | |
Cash received from customers | | $ | 31,444 | | | $ | 157,616 | |
Cash paid to suppliers and employees | | | (40,790 | ) | | | (118,742 | ) |
Interest, net of amounts capitalized | | | 156 | | | | 6,413 | |
Income tax | | | — | | | | (19,253 | ) |
Other | | | 53 | | | | (699 | ) |
| | | | | | | | |
Net cash provided by (used in) operating activities | | | (9,137 | ) | | | 25,335 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Purchases of property, plant and equipment | | | (67,804 | ) | | | (80,388 | ) |
Deposits | | | — | | | | (3,229 | ) |
Purchase of marketable securities | | | | | | | (238,855 | ) |
Proceeds from maturities and sales of marketable securities | | | — | | | | 40,254 | |
Purchases of restricted investments | | | (1,652 | ) | | | (5,708 | ) |
Other investments in long-term assets | | | (5 | ) | | | — | |
| | | | | | | | |
Net cash used in investing activities | | | (69,461 | ) | | | (287,926 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Proceeds from notes payable to a related party | | | 10,000 | | | | — | |
Repayment of notes payable to a related party | | | (30,000 | ) | | | — | |
Repayment of long-term debt | | | — | | | | (1,648 | ) |
Equity contributions | | | 30,000 | | | | — | |
Proceeds from stock options exercised | | | 100 | | | | 2,836 | |
Proceeds from debt | | | 73,260 | | | | 41,256 | |
Excess tax benefit from share-based compensation arrangements | | | — | | | | 14,026 | |
Proceeds from economic development funding | | | — | | | | 4,817 | |
Other financing activities | | | 10 | | | | (2 | ) |
| | | | | | | | |
Net cash provided by financing activities | | | 83,370 | | | | 61,285 | |
Effect of exchange rate changes on cash and cash equivalents | | | (98 | ) | | | 1,013 | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 4,674 | | | | (200,293 | ) |
Cash and cash equivalents, beginning of the period | | | 16,721 | | | | 308,092 | |
| | | | | | | | |
Cash and cash equivalents, end of the period | | $ | 21,395 | | | $ | 107,799 | |
| | | | | | | | |
Supplemental disclosure of significant non-cash investing and financing activities: | | | | | | | | |
Property, plant and equipment acquisitions funded by liabilities | | $ | 8,476 | | | $ | 7,743 | |
| | | | | | | | |
Non-cash conversion of debt and accrued interest to equity | | $ | 74,000 | | | $ | — | |
| | | | | | | | |
See accompanying notes to these condensed consolidated financial statements.
F-4
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2007
Note 1 — Basis of Presentation
Basis of presentation. The accompanying unaudited condensed consolidated financial statements of First Solar, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions toForm 10-Q and Article 10 ofRegulation S-X of the Securities and Exchange Commission. Accordingly, the interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 29, 2007, or for any other period. The balance sheet at December 30, 2006 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements and notes should be read in conjunction with the financial statements and notes thereto for the year ended December 30, 2006 included in our Annual Report onForm 10-K filed with the Securities and Exchange Commission.
Fiscal periods. We report our results of operations using a 52 or 53 week fiscal year, which ends on the Saturday on or before December 31. Our fiscal quarters end on the Saturday closest to the end of the applicable calendar quarter. Fiscal 2007 will end on December 29, 2007 and will consist of 52 weeks.
Reclassifications. Certain prior period balances have been reclassified to conform to the current financial statement presentation. These reclassifications had no impact on previously reported results of operations or stockholders’ equity.
Note 2 — Significant Accounting Policies
Our significant accounting policies are disclosed in our Annual Report onForm 10-K for the year ended December 30, 2006 filed with the Securities and Exchange Commission. Our significant accounting policies reflect the adoption of the provisions of FASB Interpretation No. (FIN) 48,Accounting for Uncertainty in Income Taxesin the first quarter of fiscal 2007 and the adoption of FASB Statement 115,Accounting for Certain Investments in Debt and Equity Securitiesin the second quarter of fiscal 2007,and have otherwise not materially changed during the three and six months ended June 30, 2007.
Note 3 — Initial Public Offering
The Securities and Exchange Commission declared the Company’s first registration statements effective on November 16, 2006, which we filed onForms S-1 (RegistrationNo. 333-135574) and pursuant to Rule 462(b) (RegistrationNo. 333-138779) under the Securities Act of 1933 in connection with the initial public offering of the Company’s common stock. Under these registration statements, the Company registered 22,942,500 shares of its common stock, including 2,942,500 subject to an underwriter’s over-allotment option. First Solar registered 16,192,500 of these shares on its own behalf and 6,750,000 of these shares on behalf of certain of its stockholders, including one of the Company’s officers. In November 2006, the Company completed the initial public offering, in which it sold all of these shares that it registered on its behalf and on behalf of the selling stockholders, for an aggregate public offering price of $458.9 million, which included $58.9 million from the underwriters’ exercise of their over-allotment option. Of the $458.9 million of total gross proceeds, the Company received gross proceeds of $323.9 million, against which it charged $16.6 million of underwriting discounts and commissions and $4.6 million of other costs of the offering, resulting in a net increase in the Company’s paid-in capital of $302.7 million. The remaining $135.0 million of gross proceeds went to selling stockholders; they applied $8.4 million to underwriting discounts and commissions and received $126.6 million of the offering proceeds.
F-5
Note 4 — Economic Development Funding
On July 26, 2006, we were approved to receive taxable investment incentives(“Investitionszuschüsse”)of approximately €21.5 million ($28.0 million at an assumed exchange rate of $1.30/€1.00) from the State of Brandenburg, Germany. These funds will reimburse us for certain costs we incurred building our plant in Frankfurt (Oder), Germany, including costs for the construction of buildings and the purchase of machinery and equipment. Receipt of these incentives is conditional upon the State of Brandenburg, Germany having sufficient funds allocated to this program to pay the reimbursements we claim. In addition, we are required to operate our facility for a minimum of five years and employ a specified number of employees during this period. Our incentive approval expires on December 31, 2009. As of June 30, 2007, we had received cash payments of $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 incurred 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 five years. In accordance with the administrative requirements of the Act, we plan to claim reimbursement under the Act in conjunction with the filing of our tax returns with the local German tax office. Therefore we do not expect to receive funding from this program until we file our annual tax return for fiscal 2006 in 2007. In addition, this program expired on December 31, 2006 and we can only claim reimbursement for investments completed by this date. The majority of our buildings and structures and our investment in machinery and equipment were completed by this date. As of 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.
Note 5 — Marketable Securities
Marketable securities at June 30, 2007 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | Gross
| | | Gross
| | | | |
| | | | | Unrealized
| | | Unrealized
| | | Market
| |
| | Cost | | | Gains | | | Losses | | | Value | |
|
Obligations of states and political subdivisions | | | 207,209 | | | | — | | | | (1 | ) | | | 207,208 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 207,209 | | | $ | | | | $ | (1 | ) | | $ | 207,208 | |
| | | | | | | | | | | | | | | | |
The above unrealized losses on our investments during the second quarter of fiscal 2007 were primarily a result of changes in interest rates. We typically invest in highly-rated securities with low probabilities of default. Our investment policy requires investments to be rated single-A or better, limits the types of acceptable investments, concentration as to security holder and duration of the investment.
Market values were determined for each individual security in the investment portfolio using third party market quotes. Our marketable securities consist primarily of auction rate securities and variable rate demand notes with maturities between three months and thirty-five years. When evaluating the investments for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below the amortized cost basis, the financial condition of the issuer, and the Company’s ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery in market value, which may be maturity.
We have classified our marketable securities as “available-for-sale”. All marketable securities represent the investment of funds available for current operations, notwithstanding their contractual maturities. Such marketable securities are recorded at fair value and net unrealized gains and losses are recorded as part of other comprehensive income until realized. Realized gains and losses on the sale of all such securities are reported in earnings, computed using the specific identification cost method.
F-6
Note 6 — Consolidated Balance Sheet Details
Accounts receivable, net
Accounts receivable, net consisted of the following at December 30, 2006 and June 30, 2007 (in thousands):
| | | | | | | | |
| | December 30,
| | | June 30,
| |
| | 2006 | | | 2007 | |
|
Accounts receivable, gross | | $ | 27,127 | | | $ | 13,736 | |
Allowance for doubtful accounts | | | (4 | ) | | | — | |
| | | | | | | | |
Accounts receivable, net | | $ | 27,123 | | | $ | 13,736 | |
| | | | | | | | |
Inventories
Inventories consisted of the following at December 30, 2006 and June 30, 2007 (in thousands):
| | | | | | | | |
| | December 30,
| | | June 30,
| |
| | 2006 | | | 2007 | |
|
Raw materials | | $ | 8,212 | | | $ | 14,679 | |
Work in process | | | 1,123 | | | | 6,555 | |
Finished goods | | | 7,175 | | | | 5,614 | |
| | | | | | | | |
Total inventories | | $ | 16,510 | | | $ | 26,848 | |
| | | | | | | | |
Property, plant and equipment
Property, plant and equipment consisted of the following at December 30, 2006 and June 30, 2007 (in thousands):
| | | | | | | | |
| | December 30,
| | | June 30,
| |
| | 2006 | | | 2007 | |
|
Buildings and improvements | | $ | 21,804 | | | $ | 42,813 | |
Machinery and equipment | | | 79,803 | | | | 152,664 | |
Office equipment and furniture | | | 4,428 | | | | 5,980 | |
Leasehold improvements | | | 3,086 | | | | 3,086 | |
| | | | | | | | |
Gross depreciable property, plant and equipment | | | 109,121 | | | | 204,543 | |
Accumulated depreciation and amortization | | | (18,880 | ) | | | (29,992 | ) |
| | | | | | | | |
Net depreciable property, plant and equipment | | | 90,241 | | | | 174,551 | |
Land | | | 2,836 | | | | 2,877 | |
Construction in progress | | | 85,791 | | | | 68,131 | |
| | | | | | | | |
Net property, plant and equipment | | $ | 178,868 | | | $ | 245,559 | |
| | | | | | | | |
Depreciation and amortization of property, plant and equipment was $2.4 million and $6.1 million for the three months ended July 1, 2006 and June 30, 2007, respectively and was $3.4 million and $11.2 million for the six months ended July 1, 2006 and June 30, 2007, respectively.
We incurred and capitalized interest cost (into our property, plant and equipment) as follows during the three and six months ended July 1, 2006 and June 30, 2007 (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months
| | | Six Months
| |
| | Ended | | | Ended | |
| | July 1,
| | | June 30,
| | | July 1,
| | | June 30,
| |
| | 2006 | | | 2007 | | | 2006 | | | 2007 | |
|
Interest cost incurred | | $ | 1,169 | | | $ | 1,474 | | | $ | 2,473 | | | $ | 2,522 | |
Interest capitalized | | | (884 | ) | | | (191 | ) | | | (1,765 | ) | | | (1,038 | ) |
| | | | | | | | | | | | | | | | |
Interest expense | | $ | 285 | | | $ | 1,283 | | | $ | 708 | | | $ | 1,484 | |
| | | | | | | | | | | | | | | | |
F-7
Accounts payable and accrued expenses
Accounts payable and accrued expenses consisted of the following at December 30, 2006 and June 30, 2007 (in thousands):
| | | | | | | | |
| | December 30,
| | | June 30,
| |
| | 2006 | | | 2007 | |
|
Accounts payable | | $ | 14,001 | �� | | $ | 25,388 | |
Product warranty liability | | | 2,764 | | | | 4,050 | |
Income tax payable | | | 5,152 | | | | 506 | |
Accrued compensation and benefits | | | 2,642 | | | | 8,159 | |
Accrued property, plant and equipment | | | 1,968 | | | | 2,884 | |
Other accrued expenses | | | 5,556 | | | | 10,407 | |
| | | | | | | | |
Total accounts payable and accrued expenses | | $ | 32,083 | | | $ | 51,394 | |
| | | | | | | | |
Note 7 — Share-Based Compensation
We measure share-based compensation cost at the grant date based on the fair value of the award and recognize this cost as an expense over the employee’s requisite service period. The share-based compensation expense that we recognized on our statements of operations for the three and six months ended July 1, 2006 and June 30, 2007 was as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months
| | | Six Months
| |
| | Ended | | | Ended | |
| | July 1,
| | | June 30,
| | | July 1,
| | | June 30,
| |
| | 2006 | | | 2007 | | | 2006 | | | 2007 | |
|
Share-based compensation expense included in: | | | | | | | | | | | | | | | | |
Cost of sales | | $ | 1,242 | | | $ | 2,425 | | | $ | 2,262 | | | $ | 3,920 | |
Research and development | | | 591 | | | | 1,495 | | | | 1,190 | | | | 2,653 | |
Selling, general and administrative | | | 989 | | | | 2,870 | | | | 1,979 | | | | 5,738 | |
Productionstart-up | | | — | | | | 210 | | | | — | | | | 465 | |
| | | | | | | | | | | | | | | | |
Total share-based compensation expense | | $ | 2,822 | | | $ | 7,000 | | | $ | 5,431 | | | $ | 12,776 | |
| | | | | | | | | | | | | | | | |
The increase in share-based compensation expense was primarily the result of new awards.
The following table presents our share-based compensation expense by type of award for the three and six months ended July 1, 2006 and June 30, 2007 (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months
| | | Six Months
| |
| | Ended | | | Ended | |
| | July 1,
| | | June 30,
| | | July 1,
| | | June 30,
| |
| | 2006 | | | 2007 | | | 2006 | | | 2007 | |
|
Stock options | | $ | 2,681 | | | $ | 6,980 | | | $ | 5,366 | | | $ | 12,660 | |
Unrestricted stock | | | — | | | | 56 | | | | — | | | | 158 | |
Restricted stock units | | | — | | | | 42 | | | | — | | | | 42 | |
Net amount absorbed into inventory | | | 141 | | | | (78 | ) | | | 65 | | | | (84 | ) |
| | | | | | | | | | | | | | | | |
Total share-based compensation expense | | $ | 2,822 | | | $ | 7,000 | | | $ | 5,431 | | | $ | 12,776 | |
| | | | | | | | | | | | | | | | |
Share-based compensation cost capitalized in our inventory was $0.3 million at both July 1, 2006 and June 30, 2007. On April 30, 2007, we modified 474,374 of our share options to change their vesting dates from August 31, 2008 to August 31, 2007 and 1,171,060 of our share options to change their vesting dates from August 31, 2008 to January 15, 2008. These modifications do not affect the fair value of these share options that we use to calculate our share-based compensation expense, but the modifications do shorten the requisite service period over which we recognize that compensation expense and also increase our estimate of the number of these share options that we expect to vest. The increase in the number of these share options that we expect to vest increased the compensation cost that we expect to recognize over the service periods of the share options by $0.8 million. At June 30, 2007, we had $22.7 million of unrecognized share-based compensation cost related to unvested stock option awards, which we expect to recognize as
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an expense over a weighted-average period of approximately two years, and $1.3 million of unrecognized share-based compensation cost related to unvested restricted stock units, which we expect to recognize as an expense over a weighted-average period of approximately four years.
Note 8 — Debt
Our long-term debt consisted of the following at December 30, 2006 and June 30, 2007 (in thousands):
| | | | | | | | |
| | December 30,
| | | June 30,
| |
| | 2006 | | | 2007 | |
|
Euro denominated loan, variable interest Euribor plus 1.6%, due 2008 through 2012 | | $ | 45,216 | | | $ | 62,043 | |
Euro denominated loan, variable interest Euribor plus 1.8%, due 2012 | | | — | | | | 20,211 | |
2.25% loan, due 2006 through 2015 | | | 14,865 | | | | 14,051 | |
0.25% — 3.25% loan, due 2007 through 2009 | | | 5,000 | | | | 4,166 | |
Capital lease obligations | | | 15 | | | | 12 | |
| | | | | | | | |
| | | 65,096 | | | | 100,483 | |
Less unamortized discount | | | (738 | ) | | | (679 | ) |
| | | | | | | | |
Total long-term debt | | | 64,358 | | | | 99,804 | |
Less current portion | | | (3,311 | ) | | | (3,327 | ) |
| | | | | | | | |
Non-current portion | | $ | 61,047 | | | $ | 96,477 | |
| | | | | | | | |
We had outstanding borrowings of $16.3 million and $22.4 million at December 30, 2006 and June 30, 2007, respectively, which we classify as short-term debt. We must repay this debt with any funding we receive from the Federal Republic of Germany under the Investment Grant Act of 2005, but in any event, this debt must be paid in full by December 30, 2008.
Note 9 — Commitments and Contingencies
Product warranties
We offer warranties on our products and record an estimate of the associated liability based on the number of solar modules under warranty at customer locations, our historical experience with warranty claims, our monitoring of field installation sites, our in-house testing of our solar modules and our estimated per-module replacement cost.
Product warranty activity during the three and six months ended July 1, 2006 and June 30, 2007 was as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months
| | | Six Months
| |
| | Ended | | | Ended | |
| | July 1,
| | | June 30,
| | | July 1,
| | | June 30,
| |
| | 2006 | | | 2007 | | | 2006 | | | 2007 | |
|
Product warranty liability, beginning of period | | $ | 1,931 | | | $ | 3,355 | | | $ | 1,853 | | | $ | 2,764 | |
Accruals for new warranties issued (warranty expense) | | | 335 | | | | 820 | | | | 454 | | | | 1,549 | |
Settlements | | | (177 | ) | | | (12 | ) | | | (178 | ) | | | (12 | ) |
Change in estimate of warranty liability | | | — | | | | (113 | ) | | | (40 | ) | | | (251 | ) |
| | | | | | | | | | | | | | | | |
Product warranty liability, end of period | | $ | 2,089 | | | $ | 4,050 | | | $ | 2,089 | | | $ | 4,050 | |
| | | | | | | | | | | | | | | | |
Note 10 — Income Taxes
On December 31, 2006, we adopted the provisions of FIN 48, which is an interpretation of SFAS 109,Accounting for Income Taxes. Tax law is subject to significant and varied interpretation, so an enterprise may be uncertain whether a tax position that it has taken will ultimately be sustained when it files its tax return. FIN 48 establishes a “more-likely-than-not” threshold that must be met before a tax benefit can be recognized in the financial statements and, for those benefits that may be recognized, stipulates that enterprises should recognize the largest amount of the tax benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the taxing authority. FIN 48 also addresses changes in judgments about the realizability of tax benefits, accrual of interest and penalties on
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unrecognized tax benefits, classification of liabilities for unrecognized tax benefits and related financial statement disclosures. As permitted by FIN 48, our policy is to recognize any interest and penalties that we might incur related to our tax positions in income tax expense.
Upon our adoption of FIN 48 at the beginning of our fiscal 2007, we identified $0.5 million of unrecognized tax benefits from prior years that, if recognized, would affect our effective tax rate. We also identified a liability of $0.1 million related to uncertain tax positions, which we recorded by a cumulative effect adjustment to equity. During the six months ended June 30, 2007, we had an increase of $0.1 million in unrecognized tax benefits that, if recognized, would affect the effective tax rate. During the six months ended June 30, 2007, we did not identify any reductions in unrecognized tax benefits resulting from settlements with taxing authorities or due to the lapse of applicable statutes of limitations.
We are subject to filing requirements for income tax returns in the U.S federal jurisdiction and various state and foreign jurisdictions. We are not presently undergoing any examinations by any taxing authorities, but our tax years going back to 2003 are subject to examination in all tax jurisdictions in which we operate.
At each period end, we exercise significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our likelihood of utilizing any future tax benefit from our deferred tax assets. Prior to our assessment at June 30, 2007, we had a valuation allowance on all of our net deferred tax assets in all of the taxing jurisdictions in which we operate. The ultimate realization of deferred tax assets depends on the generation of sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions during the future periods in which the underlying tax-deductible temporary differences become deductible. We determined the valuation allowance on our deferred tax assets in accordance with the provisions of SFAS 109, which require us to weigh both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. We evaluated all significant available positive and negative evidence, including the existence of cumulative net losses, benefits that could be realized from available tax strategies and forecasts of future taxable income, in determining the need for a valuation allowance on our deferred tax assets.
After applying the evaluation guidance of SFAS 109 as of June 30, 2007, we concluded that it was more-likely-than-not that $39.2 million of deferred tax assets against which we had previously held a full valuation allowance would be realized during future periods. This amount pertained to U.S. deferred tax assets. The reversal of the $39.2 million of valuation allowances was based upon management’s assessment of the future realization of our U.S. deferred income tax assets. 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. As a result of the reversal of the valuation allowance, we recorded a tax benefit of $39.2 million on our condensed consolidated statement of operations for the three months ended June 30, 2007, which was partially offset by tax expenses of $2.7 million on our operations for that period. We also concluded that it was necessary to retain a valuation allowance against all of our foreign net deferred tax assets of $11.0 million. We will maintain this valuation allowance until sufficient positive evidence exists to support its reversal in accordance with SFAS 109.
Note 11 — Income (loss) per share
Basic net income (loss) per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed giving effect to all potential dilutive common stock, including stock options.
F-10
The reconciliation of the numerator and denominator used in the calculation of basic and diluted net income (loss) per share is as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | July 1,
| | | June 30,
| | | July 1,
| | | June 30,
| |
| | 2006 | | | 2007 | | | 2006 | | | 2007 | |
|
Basic net income (loss) per share | | | | | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (2,461 | ) | | $ | 44,418 | | | $ | (8,356 | ) | | $ | 49,446 | |
| | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted-average common stock outstanding | | | 54,358 | | | | 72,596 | | | | 51,250 | | | | 72,472 | |
Effect of rights issue | | | — | | | | — | | | | 1,317 | | | | — | |
| | | | | | | | | | | | | | | | |
Weighted-average shares used in computing basic net income (loss) per share | | | 54,358 | | | | 72,596 | | | | 52,567 | | | | 72,472 | |
| | | | | | | | | | | | | | | | |
Diluted net income (loss) per share | | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted-average shares used in computing basic net income (loss) per share | | | 54,358 | | | | 72,596 | | | | 52,567 | | | | 72,472 | |
Add stock options and RSU outstanding | | | — | | | | 3,493 | | | | — | | | | 3,268 | |
| | | | | | | | | | | | | | | | |
Weighted-average shares used in computing diluted net income (loss) per share | | | 54,358 | | | | 76,089 | | | | 52,567 | | | | 75,740 | |
| | | | | | | | | | | | | | | | |
The following number of outstanding options were excluded from the computation of diluted net income (loss) per share as they had an antidilutive effect (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months
| | | Six Months
| |
| | Ended | | | Ended | |
| | July 1,
| | | June 30,
| | | July 1,
| | | June 30,
| |
| | 2006 | | | 2007 | | | 2006 | | | 2007 | |
|
Options to purchase common stock and RSU | | | 5,171 | | | | 2,786 | | | | 5,200 | | | | 3,112 | |
| | | | | | | | | | | | | | | | |
Note 12 — Comprehensive Income (Loss)
Comprehensive income (loss) includes foreign currency translation adjustments, unrealized gains on derivate instruments designated and qualifying as cash flow hedges and unrealized losses on available-for-sale securities, the impact of which has been excluded from net income and reflected as components of stockholders’ equity (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | July 1,
| | | June 30,
| | | July 1,
| | | June 30,
| |
| | 2006 | | | 2007 | | | 2006 | | | 2007 | |
|
Net income (loss) | | $ | (2,461 | ) | | $ | 44,418 | | | $ | (8,356 | ) | | $ | 49,446 | |
Foreign currency translation adjustments | | | 27 | | | | 179 | | | | (100 | ) | | | 340 | |
Change in unrealized gain (loss) on marketable securities | | | — | | | | (1 | ) | | | — | | | | (1 | ) |
Change in unrealized gain (loss) on derivative instruments | | | — | | | | 817 | | | | — | | | | 836 | |
| | | | | | | | | | | | | | | | |
Comprehensive income (loss) | | $ | (2,434 | ) | | $ | 45,413 | | | $ | (8,456 | ) | | $ | 50,621 | |
| | | | | | | | | | | | | | | | |
F-11
Components of accumulated other comprehensive income were as follows (in thousands):
| | | | | | | | |
| | December 30,
| | | June 30,
| |
| | 2006 | | | 2007 | |
|
Foreign currency translation adjustments | | $ | 1,002 | | | $ | 1,342 | |
Unrealized loss on marketable securities | | | — | | | | (1 | ) |
Unrealized gain on derivative instruments | | | 20 | | | | 856 | |
| | | | | | | | |
Accumulated other comprehensive loss | | $ | 1,022 | | | $ | 2,197 | |
| | | | | | | | |
Note 13 — Statement of Cash Flows
Following is a reconciliation of net income (loss) to net cash provided by or used in operating activities for the six months ended July 1, 2006 and June 30, 2007 (in thousands):
| | | | | | | | |
| | Six Months Ended | |
| | July 1,
| | | June 30,
| |
| | 2006 | | | 2007 | |
|
Net income (loss) | | $ | (8,356 | ) | | $ | 49,446 | |
Adjustment to reconcile net income (loss) to cash provided by (used in) operating activities: | | | | | | | | |
Depreciation and amortization | | | 3,388 | | | | 11,150 | |
Stock-based compensation | | | 5,431 | | | | 12,776 | |
Deferred income taxes | | | — | | | | (39,218 | ) |
Excess tax benefit from share-based compensation arrangements | | | — | | | | (14,026 | ) |
Loss on disposal of property and equipment | | | — | | | | (2 | ) |
Non-cash interest | | | 281 | | | | (3 | ) |
Non-cash loss | | | 45 | | | | — | |
Provision for excess and obsolete inventories | | | — | | | | (83 | ) |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (11,710 | ) | | | 13,518 | |
Inventories | | | (1,046 | ) | | | (10,139 | ) |
Prepaid expenses and other current assets | | | (1,840 | ) | | | (11,090 | ) |
Other non-current assets | | | — | | | | (319 | ) |
Accounts payable and accrued expenses | | | 4,670 | | | | 13,325 | |
| | | | | | | | |
Total adjustments | | | (781 | ) | | | (24,111 | ) |
| | | | | | | | |
Net cash provided by (used in) operating activities | | $ | (9,137 | ) | | $ | 25,335 | |
| | | | | | | | |
Note 14 — Derivative Financial Instruments
We have interest rate swaps with a financial institution that effectively convert to fixed rates the floating variable rate of Euribor on certain drawdowns taken on the term loan portion of our credit facility with a consortium of banks led by IKB Deutsche Industriebank AG. At June 30, 2007, the notional values of the interest rate swaps (in thousands) and their annual fixed payment rates and maturities were as follows:
| | | | | | | | |
Notional Amount | | Fixed Rate | | | Maturity | |
|
€14,921 ($19,397 at an assumed exchange rate of $1.30/€1.00) | | | 3.96 | % | | | December 2012 | |
€9,902 ($12,873 at an assumed exchange rate of $1.30/€1.00) | | | 4.03 | % | | | December 2012 | |
€3,928 ($5,106 at an assumed exchange rate of $1.30/€1.00) | | | 4.07 | % | | | December 2012 | |
€10,685 ($13,891 at an assumed exchange rate of $1.30/€1.00) | | | 4.29 | % | | | December 2012 | |
€3,248 ($4,222 at an assumed exchange rate of $1.30/€1.00) | | | 4.25 | % | | | December 2012 | |
€3,363 ($4,372 at an assumed exchange rate of $1.30/€1.00) | | | 4.55 | % | | | December 2012 | |
F-12
The notional amounts of the interest rate swaps are scheduled to decline in accordance with our scheduled principal payments on the hedged term loan drawdowns. These derivative financial instruments qualified for accounting as cash flow hedges in accordance with SFAS 133,Accounting for Derivative Instruments and Hedging Activitiesand we designated them as such. As a result, we classified the aggregate fair value of the interest rate swap agreements, which was $0.8 million, as an other current asset on our balance sheet at June 30, 2007 and we record changes in that fair value in other comprehensive income. We assessed the interest rate swap agreements as highly effective as cash flow hedges at June 30, 2007. We use interest rate swap agreements to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments; we do not use interest rate swap agreements for speculative or trading purposes.
During the six months ended June 30, 2007, we purchased a forward foreign exchange contract to hedge certain foreign currency denominated intercompany long-term debt. This hedge does not qualify for hedge accounting treatment in accordance with the provisions of SFAS 133,Accounting for Derivative Instruments and Hedging Activities. Accordingly, we recognize gains or losses from the fluctuation in foreign exchange rates and the valuation of this hedging contract in other expenses. We do not use derivative financial instruments for trading or speculative purposes. 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. Unrealized mark-to-market losses recorded in the three and six months ended June 30, 2007 were $0.2 million and $0.5 million, respectively. The contract will be due on February 27, 2009.
Note 15 — Recent Accounting Pronouncements
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. Unrealized gains and losses on items for which the fair value option has been elected are reported 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 consolidated financial position and results of operations.
In June 2007, the FASB Emerging Issues Task Force (“EITF”) published IssueNo. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities.” EITFNo. 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. EITFNo. 07-3 is effective for us beginning on January 1, 2008. Earlier application is not permitted. We do not expect that adoption of EITFNo. 07-3 will 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 FSPFIN 48-1, an enterprise’s 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. FSPFIN 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 FSPFIN 48-1 would be required to retrospectively apply its provisions to the date of the initial adoption of FIN No. 48. FSPFIN 48-1 did not have a material impact on our initial adoption of FIN No. 48.
Note 16 — Subsequent Events
On July 9, 2007 we announced that we entered into five agreements for the manufacture and sale of solar modules totaling 685 Megawatts. These new agreements are expected to allow for sales of approximately $1.28 billion at an assumed exchange rate of $1.30/€1.00 over the period of 2007 to 2012. Included in the new agreements are long term agreements with EDF Energies Nouvelles (EDF EN), a renewable energy producer specializing in wind, hydro, biomass, and solar power plants; and Séchilienne-Sidec, a renewable energy producer specializing in thermal, wind, and solar power plants. In addition, First Solar and the Juwi Group have also agreed to increase volumes under an existing long term supply agreement. These customers are targeting development of solar projects with First Solar modules in Spain, Italy, France, Greece and Portugal. Also included in the new agreements is a long term agreement with RIO Energie GmbH & Co. KG, a joint venture of the Stadtwerke Mainz AG utility company and the Juwi Group with a focus on the development of solar power plants in the utility service region of the Stadtwerke Mainz AG and its subsidiaries through 2012. These new long term agreements are structured on terms similar to our existing long term
F-13
supply contracts. Furthermore, we entered into new multi-year sales contracts with SunEdison, LLC, a leading provider of solar generated electricity to commercial, municipal, and utility customers in North America. SunEdison will deploy First Solar modules in Ontario, Canada, which has adopted a feed-in tariff for solar energy.
On July 5, 2007 we completed a tender offer to amend, at the election of the applicable option holder, certain portions of options to purchase Company stock that were granted under the Company’s 2003 Unit Option Plan between May 1, 2004 and October 1, 2005, were held by Eligible Optionees as of the Expiration Time, have vested or will vest on or after January 1, 2005 and were still outstanding and unexercised on the expiration date of the offer. The offer expired on July 5, 2007 and we accepted for amendment Eligible Portions of Eligible Options to purchase 2,135,834 shares of common stock.
On July 19, 2007 we filed a registration statement onForm S-1 for a proposed follow-on offering of our common stock. The planned offering will be comprised of up to 4,000,000 shares offered by us and 5,650,000 shares offered by existing stockholders. We intend to use the net proceeds from this offering for the build of plant two at our Malaysian manufacturing center, fund the associated productionstart-up andramp-up costs and use the remainder for working capital and general corporate purposes, including possible future capacity expansions.
On July 30, 2007 the compensation committee of our Board approved the grant of 301,340 options and restricted stock units to certain of our current employees and consultants. The estimated grant date fair value, after estimated forfeitures, for these grants is approximately $28.0 million, of which $8.7 million will be recognized as share-based compensation expense in the third quarter of fiscal 2007 due to immediate vesting upon grant of approximately 72,202 restricted stock units and the remaining amount of $19.3 million will be recognized over the respective vesting period, which is generally four years.
F-14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of First Solar, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows, and of members’/shareholders’stockholders’ equity and comprehensive lossincome (loss) present fairly, in all material respects, the financial position of First Solar, Inc. and its subsidiaries at December 31, 200530, 2006 and December 25, 2004,31, 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 200530, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule appearing under Item 16(b) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 19 to the consolidated financial statements, the Company restated its 2004 and 2003 financial statements.
As discussed in Note 13 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation in 2005.
PricewaterhouseCoopers llp
PRICEWATERHOUSECOOPERS LLP
Phoenix, Arizona
March 15, 2007
June 30, 2006, except for the stock split
F-15
discussed in paragraph 2 to Note 1 to the
consolidated financial statements, as to which
the date is November 1, 2006
F-2
FIRST SOLAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2005 December 25, 2004, and SeptemberDecember 30, 2006
(in thousands, except share information)
| | | | | | | | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
| | | | | | | | | |
| | (as restated) | | | | | (unaudited) | |
Assets | | | | | | | | | | | | |
|
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 3,465 | | | $ | 16,721 | | | $ | 31,373 | |
Marketable securities | | | 306 | | | | 312 | | | | 320 | |
Accounts receivable, net | | | 4,393 | | | | 1,098 | | | | 26,433 | |
Inventories | | | 3,686 | | | | 6,917 | | | | 10,526 | |
Economic development funding receivable | | | — | | | | — | | | | 16,720 | |
Prepaid expenses and other current assets | | | 431 | | | | 1,505 | | | | 4,575 | |
| | | | | | | | | |
Total current assets | | | 12,281 | | | | 26,553 | | | | 89,947 | |
|
Property, plant, and equipment, net | | | 29,277 | | | | 73,778 | | | | 156,799 | |
Restricted investments | | | — | | | | 1,267 | | | | 6,734 | |
Other noncurrent assets | | | 207 | | | | 286 | | | | 1,666 | |
| | | | | | | | | |
|
Total assets | | $ | 41,765 | | | $ | 101,884 | | | $ | 255,146 | |
| | | | | | | | | |
|
Liabilities and Members’/ Stockholders’ Equity | | | | | | | | | | | | |
|
Current liabilities: | | | | | | | | | | | | |
Short-term debt | | $ | — | | | $ | — | | | $ | 6,827 | |
Note payable to a related party | | | — | | | | 20,000 | | | | 26,000 | |
Current portion of long-term debt | | | — | | | | 142 | | | | 2,621 | |
Accounts payable and accrued expenses | | | 5,353 | | | | 13,771 | | | | 34,949 | |
Other current liabilities | | | — | | | | — | | | | 160 | |
| | | | | | | | | |
Total current liabilities | | | 5,353 | | | | 33,913 | | | | 70,557 | |
Accrued recycling | | | — | | | | 917 | | | | 2,762 | |
Note payable to a related party | | | 8,700 | | | | 8,700 | | | | — | |
Long-term debt | | | 5,000 | | | | 19,881 | | | | 35,569 | |
Other noncurrent liabilities | | | 71 | | | | 79 | | | | 56 | |
| | | | | | | | | |
Total liabilities | | | 19,124 | | | | 63,490 | | | | 108,944 | |
| | | | | | | | | |
Commitments and contingencies | | | | | | | | | | | | |
Employee stock options on redeemable shares | | | — | | | | 25,265 | | | | 24,944 | |
Members’/stockholders’ equity: | | | | | | | | | | | | |
Membership equity | | | 165,742 | | | | 162,307 | | | | — | |
Common stock, $0.001 par value per share; 242,500,000 shares authorized; 56,137,276 shares issued and outstanding at September 30, 2006 (unaudited) | | | — | | | | — | | | | 56 | |
Additional paid-in capital | | | — | | | | — | | | | 274,707 | |
Accumulated deficit | | | (142,915 | ) | | | (149,377 | ) | | | (153,441 | ) |
Accumulated other comprehensive income (loss) | | | (186 | ) | | | 199 | | | | (64 | ) |
| | | | | | | | | |
Total members’/stockholders’ equity | | | 22,641 | | | | 13,129 | | | | 121,258 | |
| | | | | | | | | |
Total liabilities and members’/stockholders’ equity | | $ | 41,765 | | | $ | 101,884 | | | $ | 255,146 | |
| | | | | | | | | |
| | | | | | | | |
| | December 31,
| | | December 30,
| |
| | 2005 | | | 2006 | |
|
Assets | | | | | | | | |
| | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 16,721 | | | $ | 308,092 | |
Short-term investments | | | 312 | | | | 323 | |
Accounts receivable, net | | | 1,098 | | | | 27,966 | |
Inventories | | | 6,917 | | | | 16,510 | |
Economic development funding receivable | | | — | | | | 27,515 | |
Prepaid expenses and other current assets | | | 1,505 | | | | 8,116 | |
| | | | | | | | |
Total current assets | | | 26,553 | | | | 388,522 | |
Property, plant and equipment, net | | | 73,778 | | | | 178,868 | |
Restricted investments | | | 1,267 | | | | 8,224 | |
Other noncurrent assets | | | 286 | | | | 2,896 | |
| | | | | | | | |
Total assets | | $ | 101,884 | | | $ | 578,510 | |
| | | | | | | | |
Liabilities and Members’/Stockholders’ Equity | | | | | | | | |
| | | | | | | | |
Current liabilities: | | | | | | | | |
Short-term debt | | $ | — | | | $ | 16,339 | |
Note payable to a related party | | | 20,000 | | | | — | |
Current portion of long-term debt | | | 142 | | | | 3,311 | |
Accounts payable and accrued expenses | | | 13,771 | | | | 32,083 | |
Other current liabilities | | | — | | | | 340 | |
| | | | | | | | |
Total current liabilities | | | 33,913 | | | | 52,073 | |
Accrued recycling | | | 917 | | | | 3,724 | |
Note payable to a related party | | | 8,700 | | | | — | |
Long-term debt | | | 19,881 | | | | 61,047 | |
Other noncurrent liabilities | | | 79 | | | | — | |
| | | | | | | | |
Total liabilities | | | 63,490 | | | | 116,844 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
Employee stock options on redeemable shares | | | 25,265 | | | | 50,226 | |
Members’/stockholders’ equity: | | | | | | | | |
Membership equity | | | 162,307 | | | | — | |
Preferred stock, $0.001 par value per share; 30,000,000 shares authorized; no shares issued and outstanding at December 30, 2006 | | | — | | | | — | |
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 72,331,964 shares issued and outstanding at December 30, 2006 | | | — | | | | 72 | |
Additional paid-in capital | | | — | | | | 555,749 | |
Accumulated deficit | | | (149,377 | ) | | | (145,403 | ) |
Accumulated other comprehensive income | | | 199 | | | | 1,022 | |
| | | | | | | | |
Total members’/stockholders’ equity | | | 13,129 | | | | 411,440 | |
| | | | | | | | |
Total liabilities and members’/stockholders’ equity | | $ | 101,884 | | | $ | 578,510 | |
| | | | | | | | |
See accompanying notes to these consolidated financial statements.
F-16
F-3
FIRST SOLAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 25, 2004, December 31, 2005 December 25, 2004, and December 27, 2003 and
the Nine Months Ended September 30, 2006 and September 24, 2005
(in thousands, except per unit/share amounts)
| | | | | | | | | | | | | | | | | | | | | |
| | | | Nine Months | |
| | Years Ended | | | Ended | |
| | | | | | |
| | 2003 | | | 2004 | | | 2005 | | | 2005 | | | 2006 | |
| | | | | | | | | | | | | | | |
| | (as restated) | | | (as restated) | | | | | |
| | | | | | | | (unaudited) | |
Net sales | | $ | 3,210 | | | $ | 13,522 | | | $ | 48,063 | | | $ | 34,482 | | | $ | 82,279 | |
Cost of sales | | | 11,495 | | | | 18,851 | | | | 31,483 | | | | 21,672 | | | | 53,650 | |
| | | | | | | | | | | | | | | |
Gross profit (loss) | | | (8,285 | ) | | | (5,329 | ) | | | 16,580 | | | | 12,810 | | | | 28,629 | |
| | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Research and development | | | 3,841 | | | | 1,240 | | | | 2,372 | | | | 910 | | | | 4,712 | |
Selling, general, and administrative | | | 11,981 | | | | 9,312 | | | | 15,825 | | | | 8,834 | | | | 22,398 | |
Production start-up | | | — | | | | 900 | | | | 3,173 | | | | 1,410 | | | | 7,750 | |
| | | | | | | | | | | | | | | |
| | | 15,822 | | | | 11,452 | | | | 21,370 | | | | 11,154 | | | | 34,860 | |
| | | | | | | | | | | | | | | |
Operating income (loss) | | | (24,107 | ) | | | (16,781 | ) | | | (4,790 | ) | | | 1,656 | | | | (6,231 | ) |
Foreign currency gain (loss) | | | — | | | | 116 | | | | (1,715 | ) | | | (1,052 | ) | | | 2,792 | |
Interest expense | | | (3,974 | ) | | | (100 | ) | | | (418 | ) | | | (146 | ) | | | (866 | ) |
Other income (expense), net | | | 38 | | | | (6 | ) | | | 372 | | | | 195 | | | | 422 | |
| | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (28,043 | ) | | | (16,771 | ) | | | (6,551 | ) | | | 653 | | | | (3,883 | ) |
Income tax expense | | | — | | | | — | | | | — | | | | — | | | | 181 | |
| | | | | | | | | | | | | | | |
Income (loss) before cumulative effect of change in accounting principle | | | (28,043 | ) | | | (16,771 | ) | | | (6,551 | ) | | | 653 | | | | (4,064 | ) |
Cumulative effect of change in accounting for share-based compensation | | | — | | | | — | | | | 89 | | | | 89 | | | | — | |
| | | | | | | | | | | | | | | |
Net income (loss) | | $ | (28,043 | ) | | $ | (16,771 | ) | | $ | (6,462 | ) | | $ | 742 | | | $ | (4,064 | ) |
| | | | | | | | | | | | | | | |
Income (loss) per membership unit/share before cumulative effect of change in accounting principle— basic and diluted | | $ | (0.78 | ) | | $ | (0.39 | ) | | $ | (0.13 | ) | | $ | 0.01 | | | $ | (0.08 | ) |
Cumulative effect of change in accounting principle—basic and diluted | | | — | | | | — | | | | 0.00 | | | | 0.00 | | | | — | |
| | | | | | | | | | | | | | | |
Net income (loss) per membership unit/share—basic and diluted | | $ | (0.78 | ) | | $ | (0.39 | ) | | $ | (0.13 | ) | | $ | 0.01 | | | $ | (0.08 | ) |
| | | | | | | | | | | | | | | |
Weighted-average units/shares used to compute net income (loss) per unit/share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 36,028 | | | | 43,198 | | | | 48,846 | | | | 48,462 | | | | 53,757 | |
| | | | | | | | | | | | | | | |
| Diluted | | | 36,028 | | | | 43,198 | | | | 48,846 | | | | 50,015 | | | | 53,757 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Years Ended | |
| | 2004 | | | 2005 | | | 2006 | |
|
Net sales | | $ | 13,522 | | | $ | 48,063 | | | $ | 134,974 | |
Cost of sales | | | 18,851 | | | | 31,483 | | | | 80,730 | |
| | | | | | | | | | | | |
Gross profit (loss) | | | (5,329 | ) | | | 16,580 | | | | 54,244 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Research and development | | | 1,240 | | | | 2,372 | | | | 6,361 | |
Selling, general and administrative | | | 9,312 | | | | 15,825 | | | | 33,348 | |
Productionstart-up | | | 900 | | | | 3,173 | | | | 11,725 | |
| | | | | | | | | | | | |
| | | 11,452 | | | | 21,370 | | | | 51,434 | |
| | | | | | | | | | | | |
Operating income (loss) | | | (16,781 | ) | | | (4,790 | ) | | | 2,810 | |
Foreign currency gain (loss) | | | 116 | | | | (1,715 | ) | | | 5,544 | |
Interest expense | | | (100 | ) | | | (418 | ) | | | (1,023 | ) |
Other income (expense), net | | | (6 | ) | | | 372 | | | | 1,849 | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | (16,771 | ) | | | (6,551 | ) | | | 9,180 | |
Income tax expense | | | — | | | | — | | | | 5,206 | |
| | | | | | | | | | | | |
Income (loss) before cumulative effect of change in accounting principle | | | (16,771 | ) | | | (6,551 | ) | | | 3,974 | |
Cumulative effect of change in accounting for share-based compensation | | | — | | | | 89 | | | | — | |
| | | | | | | | | | | | |
Net income (loss) | | $ | (16,771 | ) | | $ | (6,462 | ) | | $ | 3,974 | |
| | | | | | | | | | | | |
Income (loss) per membership unit/share before cumulative effect of change in accounting principle—basic and diluted | | $ | (0.39 | ) | | $ | (0.13 | ) | | $ | 0.07 | |
Cumulative effect of change in accounting principle—basic and diluted | | | — | | | | 0.00 | | | | — | |
| | | | | | | | | | | | |
Net income (loss) per membership unit/share—basic and diluted | | $ | (0.39 | ) | | $ | (0.13 | ) | | $ | 0.07 | |
| | | | | | | | | | | | |
Weighted-average units/shares used to compute net income (loss) per unit/share: | | | | | | | | | | | | |
Basic | | | 43,198 | | | | 48,846 | | | | 56,310 | |
| | | | | | | | | | | | |
Diluted | | | 43,198 | | | | 48,846 | | | | 58,255 | |
| | | | | | | | | | | | |
See accompanying notes to these consolidated financial statements.
F-17
F-4
FIRST SOLAR, INC. AND SUBSIDIARIES
Consolidated Statements of Members’/Stockholders’ Equity and Comprehensive LossIncome (Loss)
For the Years Ended December 25, 2004, December 31, 2005 December 25, 2004, and December 27, 2003
and the Nine Months Ended September 30, 2006
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Membership | | | | | | | | | Accumulated | | | |
| | Equity | | | Common Stock | | | Additional | | | | | Other | | | |
| | | | | | | | Paid-In | | | Accumulated | | | Comprehensive | | | Total | |
| | Units | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Loss | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 28, 2002 | | | 56,978 | | | $ | 35,098 | | | | — | | | $ | — | | | $ | — | | | $ | (79,227 | ) | | $ | — | | | $ | (44,129 | ) |
Cumulative effect of restatements | | | — | | | | 19,355 | | | | — | | | | — | | | | — | | | | (18,854 | ) | | | — | | | | 501 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 28, 2002, as restated | | | 56,978 | | | | 54,453 | | | | — | | | | — | | | | — | | | | (98,081 | ) | | | — | | | | (43,628 | ) |
Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss, as restated | | | — | | | | — | | | | — | | | | — | | | | — | | | | (28,043 | ) | | | — | | | | (28,043 | ) |
| Foreign currency translation adjustments, as restated | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (28,042 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Forfeiture of membership units | | | (27,432 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Repurchase of membership units, as restated | | | (810 | ) | | | — | | | | — | | | | — | | | | — | | | | (20 | ) | | | — | | | | (20 | ) |
Transfer of First Solar US Manufacturing, LLC equity to First Solar Holdings, LLC, as restated | | | — | | | | 82,600 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 82,600 | |
Cash contributions from owner, as restated | | | 4,123 | | | | 8,500 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 8,500 | |
Stock-based compensation | | | — | | | | 1,146 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,146 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 27, 2003, as restated | | | 32,859 | | | | 146,699 | | | | — | | | | — | | | | — | | | | (126,144 | ) | | | 1 | | | | 20,556 | |
Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss, as restated | | | — | | | | — | | | | — | | | | — | | | | — | | | | (16,771 | ) | | | — | | | | (16,771 | ) |
| Foreign currency translation adjustments, as restated | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (187 | ) | | | (187 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss, as restated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (16,958 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash contributions from owner | | | 8,681 | | | | 17,900 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 17,900 | |
Stock-based compensation | | | — | | | | 1,143 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,143 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 25, 2004, as restated | | | 41,540 | | | | 165,742 | | | | — | | | | — | | | | — | | | | (142,915 | ) | | | (186 | ) | | | 22,641 | |
Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,462 | ) | | | — | | | | (6,462 | ) |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 385 | | | | 385 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (6,077 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Equity contributions | | | 3,674 | | | | 16,663 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 16,663 | |
Stock-based compensation | | | — | | | | 5,167 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,167 | |
Reclassifications to employee stock options on redeemable shares | | | — | | | | (25,265 | ) | | | — | | | | �� | | | | — | | | | — | | | | — | | | | (25,265 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | | 45,214 | | | | 162,307 | | | | — | | | | — | | | | — | | | | (149,377 | ) | | | 199 | | | | 13,129 | |
Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (4,064 | ) | | | — | | | | (4,064 | ) |
| Foreign currency translation adjustments (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (110 | ) | | | (110 | ) |
| Change in unrealized loss on derivative instruments designated and qualifying as cash flow hedges (unaudited) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (153 | ) | | | (153 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss (unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,327 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash contributions from owner (unaudited) | | | 6,613 | | | | 30,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 30,000 | |
Stock issued upon conversion of convertible notes | | | — | | | | — | | | | 4,261 | | | | 1 | | | | 73,999 | | | | — | | | | — | | | | 74,000 | |
Conversion of membership units into common shares (unaudited) | | | (51,827 | ) | | | (192,307 | ) | | | 51,827 | | | | 11 | | | | 192,296 | | | | — | | | | — | | | | — | |
Stock-based compensation (unaudited) | | | — | | | | — | | | | — | | | | — | | | | 8,035 | | | | — | | | | — | | | | 8,035 | |
Stock options exercised (unaudited) | | | — | | | | — | | | | 49 | | | | — | | | | 100 | | | | — | | | | — | | | | 100 | |
Reclassifications to employee stock options on redeemable shares (unaudited) | | | — | | | | — | | | | — | | | | — | | | | 321 | | | | — | | | | — | | | | 321 | |
Effect of stock split (unaudited) | | | — | | | | — | | | | — | | | | 44 | | | | (44 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2006 (unaudited) | | | — | | | $ | — | | | | 56,137 | | | $ | 56 | | | $ | 274,707 | | | $ | (153,441 | ) | | $ | (64 | ) | | $ | 121,258 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Accumulated
| | | | |
| | | | | | | | | | | | | | Additional
| | | | | | Other
| | | | |
| | Membership Equity | | | Common Stock | | | Paid-In
| | | Accumulated
| | | Comprehensive
| | | Total
| |
| | Units | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Income (Loss) | | | Equity | |
|
Balance, December 27, 2003 | | | 32,859 | | | $ | 146,699 | | | | — | | | $ | — | | | $ | — | | | $ | (126,144 | ) | | $ | 1 | | | $ | 20,556 | |
Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (16,771 | ) | | | — | | | | (16,771 | ) |
Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (187 | ) | | | (187 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (16,958 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash contributions from owner | | | 8,681 | | | | 17,900 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 17,900 | |
Stock-based compensation from options | | | — | | | | 1,143 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,143 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 25, 2004 | | | 41,540 | | | | 165,742 | | | | — | | | | — | | | | — | | | | (142,915 | ) | | | (186 | ) | | | 22,641 | |
Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,462 | ) | | | — | | | | (6,462 | ) |
Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 385 | | | | 385 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (6,077 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash contributions from owner | | | 3,674 | | | | 16,663 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 16,663 | |
Stock-based compensation from options | | | — | | | | 5,167 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,167 | |
Reclassifications to employee stock options on redeemable shares | | | — | | | | (25,265 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (25,265 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | | 45,214 | | | | 162,307 | | | | — | | | | — | | | | — | | | | (149,377 | ) | | | 199 | | | | 13,129 | |
Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,974 | | | | — | | | | 3,974 | |
Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 803 | | | | 803 | |
Change in unrealized gain on derivative instruments designated and qualifying as cash flow hedges | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 20 | | | | 20 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,797 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash contributions from owner | | | 6,613 | | | | 30,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 30,000 | |
Stock options exercised | | | — | | | | — | | | | 49 | | | | — | | | | 100 | | | | — | | | | — | | | | 100 | |
Tax benefit from exercise of stock options | | | — | | | | — | | | | — | | | | — | | | | 43 | | | | — | | | | — | | | | 43 | |
Conversion of membership units into common shares | | | (51,827 | ) | | | (192,307 | ) | | | 51,827 | | | | 11 | | | | 192,296 | | | | — | | | | — | | | | — | |
Common stock issued upon conversion of convertible notes | | | — | | | | — | | | | 4,261 | | | | 1 | | | | 73,999 | | | | — | | | | — | | | | 74,000 | |
Common stock issued in initial public offering, net of offering costs | | | — | | | | — | | | | 16,193 | | | | 16 | | | | 302,634 | | | | — | | | | — | | | | 302,650 | |
Common stock issued to directors | | | — | | | | — | | | | 2 | | | | — | | | | 59 | | | | — | | | | — | | | | 59 | |
Stock-based compensation from options | | | — | | | | — | | | | | | | | — | | | | 11,623 | | | | — | | | | — | | | | 11,623 | |
Reclassifications to employee stock options on redeemable shares | | | — | | | | — | | | | — | | | | — | | | | (24,961 | ) | | | — | | | | — | | | | (24,961 | ) |
Effect of stock split | | | — | | | | — | | | | — | | | | 44 | | | | (44 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 30, 2006 | | | — | | | $ | — | | | | 72,332 | | | $ | 72 | | | $ | 555,749 | | | $ | (145,403 | ) | | $ | 1,022 | | | $ | 411,440 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to these consolidated financial statements.
F-18
F-5
FIRST SOLAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 25, 2004, December 31, 2005, December 25, 2004, and December 27, 2003 and
the Nine Months Ended September 30, 2006 and September 24, 2005
(in thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | | Nine Months Ended | |
| | | | | | |
| | 2003 | | | 2004 | | | 2005 | | | 2005 | | | 2006 | |
| | | | | | | | | | | | | | | |
| | (as restated) | | | (as restated) | | | | | |
| | | | | | | | (unaudited) | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | |
| Cash received from customers | | $ | 1,504 | | | $ | 11,152 | | | $ | 49,643 | | | $ | 28,861 | | | $ | 58,496 | |
| Cash paid to suppliers and employees | | | (21,123 | ) | | | (26,516 | ) | | | (44,674 | ) | | | (31,017 | ) | | | (72,638 | ) |
| Interest paid, net of amounts capitalized | | | — | | | | (45 | ) | | | (322 | ) | | | (62 | ) | | | (551 | ) |
| Cash paid for settlement | | | (3,000 | ) | | | — | | | | — | | | | — | | | | — | |
| Other | | | 391 | | | | 224 | | | | 393 | | | | 119 | | | | 790 | |
| | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (22,228 | ) | | | (15,185 | ) | | | 5,040 | | | | (2,099 | ) | | | (13,903 | ) |
| | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
| Purchases of property, plant, and equipment | | | (14,854 | ) | | | (7,733 | ) | | | (42,481 | ) | | | (23,424 | ) | | | (98,049 | ) |
| Purchases of restricted investments | | | — | | | | — | | | | (1,267 | ) | | | (1,234 | ) | | | (5,467 | ) |
| Other investments in long-term assets | | | (370 | ) | | | (57 | ) | | | (84 | ) | | | — | | | | (40 | ) |
| | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (15,224 | ) | | | (7,790 | ) | | | (43,832 | ) | | | (24,658 | ) | | | (103,556 | ) |
| | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
| Proceeds from notes payable to a related party | | | — | | | | — | | | | 20,000 | | | | 5,000 | | | | 36,000 | |
| Repayment of notes payable to a related party | | | — | | | | — | | | | — | | | | — | | | | (38,700 | ) |
| Equity contributions | | | 8,500 | | | | 17,900 | | | | 16,663 | | | | 16,663 | | | | 30,000 | |
| Proceeds from stock options exercised | | | — | | | | — | | | | — | | | | — | | | | 100 | |
| Proceeds from debt | | | 30,649 | | | | 5,000 | | | | 15,000 | | | | 7,642 | | | | 98,252 | |
| Debt issuance costs | | | — | | | | — | | | | — | | | | — | | | | (1,497 | ) |
| Proceeds from economic development funding | | | — | | | | — | | | | — | | | | — | | | | 8,059 | |
| Repurchase of membership units | | | (20 | ) | | | — | | | | — | | | | — | | | | — | |
| Other financing activities | | | — | | | | — | | | | — | | | | — | | | | 7 | |
| | | | | | | | | | | | | | | |
Net cash provided by financing activities | | | 39,129 | | | | 22,900 | | | | 51,663 | | | | 29,305 | | | | 132,221 | |
| | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | — | | | | (187 | ) | | | 385 | | | | 266 | | | | (110 | ) |
| | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 1,677 | | | | (262 | ) | | | 13,256 | | | | 2,814 | | | | 14,652 | |
Cash and cash equivalents, beginning of year | | | 2,050 | | | | 3,727 | | | | 3,465 | | | | 3,465 | | | | 16,721 | |
| | | | | | | | | | | | | | | |
Cash and cash equivalents, end of year | | $ | 3,727 | | | $ | 3,465 | | | $ | 16,721 | | | $ | 6,279 | | | $ | 31,373 | |
| | | | | | | | | | | | | | | |
Supplemental disclosure of noncash investing and financing activities: | | | | | | | | | | | | | | | | | | | | |
| Property, plant, and equipment acquisitions funded by liabilities | | $ | 462 | | | $ | — | | | $ | 5,418 | | | $ | — | | | $ | 15,540 | |
| | | | | | | | | | | | | | | |
| Non-cash conversion of debt and accrued interest to equity | | $ | 82,600 | | | $ | — | | | $ | — | | | $ | — | | | $ | 74,000 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Years Ended | |
| | 2004 | | | 2005 | | | 2006 | |
|
Cash flows from operating activities: | | | | | | | | | | | | |
Cash received from customers | | $ | 11,152 | | | $ | 49,643 | | | $ | 110,196 | |
Cash paid to suppliers and employees | | | (26,516 | ) | | | (44,674 | ) | | | (111,945 | ) |
Interest paid, net of amounts capitalized | | | (45 | ) | | | (322 | ) | | | (712 | ) |
Other | | | 224 | | | | 393 | | | | 1,885 | |
| | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (15,185 | ) | | | 5,040 | | | | (576 | ) |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Purchases of property, plant and equipment | | | (7,733 | ) | | | (42,481 | ) | | | (153,150 | ) |
Purchases of restricted investments | | | — | | | | (1,267 | ) | | | (6,804 | ) |
Other investments in long-term assets | | | (57 | ) | | | (84 | ) | | | (40 | ) |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (7,790 | ) | | | (43,832 | ) | | | (159,994 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Proceeds from issuance of common stock, net of offering costs | | | — | | | | — | | | | 302,650 | |
Proceeds from notes payable to a related party | | | — | | | | 20,000 | | | | 36,000 | |
Repayment of notes payable to a related party | | | — | | | | — | | | | (64,700 | ) |
Repayment of long-term debt | | | — | | | | — | | | | (135 | ) |
Equity contributions | | | 17,900 | | | | 16,663 | | | | 30,000 | |
Proceeds from stock options exercised | | | — | | | | — | | | | 100 | |
Proceeds from debt | | | 5,000 | | | | 15,000 | | | | 132,330 | |
Tax benefit from options | | | — | | | | — | | | | 45 | |
Debt issuance costs | | | — | | | | — | | | | (1,497 | ) |
Proceeds from economic development funding | | | — | | | | — | | | | 16,766 | |
Other financing activities | | | — | | | | — | | | | (9 | ) |
| | | | | | | | | | | | |
Net cash provided by financing activities | | | 22,900 | | | | 51,663 | | | | 451,550 | |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | (187 | ) | | | 385 | | | | 391 | |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (262 | ) | | | 13,256 | | | | 291,371 | |
Cash and cash equivalents, beginning of year | | | 3,727 | | | | 3,465 | | | | 16,721 | |
| | | | | | | | | | | | |
Cash and cash equivalents, end of year | | $ | 3,465 | | | $ | 16,721 | | | $ | 308,092 | |
| | | | | | | | | | | | |
Supplemental disclosure of noncash investing and financing activities: | | | | | | | | | | | | |
Property, plant and equipment acquisitions funded by liabilities | | $ | — | | | $ | 5,418 | | | $ | 2,304 | |
| | | | | | | | | | | | |
Non-cash conversion of debt and accrued interest to equity | | $ | — | | | $ | — | | | $ | 74,000 | |
| | | | | | | | | | | | |
See accompanying notes to these consolidated financial statements.
F-19
F-6
FIRST SOLAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| |
Note 1. | First Solar and Its Business |
We design, manufacture and sell solar electric power modules, which we produce at our plant in Perrysburg, Ohio.modules. First Solar Holdings, LLC was formed as a Delaware limited liability company in May 2003 to act as the holding company for First Solar, LLC, which was formed in 1999 and renamed First Solar US Manufacturing, LLC in the second quarter of 2006 and other subsidiaries formed in 2003 and later. Prior to 2003, our business activities were transacted in the First Solar US Manufacturing, LLC subsidiary. Therefore, the consolidated financial statements prior to May 2003 reflect the accounts of First Solar US Manufacturing, LLC, while the consolidated financial statements for the year ended December 27, 2003 and subsequent years reflect the consolidated accounts of First Solar Holdings, LLC. We believe that the financial statements prior to and after May 2003 are comparable because the holding company was created to facilitate the evolution and expansion of the business being developed by First Solar US Manufacturing, LLC. On February 22, 2006, First Solar Holdings, LLC was incorporated in Delaware as First Solar Holdings, Inc. and, also during the first quarter of 2006, was renamed First Solar, Inc. Upon our change in corporate organization on February 22, 2006, our membership units became common stock shares and our unit options became share options on a one-for-one basis. For clarity of presentation, we refer to our ownership interests as “shares” or “stock” in the remainder of these notes to our consolidated financial statements, although prior to February 22, 2006 they were membership units. First Solar, Inc. has wholly owned subsidiaries in Ohio, Arizona and Germany.
On October 30, 2006, our board of directors approved a 4.85 to 1 stock split of our common shares, which iswas effective November 1, 2006; the par value of our common shares will remainremains $0.001 per share. All share and per share amounts presented in these consolidated financial statements have been retroactively adjusted to reflect the stock split.
As described in note 19, we have restated our consolidated financial statements as of December 25, 2004 and for the years ended December 27, 2003 and December 25, 2004.
| |
Note 2. | Summary of Significant Accounting Policies |
Principles of consolidation. These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of First Solar, Inc. and all of its subsidiaries. We have eliminated all intercompany transactions and balances during consolidation.
Basis of presentation. As shown in the consolidated financial statements, at December 31, 2005, we had a net accumulated deficit of $149.4 million, working capital deficit of $7.4 million, and a history of operating losses. On September 30, 2006, we had a net accumulated deficit of $153.4 million and working capital of $19.4 million.
Fiscal periods. We report the results of our operations using a 52 or 53 week fiscal year, which ends on the Saturday closest toon or before December 31. Fiscal 2006 ended on December 30, 2006 and included 52 weeks, fiscal 2005 ended on December 31, 2005 and included 53 weeks;weeks and fiscal 2004 ended on December 25, 2004 and included 52 weeks; and fiscal 2003 ended on December 27, 2003 and included 52 weeks. Our fiscal quarters end on the Saturday closest to the end of the applicable calendar quarter. Our third quarter of fiscal 2006 ended on September 30, 2006 and the corresponding quarter in fiscal 2005 ended on September 24, 2005.
Interim financial information. The consolidated interim financial statements included herein as of September 30, 2006, and for the nine-month periods ended September 24, 2005 and September 30, 2006 are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. These statements reflect all normal recurring adjustments that, in the opinion of management, are necessary for fair statement of the information contained herein.
Use of estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. Significant estimates in these consolidated financial statements include allowances for doubtful accounts receivable, inventory write-downs, estimates of future cash flows from and economic useful lives of long-lived assets, asset impairments, certain accrued liabilities, income taxes and tax valuation allowances, accrued warranty expenses, accrued environmental remediation expenses, accrued reclamation and recycling expense, stock-based compensation costs and fair value estimates. Actual results could differ materially from these estimates under different assumptions and conditions.
Fair value estimates. The fair value of an asset or liability is the amount at which the instrumentit could be exchanged or settled in a current transaction between willing parties. The carrying values for cash and cash equivalents, short-term investments and restricted investments, accounts
F-7
receivable, accounts payable and accrued liabilities and other current assets and liabilities approximate their fair values due to their short maturities. The carrying value of the portion of our long term debt with stated interest rates reflects its fair value based on current rates afforded to us on debt with similar maturities and characteristics.
Foreign currency translation. The functional currencies of our foreign subsidiaries are their local currencies. Accordingly, we apply the period end exchange rate to translate their assets and liabilities and the weighted average exchange rate for the period to translate their revenues, expenses, gains and losses into U.S. dollars. We include the translation adjustments as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity.
Cash and cash equivalents. We consider all highly liquid investments with original or remaining maturities of 90 days or less when purchased to be cash equivalents.
Short-term Investments. Investments with maturities greater than 90 days, but less than one-year at purchase are recorded as short-term investments. Short-term investments consist of a deposit account.
F-20
Inventories. We report our inventories at the lower of cost or market. We determine cost on afirst-in, first-out basis and include both the costs of acquisition and the costs of manufacturing in our inventory costs. These costs include direct material, direct labor and fixed and variable indirect manufacturing costs, including depreciation and amortization.
We also regularly review the cost of inventory against its estimated market value and will record a lower of cost or market write-down forif any inventories that have a cost in excess of estimated market value. For example, we regularly evaluate the quantity and value of our inventory in light of current market conditions and market trends and record write-downs for any quantities in excess of demand and for any product obsolescence. This evaluation considers historic usage, expected demand, anticipated sales price, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, customer concentrations, product merchantability and other factors. Market conditions are subject to change and actual consumption of our inventory could differ from forecast demand. Our products have a long life cycle and obsolescence has not historically been a significant factor in the valuation of our inventories.
Property, plant and equipment. We report our property, plant and equipment at cost, less accumulated depreciation. Cost includes the price paid to acquire or construct the assets, including interest capitalized interest during the construction period and any expenditures that substantially add to the value of or substantially extend the useful life of an existing asset. We expense repair and maintenance costs when they are incurred.
We compute depreciation expense using the straight-line method over the estimated useful lives of the assets, as presented in the table below. LeaseholdWe amortize leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining term of the lease.
| | | | |
| | Useful Lives in Years | |
| | | |
Buildings | | | 40 | |
Manufacturing machinery and equipment | | | 5 – 7 | |
Furniture, fixtures, computer hardware and computer software | | | 3 – 5 | |
Leasehold improvements | | | 15 | |
Long-lived assets. We account for our long-lived, tangible assets and definite-lived intangible assets in accordance with Statement of Financial Accounting Standards No. (SFAS, 144),144,Accounting for the Impairment or Disposal of Long-Lived Assets.As a result, we assess long-lived assets classified as “held and used”, including our property, plant and equipment, for impairment whenever events or changes in business circumstances arise that may indicate that the carrying amount of the long-lived asset may not be recoverable. These events would include significant current period operating or cash flow losses associated with the use of a long-lived asset or group of assets combined with a history of such losses, significant changes in the manner of use of assets and significant negative industry or economic trends. We evaluated our long-lived assets for impairment during 20052006 and concludeddid not note any triggering event that the carrying values of these assets wereasset are not recoverable.
Economic development funding. We are eligible for economic development funding from various German governmental entities for certain of our capital expenditures. We record a receivable for these funds when our legal right to them exists and all criteria for receiving the funds have been met. We deduct the amount of the funds from the acquisition costs of the related assets, which reduceswill reduce the depreciation expense that we otherwise would have recognizedto recognize in future periods. See Notenote 4 for a description of this economic development funding.
Product warranties. We provide a limited warranty to the original purchasers of our solar modules for five years following deliverythe date of sale that the modules will be free from defects in materials and workmanship under normal use and service conditions and we provide a warranty that the modules will produce at least 90% of their power output rating during the first 10 years following their installationthe date of sale and at least 80% of their power output rating during the
F-8
following 15 years. In resolving claims under both the defects and power output warranties, we have the option of either repairing or replacing the covered module or, under the power output warranty, providing additional modules to remedy the power shortfall. Our warranties may be transferred from the original purchaser of our modules to a subsequent purchaser. We accrue an estimate of the future costs of meeting our warranty obligations when we recognize revenue from sales. We make and revise this estimate based on the number of solar modules under warranty at customer locations, our historical experience with warranty claims, our monitoring of field installation sites, our in-house testing of our solar modules and our estimated per-module replacement cost.
Environmental remediation liabilities. We record environmental remediation liabilities when environmental assessmentsand/or remediation efforts are probable and the costs can be reasonably estimated. We estimate these costs based
F-21
on current laws and regulations, existing technology and the most likely method of remediation. We do not discount these costs and we exclude the effects of possible inflation and other economic factors. If our cost estimates result in a range of equally probable amounts, we accrue the lowest amount in the range.
End of life recycling and reclamation. We recognize an expense for the estimated fair value of certain future obligations for reclaiming and recycling the solar modules that we have sold once they have reached the end of their useful lives. See note 7 for further information about this obligation and how we account for it.
Revenue recognition. We sell our products directly to system integrators and recognize revenue when persuasive evidence of an arrangement exists, delivery of the product has occurred and title and risk of loss has passed to the customer, the sales price is fixed or determinable and collectibility of the resulting receivable is reasonably assured. In accordance withUnder this policy, we record a trade receivable for the selling price of our product and reduce inventory for the cost of goods sold when delivery occurs in accordance with the terms of the respective sales contracts. During the quarter ended July 1, 2006, we changed the terms of our sales contracts with all of our significant customers to provide that delivery occurs when we deliver our products to the carrier, rather than when the products are received by our customer, as had been our terms under our prior contracts. This change in the terms of our sales contracts resulted in a one-time increase to our net sales of $5.4 million during the nine monthsyear ended SeptemberDecember 30, 2006. We do not offer extended payment terms or rights of return offor our sold products.
Shipping and handling costs. Shipping and handling costs are classified as a component of cost of sales. Customer payments of shipping and handling costs are recorded as a component of net sales.
Stock-based compensation. We account for stock-based employee compensation arrangements in accordance with SFAS 123 (revised 2004),Share-Based Payments.Payments See “Recent Accounting Pronouncements” below, which we adopted during the first quarter of the year ended December 31, 2005 using the “modified retrospective” method of transition. SFAS 123(R) requires us to recognize compensation cost in our financial statements for further information.the fair value of share-based payments as of their grant date. We use the Black-Scholes-Merton option valuation formula to estimate the grant date fair value of our employee stock option awards. This formula requires us to estimate a number of input parameters, including the expected term of our employee stock options and the future volatility of our stock price.
We estimateddeveloped our estimate of our options’ expected terms as of their grant dates, which represent our best estimate ofrepresents the period of time from the grant date that we expect the options to remain outstanding.outstanding, as the midpoint between the options’ vesting dates and expiration dates. Because our stock is not currentlynewly publicly traded, we do not have ana meaningful observable share-price volatility; therefore, we estimatedbased our estimate of the expected volatility basedof our future stock price on that of similar publicly-traded companies and we expect to continue to do soestimate our expected stock price volatility in this manner until such time as we might have adequate historical data to refer to from our own traded share prices.
The stock-based compensation expense that we recognized in our results of operations is based on the number of awards expected to ultimately vest, so the actual award amounts have been reduced for estimated forfeitures. SFAS 123(R)requires us to estimate forfeitures at the time the options are granted and revise those estimates, if necessary, in subsequent periods. We estimated forfeitures based on our historical experience with forfeitures of our options, giving consideration to whether future forfeiture behavior might be expected to differ from past behavior.
We recognize compensation cost for awards with graded vesting schedules on a straight-line basis over the requisite service periods for each separately vesting portion of the awards as if each award was, in substance, multiple awards.
Research and development expense. Research and development costs are incurred during the process of researching and developing new products and enhancing our existing products, technologies and manufacturing processes and consist primarily of compensation and related costs for personnel, materials, supplies, equipment depreciation and equipment depreciation.consultant and laboratory testing costs. We expense these costs as incurred until the resulting product has been completed and tested and is ready for commercial manufacturing.
We are party to several research grant contracts with the U.S. federal government under which we receive reimbursement for specified costs incurred withfor certain of our research projects. We record amounts recoverable throughfrom these grants as an offset to research and development expense when the related research and development costs are incurred, which is consistent with the timing of our contractual right to receive the cost reimbursement. We have included grant proceeds of $1.4$1.0 million, $1.0 $0.9��million and $0.9 million as offsets to research and development
F-9
expense during the years ended December 27, 2003, December 25, 2004, and December 31, 2005 respectively, and $0.9 million (unaudited) and $0.4 million (unaudited) for the nine months ended September 24, 2005 and SeptemberDecember 30, 2006, respectively.
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Productionstart-up expense. Productionstart-up expense consists primarily of salaries and personnel-related costs and the cost of operating a production line before it has been qualified for full production, including the cost of raw materials for solar modules run through the production line during the qualification phase. It also includes all expenses related to the selection of a new site and the related legal and regulatory costs, to the extent we cannot capitalize the expenditure.
Income taxes. First Solar Holdings, LLC was formed as a limited liability company and, accordingly, was not subject to U.S. federal or state income taxes, although certain of its foreign subsidiaries were subject to income taxes in their local jurisdictions. However, upon incorporation as First Solar, Inc. during the first quarter of 2006, the company became subject to U.S. federal and state income taxes.
We account for income taxes using the asset and liability method, in accordance with SFAS 109,Accounting for Income Taxes.Under this method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using the enacted tax laws expected to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled; we will recognize the effect on deferred tax assets and liabilities of a change in tax laws in the results of our operations during the period that includes the enactment date. We record valuation allowances to reduce deferred tax assets when we determine that it is more likely than not that some or all of the deferred tax assets will not be realized.
We operate in multiple taxing jurisdictions under several legal forms. As a result, we are subject to the jurisdiction of a number of U.S. and non U.S. tax authorities and to tax agreements and treaties among these governments.authorities. Our operations in these different jurisdictions are taxed on various bases, including income before taxes calculated in accordance with jurisdictional regulations. Determining our taxable income in any jurisdiction requires the interpretation of the relevant tax laws and regulations and the use of estimates and assumptions about significant future events, including the following: the amount, timing and character of deductions; permissible revenue recognition methods under the tax law; and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, currency exchange restrictions, or our level of operations or profitability in each taxing jurisdiction could have an impact on the amount of income tax assets, liabilities, expenses and benefits that we record during any given period.
See Notenote 14 for more information about the impact of income taxes on our financial position and results of operations.
Per share data. Basic lossincome (loss) per share is based on the weighted effect of all common shares issued and outstanding and is calculated by dividing net lossincome (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is based on the weighted effect of all common shares and dilutive potential common shares outstanding and is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive potential common shares outstanding during the period.
Comprehensive loss.income (loss). Our comprehensive lossincome (loss) consists of our net loss,income (loss), changes in unrealized gains or losses on derivative instruments that we hold and that qualify as and that we have designated as cash flow hedges and the effects on our consolidated financial statements of translating the financial statements of our subsidiaries that operate in foreign currencies. We present our comprehensive lossincome (loss) in a combined consolidated statementstatements of members’/stockholders’ equity and comprehensive loss.income (loss). Our accumulated other comprehensive income (loss) is presented as a component of equity in our consolidated balance sheetsheets and consists of the cumulative amount of net financial statement translation incomeadjustments and unrealized gains or losses on cash flow hedges that we have incurred since the inception of our business.
Recent accounting pronouncements. In December 2004,July 2006, the FASBFinancial Accounting Standards Board (FASB) issued SFAS 123 (revised 2004),Share-Based Payments, which revises SFAS 123,Accounting for Stock-Based Compensation, supersedes APB 25,Accounting for Stock Issued to Employees, and SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure, and amends SFAS 95,Statement of Cash Flows. Generally, the requirements of SFAS 123(R) are similar to those of SFAS 123. However, SFAS 123(R) requires companies to recognize compensation expense in their statements of operations for all stock-based payments to employees, including grants of employee stock options, based on the fair value of the awards. We adopted SFAS 123(R) during the first quarter of the year ended December 31, 2005 using the “modified retrospective” method of transition.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. (SAB) 107,Share-Based Payment, which provides guidance regarding the implementation of SFAS 123(R). In particular,
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SAB 107 provides guidance regarding calculating assumptions used in stock-based compensation valuation models, the classification of stock-based compensation expense, the capitalization of stock-based compensation costs, the classification of redeemable financial instruments, and disclosures in management’s discussion and analysis in filings with the SEC. We have applied SAB 107 in our adoption of SFAS 123(R).
In November 2004, the FASB issued SFAS 151, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and spoilage. SFAS 151 also requires the allocation of fixed production overhead costs based on normal production capacity. We adopted this statement in 2005, and the adoption did not have a material effect on our financial position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS 153,Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. APB 29,Accounting for Nonmonetary Transactions, applies the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS 153 amends APB 29 by eliminating the exception to fair value accounting for nonmonetary changes of similar productive assets and replacing it with a general exception to fair value accounting for nonmonetary exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. We adopted this statement in 2005, and the adoption did not have a material effect on our financial position, results of operations, or cash flows.
In March 2005, the FASB issued Interpretation No. (FIN) 47,Accounting for Conditional Asset Retirement Obligations. “Conditional” asset retirement obligations are legal obligations to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the entity’s control. FIN 47 clarifies that an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated and establishes when an entity would have sufficient information to reasonably estimate that fair value. We adopted FIN 47 during 2005, and the adoption of this statement did not have a material effect on our financial position, results of operations, or cash flows.
In May 2005, the FASB issued SFAS 154,Accounting Changes and Error Corrections, which supersedes APB 20,Accounting Changes, and SFAS 3,Reporting Accounting Changes in Interim Financial Statements. SFAS 154 changes the method for reporting an accounting change. Under SFAS 154, accounting changes must be retrospectively applied to all prior periods whose financial statements are presented, unless the change in accounting principle is due to a new pronouncement that provides other transition guidance or unless application of the retrospective method is impracticable. Under the retrospective method, companies will no longer present the cumulative effect of a change in accounting principle in their statement of operations for the period of the change. SFAS 154 carries forward unchanged APB 20’s guidance for reporting corrections of errors in previously issued financial statements and for reporting changes in accounting estimates. We adopted this statement in 2006, and the adoption did not have a material effect on our financial position, results of operations, or cash flows.
In January of 2006, the FASB issued SFAS 155,Accounting for Certain Hybrid Financial Instruments. SFAS 155 amends SFAS 133,Accounting for Derivative Instruments and Hedging Activities and SFAS 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 also resolves issues addressed in SFAS 133 Implementation Issue No. D1,Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS 155 eliminates the exemption from applying SFAS 133 to interests in securitized financial assets so that similar instruments are accounted for in the same manner regardless of the form of the instruments. SFAS 155 allows a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement (new basis) event, on an instrument-by-instrument basis. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of SFAS 155 may also be applied upon adoption of SFAS 155 for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS 133 prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of SFAS 155 may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. We will adopt SFAS 155 during 2007 and do not expect this to have a material impact on our financial position, results of operations, or cash flows.
In February 2006, the FASB issued FSP FAS 123R-4,Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event. The guidance in FSP FAS 123R-4 amends paragraphs 32 and A229 of SFAS 123(R) to incorporate the concept articulated in footnote 19 of SFAS 123(R). That is, a cash settlement feature that can be exercised only upon the occurrence of a
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contingent event that is outside the employees control does not meet the condition in paragraphs 32 and A229 until it becomes probable that the event will occur. Originally under SFAS 123(R), a provision in a stock-based payment plan that required an entity to settle outstanding options in cash upon the occurrence of any contingent event required classification and accounting for the share based payment as a liability. This caused an issue for certain awards that require or permit, at the holders election, cash settlement of the option or similar instrument upon (a) a change in control or other liquidity event of the entity or (b) death or disability of the holder. With this new FSP, these types of cash settlement features will not require liability accounting so long as the feature can be exercised only upon the occurrence of a contingent event that is outside the employees control (such as an initial public offering) until it becomes probable that event will occur. We applied the guidance in this FSP in our adoption of SFAS 123(R).
In March 2006, the FASB issued SFAS 156,Accounting for Servicing of Financial Assets — an Amendment of FASB Statement No. 140. SFAS 156 provides guidance on the accounting for servicing assets and liabilities when an entity undertakes an obligation to service a financial asset by entering into a servicing contract. This statement is effective for all transactions in fiscal years beginning after September 15, 2006. We do not expect the adoption of SFAS 156 to have a material effect on our financial position, results of operations, or cash flows.
In July 2006, the FASB issued FIN 48,Accounting for Uncertainty in Income TaxesTaxes.. Tax law is subject to significant and varied interpretation, so an enterprise may be uncertain whether a tax position that it has taken will ultimately be sustained when it files its tax return. FIN 48 establishes a “more-likely-than-not” threshold that must be met before a tax benefit can be recognized in the financial statements and, for those benefits that may be recognized, stipulates that enterprises should recognize the largest amount of the tax benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the taxing authority. FIN 48 also addresses changes in judgments about the realizability of tax benefits, accrual of interest and penalties on unrecognized tax benefits, classification of liabilities for unrecognized tax benefits and related financial statement disclosures. We will adopt FIN 48 during 2007 and do not expect this to have a material effectat the beginning of fiscal 2007. Based on our financial position, resultscurrent assessment and subject to any changes that may result from additional technical
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guidance being issued, we expect the adoption of operations, or cash flows.FIN 48 to increase our reserves for uncertain tax positions by less than $1.0 million, which we will record as a cumulative effect adjustment to equity.
In September 2006, the SEC issued SAB 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on the consideration of the effects of prior year misstatements when quantifying current year misstatements during a materiality assessment. SAB 108 is effective for companies with fiscal years ending after November 15, 2006. We do not expecthave applied SAB 108 during the adoptionpreparation of our financial statements and the application of SAB 108 todid not have a material effect on our financial position, results of operations, or cash flows.
In September 2006,February 2007, the FASB issued SFAS 157,159,The Fair Value Measurements.Option for Financial Assets and Financial Liabilities.SFAS 157 establishes a framework for measuring159 permits entities to choose to measure many financial assets and financial liabilities at fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application ofreport unrealized gains and losses on those assets and liabilities in earnings. SFAS 157 relate to the definition of fair value, the methods used to measure fair value, and expanded disclosures about fair value measurements. SFAS 157159 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.2007. We do not expectare currently assessing the adoptionimpact of SFAS 157 to have a material effect159 on our financial position and results of operations, or cash flows.operations.
In SeptemberJuly 2006, the FASB issued SFAS 158,EITF IssueNo. 06-3,Employers Accounting for Defined Benefit PensionHow Taxes Collected from Customers and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires an employerRemitted to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status through comprehensive incomeGovernmental Authorities Should be Presented in the year in which the changes occur. SFAS 158 also requires additional disclosures of defined benefit postretirement plans. SFAS 158Income Statement (that is, effective for fiscal years ending after December 15, 2006. We do not expect theGross versus Net Presentation).The adoption of SFAS 158 toEITFNo. 06-3 did not have a material effectan impact on our consolidated financial position, results of operations, or cash flows.statements. Our accounting policy has been to present above mentioned taxes on a net basis, excluded from revenues.
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Note 3. Consolidated Balance Sheet Details
| |
Note 3. | Consolidated Balance Sheet Details |
Accounts receivable, net
Accounts receivable, net consisted of the following at December 25, 2004, December 31, 2005 and SeptemberDecember 30, 2006 (in thousands):
| | | | | | | | | | | | |
| | December 25, | | | December 31, | | | September 30, | |
| | 2004 | | | 2005 | | | 2006 | |
| | | | | | | | | |
| | | | | | (unaudited) | |
Accounts receivable, gross | | $ | 4,426 | | | $ | 1,102 | | | $ | 26,437 | |
Allowance for doubtful accounts | | | (33 | ) | | | (4 | ) | | | (4 | ) |
| | | | | | | | | |
|
Accounts receivable, net | | $ | 4,393 | | | $ | 1,098 | | | $ | 26,433 | |
| | | | | | | | | |
| | | | | | | | |
| | 2005 | | | 2006 | |
|
Accounts receivable, gross | | $ | 1,102 | | | $ | 27,970 | |
Allowance for doubtful accounts | | | (4 | ) | | | (4 | ) |
| | | | | | | | |
Accounts receivable, net | | $ | 1,098 | | | $ | 27,966 | |
| | | | | | | | |
Inventories
Inventories consisted of the following at December 25, 2004, December 31, 2005 and SeptemberDecember 30, 2006 (in thousands):
| | | | | | | | | | | | |
| | December 25, | | | December 31, | | | September 30, | |
| | 2004 | | | 2005 | | | 2006 | |
| | | | | | | | | |
| | (as restated) | | | | | (unaudited) | |
Raw materials | | $ | 921 | | | $ | 1,675 | | | $ | 5,296 | |
Work in process | | | — | | | | 597 | | | | 1,686 | |
Finished goods | | | 2,765 | | | | 4,645 | | | | 3,544 | |
| | | | | | | | | |
|
Total inventories | | $ | 3,686 | | | $ | 6,917 | | | $ | 10,526 | |
| | | | | | | | | |
| | | | | | | | |
| | 2005 | | | 2006 | |
|
Raw materials | | $ | 1,675 | | | $ | 8,212 | |
Work in process | | | 597 | | | | 1,123 | |
Finished goods | | | 4,645 | | | | 7,175 | |
| | | | | | | | |
Total inventories | | $ | 6,917 | | | $ | 16,510 | |
| | | | | | | | |
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Property, plant and equipment
Property, plant and equipment consisted of the following at December 25, 2004, December 31, 2005 and SeptemberDecember 30, 2006 (in thousands):
| | | | | | | | | | | | |
| | December 25, | | | December 31, | | | September 30, | |
| | 2004 | | | 2005 | | | 2006 | |
| | | | | | | | | |
| | (as restated) | | | | | (unaudited) | |
Buildings and improvements | | $ | 8,771 | | | $ | 20,959 | | | $ | 21,804 | |
Machinery and equipment | | | 14,737 | | | | 18,596 | | | | 77,773 | |
Office equipment and furniture | | | 1,198 | | | | 1,496 | | | | 3,324 | |
Leasehold improvements | | | 994 | | | | 1,362 | | | | 2,978 | |
| | | | | | | | | |
|
Gross depreciable property, plant, and equipment | | | 25,700 | | | | 42,413 | | | | 105,879 | |
Accumulated depreciation and amortization | | | (5,562 | ) | | | (8,877 | ) | | | (15,374 | ) |
| | | | | | | | | |
|
Net depreciable property, plant, and equipment | | | 20,138 | | | | 33,536 | | | | 90,505 | |
Land | | | 125 | | | | 1,047 | | | | 2,767 | |
Construction in progress | | | 9,014 | | | | 39,195 | | | | 63,527 | |
| | | | | | | | | |
|
Net property, plant, and equipment | | $ | 29,277 | | | $ | 73,778 | | | $ | 156,799 | |
| | | | | | | | | |
| | | | | | | | |
| | 2005 | | | 2006 | |
|
Buildings and improvements | | $ | 20,959 | | | $ | 21,804 | |
Machinery and equipment | | | 18,596 | | | | 79,803 | |
Office equipment and furniture | | | 1,496 | | | | 4,428 | |
Leasehold improvements | | | 1,362 | | | | 3,086 | |
| | | | | | | | |
Gross depreciable property, plant and equipment | | | 42,413 | | | | 109,121 | |
Accumulated depreciation and amortization | | | (8,877 | ) | | | (18,880 | ) |
| | | | | | | | |
Net depreciable property, plant and equipment | | | 33,536 | | | | 90,241 | |
Land | | | 1,047 | | | | 2,836 | |
Construction in progress | | | 39,195 | | | | 85,791 | |
| | | | | | | | |
Net property, plant and equipment | | $ | 73,778 | | | $ | 178,868 | |
| | | | | | | | |
Depreciation and amortization of property, plant and equipment was $1.5 million, $1.9 million, $3.4 million and $3.4$10.2 million for the years ended December 27, 2003, December 25, 2004, and December 31, 2005 respectively and was $2.4 million (unaudited) and $6.5 million (unaudited) for the nine months ended September 24, 2005 and SeptemberDecember 30, 2006, respectively.
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We incurred and capitalized interest cost (into our property, plant and equipment) as follows during the years ended December 27, 2003, December 25, 2004, and December 31, 2005 and the nine months ended September 24, 2005 and SeptemberDecember 30, 2006:2006 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | | Nine Months Ended | |
| | | | | | |
| | 2003 | | | 2004 | | | 2005 | | | 2005 | | | 2006 | |
| | | | | | | | | | | | | | | |
| | (as restated) | | | (as restated) | | | | | |
| | | | | | | | (unaudited) | |
Interest cost incurred | | $ | 4,435 | | | $ | 447 | | | $ | 773 | | | $ | 377 | | | $ | 3,292 | |
Interest capitalized | | | (461 | ) | | | (347 | ) | | | (355 | ) | | | (231 | ) | | | (2,426 | ) |
| | | | | | | | | | | | | | | |
|
Interest expense | | $ | 3,974 | | | $ | 100 | | | $ | 418 | | | $ | 146 | | | $ | 866 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
|
Interest cost incurred | | $ | 447 | | | $ | 773 | | | $ | 4,363 | |
Interest capitalized | | | (347 | ) | | | (355 | ) | | | (3,340 | ) |
| | | | | | | | | | | | |
Interest expense | | $ | 100 | | | $ | 418 | | | $ | 1,023 | |
| | | | | | | | | | | | |
Accounts payable and accrued expenses
Accounts payable and accrued expenses consisted of the following at December 25, 2004, December 31, 2005 and SeptemberDecember 30, 2006 (in thousands):
| | | | | | | | | | | | |
| | December 25, | | | December 31, | | | September 30, | |
| | 2004 | | | 2005 | | | 2006 | |
| | | | | | | | | |
| | (as restated) | | | | | (unaudited) | |
Accounts payable | | $ | 439 | | | $ | 4,599 | | | $ | 15,883 | |
Product warranty liability | | | 2,425 | | | | 1,853 | | | | 2,452 | |
Accrued compensation and benefits | | | 1,116 | | | | 780 | | | | 2,198 | |
Other accrued expenses | | | 1,373 | | | | 6,539 | | | $ | 14,416 | |
| | | | | | | | | |
|
Total accounts payable and accrued expenses | | $ | 5,353 | | | $ | 13,771 | | | $ | 34,949 | |
| | | | | | | | | |
Note 4. Economic Development Funding
| | | | | | | | |
| | 2005 | | | 2006 | |
|
Accounts payable | | $ | 4,599 | | | $ | 14,001 | |
Product warranty liability | | | 1,853 | | | | 2,764 | |
Income tax payable | | | — | | | | 5,152 | |
Accrued compensation and benefits | | | 780 | | | | 2,642 | |
Other accrued expenses | | | 6,539 | | | $ | 7,524 | |
| | | | | | | | |
Total accounts payable and accrued expenses | | $ | 13,771 | | | $ | 32,083 | |
| | | | | | | | |
| |
Note 4. | Economic Development Funding |
On July 26, 2006, we were approved to receive taxable investment incentives(“Investitionszuschuesse”Investitionszuschüsse”)of approximately€21.5 €21.5 million ($25.828.0 million at an assumed exchange rate of $1.20/$1.30/€1.00) from the State of Brandenburg, Germany. These funds will reimburse us for certain costs we will incur building our plant in Frankfurt (Oder), Germany, including costs for the construction of buildings and the purchase of machinery and equipment. Receipt of these incentives is conditional upon the State of Brandenburg, Germany having sufficient funds allocated to this program to pay the reimbursements we claim. In addition, we are required to operate our facility for a minimum of five years and employ a specified number of employees during this period. Our incentive approval expires on December 31, 2009. As of SeptemberDecember 30, 2006, we had received cash payments of $8.1$16.8 million (unaudited) under this program and we had accrued an additional $3.7$4.0 million (unaudited) that we are eligible to receive under this program based on qualifying expenditures that we had incurred tothrough that date.
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We are eligible to recover up to approximately€23.8 €23.8 million ($28.630.9 million at an assumed exchange rate of $1.20/$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. WeIn accordance with the administrative requirements of the Act, we plan to claim reimbursement under the Act in conjunction with the filing of our tax returns with the local German tax office. Therefore we do not expect to receive funding from this program until we file our annual tax return for fiscal 2006 in 2007. In addition, this program expiresexpired on December 31, 2006 and we can only claim only reimbursement for investments completed by this date. We expect to have theThe majority of our buildings and structures and a portion of our investment in machinery and equipment were completed by this date. As of SeptemberDecember 30, 2006, we had accrued $13.0$23.5 million (unaudited) that we are eligible to receive under this program based on qualifying expenditures that we had incurred tothrough that date.
Note 5. Intangible Assets
| |
Note 5. | Intangible Assets |
Included in other noncurrentnon-current assets on our consolidated balance sheets are intangible assets, substantially all of which are patents on technologies related to our products and production processes. We record an asset for patents based on the legal, filing and other costs incurred to secure them and amortize these costs on a straight-line basis over estimated useful lives ranging from 5 to 15 years. Amortization expense for our patents was $43,000, $24,000,
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and $13,000less than $0.1 million for each of the years ended December 27, 2003, December 25, 2004, and December 31, 2005 respectively, and $10,000 (unaudited) and $16,000 (unaudited) for the quarters ended September 24, 2005 and SeptemberDecember 30, 2006, respectively.2006. Intangible assets consisted of the following at December 25, 2004, December 31, 2005 and SeptemberDecember 30, 2006 (in thousands):
| | | | | | | | | | | | |
| | December 25, | | | December 31, | | | September 30, | |
| | 2004 | | | 2005 | | | 2006 | |
| | | | | | | | | |
| | | | | | (unaudited) | |
Intangible assets, gross | | $ | 1,297 | | | $ | 1,389 | | | $ | 1,400 | |
Accumulated amortization | | | (1,107 | ) | | | (1,120 | ) | | | (1,136 | ) |
| | | | | | | | | |
|
Intangible assets, net | | $ | 190 | | | $ | 269 | | | $ | 264 | |
| | | | | | | | | |
| | | | | | | | |
| | 2005 | | | 2006 | |
|
Intangible assets, gross | | $ | 1,389 | | | $ | 1,389 | |
Accumulated amortization | | | (1,120 | ) | | | (1,141 | ) |
| | | | | | | | |
Intangible assets, net | | $ | 269 | | | $ | 248 | |
| | | | | | | | |
Estimated future amortization expense for our patents is as follows at December 31, 200530, 2006 (in thousands):
| | | | | |
| 2006 | | $ | 20 | |
| 2007 | | $ | 20 | |
| 2008 | | $ | 20 | |
| 2009 | | $ | 20 | |
| 2010 | | $ | 20 | |
|
Thereafter | | $ | 169 | |
Note 6. Restricted Investments
| | | | |
2007 | | $ | 20 | |
2008 | | $ | 20 | |
2009 | | $ | 20 | |
2010 | | $ | 20 | |
2011 | | $ | 20 | |
Thereafter | | $ | 148 | |
| |
Note 6. | Restricted Investments |
Our restricted investments consistsconsist of a funding arrangement for our solar module reclamation and recycling program (see Notenote 7) and, a debt service reserve account of $3.8$4.0 million (unaudited) for our credit facility with a consortium of banks led by IKB Deutsche Industriebank AG (see Notenote 8). and cash held by a financial institution as collateral for a letter of credit.
We pre-fund our estimated product reclamation and recycling expense at the time of sale through an agreement with a financial services company. During the years 2028 through 2045, we may elect to commute the agreement and receive back the amounts we have deposited plus a rate of return (computed at 5.3% for the years 2005 through 2022 and LIBOR less 0.35% thereafter) less any cost reimbursements that we have already received. At December 31, 2005 and SeptemberDecember 30, 2006, the cumulative amount of deposits made and the investment returns earned through that date were $1.3 million and $2.9$3.0 million, (unaudited), respectively, which we report as a restricted investment on our consolidated balance sheet. We will make additional deposits during 2006 and 2007, based on our estimates at the timesmade two months before the deposits are due, of the number of modules that we expect to ship during each2007.
During fiscal 2006 we entered into a sale and purchase agreement with one of those years.our suppliers which required us to deliver an irrevocable standby letter of credit in the amount of $1.3 million. This letter of credit has been collateralized through a bank deposit account which we have classified as a restricted investment.
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Note 7. Product Reclamation and Liability | |
Note 7. | Product Reclamation Liability |
Legislative initiatives in Europe hold manufacturers responsible for the return and recycling of certain electrical products. The legislation passed to date does not include our solar modules, but based on the progress of legislative deliberations and our commitment to the environment, we determined in the fourth quarter of 2004 that we should develop a program for ensuring the reclamation and recycling of the modules that we sell in Europe. As a result, we included a solar module reclamation and recycling arrangement in our standard 2005 and 2006 sales contracts, into which our customers, who are solar electricity generation project developers and system integrators, can enroll the eventual system owners. Under this arrangement, we agree to provide for the reclamation and recycling of the materials in our solar modules and the system owners agree to notify us, disassemble their solar electricity generation systems, package the solar modules for shipment and revert ownership rights over the modulemodules back to us at the end of their expected service lives.
During the yearyears ended December 31, 2005 and the nine months ended SeptemberDecember 30, 2006, and September 24, 2005, we have recorded accrued recycling liabilities for the estimated fair value of our obligations for the reclamation and recycling of our solar modules and we have made associated charges to cost of sales. We based our estimate of the fair value of our reclamation and recycling obligations on the present value of the expected future cost of reclaiming and recycling the modules, which includes the cost of packaging the module for transport, the cost of freight from the module’s installation site to a recycling center and the material, labor and capital costs of the recycling process. We based this estimate on our experience reclaiming and recycling our solar modules and on our expectations about future developments in recycling technologies and processes and about economic conditions at the time the modules will be reclaimed and recycled. In the periods between the time of our sales and our settlement of the reclamation and recycling obligations, we accrete the carrying amount of the associated liability by applying the discount rate used in its initial measurement. Our moduleend-of-life end-of-life reclamation and recycling liabilities totaled $0.9 million at
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December 31, 2005 and $2.8$3.7 million (unaudited) at SeptemberDecember 30, 2006 and are classified as accrued recycling with other non-current liabilities on our consolidated balance sheet.sheets. We charged $0.9 million and $1.5$2.5 million (unaudited) to cost of sales for the fair value of our reclamation and recycling obligation for modules sold during the yearyears ended December 31, 2005 and the nine months ended SeptemberDecember 30, 2006, respectively. During both the yearyears ended December 31, 2005 and the nine months ended SeptemberDecember 30, 2006, the accretion expense on our reclamation and recycling obligations was insignificant.
Starting in the first quarter of 2005, we also offered participation in the solar module reclamation and recycling program to owners of the 164,000 modules that we sold during 2003 and 2004, at no charge to the owners. When owners enroll in the program, we record liabilities for the estimated fair value of our obligations for the reclamation and recycling of the solar modules, with an associated charge to cost of sales. We estimate the fair value of our obligation and account for the subsequent accretion the same way as for our obligation for solar modules sold during 2005.2005 and 2006. During the year ended December 31, 2005, our costs related to this program were insignificant. During the nine monthsyear ended SeptemberDecember 30, 2006, we charged $0.3 million (unaudited) to cost of sales for the fair value of the obligations incurred during that year for modules sold during 2003 and 2004. The accretion expense on those obligations was insignificant during the nine monthsyear ended SeptemberDecember 30, 2006. If all owners participated as of SeptemberDecember 30, 2006, we estimate that the fair value of our obligation would be $0.5 million (unaudited).million.
Note 8. Debt
Current related party debt
During the year ended December 31, 2005, we borrowed $20.0 million from the Estate of John T. Walton, a related party,an affiliate of our majority shareholder, under a promissory note, all of which was outstanding at December 31, 2005. During January 2006, we borrowed an additional $10.0 million and subsequently repaid the entire $30.0 million in February 2006. These notes were unsecured, the balance wasbalances were payable on demand and interest was payable monthly at an annual rate equal to the short term Applicable Federal Rate published by the Internal Revenue Service (4.34% at December 31, 2005). We classified these notes as a current liability on our consolidated balance sheet at December 31, 2005.
During July 2006, we entered into a loan agreement, which we amended and restated on August 7, 2006, with the Estate of John T. Walton an affiliate of our majority shareholder, under which we cancould draw up to $34.0 million. Interest iswas payable monthly at the annual rate of the commercial prime lending rate; principal payments are duewas to be repaid at the earlier of January 2008 or the completion of an initial public offering of our stock. This loan doesdid 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.LLC, a related party. During July 2006, we drew $26.0 million (unaudited) against this loan, $8.7 million of which we used to repay the
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Kingston Properties, LLC note. Theloan. Upon completion of our initial public offering in November 2006, we repaid the entire $26.0 million (unaudited) wasloan balance.
We had no related party debt outstanding at SeptemberDecember 30, 2006.
Long-term debt
Our long-term debt at December 25, 2004, December 31, 2005 and SeptemberDecember 30, 2006 consisted of the following (in thousands):
| | | | | | | | | | | | |
| | December 25, | | | December 31, | | | September 30, | |
| | 2004 | | | 2005 | | | 2006 | |
| | | | | | | | | |
| | | | | | (unaudited) | |
|
Foreign denominated loan, variable interest Euribor plus 1.6%, due 2008 through 2012, including unamortized discount of $731 at September 30, 2006 | | $ | — | | | $ | — | | | $ | 18,159 | |
2.25% loan, due 2006 through 2015 | | | — | | | | 15,000 | | | | 15,000 | |
3.70% loan from a related party, due June 1, 2010 | | | 8,700 | | | | 8,700 | | | | — | |
0.25% – 3.25% loan, due 2007 through 2009 | | | 5,000 | | | | 5,000 | | | | 5,000 | |
Capital lease obligations | | | — | | | | 23 | | | | 31 | |
| | | | | | | | | |
|
Total long-term debt | | | 13,700 | | | | 28,723 | | | | 38,190 | |
Less current portion | | | — | | | | (142 | ) | | | (2,621 | ) |
| | | | | | | | | |
|
Non-current portion | | $ | 13,700 | | | $ | 28,581 | | | $ | 35,569 | |
| | | | | | | | | |
| | | | | | | | |
| | December 31,
| | | December 30,
| |
| | 2005 | | | 2006 | |
|
Euro denominated loan, variable interest Euribor plus 1.6%, due 2008 through 2012 | | $ | — | | | $ | 45,216 | |
2.25% loan, due 2006 through 2015 | | | 15,000 | | | | 14,865 | |
3.70% loan from a related party, due June 1, 2010 | | | 8,700 | | | | — | |
0.25%—3.25% loan, due 2007 through 2009 | | | 5,000 | | | | 5,000 | |
Capital lease obligations | | | 23 | | | | 15 | |
| | | | | | | | |
| | | 28,723 | | | | 65,096 | |
Less unamortized discount | | | — | | | | (738 | ) |
| | | | | | | | |
Total long-term debt | | | 28,723 | | | | 64,358 | |
Less current portion | | | (142 | ) | | | (3,311 | ) |
| | | | | | | | |
Non-current portion | | $ | 28,581 | | | $ | 61,047 | |
| | | | | | | | |
On July 27, 2006, First Solar Manufacturing GmbH, a wholly owned indirect subsidiary of First Solar, Inc., entered into a credit facility agreement with a consortium of banks led by IKB Deutsche Industriebank AG under which we can draw up to€102.0 €102.0 million ($122.4132.6 million at an assumed exchange rate of $1.20/$1.30/€1.00) to fund costs of
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constructing and starting up our German plant. This credit facility consists of a term loan of up to€53.0 €53.0 million ($63.668.9 million at an assumed exchange rate of $1.20/$1.30/€1.00) and a revolving credit facility of€27.0 €27.0 million ($32.435.1 million at an assumed exchange rate of $1.20/$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 €22.0 million ($26.428.6 million at an assumed exchange rate of $1.20/$1.30/€1.00). We can make drawdowns against the term loan and the bridge loan until December 30, 2007 and we can make drawdowns against the revolving credit facility until September 30, 2012. We have incurred costs related to the credit facility totaling $1.9$2.0 million as of SeptemberDecember 30, 2006, which we will recognize as interest and other financing expenses over the time that borrowings are outstanding under the credit facility. We also pay an annual commitment fee of 0.6% of any amounts not drawn down on the credit facility. At SeptemberDecember 30, 2006, we had outstanding borrowings of $18.2$45.2 million under the term loan, which we classify as long-term debt and $6.8$16.3 million under the bridge loan, which we classify as short-term debt. We had no outstanding borrowings under the revolving credit facility.facility at December 30, 2006.
We must repay the term loan in twenty quarterly payments beginning on March 31, 2008 and ending on December 30, 2012. We must repay the bridge loan with any funding we receive from the Federal Republic of Germany under the Investment Grant Act of 2005, but in any event, the bridge loan must be paid in full by December 30, 2008. Once repaid, we may not draw again against term loan or bridge loan facilities. The revolving credit facility expires on and must be completely repaid by December 30, 2012. In certain circumstances, we must also use proceeds from fixed asset sales or insurance claims to make additional principal payments and during 2009 we will also be required to make a one-time principal repayment equal to 20% of any “surplus cash flow” of First Solar Manufacturing GmbH during 2008. Surplus cash flow is a term defined in the credit facility agreement that is approximately equal to cash flow from operating activities less required payments on indebtedness.
We must pay interest at the annual rate of the Euro interbank offered rate (Euribor) plus 1.6% on the term loan, Euribor plus 2.0% on the bridge loan and Euribor plus 1.8% on the revolving credit facility. Each time we make a draw against the term loan or the bridge loan, we may choose to pay interest on that drawdown every three or six months; each time we make a draw against the revolving credit facility, we may choose to pay interest on that drawdown every one, three, or six months. The credit facility requires us to mitigate our interest rate risk on the term loan by entering into pay-fixed, receive-floating interest rate swaps covering at least 75% of the balance outstanding under the term loan.
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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 €0.5 million ($0.60.7 million at an assumed exchange rate of $1.20/$1.30/€1.00) for these guarantees. In addition, we must maintain a debt service reserve of€3.0 €3.0 million ($3.63.9 million at an assumed exchange rate of $1.20/$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 GmbH’s 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 GmbH’s 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,
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First Solar Manufacturing GmbH generally cannot make any payments to affiliates if doing so would cause its cash flow available for debt service to fall below 1.3 times its required principal and interest payments for all its liabilities for any one year period or cause the amount of its equity to fall below 30% of the amount of its total assets. First Solar Manufacturing GmbH also cannot pay commissions of greater than 2% to First Solar affiliates that sell or distribute its products. Also, we may be required under certain circumstances to contribute more funds to First Solar Manufacturing GmbH, such as if project-related costs exceed our plan, we do not recover the expected amounts from governmental investment subsidies, or all or part of the government guarantees are withdrawn. If there is a decline in the value of the assets pledged as collateral for the credit facility, we may also be required to pledge additional assets as collateral.
During the year ended December 31, 2005, we received a $15.0 million loan from the Director of Development of the State of Ohio, all$14.9 million of which was outstanding at SeptemberDecember 30, 2006. Interest is payable monthly at the annual rate of 2.25%; principal payments commencecommenced on December 1, 2006 and end on July 1, 2015. Land and buildings at our Ohio plant with a net book value of $21.7$21.6 million (unaudited) at SeptemberDecember 30, 2006 have been pledged as collateral for this loan.
During the year ended December 25, 2004, we received a $5.0 million loan from the Director of Development of the State of Ohio, all of which was outstanding at SeptemberDecember 30, 2006. Interest is payable monthly at annual rates starting at 0.25% during the first year the loan is outstanding, increasing to 1.25% during the second and third years, increasing to 2.25% during the fourth and fifth years and increasing to 3.25% for each subsequent year; principal payments commence on January 1, 2007 and end on December 1, 2009. Accounts receivable, inventory, and machineryMachinery and equipment at our Ohio plant with a net book value of $104.6$9.8 million (unaudited) at SeptemberDecember 30, 2006 have been pledged as collateral for this loan. Due to the preparation of our registration statement for our initial public offering, we did not meet the non-financial covenant to furnish our audited financial statements for the year ended December 31, 2005 to the lender within 120 days after our fiscal year end and we received a waiver on June 5, 2006 for that requirement from the lender.lender on June 5, 2006. We have subsequently provided these financial statements to the lender.
During the year ended December 27, 2003, we received an $8.7 million loan from Kingston Properties, LLC, an affiliate of our majority stockholder. Interest accrued at the annual rate of 3.70% and iswas payable in monthly installments of $27,000; the principal amount and any unpaid accrued interest was due on June 1, 2010. We repaid the entire principal balance of this loan and all accrued interest in July 2006.
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At December 31, 2005,30, 2006, future principal payments on our long-term debt, excluding payments related to capital leases, which are disclosed in Notenote 11, were due as follows (in thousands):
| | | | | |
| 2006 | | $ | 135 | |
| 2007 | | | 3,305 | |
| 2008 | | | 3,337 | |
| 2009 | | | 3,372 | |
| 2010 | | | 10,439 | |
|
Thereafter | | | 8,112 | |
| | | |
|
Total long-term debt | | $ | 28,700 | |
| | | |
| | | | |
2007 | | $ | 3,305 | |
2008 | | | 10,120 | |
2009 | | | 12,416 | |
2010 | | | 10,783 | |
2011 | | | 13,078 | |
Thereafter | | | 15,379 | |
| | | | |
Total long-term debt | | $ | 65,081 | |
| | | | |
We made interest payments to related parties of $4.5 million, $0.3 million, $0.6 million and $0.6$1.1 million for the years ended December 27, 2003, December 25, 2004, and December 31, 2005 respectively, and $0.2 million (unaudited) and $0.7 million (unaudited) for the nine months ended September 24, 2005 and SeptemberDecember 30, 2006, respectively.
Note 9. Interest Rate Swap Agreement
| |
Note 9. | Interest Rate Swap Agreements |
We have an interest rate swap agreementagreements with a bankfinancial institution that effectively convertsconvert to fixed rates the floating variable rate of Euribor on certain drawdowns taken on the term loan portion of our credit facility agreement with a consortium of banks led by IKB Deutsche lndustriebankIndustriebank AG (see note 8) to an annual fixed rate of 3.96%. At SeptemberDecember 30, 2006, the notional valuevalues of thisthe interest rate swap was€14.3 million ($17.2 millionswaps (in thousands) and their annual fixed payment rates and maturities were as follows:
| | | | | | | | |
Notional Amount | | Fixed Rate | | Maturity |
|
€14,921 ($19,397 at an assumed exchange rate of $1.30/€1.00) | | | 3.96 | % | | | December 2012 | |
€9,902 ($12,873 at an assumed exchange rate of $1.30/€1.00) | | | 4.03 | % | | | December 2012 | |
€3,928 ($5,106 at an assumed exchange rate of $1.30/€1.00) | | | 4.07 | % | | | December 2012 | |
The notional amounts of the interest rate of $1.20/€1.00). Thisswaps are scheduled to decline in accordance with our scheduled principal payments on the hedged term loan drawdowns. These derivative financial instrumentinstruments qualified for accounting as a cash flow hedgehedges in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activitiesand we designated itthem as such. As a result, we classified the aggregate fair value of the interest rate swap agreementagreements, which was less than of $(0.2)$0.1 million, as an other current liabilityasset on our balance sheet at SeptemberDecember 30, 2006 and we record changes in that fair value in other comprehensive income. We assessed the interest rate swap agreementagreements as highly effective as a cash flow hedgehedges at SeptemberDecember 30, 2006. We did not enter into any interest rate swap agreements prior to the quarter ended September 30, 2006. We use interest rate swap agreements to mitigate
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our exposure to interest rate fluctuations associated with certain of our debt instruments; we do not use interest rate swap agreements for speculative or trading purposes.
Note 10. Benefit Plans
We offer a 401(k) retirement savings plan into which employees inall of our Ohio facilityUnited States employees can voluntarily contribute a portion of their annual salaries and wages, subject to legally prescribed dollar limits, andlimits. We also offered a SIMPLE IRA, plan into which we terminated during 2006, for employees in our Phoenix office can voluntarily contribute up to a legally prescribed dollar limit.office. Our contributions to our employees’ plan accounts are made at the discretion of our board of directors and are based on a percentage of the participating employees’ contributions, and vest overcontributions. In addition, our 401(k) plan requires a 4 years.year vesting period on employer contributions. During 2005,2006, we matched half of the first 4% of their compensation that our Ohio employees contributed to their planthe 401(k) Plan and all of the first 3% of their compensation that our Phoenix based employees contributed to their plan.the SIMPLE IRA. Our contributions to the plans totaled $0.1 million, $0.1$0.2 million and $0.2$0.3 million for the years ended December 27, 2003, December 25, 2004, and December 31, 2005 respectively, and $0.1 million (unaudited) and $0.2 million (unaudited) for the nine months ended September 24, 2005 and SeptemberDecember 30, 2006 respectively. None of these benefit plans offeroffered participants an option to invest in First Solar.our common stock.
Note 11. Commitments and Contingencies
| |
Note 11. | Commitments and Contingencies |
Lease commitments
We lease our headquarters in Phoenix, Arizona, a customer service office in Mainz, Germany and a business development office in Berlin, Germany under non-cancelable operating leases, which expire in March 2007, April 2009 and May 2006,2007, respectively. The leases require us to pay property taxes, common area maintenance and certain other costs in addition to base rent. We also lease certain machinery and equipment and office furniture and equipment
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under operating and capital leases. Future minimum payments under all of our non-cancelable leases are as follows as of December 31, 200530, 2006 (in thousands):
| | | | | | | | | | | | |
| | Capital Leases | | | Operating Leases | | | Total | |
| | | | | | | | | |
|
2006 | | $ | 9 | | | $ | 290 | | | $ | 299 | |
2007 | | | 9 | | | | 191 | | | | 200 | |
2008 | | | 7 | | | | 159 | | | | 166 | |
2009 | | | 6 | | | | 87 | | | | 93 | |
2010 | | | 2 | | | | 53 | | | | 55 | |
|
Thereafter | | | — | | | | 96 | | | | 96 | |
| | | | | | | | | |
|
Total minimum lease payments | | | 33 | | | $ | 876 | | | $ | 909 | |
| | | | | | | | | |
|
Less amounts representing interest | | | (10 | ) | | | | | | | | |
| | | | | | | | | |
|
Present value of minimum lease payments | | | 23 | | | | | | | | | |
|
Less current portion of obligations under capital leases | | | (7 | ) | | | | | | | | |
| | | | | | | | | |
|
Non-current portion of obligations under capital leases | | $ | 16 | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | Capital
| | | Operating
| | | | |
| | Leases | | | Leases | | | Total | |
|
2007 | | $ | 9 | | | $ | 388 | | | $ | 397 | |
2008 | | | 7 | | | | 290 | | | | 297 | |
2009 | | | 6 | | | | 284 | | | | 290 | |
2010 | | | 2 | | | | 280 | | | | 282 | |
2011 | | | — | | | | 272 | | | | 272 | |
Thereafter | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Total minimum lease payments | | | 24 | | | $ | 1,514 | | | $ | 1,538 | |
| | | | | | | | | | | | |
Less amounts representing interest | | | (9 | ) | | | | | | | | |
| | | | | | | | | | | | |
Present value of minimum lease payments | | | 15 | | | | | | | | | |
Less current portion of obligations under capital leases | | | (6 | ) | | | | | | | | |
| | | | | | | | | | | | |
Non-current portion of obligations under capital leases | | $ | 9 | | | | | | | | | |
| | | | | | | | | | | | |
Our rent expense was $0.4 million, $0.4 million and $0.6 million in each of the years ended December 27, 2003, December 25, 2004, and December 31, 2005 and $0.3 million (unaudited) and $0.4 million (unaudited) in the nine months ended September 24, 2005 and SeptemberDecember 30, 2006, respectively.
Purchase commitments
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. In certain instances, these latter agreements allow us the option to cancel, reschedule, or adjust our requirements based on our business needs prior to firm orders being placed. Consequently, only a portion of our recorded purchase commitments are firm, noncancelable,non-cancelable and unconditional. At December 31, 2005,30, 2006, our obligations under firm, noncancelable,non-cancelable and unconditional agreements were approximately $36.2$56.9 million,
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of which $33.0$26.5 million was for commitments related to plant construction and maintenance. $36.1$36.4 million of our purchase obligations are due in fiscal 2006.2007.
Product warranties
Product warranty activity during the years ended December 24, 2004, and December 31, 2005 and for the nine months ended SeptemberDecember 30, 2006 was as follows (in thousands):
| | | | | | | | | | | | |
| | | | Nine Months | |
| | Years Ended | | | Ended | |
| | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
| | | | | | | | | |
| | (as restated) | | | | | (unaudited) | |
Product warranty liability, beginning of period | | $ | 462 | | | $ | 2,425 | | | $ | 1,853 | |
Accruals for new warranties issued (warranty expense) | | | 1,900 | | | | 637 | | | | 897 | |
Settlements | | | (171 | ) | | | (170 | ) | | | (249 | ) |
Change in estimate of warranty liability | | | 234 | | | | (1,039 | ) | | | (49 | ) |
| | | | | | | | | |
|
Product warranty liability, end of period | | $ | 2,425 | | | $ | 1,853 | | | $ | 2,452 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
|
Product warranty liability, beginning of period | | $ | 462 | | | $ | 2,425 | | | $ | 1,853 | |
Accruals for new warranties issued (warranty expense) | | | 1,900 | | | | 637 | | | | 1,675 | |
Settlements | | | (171 | ) | | | (170 | ) | | | (554 | ) |
Change in estimate of warranty liability | | | 234 | | | | (1,039 | ) | | | (210 | ) |
| | | | | | | | | | | | |
Product warranty liability, end of period | | $ | 2,425 | | | $ | 1,853 | | | $ | 2,764 | |
| | | | | | | | | | | | |
We reduced our estimate of our product warranty liability by $1.0 million in the year ended December 31, 2005 because of the reductions in our manufacturing costs achieved in that year, which reduced our estimate of the cost required to replace our solar modules under warranty.
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Environmental matters
Our environmental liabilities were $0.1 million at December 25, 2004,and nil for the years ended December 31, 2005 and SeptemberDecember 30, 2006, respectively and are classified with other noncurrent liabilities on our consolidated balance sheets. The majority of our liability at December 31, 2005 and September 30, 2006 relates to our estimate of the future costs of remediation at our research and development facilities in Toledo, Ohio (closed in 1999) and Eckel Junction, Ohio (closed in 2004).
Legal matters
We are a party to litigation matters and claims that are normal in the course of our operations. While we believe that the ultimate outcome of these matters will not have a material adverse effect on our financial position, results of operations, or cash flows, the outcome of these matters is not determinable and negative outcomes may adversely affect us.
Sales Agreements
In April 2006, we entered into contracts with six European project developers and systems integrators for the purchase and sale of a significant portion of our planned production of solar modules during the period from 2006 to 2011.2012. Under these contracts, we agree to provide each customer with solar modules totaling certain amounts of power generation capability during specified time periods. Our customers are entitled to certain remedies in the event of missed deliveries of the total kilowatt volume. Such delivery commitments are established through a rolling four quarter forecast and definethat defines the specific quantities to be purchased on a quarterly basis and schedules the individual shipments to be made to our customers. In the case of a late delivery, our customers are entitled to a maximum charge of up to 6% of the delinquent revenue. If we do not meet our annual minimum volume shipments or the minimum average Watt per module, our customers also have the right to terminate these contracts on a prospective basis.
| |
Note 12. | Stockholders’ Equity Transactions and Settlement |
Preferred stock
We have authorized 30,000,000 shares of undesignated preferred stock, $0.001 par value, none of which was issued and outstanding at December 30, 2006. Our board of directors is authorized to determine the rights, preferences and restrictions on any series of issued preferred stock that we may issue.
Common stock
We have authorized 500,000,000 shares of common stock, $0.001 par value, 72,331,964 shares of which were issued and outstanding at December 30, 2006. Each share of common stock has the right to one vote. No dividends have been declared or paid as of December 30, 2006.
Employee stock options on redeemable shares
During the years ended December 27, 2003 and December 31, 2005, we issued to certain employees options to purchase a total of 1,872,100 shares of our common stock that had a provision allowing, upon the employees’ deaths, their estates to sell any equity shares obtained as a result of exercising the options back to us at an amount equal to the then current fair value per share. As a result of this provision, we report the vested portion of the intrinsic value of these stock options on our consolidated balance sheet as employee stock options on redeemable shares. These options also allow the employees to sell back to us at fair value any equity shares obtained as a result of exercising the options if the employee becomes disabled or if his employment with us is terminated other than for cause or good reason or upon termination resulting from a change of control (as defined in the award agreement). These rights did not expire upon the consummation of our initial public offering of our common stock during the year ended December 27, 2003, a previous owner forfeited its entire interest in First Solar US Manufacturing, LLC in connection with a settlement of claims, including matters subject to on-going arbitration and pending litigation, in exchange for a cash payment of $3.0 million from First Solar US Manufacturing, LLC recorded in selling, general, and administrative expenses, resulting in the retirement of 27,432,000 membership units. 30, 2006.
Equity transactions
During the same year, the sole remaining owner of First Solar US Manufacturing, LLC formed First Solar Holdings, LLC and contributed all its equity interest in First Solar US Manufacturing, LLC and First Solar Property, LLC into First Solar Holdings, LLC. The owner also transferred all rights and ownership of a promissory note and loan agreement with First Solar US Manufacturing, LLC to First Solar Holdings, LLC. First Solar Holdings, LLC
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subsequently converted the outstanding principal of $72.0 million and related accrued interest of $10.6 million into an equity contribution. The owner also made an additional cash contribution of $8.5 million to First Solar Holdings, LLC. Inyears ended December 2003, the First Solar Holdings, LLC Second Amended and Restated Limited Liability Company Agreement converted all of the owners equity interest in the company to 32,859,000 membership units. In fiscal25, 2004, fiscalDecember 31, 2005 and the first nine months ofDecember 30, 2006, the owner made furtherwe received cash equity contributions of $17.9 million, $16.7 million and $30.0 million, (unaudited), respectively.respectively, from our then sole owner.
During the nine monthsyear ended SeptemberDecember 30, 2006, we received $73.3 million (unaudited) from the issuance of $74.0 million (unaudited) in convertible senior subordinated notes due in 2011, less $0.7 million (unaudited) of issuance costs that we deferred. Later during the nine months ended September 30, 2006,same year, we extinguished these notes by payment of 4,261,000 (unaudited) shares of our common stock.stock to the note holder. This extinguishment took place under the terms of a negotiated extinguishment agreement and not under the conversion
F-32
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. As a result of the extinguishment, we recorded a $74.0 million (unaudited) increase in our stockholders’ equity and a $43,000 (unaudited) loss on the extinguishment of the notes, which we recorded in other income/income (expense), net in our consolidated statement of operations.
DuringThe Securities and Exchange Commission declared our first registration statements effective on November 16, 2006, which we filed onForms S-1 (RegistrationNo. 333-135574 and 462(b) RegistrationNo. 333-138779) under the years ended December 27, 2003 and December 25, 2004,Securities Act of 1993 in connection with the initial public offering of our common stock. Under these registration statements, we issuedregistered 22,942,500 shares of our common stock, optionsincluding 2,942,500 subject to certain employees that had a provision allowing the employee’s estate or its successors to sell any equity shares obtained as a result of exercising the options back to us at an amount equal to the fair value of the shares upon the death of the optionee. As a result, we report the vested portion of the intrinsic valueunderwriter’s over-allotment option. We registered 16,192,500 of these stock options as employee stock options on redeemable shares on our consolidated balance sheets.own behalf and 6,750,000 of these shares on behalf of certain of our stockholders, including one of our officers. In November 2006, we completed the initial public offering, in which we sold all of these shares that we registered on our behalf and on behalf of the selling stockholders, for an aggregate public offering price of $458.9 million, which included $58.9 million from the underwriters’ exercise of their over-allotment option. Of the $458.9 million of total gross proceeds, we received gross proceeds of $323.9 million, against which we charged $16.6 million of underwriting discounts and commissions and $4.6 million of other costs of the offering, resulting in a net increase in our paid-in capital of $302.7 million. The remaining $135.0 million of gross proceeds went to selling stockholders; they applied $8.4 million to underwriting discounts and commissions and received $126.6 million of the offering proceeds.
On November 22, 2006, we awarded a total of 2,188 fully vested, unrestricted shares of our common stock to the independent members of our board of directors. We recognized $0.1 million of share-based compensation expense for this transaction.
During 2003, we adopted theour 2003 Unit Option Plan (the “Plan”“2003 Plan”). In connection with our February 2006 conversion from a limited liability company to a corporation, we converted each outstanding option to purchase one limited liability membership unit under the 2003 Plan into an option to purchase one share of our common stock, in each case at the same exercise price and subject to the other terms and conditions of the outstanding option. Under the 2003 Plan, we may grant non-qualified options to purchase common shares of First Solar,Inc. to employees of First Solar, Inc. (including its parent and any of its subsidiaries) and non-employee individuals and entities that provide services to First Solar, Inc., its parent, or any of its subsidiaries. The 2003 Plan is administered by a committee appointed by our board of directors, which is authorized to, among other things, select the officers and other employeesdetermine who will receive grants and determine the exercise price and vesting schedule of the options. A totalThe maximum number of 6,847,060new shares were made available for issuanceof our common stock that may be delivered by awards granted under the 2003 Plan is 6,847,060 and the shares underlying forfeited, sharesexpired, terminated, or cancelled awards become available for re-issuance.new award grants. Our board of directors may amend, modify, or terminate the 2003 Plan without the approval of our stockholders. We may not grant awards under the 2003 Plan after 2013, which is the tenth anniversary of the plan’s approval by our stockholders. At December 31, 2005 and September 30, 2006, 1,574,456 and 1,753,280 (unaudited)1,810,453 shares respectively, were available for grant.
Activitygrant under the 2003 Plan. All shares available for grant under the 2003 Plan, wasall options outstanding under the plan and all shares outstanding from the exercise of options under the plan have been adjusted to give effect to the 4.85 to 1 stock split of our common shares during 2006 (see note 12).
During 2006, we adopted our 2006 Omnibus Incentive Compensation Plan (the “2006 Plan”). Under the 2006 Plan, directors, employees and consultants of First Solar, Inc. (including any subsidiaries) are eligible to participate. The 2006 Plan is administered by the compensation committee of our board of directors (or any other committee designated by our board of directors), which is authorized to, among other things, determine who will receive grants and determine the exercise price and vesting schedule of the awards made under the plan. The 2006 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units, performance units, cash incentive awards and other equity-based and equity-related awards. The maximum number of new shares of our common stock that may be delivered by awards granted under the 2006 Plan is 5,820,000, of which the maximum number that may be delivered by incentive stock options is 5,820,000 and the maximum number that may be delivered as follows duringrestricted stock awards is 2,910,000. Also, the years ended December 27, 2003 and December 25, 2004:shares underlying forfeited, expired, terminated, or cancelled awards become available for new award grants. Our board of directors may amend, modify, or terminate the 2006 Plan without the approval of our stockholders, except stockholder approval is required for amendments that would increase the maximum number of shares of our common stock available for awards under the plan, increase the maximum number of shares of our common stock that may be delivered by incentive stock options, or modify the requirements for
| | | | | | | | | | | | | | | | | |
| | Years Ended | |
| | | |
| | 2003 | | | 2004 | |
| | | | | | |
| | | | Weighted | | | | | Weighted | |
| | Number of | | | Average | | | Number of | | | Average | |
| | Shares under | | | Exercise | | | Shares under | | | Exercise | |
| | Option | | | Price | | | Option | | | Price | |
| | | | | | | | | | | | |
Balance at beginning of year | | | — | | | | — | | | | 2,505,398 | | | $ | 2.06 | |
| Options granted | | | 2,505,398 | | | $ | 2.06 | | | | 550,621 | | | $ | 2.06 | |
| Options exercised | | | — | | | | — | | | | — | | | | — | |
| Options cancelled | | | — | | | | — | | | | (109,770 | ) | | $ | 2.06 | |
| | | | | | | | | | | | |
|
Balance at end of year | | | 2,505,398 | | | $ | 2.06 | | | | 2,946,249 | | | $ | 2.06 | |
| | | | | | | | | | | | |
|
Exercisable at end of year | | | 777,940 | | | $ | 2.06 | | | | 1,033,050 | | | $ | 2.06 | |
| | | | | | | | | | | | |
F-21
participation in the 2006 Plan. We may not grant awards under the 2006 Plan after 2016, which is the tenth anniversary of the plan’s approval by our stockholders. At December 30, 2006, 4,278,631 shares were available for grant under the 2006 Plan.
Following is a summary of our share options as of December 25, 2004 and changes during the year then ended:
| | | | | | | | |
| | | | | Weighted
| |
| | Number of
| | | Average
| |
| | Shares Under
| | | Exercise
| |
| | Option | | | Price | |
|
Balance at beginning of year | | | 2,505,398 | | | $ | 2.06 | |
Options granted | | | 550,621 | | | $ | 2.06 | |
Options exercised | | | — | | | | — | |
Options canceled | | | (109,770 | ) | | $ | 2.06 | |
| | | | | | | | |
Balance at end of year | | | 2,946,249 | | | $ | 2.06 | |
| | | | | | | | |
Exercisable at end of year | | | 1,033,050 | | | $ | 2.06 | |
| | | | | | | | |
Following is a summary of our share options as of December 31, 2005 and changes during the year then ended:
| | | | | | | | | | | | | | | | |
| | | | Weighted Average | | | |
| | Number of | | | | | | |
| | Shares under | | | | | Remaining | | | Aggregate | |
| | Option | | | Exercise Price | | | Contractual Term | | | Intrinsic Value | |
| | | | | | | | | | | | |
Options outstanding at December 25, 2004 | | | 2,946,249 | | | $ | 2.06 | | | | | | | | | |
Options granted | | | 2,761,333 | | | $ | 4.34 | | | | | | | | | |
Options exercised | | | — | | | | — | | | | | | | $ | — | |
Options forfeited or expired | | | (434,977 | ) | | $ | 3.74 | | | | | | | | | |
| | | | | | | | | | | | |
|
Options outstanding at December 31, 2005 | | | 5,272,605 | | | $ | 3.11 | | | | 7.97 | | | $ | 74,901,000 | |
| | | | | | | | | | | | |
|
Options vested, or expected to vest, and exercisable at December 31, 2005 | | | 1,543,270 | | | $ | 2.29 | | | | 8.36 | | | $ | 23,187,000 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Number of
| | | Weighted Average | | | | |
| | Shares Under
| | | Exercise
| | | Remaining
| | | Aggregate
| |
| | Option | | | Price | | | Contractual Term | | | Intrinsic Value | |
|
Options outstanding at December 25, 2004 | | | 2,946,249 | | | $ | 2.06 | | | | | | | | | |
Options granted | | | 2,761,333 | | | $ | 4.34 | | | | | | | | | |
Options exercised | | | — | | | | — | | | | | | | $ | — | |
Options forfeited or expired | | | (434,977 | ) | | $ | 3.74 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Options outstanding at December 31, 2005 | | | 5,272,605 | | | $ | 3.11 | | | | 7.97 | | | $ | 74,901,000 | |
| | | | | | | | | | | | | | | | |
Options vested, or expected to vest and exercisable at December 31, 2005 | | | 1,543,270 | | | $ | 2.29 | | | | 8.36 | | | $ | 23,187,000 | |
| | | | | | | | | | | | | | | | |
Following is a summary of our share options as of SeptemberDecember 30, 2006 (unaudited) and changes during the nine monthsyear then ended:
| | | | | | | | | | | | | | | | |
| | | | Weighted Average | | | |
| | Number of | | | | | | |
| | Shares under | | | | | Remaining | | | Aggregate | |
| | Option | | | Exercise Price | | | Contractual Term | | | Intrinsic Value | |
| | | | | | | | | | | | |
Options outstanding at December 31, 2005 | | | 5,272,605 | | | $ | 3.11 | | | | | | | | | |
Options granted | | | — | | | | — | | | | | | | | | |
Options exercised | | | (48,500 | ) | | $ | 2.06 | | | | | | | $ | 740,000 | |
Options forfeited or expired | | | (130,325 | ) | | $ | 3.66 | | | | | | | | | |
| | | | | | | | | | | | |
|
Options outstanding at September 30, 2006 | | | 5,093,780 | | | $ | 3.11 | | | | 7.22 | | | $ | 65,891,000 | |
| | | | | | | | | | | | |
|
Options vested, or expected to vest, and exercisable at September 30, 2006 | | | 1,677,130 | | | $ | 2.28 | | | | 7.56 | | | $ | 23,092,000 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Number of
| | | Weighted Average | | | | |
| | Shares Under
| | | Exercise
| | | Remaining
| | | Aggregate
| |
| | Option | | | Price | | | Contractual Term | | | Intrinsic Value | |
|
Options outstanding at December 31, 2005 | | | 5,272,605 | | | $ | 3.11 | | | | | | | | | |
Options granted | | | 1,543,559 | | | $ | 20.37 | | | | | | | | | |
Options exercised | | | (48,500 | ) | | $ | 2.06 | | | | | | | $ | 740,000 | |
Options forfeited or expired | | | (238,188 | ) | | $ | 3.78 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Options outstanding at December 30, 2006 | | | 6,529,476 | | | $ | 7.18 | | | | 6.92 | | | $ | 147,972,000 | |
| | | | | | | | | | | | | | | | |
Options vested, or expected to vest and exercisable at December 30, 2006 | | | 1,925,037 | | | $ | 2.57 | | | | 7.28 | | | $ | 52,501,000 | |
| | | | | | | | | | | | | | | | |
Options granted under the 2003 Plan and 2006 Plan have varying vesting provisions. Some cliff-vest, four years aftersome vest ratably following the grant date, some vest ratablyat different rates during the four-year period following the grant datedifferent portions of their vesting periods and some vested on the date of grant. The total fair value of shares vesting during the years ended December 25, 2004, December 31, 2005 and December 30, 2006 were $359,000, $2,689,000 and $1,412,000, respectively. During the nine monthsyear ended SeptemberDecember 30, 2006, we received $0.1 million (unaudited) from the exercise of our options; these were the first exercises of our options that have occurred.
F-34
OptionsOur options expire approximatelyseven to ten years from their grant date. The following table presents information about share options outstanding at December 31, 2005:
| | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | | Options Exercisable | |
| | | | | | |
| | | | Weighted | | | |
| | | | Weighted | | | Average | | | | | Weighted | |
| | | | Average | | | Remaining | | | | | Average | |
Exercise Price | | Number of | | | Exercise | | | Contractual | | | Number of | | | Exercise | |
Range | | Shares | | | Price | | | Life (Years) | | | Shares | | | Price | |
| | | | | | | | | | | | | | | |
$2.06 | | | 2,855,724 | | | $ | 2.06 | | | | 7.88 | | | | 1,397,770 | | | $ | 2.06 | |
$4.33 | | | 2,101,631 | | | $ | 4.33 | | | | 7.71 | | | | — | | | | — | |
$4.54 | | | 315,250 | | | $ | 4.54 | | | | 9.96 | | | | 145,500 | | | $ | 4.54 | |
| | | | | | | | | | | | | | | |
|
$2.06 – $4.54 | | | 5,272,605 | | | $ | 3.11 | | | | 7.97 | | | | 1,543,270 | | | $ | 2.29 | |
| | | | | | | | | | | | | | | |
F-22
The following table presents exercise price and remaining life information about options outstanding at SeptemberDecember 30, 2006 (unaudited):2006:
| | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | | Options Exercisable | |
| | | | | | |
| | | | Weighted | | | |
| | | | Weighted | | | Average | | | | | Weighted | |
| | | | Average | | | Remaining | | | | | Average | |
Exercise Price | | | | Exercise | | | Contractual | | | | | Exercise | |
Range | | Number of Shares | | | Price | | | Life (Years) | | | Number of Shares | | | Price | |
| | | | | | | | | | | | | | | |
$2.06 | | | 2,768,967 | | | $ | 2.06 | | | | 7.12 | | | | 1,531,630 | | | $ | 2.06 | |
$4.33 | | | 2,009,563 | | | $ | 4.33 | | | | 6.96 | | | | — | | | | — | |
$4.54 | | | 315,250 | | | $ | 4.54 | | | | 9.22 | | | | 145,500 | | | $ | 4.54 | |
| | | | | | | | | | | | | | | |
|
$2.06 – $4.54 | | | 5,093,780 | | | $ | 3.11 | | | | 7.22 | | | | 1,677,130 | | | $ | 2.28 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | | Options Exercisable | |
| | | | | | | | Weighted
| | | | | | | |
| | | | | Weighted
| | | Average
| | | | | | Weighted
| |
| | | | | Average
| | | Remaining
| | | | | | Average
| |
Exercise Price
| | Number of
| | | Exercise
| | | Contractual
| | | Number of
| | | Exercise
| |
Range | | Shares | | | Price | | | Life (Years) | | | Shares | | | Price | |
|
$2.06 | | | 2,734,181 | | | $ | 2.06 | | | | 6.87 | | | | 1,713,990 | | | $ | 2.06 | |
$4.33 | | | 1,938,676 | | | $ | 4.33 | | | | 6.71 | | | | — | | | | — | |
$4.54 | | | 315,250 | | | $ | 4.54 | | | | 8.96 | | | | 181,875 | | | $ | 4.54 | |
$20.00 | | | 1,470,208 | | | $ | 20.00 | | | | 6.88 | | | | 29,172 | | | $ | 20.00 | |
$27.78—$28.59 | | | 71,161 | | | $ | 28.12 | | | | 6.97 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
$2.06—$28.59 | | | 6,529,476 | | | $ | 7.18 | | | | 6.92 | | | | 1,925,037 | | | $ | 2.57 | |
| | | | | | | | | | | | | | | | | | | | |
We have granted options with exercise prices that differed from the fair value of our shares (or membership units, for grants prior to our conversion into a corporation) on the grant date. The following table presents information about the options granted during the years ended December 27, 2003, December 25, 2004, December 31, 2005 and December 31, 2005.30, 2006:
| | | | | | | | | | | | |
| | | | | | Weighted Average | |
| | Number of Share | | | Weighted Average | | | Fair Value at | |
| | Options Granted | | | Exercise Price | | | Grant Date | |
| | | | | | | | | |
2005: | | | | | | | | | | | | |
Exercise price equaled grant date fair value of share | | | — | | | | — | | | | — | |
Exercise price less than grant date fair value of share | | | 2,761,333 | | | $ | 4.34 | | | $ | 14.74 | |
| | | | | | | | | |
| | | 2,761,333 | | | $ | 4.34 | | | $ | 14.74 | |
| | | | | | | | | |
2004: | | | | | | | | | | | | |
Exercise price equaled grant date fair value of share | | | 550,621 | | | $ | 2.06 | | | $ | 2.06 | |
Exercise price less than grant date fair value of share | | | — | | | | — | | | | — | |
| | | | | | | | | |
| | | 550,621 | | | $ | 2.06 | | | $ | 2.06 | |
| | | | | | | | | |
2003: | | | | | | | | | | | | |
Exercise price equaled grant date fair value of share | | | 2,505,398 | | | $ | 2.06 | | | $ | 2.06 | |
Exercise price less than grant date fair value of share | | | — | | | | — | | | | — | |
| | | | | | | | | |
| | | 2,505,398 | | | $ | 2.06 | | | $ | 2.06 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | Weighted Average
| |
| | Number of Share
| | | Weighted Average
| | | Fair Value at
| |
| | Options Granted | | | Exercise Price | | | Grant Date | |
|
2006: | | | | | | | | | | | | |
Exercise price equaled grant date fair value of share | | | 1,543,559 | | | $ | 20.37 | | | $ | 20.37 | |
Exercise price less than grant date fair value of share | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
| | | 1,543,559 | | | $ | 20.37 | | | $ | 20.37 | |
| | | | | | | | | | | | |
2005: | | | | | | | | | | | | |
Exercise price equaled grant date fair value of share | | | — | | | | — | | | | — | |
Exercise price less than grant date fair value of share | | | 2,761,333 | | | $ | 4.34 | | | $ | 14.74 | |
| | | | | | | | | | | | |
| | | 2,761,333 | | | $ | 4.34 | | | $ | 14.74 | |
| | | | | | | | | | | | |
2004: | | | | | | | | | | | | |
Exercise price equaled grant date fair value of share | | | 550,621 | | | $ | 2.06 | | | $ | 2.06 | |
Exercise price less than grant date fair value of share | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
| | | 550,621 | | | $ | 2.06 | | | $ | 2.06 | |
| | | | | | | | | | | | |
The weighted average estimated fair value of the options granted during the nine months ended September 24, 2005 was $3.58 (unaudited), and no grants were made during the nine months ended September 30, 2006.
We estimate the fair value of each option award on its grant date using the Black-Scholes-Merton closed-form option valuation model,formula, which uses the assumptions documented in the following table for the years ended December 27, 2003, December 24, 2004, and December 31, 2005 and for the nine months ended September 24, 2005 and SeptemberDecember 30, 2006:
| | | | | | | | | | |
| | Years Ended | | Nine Months Ended |
| | | | |
| | 2003 | | 2004 | | 2005 | | 2005 | | 2006 |
| | | | | | | | | | |
| | | | | | | | (unaudited) |
Share (or membership unit) price on grant date | | $2.06 | | $2.06 | | $4.54 - $17.32 | | $4.54 | | — |
Stock option exercise price | | $2.06 | | $2.06 | | $2.06 - $4.54 | | $2.06 - $4.33 | | — |
Expected term | | 5.0 - 7.2 years | | 5.5 - 6.8 years | | 5.0 - 7.5 years | | 6.0 years | | — |
Volatility | | 80% | | 80% | | 80% | | 80% | | — |
Risk-free interest rate | | 3.26% - 3.81% | | 3.17% - 4.31% | | 3.97% - 4.41% | | 3.97% | | — |
Dividend yield | | 0.00% | | 0.00% | | 0.00% | | 0.00% | | — |
| | | | | | |
| | 2004 | | 2005 | | 2006 |
|
Share (or membership unit) price on grant date | | $2.06 | | $4.54 - $17.32 | | $20.00 - $28.59 |
Stock option exercise price | | $2.06 | | $2.06 - $4.54 | | $20.00 - $28.59 |
Expected term | | 5.5 - 6.8 years | | 5.0 - 7.5 years | | 3.5 - 6.0 years |
Volatility | | 80% | | 80% | | 75% |
Risk-free interest rate | | 3.17% - 4.31% | | 3.97% - 4.41% | | 4.57% - 4.65% |
Dividend yield | | 0.00% | | 0.00% | | 0.00% |
F-35
We estimated our options’ expected terms, which represent our best estimate of the period of time from the grant date that we expect the options to remain outstanding. Because our stock is not currentlynewly publicly traded, we do not have ana meaningful observable share-price volatility; therefore, we estimatedbased our estimate of the expected volatility of our future stock price on that of similar publicly-traded companies and we expect to continue to do soestimate our expected stock price volatility in this manner until such time as we might have adequate historical data to refer to from our own traded share prices.
F-23
The stock-based compensation expense that we recognized in our results of operations is based on the number of awards expected to ultimately vest, so the actual award amounts have been reduced for estimated forfeitures. SFAS 123(R)requires us to estimate forfeitures at the time the options are granted and revise those estimates, if necessary, in subsequent periods. We estimated forfeitures based on our historical experience with forfeitures of our options, giving consideration to whether future forfeiture behavior might be expected to differ from past behavior.
We recognize compensation cost for awards with graded vesting schedules on a straight-line basis over the requisite service periods for each separately vesting portion of the awards as if each award was, in substance, multiple awards.
The stock-based compensation expense that we charged against our results of operations on our statement of operations was as follows for the years ended December 27, 2003, December 24, 2004, and December 31, 2005 and for the nine months ended September 24, 2005 and SeptemberDecember 30, 2006 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | | Nine Months Ended | |
| | | | | | |
| | 2003 | | | 2004 | | | 2005 | | | 2005 | | | 2006 | |
| | | | | | | | | | | | | | | |
| | | | �� | | | | (unaudited) | |
Stock-based compensation cost included in: | | | | | | | | | | | | | | | | | | | | |
| Cost of sales | | $ | — | | | $ | 63 | | | $ | 822 | | | $ | 76 | | | $ | 3,409 | |
| Research and development | | | — | | | | 64 | | | | 639 | | | | 54 | | | | 1,790 | |
| Selling, general, and administrative | | | 1,146 | | | | 1,016 | | | | 3,425 | | | | 456 | | | | 2,962 | |
| | | | | | | | | | | | | | | |
|
Total stock-based compensation cost | | $ | 1,146 | | | $ | 1,143 | | | $ | 4,886 | | | $ | 586 | | | $ | 8,161 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
|
Stock-based compensation cost included in: | | | | | | | | | | | | |
Cost of sales | | $ | 63 | | | $ | 822 | | | $ | 4,160 | |
Research and development | | | 64 | | | | 639 | | | | 2,348 | |
Selling, general and administrative | | | 1,016 | | | | 3,425 | | | | 5,251 | |
Productionstart-up | | | — | | | | — | | | | 138 | |
| | | | | | | | | | | | |
Total stock-based compensation cost | | $ | 1,143 | | | $ | 4,886 | | | $ | 11,897 | |
| | | | | | | | | | | | |
The adoption of SFAS 123(R) required us to change the way we account for forfeitures of employee stock options; in accordance with the provisions of SFAS 123(R), we presented the $0.1 million impact of this change as a cumulative effect of a change in account principle on our statements of operations for the year ended December 31, 2005 and the nine months ended September 24, 2005. The adoption of SFAS 123(R)did not have any effect on our cash flows from operating or financing activities and, since we were not a taxable entity at the time and had not had any exercises of options, exercise, did not have any effect on our income taxes. Furthermore, we did not recognize any income tax benefit for stock-based compensation during the years ended December 27, 2003, December 24, 2004 and December 31, 2005 and the nine months ended September 24, 2005 because we were not organized as an entity subject to income tax during those periods; we did not recognize any income tax benefit for stock-based compensation during the nine monthsyear ended SeptemberDecember 30, 2006 due to the valuation allowance on our deferred tax assets. Since we did not grant any stock-based compensation awards prior to the year ended December 27, 2003, our adoption of SFAS 123(R) using the modified retrospective method of transition from prior accounting standards did not have any impact on our paid-in capital, accumulated deficit, or deferred taxes from years prior to that year. At December 31, 2005 and September 30, 2006, we had $27.6$29.9 million and $19.5 million (unaudited), respectively, of compensation costcosts related to unvested option awards that remained to be recognized over a weighted average periodsservice period of 2.7 and 2.0 years, respectively.years.
Stock-based compensation cost capitalized in our inventory was $0.4 million and $0.2 million (unaudited) at December 31, 2005 and SeptemberDecember 30, 2006, respectively; no stock-based compensation cost was capitalized in any of our assets at December 27, 2003, and December 24, 2004, and less than $0.1 million was capitalized at September 24, 2005.respectively.
F-36
During the first quarter of the year ended December 31, 2005, we adopted SFAS 123(R) using the modified retrospective method, which involves adjusting our prior consolidated financial statements for the amounts previously reported in our pro forma disclosures under SFAS 123. The following table presents the adjustments that we made to our restated statements of operations (see note 19) for the effect of the adoption of SFAS 123(R) on our previously reported consolidated financial statements for the yearsyear ended December 27, 2003 and December 25, 2004 (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | |
| | | |
| | 2003 | | | 2004 | |
| | | | | | |
| | | | As Restated | | | | | As Restated | |
| | | | and | | | | | and | |
| | As Restated | | | Adjustments | | Adjusted | | | As Restated | | | Adjustments | | Adjusted | |
| | | | | | | | | | | | | | | | |
Net sales | | $ | 3,210 | | | $ | — | | | $ | 3,210 | | | $ | 13,522 | | | $ | — | | | $ | 13,522 | |
F-24
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | |
| | | |
| | 2003 | | | 2004 | |
| | | | | | |
| | | | As Restated | | | | | As Restated | |
| | | | and | | | | | and | |
| | As Restated | | | Adjustments | | | Adjusted | | | As Restated | | | Adjustments | | | Adjusted | |
| | | | | | | | | | | | | | | | | | |
Cost of sales | | | 11,495 | | | | — | | | | 11,495 | | | | 18,788 | | | | 63 | | | | 18,851 | |
| | | | | | | | | | | | | | | | | | |
|
Gross profit (loss) | | | (8,285 | ) | | | — | | | | (8,285 | ) | | | (5,266 | ) | | | (63 | ) | | | (5,329 | ) |
| | | | | | | | | | | | | | | | | | |
|
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development | | | 3,841 | | | | — | | | | 3,841 | | | | 1,176 | | | | 64 | | | | 1,240 | |
Selling, general, and administrative | | | 10,835 | | | | 1,146 | | | | 11,981 | | | | 8,296 | | | | 1,016 | | | | 9,312 | |
Production start-up costs | | | — | | | | — | | | | — | | | | 900 | | | | — | | | | 900 | |
| | | | | | | | | | | | | | | | | | |
| | | 14,676 | | | | 1,146 | | | | 15,822 | | | | 10,372 | | | | 1,080 | | | | 11,452 | |
| | | | | | | | | | | | | | | | | | |
|
Operating loss | | | (22,961 | ) | | | (1,146 | ) | | | (24,107 | ) | | | (15,638 | ) | | | (1,143 | ) | | | (16,781 | ) |
|
Foreign currency gain | | | — | | | | — | | | | — | | | | 116 | | | | — | | | | 116 | |
Interest expense | | | (3,974 | ) | | | — | | | | (3,974 | ) | | | (100 | ) | | | — | | | | (100 | ) |
Other income (expense), net | | | 38 | | | | — | | | | 38 | | | | (6 | ) | | | — | | | | (6 | ) |
| | | | | | | | | | | | | | | | | | |
|
Net loss | | $ | (26,897 | ) | | $ | (1,146 | ) | | $ | (28,043 | ) | | $ | (15,628 | ) | | $ | (1,143 | ) | | $ | (16,771 | ) |
| | | | | | | | | | | | | | | | | | |
|
Net loss per share – basic and diluted | | $ | (0.75 | ) | | $ | (0.03 | ) | | $ | (0.78 | ) | | $ | (0.36 | ) | | $ | (0.03 | ) | | $ | (0.39 | ) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2004 | |
| | | | | | | | As Reported
| |
| | | | | | | | and
| |
| | As Reported | | | Adjustments | | | Adjusted | |
|
Net sales | | $ | 13,522 | | | $ | — | | | $ | 13,522 | |
Cost of sales | | | 18,788 | | | | 63 | | | | 18,851 | |
| | | | | | | | | | | | |
Gross profit (loss) | | | (5,266 | ) | | | (63 | ) | | | (5,329 | ) |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Research and development | | | 1,176 | | | | 64 | | | | 1,240 | |
Selling, general, and administrative | | | 8,296 | | | | 1,016 | | | | 9,312 | |
Productionstart-up costs | | | 900 | | | | — | | | | 900 | |
| | | | | | | | | | | | |
| | | 10,372 | | | | 1,080 | | | | 11,452 | |
| | | | | | | | | | | | |
Operating loss | | | (15,638 | ) | | | (1,143 | ) | | | (16,781 | ) |
Foreign currency gain | | | 116 | | | | — | | | | 116 | |
Interest expense | | | (100 | ) | | | — | | | | (100 | ) |
Other income (expense), net | | | (6 | ) | | | — | | | | (6 | ) |
| | | | | | | | | | | | |
Net loss | | $ | (15,628 | ) | | $ | (1,143 | ) | | $ | (16,771 | ) |
| | | | | | | | | | | | |
Net loss per share—basic and diluted | | $ | (0.36 | ) | | $ | (0.03 | ) | | $ | (0.39 | ) |
| | | | | | | | | | | | |
As a result of adopting SFAS 123(R), membership equity reported on our restated consolidated balance sheet at December 25, 2004 increased by $2.3 million, from $163.4 million to $165.7 million, and accumulated deficit increased by the same amount, from $140.6 million to $142.9 million.
Our 2006 annual income tax was $5.2 million. The 2006 tax rate was 56.7% which primarily reflects a full valuation allowance on our deferred tax assets of $54.9 million. In 2004 and 2005, First Solar was formedoperated as a limited liability company (LLC) and, accordingly was not subject to U.S. federal orand state income taxes prior to 2006; instead,taxes. Instead our income was directly taxed directly toby our owners. However, certain of ournon-U.S. non U.S. subsidiaries were subject to income taxes in their local jurisdictions. On February 22, 2006,2206, First Solar converted to a taxable corporate“C” corporation form of organization.
The U.S. andnon-U.S. components of our loss before income taxes were as follows during the years ended December 27, 2003, December 25, 2004, and December 31, 2005 and for the nine months ended September 24, 2005 and SeptemberDecember 30, 2006 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | | Nine Months Ended | |
| | | | | | |
| | 2003 | | | 2004 | | | 2005 | | | 2005 | | | 2006 | |
| | | | | | | | | | | | | | | |
| | (as restated) | | | (as restated) | | | | | (unaudited) | |
U.S. income (loss) | | $ | (28,027 | ) | | $ | (14,083 | ) | | $ | (4,604 | ) | | $ | 1,122 | | | $ | (3,836 | ) |
Non-U.S. loss | | | (16 | ) | | | (2,688 | ) | | | (1,947 | ) | | | (469 | ) | | | (47 | ) |
| | | | | | | | | | | | | | | |
Income (loss) before income taxes | | $ | (28,043 | ) | | $ | (16,771 | ) | | $ | (6,551 | ) | | $ | 653 | | | $ | (3,883 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
|
U.S. income (loss) | | $ | (14,083 | ) | | $ | (4,604 | ) | | $ | 10,314 | |
Non-U.S. loss | | | (2,688 | ) | | | (1,947 | ) | | | (1,134 | ) |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | (16,771 | ) | | $ | (6,551 | ) | | $ | 9,180 | |
| | | | | | | | | | | | |
F-37
F-25
The components of our income tax expense were as follows during the years ended December 25, 2004, December 31, 2005 and December 30, 2006 (in thousands):
| | | | | | | | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
|
Current expense: | | | | | | | | | | | | |
Federal | | $ | — | | | $ | — | | | $ | 4,401 | |
State | | | — | | | | — | | | | 453 | |
Foreign | | | — | | | | — | | | | 352 | |
| | | | | | | | | | | | |
| | | — | | | | — | | | | 5,206 | |
| | | | | | | | | | | | |
Deferred expense: | | | | | | | | | | | | |
Federal | | | — | | | | — | | | | — | |
State | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Foreign | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Total income tax expense | | $ | — | | | $ | — | | | $ | 5,206 | |
| | | | | | | | | | | | |
As a result of our status as a limited liability company and as a result of our net operating losses and a valuation allowance on all of our net deferred tax assets in those jurisdictions in which we did operate under a form of organization subject to income taxes, we did not record anany income tax expense or benefit during the years ended December 27, 2003, December 25, 2004 and December 31, 2005 and the nine months ended September 24, 2005. We recorded incomedid not record a deferred tax expense as a result of taxable income in certain jurisdictions in which we operateor benefit during the nine monthsyear ended SeptemberDecember 30, 2006.
Our income tax results differsdiffer from the amount computed by applying the U.S. statutory federal income tax rate of 35% to our income or losses before income taxes for the following reasons during the years ended December 25, 2004, December 31, 2005 and December 30, 2006 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | | Nine Months Ended | |
| | | | | | |
| | 2003 | | | 2004 | | | 2005 | | | 2005 | | | 2006 | |
| | | | | | | | | | | | | | | |
| | (as restated) | | | (as restated) | | | | | (unaudited) | |
Computed income tax benefit (expense) | | $ | 9,815 | | | $ | 5,870 | | | $ | 2,293 | | | $ | (229 | ) | | $ | 1,360 | |
Economic development funding benefit | | | — | | | | — | | | | — | | | | — | | | | 5,163 | |
Income (loss) not subject to income taxes | | | (9,809 | ) | | | (4,929 | ) | | | (1,611 | ) | | | 393 | | | | (342 | ) |
Effect of foreign tax rates | | | — | | | | 124 | | | | 91 | | | | 22 | | | | (2 | ) |
Effect of state taxes | | | — | | | | — | | | | — | | | | — | | | | 51 | |
Effect of foreign currency changes | | | — | | | | — | | | | — | | | | — | | | | 120 | |
Other | | | — | | | | 102 | | | | (81 | ) | | | — | | | | 81 | |
Valuation allowance | | | (6 | ) | | | (1,167 | ) | | | (692 | ) | | | (186 | ) | | | (6,612 | ) |
| | | | | | | | | | | | | | | |
|
Reported income tax expense | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (181 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
|
Computed income tax (benefit) expense | | $ | (5,870 | ) | | $ | (2,293 | ) | | $ | 3,213 | |
Economic development funding benefit | | | — | | | | — | | | | (8,873 | ) |
Permanent differences | | | — | | | | — | | | | 407 | |
(Income) loss not subject to income taxes | | | 4,929 | | | | 1,611 | | | | 326 | |
Effect of state taxes | | | — | | | | — | | | | 244 | |
Effect of foreign tax rates | | | (124 | ) | | | (91 | ) | | | (53 | ) |
Other | | | (102 | ) | | | 81 | | | | (235 | ) |
Valuation allowance | | | 1,167 | | | | 692 | | | | 10,177 | |
| | | | | | | | | | | | |
Reported income tax expense | | $ | — | | | $ | — | | | $ | 5,206 | |
| | | | | | | | | | | | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities calculated for financial reporting purposes and the amounts calculated for preparing our income tax returns
F-38
in accordance with tax regulations and the net tax effects of operating loss and tax credit carryforwards. The items that gave rise to our deferred taxes at December 25, 2004, December 31, 2005 and SeptemberDecember 30, 2006 were as follows (in thousands):
| | | | | | | | | | | | | |
| | December 25, | | | December 31, | | | September 30, | |
| | 2004 | | | 2005 | | | 2006 | |
| | | | | | | | | |
| | (as restated) | | | | | (unaudited) | |
Deferred tax assets: | | | | | | | | | | | | |
| Goodwill | | $ | — | | | $ | — | | | $ | 36,512 | |
| Property, plant, and equipment | | | — | | | | — | | | | 5,940 | |
| Economic development funding | | | — | | | | — | | | | 5,163 | |
| Share-based compensation | | | — | | | | — | | | | 2,958 | |
| Accrued expenses | | | — | | | | 461 | | | | 2,112 | |
| Net operating losses | | | 1,173 | | | | 1,321 | | | | 1,494 | |
| Inventory | | | — | | | | — | | | | 872 | |
| Other | | | — | | | | 83 | | | | 64 | |
| | | | | | | | | |
|
Deferred tax assets, gross | | | 1,173 | | | | 1,865 | | | | 55,115 | |
Valuation allowance | | | (1,173 | ) | | | (1,865 | ) | | | (54,731 | ) |
| | | | | | | | | |
|
Deferred tax assets, net | | | — | | | | — | | | $ | 384 | |
Deferred tax liabilities: | | | | | | | | | | | | |
| Capitalized interest | | | — | | | | — | | | | (384 | ) |
| | | | | | | | | |
Net deferred tax assets and liabilities | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | |
| | | | | | | | |
| | 2005 | | | 2006 | |
|
Deferred tax assets: | | | | | | | | |
Goodwill | | $ | — | | | $ | 32,694 | |
Economic development funding | | | — | | | | 8,873 | |
Share-based compensation | | | — | | | | 4,368 | |
Property, plant and equipment | | | — | | | | 4,113 | |
Accrued expenses | | | 461 | | | | 2,510 | |
Net operating losses | | | 1,321 | | | | 2,433 | |
Inventory | | | — | | | | 273 | |
Other | | | 83 | | | | 230 | |
| | | | | | | | |
Deferred tax assets, gross | | | 1,865 | | | | 55,494 | |
Valuation allowance | | | (1,865 | ) | | | (54,890 | ) |
| | | | | | | | |
Deferred tax assets, net of valuation allowance | | | — | | | | 604 | |
Deferred tax liabilities: | | | | | | | | |
Capitalized interest | | | — | | | | (604 | ) |
| | | | | | | | |
Net deferred tax assets and liabilities | | $ | — | | | $ | — | |
| | | | | | | | |
The ultimate realization of deferred tax assets depends on the generation of sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions during the future periods in which the related temporary differences become deductible. We determined the valuation allowance on our deferred tax assets in accordance with the provisions of SFAS 109, which require us to weigh both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. We evaluated all significant
F-26
available positive and negative evidence, including the existence of cumulative net losses, benefits that could be realized from available tax strategies and forecasts of future taxable income, in determining the need for a valuation allowance on our deferred tax assets. After applying the evaluation guidance of SFAS No. 109, we determined that it was necessary to record a valuation allowance against all of our net deferred tax assets. We will maintain this valuation allowance until sufficient positive evidence exists to support its reversal in accordance with SFAS No. 109.
Activity in our valuation allowance on our deferred tax assets was as follows during the years ended December 25, 2004 and December 31, 2005 and the nine months ended SeptemberDecember 30, 2006 (in thousands):
| | | | | | | | | | | | |
| | | | Nine Months | |
| | Years Ended | | | Ended | |
| | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
| | | | | | | | | |
| | (as restated) | | | | | (unaudited) | |
Valuation allowance, beginning of year | | $ | 6 | | | $ | 1,173 | | | $ | 1,865 | |
Additions | | | 1,167 | | | | 692 | | | | 6,665 | |
Change in form of corporate organization | | | — | | | | — | | | | 46,201 | |
| | | | | | | | | |
Valuation allowance, end of period | | $ | 1,173 | | | $ | 1,865 | | | $ | 54,731 | |
| | | | | | | | | |
| | | | | | | | |
| | 2005 | | | 2006 | |
|
Valuation allowance, beginning of year | | $ | 1,173 | | | $ | 1,865 | |
Change in form of corporate organization | | | 692 | | | | 42,848 | |
Additions | | | — | | | | 10,177 | |
| | | | | | | | |
Valuation allowance, end of year | | $ | 1,865 | | | $ | 54,890 | |
| | | | | | | | |
Upon our change in form of corporate organization on February 22, 2006, we recognized $46.2 million of net deferred tax assets against whichand we placed a valuation allowance in that fullentire amount.
At December 31, 2005, we hadnon-U.S. net operating loss carryforwards of $3.4 million, which will begin expiring in 2008. At September 30, 2006, we hadnon-U.S. net operating loss carry-forwards of $6.8$6.4 million, which will begin expiring in 2008.have an unlimited expiration period. Our ability to use the net operating loss carryforwards is dependent on our being able to generate taxable income in future periods.
Pro forma information (unaudited)
On February 22, 2006, we changed our status from a limited liability company and arewere thereafter subject to corporate federal and state income taxes as a subchapter C corporation. Because we had been a limited liability company, we had not reflected deferred taxes in our consolidated financial statements, except for deferred tax assets at certainnon-U.S. subsidiariessubsidiaries that were subject to local income tax requirements and upon which we recorded full valuation allowances. Our statement of operations does not include a pro forma presentation calculated in accordance with SFAS 109 for income taxes that would have been recorded had we been a subchapter C corporation because we would
F-39
have provided a full valuation allowance on all of our net deferred tax assets and therefore would not have recorded a tax provision.
| |
Note 15. | Income (Loss) Per Share |
The calculation of basic and diluted income (loss) per share for the years ended December 27, 2003, December 25, 2004, and December 31, 2005 and for the nine months ended September 24, 2005 and SeptemberDecember 30, 2006 is as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | | Nine Months Ended | |
| | | | | | |
| | 2003 | | | 2004 | | | 2005 | | | 2005 | | | 2006 | |
| | | | | | | | | | | | | | | |
| | (as restated) | | | (as restated) | | | | | |
| | | | | | | | (unaudited) | |
Numerator – basic and diluted: | | | | | | | | | | | | | | | | | | | | |
Income (loss) before cumulative effect of change in accounting principle | | $ | (28,043 | ) | | $ | (16,771 | ) | | $ | (6,551 | ) | | $ | 653 | | | $ | (4,064 | ) |
Cumulative effect of change in accounting principle | | | — | | | | — | | | | 89 | | | | 89 | | | | — | |
| | | | | | | | | | | | | | | |
Net income (loss) | | $ | (28,043 | ) | | $ | (16,771 | ) | | $ | (6,462 | ) | | $ | 742 | | | $ | (4,064 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
|
Basic net income (loss) per share | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | |
Income (loss) before cumulative effect of changes in accounting principle | | $ | (16,771 | ) | | $ | (6,551 | ) | | $ | 3,974 | |
Cumulative effect of change in accounting Principle | | | — | | | | 89 | | | | — | |
| | | | | | | | | | | | |
Net income (loss) | | $ | (16,771 | ) | | $ | (6,462 | ) | | $ | 3,974 | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted-average common stock outstanding | | | 39,129 | | | | 44,244 | | | | 55,651 | |
Effect of rights issue | | | 4,069 | | | | 4,602 | | | | 659 | |
| | | | | | | | | | | | |
Weighted-average shares used in computing net income (loss) per share | | | 43,198 | | | | 48,846 | | | | 56,310 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Diluted net income (loss) per share | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted-average shares used in computing basic net income per share | | | 43,198 | | | | 48,846 | | | | 56,310 | |
Add stock options outstanding | | | — | | | | — | | | | 1,945 | |
| | | | | | | | | | | | |
Weighted-average shares used in computing diluted net income (loss) per share | | | 43,198 | | | | 48,846 | | | | 58,255 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
|
Per share information—basic and diluted: | | | | | | | | | | | | |
Income (loss) per share before cumulative effect of change in accounting principle | | $ | (0.39 | ) | | $ | (0.13 | ) | | $ | 0.07 | |
Cumulative effect of change in accounting principle | | | — | | | | 0.00 | | | | — | |
| | | | | | | | | | | | |
Income (loss) per share | | $ | (0.39 | ) | | $ | (0.13 | ) | | $ | 0.07 | |
| | | | | | | | | | | | |
The following outstanding options were excluded from the computation of diluted net income (loss) per share as they had an antidilutive effect (in thousands):
| | | | | | | | | | | | |
| | 2004 | | 2005 | | 2006 |
|
Options to purchase common stock | | | 2,693 | | | | 3,522 | | | | 3,363 | |
F-40
F-27
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | | Nine Months Ended | |
| | | | | | |
| | 2003 | | | 2004 | | | 2005 | | | 2005 | | | 2006 | |
| | | | | | | | | | | | | | | |
| | (as restated) | | | (as restated) | | | | | |
| | | | | | | | (unaudited) | |
Denominator | | | | | | | | | | | | | | | | | | | | |
Weighted average shares | | | 32,634 | | | | 39,129 | | | | 44,244 | | | | 43,897 | | | | 52,879 | |
|
Effect of rights issue | | | 3,394 | | | | 4,069 | | | | 4,602 | | | | 4,565 | | | | 878 | |
| | | | | | | | | | | | | | | |
|
Weighted average shares for basic income (loss) per share | | | 36,028 | | | | 43,198 | | | | 48,846 | | | | 48,462 | | | | 53,757 | |
Effect of dilutive potential common shares: | | | | | | | | | | | | | | | | | | | | |
Stock options outstanding | | | — | | | | — | | | | — | | | | 1,553 | | | | — | |
| | | | | | | | | | | | | | | |
Weighted average shares for diluted income (loss) per share | | | 36,028 | | | | 43,198 | | | | 48,846 | | | | 50,015 | | | | 53,757 | |
| | | | | | | | | | | | | | | |
Per share information – basic and diluted: | | | | | | | | | | | | | | | | | | | | |
Income (loss) per share before cumulative effect of change in accounting principle | | $ | (0.78 | ) | | $ | (0.39 | ) | | $ | (0.13 | ) | | $ | 0.01 | | | $ | (0.08 | ) |
Cumulative effect of change in accounting principle | | | — | | | | — | | | | 0.00 | | | | 0.00 | | | | — | |
| | | | | | | | | | | | | | | |
|
Income (loss) per share | | $ | (0.78 | ) | | $ | (0.39 | ) | | $ | (0.13 | ) | | $ | 0.01 | | | $ | (0.08 | ) |
| | | | | | | | | | | | | | | |
Diluted income (loss) per share excludes the effect of 151,000, 2,693,000, and 3,522,000 anti-dilutive potential common shares for the years ended December 27, 2003, December 25, 2004, and December 31, 2005, respectively, and 1,423,000 (unaudited) and 5,175,000 (unaudited) anti-dilutive potential common shares for the nine months ended September 24, 2005 and September 30, 2006, respectively.
| |
Note 16. | Statement of Cash Flows |
During the quarter ended March 26, 2005, we began presenting our consolidated statement of cash flows using the direct method and conformed the presentation for all prior periods accordingly.
Following is a reconciliation of net loss to net cash provided by or used in operating activities for the years ended December 27, 2003, December 25, 2004, and December 31, 2005 and for the nine months ended September 24, 2005 and SeptemberDecember 30, 2006 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | | Nine Months Ended | |
| | | | | | |
| | 2003 | | | 2004 | | | 2005 | | | 2005 | | | 2006 | |
| | | | | | | | | | | | | | | |
| | (as restated) | | | (as restated) | | | | | |
| | | | | | | | (unaudited) | |
Net loss | | $ | (28,043 | ) | | $ | (16,771 | ) | | $ | (6,462 | ) | | $ | 742 | | | $ | (4,064 | ) |
|
Adjustment to reconcile net loss to cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 1,502 | | | | 1,944 | | | | 3,376 | | | | 2,356 | | | | 6,512 | |
| Stock-based compensation | | | 1,146 | | | | 1,143 | | | | 4,797 | | | | 497 | | | | 8,160 | |
| Loss on disposal of property and equipment | | | — | | | | — | | | | — | | | | — | | | | 243 | |
| Non-cash interest | | | 4,327 | | | | 51 | | | | 90 | | | | 8 | | | | 398 | |
| Non-cash loss | | | — | | | | 234 | | | | 27 | | | | — | | | | 45 | |
F-28
| | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | | Nine Months Ended | |
| | | | | | |
| | 2003 | | | 2004 | | | 2005 | | | 2005 | | | 2006 | |
| | | | | | | | | | | | | | | |
| | (as restated) | | | (as restated) | | | | | |
| | | | | | | | (unaudited) | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | |
| | Accounts receivable | | | (1,706 | ) | | | (2,486 | ) | | | 3,295 | | | | (4,569 | ) | | | (25,335 | ) |
| | Inventories | | | 496 | | | | (2,124 | ) | | | (2,861 | ) | | | (1,015 | ) | | | (3,734 | ) |
| | Prepaid expenses and other current assets | | | (127 | ) | | | (226 | ) | | | (1,074 | ) | | | (667 | ) | | | (3,308 | ) |
| | Other non-current assets | | | — | | | | — | | | | — | | | | — | | | | 22 | |
| | Accounts payable and accrued expenses | | | 177 | | | | 3,050 | | | | 3,852 | | | | 549 | | | | 7,158 | |
| | | | | | | | | | | | | | | |
Total adjustments | | | 5,815 | | | | 1,586 | | | | 11,502 | | | | (2,841 | ) | | | (9,839 | ) |
| | | | | | | | | | | | | | | |
|
Net cash provided by (used in) operating activities | | $ | (22,228 | ) | | $ | (15,185 | ) | | $ | 5,040 | | | $ | (2,099 | ) | | $ | (13,903 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
|
Net income (loss) | | $ | (16,771 | ) | | $ | (6,462 | ) | | $ | 3,974 | |
Adjustment to reconcile net loss to cash provided by (used in) operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 1,944 | | | | 3,376 | | | | 10,210 | |
Stock-based compensation | | | 1,143 | | | | 4,797 | | | | 11,897 | |
Loss on disposal of property and equipment | | | — | | | | — | | | | 314 | |
Non-cash interest | | | 51 | | | | 90 | | | | 394 | |
Non-cash loss | | | 234 | | | | 27 | | | | 45 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | (2,486 | ) | | | 3,295 | | | | (28,149 | ) |
Inventories | | | (2,124 | ) | | | (2,861 | ) | | | (9,742 | ) |
Prepaid expenses and other current assets | | | (226 | ) | | | (1,074 | ) | | | (6,689 | ) |
Other non-current assets | | | — | | | | — | | | | 142 | |
Accounts payable and accrued expenses | | | 3,050 | | | | 3,852 | | | | 17,028 | |
| | | | | | | | | | | | |
Total adjustments | | | 1,586 | | | | 11,502 | | | | (4,550 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | (15,185 | ) | | $ | 5,040 | | | $ | (576 | ) |
| | | | | | | | | | | | |
| |
Note 17. | Segment and Geographical Information |
SFAS 131,Disclosure about Segments of an Enterprise and Related Information,, establishes standards for the manner in which companies report in their financial statements information about operating segments, products, services, geographic areas and major customers. The method of determining what information to report is based on the way that management organizes the operating segments within the enterprise for making operating decisions and assessing financial performance. We operate in one industry segment, which entails the design, manufacture and sale of solar electric power products, so under SFAS 131, we do not present a disaggregation of our consolidated financial results into multiple operating segments, products, or services.
The following table presents net sales for the years ended December 27, 2003, December 25, 2004, and December 31, 2005 and the nine months ended September 24, 2005 and SeptemberDecember 30, 2006 by geographic region, which is based on the destination of the shipments (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | | Nine Months Ended | |
| | | | | | |
| | 2003 | | | 2004 | | | 2005 | | | 2005 | | | 2006 | |
| | | | | | | | | | | | | | | |
| | (as restated) | | | (unaudited) | |
Germany | | $ | 2,005 | | | $ | 12,800 | | | $ | 47,867 | | | $ | 34,292 | | | $ | 80,514 | |
All other geographic regions | | | 1,205 | | | | 722 | | | | 196 | | | | 190 | | | | 1,765 | |
| | | | | | | | | | | | | | | |
|
Net sales | | $ | 3,210 | | | $ | 13,522 | | | $ | 48,063 | | | $ | 34,482 | | | $ | 82,279 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
|
Germany | | $ | 12,800 | | | $ | 47,867 | | | $ | 128,239 | |
All other geographic regions | | | 722 | | | | 196 | | | | 6,735 | |
| | | | | | | | | | | | |
Net sales | | $ | 13,522 | | | $ | 48,063 | | | $ | 134,974 | |
| | | | | | | | | | | | |
The following table presents long-lived assets, excluding financial instruments, deferred tax assets and intangible assets, at December 25, 2004, December 31, 2005 and SeptemberDecember 30, 2006 by geographic region, based on the physical location of the assets (in thousands):
| | | | | | | | | | | | |
| | December 25, | | | December 31, | | | September 30, | |
| | | | | | | | | |
| | 2004 | | | 2005 | | | 2006 | |
| | | | | | | | | |
| | (as restated) | | | (as restated) | | | (unaudited) | |
United States | | $ | 29,219 | | | $ | 73,556 | | | $ | 97,260 | |
Germany | | | 58 | | | | 222 | | | | 59,539 | |
| | | | | | | | | |
|
Long-lived assets | | $ | 29,277 | | | $ | 73,778 | | | $ | 156,799 | |
| | | | | | | | | |
| | | | | | | | |
| | 2005 | | | 2006 | |
|
United States | | $ | 73,556 | | | $ | 98,559 | |
Germany | | | 222 | | | | 80,309 | |
| | | | | | | | |
Long-lived assets | | $ | 73,778 | | | $ | 178,868 | |
| | | | | | | | |
F-41
F-29
| |
Note 18. | Concentrations of Credit and Other Risks |
Customer concentration. The following customers comprised 10% or more of our total net sales during the years ended December 27, 2003, December 25, 2004, and December 31, 2005 and the nine months ended SeptemberDecember 30, 2006 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | | Nine Months Ended | |
| | | | | | |
| | 2003 | | | 2004 | | | 2005 | | | September 30, 2006 | |
| | | | | | | | | | | | |
| | Net Sales | | | % of Total | | | Net Sales | | | % of Total | | | Net Sales | | | % of Total | | | Net Sales | | | % of Total | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | (as restated) | | | (unaudited) | |
Customer #1 | | $ | 1,892 | | | | 58.9 | % | | $ | 9,209 | | | | 68.1 | % | | $ | 21,698 | | | | 45.1 | % | | $ | 16,029 | | | | 19.5 | % |
Customer #2 | | $ | * | | | | * | % | | $ | * | | | | * | % | | $ | 5,520 | | | | 11.5 | % | | $ | 9,606 | | | | 11.7 | % |
Customer #3 | | $ | * | | | | * | % | | $ | * | | | | * | % | | $ | 5,483 | | | | 11.4 | % | | $ | 19,141 | | | | 23.3 | % |
Customer #4 | | $ | * | | | | * | % | | $ | * | | | | * | % | | $ | 5,065 | | | | 10.5 | % | | $ | 15,516 | | | | 18.9 | % |
Customer #5 | | $ | * | | | | * | % | | $ | * | | | | * | % | | $ | 5,065 | | | | 10.5 | % | | $ | 16,632 | | | | 20.2 | % |
Customer #6 | | $ | 448 | | | | 14.0 | % | | $ | * | | | | * | % | | $ | * | | | | * | % | | $ | * | | | | * | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2004 | | 2005 | | 2006 |
| | Net Sales | | % of Total | | Net Sales | | % of Total | | Net Sales | | % of Total |
|
Customer #1 | | $ | 9,209 | | | | 68.1 | % | | $ | 21,698 | | | | 45.1 | % | | $ | 23,023 | | | | 17.1 | % |
Customer #2 | | $ | * | | | | | *% | | $ | 5,520 | | | | 11.5 | % | | $ | 21,568 | | | | 16.0 | % |
Customer #3 | | $ | * | | | | | *% | | $ | 5,483 | | | | 11.4 | % | | $ | 25,882 | | | | 19.2 | % |
Customer #4 | | $ | * | | | | | *% | | $ | 5,065 | | | | 10.5 | % | | $ | 25,054 | | | | 18.6 | % |
Customer #5 | | $ | * | | | | | *% | | $ | 5,065 | | | | 10.5 | % | | $ | 22,353 | | | | 16.6 | % |
| | |
* | | Net sales to this customer were less than 10% of our total net sales during this period. |
During the quarter ended April 1, 2006, we entered into five-year supply agreements, with an option for a sixth year, with six customers who develop solar energy investment projects in Germany. Under these agreements, we agreed to supply the customers with modules with specified total power ratings at specified prices through the term of the contract, along with other terms and conditions.
Credit risk. Financial instruments that potentially subject us to concentrations of credit risk are primarily cash, cash equivalents and trade accounts receivable. We place cash and cash equivalents with high-credit quality institutions and limit the amount of credit risk from any one issuer. As previously noted, our sales are primarily concentrated among six customers. We monitor the financial condition of our customers and perform credit evaluations whenever deemed necessary. In addition, during the fourth quarter of 2006, we received letters of credit from five of our customers securing accounts receivable as required by our long term customer contracts. Further, effective 2007 our customer payment terms have been reduced to 10 days. We have generally do not requirerequired collateral for our sales on account.
Geographic risk. Our solar modules are presently primarily made for inclusionincorporation by our customers ininto electricity generation projects concentrated in a single geographic region, Germany. This concentration of our sales in one geographic region exposes us to local economic risks and local risks from natural or man-made disasters.
Production. Our products include components that are available from a limited number of suppliers or sources. Shortages of essential components could occur due to interruptions of supply or increases in demand and could impair our ability to meet demand for our products. Our modules are presently produced entirely in one facility in Perrysburg, Ohio. Damage to or disruption of that facility could interrupt our business and impair our ability to generate sales.
International operations. We derive substantially all of our revenue from sales outside our country of domicile, the United States. Therefore, our financial performance could be affected by events such as changes in foreign currency exchange rates, trade protection measures, long accounts receivable collection patterns and changes in regional or worldwide economic or political conditions.
| |
Note 19. | Restatement of Previously Issued Consolidated Financial StatementsSubsequent Events |
We have restated our consolidated financial statements for the years ended December 27, 2003 and December 25, 2004 in order to correct errors that we identified during the preparation of this registration statement in connection with our initial public offering and the performance of the associated audits for our years ended December 25, 2004 and December 31, 2005. We also made adjustments to our previously reported consolidated financial statements for the adoption of SFAS 123(R), as we describe in note 13.
F-30
Statement of operations
The effects of our restatement adjustments on our consolidated statements of operations for the years ended December 27, 2003 and December 25, 2004 are listed below and do not reflect the adoption of SFAS 123(R) on our previously reported consolidated financial statements as stated in note 13.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | |
| | | |
| | 2003 | | | 2004 | |
| | | | | | |
| | As | | | | | As | | | |
| | Previously | | | | | Previously | | | |
| | Reported | | | Adjustments | | | As Restated | | | Reported | | | Adjustments | | | As Restated | |
| | | | | | | | | | | | | | | | | | |
Net sales | | $ | 3,210 | | | $ | — | | | $ | 3,210 | | | $ | 13,157 | | | $ | 365 | | | $ | 13,522 | |
Cost of sales | | | 9,569 | | | | 1,926 | | | | 11,495 | | | | 16,813 | | | | 1,975 | | | | 18,788 | |
| | | | | | | | | | | | | | | | | | |
|
Gross profit (loss) | | | (6,359 | ) | | | (1,926 | ) | | | (8,285 | ) | | | (3,656 | ) | | | (1,610 | ) | | | (5,266 | ) |
| | | | | | | | | | | | | | | | | | |
|
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development | | | 3,841 | | | | — | | | | 3,841 | | | | 1,176 | | | | — | | | | 1,176 | |
Selling, general, and administrative | | | 9,728 | | | | 1,107 | | | | 10,835 | | | | 8,490 | | | | (194 | ) | | | 8,296 | |
Production start-up | | | — | | | | — | | | | — | | | | — | | | | 900 | | | | 900 | |
| | | | | | | | | | | | | | | | | | |
| | | 13,569 | | | | 1,107 | | | | 14,676 | | | | 9,666 | | | | 706 | | | | 10,372 | |
| | | | | | | | | | | | | | | | | | |
|
Operating loss | | | (19,928 | ) | | | (3,033 | ) | | | (22,961 | ) | | | (13,322 | ) | | | (2,316 | ) | | | (15,638 | ) |
|
Foreign currency gain | | | — | | | | — | | | | — | | | | 110 | | | | 6 | | | | 116 | |
Interest expense | | | (4,436 | ) | | | 462 | | | | (3,974 | ) | | | (367 | ) | | | 267 | | | | (100 | ) |
Other income (expense), net | | | 38 | | | | — | | | | 38 | | | | (62 | ) | | | 56 | | | | (6 | ) |
| | | | | | | | | | | | | | | | | | |
|
Net loss | | $ | (24,326 | ) | | $ | (2,571 | ) | | $ | (26,897 | ) | | $ | (13,641 | ) | | $ | (1,987 | ) | | $ | (15,628 | ) |
| | | | | | | | | | | | | | | | | | |
|
Net loss per share — basic and diluted | | $ | (0.68 | ) | | $ | (0.07 | ) | | $ | (0.75 | ) | | $ | (0.31 | ) | | $ | (0.05 | ) | | $ | (0.36 | ) |
| | | | | | | | | | | | | | | | | | |
Net sales. The $0.4 million restatement of net sales for the year ended December 25, 2004 is primarily the result of the reclassification to cost of sales of $0.2 million of shipping costs for our product sales that we had incorrectly reported as an offset to net sales and $0.1 million to reclassify sales activity that had been incorrectly classified with cost of sales.
Cost of sales. The $1.9 million restatement of cost of sales for the year ended December 27, 2003 is the result of a $1.4 million reclassification of plant asset depreciation that we had previously incorrectly classified with selling, general, and administrative expenses and a $0.5 million reclassification of warranty costs that we had previously incorrectly classified as selling, general, and administrative expenses. It is also the result of $0.1 million in additional depreciation charges resulting from the restatement of property, plant, and equipment expense for the year ended December 27, 2003 and preceding years in order to properly capitalize interest expenditures made during the construction of the assets. We identified interest expenditures from the year ended December 30, 2000 through the year ended December 25, 2004 that should have been, but were not, capitalized into our property, plant, and equipment in accordance with SFAS 34,Capitalization of Interest Costs. This has resulted in restatements reducing our interest expense and increasing our depreciation expense. The $2.0 million restatement of cost of sales for the year ended December 25, 2004 is primarily the result of a $1.7 million charge to correct an understatement of our warranty liability. We had not been properly reconciling or reviewing our warranty liability, and we determined during the quarter ended April 1, 2006 that we had not properly included estimated warranty charges for products shipped during the year ended December 25, 2004 that had defects known to likely result in a significant level of warranty returns. We also did not properly incorporate all the costs likely to be associated with fulfilling our warranty obligations in the estimate of this liability. In addition, we made a $0.5 million adjustment for a intercompany profit elimination for the inventory held by our German sale office subsidiary and a $0.3 million correction of the amount of labor and overhead included in the cost of our inventory. We determined that we did not properly calculate labor and overhead elements capitalized into our inventory during 2004. The remaining $0.3 million are the offsetting entries for the sales adjustments described above. We also reclassified $(0.9) million of charges related to the planning of our plant replication program for 2004 from cost of sales to its own line in the
F-31
operating expenses section of our statement of operations. We determined that these costs were not direct or indirect costs of manufacturing our products for sale, but instead constitutedstart-up type costs as addressed in Statement of Position No. (SOP) 98-5,Reporting on the Costs ofStart-up Activities, by the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants.
Selling, general, and administrative expenses. The $1.1 million restatement of selling, general and administrative expenses for the year ended December 27, 2003 is primarily due to a total of $3.0 million in payments made during the year ended December 27, 2003 to former members of First Solar US Manufacturing, LLC for a settlement of claims, including matters subject to on-going arbitration and pending litigation, had been incorrectly reported as a repurchase of membership units. This was partially offset by $1.4 million reclassification of plant asset depreciation that we had previously incorrectly classified with selling, general, and administrative expenses and a $0.5 million reclassification of warranty costs that were previously classified as selling, general, and administrative expenses, to cost of sales.
The $0.2 million restatement of selling, general, and administrative expenses for the year ended December 25, 2004 is the result of the reclassification of $0.1 million of shipping costs that were not related to our inventory from cost of sales to selling, general, and administrative expenses and $(0.4) million to reverse the erroneous accrual of costs for the reclamation and recycling of solar modules that we sold during the year.
Interest expense. The $0.5 million and $0.3 million restatements of interest expense for the years ended December 27, 2003 and December 25, 2004, respectively, are the result of the capitalization of interest expenditures made during the construction of property, plant, and equipment.
Other income (expense), net. The $0.1 million restatement of other income (expense), net for the year ended December 25, 2004 is the result of reclassifying interest income that had been netted against interest expense.
Consolidated balance sheet
The effects of our restatement adjustments on our consolidated balance sheet at December 25, 2004 are as follows:
| | | | | | | | | | | | |
| | December 25, 2004 | |
| | | |
| | As Previously | | | |
| | Reported | | | Adjustments | | | As Restated | |
| | | | | | | | | |
Assets | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 3,465 | | | $ | — | | | $ | 3,465 | |
Marketable securities | | | — | | | | 306 | | | | 306 | |
Accounts receivable, net | | | 4,393 | | | | — | | | | 4,393 | |
Inventories | | | 4,547 | | | | (861 | ) | | | 3,686 | |
Prepaid expenses and other current assets | | | 431 | | | | — | | | | 431 | |
| | | | | | | | | |
Total current assets | | | 12,836 | | | | (555 | ) | | | 12,281 | |
|
Property, plant, and equipment, net | | | 28,090 | | | | 1,187 | | | | 29,277 | |
Other noncurrent assets | | | 513 | | | | (306 | ) | | | 207 | |
| | | | | | | | | |
|
Total assets | | $ | 41,439 | | | $ | 326 | | | $ | 41,765 | |
| | | | | | | | | |
F-32
| | | | | | | | | | | | |
| | December 25, 2004 | |
| | | |
| | As Previously | | | |
| | Reported | | | Adjustments | | | As Restated | |
| | | | | | | | | |
|
Liabilities and Members’/ Stockholders’ Equity | | | | | | | | | | | | |
|
Current liabilities: | | | | | | | | | | | | |
Accounts payable and accrued expenses | | $ | 3,122 | | | $ | 2,231 | | | $ | 5,353 | |
Accrued recycling | | | 922 | | | | (922 | ) | | | — | |
Note payable to a related party | | | 8,700 | | | | — | | | | 8,700 | |
Long-term debt | | | 5,000 | | | | — | | | | 5,000 | |
Other noncurrent liabilities | | | — | | | | 71 | | | | 71 | |
| | | | | | | | | |
Total liabilities | | | 17,744 | | | | 1,380 | | | | 19,124 | |
|
Commitments and contingencies | | | | | | | | | | | | |
|
Members’/stockholders’ equity: | | | | | | | | | | | | |
Membership equity | | | 144,033 | | | | 19,420 | | | | 163,453 | |
Accumulated deficit | | | (120,117 | ) | | | (20,509 | ) | | | (140,626 | ) |
Accumulated other comprehensive income (loss) | | | (221 | ) | | | 35 | | | | (186 | ) |
| | | | | | | | | |
Total members’/stockholders’ equity | | | 23,695 | | | | (1,054 | ) | | | 22,641 | |
| | | | | | | | | |
|
Total liabilities and members’/stockholders’ equity | | $ | 41,439 | | | $ | 326 | | | $ | 41,765 | |
| | | | | | | | | |
See note 13 for the effect of the adoption of SFAS 123(R) on our previously reported consolidated financial statements.
Marketable securities. The $0.3 million restatement of marketable securities is the result of reclassifying a certificate of deposit that had been incorrectly considered a restricted asset.
Inventories. The $0.9 million restatement of inventories is primarily the result of a $0.5 million correction removing intercompany profit from the inventory held by our German sales office subsidiary and a $0.3 million correction of the amount of labor and overhead included in the cost of our inventory.
Property, plant, and equipment. The $1.2 million restatement of property, plant, and equipment is the result of properly capitalizing interest expenditures made during the construction of the assets in accordance with SFAS 34,Capitalization of Interest Costs.
Accounts payable and accrued expenses. The $2.2 million restatement of accounts payable and accrued expenses is the result of the reclassification of $0.5 million of warranty cost accruals from the accrued recycling line on our consolidated balance sheet and the accrual of $1.7 million in additional warranty liabilities.
Accrued recycling. The $0.9 million restatement of accrued recycling is the result of $0.5 for the reclassification of warranty cost accruals to accounts payable and accrued expenses, $0.3 million to reverse the erroneous accrual costs for the reclamation and recycling of solar modules that we sold during the year, and $0.1 million of environmental remediation liabilities that we reclassified to other noncurrent liabilities.
Total members’/stockholders’ equity. The $1.1 million restatement of our total members’/stockholders’ equity is the result of $(0.5) million to properly capitalize interest expenditures made during the construction of property, plant, and equipment prior to the year ended December 27, 2003, $(0.4) million for restatements made to our consolidated statement of operations for the year ended December 27, 2003, and $2.0 million for restatements made to our consolidated statement of operations for the year ended December 25, 2004. We also increased membership equity and accumulated deficit by $19.4 million to properly present in our equity accounts the impact of intangible assets contributed to First Solar US Manufacturing, LLC upon its formulation in 1999, which were subsequently written off or fully amortized prior to the beginning of the year ended December 25, 2004.
| |
Note 20. | Subsequent Events (unaudited) |
On October 16, 2006,January 17, 2007 and February 15, 2007, we received an additional drawdown of€3.6drawdowns totaling €3.0 million ($4.33.9 million at an assumed exchange rate of $1.20/$1.30/€1.00) on the bridge loan facility and€9.9 €8.4 million ($11.910.9 million at an assumed exchange rate of $1.20/$1.30/€1.00) on the term loan facility of our credit facility from a consortium of banks led by IKB Deutsche Industriebank AG. On October 28, 2006, we received an additional drawdown of€1.4 million ($1.7 million at an assumed exchange rate of $1.20/€1.00) on the bridge loan facility and€3.9 million ($4.7 million at an assumed
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exchange rate of $1.20/€1.00) on the term loan facility of our credit facility from a consortium of banks led by IKB Deutsche Industriebank AG.
On OctoberFebruary 8, 2007 and March 5, 2007, we entered into interest rate swap agreements with a financial institution under which we pay the variable amount of the three month Euribor rate and receive a fixed amounts of 4.29% and 4.25% per annum, respectively, on notional amounts of €10.7 million ($13.9 million at an assumed exchange rate of $1.30/€1.00) and €3.2 million ($4.2 million at an assumed exchange rate of $1.30//€1.00), respectively. These derivative financial instruments are cash flow hedges of the variable interest payments on drawdowns we have taken on the term loan facility of our credit facility from a consortium of banks led by IKB Deutsche Industriebank AG.
On January 24, 2006,2007, we amended our articlesentered into a land lease agreement on a 17.8 hectare lot in Kulim, Malaysia, with an initial lease term of incorporation60 years. We plan to authorizeconstruct a new four line 100 MW solar module manufacturing plant on the leased land. Total rental payments during the lease term will be $6.7 million. We paid $0.7 million upon entering into the lease and the remaining amounts are due in three installments of $2.0 million to be paid in 2007, 2008 and 2009. The lease agreement also provides us with a six year option to issue uplease an adjacent 16.2 hectare lot for a lease term that would expire at the same time as the lease on the 17.8 hectare lot.
On February 26, 2007, we entered into a forward exchange contract to 500,000,000 shares of common stocksell €20 million for $26.8 million at a par valuefixed exchange rate 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.
During October 2006, we adopted our 2006 Omnibus Incentive Compensation Plan (the “2006 Plan”) for the purpose of attracting and retaining qualified directors, officers, employees, and consultants and enabling these people to participate in our long-term growth and financial success.$1.34/€1.00. The 2006 Plan is administered by the compensation committee of our board of directors or any other committee designated by our board of directors. The 2006 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units, performance units, cash incentive awards, and other equity-based and equity-related awards. The maximum number of shares of our common stock that may be delivered by awards granted under the 2006 Plan is 5,820,000, of which the maximum number that may be delivered by incentive stock options is 5,820,000 and the maximum number that may be delivered as restricted stock awards is 2,910,000. The shares underlying forfeited, expired, terminated, or cancelled awards become available for new award grants. Our board of directors may amend, modify, or terminate the 2006 Plan without the approval of our stockholders, except stockholder approval is required for amendments that would increase the maximum number of shares of our common stock available for awards under the plan, increase the maximum number of shares of our common stock that may be delivered by incentive stock options, or modify the requirements for participation in the 2006 Plan. We may not grant awards under the 2006 Plan after the tenth anniversary of its approval by our stockholders.
During October 2006, we agreed to settle pending litigation with a vendor of ours. Under the terms of the settlement, we will receive a payment of $0.8 million from the vendor, and all our claims and the vendor’s counterclaimscontract will be dismissed.due on February 27, 2009.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
| |
ITEM 13. | OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION |
The following table sets forth the expenses payable by the Registrant in connection with the issuance and distribution of the common stock being registered hereby. All of such expenses are estimates, other than the filing and quotation fees payable to the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. and The Nasdaq Global Market.
| | | | |
SEC Registration Fee | | $ | 40,914 | |
Printing and Engraving Expenses | | | 500,000 | |
Legal Fees and Expenses | | | 2,031,000 | |
Accounting Fees and Expenses | | | 677,500 | |
Structuring Fee | | | 900,000 | |
Transfer Agent and Registrar Fees and Expenses | | | 20,000 | |
The Nasdaq Global Market Listing Fees | | | 100,000 | |
NASD Filing Fee | | | 38,737 | |
Miscellaneous | | | 50,000 | |
| | | |
Total | | $ | 4,358,151 | |
| | | |
| | | | |
SEC Registration Fee | | $ | 38,079 | |
Printing and Engraving Expenses | | | 100,000 | |
Legal Fees and Expenses | | | 350,000 | |
Accounting Fees and Expenses | | | 130,000 | |
Transfer Agent and Registrar Fees and Expenses | | | 10,000 | |
NASD Filing Fee | | | 75,500 | |
| | | | |
Total | | $ | 703,579 | |
| | | | |
ITEM 14 INDEMNIFICATION OF DIRECTORS AND OFFICERS
| |
ITEM 14. | INDEMNIFICATION OF DIRECTORS AND OFFICERS |
Section 145(a) of the Delaware General Corporation Law (the “DGCL”) provides in relevant part that a corporation may indemnify any officer or director who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another entity, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful.
Section 145(b) of the DGCL provides in relevant part that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
Our bylaws generally provide that we will indemnify our directors and officers to the fullest extent permitted by law. 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 related to our officers and directors in our bylaws.
The registrant will obtainhas obtained officers’ and directors’ liability insurance which insures against liabilities that officers and directors of the registrant may, in such capacities, incur. Section 145(g) of the DGCL provides that a corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any
II-1
liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as
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such, whether or not the corporation would have the power to indemnify such person against such liability under that section.
The underwriting agreement with the underwriters will provide for the indemnification of the directors and officers of the Company who sign this registration statement and certain controlling persons against specified liabilities, including liabilities under the Securities Act.
ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES
| |
ITEM 15. | RECENT SALES OF UNREGISTERED SECURITIES |
During the past three years, we have issued unregistered securities to a limited number of persons, as described below. None of these transactions involved any underwriters or any public offerings and we believe that each of these transactions was exempt from registration requirements pursuant to Section 3(a)(9) or Section 4(2) of the Securities Act of 1933, as amended, Regulation D promulgated thereunder, Rule 144A of the Securities Act of 1933, as amended, or Rule 701 of the Securities Act of 1933 pursuant to compensatory benefit plans and contracts related to compensation as provided under Rule 701. The recipients of the securities in these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in these transactions.
From December 2003 through February 2005, the registrant issued options to purchase a total of 3,078,310 shares of its common stock with an exercise price of $2.06 per share to directors, officers and key employees pursuant to its 2003 Unit Option Plan. In each case, no consideration was paid to the registrant by any recipient of any of the foregoing options for the grant of such options. The transactions were conducted in reliance upon the available exemptions from the registration requirements of the Securities Act, including those contained in Rule 701 promulgated under Section 3(b), which relates to exemptions for offers and sales of securities pursuant to certain compensatory benefit plans.
From February 2005 through October 2005, the registrant issued options to purchase a total of 2,423,792 shares of its common stock with an exercise price of $4.33 per share to directors, officers and key employees pursuant to its 2003 Unit Option Plan. In each case, no consideration was paid to the registrant by any recipient of any of the foregoing options for the grant of such options. The transactions were conducted in reliance upon the available exemptions from the registration requirements of the Securities Act, including those contained in Rule 701 promulgated under Section 3(b), which relates to exemptions for offers and sales of securities pursuant to certain compensatory benefit plans.
During December 2005, the registrant issued options to purchase a total of 315,250 shares of its common stock with an exercise price of $4.54 per share to directors, officers and key employees pursuant to its 2003 Unit Option Plan. In each case, no consideration was paid to the registrant by any recipient of any of the foregoing options for the grant of such options. The transactions were conducted in reliance upon the available exemptions from the registration requirements of the Securities Act, including those contained in Rule 701 promulgated under Section 3(b), which relates to exemptions for offers and sales of securities pursuant to certain compensatory benefit plans.
From December 2003 through October 2004, the registrant issued an aggregate total of 41,540,250 shares of its common stock to JWMA Holdings, LLC, an “accredited investor” within the meaning of Rule 501 of the Securities Act, at a price of $2.06 per share. The transactions were conducted in reliance upon the available exemptions from the registration requirements of the Securities Act, including those contained in Section 4(2). From March 2005 through February 2006, the registrant issued an aggregate total of 10,287,068 shares of its common stock to JWMA Holdings, LLC, an accredited investor, at a price of $4.54 per share. The transactions were conducted in reliance upon the available exemptions from the registration requirements of the Securities Act, including those contained in Section 4(2).
From February 2005 through October 2005, the registrant issued options to purchase a total of 2,423,792 shares of its common stock with an exercise price of $4.33 per share to directors, officers and key employees pursuant to its 2003 Unit Option Plan. In each case, no consideration was paid to the registrant by any recipient of any of the foregoing options for the grant of such options. The transactions were conducted in reliance upon the available exemptions from the registration requirements of the Securities Act, including those contained in Rule 701 promulgated under Section 3(b), which relates to exemptions for offers and sales of securities pursuant to certain compensatory benefit plans.
During December 2005, the registrant issued options to purchase a total of 315,250 shares of its common stock with an exercise price of $4.54 per share to directors, officers and key employees pursuant to its 2003 Unit Option Plan. In each case, no consideration was paid to the registrant by any recipient of any of the foregoing options for the grant of such options. The transactions were conducted in reliance upon the available exemptions from the registration requirements of the Securities Act, including those contained in Rule 701 promulgated under Section 3(b), which relates to exemptions for offers and sales of securities pursuant to certain compensatory benefit plans.
Upon our change in corporate organization on February 22, 2006, we issued an aggregate of 51,827,318 shares of common stock to holders of our membership units, each of which was an accredited investor, in exchange for the contribution to us of all such membership units. In each case, these transactions were conducted in reliance upon the available exemptions from the registration requirements of the Securities Act, including those contained in Section 4(2).
Also upon our change in corporate organization on February 22, 2006, our unit options became 5,246,492 share options on a one-for-one basis. The transactions were conducted in reliance upon the available exemptions from the registration requirements of the Securities Act, including those contained in Rule 701
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promulgated under Section 3(b), which relates to exemptions for offers and sales of securities pursuant to certain compensatory benefit plans.
On February 22, 2006, wethe registrant issued $74 million aggregate principal amount of convertible senior subordinated notes due February 22, 2011 to Goldman, Sachs & Co. On May 10, 2006, Goldman, Sachs & Co. converted all of the convertible senior subordinated notes into 4,261,457 shares of common stock and is now a stockholder. These transactions were conducted in reliance upon the available exemptions from the registration requirements of the Securities Act, including those contained in Section 4(2).
ITEM 16 EXHIBITSFrom November 2006 through February 2007, the registrant issued options to purchase a total of 1,567,739 shares of its common stock with exercise prices ranging from $20.00 to $32.81 per share to executive officers, directors and employees pursuant to its 2006 Plan. In each case, no consideration was paid to the registrant by any recipient of any of the foregoing options for the grant of such options. The transactions were conducted in reliance upon the available exemptions from the registration requirements of the Securities Act, including those contained in Section 4(2) and Rule 701 promulgated under Section 3(b), which relates to exemptions for offers and sales of securities pursuant to certain compensatory benefit plans.
| | | | |
Exhibit Number | | Description of Document |
| | |
| 1 | .1 | | Form of Underwriting Agreement |
| 3 | .1** | | Amended and Restated Certificate of Incorporation of First Solar, Inc. |
| 3 | .2 | | By-Laws of First Solar, Inc. |
| 4 | .1 | | Form of Certificate of First Solar, Inc. Common Stock |
| 4 | .2** | | Loan Agreement dated December 1, 2003, among First Solar US Manufacturing, LLC, First Solar Property, LLC and the Director of Development of the State of Ohio |
| 4 | .3** | | Loan Agreement dated July 1, 2005, among First Solar US Manufacturing, LLC, First Solar Property, LLC and the Director of Development of the State of Ohio |
| 4 | .4** | | Promissory Note dated September 30, 2005 |
| 4 | .5** | | Promissory Note dated January 30, 2006 |
| 4 | .6** | | Promissory Note dated February 3, 2006 |
| 4 | .7** | | Amended and Restated Promissory Note dated August 7, 2006, between First Solar, Inc. and the Estate of John T. Walton |
| 4 | .8** | | Cognovit Term Note dated May 14, 2003, between First Solar Property, LLC and Kingston Properties, LLC |
| 4 | .9** | | Form of Convertible Senior Subordinated Note due 2011 |
| 4 | .10** | | Registration Rights Agreement dated February 22, 2005, between First Solar, Inc. and Goldman, Sachs & Co. |
| 4 | .11** | | Facility Agreement dated July 27, 2006, between First Solar Manufacturing GmbH, subject to the joint and several liability of First Solar Holdings GmbH and First Solar GmbH, and IKB Deutsche Industriebank AG |
| 4 | .12** | | Addendum No. 1 to the Facility Agreement dated July 27, 2006, between First Solar Manufacturing GmbH, subject to the joint and several liability of First Solar Holdings GmbH and First Solar GmbH, and IKB Deutsche Industriebank AG |
| 4 | .13** | | Demand Note dated July 26, 2005 |
| 4 | .14** | | 2003 Unit Option Plan |
| 4 | .15** | | Form of 2003 Unit Option Plan Agreement |
| 4 | .16** | | Waiver Letter dated June 5, 2006, from the Director of Development of the State of Ohio |
| 4 | .17 | | Form of Registration Rights Agreement between First Solar, Inc., JWMA Partners, LLC, the Estate of John T. Walton, JCL Holdings, LLC and Michael J. Ahearn |
| 5 | .1* | | Opinion of Cravath, Swaine & Moore LLP |
| 10 | .1†** | | Framework Agreement on the Sale and Purchase of Solar Modules dated April 10, 2006, between First Solar GmbH and Blitzstrom GmbH |
| 10 | .2†** | | Framework Agreement on the Sale and Purchase of Solar Modules dated April 11, 2006, between First Solar GmbH and Conergy AG |
| 10 | .3†** | | Framework Agreement on the Sale and Purchase of Solar Modules dated April 5, 2006, between First Solar GmbH and Gehrlicher Umweltschonende Energiesysteme GmbH |
| 10 | .4†** | | Framework Agreement on the Sale and Purchase of Solar Modules dated April 9, 2006, among First Solar GmbH, Juwi Holding AG, JuWi Handels Verwaltungs GmbH & Co KG and juwi solar GmbH |
| 10 | .5†** | | Framework Agreement on the Sale and Purchase of Solar Modules dated March 30, 2006, between First Solar GmbH and Phönix Sonnenstrom AG |
| 10 | .6†** | | Framework Agreement on the Sale and Purchase of Solar Modules dated April 7, 2006, between First Solar GmbH and Reinecke + Pohl Sun Energy AG |
| 10 | .7** | | Guarantee Agreement between Michael J. Ahearn and IKB Deutsche Industriebank AG |
| 10 | .8** | | Consulting Agreement with James F. Nolan |
| 10 | .9** | | Grant Decision dated July 26, 2006, between First Solar Manufacturing GmbH and InvestitionsBank des Landes Brandenburg |
II-3
| | | | |
Exhibit Number | | Description of Document |
| | |
| 10 | .10** | | 2006 Omnibus Incentive Compensation Plan |
| 10 | .11** | | Employment Agreement dated October 19, 2006, between First Solar, Inc. and Michael J. Ahearn |
| 10 | .12** | | Employment Agreement dated May 30, 2001, between First Solar, Inc. and George A. (“Chip”) Hambro, as amended on February 6, 2003 |
| 10 | .13** | | Employment Agreement dated October 19, 2006, between First Solar, Inc. and I. Paul Kacir |
| 10 | .14** | | Employment Agreement dated November 1, 2002, between First Solar, Inc. and Kenneth M. Schultz |
| 10 | .15** | | Form of Change in Control Severance Agreement |
| 10 | .16** | | Guaranty dated February 5, 2003 |
| 10 | .17** | | Form of Director and Officer Indemnification Agreement |
| 10 | .18** | | Reclamation and Recycling Indemnification Policy |
| 10 | .19 | | Letter Agreement dated November 30, 2005, between First Solar, Inc. and Robert H. Williams |
| 10 | .20 | | Employment Agreement dated October 31, 2006, between First Solar, Inc. and Jens Meyerhoff |
| 10 | .21 | | Amended and Restated Employment Agreement dated October 31, 2006, between First Solar, Inc. and I. Paul Kacir |
| 10 | .22 | | Amended and Restated Employment Agreement dated October 31, 2006, between First Solar, Inc. and Michael J. Ahearn |
| 21 | .1** | | List of Subsidiaries of First Solar, Inc. |
| 23 | .1* | | Consent of Cravath, Swaine & Moore LLP (included in Exhibit 5.1) |
| 23 | .2 | | Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm |
| 24 | .1** | | Powers of Attorney of the directors and officers of the registrant |
| 99 | .1** | | Consent of J. Thomas Presby |
| |
* ITEM 16. | To be filed by amendment.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) Set forth below is a list of exhibits that are being filed or incorporated by reference into this prospectus:
| | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | | | |
| | | | | | | | Date of
| | Exhibit
| | Filed
|
Exhibit Number | | Exhibit Description | | Form | | File No. | | First Filing | | Number | | Herewith |
|
| 1 | .1 | | Form of Underwriting Agreement. | | — | | — | | — | | — | | X |
| 3 | .1 | | Amended and Restated Certificate of Incorporation of First Solar Inc. | | S-1/A | | 333-135574 | | 9/18/06 | | 3.1 | | |
| 3 | .2 | | By-Laws of First Solar Inc. | | S-1/A | | 333-135574 | | 11/16/06 | | 3.1 | | |
| 4 | .1 | | Loan Agreement dated December 1, 2003, among First Solar US Manufacturing, LLC, First Solar Property, LLC and the Director of Development of the State of Ohio. | | S-1/A | | 333-135574 | | 9/18/06 | | 4.2 | | |
| 4 | .2 | | Loan Agreement dated July 1, 2005, among First Solar US Manufacturing, LLC, First Solar Property, LLC and Director of Development of the State of Ohio. | | S-1/A | | 333-135574 | | 9/18/06 | | 4.3 | | |
| 4 | .3 | | Facility Agreement dated July 27, 2006, between First Solar Manufacturing GmbH, subject to the joint and several liability of First Solar Holdings GmbH and First Solar GmbH and IKB Deutsche Industriebank AG. | | S-1/A | | 333-135574 | | 9/18/06 | | 4.11 | | |
| 4 | .4 | | Addendum No. 1 to Facility Agreement dated July 27, 2006, between First Solar Manufacturing GmbH, subject to the joint and several liability of First Solar Holdings GmbH and First Solar GmbH and IKB Deutsche Industriebank AG. | | S-1/A | | 333-135574 | | 9/18/06 | | 4.12 | | |
| 4 | .5 | | Waiver Letter dated June 5, 2006, from the Director of Development of the State of Ohio. | | S-1/A | | 333-135574 | | 10/10/06 | | 4.16 | | |
| 5 | .1 | | Opinion of Cravath, Swaine & Moore LLP. | | — | | — | | — | | — | | X |
| 10 | .1† | | Framework Agreement on the Sale and Purchase of Solar Modules dated April 10, 2006, between First Solar GmbH and Blitzstrom GmbH. | | S-1/A | | 333-135574 | | 11/8/06 | | 10.1 | | |
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| | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | | | |
| | | | | | | | Date of
| | Exhibit
| | Filed
|
Exhibit Number | | Exhibit Description | | Form | | File No. | | First Filing | | Number | | Herewith |
|
| 10 | .2† | | Amendment to the Framework Agreement dated April 10, 2006 on the Sale and Purchase of Solar Modules between First Solar GmbH and Blitzstrom GmbH. | | 10-K | | 001-33156 | | 3/16/07 | | 10.02 | | |
| 10 | .3† | | Framework Agreement on the Sale and Purchase of Solar Modules dated April 11, 2006, between First Solar GmbH and Conergy AG. | | S-1/A | | 333-135574 | | 11/8/06 | | 10.2 | | |
| 10 | .4† | | Amendment to the Framework Agreement dated April 11, 2006 on the Sale and Purchase of Solar Modules between First Solar GmbH and Conergy AG. | | 10-K | | 001-33156 | | 3/16/07 | | 10.04 | | |
| 10 | .5† | | Framework Agreement on the Sale and Purchase of Solar Modules dated April 5, 2006, between First Solar GmbH and Gehrlicher Umweltschonende Energiesysteme GmbH. | | S-1/A | | 333-135574 | | 11/8/06 | | 10.3 | | |
| 10 | .6† | | Amendment to the Framework Agreement dated April 5, 2006 on the Sale and Purchase of Solar Modules between First Solar GmbH and Gehrlicher Umweltschonende Energiesysteme GmbH. | | 10-K | | 001-33156 | | 3/16/07 | | 10.06 | | |
| 10 | .7† | | Framework Agreement on the Sale and Purchase of Solar Modules dated April 9, 2006, among First Solar GmbH, Juwi Holding AG, JuWi Handels Verwaltungs GmbH & Co. KG and juwi solar GmbH. | | S-1/A | | 333-135574 | | 11/8/06 | | 10.4 | | |
| 10 | .8† | | Amendment to the Framework Agreement dated April 9, 2006 on the Sale and Purchase of Solar Modules among First Solar GmbH, Juwi Holding AG, JuWi Handels Verwaltungs GmbH & Co. KG and juwi solar GmbH. | | 10-K | | 001-33156 | | 3/16/07 | | 10.08 | | |
II-5
| | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | | | |
| | | | | | | | Date of
| | Exhibit
| | Filed
|
Exhibit Number | | Exhibit Description | | Form | | File No. | | First Filing | | Number | | Herewith |
|
| 10 | .9† | | Framework Agreement on the Sale and Purchase of Solar Modules dated March 30, 2006, between First Solar GmbH and Phönix Sonnenstrom AG. | | S-1/A | | 333-135574 | | 11/8/06 | | 10.5 | | |
| 10 | .10† | | Amendment to the Framework Agreement dated March 30, 2006 on the Sale and Purchase of Solar Modules between First Solar GmbH and Phönix Sonnenstrom AG. | | 10-K | | 001-33156 | | 3/16/07 | | 10.10 | | |
| 10 | .11† | | Framework Agreement on the Sale and Purchase of Solar Modules dated April 7, 2006, between First Solar GmbH and Reinecke + Pohl Sun Energy AG. | | S-1/A | | 333-135574 | | 11/8/06 | | 10.6 | | |
| 10 | .12† | | Amendment to the Framework Agreement dated April 7, 2006 on the Sale and Purchase of Solar Modules between First Solar GmbH and Reinecke + Pohl Sun Energy AG. | | 10-K | | 001-33156 | | 3/16/07 | | 10.12 | | |
| 10 | .13 | | Guarantee Agreement between Michael J. Ahearn and IKB Deutsche Industriebank AG. | | S-1/A | | 333-135574 | | 9/18/06 | | 10.7 | | |
| 10 | .14 | | Grant Decision dated July 26, 2006, between First Solar Manufacturing GmbH and InvestitionsBank des Landes Brandenburg. | | S-1/A | | 333-135574 | | 10/10/06 | | 10.9 | | |
| 10 | .15 | | 2003 Unit Option Plan. | | S-1/A | | 333-135574 | | 9/18/06 | | 4.14 | | |
| 10 | .16 | | Form of 2003 Unit Option Plan Agreement. | | S-1/A | | 333-135574 | | 9/18/06 | | 4.15 | | |
| 10 | .17 | | 2006 Omnibus Incentive Compensation Plan. | | S-1/A | | 333-135574 | | 10/25/06 | | 10.10 | | |
| 10 | .18 | | Amended and Restated Employment Agreement dated October 31, 2006, between First Solar Inc. and Michael J. Ahearn. | | S-1/A | | 333-135574 | | 11/2/06 | | 10.22 | | |
| 10 | .19 | | Amended and Restated Employment Agreement dated May 3, 2007, between First Solar Inc. and George A. (“Chip”) Hambro. | | 10-Q | | 001-33156 | | 5/8/07 | | 10.01 | | |
II-6
| | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | | | |
| | | | | | | | Date of
| | Exhibit
| | Filed
|
Exhibit Number | | Exhibit Description | | Form | | File No. | | First Filing | | Number | | Herewith |
|
| 10 | .20 | | Amended and Restated Employment Agreement dated October 31, 2006, between First Solar, Inc. and I. Paul Kacir. | | S-1/A | | 333-135574 | | 11/2/06 | | 10.21 | | |
| 10 | .21 | | Employment Agreement dated October 31, 2006, between First Solar, Inc. and Jens Meyerhoff. | | S-1/A | | 333-135574 | | 11/2/06 | | 10.20 | | |
| 10 | .22 | | Employment Agreement dated November 1, 2002, between First Solar, Inc. and Kenneth M. Schultz. | | S-1/A | | 333-135574 | | 10/25/06 | | 10.14 | | |
| 10 | .23 | | Employment Agreement dated March 12, 2007 between First Solar, Inc. and Bruce Sohn. | | 10-K | | 001-33156 | | 3/16/07 | | 10.24 | | |
| 10 | .24 | | Form of Change in Control Severance Agreement. | | S-1/A | | 333-135574 | | 10/25/06 | | 10.15 | | |
| 10 | .25 | | Guaranty dated February 5, 2003. | | S-1/A | | 333-135574 | | 10/25/06 | | 10.16 | | |
| 10 | .26 | | Form of Director and Officer Indemnification Agreement. | | S-1/A | | 333-135574 | | 10/25/06 | | 10.17 | | |
| 10 | .27 | | Reclamation and Recycling Indemnification Policy. | | S-1/A | | 333-135574 | | 10/25/06 | | 10.18 | | |
| 21 | .1 | | List of Subsidiaries of First Solar, Inc. | | S-1 | | 333-144714 | | 7/19/07 | | 21.1 | | |
| 23 | .1 | | Consent of Cravath, Swaine & Moore LLP (included in Exhibit 5.1). | | — | | — | | — | | — | | X |
| 23 | .2 | | Consent of Independent Registered Public Accounting Firm. | | — | | — | | — | | — | | X |
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** | Previously filed. |
† |
† | Confidential treatment has been requested and granted for certain portions that are omitted in the copy of the exhibit electronically filed with the SEC. The omitted information has been filed separately with the SEC pursuant to our application for confidential treatment.this exhibit. |
ITEM 17 UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations
(b) Financial Statement Schedule:
Schedule II — Valuation and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.Qualifying Accounts
| | | | | | | | | | | | | | | | |
| | Balance at
| | | | | | | | | Balance
| |
| | Beginning
| | | | | | | | | at End of
| |
Description | | of Year | | | Additions | | | Deductions | | | Year | |
| | (In thousands) | |
|
Allowance for doubtful accounts receivable | | | | | | | | | | | | | | | | |
Year ended December 25, 2004 | | $ | — | | | $ | 33 | | | $ | — | | | $ | 33 | |
Year ended December 31, 2005 | | $ | 33 | | | $ | 19 | | | $ | (48 | ) | | $ | 4 | |
Year ended December 30, 2006 | | $ | 4 | | | $ | — | | | $ | — | | | $ | 4 | |
Reserve for excess and obsolete inventory | | | | | | | | | | | | | | | | |
Year ended December 25, 2004 | | $ | 477 | | | $ | 41 | | | $ | (487 | ) | | $ | 31 | |
Year ended December 31, 2005 | | $ | 31 | | | $ | 60 | | | $ | (91 | ) | | $ | — | |
Year ended December 30, 2006 | | $ | — | | | $ | 48 | | | $ | (37 | ) | | $ | 11 | |
II-7
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrantRegistrant hereby undertakes that:the following:
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| (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
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| (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of these securities at that time shall be deemed to be the initial bona fide offering thereof. |
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That, for the purpose of determining liability under the Securities Act to any purchaser, if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in thethis registration statement as of the date thattime it is first used after effectiveness; provided, however, that no statement made in a registration statement or prospectus that is part of a registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or a prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.declared effective.
That, for
(2) For the purpose of determining any liability of the registrant under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to any purchaser inbe a new registration statement relating to the securities offered therein, and this offering of these securities at that time shall be deemed to be the initial distribution of the securities, in a primarybona fide offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:thereof.
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| (i) any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
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| (ii) any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
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| (iii) the portion of any other free writing prospectus relating to the offering, containing material information about the undersigned registrant or its securities, provided by or on behalf of the undersigned registrant; and |
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| (iv) any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment No. 5 to the Registration Statementregistration statement to be signed on its behalf by the undersigned, thereunto duly authorized in Phoenix, Arizona on November 2, 2006.August 3, 2007.
First Solar, Inc.
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| First Solar, Inc.By: | /s/ JENS MEYERHOFF |
| | |
| By:Name: | /s/ JENS MEYERHOFF |
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| |
| Name: Jens Meyerhoff |
| Title: | Chief Financial Officer |
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 5 to the Registration Statement has been signed below by the following persons in the capacities and on the date indicated.
| | | | | | |
Signature | | Title | | Date |
|
| | | | |
|
* Michael J. Ahearn | | President, Chief Executive Officer and Director (Principal (Principal Executive Officer) | | November 2, 2006August 3, 2007 |
| | | | |
*/s/ JENS MEYERHOFF Jens Meyerhoff | | Chief Financial Officer (Principal Financial and Principal Accounting Officer) | | November 2, 2006August 3, 2007 |
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* James F. Nolan | | Director | | November 2, 2006August 3, 2007 |
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* J. Thomas Presby | | Director | | August 3, 2007 |
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* Bruce Sohn | | Director | | November 2, 2006August 3, 2007 |
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* Paul H. Stebbins | | Director | | August 3, 2007 |
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* Michael Sweeney | | Director | | November 2, 2006August 3, 2007 |
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*By: | | /s/JENS MEYERHOFF Jens Meyerhoff Attorney-in-Fact | | | | |
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