e10vq
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to
Commission file number: 001-33156
First Solar, Inc.
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  20-4623678
(I.R.S. Employer
Identification No.)
4050 East Cotton Center Boulevard, Building 6, Suite 68
Phoenix, Arizona 85040

(Address of principal executive offices, including zip code)
(602) 414-9300
(Registrant’s telephone number, including area code)
 
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     The number of shares of the registrant’s common stock, par value $0.001, outstanding as of May 1, 2007 was 72,365,068 shares.
 
 

 


 

FIRST SOLAR, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
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 EX-10.01
 EX-31.01
 EX-31.02
 EX-32.01

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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
                 
    Three Months Ended  
    April 1,     March 31,  
    2006     2007  
Net sales
  $ 13,624     $ 66,949  
Cost of sales
    10,352       36,907  
 
           
Gross profit
    3,272       30,042  
 
           
Operating expenses:
               
Research and development
    1,519       3,058  
Selling, general and administrative
    5,872       13,690  
Production start up
    2,579       8,474  
 
           
Total operating expenses
    9,970       25,222  
 
           
Operating income (loss)
    (6,698 )     4,820  
Foreign currency gain (loss)
    900       (270 )
Interest expense
    (423 )     (201 )
Other income (expense), net
    349       3,960  
 
           
Income (loss) before income taxes
    (5,872 )     8,309  
Income tax expense
    23       3,281  
 
           
Net income (loss)
  $ (5,895 )   $ 5,028  
 
           
Net income (loss) per share:
               
Basic
  $ (0.12 )   $ 0.07  
 
           
Diluted
  $ (0.12 )   $ 0.07  
 
           
Weighted-average number of shares used in per share calculations:
               
Basic
    50,777       72,347  
 
           
Diluted
    50,777       75,392  
 
           
See accompanying notes to these condensed consolidated financial statements.

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FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
                 
    December 30,     March 31,  
    2006     2007  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 308,092     $ 325,012  
Short-term investments
    323       326  
Accounts receivable, net
    27,966       7,844  
Inventories
    16,510       15,023  
Economic development funding receivable
    27,515       34,947  
Prepaid expenses and other current assets
    8,116       4,337  
 
           
Total current assets
    388,522       387,489  
Property, plant and equipment, net
    178,868       220,918  
Restricted investments
    8,224       8,313  
Other noncurrent assets
    2,896       2,043  
 
           
Total assets
  $ 578,510     $ 618,763  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Short-term debt
  $ 16,339     $ 20,556  
Current portion of long-term debt
    3,311       3,319  
Accounts payable and accrued expenses
    32,083       44,319  
Other current liabilities
    340        
 
           
Total current liabilities
    52,073       68,194  
Accrued recycling
    3,724       4,989  
Long-term debt
    61,047       71,955  
Other noncurrent liabilities
          310  
 
           
Total liabilities
    116,844       145,448  
Commitments and contingencies
               
Employee stock options on redeemable shares
    50,226       91,097  
Stockholders’ equity:
               
Common stock, $0.001 par value per share; 500,000,000 shares authorized; 72,364,135 shares issued and outstanding at March 31, 2007
    72       72  
Additional paid-in capital
    555,749       521,375  
Accumulated deficit
    (145,403 )     (140,431 )
Accumulated other comprehensive income
    1,022       1,202  
 
           
Total stockholders’ equity
    411,440       382,218  
 
           
Total liabilities and stockholders’ equity
  $ 578,510     $ 618,763  
 
           
See accompanying notes to these condensed consolidated financial statements.

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FIRST SOLAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
                 
    Three Months Ended  
    April 1,     March 31,  
    2006     2007  
Cash flows from operating activities:
               
Cash received from customers
  $ 9,502     $ 86,618  
Cash paid to suppliers and employees
    (20,772 )     (46,395 )
Interest, net of amounts capitalized
    (424 )     3,923
Income tax
    (23 )     (5,025 )
Other
    347       (192 )
 
           
Net cash provided by (used in) operating activities
    (11,370 )     38,929  
 
           
Cash flows from investing activities:
               
Purchases of property, plant and equipment
    (25,793 )     (40,755 )
Purchases of restricted investments
    (8 )     (38 )
Other investments in long-term assets
    4        
 
           
Net cash used in investing activities
    (25,797 )     (40,793 )
 
           
Cash flows from financing activities:
               
Proceeds from notes payable to a related party
    10,000        
Repayment of notes payable to a related party
    (30,000 )      
Repayment of long-term debt
          (823 )
Equity contributions
    30,000        
Proceeds from stock options exercised
    100       588  
Proceeds from debt
    73,260       14,815  
Tax benefit from options
          123  
Proceeds from economic development funding
          3,968  
Other financing activities
          (2 )
 
           
Net cash provided by financing activities
    83,360       18,669  
 
           
Effect of exchange rate changes on cash and cash equivalents
    (126 )     115  
 
           
Net increase in cash and cash equivalents
    46,067       16,920  
Cash and cash equivalents, beginning of the period
    16,721       308,092  
 
           
Cash and cash equivalents, end of the period
  $ 62,788     $ 325,012  
 
           
Supplemental disclosure of significant non-cash investing activities:
               
Property, plant and equipment acquisitions funded by liabilities
  $ 13,798     $ 16,199  
 
           
See accompanying notes to these condensed consolidated financial statements.

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FIRST SOLAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Three Months Ended March 31, 2007
Note 1 — Basis of Presentation
     Basis of presentation. The accompanying unaudited condensed consolidated financial statements of First Solar, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, the interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three months ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 29, 2007, or for any other period. The balance sheet at December 30, 2006 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements and notes should be read in conjunction with the financial statements and notes thereto for the year ended December 30, 2006 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.
     Fiscal periods. We report our results of operations using a 52 or 53 week fiscal year, which ends on the Saturday on or before December 31. Our fiscal quarters end on the Saturday closest to the end of the applicable calendar quarter. Fiscal 2007 will end on December 29, 2007 and will consist of 52 weeks.
Note 2 — Significant Accounting Policies
     Our significant accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 30, 2006 filed with the Securities and Exchange Commission. Our significant accounting policies reflect the adoption of the provisions of FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, and have otherwise not materially changed during the three months ended March 31, 2007.
Note 3 — Initial Public Offering
     The Securities and Exchange Commission declared the Company’s first registration statements effective on November 16, 2006, which we filed on Forms S-1 (Registration No. 333-135574) and pursuant to Rule 462(b) (Registration No. 333-138779) under the Securities Act of 1933 in connection with the initial public offering of the Company’s common stock. Under these registration statements, the Company registered 22,942,500 shares of its common stock, including 2,942,500 subject to an underwriter’s over-allotment option. First Solar registered 16,192,500 of these shares on its own behalf and 6,750,000 of these shares on behalf of certain of its stockholders, including one of the Company’s officers. In November 2006, the Company completed the initial public offering, in which it sold all of these shares that it registered on its behalf and on behalf of the selling stockholders, for an aggregate public offering price of $458.9 million, which included $58.9 million from the underwriters’ exercise of their over-allotment option. Of the $458.9 million of total gross proceeds, the Company received gross proceeds of $323.9 million, against which it charged $16.6 million of underwriting discounts and commissions and $4.6 million of other costs of the offering, resulting in a net increase in the Company’s paid-in capital of $302.7 million. The remaining $135.0 million of gross proceeds went to selling stockholders; they applied $8.4 million to underwriting discounts and commissions and received $126.6 million of the offering proceeds.

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Note 4 — Economic Development Funding
     On July 26, 2006, we were approved to receive taxable investment incentives (“Investitionszuschüsse”) of approximately €21.5 million ($28.0 million at an assumed exchange rate of $1.30/€1.00) from the State of Brandenburg, Germany. These funds will reimburse us for certain costs we will incur building our plant in Frankfurt (Oder), Germany, including costs for the construction of buildings and the purchase of machinery and equipment. Receipt of these incentives is conditional upon the State of Brandenburg, Germany having sufficient funds allocated to this program to pay the reimbursements we claim. In addition, we are required to operate our facility for a minimum of five years and employ a specified number of employees during this period. Our incentive approval expires on December 31, 2009. As of March 31, 2007, we had received cash payments of $21.0 million under this program and we had accrued an additional $3.6 million that we are eligible to receive under this program based on qualifying expenditures that we had incurred through that date.
     We are eligible to recover up to approximately €23.8 million ($30.9 million at an assumed exchange rate of $1.30/€1.00) of expenditures related to the construction of our plant in Frankfurt (Oder), Germany under the German Investment Grant Act of 2005 (“Investitionszulagen”). This Act permits us to claim tax-exempt reimbursements for certain costs we will incur building our plant in Frankfurt (Oder), Germany, including costs for the construction of buildings and the purchase of machinery and equipment. Tangible assets subsidized under this program have to remain in the region for at least five years. In accordance with the administrative requirements of the Act, we plan to claim reimbursement under the Act in conjunction with the filing of our tax returns with the local German tax office. Therefore we do not expect to receive funding from this program until we file our annual tax return for fiscal 2006 in 2007. In addition, this program expired on December 31, 2006 and we can only claim reimbursement for investments completed by this date. The majority of our buildings and structures and our investment in machinery and equipment were completed by this date. As of March 31, 2007, we had accrued $30.5 million that we are eligible to receive under this program based on qualifying expenditures that we had incurred through that date.
Note 5 — Consolidated Balance Sheet Details
Accounts receivable, net
     Accounts receivable, net consisted of the following at December 30, 2006 and March 31, 2007 (in thousands):
                 
    December 30,
2006
    March 31,
2007
 
Accounts receivable, gross
  $ 27,970     $ 7,844  
Allowance for doubtful accounts
    (4 )      
 
           
Accounts receivable, net
  $ 27,966     $ 7,844  
 
           
Inventories
     Inventories consisted of the following at December 30, 2006 and March 31, 2007 (in thousands):
                 
    December 30,
2006
    March 31,
2007
 
Raw materials
  $ 8,212     $ 10,278  
Work in process
    1,123       481  
Finished goods
    7,175       4,264  
 
           
Total inventories
  $ 16,510     $ 15,023  
 
           

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Property, plant and equipment
     Property, plant and equipment consisted of the following at December 30, 2006 and March 31, 2007 (in thousands):
                 
    December 30,
2006
    March 31,
2007
 
Buildings and improvements
  $ 21,804     $ 43,163  
Machinery and equipment
    79,803       153,219  
Office equipment and furniture
    4,428       5,080  
Leasehold improvements
    3,086       3,086  
 
           
Gross depreciable property, plant and equipment
    109,121       204,548  
Accumulated depreciation and amortization
    (18,880 )     (24,022 )
 
           
Net depreciable property, plant and equipment
    90,241       180,526  
Land
    2,836       2,859  
Construction in progress
    85,791       37,533  
 
           
Net property, plant and equipment
  $ 178,868     $ 220,918  
 
           
     Depreciation and amortization of property, plant and equipment was $1.0 million and $5.1 million for the three months ended April 1, 2006 and March 31, 2007, respectively.
     We incurred and capitalized interest cost (into our property, plant and equipment) as follows during the three months ended April 1, 2006 and March 31, 2007 (in thousands):
                 
    Three Months Ended  
    April 1,
2006
    March 31,
2007
 
Interest cost incurred
  $ 1,304     $ 1,048  
Interest capitalized
    (881 )     (847 )
 
           
Interest expense
  $ 423     $ 201  
 
           

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Accounts payable and accrued expenses
     Accounts payable and accrued expenses consisted of the following at December 30, 2006 and March 31, 2007 (in thousands):
                 
    December 30,
2006
    March 31,
2007
 
Accounts payable
  $ 14,001     $ 11,219  
Product warranty liability
    2,764       3,355  
Income tax payable
    5,152       3,411  
Accrued compensation and benefits
    2,642       3,587  
Accrued property, plant and equipment
    1,968       16,746  
Other accrued expenses
    5,556       6,001  
 
           
Total accounts payable and accrued expenses
  $ 32,083     $ 44,319  
 
           
Note 6 — Stock-Based Compensation
     On December 26, 2004, we adopted Statement of Financial Accounting Standards No. (“SFAS”) 123(R), Share-Based Payment, using the modified retrospective transition method. Accordingly, we measure stock-based compensation cost at the grant date based on the fair value of the award and recognize this cost as an expense over the employee’s requisite service period. The stock-based compensation expense that we recognized on our statements of operations for the three months ended April 1, 2006 and March 31, 2007 was as follows (in thousands):
                 
    Three Months Ended  
    April 1,
2006
    March 31,
2007
 
Stock-based compensation cost included in:
               
Cost of sales
  $ 1,020     $ 1,495  
Research and development
    599       1,158  
Selling, general and administrative
    990       2,868  
Production start-up
          255  
 
           
 
               
Total stock-based compensation cost
  $ 2,609     $ 5,776  
 
           
     The increase in stock-based compensation was primarily the result of new option grants. Stock-based compensation cost capitalized in our inventory was $0.4 million and $0.2 million at April 1, 2006 and March 31, 2007, respectively. At March 31, 2007, we had $28.3 million of unrecognized stock-based compensation cost related to non-vested awards, which we expect to recognize as an expense over a weighted-average period of approximately two years.
Note 7 — Debt
     Our long-term debt consisted of the following at December 30, 2006 and March 31, 2007 (in thousands):
                 
    December 30,     March 31,  
    2006     2007  
Euro denominated loan, variable interest Euribor plus 1.6%, due 2008 through 2012
  $ 45,216     $ 56,931  
2.25% loan, due 2006 through 2015
    14,865       14,459  
0.25% – 3.25% loan, due 2007 through 2009
    5,000       4,583  
Capital lease obligations
    15       13  
 
           
 
    65,096       75,986  
Less unamortized discount
    (738 )     (712 )
 
           
Total long-term debt
    64,358       75,274  
Less current portion
    (3,311 )     (3,319 )
 
           
Non-current portion
  $ 61,047     $ 71,955  
 
           

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     We had outstanding borrowings of $16.3 million and $20.6 million at December 30, 2006 and March 31, 2007, respectively, which we classify as short-term debt. We must repay this debt with any funding we receive from the Federal Republic of Germany under the Investment Grant Act of 2005, but in any event, this debt must be paid in full by December 30, 2008.
Note 8 — Commitments and Contingencies
Product warranties
     Product warranty activity during the three months ended April 1, 2006 and March 31, 2007 was as follows (in thousands):
                 
    Three Months Ended  
    April 1,
2006
    March 31,
2007
 
Product warranty liability, beginning of period
  $ 1,853     $ 2,764  
Accruals for new warranties issued (warranty expense)
    119       728  
Settlements
    (1 )     (1 )
Change in estimate of warranty liability
    (40 )     (136 )
 
           
Product warranty liability, end of period
  $ 1,931     $ 3,355  
 
           
Note 9 — Income Taxes
     On December 31, 2006, we adopted the provisions of FIN 48, which is an interpretation of SFAS 109, Accounting for Income Taxes. Tax law is subject to significant and varied interpretation, so an enterprise may be uncertain whether a tax position that it has taken will ultimately be sustained when it files its tax return. FIN 48 establishes a “more-likely-than-not” threshold that must be met before a tax benefit can be recognized in the financial statements and, for those benefits that may be recognized, stipulates that enterprises should recognize the largest amount of the tax benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the taxing authority. FIN 48 also addresses changes in judgments about the realizability of tax benefits, accrual of interest and penalties on unrecognized tax benefits, classification of liabilities for unrecognized tax benefits and related financial statement disclosures. As permitted by FIN 48, our policy is to recognize any interest and penalties that we might incur related to our tax positions in income tax expense.
     As a result of the implementation of FIN 48, there are $0.5 million of potential tax benefits from prior years that we are not permitted to recognize under FIN 48 and have not previously recognized, but which would affect our effective tax rate if recognized. We also identified a liability of $0.1 million related to uncertain tax positions, which we recorded by a cumulative effect adjustment to equity. During the three months ended March 31, 2007, we did not identify any increases or decreases in unrecognized tax benefits as a result of tax positions taken in prior periods or taken during the three months ended March 31, 2007. Furthermore, during the three months ended March 31, 2007, we did not identify any reductions in unrecognized tax benefits relating to settlements with taxing authorities or due to the lapse of applicable statutes of limitations.
     We are subject to filing requirements for income tax returns in the U.S federal jurisdiction and various state and foreign jurisdictions. We are not presently undergoing any examinations by any taxing authorities, but our tax years going back to 2003 are subject to examination in certain foreign tax jurisdictions in which we operate.
     We presently have a valuation allowance on all of our net deferred tax assets in all of the taxing jurisdictions in which we operate. The ultimate realization of deferred tax assets depends on the generation of sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions during

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the future periods in which the related temporary differences become deductible. We determined the valuation allowance on our deferred tax assets in accordance with the provisions of SFAS 109, which require us to weigh both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. We evaluated all significant available positive and negative evidence, including the existence of cumulative net losses, benefits that could be realized from available tax strategies and forecasts of future taxable income, in determining the need for a valuation allowance on our deferred tax assets. After applying the evaluation guidance of SFAS 109, we determined that it was necessary to record a valuation allowance against all of our net deferred tax assets. We will maintain this valuation allowance until sufficient positive evidence exists to support its reversal in accordance with SFAS 109.
Note 10 — Income (loss) per share
     Basic net income (loss) per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed giving effect to all potential dilutive common stock, including stock options.
     The reconciliation of the numerator and denominator used in the calculation of basic and diluted net income (loss) per share is as follows (in thousands):
                 
    Three Months Ended  
    April 1,     March 31,  
    2006     2007  
Basic net income (loss) per share
               
Numerator:
               
Net income (loss)
  $ (5,895 )   $ 5,028  
 
           
 
               
Denominator:
               
Weighted-average common stock outstanding
    48,142       72,347  
Effect of rights issue
    2,635        
 
           
Weighted-average shares used in computing basic net income (loss) per share
    50,777       72,347  
 
           
 
               
Diluted net income (loss) per share
               
Denominator:
               
Weighted-average shares used in computing basic net income (loss) per share
    50,777       72,347  
Add stock options outstanding
          3,045  
 
           
Weighted-average shares used in computing diluted net income (loss) per share
    50,777       75,392  
 
           
     The following outstanding options were excluded from the computation of diluted net income (loss) per share as they had an antidilutive effect (in thousands):
                 
    Three Months Ended
    April 1,   March 31,
    2006   2007
Options to purchase common stock
    5,229       3,437  
 
       

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Note 11 — Comprehensive Income (loss)
     Comprehensive income (loss) includes foreign currency translation adjustments and unrealized gains on derivate instruments designated and qualifying as cash flow hedges, the impact of which has been excluded from net income and reflected as components of stockholders’ equity (in thousands).
                 
    Three Months Ended  
    April 1, 2006     March 31, 2007  
Net income
  $ (5,895 )   $ 5,028  
Foreign currency translation adjustments
    (127 )     161  
Unrealized gain (loss) on derivative instruments
          19  
 
           
Comprehensive income (loss)
  $ (6,022 )   $ 5,208  
 
           
     Components of accumulated other comprehensive income were as follows (in thousands):
                 
    December 30,     March 31,  
    2006     2007  
Foreign currency translation adjustments
  $ 1,002     $ 1,163  
Unrealized gain on derivative instruments
    20       39  
 
           
Accumulated other comprehensive income loss
  $ 1,022     $ 1,202  
 
           
Note 12 — Statement of Cash Flows
     Following is a reconciliation of net income (loss) to net cash provided by or used in operating activities for the three months ended April 1, 2006 and March 31, 2007 (in thousands):
                 
    Three Months Ended  
    April 1,     March 31,  
    2006     2007  
Net income (loss)
  $ (5,895 )   $ 5,028  
Adjustment to reconcile net income (loss) to cash provided by (used in) operating activities:
               
Depreciation and amortization
    1,024       5,123  
Stock-based compensation
    2,609       5,776  
Loss on disposal of property and equipment
          (2 )
Non-cash interest
    (3 )     (3 )
Provision for excess and obsolete inventories
          (23 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (5,022 )     19,745  
Inventories
    (2,828 )     1,535  
Prepaid expenses and other current assets
    (2,584 )     3,783  
Other non-current assets
          (446 )
Accounts payable and accrued expenses
    1,329       (1,587 )
 
           
Total adjustments
    (5,475 )     33,901  
 
           
Net cash provided by (used in) operating activities
  $ (11,370 )   $ 38,929  
 
           

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Note 13 — Derivative Financial Instruments
     We have interest rate swap agreements with a financial institution that effectively convert to fixed rates the floating variable rate of Euribor on certain drawdowns taken on the term loan portion of our credit facility with a consortium of banks led by IKB Deutsche Industriebank AG. At March 31, 2007, the notional values of the interest rate swaps (in thousands) and their annual fixed payment rates and maturities were as follows:
             
Notional Amount   Fixed Rate   Maturity
14,921 ($19,397 at an assumed exchange rate of $1.30/1.00)
    3.96 %   December 2012
9,902 ($12,873 at an assumed exchange rate of $1.30/1.00)
    4.03 %   December 2012
3,928 ($5,106 at an assumed exchange rate of $1.30/1.00)
    4.07 %   December 2012
10,685 ($13,891 at an assumed exchange rate of $1.30/1.00)
    4.29 %   December 2012
3,248 ($4,222 at an assumed exchange rate of $1.30/1.00)
    4.25 %   December 2012
     The notional amounts of the interest rate swaps are scheduled to decline in accordance with our scheduled principal payments on the hedged term loan drawdowns. These derivative financial instruments qualified for accounting as cash flow hedges in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities and we designated them as such. As a result, we classified the aggregate fair value of the interest rate swap agreements, which was less than $0.1 million, as an other current asset on our balance sheet at March 31, 2007 and we record changes in that fair value in other comprehensive income. We assessed the interest rate swap agreements as highly effective as cash flow hedges at March 31, 2007. We use interest rate swap agreements to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments; we do not use interest rate swap agreements for speculative or trading purposes.
     During the three months ended March 31, 2007, we purchased a forward foreign exchange contract to hedge certain foreign currency denominated intercompany long-term debt. This hedge does not qualify for hedge accounting treatment in accordance with the provisions of SFAS 133, Accounting for Derivative Instruments and Hedging Activities. Accordingly, we recognize gains or losses from the fluctuation in foreign exchange rates and the valuation of this hedging contract in other expense. We do not use derivative financial instruments for trading or speculative purposes. As of March 31, 2007, we had one outstanding foreign exchange forward contract to sell €20.0 million for $26.8 million at a fixed exchange rate of $1.34/€1.00. The contract will be due on February 27, 2009.
Note 14 — Recent Accounting Pronouncements
     In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of SFAS 159 on our consolidated financial position and results of operations.
     In March 2007, the FASB ratified Emerging Issues Task Force Issue (“EITF”) No. 06-10, Accounting for Deferred Compensation and Post Retirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangement. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation and for recognition and measurement of the associated asset based on the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. We have evaluated EITF 06-10 and have determined that its adoption is not expected to have a material effect on our financial position or results of operations.
Note 15 — Subsequent Events
     On April 30, 2007, we modified 474,374 of our share options to change their vesting dates from August 31, 2008 to August 31, 2007 and 1,171,060 of our share options to change their vesting dates from August 31, 2008 to January 15, 2008. These modifications do not affect the fair value of these share options that we use to calculate our share-based compensation expense, but the modifications do shorten the requisite service period over which we recognize that compensation expense and also increase our estimate of the number of these share options that we expect to vest. The increase in the number of these share options that we expect to vest increased the compensation cost that we expect to recognize over the service periods of the share options by $0.8 million. As a result, after the modification of the share options, we had $29.1 million of unrecognized stock-based compensation cost related to non-vested awards, which we expect to recognize as an expense over a weighted-average period of approximately 1.7 years.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
     This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to risks, uncertainties and assumptions that are difficult to predict. All statements in this quarterly report on Form 10-Q, other than statements of historical fact, are forward-looking statements. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements, among other things, concerning our business strategy, including anticipated trends and developments in and management plans for, our business and the markets in which we operate; future financial results, operating results, revenues, gross margin, operating expenses, products, projected costs and capital expenditures; research and development programs; sales and marketing initiatives; and competition. In some cases, you can identify these statements by forward-looking words, such as “estimate”, “expect”, “anticipate”, “project”, “plan”, “intend”, “believe”, “forecast”, “foresee”, “likely”, “may”, “should”, “goal”, “target”, “might”, “will”, “could”, “predict” and “continue”, the negative or plural of these words and other comparable terminology. The forward-looking statements are only predictions based on our current expectations and our projections about future events. All forward-looking statements included in this quarterly report on Form 10-Q are based upon information available to us as of the filing date of this quarterly report on Form 10-Q. You should not place undue reliance on these forward-looking statements. We undertake no obligation to update any of these forward-looking statements for any reason. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed in the section entitled “Risk Factors” elsewhere in this Form 10-Q. You should carefully consider the risks and uncertainties described under this section.
     The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes contained in this quarterly report. Unless expressly stated or the context otherwise requires, the terms “we”, “our”, “us” and “First Solar” refer to First Solar, Inc. and its subsidiaries.
Overview
     We design and manufacture solar modules using a proprietary thin film semiconductor technology that has allowed us to reduce our average solar module manufacturing costs to among the lowest in the world. Each solar module uses a thin layer of cadmium telluride semiconductor material to convert sunlight into electricity. We manufacture our solar modules on a high-throughput production line, and we perform all manufacturing steps ourselves in an automated, proprietary and continuous process. In 2006 and the first quarter of 2007, we sold almost all of our solar modules to solar project developers and system integrators headquartered in Germany.
     First Solar was founded in 1999 to bring an advanced thin film semiconductor process into commercial production through the acquisition of predecessor technologies and the initiation of a research, development and production program that allowed us to improve upon the predecessor technologies and launch commercial operations in January 2002. Currently, we manufacture our solar modules and conduct our research and development activities at our Perrysburg, Ohio manufacturing facility. We completed the qualification of our base plant in Perrysburg for high volume production in November 2004. In April 2007, we started initial production at a 120MW manufacturing facility in Germany, which we expect to reach full capacity in the third quarter of 2007. In April 2007, we also began construction of our Malaysia manufacturing plant. Our objective is to become, by 2010, the first solar module manufacturer to offer a solar electricity solution that competes on a non-subsidized basis with the price of retail electricity in key markets in North America, Europe and Asia. To approach the price of retail electricity in such markets, we believe that we will need to reduce our manufacturing costs per watt by an additional 40-50%, assuming prices for traditional energy sources remain flat on an inflation adjusted basis.

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     We converted, on February 22, 2006, from a Delaware limited liability company to a Delaware corporation. Prior that date, we operated as a Delaware limited liability company.
Net Sales
     We generate substantially all of our net sales from the sale of solar modules. Over the past three years and during the first three months of 2007, the main constraint limiting our sales has been production capacity as customer demand has exceeded the number of solar modules we could produce. We price and sell our solar modules per watt of power. As a result, our net sales can fluctuate based on our output of sellable watts. We currently sell almost all of our solar modules to solar project developers and system integrators headquartered in Germany, which then resell our solar modules to end-users who receive government subsidies. Our net sales could be negatively impacted if legislation reduces the current subsidy programs in Europe, North America, or Asia or if interest rates increase, which could impact our end-users’ ability to either meet their target return on investment or finance their projects. We entered into contracts for the purchase and sale of our solar modules with six European project developers and system integrators. We refer to these as our “Long Term Sales Contracts”. These contracts account for a significant portion of our planned production over the period from 2007 through 2012 and therefore will significantly affect our overall financial performance.
     Under the Long Term Sales Contracts, starting in April 2006, we transfer title and risk of loss to the customer and recognize revenue upon shipment. Under our customer contracts in effect prior to April 1, 2006, we did not transfer title or risk of loss, or recognize revenue, until the solar modules were received by our customers. Our customers do not have extended payment terms or rights of return under these contracts.
     We retain the right to terminate the Long Term Sales Contracts upon 12 months notice and the payment of a termination fee if we determine that any of the following material adverse changes have occurred: new laws, rules or regulations with respect to our production, distribution, installation, or reclamation and recycling program have a substantial adverse impact on our business; unanticipated technical or operational issues result in our experiencing widespread, persistent quality problems or the inability to achieve stable conversion efficiencies at planned levels; or extraordinary events beyond our control substantially increase the cost of our labor, materials or utility expenses or significantly reduce our throughput.
     Our customers are entitled to certain remedies in the event of missed deliveries of kilowatt volume. These delivery commitments are established through rolling four quarter forecasts to be negotiated with each of the customers and define the specific quantities to be purchased on a quarterly basis and the schedules of the individual shipments to be made to the customers. In the case of a late delivery, our customers are entitled to a maximum charge of up to 6% of the delinquent revenue. If we do not meet our annual minimum volume shipments or the minimum average watt per module, our customers also have the right to terminate these contracts on a prospective basis.
     No single customer accounted for more than 22% of our net sales in the three months ended March 31, 2007.
Cost of sales
     Our cost of sales includes the cost of raw materials, such as tempered back glass, TCO coated front glass, cadmium telluride, EVA laminate, connector assemblies and laminate edge seal. In addition, other items contributing to our cost of sales are direct labor and manufacturing overhead such as engineering expense, equipment maintenance, environmental health and safety, quality and production control and procurement. Cost of sales also includes depreciation of manufacturing plant and equipment and facility related expenses. In addition, we accrue warranty and end of life reclamation and recycling expenses to our cost of sales.

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     We implemented a program in 2005 to reclaim and recycle our solar modules after their use. Under our reclamation and recycling program, we enter into an agreement with the end-users of the photovoltaic systems that use our solar modules. In the agreement, we commit, at our expense, to remove the solar modules from the installation site at the end of their use and transport them to a processing center where the solar module materials and components will be recycled, and the owner agrees not to dispose of the solar modules except through our program or another program that we approve. The photovoltaic system owner is responsible for disassembling the solar modules and packaging them in containers that we provide. At the time we sell a solar module, we record an expense in cost of sales equal to the present value of the estimated future end of life obligation. We record the accretion expense on this future obligation to selling, general and administrative expense.
     Overall, we expect our cost of sales per watt to decrease over the next several years due to an increase of sellable watts per solar module, an increase in unit output per line, geographic diversification and more efficient absorption of fixed costs driven by economies of scale.
Research and development
     Research and development expense consists primarily of salaries and personnel-related costs and the cost of products, materials and outside services used in our process and product research and development activities. In 2006, we began adding equipment for further process developments and recording the depreciation of such equipment as research and development expense. We may also allocate a portion of the annual operating cost of the Ohio expansion to research and development expense.
Selling, general and administrative
     Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, insurance costs, travel expense and other selling expenses. We expect these expenses to increase in the near term, both in absolute dollars and as a percentage of net sales, in order to support the growth of our business as we expand our sales and marketing efforts, improve our information processes and systems and implement the financial reporting, compliance and other infrastructure required for a public company. Over time, we expect selling, general and administrative expense to decline as a percentage of net sales and on a cost per watt basis as our net sales and our total watts produced increase.
Production start-up
     Production start-up expense consists primarily of salaries and personnel-related costs and the cost of operating a production line before it has been qualified for full production, including the cost of raw materials for solar modules run through the production line during the qualification phase. It also includes all expenses related to the selection of a new site and the related legal and regulatory costs and the costs to maintain our plant replication program, to the extent we cannot capitalize these expenditures. We expect to incur significant production start-up expenses in fiscal year 2007 in connection with the Malaysian and German plant. In general, we expect production start-up expenses per production line to be higher when we build an entire new manufacturing facility compared to the addition of a new production line at an existing manufacturing facility, primarily due to the additional infrastructure investment required. Over time, we expect production start-up expenses to decline as a percentage of net sales and on a cost per watt basis as a result of economies of scale.
Interest expense
     Interest expense is associated with various debt financings.
Use of estimates
     Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with

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accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, intangible assets, income taxes, warranty obligations, end of life reclamation and recycling, contingencies and litigation and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Results of Operations
     The following table sets forth our consolidated statement of operations as a percentage of net sales for the periods indicated:
                 
    Three Months Ended
    April 1,   March 31,
    2006   2007
Net sales
    100.0 %     100.0 %
Cost of sales
    76.0 %     55.1 %
Gross profit
    24.0 %     44.9 %
Research and development
    11.2 %     4.6 %
Selling, general and administrative
    43.1 %     20.4 %
Production start up
    18.9 %     12.7 %
Operating income (loss)
    (49.2 )%     7.2 %
Foreign currency gain (loss)
    6.6 %     (0.4 )%
Interest expense
    (3.1 )%     (0.3 )%
Other income (expense), net
    2.6 %     5.9 %
Income tax expense
    0.2 %     4.9 %
Net income (loss)
    (43.3 )%     7.5 %
Three Months Ended April 1, 2006 and March 31, 2007
          Net sales
                                 
    Three Months Ended    
(Dollars in thousands)   April 1, 2006   March 31, 2007   Three Month Period Change
Net sales
  $ 13,624     $ 66,949     $ 53,325       391 %
          Net sales increased by $53.3 million, or 391%, from $13.6 million in the first three months of 2006 to $66.9 million in the first three months of 2007. The increase in our net sales was due primarily to a 377% increase in the MW volume of solar modules sold in the first three months of 2007 compared to the first three months of 2006. We were able to increase the MW volume of solar modules sold primarily as a result of the full production ramp of the two additional production lines at our Ohio plant, higher throughput and a 2.8 MW reduction in inventory, which contributed $6.6 million of revenue in the first three months of 2007. In addition, we increased the average number of sellable Watts per solar module from approximately 62 Watts in the first three months of 2006 to approximately 66 Watts in the first three months of 2007. Our average selling price in the first three months of 2007 was $2.32 versus $2.25 in the first three months of 2006 and was positively impacted by $0.19 due to a favorable foreign exchange rate between the U.S. dollar and the euro, offset in part by our contracted annual price decline. In both periods, almost all of our net sales resulted from sales of solar modules to customers headquartered in Germany.

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          Cost of sales
                                 
    Three Months Ended    
(Dollars in thousands)   April 1, 2006   March 31, 2007   Three Month Period Change
Cost of sales
  $ 10,352     $ 36,907     $ 26,555       257 %
% of Net sales
    76.0 %     55.1 %                
          Cost of sales increased by $26.6 million, or 257%, from $10.4 million in the first three months of 2006 to $36.9 million in the first three months of 2007 primarily as a result of further capacity build-out. Direct material expense increased $13.6 million, warranty and end of life costs relating to the reclamation and recycling of our solar modules increased $1.3 million, sales freight and other costs increased $0.6 million, in each case, primarily as a result of higher production volumes in the first three months of 2007 compared to the first three months of 2006. In addition, manufacturing overhead costs increased by $11.1 million, which was primarily composed of an increase in salaries and personnel related expenses of $6.1 million, including a $0.5 million increase in stock-based compensation expense, resulting from the overall infrastructure build-out of our Ohio expansion, facility and related expenses of $1.7 and depreciation expense of $3.3 million, in each case primarily as a result of additional equipment becoming operational at the two additional production lines in our Ohio plant.
          Gross profit
                                 
    Three Months Ended    
(Dollars in thousands)   April 1, 2006   March 31, 2007   Three Month Period Change
Gross profit
  $ 3,272     $ 30,042     $ 26,770       818 %
% Gross margin
    24.0 %     44.9 %                
          Gross profit increased by $26.8 million, or 818%, from $3.3 million in the first three months of 2006 to $30.0 million in the first three months of 2007 primarily due to an increase in net sales. As a percentage of sales, gross margin increased 20.9 percentage points from 24.0% in the first three months of 2006 to 44.9% in the first three months of 2007, representing increased leverage of our fixed cost infrastructure and scalability associated with the two additional production lines at our Ohio plant, which drove a 377% increase in the number of MW sold.
          Research and development
                                 
    Three Months Ended    
(Dollars in thousands)   April 1, 2006   March 31, 2007   Three Month Period Change
Research and development
  $ 1,519     $ 3,058     $ 1,539       101 %
% of Net sales
    11.2 %     4.6 %                
          Research and development expense increased by $1.5 million, or 101%, from $1.5 million in the first three months of 2006 to $3.1 million in the first three months of 2007. The increase in research and development expense was primarily the result of a $1.4 million increase in personnel related expense, including a $0.6 million increase in stock-based compensation expense, due to increased headcount and additional option awards. Consulting and other expenses also increased by $0.5 million, which was partially offset by a $0.4 million increase in grant revenue.
          Selling, general and administrative
                                 
    Three Months Ended    
(Dollars in thousands)   April 1, 2006   March 31, 2007   Three Month Period Change
Selling, general and administrative
  $ 5,872     $ 13,690     $ 7,818       133 %
% of Net sales
    43.1 %     20.4 %                

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     Selling, general and administrative expense increased by $7.8 million, or 133%, from $5.9 million in the first three months of 2006 to $13.7 million in the first three months of 2007. This increase was primarily a result of an increase in salaries and personnel-related expenses of $4.9 million, including a $1.9 million increase in stock-based compensation expense, due to increased headcount and additional option awards. In addition, legal and professional service fees increased by $2.3 million and other expenses increased by $0.6 million, primarily resulting from costs incurred in connection with being a public company.
     Production start-up
                                 
    Three Months Ended    
(Dollars in thousands)   April 1, 2006   March 31, 2007   Three Month Period Change
Production start-up
  $ 2,579     $ 8,474     $ 5,895       229 %
% of Net sales
    18.9 %     12.7 %                
     In the first three months of 2007, we incurred $8.5 million of production start-up expenses related to the ramp and qualification of our German plant, including related legal and regulatory costs and increased headcount, compared to $2.6 million of production start-up expenses for the Ohio expansion during the first three months of 2006. Production start-up expenses are primarily attributable to the cost of labor and material to run and qualify the line, related facility expenses and management of our replication process.
     Foreign exchange gain (loss)
                             
    Three Months Ended    
(Dollars in thousands)   April 1, 2006   March 31, 2007   Three Month Period Change
Foreign exchange gain (loss)
  $ 900     $ (270 )   $ (1,170 )   N.M.
     Foreign exchange gain decreased by $1.2 million from the first three months of 2006 to the first three months of 2007 primarily as a result of lower euro denominated asset balances and an unrealized loss from the measurement of our outstanding foreign currency forward contract.
     Interest expense
                                 
    Three Months Ended    
(Dollars in thousands)   April 1, 2006   March 31, 2007   Three Month Period Change
Interest expense
  $ (423 )   $ (201 )   $ 222       N.M.  
     Interest expense decreased by $0.2 million from the first three months of 2006 to the first three months of 2007 as a result of the payoff of various notes during 2006.
     Other income (expense), net
                                 
    Three Months Ended    
(Dollars in thousands)   April 1, 2006   March 31, 2007   Three Month Period Change
Other income (expense), net
  $ 349     $ 3,960     $ 3,611       N.M.  
     The increase in other income of $3.6 million in the first three months of 2007 compared to the first three months of 2006 was primarily due to increased interest income from higher cash balances as a result of our initial public offering in the fourth quarter of 2006.

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          Income tax expense
                                 
    Three Months Ended    
(Dollars in thousands)   April 1, 2006   March 31, 2007   Three Month Period Change
Income tax expense
  $ 23     $ 3,281     $ 3,258       N.M.  
          The increase in income tax expense of $3.3 million in the first three months of 2007 compared to the first three months of 2006 was the result of profitability in the first three months of 2007 and a full valuation allowance against our net deferred tax assets.
Critical Accounting Policies and Estimates
     For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K filed with the Securities and Exchange Commission. There have been no changes to our critical accounting policies since December 30, 2006, with the exception of the accounting related to uncertainty in income taxes.
Liquidity and Capital Resources
     As of March 31, 2007, we had $325.3 million in cash, cash equivalents and short-term investments compared to $308.4 million at December 30, 2006.
Operating Activities
     Cash provided by operating activities was $38.9 million during the first quarter of 2007 compared to cash used in operating activities of $11.4 million during the same period in 2006. Cash received from customers increased to $86.6 million during the first quarter of 2007 from $9.5 million during the first quarter of 2006 mainly due to an increase in net sales and a decrease in accounts receivable during the first quarter of 2007 as a result of shorter payment terms. This increase was partially offset by an increase in cash paid to suppliers and employees of $25.6 million during the first quarter of 2007, mainly due to an increase in raw materials, an increase in personnel related costs due to higher headcount and other costs supporting our global expansion.
Investing Activities
     Cash used in investing activities was $40.8 million during the first quarter of 2007 compared to $25.8 million during the same period in 2006. Cash used in investing activities resulted primarily from capital expenditures in these periods. Capital expenditures were $40.8 million during the first quarter of 2007 and $25.8 million during the same period in 2006. The increase in capital expenditures was primarily due to our investments related to the construction of our new plants in Germany and Malaysia.
Financing Activities
     Cash provided by financing activities was $18.7 million during the first quarter of 2007 compared to $83.4 million during the same period in 2006. During the first quarter of 2007 we received $14.8 million from additional drawings under our IKB credit facilities. In addition, we received $4.0 million in taxable investment incentives (“Investitionszuschuesse”) from the State of Brandenburg related to the construction of our plant in Frankfurt/Oder, Germany. Cash provided by financing activities for the first quarter of 2006 was primarily due to the issuance of convertible senior subordinated notes in the principal aggregate amount of $74.0 million (resulting in cash of $73.3 million, net of issuance costs). The notes were extinguished in the second quarter of 2006 by payment of 4.3 million shares of our common stock. Also, during the first quarter of 2006, we received equity contributions of $30.0 million from our majority stockholder, which was partially offset by $20.0 million in net repayments of related party debt.

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     We expect capital expenditures for fiscal 2007 to average between 55% and 60% of our revenues.
     We believe that our current cash and cash equivalents, cash flows from operating activities and government grants and low interest debt financings for our German plant will be sufficient to meet our working capital and capital expenditures needs for at least the next 12 months. However, if our financial results or operating plans change from our current assumptions, we may not have sufficient resources to support our business plan. As a result, we may engage in one or more debt or equity financings in the future that would result in increased expenses or dilution to our existing stockholders. If we are unable to obtain debt or equity financing on reasonable terms, we may be unable to execute our expansion strategy.
Off-Balance Sheet Arrangements
     We had no off-balance sheet arrangements as of March 31, 2007.
Recent Accounting Pronouncements
     In February 2007, the FASB issued SFAS 159 The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS 159 on its consolidated financial position and results of operations.
     In March 2007, the FASB ratified Emerging Issues Task Force Issue (“EITF”) No. 06-10, Accounting for Deferred Compensation and Post Retirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangement. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation and for recognition and measurement of the associated asset based on the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. We have evaluated the new statement and have determined that the adoption of EITF 06-10 is not expected to have a material effect on our financial position or results of operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
     Our international operations accounted for 100.0% of our net sales in the first three months of 2007 and 99.8% of our net sales in the first three months of 2006. In the first three months of 2007 and the first three months of 2006, all of our international sales were denominated in euros. As a result, we have exposure to foreign exchange risk with respect to almost all of our net sales. Fluctuations in exchange rates, particularly in the U.S. dollar to euro exchange rate, affect our gross and net profit margins and could result in foreign exchange and operating losses. Historically, most of our exposure to foreign exchange risk has related to currency gains and losses from the time we sign and settle our sales contracts. For example, our Long Term Supply Contracts obligate us to deliver solar modules at a fixed price in euros per watt and do not adjust for fluctuations in the U.S. dollar to euro exchange rate. In the first three months of 2007, a 10% change in foreign currency exchange rates would have impacted our net sales by $6.7 million.
     In the past, exchange rate fluctuations have had an impact on our business and results of operations. For example, exchange rate fluctuations positively impacted our cash flows by $0.1 million in the first three months of 2007 and negatively impacted our cash flows by $0.1 million in the first three months of 2006. Although we cannot predict the impact of future exchange rate fluctuations on our business or results of operations, we believe that we may have increased risk associated with currency fluctuations in the future. As of March 31, 2007, we had one outstanding foreign exchange forward contract to sell 20.0 million for $26.8 million at a fixed exchange rate of $1.34/1.00. The contract will be due on

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February 27, 2009. This foreign exchange forward contract hedges an intercompany loan. Most of the German plant’s operating expenses will be in euro, creating increasing opportunities for some natural hedge against the currency risk in our net sales. In addition, we may decide to enter into other hedging activities in the future.
Interest Rate Risk
     We are exposed to interest rate risk because many of our end-users depend on debt financing to purchase and install a photovoltaic system. Although the useful life of a photovoltaic system is approximately 25 years, end-users of our solar modules must pay the entire cost of the photovoltaic system at the time of installation. As a result, many of our end-users rely on debt financing to fund their up-front capital expenditure and final project. An increase in interest rates could make it difficult for our end-users to secure the financing necessary to purchase and install a photovoltaic system on favorable terms, or at all and thus lower demand for our solar modules and reduce our net sales. In addition, we believe that a significant percentage of our end-users install photovoltaic systems as an investment, funding the initial capital expenditure through a combination of equity and debt. An increase in interest rates could lower an investor’s return on investment in a photovoltaic system or make alternative investments more attractive relative to photovoltaic systems, which, in each case, could cause these end-users to seek alternative investments that promise higher returns.
     During July 2006, we entered into the IKB credit facility, which bears interest at Euribor plus 1.6% for the term loan, Euribor plus 2.0% for the bridge loan and Euribor plus 1.8% for the revolving credit facility. As of March 31, 2007, we held five pay fixed, receive Euribor interest rate swaps with a combined notional value of 42.7 million ($55.5 million at an assumed exchange rate of $1.30/1.00), which hedge our interest rate risk on the IKB term loan.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
          Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of March 31, 2007 of the effectiveness of our “disclosure controls and procedures” as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2007, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC, and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
     Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our “internal control over financial reporting” as defined in Exchange Act Rule 13a-15(f) to determine whether any changes in our internal control over financial reporting occurred during the first quarter of fiscal 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there have been no such changes in our internal control over financial reporting during the first quarter of fiscal 2007.
CEO and CFO Certifications
     We have attached as exhibits to this Quarterly Report on Form 10-Q the certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with the Exchange Act. We recommend that this Item 4T be read in conjunction with the certifications for a more complete understanding of the subject matter presented.

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Limitations on the Effectiveness of Controls
     Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
     In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited to, routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, results of operations, cash flows, or financial condition.
Item 1A. Risk Factors
     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 30, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. The risk factors included in our Annual Report on Form 10-K for the year ended December 30, 2006, have not materially changed.
Item 2. Exhibits
     The following exhibits are filed with this Quarterly Report on Form 10-Q:
                         
Exhibit       Incorporated by Reference       Filed
Number   Exhibit Description   Form   Date of First Filing   File Number   Exhibit Number   Herewith
 
                   
3.1
  Amended and Restated Certificate of Incorporation of First Solar Inc.   S-1/A   10/25/06   333-135574   3.1    
 
                       
3.2
  By-Laws of First Solar Inc.   S-1/A   11/2/06   333-135574   3.2    
 
                       
10.01
  Amended and Restated Employment Agreement dated May 3, 2007, between First Solar Inc. and George A. (“Chip”) Hambro                   X
 
                       
31.01
  Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                   X
 
                       
31.02
  Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                   X
 
                       
32.01*
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                   X
 
*   This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

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SIGNATURE
     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.
             
    FIRST SOLAR, INC.    
 
           
 
  By:   /s/ JENS MEYERHOFF    
 
           
 
      Jens Meyerhoff    
 
      Chief Financial Officer    
 
      (Principal Financial Officer and    
 
      Duly Authorized Officer)    
May 7, 2007

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EXHIBIT INDEX
                         
Exhibit       Incorporated by Reference       Filed
Number   Exhibit Description   Form   Date of First Filing   File Number   Exhibit Number   Herewith
 
                   
3.1
  Amended and Restated Certificate of Incorporation of First Solar Inc.   S-1/A   10/25/06   333-135574   3.1  
 
                   
3.2
  By-Laws of First Solar Inc.   S-1/A   11/2/06   333-135574   3.2  
 
                   
10.01
  Amended and Restated Employment Agreement dated May 3, 2007, between First Solar Inc. and George A. (“Chip”) Hambro                   X
 
                   
31.01
  Certification of Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                   X
 
                   
31.02
  Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                   X
 
                   
32.01*
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                   X
 
*   This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

25

exv10w01
 

Exhibit 10.01
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
          This Agreement is made as of this 3rd day of May, 2007 (this “Agreement”), by and between FIRST SOLAR, INC., a Delaware corporation having its principal office at 4050 East Cotton Boulevard, Building 6, Suite 68, Phoenix, AZ 85040 (hereinafter, “Employer”) and GEORGE A. (“CHIP”) HAMBRO (hereinafter “Employee”).
WITNESSETH:
          WHEREAS, Employer and Employee wish to (a) amend and restate the Employment Agreement dated May 30, 2001, as amended as of February 3, 2003 (the “Prior Employment Agreement”) and (b) irrevocably waive certain provisions contained in the First Solar Holdings, LLC 2003 Unit Option Plan (the “Plan”) and in the option agreements entered into between Employer and Employee dated December 8, 2003 (the “2003 Stock Option Agreement”) and December 14, 2005 (the “2005 Stock Option Agreement”, and together with the 2003 Stock Option Agreement, the “Stock Option Agreements”) and (c) enter into this agreement relating to the employment of Employee by Employer; and
          WHEREAS, Employer and Employee entered into a Change in Control Severance Agreement, dated as of December 8, 2003, between Employer and Employee (the “CIC Agreement”).
          NOW, THEREFORE, in consideration of the foregoing premises, and the mutual covenants, terms and conditions set forth herein, and intending to be legally bound hereby, it is hereby agreed between Employer and Employee as follows:
ARTICLE I
Employment
          1.1. Term. The term of this Agreement shall commence on May 3, 2007 (the “Effective Date”) and end on June 30, 2009 (the “Projected Separation Date”), subject to earlier termination as provided in Section 1.4 (such period, the “Term”). Articles III, IV, V, VI, VII, VIII and IX of this Agreement shall survive any termination of this Agreement. To the extent of the subject matter hereof, this Agreement shall replace and supercede any other agreement between Employer and Employee and any plan or policy of Employer, except as otherwise required by applicable law.
          1.2. Position and Duties of Employee. Employer hereby employs Employee in the capacity of Vice President, and Employee hereby accepts such position, and agrees to provide general assistance and advice to the President regarding the transition of Employee’s prior duties. Employee agrees to provide his services under the general direction of the President. Employer and Employee shall mutually agree on the number of hours to be worked by Employee per week. Employer and Employee acknowledge that Employee’s responsibilities shall be such that Employee shall not be considered an executive officer for purposes of Section 16 of the Securities and Exchange

 


 

Act of 1934, as amended, and therefore Employee agrees that he shall not, and shall have no authority or power to, perform any policy-making function for the Employer.
          1.3. No Salary or Benefits Continuation Beyond Termination. Except as may be required by law or as otherwise specified in this Agreement, Employer shall not be liable to Employee for any salary or benefits continuation beyond the date of Employee’s cessation of employment with Employer.
          1.4. Termination of Employment. Employee’s employment and the Term shall terminate upon the earliest of: (i) Employee’s death; (ii) unless waived by Employer, Employee’s disability, either physical or mental (as determined by a physician chosen by Employer) which renders Employee unable, for a period of at least six (6) months, effectively to perform the obligations, duties and responsibilities of Employee’s employment with Employer; (iii) the termination of Employee’s employment by Employer for cause (as hereinafter defined); (iv) Employee’s voluntary resignation; (v) the termination of Employee’s employment by Employer without cause and (vi) the Projected Separation Date. As used herein, “cause” shall mean (a) fraudulent or illegal conduct of Employee relating to the business of Employer or Employee’s performance of his employment with Employer; (b) misappropriation of Employer funds; (c) conviction of a felony whether or not relating to the business of Employer or Employee’s employment with Employer; (iv) conviction of, or a finding of liability by a court of competent jurisdiction for, a willful breach of any statutory or common law duty of loyalty to Employer; or (v) breach of the covenants in Articles III, IV, V and VI.
          1.5. Severance Payments. If Employee’s employment is terminated for any reason other than due to Section 1.4(iii) (termination with cause by Employer), Section 1.4(iv) (voluntary resignation by the Employee) or Section 1.4(vi) (scheduled expiration of the Term), then, in any such case, subject to Section 1.7, Employee shall be entitled to the following payments and benefits:
     (i) payment, in lump sum, within 30 days following such termination, of an amount equal to (a) $600,000 minus the sum of (A) the amounts paid as Base Salary to Employee prior to such termination during the Term and (B) the amounts paid under clause (c) below; (b) the dollar value of any accrued and unpaid (and unforfeited) vacation; and (c) the value of any accrued and unpaid Base Salary;
     (ii) any unvested options to purchase common stock of Employer granted to Employee prior to the date hereof and held by the Employer as of the date of such termination shall be vested in full on the termination date and, if Employee’s employment is terminated by Employer without cause, such options shall remain exercisable until the later of the Projected Separation Date and 180 days following such termination; and
     (iii) from the date of termination, if Employee elects to continue medical benefits after such termination, as provided by applicable plans and laws, payment by Employer of the premiums that Employee is required to pay to maintain such continuation coverage, at the same level of coverage that was in effect on the date

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of such termination until the earliest of: (a) June 30, 2009; (b) the date on which Employee becomes eligible for comparable group insurance coverage from any other employer; and (c) the date that continuation coverage ends under the applicable plan or laws.
          1.6. Vesting of Options on Projected Separation Date. Subject to Employee’s continued employment through the Projected Separation Date, any unvested options to purchase common stock of Employer granted to Employee prior to the date hereof and held by Employee as of the Projected Separation Date shall be vested in full on the Projected Separation Date. Such unvested options will however vest immediately upon the events specified in the Stock Option Agreements or the CIC Agreement or in the event of Employee’s termination by Employer for any reason other than for Cause.
          1.7. Release. Notwithstanding anything to the contrary, no severance payments shall be made or benefits provided under Sections 1.5 and 1.6 unless, Employee executes a general release in favor of Employer and its affiliates, substantially in the form attached hereto as Exhibit A, and such release is effective and irrevocable.
ARTICLE II
Compensation
          2.1. Base Salary. Employee shall be compensated at an annual rate of base salary of Three Hundred Thousand Dollars ($300,000.00) during the Term (“Base Salary”). If Employee elects to forgo medical benefits provided by Employer, Employee will be paid an additional amount of compensation at the annual rate of Ten Thousand Dollars ($10,000) (the “Additional Payments”). Such Base Salary and Additional Payments shall be paid in accordance with Employer’s standard policies and shall be subject to such withholdings as are required by law.
          2.2. Benefits. During the Term, Employee also shall be entitled to participate in all employee benefit plans and programs of Employer. Employer provides no assurance as to the adoption or continuance of any particular employee benefit plan or program, and Employee’s participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto. If during the Term, Employee is deemed to no longer qualify for any benefit plan of Employer, Employer shall reimburse Employee for Employee’s costs of obtaining equivalent benefits.
          2.3. Reimbursement of Business Expenses. Employee may incur reasonable expenses in the course of employment hereunder for which he shall be eligible for reimbursement or advances in accordance with Employer’s standard policy therefor.

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ARTICLE III
Invention, Disclosure, Patent Assignment and Copyright
          3.1. Disclosure of Inventions. Employee shall promptly disclose in writing to Employer complete and accurate information concerning each and every invention, discovery, improvement, device, design, apparatus, practice, process, software or computer program, method or product, whether or not patentable or copyrightable, made, developed, perfected, devised, conceived or first reduced to practice by Employee, either solely or in collaboration with others, during the term of Employee’s employment (an “Invention”).
          3.2. Employer Inventions. Any and all Inventions relating to the actual or contemplated business, technologies or products of Employer are and shall be the exclusive property of Employer (collectively, the “Employer Inventions”). Employee hereby assigns to Employer any and all of Employee’s right, title and interest in and to any and all of the Employer Inventions, without further payment or other form of consideration. Employee agrees to execute such additional applications, assignments and other documents, and to perform such other actions, as Employer may in the future reasonably request in order to confirm in Employer the rights granted pursuant to this Section 3.2.
          3.3. Inventions Which Are Not Employer Inventions. If Employee develops an Invention which Employee believes is not an Employer Invention, Employee shall disclose in writing to Employer all information reasonably requested by Employer from time to time concerning such Invention for the purpose of permitting Employer to confirm, determine and/or verify that the Invention is not an Employer Invention. If Employer determines that such Invention is an Employer Invention, Employee shall not disclose, assign, license, use, sell or in any other manner exploit such Invention until the question of whether it is an Employer Invention has been finally resolved, either by agreement between Employer and Employee or by final, non-appealable order entered by a court of competent jurisdiction.
          3.4. Assignments; Execution of Documents by Employee. Upon the request of Employer, whether during the term of Employee’s employment or thereafter, Employee shall perform all lawful acts, including, but not limited to, the execution of papers and lawful oaths and the giving of testimony, that in the opinion of Employer, its successors and assigns, may be necessary or desirable in obtaining, sustaining, reissuing, extending and enforcing United States and foreign Letters Patents, including, but not limited to, design patents, on any and all Employer Inventions, and for perfecting, affirming and recording Employer’s complete ownership of and title thereto. Such acts shall be performed by Employee during the term of Employee’s employment without the payment of additional compensation by Employer; provided, however, that if Employee is asked to undertake or perform any such acts after the termination of Employee’s employment with Employer, Employee shall be entitled to reasonable compensation for the performance of such acts.

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          3.5. Employee’s Records. Employee shall keep complete, accurate and authentic accounts, notes, data and records of all of the Inventions in the manner and form requested by Employer. Such accounts, notes, data and records relating to Employer Inventions shall be the exclusive property of Employer, and, upon its request, Employee shall promptly surrender the same to Employer or, if not previously surrendered upon Employer’s request or otherwise, Employee shall surrender the same, and all copies thereof, to Employer upon the conclusion of his or her employment.
          3.6. United States Government Contracts. Employee understands that Employer may enter into agreements or arrangements with agencies of the United States Government, and that Employer may be subject to laws and regulations which impose obligations, restrictions and limitations on it with respect to inventions and patents which may be acquired by it or which may be conceived or developed by employees, consultants or other agents rendering services to it. Employee agrees that he shall be bound by all such obligations, restrictions and limitations applicable to any said invention conceived or developed by him during the term of his employment and shall take any and all further action which may be required to discharge such obligations and to comply with such restrictions and limitations.
ARTICLE IV
Ventures
          4.1. If, during the term of his employment, Employee is engaged in or associated with the research, investigation, planning or implementation of any project, program or venture on behalf of or involving Employer, all rights in the project, program or venture shall belong exclusively to Employer and shall constitute an opportunity belonging exclusively to Employer. Except as approved in advance and in writing by Employer, Employee shall not be entitled to any interest in such project, program or venture or to any commission, finder’s fee or other compensation in connection therewith.
ARTICLE V
Non-Competition & Non-Solicitation
          5.1. Definition of “Employer”. For purposes of this Article V, the term “Employer” includes Employer, its subsidiaries and affiliates, and any other business enterprises through which Employer conducts business from time to time, whether alone or with others.
          5.2. Covenant Not To Compete. Employee agrees that during his employment with Employer and for the Post-Employment Non-Competition Period (as defined below in this Section 5.2), Employee shall not become employed by, become a director, officer, shareholder, partner, manager or member of, or consultant to, or otherwise enter into, conduct, or advise or assist any business, other than that of Employer (or any successor to the operations of Employer) that engages in the

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manufacture of photovoltaic products anywhere in the world. Ownership of not more than five percent (5%) of the issued and outstanding shares of a class of securities of a corporation, the securities of which are traded on a national securities exchange or in the over-the-counter market shall not cause Employee to be in violation of this provision. As used in this Agreement, the term “Post-Employment Non-Competition Period” means a period of (a) three (3) years following May 1, 2007 or (b) one (1) year after termination, whichever is later.
          5.3. No Solicitation. During the term of this Agreement and during the Post-Employment Non-Competition Period, if any, Employee shall not (a) solicit, divert or take away, or attempt to divert or take away, the business or patronage of any of the clients, customers or accounts of Employer serviced by Employee during any part of the term of Employee’s employment with Employer, or any of the prospective clients, customers or accounts of Employer which were contacted, solicited or served by Employee during any part of the time Employee was employed by Employer, or (b) directly or indirectly recruit, solicit or hire any employee of Employer, or induce or attempt to induce any employee of Employer to discontinue his or her employment relationship with Employer.
          5.4. Severability. Employee acknowledges and agrees that the foregoing agreements are a material inducement to Employer in employing Employee, and that Employee has had a full and fair opportunity to consider the advisability of entering into such agreements and to seek legal advice in connection with such consideration. If, despite the mutual intentions of Employer and Employee, any provision of this Article V is determined by any court of competent jurisdiction to be invalid, illegal or unenforceable, in whole or in part, the offending provision shall not affect the enforceability of the remaining provisions of this Agreement, and Employee and Employer shall promptly and in good faith negotiate a replacement provision that is fully enforceable and gives maximum effect to the intentions of Employee and Employer in entering into an employment relationship.
ARTICLE VI
Confidentiality
          6.1 During the course of employment pursuant to this Agreement, Employee will be privy to information belonging to or received in confidence by Employer or its subsidiaries or affiliates which information is valuable to Employer and which information Employer believes to be novel and which it holds in confidence for itself or third parties. Except as permitted or directed by Employer, Employee shall not during the term of his employment or at any time thereafter, divulge, furnish, disclose, make accessible or use any Confidential Information (as defined below). “Confidential Information” includes, without limitation, confidential designs, processes or formulae; confidential software or computer programs; the identities of Employer’s customers and suppliers and the terms under which Employer deals with them; confidential marketing, sales, product development, financing or engineering plans; confidential strategic or other business plans; confidential development or research work of Employer; and any other

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confidential aspects of the business of Employer. For purposes of this Agreement, a matter is “confidential” if Employer identifies it as confidential, either before or after disclosure to Employee, or if Employee should reasonably know that Employer regards it as confidential based on the facts and circumstances available to Employee. At the expiration or termination of this Agreement or termination of employment hereunder, Employee will, at Employer’s request, return to Employer all written confidential information received from Employer and destroy any transcriptions or copies Employee may have of such information (including information stored in computer form), unless an alternative method of disposition is approved by Employer in writing. This section shall survive the termination of this Agreement.
          6.2 Notwithstanding the foregoing, Confidential Information does not include information which (a) is or becomes generally available to the public other than as a result of a disclosure by Employee, (b) was available to Employee on a nonconfidential basis prior to its disclosure by the Employer to Employee, or (c) became available to Employee on a nonconfidential basis from a person who is not bound by a confidentiality agreement with the Employer, or is not otherwise prohibited from transmitting the information to Employee.
ARTICLE VII
Injunctive Relief
          7.1 Because the services to be performed by Employee hereunder are of a special, unique, unusual, confidential, extraordinary and intellectual character which character renders such services unique and because Employee will acquire by reason of his employment and association with Employer, an extensive knowledge of Employer’s trade secrets, customers, procedures, and other confidential information, the parties hereto recognize and acknowledge that, in the event of a breach or threat of breach by Employee of any of the terms and provisions contained in Article III, IV, V or VI of this Agreement by Employee, Employer shall be entitled to an immediate injunction from any court of competent jurisdiction restraining Employee, as well as any third parties, including successor employers, whose joinder may be necessary to effect full and complete relief, from committing or continuing to commit a breach of such provisions without the showing or proving of actual damages. Any preliminary injunction or restraining order shall continue in full force and effect until any and all disputes between the parties to such injunction or order regarding this Agreement have been finally resolved.
ARTICLE VIII
Absence of Restrictions
          8.1 Employee hereby represents and warrants that he has full power, authority and legal right to enter into this Agreement and to carry out his obligations and duties hereunder and that the execution, delivery and performance by Employee of this Agreement will not violate or conflict with, or constitute a default under, any agreements

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or other understandings to which Employee is a party or by which he may be bound or affected, including, but not limited to, any order, judgment or decree of any court or governmental agency.
ARTICLE IX
Miscellaneous
          9.1. Conversion of Employer. Employer and Employee acknowledge that (i) Employer granted Employee options to purchase limited liability membership units of Employer under the Plan pursuant to the Stock Option Agreements and (ii) in connection with Employer’s conversion from a limited liability company to a corporation on February 22, 2006, Employer converted each outstanding option to purchase one limited liability membership unit into a non-qualified stock option to purchase one share of Employer common stock, in each case, at the same exercise price and subject to the other terms and conditions of such outstanding option.
          9.2. Compliance. Employer and Employee hereby represent and warrant to the other that they are both in full compliance with the terms and conditions of the Prior Employment Agreement, the Plan, the Stock Option Agreements, and any other duty or obligation between them (collectively, the “Provisions”), and neither is aware of any breach by either party of any such terms of the Provisions which would or could adversely effect Employee’s rights under the Plan or either the 2003 Stock Option Agreement or 2005 Stock Option Agreement.
          9.3. Rights to Vested Options. Employer and Employee hereby agree that, notwithstanding any provision to the contrary, whether in this Agreement, the Plan, the Stock Option Agreements or otherwise, Employee shall have the right to exercise Employee’s options granted under the Stock Option Agreements and vested as of the date hereof, which are options with respect to 923,925 shares (the “Vested Options”), until the expiration date without regard to any termination of his employment for any reason (including a termination by Employer for “cause”) (the “Vested Options”), except as provided in Sections 13 and 14 of the Plan, which cover certain extraordinary events and adjustments. The right to exercise the Vested Options, however, may from time to time be limited due to law or contractual lock-up provisions.
          9.4. Stock Option Agreements. Employer and Employee acknowledge that by operation of the conversion of the Employer to a corporation formed under the laws of Delaware and becoming a public company with common stock listed on the NASDAQ stock exchange, certain provisions of the Plan and the Stock Option Agreements are no longer applicable and mutually agree to irrevocably waive their respective rights under (i) Sections 12, 13, 14, 15 and 24 of the 2003 Stock Option Agreement and (ii) Sections 13 and 14 of the Stock Option Agreement.
          9.5. Withholding. Any payments made under this Agreement shall be subject to applicable Federal, state and local tax reporting and withholding requirements.

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          9.6. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware without reference to the principles of conflicts of laws. Any judicial action commenced relating in any way to this Agreement including, the enforcement, interpretation, or performance of this Agreement, shall be commenced and maintained in a court of competent jurisdiction located in Maricopa County, Arizona. The parties hereby waive and relinquish any right to a jury trial and agree that any dispute shall be heard and resolved by a court and without a jury. The parties further agree that the dispute resolution, including any discovery, shall be accelerated and expedited to the extent possible. Each party’s agreements in this Section 9.6 are made in consideration of the other party’s agreements in this Section 9.6, as well as in other portions of this Agreement.
          9.7. No Waiver. The failure of Employer or Employee to insist in any one or more instances upon performance of any of terms, covenants and conditions of this Agreement shall not be construed as a waiver or relinquishment of any rights granted hereunder or of the future performance of any such terms, covenants or conditions.
          9.8. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered, delivered by facsimile transmission or by courier or mailed, registered or certified mail, postage prepaid as follows:
         
 
  If to Employer:   First Solar, Inc.
 
      4050 East Cotton Boulevard
 
      Building 6, Suite 68
 
      Phoenix, Arizona 85040
 
      Attention: President
 
       
 
  If to Employer:   To Employee’s then current address on file with Employer
or at such other address or addresses as any such party may have furnished to the other party in writing in a manner provided in this Section 9.8.
          9.9. Assignability. This Agreement is for personal services and is therefore not assignable by the Employee. This Agreement is freely assignable by Employer.
          9.10. Entire Agreement. This Agreement sets forth the entire agreement between Employer and Employee regarding the terms of Employee’s employment and supersedes all prior agreements between Employer and Employee covering the terms of Employee’s employment, including, effective as of the Effective Date, the Prior Employment Agreement and the CIC Agreement, and may not be amended or modified except in a written instrument signed by Employer and Employee identifying this Agreement and stating the intention to amend or modify it.

- 9 -


 

          9.11. Severability. If it is determined by a court of competent jurisdiction that any of the restrictions or language in this Agreement are for any reason invalid or unenforceable, the parties desire and agree that the court revise any such restrictions or language, including reducing any time or geographic area, so as to render them valid and enforceable to the fullest extent allowed by law. If any restriction or language in this Agreement is for any reason invalid or unenforceable and cannot by law be revised so as to render it valid and enforceable, then the parties desire and agree that the court strike only the invalid and unenforceable language and enforce the balance of this Agreement to the fullest extent allowed by law. Employer and Employee agree that the invalidity or unenforceability of any provision of this Agreement shall not affect the remainder of this Agreement.
          9.12. Construction. As used in this Agreement, words such as “herein,” “hereinafter,” “hereby,” and “hereunder,” and the words of like import refer to this Agreement, unless the context requires otherwise. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.”

- 10 -


 

          IN WITNESS WHEREOF, Employer has caused this Agreement to be executed by one of its duly authorized officers and Employee has individually executed this Agreement, each intending to be legally bound, as of the date first above written.
             
    EMPLOYER:    
 
           
    FIRST SOLAR, INC.    
 
           
 
  By:   /s/ Michael J. Ahearn    
 
     
 
   
 
  Name:   Michael J. Ahearn    
 
  Title:   CEO    
 
           
    EMPLOYEE:    
 
           
 
  /s/ George A. (“Chip”) Hambro
         
    George A. (“Chip”) Hambro    

- 11 -


 

SEPARATION AGREEMENT AND MUTUAL RELEASE
   I. Release .
          (A) For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned Employee, with the intention of binding himself/herself, his/her heirs, executors, administrators and assigns, does hereby release and forever discharge First Solar, Inc., a Delaware corporation (the “ Company”), and its present and former officers, directors, executives, agents, employees, affiliated companies, subsidiaries, successors, predecessors and assigns (collectively, the “Released Parties”), from any and all claims, actions, causes of action, demands, rights, damages, debts, accounts, suits, expenses, attorneys’ fees and liabilities of whatever kind or nature in law, equity, or otherwise, whether now known or unknown (collectively, the “ Claims”), which the undersigned Employee now has, owns or holds, or has at any time heretofore had, owned or held against any Released Party, arising out of or in any way connected with the undersigned Employee’s employment relationship with the Company, its subsidiaries, predecessors or affiliated entities, or the termination thereof, under any Federal, state or local statute, rule, or regulation, or principle of common, tort or contract law, including but not limited to, the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. §§ 201 et seq., the Family and Medical Leave Act of 1993, as amended (the “ FMLA”), 29 U.S.C. §§ 2601 et seq., Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. §§ 2000e et seq., the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C. §§ 621 et seq., the Americans with Disabilities Act of 1990, as amended, 42 U.S.C. §§ 12101 et seq., the Worker Adjustment and Retraining Notification Act of 1988, as amended, 29 U.S.C. §§ 2101 et seq., the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. §§ 1001 et seq., and any other equivalent or similar Federal, state, or local statute; provided, however, that nothing herein shall release the Company from (a) any claims by the undersigned Employee arising out of any director and officer indemnification or insurance obligations in favor of the undersigned Employee, (b) any director and officer indemnification obligations under the Company’s by-laws and (c) any obligations to provide payments and benefits to Employee pursuant to provisions under separate agreements or contracts between the parties that survive the termination of Employee’s employment. The undersigned Employee understands that, as a result of executing this Separation Agreement and Mutual Release, he/she will not have the right to assert that the Company or any other Released Party unlawfully terminated his/her employment or violated any of his/her rights in connection with his/her employment or otherwise.
   The undersigned Employee affirms that he/she has not filed, caused to be filed, or presently is a party to any Claim, complaint or action against any Released Party in any forum or form and that he/she knows of no facts which may lead to any Claim, complaint or action being filed against any Released Party in any forum by the undersigned Employee or by any agency, group, or class persons. The undersigned Employee also affirms that he/she (i) has made no assignment and will make no assignment of the

 


 

Claims released herein; and (ii) will not institute legal or administrative proceedings or, absent an order from a court of competent jurisdiction, participate in any manner in any civil lawsuit or administrative proceeding based upon, arising out of or relating to any Claim released by the undersigned Employee herein. The undersigned Employee further affirms that he/she has been paid and/or has received all leave (paid or unpaid), compensation, wages, bonuses, commissions, and/or benefits to which he/she may be entitled and that no other leave (paid or unpaid), compensation, wages, bonuses, commissions and/or benefits are due to him/her from the Company and its subsidiaries, except as specifically provided in this Separation Agreement and Mutual Release or within another agreement or contract with the Company. The undersigned Employee furthermore affirms that he/she has no known workplace injuries or occupational diseases and has been provided and/or has not been denied any leave requested under the FMLA. If any agency or court assumes jurisdiction of any such Claim, complaint or action against any Released Party on behalf of the undersigned Employee, the undersigned Employee will request such agency or court to withdraw the matter.
   The undersigned Employee further declares and represents that he/she has carefully read and fully understands the terms of this Separation Agreement and Mutual Release and that he/she has been advised and had the opportunity to seek the advice and assistance of counsel with regard to this Separation Agreement and Mutual Release, that he/she may take up to and including 21 days from receipt of this Separation Agreement and Mutual Release, to consider whether to sign this Separation Agreement and Mutual Release, that he/she may revoke this Separation Agreement and Mutual Release within seven calendar days after signing it by delivering to the Company written notification of revocation, and that he/she knowingly and voluntarily, of his/her own free will, without any duress, being fully informed and after due deliberate action, accepts the terms of and signs the same as his own free act.
   [To effect a full and complete general release as described above, the undersigned Employee expressly waives and relinquishes all rights and benefits of Section 1542 of the Civil Code of the State of California, and the undersigned Employee does so understanding and acknowledging the significance and consequence of specifically waiving Section 1542. Section 1542 of the Civil Code of the State of California states as follows:
A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.
   Thus, notwithstanding the provisions of Section 1542, and to implement a full and complete release and discharge of the Released Parties, the undersigned Employee expressly acknowledges this Separation Agreement and Mutual Release is intended to include in its effect, without limitation, all Claims the undersigned Employee does not know or suspect to exist in the undersigned Employee’s favor at the time of signing this

2


 

Separation Agreement and Mutual Release, and that this Separation Agreement and Mutual Release contemplates the extinguishment of any such Claim or Claims.]1
          (B) For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company, with the intention of binding itself, its subsidiaries, divisions, affiliates, and assigns, does hereby release and forever discharge Employee, his heirs, attorneys, successors and assigns from all Claims which the Company now has, owns or holds, or has at any time heretofore had, owned or held against the undersigned Employee, arising out of or in any way connected with the undersigned Employee’s employment relationship with the Company, its subsidiaries, predecessors or affiliated entities, or the termination thereof, under any Federal, state or local statute, rule, or regulation, or principle of common, tort or contract law; provided, however, that nothing herein shall release the undersigned Employee from any obligations to the Company pursuant to provisions under separate agreements or contracts between the parties that survive the termination of Employee’s employment.
          Further, the Company affirms that (i) the Company has made no assignment and will make no assignment of the Claims released by the Company herein; and (ii) the Company will not institute legal or administrative proceedings or, absent an order from a court of competent jurisdiction, participate in any manner in any civil lawsuit or administrative proceeding based upon, arising out of or relating to any Claims released by the Company herein.
   II. Protected Rights. The Company and the undersigned Employee agree that nothing in this Separation Agreement and Mutual Release is intended to or shall be construed to affect, limit or otherwise interfere with any non-waivable right of the undersigned under any Federal, state or local law, including the right to file a charge or participate in an investigation or proceeding conducted by the Equal Employment Opportunity Commission (“EEOC”) or to exercise any other right that cannot be waived under applicable law. The undersigned is releasing, however, his/her right to any monetary recovery or relief should the EEOC or any other agency pursue Claims on his/her behalf. Further, should the EEOC or any other agency obtain monetary relief on his/her behalf, the undersigned assigns to the Company all rights to such relief.
   III. Equitable Remedies. The undersigned Employee acknowledges that a violation by the undersigned Employee of any of the covenants contained in this Separation Agreement and Mutual Release would cause irreparable damage to the Company and its subsidiaries in an amount that would be material but not readily ascertainable, and that any remedy at law (including the payment of damages) would be inadequate. Accordingly, the undersigned Employee agrees that, notwithstanding any provision of this Separation Agreement and Mutual Release to the contrary, the Company shall be entitled (without the necessity of showing economic loss or other actual damage)
 
1   Only include for employees who were employed by the Company or its subsidiaries in California. To be updated to reflect changes in California law, as applicable.

3


 

to injunctive relief (including temporary restraining orders, preliminary injunctions and/or permanent injunctions) in any court of competent jurisdiction for any actual or threatened breach of any of the covenants set forth in this Separation Agreement and Mutual Release in addition to any other legal or equitable remedies it may have.
   IV. Return of Property. The undersigned Employee shall return to the Company on or before [10 DAYS AFTER TERMINATION DATE], all property of the Company in the undersigned Employee’s possession or subject to the undersigned Employee’s control, including without limitation any laptop computers, keys, credit cards, cellular telephones and files. The undersigned Employee shall not alter any of the Company’s records or computer files in any way after [TERMINATION DATE].
   V. Severability. If any term or provision of this Separation Agreement and Mutual Release is invalid, illegal or incapable of being enforced by any applicable law or public policy, all other conditions and provisions of this Separation Agreement and Mutual Release shall nonetheless remain in full force and effect so long as the economic and legal substance of the transactions contemplated by this Separation Agreement and Mutual Release is not affected in any manner materially adverse to any party.
   VI. GOVERNING LAW. THIS SEPARATION AGREEMENT AND MUTUAL RELEASE SHALL BE DEEMED TO BE MADE IN THE STATE OF DELAWARE, AND THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS SEPARATION AGREEMENT AND MUTUAL RELEASE IN ALL RESPECTS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAW.
Effective on the eighth calendar day following the date set forth below.
         
FIRST SOLAR, INC.,    
 
       
by
       
 
 
 
   
 
    Name:    
 
    Title:    
 
       
EMPLOYEE,    
 
       
 
 
 
  [NAME]
   
 
    Date    
 
    Signed:    

4

exv31w01
 

EXHIBIT 31.01
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 15 U.S.C. SECTION 7241, AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael J. Ahearn, certify that:
1.   I have reviewed the quarterly report on Form 10-Q of First Solar, Inc., a Delaware corporation, for the period ended March 31, 2007, as filed with the Securities and Exchange Commission;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  (b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  (c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: May 7, 2007  /s/ MICHAEL J. AHEARN    
  Michael J. Ahearn   
  Chief Executive Officer   
 

 

exv31w02
 

EXHIBIT 31.02
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 15 U.S.C. SECTION 7241, AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jens Meyerhoff, certify that:
1.   I have reviewed the quarterly report on Form 10-Q of First Solar, Inc., a Delaware corporation, for the period ended March 31, 2007, as filed with the Securities and Exchange Commission;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  (b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  (c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: May 7, 2007  /s/ JENS MEYERHOFF    
  Jens Meyerhoff   
  Chief Financial Officer   
 

 

exv32w01
 

EXHIBIT 32.01
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-Q of First Solar, Inc., a Delaware corporation, for the period ended March 31, 2007, as filed with the Securities and Exchange Commission, each of the undersigned officers of First Solar, Inc. certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his respective knowledge:
  (1)   the quarterly report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
  (2)   the information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of First Solar, Inc. for the periods presented therein.
         
Date: May 7, 2007
  /s/ MICHAEL J. AHEARN    
 
       
 
  Michael J. Ahearn    
 
  Chief Executive Officer    
 
       
Date: May 7, 2007
  /s/ JENS MEYERHOFF    
 
       
 
  Jens Meyerhoff    
 
  Chief Financial Officer