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LDK Solar 6-K 2009 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934 For the month of December 2009
Commission File Number: 001-33464
LDK SOLAR CO., LTD.
(Translation of registrant’s name into English)
Hi-Tech Industrial Park
Xinyu City Jiangxi Province 338032 People’s Republic of China (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover Form
20-F or Form 40-F.
Form 20-F þ Form 40-F o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(1): o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(7): o
Indicate by check mark whether by furnishing the information contained in this Form, the registrant
is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934.
Yes o No þ
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with
Rule 12g3-2(b): 82-
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Supplemental Information About LDK Solar
We, LDK Solar Co., Ltd., a leading manufacturer of solar wafers, are providing supplemental
information about ourselves in this report on Form 6-K, which is hereby incorporated by reference
into our registration statements filed with the SEC under the Securities Act of 1933, as amended.
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TABLE OF
CONTENTS
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Investment in our ADSs and our ordinary shares involves a
high degree of risk. You should consider carefully the following
risks and uncertainties, together with other risk factors
contained in our annual report on
Form 20-F
for the fiscal year ended December 31, 2008 before
you decide whether to buy our ADSs.
Risks
Relating to Our Company and Our Industry
At September 30, 2009, we had a working capital deficit
(i.e., total consolidated current liabilities exceeded total
consolidated current assets) of $1,151.7 million and an
accumulated deficit of $8.5 million. During the nine months
ended September 30, 2009, we incurred a net loss of
$209.9 million and used $95.2 million of cash in
operations. As of September 30, 2009, we had cash and cash
equivalents of $67.7 million, most of which are held by
subsidiaries in China. Most of our short-term bank borrowings
and current installments of our long-term debt totaling
$1,103.8 million are the obligations of these subsidiaries.
These factors initially raised substantial doubt as to our
ability to continue as a going concern. We are in need of
additional funding to sustain our business as a going concern,
and we have formulated a plan to address our liquidity problem.
Our liquidity plan includes:
For more information, see “Note (1) — Basis of
presentation and liquidity” of our Unaudited Condensed
Consolidated Financial Statements as of and for the nine-month
periods ended September 30, 2008 and 2009 beginning on
page F-1.
However, we cannot assure you that we will successfully execute
our liquidity plan. If we do not successfully execute such plan,
we may have substantial doubt as to our ability to continue as a
going concern. As a result, we cannot assure you that our
independent auditors will not issue a modified report regarding
our ability to continue as a going concern nor can we assure you
that a deterioration in our financial condition would not result
in adjustments to our financial statements relating to
recoverability and classification of recorded assets or the
amounts and classification of liabilities or other adjustments.
Substantial doubt about our ability to continue as a going
concern could also result in the exercise of broadly drafted
provisions in certain loan agreements that give the lenders the
right to accelerate the payment of the loans in the event of a
deterioration in our financial condition, which could thereby
potentially trigger other cross-default provisions in other loan
agreements if we were not able to repay the loans upon
acceleration. The occurrence of the foregoing would materially
and adversely affect our financial condition and business
prospects and result in a significant drop in the trading price
of our ADSs.
We require a significant amount of cash to fund our operations.
In particular, we will need substantial additional funding to
finance the ramp-up of our polysilicon production plant and the
expansion of our wafer and module production capacity, and our
working capital requirements. We will also need capital to fund
our R&D activities in order to remain competitive on cost
and technology. Historically, we have relied on equity and
convertible debt offerings and substantial short-term bank
borrowings and advance payments from customers to finance our
capital expenditure and working capital requirements. We will
need additional debt or equity financing
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to finance our planned wafer production capacity expansion,
construction of our polysilicon facilities and working capital
requirements. In addition, future acquisitions, expansions,
market changes or other developments may cause us to require
additional financing. Furthermore, we may not be able to
refinance our current borrowings on terms that are acceptable to
us. Our ability to obtain external financing in the future is
subject to a number of uncertainties, including:
If we are unable to obtain funding in a timely manner or on
commercially acceptable terms, or at all, our growth prospects
and future profitability may be materially adversely affected.
In addition, a number of our loan agreements contain covenants
that require us to maintain certain financial ratios, including
liability to assets ratios. If we fail to comply with such
ratios, the lenders have the right to raise the interest rate,
change the repayment terms or require us to provide additional
collateral to secure the loan. Certain of our loan agreements
also require the consent of the lenders before we can undertake
significant corporate transactions, including sale or disposal
of assets, pledge of assets and increase in registered capital.
Furthermore, Mr. Peng, our chairman, chief executive
officer and principal shareholder, has agreed to grant personal
guarantees under certain loans. Such guarantees also restrict
him from granting guarantees to other lenders without the
consent of the relevant lender.
We have not complied with, and may from time to time fail to
comply with, certain of these covenants. For example, the
worsening operating environment that has generally affected
companies operating in our industry since the fourth quarter of
2008 has led to potential breaches of certain financial ratios.
We have also failed to comply with the consent requirements
prior to engaging in certain transactions. Mr. Peng may
have breached the terms of the guarantees by extending
guarantees to other lenders with consent of the relevant
lenders. In response to such breaches or potential breaches, we
have sought to obtain the consents or waivers from the relevant
lenders. As of the date hereof, China
Minsheng Bank has not provided such consent and waiver. We will
continue to seek such consent and waiver and hope to obtain it
in the near future. However, we cannot assure you that we will
succeed in obtaining these consents or waivers if we or
Mr. Peng were to breach these covenants in the future that
we would be able to obtain a consent or waiver. Furthermore, in
connection with any future consents or waivers, our lenders may
impose additional operating and financial restrictions on us and
otherwise seek to modify the terms of our existing loan
agreements in ways that are adverse to us.
If we or Mr. Peng were to breach certain covenants or terms
of the loans or guarantees, as the case may be, and we are not
able to obtain consents or waivers from the lenders or prepay
such loan, such breach may constitute an event of default under
the loan agreements. As a result, repayment of the indebtedness
under the relevant loan agreements may be accelerated, which may
in turn require us to repay the entire principal amounts
including interest accrued, if any, of certain of our other
existing indebtedness prior to their maturity under
cross-default provisions in our existing loan agreements,
including the convertible senior notes we issued in April 2008.
If we are required to repay a significant portion or all of our
existing indebtedness prior to their maturity, we may lack
sufficient financial resources to do so. Any of those events
could have a material adverse effect on our financial condition,
results of operations and business prospects.
As of September 30, 2009, our outstanding short-term and
long-term bank borrowings amounted to $1,103.8 million and
$298.9 million, respectively. As of September 30, 2009, the
aggregate outstanding principal amount of our convertible senior
notes was $390.1 million. As of December 17, 2009, we
had short-term and long-term bank borrowings and amounted to
$1,009.6 million and $393.5 million, respectively. We
may from time to
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time incur substantial additional indebtedness. If we or our
subsidiaries incur additional debt, the risks that we face as a
result of such indebtedness and leverage could intensify. Our
substantial existing indebtedness and any increase in the amount
of our indebtedness could adversely affect our financial
condition and we may not be able to generate sufficient cash to
service our increased indebtedness. For example, our incurrence
of additional debt could:
Because the majority of our indebtedness is short-term
indebtedness, we may suffer a near-term liquidity problem if we
are unable to refinance these borrowings as they become due. As
of December 31, 2008 and September 30, 2009, our
outstanding short-term borrowings from banks (including the
current portion of long-term bank borrowings) were
$666.2 million and $1,103.8 million, respectively, and
bore a weighted average interest rate of 6.376% and 4.654%,
respectively. We had an outstanding balance of
$348.2 million in short-term and long-term borrowings
arranged or guaranteed by related parties as at
September 30, 2009. Generally, our short-term loans contain
no specific renewal terms, although we have traditionally
negotiated renewal of some of our loans shortly before they
would mature. However, we cannot assure you that we will be able
to renew our loans in the future as they mature. If we are
unable to obtain renewals of any future loans or sufficient
alternative funding on reasonable terms, we will have to repay
these borrowings.
Our ability to generate sufficient cash to satisfy our
outstanding and future debt obligations will depend upon our
future operating performance, which will be affected by
prevailing economic conditions and financial, business and other
factors, many of which are beyond our control. We may not
generate sufficient cash flow to meet our anticipated operating
expenses or to service our debt obligations as they become due.
For the years ended December 31, 2006 and 2007, our net
cash outflow from operating activities was $57.1 million
and $80.7 million, respectively. Although we recorded a
positive net cash flow of $333.1 million from operating
activities in the year ended December 31, 2008, we incurred
a net cash outflow of $95.2 million from operating
activities during the nine months ended September 30, 2009
and cannot assure you that we will have positive net cash flows
in the future. If we are unable to service our indebtedness, we
will be forced to adopt an alternative strategy that may include
actions such as reducing or delaying capital expenditures,
selling assets, restructuring or refinancing existing
indebtedness or seeking equity capital. These strategies, if
implemented, may not be instituted on satisfactory terms. Any of
these constraints upon us could materially adversely affect our
financial condition and ability to satisfy our obligations.
We commenced our down-stream solar module business beginning in
the third quarter of 2009. We sell solar modules in the
international markets principally to solar panel makers, solar
system integrators and PV whole-sale distributors. We do not
sell our modules in China as we have an agreement with Best
Solar, which is wholly owned by LDK New Energy Holding Limited,
or LDK New Energy, our controlling shareholder, not to compete
with Best Solar in China. In turn, Best Solar will not compete
with our solar power projects and EPC services in China and our
sale of modules outside China. We entered into the solar module
business as a result of the market demands.
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To meet the market needs, we currently procure solar cells and
modules primarily through OEM or tolling arrangements, rather
than incurring substantial capital expenditures in developing
the infrastructure for this new business. Best Solar provides
substantially all of our tolling services. Our ability to
successfully implement our down-stream solar module business
strategy is subject to various risks and uncertainties,
including:
In addition, we will need to recruit additional skilled
employees, including technicians and managers at different
levels for our successful expansion into this business. Our
current management team has limited experience in this area and
we also face additional difficulties in staffing our overseas
operations. All these could adversely affect our business
expansion strategy and our chance of success in this expansion.
We commenced our EPC business in China in the first quarter of
2009. Internationally in collaboration with other EPC companies,
and domestically using our EPC capabilities, we have been
engaged in a number of turn-key solar power generation projects
for sale to interested power companies. We entered into this
business operation as a result of the market demands. We believe
PV solution providers, rather than specialized product providers
such as providers of solar wafers, are viewed by the market as
preferable in terms of overall pricing and reliability. Our
ability to successfully implement our solar power project and
EPC business strategy is subject to various risks and
uncertainties, including:
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In addition, we will need to recruit additional skilled
employees, including technicians and managers at different
levels for our successful expansion into this business. Our
current management team has limited experience in this area and
all these factors and uncertainties could adversely affect our
business expansion strategy and our chance of success in this
expansion.
As we engage in and expand our operations, including sales and
services, outside China, such international operations expose us
to a number of related risks, including:
If we are unable to effectively manage these risks relating to
international operations, they could impair our ability to
expand our business abroad, and our results of operations may be
materially adversely affected and our business expansion and
vertical integration strategies will be materially hampered.
Declining wafer prices have had a negative impact on the net
realizable value of our inventories and we have had to write
down the carrying value of our inventories to the extent they
are greater than their net realizable value. For the year ended
December 31, 2008 and the nine months ended
September 30, 2009, we recognized a write-down of
$302.3 million and $177.5 million, respectively, of
our inventories to their estimated net realizable values
resulting from the decline in wafer selling prices. If wafer
prices continue to decline and we are unable to lower our costs
in line with the price decline, our gross margins will continue
to be adversely affected. We previously purchased polysilicon
feedstock at higher costs during the time of polysilicon
shortage before the current economic downturn, resulting in our
having a higher cost of goods sold than would be the case if we
purchased polysilicon feedstock now. The current global economic
downturn resulted in a significant decline in the estimated net
realizable value of our wafer and polysilicon feedstock
inventories. Although we attempt to renegotiate these contracts
and have succeeded partially in our endeavor, we cannot assure
that we will be able to reduce our
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polysilicon feedstock procurement costs as a result of such
prior contractual commitments. If wafer prices continue to
decline or we are unable to sell all our production, we may
incur further substantial inventory write-down to reflect any
further reduction in our net realizable value estimates.
We are in the process of expanding our polysilicon production
facilities at our Xinyu city plant and have plans to commence
commercial production of polysilicon feedstock in the fourth
quarter of 2009. As of September 30, 2009, our installed
annualized production capacity at the plant was 6,000 MT, and we
expect to increase our aggregate annualized production capacity
to 18,000 MT by the end of 2010. As of September 30, 2009,
we had spent approximately $1.7 billion in construction
costs for the polysilicon plant, and we expect that an
additional $250 million will be needed to complete the
plant. If we fail to successfully increase our aggregate
production capacity to our targeted production capacity, our
depreciation expense will be disproportionately higher if we
under-utilize our plant facilities.
We currently sell our multicrystalline wafers to over 60
customers. They are mostly solar cell and module manufacturers,
including CSI, E-Ton, Gintech, Hyundai, Neo Solar and Q-Cells.
For the years ended December 31, and 2008 and the nine
months ended September 30, 2009, our five largest customers
collectively accounted for approximately 48.6% and 51.3%,
respectively, of our net sales. For the year ended
December 31, 2008, Q-Cells and CSI contributed 20.4%, and
8.2%, respectively, of our net sales. For the nine months ended
September 30, 2009, Gintech, Q-Cells and CSI contributed
15.4%, 12.8% and 8.4%, respectively, to our net sales.
We will continue to rely on a relatively small number of
customers for a significant portion of our net sales of solar
wafers for the foreseeable future. Under the current global
economic downturn, there can be no assurance that any of these
customers will continue to purchase significant quantities of,
or any, wafers from us. In such an event, we have to find
alternative customers for these wafers. If this trend continues,
or if our customers decide to expand upstream into the solar
wafer business, our sales to such customers would be adversely
affected. In addition, because of our reliance on a limited
number of customers, any of the following events may cause
material fluctuations or declines in our net sales and profits:
If we fail to develop or maintain our customer relationships
with these and other customers, or if any of our major customers
encounters difficulties in its operations or reduces its
purchases of our products, it may be difficult for us to find
alternative customers on a timely basis and on commercially
reasonable terms or at all. Many of these customers make
prepayments to us and if contracts are changed they may ask for
repayments. This may have an adverse effect on our revenue and
profitability.
We have entered into long-term sales arrangements with some of
our major customers. Pursuant to these arrangements, we have
committed to supply each of them with specific quantities of
wafers over the next few years, with some subject to periodic
negotiations on prices. We have also entered into framework
agreements with other customers in which the volume and price,
as well as other terms, are determined on a quarterly or annual
basis or through monthly purchase orders. The current global
economic slowdown and crisis in the global financial markets
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have caused a number of our customers to seek to terminate their
contracts or request us to delay our shipments of wafers. At
their request, we have re-negotiated various terms under the
existing contractual arrangements, including contract quantity,
price and delivery timetable. We have had to concede to terms
that may be less favorable to us. For example, in December 2009,
we amended a supply contract with Q-Cells originally made for a
period of 10 years in December 2007 with fixed wafer
delivery quantity and pricing for 2009.
Under the terms of the amendment, we have agreed to cease any
pending proceedings or claims against Q-Cells and Q-Cells has
agreed not to draw down the prepayment guarantee issued. The
amendment grants Q-Cells preferential prices reflecting its
preferred customer status and greater flexibility in determining
the annual and final contract volumes based on its actual
demand. Under the amendment, a portion of shipments scheduled
for delivery in 2009 to 2011 is deferred to the period from 2012
to 2018. Q-Cells’ contractual obligation to take delivery
of wafer shipments is reduced to 20% of the originally agreed
volume for 2009 and 33% of the originally agreed volume with
respect to 2010 and 2011. The amendment also allows Q-Cells to
substitute up to 400-MT annually of its own silicon feedstock
for volumes to be purchased under the agreement in 2010 and
2011. In addition, we are required to repay prepayments made by
Q-Cells to
us according to the following repayment schedule:
The amendment also grants Q-Cells the right to terminate the
agreement at will and without cause after April 1,
2011, upon giving a
12-month
prior notice. Upon a valid termination of the agreement, we are
required to repay to Q-Cells the remaining outstanding
prepayment within 90 days after the written termination.
Our customers, such as
Q-Cells, may
have made prepayments to us pursuant to the contracts under
renegotiation, and our inability to arrive at mutually
satisfactory terms may result in our having to return all or
part of the prepayment amounts. Any significant deviation from
the contract terms or our inability to negotiate or renegotiate
acceptable quantities, prices and delivery terms from time to
time with our customers may disrupt our operations and
materially adversely affect our financial results.
We have significantly expanded our polysilicon and wafer
manufacturing facilities to accommodate our expansion efforts
and typically maintain a reasonable amount of inventory of raw
materials and finished goods based on our existing and projected
contractual arrangements with our customers. Any non-compliant
practice on the part of our customers with respect to their
contractual arrangements may result in our internalization of
the related economic losses because although we are subject to
the risks of non-performance or renegotiation of existing
contractual arrangements on the part of our customers, we are
not at liberty to delay or renegotiate our existing procurement
contractual arrangements with our polysilicon feedstock or
equipment suppliers. See “— We have entered into
long-term supply contracts with suppliers which we may not be
able to renegotiate.” Therefore, the non-performance of
contracts by our customers could have a material adverse effect
on our financial condition and results of operations.
In order to secure supplies of polysilicon feedstock, we have
entered into substantial long-term contractual commitments to
purchase polysilicon feedstock from various suppliers. Our
polysilicon purchase commitments are generally on a “take
or pay” basis, so that we are required to purchase the
contracted supplies of polysilicon feedstock even if we are
unable to use them. As a result, while we are subject to the
risks of non-performance or renegotiation of existing
contractual arrangements on the part of our customers, we are
not at liberty to delay or renegotiate our existing procurement
contractual arrangements with our polysilicon feedstock
suppliers. You may find additional information on our purchase
commitments in “Item 5. Operating and Financial Review
and Prospects—F. Tabular Disclosure of Contractual
Obligations” in our 2008 20-F report and the section
entitled “Supplemental Information about Us —
Material Contracts” below. Some of these polysilicon
procurement contracts, especially those concluded prior to the
current global economic downturn, contain pricing terms above
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the current market levels with the protection of our
prepayments. Although we attempt to renegotiate these contracts
and have succeeded partially in our endeavor, we cannot assure
that we will be able to reduce our polysilicon feedstock
procurement costs as a result of such prior contractual
commitments. Further, any prepayments that we are contractually
committed to make to suppliers at prices higher than current
market prices may adversely affect our liquidity. If our wafer
production and sales and polysilicon requirements do not grow as
expected, these purchase commitments could have a material
adverse effect on our financial condition and results of
operations.
The current global economic slowdown and crisis in the
global financial markets have negatively impacted, and may
continue to negatively impact, our business and our ability to
obtain necessary financing for our operations.
The current global economic slowdown and turmoil in the global
financial markets have resulted in a general credit crunch, an
increased level of commercial and consumer delinquencies, lack
of consumer confidence and increased market volatility. The
negative impact of the current global economic slowdown on our
business is manifold. For example:
The global economic slowdown and financial market turmoil may
continue to adversely impact our suppliers and customers and the
end-users of the PV products, which may lead to a further
decrease in the general demand for our products and a further
erosion of their selling prices.
The current global financial markets turmoil and the tightening
of credit due to the lack of liquidity have also negatively
impacted our liquidity and our ability to obtain additional
financings. We have significantly scaled back our original
expansion plan, not only because of the slowdown of the global
economy and its anticipated impact on our solar industry, but
also due to the tightened credit market that is making it
difficult for us to access affordable financing for the capital
expenditure and working capital needs in our expansion plan. We
developed our wafer production expansion plan and our greenfield
polysilicon production plan prior to the slowdown in the global
economy when the PV industry was growing rapidly. Despite our
significant scale-back and slow-down with respect to these
projects, we have substantially implemented such expansion and
construction plans. We have been able to finance a substantial
portion of our wafer production expansion and polysilicon plant
construction by relying on short-term bank loans and prepayments
from our customers. Although PRC commercial banks have made
short-term financings generally available to us, it is almost
impossible to secure long-term financings from them for our
projects without the project approval of the National
Development and Reform Commission, or NDRC, in China. The
current global financial markets crisis and the unavailability
of long-term financing in China have adversely impacted, and
will continue to adversely impact, our liquidity, capital
expenditure financing and working capital. You may find
additional information on our liquidity and financial condition
in the risk factors entitled “— We require a
significant amount of cash to fund our future capital
expenditure requirements and working capital needs; if we cannot
obtain additional sources of liquidity when we need it, our
growth prospects and future profitability may be materially
adversely affected” and “— We have
substantial existing indebtedness, in particular short-term
indebtedness, and we may incur substantial indebtedness in the
future, which could adversely affect our financial condition and
our ability to generate sufficient cash to satisfy our
outstanding and future debt obligations” as well as
“Item 5. Operating and Financial Review and
Prospects — B. Liquidity and Capital Resources”
in our annual report on Form 20-F for the fiscal year ended
December 31, 2008, or our 2008 20-F report, and the section
entitled “Supplemental Information about Us —
Management’s Discussion and Analysis of Financial Condition
and Results of Operations for the Nine Months Ended
September 30, 2009 — Liquidity and Capital
Resources.” If the current global economic slowdown and
financial market crisis continue on a sustained basis, they will
materially
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adversely impact the demand for our products and materially
adversely affect our ability to obtain necessary financing for
our operations, thereby causing damage to our financial
condition and results of operations.
Growth of the solar power market, particularly for on-grid
applications, depends largely on the availability and size of
government subsidies and economic incentives. At present, the
cost of solar power substantially exceeds the cost of
conventional power provided by electric utility grids in many
locations around the world. Various governments have used
different policy initiatives to encourage or accelerate the
development and adoption of solar power and other renewable
energy sources. Renewable energy policies are in place in the
European Union, most notably Germany, certain countries in Asia,
including China, Japan and South Korea, and many of the states
in Australia and the United States. Examples of
government-sponsored financial incentives include capital cost
rebates, feed-in tariffs, tax credits, net metering and other
incentives to end-users, distributors, system integrators and
producers of solar power products to promote the use of solar
power in both on-grid and off-grid applications and to reduce
dependency on conventional forms of energy. Governments may
decide to reduce or eliminate these economic incentives for
political, financial or other reasons. Government subsidies have
been reduced in a few countries, including Spain, and may be
further reduced or eliminated in the future. Reductions in, or
eliminations of, government subsidies and economic incentives
before the solar power industry reaches a sufficient scale to be
cost-effective in a non-subsidized marketplace could reduce
demand for our products and adversely affect our business
prospects and results of operations. In addition, reductions in,
or eliminations of, government subsidies and economic incentives
may cause the prices for the products of our customers to
decline and we may in turn face increased pressure to reduce the
sale price of our wafers. To the extent any price decline cannot
be offset by further reduction of our costs, our profit margin
will suffer.
We consume a significant amount of electricity in our wafer and
polysilicon manufacturing operations. With the rapid development
of the PRC economy, demand for electricity has continued to
increase. There have been shortages in electricity supply in
various regions across China, especially during the winter
season when the weather is bad and during the summer peak
seasons. For instance, in early 2008, due to severe weather
conditions over a period of two weeks, supply of electricity to
our plant was curtailed as a result of destructions of some of
the national grid lines in certain provinces in China, including
Jiangxi province. Consequently, we experienced delays in some of
our shipments to customers and some of the shipments from our
suppliers as a result of highway closures and power outages in
various parts of China. In the summer of 2006, our production
was also significantly disrupted due to power blackouts in Xinyu
city. Although we have installed backup power transformer
substations at our Xinyu plant site, we cannot assure you that
there will be no interruption or shortages in our electricity
supply or that there will be sufficient electricity available to
us to meet our future requirements. Shortages in electricity
supply may disrupt our normal operations and adversely affect
our profitability.
In August 2006, the Xinyu Industry Development District
government agreed to subsidize us for our utility charges over
and above Rmb 0.40 per
kilowatt-hour.
At the then market rate of Rmb 0.55 per
kilowatt-hour,
we were effectively subsidized by Rmb 0.15, or $0.02, per
kilowatt-hour
we used for our wafer production. In the years ended
December 31, 2006, 2007 and 2008, we received an aggregate
of $0.8 million, $3.1 million and $4.7 million in
such government subsidies. This utility arrangement was renewed
for five years from April 1, 2009 and may be extended only
with consent of both parties. Pursuant to the new arrangement,
the Xinyu Industry Development District government will
subsidize us at Rmb 0.08 or $0.01, per kilowatt-hour we use
for our wafer manufacturing. Since that same time, we have been
recognized as a large enterprise in China, able to enjoy the
current rate of Rmb 0.48 per
kilowatt-hour
applicable to such large enterprises. In September 2007, as
support to our polysilicon production in Xinyu city, the Xinyu
Industry Development District government agreed to subsidize us
for our utility charges over and above Rmb 0.25 per
kilowatt-hour
consumed by our polysilicon production. At the then market rate
of Rmb 0.55 per
kilowatt-hour,
we were effectively subsidized by Rmb 0.30, or $0.04, per
kilowatt-hour
we
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used for our polysilicon production prior to our recognition by
the PRC government as a large enterprise in China. Although this
additional utility arrangement does not provide for an
expiration date, there is no assurance that the government will
not terminate it or adjust the subsidy amount for reasons beyond our control. Polysilicon
production is energy-intensive and is highly dependent on
continuous electricity supply. Our results of operations will be
materially adversely affected if our electricity supply is
interrupted or electricity costs significantly increase upon
expiration, termination or adjustment of our subsidy arrangements with the
government.
Solar-grade polysilicon feedstock is an essential raw material
in manufacturing our multicrystalline solar wafers. Our
operations depend on our ability to procure sufficient
quantities of solar-grade polysilicon on a timely basis and on
commercially reasonable terms. Polysilicon is also an essential
raw material for the semiconductor industry, which requires
polysilicon of higher purity than that for the solar industry.
According to Solarbuzz, spot polysilicon prices fluctuated
widely in 2008 and 2009, from a peak of $450 per kilogram to
$130 per kilogram by the first quarter of 2009. Currently,
we have polysilicon inventories and supply commitments that we
believe will satisfy currently estimated polysilicon
requirements during the first half of 2010. However, some of our
polysilicon supply agreements are subject to fluctuating market
prices or price negotiations with our suppliers. In addition,
suppliers may delay or default in their delivery obligations
under the supply agreements, as we have disclosed in the risk
factor “— There are a limited number of suppliers
of virgin polysilicon feedstock and failure or delay by any of
our polysilicon suppliers in delivering supplies to us could
adversely impact our production and delivery schedule and harm
our reputation” below. We cannot assure you that we will
continue to be able to acquire polysilicon in sufficient
quantities and on commercially reasonable terms or that we will
be able to pass any increased costs of polysilicon to our
customers. If we fail to do either, our business and
profitability will be adversely affected.
Polysilicon production is a highly concentrated industry and
there are only a limited number of virgin polysilicon producers
in the world. According to Solarbuzz, the largest five virgin
polysilicon producers had a combined production capacity of
approximately 66% of the global production capacity of
polysilicon in 2008. These virgin polysilicon producers not only
provide polysilicon feedstock to the solar industry but are also
the sources of polysilicon feedstock for the semiconductor
industry. Although a small portion of our polysilicon feedstock
consists of virgin polysilicon, the suppliers of our remaining
requirements in the form of recyclable polysilicon also rely on
the virgin polysilicon producers for their polysilicon raw
materials. From time to time we have experienced delays or
defaults by some of our polysilicon suppliers in delivering
supplies to us. Material or prolonged delays or defaults such as
these could adversely impact our production and delivery
schedule and harm our reputation. If we fail to develop or
maintain our relationships with polysilicon suppliers, or should
any of our major suppliers encounter difficulties in its
production or shipment of polysilicon feedstock to us, whether
due to natural disasters, labor unrest, global financial market
crisis, or any other reason, it will be difficult for us to find
alternative sources on a timely basis and on commercially
reasonable terms. In that event, we may be unable to produce and
sell our products in the required quantities and on a timely
basis. As a result, our production and delivery schedules may be
adversely affected and our reputation may be harmed.
Our suppliers of raw materials and equipment, particularly
virgin polysilicon suppliers, require us to make prepayments
from time to time. We make these prepayments, without receiving
any collateral, in order to secure stable supply of polysilicon.
As of September 30, 2009, our prepayments to polysilicon
suppliers amounted to $104.7 million. Some of our suppliers
have failed to meet their delivery schedule in the past. In
addition, because we have embarked on our own polysilicon
production program, the perceived competition from us may
inhibit virgin polysilicon suppliers from supplying us with
polysilicon. If our suppliers fail or become unwilling to
deliver the
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polysilicon we have ordered on time or at all and do not return
our prepayments, our results of operations may be adversely
affected. We recognized a provision for doubtful recoveries of
$20.6 million and $10.4 million, respectively, for
prepayments to suppliers for the year ended December 31,
2008 and the nine months ended September 30, 2009. Our
claims for such payments would rank as unsecured claims, which
would expose us to the credit risks of our suppliers in the
event of their insolvency or bankruptcy. Under such
circumstances, our claims against the defaulting suppliers would
rank below those of secured creditors, which would undermine our
chances of obtaining the return of our advance payments. In
addition, if the market price of polysilicon decreases after we
prepay our suppliers, we may not be able to adjust historical
payments insofar as they relate to future deliveries.
Furthermore, if demand for our products decreases, we may incur
costs associated with carrying excess materials. Accordingly,
any of the above scenarios may have a material adverse effect on
our financial condition, results of operations and liquidity.
We commenced the construction of our polysilicon production
plant in August 2007. This plant is located near our current
solar wafer production facilities in Xinyu Hi-Tech Industrial
Park. Our polysilicon production plant consists of two
factories, one with an estimated annualized installed
polysilicon production capacity of 15,000 MT and the other
with an estimated annualized installed polysilicon production
capacity of 1,000 MT. We have completed the first
production run in the 1,000-MT factory in January 2009 and
intend to expand its annualized production capacity to
3,000 MT. We have also completed equipment installation for
an annualized production capacity of 5,000 MT with respect
to the 15,000-MT factory. Our total construction cost for the
polysilicon plant incurred as of September 30, 2009 was
approximately $1.7 billion. We estimate that an additional
amount of approximately $250 million is required to
complete construction of the polysilicon plant. We may face cost
overruns if the actual cost exceeds our budget. We expect to
produce approximately between 300 MT and 500 MT of
polysilicon in 2009 and between 6,000 MT to 7,000 MT
in 2010. In addition, we have to largely rely on contractors,
consultants, managers and technicians that we have hired or will
hire from the industry to construct, complete, operate and
maintain this plant. We also rely on equipment that we have
imported or contracted to import for our polysilicon production
operations. In addition, polysilicon production is a capital
intensive business. We have expended and will continue to expend
significant financial and other resources in order to construct,
start-up,
test-run and ramp up our new line of business. Apart from the
risks described above, our ability to successfully construct and
ramp up our polysilicon production plant is subject to various
other risks and uncertainties, including:
Product defects and the possibility of product defects could
cause significant damage to our market reputation and reduce our
product sales and market share. If we cannot successfully
maintain the consistency and quality throughout our production
process, this will result in substandard quality or performance
of our polysilicon. If we produce defective polysilicon, or if
there is a perception that our products are of substandard
quality, we may incur
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substantially increased costs associated with replacements, our
credibility and market reputation will be harmed and sales of
our polysilicon may be adversely affected.
If we fail to complete the construction of our polysilicon
production plant in time or to make it operational up to its
designed capacity or fail to produce polysilicon that meets our
quality standards, or if the construction and
ramp-up
costs significantly exceed our original budget, our results of
operations will be materially adversely affected and our
business expansion and low-cost production strategies will be
materially affected.
Prior to our entering into the polysilicon production business,
we had no experience in polysilicon production and may,
therefore, face significant operational challenges in our
polysilicon production. The technology used to produce
polysilicon is complex, requires costly equipment and is
continuously being modified in an effort to improve yields and
product performance. Microscopic impurities such as dust and
other contaminants, difficulties in the manufacturing process,
disruptions in the supply of utilities or defects in the key
materials and tools used to produce polysilicon could interrupt
production, reduce yields or cause a portion of the polysilicon
unusable for our wafer production. If we are unable to build our
polysilicon production capability on a timely basis, or if we
face technological difficulties in our production of
polysilicon, we may be unable to achieve cost-effective
production of polysilicon to satisfy our wafer production needs.
Even if we successfully implement our in-house polysilicon
production program, we cannot assure you that our polysilicon
feedstock produced in-house will be cost-competitive. We
formulated our in-house polysilicon production plan prior to the
current global economic downturn when polysilicon feedstock was
selling at prices far above the current spot market price. After
we take into account amortization, depreciation and additional
production, maintenance and other costs, we cannot assure you
that our polysilicon feedstock produced in-house, at least in
the short term, if at all, will be cheaper than that available
in the market with comparable quality.
Our effective capacity and ability to produce high volumes of
polysilicon also depend on the cycle time for each batch of
polysilicon. We may encounter problems in our manufacturing
process or facilities as a result of, among other things,
production failures, construction delays, human error, equipment
malfunction or process contamination, all of which could
seriously harm our operations. We may experience production
delays if any modifications we make in the production process to
shorten cycles are unsuccessful. Moreover, any failure to
achieve acceptable production level and cost may cause our
wafers not to be competitively priced, which could adversely
affect our business, financial condition and results of
operations. In addition, market prices of polysilicon are
unpredictable and may fall further. Even if we are able to bring
our production cost down, our cost may not be necessarily more
competitive than the prevailing market price.
Production of polysilicon requires the use of volatile materials
and chemical reactions sensitive to temperature, pressure and
external controls to maintain safety and provide commercial
production yields. For example, in the production of polysilicon
we plan to use TCS, which is a type of chlorosilane gas that,
when purified, can be highly combustible upon contact with air
and is therefore potentially destructive and extremely dangerous
if mishandled or used in uncontrolled circumstances. The
occurrence of a catastrophic event involving chlorosilane gas as
a result of a natural disaster or human error or otherwise at
one of our polysilicon production facilities could threaten,
disrupt or destroy a significant portion or all of our
polysilicon production capacity at such facility for a
significant period of time. Additionally, our polysilicon
production facilities, in particular, are highly reliant on our
ability to maintain temperatures and pressure at appropriate
levels, the availability of adequate electricity and our ability
to control the application of such electricity. Accordingly,
mistakes in operating our equipment or an interruption in the
supply of electricity at our production facilities could result
in substantial shortfalls in production and could reduce our
production capacity for a significant period of time. Damage
from any such events or disruptions may not be adequately
covered by insurance, and could also damage our reputation, any
of which could have a material adverse effect on our business,
operating results and financial condition.
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Our
ability to cost-effectively produce polysilicon depends on our
ability to recycle the STC produced as a by-product of the
polysilicon production process into TCS, which ability is
materially dependent on our continued ability to install and
integrate our hydrochlorination process into a closed-loop
system.
Our ability to recycle the STC produced as a by-product from the
polysilicon production process into TCS is a critical factor in
reducing production costs and environmental costs and is
principally accomplished through hydrochlorination.
Currently, we apply a hydrochlorination process in a closed-loop
system in our production facility. We cannot assure you that we
will continue to be successful in operating the
hydrochlorination process on a continuing basis or with high
conversion rates.
If we are unable to continually operate our hydrochlorination
processes and further increase production yields and benefit
from efficiencies in purchasing, manufacturing, sales and
shipping, we may not be able to achieve lower costs per unit of
production, which would decrease our margins and lower our
profitability. Any of the foregoing factors could materially and
adversely affect our business, financial condition or results of
operations.
We may
not be able to complete our in-house TCS production facilities
within our expected timeframe and budget, or at all, in-house
TCS production may not be more
cost-efficient
than purchasing TCS from third party suppliers; if we need to
purchase TCS in substantial quantities to operate our production
facilities and are unable to source TCS at a reasonable cost or
at all, it could have a material adverse effect on our financial
condition and results of operations.
TCS is one of the main and most costly raw materials in the
production of polysilicon. We intend to reduce costs of
producing polysilicon by producing TCS internally.
We have substantially completed the construction of our TCS
production facilities on the site of our polysilicon production
plant, which are designed to meet the
top-up
requirement in our closed-loop polysilicon production process.
However, the production of TCS is difficult and requires strict
controls over the management of raw materials and over the
production process itself. We have no previous experience in the
production of TCS. Therefore, we cannot assure you that we will
complete our TCS production facilities within the expected
timeframe and budget, or at all, or that our own production of
TCS will be more cost-efficient than purchasing TCS from third
party suppliers. Any failure to complete our TCS production
facilities may have a material adverse effect on our business,
prospects, financial condition and results of operations. Even
if we are able to produce TCS in-house, we may from time to time
be required to purchase from external sources a substantial
quantity of the TCS required for our production of polysilicon.
The quality of TCS that we have been able to purchase has
fluctuated, and the price has increased substantially since we
commenced TCS procurement. The expansion or development of
polysilicon production capacity by existing or new solar
industry participants could increase the price or limit the
supply of TCS available to us. If we are unable to source the
TCS we require at a reasonable cost or at all, it could have a
material adverse effect on our financial condition and result of
operations.
We have expanded our business operations significantly over the
past few years. Although we have revised our expansion plan in
light of the current global economic slowdown and crisis in the
global financial markets, we still have an aggressive expansion
plan for the next few years. The success of our business
expansion and operational growth will depend upon the general
economic environment for the solar industry, our ability to
maintain and expand our relationships with customers, suppliers
and other third parties, the improvement of our operational and
financial systems, enhancement of our internal procedures and
controls, increase in our production capacity and output, and
effective recruitment, training and retention of technicians and
skilled employees. We cannot assure you that the current global
solar markets and prospects will continue to support our
expanded production capacity or that our current and planned
operations, personnel, systems, internal procedures and controls
will be adequate to support our growth. If we are unable to
manage our growth effectively, we may not be able to take
advantage of market opportunities, successfully execute our
business strategies or respond to competitive economic
environment and pressures, and our results of operations may be
adversely affected.
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Our expansion and further expansion plan have been based on the
projected market demand for solar wafers and modules relative to
the insufficient manufacturing capacity in the wafer,
polysilicon and module production segments of the solar industry
over the past years. There has been an industry-wide expansion
effort to increase the overall wafer manufacturing capacity. In
connection with our expansion, we have entered into substantial
commitments to purchase polysilicon feedstock over the next few
years. In addition, we had invested approximately
$1.7 billion in the construction of our own polysilicon
production facilities as of September 30, 2009, and expect
to invest approximately an additional $250 million to
complete the construction. The aggressive expansion over the
years and the continued expansion by us and our competitors of
the production capacity may result in significant excess
capacity in the wafer segment, the polysilicon segment, the
module segment or in the overall solar industry and, as a
result, prices may decline, our utilization ratio may decrease
and our results of operations may be adversely affected.
Our wafer, polysilicon and module prices are based on a variety
of factors, including global market wafer, polysilicon and
module prices, supply and demand conditions, and the terms of
our customer contracts, including sales volumes. Over the years,
many PV companies have significantly increased their capacity to
meet customer demand. The current global economic slowdown,
crisis in the global financial markets and the significant
decrease in global petroleum prices have further reduced or
delayed the general demand for PV products. According to
Solarbuzz, wafer and module prices in general remained steady
during the first three quarters of 2008, but declined
significantly starting in 2008 through 2009.
We have required certain customers to prepay a portion of the
purchase price of their orders. Such prepayment arrangements
with our customers have historically allowed us to prepay our
suppliers with less reliance on borrowings to cover our cash
needs for working capital. The current global economic slowdown
and financial market crisis have made this practice less likely
to be sustainable. We have agreed to reduce the contractual
prepayments with some of our customers, and some others have
started to insist on payment upon delivery of goods. Advance
payments from customers decreased from $744.0 million in
the year ended December 31, 2008 to $422.6 million in
the nine months ended September 30, 2009. Our accounts
receivable also increased significantly from $94.7 million
as of December 31, 2008 to $247.2 million as of
September 30, 2009. We expect the trend of customers
seeking to reduce or eliminate prepayments to continue in the
future. Our recent engagement in the solar module and other
down-stream businesses has not only increased our working
capital needs but will also further extend our overall accounts
receivable turnover time. Our module customers typically require
longer payment terms as compared to our wafer customers. Our
down-stream business tends to increase our inventory turnover
days as compared to our wafering business. Should the trend to
reduce or eliminate wafer prepayments continue, coupled with our
expanding solar module and other down-stream businesses, our
working capital needs may significantly increase, and our
business operations may be materially adversely affected if we
fail to raise more cash, or do it on a timely basis, due to our
longer accounts receivable turnover cycles.
We have significantly increased our wafer manufacturing capacity
and output over the years in order to meet the growing demand of
our customers. As of September 30, 2009, we had an
annualized wafer production capacity of approximately
1.7 GW. All of our wafer production facilities have been
operating at close to full capacity. Our present strategy
includes a measured expansion of our wafer production capacity.
To accommodate such expansion plan, we have acquired additional
land adjacent to our current production site at Xinyu Hi-Tech
Industrial Park and are constructing additional manufacturing
facilities on the acquired land. Our expansion plan requires a
substantial increase in our wafer production and ancillary
equipment. We have entered into contracts to purchase additional
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equipment that is expected to be sufficient for our planned
multicrystalline wafer production capacity expansion in 2010. If
any of our equipment producers fails to deliver, or delays its
delivery of, our equipment for any reason, the implementation of
our expansion plan may be adversely affected. In addition, there
is a limited supply of the principal wafer manufacturing
equipment we use and we may not be able to replace our providers
for the required equipment at reasonable costs and on a timely
basis to implement our expansion plan.
In addition, as we disclosed in the risk factors entitled
“— We may develop excess production capacity and,
as a result, our profitability may be adversely affected”
and “— Global supply of PV products may exceed
demand, which could cause our wafer, polysilicon and module
prices to decline” above, we cannot assure you that we can
successfully implement our expansion plan or manage such an
expanded capacity. If we fail, or encounter significant delays
in our efforts, to establish or successfully utilize additional
manufacturing capacity or to increase our manufacturing output,
we will be unable to increase our sales and capture additional
market share, and our results of operations will be adversely
affected.
We have obtained approval from NDRC in China to produce with
respect to a portion of our planned aggregate annual production
capacity at our polysilicon production plant and our wafer
manufacturing facilities. We intend to apply for approval from
NDRC for an additional annual production capacity in line with
our expansion plan. Such approval is required before we can
increase our investment to construct the additional production
capacity and commence construction of such facilities. If we are
not able to obtain such approval, we will not be able to achieve
our planned annualized polysilicon production capacity of
18,000 MT, which could delay our expansion and could
adversely affect our growth and profitability.
If you are a U.S. investor and we are a passive foreign
investment company, or PFIC, for any taxable year during which
you own our ordinary shares or ADSs, you could be subject to
adverse U.S. tax consequences. As of the time hereof, we do not expect to be a PFIC for U.S. federal
income tax purposes for our current taxable year or in the
foreseeable future. However, because this determination is made
on an annual basis and the composition of our gross income and
assets may vary significantly from
year-to-year,
no assurance can be provided regarding our PFIC status. See
“Certain United States Federal Income Taxation
Considerations — Passive Foreign Investment Company
Rules” for a more detailed discussion.
The solar wafer manufacturing market and solar module sale
market is highly competitive. Many of our current and potential
competitors have a longer operating history, better name
recognition, greater resources, larger customer base, better
access to polysilicon feedstock and greater economies of scale
than we do. In addition, most of our competitors are integrated
players in the solar industry that also engage in the production
of virgin polysilicon, and manufacturing of PV cells
and/or
modules. Their business models may give them competitive
advantages as these integrated players place less reliance on
the upstream suppliers
and/or
downstream customers in the value chain. A number of our
customers and suppliers are also our competitors. We have
recently expanded into the down-stream PV cell and module
business and face a series of related risks as we have disclosed
in the risk factors entitled “— We have recently
entered into the down-stream solar module business for markets
outside China, and we may not be successful in this new
endeavor, which could adversely affect our business expansion
strategies and harm our reputation” and
“— We have recently started to engage in the
solar power project and PV-related EPC business and we may not
be successful in this new endeavor, which could adversely affect
our business expansion strategies and harm our reputation.”
Furthermore, due to the global economic slowdown and global
financial crisis, the competition within our industry has
intensified. The key barriers to entry into our industry at
present consist of availability of financing and development of
our technological know-how. If these barriers disappear or
become
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more easily surmountable, new competitors may successfully and
more easily enter our industry, resulting in loss of our market
share and increased price competition.
We are currently focused on crystalline silicon solar
technologies and we compete with alternative solar technologies.
Some companies have spent significant resources in the R&D
of proprietary solar technologies that may eventually produce PV
products at costs similar to, or lower than, those of
multicrystalline wafers without compromising product quality.
For example, they are developing or currently producing PV
products based on thin-film PV materials, which require
significantly less polysilicon to produce than multicrystalline
solar products. These alternative PV products may cost less than
those based on multicrystalline technologies while achieving the
same level of conversion efficiency. Our founder, chairman,
chief executive officer and controlling shareholder,
Mr. Xiaofeng Peng, in his personal capacity, and his family
members are engaged in certain alternative energy projects,
including a project involving thin-film technology. In addition,
Mr. Peng and his family may invest or otherwise participate
in their personal capacity in other alternative energy projects,
such as projects involving solar thermal, wind energy and
biofuels. After considering the available business
opportunities, we have decided not to enter into the thin film
module production.
The solar power market in general also competes with other
sources of renewable energy and conventional power generation.
If prices for conventional and other renewable energy sources
decline, or if these sources enjoy greater policy support than
solar power, the solar power market could suffer and our
business and results of operations may be adversely affected.
We rely on a limited number of equipment suppliers for all of
our principal manufacturing equipment and spare parts, including
our DSS furnaces, squarers that we use to cut multicrystalline
ingots into smaller blocks, wafering wire saws that we use to
slice these blocks into wafers and polysilicon reactors and
converters that produce polysilicon with solar-grade purity. In
addition, we rely on a limited number of suppliers for the
consumables, such as crucibles and slurry, that we use in our
wafer production. These suppliers have supplied most of our
current equipment and spare parts, and we will also rely on them
to provide a substantial portion of the principal manufacturing
equipment and spare parts contemplated in our expansion program
including polysilicon production. If we fail to develop or
maintain our relationships with these and other equipment or
consumables suppliers, or should any of our major equipment or
consumables suppliers encounter difficulties in the
manufacturing or shipment of its equipment or consumables to us,
including due to natural disasters or otherwise fail to supply
equipment or consumables according to our requirements, it will
be difficult for us to find alternative providers for such
equipment or consumables on a timely basis and on commercially
reasonable terms. For example, in the first quarter of 2008, we
experienced delays in the shipments of certain wafer production
equipment, and such delays adversely affected the implementation
of our expansion plan and our production schedule.
We have entered into agreements to purchase some of our key
equipment and consumables from domestic suppliers. In the event
that our equipment and crucibles lead to defective or
substandard wafers, our business, financial condition and
results of operations could be adversely affected.
We have experienced delays in fulfilling purchase orders from
some of our customers due to shortages in supplies of
polysilicon feedstock, constraints in our production capacity,
and in disruption to our production as a result of various
factors. For example, during the first quarter of 2007, our
production was interrupted because we temporarily shut down our
DSS furnaces to install safety kits provided by GT Solar,
producer of such DSS furnaces. In early 2008, we also
experienced delays in the delivery of our products due to
logistics disruptions as a result of the snow storms in China.
In addition, our ability to meet existing contractual
commitments to our customers depends
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on the successful and timely implementation of our expansion
plan. If we are unable to fulfill our commitments to customers
or customer orders on a timely basis, we may lose our customers
and our reputation may be damaged. Moreover, our contracts with
our customers sometimes provide for specified monetary damages
or penalties for non-delivery or failure to meet delivery
schedules or product specifications. If any of our customers
invokes these clauses against us, we may need to defend against
the relevant claims, which could be time-consuming and
expensive. We may be found liable under these clauses and be
required to pay damages.
We are
subject to a consolidated securities class action lawsuit
resulting from allegations of incorrect inventory reporting by
our former financial controller, and we are unable to quantify
their future potential impact of this lawsuit, if any, on us.
These lawsuits or any similar or other allegations, lawsuits or
proceedings in the future could adversely affect our results of
operations, financial condition, reputation and market price of
our ADSs and may cause loss of business.
In October 2007, our former finance controller, Charley Situ,
alleged that we incorrectly reported our inventories of silicon
feedstock. As a result of Mr. Situ’s allegations,
several securities class action lawsuits were filed against us
and several of our current officers and directors during October
2007 in the U.S. District Courts in the Northern District
of California and the Southern District of New York. Those
actions have been consolidated into a single action, pending in
the Northern District of California, entitled In re LDK Solar
Sec. Litig., Case
No. C07-05182
WHA. The complaint seeks substantial monetary damages on behalf
of a class of persons who purchased our securities from
June 1, 2007 to October 7, 2007 and allege that we
overstated our inventory, among other things. We believe the
allegations in the securities lawsuits are without merit and
filed motions to dismiss the complaints in April 2008. On
May 29, 2008, the United States District Court Northern
District of California denied our motions to dismiss. We filed a
motion for reconsideration on June 13, 2008 but the motion
was denied again by the court on July 14, 2008. We filed an
additional motion to dismiss counts against certain of the
individual defendants on July 21, 2008. On August 21,
2008, the plaintiffs conceded to the dismissal of all claims
against Jiangxi LDK Solar Hi-Tech Co., Ltd., or Jiangxi LDK
Solar, and certain claims against two individual directors. On
January 28, 2009, the court issued an order certifying the
plaintiff class of all persons who purchased our ADSs, call
options for our ADSs or sold put options for our ADSs during the
class period of June 1, 2007 through October 7, 2007.
We plan to continue to vigorously defend this lawsuit. This
trial is in the discovery phase. A trial date is scheduled for
March 22, 2010. It is not possible for us to reasonably
estimate the amount of loss, if any, we would incur in the event
of an unfavorable outcome from the resolution of these lawsuits.
If this lawsuit against us is successful, it may result in
substantial liabilities, which may have an adverse effect on our
financial condition and operating results.
In response to Mr. Situ’s allegations, in October
2007, we formed an internal committee to investigate the
allegations and conduct an immediate physical inventory count of
our polysilicon materials. We found no material discrepancies as
compared to our financial records. We believe that
Mr. Situ’s allegations have no merit. Additionally,
the independent directors of our audit committee conducted an
independent investigation into the allegations made by
Mr. Situ. The independent investigation was primarily
conducted by our audit committee’s independent counsel, a
major U.S. law firm, and forensic accountants from a
“big four” independent accounting firm that was
separate from our external auditors, as well as independent
experts in the evaluation of silicon feedstock and the
manufacturing of multicrystalline solar wafers. The independent
investigation found no material errors in our stated silicon
inventory quantities as of August 31, 2007, and concluded
that Mr. Situ’s allegations of an inventory
discrepancy were incorrect because he had not taken into account
all locations where we stored our silicon feedstock. The
independent investigation further concluded that we were using
each of our various types of silicon feedstock in the
manufacturing of our multicrystalline solar wafers, and that a
provision for obsolete or excess silicon feedstock was not
required.
The United States Securities and Exchange Commission, or the
SEC, also initiated an investigation into the Situ allegations.
The results of our audit committee’s independent
investigation were also presented to the SEC. On March 24,
2008, the SEC staff informed us that it did not intend to
recommend any enforcement action by the SEC.
In addition, several of our officers and directors are
defendants in another lawsuit, pending in California Superior
Court, Santa Clara County, entitled Sean Coonerty v.
Xiaofeng Peng, et al., Case No. 108CV103758. This
derivative lawsuit alleges claims of breach of fiduciary duty
and unjust enrichment based on the same allegations contained in
the securities lawsuit, repeating Mr. Situ’s
allegations that the feedstock inventory was overstated, and
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seeks damages in an unspecified amount on behalf of our company.
This lawsuit is at its early stage, and our officers and
directors have not responded to the complaint.
We and/or our directors and officers may be involved in similar
or other allegations, litigations or legal or administrative
proceedings in the future. Regardless of the merits of the
lawsuits, litigation and other preparation undertaken to defend
the litigation can be costly, and we may incur substantial costs
and expenses in doing so. It may also divert the attention of
our management. Any such future allegations, lawsuits or
proceedings could have a material adverse effect on our business
operations and adversely affect the market price of our ADSs.
Our
business depends on the continued services of our executive
officers and key personnel and our business may be severely
disrupted if we lose their services.
Our success depends on the continued services of our executive
officers and key personnel, in particular Mr. Xiaofeng
Peng, our founder, chairman and chief executive officer. We do
not maintain key-man life insurance on any of our executive
officers and key personnel. If one or more of our executive
officers and key personnel are unable or unwilling to continue
in their present positions, we may not be able to replace them
readily, if at all. As a result, our business may be severely
disrupted and we may have to incur additional expenses in order
to recruit and retain new personnel. In addition, if any of our
executives joins a competitor or forms a competing company, we
may lose some of our customers. Each of our executive officers
and key personnel has entered into an employment agreement with
us that contains confidentiality and non-competition provisions.
However, if any dispute arises between our executive officers or
key personnel and us, we cannot assure you, in light of
uncertainties associated with the PRC legal system, that these
agreements could be enforced in China where most of our
executive officers and key personnel reside and hold most of
their assets. In addition, Mr. Peng, our founder, chairman,
chief executive officer and controlling shareholder, in his
personal capacity, and his family members are engaged in certain
alternative energy projects, including a project involving
thin-film technology. Mr. Peng and his family may invest or
otherwise participate in their personal capacity in other
alternative energy projects, such as projects involving solar
thermal, wind energy and biofuels. To the extent that
Mr. Peng devotes significant time to any such projects, it
may reduce his time and services devoted to our company as
chairman and chief executive officer, which could materially
adversely affect our business.
Mr. Peng, our founder, chairman and chief executive
officer, currently beneficially owns, through LDK New Energy his
wholly owned British Virgin Islands company, 72,585,796 of our
shares, representing approximately 64.1% of our outstanding
share capital. As such, Mr. Peng will have substantial
control over our business, including decisions regarding
mergers, consolidations and the sale of all or substantially all
of our assets, election of directors, dividend policy and other
significant corporate actions. Mr. Peng may take actions
that are not in the best interest of our company or our
shareholders and other securities holders. For example, this
concentration of ownership may discourage, delay or prevent a
change in control of our company, which could deprive our
shareholders of an opportunity to receive a premium for their
shares as part of a sale of our company and might reduce the
price of our ADSs. On the other hand, if Mr. Peng is in
favor of any of these actions, these actions may be taken even
if they are opposed by our other shareholders, including you and
those who invest in our ADSs.
Mr. Peng, in his personal capacity, and his family members
are engaged in certain alternative energy projects, including a
project involving thin-film solar technology. LDK New Energy is
the beneficial owner of all of the equity interest of the
thin-film solar company. In addition, Mr. Peng and his
family may invest or otherwise participate in their personal
capacity in other alternative energy projects, such as projects
involving solar thermal, wind energy and biofuels which might
not be aligned with the interests of our shareholders.
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Our
controlling shareholder Mr. Peng has directly or indirectly
pledged a significant portion of his equity interests in our
company to secure certain loan facilities. A default under these
loan facilities could result in the sale of our ordinary shares
or ADSs in open market, which may cause a drop in the price of
our ADSs and potentially result in a change of control of our
company.
Our controlling shareholder Mr. Peng, through his
wholly-owned entity, LDK New Energy, has pledged a significant
portion of his equity interest (in the form of ordinary shares
or ADSs) in our company to secure certain loan facilities to
finance his investment in the thin-film solar project and other
projects. Such loan facilities also require LDK New Energy to
pledge additional shares or ADSs or other collateral if the
market value of the pledged shares or ADSs fall below a certain
threshold. For example, the decline of the price of our ADSs on
the New York Stock Exchange during the past two months has
triggered margin calls. As of the date of this report, LDK New Energy has pledged approximately
56.5 million of our ordinary shares (including ordinary
shares represented by ADSs), representing approximately 48.9% of
our outstanding ordinary shares, to secure such loan facilities.
Under some loan agreements, Mr. Peng has also provided
unlimited personal guarantees to secure the loans. LDK New
Energy and Mr. Peng may from time to time obtain additional
loans that are secured by a pledge of additional equity interest
(in the form of ordinary shares or ADSs) in our company to
finance the thin-film solar project or for other purposes. The
continuation and/or deterioration of the current global economic
slowdown and financial market crisis could trigger additional
margin calls for these loan facilities. Failure or delay by LDK
New Energy to promptly meet such margin calls or other default
under these financing arrangements could result in the sale or
other disposition of some or all of the pledged shares. In
addition, if we default under the loan agreements for which
Mr. Peng has provided personal guarantee,
Mr. Peng’s personal property, including his shares in
us, may be seized and sold by the relevant lenders. This may
result in a drop in the price of our ordinary shares and ADSs
and potentially result in a change of control of our company.
The solar power market is at an early stage of development and
the extent of acceptance of solar power technology and products
is uncertain. Market data on the solar power industry is not as
readily available as that on other more established industries
where trends can be assessed more reliably from data gathered
over a longer period of time. As a result, the average selling
price and the market demand for our products are highly volatile
and subject to many factors which are beyond our control,
including:
If the average selling price or demand for solar power products
decrease dramatically, we may not be able to grow our business
or generate sufficient revenues to sustain our profitability.
For example, partially due to the current global economic
slowdown and turmoil in the global financial markets, while we
made a profit of
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$29.4 million for the quarter ended September 30,
2009, we incurred losses of $219.0 million,
$22.5 million and $216.9 million, respectively, for
the three quarters ended December 31, 2008, March 31,
2009 and June 30, 2009.
The solar power industry is characterized by evolving
technologies and standards. These technological evolutions and
developments place increasing demands on the improvement of our
products, such as higher PV efficiency and larger and thinner
wafers. Other companies may devise production technologies that
enable them to produce crystalline wafers that could yield
higher PV conversion efficiencies at a lower cost than our
products. Some of our competitors are developing alternative and
competing solar technologies that may require significantly less
silicon than crystalline solar cells and modules, or no silicon
at all. Technologies developed or adopted by others may prove
more advantageous than ours for commercialization of solar
products and may render our products obsolete. For example,
thin-film solar technology is being developed as an alternative
method of producing solar power products as compared to our
crystalline wafer-based solar technology and products. In
addition, further developments in competing polysilicon
production technologies may result in lower manufacturing costs
or higher product performance than those achieved from Siemens
processes, including the one we employ. As a result, we may need
to invest significant resources in research and development to
maintain our market position, keep pace with technological
advances in the solar power industry and effectively compete in
the future. Our failure to further refine and enhance our
products or to keep pace with evolving technologies and industry
standards could cause our products to become uncompetitive or
obsolete, which could in turn reduce our market share and cause
our net sales and profits to decline.
Our wafer manufacturing and polysilicon production processes use
hazardous equipment, such as reactors, DSS furnaces, squarers
and wire saws. Such equipment requires skills and experience for
safe operation. We could experience events such as equipment
failures, explosions or fires due to employee errors, equipment
malfunctions, accidents, interruptions in electricity or water
cooling supplies, natural disasters or other causes. In
addition, such events could cause damage to properties, personal
injuries or even deaths. As a result, we may in the future
experience production curtailments or shutdowns or periods of
reduced production, which would negatively affect our results of
operations. In addition, our polysilicon operations will involve
the use, handling, generation, processing, storage,
transportation and disposal of hazardous materials, which may
result in fires, explosions, spills, leakage and other
unexpected or dangerous accidents causing personal injuries or
death, property damage, environmental damage and business
interruption. Any such event could result in civil lawsuits or
regulatory enforcement proceedings, which in turn could lead to
significant liabilities.
As part of our strategy, we intend to enter into strategic
acquisitions and investments and establish strategic alliances
with third parties in the solar industry if suitable
opportunities arise. For example, in January 2008, we acquired
33.5% of Jiangxi Sinoma, a Xinyu-based crucibles manufacturer,
from Xinyu Chengdong Investment and Construction Co., Ltd. for
the consideration of approximately Rmb 16.8 million. In
April 2009, we formed a joint venture with Q-Cells to focus on
solar power generation systems and the market development of
such systems. We may engage in similar or other acquisitions and
investments that will complement our expansion strategies, such
as expanding our module production through acquisitions of
module manufacturing facilities. We may also make strategic
dispositions of our assets or restructure our business
operations. completed the sale of a 15% equity interest in
Jiangxi LDK Silicon, which owns our polysilicon plant with
15,000-MT annualized production capacity in Xinyu city, China,
to Jiangxi Trust, for Rmb 1.5 billion on
November 20, 2009. Urban Construction Investment Group Co.,
Ltd., a PRC company wholly owned by the Xinyu city government,
has agreed to purchase from us a 10% equity interest in Jiangxi
LDK Silicon for a minimum consideration of Rmb 1.2 billion
upon our giving them one month’s
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notice within 18 months after signing the agreement. We may
raise additional financing through the disposal of our stakes in
the polysilicon plant or any other business. Strategic
acquisitions, investments and alliances with third parties could
subject us to a number of risks, including risks associated with
sharing proprietary information and a reduction or loss of
control of operations that are material to our business.
Moreover, strategic acquisitions, investments and alliances may
be expensive to implement and subject us to the risk of
non-performance by a counterparty, which may in turn lead to
monetary losses that may materially adversely affect our
business. An acquisition of a business could also expose us to
the risk of assumption of unknown liabilities and other
unforeseen risks.
Our products may contain defects that are not detected until
they have been shipped or installed. For example, in July 2006,
we had sales returns of over 7,000 pieces of improperly cleaned
wafers due to the malfunction of our automated cleaning system
and the limited operating experience of our employees. In 2007,
2008 and the nine months ended September 30, 2009, we
recorded an inventory write-down of $4.2 million,
$9.7 million and nil, respectively, due to defects
identified in certain of our wafers. In the ordinary course of
our business, we also encounter periodic sales returns due to
non-conformity with customers’ specifications or product
defects. In each case, we are required to replace our products
promptly. Product defects and the possibility of product defects
could cause significant damage to our market reputation and
reduce our product sales and market share. If we cannot
successfully maintain the consistency and quality throughout our
production process, this will result in substandard quality or
performance of our wafers, including their reduced PV efficiency
and higher wafer breakage. If we deliver solar wafers with
defects, or if there is a perception that our products are of
substandard quality, we may incur substantially increased costs
associated with replacements of wafers, our credibility and
market reputation will be harmed and sales of our wafers may be
adversely affected.
We are
subject to the management report and auditor attestation report
requirements of Section 404 of the Sarbanes-Oxley Act; if
we fail to maintain an effective system of internal control over
financial reporting, we may be unable to accurately report our
financial results or prevent fraud, and investor confidence and
the market price of our ADSs may be adversely
affected.
We, as a public company, are subject to the Sarbanes-Oxley Act
of 2002, or the Sarbanes-Oxley Act. Section 404 of the
Sarbanes-Oxley Act and the related SEC rules require, beginning
with our fiscal year ended December 31, 2008, that we
evaluate the effectiveness, as of the end of each fiscal year,
of our internal control over financial reporting and include in
our annual reports on
Form 20-F
for each fiscal year (i) a report of our management on our
internal control over financial reporting that contains, among
other things, management’s assessment of the effectiveness
of our internal control over financial reporting as of the end
of the most recent fiscal year, including a statement whether or
not internal control over financial reporting is effective and
(ii) the opinion of our registered public accounting firm,
either unqualified or adverse, as to whether we maintained, in
all material respects, effective internal control over financial
reporting as of the end of such fiscal year. Our management and
auditors are not permitted to conclude that our internal control
over financial reporting is effective if there are one or more
“material weaknesses” in our internal control over
financial reporting, as defined in rules of the SEC and the
U.S. Public Company Accounting Oversight Board, or the
PCAOB. Our management or our auditors may conclude that our
efforts to remediate the problems identified were not successful
or that otherwise our internal control over financial reporting
is not effective. This could result in an adverse reaction in
the financial marketplace due to a loss of investor confidence
in the reliability of our reporting processes, which could
adversely impact the market price of our ADSs. We have incurred
significant costs and use significant management and other
resources in order to comply with Section 404 of the
Sarbanes-Oxley Act.
In the past, we had certain deficiencies in our internal
controls. For example, in the course of auditing our
consolidated financial statements for the year ended
December 31, 2006, our independent registered public
accounting firm noted and communicated to us a significant
deficiency and other weaknesses in our internal control over
financial reporting. The significant deficiency identified by
our independent registered public accounting firm was that our
chief financial officer joined us in August 2006 and that we did
not previously have any personnel who
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were familiar with United States generally accepted accounting
principles, or U.S. GAAP. We did not have sufficient
personnel with adequate expertise to ensure that we can produce
financial statements in accordance with U.S. GAAP on a
timely basis. Following the identification of this significant
deficiency and other weaknesses, we have adopted steps to
address them and to improve our internal control over financial
reporting generally. If we fail to maintain an effective system
of internal control over financial reporting, we may be unable
to accurately report our financial results or prevent fraud, and
investor confidence and the market price of our ADSs may be
adversely affected.
Our continued success depends, to a significant extent, on our
ability to attract, train and retain technicians and a skilled
labor force for our business. Recruiting and retaining capable
technicians, particularly those with expertise in the solar
power industry, are vital to our success. Our principal
operations are located at Xinyu city of Jiangxi province, a
relatively less developed region compared to coastal cities in
China. Our location adds difficulties to our recruiting efforts.
In addition, there exists substantial competition for qualified
technicians in the solar power industry, and there can be no
assurance that we will be able to attract or retain technicians.
Neither can we assure you that we will be able to recruit, train
and retain skilled workers. As we have disclosed in the risk
factor entitled “— We have recently expanded our
international business operations, and our failure
and/or
inexperience in such new endeavors could adversely affect our
business expansion strategies and harm our reputation,” we
now face additional difficulties in staffing our overseas
operations. If we fail to attract and retain qualified
employees, our business and prospects may be materially
adversely affected.
A significant portion of our sales is denominated in Renminbi.
Our costs and capital expenditures are largely denominated in
U.S. dollars and euros. Therefore, fluctuations in currency
exchange rates could have a material adverse effect on our
financial condition and results of operations. Fluctuations in
exchange rates, particularly among the U.S. dollar,
Renminbi and euro, affect our gross and net profit margins and
could result in foreign exchange and operating losses.
Our financial statements are expressed in U.S. dollars but
the functional currency of our principal operating subsidiaries,
Jiangxi LDK Solar, Jiangxi LDK Silicon and Jiangxi LDK Solar
Polysilicon Co., Ltd., or Jiangxi LDK Polysilicon, is Renminbi.
The value of your investment in our ADSs and other securities
will be affected by the foreign exchange rate between
U.S. dollars and Renminbi. In addition, to the extent we
hold assets denominated in U.S. dollars, including the net
proceeds to us from our various offerings of securities, any
appreciation of Renminbi against the U.S. dollar could
result in a change to our income statement and a reduction in
the value of our U.S. dollar denominated assets. On the
other hand, if we decide to convert our Renminbi amounts into
U.S. dollars for the purpose of making payments for
dividends on our shares or ADSs or for other business purposes,
including payments to service our convertible senior notes and
other foreign debt, a decline in the value of Renminbi against
the U.S. dollar could reduce the U.S. dollar
equivalent amounts of the Renminbi upon such conversion. In
addition, a depreciation of Renminbi against the
U.S. dollar could reduce the U.S. dollar equivalent
amounts of our financial results, the value of your investment
in our company and the dividends we may pay in the future, if
any, all of which may have a material adverse effect on the
price of our ADSs.
We incurred a net foreign currency exchange loss of
$1.3 million and $1.7 million during the years ended
December 31, 2006 and 2007, respectively, and we recorded a
net foreign currency exchange gain of $14.5 million and
$1.2 million for the year ended December 31, 2008 and
the nine months ended September 30, 2009, respectively. We
cannot predict the impact of future exchange rate fluctuations
on our results of operations and may incur additional net
foreign currency losses in the future. During 2007 and 2008, we
entered into certain foreign exchange forward contracts to
reduce the effect of our foreign exchange exposure. However, we
cannot assure you that such hedging activities will be effective
in managing our foreign exchange risk exposure.
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We are required to comply with all national and local
regulations regarding protection of the environment. Compliance
with environmental regulations is expensive. In addition, if
more stringent regulations are adopted by the PRC government in
the future, the costs of compliance with PRC environmental
protection regulations could increase. Upon the completion of
our polysilicon production facilities, we will use, generate,
store and discharge toxic, volatile and otherwise hazardous
chemicals and wastes in our R&D and production processes,
and we are subject to regulations and periodic monitoring by
local environmental protection authorities and are required to
comply with all PRC national and local environmental protection
laws and regulations.
Our polysilicon plant will use hazardous chemicals in the
production process. Under PRC environmental regulations, we are
required to obtain a safety appraisal approval before the
construction of our polysilicon production facilities, and we
are further required to undergo safety examination and obtain
approval with relevant governmental authorities after we have
completed the installation of our manufacturing equipment and
before the polysilicon production plant commences commercial
production. We must also register the hazardous chemicals to be
used in the production process with the relevant authorities and
to obtain safety permits, which include a permit for the storage
and use of hazardous chemicals and a permit for the use of
atmospheric pressure containers. We have not yet obtained all of
the necessary approvals and permits for our polysilicon
production plant and multicrystalline wafer manufacturing
facilities currently under construction, and we cannot assure
you that we will be able to obtain these approvals and permits
upon completion of the construction or commencement of
commercial production on a timely basis or at all. The relevant
governmental authorities have the right to impose fines or
deadlines to cure any non-compliance, or to order us to cease
construction or production if we fail to comply with these
requirements. If we fail to comply with present or future
environmental regulations, we may be subject to substantial
fines or damages or suspension of our business operations, and
our reputation may be harmed.
We are exposed to risks associated with product liability claims
in the event that the use of our solar wafers and ingots results
in injury. Since our solar wafers and ingots are made into
electricity producing devices, it is possible that users could
be injured or killed by devices that use our solar wafers and
ingots, whether by product malfunctions, defects, improper
installations or other causes. Due to our limited historical
experience, we are unable to predict whether product liability
claims will be brought against us in the future or to predict
the effect of any resulting adverse publicity on our business.
The successful assertion of product liability claims against us
could result in potentially significant monetary damages and
require us to make significant payments. Moreover, we do not
carry any product liability insurance and may not have adequate
resources to satisfy a judgment in the event of a successful
claim against us. We do not carry any business interruption
insurance. As the insurance industry in China is still in its
early stage of development, even if we decide to take out
business interruption coverage, such insurance available in
China offers limited coverage compared to that offered in many
other countries. Any business disruption or natural disaster
could result in substantial losses and diversion of our
resources.
We have developed various production process related know-how
and technologies in the production of solar wafers, ingots,
polysilicon and recycling of the STC produced as a by-product of
polysilicon production. We anticipate that we will also develop
various production process related know-how and technologies in
the production of polysilicon over time. Such know-how and
technologies play a critical role in our quality assurance and
cost reduction. In addition, we have implemented a number of
R&D programs with a view to developing techniques and
processes that will improve production efficiency and product
quality. Our intellectual property and proprietary rights
arising out of these R&D programs will be crucial in
maintaining our competitive edge in the solar wafer and
polysilicon industries. We currently do not have any patent or
patent application pending in China or elsewhere. We currently
use contractual arrangements with employees and trade secret
protections to protect our
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intellectual property and proprietary rights. Nevertheless,
contractual arrangements afford only limited protection and the
actions we may take to protect our intellectual property and
proprietary rights may not be adequate. In addition, others may
obtain knowledge of our know-how and technologies through
independent development. Our failure to protect our production
process related know-how and technologies
and/or our
intellectual property and proprietary rights may undermine our
competitive position. Third parties may infringe or
misappropriate our proprietary technologies or other
intellectual property and proprietary rights. Policing
unauthorized use of proprietary technology can be difficult and
expensive. Also, litigation, which can be costly and divert
management attention and other resources away from our business,
may be necessary to enforce our intellectual property rights,
protect our trade secrets or determine the validity and scope of
our proprietary rights. We cannot assure you that the outcome of
such potential litigation will be in our favor. An adverse
determination in any such litigation will impair our
intellectual property and proprietary rights and may harm our
business, prospects and reputation.
Our success depends on our ability to use and develop our
technology and know-how, to produce our polysilicon, solar
wafers and ingots and to sell our solar wafers and ingots
without infringing the intellectual property or other rights of
third parties. We do not have, and have not applied for, any
patents for our proprietary technologies in China or elsewhere.
We may be subject to litigation involving claims of patent
infringement or violation of intellectual property rights of
third parties. For example, in June 2008, an objection was filed
against Jiangxi LDK Solar regarding its trademark
“LDK”. The review proceeding is still pending. The
validity and scope of claims relating to solar power technology
patents involve complex scientific, legal and factual questions
and analyses and, therefore, may be highly uncertain. The
defense and prosecution of intellectual property suits, patent
opposition proceedings, trademark disputes and related legal and
administrative proceedings can be both costly and time consuming
and may significantly divert our resources and the attention of
our technical and management personnel. An adverse ruling in any
such litigation or proceedings could subject us to significant
liability to third parties, require us to seek licenses from
third parties, to pay ongoing royalties, or to redesign our
products, or subject us to injunctions prohibiting the
production and sale of our products or the use of our
technologies. Protracted litigation could also result in our
customers or potential customers deferring or limiting their
purchase or use of our products until resolution of such dispute.
We adopted a stock incentive plan in 2006. As of the date hereof, we have outstanding stock options
under our stock incentive plan with respect to
6,403,234 shares, all of which were granted to our
directors, employees, consultants and service providers. During
2008, as a result of the significant decreases of our share
prices amid the global economic slowdown and financial market
crisis, we and some of our optionees agreed to cancel some of
the previously granted, but not yet vested, stock options and to
replace them with newly granted options with similar terms at
lower exercise prices. In December 2004, the Financial
Accounting Standards Board, or FASB, issued Accounting Standards
Codification (“ASC”) Topic 718, “Share-Based
Payment.” This statement, which became effective in the
first quarter of 2006, prescribes how we account for share-based
compensation and may have an adverse impact on our results of
operations or the price of our ADSs. SFAS No. 123R
requires us to recognize share-based compensation, as
compensation expense in the statement of operations based on the
fair value of equity awards on the date of the grant, with the
compensation expense recognized over the period in which the
recipient is required to provide service in exchange for the
equity award. The additional expenses associated with
share-based compensation may reduce the attractiveness of
issuing stock options under our stock incentive plan. However,
if we do not grant stock options or reduce the number of stock
options that we grant, we may not be able to attract and retain
key personnel. If we grant more stock options to attract and
retain key personnel, the expenses associated with share-based
compensation may adversely affect our net income.
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Most
of our production, storage, administrative and R&D
facilities are located in close proximity to one another in
Xinyu city of Jiangxi province. Any damage or disruption at
these facilities would have a material adverse effect on our
business, financial condition and results of
operations.
Our production, storage, administrative and R&D facilities
are located in close proximity to one another in Xinyu city of
Jiangxi province in China. A natural disaster, such as fire,
floods, typhoons or earthquakes, snow storms, or other
unanticipated catastrophic events, including power interruption,
telecommunications failures, equipment failures, explosions,
fires, break-ins, terrorist acts or war, could significantly
disrupt our ability to manufacture our products and operate our
business. If any of our production facilities or material
equipment were to experience any significant damage or downtime,
we would be unable to meet our production targets and our
business would suffer. Any damage or disruption at these
facilities would have a material adverse effect on our business,
financial condition and results of operations.
Risks
Relating to Business Operations in China
China has been, and will continue to be, our primary production
base and currently almost all of our assets are located in
China. While the PRC government has been pursuing economic
reforms to transform its economy from a planned economy to a
market-oriented economy since 1978, a substantial part of the
PRC economy is still being operated under various controls of
the PRC government. By imposing industrial policies and other
economic measures, such as control of foreign exchange, taxation
and foreign investment, the PRC government exerts considerable
direct and indirect influence on the development of the PRC
economy. Many of the economic reforms carried out by the PRC
government are unprecedented or experimental and are expected to
be refined and improved over time. Other political, economic and
social factors may also lead to further adjustments of the PRC
reform measures. This refining and adjustment process may not
necessarily have a positive effect on our operations and our
future business development. Our business, prospects and results
of operations may be materially adversely affected by changes in
the PRC economic and social conditions and by changes in the
policies of the PRC government, such as measures to control
inflation, changes in the rates or method of taxation and the
imposition of additional restrictions on currency conversion.
Renminbi is not a freely convertible currency at present. The
PRC government regulates conversion between Renminbi and foreign
currencies. Changes in PRC laws and regulations on foreign
exchange may result in uncertainties in our financing and
operating plans in China. Over the years, China has
significantly reduced the government’s control over routine
foreign exchange transactions under current accounts, including
trade and service related foreign exchange transactions, payment
of dividends and service of foreign debts. In accordance with
the existing foreign exchange regulations in China, our PRC
subsidiaries may, within the scope of current account
transactions, pay dividends and service debts in foreign
currencies without prior approval from the PRC State
Administration of Foreign Exchange, or SAFE, by complying with
certain procedural requirements. However, there can be no
assurance that the current PRC foreign exchange policies with
respect to debt service and payment of dividends in foreign
currencies will continue in the future. Changes in PRC foreign
exchange policies may have a negative impact on our ability to
service our foreign currency-denominated indebtedness and to
distribute dividends to our shareholders in foreign currencies
since we, as a Cayman Islands holding company, rely on our
operating subsidiaries in China to convert their Renminbi cash
flow to service such foreign debt and to make such dividend
payments.
Foreign exchange transactions by our PRC subsidiaries under the
capital account continue to be subject to significant foreign
exchange controls. In particular, foreign exchange transactions
involving foreign direct investment, foreign debts and outbound
investment in securities and derivatives are subject to
limitations and require approvals from the relevant SAFE
authorities. We have the choice, as permitted by the PRC foreign
investment regulations, to invest our net proceeds from our
various offerings in the form of registered capital or a
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shareholder loan into our PRC subsidiaries to finance our
operations in China. Our choice of investment is affected by the
different treatments under the relevant PRC regulations with
respect to capital-account and current-account foreign exchange
transactions in China. For example, our transfer of funds to our
subsidiaries in China is subject to approval of PRC governmental
authorities in case of an increase in registered capital, or
subject to registration with PRC governmental authorities in
case of a shareholder loan. These and other limitations on the
flow of funds between us and our PRC subsidiaries could restrict
our ability to act in response to changing market conditions and
limit our flexibility in the management of our cash flow and
financings.
Our principal operating subsidiaries, Jiangxi LDK Solar, Jiangxi
LDK Silicon and Jiangxi LDK Polysilicon, are foreign-invested
enterprises in China and are subject to laws and regulations
applicable to foreign investments in China in general and laws
and regulations applicable to wholly foreign-owned enterprises
and sino-foreign joint venture enterprises in particular. The
PRC legal system is a civil law system based on written
statutes. Unlike the common law system, the civil law system is
a system in which decided legal cases have little precedential
value. When the PRC government started its economic reform in
1978, it began to formulate and promulgate a comprehensive
system of laws and regulations to provide general guidance on
economic and business practices in China and to regulate foreign
investments. China has made significant progress in the
promulgation of laws and regulations dealing with economic
matters such as corporate organization and governance, foreign
investment, commerce, taxation and trade. However, the
promulgation of new laws, changes in existing laws and
abrogation of local regulations by national laws may have a
negative impact on our business and prospects. In addition, as
these laws, regulations and legal requirements are relatively
recent and because of the limited volume of published cases and
their non-binding nature, the interpretation and enforcement of
these laws, regulations and legal requirements involve
significant uncertainties. These uncertainties could limit the
legal protections available to foreign investors, including you.
Under PRC laws and regulations effective prior to
January 1, 2008, a company established in China was
typically subject to a national enterprise income tax at the
rate of 30% on its taxable income and a local enterprise income
tax at the rate of 3% on its taxable income. The PRC government
provided various incentives to foreign-invested enterprises to
encourage foreign investments. Such incentives included reduced
tax rates and other measures. Foreign-invested enterprises that
were determined by PRC tax authorities to be manufacturing
companies with authorized terms of operation for more than ten
years were eligible for:
The local preferential enterprise income tax treatment was
within the jurisdiction of the local provincial authorities as
permitted under the prior PRC tax laws relating to
foreign-invested enterprises. The local tax authorities would
decide whether to grant any tax preferential treatment to
foreign-invested enterprises on the basis of their local
conditions. The Jiangxi provincial government announced that
energy companies with authorized terms of operation for more
than ten years were eligible for:
Under such pre-existing PRC tax laws and regulations, Jiangxi
LDK Solar, as a foreign-invested manufacturing enterprise, was
entitled to a two-year exemption from the national enterprise
income tax for 2006 and 2007 and would be subject to a reduced
national enterprise income tax rate of 15% from 2008 through
2010. Likewise, Jiangxi LDK Solar was entitled to a five-year
exemption from the local enterprise income tax beginning in 2006
and would be subject to a reduced local enterprise income tax
rate of 1.5% from 2011 through 2015.
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In March 2007, the PRC National People’s Congress enacted a
new Enterprise Income Tax Law, which became effective on
January 1, 2008. The new tax law imposes a unified income
tax rate of 25% on all domestic enterprises and foreign-invested
enterprises unless they qualify for preferential tax treatments
under certain limited exceptions. The new tax law and the
related regulations permit companies to continue to enjoy their
preferential tax treatments under the prior tax regime until
such treatments expire in accordance with their terms, on the
condition that such preferential tax treatments are available
under the grandfather clauses of the new tax law and the related
regulations. As a result, Jiangxi LDK Solar is subject to a
reduced unified enterprise income tax rate of 12.5% from 2008 to
2010 and will be subject to income tax at 25% starting from
2011. Jiangxi LDK Silicon and Jiangxi LDK Polysilicon do not
enjoy any preferential tax treatment in China. When our current
tax benefits expire or otherwise become unavailable to us for
any reason, our profitability may be adversely affected.
The PRC labor laws and regulations have a direct impact on our
business operations. In June 2007, the National People’s
Congress promulgated the Labor Contract Law of China, which
became effective on January 1, 2008. In September 2008, the
State Council adopted the relevant rules and regulations to
implement the new labor law. This labor contract law is aimed at
providing employees with greater protection in their employment
relationships. For example, the new labor contract law requires
employers to enter into written contracts with their employees,
and if an employer fails to enter into a written contract with
an employee within one month after the commencement of the
employment, the employer is required to pay to the employee
double salary for the noncompliance period for up to one year.
The new law also calls for open-ended employment contracts
rather than fixed-term contracts under specified circumstances.
The law further prohibits an employer from entering into a
one-year or shorter-term contract with an employee if it
constitutes the third consecutive renewal of the employment
contract unless it is so requested by the employee. As a result
of this more labor-friendly legislation, our discretion in the
hiring and termination process has been significantly curtailed,
which could in turn affect our overall labor costs and our
ability to adjust our labor needs in response to market changes.
Our business, financial condition and results of operations
could therefore be adversely affected by these PRC labor laws
and regulations.
We are a Cayman Islands holding company with substantially all
of our operations conducted through our operating subsidiaries
in China. Under the PRC Income Tax Law for Enterprises with
Foreign Investment and Foreign Enterprises effective prior to
January 1, 2008, any dividends payable by foreign-invested
enterprises, such as our PRC subsidiaries, to their non-PRC
investors, such as our Cayman Islands holding company, were
exempt from PRC withholding tax. In addition, any dividends
payable, or distributions made, by us to holders or beneficial
owners of our shares or ADSs were not subject to any PRC tax,
provided that such holders or beneficial owners, including
individuals and enterprises, were not deemed to be PRC residents
under the PRC tax law and were not otherwise subject to PRC tax.
Under the new PRC Enterprise Income Tax Law and its
implementation regulations, if our Cayman Islands holding
company continues to be treated as a foreign investor, or a
“non-resident enterprise” as defined in the new tax
law, dividends and distributions for earnings derived since
January 1, 2008 from our PRC subsidiaries to us will be
subject to a 10% withholding tax. The Cayman Islands where we
are incorporated has no tax treaty with China entitling us to
any withholding tax lower than 10%.
The new PRC Enterprise Income Tax Law, however, also provides
that enterprises established outside China whose “de facto
management bodies” are located in China are considered
“resident enterprises” and will generally be subject
to the uniform 25% enterprise income tax rate as to their global
income. Under the implementation regulations issued by the State
Council relating to the new PRC Enterprise Income Tax Law,
“de facto management body” is defined as the body that
has material and overall management control over the business,
personnel, accounts and properties of an enterprise. In April
2009, the PRC State Administration of Taxation promulgated a
circular to clarify the definition of “de facto management
body” for enterprises incorporated overseas with
controlling shareholders being PRC enterprises. However, it
remains unclear how the tax authorities will treat an overseas
enterprise invested or controlled by another overseas enterprise
and ultimately controlled by PRC
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individual residents as is in our case. We have not been
notified by the relevant tax authorities that we are treated as
a PRC resident enterprise. Since substantially all of our
management is currently based in China and may remain in China
in the future, we may be treated as a PRC resident enterprise
for PRC enterprise income tax purposes and subject to the
uniform 25% enterprise income tax on our global income excluding
the dividend income we receive from our PRC subsidiaries. You
should also read the risk factor entitled
“— Dividends payable by us to our foreign
investors and gains on the sale of our shares or ADSs may be
subject to withholding taxes under PRC tax laws” below. If
we are treated as such a PRC resident enterprise under the PRC
tax law, we could face significant adverse tax consequences
which could affect the value of your shares or ADSs.
Under the new PRC Enterprise Income Tax Law and its
implementation regulations, to the extent dividends from
earnings derived since January 1, 2008 are sourced within
China and we are considered a “resident enterprise” in
China, then PRC income tax at the rate of 10% would be withheld
from dividends payable by us to investors that are
“non-resident enterprises” so long as such
“non-resident enterprise” investors do not have an
establishment or place of business in China or, despite the
existence of such establishment or place of business in China,
the relevant income is not effectively connected with such
establishment or place of business in China. Any gain realized
on the transfer of our shares or ADSs by such investors would be
subject to a 10% PRC income tax if such gain is regarded as
income derived from sources within China and we are considered a
“resident enterprise” in China. If we are required
under the new tax law to withhold PRC income tax on our
dividends payable to our foreign shareholders or foreign holders
of our ADSs who are “non-resident enterprises,” or if
you are required to pay PRC income tax on the transfer of our
shares or ADSs, the value of your investment in our shares or
ADSs may be materially adversely affected. It is unclear
whether, if we are considered a PRC “resident
enterprise,” holders of our shares or ADSs might be able to
claim the benefit of income tax treaties or agreements entered
into between China and other countries or areas.
We are a holding company and rely principally on dividends, if
any, paid by our subsidiaries for cash requirements, including
the funds necessary to service any debt we incur and to pay any
dividend we declare. If any of our subsidiaries incurs debt in
its own name, the instruments governing the debt may restrict
dividends or other distributions on its equity interest to be
paid to us. Furthermore, applicable PRC laws, rules and
regulations permit payment of dividends by our PRC subsidiaries
on a combined basis only out of their retained earnings, if any,
determined in accordance with PRC accounting standards. Our PRC
subsidiaries are required to set aside a certain percentage of
their after-tax profit based on PRC accounting standards each
year for their reserve fund in accordance with the requirements
of relevant PRC laws and the relevant provisions in their
respective articles of associations. As a result, our PRC
subsidiaries combined may be restricted in their ability to
transfer any portion of their net income to us whether in the
form of dividends, loans or advances. Any limitation on the
ability of our subsidiaries to pay dividends to us could
materially adversely limit our ability to grow, make investments
or acquisitions that could be beneficial to our businesses, pay
dividends, service our debts, or otherwise fund and conduct our
business. Under the new PRC Enterprise Income Tax Law and its
implementation regulations, PRC income tax at the rate of 10% is
applicable to dividends payable for earnings derived since
January 1, 2008 by PRC enterprises to “non-resident
enterprises” (enterprises that do not have an establishment
or place of business in China, or that have such establishment
or place of business in China but the relevant income is not
effectively connected with such establishment or place of
business), subject to any lower withholding tax rate as may be
contained in any income tax treaty or agreement that China has
entered into with the government of the jurisdiction where such
“non-resident enterprises” were incorporated. If we
are considered as a “non-resident enterprise” under
the PRC tax law, any dividend that we receive from our PRC
subsidiaries may be subject to PRC taxation at the 10% rate.
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Recent
PRC regulations relating to the establishment of offshore
special purpose companies by PRC residents may subject our PRC
resident shareholders to personal liability and limit our
ability to acquire PRC companies or to inject capital into our
PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us, or otherwise materially adversely
affect us.
SAFE issued a public notice in October 2005, together with its
subsequent implementation procedures and clarifications, to
require PRC residents, both legal and natural persons, to
register with the local SAFE branches before they establish or
take control of any company outside China for the purpose of
acquiring any asset of or equity interest in PRC companies and
raising funds overseas. SAFE refers to such companies outside
China as “offshore special purpose companies” in its
notice. In addition, SAFE also requires any PRC resident that is
the shareholder of an offshore special purpose company to amend
its SAFE registration with respect to the offshore special
purpose company in connection with any increase or decrease of
capital, transfer of shares, merger, division, equity investment
or creation of any security interest over any assets located in
China. If any PRC shareholder of an offshore special purpose
company fails to make the required SAFE registration and
amendment, the PRC subsidiaries of that offshore special purpose
company may be prohibited from distributing their profits and
the proceeds from any reduction in capital, share transfer or
liquidation to the offshore special purpose company. Moreover,
failure to comply with such SAFE registration and amendment
requirements could result in liabilities under the PRC law for
the evasion of applicable foreign exchange restrictions. Our
current beneficial owners who are PRC residents have registered
with SAFE as required under the SAFE notice. The failure of
these beneficial owners to amend their SAFE registrations in a
timely manner pursuant to the SAFE notice or the failure of our
other future beneficial owners who are PRC residents to comply
with the SAFE registration requirements may subject such
beneficial owners to fines and legal sanctions, and may also
result in restrictions on our PRC subsidiaries in their
abilities to distribute profits to us, or may otherwise
materially adversely affect our business.
On March 28, 2007, SAFE issued the Operating Procedures on
Administration of Foreign Exchange Regarding Participation by
PRC Individuals in Employee Stock Ownership Plan and Stock
Option Plan of Overseas Listed Companies, or the Stock Option
Rule. It is not clear whether the Stock Option Rule covers any
type of equity compensation plans or incentive plans which
provide for the grant of ordinary share options or authorize the
grant of restricted share awards. For plans which are so covered
and are adopted by an overseas listed company, the Stock Option
Rule requires the employee participants who are PRC citizens to
register with SAFE or its local branch within ten days of the
beginning of each quarter. In addition, the Stock Option Rule
also requires the employee participants who are PRC citizens to
follow a series of requirements on making necessary applications
for foreign exchange purchase quota, opening special bank
account and filings with SAFE or its local branch before they
exercise their stock options.
The Stock Option Rule has not yet been made publicly available
or formally promulgated by SAFE, but SAFE has begun enforcing
its provisions. Nonetheless, it is not predictable whether SAFE
will continue to enforce this rule or adopt additional or
different requirements with respect to equity compensation plans
or incentive plans. Although we have assisted our employees with
registration with the Jiangxi branch of SAFE for our stock
option plan according to the Stock Option Rule, failure to
comply with such provisions may subject us and the participants
of our employee stock option plan who are PRC citizens to fines.
To date, we have not received any notice from SAFE or its local
branch regarding any legal sanctions to us or our employees. If
it is determined that our employee stock option plan is subject
to the Stock Option Rule, failure to comply with such provisions
may subject us and the participants of our employee stock option
plan who are PRC citizens to fines and legal sanctions and
prevent us from further granting options under our employee
stock option plan to our employees, which could adversely affect
our business operations.
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Our business could be adversely affected by the effects of
influenza A (H1N1), avian flu, SARS, or other epidemic
outbreaks. In April 2009, an outbreak of influenza A caused by
the H1N1 virus occurred in Mexico and the United States, and
spread into a number of countries rapidly. There have been
reports of outbreaks of a highly pathogenic avian flu, caused by
the H1N1 virus, in certain regions of Asia and Europe. Over the
years, there have been reports on the occurrences of avian flu
in various parts of China, including a few confirmed human
cases. An outbreak of avian flu in the human population could
result in a widespread health crisis that could adversely affect
the economies and financial markets of many countries,
particularly in Asia. Additionally, any recurrence of SARS, a
highly contagious form of atypical pneumonia, similar to the
outbreaks in 2003 which affected China, Hong Kong, Taiwan,
Singapore, Vietnam and certain other countries, could also have
similar adverse effects of a similar scale. Any prolonged
occurrence or recurrence of these contagious diseases or other
adverse public health developments may have a material adverse
effect on our business operations. These include limitations on
our ability to travel or ship our products outside China as well
as temporary closure of our production facilities for quarantine
or for preventive purposes. Such closures or travel or shipment
restrictions could severely disrupt our business operations and
adversely affect our financial condition and results of
operations. We have not adopted any written preventive measures
or contingency plans to combat any health epidemics and other
outbreaks of contagious diseases, including influenza A (H1N1),
avian flu, or SARS.
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SUPPLEMENTAL
INFORMATION ABOUT US
We are the world’s largest producer of solar wafers in
terms of capacity, according to Solarbuzz, a third-party market
research firm. We have been expanding our business to meet the
solar industry’s requirements for high-quality and low-cost
solar materials, modules, systems and solutions. We are
currently ramping up our polysilicon production capacity, and we
intend to continue to pursue our strategy of the vertical
integration by expanding our downstream business.
We believe our production is cost-effective due to our efficient
production process, China-based production facilities, R&D
and economy of scale, enabling us to reduce our unit production
cost. We use advanced equipment for our wafer production.
Coupled with the
know-how we
have gained during the years, we have developed process
technologies that enable us to increase yield, improve quality
and reduce costs.
We sell multicrystalline and monocrystalline wafers globally to
manufacturers of solar cells and modules. Solar wafers are the
principal raw material used to produce solar cells, which are
devices capable of converting sunlight into electricity. We also
sell solar materials, which include ingots, and other chemicals
used to produce polysilicon and solar wafers. In addition, we
provide wafer processing services. As of September 30,
2009, we had an annualized wafer production capacity of
approximately 1.7 GW and we intend to increase our production
capacity to 2.0 GW in the first half of 2010. Our production
operations are primarily located in Xinyu City of Jiangxi
Province, China.
As part of our vertical integration strategy, we have
constructed two polysilicon production facilities near our wafer
production facilities. As of September 30, 2009, we had an
annualized polysilicon production capacity of 6,000 MT. We have
implemented a modified Siemens process to produce
solar-grade
polysilicon. In our first facility, we commenced commercial
production in the third quarter of 2009 and currently have an
annualized polysilicon production capacity of 1,000 MT. We
intend to increase the annualized production capacity of the
first facility to 3,000 MT by the end of 2010. In our second
facility, we have been in the process of building out three
separate trains, each with a
5,000-MT
annualized production capacity. In September 2009, we commenced
production at the first
5,000-MT
train, thereby increasing our aggregate annualized production
capacity to 6,000 MT. We expect our second train to commence
production in early 2010 and our third train in the second half
of 2010. We have completed the installation of the closed-loop
production process for our first facility and expect to complete
such installation for the second facility in early 2010. Our
closed-loop polysilicon production process is designed so we are
able to internally produce and use many of the key chemicals and
gases required to make silicon, such as TCS, HCl and hydrogen,
while also recycling the residual STC for the polysilicon
production process. We intend to increase our total annualized
polysilicon production capacity to 18,000 MT by the end of 2010.
As part of the strategy to reduce wafer production costs, we
intend to consume all of the polysilicon output in our wafer
production. We will also consider selling any surplus output to
customers.
In the third quarter of 2009, we commenced sales of solar
modules to developers, distributors and system integrators. Our
modules have been certified in various European countries and
the U.S. We currently procure modules or outsource the cell and
module production on a tolling basis with the wafers we provide.
We source most of our modules from Best Solar, a solar module
producer controlled by Mr. Xiaofeng Peng, our chairman, chief
executive officer and principal shareholder. We sell our modules
under our own brand name and also on an OEM basis for our
customers. We intend to develop and expand our module business
to approximately 1.5 GW by further developing our in-house
production capabilities
and/or
potential acquisitions. We are also establishing an R&D
line for high-efficiency solar cells with an annualized
production capacity of 60 MW.
We develop solar projects in Europe and China and may enter
additional markets in the future, including through joint
ventures or project partnerships. We intend to sell such
projects to third parties upon completion of their development.
We also provide EPC services in China.
Our principal customers include CSI,
E-Ton,
Gintech, Hyundai, Motech, Neo Solar, and Q-Cells.
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Our organizational structure is as follows:
Solar power has been one of the most rapidly growing renewable
energy sources in the world today. The PV industry has
experienced significant growth over the past decade. According
to Solarbuzz, a third-party research firm, the PV industry is
expected to grow from 5.9 GW in 2008 to 14.8 GW in 2013,
representing a five-year CAGR of 20.2%. We believe the following
factors have driven the global demand in the PV industry for the
past decade and will continue to play an important role in the
future of the PV industry:
The current global economic slowdown and financial market
crisis, however, are posing a tremendous challenge to the future
development of the global PV industry. Some of the key
challenges faced by the solar power industry include:
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We believe that our rapid growth and strong market position are
largely attributable to our following principal competitive
strengths:
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We intend to pursue the following strategies:
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We manufacture and sell multicrystalline solar wafers. We
currently produce and sell multicrystalline wafers in three
principal sizes of 125 by 125 millimeters, or mm, 150 by
150 mm and 156 by 156 mm, and with thicknesses from 180 to
220 microns. We began manufacturing monocrystalline wafers in
the second quarter of 2009.
We also provide wafer processing services to manufacturers of
monocrystalline and multicrystalline solar cells and modules,
who provide us with their own silicon materials, such as
polysilicon feedstock and ingots. We process the feedstock
provided by the manufacturers to produce ingots. We then slice
such ingots and ingots provided by our customers into wafers to
be delivered back to our customers. We charge a fee based on the
number of wafers processed and the type of materials we receive.
In addition, we also sell silicon materials, which include
ingots and polysilicon scraps.
Manufacturing of multicrystalline wafers can be divided into two
main steps:
We manufacture multicrystalline and monocrystalline wafers and
ingots at our facilities in Xinyu city, Jiangxi province, China.
Our wafer manufacturing facilities occupy a site area of
approximately 1.3 million square meters in Xinyu Hi-Tech
Industrial Park of the high-tech development zone of Xinyu city.
We began manufacturing monocrystalline wafers in the second
quarter of 2009. Casting process for monocrystalline wafers is
generally more expensive than that for multicrystalline wafers
with similar dimensions. However, monocrystalline wafers are
generally more efficient than multicrystalline wafers because
the increased conductivity of electrons in monocrystalline
silicon yields higher energy conversion rates than
multicrystalline silicon.
We have been improving our technologies and expertise to
optimize the mix of polysilicon feedstock of different grades
and to ensure and improve our multicrystalline polysilicon
yield. We use wire saws rather than band
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saws in our squaring. This enables us to reduce silicon material
loss in the squaring processes, or kerf loss. We use automatic
wafer cleaning and sorting equipment to improve sorting
efficiency and reduce breakage.
We recover some of our slurry through third-party service
providers. We have also purchased slurry recovery systems from
Applied Materials and GT Solar to recover the slurry internally.
As of September 30, 2009, we had installed two slurry
recovery systems. We intend to install additional slurry
recovery systems as we expand our production capacity. The
slurry recovery ratio of these systems is over 75%. Through
additional research and development, we endeavor to recycle and
re-use as many of our production consumables as possible. This
is not only a cost reduction measure, but also an important part
of our environmentally friendly program.
Our manufacturing capacity of solar wafers as of
September 30, 2009 was approximately 1.7 GW on an
annualized basis.
In August 2007, we commenced the construction of our polysilicon
production plant located near our solar wafer manufacturing
facilities in Xinyu city of Jiangxi province in China to produce
solar-grade virgin silicon feedstock for use in our production
of multicrystalline and monocrystalline solar wafers. Our
polysilicon production plant consists of two factories, one with
an estimated annual installed polysilicon production capacity of
15,000 MT and the other with an estimated annual installed
polysilicon production capacity of 1,000 MT. We plan to
expand the annualized production capacity of the 1,000-MT
factory to 3,000 MT. We completed the first production run in
the 1,000-MT factory in January 2009. We have completed the
installation of the closed-loop production process in our
1,000-MT factory and expect to achieve closed-loop operation at
this factory in early 2010. With respect to the 15,000-MT
factory, we have completed production at our first train with an
annualized polysilicon production capacity of 5,000 MT. We
expect to commence production at our second 5,000-MT train in
early 2010 and our third 5,000-MT train in the second half of
2010. Our 15,000-MT factory is also designed for closed-loop
operation and we expect to achieve closed-loop operation when we
commence commercial production. We have substantially completed
the construction of our TCS and HCl production facilities on the
site of the 15,000-MT factory, which are designed to meet the
top-up
requirement in our closed-loop polysilicon production process.
We expect to commence TCS and HCl production on the same
schedule as we commence polysilicon production. Polysilicon
produced at our plant will be used primarily for the
manufacturing of our solar wafers. We have engaged Fluor to
provide general engineering, procurement, construction and
management services for our polysilicon production plant at our
Xinyu site.
We produce solar-grade pure polysilicon at our facilities in
Xinyu city, Jiangxi province, China. Our polysilicon production
facilities occupy a site area of approximately 1.2 million
square meters in the
Xinyu Hi-Tech
Industrial Park next to our other principal production
facilities and 0.4 million square meters in the Yushui
Xiacun Industrial Park in Xinyu city, approximately
15 kilometers away from our facilities at the Xinyu Hi-Tech
Industrial Park.
In the third quarter of 2009, we began selling solar modules and
sold 9.4 MW of modules to our European distributor customers.
The majority of our modules bear our brand. We plan to expand
our distribution to the U.S. and Canadian markets. We
plan to sell 400 to 600 MW of modules in 2010.
Our solar module warranty period lasts for 20 to 25 years.
As a result, we bear the risk of warranty claims long after we
have sold our products and recognized revenues.
We commenced our PV-related EPC business in China in the first
quarter of 2009. In response to the domestic market demand, in
addition to selling our solar modules produced primarily out of
our wafers, we often provide the related EPC services. We also
develop projects in Europe and China.
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We both own and lease properties for our operations. When we
state that we own certain properties in China, we own the
relevant land use rights because land is owned by the PRC state
under the PRC land system.
We own the land use rights to the underlying parcel of land for
our production facilities, including both our wafer
manufacturing and polysilicon production facilities, located at
the Hi-Tech Industrial Park, Xinyu city, Jiangxi province of
China. In 2009, we acquired additional land use rights for a
total site area of 1,815,077 square meters located in Xinyu
city for $67.0 million. As of September 30, 2009, the
total site area that we owned was approximately
5,958,317 square meters for an original term of
50 years and renewable upon its expiration. The gross floor
areas of our plants in the Xinyu Hi-Tech Industrial Park,
Nanchang High Tech Industry Development Zone and the Yushui
Xiacun Industrial Park were approximately 817,367 square
meters, 207,230 square meters and 100,355 square
meters, respectively, as of September 30, 2009. We occupy
our owned properties for purposes of production, R&D and as
our headquarters office and employee living quarters.
We currently lease 208 square meters of office space in
Shanghai from an independent third party. This lease will expire
in December 2011.
We also lease a 2,860-square-foot office space in Sunnyville,
California, from an independent third party. This lease will
expire in April 2010.
In addition, we lease a 1,617-square-foot office space in Hong
Kong from an independent third party. This lease will expire in
January 2011.
We have entered into the following material agreement since the
beginning of 2009:
We have amended
and/or
supplemented a number of our existing long-term agreements with
our principal customers as summarized below:
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We have amended
and/or
supplemented a number of the long-term polysilicon feedstock
supply agreements with our principal polysilicon feedstock
suppliers. These amendments and supplements provide for
postponement of deliveries, adjustment to feedstock pricing by
reference to the current market, and changes to feedstock
requirements in kind and in volume. We have made prepayments to
such suppliers under these feedstock supply agreements. We have
limited long-term feedstock purchase commitments.
We have also amended
and/or
supplemented some of our major equipment supply agreements with
our principal equipment suppliers. These amendments and
supplements provide for postponement of deliveries of some of
our equipment, such as DSS furnaces, ordered to expand our
wafering business. We have also postponed the deliveries of a
limited amount of our polysilicon production equipment, mostly
ordered for the third 5,000-MT train in our 15,000-MT
polysilicon factory.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations for the Nine Months Ended September 30,
2009
You should read the following discussion and analysis of our
financial condition and results of operations in conjunction
with our unaudited condensed consolidated financial statements
as of and for the nine months ended September 30,
2008 and 2009 included in this report beginning
on
page F-1,
“Item 5. Operating and Financial Review and
Prospects” in our 2008 20-F report, our audited financial
statements for the year ended December 31, 2008 in our 2008
20-F report and our amended consolidated financial statements as
of December 31, 2007 and 2008, and for each of the years in
the three-year period ended December 31, 2008, adjusted to
give effect to the retrospective application of the relevant
provisions of FASB ASC Subtopic 470-20. Accounting for
Convertible Debt Instruments That May Be Settled in Cash Upon
Conversion (Including Partial Cash Settlement) contained in our
report on Form 6-K of June 19, 2009.
The following discussion and analysis contain forward-looking
statements that involve risks and uncertainties. Our actual
results and the timing of selected events could differ
materially from those anticipated in these forward-looking
statements as a result of various factors, including those set
forth under “Risk Factors” in this
report.
In the following discussion and analysis, “we,”
“us,” “our company” or “LDK Solar”
refers to LDK Solar Co., Ltd. and its predecessor entities and
its subsidiaries.
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Results
of operations
Net sales. For the nine months ended
September 30, 2009, our net sales were approximately
$793.4 million, representing a decrease of
$423.4 million from our net sales of $1,216.9 million
for the nine months ended September 30, 2008. This decrease
was primarily due to the decline in the average selling price of
our wafers, partially offset by an increase in processing
volume. Demand for our wafers declined in the fourth quarter of
2008 and first quarter of 2009 due to the global economic
slowdown and crisis in the global financial market but recovered
beginning in the middle of the second quarter of 2009. In
addition, the rapid expansion in production capacity by
polysilicon producers has resulted in an increase in supply of
polysilicon materials worldwide, thereby resulting in a decrease
in polysilicon prices. The combined effect of the decrease in
our wafers demand and increase in polysilicon supply has
resulted to significant decline in the average selling price of
our wafers since the fourth quarter of 2008. Although the demand
in our wafers has grown significantly since the second quarter
of 2009 and our wafer sales and processing volume increased by
197 MW, or 35%, from 561 MW during the nine months
ended September 30, 2008 to 758 MW during the nine
months ended September 30, 2009, the increase in sales
volume was offset by the decrease in average selling price of
our wafers by 52% from $2.4 per watt during the nine months
ended September 30, 2008 to $1.16 per watt during the nine
months ended September 30, 2009. Net sales of our wafers
decreased by $420.3 million, from $1,125.4 million for
the nine months ended September 30, 2008 to
$705.1 million for the nine months ended September 30,
2009. The decrease in wafer net sales was partially offset by
net sales of $21.0 million of our modules as we commenced
solar module sales in the third quarter of 2009.
Cost of goods sold. For the nine months ended
September 30, 2009, our cost of goods sold was
approximately $937.3 million, representing an increase of
$20.2 million from our cost of goods sold of
$917.1 million for
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the nine months ended September 30, 2008. The increase in
costs of goods sold was due to an increase in volume production
and an increase in inventory write-down, which amounted to
$177.5 million in the nine months ended September 30,
2009. The rapid downturn of the global economy and the crisis in
the global financial markets beginning during the second half of
2008 resulted in significant price declines for both solar
wafers and polysilicon feedstock since the fourth quarter of
2008, which caused a significant decline in the estimated net
realizable value of our inventories that we had previously
purchased at higher costs when there was a polysilicon shortage.
However, the price decline in polysilicon feedstock also lowered
our costs of raw materials consumed for wafer production, as
polysilicon accounts for a significant portion of our total
costs of production. In particular, our weighted average
purchase price of polysilicon feedstock decreased from
$257 per kilogram for the nine months ended
September 30, 2008 to $95 per kilogram for the nine
months ended September 30, 2009. As a result, our costs of
goods sold only increased by 2.2% while sales volume increased
by 35% for the nine months ended September 30, 2009 as
compared to the nine months ended September 30, 2008.
Gross profit (loss). For the nine months ended
September 30, 2009, our gross loss was $143.8 million,
compared to a gross profit of $299.8 million for the nine
months ended September 30, 2008. Decrease in gross profit
in the nine months ended September 30, 2009 was primarily
due to the decline in net sales and the inventory
write-down
of $177.5 million resulting from the significant price
decline in the selling price of our wafers and net realizable
value of inventories. Our gross margin declined from a profit
margin of 25% during the nine months ended September 30,
2008 to a loss margin of 18% during the nine months ended
September 30, 2009, primarily due to an increase in
inventory
write-down
by $169.3 million and decrease in average selling price by 52%,
partially offset by a reduction in unit cost of wafer production
by 63%.
Operating expenses. For the nine months ended
September 30, 2009, our operating expenses were
$70.2 million, an increase of $31.1 million from our
operating expenses of $39.1 million for the nine months
ended September 30, 2008. This increase was primarily due
to an increase of approximately $26.9 million in our
general and administrative expenses, which increased primarily
due to (1) a $10.5 million provision for doubtful
recoveries of prepayment to suppliers resulting from certain
suppliers, failure to deliver to us polysilicon feedstock and
refund our prepayments, (2) an increase in salary and
welfare expenses, (3) an increase in depreciation and
amortization and (4) higher legal and professional expenses
relating to contract disputes with our customers and suppliers.
Interest income and expense. For the nine
months ended September 30, 2009, our interest income was
approximately $1.8 million, a decrease of $3.1 million
from our interest income for the nine months ended
September 30, 2008 of approximately $4.9 million. The
decrease was primarily due to the decrease in our average
balance of cash on deposit in interest-bearing savings accounts
since our convertible notes offering and follow-on offering of
4.8 million ADSs in 2008. For the nine months ended
September 30, 2009, our interest expense and amortization
of convertible senior notes issuance costs and debt discount
increased to $35.6 million from $28.5 million for the
nine months ended September 30, 2008 as a result of an
increase in our bank borrowings to finance our working capital
needs and capital expenditures and additional four months of
interest on amortization charges for the convertible senior
notes that we issued in April 2008, the combined effect of which
was partially offset by the decrease in interest rates in our
bank borrowings.
Foreign currency exchange gain, net. For the
nine months ended September 30, 2009, our foreign currency
exchange gain, net, was $1.2 million, a decrease by
$8.4 million from our foreign currency exchange gain, net,
of $9.5 million for the nine months ended
September 30, 2008. This was primarily because the US
dollar depreciated considerably against the Renminbi for the
nine months ended September 30, 2008 while the exchange
rate of the US dollar remained stable against the Renminbi for
the nine months ended September 2009, and our PRC operating
subsidiaries, whose functional currency is Renminbi, held
foreign currency denominated liabilities on a net basis for the
nine months ended September 30, 2008 and 2009.
Government subsidies. For the nine months
ended September 30, 2009, government subsidies received and
recognized as other income totaled $17.4 million, compared
to $14.3 million for the nine months ended
September 30, 2008. The increase in government subsidy was
primarily due to the increase in subsidy of $15.2 million
paid by the local government as an incentive for our development
of wafer industry at Xinyu city, which was partially offset by
the decrease in subsidy of $12.1 million in connection with
our tax payments to the national tax bureau,
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which are calculated based on the portion of tax revenue
allocated to the local city government by the PRC central
government. Our government subsidy did not include a subsidy of
$63.2 million received from the local government during the
nine month period ended 2009, for obtaining the land use rights
in relation to our production operation in China, which was
deferred and amortized as a reduction of the amortization
charges for the related pieces of land over their respective
lease period.
Equity in income (loss) for an associate and a
jointly-controlled entity. For the nine month
ended September 30, 2009, our equity in loss for an
associate and a jointly-controlled entity was $5.3 million,
compared to our equity in income of $118,000 for the nine months
ended September 30, 2008 primarily because our
jointly-controlled entity, which was established in the first
quarter of 2009 and was 51% owned by us, incurred losses of
$10.2 million as the net realisable value of the solar
power plant project that was in development for sales by the
jointly-controlled entity was lower than the estimated
construction costs to completion as of September 30, 2009.
Change in fair value of prepaid forward
contracts. For the nine months ended
September 30, 2008, we had unrealized income of
$60.0 million from the fair value change in the prepaid
forward contracts which we entered into on April 9, 2008 in
connection with our offering of the convertible senior notes.
The prepaid forward contracts were initially recognized as
assets and measured at fair value as the contracts could only be
settled in cash on the issuance date and were reclassified as a
reduction of additional paid-in capital in equity when the
conditions for physical settlement in shares were met on
June 17, 2008. The change in fair value of the prepaid
forward contracts of $60.0 million from the issuance date
to June 17, 2008, which was based on the change in the
market price of our ADSs, the underlying securities of the
prepaid forward contracts, was recorded as other income for the
nine months ended September 30, 2008. We had no such income
in the nine months ended September 30, 2009.
Income tax benefit (expense). For the nine
months ended September 30, 2009, our income tax benefit
totaled $24.6 million as compared to income tax expense of
$35.6 million for the nine months ended September 30,
2008 because we incurred a loss before income tax of
$234.6 million. Jiangxi LDK Solar was our principal
operating subsidiary during the nine months ended
September 30, 2008 and 2009. Jiangxi LDK Solar is entitled
to an exemption from the PRC enterprise income tax for two years
beginning from January 1, 2006 and a reduced income tax
rate of 12.5% for three years beginning from January 1,
2008. Our effective income tax rate remained stable at 11.1% and
10.5% for the nine months ended September 30, 2008 and
2009, respectively. The effective income tax rate in the
relevant periods was lower than the applicable tax rate of
Jiangxi LDK Solar of 12.5% primarily because we incurred
share-based compensation expenses as well as interest and
amortization expenses relating to our convertible notes that
were not deductible for tax purposes. Decrease in our effective
income tax rate in the nine months ended September 30, 2009
was primarily due to the increase in interest expenses and
amortization expenses relating to our convertible notes as
compared with the nine months ended September 30, 2008.
Net income (loss). For the nine months ended
September 30, 2009, our net loss after taxes before
non-controlling interests was $210.0 million, compared to a
net income of $285.4 million for the nine months ended
September 30, 2008. This decrease was primarily due to the
decrease in net sales and increase in provision for inventory
write-down.
Loss attributable to non-controlling
interests. For the nine months ended
September 30, 2009, we had a loss attributable to
non-controlling interests of $60,000. Those subsidiaries which
are not wholly-owned by us were newly established or acquired in
Europe for our development of solar power plant projects and
majority of them were still at the start-up stage. We had no
loss attributable to non-controlling interests as all those
subsidiaries were either established or acquired during the nine
month period ended September 30, 2009.
Net income (loss) attributable to LDK Solar Co., Ltd.
shareholders. As a result of the foregoing, for
the nine months ended September 30, 2009, our net loss to
ordinary shareholders was $209.9 million. Our net income
available to ordinary shareholders for the nine months ended
September 30, 2008 was $285.4 million.
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The following table sets forth a summary of our net cash flows
for the periods indicated:
During the nine months ended September 30, 2008, our net
cash provided by operating activities was $353.5 million
because we had an $553.5 million increase in advance
payments received from our customers for future sales, which was
partially offset by an increase in our inventory by
$311.4 million, an increase in our prepayments to suppliers
by $148.5 million to secure our future sources of raw
materials, and an increase in our pledged bank deposits by
$35.4 million. We pledged such bank deposits as security
for the issuance of letters of credit and letters of guarantee
primarily in connection with our purchases of polysilicon
feedstock and sales of wafers.
During the nine months ended September 30, 2009, our net
cash used in operating activities was $95.2 million because
of an increase in our trade accounts receivable and bills
receivable of $154.2 million as a result of our offering a
credit period to more customers instead of requiring prepayment
in 2009 in light of recent changes to industry practice, an
increase in our pledged bank deposit by $17.2 million and
an increase in our prepayments to suppliers by $9.6 million
to secure our future sources of raw materials.
During the nine months ended September 30, 2008, our net
cash used in investing activities amounted to
$869.5 million, mainly as a result of our purchases of
property, plant and equipment for $743.0 million, purchase
of additional land use rights at our Xinyu Hi-Tech Industry Park
site for $67.1 million for the expansion of our wafer
manufacturing capacity and the construction of our polysilicon
plants and our pledged bank deposits of $57.1 million
relating to purchases of property, plant and equipment.
During the nine months ended September 30, 2009, our net
cash used in investing activities amounted to
$661.1 million, mainly as a result of investments in
additional property, plant and equipment for
$598.8 million, purchase of additional land use rights at
our Xinyu Hi-Tech Industrial Park site for $14.5 million
and cash paid for investment in an associate and a
jointly-controlled entity of $74.5 million. We pledged such
bank deposits as security for the issuance of letters of credit
in connection with our purchases of property, plant and
equipment.
During the nine months ended September 30, 2008, our net
cash provided by financing activities amounted to
$778.7 million, mainly as a result of net proceeds of
$905.9 million from our issuance of ordinary shares and
convertible senior notes and our net bank borrowings during the
period. Our aggregate new loans and borrowings during the nine
months ended September 30, 2008 amounted to
$671.0 million. We repaid an aggregate principal amount of
$358.9 million of our loans and borrowings during the
period. We prepaid $199.4 million relating to our prepaid
forward contracts in connection with the offering of our
convertible senior notes in April 2008.
During the nine months ended September 30, 2009, our net
cash provided by financing activities amounted to
$566.5 million, mainly as a result of the net proceeds of
$581.7 million from our net bank borrowings during the
period. Our aggregate new loans and borrowings during the nine
months ended September 30, 2009 amounted to
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$1,783.0 million. We repaid an aggregate principal amount
of $1,201.3 million of our loans and borrowings during the
period.
The aggregate principal amount of our short-term bank borrowings
and current installments of long-term bank borrowing,
outstanding as of December 31, 2008 and September 30,
2009 was $666.2 million and $1,103.8 million,
respectively. The aggregate principal amount of our long-term
bank borrowings outstanding, excluding current portions, as of
December 31, 2008 and September 30, 2009 was
$154.3 million and $298.9 million, respectively.
As of September 30, 2009, our short-term borrowings and
current installments of long-term bank borrowing, amounted to
$1,103.8 million. The short-term bank borrowings
outstanding as of September 30, 2009 had maturity terms
ranging from three to 12 months and interest rates ranging
from 1.126% to 7.391% and a weighted average interest rate of
4.654%. These loans were obtained from various financial
institutions. The proceeds from these short-term bank borrowings
were for working capital purposes. Certain of these outstanding
borrowings amounting to approximately $82.7 million
borrowed by Jiangxi LDK Solar contain interest rate adjustment
provisions. If Jiangxi LDK Solar’s debt-to-asset ratio
exceeds 65% calculated based on its financial statements
prepared under PRC GAAP, the Bank of China would increase the
interest rate currently charged on the borrowings by 5%. On the
other hand, if Jiangxi LDK Solar’s debt to asset ratio is
maintained at less than 40%, the interest rate charged on those
bank borrowings would be reduced by 5%. As of September 30,
2009, Jiangxi LDK Solar’s debt to asset ratio was 74%.
Jiangxi LDK Solar has received a waiver letter dated
December 16, 2009 from the Bank of China that these
interest rate adjustment provisions will not apply to these
outstanding borrowings in the year of 2009. These loan
facilities contain no specific renewal terms, but we expect to
be able to obtain extensions of some of the loan facilities
shortly before they mature. We plan to repay these short-term
bank borrowings with cash generated by our operating activities
in the event we are unable to obtain extensions of these
facilities or alternative funding in the future. A substantial
portion of our short-term loans were secured by certain of our
buildings, land use rights, plant and machinery, pledged bank
deposits and raw materials.
As of September 30, 2009, we had total long-term bank
borrowings of approximately $298.9 million with interest
rates ranging from 2.661% to 8.000%.
As of September 30, 2009, we had a working capital deficit
of $1,151.7 million, that is, our total current liabilities
of $2,250.3 million exceeded our total current assets of
$1,098.6 million. We had an accumulated deficit of
$8.5 million. During the nine months ended
September 30, 2009, we incurred a net loss of
$209.9 million and used $95.2 million of cash in
operations. We had cash and cash equivalents of
$67.8 million, most of which are held by our PRC
subsidiaries. Most of our short-term bank borrowings and current
installments of our long-term debt totaling
$1,103.8 million are the obligations of these subsidiaries.
Our net working capital deficit may initially raise substantial
doubt as to our ability to continue as a going concern. However,
we believe that we have developed a liquidity plan that, if
executed successfully, will provide sufficient liquidity to
finance our anticipated working capital and capital expenditure
requirements for the next 12 months. Our liquidity plan is
summarized below:
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See “Risk Factors — Risks Relating to Our Company
and Our Industry — We are operating with a significant
working capital deficit and incurred a net loss of
$209.9 million for the nine months ended September 30,
2009; if we do not successfully execute our liquidity plan, we
face the risk of not being able to continue as a going
concern” for a more detailed discussion on risks relating
to our working capital deficit.
We invested $941.2 million and $689.5 million in
capital expenditures during the nine months ended
September 30, 2008 and 2009, respectively, primarily to
build and expand our wafer and ingot processing plant, purchase
production equipment and construct our polysilicon production
plant.
Our capital expenditures are expected to increase in the future
as we expand our wafer production capacity and polysilicon
production capacity in line with our business expansion
strategy. As of September 30, 2009, our polysilicon
production plant consists of two factories under construction.
We estimate that our capital expenditures will be approximately
$800 million in 2009 and approximately $200 million to
$300 million in 2010.
We will need additional funding to finance our planned wafer
production capacity expansion, construction of our polysilicon
facilities and working capital requirements. In addition, we may
require additional cash due to changing business conditions or
other future developments, including any investments or
acquisitions we may decide to pursue. If we do not have
sufficient cash to meet our requirements, we may seek to issue
additional equity securities or debt securities or to borrow
from lending institutions. If we are unable to obtain additional
equity or debt financing as required, our business operations
and prospects may suffer.
In order to secure stable supply of polysilicon materials, we
make prepayments to certain suppliers based on written purchase
orders detailing product, quantity and price. Our prepayments to
suppliers are recorded either as prepayments to suppliers, if
they are expected to be utilized within 12 months as of
each balance sheet date, or as prepayments to suppliers to be
utilized beyond one year, if they represent the portion expected
to be utilized after 12 months. As of September 30,
2008 and September 30, 2009, we had prepayments to
suppliers that amounted to $294.9 million and
$74.1 million, respectively, and prepayments to suppliers
to be utilized beyond one year that amounted to
$22.1 million and $30.6 million, respectively.
Prepayments to suppliers are reclassified to inventories when we
apply the prepayments to related purchases of polysilicon
feedstock, and such reclassifications are not reflected in our
consolidated cash flows from operations.
We make prepayments without receiving collateral, as a result,
we are subject to counterparty risks, and our claims for such
prepayments would rank only as an unsecured claim, which exposes
us to the credit risks of these suppliers in the event of their
insolvency or bankruptcy. See “Risk Factors —
Risks Relating to Our Company and Our Industry — We
have entered into long-term supply contracts with suppliers
which we may not be able to renegotiate” for a discussion
on risks relating to our prepayment obligations to our suppliers.
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As of September 30, 2009, advance payments from our
customers amounted to $422.6 million, a decrease of
$354.6 million from advance payments from our customers as
of the nine months ended September 30, 2008 of
$777.2 million. This decrease was mainly due to a
reclassification of a $244.1 million prepayment from
Q-Cells from advance payments from customers to other payable as
a result of the entry into an amendment agreement between
Q-Cells and us, pursuant to which we are required to refund the
prepayment to Q-Cells in accordance with the repayment schedule
set forth in the amendment agreement. In addition, there was a
decline in the global market demand for solar wafers and
requests by more customers to effect payments upon delivery or
after acceptance of delivery. In line with the changes with
respect to our net sales and advance payments from customers,
our trade accounts receivable amounted to $40.3 million as
of September 30, 2008, and $247.2 million as of
September 30, 2009. We expect the current business
environment to continue for some time and advance payments from
our customers to decrease while accounts receivable to increase.
See “Risk Factors — Risks Relating to Our Company
and Our Industry — We have entered into long-term
sales contracts with customers which may be renegotiated at
terms less favorable to us.” and “Risk
Factors — Risks Relating to Our Company and Our
Industry — Our customers may not prepay for their
orders under agreed contractual terms, resulting in longer
accounts receivable turnover cycles.” for a discussion on
risks relating to our prepayment obligations to our suppliers.
We have entered into substantial commitments for future
purchases of raw materials and equipment, including polysilicon
feedstock, wafer manufacturing equipment and polysilicon
production equipment. These commitments as of September 30,
2009 amounted to approximately $464.5 million in total,
including approximately $248.7 million for the
12 months ending September 30, 2010 and approximately
$215.8 million for the 24 months ending
September 30, 2012. Our actual purchases of polysilicon
feedstock, wafer manufacturing equipment and polysilicon
production equipment in the future may exceed these amounts.
Recently
Adopted Accounting Standards
In May 2008, the FASB issued Accounting Standards Codification,
or ASC, Subtopic
470-20,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement), or ASC Subtopic
470-20. ASC
Subtopic
470-20
required LDK Solar Co., Ltd. to separately account for the
liability and equity components of LDK Solar Co., Ltd.’s
4.75% convertible senior notes issued in April 2008 in a manner
that result in recording interest expense using LDK Solar Co.,
Ltd.’s nonconvertible debt borrowing rate for such debt.
The associated discount is amortized using the effective
interest rate method over 3 years from the date of the debt
issuance. LDK Solar Co., Ltd. adopted the ASC Subtopic
470-20 on
January 1, 2009, and applied its provisions retrospectively
to all periods presented as required by ASC Subtopic
470-20. As a
result, management has adjusted our previously issued 2008
consolidated financial statements. The following table
summarizes the impact of the retrospective application of the
ASC Subtopic
470-20 in
our consolidated balance sheet as of December 31, 2008:
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The unaudited condensed consolidated statement of operations,
equity and comprehensive income, and cash flows for the nine
months period ended September 30, 2008 has reflected the
retrospective adjustment as required by ASC Subtopic
470-20.
In February 2008, the FASB issued ASC
paragraphs 820-10-50-8A,
55-23A, and
55-23B,
Effective Date of FASB Statement No. 157, or ASC
paragraphs
820-10-50-8A,
55-23A, and
55-23B,
which delayed the effective date of ASC Subtopic
820-10,
until fiscal year beginning after November 15, 2008 for all
non-financial assets and non-financial liabilities that are
recognized or disclosed at fair value in the financial
statements on a non-recurring basis. The adoption of the
provisions of ASC Subtopic
820-10
related to non-financial assets and non-financial liabilities on
January 1, 2009 did not have any impact on our financial
position and results of operations.
ASC Subtopic
810-10,
Non-controlling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51,
establishes accounting and reporting standards for the
non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. This standard defines a
non-controlling interest, previously called a minority interest,
as the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. ASC Subtopic
810-10
requires, among other items, that a non-controlling interest be
included in the consolidated statement of financial position
within equity separate from the parent’s equity;
consolidated net income to be reported at amounts inclusive of
both the parent’s and non-controlling interest’s
shares and, separately, the amounts of consolidated net income
attributable to the parent and non-controlling interest all on
the consolidated statement of operations; and if a subsidiary is
deconsolidated, any retained non-controlling equity investment
in the former subsidiary be measured at fair value and a gain or
loss be recognized in net income based on such fair value. We
adopted the provisions of ASC Subtopic
810-10 on
January 1, 2009.
ASC Topic 805, Business Combinations, or ASC Topic 805,
which retains the underlying concepts of the previously issued
standard in that all business combinations are still required to
be accounted for at fair value under the acquisition method of
accounting, but changes the method of applying the acquisition
method in a number of ways. Acquisition costs are no longer
considered part of the fair value of an acquisition and will
generally be expensed as incurred, non-controlling interests are
valued at fair value at the acquisition date, in-process
R&D is recorded at fair value as an indefinite-lived
intangible asset at the acquisition date, restructuring costs
associated with a business combination are generally expensed
subsequent to the acquisition date, and changes in deferred tax
asset valuation allowances and income tax uncertainties after
the acquisition date generally will affect income tax expense.
In April 2009, the FASB issued ASC Subtopic
805-20,
Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies, or ASC
Subtopic
805-20,
which amends the guidance in ASC Topic 805 to require contingent
assets acquired and liabilities assumed in a business
combination to be recognized at fair value on the acquisition
date if fair value can be reasonably estimated during the
measurement period. If fair value cannot be reasonably estimated
during the measurement period, the contingent asset or liability
would be recognized in accordance with ASC Topic 450,
“Accounting for Contingencies,” and ASC Subtopic
450-20,
Reasonable Estimation of the Amount of a Loss. Further,
ASC Subtopic
805-20
eliminated the specific subsequent accounting guidance for
contingent assets and liabilities from ASC Topic 805, without
significantly revising the guidance in Statement of Financial
Accounting Standard No. 141. However, contingent
consideration arrangements of an acquiree assumed by the
acquirer in a business combination would still be initially and
subsequently measured at fair value in accordance with ASC Topic
805. ASC Subtopic
805-20 is
effective for all business acquisitions occurring on or after
the beginning of the first annual reporting period beginning on
or after December 15, 2008. We adopted the provisions of
ASC Subtopic
805-20 on
July 10, 2009.
In May 2009, the FASB issued FASB ASC 855, Subsequent
Events, or ASC 855. ASC 855 addresses accounting and
disclosure requirements related to subsequent events. ASC 885
requires management to evaluate subsequent events through the
date the financial statements are either issued or available to
be issued, depending on the company’s expectation of
whether it will widely distribute its financial statements to
its shareholders and other financial statement users. Companies
are required to disclose the date through which subsequent
events have been evaluated. ASC 855 is effective for interim or
annual financial periods ending after June 15, 2009 and to
be applied prospectively. Management has evaluated subsequent
events through December 17, 2009, which is the date that
the unaudited condensed consolidated financial statements as of
and for the nine-month periods ended September 30, 2008 and
2009 were available to be issued.
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In April 2009, the FASB issued FASB ASC
paragraph 820-10-65-1,
Interim Disclosures about Fair Value of Financial
Instruments. FASB ASC paragraph
820-10-65-1
amends FASB ASC Subtopic
825-10,
Disclosures about Fair Value of Financial Instruments, to
require publicly-traded companies, as defined in FASB ASC
Subtopic
270-10,
Interim Financial Reporting, to provide disclosures on
the fair value of financial instruments in interim financial
statements. FASB ASC
paragraph 825-10-65-1
is effective for interim periods ending after June 15,
2009. The Group adopted the new disclosure requirements in the
unaudited condensed consolidated financial statements as of and
for the nine-month periods ended September 30, 2008 and
2009. The disclosures required under FASB ASC
paragraph 820-10-65-1
are included in note 19 to the unaudited condensed
consolidated financial statements as of and for the nine-month
periods ended September 30, 2008 and 2009.
Other
Recent Developments
In October 2007, our former finance controller, Charley Situ,
alleged that we incorrectly reported our inventories of silicon
feedstock. As a result of Mr. Situ’s allegations,
several securities class action lawsuits were filed against us
and several of our current officers and directors during October
2007 in the U.S. District Courts in the Northern District
of California and the Southern District of New York. Those
actions have been consolidated into a single action, pending in
the Northern District of California, entitled In re LDK Solar
Sec. Litig., Case
No. C07-05182
WHA. The complaint seeks substantial monetary damages on behalf
of a class of persons who purchased our securities from
June 1, 2007 to October 7, 2007 and allege that we
overstated our inventory, among other things. We believe the
allegations in the securities lawsuits are without merit and
filed motions to dismiss the complaints in April 2008. On
May 29, 2008, the United States District Court Northern
District of California denied our motions to dismiss. We filed a
motion for reconsideration on June 13, 2008 but the motion
was denied again by the court on July 14, 2008. We filed an
additional motion to dismiss counts against certain of the
individual defendants on July 21, 2008. On August 21,
2008, the plaintiffs conceded to the dismissal of all claims
against Jiangxi LDK Solar and certain claims against two
individual directors. On January 28, 2009, the court issued
an order certifying the plaintiff class of all persons who
purchased our ADSs, call options for our ADSs or sold put
options for our ADSs during the class period of June 1,
2007 through October 7, 2007. We plan to continue to
vigorously defend this lawsuit. The trial is in the discovery
phase. A trial date is scheduled for March 22, 2010. It is
not possible for us to reasonably estimate the amount of loss,
if any, we would incur in the event of an unfavorable outcome
from the resolution of this lawsuit.
In response to Mr. Situ’s allegations, in October
2007, we formed an internal committee to investigate the
allegations and conduct an immediate physical inventory count of
our polysilicon materials. We found no material discrepancies as
compared to our financial records. We believe that
Mr. Situ’s allegations have no merit. Additionally,
the independent directors of our audit committee conducted an
independent investigation into the allegations made by
Mr. Situ. The independent investigation was primarily
conducted by our audit committee’s independent counsel, a
major U.S. law firm, and forensic accountants from a
“big four” independent accounting firm that was
separate from our external auditors, as well as independent
experts in the evaluation of silicon feedstock and the
production of multicrystalline solar wafers. The independent
investigation found no material errors in our stated silicon
inventory quantities as of August 31, 2007, and concluded
that Mr. Situ’s allegations of an inventory
discrepancy were incorrect because he had not taken into account
all locations where we stored our silicon feedstock. The
independent investigation further concluded that we were using
each of our various types of silicon feedstock in the production
of our multicrystalline solar wafers, and that a provision for
obsolete or excess silicon feedstock was not required.
The United States Securities and Exchange Commission, or the
SEC, also initiated an investigation into the allegations by
Mr. Situ. The results of our audit committee’s
independent investigation were also presented to the SEC. On
March 24, 2008, the SEC staff informed us that it did not
intend to recommend any enforcement action by the SEC.
In addition, several of our officers and directors are
defendants in another lawsuit, pending in California Superior
Court, Santa Clara County, entitled Sean Coonerty v.
Xiaofeng Peng, et al., Case No. 108CV103758. This
derivative lawsuit alleges claims of breach of fiduciary duty
and unjust enrichment based on the same allegations
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contained in the securities lawsuit, repeating
Mr. Situ’s allegations that the feedstock inventory
was overstated, and seeks damages in an unspecified amount on
behalf of our company. This lawsuit is at its early stage, and
our officers and directors have not responded to the complaint.
In May 2009, we received a demand letter from a former employee
claiming that we breached our compensation agreement with him.
We have agreed to resolve this claim through arbitration. The
matter is in the discovery stage. Discovery is expected to be
completed in the first quarter of 2010, and arbitration is
scheduled for June 2010.
We completed the sale of a 15% equity interest in Jiangxi LDK
Silicon, which owns our polysilicon plant with 15,000-MT
annualized production capacity in Xinyu city, China, to Jiangxi
Trust, for Rmb 1.5 billion on November 20, 2009.
Urban Construction Investment Group Co., Ltd., a PRC company
wholly owned by the Xinyu city government, has agreed to
purchase from us a 10% equity interest in Jiangxi LDK Silicon
for a minimum consideration of Rmb 1.2 billion upon our
giving them one months’ notice within 18 months after
signing the agreement. The actual transfer of this interest will
have to be pre-approved by the local foreign investment bureau.
On December 17, 2009, we signed an indicative
termsheet with VMS Investment Group Limited and its affiliates,
or the Investors, pursuant to which the Investors have agreed to
subscribe to between $50 million to $80 million
aggregate amount of redeemable and convertible preference shares
to be issued by a Cayman Islands subsidiary to be created to
hold and operate our polysilicon business. The transaction will
require a reorganization of our polysilicon business through
which the assets and liabilities relating to our polysilicon
business will be assumed by the newly created subsidiary, which
will be wholly owned by us and be the issuer of the redeemable
and convertible preference shares. The terms of the securities
have a two-year maturity and are convertible at the option of
the holders at a conversion ratio that includes an investment
internal rate of return. The investment is expected to close by
the end of March 2010 subject to final documentation and closing
conditions.
On December 4, 2009, we and Q-Cells jointly announced that
the two companies amended the supply agreement of December 2007,
pursuant to which we agreed to supply solar wafers to Q-Cells
for a
10-year
period from 2009 to 2018. The amendment to the supply agreement
followed negotiations aimed to resolve a dispute between the two
companies as a result of the announcement in August 2009 by
Q-Cells of its claim to terminate the supply agreement. Q-Cells
alleged that we failed to fulfill “significant contractual
obligations” and sought to take measures to draw down our
bank guarantee relating to the $244.5 million prepayment by
Q-Cells to us under the supply agreement. We vigorously
disagreed with Q-Cells’ claim, believed its purported
termination was without merit and sought a preliminary
injunction in the Regional Court of Berlin to enjoin Q-Cells
from drawing down the prepayment guarantee issued by a German
bank in favor of Q-Cells.
Under the terms of the amendment, we have agreed to cease any
pending proceedings or claims against Q-Cells and Q-Cells has
agreed not to draw down the prepayment guarantee issued. The
amendment grants Q-Cells preferential prices reflecting its
preferred customer status and greater flexibility in determining
the annual and final contract volumes based on its actual
demand. Under the amendment, a portion of shipments scheduled
for delivery in 2009 to 2011 is deferred to the period from 2012
to 2018. Q-Cells’ contractual obligation to take delivery
of wafer shipments is reduced to 20% of the originally agreed
volume for 2009 and 33% of the originally agreed volume with
respect to 2010 and 2011. The amendment also allows Q-Cells to
substitute up to 400-MT annually of its own silicon feedstock
for volumes to be purchased under the agreement in 2010 and
2011. In addition, we are required to repay prepayments made by
Q-Cells to
us according to the following repayment schedule:
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The amendment also grants Q-Cells the right to terminate the
agreement at will and without cause after April 1,
2011, upon giving a
12-month
prior notice. Upon a valid termination of the agreement, we are
required to repay to Q-Cells the remaining outstanding
prepayment within 90 days after the written termination.
Concurrent with the entry into such amendment, we also finalized
a tolling agreement with Q-Cells to expand the parties’
cooperation in the areas of cell and module processing. Under
this agreement, Q-Cells will supply solar cells to us on a
tolling basis and we will supply modules to Q-Cells on the same
basis.
Mr. Xiaofeng Peng, our founder, chairman, chief executive
officer and ultimate controlling shareholder, in his personal
capacity, and his family members are engaged in certain
alternative energy projects, including a company that is
developing a project involving thin-film solar technology. LDK
New Energy, our immediate controlling shareholder that is wholly
owned by Mr. Peng, is the beneficial owner of all of the
equity interest of this thin-film solar company. Thin-film solar
technology is an alternative method of producing solar power
products compared to our crystalline wafer-based solar
technology and products. Mr. Peng and his family members
may finance such alternative energy projects, including the
thin-film solar project, in part, by proceeds from LDK New
Energy’s sales of a portion of its equity interest in our
company. In addition, LDK New Energy has entered into loan
facilities with financial and banking institutions to finance
the thin-film solar project. As of the date of this report, LDK New Energy has pledged approximately
56.5 million shares, including ADSs. Mr. Peng and his
family members may from time to time obtain additional
borrowings to fund investments in such alternative energy
projects from financial institutions, which may be secured by
additional pledges of a portion of LDK New Energy’s shares
in our company. These future financing arrangements may be
structured in such a way that Mr. Peng would be required to
pledge additional shares or other collateral if the market value
of the pledged shares does not meet specified levels.
In August 2009, we entered into a framework agreement, as
amended and restated in December 2009, with Best Solar, a solar
module manufacturer controlled by Mr. Peng, our chairman,
chief executive officer and principal shareholder, pursuant to
which, in addition to sale or purchase of solar modules, we have
agreed to contract for solar module manufacturing services from
Best Solar with the requisite solar cells supplied by us. The
parties have also agreed to discuss terms when we initiate any
proposal to establish a dedicated manufacturing facility at Best
Solar or to acquire any of its module manufacturing facilities.
We have also agreed not to sell modules in competition with Best
Solar’s existing business in China and, in return, Best
Solar has agreed not to compete with us in selling modules
outside China or engage in solar power projects and related EPC
services in China.
For the nine-month periods ended September 30, 2008 and
2009, in addition to the guarantees and security provided by
related parties for our bank borrowings, the principal related
party transactions and amounts outstanding with our related
parties are summarized as follows:
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In addition to the above, certain of our executives and
employees exercised share options which vested in 2007 and 2008
during the period ended September 30, 2008. Pursuant to PRC
tax regulations, the income derived from the exercise of the
share options is subject to individual income tax, which we
should have withheld from these executives and employees for
payment to the PRC tax authorities. We had an outstanding
receivable from these executives and employees of
$42.0 million and $41.8 million as of
December 31, 2008 and September 30, 2009 respectively
in relation to the individual income tax liabilities arising
from the exercise of share options by these executives and
employees, which are included in other current assets.
Subsequent to September 30, 2009, we successfully obtained
additional secured and unsecured short-term bank borrowings of
$264.2 million with interest rates ranging from 1.044% and
5.310% and unsecured long-term bank borrowings of
$99.6 million with an interest rate of 5.400% to be
repriced annually. We repaid short-term bank borrowings and
current portion of long-term bank borrowings of
$363.4 million in total. As of December 17, 2009, our
short-term bank borrowings with current portion of long-term
bank borrowings and long-term bank borrowings amounted to
$1,009.6 million and $393.5 million respectively. In
November 2009, Bank of China granted us long-term bank
borrowings of Rmb 600 million. Bank of China also granted
to us revolving credit facilities of
Rmb 4,950 million, which covers both our additional
Rmb 600 million long-term bank borrowing and our existing
bank borrowings from Bank of China as of December 17, 2009
of Rmb 2,958 million, leading to an unused revolving credit
facility of Rmb 1,392 million for short-term bank
borrowings from Bank of China. As of December 17, 2009, we
had total revolving credit facilities of $1,793.0 million,
of which $458.8 million was unused.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND SEPTEMBER 30, 2009
See accompanying notes to the unaudited condensed consolidated
interim financial statements.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS — (Continued)
See accompanying notes to the unaudited condensed consolidated
interim financial statements.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND
2009
See accompanying notes to the unaudited condensed consolidated
interim financial statements.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND
2009
See accompanying notes to the unaudited condensed consolidated
interim financial statements.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND 2009
See accompanying notes to the unaudited condensed consolidated
interim financial statements.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS —
(Continued)
See accompanying notes to the unaudited condensed consolidated
interim financial statements.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND 2009 (Amounts in US$ thousands, except share and per share data)
The accompanying unaudited condensed consolidated interim
financial statements consist of the financial statements of LDK
Solar Co., Ltd. (the “Company” or “LDK”) and
its subsidiaries. The Company and its subsidiaries are
collectively referred to as the “Group”. All
significant inter-company transactions and balances have been
eliminated on consolidation.
The Group’s principal activities are design, development,
manufacturing and marketing of photovoltaic (“PV”)
products and development of power plant projects.
Basis
of presentation and liquidity
The accompanying unaudited condensed consolidated interim
financial statements have been prepared in accordance with
U.S. generally accepted accounting principles
(“U.S. GAAP”). Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with U.S. GAAP have been condensed or omitted
as permitted by rules and regulations of the
U.S. Securities and Exchange Commission. The
December 31, 2008 condensed consolidated balance sheet was
derived from audited consolidated financial statements of the
Group. The accompanying unaudited condensed consolidated interim
financial statements should be read in conjunction with the
adjusted consolidated financial statements of the Group included
in the Company’s
Form 6-K
dated June 19, 2009.
In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary to present a fair
statement of the financial position as of September 30,
2009, and the result of operations and cash flows for the
nine-month periods ended September 30, 2008 and 2009, have
been made.
The accompanying unaudited condensed consolidated interim
financial statements contemplate the realization of assets and
the satisfaction of liabilities in the normal course of business.
At September 30, 2009, the Group had a working capital
deficit (i.e. total consolidated current liabilities exceeded
total consolidated current assets) of US$1,151,717 and an
accumulated deficit of US$8,478. During the nine-month period
ended September 30, 2009, the Group incurred a net loss of
US$209,943 and used US$95,160 of cash in operations. The Group
had cash and cash equivalents of US$67,753, most of which are
held by subsidiaries in the PRC. Most of the Group’s short
term bank borrowings and current installments of its long-term
debt totaling US$1,103,754 reside with these subsidiaries. These
factors initially raise substantial doubt as to the Group’s
ability to continue as a going concern. However, management
believes that it has developed a liquidity plan that, if
executed successfully, will provide sufficient liquidity to
finance the Group’s anticipated working capital and capital
expenditure requirements for the next 12 months as
summarized below:
In November 2009, the Group sold a 15% equity interest in
Jiangxi LDK PV Silicon Technology Co., Ltd. (“LDKPV”)
to Jiangxi International Trust and Investment Co., Ltd. for cash
consideration of RMB 1,500,000 (US$219,651). The proceeds
from the sale have been received. In addition, management is in
the process of negotiation with several potential buyers for
additional equity interests in LDKPV if necessary. In
particular, the Group has secured a commitment to sell a 10%
equity interest in LDKPV at cash consideration of no less than
RMB 1,200,000 (US$175,721) to Urban Construction Investment
Group Co., Ltd., Xinyu City.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
LQ Energy GmbH, an associate of the Group, currently holds one
40 MW power plant project in Germany, which had grid
connected in December 2009. LQ Energy GmbH is engaged in the
negotiation with potential buyers of the completed PV project by
the end of second quarter in 2010. Upon the successful sale of
the project, LQ Energy GmbH is expected to distribute the
portion of consideration allocated to the Group pursuant to its
equity interest in LQ Energy GmbH, amounting to no less than
US$70,000.
Subsequent to September 30, 2009, the Group has
successfully obtained additional secured and unsecured
short-term bank borrowings and unsecured long-term bank
borrowings. In November 2009, the Group was granted by Bank of
China new revolving credit facilities. Details of subsequent
bank financing are disclosed in note 21. Management
believes that the Group will be able to obtain continued
borrowing facilities from the banks so that when required by the
Group, the bank loans due for repayment within the next
12 months can be successfully replaced with new loans drawn
down from existing revolving banking facilities and new
borrowing facilities.
The Company intends to obtain additional funds of up to
US$200,000 from the issuance of additional equity of the Company
when market conditions permit. The sale of additional equity
securities could result in additional dilution to the
Company’s current shareholders and there can be no
assurance that should additional financing, if required, will be
available on terms satisfactory to the Company.
Management has been negotiating with a number of the
Group’s vendors including raw material suppliers, equipment
suppliers and construction suppliers to lower the prices or
obtain more favorable payment terms with an aim to achieve
saving in costs or required cash flow in the next 12 months.
Therefore, after careful consideration of the factors that
initially raise substantial doubt and the liquidity plans
described above, management has prepared the accompanying
unaudited condensed consolidated interim financial statements on
the basis that the Group will be able to continue as going
concern. The unaudited condensed consolidated interim financial
statements do not include any adjustments related to the
recoverability and classification of recorded assets or the
amounts and classification of liabilities or any other
adjustments that might be necessary should the Group be unable
to continue as a going concern.
The preparation of the unaudited condensed consolidated interim
financial statements in conformity with U.S. GAAP requires
management of the Group to make a number of estimates and
assumptions relating to the reported amounts of assets and
liabilities as well as the disclosure of contingent assets and
liabilities at the date of the unaudited condensed consolidated
interim financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from estimates on an ongoing basis.
Management reviews its estimates, including those related to the
classification and realization of inventories and prepayments to
suppliers, estimated useful lives and residual values of
long-lived assets, the recoverability of the carrying values of
long-lived assets, the determination of fair values of financial
instruments and share-based instruments, allowance for doubtful
receivables, and assessments about potential tax uncertainties
and contingent liabilities. Changes in facts and circumstances
may result in revised estimates. The current economic
environment has increased the degree of uncertainty inherent in
those estimates and assumptions.
In May 2008, the FASB issued ASC Subtopic
470-20,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement), or ASC Subtopic
470-20. ASC
Subtopic
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
470-20
required the Company to separately account for the liability and
equity components of the Company’s 4.75% convertible senior
notes issued in April 2008 in a manner that result in recording
interest expense using the Company’s nonconvertible debt
borrowing rate for such debt. The associated discount is
amortized using the effective interest rate method over
3 years from the date of the debt issuance. The Company
adopted the ASC Subtopic
470-20 on
January 1, 2009, and applied its provisions retrospectively
to all periods presented as required by ASC Subtopic
470-20. As a
result, management has adjusted the Company’s previously
issued 2008 consolidated financial statements. The following
table summarizes the impact of the retrospective application of
the ASC Subtopic
470-20 in
the Group’s consolidated balance sheet as of
December 31, 2008:
The unaudited condensed consolidated statement of operations,
equity and comprehensive income, and cash flows for the
nine-month period ended September 30, 2008 has reflected
the retrospective adjustment as required by ASC Subtopic
470-20.
In February 2008, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Codification
(“ASC”)
paragraphs 820-10-50-8A,
55-23A, and
55-23B,
Effective Date of FASB Statement No. 157, or ASC
paragraphs
820-10-50-8A,
55-23A, and
55-23B,
which delayed the effective date of ASC Subtopic
820-10,
until fiscal year beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The adoption of the
provisions of ASC Subtopic
820-10
related to nonfinancial assets and nonfinancial liabilities on
January 1, 2009 did not have any impact on the Group’s
financial position and results of operations.
ASC Subtopic
810-10,
Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51,
establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This standard defines a
noncontrolling interest, previously called a minority interest,
as the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. ASC Subtopic
810-10
requires, among other items, that a noncontrolling interest be
included in the consolidated statement of financial position
within equity separate from the parent’s equity;
consolidated net income to be reported at amounts inclusive of
both the parent’s and noncontrolling interest’s shares
and, separately, the amounts of consolidated net income
attributable to the parent and noncontrolling interest all on
the consolidated statement of operations; and if a subsidiary is
deconsolidated, any retained noncontrolling equity investment in
the former subsidiary be measured at fair value and a gain or
loss be recognized in net income based on such fair value. The
Group adopted the provisions of ASC Subtopic
810-10 on
January 1, 2009.
ASC Topic 805, Business Combinations, or ASC Topic 805,
which retains the underlying concepts of the previously issued
standard in that all business combinations are still required to
be accounted for at fair value under the acquisition method of
accounting, but changes the method of applying the acquisition
method in a number of ways. Acquisition costs are no longer
considered part of the fair value of an acquisition and will
generally be expensed as incurred, noncontrolling interests are
valued at fair value at the acquisition date, in-process
research
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
and development is recorded at fair value as an indefinite-lived
intangible asset at the acquisition date, restructuring costs
associated with a business combination are generally expensed
subsequent to the acquisition date, and changes in deferred tax
asset valuation allowances and income tax uncertainties after
the acquisition date generally will affect income tax expense.
In April 2009, the FASB issued ASC Subtopic
805-20,
Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies, or ASC
Subtopic
805-20,
which amends the guidance in ASC Topic 805 to require contingent
assets acquired and liabilities assumed in a business
combination to be recognized at fair value on the acquisition
date if fair value can be reasonably estimated during the
measurement period. If fair value cannot be reasonably estimated
during the measurement period, the contingent asset or liability
would be recognized in accordance with ASC Topic 450,
“Accounting for Contingencies,” and ASC Subtopic
450-20,
Reasonable Estimation of the Amount of a Loss. Further,
ASC Subtopic
805-20
eliminated the specific subsequent accounting guidance for
contingent assets and liabilities from ASC Topic 805, without
significantly revising the guidance in Statement of Financial
Accounting Standard No. 141. However, contingent
consideration arrangements of an acquiree assumed by the
acquirer in a business combination would still be initially and
subsequently measured at fair value in accordance with ASC Topic
805. ASC Subtopic
805-20 is
effective for all business acquisitions occurring on or after
the beginning of the first annual reporting period beginning on
or after December 15, 2008. The Group adopted the
provisions of ASC Subtopic
805-20 on
July 10, 2009. (See Note 6).
In May 2009, the FASB issued FASB ASC 855, Subsequent
Events, or ASC 855. ASC 855 addresses accounting and
disclosure requirements related to subsequent events. ASC 885
requires management to evaluate subsequent events through the
date the financial statements are either issued or available to
be issued, depending on the company’s expectation of
whether it will widely distribute its financial statements to
its shareholders and other financial statement users. Companies
are required to disclose the date through which subsequent
events have been evaluated. ASC 855 is effective for interim or
annual financial periods ending after June 15, 2009 and to
be applied prospectively. Management has evaluated subsequent
events through December 17, 2009, which is the date that
the unaudited condensed consolidated interim financial
statements were available to be issued.
In April 2009, the FASB issued FASB ASC
paragraph 820-10-65-1,
Interim Disclosures about Fair Value of Financial
Instruments. FASB ASC paragraph
820-10-65-1
amends FASB ASC Subtopic
825-10,
Disclosures about Fair Value of Financial Instruments, to
require publicly-traded companies, as defined in FASB ASC
Subtopic
270-10,
Interim Financial Reporting, to provide disclosures on
the fair value of financial instruments in interim financial
statements. FASB ASC
paragraph 825-10-65-1
is effective for interim periods ending after June 15,
2009. The Group adopted the new disclosure requirements in the
unaudited condensed consolidated interim financial statements
for the nine-month period ended September 30, 2009. The
disclosures required under FASB ASC
paragraph 820-10-65-1
are included in note 19.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
The Group had US$7,150 and US$13,894 of raw materials consigned
to third parties as of December 31, 2008 and
September 30, 2009 respectively.
Raw materials consist of a variety of polysilicon materials,
including solar-grade virgin polysilicon, recyclable polysilicon
materials and silicon powder.
Write-downs of raw materials, work in progress and finished
goods inventories were US$8,174 and US$177,537 during the
nine-month periods ended September 30, 2008 and 2009,
respectively, which are included in cost of goods sold.
In order to secure a stable supply of silicon materials, the
Group makes prepayments to certain suppliers. Prepayments of
which the Group expects to take delivery of the inventory after
the next twelve months are classified as non-current assets in
the Group’s consolidated balance sheet as at year/period
end dates. Prepayments to suppliers are reclassified to
inventories when the Group applies the prepayment to related
purchases of silicon materials. Such non-cash reclassifications
from prepayment to inventories, which were included in the
“Changes in operating assets and liabilities” in the
Group’s consolidated statements of cash flow, amounted to
US$1,001,747 and US$447,219 for the nine-month periods ended
September 30, 2008 and 2009, respectively.
Depreciation expense was US$23,362 and US$49,859 for the
nine-month periods ended September 30, 2008 and 2009,
respectively.
Construction in progress as of September 30, 2009 includes
US$380,077 (2008: US$160,771) of furnaces, wire saws and other
equipment that has been received but is pending installation.
The installation of these machines and equipment is normally
completed within one month to three months after they are
received by the Group.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
Solar
Green Technology Spa (“SGT”)
On July 10, 2009, the Company, through its wholly-owned
subsidiary, acquired 70% of the equity interest of SGT. The
results of SGT’s operations have been included in the
consolidated financial statements since that date SGT is mainly
engaged in the provision of energy saving services, products and
integrated solution in Italy. The acquisition was accounted for
as a business combination. The following table summarizes the
acquisition-date fair value of the consideration and the amounts
of the assets acquired and liabilities assumed recognized at the
acquisition date, as well as the fair value at the acquisition
date of the noncontrolling interest in SGT.
As of July 10, 2009
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
The fair value of contingent consideration, identifiable
intangible assets and noncontrolling interest as of acquisition
date are provisional pending receipt of final valuation.
This acquisition was not material to our consolidated results of
operations. Consequently, pro-forma financial information has
been omitted.
On January 2, 2008, the Group acquired a 33.5% equity
interest in Jiangxi Sinoma New Material Co., Ltd.
(“Sinoma”), a crucible manufacturer based in the PRC,
from an unrelated party. As the Group does not have a
controlling financial interest, but has the ability to exercise
significant influence over the operating and financial policies
of Sinoma, the investment in Sinoma is accounted for using the
equity method of accounting. The Group’s equity in net
income (loss) of Sinoma amounted to US$118 and US$(67) for the
nine-month periods ended September 30, 2008 and 2009,
respectively.
In March 2009, the Group entered into a joint venture agreement
with Q-cells SE to form a jointly owned company named LQ Energy
GmbH (“LQ Energy”), which is engaged in the investment
on solar projects. Pursuant to the joint venture agreement, LDK
Europe has contributed a capital investment of Euro 51,000
(equivalent to US$74,460) in cash, which represented 51% of the
share capital of LQ Energy. LQ Energy is managed by
5 directors, 3 of which are nominated by LDK Europe. The
Group accounts for its investment in LQ Energy using the equity
method because management believes the minority shareholder has
significant participating rights in determining certain
financial and operating decisions of LQ Energy that are made in
the ordinary course of business. Such participating rights
include but not limited to the selection of solar projects.
Under the equity method of accounting, the Group’s share of
LQ Energy’s results of operations is included in other
income (expense) in the Group’s consolidated statements of
operation. The Group’s equity in net loss of LQ Energy
amounted to US$5,198 for the nine-month period ended
September 30, 2009.
The short-term bank borrowings outstanding as of
September 30, 2009 carry a weighted average interest rate
of 4.654% (2008: 6.376%) and have maturity terms ranging from
three to twelve months and interest rates ranging from 1.126% to
7.391% (2008: 2.298% to 7.504%). Certain of these outstanding
borrowings totaling US$82,735 (2008: US$82,667) borrowed by
Jiangxi LDK Solar Hi-tech Co., Ltd. (“JXLDK”), one of
the Company’s subsidiary, contain interest rate adjustment
provisions. If JXLDK’s debt to asset ratio exceeds 65%
calculated
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
based on its financial statements prepared under PRC GAAP, the
relevant bank would increase the interest rate currently charged
on those bank borrowings by 5%. On the other hand, if
JXLDK’s debt to asset ratio is maintained at less than 40%,
the interest rate currently charged on those bank borrowings
will be reduced by 5%. As of September 30, 2009,
JXLDK’s debt to asset ratio was 74%. JXLDK has received
waivers letter dated December 16, 2009 from the relevant
bank that these interest rate adjustment provisions will not
apply to these outstanding borrowings in the year of 2009.
Included in short term bank borrowings at September 30,
2009 is US$117,147 payable to Agricultural Bank of China. These
borrowings together with long term borrowings obtained from the
same banker with outstanding balance of US$29,287 are secured by
JXLDK’s raw materials with carrying amount of US$80,318 as
of September 30, 2009. The rest of the Group’s short
term borrowings of US$371,466 are secured by certain of
JXLDK’s buildings, land use rights, plant and machinery,
pledged bank deposits and raw materials with the carrying
amounts of US$51,485, US$20,645, US$199,219, US$3,666 and
US$31,103, as of September 30, 2009 respectively.
As of September 30, 2009, the Group has total revolving
credit of US$1,033,036 (2008: US$507,280) and unused credit of
US$226,373 (2008: US$106,584).
In December 2006, the Group borrowed US$25,000 from China
Development Bank, of which US$10,000 was repaid in 2 equal
annual installments of US$5,000 in December 2007 and 2008, and
US$15,000 is repayable in 3 equal annual installments of
US$5,000 through December of 2011. The loan carries a variable
interest rate that is repriced daily with reference to the
prevailing six-month US Libor rate. The effective interest rate
of the loan was 2.661% as of September 30, 2009. Interest
is payable semi-annually. The loan is secured by JXLDK’s
plant and machinery and land use rights with carrying amount of
US$42,912 and US$3,705 as of September 30, 2009,
respectively, and is guaranteed by two of the Company’s
shareholders, Mr. Peng Xiaofeng (“Mr Peng”) and
Ms. Zhou Shan (“Ms Zhou”).
In April 2008, the Group borrowed US$60,000 from China
Development Bank, of which US$5,000 was repaid in April 2009,
and US$55,000 is repayable in 4 installments of US$10,000
in 2010, US$10,000 in 2011, US$15,000 in 2012 and US$20,000 in
2013. The loan carries variable interest with interest rate
repriced daily with reference to
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
the prevailing six-month US Libor rate. The effective interest
rate of the loan was 4.161% as of September 30, 2009.
Interest is payable semi-annually. The loan is secured by
JXLDK’s plant and machinery with an aggregate carrying
amount of US$95,251 as at September 30, 2009, and is
guaranteed by two of the Company’s shareholders,
Mr. Peng and Ms. Zhou.
In March and April 2008, the Group borrowed RMB 160,000
(US$23,430) and RMB 40,000 (US$5,857) respectively from
Agricultural Bank of China. The loans are repayable in 2011. The
loans carry variable interest with interest rate repriced
annually with reference to the prevailing base lending rate
pronounced by People’s Bank of China (“PBOC”).
The effective interest rate of the loan was 5.400% as of
September 30, 2009. Interest is payable quarterly. The
loans are secured by JXLDK’s raw materials with an
aggregate carrying amount of US$80,318 as at September 30,
2009.
In July 2008, the Group borrowed RMB 250, 000 (US$36,609)
from China Construction Bank, of which US$5,858 was repaid in
July 2009, and US$30,751 is repayable in installments of RMB
70,000 (US$10,250) in 2010, RMB 100,000 (US$14,643) in 2011 and
RMB 40,000 (US$5,858) in 2012. The loan is unsecured and carries
a variable interest rate that is repriced annually with
reference to the prevailing base lending rate pronounced by
PBOC. The effective interest rate of the loan was 5.760% as of
September 30, 2009. Interest is payable monthly.
In August 2008, JXLDK borrowed RMB 200,000 (US$29,287) from
Bank of China, which is repayable in February 2010. The loan is
unsecured and carries a fixed interest rate at 7.560%, which is
subject to an interest rate adjustment provision. Interest is
payable quarterly. Pursuant to the interest rate adjustment
provision, if JXLDK’s debt to asset ratio exceeds 65%
calculated based on its financial statements prepared under PRC
GAAP, the relevant bank would increase the interest rate
currently charged on those bank borrowings by 5%. On the other
hand, if JXLDK’s debt to asset ratio is maintained at less
than 40%, the interest rate currently charged on those bank
borrowings will be reduced by 5%. As of September 30, 2009,
JXLDK’s debt to asset ratio was 74%. JXLDK has received
waivers letter dated December 16, 2009 from the relevant
bank that these interest rate adjustment provisions will not
apply to these outstanding borrowings in the year of 2009.
In March 2009, JXLDK borrowed RMB 100,000 (US$14,644) from
Rural Credit Cooperatives Bank, which is repayable in March
2011. The loan is unsecured and carries variable interest with
interest rate repriced annually with reference to the prevailing
base lending rate pronounced by PBOC. The effective interest
rate of the loan was 5.400% as of September 30, 2009.
Interest is payable monthly.
In April 2009, JXLDK borrowed RMB 300,000 (US$43,930) from
China Merchant Bank. The loan is repayable in 2 equal
installments of RMB 150,000 (US$21,965) in December 2011
and April 2012 respectively. The loan is unsecured and carries
variable interest with interest rate repriced annually with
reference to the prevailing base lending rate pronounced by
PBOC. The effective interest rate of the loan was 5.400% as of
September 30, 2009. Interest is payable quarterly.
In June 2009, JXLDK borrowed RMB 7,160 (US$1,048) from
China Minsheng Banking Corp. Ltd., of which RMB 716
(US$104) was repaid before September 30, 2009 and
RMB 6,444 (US$944) is repayable through a number of
installments starting from December 2009 to March 2012. The loan
is unsecured and carries a fixed interest rate of 5.271% as of
September 30, 2009. Interest is payable when each
installment falls due.
In June 2009, JXLDK borrowed RMB 500,000 (US$73,217) from
Huarong International Trust Co., Ltd., which is repayable
in June 2012. The loan is unsecured and carries variable
interest with interest rate repriced annually with reference to
the prevailing base lending rate pronounced by PBOC. The
effective interest rate of the loan was 8.000% as of
September 30, 2009. Interest is payable quarterly.
In August 2009, JXLDK borrowed RMB 222,000 (US$32,508) from
China Construction Bank, which is repayable in August 2011. The
loan carries variable interest with interest rate repriced
annually with reference to the prevailing base lending rate
pronounced by PBOC. The effective interest rate of the loan was
5.400% as of
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
September 30, 2009. Interest is payable monthly. The loans
are secured by JXLDK’s equipment with an aggregate carrying
amount of US$38,394 as at September 30, 2009.
In September 2009, JXLDK borrowed RMB 200,000 (US$29,287)
from China Construction Bank, which is repayable in September
2011. The loan is unsecured and carries variable interest with
interest rate repriced annually with reference to the prevailing
base lending rate pronounced by PBOC. The effective interest
rate of the loan was 5.400% as of September 30, 2009.
Interest is payable monthly.
On April 15, 2008, the Company sold an aggregate principal
amount of US$400,000 4.75% Convertible Senior Notes due
2013 (the “Convertible Senior Notes”) to Morgan
Stanley & Co International plc, UBS AG,
J.P. Morgan Securities Inc., Needham & Company,
LLC, Cowen and Company, LLC and Lazard Capital Markets LLC (the
“Initial Purchasers”). The net proceeds from the
offering, after deducting the offering expenses, were
approximately US$388,743. The Convertible Senior Notes bear
interest at a rate of 4.75% per annum, payable semi-annually in
arrears on April 15 and October 15 of each year beginning on
October 15, 2008. The Convertible Senior Notes mature on
April 15, 2013. (“maturity date”).
The Convertible Senior Notes are convertible at any time prior
to (and including) the third business day preceding the maturity
date into the American Depositary Shares, or ADSs, based on an
initial conversion rate of 25.4534 ADSs per US$1 principal
amount of Convertible Senior Notes (which represents an initial
conversion price of approximately US$39.29 per ADS), subject to
adjustments as defined in the Convertible Senior Notes Agreement
(the “Agreement”). In no event will the conversion
rate for the notes exceed 31.8167 ADSs shares per US$1 principal
amount.
Upon conversion of the Convertible Senior Notes, in lieu of
deliver of ADSs, the Company may elect to deliver cash or a
combination of cash and ADSs.
If a fundamental change, as defined in the Agreement, occurs,
the holders of the Convertible Senior Notes may require the
Company to repurchase all or a portion of their Convertible
Senior Notes, in integral multiples of US$1, at a repurchase
price in cash equal to 100% of the principal amount plus accrued
and unpaid interest to, but excluding, the repurchase date.
The Convertible Senior Notes may not be redeemed prior to
April 15, 2011. At any time on or after April 15,
2011, the Company may, at its option, redeem the Convertible
Senior Notes, in whole or in part from time to time, in integral
multiples of US$1, at a redemption price in cash equal to 100%
of the principal amount plus any accrued and unpaid interest to,
but excluding, the redemption date, provided that the closing
sale price of the Company’s ADSs for at least 20 trading
days in the 30 consecutive trading day period ending on the date
one trading day prior to the date of the notice of redemption is
greater than 130% of the conversion price of the notes on the
date of such notice.
On April 15, 2011, holders of the Convertible Senior Notes
may require the Company to repurchase all or a portion their
Convertible Senior Notes, in integral multiples of US$1, at a
price in cash equal to 100% of the principal amount plus any
accrued and unpaid interest to, but excluding, the repurchase
date, subject to certain additional conditions, as defined in
the Agreements.
The Convertible Senior Notes are unsecured, and are effectively
subordinated to all of the Company’s existing and future
secured indebtedness to the extent of the assets securing such
indebtedness, and are structurally subordinated to all
liabilities of our subsidiaries, including trade payables.
Pursuant to the registration rights agreement dated
April 15, 2008, the Company is required to file with the
SEC a shelf registration statement that would cover the resale
of the Convertible Senior Notes, the underlying ordinary shares
and the underlying ADSs, cause the shelf registration statement
to become effective and keep it
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
continuously effective under the U.S. Securities Act within
a specified period. If the Company fails to do so, the Company
is required to pay additional interest while there is a
continuing registration default at a rate per annum equal to
0.25% for the
90-day
period beginning on (and including) the date of the registration
default events, and thereafter at a rate per annum equal to
0.50%, of the aggregate principal amount of the applicable
Convertible Senior Notes, payable semi-annually on April 15 and
October 15 of each year, until the cessation of the registration
default events. This additional interest would be required to be
paid in cash. The maximum amount of additional interest expense
the Company would incur would be approximately US$9 million
through the maturity of the Convertible Senior Notes. The
Company filed the required shelf registration statement and
caused it to become effective under the U.S. Securities Act
on September 30, 2008. Management currently believes that
it is not probable the Company will be required to incur any
additional interest for failing to keep the shelf registration
statement continuously effective within the period as specified
in the registration rights agreement.
The convertible senior notes agreement does not contain any
financial covenants or other significant restrictions.
The Company adopted ASC Subtopic
470-20 as of
January 1, 2009 and retrospectively applied this change in
accounting to all prior periods presented for which the Company
had outstanding convertible notes that may be settled in cash
upon conversion (including partial conversion), as required by
the new standard. Under ASC Subtopic
470-20, the
Company separated the 4.75% convertible senior notes into a
liability component and an equity component. The carrying amount
of the liability component was calculated by measuring the fair
value of a similar liability (including any embedded features
other than the conversion option) that does not have an
associated equity component. The carrying amount of the equity
component representing the embedded conversion option was
determined by deducting the fair value of the liability
component from the initial proceeds ascribed to the 4.75%
convertible senior notes as a whole. The excess of the principal
amount of the liability component over its carrying amount is
amortized to interest expense over the expected life of a
similar liability that does not have an associated equity
component using the effective interest method. The equity
component is not remeasured as long as it continues to meet the
conditions for equity classification in ASC Subtopic
815-40,
Accounting for Derivative Financial Instruments Indexed to
and Potentially Settled in a Company’s own stock.
Issuance and transaction costs incurred at the time of the
issuance of the 4.75% convertible senior notes with third
parties are allocated to the liability and equity components in
proportion to the allocation of proceeds and accounted for as
debt issuance costs and equity issuance costs, respectively. The
4.75% convertible senior notes consisted of the following as of
December 31, 2008 and September 30, 2009:
As of September 30, 2009, the remaining life of the 4.75%
convertible senior notes was 1.54 years.
Debt issuance costs and debt discount are amortized as interest
expense using the effective interest rate method through
April 15, 2011, the earliest date the holders of the
Convertible Senior Notes can demand payments.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
The following table set forth total interest expense recognized
related to the 4.75% convertible senior notes during the
nine-month periods ended September 30, 2008 and 2009,
respectively:
Government subsidies are recognized when received and when all
the conditions for their receipt have been met. Subsidies that
compensate the Group for expenses incurred are recognized as a
reduction of expenses in the consolidated statement of
operations. Subsidies that are not associated with expenses
incurred or to be incurred are recognized as income. Subsidies
for the acquisition of equipment are recorded as a liability
until earned and then offset against the related capital assets.
Subsidies for obtaining the rights to use land are recorded as a
liability until earned and then amortized over the land use
right periods as a reduction of the amortization charges of the
related land use rights.
Xinyu Industry Development District of Jiangxi province in the
mainland China and JXLDK reached an agreement that for
electricity costs JXLDK pays at market rate, the district will
provide JXLDK with an unconditional subsidy. JXLDK received
subsidies of electricity costs of US$3,533 and US$3,084 for the
nine-month periods ended September 30, 2008 and 2009
respectively, which were recorded as a reduction to cost of
goods sold.
Certain subsidiaries of the Company in the mainland China
received subsidies of US$1,864 and US$17,054 in total for the
nine-month periods ended September 30, 2008 and 2009
respectively from the local government authority as an incentive
for development of the wafer industry and environmental
protection in Xinyu city of Jiangxi province in the mainland
China, which were recorded as other income as there were no
specific expenses required to be incurred by the Group to obtain
the subsidies. In addition, JXLDK received subsidies of
US$12,435 and US$372 from the city government of Xinyu, Jiangxi
province in the mainland China during the nine-month periods
ended September 30, 2008 and 2009 respectively. The
subsidies are calculated based on the portion of tax revenue the
city government is allocated by the state government in
connection with JXLDK’s tax payments to the national tax
bureau. Such subsidy was considered as an unconditional
appropriation of funds from the local government and recorded as
other income.
Certain subsidiaries of the Company in the mainland China also
received a tax refund of US$572 and US$4,673 from the local tax
bureau of Xinyu city for purchases of domestic equipment during
the nine-month periods ended September 30, 2008 and 2009
respectively, which was recorded as a reduction to acquisition
cost of the equipment.
Certain subsidiaries of the Company in the mainland China
received subsidies of US$ nil and US$63,186 in total for the
nine-month periods ended September 30, 2008 and 2009
respectively from local government authority for obtaining the
rights to use several pieces of land. Amortization of these
subsidies amounted to US$542 during the nine-month period ended
September 30, 2009, which are recognized as a reduction of
the amortization charges of the relevant land use rights.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
In connection with and to facilitate the offering of the
Convertible Senior Notes, the Company entered into Prepaid
Forward Contracts (the “Prepaid Forward Contracts”) on
April 9, 2008 with J.P. Morgan Chase Bank, Morgan
Stanley & Co International plc and UBS AG, which are
the affiliates of the representatives of the Initial Purchasers
(the “Dealers”). The Prepaid Forward Contracts relate
to a number of the Company’s ADSs equal to US$199,437,
divided by the closing price of the Company’s ADSs on the
New York Stock Exchange on April 9, 2008. Pursuant to the
Prepaid Forward Contracts, the Company prepaid the Dealers
US$199,437 on April 15, 2008 for the repurchase of
6,345,450 ADSs of the Company.
Until the Company satisfied certain conditions, including
completing certain corporate actions and satisfying requirements
of Cayman Islands law in relation to the repurchase of the
Company’s shares, the prepaid forward contracts would be
settled in cash on the final settlement date (or ealier in
certain circumstances) with the Dealers delivering the Company
an amount of cash equal to the product of (a) the ADS
number of 6,345,450 and (b) the weighted average price of
our ADSs over a number of days specified in the Prepaid Forward
Contracts. Once those conditions are satisfied, the Prepaid
Forward Contracts will, from the date when such conditions are
satisfied, be settled in shares with the Dealers delivering the
ADSs at their discretion, in full or in part, at any time prior
to May 30, 2013. The Company’s management determined
that the Company satisfied all those conditions on June 17,
2008.
The Prepaid Forward Contracts were initially recognized as
assets and measured at fair value as the contracts could only be
settled in cash at the inception date. When the conditions for
physically settlement in shares were met on June 17, 2008,
the fair value of Prepaid Forward Contracts as at that date were
reclassified as a reduction of additional paid-in capital in
equity. The change in fair value of the Prepaid Forward
Contracts of US$60,028 from the issuance date to June 17,
2008 was reported in the unaudited condensed consolidated
statement of operations for the nine-month period ended
September 30, 2008.
Since the Prepaid Forward Contracts require physical settlement
of a fixed number of ADSs at a fixed price per ADS at the time
conditions for physical settlement are met, the shares to be
repurchased pursuant to the Prepaid Forward Contracts are
treated as retired from June 17, 2008 through
September 30, 2008 for purposes of the Company’s basic
and diluted earning per shares calculations during the
nine-month period ended September 30, 2008.
The Company’s effective income tax rate was 11.1% and 10.5%
for the nine-month periods ended September 30, 2008 and
2009, respectively. Income taxes include foreign income tax at
statutory rules, the effect of permanent differences and foreign
income tax holiday.
Basic and diluted earning (loss) per share effects of the tax
holiday for the nine-month periods ended September 30, 2008
and 2009 are as follows:
As of January 1, 2008 and 2009 and for the nine-months
periods ended September 30, 2008 and 2009, the Group has no
unrecognized tax benefit relating to uncertain tax positions.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
Capital commitments outstanding at December 31, 2008 and
September 30, 2009 not provided for in the financial
statements were as follows:
The Group has entered into several purchase agreements with
certain suppliers whereby the Group is committed to purchase a
minimum amount of raw materials to be used in the manufacture of
its products:
On October 4, 2007, the Company announced that its former
financial controller, Charley Situ, who was terminated for cause
on September 25, 2007, had communicated to LDK’s
management and others subsequent to his termination alleged
inconsistencies in LDK’s inventory reporting as of
August 31, 2007 (“Situ allegations”). On
October 9, 2007 and through January 22, 2008, the
Group has been named as defendant, along with certain of its
senior executives, in a number of class action complaints and a
derivative complaint in the United States pertaining to the Situ
allegations (“Complaints”). These Complaints further
allege that management of the Group had knowingly and
intentionally deceived the plaintiffs through misleading
financial reporting by overstating its inventories of
polysilicon.
In response to the Situ allegations, the Company’s Audit
Committee called for an independent investigation into the
matter and engaged outside professionals, including legal
counsel, forensic accountants from a big four accounting firm
and two technical polysilicon experts to carry out this
investigation. Upon completion of this independent
investigation, the Company’s Audit Committee was informed
that no material errors were found with the Group’s stated
silicon inventory quantity as of August 31, 2007, and that
the Group was using each of its various types of silicon
feedstock in the production of its multicrystalline solar
wafers, and that a provision for obsolete, unusable or excess
silicon feedstock was not required. Subsequently, the United
States Securities and Exchange Commission (“SEC”) also
initiated an investigation into the Situ allegations. Upon
completion of the Audit Committee’s independent
investigation, the results were presented to the SEC. On
March 24, 2008 the SEC staff informed the Company that it
did not intend to recommend any enforcement action by the
Commission.
The various class action complaints were consolidated into a
Consolidated Class Action Complaint filed on March 10,
2008 in U.S. Federal Court in Northern California. The
Company believes the allegations in the securities and
derivative lawsuits are without merit and filed several motions
to dismiss the complaints beginning from April 2008. All of
these motions to dismiss were denied by September 2008. The
Company has begun the discovery phrase of the complaints and
continues to vigorously defend these legal complaints. A trial
date was previously scheduled on November 9, 2009 for these
complaints and was postponed to March 2010 because the plaintiff
and the Company will not complete the discovery until December
2009.
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LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
Based on the results of this independent investigation, the
decision by the SEC and consultation with its legal counsel,
management believes it is not probable that an unfavorable
outcome will occur upon the ultimate resolution of the pending
litigation for this matter. Further, it is not possible for
management to reasonably estimate the amount of loss, if any,
the Group would incur in the event of an unfavorable outcome
stemming from the resolution of this uncertainty.
ii) Allegation
for breach of employment contract
On May 22, 2009, the Company received a letter a former
employee sent though the employee’s lawyer claiming the
Company for breach of employment agreement for compensation. The
Company and the former employee have agreed to resolve the
personal claim through arbitration. The case is currently in
discovery stage and the discovery is expected to be completed in
first quarter of 2010 with the arbitration to be scheduled in
June 2010. Based on the relevant facts and consultation with its
legal counsel, management believes it is not probable that an
unfavorable outcome will occur upon the ultimate resolution for
this matter. Further, it is not possible for management to
reasonably estimate the amount of loss, if any, the Group would
incur in the event of an unfavorable outcome stemming from the
resolution of this uncertainty.
The Group signed a long-term solar wafer supply agreement
(“Supply Agreement”) with Q-cells SE
(“Q-Cells”)
in December 2007, pursuant to which Q-Cells made a prepayment of
US$244,500. Pursuant to the Supply Agreement, the prepayment was
scheduled to be credited towards Q-Cells purchases from the
Group each year from 2009 to 2015 at a predetermined percentage.
As of December 31, 2008, US$7,335 and US$237,165 were
recorded as current and non-current advance payment liabilities
to Q-Cells respectively in accordance with the deduction
schedule stipulated in the Supply Agreement.
In August 2009, the Group was informed by Q-Cells of its claim
of unilateral termination of the Supply Agreement with immediate
effect and its request to draw the outstanding prepayment of
US$244,085 against a bank guarantee issued by Bayerische
Hypo-Und Vereinsbank AG-Hamburg Germany (“HVB”).
Management, together with the Group’s legal counsel
reviewed the Supply Agreement terms and all the written
communications with Q-Cells, and concluded that
Q-Cells
lacked the legal and contractual ground to unilaterally
terminate the Supply Agreement. Consequently, the Group
determined that it defend itself rigorously to have Q-Cells
honor the terms of the Supply Agreement.
On 4 December 2009, the Group and Q-Cells reached an
amendment agreement (“Amendment Agreement”). Pursuant
to the Amendment Agreement, the Group has agreed to cease any
pending proceedings or claims against Q-Cells and Q-Cells has
agreed not to draw the guarantee issued by HVB.
Q-Cells also
agreed that prior to June 30, 2010, it will not withdraw
the prepayment against the HVB guarantee.
In respect of the outstanding US$244,085, the Group reclassified
the liability due to
Q-Cells in
accordance with the repayment schedule as set out in the
Amendment Agreement below:
However, in any instance of valid termination of the Amendment
Agreement and Supply Agreement, the Group shall pay back the
outstanding prepayment to Q-Cells within 90 days after the
written termination notice. Also, beginning on April 1,
2011, Q-Cells has the right to terminate the Supply Agreement
and Amendment Agreement with 12 months prior written notice
without cause. Upon receiving such written notice from Q-cells,
the Group is obliged to repay all the outstanding prepayments
within 12 months period.
Table of Contents
LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
During the nine-month periods ended September 30, 2009, the
Board of Directors of the Company approved the granting of
710,400 share options to the Company’s employees at
exercise prices ranging from US$8.46 to US$13.06 with
contractual terms of ten years and vesting periods of no less
than five years, with no more than one-fifth of the options to
be vested each year.
The weighted-average grant-date fair value of options granted
during the nine-month periods ended September 30, 2009 was
US$8.19 per share. The fair value of the option award is
estimated on the date of grant using a lattice-based option
valuation model that uses the weighted average assumptions noted
in the following table.
A summary of movements of share options for the nine-month
periods ended September 30, 2009 is presented below:
The total intrinsic value of options exercised during the
nine-month periods ended September 30, 2009 was US$697.
Cash received from the exercise of options under the share
option plans during the nine-month periods ended
September 30, 2009 was US$772.
The Company recorded non-cash share-based compensation expense
of US$12,205 and US$11,794 for the nine-month periods ended
September 30, 2008 and 2009 respectively in respect of
share options granted to employees, of which US$2,655 was
allocated to costs of goods sold, US$8,862 was allocated to
general and administrative expenses, US$24 was allocated to
selling expenses, and US$253 was allocated to research and
development costs. As of September 30, 2009, US$13,389 of
unrecognized compensation cost related to non-vested share
options is expected to be recognized over the remaining weighted
average period of 2.2 years. The Company is expected to
issue new shares to satisfy share option exercises.
Table of Contents
LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
The computation of basic and diluted earnings (loss) per share
is as follows:
The computation of basic and dilutive earnings per share for the
nine-month periods ended September 30, 2008 and
September 30, 2009 reflects a reduction for a weighted
average of 2,454,809 ordinary shares and 6,345,450 ordinary
shares respectively deemed to have been retired as a result of
the Prepaid Forward Contracts (See note (11)).
During the nine-month periods ended September 30, 2008 and
2009, respectively, the Group’s dilutive potential ordinary
shares outstanding consist of convertible senior notes and share
options. The computation of diluted loss per share for the
nine-month period ended September 30, 2009 did not assume
conversion of the convertible senior notes because, when
applying the as-if converted method, the effect of the
10,181,360 ordinary shares issuable upon conversion of the
convertible senior notes under the conversion terms of the
convertible senior notes agreements was anti-dilutive.
In computing diluted loss per share for the nine-month period
ended September 30, 2009, there was no dilutive effect of
outstanding share options of 1,306,805 by applying the treasury
stock method because the impact was anti-dilutive.
Table of Contents
LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
For the periods presented, in addition to the guarantees and
security provided by related parties for the Group’s bank
borrowings in note 8, the principal related party
transactions and amounts outstanding with the related parties
are summarized as follows:
In addition to the above, certain of the Group’s executives
and employees exercised share options which vested in 2007 and
2008 during the period ended September 30, 2008. Pursuant
to the PRC tax regulations, the income derived from the exercise
of the share options is subject to individual income tax, which
should be withheld by the Group from these executives and
employees for payment to the PRC tax authorities. The Group had
an outstanding receivable from these executives and employees of
US$42,021 and US$41,820 as of December 31, 2008 and
September 30, 2009 respectively in relation to the
individual income tax liabilities arising from the exercise of
share options by these executives and employees, which are
included in other current assets.
Table of Contents
LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the Group’s net revenues,
based on the geographic location of the customers:
Significant
concentrations
The carrying amounts of cash and cash equivalents, pledged bank
deposits, trade accounts receivable, prepayments and other
current assets represent the Group’s maximum exposure to
credit risk in relation to financial assets. As of
September 30, 2009, substantially all of the Group’s
cash and cash equivalents and pledged bank deposits were held in
major financial institutions located in the mainland China and
the Hong Kong Special Administrative Region, which management
believes have high credit ratings. As of September 30,
2009, cash and cash equivalents and pledged bank deposits held
in mainland China and Hong Kong financial institutions amounted
to US$189,145 in total and were denominated in the following
currencies:
The following represents the amount of sales to customers that
directly or indirectly contributed, on an individual basis, 10%
or more of revenue for the nine-month periods ended
September 30, 2008 and 2009:
Accounts receivable balances due from the above customers are as
follows:
Table of Contents
LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
A significant portion of the Company’s outstanding accounts
receivables is derived from sales to a limited number of
customers. As of September 30, 2008 and 2009, in addition
to the accounts receivable balances due from Gintech and CSI
disclosed above, outstanding accounts receivables with
individual customers in excess of 10% of total accounts
receivables are as follows:
Solar-grade polysilicon feedstock is an essential raw material
in manufacturing the Group’s multicrystalline solar wafers.
The Group’s operations depend on its ability to procure
sufficient quantities of solar-grade polysilicon on a timely
basis. The significant growth of the solar wafer industry and
the competing demand and buying power of the semiconductor
industry have resulted in an industry-wide shortage in
solar-grade polysilicon. Also, polysilicon manufacturing is a
highly concentrated industry and there are only a limited number
of polysilicon producers in the world. The Group’s failure
to obtain sufficient quantities of polysilicon in a timely
manner could disrupt its operations, prevent it from operating
at full capacity or limit its ability to expand as planned,
which will reduce, and stunt the growth of, its manufacturing
output and revenue.
In order to secure stable supply of polysilicon, the Group makes
prepayments to certain suppliers. Such amounts are recorded as
prepayments to suppliers on the unaudited condensed consolidated
balance sheets and amounted to US$135,692 as of
September 30, 2009 (December 31, 2008: US$125,413).
The Group makes the prepayments without receiving collateral for
such payments. As a result, the Group’s claims for such
prepayments would rank only as an unsecured claim, which exposes
the Group to the credit risks of the suppliers. As of
December 31, 2008 and September 30, 2009, outstanding
advances made to individual suppliers in excess of 10% of total
prepayments to suppliers are as follows:
The Group relies on a limited number of equipment suppliers for
all of its principal manufacturing equipment. There is currently
a shortage globally in much of the equipment required for its
manufacturing process and capacity expansion. If any of the
Group’s major equipment suppliers encounter difficulties in
the manufacturing or shipment of its equipment to the Group or
otherwise fail to supply equipment according to its
requirements, it will be difficult for the Group to find
alternative providers for such equipment on a timely basis which
in turn could adversely affect its production and sales.
Before 2009, the Group’s only operating segment is the
wafer productions in the PRC. The chief operating decision maker
regularly reviewed the financial statements of the Group’s
sole operating subsidiary prepared under general accept
accounting principles in the PRC (“PRC GAAP”). With
the Group’s expansion into downstream business and
commencement of operations of Hong Kong and European companies
in 2009, the Group determined that it operates in a single
business segment that includes the design, development and
manufacture of PV products for the nine-month period ended
September 30, 2009 because the Group’s chief operating
decision maker regularly reviews consolidated results of the
whole group prepared under US GAAP when making decisions about
allocating resources and assessing performance of the Group. As
a result, the Group operates in a single segment and total
Table of Contents
LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
segment revenue, income and assets equals the consolidated
revenue, income before income taxes and assets. Therefore,
segment information is no longer presented.
Management used the following methods and assumptions to
estimate the fair value of financial instruments at the relevant
balance sheet date:
As of September 30, 2009, the Group did not have any assets
and liabilities that are measured at fair value on a
nonrecurring basis in periods subsequent to initial recognition.
The Group is exposed to certain risks relating to its ongoing
business operation in the PRC. The primary risks managed by
using derivative instruments are foreign currencies risks and
interest rate risks.
The Company’s principal operating subsidiaries are located
in the PRC with the Renminbi being their functional currency.
The majority of sales, costs and capital expenditures are
denominated in Renminbi, however the Company’s PRC
operating subsidiaries also make sales, purchases and capital
expenditures and obtain bank borrowings in currencies other than
Renminbi, which primarily are in U.S. dollars.
Historically, the required payments in U.S. dollars
resulting from purchases, capital expenditure and bank
borrowings have exceeded receipts in U.S. dollars resulting
from sales. Any appreciation of the U.S. dollar against the
Renminbi will generally result in foreign exchange losses and
adversely affect the Group’s net income. With an aim to
reduce its risk exposure, the Company will, on a selected basis,
enter into forward contracts with the same financial
institutions to forward purchase U.S. dollars when it
obtains certain bank borrowings denominated in U.S. dollars
through its PRC operating subsidiaries. During the nine-month
period ended September 30, 2008, the Group entered into a
foreign exchange forward contract with a notional amount of
US$33,000, against its U.S. denominated short term and long
term bank borrowings. No foreign exchange forward contract was
entered by the Group during the nine-month period ended
September 30, 2009.
The Group’s exposure to the risk of changes in market
interest rates primarily relates to its bank borrowings. To
finance its business operation and expansion, the Company’s
PRC operating subsidiaries will obtain short-term and long-term
bank borrowings. As of September 30, 2009, the Group had
outstanding bank borrowings of US$1,402,672 in total, of which
US$373,624 in total carries variable interest rates with
effective interest rates ranging from 2.661% to 8.000% per annum
as of September 30, 2009. Interest expenses on these
banking
Table of Contents
LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
borrowings may increase as a result of change in market interest
rates. With an aim to reduce its interest rate exposure, the
Group will, from time to time, enter into interest rate swap
contracts with financial institutions in the PRC. During the
nine-month period ended September 30, 2008, the Group
entered into an interest rate swap contract with a notional
amount of US$60,000 in respect of a long-term bank loan with the
same amount obtained during this period, and sold an interest
rate swap contract entered prior to January 1, 2008 to an
independent third party at its carrying value on the date of
transfer. During the nine-month period ended September 30,
2009, the Group did not enter into any interest rate swap
contract.
The effect of derivative instruments on the consolidated
statements of operations for the nine-month periods ended
September 30, 2008 and 2009 are as follows:
In addition to the disposal of equity interests in a subsidiary
and subsequent settlement of dispute with Q-cells as disclosed
in note 1 and note 13(d) respectively, the following
significant events have occurred subsequent to the balance sheet
date of September 30, 2009.
Subsequent to September 30, 2009, the Group has
successfully obtained additional secured and unsecured
short-term bank borrowings of US$264,206 with interest rates
ranging from 1.044% and 5.310% and secured and unsecured
long-term bank borrowings of US$99,575 with interest rate 5.400%
to be repriced annually, and repaid short-term bank borrowings
and current portion of long-term bank borrowings of US$363,405
in total. As of December 17, 2009, the Group’s
short-term bank borrowings with current portion of long-term
bank borrowings and long-term bank borrowings amounted to
US$1,009,555 and US$393,493 respectively. In November 2009, the
Group was granted by Bank of China (“BOC”) a long-term
bank borrowing of RMB600 million (US$88 million). BOC
also granted a revolving credit facilities of
RMB4,950 million (US$725 million) to the Group, which
covers both the additional RMB600 million long-term bank
borrowing and existing bank borrowings from BOC as of
December 17, 2009 of RMB2,958 million
(US$433 million), leading to an unused revolving credit
facility of RMB1,392 million (US$204 million) for
short-term bank borrowings from BOC. As of December 17,
2009, the Group has total revolving credit facilities of
US$1,792,989, of which US$458,771 is unused. Management believes
that the Group will be able to obtain continued borrowing
facilities from the banks so that when required by the Group,
the bank loans due for repayment within the next 12 months
can be successfully replaced with new loans drawn down from
existing revolving banking facilities and new borrowing
facilities.
On December 17, 2009, we signed indicative
termsheet with VMS Investment Group Limited and its affiliates,
or the Investors, pursuant to which the Investors have agreed to
subscribe to between $50 million to $80 million
aggregate amount of redeemable and convertible preference shares
to be issued by a Cayman Islands
Table of Contents
LDK SOLAR
CO., LTD. AND SUBSIDIARIES
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED
INTERIM FINANCIAL
STATEMENTS — (Continued)
subsidiary to be created to hold and operate our polysilicon
business. The transaction will require a reorganization of our
polysilicon business through which the assets and liabilities
relating to our polysilicon business will be assumed by the
newly created subsidiary, which will be wholly owned by us and
be the issuer of the redeemable and convertible preference
shares. The terms of the securities have a two-year maturity and
are convertible at the option of the holders at a conversion
ratio that includes an investment internal rate of return. The
investment is expected to close by the end of March 2010 subject
to final documentation and closing conditions.
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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