Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement of a Foreign Private Issuer — Form F-1 Filing Table of Contents
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F-1/A — Pre-Effective Amendment to Registration Statement of a Foreign Private Issuer Document Table of Contents
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
Christopher J. Cummings
Chris Hewat
Riccardo A. Leofanti
D. Shawn McReynolds
Shearman & Sterling LLP
Blake, Cassels & Graydon LLP
Skadden, Arps, Slate, Meagher & Flom LLP
Davies Ward Phillips & Vineberg LLP
199 Bay Street, Suite 4405
199 Bay Street, Suite 2800
222 Bay Street, Suite 1750
1 First Canadian Place,
44th Floor
Toronto, ON Canada M5L 1E8
Toronto, ON Canada M5L 1A9
Toronto, ON Canada M5K 1J5
Toronto, ON Canada M5X 1B1
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration
Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, please check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act, or until this Registration Statement
shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
The information in this preliminary
prospectus is not complete and may be changed. We may not sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
This is an initial public offering of our common shares in the
United States and Canada.
The common
shares are being offered by us. Prior to this offering, there
has been no public market for our common shares.
The initial public offering price of our common shares is
expected to be between
$ and
$ per
share. We have applied to list our common shares on The Nasdaq
Global Market under the symbol “PHWT” and on the
Toronto Stock Exchange under the symbol “PHW.” Any
such listing will be subject to the approval of the relevant
stock exchange, and any such approval would not be given unless
all of the original listing requirements were met.
Investing in our common shares involves a high degree of
risk. Before buying any shares, you should read the discussion
of material risks of investing in our common shares in
“Risk Factors” beginning on page 10 of this
prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Per Share
Total
Initial public offering price
$
$
Underwriting commissions
$
$
Proceeds, before expenses, to us
$
$
The underwriters may also purchase up to an
additional common
shares from our parent company, ATS Automation Tooling Systems
Inc., at the public offering price, less underwriting
commissions, to cover over-allotments, if any, within
30 days from the date of this prospectus.
The underwriters are offering the common shares as set forth
under “Underwriting.” Delivery of the common shares
will be made on or
about ,
2006.
BMO Capital Markets
UBS Investment Bank
The date of this prospectus
is ,
2006.
You should rely only on the information contained in this
prospectus or any free writing prospectus prepared by or on
behalf of us. We have not, and the underwriters have not,
authorized anyone to provide you with additional or different
information. We are not, and the underwriters are not, offering
to sell these securities in any jurisdiction where the offer or
sale is not permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any
sale of our common shares. Our business, financial condition,
results of operations and prospects may have changed since the
date of this prospectus.
Following is a description of certain units of measure or power
used in this prospectus:
“g” grams
“W” watt
“g/ W” grams per watt
“kW” kilo-watt, or one thousand watts
“mm” millimeters
“MW” mega-watt, or one million watts
“GW” giga-watt, or one billion watts
“kWh” kilo-watt hour, or the power of one kilo-watt
operating for one hour
“Wp” watt peak, or the output of a solar module as
measured under an industry standardized light test
Any references in this prospectus to our production capacity
assume the use of polysilicon at currently experienced levels of
efficiency, in the case of Photowatt International, and assume
the use of polysilicon at expected levels of efficiency, in the
case of Spheral Solar.
As used in this prospectus, “efficiency” is the
percentage of incident energy that is converted into electrical
energy in a solar cell. Solar cells with lower efficiencies need
to be larger than solar cells with higher efficiencies to
generate the same power output.
As used in this prospectus, “silicon” refers to a
variety of silicon feedstock, including polysilicon, refined
metallurgical silicon and polysilicon powders and fines.
Through and
including ,
2006 (the 25th day after the date of this prospectus),
U.S. federal securities law may require all dealers that
effect transactions in these securities, whether or not
participating in this offering, to deliver a prospectus. This
requirement is in addition to the dealers’ obligations to
deliver a prospectus when acting as an underwriter and with
respect to unsold allotments or subscriptions.
You should read the following summary together with the more
detailed information regarding our company contained in this
prospectus, including the risk factors and the combined
financial statements and notes thereto included elsewhere in
this prospectus. Unless the context otherwise requires, any
references in this prospectus to “we,”“our,”“us,” the “Company” and
“Photowatt” refer to Photowatt Technologies Inc. and
its subsidiaries as in effect on the closing date of this
offering. Any references in this prospectus to “ATS”
refer to our parent company, ATS Automation Tooling Systems Inc.
and its subsidiaries, other than us.
We design, manufacture and sell photovoltaic products, commonly
referred to as solar cells and modules. Solar cells and modules
provide clean, renewable energy by converting sunlight into
electricity through a process known as the photovoltaic effect.
We operate through two segments, Photowatt International, our
core business that is based on a wafer technology and Spheral
SolarTM,
a development project that is based on a spheral technology
using thousands of tiny silicon spheres instead of silicon
wafers.
Photowatt International designs, manufactures and sells solar
modules and installation kits, and provides solar power system
design and other value-added services, principally in Western
Europe. Photowatt International also manufactures wafers and
solar cells, primarily for use in manufacturing its modules and
for sale to third parties on an opportunistic basis. Most of
Photowatt International’s products are manufactured in our
Photowatt France facility outside of Lyon, France. Photowatt
USA, our facility in Albuquerque, New Mexico, performs certain
module assembly operations for Photowatt International. Solar
modules manufactured by Photowatt International are used by
businesses, institutions and homeowners to generate electric
power. Photowatt International sells its products under the
Photowatt and Matrix brands to a network of independent solar
power systems distributors and installers. Photowatt
International has been developing and selling photovoltaic
products since 1979. Products manufactured by Photowatt
International accounted for all of our combined revenue for our
fiscal 2006 and for the first quarter of fiscal 2007.
Our Competitive Strengths
We believe that we have the following competitive strengths:
•
Integrated manufacturing capabilities. We participate in
each of the ingot, wafer, cell and module stages of the solar
module production process. We believe that being an integrated
manufacturer gives us several advantages relative to many of our
competitors, including:
—
the ability to capture a greater portion of the profits
available by participating across a significant portion of the
solar value chain;
—
reduced dependence on third-party suppliers for ingots, wafers
and cells;
—
enhanced research and development capabilities to increase cell
efficiency levels;
—
the ability to process a wide variety of silicon
feedstock; and
—
improved process development capabilities by allowing us to
continually evaluate the impact of changes throughout the
production process.
•
Proprietary silicon processing technologies. We have
developed processes to make solar cells from lower grades of
silicon that we believe we can acquire more easily than
polysilicon, which we believe will allow us to meet customer
demand and mitigate the effects on our business of the current
polysilicon shortage, including:
—
Processing of refined metallurgical silicon. We are
currently producing solar cells using refined metallurgical
silicon which we believe we can acquire more easily than
polysilicon. We expect that by the fourth quarter of fiscal
2007, in excess of 25% of the solar cells we make will be
produced using refined metallurgical silicon. Based on
contractual commitments for the supply of refined metallurgical
silicon that we have entered into or expect to enter into, we
believe that approximately 90% of our total silicon requirement
during fiscal 2008 could be met with refined metallurgical
silicon.
Processing of polysilicon powder and fines. Polysilicon
powder and fines are by-products of the polysilicon production
process that many manufacturers have limited use for. Spheral
Solar has developed a proprietary process called optically fused
powder, or OFP, technology to convert polysilicon powder and
fines into polysilicon clusters that can be used, together with
conventional polysilicon, by Photowatt International to make
solar cells. Utilizing polysilicon powder and fines in
combination with conventional polysilicon does not decrease the
efficiency of our cells and is less costly for us than
purchasing polysilicon in the current market environment.
•
Advanced wafer sawing capabilities. Wafers used in solar
cells are cut from silicon bricks using specialized wire saws.
In general, thinner wafers result in lower production costs
because more wafers can be produced from each brick. Photowatt
International produces wafers with thicknesses ranging from 180
to 220 microns using a wire 160 microns thick. Photowatt
International used approximately 10 grams of polysilicon per
watt of power in our solar cells in 2005, which compares to an
average of approximately 12 grams for the industry in 2005 as
reported by Solarbuzz LLC, or Solarbuzz, a market research
firm specializing in the solar industry. Our current usage is
approximately 9 grams per watt, which we believe remains below
the current industry average.
•
Established market positions and relationships with key
distributors and installers. We have successfully sold solar
products in Europe for over 20 years. We enjoy established
market positions in several Western European countries that have
well developed and growing solar markets, including Germany,
which is currently the world’s largest market for solar
power. We are also developing a presence in emerging growth
markets for solar power in Europe, including Spain, Italy and
Greece, as well as in the United States and Canada.
Our Business Strategy
Our objective is to be a market leader in the development and
manufacturing of solar products. We intend to achieve this
objective through the following strategies:
•
Expand integrated annual manufacturing capacity to
approximately 390 MW by the end of calendar 2011.
Demand for our products is currently greater than our capacity
to produce them. We intend to capitalize on the demand for our
products by increasing our annual integrated manufacturing
capacity to approximately 390 MW by the end of calendar
2011. If we are able to successfully complete the development
and process engineering necessary to commercialize our Spheral
Solar technology, we expect that 140 MW of this aggregate
manufacturing capacity will relate to Spheral Solar technology.
•
Establish reliable, long-term silicon supply. Our
strategy is to establish a long-term supply of polysilicon and
polysilicon alternatives from a variety of sources to support
our continued growth. We plan to:
—
enter into long term supply agreements for refined metallurgical
silicon and polysilicon, including polysilicon ingots and wafers;
—
secure a supply of polysilicon powder and fines (for use with
our OFP technology); and explore the possibility of licensing
OFP technology to third-parties in exchange for long-term
polysilicon supply agreements; and
—
purchase silicon, including polysilicon ingots and wafers, on
the spot market, to the extent available and subject to
appropriate pricing.
•
Continue to invest in research and development to improve
cell efficiency. We expect to continue to devote substantial
resources to our research and development efforts, either
through direct investment or collaborative research and
development activities with leading industry participants, aimed
at increasing the efficiency of our solar cells. We believe that
higher efficiencies will enable us to produce cells that use
less silicon per watt and reduce the cost of the products we
manufacture and sell.
•
Commercialize our Spheral Solar technology. We are
working on development and process engineering in an effort to
commercialize our Spheral Solar technology. We believe that if
our Spheral Solar technology can be made commercially viable,
there are significant market opportunities for Spheral Solar
products, including commercial roofing membranes and residential
applications, such as
solar shingles, as well as several consumer/ recreational
applications, where aesthetics, physical flexibility and low
weight are critical product characteristics. The technological
and commercialization challenges associated with the development
of our Spheral Solar technology are substantial. Our development
process for our Spheral Solar technology has targeted the
achievement of certain technical objectives and resolution of
process issues, which we review on an ongoing basis. Our next
review of our Spheral Solar technology is scheduled for January
2007 following the completion of the current phase of analysis
that includes the results of a technical report from our
third-party technical consultant on certain aspects of the
manufacturing processes. We may decide to discontinue
development of the technology following this review or at any
time.
Our Silicon Supply
Polysilicon is the primary raw material used in the production
of our solar cells and modules. Silicon is currently in short
supply and its price has increased significantly over the past
18 months. Without an adequate supply of polysilicon or an
alternative, such as refined metallurgical silicon, which we
have developed the capacity to process, we are not able to
manufacture our products. As of June 30, 2006, we had
approximately 287 metric tonnes of polysilicon, including
polysilicon fines and powder, and 23 metric tonnes of
refined metallurgical silicon in inventory. At August 29,2006, we had commitments from suppliers to deliver an additional
40 metric tonnes of polysilicon and 130 metric tonnes
of refined metallurgical silicon during the remainder of fiscal
2007. At August 29, 2006, we also had commitments from
suppliers to deliver 48 metric tonnes of polysilicon and
120 metric tonnes of refined metallurgical silicon during
fiscal 2008. We believe that our existing inventory and supplier
commitments are sufficient to satisfy our planned capacity until
the end of fiscal 2007. We intend to meet our silicon
requirements in fiscal 2008 through a combination of existing
commitments, purchases of polysilicon on an opportunistic basis,
purchases of refined metallurgical silicon and purchases of
polysilicon fines and powders that we can upgrade into
polysilicon clusters that can be used in combination with
conventional polysilicon to make solar cells.
Our Industry
Solar power systems are used for a variety of residential,
commercial and industrial applications generally described as
either “on-grid” or “off-grid” in nature.
The market for “on-grid” applications, where solar
power is used to supplement electricity purchased from the
utility network, represents the largest and fastest growing
segment of the market. According to Solarbuzz, in 2005, the
global on-grid segment grew by 42% to 1,262 MW, and since
2001, the on-grid segment has grown at an average annual rate of
approximately 55%. We believe the majority of our products are
used in on-grid applications.
“Off-grid” markets, where access to utility networks
is not physically feasible or economical, offer additional
opportunities for solar technology. Off-grid industrial
applications include road signs, highway call boxes,
communications support along remote pipelines and
telecommunications equipment, as well as rural residential
applications. Off-grid consumer applications include portable
recreational power modules, garden lights, marine lighting and
camping equipment. As reported by Solarbuzz, the off-grid market
grew 2% in 2005, to 198 MW, and has grown at an average of
12% per annum since 2001.
According to Solarbuzz, between 2001 and 2005, total annual
solar power system installations increased globally from
345 MW to 1,460 MW, representing a compound annual
growth rate of 43%, and global installations of solar power
systems are expected to grow at a compound annual growth rate of
17% from 1,460 MW in 2005 to 3,250 MW by 2010.
Solarbuzz forecasts continued strong growth globally, with sales
increasing from $9.8 billion in 2005 to an estimated
$18.6 billion by 2010, a 14% compound annual growth rate.
Despite this rapid growth, solar energy constitutes only a small
fraction of the world’s energy output.
The development and increased usage of solar power is, and for
the foreseeable future will be, affected by the existence of
government incentives. A growing number of countries have
established attractive incentive programs for the development of
solar and other renewable energy sources. In 2005, two of the
three largest markets for solar products, as measured by total
installations per annum, were Germany and the United States,
each having significant government subsidy programs for solar
power. Other countries in which we sell our products such as
Spain, France and Italy also have significant government subsidy
programs for solar power.
Our parent company, ATS, is a leading designer and producer of
turn-key automated manufacturing and test systems, which are
used primarily by multinational corporations operating in a
variety of industries including: automotive,
computer/electronics, healthcare, and consumer products. ATS
also uses its many years of repetitive manufacturing experience
and skills to produce precision components and sub-assemblies
and specialized repetitive equipment. ATS employs approximately
3,800 people at 26 manufacturing facilities in Canada,
the United States, Europe, southeast Asia and China. ATS’
shares are traded on the Toronto Stock Exchange under the symbol
ATA.
ATS currently owns, either directly or indirectly through its
subsidiaries, substantially all of our assets and operations.
Upon the completion of this offering, ATS will establish our
business as a separate, publicly traded company. To accomplish
the separation of our business from the other businesses of ATS,
ATS will undertake, subject to ATS shareholder approval of not
less than two-thirds of the votes entitled to be cast by holders
of ATS shares present in person or represented by proxy at a
meeting of ATS shareholders to be held prior to the date of this
offering, a corporate reorganization upon the closing of this
offering under which ATS will transfer our assets and operations
to us. For further information on this reorganization, see
“Our Relationship with ATS — General —
ATS reorganization relating to our company.” Immediately
following this offering, ATS will own of record and beneficially
approximately %
of our common shares. If the underwriters exercise their
over-allotment option in full, immediately following this
offering ATS will own of record and beneficially
approximately %
of our common shares. As long as ATS continues to control more
than 50% of the voting power of our common shares, ATS will be
able to direct the election of all of the members of our board
and exercise a controlling influence over our business and
affairs. As well, provisions in our Shareholder Agreement with
ATS provide ATS with certain rights for so long as ATS owns a
significant percentage of our common shares.
Corporate Information
We are a Canadian corporation. Our principal executive offices
are located at 25 Reuter Drive, Cambridge, Ontario, Canada N3E
1A9, and our telephone number is (519) 650-6505. We were
incorporated on July 10, 2006.
Presentation of Financial Information
We present our combined financial statements in United States
dollars. In this prospectus, references to “$,”“U.S.$,”“dollars” or
“U.S. dollars” are to United States dollars,
references to “C$” are to Canadian dollars, and
references to
“€” are
to euro. Amounts are stated in U.S. dollars unless
otherwise indicated.
On October 13, 2006, the noon buying rate in New York for
cable transfers payable in Canadian dollars and euros, as
certified for customs purposes by the Federal Reserve Bank of
New York, was $1.00 = C$1.1367 and
€1.00 = $1.2502,
respectively.
Our combined financial statements included in this prospectus
have been prepared in accordance with Canadian generally
accepted accounting principles, or Canadian GAAP, which conform
in all material respects with United States generally accepted
accounting principles, or U.S. GAAP, as applied to our
combined financial statements, except as presented in
note 20 to our combined annual financial statements and
note 14 to our combined quarterly financial statements.
Our combined financial statements present our historical
financial position, results of operations, changes in net
investment and cash flows on a “carve-out” basis from
ATS as if we had operated as a stand-alone entity. However, the
combined financial statements may not necessarily be indicative
of the results that would have been attained if we had operated
as a stand-alone entity, or our results for any future periods.
Common shares to be held by ATS immediately after this offering
(assuming no exercise of the over-allotment option)
shares
Common shares outstanding immediately after this offering
shares
Over-allotment option
ATS has granted the underwriters an over-allotment option
exercisable for a period of 30 days from the date of this
prospectus to purchase up to an
additional common
shares from ATS (representing 15% of the common shares offered
hereby) at the initial public offering price to cover
over-allotments, if any. We will not receive any of the proceeds
from the shares sold pursuant to any exercise of the
over-allotment option. See “Underwriting.”
Use of proceeds
We estimate that the net proceeds to be received by us from the
sale
of of
our common shares in this offering will be approximately
$ million,
after deducting estimated underwriting commissions and estimated
offering expenses payable by us, assuming an initial public
offering price of
$ per
share. We intend to use the net proceeds from this offering to
finance the capital expenditures associated with the first and
second phases of our manufacturing capacity expansion plan at
Photowatt International estimated to be approximately
$ million,
to repay
$ million
expected to be owed to ATS under an intercompany demand loan,
and the balance for general corporate purposes, including
further development and process engineering associated with our
Spheral Solar technology, the procurement of silicon supply
contracts and investments that will enhance our manufacturing,
silicon supply or research and development capabilities. See
“Use of Proceeds.”
Risk factors
See “Risk Factors” beginning on page 10 and the
other information included in this prospectus for a discussion
of the risks you should carefully consider before deciding to
invest in our common shares.
Nasdaq Global Market and Toronto Stock Exchange Listings
We have applied to list our common shares on The Nasdaq Global
Market under the symbol “PHWT” and the Toronto Stock
Exchange under the symbol “PHW.” Any such listing will
be subject to the approval of the relevant stock exchange, and
any such approval would not be given unless all of the original
listing requirements were met.
Unless otherwise indicated, the information in this prospectus,
including the number of common shares outstanding after this
offering noted above, is based
on shares
outstanding as
of ,
2006 and gives effect to the corporate reorganization to be
completed upon the closing of this offering as described
The following summary combined statements of earnings (loss)
data for the three years ended March 31, 2004, 2005 and
2006 have been derived from our audited combined annual
financial statements included elsewhere in this prospectus. The
following summary combined statements of earnings data for the
three-month periods ended June 30, 2005 and 2006 and the
summary combined balance sheet data as of June 30, 2006
have been derived from our unaudited combined quarterly
financial statements included elsewhere in this prospectus. Our
combined financial statements have been prepared in accordance
with Canadian GAAP, which conform in all material respects with
U.S. GAAP as applied to our combined financial statements,
except as presented in note 20 to our combined annual
financial statements and note 14 to our combined quarterly
financial statements. Amounts are stated in United States
dollars. The unaudited pro forma balance sheet data below give
effect to the corporate reorganization to be completed upon the
closing of this offering as described under “Our
Relationship with ATS — General — ATS
reorganization relating to our company.” The unaudited pro
forma, as adjusted balance sheet data below give further effect
to our sale
of common
shares in this offering at an assumed initial public offering
price of
$ per
share, after deducting the underwriting commissions and
estimated offering expenses payable by us, and the use of the
net proceeds therefrom as described in “Use of
Proceeds.” Other than as discussed above, the data below
does not give effect to the corporate reorganization. You should
read the following summary combined financial data in
conjunction with our combined financial statements and the notes
thereto and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included
elsewhere in this prospectus. Our combined financial statements
present our historical financial position, results of
operations, changes in net investment and cash flows on a
“carve-out” basis from ATS as if we had operated as a
stand-alone entity. However, the combined financial statements
may not necessarily be indicative of the results that would have
been attained if we had operated as a stand-alone entity, or our
results in any future periods.
The following table sets forth certain information prepared in
accordance with U.S. GAAP. You should read this information
in conjunction with note 20 to our combined annual
financial statements and note 14 to our combined quarterly
financial statements included elsewhere in this prospectus.
We incurred an after-tax, non-cash asset impairment charge in
fiscal 2006 of $94.3 million (pre-tax $94.3 million)
against our Spheral Solar technology deferred development costs
and other long-lived assets in the fourth quarter of fiscal 2006
due to the current uncertainty in resolving technological
challenges and resulting delays of realizing cash flows from the
investment in our Spheral Solar technology.
(3)
Corporate costs include Photowatt corporate costs which were
incurred directly by us and include legal, compliance,
personnel, finance and other corporate costs not directly
associated with a segment. Corporate costs also include shared
corporate costs, which represent an estimate of costs
attributable to our business for services that were provided by
ATS or one of its affiliates in the past.
(4)
Based on the number of common shares to be outstanding upon
completion of the corporate reorganization and the closing of
this offering as described under “Our Relationship with
ATS — General — ATS reorganization relating
to our company.”
(5)
The pro forma, as adjusted balance sheet data are
illustrative only and are subject to adjustment based on the
actual initial public offering price of our common shares and
other terms of this offering determined at pricing. A $1.00
increase (decrease) in the assumed initial public offering price
per share would increase (decrease) cash and cash equivalents,
total assets, working capital and group equity by approximately
$ million.
(6)
Working capital represents total current assets minus total
current liabilities.
(7)
Total debt consists of debt under our intercompany loan from
ATS, which was considered nil as at March 31, 2006 and
$8.6 million at June 30, 2006 for the purposes of the
combined financial statements. At the time of the closing of
this offering we expect to owe approximately
$ million
to ATS pursuant to an intercompany demand loan for investment in
additional manufacturing capacity at Photowatt International,
further development and process engineering associated with our
Spheral Solar technology, and other general corporate purposes.
(8)
Represents revenue from third parties. Spheral Solar had
inter-segment revenue of $1.0 million for the three month
period ended June 30, 2006 from sales of silicon to
Photowatt International that is eliminated in the combined
financial statements.
An investment in our common shares involves significant
risks. You should carefully consider the risks described below
and the other information elsewhere in this prospectus,
including our combined financial statements and related notes,
before making a decision to buy our common shares. If any of the
following risks occur, our business, financial condition and
results of operations could be materially harmed. In that case,
the trading price of our common shares could decline and you
could lose all or part of your investment in our common
shares.
Risks Relating to Our Business
Failure to obtain sufficient quantities of silicon at
reasonable prices or at all could constrain our revenue and
production growth and decrease our gross margins.
Silicon is the most important raw material for our production of
solar wafers, cells and modules. To maintain competitive
manufacturing operations, we must obtain silicon in sufficient
quantities, on a timely basis and at acceptable prices as there
are only a limited number of suppliers. Strong growth in demand
for silicon for use in solar cell and module production and for
use in the semiconductor industry has led to an industry-wide
shortage of silicon and to significant price increases in
silicon. Increases in silicon prices have in the past increased
our manufacturing costs and may impact our manufacturing costs
and net income in the future. Some suppliers of silicon also
supply to silicon wafer manufacturers for the semiconductor
industry, which typically have greater buying power and market
influence than manufacturers for the solar cell industry. As a
result, increases in the demand for silicon from the
semiconductor industry may in the future result in late
deliveries or supply shortages with respect to the silicon that
we need as raw material. This could result in reduced
manufacturing output, delayed or missed shipments, damaged
customer relationships and decreased revenue and gross margins.
As demand for solar cells has increased, we and many of our
principal competitors have announced plans to add additional
manufacturing capacity. As this manufacturing capacity becomes
operational, it will increase the demand for silicon and further
exacerbate the current shortage and price increases. We cannot
assure you that we will be able to secure a sufficient supply of
polysilicon, whether conventional or fines and powder, or
refined metallurgical silicon, to meet our needs.
Most of our silicon feedstock is currently purchased through
spot market purchases. We are continuing to devote resources to
secure additional supply to enable our operations to grow
without interruption and we believe that we have developed a
silicon supply strategy for our longer term needs. However, we
cannot assure you that we will be able to realize on our current
efforts or our supply strategy. An important element of our long
term silicon supply strategy involves the negotiation of new
supply arrangements, but they may not be finalized or become
effective at all. Under these arrangements we would typically be
required to pre-pay or pay deposits to our suppliers in order to
secure silicon supply. If any one of our suppliers was unable to
provide us with silicon, we would have difficulty finding a
replacement supplier. Additionally, although we aim to enter
into fixed-price, prepaid arrangements with silicon suppliers,
entering into such arrangements could make us less competitive
if the spot market price of silicon falls. Our inability to
obtain sufficient silicon at commercially reasonable prices or
at all would adversely affect our ability to meet existing and
future customer demand for our products, constrain our revenue
and production growth and decrease our gross margins.
The reduction or elimination of government subsidies and
economic incentives for solar energy applications could cause a
reduction in demand for our products and lead to a decrease in
our revenue and profitability.
Demand for solar products is driven, in part, by government
incentives that make the economic cost of solar power
competitive with traditional forms of electricity. The
unsubsidized cost of using solar energy is currently more
expensive, on a per watt basis, than the retail cost of
conventional hydroelectric, nuclear or fossil fuel-generated
energy sources in most industrialized regions of the world. As a
result, federal, state, provincial and local governmental bodies
in many countries, including Germany, France, Spain, Italy, the
United States, China and Canada, have provided subsidies in the
form of cost reductions, tax write-offs and
other incentives to end users, distributors, systems integrators
and manufacturers of solar cells and solar modules. Reduction or
elimination of these government subsidies and economic
incentives because of policy changes, fiscal tightening or other
reasons may result in market volatility, including rapid changes
in demand and pricing, as well as the diminished competitiveness
of solar energy, and could materially and adversely affect the
growth of these markets. For example, in 2005, Japan, one of the
largest markets for solar products, eliminated its direct
subsidies in favor of other incentive programs, which may not be
as successful in promoting the adoption of solar energy in that
market. Other jurisdictions, such as Germany, have subsidy
programs that are designed to decline over time. Government
subsidies and economic incentives may change depending on
various factors including the particular political situation of
the country providing the subsidy. The reduction or elimination
of government subsidies and economic incentives for solar energy
applications, especially those in our target markets, could
decrease demand for our products and cause our revenue to
decline.
Our failure to further refine our technology and develop
and introduce new solar products could render our products
uncompetitive or obsolete and reduce our sales and market
share.
The solar industry is rapidly evolving and is characterized by
continually improving technology providing more efficient and
higher power output, improved aesthetics and smaller size at
competitive prices. We will need to invest significant financial
resources in research and development to keep pace with
technological advances in the solar industry and to effectively
compete. However, research and development activities are
inherently uncertain, we may encounter practical difficulties in
commercializing our products under development, and our
significant expenditures on research and development may not
reap corresponding benefits. A variety of competing solar
technologies that other companies may develop could prove to be
more cost-effective and have better performance than our solar
products. Therefore, our products may be rendered obsolete by
the technological advances of others. See “— We
may not be able to fully develop and commercialize our Spheral
Solar technology, and products using that technology may not
gain market acceptance.”
Our future success substantially depends on our ability to
significantly increase both our manufacturing capacity and
output. Our ability to achieve our expansion goals is subject to
a number of risks and uncertainties.
At Photowatt International, we currently have annual capacity to
manufacture approximately 40 MW of solar cells and
54 MW of solar modules, whereas some of our larger
competitors have claimed that they can annually produce
over 400 MW of solar cells and solar modules. In
addition, many of our competitors have greater financial
resources and strategic access to greater amounts of silicon
than we do, which could enable them to grow faster than we do.
Our future success depends on our ability to significantly
increase both our manufacturing capacity and output. If we are
unable to do so, we may be unable to expand our business,
decrease our costs per watt and maintain our competitive
position. Our ability to establish additional manufacturing
capacity and increase output is subject to significant risks and
uncertainties, including:
•
the need to raise significant additional funds to purchase raw
materials and equipment or to build additional manufacturing
facilities;
•
delays and cost overruns as a result of a number of factors,
many of which may be beyond our control, such as increases in
raw materials prices and problems with equipment vendors;
•
delays or denial of required approvals by relevant government
authorities;
•
diversion of significant management attention and other
resources;
•
shortages of equipment or skilled labor; and
•
failure to execute our business plan effectively.
If we are unable to establish and operate additional
manufacturing capacity, or increase manufacturing output, or if
we encounter any of the risks described above, we may be unable
to expand our business as
planned. Moreover, we cannot assure you that if we do expand our
manufacturing capacity and output we will be able to generate
sufficient customer demand for our solar power products to
support our increased production levels.
We face intense competition from other companies producing
solar and other renewable energy products and conventional power
generation. Because many of our competitors have greater
resources than us, we may not be able to compete successfully
and we may lose or be unable to gain market share which could
affect our future revenue and profitability.
The market for solar power products is intensely competitive and
continually evolving. Industry participants compete with each
other for supplies of silicon. As well, industry participants
compete for sales primarily on the basis of their products’
design, efficiency and aesthetics, the strength of their
distribution networks, branding, price, reliability and
capacity. Many of our competitors have established a stronger
market position than ours, and if we fail to attract and retain
customers and establish successful distribution networks in our
target markets for our products, we will be unable to compete.
We compete with a large number of competitors in the solar
market, including Sharp, Q-Cells, Kyocera, Sanyo, Mitsubishi,
Schott, Suntech, Sunpower and BP Solar. We expect to compete
with future entrants to the solar market that offer new
technological solutions which could cause our products to become
obsolete or uncompetitive. The solar power market in general
also competes with other sources of renewable energy and
conventional power generation.
Many of our current and potential competitors have longer
operating histories, greater brand name recognition, more
established distribution networks, access to larger customer
bases and substantially greater financial, distribution,
technical, sales and marketing, manufacturing and other
resources than we do. As a result, they may be able to respond
more quickly to changing customer demands or to devote greater
resources to the development, promotion and sales of their
products than we can. Our business relies principally on sales
of our solar modules and our competitors with more diversified
product offerings may be better positioned to withstand a
decline in the demand for solar modules. Our competitors’
greater size in some cases provides them with a competitive
advantage with respect to manufacturing costs because of their
economies of scale and their ability to purchase raw materials
at lower prices. As a result, those competitors may have
stronger bargaining power with suppliers and have an advantage
over us in negotiating favorable pricing, as well as securing
silicon at times of shortages.
If solar technology is not suitable for widespread
adoption, or sufficient demand for solar products does not
develop or takes longer to develop than we anticipate, our sales
could decline, and we may be unable to operate
profitably.
The solar market is at a relatively early stage of development,
and the extent to which solar products will be widely adopted is
uncertain. Market data on the solar industry is not as readily
available as is data in more established industries where trends
can be assessed more reliably from data gathered over a longer
period of time. If solar technology proves unsuitable for
widespread adoption or if demand for solar products fails to
develop sufficiently, we may not be able to grow our business or
generate sufficient revenue to operate profitably. In addition,
demand for solar products in our targeted markets may not
develop or may develop to a lesser extent than we anticipated.
Many factors may affect the viability of widespread adoption of
solar technology and demand for solar products, including:
•
cost-effectiveness of solar products compared to conventional
and other non-solar energy sources and products;
•
performance and reliability of solar products compared to
conventional and other non-solar energy sources and products;
•
availability of government subsidies and incentives to support
the development of the solar industry;
•
success of other alternative energy generation technologies,
such as fuel cells, wind power and biomass;
fluctuations in economic and market conditions that affect the
viability of conventional and non-solar alternative energy
sources, such as increases or decreases in the prices of oil and
other fossil fuels;
•
capital expenditures by end users of solar products, which tend
to decrease when the economy slows down;
•
nature and rate of advances in solar technologies; and
•
deregulation of the electric power industry and broader energy
industry.
Solar cells made using alternatives to polysilicon, such
as refined metallurgical silicon, are new to the market and if
they are not accepted, we could be unable to fulfill our
contracts and could lose customers.
We intend to use refined metallurgical silicon to manufacture
over 25% of our solar cells by the fourth quarter of fiscal 2007
and believe that approximately 90% of our total silicon
requirement could be met with refined metallurgical silicon
during fiscal 2008. The cells we currently manufacture using
refined metallurgical silicon have lower efficiencies than solar
cells we make using polysilicon. Cell efficiency is important to
our customers as lower cell efficiency can result in the need
for larger and more expensive modules. Our customers have not
used solar products made using refined metallurgical silicon in
the past and we cannot be certain that they will view them as
acceptable alternatives to solar products made using
polysilicon. If there is resistance to our products made using
refined metallurgical silicon, we may be required to charge less
on a per watt basis for these products, which would adversely
affect our revenue and results of operations. We cannot assure
you that our customers will accept products made using refined
metallurgical silicon at all. If a significant number of our
customers were to object to our products made using refined
metallurgical silicon, we could be required to obtain
polysilicon at much higher cost to us to fulfill our contracts
with these customers. If we were unable to obtain polysilicon
due to insufficient supply in the market or otherwise, we would
not be able to fulfill our obligations to our customers, which
could result in financial damages to us, loss of customers and
damage to our reputation.
If we do not achieve satisfactory yields or quality in
manufacturing our solar cells, our sales could decrease and our
relationships with our customers and our reputation may be
harmed.
The manufacture of solar cells is a highly complex process.
Minor deviations in the manufacturing process can cause
substantial decreases in yield and in some cases, cause
production to be suspended or yield no output. We have from time
to time experienced lower than anticipated manufacturing yields.
This often occurs during the production of new products or the
installation and
start-up of new process
technologies or equipment. As we expand our manufacturing
capacity and bring additional lines or facilities into
production, we may experience lower yields as is typical with
any new equipment or process. We also expect to achieve lower
yields initially as we increase our use of refined metallurgical
silicon and use increasingly thinner wafers. If we do not
achieve planned yields, our sales could decrease and our
relationships with our customers and our reputation may be
harmed.
We expect that we will need to obtain significant
additional financing to expand our business, particularly our
manufacturing facilities and developing our Spheral Solar
technology, and if we are not able to secure such financing on
reasonable terms or at all, our ability to expand our business
could suffer.
Our industry is highly capital intensive and our success depends
to a significant degree on our ability to develop and update our
facilities and technology. We expect to make significant capital
expenditures related to increasing our capacity at our
manufacturing facilities, and our research and development
efforts, including our efforts to develop and commercialize our
Spheral Solar technology, and we expect that our expenses will
increase significantly as we expand our manufacturing
operations, continue our research and development efforts, hire
additional personnel, pay more for or make advance payments for
raw materials (especially silicon), and increase our marketing
and sales efforts. As a stand-alone entity, we will not be able
to rely on ATS to fund our capital requirements. We expect to
require significant financing in order to realize our growth
plans. Our ability to obtain adequate financing depends
significantly on our financial condition and results of
operations, as well as the conditions of the markets for solar
power products and the financial
markets. We may not be able to obtain financing when we need it
or on reasonable terms. Additional equity financing may result
in substantial dilution to our shareholders, including
purchasers of the common shares in this offering. If we raise
additional funds through debt financing, we could incur
significant borrowing costs and the terms of the instruments
governing our indebtedness could impose restrictions on our
ability to operate our business. If adequate funds are not
available when we need them and on reasonable terms, our ability
to fund our operations, develop and expand our manufacturing
operations and distribution network, invest in key partnerships,
fund our research and development or otherwise respond to
competitive pressures could be significantly impaired.
We may not be able to fully develop and commercialize our
Spheral Solar technology, and products using that technology may
not gain market acceptance.
We are developing our Spheral Solar technology, a light weight,
flexible crystalline solar module. To successfully commercialize
this technology, we must also develop new production processes
that are able to achieve yield, power efficiency and
manufacturing throughput for this proprietary solar product.
This development and process engineering work is taking longer
than originally expected, and the challenges and risks
associated with achievement of our development and process
engineering goals are substantial. We also face significant
financial and other risk of delays in commercializing this
technology from unforeseen events or other factors. Other market
participants could be faster in achieving cost-effective
industrial production of new solar power technologies, thereby
increasing cost pressure. There is no certainty when we will be
able to commercialize our Spheral Solar technology or that we
will be able to commercialize it at all. We incurred an
after-tax, non-cash asset impairment charge in fiscal 2006 of
$94.3 million (pre-tax $94.3 million) against our
Spheral Solar technology deferred development costs and other
long-lived assets due to the current uncertainty in resolving
technological challenges and resulting delays of realizing cash
flows from the investment in our Spheral Solar technology. The
technological and commercialization challenges associated with
the development of our Spheral Solar technology are substantial.
Our development process for our Spheral Solar technology has
targeted the achievement of certain technical objectives and
resolution of process issues, which we review on an ongoing
basis. Our next review of our Spheral Solar technology is
scheduled for January 2007 following the completion of the
current phase of analysis that includes the results of a
technical report from our third-party technical consultant on
certain aspects of the manufacturing processes. We may decide to
discontinue development of the technology following this review
or at any time.
Even if we are able to develop and commercially manufacture
Spheral Solar products, we cannot be sure that the market will
accept such Spheral Solar products. Our Spheral Solar products
would require significant marketing and sales efforts to gain
market acceptance. If we are able to commercially manufacture
our Spheral Solar products but they are not accepted by the
market, our ability to generate revenue would be adversely
affected and we may not recover the significant research and
development and marketing costs expended to develop the products.
Our ability to successfully commercialize our Spheral
Solar technology depends in part on our ability to establish and
maintain strategic relationships, and our failure to do so could
have a material adverse effect on our market penetration and
revenue growth.
The commercial viability of our Spheral Solar technology has not
yet been established. If our Spheral Solar technology proves to
be commercially viable, we believe we would need to establish
relationships with established building product manufacturers
and original equipment manufacturers. In fiscal 2004, we
commenced a product development relationship with Elk
Corporation on a residential roofing product. We cannot assure
you, however, that we will be able to maintain this relationship
or establish strategic relationships with other third parties or
that these relationships will be an effective method for
developing or commercializing our Spheral Solar technology.
If we are not able to establish further strategic relationships
or if any or all of our existing strategic relationships
terminate, our ability to generate revenue from Spheral Solar
technology may be impaired and
we may have to undertake product development and
commercialization entirely at our own expense. Such an
undertaking may:
•
limit the number of products that we are able to develop and
commercialize;
•
reduce the likelihood of successful product introduction;
•
significantly increase our capital requirements; and
•
divert our management’s attention and time.
We expect that our significant customer concentration will
continue to expose us to potentially significant fluctuations or
declines in our revenue and increased customer turnover.
We currently sell a substantial portion of our solar modules and
related solar products to a limited number of customers. In
fiscal 2006, our ten and three largest customers represented
approximately 79% and 46% of our revenue, respectively. Sales to
our customers are typically made through non-exclusive,
short-term purchase order arrangements. We cannot be certain
that these customers will generate significant revenue for us in
the future or that these customer relationships will continue.
We anticipate that customer concentration will continue for the
foreseeable future. Consequently, any one of the following
events may cause material fluctuations or declines in our
revenue and have a material adverse effect on our results of
operations:
•
reduction, delay or cancellation of orders from one or more of
our significant customers;
•
purchases by one or more of our significant customers of
products competitive with ours;
•
the loss of one or more of our significant customers and our
failure to identify additional or replacement customers; and
•
failure of any of our significant customers to make timely
payment for our products.
Because we operate on a purchase order basis with our
largest customers, our financial results, including gross
margins, may suffer if purchase orders were changed or
cancelled.
Sales to our customers are typically made through non-exclusive,
short-term purchase order arrangements. Our customers may cancel
or reschedule purchase orders with us on relatively short
notice. Cancellations or rescheduling of customer orders could
result in the delay or loss of anticipated sales without
allowing us sufficient time to reduce, or delay the incurrence
of, our corresponding inventory and operating expenses. In
addition, changes in forecasts or the timing of orders from
these or other customers expose us to the risks of inventory
shortages or excess inventory. This in turn could cause our
operating results to fluctuate.
We have incurred losses in recent prior periods and may
not be profitable in the future.
Our industry is characterized by long and variable delays
between expenses incurred for research and development and the
generation of revenue, if any, from such expenditures. We
incurred a combined net loss of $98.4 million in fiscal
2006, including an after-tax, non-cash asset impairment charge
of $94.3 million (pre-tax $94.3 million) against our
Spheral Solar technology deferred development costs and other
long-lived assets. Beginning October 1, 2005, operating
losses related to developing our Spheral Solar technology were
included in our combined results of operations. We expect to
continue to incur losses relating to the development of our
Spheral Solar technology for the foreseeable future. We cannot
assure you that we will be able to achieve profitability in the
future, or that, if achieved, such profitability can be
sustained. Our future success in attaining profitability and
growing our revenue and market share for our products will
depend upon our ability to develop products that have a
competitive advantage, build our brand image and reputation,
attract orders and increase efficiency in our production
process. If we do not achieve or sustain profitability or
otherwise meet the expectations of securities analysts or
investors, the market price of our common shares may decline.
We may not be able to manage our expansion of operations
effectively.
We anticipate significant continued expansion of our business to
address growth in demand for our solar products and services, as
well as to capture new market opportunities. We also intend to
expand our business by entering into strategic alliances with
third parties. To manage the potential growth of our operations,
we will need to improve our operational and financial systems,
procedures and controls, increase manufacturing capacity and
output, and expand, train and manage our growing employee base.
Furthermore, our management will be required to maintain and
expand our relationships with our customers, suppliers, joint
venture partners and other third parties. We cannot assure you
that our current and planned operations, personnel, systems,
internal procedures and controls will be adequate to support our
future growth or that we have made adequate allowances for the
costs and risks associated with our expansion of operations. If
we are unable to manage our growth effectively, we may not be
able to take advantage of market opportunities, execute our
business strategies or respond to competitive pressures.
We expect to be exposed to risks in connection with joint
ventures and strategic alliances with third parties.
We intend to enter into joint ventures and strategic alliances
with third parties. These joint ventures and strategic alliances
may subject us to a number of risks, including risks associated
with sharing proprietary information, access to cash flows,
disputes concerning business issues, disputes concerning the
ownership of intellectual property and not having 100% ownership
of our operations. Moreover, joint ventures and strategic
alliances may subject us to the risk of non-performance by a
counterparty, which may in turn lead to monetary losses that
materially and adversely affect our business.
We expect to continue to have a limited number of
suppliers of our customized manufacturing equipment and a
limited number of suppliers of key components of our solar
products. Any significant damage to our customized manufacturing
equipment, or a failure to develop or maintain our relationships
with these suppliers, could cause material interruptions to our
operations and could have a material adverse effect on our
business, financial condition and results of operations.
Certain of our manufacturing tools, equipment and fixtures have
been designed and made specifically for us, and certain of the
components that we use in manufacturing, such as certain
encapsulating plastics as well as silicon carbide, which is used
in the wafer-sawing process, are procured from a limited number
of third-party suppliers. As a result, such tools, fixtures and
components are not readily available from multiple vendors and
would be difficult to repair or replace. We are therefore
susceptible to price pressure from these suppliers, and if one
of these suppliers were unable or unwilling to supply us with
our customized equipment or manufacturing components, we would
have difficulty finding a replacement supplier. If we fail to
maintain relationships with these suppliers, we may be unable to
manufacture our products and could be prevented from delivering
our products to our customers in the required quantities or at
competitive prices, which could result in order cancellations
and loss of market share. Similarly, any significant damage to,
or break down of, our customized equipment, or any inability of
our suppliers to supply us with replacement equipment or to
repair our equipment, could cause material interruptions to our
operations, revenue loss and increased expenses and consequently
could have a material adverse effect on our business, financial
condition and results of operations.
Our reliance on Photowatt France’s manufacturing
facility could have a material adverse impact on our
business.
Nearly all of our solar products are produced at our Photowatt
France facility near Lyon, and our business therefore relies to
a significant degree on the efficient and uninterrupted
operation of that facility. Our Photowatt France facility is
vulnerable to damage or interruption from a variety of sources.
A natural disaster or other unanticipated problems that leads to
disruption at our Photowatt France facility could have a
material adverse effect on our business, financial condition and
results of operations.
As of July 31, 2006 we employed 711 active employees
globally, including 604 in France. Certain of our
non-management
employees in France belong to the CFDT (the
Confédération Française Démocratique du
Travail), a trade union, and all of our non-management employees
are covered by a collective bargaining agreement. Future
industrial action, or the threat of future industrial action, by
our employees in response to any future efforts by our
management to reduce labor costs, restrain wage increases or
modify work practices could adversely affect our business by
disrupting production or constraining our ability to carry out
any such efforts.
Our business depends substantially on the continuing
efforts of our key officers and our ability to maintain a
skilled labor force, and our business may be materially
adversely affected if we lose any of our key officers or
employees or if we are unable to attract, train and retain
skilled personnel.
Our business is dependent upon our ability to attract, train and
retain key employees with the specialized skills we require.
There is substantial competition for qualified skilled
personnel, and we may not be able to attract or retain highly
qualified personnel. If we are unable to attract and retain
qualified employees, our business may be materially and
adversely affected. Our future success also depends upon a
number of key members of our senior management. The unexpected
loss or departure of any of our key officers or employees could
disrupt our operations and impair our ability to compete
effectively.
Changes to existing regulations concerning the utility
sector and the solar industry may present technical, regulatory
and economic barriers to the purchase and use of solar products,
which may significantly reduce demand for our products.
The market for power generation products is heavily influenced
by government regulations and policies concerning the electric
utility industry, as well as the internal policies of electric
utilities companies. These regulations and policies often relate
to electricity pricing and technical interconnection of end
user-owned power generation. In a number of countries, these
regulations and policies are being modified and may continue to
be modified. End users’ purchases of alternative energy
sources, including solar products, could be deterred by these
regulations and policies, which could result in a significant
reduction in the potential demand for our solar products. For
example, utility companies commonly charge fees to larger,
industrial customers for disconnecting from the electricity
transmission grid or for having the capacity to use power from
the electricity transmission grid for
back-up purposes. These
fees could increase end users’ costs of using our solar
products and make our products less desirable, thereby having an
adverse effect on our business, financial condition and results
of operations.
We anticipate that our solar products and their installation
will be subject to oversight and regulation in accordance with
national and local ordinances relating to building codes,
safety, environmental protection, utility interconnection and
metering and related matters in various countries. It is also
burdensome to track the requirements of individual localities
and design equipment to comply with the varying standards. Any
new government regulations or utility policies pertaining to our
solar products may result in significant additional expenses to
us, our distributors and end users and, as a result, could cause
a significant reduction in demand for our solar products.
We have relied on government grants to partially fund our
research and development and if we are unable to obtain grants
in the future, our expenses would increase and our results of
operation may be adversely affected.
In fiscal 2004, 2005 and 2006, we received government grants to
fund research and development in the amounts of
$5.7 million, $12.8 million and $3.4 million,
respectively. The vast majority of these grants were received
from Technology Partnerships Canada (“TPC”), an agency
of the Canadian government. The final TPC funding claims were
recognized in fiscal 2006 and at this time there are no further
amounts under this program to be recognized by us. These grants
are subject to the satisfaction of certain requirements in
connection with our research and development activities, and
they are subject to governmental audits to
ensure compliance. If we apply funding received under a
government grant for a research and development project that is
determined not to satisfy the relevant requirements, we would
have to refund the grant. As well, technology that we develop
using government funding may be subject to limitations on how we
may deploy it, and certain details regarding this technology may
be required to be publicly disclosed, which exposes us to the
risk of loss of confidential information. We cannot be certain
that grants will be available to us in the future. If we cannot
obtain grants in the future, our research and development costs
could be more significant and our results of operations could be
adversely affected.
Our quarterly revenue and results of operations may vary
from quarter to quarter, and if we fail to meet quarterly
financial expectations, our stock price will likely
decline.
Our quarterly revenue and results of operations are difficult to
predict and fluctuate from quarter to quarter and our results of
operations in some quarters may be below market expectations.
Our quarterly results of operations may be substantially
affected by a number of factors, many of which are outside of
our control, including:
•
the availability and pricing of raw materials, particularly
silicon, and customized manufacturing tools and fixtures;
•
seasonal trends, including the annual summer shutdown of our
operations in France in the second quarter as well as the
possibility of our having slower sales in the winter months,
when the weather may impair the ability to install our products
in certain geographical areas;
•
timing, availability and changes in government subsidy and
incentive programs;
•
variations in capital expenditures and unplanned additional
expenses such as manufacturing failures, defects, and changes in
our manufacturing costs;
•
unpredictable volume and timing of customer orders or the loss
of, or a significant reduction or postponement in orders from,
one or more key customers;
•
unanticipated manufacturing downtime;
•
fluctuations in the selling prices of solar cells and modules;
•
foreign currency fluctuations, particularly in the relationships
amongst the Canadian dollar, the euro and the U.S. dollar;
•
timing of research and development expenditures;
•
changes in the mix of selling solar modules, cells and
value-added services; and
•
the timing of new product or technology announcements or
introductions by our competitors and other developments in the
competitive environment.
We base our planned operating expenses in part on our
expectations of future revenue, and a significant portion of our
expenses are relatively fixed in the short term. If revenue for
a particular quarter is lower than we expect, we likely will be
unable to proportionately reduce our operating expenses for that
quarter, which will harm our results of operations for that
quarter. If we fail to meet or exceed analyst or investor
expectations, the price of our common shares may materially
decline.
Our failure to protect our intellectual property rights
may undermine our competitive position.
Our success depends in part upon our ability to protect our
intellectual property and our proprietary technology. We rely
primarily on patent, trademark, trade secret, copyright law and
other contractual
restrictions to protect our intellectual property. Nevertheless,
these afford only limited protection and the actions we take to
protect our intellectual property rights may not be adequate. It
is possible that:
•
some or all of our confidentiality agreements will not be
honored;
•
disputes will arise with our consultants, strategic partners or
others concerning the ownership of intellectual property;
•
unauthorized disclosure of our know-how, trade secrets and other
confidential information will occur; or
•
third parties may copy, infringe, misappropriate or reverse
engineer our proprietary technologies or other intellectual
property rights.
We generally do not require our employees (including research
and development personnel) to sign confidentiality or other
agreements in respect of our intellectual property, nor do we
require our contractors to sign general agreements in respect of
intellectual property developed for us. This could adversely
affect our ability to secure, protect and/or enforce
intellectual property developed by and/or for us. Any inability
to adequately secure, protect and/or enforce our proprietary
rights could harm our ability to compete, generate revenue and
grow our business, which could have a material adverse effect on
our business, financial condition and results of operations.
Policing unauthorized use of proprietary technology can be
difficult and expensive. Also, litigation may be necessary to
enforce our intellectual property rights, protect our trade
secrets or determine the validity and scope of the proprietary
rights of others. We cannot assure you that the outcome of any
such potential litigation would be in our favor. Such litigation
may be costly and may divert management attention away from our
business as well as expend other resources. In certain
situations, we may have to bring such suit in foreign
jurisdictions, in which case we are subject to additional risk
associated with the result of the proceedings and the amount of
damage that we can recover. Certain foreign jurisdictions may
not provide protection to intellectual property comparable to
that in the United States and Canada. An adverse determination
in any such litigation would impair our intellectual property
rights and may harm our business, financial condition and
results of operations.
We may not obtain sufficient patent protection on the
technology embodied in the solar products we currently
manufacture and market or in our new products, which could harm
our competitive position and increase our expenses.
Our success and ability to compete is impacted by the patent
protection we obtain for our proprietary technology. We hold a
number of patents, primarily in connection with various aspects
of our Spheral Solar technology and also in connection with our
ability to convert and use silicon powder and fines, which is
significant to our silicon supply strategy. The patents that we
consider to be of the greatest importance to our Spheral Solar
technology will expire between 2008 and 2023 and have been
issued primarily in the United States, although we also have
patent protection in certain jurisdictions in Europe and Asia
for some of the same technology that is covered by our
U.S. patents. Our patent applications may not result in
issued patents, and even if they result in issued patents, the
patents may not have claims of the scope we seek. In addition,
any issued patents may be challenged, invalidated or declared
unenforceable. In general, the term of any patents, including
any patents issued from applications recently filed in the
United States, would be 20 years from their filing date and
if our applications are pending for a long time period, we may
have a correspondingly shorter term for any patent that may be
issued. Our present and future patents may provide only limited
protection for our technology and may not be sufficient to
provide competitive advantages to us. For example, competitors
could be successful in challenging any issued patents or,
alternatively, could develop similar or more advantageous
technologies on their own or design around our patents. Also,
patent protection in certain foreign countries may not be
available or may be limited in scope and any patents obtained
may not be as readily enforceable as in the United States or
Canada, making it difficult for us to effectively protect our
intellectual property from misuse or infringement by other
companies in these countries. Our inability to obtain and
enforce our intellectual property rights in some countries may
harm our
business. In addition, given the costs of obtaining patent
protection, we may choose not to protect certain innovations
that later turn out to be important.
If the effective term of our patents is decreased or if we
need to refile some of our patent applications, the value of our
patent portfolio and the revenue we derive from products
protected by the patents may be decreased.
The value of our patents depends in part on their duration.
Shorter periods of patent protection are relatively less
valuable. Because the period between the filing of a patent
application to the issuance of a patent is often longer than
three years, a twenty year patent term from the filing date may
result in substantially shorter patent protection. In some
cases, we may need to refile some of our patent applications
and, in these situations, the patent term will be measured from
the filing date of the earliest prior application to which
benefit of earlier filing date in the applicable jurisdiction is
claimed in such a patent application. This would also shorten
our period of patent exclusivity. Similarly, because of the
extensive time required for the development and
commercialization of products based on our technologies, it is
possible that, before some products can be commercialized, any
related patents may expire or remain in force for only a short
period following commercialization, thereby reducing any
advantages of these patents and making it unlikely that we will
be able to recover investments we have made to develop our
technologies and products based on our technologies. A shortened
period of patent exclusivity, resulting from a change in patent
laws, the passage of time, or otherwise, may negatively impact
our revenue protected by our patents.
We may be exposed to infringement or misappropriation
claims by third parties, causing costly litigation and the loss
of significant rights.
Our success also depends largely on our ability to use and
develop our technology and know-how without infringing the
intellectual property rights of third parties. The validity and
scope of claims relating to solar technology patents involve
complex scientific, legal and factual questions and analysis
and, therefore, may be highly uncertain. We may be unaware that
we infringe third-party intellectual property rights, in
particular process-related patents. We may become subject to
litigation involving claims of patent infringement or violation
of intellectual property rights of third parties. The defense
and prosecution of intellectual property suits, patent
opposition proceedings and related legal and administrative
proceedings can be both costly and time consuming and may
significantly divert the efforts and resources of our technical
and management personnel. An adverse determination in any such
litigation or proceedings to which we may become a party could
subject us to significant liability to third parties, divert our
management’s attention and resources, require us to seek
licenses from third parties, to pay ongoing royalties, or to
redesign our products, or subject us to injunctions prohibiting
the manufacture and sale of our products or the use of our
technologies. Protracted litigation could also result in our
customers or potential customers deferring or limiting their
purchases or use of our products until resolution of such
litigation. All these judgments could materially damage our
business. We believe that as technology develops, we may have to
develop non-infringing technology, and our failure in doing so
or obtaining licenses to the proprietary rights on a timely
basis or on desired terms could have a material adverse effect
on our business, financial condition and results of operations.
Problems with product quality or product performance,
including defects, in our solar products could result in a
decrease in customers and revenue, unexpected expenses and loss
of market share.
Our solar products are complex and must meet stringent quality
requirements. Products as complex as ours may contain undetected
errors or defects, especially when first introduced. These
defects could cause us to incur significant re-engineering
costs, divert the attention of our engineering personnel from
product development efforts and significantly affect our
customer relations and business reputation. If we deliver solar
products with errors or defects, or if there is a perception
that our solar products contain errors or defects, our
credibility and the market acceptance and sales of our solar
products could be harmed. The possibility of future product
failures could cause us to incur substantial expense to repair
or replace defective products.
Widespread product failures may damage our market reputation and
reduce our market share and cause sales to decline.
Since we cannot test our solar products for the full
duration of our applicable warranty periods, we may be subject
to unexpected warranty expense.
Our standard product warranty provides for a five-year limited
warranty in connection with module malfunctions and additional
limited warranties in connection with modules’ loss of
power over time that, depending on the product and its use,
range from five to 25 years. These limited warranties apply
only in the event that our materials and/or workmanship is
defective, and require us at our option either to repair,
replace or (except in connection with loss of power) provide a
refund in respect of the products affected. We believe our
warranty periods are consistent with industry practice. Due to
the long warranty period and our proprietary technology, we bear
the risk of extensive warranty claims long after we have shipped
product and recognized revenue. Although we conduct accelerated
testing of our solar products, such testing cannot simulate the
full warranty period.
As a result of these factors, we may be subject to unexpected
warranty expense, which in turn would harm our financial
results. Any increase in the defect rate of our products would
cause us to increase the amount of warranty reserves and have a
corresponding negative impact on our combined financial
statements.
Product liability claims against us could result in
adverse publicity and potentially significant monetary
damages.
As with other solar product manufacturers, we are exposed to
risks associated with product liability claims in the event that
the use of the solar products we sell results in injury. Because
our products are electricity producing devices, it is possible
that users could be injured or killed by our products, whether
by product malfunctions, defects, improper installation or other
causes. The effectiveness of the steps we take to contractually
reduce the risk of product liability-related claims depends, to
a significant degree, on judicial decisions and the application
of ever-developing jurisprudence in each of the jurisdictions in
which we operate. An alleged product defect that results in
direct injury or loss may result in significant liability to us
that may exceed the limits of our liability insurance. We may
not have adequate resources in the event of a successful claim
against us, and such a liability may have a material adverse
effect on our financial condition and results of operations.
If we fail to maintain an effective system of internal
controls, we may not be able to accurately report our financial
results or prevent fraud. As a result, current and potential
shareholders could lose confidence in our financial reporting,
which could harm our business and the trading price of our
common shares.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. In
connection with our annual report for the fiscal year ending
March 31, 2008, Section 404 of the Sarbanes-Oxley Act
of 2002 will require us to evaluate and report on our internal
controls over financial reporting and have our independent
registered public accounting firm attest to our evaluation.
Under Canadian securities law requirements, commencing with the
fiscal year ending March 31, 2007, our Chief Executive
Officer and Chief Financial Officer will be required to certify
that they have designed internal control over financial
reporting and caused certain changes in internal control over
financial reporting to be disclosed. In addition, under proposed
Canadian securities law requirements, our Chief Executive
Officer and Chief Financial Officer will be required to certify
annually that they have evaluated the effectiveness of our
internal controls over financial reporting commencing with the
fiscal year ending March 31, 2008. We intend to prepare for
compliance with Section 404 and the Canadian requirements
by strengthening, assessing and testing our system of internal
controls to provide the basis for our report. However, the
continuous process of strengthening our internal controls and
complying with Section 404 and the Canadian requirements is
expensive and time consuming, and requires significant
management attention. We cannot be certain that these measures
will ensure that we will maintain adequate control over our
financial processes and reporting. Furthermore, as we grow our
business, our internal controls will become more complex and
will require
significantly more resources to ensure our internal controls
overall remain effective. Failure to implement required new or
improved controls, or difficulties encountered in their
implementation, could harm our results of operations or cause us
to fail to meet our reporting obligations. If we or our
independent registered public accounting firm discover a
material weakness, the disclosure of that fact, even if quickly
remedied, could reduce the market’s confidence in our
combined financial statements and harm our share price. In
addition, future non-compliance with Section 404 and the
Canadian requirements could subject us to a variety of
administrative sanctions, including the suspension or delisting
of our common shares and the inability of registered
broker-dealers to make a market in our common shares, which
would further reduce our share price.
Compliance with environmental regulations can be
expensive, and noncompliance with these regulations may result
in adverse publicity and potentially significant monetary
damages and fines.
We are required to comply with all foreign, national and local
laws and regulations regarding the operation of industrial
facilities, pollution control, environmental protection, and
health and safety. In addition, under some statutes and
regulations, a government agency or other parties may seek
recovery and response costs from operators of facilities where
releases of hazardous substances have occurred or are ongoing,
even if the operator was not responsible for such release or
otherwise at fault. We use, store, generate and discharge toxic,
volatile and otherwise hazardous chemicals and wastes in our
research and development and manufacturing activities. Failure
to comply with present or future environmental laws, rules and
regulations may result in substantial fines, suspension of
production or cessation of operations. In addition, if more
stringent laws and regulations are adopted in the future, the
costs of compliance with these new laws and regulations could be
substantial or could impose significant changes in our
manufacturing process.
Fluctuations in exchange rates could have a material
adverse effect on our business, financial condition and results
of operations.
We are exposed to foreign exchange risk because a substantial
portion of our sales are currently denominated in a number of
foreign currencies, primarily the euro. Changes in exchange
rates on the translation of the earnings of our French
subsidiary into dollars is directly reflected in our combined
earnings. To the extent net foreign currency cash inflows are
not fully hedged, strengthening of the U.S. dollar against
these foreign currencies will negatively impact our revenues
stated in U.S. dollars. In addition, strengthening of the
euro against other foreign currencies will make our products
manufactured in France more expensive for international
customers. To the extent our operations are not able to adjust
to changes in exchange rates by reducing costs, or by providing
more valuable products that command higher prices, revenue and
earnings will be negatively impacted. We cannot predict the
impact of future exchange rate fluctuations on our results of
operations and may incur net foreign currency losses in the
future. Therefore, fluctuations in currency exchange rates could
have a material adverse effect on our business, financial
condition and results of operations.
We depend on the performance of our subsidiaries and their
ability to make distributions to us.
Our principal assets are the equity interests we own in our
operating subsidiaries. As a result, we are dependent upon cash
dividends, distributions or other transfers we receive from our
subsidiaries in order to repay any debt we may incur and to meet
our other obligations. The ability of our subsidiaries to pay
dividends and make payments to us will depend on their results
of operations and may be restricted by, among other things,
applicable corporate, tax and other laws and regulations and
agreements of those subsidiaries. Our subsidiaries are separate
and distinct legal entities. Any right that we have to receive
any assets of or distributions from any subsidiary upon its
bankruptcy, dissolution, liquidation or reorganization, or to
realize proceeds from the sale of the assets of any subsidiary,
will be junior to the claims of that subsidiary’s
creditors, including trade creditors. In addition, we may enter
into joint ventures with third parties as a means to execute our
business strategy. Our ability to access our assets, including
cash in these joint ventures, may be restricted by the governing
documents of any such joint ventures.
Our historical financial information as a business segment
of ATS may not be representative of our results as a stand-alone
public company and, therefore, may not be reliable as an
indicator of our future financial results.
The historical financial information we have included in this
prospectus has been derived from our and ATS’ historical
accounting records. We believe that the assumptions underlying
the combined financial statements are reasonable. However, the
combined financial statements may not reflect what our financial
position, results of operations or cash flows would have been
had we been a stand-alone entity during the historical periods
presented or what our financial position, results of operations
or cash flows will be in the future.
In particular, the historical costs and expenses reflected in
our combined financial statements include an allocation for
certain corporate functions historically provided by ATS. These
expense allocations were based on what ATS considered to be
reasonable allocations of the utilization of services provided
or the benefit received by us. We currently estimate that
general annual corporate expenses will increase significantly
when we become a stand-alone company. We have not made
adjustments to our historical financial information to reflect
changes that may occur in our cost structure, financing and
operations as a result of our separation from ATS, including
certain tax changes resulting from the reorganization to be
undertaken by ATS related to this offering. These changes
potentially include increased costs associated with reduced
economies of scale and being a publicly traded, stand-alone
company.
As a public company, we will incur a significantly higher level
of legal, accounting and other related expenses than we did as a
division of ATS. In addition, the Sarbanes-Oxley Act of 2002, as
well as rules subsequently implemented by the Securities and
Exchange Commission, or the SEC, The Nasdaq Global Market, the
Toronto Stock Exchange and the Canadian securities regulatory
authorities, have required changes in the corporate governance
practices of public companies. We expect these rules and
regulations to increase our legal and financial compliance costs
and to make some activities more time-consuming and costly. We
cannot predict or estimate the amount of additional costs we may
incur or the timing of such costs.
Following this offering, we will continue to be dependent
on ATS to provide us with many key services for our business,
and our ability to operate our business effectively may suffer
if we are unable to cost-effectively establish our own
administrative and other support functions in order to operate
as a stand-alone company after the expiration of our
transitional services agreement with ATS.
Historically, ATS has performed various corporate functions on
our behalf, including accounting services; tax services;
employee benefits management; financial and legal services; real
estate management; risk and claims management; information
management and technology services; and office
administration services. Prior to the completion of this
offering, we will enter into agreements with ATS related to the
separation of our business operations from ATS, including a
Transitional Services Agreement. Under the terms of the
Transitional Services Agreement, Master Supply Agreement and
Lease Agreement, ATS will provide us with many key services, and
ATS will have no obligation to provide any services on our
behalf other than as provided in those agreements. These
services include certain:
•
communications services such as phone, cell phone and wireless
devices;
•
internal audit, tax, and merger and acquisition transaction
services;
•
payroll;
•
information technology, including access to network, systems,
applications and technical support;
accounting support, treasury and general administrative
services; and
•
other specified services.
We expect some of these services to be provided for longer or
shorter periods than the initial term. We believe it is
necessary for ATS to provide these services for us to facilitate
the efficient operation of our business as we transition into a
public company. We will, as a result, initially be dependent on
ATS for transition services following this offering. See
“Our Relationship with ATS — Agreements Between
ATS and Us — Transitional Services Agreement,”“— Master Supply Agreement” and “—
Lease Agreement.”
Once the transition periods specified in the Transitional
Services Agreement have expired and are not renewed, or if ATS
exercises its right to terminate the provision of any service
under the Transitional Services Agreement in the event the
provision becomes commercially impracticable for ATS, or if ATS
does not or is unable to perform its obligations under the
Transitional Services Agreement, we will be required to provide
these services ourselves or to obtain substitute arrangements
with third parties. We may be unable to provide these services
because of financial or other constraints or be unable to
implement substitute arrangements on a timely basis on terms
that are favorable to us, or at all. As a result we may not be
able to effectively operate our business, we may experience
unexpected material costs, and our profitability may be
adversely affected.
As long as ATS controls us, you will have no ability to
influence the outcome of matters requiring shareholder
approval.
After the completion of this offering, ATS will
own %
of our outstanding common shares,
or %
if the underwriters exercise their over-allotment option in
full. See “Principal and Selling Shareholders.” As
long as ATS has voting control of us, ATS will have the ability
to take shareholder actions irrespective of the vote of any
other shareholder, including the ability to prevent any
transactions that it does not believe are in ATS’ best
interest. As a result, ATS will have the ability to influence or
control all matters affecting us, including:
•
the composition of our board of directors and, through our board
of directors, any determination with respect to our business
plans and policies, including the appointment and removal of our
officers;
•
any determinations with respect to acquisitions of businesses,
mergers or other business combinations;
•
our acquisition or disposition of assets;
•
our capital structure, including all financing activities;
•
compensation, option programs and other human resource policy
decisions;
•
changes to the transitional agreements with ATS, subject to
applicable laws;
•
changes to other agreements that may adversely affect
us; and
•
our payment or non-payment of dividends.
This voting control may discourage transactions involving a
change of control of us, including transactions in which you as
a holder of our common shares might otherwise receive a premium
for your shares over the then-current market price. As well,
provisions in our Shareholder Agreement with ATS provide that,
for so long as ATS, directly or indirectly, holds not less than
50% of our outstanding common shares, we shall not, and shall
not permit any subsidiary entity to, without the affirmative
vote of a majority of our board of directors and the prior,
written consent of ATS as a shareholder:
•
enter into any merger, amalgamation, plan of arrangement,
consolidation, business combination, joint venture or other
material corporate transaction, including the acquisition of
property or assets with a fair market value in excess of
C$50 million;
sell, lease, exchange, license on an exclusive basis or dispose
of property or assets with a fair market value in excess of
C$50 million, other than the sale or disposition of
inventory in the ordinary course of business, or sell or grant
an exclusive license with respect to material intellectual
property;
•
adopt any plan or proposal for a complete or partial liquidation
or dissolution or any reorganization or commence any case,
proceeding or action seeking relief under any existing laws or
future laws relating to bankruptcy or insolvency;
•
take any action that could reasonably be expected to lead to or
result in a material change in the nature of our business;
•
issue any shares of our capital stock, or any rights, warrants
or options to acquire our capital stock (excluding securities
issued pursuant to benefit plans), if the issuance exceeds 5% of
our outstanding common shares;
•
take any action limiting the rights of ATS to transfer shares of
our stock it owns;
•
enter into a partnership or any arrangement for the sharing of
profits, union of interests, joint venture or reciprocal
concession with any person if the aggregate fair market value of
the assets contributed and liabilities assumed by us (and our
subsidiaries) in connection therewith either exceeds on
formation or at any time in the future could reasonably be
expected to exceed C$50 million; or
•
make any commitment or agreement to do any of the foregoing.
See “Our Relationship with ATS — Agreements
Between ATS and Us — Shareholder Agreement” for a
description of the Shareholder Agreement.
Furthermore, ATS generally has the right at any time to sell our
common shares that it owns or to sell a controlling interest in
us to a third party after the expiration of the
180-day
lock-up period, without
your approval and without providing for a purchase of your
shares, subject to applicable securities laws. Accordingly, your
shares may be less liquid and worth less than they would be if
ATS did not have the ability to influence or control matters
affecting us. See “Shares Eligible for Future Sales.”
If ATS determines to sell our common shares that it owns and
reduces its ownership interest to less than 50% of our
outstanding common shares, ATS may be expected, through the
voting rights attaching to the common shares it then owns, to
continue to have significant influence over matters affecting
us, and may, in connection with any matter requiring approval by
two-thirds of the votes attaching to our common shares and
represented by holders in attendance at a meeting of our
shareholders in person or by proxy, have sufficient votes to
preclude any such matter from proceeding.
We may have potential disputes and business conflicts of
interest with ATS regarding our past and ongoing relationships,
and because of ATS’ controlling ownership in us, the
resolution of these conflicts may not be favorable to us.
Conflicts of interest and disputes may arise between ATS and us
in a number of areas relating to our past and ongoing
relationships, including:
•
labor, tax, employee benefit, indemnification and other matters
arising under the transitional and separation agreements;
•
intellectual property matters;
•
employee recruiting and retention;
•
business opportunities that may be attractive to both ATS and us;
•
equipment supply arrangements;
•
sales or distributions by ATS of all or any portion of its
ownership interest in us, which could be to one of our
competitors; and
We may not be able to resolve any potential conflicts, and, even
if we do so, the resolution may be less favorable to us than if
we were dealing with an unaffiliated party. The agreements we
entered into with ATS may be amended upon agreement between the
parties, subject to applicable laws. Because we are controlled
by ATS, we may not have the leverage to negotiate any required
amendments to these agreements on terms as favorable to us as
those we would negotiate with a third party.
We may have a business conflict of interest with ATS as a
result of ATS’ portfolio investment in a company that may
compete with us.
Although ATS, in connection with this offering, is transferring
to us its interest in the assets that are used exclusively in
our business conducted by ATS and its subsidiaries, this
transfer is subject to certain excluded assets, including the
investment of ATS in securities of Canadian Solar Inc., or CSI,
a solar module assembly company in which ATS has a less than 15%
interest held as a portfolio investment. Because CSI may compete
with us, ATS’ continuing portfolio investment in CSI may
lead to conflicts of interest between ATS and us which may not
be resolved in our favor or at all.
We will be a “controlled company” within the
meaning of the rules of The Nasdaq Global Market, and, as a
result, will qualify for, and intend to rely on, exemptions from
certain corporate governance requirements that provide
protection to shareholders of other companies.
After the completion of this offering, ATS will own more
than %
of the total voting power of our common shares and we will be a
“controlled company” within the meaning of the rules
of The Nasdaq Global Market. As a controlled company, we intend
to utilize certain exemptions under the rules of The Nasdaq
Global Market that free us from the obligation to comply with
certain corporate governance requirements, including the
requirements:
•
that compensation of our chief executive officer and our other
executive officers be determined, or be recommended to our board
of directors for determining, either by a majority of the
independent directors or a compensation committee comprised
solely of independent directors;
•
that our director nominees be selected, or recommended for the
board’s selection, either by a majority of the independent
directors or a nominations committee comprised solely of
independent directors; and
•
that we have a written charter or board resolution addressing
our director nominations process.
We intend to use some or all of these exemptions until such time
that we cease to be a “controlled company,” and, as a
result, you will not have the same protection afforded to
shareholders of companies that are subject to all of the
corporate governance requirements of The Nasdaq Global Market.
Our transitional and separation agreements with ATS
require us to assume the past, present and future liabilities
related to our business and may be less favorable to us than if
they had been negotiated with unaffiliated third parties.
We will negotiate our separation agreements with ATS while we
are a wholly-owned subsidiary of ATS and will enter into these
agreements immediately prior to the completion of this offering.
Had these agreements been negotiated with unaffiliated third
parties, they might have been more favorable to us. Pursuant to
these agreements, we will agree to indemnify ATS for, among
other matters, all liabilities arising out of or related to our
present or future business, operations or assets, and we have
assumed these liabilities under the separation agreements. Such
broad assumptions may include unknown liabilities that could be
significant. The allocation of assets and liabilities between
ATS and us may not reflect the allocation that would have been
reached between two unaffiliated parties. See “Our
Relationship with ATS — Agreements Between ATS and
Us — Master Separation Agreement” for a
description of these obligations.
ATS may enter into contracts relating to the design and
manufacture of automated manufacturing and test systems with our
competitors or potential competitors. Services provided by ATS
under these contracts may assist those competitors in advancing
their businesses.
ATS’ principal business is the custom design, manufacture,
installation, service and support of automated manufacturing and
test systems. These systems are used principally by
multinational companies in a broad range of industries. In the
course of this business, ATS has in the past and expects in the
future to enter into contracts with customers whose business is
directly or indirectly competitive with ours. Pursuant to
services performed under these contracts, ATS may assist our
competitors or potential competitors in advancing their own
businesses, with the result that our competitive position may be
materially adversely affected.
After this offering, we may experience increased costs
resulting from a decrease in our purchasing power and we may
have difficulty obtaining new customers due to our relatively
small size after our separation from ATS.
Prior to this offering, we were able to take advantage of
ATS’ size and purchasing power in procuring goods,
technology and services, including insurance, banking, employee
benefit support and audit services. As a result of this offering
and the transactions described in “Our Relationship with
ATS,” we will be a smaller company than ATS, and we cannot
assure you that we will have access to financial and other
resources comparable to those available to us prior to the
offering. As a stand-alone company, we may be unable to obtain
goods, technology and services at prices or on terms as
favorable as those available to us prior to our separation from
ATS, which could increase our costs and reduce our
profitability. In addition, as a smaller, separate, stand-alone
company, we may encounter more customer concerns about our
viability as a separate entity, which could harm our business,
financial condition and results of operations. Our future
success depends on our ability to maintain our current
relationships with existing customers, and the difficult task of
attracting new customers.
Our directors and executive officers who own ATS common
shares or options to acquire ATS common shares or who hold
positions with ATS may have potential conflicts of
interest.
Ownership of ATS common shares, options to acquire ATS common
shares and other equity securities of ATS by certain of our
directors and officers after this offering and the presence of
ATS’ directors or officers on our board of directors could
create, or appear to create, potential conflicts of interest
when those directors and officers are faced with decisions that
could have different implications for ATS than they do for us.
See “Management” for a description of the extent of
the relationship between our directors and officers and ATS.
Our prior and continuing relationship with ATS exposes us
to risks attributable to the businesses of ATS.
Although ATS will indemnify us from losses suffered by us
arising out of certain circumstances or events, such
indemnification may not be sufficient to protect us from all
risks attributable to the businesses of ATS. Immediately
following this offering, any claims made against us that are
properly attributable to ATS in accordance with these
arrangements would require us to exercise our rights under the
separation agreements to obtain payment from ATS. If those
liabilities are significant and we are ultimately held liable
for them, we cannot assure you that we will be able to recover
the full amount of our losses from ATS.
Risks Relating to this Offering
Prior to this offering, no public market existed for our
common shares. An active trading market may not develop for our
common shares, and the price of our common shares may be subject
to factors beyond our control. If our share price fluctuates
after this offering, you could lose all or a significant part of
your investment.
Prior to this offering, no public market existed for our common
shares. We have applied to list our common shares on The Nasdaq
Global Market and the Toronto Stock Exchange. Any such listing
will be subject to the approval of the relevant stock exchange,
and any such approval would not be given unless all
of the original listing requirements were met. An active and
liquid market for the common shares may not develop following
the completion of this offering, or, if developed, may not be
maintained. If an active public market does not develop or is
not maintained, you may have difficulty selling your common
shares.
The initial public offering price of our common shares was
determined by negotiations between us, ATS and the underwriters
for this offering and may not be indicative of the price at
which the common shares will trade following the completion of
this offering. We cannot assure you that the market price of our
common shares will not materially decline below the initial
public offering price.
The market price for our common shares may be volatile,
and your investment could suffer a decline in value.
The market price for our common shares may be volatile and
subject to wide fluctuations in response to numerous factors,
many of which are beyond our control, including the following:
•
actual or anticipated fluctuations in our quarterly results of
operations;
•
actual or anticipated changes in energy prices;
•
new products introduced by our competitors;
•
recommendations by securities research analysts;
•
changes in the economic performance or market valuations of
other solar technology companies;
•
addition or departure of our executive officers and other key
personnel;
•
release or expiration of
lock-up or other
transfer restrictions on our outstanding common shares;
•
sales or perceived sales of additional common shares;
•
significant acquisitions or business combinations, strategic
partnerships, joint ventures or capital commitments by or
involving us or our competitors;
•
operating and share price performance of other companies that
investors deem comparable to us; and
•
news reports relating to trends, concerns, patent litigation,
technological or competitive developments, regulatory changes
and other related issues in our industry or target markets.
In addition, stock markets have from time to time experienced
significant price and volume fluctuations that are not related
to the operating performance of particular listed companies.
These market fluctuations may also have a material adverse
effect on the market price of our common shares, regardless of
our operating performance.
Investors purchasing common shares in this offering will
incur substantial and immediate dilution.
The initial public offering price of our common shares is
substantially higher than the net tangible book value per
outstanding common share. Purchasers of our common shares in
this offering will incur immediate and substantial dilution of
$ per
common share in the net tangible book value of our common shares
from an assumed initial public offering price of
$ per
common share. This means that if we were to be liquidated
immediately after this offering, there might be no assets
available for distribution to you after satisfaction of all our
obligations to creditors. For further description of the effects
of dilution in the net tangible book value of our common shares,
see “Dilution.”
Our share price may decline because of the ability of ATS
and others to sell our common shares.
Sales of substantial amounts of our common shares after this
offering, or the possibility of those sales, could adversely
affect the market price of our common shares and impede our
ability to raise capital through the issuance of equity
securities. See “Shares Eligible for Future Sale” for
a discussion of possible future sales of our common shares.
After this offering, ATS will
own %
of our outstanding common shares
( %
if the underwriters exercise their over-allotment option in
full). ATS has no contractual obligation to retain any of our
common shares, except that, as described under
“Underwriting,” it has agreed not to sell any of our
common shares without the underwriters’ consent until
180 days after the date of this prospectus. Subject to
applicable securities laws, after the expiration of this
180-day
lock-up period, or
before with consent of the representatives of the underwriters
to this offering, ATS may sell any and all of our common shares
that it beneficially owns and may distribute any or all of these
shares to its shareholders. The registration rights agreement we
will enter into with ATS grants ATS the right to require us to
register our common shares it holds in specified circumstances.
See “Our Relationship with ATS — Agreements
Between ATS and Us — Registration Rights
Agreement.” In addition, after the expiration of the
180-day
lock-up period, we
could issue and sell additional common shares. Any sale by ATS
or us of our common shares in the public market, or the
perception that sales could occur (for example, as a result of a
spin-off), could adversely affect prevailing market prices for
our common shares.
Our board of directors may issue, without shareholder
approval, additional common shares and preference shares that
have rights and preferences in priority to the common shares,
which issuance may delay or prevent a change of control.
Our board of directors may issue an unlimited number of
preference shares, issuable in one or more series, and an
unlimited number of common shares, without any vote or action by
our shareholders. If we were to issue any preference shares or
any additional common shares, the percentage ownership of
existing shareholders may be reduced and diluted. In addition,
our board of directors may determine the price, rights,
preferences, privileges and restrictions, including voting,
dividend and conversion rights, of each series of our preference
shares and determine to whom they shall be issued. Immediately
after the completion of this offering, there will be no
preference shares outstanding and we have no present plans to
issue any preference shares. However, the rights of the holders
of any series of preference shares that may be issued in the
future may be senior to the rights of holders of our common
shares, which could preclude holders of common shares from
receiving dividends, proceeds of a liquidation or other
benefits. The issuance of preference shares, while providing
desirable flexibility in connection with possible acquisitions
and other corporate purposes, could make it more difficult for a
third party to acquire control of our company, for example, by
discouraging an unsolicited acquisition proposal or a proxy
contest, the effect of which may be to deprive our shareholders
of a control premium that might otherwise be realized in
connection with an acquisition of our company.
Because we are a Canadian corporation and the majority of
our directors and officers are resident in Canada, it may be
difficult for investors in the United States to enforce against
us certain civil liabilities and judgments based solely upon the
federal securities laws of the United States.
We are organized under the laws of Canada and our principal
executive offices are located in Canada. A majority of the
directors and officers and the experts named in this prospectus
reside principally in Canada and all or a substantial portion of
their assets and all or a substantial portion of our assets may
be located outside the United States. Consequently, it may be
difficult for shareholders to effect service of process within
the United States upon us or our directors, officers or experts
who are not residents of the United States. Furthermore, it may
not be possible to enforce against us or such directors,
officers or experts, in the United States, judgments obtained in
U.S. courts, including judgments based upon the civil
liability provisions of the U.S. federal securities laws,
because a substantial portion of our assets and the assets of
these persons may be located outside the United States.
Investors should not assume that Canadian courts (1) would
enforce judgments of U.S. courts obtained in actions
against us or such persons predicated upon the civil liability
provisions of the U.S. federal securities laws or the
securities or “blue sky” laws of any state within the
United States or (2) would enforce, in original actions,
liabilities against us or such persons predicated upon the
U.S. federal securities laws or any such state securities
or blue sky laws.
We do not anticipate paying dividends in the near
future.
Our current policy is to retain earnings. Any future
determination to pay cash dividends will be at the discretion of
our board of directors after taking into account such factors as
our financial condition, results of operations, current and
anticipated cash needs, the requirements of any future financing
agreements and other factors that our board of directors may
deem relevant, with a view to paying dividends whenever
operational circumstances permit. Until we pay dividends our
shareholders may not be able to receive a return on our common
shares unless the price of our common shares appreciates and our
shareholders sell them. We cannot assure you that you will
receive a return on your investment when you do sell your shares
or that you will not lose the entire amount of your investment.
This prospectus contains forward-looking statements that relate
to our current expectations and views of future events. The
forward-looking statements are contained principally in the
sections titled “Prospectus Summary,”“Risk
Factors,”“Use of Proceeds,”“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and
“Business.”
In some cases, these forward-looking statements can be
identified by words or phrases such as “may,”“will,”“expect,”“anticipate,”“aim,”“estimate,”“intend,”“plan,”“believe,”“potential,”“continue,”“is/are likely to” or the
negative of these terms, or other similar expressions intended
to identify forward-looking statements. We have based these
forward-looking statements on our current expectations and
projections about future events and financial trends that we
believe may affect our financial condition, results of
operations, business strategy and financial needs. These
forward-looking statements include, among other things,
statements relating to:
•
our expectations regarding our revenue, expenses and operations;
•
our anticipated cash needs and our estimates regarding our
capital expenditures, capital requirements and our needs for
additional financing;
•
our expectations with respect to our ability to secure, and the
price of, raw materials, including silicon;
•
our ability to achieve increased cell efficiencies;
•
our ability to use silicon sources other than polysilicon in our
manufacturing process to achieve cell efficiency levels
consistent with those obtained using polysilicon and reduce our
costs;
•
our plans for and timing of expanding our manufacturing capacity;
•
our plans for entering into key strategic partnership
arrangements and joint ventures;
•
our plans for developing and commercializing new products,
including products based on our Spheral Solar technology;
•
the acceptance by our customers of new technologies and products;
•
our ability to attract customers and develop and maintain
customer and supplier relationships;
•
our expectations regarding the worldwide demand for electricity
and the market for solar energy;
•
our expectations regarding governmental support for the
deployment of solar energy and the adoption of solar
technologies;
•
our intellectual property and our expectations with respect to
advancements in our technologies;
•
our competitive position and our expectations regarding
competition from other manufacturers of solar products and
conventional energy suppliers; and
•
anticipated trends and challenges in our business and the
markets in which we operate.
Forward-looking statements involve a variety of known and
unknown risks, uncertainties and other factors, including those
listed under “Risk Factors,” which may cause our
actual results, performance or achievements to be materially
different from any future results, performances or achievements
expressed or implied by the forward-looking statements.
The forward-looking statements made in this prospectus relate
only to events or information as of the date on which the
statements are made in this prospectus. Except as required by
law, we undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new
information, future events or otherwise, after the date on which
the statements are made or to reflect the occurrence of
unanticipated events.
You should read this prospectus and the documents to which we
refer in this prospectus and have filed as exhibits to the
registration statement, of which this prospectus is a part,
completely and with the understanding that our actual future
results may be materially different from what we expect.
We estimate that the net proceeds to be received by us from the
sale
of of
our common shares in this offering will be approximately
$ million,
after deducting estimated underwriting commissions and estimated
offering expenses payable by us, assuming an initial public
offering price of
$ per
share. We intend to use the net proceeds from this offering to
finance the capital expenditures associated with the first and
second phases of our manufacturing capacity expansion plan at
Photowatt International estimated to be approximately
$ million,
to repay
$ million
expected to be owed to ATS under an intercompany demand loan
bearing interest at the Bank of Nova Scotia’s
U.S. dollar base rate in Canada, and the balance for
general corporate purposes, including further development and
process engineering associated with our Spheral Solar
technology, the procurement of silicon supply contracts and
investments that will enhance our manufacturing, silicon supply
or research and development capabilities.
While we currently anticipate that we will use the net proceeds
of this offering as described above, we may re-allocate the net
proceeds from time to time depending upon the ultimate amount of
net proceeds raised and upon changes in business conditions
prevalent at the time. If we decide not to proceed with the
development of our Spheral Solar technology, we would apply the
net proceeds of this offering and future capital that we would
have used to develop our Spheral Solar technology to Photowatt
International for capacity expansion and the other general
corporate purposes described above. Pending their application in
the manner described above, we intend to invest the net proceeds
in short-term, interest-bearing securities such as government
securities, commercial paper and other highly rated investment
grade securities.
We have never declared or paid any dividends. We currently
intend to retain any future earnings to finance the development
and growth of our business and do not expect to pay any cash
dividends in the foreseeable future. Any decision to pay cash
dividends after this offering will be at the discretion of our
board of directors after taking into account such factors as our
financial condition, results of operations, current and
anticipated cash needs, the requirements of any future financing
agreements and other factors that our board of directors may
deem relevant, with a view to paying dividends whenever
operational circumstances permit.
The following table sets forth our cash and cash equivalents and
capitalization as of June 30, 2006:
•
on an actual basis;
•
on a pro forma basis to give effect to the corporate
reorganization to be completed upon the closing of this offering
as described under “Our Relationship with ATS —
General — ATS reorganization relating to our
company”; and
•
on a pro forma, as adjusted basis to give further effect to our
sale
of common
shares in this offering at an assumed initial public offering
price of
$ per
share, after deducting underwriting commissions and the
estimated offering expenses payable by us and giving effect to
the use of the net proceeds from this offering as described
under “Use of Proceeds.”
You should read this table together with our combined financial
statements and the notes thereto included elsewhere in this
prospectus and the information under “Management’s
Discussion and Analysis of Financial Condition and Results
of Operations.”
Represents the amount invested by ATS in our company during
fiscal 2007 that is expected to be outstanding at the date of
closing. We intend to use a portion of the net proceeds from
this offering to repay this amount.
(2)
Unlimited shares authorized, pro forma and pro forma, as
adjusted; no shares outstanding,
actual, shares
outstanding, pro forma
and shares
outstanding, pro forma, as adjusted.
(3)
Unlimited preferred shares authorized, pro forma and pro forma,
as adjusted; no shares outstanding, actual, pro forma and pro
forma, as adjusted.
The pro forma, as adjusted information above is illustrative
only, and our capitalization following the completion of this
offering is subject to adjustment based on the actual initial
public offering price of our common shares and other terms of
this offering to be determined at pricing. A $1.00 increase
(decrease) in the assumed initial offering price per share would
increase (decrease) each of cash and cash equivalents, total
group equity and total capitalization by approximately
$ million.
If you invest in our common shares, your ownership interest will
be immediately diluted to the extent of the difference between
the initial public offering price per common share and the net
tangible book value per common share upon the completion of this
offering. The pro forma net tangible book value per common share
below represents the book value of our total tangible assets
(total assets less intangible assets) less total liabilities,
divided by the total number of outstanding common shares, after
giving effect to the corporate reorganization to be completed
upon the closing of this offering as described under “Our
Relationship with ATS — General — ATS
reorganization relating to our company.” Our pro forma net
tangible book value as of June 30, 2006 was approximately
$ million,
or
$ per
common share. After giving effect to the sale of common shares
offered by us in this offering at an assumed initial public
offering price of
$ per
common share, the midpoint of the estimated range of the initial
public offering price set forth on the cover page of this
prospectus, and after deducting underwriting commissions and
estimated expenses of this offering payable by us, our pro
forma, as adjusted net tangible book value as of June 30,2006 would have equaled approximately
$ million,
or
$ per
common share. This represents an immediate increase in pro forma
net tangible book value of
$ per
common share to our existing shareholders prior to this
offering, and an immediate dilution in pro forma net tangible
book value of
$ per
common share to new investors purchasing shares in this
offering. The following table illustrates this dilution per
common share.
Assumed initial public offering price
$
Pro forma net tangible book value per common share as of
June 30, 2006
Increase in pro forma net tangible book value per common share
attributable to this offering
Pro forma, as adjusted net tangible book value per common share
after this offering
Dilution per common share to new investors
$
The pro forma, as adjusted information discussed above is
illustrative only. Our pro forma net tangible book value
following the completion of this offering is subject to
adjustment based on the actual initial public offering price of
our common shares and other terms of this offering determined at
pricing. A $1.00 increase (decrease) in the assumed initial
public offering price of
$ per
common share would increase (decrease) total consideration paid
by new investors, total consideration paid by all shareholders
and the average price per common share paid by all shareholders
by
$ million,
$ million
and
$ ,
respectively, and would increase (decrease) the pro forma, as
adjusted net tangible book value per common share after giving
effect to this offering by
$ per
common share and increase (decrease) dilution in pro forma, as
adjusted net tangible book value per common share to new
investors in this offering by
$ per
common share, in each case assuming no change in the number of
common shares sold by us as set forth on the cover page of this
prospectus and without deducting underwriting commissions and
other estimated expenses of the offering payable by us.
Furthermore, upon the completion of this offering, we expect
that an
additional shares
of our common stock will be issuable, subject to vesting, under
outstanding stock options. If all of these options were
exercised immediately upon the completion of this offering, then
based on the assumed initial public offering price in the table
above, our pro forma net tangible book value per common share as
of June 30, 2006 would be
$ ,
the increase in our pro forma net tangible book value per common
share attributable to this offering would be
$ ,
our pro forma, as adjusted net tangible book value per common
share after this offering would be
$ ,
and the dilution per common share to new investors would be
$ .
The following table summarizes, on, a pro forma, as adjusted
basis as of June 30, 2006, the differences between the
existing shareholders and the new investors with respect to the
number of common shares purchased from us, the total
consideration paid and the average price per common share paid
before deducting estimated underwriting commissions and
estimated expenses of this offering payable by us, assuming an
initial public offering price of
$ per
common share, the midpoint of the estimated range of the initial
public offering price set forth on the cover page of this
prospectus. The information in the
following table is illustrative only and the total consideration
paid and the average price per common share is subject to
adjustment based on the actual initial public offering price of
our common shares.
Common Shares
Total Consideration
Average Price per
Number
Percent
Amount
Percent
Share
Existing shareholders
%
$
%
$
New investors
Total
100
%
$
100
%
$
If the underwriters exercise in full their over-allotment option
to purchase common shares from ATS, the number of common shares
held by new investors will increase
to ,
or %
of the total common shares outstanding after this offering, our
pro forma, as adjusted net tangible book value per common share
would continue to be
$ ,
and the dilution per common share would be
$ .
If all of the options outstanding upon the completion of this
offering were exercised immediately upon the completion of this
offering, the number of common shares purchased by existing
shareholders and new investors would
be ,
or %,
and ,
or %,
respectively; total consideration paid by existing shareholders
and new investors would be
$ ,
or %,
and
$ ,
or %,
respectively; and the average price per common share paid by
existing shareholders and new investors would be
$ ,
or %,
and
$ ,
or %,
respectively.
The following selected combined statements of earnings (loss)
data for the three years ended March 31, 2004, 2005 and
2006 and the selected combined balance sheet data as of
March 31, 2005 and 2006 have been derived from our audited
combined annual financial statements included elsewhere in this
prospectus. The following selected combined statements of
earnings data for the three-month periods ended June 30,2005 and 2006 and the selected combined balance sheet data as of
June 30, 2006 have been derived from our unaudited combined
quarterly financial statements included elsewhere in this
prospectus. The combined balance sheet data as of March 31,2004 have been derived from our unaudited combined financial
statements. Our combined financial statements have been prepared
in accordance with Canadian GAAP, which conform in all material
respects with U.S. GAAP as applied to our combined
financial statements, except as presented in note 20 to our
combined annual financial statements and note 14 to our combined
quarterly financial statements. Amounts are stated in
U.S. dollars. The data below does not give effect to the
corporate reorganization to be completed upon the closing of
this offering as described under “Our Relationship with
ATS — General — ATS reorganization relating
to our company.” You should read the following selected
combined financial data in conjunction with our combined
financial statements and the notes thereto and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus. Our combined financial statements present our
historical financial position, results of operations, changes in
net investment and cash flows on a “carve-out” basis
from ATS as if we had operated as a stand-alone entity. However,
the combined financial statements may not necessarily be
indicative of the results that would have been attained if we
had operated as a stand-alone entity, or our results in any
future periods.
We have not included selected combined financial data as of or
for the fiscal years ended March 31, 2002 and 2003 because
the selected combined financial data could not be produced
without unreasonable effort and expense. We do not believe that
the selected combined financial data for those earlier two years
would be indicative of our future operating results or that the
additional information would be useful for your review of our
historical operating results.
The following table sets forth certain information prepared in
accordance with U.S. GAAP. You should read this information
in conjunction with note 20 to our combined annual
financial statements and note 14 to our combined quarterly
financial statements included elsewhere in this prospectus.
We incurred an after-tax, non-cash asset impairment charge in
fiscal 2006 of $94.3 million (pre-tax $94.3 million)
against our Spheral Solar technology deferred development costs
and other long-lived assets in the fourth quarter of fiscal 2006
due to the current uncertainty in resolving technological
challenges and resulting delays of realizing cash flows from the
investment in our Spheral Solar technology.
(3)
Corporate costs include Photowatt corporate costs which were
incurred directly by us and include legal, compliance,
personnel, finance and other corporate costs not directly
associated with a segment. Corporate costs also include shared
corporate costs, which represent an estimate of costs
attributable to our business for services that were provided by
ATS or one of its affiliates in the past.
(4)
Based on the number of common shares to be outstanding upon
completion of the corporate reorganization and the closing of
this offering as described under “Our Relationship with
ATS — General — ATS reorganization relating
to our company.”
(5)
Working capital represents total current assets minus total
current liabilities.
(6)
Total debt consists of debt under our intercompany loan from
ATS, which was considered nil as at March 31, 2006 and
$8.6 million as at June 30, 2006 for the purposes of
the combined financial statements. At the time of the closing of
this offering we expect to owe approximately
$ million to ATS pursuant to
an intercompany demand loan for investment in additional
manufacturing capacity at Photowatt International, further
development and process engineering associated with our Spheral
Solar technology, and other general corporate purposes.
(7)
Represents revenue from third parties. Spheral Solar had
inter-segment revenue of $1.0 million for the three months
ended June 30, 2006 from sales of silicon to Photowatt
International that is eliminated in the combined financial
statements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations in conjunction
with the section entitled “Selected Combined Financial
Data” and our combined financial statements and the notes
thereto included elsewhere in this prospectus. Our combined
financial statements have been prepared in accordance with
Canadian GAAP, which conform in all material respects with
U.S. GAAP as applied to our combined financial statements,
except as presented in note 20 to our combined annual
financial statements and note 14 to our combined quarterly
financial statements included in this prospectus. Amounts are
stated in United States dollars unless otherwise indicated. Our
fiscal year-end is March 31. This discussion contains
forward-looking statements that involve risks and uncertainties.
Our actual results and the timing of selected events could
differ materially from those anticipated in these
forward-looking statements as a result of various factors,
including those set forth under “Risk Factors” and
elsewhere in this prospectus.
Overview
Our business
We design, manufacture and sell photovoltaic products, commonly
referred to as solar cells and modules. Solar cells and modules
provide clean, renewable energy by converting sunlight into
electricity through a process known as the photovoltaic effect.
We operate through two segments, Photowatt International, our
core business that is based on a wafer technology and Spheral
Solar, a development project that is based on a spheral
technology using thousands of tiny silicon spheres instead of
silicon wafers.
Photowatt International designs, manufactures and sells solar
modules and installation kits, and provides solar power system
design and other value-added services, principally in Western
Europe. Photowatt International also manufactures wafers and
solar cells, primarily for use in manufacturing its modules and
for sale to third parties on an opportunistic basis. Most of
Photowatt International’s products are manufactured in our
Photowatt France facility outside of Lyon, France. Photowatt
USA, our facility in Albuquerque, New Mexico, performs certain
module assembly operations for Photowatt International. Solar
modules manufactured by Photowatt International are used by
businesses, institutions and homeowners to generate electric
power. Photowatt International sells its products under the
Photowatt and Matrix brands to a network of independent solar
power systems distributors and installers. Photowatt
International has been developing and selling photovoltaic
products since 1979. Products manufactured by Photowatt
International accounted for all of our combined revenue for our
fiscal 2006 and for the first quarter of fiscal 2007.
Basis of presentation
ATS currently owns, either directly or indirectly through its
subsidiaries, substantially all of our assets and operations.
Upon the completion of this offering, ATS will establish our
business as a separate publicly-traded company. To accomplish
the separation of our business from the other businesses of ATS,
ATS will undertake, subject to ATS shareholder approval of not
less than two-thirds of the votes entitled to be cast by holders
of ATS shares present in person or represented by proxy at a
meeting of ATS shareholders to be held prior to the date of this
offering, a corporate reorganization upon the closing of this
offering under which ATS will transfer our assets and operations
to us. For further information on this reorganization, see
“Our Relationship with ATS — General —
ATS reorganization relating to our company.” Immediately
following this offering, ATS will own of record and beneficially
approximately %
of our common shares. If the underwriters exercise their
over-allotment option in full, immediately following this
offering ATS will own of record and beneficially
approximately %
of our common shares. As long as ATS continues to control more
than 50% of the voting power of our common shares, ATS will be
able to direct the election of all of the members of our board
and exercise a controlling influence over our business and
affairs. In addition, provisions of our Shareholder Agreement
with ATS provide ATS with certain rights for so long as ATS owns
a significant percentage of our common shares. For more
information, see “Risk Factors — As long as ATS
controls us, you will have no ability to influence the outcome
of matters requiring shareholder approval.”
Our combined financial statements present our historical
financial position, results of operations, changes in net
investment and cash flows on a “carve-out” basis from
ATS as if we had operated as a stand-alone entity. However, the
combined financial statements may not necessarily be indicative
of the results that would have been attained if we had operated
as a stand-alone entity, or our results for any future periods.
Our separation from ATS will affect our results of operations
and financial condition in a number of ways. In particular, in
the near term, we must assume certain support functions and
replicate certain systems, infrastructure and support functions
previously performed for or provided to us by ATS or one of its
affiliates. In this regard, we have hired a number of
individuals to perform these functions, and we believe we have
made substantial progress in replicating the necessary systems,
infrastructure and support functions utilized in our business.
However, it will take significant additional management time and
effort to ensure that we have successfully replicated these
functions. We also must negotiate new or revised agreements with
various third parties as a separate, stand-alone entity. In
addition, we benefited from various economies of scale as part
of ATS, including shared administrative functions. We expect
that our costs in some cases will increase, including the costs
of being a stand-alone publicly-traded entity and meeting the
required corporate governance and reporting obligations.
Principal factors affecting our results of
operations
Our results of operations are affected by a number of factors,
principally:
•
demand for our solar products, including the effects of
government incentives for photovoltaic generation;
•
our production capacity and ability to produce and ship our
products;
•
the availability of silicon;
•
technological developments;
•
the impact of competition on the pricing of our
products; and
•
exchange rate fluctuations.
Demand for our solar products
Growth in our business is, in part, a function of demand for
solar products. Although the solar market remains at a
relatively early stage of development, and the extent to which
solar products will be widely adopted is uncertain, demand for
solar products has grown significantly over the past decade.
According to Solarbuzz, the solar market, as measured by annual
photovoltaic system installations, increased from 345 MW in
2001 to 1,460 MW in 2005, representing a compound annual
growth rate, or CAGR, of 43%. Solarbuzz projects that solar
industry revenue will reach $18.6 billion by 2010,
representing a CAGR of 14% from $9.8 billion in 2005.
Demand for solar products is driven, in part, by government
incentives that make the economic cost of solar power
competitive with traditional forms of electricity. The
unsubsidized cost of using solar energy is currently more
expensive, on a per watt basis, than the retail cost of
conventional hydroelectric, nuclear or fossil fuel-generated
energy sources in most industrialized regions of the world. To
the extent that government incentives increase, decrease or
otherwise change, demand for our solar products and our results
of operations may be materially affected.
Our production capacity and ability to produce and ship our
products
Demand for our solar products is currently greater than our
capacity to produce them. As a result, we need to increase our
production capacity to continue to grow. We plan to increase our
annual solar module production capacity to approximately
390 MW by the end of calendar 2011. If we are able to
successfully complete the development and process engineering
necessary to commercialize our Spheral Solar technology, we
expect that 140 MW of this aggregate manufacturing capacity
will relate to Spheral Solar technology.
We intend to implement our Photowatt International capacity
expansion plan in three phases. In May 2006, we announced the
first phase of our capacity expansion plan, which includes the
expansion of Photowatt International’s annual ingot, wafer,
cell and module manufacturing capacity from approximately
31 MW, 32 MW, 40 MW and 54 MW, respectively,
to approximately 60 MW of integrated manufacturing capacity
by March 2007. The second phase of our capacity expansion plan
provides for construction of a second facility near Lyon, France
on land immediately adjacent to our existing facility and for
construction of a module assembly facility in Eastern Europe or
another low-cost region that will increase our annual integrated
manufacturing capacity to approximately 100 MW. We plan to
begin this phase of our expansion in calendar 2006 and complete
it in calendar 2008. In addition, we also intend to increase our
annual integrated manufacturing capacity in calendar 2008 by
50 MW. In connection with this, we are considering a joint
venture with a mandate to develop a new manufacturing facility
for the production of high efficiency solar cells and
constructing module assembly facilities in low-cost regions. The
third phase of our expansion plan provides for an additional
100 MW of annual integrated manufacturing capacity in
calendar 2009 through 2011 either through the expansion of
existing facilities or construction of new facilities.
If we are successful in completing the development and process
engineering required to commercialize our Spheral Solar
technology, we plan to expand Spheral Solar’s existing
production line to an annual capacity of 20 MW and build a
second line to add another 20 MW of annual production
capacity. We would also build a 100 MW Spheral Solar
technology facility by the end of 2010, which would bring our
annual capacity for Spheral Solar technology products to
140 MW.
We plan to use proceeds from this offering to finance the first
and second phases of our Photowatt International capacity
expansion plan and the development and process engineering for
our Spheral Solar technology. We will need to raise additional
capital to fund the third phase of our Photowatt International
capacity expansion plan and the expansion of our Spheral Solar
technology manufacturing capacity, assuming we successfully
complete our development and process engineering. If we decide
not to proceed with the development of our Spheral Solar
technology, we would apply the net proceeds of this offering and
future capital we would have used to develop the Spheral Solar
technology to Photowatt International for 140 MW of
additional capacity expansion, the procurement of silicon supply
contracts and investments that will enhance our manufacturing,
silicon supply or research and development capabilities.
Availability of silicon
Polysilicon is a specially processed form of silicon and is the
primary raw material used to make crystalline solar cells. The
increase in demand for solar cells has led to an industry-wide
silicon shortage and to significant price increases in
polysilicon that have increased our manufacturing costs in the
past and are expected to impact our manufacturing costs and net
income in the future. Polysilicon prices more than doubled
during fiscal 2006, and we believe that supply shortages for
polysilicon will continue throughout fiscal 2007 and possibly
for some time thereafter. Photowatt France was able to partially
offset the impact in fiscal 2006 of higher polysilicon costs by
increasing its production efficiencies and producing thinner
wafers. In general, thinner wafers result in lower production
costs because more wafers can be produced from each polysilicon
ingot. In addition, Photowatt France has also developed the
ability to use a wide variety of silicon feedstock including
powders and fines using OFP and refined metallurgical silicon
which broadens our sources of supply. However, to the extent
that we employ refined metallurgical silicon in the production
of our wafers without blending substantial amounts of
polysilicon, we expect to experience lower operating margins.
Access to a secure supply of all the relevant forms of silicon
continues to be a critical factor that could limit the
production of wafers, cells and modules and the growth of solar
power business. We have secured sources of silicon at Photowatt
France that we believe satisfy our planned capacity until the
end of fiscal 2007. We are continuing to devote resources to
securing additional supply to enable our operations to grow
without interruption. We plan to:
•
enter into long term supply agreements for refined metallurgical
silicon and polysilicon, including polysilicon ingots and wafers;
secure a supply of polysilicon powder and fines through
agreements with companies that produce these by-products, and
use our OFP technology to process the powder and fines into
polysilicon feedstock for use in our Photowatt International
operations; we also intend to explore the possibility of
licensing this technology to third-parties in exchange for
long-term polysilicon supply agreements; and
•
purchase silicon, including polysilicon ingots and wafers, on
the spot market, to the extent available and subject to
appropriate pricing.
Technological developments
The solar industry is rapidly evolving and is characterized by
continually improving technology providing more efficient and
higher power output and improved aesthetics at competitive
prices. These changes can positively impact demand for solar
products generally, but also require us to continue to invest
significant financial resources in research and development to
remain competitive. Our advanced process technologies have
significantly improved our productivity and increased the
efficiency of our raw material usage, both of which have led to
the lowering of the cost per watt of our products and improved
our operating margins.
Photowatt International. Photowatt International is
engaged in the production and sale of solar modules and
installation kits and provides solar power system design
services. We have a long successful history of technological
development at Photowatt International. We believe our strong
capabilities in research and development and our vertically
integrated production process are the key factors driving our
ability to further develop our manufacturing process technology.
Our integrated production process allows us to test different
forms of silicon feedstock and make refinements to the
manufacturing process and immediately determine and study the
impact on solar cell and solar module efficiency. We are then
able to implement changes to optimize and enhance the
manufacturing process to reduce costs and improve cell quality.
Specifically, the primary areas of technological improvement in
Photowatt International have focused on:
•
expanding the types of silicon feedstock that we can use to
manufacture solar cells;
•
developing capabilities that will allow us to reduce silicon
usage per watt, such as enhancing our wire saw technology to
reduce wafer thickness;
•
improving production yields; and
•
increasing cell efficiency levels.
During the past several years we have achieved significant
improvements in each of these areas. In addition, we expect to
be able to mitigate in part the supply shortage and higher cost
of polysilicon by producing commercially saleable cells from a
wide variety of silicon feedstock including refined
metallurgical silicon and polysilicon powder and fines. Our
technological capabilities are also demonstrated by our
reduction in silicon usage per watt. Silicon usage per watt
decreased by 30% from 2004 to 2006 and our wafer thickness
decreased during the same period from approximately 320 to
340 microns to approximately 180 to 220 microns.
Photowatt International’s research and development and
process improvements continue to achieve year-over-year
improvements in production yields and cell efficiency levels.
Spheral Solar. Spheral Solar is developing a technology
for a light weight, flexible crystalline solar module designed
to compete with both conventional crystalline and thin film
technologies. Our Spheral Solar technology incorporates
thousands of tiny silicon spheres, bonded between thin, flexible
aluminum foil substrates to form solar cells. We believe that
our Spheral Solar technology, if we are able to successfully
develop it, would have advantages over conventional crystalline
solar cells, including better aesthetics, greater durability,
less use of silicon, lighter weight, multiple available colors,
more applications and physical flexibility. Spheral Solar is
committing significant resources, including the services of a
third-party technology consultant, to development and process
engineering in an effort to commercially manufacture products
using our Spheral Solar technology at commercially acceptable
manufacturing costs and yields. Our target efficiency for our
Spheral Solar technology at commercialization is approximately
11%, compared with our average solar cell efficiency of 15% for
conventional solar cells. Although certain of our Spheral Solar
prototypes have reached approximately 10% efficiency in a
prototype laboratory setting, more recently our Spheral Solar
cells have demonstrated efficiency levels in the range of 5 to
6% on our current equipment.
Our development process for our Spheral Solar technology has
been based on establishing milestones for achievement of certain
technical objectives and resolution of process issues, which we
review on an ongoing basis. The technological and
commercialization challenges associated with the development of
our Spheral Solar technology are substantial. Our development
process for our Spheral Solar technology has targeted the
achievement of certain technical objectives and resolution of
process issues, which we review on an ongoing basis. Our next
review of our Spheral Solar technology is scheduled for January
2007 following the completion of the current phase of analysis
that includes the results of a technical report from our
third-party technical consultant on certain aspects of the
manufacturing processes. We may decide to discontinue
development of the technology following this review or at any
time.
Concurrent with this development and process engineering
activity, we intend to continue to use proprietary production
processes at Spheral Solar to convert certain forms of silicon
into silicon feedstock for Photowatt International to use in its
production, and to seek licensing opportunities for this
technology.
Impact of competition on the pricing of our products
The market for solar power products is intensely competitive and
continually evolving. Although we experienced increased selling
prices in fiscal 2005 and 2006 primarily due to strong
end-market demand during those years and increases in silicon
feedstock costs, we experienced price reductions for our solar
products in fiscal 2004. When our competitors have historically
lowered their product prices or increased them less than we
otherwise would, competitive pressures have generally caused us
to do the same. We expect that our results of operations will
remain subject to market-driven pricing pressures of this
nature, which are largely outside of our control.
Foreign exchange fluctuations
For a discussion of the effects of foreign exchange fluctuations
on our business, see “— Quantitative and
Qualitative Disclosure About Market Risk — Foreign
exchange risk.”
Revenue
In fiscal 2004, 2005 and 2006, as well as the quarter ended
June 30, 2006, all of our revenue from third parties was
generated by our Photowatt International business segment, which
includes Photowatt France and Photowatt USA. Our revenue is
generated primarily from sales to solar product distributors and
installers. In each of fiscal 2004, 2005 and 2006, our revenue
was almost entirely from the sale of solar modules and cells. In
fiscal 2006, we began to sell additional components of solar
power systems in the form of kits and to provide certain design
and project management services and contracting for installation
services. We expect that these products and services will
account for an increasing proportion of our revenue in the
future.
Our revenue is affected by our unit volumes shipped, average
selling prices per watt and product mix. We have experienced
year-over-year unit volume increases in our solar power products
for the past three years, as we have continued to increase our
production. We experienced price reductions for our solar
products in fiscal 2004 and increased selling prices in fiscal
2005 and 2006. Average selling prices were approximately 15%
higher in fiscal 2006 as compared to those in fiscal 2004,
primarily due to strong end-market demand during those years and
increases in silicon feedstock costs.
Sales to our customers are typically made through non-exclusive,
short-term purchase order arrangements, and our customers
generally change from
year-to-year. In fiscal
2004, two customers accounted for 41% of our revenue. In fiscal
2005, two customers accounted for 55% of our revenue, and in
fiscal 2006, three customers accounted for 46% of our revenue.
We cannot be certain that our existing customers will generate
significant revenue for us in the future or that these customer
relationships will continue. For more information, see
“Risk Factors — We expect that our significant
customer concentration will continue to expose us to potentially
significant fluctuations or declines in our revenue” and
“Risk Factors — Because we operate on a purchase
order basis with our largest customers, our financial results,
including gross margins, may suffer if purchase orders were
changed or cancelled.”
silicon feedstock of various types, including chunks, granules,
powder and fines;
•
purchases of silicon ingots, wafers and solar cells from third
parties as required to balance production;
•
various raw materials, including tempered glass, plastic films,
tedlar, anti-reflective and aluminum coatings, metal frames,
connecting systems, crucibles and aluminum foil;
•
direct labor, including salaries and benefits of personnel
directly involved in manufacturing activities; and
•
factory overhead, including facility leasing, utility,
maintenance of production equipment and other support expenses
associated with the manufacturing of our solar products.
We expect our total cost of revenue to increase as we bring on
additional capacity and increase our production volumes. From
fiscal 2004 to 2006, as a percentage of revenue on a per-watt
basis, the cost of silicon feedstock has increased but remained
at less than 20% of revenue, despite the increasing silicon
feedstock prices, primarily as a result of increased economies
of scale and improved internal operating efficiencies and
increased market prices for our products. Increases in the price
of silicon feedstock, wafers and cells charged by our suppliers
will also contribute to higher cost of revenue going forward,
and we will probably not be able to offset higher silicon costs
with increased efficiency gains.
Prior to the third quarter of fiscal 2006, the expenditures
designed to advance the commercialization of our Spheral Solar
technology were capitalized as deferred development, as they met
the criteria for deferred development under Canadian GAAP.
Beginning in the third quarter of fiscal 2006, these
expenditures were no longer capitalized and began to be
expensed, with these costs being charged to our combined
statements of earnings (loss) (including cost of revenue,
amortization, selling and administrative expenses, and research
and development expenses), because the maximum time period
during which we had determined to defer them had elapsed.
Research and development expenses
Research and development expenses are presented net of
government grants and primarily relate to raw materials used in
our research and development activities, research and
development personnel costs, and prototype and equipment costs
related to the design, development, testing and enhancement of
our products and process technologies. Research costs are
expensed as incurred. Development costs that meet the Canadian
GAAP criteria for deferral are deferred and amortized over the
period over which we expect to benefit from the resulting
product or process.
Prior to the third quarter of fiscal 2006, we deferred the
majority of the costs associated with our Spheral Solar
technology as development costs. Beginning in the third quarter
of fiscal 2006, we began to expense these costs. As at
March 31, 2006, we determined that the carrying value of
the Spheral Solar technology development costs was in excess of
their associated estimated undiscounted future cash flows, and
the associated asset was written down. For more information, see
“— Results of Operations — Results of
operations for fiscal year 2006 compared with fiscal year
2005 — Earnings (loss) from operations.”
Amortization
Our amortization expense primarily relates to amortization of
our manufacturing equipment, facilities and intangible assets
for both Photowatt International and Spheral Solar. With the
capacity that we have added over the past several years and that
we plan to add, we expect the amortization expense recorded by
Photowatt International to continue to increase. At the end of
fiscal 2006, a significant amount of Spheral Solar’s
production equipment was written down to a nominal value, and as
a result, amortization costs related to Spheral Solar are
expected to decrease from fiscal 2006. Further capital
investments may be required,
which would increase amortization. For more information, see
“— Results of Operations — Results of
operations for fiscal year 2006 compared with fiscal year
2005 — Earnings (loss) from operations.”
Selling and administrative expenses
Selling and administrative expenses consist primarily of
salaries, benefits, performance incentive costs, and stock-based
compensation costs related to sales, marketing, administrative,
finance and human resources personnel in Canada, France and the
United States; travel and living expenses; marketing, trade
shows and advertising; capital taxes; allowance for doubtful
accounts; fees and expenses of legal, accounting, tax and other
professional services; and foreign exchange gains and losses. We
expect that our selling and administrative costs will increase
as we increase our sales efforts, hire additional personnel,
launch new business initiatives and programs, improve our
information technology infrastructure and incur other costs
related to the anticipated growth of our business. Furthermore,
we also expect significant increases in selling and
administrative costs as a result of becoming a listed public
company in the United States and Canada upon completion of this
offering.
Asset impairment charge
We regularly review the net recoverable amount of our deferred
development costs and long lived assets. The asset impairment
charge in fiscal 2006 relates to write-downs of these costs and
assets as required as a result of these reviews. See
“— Results of Operations — Results of
operations for fiscal year 2006 compared with fiscal year
2005 — Earnings (loss) from operations.”
Corporate costs
Corporate costs include “Photowatt corporate costs”
which were incurred directly by us and include legal,
compliance, personnel, finance and other corporate costs not
directly associated with a segment. Corporate costs also include
shared corporate costs which represent an estimate of costs
attributable to our business for services that were provided by
ATS or one of its affiliates in the past. These expenses
primarily relate to an allocation of ATS corporate personnel
costs to provide functions including tax, legal, compliance,
finance and operational consulting. The costs are included in
our combined financial statements and are based on certain
assumptions that are intended to allocate estimated expenses
directly attributable to us. The allocations and expenses do not
necessarily represent the expenses that we would have incurred
if we had operated on a stand-alone basis. Included in shared
corporate costs is an allocation of amortization related to the
building that Spheral Solar occupies that immediately prior to
completion of this offering will be leased by us from ATS. See
“Our Relationship with ATS — Agreements Between
ATS and Us — Lease Agreement.”
Interest (income) expense
Interest expense in the periods presented primarily arose from
interest payable on intercompany loans from ATS. At the time of
the closing of this offering, we expect to owe approximately
$ million to ATS
pursuant to an intercompany demand loan to be provided by ATS
that we expect to repay after the closing of this offering
through the application of the net proceeds as described under
“Use of Proceeds.” We expect to incur interest expense
in future periods in relation to debt we may incur to fund our
manufacturing capacity expansion plans.
Provision for income taxes
As required by Canadian GAAP for carve-out financial statements,
income taxes have been recorded at statutory rates based on
income taxes as reported in the combined statements of earnings
(loss) as though we were a separate tax paying entity. Income
taxes payable or recoverable in respect of the components of our
combined operations that were not historically separate tax
paying legal entities have been included in the account
recording ATS’ net investment. Future income taxes have
been presented in the combined balance sheets for each temporary
difference between the financial reporting and tax basis of the
assets and liabilities.
In addition, future income tax assets have been recognized to
the extent that they would have been realized as though we were
a separate tax paying entity. Future income tax assets are
recognized only to the extent that management determines that it
is more likely than not that the future income tax assets will
be realized in the foreseeable future. No future income tax
assets have been recorded for the losses related to Spheral
Solar, Matrix Solar Technologies, Inc. and Spheral Solar Power
Inc.
Our provision for income taxes for the fiscal years 2004, 2005
and 2006 and the quarters ended June 30, 2005 and 2006 was
$1.1 million, $3.8 million, $5.6 million,
$1.9 million and $2.9 million, respectively. This
provision for income taxes primarily reflects the income taxes
payable on the net earnings of Photowatt France, as the Canadian
and U.S. operations of Photowatt Technologies have tax
losses for which future income tax assets have not been
recognized.
Minority interest
Minority interest primarily consists of an allocation of the net
earnings and losses from one of the entities included in our
carve out combined financial statements where less than 5% of
the outstanding shares are held by individuals or entities other
than us or a company controlled by us.
Critical accounting policies
The preparation of our combined financial statements requires us
to make estimates and judgments that affect (i) our
reported amounts of assets and liabilities, (ii) revenue
and expenses in the respective fiscal periods, and
(iii) the disclosure of contingent liabilities and assets
at the date of the combined financial statements. We base our
estimates on historical experience, knowledge and assessment of
current business and other conditions and our expectations
regarding the future, based on available information and on
various other assumptions that we believe to be reasonable under
the circumstances. Actual results may differ from these
estimates as a result of new information, future events or
otherwise.
We believe that the following accounting policies involve the
most significant judgments and estimates used in the preparation
of our combined financial statements:
Revenue recognition: Revenue is recognized when earned,
which is generally at the time of shipment and when title is
transferred to the customer, provided that collection is
reasonably assured, the sales price is fixed and determinable,
and the rights and risks of ownership have passed to the
customer. As of June 30, 2006, we did not have any
significant post-shipment obligations, such as installation,
training or customer acceptance clauses, with any of our
customers that we believe would have an impact on historical
revenue recognition.
Warranty reserves: It is customary in our business and
industry to warrant or guarantee the performance of traditional
solar panels at certain levels of conversion efficiency for
extended periods, often as long as 25 years. We provide for
the costs of product warranties for the products of Photowatt
International at the time revenue is recognized. Our estimates
of product warranty costs are based upon our historical
experience and expectations of future return rates and unit
warranty repair costs. To the extent our actual product failure
rates and associated costs differ from our estimates, revisions
to the estimated warranty liability would be required. Based on
our experience, warranty costs have been de minimis, and as a
result we do not have any warranty reserves. If in the future
our experience changes, we will take a warranty reserve to the
extent appropriate.
Allowance for doubtful accounts: We maintain an allowance
for doubtful accounts primarily based on our assessment of
historical bad debts, factors surrounding the credit risk of
specific customers and current economic trends. If there is a
deterioration of a major customer’s creditworthiness or
actual defaults are higher than our historical experience, we
may be required to increase our allowance for doubtful accounts.
Foreign currency translation: The functional currencies
of Photowatt France, Spheral Solar and Photowatt USA are the
euro, Canadian dollar and U.S. dollar, respectively. For
the purposes of our combined financial statements, the
functional currency is the Canadian dollar and the reporting
currency is the U.S. dollar. As our subsidiaries are
self-sustaining, the accounts of our foreign subsidiaries are
translated into
U.S. dollars using the current rate method under which
assets and liabilities are translated at the exchange rate
prevailing at the year-end and revenues and expenses at average
rates during the year. Gains or losses on translation are not
included in the combined statements of earnings (loss) but are
deferred and included in cumulative translation adjustment, a
separate component of group equity.
Other monetary assets and liabilities, including long-term
monetary assets and liabilities, which are denominated in
foreign currencies, are translated into the respective
functional currency of each entity at
period-end exchange
rates, and transactions included in earnings are translated at
rates prevailing during the period. Exchange gains and losses
resulting from the translation of monetary assets and
liabilities are included in the combined statements of earnings
(loss).
Inventories: Raw materials are valued at the lower of
cost and replacement cost.
Work-in-process and
finished goods inventory are stated at the lower of cost and net
realizable value. Cost includes the cost of materials plus
direct labor applied to the product and applicable share of
manufacturing overhead. Cost is determined on a
first-in, first-out
basis.
Property, plant and equipment: Property, plant and
equipment are recorded at cost. Amortization is computed using
the following methods and annual rates:
Asset
Basis
Rate
Buildings
Straight-line
15 years
Production equipment
Straight-line
5 to 10 years
Other equipment and furniture
Declining-balance
20%
Straight-line
5 to 7 years
Goodwill: Goodwill represents the excess of the cost of
an acquired enterprise over the net of the fair values assigned
to the assets acquired and liabilities assumed, less any
subsequent impairment write-down. Goodwill is subject to an
impairment test on at least an annual basis or upon the
occurrence of certain events or circumstances. Goodwill
impairment is assessed based on a comparison of the fair value
of a reporting unit to the underlying carrying value of the
reporting unit’s net assets, including goodwill. When the
carrying amount of the reporting unit exceeds its fair value,
the implied fair value of the reporting unit’s goodwill is
compared with its carrying amount to measure the amount of
impairment loss, if any. Goodwill presented in the combined
financial statements relates to our purchase of Photowatt France.
Intangible assets: Intangible assets, which are patents
and licenses on technologies, are recorded at cost and amortized
over their estimated economic life of 10 to 17 years.
Impairment of long-lived assets: We review long-lived
assets such as property, plant and equipment and intangible
assets with finite useful lives for impairment whenever events
or changes in circumstances indicate that the carrying value may
not be recoverable. If the total of the expected undiscounted
cash flows is less than the carrying value of the asset, a loss,
if any, is recognized for the excess of the carrying value over
the fair value of the asset. During the year ended
March 31, 2006, we determined that the carrying value of
certain property, plant and equipment and intangible assets was
in excess of their associated estimated undiscounted future cash
flows, and the assets were written down to their fair value as
further described in note 15 to our combined annual
financial statements.
Research and development costs: Research costs are
expensed as incurred. Development costs which meet generally
accepted criteria for deferral are deferred and amortized over
the period over which we expect to benefit from the resulting
product or process. Subject to meeting the generally accepted
criteria for deferral, we capitalize both direct and indirect
costs with respect to ventures which are in the development
stage.
Deferred development costs are reviewed annually for
recoverability or whenever events or circumstances indicate that
the carrying value may not be recoverable. When the criteria
that previously justified the deferral of costs are no longer
met, the unamortized balance is written off as a charge to
earnings in that period. When the criteria for deferral continue
to be met, but the amount of deferred development costs that can
reasonably be regarded as assured through recovery of related
future revenue less relevant costs is exceeded by the
unamortized balance of such costs, the excess is written off as
a charge to earnings in that period. During the year ended
March 31, 2006, we determined that the carrying value of
certain deferred development costs was in excess of their
associated estimated undiscounted future cash flows and the
assets were written down as further described in note 15 to
our combined annual financial statements.
Income taxes: We use the liability method of accounting
for income taxes. Under the liability method of accounting for
income taxes, future income tax assets and liabilities are
determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using
the substantively enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
We continue to assess, on an ongoing basis, the degree of
certainty regarding the realization of future income tax assets
and whether a valuation allowance is required.
Investment tax credits and government assistance:
Investment tax credits and government assistance are accounted
for as a reduction in the cost of the related asset or expense
when there is reasonable assurance that such credits or
assistance will be realized.
Stock-based compensation plans: For all employee stock
option awards granted on or after April 1, 2003, we
recognize compensation using the fair value based method of
accounting for stock-based compensation.
We have accounted for all employee stock options granted before
April 1, 2003 as capital transactions with the provision of
pro forma disclosure for those awards granted between
April 1, 2002 and March 31, 2003. Pro forma
disclosures present net earnings and earnings per share as if
the compensation cost for our stock option plan had been
determined and recorded based on the fair value of options
awarded for the year ended March 31, 2003. No pro forma
disclosure is provided for stock options awarded prior to
April 1, 2002.
The fair value of stock options is estimated at the grant date
using the Black-Scholes option pricing model. Although the
assumptions used reflect management’s best estimates, they
involve inherent uncertainties based on market conditions
generally outside of our control. If other assumptions were
used, stock-based compensation expense could be significantly
impacted. As stock options are exercised, the proceeds received
on exercise, in addition to the previously recognized expense
related to those stock options, are credited to net investment.
For those options which can be settled in cash at the
holder’s option, a liability is recognized for the cash
settlement value. This liability is adjusted each reporting
period with the corresponding charge to the combined statements
of earnings (loss).
Revenue. For the first quarter of fiscal 2007, our
revenue, which was entirely derived from Photowatt
International, was $39.6 million, or 15% higher than the
first quarter of fiscal 2006. This increase is primarily due to
product pricing increases, which for module prices increased by
12% over the first quarter of fiscal 2006. In addition, we
experienced significant increases in revenue from installation
kits and other equipment sales, including inverters and other
related equipment, which increased from approximately $100
thousand during the first quarter of fiscal 2006 to over
$2 million during the first quarter of fiscal 2007. In
euro, the functional currency of Photowatt France, Photowatt
France revenue for the first quarter of fiscal 2007 increased by
19% compared to the first quarter of fiscal 2006.
The following table sets forth the geographic sources of our
revenue for the first quarter of each of fiscal 2006 and 2007.
Cost of revenue. For the first quarter of fiscal 2007,
our cost of revenue, which was entirely derived from Photowatt
International on a combined basis, was $26.2 million,
representing 66% of revenue, compared to $25.5 million, or
74% of revenue, in the first quarter of fiscal 2006. Several
factors impacted the cost of revenue as compared to the prior
year. By improving production yields, realizing efficiencies
related to economies of scale, and through improvements in the
production process leading to reduced other material costs, cost
of revenue was reduced by 9% as a percentage of revenue.
Although silicon costs were higher in fiscal 2007 compared to
fiscal 2006, these cost increases were largely mitigated by a
reduction in the number of grams used per watt manufactured.
Research and development. Research and development
expenses increased from $0.2 million in the first quarter
of fiscal 2006 to $3.0 million in the first quarter of
fiscal 2007, primarily as a result of research and development
costs associated with our Spheral Solar technology that were
capitalized as deferred development costs in the first quarter
of the prior year. The following table summarizes the breakdown
of research and development expenses between our segments:
Amortization. For the first quarter of fiscal 2007, our
amortization expense was $2.3 million, or 48% higher than
in the first quarter of the prior year. This increase was
primarily due to increased amortization at Photowatt
International related to capital expenditures made to increase
capacity in fiscal 2005 and 2006. The following table summarizes
the breakdown of the amortization between our segments:
Three Months Ended June 30
2005
2006
Amortization as a
Amortization as a
% of combined
% of combined
Amortization
revenue
Amortization
revenue
(U.S. dollars in thousands)
Photowatt International
$
1,549
4
%
$
2,171
6
%
Spheral Solar
—
—
125
N/M
Combined
$
1,549
4
%
$
2,296
6
%
Selling and administrative. For the first quarter of
fiscal 2007, our selling and administrative expenses were
$3.7 million, or 114% higher than in the first quarter of
the prior year. Photowatt International selling and
administrative expenses increased $0.9 million from the
first quarter of fiscal 2006 compared to the first quarter of
fiscal 2007 primarily as a result of increased incentive
compensation related to increased profitability. Selling and
administrative expenses at Spheral Solar include sales and other
administrative costs not directly associated with the
development initiative. Photowatt corporate costs increased due
to increased expenditures related to preparation for this
offering including increased corporate infrastructure and
personnel
Shared corporate costs. For the first quarter of fiscal
2007, our shared corporate costs were $0.2 million, or 104%
higher than in the first quarter of the prior year. This
increase was primarily due to increased allocated amortization
pertaining to the Cambridge, Ontario facility.
Earnings from operations
Three Months Ended June 30
2005
2006
Earnings (loss)
Earnings (loss)
Earnings
from operations
Earnings
from operations
(loss) from
as a % of
(loss) from
as a % of
operations
combined revenue
operations
combined revenue
(U.S. dollars in thousands)
Photowatt International
$
5,503
16
%
$
8,368
21
%
Spheral Solar
20
N/M
(3,078
)
(8
)
Corporate costs
(122
)
N/M
(696
)
(2
)
Inter-segment eliminations
—
—
(446
)
(1
)
Combined
$
5,401
16
%
$
4,148
10
%
For the first quarter of fiscal 2007, our earnings from
operations were $4.1 million, compared with
$5.4 million of earnings from operations in the first
quarter of the prior year. This decrease was primarily due to
the inclusion of Spheral Solar’s loss from operations in
the first quarter of fiscal 2007, which was only partially
offset by an increase in Photowatt International’s earnings
from operations in the first quarter of fiscal 2007 compared
with the first quarter of fiscal 2006. Spheral Solar’s loss
from operations in the first quarter of fiscal 2007 was
$3.1 million, compared with earnings from operations of $20
thousand in the first quarter of fiscal 2006. This change was
primarily because costs relating to the development of Spheral
Solar technology were capitalized as deferred development costs
in the first quarter of the prior year. Photowatt
International’s earnings from operations in the first
quarter of fiscal 2007 were $8.4 million, or 52% higher
than in the first quarter of the prior year, and represented 21%
of Photowatt International’s revenue, compared to 16% in
the first quarter of fiscal 2006. This increase was primarily
due to product pricing increases and significant improvements in
production yields, throughput gains, and manufacturing
cost-reductions reflecting the benefits of capital investments.
These factors more than offset the impact of higher silicon
costs in the first quarter of fiscal 2007 compared with the same
period in 2006. Inter-segment eliminations represent profit that
is deferred until the underlying shipments of silicon between
Spheral Solar and Photowatt International are converted to
third-party revenue.
Interest expense. For the first quarter of fiscal 2007,
our interest expense was $1.0 million, compared with
$0.3 million in the first quarter of the prior year. The
increase in interest expense for the first quarter of fiscal
2007 compared to the first quarter of fiscal 2006 primarily
related to the increase in interest-bearing net investment and
amount due to parent.
Provision for income taxes. For the first quarter of
fiscal 2007, our provision for income taxes was
$2.9 million, compared with $1.9 million in the first
quarter of the prior year. The provision for income taxes
related primarily to the earnings of Photowatt International,
and the increase in the first quarter of fiscal 2007 compared
with the prior year was mainly due to the increased earnings of
Photowatt International. No future income tax benefit has been
recognized related to loss carryforwards or other temporary
differences in the Spheral Solar segment or Photowatt USA.
Minority interest. For the first quarter of fiscal 2007,
we had minority interest of $0.1 million, compared with
$0.1 million in the first quarter of the prior year.
Results of operations for fiscal year 2006 compared with
fiscal year 2005
The following table provides a comparison of our revenue and
expenses for the periods indicated:
Revenue. For fiscal 2006, our revenue, which was entirely
derived from Photowatt International, was $121.9 million,
or 8% higher than in fiscal 2005. This increase was due to both
higher production volumes (approximately 2% higher than the
prior year) and product price increases (approximately a 10%
increase over the prior year), offset in part by the weakening
euro against the US dollar in fiscal 2006, compared with fiscal
2005. In euro, Photowatt France revenue for fiscal 2006
increased by 13% compared to fiscal 2005.
The following table sets forth the geographic sources of our
revenue for fiscal 2005 and 2006.
Cost of revenue. For fiscal 2006, our cost of revenue,
which was almost entirely derived from Photowatt International,
was $90.0 million, representing 74% of revenue, compared to
$89.9 million or 80% of revenue in fiscal 2005. Several
factors impacted the cost of revenue as compared to the prior
year. By improving production yields, realizing efficiencies
relating to economies of scale, and through improvements in the
production process leading to reduced other material costs, cost
of revenue was reduced by 7% as a percentage of revenue.
Although silicon costs were higher in fiscal 2006 compared to
fiscal 2005, these cost increases were largely mitigated by a
reduction in the number of grams used per watt manufactured.
Research and development. Research and development
expenses increased from $0.7 million in fiscal 2005 to
$9.3 million in fiscal 2006, primarily as a result of
research and development costs associated with Spheral Solar
technology that were expensed in the third and fourth quarters
of fiscal 2006 but were capitalized as deferred development
costs in fiscal 2005. The following table summarizes the
breakdown of research and development expenses between our
segments:
Amortization. For fiscal 2006, our amortization was
$9.7 million, or 79% higher than in fiscal 2005. This
increase was primarily due to the inclusion of Spheral Solar
technology amortization for the third and fourth quarters of
fiscal 2006 in the combined statements of earnings (loss) and
increased amortization at Photowatt France primarily related to
capital expenditures made to increase capacity in fiscal 2005
and 2006. The following table summarizes the breakdown of the
amortization between our segments:
Selling and administrative. For fiscal 2006, our selling
and administrative costs were $9.1 million, or 55% higher
than in fiscal 2005. This increase was primarily due to the
inclusion of the Spheral Solar selling and administrative
expenses for the third and fourth quarters of fiscal 2006 in the
combined statements of earnings (loss). Photowatt International
selling and administrative expenses increased $1.0 million
from fiscal
2005 to fiscal 2006 primarily as a result of increased incentive
compensation related to increased profitability. The following
table summarizes the breakdown of the selling and administrative
costs between our segments:
Asset impairment charge. As we continued to face
significant technical challenges associated with the
commercialization of Spheral Solar technology and due to the
current uncertainty in resolving these challenges and resulting
delays in realizing cash flows from the investment in Spheral
Solar technology, Canadian GAAP required that we recognize an
after-tax, non-cash asset impairment charge of
$94.3 million (pre-tax $94.3 million) against our
Spheral Solar technology deferred development costs and other
long-lived assets in the fourth quarter of fiscal 2006. Deferred
development costs were written down by $41.0 million,
property, plant and equipment was written down by
$51.9 million, and intangible assets were written down by
$1.4 million for a total impairment charge of
$94.3 million. Total assets recorded on our combined
balance sheet related to Spheral Solar after this adjustment
were approximately $11.3 million at March 31, 2006,
consisting of $4.6 million of current assets,
$4.2 million of long-lived assets, and $2.5 million of
other assets. Total assets at March 31, 2005 related to
Spheral Solar technology were $86.9 million.
Shared corporate costs. For fiscal 2006, our shared
corporate costs were $0.7 million, or 22% higher than in
fiscal 2005. This increase was primarily due to allocated
facilities costs in Cambridge, Ontario.
For fiscal 2006, our loss from operations was
$91.1 million, compared with $10.5 million of earnings
from operations in fiscal 2005. This change was primarily due to
the inclusion of Spheral Solar’s loss from operations in
fiscal 2006, which was only partially offset by an increase in
Photowatt International’s earnings from operations in
fiscal 2006 compared with fiscal 2005. Spheral Solar’s loss
from operations in fiscal 2006 was $109.8 million, compared
with earnings from operations of $0.2 million in fiscal
2005. This change was primarily due to the after-tax, non-cash
asset impairment charge of $94.3 million (pre-tax
$94.3 million) against our Spheral Solar technology
deferred development costs and other long-lived assets (see
“— Asset impairment charge” above) and
continuing expenditures in the third and fourth quarters
designed to advance the commercialization plan for our Spheral
Solar technology. Prior to the third quarter of fiscal 2006,
these continuing expenditures were capitalized as deferred
development costs. Photowatt International’s earnings
from operations in fiscal 2006 were $19.8 million, or 81%
higher than in fiscal 2005, and represented 16% of Photowatt
International’s revenue, compared with 10% in fiscal 2005.
This increase was primarily due to an increase in annual
production, price increases and significant improvements in
production yields, throughput gains, and manufacturing cost
reductions reflecting the benefits of capital investments. These
factors more than offset the impact of higher silicon costs in
fiscal 2006 compared with fiscal 2005.
Interest expense. For fiscal 2006, our interest expense
was $1.7 million, compared with $3 thousand in fiscal 2005.
The fiscal 2006 interest expense related primarily to interest
expense on certain indebtedness owing to ATS that was included
as part of ATS’ net investment in us. During fiscal 2005,
no interest expense was charged related to ATS’ net
investment in us.
Provision for income taxes. For fiscal 2006, our
provision for income taxes was $5.6 million, compared with
$3.8 million in fiscal 2005. The provision for income taxes
relates primarily to the earnings of Photowatt International,
and the increase in fiscal 2006 compared with fiscal 2005 was
mainly due to the increased earnings of Photowatt International.
Minority interest. For fiscal 2006, we had nominal
minority interest, compared with $0.1 million in fiscal
2005. This change resulted from the portion of the asset
impairment charge assigned to minority shareholders, which
offset the increased profitability of Photowatt International.
Results of operations for fiscal year 2005 compared with
fiscal year 2004
The following table provides a comparison of our revenue and
expenses for the periods indicated:
Revenue. For fiscal 2005, our revenue, which was entirely
derived from Photowatt International, including its facility in
the United States, was $113.0 million, or 72% higher than
in fiscal 2004. The increase in revenue from 2004 to 2005 is
primarily due to increased production volumes (approximately 70%
higher than the prior year) related to our capacity expansion
and increasing demand for solar products. Product pricing
decreased by approximately 1% during fiscal 2005, which was more
than offset by the strengthening of the euro to the
US dollar. In euros, Photowatt France revenue in fiscal
2005 increased 60% compared to fiscal 2004.
Cost of revenue. For fiscal 2005, our cost of revenue was
$89.9 million, or 70% higher than in fiscal 2004,
representing 80% of revenue, consistent with fiscal 2004.
Overall cost of revenue increased from 2004
to 2005 primarily due to volume increases. While cost of revenue
remained steady at 80% of revenue, higher silicon costs, which
had increased from 11% to 19% of revenue, were partially offset
by improving production yields, realizing efficiencies related
to economies of scale, and through improvements in the
production process leading to a reduction in other material
costs and labor costs by a similar amount. In fiscal 2005 and
2004, our cost of revenue almost entirely related to Photowatt
International.
Research and development. For fiscal 2005, our research
and development expenses were $0.7 million, or 45% lower
than in fiscal 2004. The expenses in fiscal 2005 and 2004 were
solely the research and development costs of Photowatt
International, as the development costs associated with the
Spheral Solar technology were capitalized as deferred
development costs. The decrease in expense was primarily the
result of increased levels of government assistance received in
fiscal 2005 compared with fiscal 2004.
Amortization. For fiscal 2005, our amortization was
$5.4 million, or 21% higher than in fiscal 2004. In fiscal
2005 and fiscal 2004, amortization expense related solely to
Photowatt International operations, and the increase over fiscal
2004 related to recent capital investments made by Photowatt
International.
Selling and administrative. For fiscal 2005, our selling
and administrative expenses were $5.9 million, or 24%
higher than in fiscal 2004. This increase was primarily due to
increased production activity and higher revenue resulting in
increased selling costs and higher employee performance
incentive costs in fiscal 2005 tied to improved earnings. As a
percentage of revenue, selling and administrative expenses
decreased from 7% in fiscal 2004 to 5% in fiscal 2005.
Shared corporate costs. For fiscal 2005, our shared
corporate costs were $589 thousand, or 42% higher than in fiscal
2004. This increase was primarily due to increased ATS corporate
activity in conjunction with our activities.
Earnings from operations. In both fiscal 2004 and fiscal
2005, earnings from operations was derived almost solely from
Photowatt International’s operations. The costs associated
with the development of Spheral Solar technology were
capitalized and deferred during fiscal 2004 and 2005. For fiscal
2005, our earnings from operations were $10.5 million, or
386% higher than in fiscal 2004, and represented 9% of revenue,
compared with 3% in fiscal 2004. This increase was primarily due
to increased revenue, improved factory utilization, cost
reduction initiatives, improved efficiencies and other factors
mentioned above. A worldwide shortage of silicon feedstock
resulted in higher industry prices for this primary raw
material, which we more than offset with our ongoing silicon
supply management efforts, strong market conditions and
improvements in operating efficiency.
Interest (income) expense. For fiscal 2005, our interest
expense was $3 thousand, compared with income of
$64 thousand in fiscal 2004. This expense fluctuates
depending on cash balances and interest charges from operating
facilities and intercompany charges. During fiscal 2005 and
2004, no interest expense was charged related to ATS’ net
investment in us.
Provision for income taxes. For fiscal 2005, our
provision for income taxes was $3.8 million, or 233% higher
than in fiscal 2004. The provision for income taxes relates
primarily to the earnings of Photowatt International, and the
increase in fiscal 2005 compared with fiscal 2004 was mainly due
to our increased earnings.
Minority interest. For fiscal 2005, our minority interest
was $125 thousand, or 205% higher than in fiscal 2004. This
change resulted primarily from increased earnings of Photowatt
International.
Liquidity and Capital Resources
Liquidity
In the first quarters of fiscal 2007 and 2006, cash flows (used
in) provided by operating activities were $(4.7) million
and $10.8 million, respectively. In the first quarter of
fiscal 2007, non-cash working capital increased by
$7.4 million, primarily related to increases in accounts
receivable and inventory, which offset the $2.7 million
generated from the net earnings adjusted for non-cash items. In
the first quarter of the prior year,
non-cash working capital decreased $5.1 million primarily
related to decreases in accounts receivable which were in
addition to the $5.6 million generated from net earnings
adjusted for non-cash items.
In fiscal 2004, 2005 and 2006, cash flows provided by operating
activities were $3.3 million, $3.8 million and
$2.2 million, respectively. In fiscal 2004, non-cash
working capital increased $3.5 million primarily related to
increases in accounts receivable which offset the
$6.8 million generated from the net earnings adjusted for
non-cash items. In fiscal 2005, non-cash working capital
increased $12.0 million primarily related to increases in
accounts receivable and inventory which partially offset the
$15.8 million generated from net earnings adjusted for
non-cash items. In 2006, increases in non-cash working capital
of $5.3 million, associated primarily with the increased
silicon inventory levels at both Photowatt International and
Spheral Solar, offset the $7.5 million net cash generated
from net loss adjusted for non-cash items.
Our investing activities in the first quarter of fiscal 2007
were composed primarily of our acquisition of property, plant
and equipment. See “— Capital expenditures”
below. In the first quarter of fiscal 2006, investing activities
were split equally between acquisitions of property, plant, and
equipment, and investments in deferred development expenditures,
at $5.9 million each. Commencing in October 2005, costs
pertaining to the Spheral Solar technology ceased being
capitalized to deferred development and instead were charged
directly as research and development expenditures. Our investing
activities in fiscal 2004, 2005 and 2006 were composed primarily
of our acquisition of property, plant and equipment and
development expenditures. See “— Capital
expenditures” below. The development expenditures in fiscal
2004, 2005 and 2006 primarily related to Spheral Solar
technology.
Our financing activities in the first quarter of fiscal 2007 and
2006, in the amounts of $11.7 million and
$4.2 million, respectively, consisted primarily of proceeds
from ATS. In the first quarter of fiscal 2007, $8.6 million
was advanced as an intercompany loan, while $4.1 million
was advanced to the company and flowed through the net
investment account. In the first quarter of fiscal 2006, all of
the advances from ATS flowed through the net investment account.
Our financing activities in fiscal 2004, 2005 and 2006 consisted
of proceeds from government assistance in the amounts of
$5.7 million, $12.8 million, and $3.4 million,
respectively, the vast majority of which we received from TPC,
and by ATS in fiscal 2004, 2005 and 2006, in the amounts of
$42.1 million, $23.1 million and $35.4 million,
respectively. The final TPC funding claims were recognized in
fiscal 2006 and at this time there are no further amounts to be
recognized by us under this program.
We expect to generate positive cash flow from operations once
the first phase of our Photowatt International capacity
expansion program comes fully on stream in fiscal 2008. The
growth in our capacity is expected to result in an increase in
cash flow as these production facilities are completed, the
effect of which we expect to be offset by our growing working
capital requirements in the short to medium term. In addition,
we may be faced with the need to make significant advance
payments in order to secure long term supplies of silicon that
will require large amounts of capital. We expect to finance
these advance payments associated with our long term silicon
supply agreements and our capital expenditure programs through
the use of a portion of the net proceeds of this offering
received by us. If we proceed with a joint venture that is
currently under consideration to expand our Photowatt
International capacity, we anticipate raising some amount of
limited recourse debt in the joint venture.
Including the net proceeds of the offering, we expect that we
will have and will generate sufficient cash and cash equivalents
to finance our operations, fund our development activities and
meet our growth plan until it is necessary to raise financing
for the later phases of our capacity expansion plans. Depending
on the nature of the silicon supply market, we may have to raise
additional capital to secure adequate silicon supply. We have
entered into discussions with a number of financial institutions
regarding the provision of lines of credit to provide liquidity
in the event that we are unable to raise equity capital at the
time that we would require funding for the later phases of our
capacity expansion or development plan, but there is no
assurance that we will be able to successfully negotiate these
agreements or the joint venture limited recourse agreements, or
that if successful, that they will be available on satisfactory
terms and conditions when we would like to access them.
We have historically satisfied our capital and liquidity
requirements through intercompany borrowings and the sale of
equity to ATS. At the time of the closing of this offering we
expect to owe approximately
$ million
to ATS pursuant to an intercompany demand loan related to the
fiscal 2007 investment in additional manufacturing capacity at
Photowatt International, further development and process
engineering associated with our Spheral Solar technology, and
other general corporate purposes. Upon completion of this
offering and after application of the net proceeds therefrom, we
expect to have no outstanding intercompany borrowings from ATS.
See “Our Relationship with ATS —
General — ATS reorganization relating to our
company.” We plan to use proceeds from this offering to
finance the first and second phases of our Photowatt
International capacity expansion plan and the further
development and process engineering of our Spheral Solar
technology. We will need to raise additional capital to fund the
third phase of our Photowatt International capacity expansion
plan and the expansion of our Spheral Solar technology capacity,
assuming we successfully complete our development and process
engineering.
Capital expenditures
Our property, plant and equipment acquisitions for the periods
indicated were as follows:
The property, plant and equipment acquisitions at Photowatt
International related primarily to equipment to increase the
estimated annual plant capacity, increase manufacturing
efficiencies and further automate production, and reduce the
quantity of silicon consumed per watt of output.
Capital expenditures at Spheral Solar related to equipment and
expenditures for the development of Spheral Solar technology and
include items such as production equipment, computer equipment,
software and office furniture. For the first quarter of fiscal
2007, as our Spheral Solar technology has not been proven to be
commercially viable, all expenditures relating to the
development of this technology are being charged to operations.
This policy will continue until certain milestones have been met
in relation to the development of this technology.
We expect that our capital expenditures will increase in the
future as we expand our manufacturing capacity in line with our
strategy, including with a portion of the net proceeds from this
offering.
In May 2006, we announced the first phase of our Photowatt
International capacity expansion plan, which includes the
expansion of our ingot, wafer, cell and module annual
manufacturing capacity to 60 MW of integrated manufacturing
capacity by March 2007, at an expected cost of
€25 million,
of which at July 31, 2006, we had spent
€5.1 million.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenue or
expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to investors.
The following table sets forth our contractual commitments as of
March 31, 2006.
Payment Due by Period
Less than
More than
Total
1 Year
1-3 Years
3-5 Years
5 Years
(U.S. dollars in thousands)
Operating lease obligations
$
1,781
$
486
$
778
$
406
$
113
Non-cancelable purchase obligations
12,150
11,008
570
570
—
Total
$
13,931
$
11,494
$
1,348
$
976
$
113
The following table sets forth our contractual commitments as of
June 30, 2006.
Payment Due by Period
Less than
More than
Total
1 Year
1-3 Years
3-5 Years
5 Years
(U.S. dollars in thousands)
Operating lease obligations
$
3,196
$
636
$
1,340
$
914
$
306
Non-cancelable purchase obligations
19,157
17,694
937
526
—
Due to parent
8,550
8,550
—
—
—
Total
$
30,903
$
26,880
$
2,277
$
1,440
$
306
Subsequent to June 30, 2006, we issued purchase orders to
acquire approximately $8.0 million of refined metallurgical
silicon which will be delivered through to fiscal 2008. In May
2006, we announced the capacity expansion plan for our Photowatt
France facility near Lyon, France, at an expected cost of
€25 million.
In September 2006, we entered into an agreement with the French
Atomic Energy Commission, or CEA, and two other partners for a
project whose primary objective is to develop a commercial
process for the production of solar grade silicon derived from
metallurgical silicon with a capacity of 200 tonnes per
year. Pursuant to the agreement, our role in the project is to
contribute certain expertise and non-financial resources in
order to improve and enhance the silicon material developed
during the project’s development phase. Under the contract,
we are to be supplied, at predetermined prices, with at least
80% of the volume of solar grade silicon or ingots produced by
the project through to April 20, 2008. We expect initial
shipments from the project to commence in April 2007, however
given that the project’s facility is currently under
construction and production has not yet begun, there is a risk
that these silicon shipments may be delayed.
In October 2006, we entered into a 10 year irrevocable
commitment to purchase from Deutsche Solar AG approximately
four million silicon wafers per annum commencing in
calendar 2009. Advance payments are required which will be
applied against the price of silicon wafers that will be
received during the life of the commitment and can only be
refunded in the event of the supplier’s failure to deliver
silicon wafers in accordance with the agreement. Commencing in
2009, the price of the silicon wafers will be adjusted at the
beginning of each calendar year based on the agreed upon formula.
We expect to enter into a lease agreement with ATS that relates
to our Spheral Solar manufacturing facility in Cambridge,
Ontario which will become effective immediately prior to
completion of this offering and which is not reflected in the
table above. Under the lease, we will pay ATS rent at a rate of
C$1 per year for two years. Thereafter, provided we are not
in default and remain creditworthy, we will have the option to
renew the lease for two consecutive five year renewal periods at
the greater of a pre-specified minimum rate of rent and the then
prevailing market rates.
As consideration for funding that we received from TPC,
commencing in our fiscal year ended March 2003, towards the
development of our Spheral Solar technology, we are required to
pay royalties of 1.8% on our future revenues resulting from the
sale, licensing or other transfer of Spheral Solar products and
related
services. These royalties commence in the first year that such
future annual revenues exceed C$20.0 million and continue
for a total of 10 years. If the cumulative royalties exceed
C$84.5 million during this 10 year period, the royalty
rate declines to 0.35% for the remaining term. If at the end of
10 years the cumulative royalties have not reached
C$84.5 million, the royalty payment term is extended for
the lesser of a further five years or once cumulative royalties
of C$84.5 million have been reached. To date, no royalties
have been accrued or paid under this obligation. For more
information, see note 14 to our combined annual financial
statements.
Quantitative and Qualitative Disclosure About
Market Risk
Foreign exchange risk
A substantial portion of our Photowatt International revenue is
denominated in euros, with the remainder largely in
U.S. dollars. While a substantial portion of our operating
costs of Photowatt International is in euros, the majority of
our silicon and wafer purchases have been in U.S. dollars.
Our current Spheral Solar expenditures are largely in Canadian
dollars with some capital purchases and consulting costs being
in U.S. dollars. Our U.S. operations largely operate
with U.S. dollar revenue and U.S. dollar costs.
Fluctuations in currency exchange rates could have a significant
impact on our financial stability due to a mismatch among
various foreign currency denominated sales and operating costs.
Fluctuations in exchange rates, particularly the euro,
U.S. dollar and Canadian dollar affect our gross and
operating profit margins and could result in foreign exchange
losses and in operating losses.
Derivative financial instruments
We employ derivative financial instruments, primarily forward
foreign exchange rate contracts, to manage exposure to
fluctuations in foreign currency exchange rates. We do not hold
derivative financial instruments for trading purposes. We have
in place policies and procedures with respect to the required
approvals for the use of derivative financial instruments and
specifically tie their use to the mitigation of foreign currency
risk. When applicable, we identify relationships between our
risk management objective and the strategy for undertaking a
hedge transaction or derivative financial instrument.
Although management considers its derivative portfolio to be an
effective risk management tool, we do not apply hedge
accounting. Such derivative instruments are marked to market and
are recorded in the combined balance sheets as either an asset
or liability, with changes in fair value recognized in the
combined statements of earnings (loss) in selling and
administrative expenses. At June 30, 2006, no derivative
financial instruments were outstanding.
Cash flows arising in respect of hedging transactions are
recognized in cash flows from operating activities.
Interest rate risk
Our exposure to interest rate risk relates to interest expense
incurred by our short-term bank borrowings and inter-company
borrowings with ATS as well as interest income generated by cash
or short term investments. Such interest earning instruments
carry a degree of interest rate risk. We have not used any
derivative financial instruments to manage our interest risk
exposure. We have not been historically exposed to material
risks due to changes in interest rates on any third-party debt;
however, future interest expense or income may increase due to
changes in market interest rates or changes in debt, cash or
cash equivalent balances.
Stock Options Grant
In September 2006, we approved the grant of options to two of
our executive officers to purchase, in aggregate, 302,860 of our
common shares at an exercise price of C$5.00 per share. The
aggregate number of common shares underlying each of these
options is subject to an automatic adjustment that will increase
or
decrease the number such that it is equal to 0.6883% of our
common shares held by ATS immediately prior to the closing of
the initial public offering (the “IPO”).
The option to purchase 160,000 common shares granted to one
executive vests as to 20% on the completion of the IPO and 20%
on each anniversary date of the completion of the IPO. The
option to purchase 142,860 common shares granted to the
second executive vests as to 20% on each anniversary date of the
completion of the IPO.
In addition to the above mentioned grants, the two executives
are eligible to receive a cash payment upon any exercise of
these options if the number of shares underlying these options
exceeds 302,860 after the adjustment described above.
In the event that a change of control occurs and the employment
of the option holder is terminated or they resign, in either
case within three months from the date of such change of
control, the options granted to the two executive officers will
accelerate and become fully vested.
Furthermore, we have approved the grant to certain of our
directors, officers, employees and other key personnel,
including one of the executives referred to above, of options to
purchase an aggregate of 844,000 common shares exercisable
at the public offering price at the closing of the IPO. Included
in the 844,000 above are options to purchase
292,000 common shares that vest on the achievement of
specific defined performance objectives related to the
development of Spheral Solar and options to purchase
552,000 common shares that vest as to 20% on each
anniversary date of the completion of the IPO.
Related Party Transactions
ATS has provided strategic, operational and administrative
services to us. These services have been reflected in the
combined financial statements at their exchange amount.
Furthermore, we purchased property, plant and equipment from
ATS, primarily for the Spheral Solar segment. We also purchased
development services, raw materials and other services from ATS
or its affiliates, and these purchases have been reflected at
their exchange amount. The majority of such exchange amounts
were based on a cost-plus basis varying from 0% to 25%.
In the first quarters of fiscal 2007 and 2006, we made sales of
$10 thousand and $15 thousand, respectively, to
EPISOL s.a.r.l., a business controlled by Eric Laborde, a
consultant who serves as managing director, Europe (acting) of
Photowatt France, which have been reflected at their exchange
amount, which we believe approximates fair market value. In
fiscal 2005 and 2006, we made sales of $61 thousand and
$150 thousand, respectively, to this business.
As at June 30, 2006, included in accounts payable and
accrued liabilities are amounts due to other subsidiaries of ATS
in the amount of $1.2 million, compared to
$1.0 million for the first quarter of the prior year. These
amounts are payable on demand and do not bear interest. As at
March 31, 2006, included in accounts payable and accrued
liabilities are amounts due to other subsidiaries of ATS in the
amount of $0.2 million, compared to $1.3 million as at
March 31, 2005. These amounts are payable on demand and do
not bear interest.
Included in our net investment are inter-company balances owed
to ATS as a result of various transactions between us and ATS.
There are no terms of settlement or interest charges associated
with the account balance, other than that disclosed in the
following table. On completion of the IPO, we will repay to ATS
amounts funded by ATS during fiscal 2007 up to the date of
closing. As at June 30, 2006, the amount funded by ATS
during fiscal 2007 that would be repaid was $8.6 million,
which is expected to be outstanding as a demand loan at the time
of this offering. This amount is included as due to parent on
our combined quarterly balance sheets. Other transactions in the
table below include intercompany purchases and sales and
miscellaneous other administrative expenses incurred by ATS on
behalf of us. For more information, see
note 17 to our combined annual financial statements and
note 10 to our combined quarterly financial statements.
Three Months Ended
Fiscal Year Ended March 31,
June 30,
Transactions
2004
2005
2006
2005
2006
(U.S. dollars in thousands)
Purchase of property, plant and equipment — ATS
$
19,128
$
18,691
$
5,725
$
1,932
$
106
Purchase of raw materials and other services — ATS
240
330
343
63
486
Development services — ATS
1,482
213
292
172
—
Initial public offering expenditures — ATS
—
—
—
—
1,275
Shared corporate costs — ATS
415
589
717
122
249
Interest expense — ATS
—
—
1,686
272
963
Sale of product — other related party
—
61
150
15
10
Recently Issued Accounting Standards, Not Yet Adopted
Canadian GAAP standards
The CICA has published three new accounting standards:
“Financial Instruments — Recognition and
Measurement,”“Hedges” and “Comprehensive
Income.” These accounting standards introduce new
requirements for the recognition and measurement of financial
instruments that are designed to harmonize Canadian accounting
standards with U.S. standards. These accounting standards
are to be applied no later than the fiscal years beginning on or
after October 1, 2006. Management is currently evaluating
the potential implications of these new standards on our
combined financial statements.
U.S. GAAP standards
In June 2006, the FASB issued interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,”
(“FIN 48”). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB
Statement 109. The interpretation is effective for fiscal
years beginning after December 15, 2006, with earlier
adoption encouraged. We are currently evaluating the impact of
adoption on our combined financial statements.
In November 2004, the FASB issued Statement of Financial
Standards No. 151, “Inventory Costs, and amendment of
ARB No. 43, Chapter 4,”
(“SFAS 151”). SFAS 151 clarifies that
abnormal amounts of idle facility expense, freight and handling
costs, and wasted materials should be recognized as current
period charges. This standard is effective for fiscal years
beginning after June 15, 2005. The adoption of this
standard did not have a significant impact on the combined
quarterly financial statements.
In September, 2006, the FASB issued Statement of Financial
Standard No. 157, “Fair Value Measurement”
(“SFAS 157”). SFAS 157 provides guidance for
using fair value to measure assets and liabilities. The
Statement also expands disclosures about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair
value measurement on earnings. The Statement is effective for
fiscal years beginning on or after January 1, 2008. We are
currently evaluating the impact of the adoption on the combined
financial statements.
We design, manufacture and sell photovoltaic products, commonly
referred to as solar cells and modules. Solar cells and modules
provide clean, renewable energy by converting sunlight into
electricity through a process known as the photovoltaic effect.
We operate through two segments, Photowatt International, our
core business that is based on a wafer technology, and Spheral
Solar, a development project that is based on a spheral
technology using thousands of tiny silicon spheres instead of
silicon wafers.
Photowatt International designs, manufactures and sells solar
modules and installation kits, and provides solar power system
design and other value-added services, principally in Western
Europe. Photowatt International also manufactures wafers and
solar cells, primarily for use in manufacturing its modules and
for sale to third parties on an opportunistic basis. Most of
Photowatt International’s products are manufactured in our
Photowatt France facility outside of Lyon, France. Photowatt
USA, our facility in Albuquerque, New Mexico, performs certain
module assembly operations for Photowatt International. Solar
modules manufactured by Photowatt International are used by
businesses, institutions and homeowners to generate electric
power. Photowatt International sells its products under the
Photowatt and Matrix brands to a network of independent solar
power systems distributors and installers. Photowatt
International has been developing and selling photovoltaic
products since 1979. Products manufactured by Photowatt
International accounted for all of our combined revenue for our
fiscal 2006 and for the first quarter of fiscal 2007.
Photowatt International
Overview. Photowatt International designs, manufactures
and sells solar modules and installation kits, and provides
solar power system design and other value-added services,
principally in Western Europe. Photowatt International also
manufactures wafers and solar cells, primarily for use in
manufacturing its modules and for sale to third parties on an
opportunistic basis. Most of Photowatt International’s
products are manufactured in our facility outside of Lyon,
France. Our facility in Albuquerque, New Mexico performs certain
module assembly operations for Photowatt International.
The first step in Photowatt International’s manufacturing
process is the growth of ingots from silicon using specialized
furnaces. The ingots are then cut into bricks, and the bricks
are sawed into wafers using an abrasive solution and specialized
wire saws. Next, the wafers are processed into solar cells,
which are connected in series to form a solar module. As of
March 31, 2006, Photowatt International had annual ingot,
wafer, cell and module production capacity of approximately
31 MW, 32 MW, 40 MW and 54 MW, respectively.
As a result, Photowatt International purchases some ingots,
wafers and cells from third parties, when available, in order to
utilize its additional wafer, cell and module production
capacity. In May 2006, Photowatt International announced the
first phase of our capacity expansion plan, which includes the
expansion of our ingot, wafer, cell and module manufacturing
capacity to 60 MW of integrated manufacturing capacity by
March 2007, at an expected cost of
€25 million,
of which at July 31, 2006, we had spent
€5.1 million.
Solar modules manufactured by Photowatt International are used
by businesses, institutions and homeowners to generate electric
power. Photowatt International sells its products predominantly
in Western Europe under the Photowatt brand to a network of
independent solar power systems distributors and installers.
Photowatt International’s revenue for the fiscal year ended
March 31, 2006 was $121.9 million and 49%, 17%, 6%,
14% and 14% of such revenue was generated in Germany, Spain,
Italy, the United States and the rest of the world, respectively.
Competitive strengths. We believe that Photowatt
International has the following competitive strengths:
•
Integrated manufacturing capabilities. We participate in
each of the ingot, wafer, cell and module stages of the solar
module production process. We believe that being an integrated
manufacturer gives us several advantages relative to many of our
competitors, including:
—
the ability to capture a greater portion of the profits
available by participating across a significant portion of the
solar value chain;
—
reduced dependence on third-party suppliers for ingots, wafers
and cells;
—
enhanced research and development capabilities to increase cell
efficiency levels;
—
the ability to process a wide variety of silicon
feedstock; and
—
improved process development capabilities by allowing us to
continually evaluate the impact of changes throughout the
production process.
•
Proprietary silicon processing technologies. Polysilicon,
a specially processed form of silicon, is the primary raw
material used to make crystalline solar cells and currently
there is not enough available to meet industry demand. The
supply shortage has led to sharply higher prices for polysilicon
and has adversely impacted many solar cell manufacturers’
sales growth and profitability. While all forms of silicon are
in short supply, we have developed processes to make solar cells
from lower grades of silicon that we believe we can acquire more
easily than polysilicon, including:
—
Processing of refined metallurgical silicon. We are
currently producing solar cells using refined metallurgical
silicon and expect that by the fourth quarter of fiscal 2007, in
excess of 25% of the solar cells we make will be produced using
refined metallurgical silicon. While all forms of silicon are in
short supply, we believe we can acquire refined metallurgical
silicon more easily than polysilicon. Currently, solar cells
that we make using refined metallurgical silicon have lower
efficiencies than solar cells we make using polysilicon.
However, we believe the capability to make solar cells from
refined metallurgical silicon will allow us to meet customer
demand and mitigate the effects on our business of the current
polysilicon shortage. We believe that approximately 90% of our
total silicon requirement during fiscal 2008 could be met with
refined metallurgical silicon. We are also currently evaluating
a further refined type of metallurgical silicon that we believe
has the potential to yield solar cells that have efficiencies
consistent with what we currently obtain using polysilicon. We
refer to this material as enhanced metallurgical silicon.
—
Processing of polysilicon powder and fines. Polysilicon
powder and fines are by-products of the polysilicon production
process that many manufacturers have limited use for due to
their high levels of impurities. Spheral Solar has developed a
proprietary process called OFP technology to convert polysilicon
powder and fines into polysilicon clusters that can be used,
together with conventional polysilicon, by Photowatt
International to make solar cells. We purchase dry polysilicon
powder and fines from polysilicon manufacturers at significantly
lower prices than we purchase polysilicon on the spot market.
Purchasing and converting polysilicon powder and fines is less
costly for us than purchasing polysilicon in the current market
environment, and using polysilicon powder and fines in
combination with conventional polysilicon does not decrease the
efficiency of our cells. We have begun selling solar cells that
include silicon derived from polysilicon clusters made using
this OFP technology. We believe that polysilicon clusters
produced by us from powder and fines could be used to satisfy
approximately 20% of our fiscal 2007 ingot production capacity.
•
Advanced wafer sawing capabilities. Wafers used in solar
cells are cut from polysilicon bricks using specialized wire
saws. In general, thinner wafers result in lower production
costs because more wafers can be produced from each brick.
However, very thin wafers are difficult to process because they
are more brittle, and substantial technical expertise is
required to develop processes that ensure acceptable yields.
Wire thickness is also important because it determines how much
silicon is lost during the cutting process. Photowatt
International was a pioneer of the wafer sawing process used by
many
wafer manufacturers today and was one of the first companies to
develop saws using wire less than 200 microns thick. Today,
Photowatt International produces wafers with thicknesses ranging
from 180 to 220 microns using a wire 160 microns thick.
Photowatt International used approximately 10 grams of
polysilicon per watt of power in our solar cells in 2005, which
compares to an average of approximately 12 grams for the
industry in 2005 as reported by Solarbuzz. Our current usage is
approximately 9 grams per watt, which we believe remains below
the current industry average.
•
Established market positions and relationships with key
distributors and installers. We have successfully sold solar
products in Europe for over 20 years. We enjoy established
market positions in several Western European countries that have
well developed and growing solar markets, including Germany,
which is currently the world’s largest market for solar
power. We are also developing a presence in emerging growth
markets for solar power in Europe, including Spain, Italy and
Greece, as well as in the United States and Canada. We believe
we have well-established relationships with key distributors and
installers and that we are differentiated from our competitors
by our timely delivery as a result of our vertical integration
capabilities, our technical expertise and our reputation for
quality solar modules with competitive price and efficiency
levels.
Spheral Solar
Overview. Spheral Solar is developing a technology for a
light weight, flexible crystalline solar module designed to
compete with both conventional crystalline and thin film
technologies. We acquired certain assets used in the development
of our Spheral Solar technology in 1997. We commenced further
development of our Spheral Solar technology in late 2001. Our
Spheral Solar technology incorporates thousands of tiny silicon
spheres, bonded between thin, flexible aluminum foil substrates
to form solar cells. We believe that our Spheral Solar
technology, if successfully developed, would have advantages
over conventional crystalline solar cells, including better
aesthetics, greater durability, less use of silicon, lighter
weight, multiple available colors, more applications and
physical flexibility, a property historically available only in
certain thin film solar cells.
We believe that our Spheral Solar technology has potential
applications in residential and commercial roofing, integrated
building products and consumer/recreational products where
aesthetics, physical flexibility and low weight are critical
product characteristics. We believe that our Spheral Solar
technology is particularly well suited for residential roofing
applications where product appearance is a primary driver of
purchasing decisions. Spheral Solar has a product development
relationship with Elk Corporation, one of the largest North
American manufacturers of roofing shingles, to develop
residential solar roofing products based on our Spheral Solar
technology.
Spheral Solar continues to work to develop our Spheral Solar
technology with a goal of resolving manufacturing process issues
required to achieve the yield efficiencies and throughput
necessary for the commercialization of our Spheral Solar
technology. We still need to commit significant resources to
development and process engineering in an effort to commercially
manufacture products using our Spheral Solar technology. Our
target efficiency for our Spheral Solar technology at
commercialization is approximately 11%. Although certain of our
Spheral Solar prototypes have reached approximately 10%
efficiency in a prototype laboratory setting, more recently our
Spheral Solar cells have demonstrated efficiency levels in the
range of 5 to 6% on our current equipment. Our development
process for our Spheral Solar technology has been based on
establishing milestones for achievement of certain technical
objectives and resolution of process issues, which we review on
an ongoing basis. The technological and commercialization
challenges associated with the development of our Spheral Solar
technology are substantial. Our development process for our
Spheral Solar technology has targeted the achievement of certain
technical objectives and resolution of process issues, which we
review on an ongoing basis. Our next review of our Spheral Solar
technology is scheduled for January 2007 following the
completion of the current phase of analysis that includes the
results of a technical report from our third-party technical
consultant on certain aspects of the manufacturing processes. We
may decide to discontinue development of the technology
following this review or at any time. Spheral Solar’s
development facility is located in Cambridge,
Ontario, Canada.
Competitive strengths. If we are able to successfully
develop and commercialize our Spheral Solar technology, we
believe that it would have the following competitive strengths
relative to conventional crystalline solar products:
•
Physical flexibility and more applications. Spheral Solar
technology would allow for flexible solar cells and modules that
can be integrated into curved surfaces where conventional
crystalline solar cells cannot be used.
•
Greater durability. We believe modules using Spheral
Solar technology would be more durable than conventional,
glass-based solar modules. For example, they could be rolled for
shipping with less risk of damaging the product.
•
Better aesthetics. Unlike conventional crystalline solar
cells, we believe that Spheral Solar modules would not require a
metal frame and could be integrated directly with roofing
materials to create a seamless appearance. Through our product
development relationship with Elk Corporation, we are developing
a solar shingle that has the general appearance of traditional
asphalt roofing shingles. Spheral Solar technology cells could
also be made in a wide range of dark colors to suit particular
customer preferences without materially impacting their
efficiency.
•
Less use of silicon. We believe that our Spheral Solar
technology cells would require less polysilicon per watt of
power than conventional crystalline solar cells. In addition, we
expect that our Spheral Solar technology could use various forms
of silicon, including granules, fines and powder, as well as
silicon with higher impurity levels than can be used in
conventional crystalline solar cells.
Our Business Strategy
Our objective is to be a market leader in the development and
manufacturing of solar products. We intend to achieve this
objective through the following strategies:
•
Expand integrated annual manufacturing capacity to
approximately 390 MW by the end of calendar 2011.
Demand for our products is currently greater than our capacity
to produce them. We intend to capitalize on the demand for our
products by increasing our annual integrated manufacturing
capacity to approximately 390 MW by the end of calendar
2011. If we are able to successfully complete the development
and process engineering required to commercialize our Spheral
Solar technology, we expect that 140 MW of this aggregate
manufacturing capacity will relate to Spheral Solar technology.
We intend to implement our Photowatt International capacity
expansion strategy in three phases:
—
In May 2006, we announced the first phase of our capacity
expansion plan, which includes the expansion of Photowatt
International’s annual ingot, wafer, cell and module
manufacturing capacity from approximately 31 MW,
32 MW, 40 MW and 54 MW, respectively, to
approximately 60 MW of integrated manufacturing capacity by
March 2007.
—
The second phase of our capacity expansion plan provides for
construction of a second facility near Lyon, France on land
immediately adjacent to our existing facility and the
construction of a module assembly facility in Eastern Europe or
another low-cost region that will increase our annual integrated
manufacturing capacity to 100 MW. We plan to begin this
phase of our expansion in calendar 2006 and complete it in
calendar 2008. In addition, we also intend to increase our
annual integrated manufacturing capacity in calendar 2008 by
50 MW. In connection with this, we are considering a joint
venture with a mandate to develop a new manufacturing facility
for the production of high efficiency solar cells and
constructing module assembly facilities in low-cost regions.
—
The third phase of our expansion plan provides for an additional
100 MW of annual integrated manufacturing capacity in
calendar through 2011 either through the expansion of existing
facilities or construction of new facilities.
If we are successful in completing the development and process
engineering required to commercialize our Spheral Solar
technology, we plan to expand Spheral Solar’s existing
production line to an annual capacity of 20 MW and build a
second line to add another 20 MW of annual production
capacity. We would also build a 100 MW Spheral Solar
technology facility by the end of 2010, which would bring our
annual capacity for Spheral Solar technology products to
140 MW.
We plan to use proceeds from this offering to finance the first
and second phases of our Photowatt International capacity
expansion plan and the development and process engineering for
our Spheral Solar technology. We will need to raise additional
capital to fund the third phase of our Photowatt International
capacity expansion plan and the expansion of our Spheral Solar
technology manufacturing capacity, assuming we successfully
complete our development and process engineering. If we decide
not to proceed with the development of our Spheral Solar
technology, we would apply the net proceeds of this offering and
future capital we would have used to develop the Spheral Solar
technology to Photowatt International for 140 MW of
additional capacity expansion, the procurement of silicon supply
contracts and investments that will enhance our manufacturing,
silicon supply or research and development capabilities.
•
Establish reliable, long-term silicon supply. The
increase in demand for solar modules has led to an industry-wide
silicon shortage. Continued growth in our business requires
access to polysilicon or polysilicon alternatives such as
refined metallurgical silicon. Our strategy is to establish a
long-term supply of polysilicon and polysilicon alternatives
from a variety of sources to support our continued growth. We
plan to:
—
enter into long term supply agreements for refined metallurgical
silicon and polysilicon, including polysilicon ingots and wafers;
—
secure a supply of polysilicon powder and fines through
agreements with companies that produce these by-products, and
use our OFP technology to process the powder and fines into
polysilicon feedstock for use in our Photowatt International
operations; we also intend to explore the possibility of
licensing this technology to third-parties in exchange for
long-term polysilicon supply agreements; and
—
purchase silicon, including polysilicon ingots and wafers, on
the spot market, to the extent available and subject to
appropriate pricing.
We believe that this approach will enable us to establish a
long-term silicon supply sufficient to support the planned
expansion of our manufacturing capacity.
•
Continue to invest in research and development to improve
cell efficiency. We expect to continue to devote substantial
resources to our research and development efforts aimed at
increasing the efficiency of our solar cells. We believe that
higher efficiencies will enable us to produce cells that use
less silicon per watt and reduce the cost of the products we
manufacture and sell. In addition to our own research and
development activities, we may engage in collaborative research
and development activities focusing on increasing cell
efficiency with leading industry participants and other research
organizations. We expect to finance our research and development
expenditures with internally generated cash flows, funding from
government organizations and a portion of the proceeds from this
offering.
•
Commercialize our Spheral Solartechnology. We are
working on development and process engineering in an effort to
commercialize our Spheral Solar technology. We expect to use the
technical expertise of internal resources as well as external
consultants to assist us in commercializing Spheral Solar
technology. For example, we have engaged SRI International,
formerly known as Stanford Research Institute, a leading
independent contract research institute, to evaluate certain
process problems we are experiencing in our Spheral Solar
business. We believe that if our Spheral Solar technology can be
made commercially viable, there are significant market
opportunities for Spheral Solar products, including commercial
roofing membranes and residential applications, such as solar
shingles, as well as consumer/recreational applications, such as
boating or recreational vehicles, or
backpacking, where aesthetics, physical flexibility and low
weight are critical product characteristics. The technological
and commercialization challenges associated with the development
of our Spheral Solar technology are substantial. Our development
process for our Spheral Solar technology has targeted the
achievement of certain technical objectives and resolution of
process issues, which we review on an ongoing basis. Our next
review of our Spheral Solar technology is scheduled for January
2007 following the completion of the current phase of analysis
that includes the results of a technical report from our
third-party technical consultant on certain aspects of the
manufacturing processes. We may decide to discontinue
development of the technology following this review or at any
time.
Photowatt International Products and Services
Our principal solar products are our cells, modules and solar
installation kits. We also offer solar design and other
value-added services. In fiscal 2006, our cells, modules and
other value added services represented 8%, 90%, and 2% of
our revenue, respectively. In fiscal 2006, we began to sell
additional components of solar power systems in the form of
solar installation kits and to provide solar design and project
management services and contracting for installation services.
We expect that these products and services will account for an
increasing proportion of our revenue in the future.
Solar cells
Our Photowatt International segment manufactures high-output
mono- and multi-crystalline solar cells. Mono-crystalline cells
are more expensive than multi-crystalline cells but deliver
approximately 10% more power over the same surface area.
Mono-crystalline solar cells represented 21% of the solar cells
we produced in 2006, and we expect to produce a de minimis
amount of mono-crystalline solar cells in the future, depending
on the availability of mono-crystalline ingots and wafers. The
quality and reliability of our cells are validated at each stage
of production. The cells are primarily used in our own modules,
although from time to time we have sold cells when opportunities
have presented themselves, and we may do so in the future. We
manufacture solar cells in three configurations: 4 inch
(101.25 mm by 101.25 mm), 5 inch (125.50 mm
by 125.50 mm) and 6 inch (150 mm by 150 mm).
Solar modules
A solar module is an assembly of solar cells that have been
electrically interconnected and laminated in a durable and
weather-proof package. Our Photowatt International segment
manufactures a wide range of modules, from 12 W to
230 W outputs, using primarily multi-crystalline cells.
Solar installation kits
Our solar installation kits are turnkey systems that include
modules, frames, inverters and other components required for
easy installation. We acquire the components other than modules
from third-party suppliers. These systems are specifically
designed to operate on pitched and flat roofs and have gained
rapid acceptance due to their quality and efficiency. Our solar
installation kits are available in three package sizes:
1600 Wp, 3200 Wp and 4800 Wp.
Solar power system design and other value-added
services
A solar power system consists of one or more solar modules that
are physically mounted and electrically connected, with system
components such as batteries and power electronics, to produce
and reserve electricity. Solar design services is one of our
relatively new offerings. There are three main applications for
our solar design services: industrial stand-alone systems,
community and individual stand-alone systems and grid connecting
systems. Grid connecting systems enable consumers to connect and
sell electricity to the electrical grid.
We also offer project management services and contracting for
solar power system installation, particularly in markets where
our customers do not install our products themselves.
The raw materials required in our manufacturing process include
polysilicon and other silicon feedstock, tempered glass, plastic
films, anti-reflective and aluminum coatings, metal frames,
connecting systems and aluminum foil. Historically, all of our
silicon feedstock has been purchased through spot market
purchases. The other raw materials are obtained from major
materials manufacturers in the industry.
Our production process is composed of four stages: ingot
production, wafer sawing, solar cell production and solar module
assembly.
Ingot production
Our manufacturing process begins by melting silicon in a
crucible at 1500 degrees Celsius and casting it into a
multi-crystalline ingot. Our approach for this casting process
was developed more than 10 years ago and was adapted for
large block HEM (heat exchanger method) furnaces approximately
eight years ago. The growth of large columnar grains in the
crucible is critical for device performance, and we produce
quality crystals as a result of our many years of experience.
As the industry continues to grow, supplies of solar and
semiconductor grade polysilicon have become limited. New silicon
products formed by refining molten metallurgical silicon into
solar quality feedstock have recently shown success in our
casting process, allowing for more flexibility in feedstock
selection. We have worked with samples from most of the groups
developing these refining approaches and have successfully
modified our crystal growth and cell processes to attempt to
minimize the impact on cell performance and silicon utilization.
We believe the flexibility of our wafer manufacturing process
allows us to optimize the mix of feedstock based on price and
performance.
Wafer sawing
In the next stage of the production process, the ingot is cut
into bricks and the slab pieces are returned to feedstock. The
bricks are sliced into wafers using a specialized wire saw from
which we produce wafers in various sizes of up to six inches and
as thin as 180 to 220 microns. We intend to continue to reduce
wafer thickness and wire diameter for improved silicon
utilization.
Solar cell production
During the production process, the wafers enter our solar cell
production line. A solar cell is a device made from a silicon
wafer that converts sunlight into electricity by a process known
as the photovoltaic effect. Impurities are selectively
incorporated into the solar cell to create regions that are
negatively or positively electrically charged, forming a p-n
junction. Sunlight enters the optically textured,
anti-reflective coated surface of the solar cell (for minimum
back reflection) and releases electrons at the charged region.
The aluminum back surface field reflects back any light which
makes it past the charged region, allowing for a second
opportunity to generate electrons. The front of the solar cell
where sunlight enters attracts these electrons and funnels them
to a metal grid that collects the current and conducts it to
external wires. The circuit is completed by a contact on the
back of the solar cell.
Our solar cells are electrically tested and sorted by numerous
parameters for proper matching in modules, ensuring maximum
module performance and reliability. Our average solar cell
efficiency of approximately 15% is competitive in the industry,
and we expect our ongoing research and development effort to
allow continued improvements in solar cell efficiency. When
refined metallurgical silicon is used, it results in lower solar
cell efficiencies requiring larger solar modules to achieve the
same performance as solar modules that use solar cells made with
polysilicon, but this can be offset by the fact that we believe
we can acquire refined metallurgical silicon more easily than
polysilicon.
Solar module assembly
In the fourth and final process stage, the solar cells are
interconnected to form solar modules. The collective voltage of
these solar modules is higher than that of the individual
component cells. Our trend
towards producing larger wafers has allowed us to improve our
product line with the addition of several large area modules in
the 150 W to 230 W size range. This allows us to minimize
materials and labor content in module production and system
installation. We believe our high throughput automated stringing
lines increase reliability of connections and improve yields.
All of the solar module materials, including the plastic film
back-skin and EVA (ethylene vinyl acetate) encapsulant, are
obtained from major materials manufacturers in the industry.
With many years of testing and field use, these materials ensure
greatest environmental stability of the glass laminates
throughout their life.
Key Partnerships
Collaborative research & development
(CEA-LETI)
The CEA’s Laboratory of Microelectronics and Technology for
Information, or LETI, is one of the largest applied research
laboratories in electronics in Europe. Its mission is to help
companies strengthen their competitive position through
technological innovation and transfer of its technical knowledge
to industry. CEA establishes and coordinates joint research
laboratories in partnership with industry participants. We and a
large French company are negotiating a partnership with CEA for
the establishment of a laboratory and production development
facility that will collaborate closely with CEA, pursuing
research into solar technologies and focusing on the development
of high efficiency solar cells.
Elk Corporation
We continue to work to develop and commercialize our Spheral
Solar technology, and our initial focus upon commercialization
will be building integrated solar cells and solar modules for
roofs, facades and building structures. In fiscal 2004, we began
a product development relationship and commenced development
work with Elk Corporation, one of the largest North American
manufacturers of roofing shingles. Our Spheral Solar technology
is not yet commercialized and we expect the product development
cycle for building integrated photovoltaic, or BIPV, products to
be longer than for other solar cells and solar modules because
of regulatory approval requirements, such as building codes and
other similar health-and-safety requirements, but we believe
that if BIPV products are commercialized and gain market
acceptance, these products will allow us to penetrate new
markets and provide us with important competitive advantages.
Our Silicon Supply
Polysilicon is the primary raw material used in the production
of our solar cells and modules. Silicon is currently in short
supply and its price has increased significantly over the past
18 months. Without an adequate supply of polysilicon or an
alternative, such as refined metallurgical silicon, which we
have developed the capacity to process, we are not able to
manufacture our products. As of June 30, 2006, we had
approximately 287 metric tonnes of polysilicon, including
polysilicon fines and powder, and 23 metric tonnes of
refined metallurgical silicon in inventory. At August 29,2006, we had commitments from suppliers to deliver an additional
40 metric tonnes of polysilicon and 130 metric tonnes
of refined metallurgical silicon during the remainder of fiscal
2007. At August 29, 2006, we also had commitments from
suppliers to deliver 48 metric tonnes of polysilicon and
120 metric tonnes of refined metallurgical silicon during
fiscal 2008. We believe that our existing inventory and supplier
commitments are sufficient to satisfy our planned capacity until
the end of fiscal 2007. We intend to meet our silicon
requirements in fiscal 2008 through a combination of existing
commitments, purchases of polysilicon on an opportunistic basis,
purchases of refined metallurgical silicon and purchases of
polysilicon fines and powders that we can upgrade into
polysilicon clusters that can be used in combination with
conventional polysilicon to make solar cells. Based on
contractual commitments for the supply of refined metallurgical
silicon that we have entered into or expect to enter into, we
believe that up to 90% of our total silicon requirement for
fiscal 2008 could be met with refined metallurgical silicon.
As part of our relationship with CEA, we recently entered into
an agreement with CEA and two other partners for the Photosil
project. Photosil offers another technology for further
enhancing the quality of metallurgical silicon. The Photosil
project’s primary objective is to develop a commercial
process for the production of solar grade silicon derived from
metallurgical silicon with a capacity of 200 tonnes per
year. Pursuant to the agreement, our role in the Photosil
project is to contribute certain expertise and non-financial
resources in order to improve and enhance the silicon material
developed during the Photosil development phase. Under the
contract, we are to be supplied at predetermined prices with at
least 80% of the volume of solar grade silicon or ingots
produced by the Photosil project through to April 20, 2008,
at which point the output would be supplied to a future joint
venture, in which we are currently considering participating. We
expect initial shipments from the Photosil project to commence
in April 2007, however given that the Photosil plant is
currently under construction and production has not yet begun,
there is a risk that these silicon shipments may be delayed.
This relationship is consistent with our silicon supply strategy
and is expected to augment our long-term sources of silicon
supply.
Deutsche Solar AG Wafer
Supply Agreement
In October 2006, we entered into a 10-year silicon supply
contract with Deutsche Solar AG, Freiberg for the supply of
solar-grade, multi-crystalline polysilicon wafers beginning in
the first half of calendar 2009. Deutsche Solar is a subsidiary
of SolarWorld AG. Under the agreement, Deutsche Solar is obliged
to deliver, and we are obliged to accept, approximately four
million polysilicon wafers per annum. These wafers will be
processed into solar cells and modules by us and are estimated
to support the manufacture of approximately 15 MW of solar
power products per annum. Advance payments to be made under the
contract will be applied against the price of silicon wafers
received during the life of the commitment. The price will be
adjusted at the beginning of each calendar year based upon an
agreed formula.
Customers, Sales and Marketing
Customers
We primarily sell our solar cells and solar modules to solar
product distributors and installers. In fiscal 2006, our 10 and
three largest customers represented approximately 79% and 46% of
our revenue, respectively. In fiscal 2006, sales in Germany
represented approximately 49% of our total revenue. We intend to
increase sales in Spain, Italy the United States and Canada to
geographically diversify our sales and reduce our customer
concentration levels.
Sales and marketing
End-users buy our solar products primarily from our established
network of distributors and installers in Europe. We currently
work with a relatively small number of distributors and
installers in Germany, Italy and Spain that have particular
experience in their geographic market. We are actively working
to expand our distribution channels by selectively adding
distributors, and we market to distributors and installers by
advertising in industry publications and participating in trade
conventions and conferences. We believe that our relationships
with our distributors enable us to:
•
benefit from the marketing and distribution and after-sales
service capabilities of other companies;
•
explore opportunities for additional product development;
•
enter new geographic markets more easily, quickly and
cost-effectively; and
•
attract additional end-users of our products.
As well, by selling primarily to distributors and installers and
not competing with them for sales to end-users in their markets,
we believe we create loyalty from these distributor and
installer customers. We sell to
our distributor and installer customers through our team of four
salespeople in Europe and intend to use the same network to sell
Spheral Solar’s products to our existing and new
distributor and installer customers if we are able to
commercialize these products.
We differentiate ourselves from our competitors on the basis of
our timely delivery as a result of our vertical integration
capabilities, our technical expertise and our reputation for
quality solar modules with competitive price and efficiency
levels.
In the United States, large distributors have not been
established, so we market primarily to small installers and
end-users. We sell to these installers through two salespeople
at our operations in the United States.
Research and Development
We engage in research and development to develop new products
and improve our manufacturing processes, with a focus on further
increasing the electrical conversion efficiency of our solar
cells and on the continuous reduction of production costs. We
employ 20 personnel engaged in research and development
activities at our operations in France. Photowatt International
has several projects underway that are dedicated to improving
the cell efficiency and in process improvements that are geared
at cost reduction.
We continue to invest in our Spheral Solar technology and are
working to develop it for commercial use. The initial
development work on Spheral Solar technology was undertaken by
Texas Instruments beginning in 1980. ATS became interested in
the technology in the early 1990s when it built some of the
equipment for the Texas Instruments Spheral Solar pilot line. In
1995, Texas Instruments sold the technology to a public utility
company, which in 1997 negotiated the sale of the Spheral Solar
technology to ATS. In 2001, with the increased interest in
renewable energy, ATS began further developing the technology
and established a Spheral Solar facility in Cambridge, Ontario,
Canada in 2004. The principal advantages of our Spheral Solar
technology, if developed and commercialized, compared with
conventional crystalline solar cells, are expected to include
more applications due to lower weight as well as physical
flexibility, a property historically available only in thin film
solar cells. As well, we expect that our Spheral Solar
technology will have greater durability, better aesthetics and
less use of silicon compared with conventional crystalline solar
cells.
Our research and development expenses were approximately
$1.2 million, $0.7 million and $9.3 million in
fiscal 2004, 2005 and 2006, respectively, with approximately
nil, nil and $8.6 million, respectively, attributable
to our Spheral Solar technology. Until October 1, 2005, our
operating costs relating to developing our Spheral Solar
technology were capitalized as deferred development costs. On
March 31, 2006, we determined that the carrying value of
the Spheral Solar technology development costs was in excess of
the estimated undiscounted future cash flows from that
technology, and the associated asset was written down. For more
information, see “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Results of Operations — Results of operations for
fiscal year 2006 compared with fiscal year 2005 —
Earnings (loss) from operations.”
Spheral Solar technology overview
Spheral Solar is developing a technology for a light weight,
flexible crystalline solar module designed to compete with both
conventional crystalline and thin film technologies. Our Spheral
Solar technology incorporates thousands of tiny silicon spheres,
bonded between thin, flexible aluminum foil substrates to form
solar cells. The manufacturing process can be broken into four
main areas: sphere fabrication, sphere junction formation and
finishing, cell fabrication and module assembly. The
technological and commercialization challenges associated with
the development of our Spheral Solar technology are substantial.
Our development process for our Spheral Solar technology has
targeted the achievement of certain technical objectives and
resolution of process issues, which we review on an ongoing
basis. Our next review of our Spheral Solar technology is
scheduled for January 2007 following the completion of the
current phase of analysis that includes the results of a
technical report from our third-party technical consultant on
certain aspects of the manufacturing processes. We may decide to
discontinue development of the technology following this review
or at any time.
Our sphere fabrication process sequence accomplishes two
purposes simultaneously. First, it refines the silicon, if
necessary, and second, it forms spherical shapes of the proper
diameter. We believe we are able to use silicon in various
forms, including granules, fines and powder, and silicon with
higher impurity levels than can be tolerated by conventional
solar cell and solar module production methods.
Sphere junction formation and finishing
After attaining the required purity, shape and size, the spheres
go through a sequence of standard semiconductor processes
designed to achieve a high-quality p-n junction.
Cell fabrication
Our cell fabrication process is a combination of mechanical and
chemical processes. We bond the spheres to two pieces of
aluminum foil. The front foil defines the size and shape of the
cell and is the electrical (negative) contact to the
negative layer. The back foil functions solely as the electrical
(positive) contact to the positive core of the spheres.
Module assembly
Our module assembly process is unique for crystalline silicon
devices in that it requires no additional materials to
interconnect the cell. Only silicon and aluminum are present in
the laminate. The cell’s front and back foils provide for
interconnections by being ultrasonically welded together.
Aluminum straps carry current out of the laminate. This
technique eliminates the need for interconnecting straps and
solder, both of which add assembly complexity and potential
reliability problems.
Prototype Spheral Solarproducts
We are currently developing prototype Spheral Solar products,
focusing first on building-integrated photovoltaic, or BIPV,
products. The principal advantages of our prototype products are
that they are significantly lighter than conventional solar
modules and are flexible, durable and aesthetically appealing.
Potential applications for Spheral Solar technology, if
commercialized, include commercial roofing membranes and
residential applications, such as solar shingles, as well as
consumer/recreational applications, such as boating or
recreational vehicles, or backpacking, where aesthetics,
physical flexibility and low weight are critical product
characteristics.
In fiscal 2004, we began a product development relationship and
commenced development work with Elk Corporation, one of the
largest North American manufacturers of roofing shingles, on a
BIPV product. We are also developing
SuperFlextm,
a lightweight, durable and flexible portable power module,
large, glass-free modules and custom cells and laminates for
integration into original equipment manufacturer applications.
License and Royalty Agreements
Upon the acquisition of our Spheral Solar technology in 1997, we
assumed the original license obligation from the vendor on the
use of Spheral Solar technology. The license fee is 2% of
certain Spheral Solar net revenues, calculated annually. This
obligation extends for a 17 year period, expiring on
September 28, 2017, and to date, no license fees have been
paid under this obligation.
As consideration for receiving C$29.5 million of funding
for the development of the Spheral Solar technology from
Technology Partnerships Canada, an agency of the Canadian
government, we agreed to pay royalties of 1.8% on our future
revenues resulting from the sale, licensing or other transfer of
Spheral Solar products and related services. These royalties
commence in the first year that such future annual revenues
exceed C$20.0 million and continue for a total of
10 years. If the cumulative royalties exceed C$84.5 million
during this 10 year period, the royalty rate declines to
0.35% for the remaining term. If at the end of 10 years the
cumulative royalties have not reached C$84.5 million, the
royalty payment term is extended for the lesser of a further
five years or once the cumulative royalties of
C$84.5 million have been reached. To date, no royalties
have been accrued or paid under this obligation.
Global electricity usage is expected to increase from
14.8 trillion kWh in 2003 to 27.1 trillion kWh by
2025, according to the U.S. Department of Energy’s
Internal Energy Outlook 2005. Approximately 65.7% of the
world’s electricity is currently produced with fossil
fuels. As demand for electricity continues to increase, the
electric power industry is facing several challenges:
•
Fossil fuel supply constraints. Limited supply and
escalating consumption of coal, oil, and natural gas continue to
drive up wholesale electricity prices, resulting in higher
electricity costs for consumers.
•
Infrastructure constraints. In many parts of the world,
electricity demand exceeds the capacity of existing electricity
generation, transmission and distribution infrastructure.
•
Desire for energy security. As political and economic
instability in key oil and natural gas producing regions has
increased, governments are increasingly focused on developing
reliable and secure energy sources.
•
Environmental concerns. Long-term use of fossil fuels is
associated with a range of environmental issues including global
warming, air pollution and water pollution, the increased
prevalence of which is driving increased environmental awareness.
Industry and governments are considering alternatives to
traditional fossil fuels to address these challenges, including
renewable energy sources and technologies.
Renewable energy industry
The renewable energy industry includes solar, hydroelectric and
wind power generation, and to a lesser extent biomass and
geothermal power generation. As opposed to fossil fuels, which
draw on finite resources, renewable energy is generally
unlimited in its availability. Hydroelectric power generation,
the use of flowing water to generate electricity, is currently
the largest source of renewable energy as measured by
electricity generation. However, the potential for additional
hydroelectric capacity in the developed world is limited due to
the lack of development opportunities and environmental concerns
over the creation of additional large reservoirs that flood
agricultural land and human and animal habitats. Wind power
generation, the use of wind turbines to harness and convert
kinetic energy into electricity, is one of the fastest growing
sources of renewable energy. Today, large-scale wind power is
becoming a cost-competitive alternative to wholesale natural gas
and coal-fired power in locations with high average wind speeds
and sufficient space for large wind plants. However, space
constraints, wind speed availability and zoning restrictions in
suburban and urban regions limit the potential of wind power
systems. Additionally, peak wind availability generally does not
coincide with peak seasonal or time of day electricity use.
Due to the constraints on other sources of renewable energy,
solar power has emerged as one of the fastest growing renewable
energy sources. Solar power has several benefits when compared
to other renewable energy technologies, including:
•
No fuel price volatility. Unlike fossil and nuclear
fuels, solar energy has no fuel price volatility. Although there
is variability in the amount and timing of sunlight over the
day, season and year, a properly sized and configured system can
be designed for high reliability while providing a long term,
fixed price electricity supply.
•
High reliability. With no moving parts or regular
required maintenance, solar power is one of the most reliable
forms of electricity generation.
Environmentally benign. Solar cells generate electricity
without air or water emissions, noise, vibration, habitat impact
or waste generation.
•
Easily located with the end-user. Unlike other renewable
resources such as hydroelectric and wind power, solar power can
be utilized anywhere there is sunlight and directly where the
power will be used. As a result, solar power limits the expense
of and energy losses associated with transmission and
distribution from large-scale electric plants to the end users.
•
Peak energy generation corresponds with peak energy
consumption. Maximum sunlight hours generally correspond
with peak electricity demand when prices are highest.
•
Applicable for a wide range of power requirements. Solar
power products can be sized to meet the specific needs of the
end-user ranging from very small consumer applications to larger
commercial applications.
Solar industry trends
Solar power systems are used for a variety of residential,
commercial and industrial applications generally described as
either “on-grid” or “off-grid” in nature.
The market for “on-grid” applications, where solar
power is used to supplement electricity purchased from the
utility network, represents the largest and fastest growing
segment of the market. According to Solarbuzz, in 2005, the
global on-grid segment grew by 42% to 1,262 MW, and since
2001, the on-grid segment has grown at an average annual rate of
approximately 55%. We believe the majority of our products are
used in on-grid applications.
“Off-grid” markets, where access to utility networks
is not physically feasible or economical, offer additional
opportunities for solar technology. Off-grid industrial
applications include road signs, highway call boxes,
communications support along remote pipelines and
telecommunications equipment, as well as rural residential
applications. Off-grid consumer applications include portable
recreational power modules, garden lights, marine lighting and
camping equipment. As reported by Solarbuzz, the off-grid market
grew at 2% in 2005, to 198 MW, and has grown at an average
of 12% per annum since 2001.
According to Solarbuzz, between 2001 and 2005, total annual
solar power system installations increased globally from
345 MW to 1,460 MW, representing a compound annual
growth rate of 43%, and global installations of solar power
systems are expected to grow at a compound annual growth rate of
17% from 1,460 MW in 2005 to 3,250 MW by 2010.
Solarbuzz forecasts continued strong growth globally, with sales
increasing from $9.8 billion in 2005 to an estimated
$18.6 billion by 2010, a 14% compound annual growth rate.
Despite this rapid growth, solar energy constitutes only a small
fraction of the world’s energy output.
The development and increased usage of solar power is, and for
the foreseeable future will be, affected by the existence of
government incentives. A growing number of countries have
established attractive incentive programs for the development of
solar and other renewable energy sources. In 2005, two of the
three largest markets for solar products, as measured by total
installations per annum, were Germany and the United States,
each having significant government subsidy programs for solar
power. Other countries in which we sell our products such as
Spain, France and Italy also have significant government subsidy
programs for solar power. Certain jurisdictions, such as
Germany, have subsidy programs that are designed to decline over
time.
Similar to other renewable energy sources, the solar industry
currently is not cost competitive on a standalone basis and
requires government incentives to be competitive with fossil
based alternatives. A growing number of countries have
established attractive incentive programs for the development of
solar and other renewable energy sources. These programs include:
•
Net metering laws and feed-in tariffs allowing on-grid end users
to sell electricity back to the grid at retail prices;
•
Direct subsidies to end users to offset costs of solar equipment
and installation charges;
•
Tax incentives and low interest loans to finance solar power
systems; and
•
Government standards mandating minimum usage levels of renewable
energy sources.
Germany. Since 2004, Germany has been the leading solar
power market in terms of annual megawatt additions. Renewable
energy laws in Germany require electricity transmission grid
operators to connect various renewable energy sources to their
electricity transmission grids and to purchase all electricity
generated by such sources at guaranteed feed-in tariffs.
Additional regulatory support measures include investment cost
subsidies, low-interest loans and tax relief to end users of
renewable energy. These programs have encouraged the development
of Germany’s solar market, which has grown from annual
installations of 79 MW in 2001 to 837 MW in 2005.
Subsidy programs in Germany are designed to decline over time.
France. France continues to generate significantly more
electricity than it consumes. Today, renewable energy generates
only approximately 15% of the country’s total energy
supply. However, current plans call for an increase in national
renewable energy use to 21% of electricity output by 2010. In
April 2006, the government increased feed-in tariffs for solar
power by 50%.
Spain. The incentive program in Spain includes a national
net metering program and favorable interest loans. The feed-in
tariff for solar energy in Spain is fully guaranteed by the
Spanish government for 25 years.
Italy. Slow economic growth and increasing national debt
has hindered development in Italy’s electrical generation
infrastructure. The resulting inability to meet increasing
demand resulted in rolling blackouts in the summer of 2003. In
2005, the government enacted legislation normalizing a system of
regional solar generation subsidies which sets fixed feed-in
tariffs to be paid over 20 years. In the program’s
second quarter (October to December 2005) it received
approximately 7,500 requests for a total output of 190 MW.
United States. With annual growth rates of 20-30%, the
U.S. solar market continues steady expansion. However,
renewable energy sources currently contribute less than 9%, or
337 billion kWh, of the nation’s total energy
consumption with solar providing only a fraction of that amount.
The United States recently enacted a major energy bill that
included federal tax credits, purchasing goals and other
programs designed to accelerate the adoption of solar power. In
addition, a number of states, including California, New Jersey
and Nevada, have committed substantial resources to the
development and implementation of renewable energy programs. For
example, in early 2006, California announced a
$2.9 billion, 10 year government incentive program to
reach 3,000 MW of solar installations by 2017. The program,
will subsidize one-third of the installation costs of all new
systems. In California, a customer who has purchased solar
energy products can receive a cash rebate from the California
Energy Commission, a state tax credit and can take advantage of
net metering. The customer’s cash rebate is based on the
capital cost of the solar power system, currently set at
$2.60 per watt.
Canada. In March 2006, Ontario became the first Canadian
province to offer subsidies to homeowners or businesses
installing solar power systems under a program whereby the
Ontario Power Authority will purchase electricity produced by
wind, biomass, small hydroelectric or solar at a fixed price.
Electricity generated through solar power systems will be
purchased at a rate of C$0.42/kWh compared to the current
consumer rate of approximately C$0.08/kWh charged by provincial
utility providers.
Japan. Incentive programs in Japan led to the
installation of more than 100,000 residential solar power
systems between 2003 and 2004. Japan is forecasting the
installation of 5 GW of generation capacity by 2010. The
Japanese government has implemented a series of incentive
programs, including a “PV 2030” roadmap. This roadmap
outlines government policies designed to generate between 50 and
200 GW of solar electricity by 2030, as well as the provision of
government subsidies for research and development. The program
is designed to be self-sustainable for households in 2010 and
for businesses and industry in 2020 and 2030, respectively.
Japan eliminated its direct subsidies in 2005.
China. In 2005, China enacted the Renewable Energy Law in
order to help reach the government target of 400 MW and
1,000 MW installed by 2010 and 2020 respectively. This law
authorizes relevant authorities to set favorable prices for the
purchase of surplus on-grid solar-generated electricity and
provides other financial incentives for the development of
renewable energy projects. In addition, the State Council of
China and the Ministry of Construction have recently created
directives encouraging the development and use of
solar energy in both urban and rural areas. For example, in
October 2005, the Shanghai municipal government endorsed the
“100,000 Roof Project” which calls for 300 MW of
installed capacity by 2015.
Principal challenges facing solar power market
growth
The solar power industry must overcome several challenges to
achieve widespread commercialization of its products.
Secure silicon supply. The strong growth in demand for
silicon for use in solar production (from 5,000 metric
tonnes in 2001 to 17,000 metric tonnes in 2005 according to
Solarbuzz) has led to an industry-wide shortage. This shortage
is widely believed to be short-term in nature as significant new
production capacity is forecast to come online in the next five
years. Compounding this shortage is a resurgence in demand for
electrical grade silicon from technology manufacturers. As
competition for secure sources of supply increases, access to a
secure supply of silicon continues to be a critical factor
limiting the growth of the solar power industry. A limited
supply of silicon may also create additional difficulties for
solar companies as they adapt to the volatility and risk related
to their principal supply component. Historically, solar
companies have addressed constrained silicon supply through
inventory build-up
during reduced demand stages of the market cycle. However, with
demand outpacing supply, inventory levels are forecast to remain
at historical lows until new silicon production capacity is
brought online. Further, solar cell and solar module producers
must compete with growing demand from the semiconductor industry
for which high-grade silicon is also a key input.
Decrease cost per watt to customers. The cost of solar
electricity is higher than the cost of retail electricity from
the utility network, with solar power systems requiring
relatively high up-front costs and relatively low ongoing
operational costs. Government programs and consumer preference
have accelerated the use of solar electricity, but product cost
remains one of the largest impediments to growth. As solar has
become a more mature technology, yields, cell efficiencies,
manufacturing efficiencies and economies of scale have improved,
but continued improvements still need to be made in these areas.
Improve aesthetics. We believe that aesthetics are a
barrier to wider adoption of solar cell and solar module
products and systems among commercial and residential consumers.
Historically, these consumers have resisted solar products in
part for aesthetic reasons. Established solar products are
heavy, rigid, fragile and non-modular. Solar cell and solar
module manufacturers can improve aesthetics by developing
products that can be more attractively integrated into building
structures, and that are lighter, flexible and modular.
Competition
The market for solar power products is intensely competitive and
continually evolving. Industry participants compete with each
other for supplies of silicon. As well, industry participants
compete for sales primarily on the basis of their products’
design, efficiency and aesthetics, the strength of their
distribution networks, branding, price, reliability and
capacity. Our competitors include companies such as Sharp,
Q-Cells, Kyocera, Sanyo, Mitsubishi, Schott, Suntech, Sunpower
and BP Solar.
Many of our competitors are developing or currently producing
products based on new solar technologies, including amorphous
silicon, ribbon, sheet and nano technologies, which they believe
will ultimately cost the same as or less than crystalline
technologies similar to ours on a cost per watt basis. The two
ribbon technologies on the market launched commercially at about
11% efficiency with a 10 g/W silicon consumption. These
technologies are currently limited to small cell areas of
100-125 cm2.
Our polysilicon wafer technology has a higher efficiency at the
same silicon utilization and on larger cell sizes. Our Spheral
Solar technology, if successfully developed, would combine 11%
targeted efficiency with the flexibility of thin film technology
in one module and is expected to have a lower silicon
utilization than conventional crystalline devices. Most
amorphous technologies use double glass construction to increase
life expectations beyond ten years, and commercial launches for
these technologies were on products with approximately 5%
efficiency.
Nano-technologies, which are not yet commercialized, are also
expected to have close to 5% efficiency with life expectancies
of several years for double glass construction. Compared to
these competing
technologies, we believe our products have higher efficiencies
and longer lifetimes without the need for double glass
construction.
Many of our competitors also have established stronger market
positions than ours and have larger resources and greater brand
recognition than we have. However, many companies compete at
different steps in the manufacturing process; we are one of the
few integrated manufacturers that compete at all stages of the
solar module manufacturing process chain. The solar power market
in general also competes with other sources of renewable energy
and conventional power generation. See “Risk
Factors — We face intense competition from other
companies producing solar and other renewable energy
products.”
Corporate Structure and Organization
The following diagram sets forth our expected corporate
structure upon the closing of this offering:
Legal and Regulatory Matters
There are no pending nor, to our knowledge, threatened legal
proceedings that we believe will have a material effect on our
business.
Patents and Trademarks
We rely primarily on patent, trademark, trade secret, copyright
law and other contractual restrictions to protect our
intellectual property. Our success and ability to compete
depends to a significant degree upon obtaining patent protection
for our proprietary technology. We hold a number of patents,
primarily in connection with various aspects of our Spheral
Solar technology and also in connection with our ability to
purify polysilicon fines, which is significant to our silicon
supply strategy. The patents that we consider to be of the
greatest importance to our Spheral Solar technology will expire
between 2008 and 2023 and have been issued primarily in the
United States, although we also have patent protection in
certain jurisdictions in Europe and Asia for some of the same
technology that is covered by our U.S. patents. We intend
to continue to seek patent protection as we believe appropriate
to protect our competitive advantage and for licensing
opportunities of new technologies relevant to our business.
We believe that many elements of our solar products and
manufacturing processes involve proprietary know-how, technology
or data that are not covered by patents or patent applications,
including technical processes, equipment designs, algorithms and
procedures. We generally do not require our employees (including
our R&D personnel) to sign confidentiality or other
agreements in respect of our intellectual property, nor do we
require our contractors to sign general agreements in respect of
intellectual property developed for us. This could adversely
affect our ability to secure, protect and/or enforce
intellectual property developed by and/or for us.
We own a number of trademarks used in association with our
products and services, some of which, are registered in the
United States, Canada and a number of other countries. We are
working to maintain and enforce our rights in our trademark
portfolio, which is important to our reputation and branding.
Facilities
Our corporate headquarters are located in Cambridge, Ontario,
Canada, where we will lease a building from ATS with
approximately 193,000 square feet of space. This building
also houses our Spheral Solar technology development facility.
Our Photowatt International facility occupies a total of
approximately 130,000 square feet of manufacturing space in
a building we own near Lyon, France. Photowatt USA leases a
sales and module assembly facility in Albuquerque, New Mexico.
See “— Our Business Strategy” for a
discussion of our expansion plans, which include the
construction of new facilities.
Environmental Matters
We are required to comply with all foreign, national and local
laws and regulations regarding the operation of industrial
facilities, pollution control, the protection of natural
resources and the environment and human health and safety. We
believe we are in compliance in all material respects with
applicable environmental laws and regulations. In addition,
under some statutes and regulations, a government agency or
other party may seek recovery and response costs from owners or
operators of facilities where releases of hazardous substances
have occurred or are ongoing, even if the owner or operator was
not responsible for such release or otherwise at fault. We are
also required to maintain and comply with a variety of
environmental permits and authorizations. Any failure by us to
comply with applicable regulations could subject us to
potentially significant monetary damages or fines or otherwise
result in the interruption of our business operations. In
addition, should environmental regulations change or become more
stringent, we could be required to incur costs that could be
material to our operations or results.
In France, our manufacturing facility is a classified
installation for the protection of the environment subject to
authorization by the local authorities. We are responsible for
compliance with applicable environmental and health and safety
regulations, including technical prescriptions imposed by
environmental permits. Failure to comply with these regulations
and prescriptions may result in criminal and administrative
fines, or suspension or termination of our activities on the
site. Pursuant to the applicable French regulations, upon
voluntary or mandatory termination of the activities on the
site, we may be required to undertake remediation of the site
which could be costly. In addition, the implementation in the
European Union of the Registry, Evaluation, Authorization and
Restriction of Chemicals (“REACH”), which has been
adopted in first reading on November 17, 2005 by the
European Parliament and which may be adopted by the end of 2006,
may result in additional costs or restrict our access to certain
chemicals that are necessary for our manufacturing process.
Employees
As of July 31, 2006, we had 711 active employees, of
which 604 are located at Photowatt International near Lyon,
France, approximately 90 are located at our Spheral Solar
technology development facility in Cambridge, Ontario, Canada
and 17 are located at our sales and module assembly operations
in Albuquerque, New Mexico, United States. From
time-to-time, we also
employ independent contractors. We plan to hire additional
employees as we expand. Certain of our non-management employees
in France belong to the CFDT (the Confédération
Française Démocratique du Travail) union, and all of
our non-management employees are covered by a collective
bargaining agreement with a current term lasting until January
2007, at which time it will be automatically renewed for an
indefinite term subject to termination and renegotiation by
either party on one month’s notice. We have had no work
stoppages during the past five years, and we believe our
relations with our employees are good.
At the time of the offering, some of our services, including
certain information technology, legal, tax, treasury and human
resource services, will be provided by ATS pursuant to a
Transitional Services Agreement between us and ATS as described
under “Our Relationship with ATS — Agreements
Between ATS and Us — Transitional Services
Agreement.”
In March 2006, ATS announced that, following a review of the
strategic alternatives for its solar business, it decided to
pursue an initial public offering of the solar business segment.
ATS’ solar business has different suppliers, customers and
industry fundamentals compared to ATS’ automation and
repetitive manufacturing businesses. The solar business also
requires a significant amount of new capital to execute its
strategic growth plan which has been developed to competitively
position the business in the growing solar industry. ATS expects
that the contemplated initial public offering will allow the
solar business to raise significant capital and best position it
to execute its strategic growth plan.
ATS currently owns, either directly or indirectly through its
subsidiaries, substantially all of our assets and operations.
Upon the completion of this offering, ATS will establish our
business as a separate publicly traded company. To accomplish
the separation of our business from the other businesses of ATS,
ATS will undertake, subject to ATS shareholder approval of not
less than two-thirds of the votes entitled to be cast by holders
of ATS shares present in person or represented by proxy at a
meeting of ATS shareholders to be held prior to the date of this
offering, a corporate reorganization upon the closing of this
offering under which ATS will transfer our assets and operations
to us.
ATS as our controlling shareholder
Immediately following this offering, ATS will own of record and
beneficially
approximately %
of our common shares. If the underwriters exercise their
over-allotment option in full, immediately following this
offering ATS will own of record and beneficially
approximately %
of our common shares. As long as ATS continues to control more
than 50% of the voting power of our common shares, ATS will be
able to direct the election of all of the members of our board
and exercise a controlling influence over our business and
affairs, including any determinations with respect to mergers or
other business combinations involving us, our acquisition or
disposition of assets, our incurrence of indebtedness, our
issuance of any additional common shares or other equity
securities, and the payment of dividends with respect to our
common shares. Similarly, ATS will have the power to determine
matters submitted to a vote of our shareholders without the
consent of our other shareholders, will have the power to
prevent a change in control of our company and will have the
power to take other actions that might be favorable to ATS but
unfavorable to us.
In addition, pursuant to the Shareholder Agreement, the consent
of ATS will be required in connection with certain corporate
actions. See “Agreements Between ATS and Us —
Shareholder Agreement — ATS Approval for
Certain Matters.”
Agreements Between ATS and Us
This section provides a summary description of agreements
between ATS and us relating to this offering and our
relationship with ATS after this offering. The description of
the agreements is not complete and, with respect to each such
agreement, is qualified by reference to the terms of the
agreement, each of which will be filed as an exhibit to the
registration statement of which this prospectus is a part and
with the Canadian securities regulatory authorities. We
encourage you to read the full text of these agreements. We will
enter into these agreements with ATS immediately prior to the
completion of this offering; accordingly, we will enter into
these agreements with ATS in the context of our relationship as
a wholly-owned subsidiary of ATS. The prices and other terms of
these agreements may be less favorable to us than those we could
have obtained in arm’s-length negotiations with
unaffiliated third parties for similar services or under similar
agreements.
Overview
The Master Separation Agreement provides for our separation from
ATS, and contemplates that immediately prior to the closing of
this offering, we will enter into certain other separation
agreements with
ATS that will govern certain aspects relating to the separation
and various interim and ongoing relationships between ATS and
us. These other separation agreements are:
The Master Separation Agreement will contain the key provisions
related to our separation from ATS in connection with this
offering. All of our covenants and agreements and those of ATS
in the Master Separation Agreement will survive indefinitely.
Certain of the principal provisions of the Master Separation
Agreement are discussed below.
Ownership of assets
The Master Separation Agreement provides for the separation of
our assets from ATS through transfer agreements that we will
enter into with ATS upon the closing of this offering and a
lease agreement that we will enter into with ATS immediately
prior to the closing of this offering. See “Our
Relationship with ATS — General — ATS
reorganization relating to our company” and “Our
Relationship with ATS — Agreements Between ATS and
Us — Transfer Agreements” and
“— Lease Agreement.” After the completion of
this offering, if it is discovered that ATS has title to, or an
interest in, any asset, other than an asset specifically
excluded, that is used exclusively or held for use exclusively
in our business, as it existed at the completion of the
offering, ATS will cooperate with us to transfer such asset to
us. Likewise, if it is discovered that we had at the completion
of this offering title to, or an interest in, any asset other
than those used or held for use exclusively in our business, as
it existed at the completion of this offering, we will cooperate
with ATS to transfer such asset to ATS.
Indemnification
We have agreed to indemnify ATS from all losses suffered by ATS
arising out of certain circumstances, including:
•
all liabilities arising out of or related to our present or
future business, operations or assets;
•
any breach by us of any separation agreement; and
•
with respect to all information contained in this prospectus,
the registration statement of which it is part and any other
materials distributed in connection with the transactions
contemplated in the separation agreements, any untrue statement
or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, other than with respect to statements or omissions
relating exclusively to (i) ATS and its subsidiaries (other
than us), and (ii) ATS and its businesses (other than
ours), which (i) and (ii) are collectively referred to
as the “ATS Disclosure Portions.”
ATS will indemnify us from all losses suffered by us arising out
of certain circumstances or events, including:
•
all liabilities arising out of or related to ATS businesses,
operations or assets;
•
any breach by ATS of any separation agreement; and
with respect to all information contained in the ATS Disclosure
Portions, any untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading.
We and ATS will each waive all special, collateral, indirect,
consequential, incidental or punitive damages (including lost
profits or savings) incurred by either of us, other than those
related to a third party in connection with an indemnification
obligation.
Non-competition and non-solicitation
The Master Separation Agreement provides that we will not, for a
period of three years from the date of that agreement, directly
or indirectly, engage in any development, production,
manufacture, marketing, distribution, promotion, sale or
otherwise of products competitive with ATS products in any
country in the world in which ATS conducts its business. In
addition, under the Master Separation Agreement, we and ATS have
agreed, for a period of five years from the date of that
agreement, not to hire, employ, retain or contract for service,
or offer to hire, employ, retain or contract for service, as a
director, officer, employee, partner, consultant, independent
contractor or otherwise, any individual employed by the other
party or any of its affiliates, or solicit for employment,
solicit for hire, contract for the services of, or encourage any
individual to terminate his or her employment with the other
party or any of its affiliates, subject in each case to certain
limited exceptions.
Expenses
We will be responsible for all costs incurred in connection with
this offering. We and ATS generally will be responsible for our
own costs incurred in connection with the matters contemplated
by the separation agreements.
Disputes
Disputes under all separation agreements will be subject to a
negotiation and mediation procedure.
Assignment
ATS will have the right to assign its rights under the Master
Separation Agreement with our consent, such consent not to be
unreasonably withheld. ATS will have the right to assign its
rights under the Master Separation Agreement to an affiliate of
ATS without our consent.
Shareholder Agreement
The Shareholder Agreement will provide for, among other things,
restrictions on the composition of our board of directors and
the board of directors of our material subsidiaries, certain
matters that we shall not undertake without ATS’ prior
written consent, financial reporting to ATS, and certain other
governance matters.
Our Board of Directors
ATS will have certain rights in respect of our board of
directors under the Shareholder Agreement. For so long as ATS
owns more than 40% of our outstanding shares, ATS will be
entitled to designate the number of nominees for election as
directors of our board that comprise 25% of the directors of our
board (rounded up to the nearest whole number, provided our
board consists of at least six directors). It is expected that
our board will be initially comprised of nine members. For so
long as ATS owns at least 10%, but less than 40%, of our
outstanding shares, ATS is entitled to appoint one director to
our board of directors. ATS will initially designate three
nominees for election as directors to our board.
The ATS nominees to our board of directors may be directors,
officers or employees of ATS or its affiliates or such other
individuals as ATS may designate from time to time, subject to
applicable director independence rules.
A quorum for a meeting of our board of directors shall be a
majority of the number of directors, subject to the Canadian
residency requirements under the Canada Business Corporations
Act (the “CBCA”), which requires that at least
twenty-five percent of the directors present at the meeting are
resident Canadians, and for so long as ATS holds not less than
40% of our outstanding common shares, subject to one ATS board
nominee being in attendance. In the event that a quorum is not
present for a meeting (an “initial directors’
meeting”), then any two directors may call a meeting of the
directors by notice to all directors to be held on a date no
earlier than the fifth business day following the initial
directors’ meeting solely to address the business proposed
at the initial directors’ meeting. A quorum for such
further meeting shall not require one ATS board nominee to be in
attendance.
Committees of our Board of Directors
The Shareholder Agreement will provide that our board of
directors establish an audit and finance committee and a
compensation, corporate governance and nominating committee,
each consisting of three to five members appointed by our board.
Our board of directors may also establish such other committees
as it may determine from time to time. Under applicable
securities laws, all members of the audit and finance committee
must be independent.
ATS approval for certain matters
The Shareholder Agreement will provide that, for so long as ATS,
directly or indirectly, holds not less than 50% of our
outstanding common shares, we shall not, and shall not permit
any subsidiary entity to, without the affirmative vote of a
majority of our board of directors and the prior, written
consent of ATS as a shareholder:
•
enter into any merger, amalgamation, plan of arrangement,
consolidation, business combination, joint venture or other
material corporate transaction, including the acquisition of
property or assets with a fair market value in excess of
C$50 million;
•
sell, lease, exchange, license on an exclusive basis or dispose
of property or assets with a fair market value in excess of
C$50 million, other than the sale or disposition of
inventory in the ordinary course of business, or sell or grant
an exclusive license with respect to material intellectual
property;
•
adopt any plan or proposal for a complete or partial liquidation
or dissolution or any reorganization or commence any case,
proceeding or action seeking relief under any existing laws or
future laws relating to bankruptcy or insolvency;
•
take any action that could reasonably be expected to lead to or
result in a material change in the nature of our business;
•
issue any shares of our capital stock, or any rights, warrants
or options to acquire our capital stock (excluding securities
issued pursuant to share compensation arrangements), if the
issuance exceeds 5% of our outstanding common shares;
•
take any action limiting the rights of ATS to transfer shares of
our stock it owns;
•
enter into a partnership or any arrangement for the sharing of
profits, union of interests, joint venture or reciprocal
concession with any person if the aggregate fair market value of
the assets contributed and liabilities assumed by us (and our
subsidiaries) in connection therewith either exceeds on
formation or at any time in the future could reasonably be
expected to exceed C$50 million; or
•
make any commitment or agreement to do any of the foregoing.
Under the Shareholder Agreement, we have agreed that, for so
long as ATS is required to consolidate our results of operations
and financial position, and under certain other circumstances,
we will:
•
maintain the same fiscal year as ATS;
•
deliver annual budgets, financial projections and monthly
financial reports to ATS;
•
provide to ATS an opportunity for preliminary review of any
reports or other information that we send to our shareholders or
file with Canadian securities regulatory authorities, the SEC or
any securities exchange or quotation system, as well as any
press releases regarding annual and quarterly earnings and
interim financial guidance;
•
cooperate, and use commercially reasonable efforts to cause our
auditors to cooperate, to the extent reasonably requested by
ATS, in connection with the preparation of ATS’ financial
statements and other information provided to the public,
Canadian securities regulatory authorities, the SEC or any
securities exchange or quotation system by ATS;
•
unless otherwise required by law, use the same auditors as
appointed by ATS; and
•
unless otherwise required by law, to the extent practicable,
keep our accounting policies and practices consistent with those
of ATS.
We have also agreed that, for so long as ATS is required to
consolidate our results of operations and financial position or
to account for its investment in our company under the equity
method of accounting, our annual financial statements and
related information will be prepared in accordance with Canadian
GAAP and, where practicable, consistent with ATS financial
statement presentation, and that such financial statements
reported in Canadian dollars will be provided to ATS prior to
their inclusion in ATS’ financial statements. However, we
will report our results in U.S. dollars and will include in
the notes to our financial statements a reconciliation
quantifying all material differences in our financial statements
had they been prepared in accordance with United States
generally accepted accounting principles.
Assignment
ATS will have the right to assign its rights under the
Shareholder Agreement with our consent, such consent not to be
unreasonably withheld, provided that if the assignee is a
significant competitor of ours, we may withhold our consent in
our own sole discretion. If assigned to a
non-ATS affiliate, the
rights of ATS referred to under “— ATS approval
for certain matters” will expire on the 90th day
following the date of assignment. ATS will have the right to
assign its rights under the Shareholder Agreement to an
affiliate of ATS without our consent.
Term
The Shareholder Agreement will continue in force until ATS
holds, directly or indirectly, less than 10% of our outstanding
common shares.
Transitional Services Agreement
The Transitional Services Agreement is designed to help us and
ATS transition to being two separate public companies, each with
its own administrative resources. Under the Transitional
Services Agreement, ATS will provide services to us and/or to
one or more of our subsidiaries, and include certain:
•
communications services such as phone, cell phone and wireless
devices;
•
internal audit, tax, and merger and acquisition transaction
services;
•
payroll;
•
information technology, including access to network, systems,
applications and technical support;
accounting support, treasury and general administrative
services; and
•
other specified services.
ATS will use commercially reasonable efforts to perform these
services at the same level of service as such services have been
provided prior to the date of the Transitional Services
Agreement. The use of such services generally will not be
substantially greater than the level of use required prior to
the completion of this offering.
These services will be provided for a period of 12 months.
ATS may terminate the provision of any service under the
Transitional Services Agreement on 30 days prior written
notice if the provision of the service becomes commercially
impracticable for ATS. We may terminate any individual service
to be provided by giving 30 days notice to ATS or if ATS
fails to perform any of its material obligations and does not
remedy the failure within 30 days.
The Transitional Services Agreement will provide for fixed price
billing, fixed rate billing, and pass through billing for
services provided either directly or indirectly by ATS to us.
The fixed price portion of the fees that we will pay ATS under
the Transitional Services Agreement over its 12 month term
is estimated to be approximately
$ .
Prior to the consummation of this offering, we will enter into a
registration rights agreement with ATS. The registration rights
agreement will include rights to require us to register the
offer and sale of our common shares held by ATS on up to four
different occasions. ATS may also require us to file
registration statements on
Form F-3 once we
become eligible to use that form. We will be entitled to defer
the filings of these registration statements in certain
circumstances for a limited period. The registration rights
agreement also will include the right to require us to include
our common shares held by ATS in future registration statements
that we file with the SEC. The agreement also will provide ATS
with comparable rights to require us to qualify our common
shares held by ATS for distribution, by prospectus or otherwise,
in any province or territory of Canada in which we are a
reporting issuer. These rights are subject to various conditions
and limitations.
We will bear all expenses incurred in connection with these
registrations, other than any underwriting discounts and
commissions. Registration of our common shares upon the exercise
of these registration rights would result in such shares
becoming freely tradable without restriction under the
Securities Act or Canadian securities laws.
Master Supply Agreement
Under the Master Supply Agreement, ATS will have a right of
first refusal to supply us with certain Spheral Solar equipment
and related services.
The right of first refusal would be triggered where we receive
an offer from a third party for the supply of certain equipment
and related services. ATS would have a period of 30 days to
exercise its right of first refusal and elect to supply such
equipment and related services to us on the same terms and
conditions of the third party’s offer with respect to
price, specifications and delivery. If ATS does not exercise its
right of first refusal, then we are free to accept the third
party offer. However if the third party offer is subsequently
revised, we must provide ATS with its right of first refusal.
In addition, ATS will be our preferred supplier with respect to
certain other equipment and related services listed in a
schedule to the Master Supply Agreement. If we determine to
purchase certain specified equipment and related services, we
must notify ATS and provide ATS with the opportunity to bid on
or make a proposal to supply such equipment and services.
ATS would provide its standard warranty that the equipment
supplied would be free from defects in workmanship and material
and shall materially conform to the specifications for the
equipment for a period of 12 months from the date of
successful site acceptance testing of the equipment in our plant
or 15 months from the date of shipment, whichever occurs
first.
In addition, for an agreed charge of C$10.00 per square
foot per year, ATS will agree to house at its premises two of
our aluminium foil presses, known as the “Systems 1
Press” and the “AMD Press,” occupying
approximately 5,000 square feet and 2,000 square feet,
respectively, of ATS’ premises. ATS will allow us access to
ATS’ premises in order to be able to use and operate the
Systems 1 Press for research and development purposes. ATS will
supply to us such quantities of aluminium foil processed by the
foil presses as we may order (subject to available labor and
press capacity) at a price equal to ATS’ manufacturing
costs plus 12%. This foil would be used by us in the manufacture
of Spheral Solar products if and when we grant firm purchase
orders for these products. The supply by ATS to us of these foil
products is on an “as is” basis, recognizing that we
own the foil presses and will be responsible for their
maintenance. The provisions of the Master Supply Agreement
relating to our use of ATS’ premises for these aluminium
foil presses may be terminated by ATS or us on six months notice
but ATS is not permitted to exercise this termination right for
a period of one year from the effective date. Upon termination,
we would de-install and remove the foil presses from ATS’
premises at our sole cost.
The term of the Master Supply Agreement is five years and would
be automatically renewed for successive one year terms unless we
or ATS gives notice of termination at least 30 days prior
to the renewal date. If ATS materially breaches its obligations
to supply equipment to us pursuant to the right of first refusal
on two occasions, we may terminate the right of first refusal.
In addition, we may terminate any individual project agreement
provided we compensate ATS for its costs incurred or committed.
Any liability of ATS to us under the Master Supply Agreement is
limited to the amount actually received by ATS for products sold
to us.
ATS solar automation know-how
Pursuant to the Master Separation Agreement, ATS will retain its
solar automation know-how, which is all information known to,
and intellectual property rights owned by, ATS relating to
automated solar equipment. This know-how primarily relates to
the design and manufacture of certain equipment that automates
one or more of the steps involved in manufacturing solar
products. We use some of this know-how in our business,
primarily in relation to our use of ATS equipment, ATS being one
of a number of equipment suppliers we utilize. Upon completion
of the offering, we will obtain an irrevocable, personal,
non-exclusive, worldwide, royalty-free, perpetual right and
license to use the ATS solar automation know-how in our
possession immediately prior to the completion of this offering,
solely for our internal use in conducting our business. This
license will be non-transferable and may not be sub-licensed.
Such license will not entitle us to use the ATS solar automation
know-how for the benefit of a competitor of ATS other than with
respect to the manufacturing of equipment for us. This
license does not include any intellectual property rights owned
by ATS solely to the extent covered by any patent or application
owned by ATS, the exclusion of which we believe will not have
any material effect on our business.
ATS may indirectly compete with us to the extent that it
manufactures solar equipment for competitors of ours. See
“Risk Factors — ATS may enter into contracts
relating to the design and manufacture of automated
manufacturing and test systems with our competitors or potential
competitors.”
The Transfer Agreements provide for the transfer of ATS’
interest in the assets that are used exclusively in our business
conducted by ATS and its subsidiaries upon the completion of
this offering, subject to certain excluded assets including:
•
the premises and building that are the subject of the Lease
Agreement.
•
the investment of ATS in securities of Canadian Solar Inc., a
solar module assembly company in which ATS has a portfolio
investment.
•
ATS solar automation know-how.
Pursuant to the Transfer Agreements, in consideration for the
transfer of assets by ATS to us, we will issue common shares to
ATS and we and our subsidiaries will assume all liabilities,
including an inter-company demand loan from ATS, relating to the
solar business conducted by ATS and its subsidiaries immediately
prior to the completion of this offering.
Lease Agreement
The Master Separation Agreement contemplates that, immediately
prior to the closing of this offering, we will enter into a
lease agreement with ATS that relates to our Spheral Solar
manufacturing facility at 25 Reuter Drive in Cambridge,
Ontario (the “Lease Agreement”). The term of the Lease
Agreement is for two years and we will pay ATS rent at a rate of
C$1 per year during that period. Thereafter, provided we are not
in default and remain creditworthy, we may renew the Lease
Agreement for a five year period, and subsequently, for a
further five year period. The rate of rent for each renewal
period, respectively, will be the greater of a pre-specified
minimum rate of rent, and the then prevailing market rate of
rent as determined by a process outlined in the Lease Agreement.
Member of the Compensation, Corporate Governance and Nominating
Committee
Mr. Silvano Ghirardiis our president and chief
executive officer and director, having joined ATS in 2005, and
has diverse experience in international operations, marketing
and start-up business.
From 2002-2005, Mr. Ghirardi was the president and chief
operating officer of Hoya Opthalmics, the second largest
publicly traded global manufacturer of prescription spectacle
lenses. From 2000-2002, Mr. Ghirardi was the president and
chief executive officer of Sartorius NA, a biotechnology and
scientific instruments company. From 1996-2000,
Mr. Ghirardi was the president and chief executive officer
of 2C Optics Inc., a
start-up company funded
by venture capital, Dow Chemical, PPG Industries and Rodenstock
and other industry participants for the purpose of producing
plastic spectacle prescriptions, on demand, utilizing
proprietary technology. Before that, Mr. Ghirardi held a
variety of senior management positions at Ciba Vision, a
business unit of Novartis AG focused on lenses, lens care and
opthalmic pharmaceuticals, joining as an early founder in 1981,
until 1995-1996 as
president. Mr. Ghirardi is a graduate of Harvard
University, Graduate School of Business, Executive MBA
(PMD) Program and attended Atkinson College, York
University, Toronto (CIM/ BA Marketing). He will no longer be
employed by ATS following this offering, at which time he will
be employed exclusively by us.
Mr. David L. Adams is our senior vice president and
chief financial officer, having joined ATS in June 2006. From
1999 through 2005, Mr. Adams was the senior vice president
and chief financial officer at SR Telecom Inc., where he was
also secretary of the corporation. From 1994 to 1998, he was
Vice President Finance & Administration at CAE
Electronics Ltd., and Treasurer of CAE Inc., from 1988 to 1994.
Mr. Adams holds a Bachelor of Commerce and Finance from the
University of Toronto, is a Chartered Accountant and has
completed the Stanford Executive Program. He will no longer be
employed by ATS following this offering, at which time he will
be employed exclusively by us.
Mr. Gary J. Seiter is currently the senior vice
president of operations and technology, having joined ATS in May
2006. From 2005-2006, Mr. Seiter was senior director of
operations and engineering at SUMCO USA. Prior to that, he held
various engineering and management roles for Motorola, Inc. from
1980 until
2000-2004 as director of manufacturing operations.
Mr. Seiter holds both a Bachelor of Science in Electrical
Engineering and a Master of Science in Electrical Engineering
from the University of Missouri — Rolla as well as an
MBA from Western International University in Arizona. He will no
longer be employed by ATS following this offering, at which time
he will be employed exclusively by us.
Mr. Jean-Louis Dubien is the managing director of
Photowatt France, having joined Photowatt France in 1991.
Throughout his 15 year tenure with Photowatt France,
Mr. Dubien has held several key management positions
including vice president of operations and, prior to that,
manufacturing manager. Mr. Dubien has made significant
contributions during this time, specifically including his
improvement of our innovative wire saw technology as well as
having successfully implemented measures which have directly
resulted in sustained yield and throughput improvements in each
of our wafer, cell, ingot and module workshops. Mr. Dubien
holds a degree in Mechanical Engineering from the Ecole
Nationale d’Ingénieurs de Saint-Etienne France.
Mr. Robert M. Franklin has been our director and
chairman since August 2006. He has played a leadership role
in a number of public companies over the past 30 years,
including serving as chairman of the board of directors of
Placer Dome Inc., from 1993-2006. Currently, Mr. Franklin
is a director of Barrick Gold Corporation, of Toromont
Industries, of Resolve Corporation and of Great Lakes Carbon
Income Fund. He is also the founder and president of Signalta, a
private investment firm. Mr. Franklin holds a Bachelor of
Arts in Business Administration from Hillsdale College, Michigan.
Mr. Gerald R. Beard has been our director since
October 2006. He is currently the vice president and chief
financial officer of ATS, which he joined in 2001. He is an
honors graduate of the University of Waterloo, a Chartered
Accountant and a Chartered Business Valuator, and he obtained
his Certified Public Accountant designation in 2001. Prior to
joining ATS, Mr. Beard was a senior manager at KPMG. Mr.
Beard was appointed to our board as a nominee of ATS.
Mr. Wayne S. Hill has been our director since August
2006. He is currently a director and the executive vice
president of Toromont Industries Ltd., a company listed on the
Toronto Stock Exchange, having joined as vice president, finance
in 1985. Prior to joining Toromont Industries Ltd.,
Mr. Hill served as vice president, finance at Maclean
Hunter Limited, a Canadian based communications and publishing
company and spent 3 years as director, planning and finance
with Massey Ferguson Limited, a heavy equipment and engine
manufacturer. Mr. Hill has a Bachelor of Commerce degree
from Queen’s University and is a Chartered Accountant.
Mr. Ronald J. Jutrashas been our director since
July 2006. He is currently the president and chief
executive officer and a director of ATS, which he joined in
1985. Prior to being promoted to president and chief executive
officer, Mr. Jutras held the positions of executive vice
president, chief operating officer, and chief financial officer,
and has served as an ATS director since 1993. Prior to joining
ATS, he was employed for seven years by KPMG Peat Marwick Thorne
as an accountant and business advisor. Mr. Jutras is an
Honours Business Administration graduate of Wilfrid Laurier
University and a Chartered Accountant. Mr. Jutras was
appointed to our board as a nominee of ATS.
Mr. Kirk Mandy has been our director since
August 2006. Since 2005, he has been the president and
chief executive officer of Zarlink Semiconductor, a company
listed on the Toronto Stock Exchange and the New York Stock
Exchange. Mr. Mandy was the vice chairman and a director of
Zarlink from 2001 until 2005. From 1984-2001, Mr. Mandy
held various senior management roles in Mitel Corporation,
including president and chief executive officer from 1998-2001,
vice president and general manager of the Business
Communications Unit from 1997-1998, vice president and general
manager of the Semiconductor Division from 1992-1998, and
various manufacturing, product operations and research and
development roles from 1984-1992. From 1976-1984, he held
various roles in GTE, Gandalf Technologies Inc. and Bymanics.
Mr. Mandy is currently a member of the board of Epocal
Inc., Mitel Networks Corporation and vice chairman of the
Armstrong Monitoring Corporation. He has served on the board of
the Strategic Microelectronics Corporation (SMC), the Canadian
Advanced Technology Association (CATA), The Canadian
Microelectronics Corp. (CMC), The Ottawa Center for Research and
Innovation (OCRI), and Micronet. He is also past chairman of the
Telecommunications Research Center of Ontario (TRIO), past
chairman of the
National Research Council’s Innovation Forum, and past
co-chairman of the Ottawa Partnership. Mr. Mandy is a
graduate of Algonquin College.
Mr. Stewart McCuaig has been our director since
July 2006. He is currently vice president, general counsel
and corporate secretary at ATS and has been with ATS since
December 2005. From 2000-2005, Mr. McCuaig was general
counsel and corporate secretary at Syndesis Limited, a private
venture capital backed telecommunications software company. From
1998-2000, he was general counsel and corporate secretary at
Mortice Kern Systems Inc., a Toronto Stock Exchange-listed
company. From 1988-1998, Mr. McCuaig was an
associate/partner at the law firm of Sims Clement Eastman.
Mr. McCuaig was admitted to the Bar in Ontario in 1988.
Mr. McCuaig completed undergraduate courses at the
University of Western Ontario and holds an LL.B. from the
University of Toronto, an LL.M. from Osgoode Hall Law School,
and has taken graduate business courses at Wilfrid Laurier
University. Mr. McCuaig was appointed to our board as a
nominee of ATS.
Mr. C. Ian Ross has been our director since August
2006. He is currently the chairman of the board of directors of
GrowthWorks Canadian Fund Ltd., of GrowthWorks
Commercialization Fund Ltd., of PetValu Inc. and of World
Heart Corporation and is currently a director of Ontario Power
Generation, Comcare Canada Limited and eJust Systems Inc. He has
in the past been a senior director, administration, at the
Richard Ivey School of Business, University of Western Ontario,
a trustee of the McMichael Canadian Art Collection, an executive
in residence at the Richard Ivey School of Business, University
of Western Ontario, and a governor of Ortech Corporation.
Mr. Ross served as the president and chief executive
officer of Ortech Corporation from 1998-1999, the chairman,
president and chief executive officer of Provincial Papers Inc.
from 1993-1997, the
president and chief executive officer of Paperboard Industries
Corporation from 1986-1990, and executive vice president,
finance and development, of Kinburn Corporation from 1979-1986.
Prior to that, he held a variety of management roles with
Canada’s Export Development Corporation and with the Bank
of Montreal. Mr. Ross holds a B.A. from the University of
Western Ontario, an LL.B. from the University of Toronto and is
a Member of the Law Society of Upper Canada.
Mr. John W. Sheridan has been our director since
August 2006. He is currently president and chief executive
officer of Ballard Power Systems, a Canadian manufacturer of
fuel cells, having served as the interim president and chief
executive officer from 2005 until February of 2006 and having
served as chairman of the board from 2004 to February of 2006.
Prior to that, Mr. Sheridan held various senior management
roles in the BCE family of companies from 1979, until 2001-2003
as president and chief operating officer, Bell Canada.
Mr. Sheridan’s outside directorships currently include
serving as a director of Ballard Power Systems and as a director
of NewPage Inc., and have in the past included directorships
with Bell Canada, Aliant Inc., MTS Inc., Sun Media Inc.,
Bell Sygma UK and Encom Ltd. Mr. Sheridan holds a B.E.S.
from the University of Waterloo, a B.A. in Economics from
Wilfred Laurier University and an M.A. in Economics from
Queen’s University.
The business address of our directors and executive officers is
c/o 25 Reuter Drive, Cambridge, Ontario, Canada N3E 1A9.
Other Key Personnel
Mr. Eric Laborde is a consultant who serves as
managing director, Europe (acting) of Photowatt France,
having joined as general manager in 2001. His consulting
agreement with us has a term of one year and is renewable
annually. He has extensive technology based experience that
spans over 20 years. He is currently on the board of
directors and councils of Swiss and Savoy Managers and Episol as
well as director of various non-profit organizations such as the
ODES Group and the European Photovoltaic Industry Association
(EPIA). From 1998-2000, Mr. Laborde was the president of
CGL Thermoformage, a French leader in tailor made thermoformed
plastic packaging. From 1990-1998, Mr. Laborde held various
management positions with Adidas Salomon Group. From 1985-1989,
Mr. Laborde held various management positions with Ciapem,
a division of Thomson Consumer Goods. Mr. Laborde holds a
degree in Mechanical Engineering from Ecole Nationale des
Techniques Avancees (ENSTA) and from Ecole
Polytechnique, France.
Our board of directors consists of nine members. Our board of
directors has determined that the following directors are
independent within the meaning of Rule 4200(a)(15) of the
Nasdaq Marketplace Rules:
Committees of the Board of Directors
Our board of directors has established an audit and finance
committee and a compensation, corporate governance and
nominating committee.
Audit and finance committee
The primary functions of the audit and finance committee will be
to oversee our accounting and financial reporting practices and
the auditing of our financial statements. In addition, the audit
and finance committee will assist the board of directors in
fulfilling its oversight responsibilities relating to financial
disclosures and internal controls over financial reporting;
monitoring the system of internal controls; monitoring our
compliance with legal and regulatory requirements relating to
financial reporting; monitoring our compliance with the
applicable requirements of the Nasdaq Global Market and the
Toronto Stock Exchange; selecting the external auditors for
shareholder approval; reviewing the qualifications, independence
and performance of the external auditors; reviewing the
qualifications and performance of our financial management; and
identifying, evaluating and monitoring the management of our
principal risks impacting financial reporting. The committee
will also assist the board of directors with the oversight of
financial strategies and overall risk management.
The audit and finance committee will be composed of
Mr. Wayne S. Hill (Chair), Mr. C. Ian Ross and
Mr. Kirk Mandy. The board has determined that Mr. Hill
will serve as the audit committee financial expert. Every member
of the audit and finance committee will be independent within
the meaning of Rule 10A-3 under the Securities Exchange Act
of 1934, as amended, Rule 4200(a)(15) of the Nasdaq
Marketplace Rules and Multilateral Instrument
52-110 — Audit Committees of the Canadian
Securities Administrators.
Compensation, corporate governance and nominating
committee
The primary functions of the compensation, corporate governance
and nominating committee will be to discharge the board of
director’s duties and responsibilities relating to human
resource policy, to assist the board of directors in
identifying, recruiting and nominating suitable candidates to
serve on the board of directors and to succeed the chief
executive officer and to assist the board of directors in
fulfilling its corporate governance oversight responsibilities.
The committee will be responsible for determining the
performance goals for the chief executive officer, evaluating
the chief executive officer’s performance in light of such
goals, and recommending the chief executive officer’s
compensation package and employment arrangements. The committee
will also be responsible for recommending the compensation
packages for senior management and non-employee directors. In
addition, the committee is responsible for reviewing and
providing recommendations on our compensation principles,
policies and plans, including our equity-based compensation
plans. The compensation, corporate governance and nominating
committee will evaluate the effectiveness of our board of
directors as a whole, each committee of our board of directors
and the contribution of individual directors. The committee will
also review and assess management’s compliance with our
Code of Business Conduct.
The compensation, corporate governance and nominating committee
will be composed of Mr. John W. Sheridan (Chair),
Mr. Robert M. Franklin and Mr. Ronald J. Jutras. After
the completion of this offering, ATS will own more
than %
of the total voting power of our common shares and we will be a
“controlled company” within the meaning of the Nasdaq
Marketplace Rules. As a controlled company, we will be exempt
from the requirements that the compensation of our chief
executive officer and our other executive officers be
determined, or be recommended to our board of directors for
determining, either by a majority of the independent directors
or a compensation committee comprised solely of independent
directors, that our director nominees be selected, or
recommended for the board’s selection, either by a majority
of the independent directors or a nominations committee
comprised solely of independent directors, and that we have a
written charter or board resolution addressing our director
nominations process, and we intend to rely on these exemptions.
See “Risk Factors — We will be a “controlled
company” within the meaning of the rules of The Nasdaq
Global Market, and, as a result, will qualify for, and intend to
rely on, exemptions from certain corporate governance
requirements that provide protection to shareholders of other
companies.”
Terms of Directors and Executive Officers
Our officers are elected by and serve at the discretion of the
board of directors. Our directors serve for one-year terms.
Employment Agreements
We have an employment contract effective May 20, 2005 (and
amended effective October 13, 2006) with Mr. Ghirardi,
our president and chief executive officer. Under the contract,
Mr. Ghirardi is entitled to receive an annual salary of
C$357,000, may be entitled to a bonus (subject to board
approval) which is currently targeted to
equal %
of his annual salary but may increase to a maximum
of %
of his annual salary, and is eligible to participate in our
share compensation arrangements. In addition, he is entitled to
participate in all of our regular employee benefit plans that he
is qualified for, reimbursement of all reasonable out-of-pocket
expenses incurred in the performance of his duties,
reimbursement of relocation expenses to a maximum of US$55,000,
reimbursement of temporary living accommodations and related
expenses up to a maximum of C$2,000 per month until
November 20, 2006 and an annual car allowance of C$10,000.
In the event that Mr. Ghirardi’s employment is
terminated with cause or he is unable to perform his services
for a continuous period of 180 days, he is entitled to his
salary and benefits until the effective termination date of his
employment. If, however, Mr. Ghirardi’s employment is
terminated without cause, he is entitled to be paid his monthly
salary and have his regular employee benefits continued during a
notice period of 24 months. In addition, Mr. Ghirardi
can terminate his employment with us at any time upon
30 days’ notice and upon receipt of such notice, we
have the right to accelerate the termination date. In this
event, Mr. Ghirardi is only entitled to his salary and
benefits until the effective termination date. Upon a change of
control of our company, either we or Mr. Ghirardi can
terminate his employment for any reason within twelve months of
such change of control. A “change of control” is
defined as (i) any person or persons who acting in concert,
other than ATS, become the beneficial owner of over 50% of the
votes attaching to our outstanding voting securities,
(ii) certain changes in the composition of our board of
directors, (iii) certain reorganizations affecting our
company, or (iv) the sale of all or substantially all of
our assets subject to certain exceptions. In such event,
Mr. Ghirardi is entitled to be paid his monthly salary and
have his regular employee benefits continued for 24 months.
Under the contract, Mr. Ghirardi has disclaimed any rights
to all intellectual property created by him or jointly with
others while employed with us. In addition, following
termination of employment, Mr. Ghirardi will be subject to
a one year non-competition covenant applicable worldwide and a
two year non-solicitation covenant. We have agreed to review
Mr. Ghirardi’s compensation package following the
completion of this offering.
We have an employment contract effective June 7, 2006 with
Mr. Adams, our senior vice president and chief financial
officer. Under the contract, Mr. Adams is entitled to
receive an annual salary of C$250,000, may be entitled to a
bonus (subject to board approval) which is currently targeted to
equal %
of his annual salary but may increase to a maximum
of %
of his annual salary, and is eligible to participate in our
share compensation arrangements. In addition, he is entitled to
participate in all of our regular employee
benefit plans that he is qualified for, reimbursement of all
reasonable out-of-pocket expenses incurred in the performance of
his duties, reimbursement of relocation expenses to a maximum of
C$55,000, supplemental monthly benefit of C$2,000 until the
earlier of securing permanent relocated housing and
June 30, 2007 and an annual car allowance of C$9,880. In
the event that Mr. Adams’ employment is terminated
with cause or he is unable to perform his services for a
continuous period of 180 days, he is entitled to his salary
and benefits until the effective termination date of his
employment. If, however, Mr. Adams’ employment is
terminated without cause, he is entitled to be paid his monthly
salary and have his regular employee benefits continued during a
notice period of not less than 12 months and not more than
18 months, depending on his years of service with us. In
addition, Mr. Adams can terminate his employment with us at
any time upon 30 days’ notice and upon receipt of such
notice, we have the right to accelerate the termination date. In
this event, Mr. Adams is only entitled to his salary and
benefits until the effective termination date. Upon a change of
control of our company, either we or Mr. Adams can
terminate his employment for any reason within three months of
such change of control. A “change of control” is
defined as (i) any person or persons who acting in concert,
other than ATS, become the beneficial owner of over 50% of the
votes attaching to our outstanding voting securities,
(ii) certain changes in the composition of our board of
directors, (iii) certain reorganizations affecting our
company, or (iv) the sale of all or substantially all of
our assets subject to certain exceptions. In such event,
Mr. Adams is entitled to be paid his monthly salary and
have his regular employee benefits continued for 18 months.
Under the contract, Mr. Adams has disclaimed any rights to
all intellectual property created by him or jointly with others
while employed with us. In addition, following termination of
employment, Mr. Adams will be subject to a one year
non-competition covenant applicable worldwide and a one year
non-solicitation covenant.
We have an employment contract effective April 10, 2006
with Mr. Seiter, our senior vice president of operations
and technology. Under the contract, Mr. Seiter is entitled
to receive an annual salary of C$230,000, may be entitled to a
bonus (subject to board approval) which is currently targeted to
equal 30% of his annual salary but may increase to a maximum of
50% of his annual salary, and is eligible to participate in our
share compensation arrangements. In addition, he is entitled to
participate in all of our regular employee benefit plans that he
is qualified for, and reimbursement of all reasonable
out-of-pocket expenses incurred in the performance of his
duties. In the event that Mr. Seiter’s employment is
terminated with cause or he is unable to perform his duties for
a continuous period of 180 days, he is entitled to his
salary and benefits until the effective termination date of his
employment. If, however, Mr. Seiter’s employment is
terminated without cause, he is entitled to be paid his monthly
salary and have his regular employee benefits continued during a
notice period of not less than six months and not more than
12 months, depending on his years of service with us. In
addition, Mr. Seiter can terminate his employment with us
at any time upon 30 days’ notice and upon receipt of
such notice, we have the right to accelerate the termination
date. In this event, Mr. Seiter is only entitled to his
salary and benefits until the effective termination date. Under
the contract, Mr. Seiter has disclaimed any rights to all
intellectual property created by him or jointly with others
while employed with us. In addition, following termination of
employment, Mr. Seiter will be subject to a one year
non-competition covenant applicable in North America and a two
year non-solicitation covenant.
We have an employment contract effective November 13, 1991
(and amended effective July 20, 2006) with Mr. Dubien,
the managing director of Photowatt France. Under the contract,
Mr. Dubien is entitled to receive an annual salary of
€100,000, may be
entitled to a bonus (subject to board approval), and is eligible
to participate in our share compensation arrangements.
Additionally, in consideration of certain additional
responsibilities, Mr. Dubien is entitled to a further
€5,000 per
year as well as the use of a company car. Mr. Dubien’s
employment contract does not include provisions relating to the
termination of his contract, and so if Mr. Dubien’s
employment contract is terminated, French law will apply, and
dismissal indemnities will have to be calculated according to
the provisions of the bargaining convention of the
“Ingénieurs et cadres de la métallurgie.”
Under his contract, following termination of employment,
Mr. Dubien will be subject to a one-year non-competition
covenant applicable in Europe and renewable once. Should we want
to enforce this covenant, Mr. Dubien will be entitled to be
paid 50% of his monthly salary during the application of the
covenant (or 60% in the absence of serious misconduct and as
long as Mr. Dubien has not found a new position).
We had no directors during fiscal 2006. We pay each of our
current non-executive directors, other than ATS nominees
(currently Messrs. Beard, Jutras and McCuaig) and our
chairman, (i) an annual retainer of C$17,500; (ii) an
annual retainer for each committee they are on in the amount of
C$2,500; (iii) an additional C$5,000 per year for
serving as the chairman of the Audit and Finance Committee, and
an additional C$3,000 per year for serving as the chairman
of the Compensation, Corporate Governance and Nominating
Committee; (iv) meeting fees of C$1,500 per day if
attending in person or C$750 if by phone (with an increase to
C$1,500 if a meeting by phone lasts longer than 30 minutes);
(vi) an initial stock option grant covering 15,000 shares;
and (vii) a DSU grant
of .
Our chairman receives an annual retainer of C$150,000 and an
initial stock option grant covering 64,290 shares.
The following table sets forth all compensation received during
fiscal 2006 by our executive officers and other key personnel
during fiscal 2006.
Mr. Ghirardi commenced employment effective June 1,2005, and the amounts in the table reflect his compensation for
the period from June 1, 2005 until March 31, 2006.
Other annual compensation includes the payment of relocation
costs of C$83,216, a car allowance of C$8,462 and a registered
retirement savings plan match of C$2,019. In addition,
Mr. Ghirardi was granted options expiring on June 6,2012 to purchase 50,000 shares of ATS in fiscal 2006 at an
exercise price of C$15.45 per share, which effective
October 13, 2006, were surrendered.
(2)
Mr. Adams commenced employment effective June 7, 2006.
See “— Employment Agreements” for details of
his current compensation arrangements.
(3)
Other annual compensation for Mr. Laborde includes a car
allowance and other benefits.
(4)
Mr. Seiter commenced employment with us effective
April 10, 2006. See “— Employment
Agreements” for details of his current compensation
arrangements.
We have granted and intend to grant options to purchase our
common shares under our Stock Option Plan to certain of our
executive officers, employees and other key personnel. See
“— Share Compensation Arrangements —
Stock Option Plan”.
Share Ownership of Directors and Executive Officers
As of July 31, 2006, and immediately after this offering,
none of our directors or executive officers beneficially owned
or is expected to beneficially own 1% or more of our common
shares.
Share Compensation Arrangements
Our board of directors has adopted the Stock Option Plan and
intends to adopt the Executive Performance Share Unit Plan and
the Directors’ Deferred Stock Unit Plan (collectively, the
“Share Compensation Arrangements”). The Share
Compensation Arrangements are designed to allow for several
different types of equity-based compensation awards and afford
our board the ability to provide incentives to employees,
officers, directors and consultants to contribute to our success
currently and in the future.
Our board of directors has adopted a Stock Option Plan (the
“Option Plan”) to provide long-term incentives to
attract, motivate and retain our key employees, directors and
officers, and consultants providing services to us.
Under the Option Plan, we may, from time to time, designate any
persons, including one or more of our affiliates’
directors, bona fide full-time employees, or consultants as
“Eligible Persons” for the purposes of the Option
Plan. In order to participate in the Option Plan (as an
“Option Plan Participant”), Eligible Persons must
deliver to us a letter agreement and thereby agree to the terms
and conditions of participation required under the Option Plan
and such other terms and conditions as we may deem appropriate.
We may, from time to time, grant options (“Options”)
to an Option Plan Participant to acquire our common shares in
accordance with the Option Plan. When granting Options, we will
designate the maximum number of shares that may be purchased
under the Options, establish the exercise price of the Options,
determine the expiry date for exercise of the Options, and
designate the conditions under which the Options will vest. The
exercise prices for Options must not be less than the fair
market value of the shares, which so long as our shares are
traded on a stock exchange, is defined to be the closing price
for the shares, on the day immediately prior to the date the
Options were granted to the Option Plan Participant, on the
stock exchange on which the highest aggregate volume of shares
have traded on such day.
If an Option Plan Participant dies, the Option Plan
Participant’s legal representatives may exercise the Option
Plan Participant’s outstanding vested Options upon notice
to us, within 180 days of the Option Plan
Participant’s death.
Options granted to an Option Plan Participant who is a citizen
or resident of the United States may be incentive stock options
within the meaning of section 422 of the Internal Revenue
Code of 1986, as amended (the “Code”), if so
designated by the board of directors and/or compensation,
corporate governance and nominating committee at the time of
grant. Only employees are eligible to be granted incentive stock
options.
At our discretion, an Option may have connected therewith, at or
after the time of grant, a number of stock appreciation rights
(an “SAR” or “SARs”) equal to the number of
shares to be received in respect of the Option. Each SAR will
entitle the Option Plan Participant to surrender to us,
unexercised, the right to subscribe for such share pursuant to
the related Option and to receive cash in an amount equal to the
excess of the fair market value over the exercise price of the
related Option. Upon exercise of an SAR in respect of a share
covered by a related Option, that Option in respect of such
share will immediately terminate and be of no further force or
effect. Unexercised SARs will terminate when the related Option
is exercised or the Option terminates.
We have granted an Option to purchase 160,000 of our common
shares to our president and chief executive officer,
Mr. Silvano Ghirardi, and an Option to purchase 142,860 of
our common shares to our senior vice president and chief
financial officer, Mr. David L. Adams, under our Option
Plan. These Options have an exercise price of C$5.00 per share
and expire on September 12, 2013. Mr. Ghirardi’s
Option will vest as to 20% of the underlying common shares on
the closing of this offering and on each anniversary of the
closing of this offering. Mr. Adam’s Option will vest
as to 20% of the underlying common shares on each anniversary of
the closing of this offering. In the event that a “change
of control” as defined in each executive’s respective
option agreement occurs following the closing of this offering
and the executive’s employment with us is terminated or he
resigns, in either case within three months from the date of
such change of control, any unvested portion of the Option held
by him will vest. The Options granted to Mr. Ghirardi and
Mr. Adams are each subject to an adjustment that will
increase or decrease the number of common shares underlying the
Option such that the resulting number of common shares is equal
to a specified percentage of the number of our common shares
held by ATS immediately prior to the closing of this offering.
If the adjustment results in an increase in the number of common
shares underlying an Option, upon exercise of the Option, the
holder will receive a cash bonus equal to a fraction of the
exercise price that is equal to the fraction that the increase
in the number of common shares underlying the Option represents
of the original number of common shares underlying the Option.
In addition, we have approved the granting of Options to certain
of our executive officers, directors, employees and other key
personnel under the Option Plan as described in the following
table. Such options will be granted on the date of the
completion of the IPO at an exercise price equal to the initial
public offering price and having an expiry date that is seven
years from the date of the completion of the IPO.
Number of
Common Shares
Class of Optionee (number of individuals in receipt of Options)
under Option(1)
All of our executive officers(3)
335,840
All of our directors who are not also executive officers(4)
Of the foregoing options, 292,000 options will vest on the
achievement of specific defined performance objectives related
to the development of Spheral Solar and 552,000 options will
vest as to 20% on each anniversary date of the completion of the
IPO.
For further details on the Option Plan see “Stock Option
Plan and Executive Performance Share Unit Plan” below.
Executive Performance Share
Unit Plan
We intend to adopt an Executive Performance Share Unit Plan (the
“RSU Plan”) to provide medium-term incentives to
certain of our executives to contribute to our success and to
build and maintain a strong spirit of performance and
entrepreneurship.
Under the RSU Plan, we may grant share units (“Share
Units”) to such participants (“RSU Plan
Participants”) in such number and at such times as we may
determine, as a bonus or similar payment. Each grant of a Share
Unit will be set forth in a grant agreement (a “Grant
Agreement”) containing terms and conditions, including
additional conditions with respect to the vesting of Share
Units, the payment of cash or the provision of common shares
under the RSU Plan, and may include restrictions on the resale
of common shares, including escrow arrangements.
When vested, each Share Unit will give the RSU Plan Participant
the right to receive, pursuant to the provisions of the RSU Plan
and in accordance with the terms of the Grant Agreement relating
to such Share Unit, one of our common shares or where the
applicable Grant Agreement so provides, the fair market value of
one of our common shares (less any applicable tax withholdings).
If an RSU Plan Participant dies, the RSU Plan Participant’s
beneficiary is entitled to receive cash or common shares in
respect of the RSU Plan Participant’s vested Share Units. A
deceased RSU Plan Participant’s unvested Share Units may
only be redeemed by a beneficiary at our discretion.
For further details on the RSU Plan see “Stock Option Plan
and Executive Performance Share Unit Plan” below.
Stock Option Plan and
Executive Performance Share Unit Plan
The Option Plan and RSU Plan (together, the “Plans”)
contain similar provisions governing their execution and the
granting of Options and Share Units (together, “Equity
Awards”) to Option Plan Participants and RSU Plan
Participants (together, the “Participants”).
Equity Awards will vest according to the terms of their grant,
and we generally intend to provide for vesting over
a year period.
Subject to some exceptions, in the event of a merger,
amalgamation or plan of arrangement involving us, acquisition or
take-over bid for our shares, or similar transaction, or the
sale of all or substantially all of our assets, any of which
results in a change of our control (a “Corporate
Transaction”), Equity Awards will be deemed to be redeemed
and terminate immediately prior to the specified effective date
of the Corporation Transaction, unless either the Equity Awards
are assumed by the successor corporation or parent thereof in
connection with the Corporate Transaction or our board of
directors determines otherwise. Our board or a committee of our
board, as the case may be, may, subject to such conditions as
the board or a committee considers appropriate, determine the
acceleration, if any, of the vesting provisions for any Equity
Award and permit a Participant to exercise or redeem unvested
Equity Awards during such period of time as may be specified by
our board of directors or a committee thereof.
The maximum quantity of common shares which may be issued under
the Plans, in aggregate, is equal to 10% of the common shares
outstanding immediately following the completion of this
offering. Notwithstanding any of the provisions of the Plans,
the number of shares reserved for issuance to any one person, in
aggregate under the Plans, will not exceed 5% of our outstanding
common shares (subject to some adjustments, the
“Outstanding Issue”), and the number of shares
reserved for issuance pursuant to all Equity Awards granted to
insiders, in aggregate, will not exceed 10% of the Outstanding
Issue. In addition, the issuance of Equity Awards to any one
insider and such insider’s associates, within a one year
period, may not exceed 5% of the Outstanding Issue and the
issuance to all insiders, within a one year period, may not
exceed 10% of the Outstanding Issue.
In the event that our common shares are changed or affected as a
result of the declaration of a stock dividend or other
distribution thereon or their subdivision or consolidation, the
maximum quantity of shares which may be issued under the Plans,
in aggregate, will be adjusted accordingly by our board, or a
committee thereof, to such extent as they deem proper in their
discretion. Equity Awards outstanding prior to, but exercised or
redeemed after such an event will be subjected to a change in
the number of shares (or cash amount) delivered upon exercise or
redemption and an adjustment in the exercise price in respect of
Options and the fair market value with respect to Share Units,
each to such extent as our board deems proper in their
discretion.
In the event of any reclassification or reorganization of our
shares, other than as specified in the preceding paragraph, or a
merger, combination, entry into a plan of arrangement or
amalgamation of us with another corporation, Equity Awards
outstanding prior to, but exercised or redeemed after, the
applicable event will be entitled to receive, in lieu of our
common shares, the number and class of shares or other
securities of the corporation continuing from such event, and/or
other consideration, to which the holder would have been
entitled if, at the effective date of the event, the holder of
an Equity Award had been the holder of our common shares.
Participants do not have the right to exercise any voting
rights, receive any dividends or have any other rights as a
shareholder in respect of any Equity Awards until the underlying
shares have been issued. However, an RSU Plan Participant will,
unless we determine otherwise, from time to time be credited
with additional Share Units in respect of non-stock dividends
declared that would have been paid to the RSU Plan Participant
if the Share Units credited to the RSU Plan Participant, on the
relevant record date for dividends, had been common shares.
Unless we provide otherwise in a written agreement, if a
Participant ceases to provide services to us or our affiliates
in any capacity of employee, officer, director, or consultant
(subject to certain exceptions), the Participant’s vested
Options will remain outstanding and subject to exercise for
30 days (but in no event beyond the expiry date of the
Options), vested Share Units will be redeemed by us as soon as
practicable following the cessation of services, and unvested
Equity Awards will immediately expire.
Unless we provide otherwise in a written agreement, if a
Participant ceases to be an employee or officer by reason of
termination for cause, is removed as a director by our board or
shareholders, or ceases to be a consultant to us for cause or
breach of duty, in each case with respect to us or our
affiliates (and in each case, if not otherwise remaining an
employee, officer or director of us or any of our affiliates),
all the
Participant’s Equity Awards, whether vested or unvested,
will immediately expire and be of no further force or effect.
From time to time, we may amend, suspend or terminate the Plans
or the terms of any outstanding Equity Awards; provided,
however, that (i) any approvals required under any
applicable law are obtained, (ii) except to the extent
required by applicable laws, no such amendment, suspension or
termination will be made to the extent that would materially
adversely affect the existing rights of a Participant with
respect to any outstanding Equity Awards, without the
Participant’s consent in writing, and (iii) certain
amendments will only become effective upon shareholder approval
by a majority of the votes attaching to shares held by
shareholders in attendance at a meeting of shareholders voting
in person or by proxy, including (subject to some exceptions):
•
any amendment to the maximum number of shares reserved for issue
under the Plans;
•
any amendment that would increase any of the percentage limits
for holdings of Equity Awards by a Participant or Participants;
•
any amendment to the maximum allowable term to expiry for an
Equity Award (seven years);
•
any amendment that would extend the term of any outstanding
Equity Award granted to an insider to a date beyond the maximum
allowable term to expiry for such Equity Award;
•
any amendment that would reduce the exercise price at which
Options may be granted below the fair market value of our shares
on the date the Options are granted; and
•
any amendment that would reduce the exercise price of an
outstanding Option of an insider.
We may make such rules and regulations for the administration of
the Plans, and interpret the provisions thereof, as we determine
to be appropriate. Our board, or a committee thereof, may from
time to time delegate all or any of our powers under the Plans
to one or more of our directors or officers.
Directors’ Deferred
Stock Unit Plan
We intend to adopt a Directors’ Deferred Stock Unit Plan
(the “DSU Plan”) to encourage our outside directors
(being directors who are not employees of our company) to have a
meaningful investment in our company, to enhance our
company’s ability to attract and retain high quality
individuals to serve on our board of directors and to align the
interests of outside directors with those of our shareholders.
Under the DSU Plan, outside directors of our company (“DSU
Participants”) will be able to elect to receive their
annual retainer fees, including annual committee fees, in the
form of deferred stock units. A deferred stock unit is a
bookkeeping entry, with a value on any date that is equivalent
to the market value of a common share on such date (as
determined in accordance with the DSU Plan), credited to an
account for a DSU Participant until he or she ceases to be a
member of our board of directors (and is not otherwise an
employee or officer of us or an employee, officer or director of
any of our affiliates). As well, the DSU Plan permits DSU
Participants to receive grants of additional deferred stock
units in such amounts and at such times as our board may deem
advisable to provide the DSU Participant with appropriate
equity-based compensation for his or her services to us. It is
contemplated that DSU Participants will receive an initial grant
of deferred stock units upon appointment to our board of
directors. Under the DSU Plan, DSU Participants will also
generally be credited with deferred stock units in respect of
any non-stock dividends declared that would have been paid to
the DSU Participants, on the relevant record date for dividends,
if the deferred stock units credited to his or her account under
the DSU Plan had been common shares. Upon a DSU
Participant’s ceasing to be a member of our board of
directors (provided he or she is not otherwise an employee or
officer of us, or an employee, officer or director of any of our
affiliates), he or she will be entitled to receive, or, in the
case of a deceased DSU Participant, the DSU Participant’s
beneficiary will be entitled to receive, the value of the
deferred stock units credited to the DSU Participant’s
account in cash (less any applicable tax withholdings).
Our board may amend or terminate the DSU Plan provided that no
amendment or termination may adversely affect the rights of a
DSU Participant with respect to fees that the DSU Participant
has elected to receive in the form of deferred stock units or
with respect to deferred stock units previously granted to the
DSU Participant under the DSU Plan, unless the DSU Participant
consents or unless such amendment or termination is required by
applicable law. The DSU Plan is an unfunded obligation of ours.
Short Term Incentive Plan
We intend to adopt a short-term incentive plan prior to the
completion of this offering.
Additional Information Regarding Directors and Officers
Corporate cease trade orders or bankruptcies
To the best of our knowledge, none of our directors or officers
is, or within the last ten years prior to the date of this
prospectus has been, a director or officer of any other
corporation that, while that person was acting in the capacity
of a director or officer of that corporation, was the subject of
a cease trade order or similar order or any order that denied
the corporation access to any statutory exemptions under Ontario
securities law for a period of more than 30 consecutive days,
was declared bankrupt or made a voluntary assignment in
bankruptcy, instituted any proceedings, arrangement or
compromise with creditors or had a receiver, receiver manager or
trustee appointed to hold the assets of that director or officer.
Conflicts of interest
To the best of our knowledge, other than as described below,
there are no known existing or potential conflicts of interest
among us, our directors and officers or any proposed director or
officer as a result of their outside business interests. Certain
of our directors serve as directors and/or officers of ATS, and
therefore it is possible that a conflict may arise between their
duties to us and their duties as directors or officers of ATS.
See “Risk Factors — We may have potential
disputes and business conflicts of interest with ATS regarding
our past and ongoing relationships, and because of ATS’
controlling ownership in us, the resolution of these conflicts
may not be favorable to us.”
Indebtedness of directors and officers
As at the date of this prospectus, no amount was owed to us or
any of our subsidiaries by any director or executive officer.
ATS has provided strategic, operational and administrative
services to us. These services have been reflected in the
combined financial statements at their exchange amount.
Furthermore, we purchased property, plant and equipment from
ATS, primarily for the Spheral Solar segment. We also purchased
development services, raw materials and other services from ATS
or its affiliates, and these purchases have been reflected at
their exchange amount. The majority of such exchange amounts
were based on a cost-plus basis varying from 0% to 25%.
In the first quarters of fiscal 2007 and 2006, we made sales of
$10 thousand and $15 thousand, respectively, to
EPISOL s.a.r.l., a business controlled by Eric Laborde, a
consultant who serves as managing director, Europe (acting) of
Photowatt France, which have been reflected at their exchange
amount, which we believe approximates fair market value. In
fiscal 2005 and 2006, we made sales of $61 thousand and
$150 thousand, respectively, to this business.
For more information regarding our related-party transactions
since the beginning of our preceding three fiscal years, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Related Party
Transactions,”“Our Relationship with ATS,”“Management — Employment Agreements,”
note 17 to our combined annual financial statements and
note 10 to our combined quarterly financial statements included
in this prospectus.
Collectively, our directors and officers hold an aggregate of
109,899 ATS common shares as well as options covering
an additional 374,800 ATS common shares as at
October 16, 2006. The following table sets forth these
common share and option holdings by our directors and officers.
Other than the foregoing, within the three years before the date
of this prospectus, neither ATS nor any director, executive
officer, or any of their associates or affiliates has had any
direct or indirect material interest in any transaction or
proposed transaction that has materially affected or will
materially affect us.
The following table sets forth information regarding the
beneficial ownership of our common shares as of July 31,2006 and immediately after this offering by:
•
each person or entity known to us to own or beneficially more
than five percent of our outstanding shares; and
•
our directors and executive officers.
Other than as set forth below, no other person or entity owned
more than five percent or more of our outstanding shares or
exercised control or could exercise control over us as of the
date of this prospectus.
Beneficial ownership is determined in accordance with SEC rules,
which generally attribute beneficial ownership of securities to
each person or entity who possesses, either solely or shares
with others, the power to vote or dispose of those securities.
These rules also treat as outstanding all shares that a person
would receive upon exercise of stock options or warrants, or
upon conversion of convertible securities, held by that person
that are exercisable or convertible within 60 days of the
determination date. Shares issuable pursuant to exercisable or
convertible securities are deemed to be outstanding for
computing the percentage ownership of the person holding such
securities but are not deemed outstanding for computing the
percentage ownership of any other person. ATS has granted the
underwriters an over-allotment option exercisable for a period
of 30 days from the date of this prospectus to purchase up
to an
additional common
shares from ATS (representing 15% of the common shares offered
hereby) at the initial public offering price to cover
over-allotments, if any. The percentage of beneficial ownership
for the following table is based on one common share outstanding
as of July 31, 2006
and common
shares outstanding immediately after the completion of this
offering, assuming no exercise of the underwriters’
over-allotment option. To our knowledge, except as indicated in
the footnotes to this table and pursuant to applicable community
property laws, the persons named in the table have sole voting
and investment power with respect to all common shares shown as
beneficially owned by them.
Common Shares
Common Shares
Beneficially Owned
Beneficially Owned
Prior to This
Immediately After This
Offering
Offering
Name and Address of Beneficial Owner
Number
%
Number
%
ATS(1)
100
%
Directors and Executive Officers
*
*
—
—
(1)
If the over-allotment option is exercised in full, ATS will
beneficially
own shares
after the offering,
representing %
of our outstanding shares. ATS acquired its common shares
pursuant to the capitalization of its investments in us referred
to in note 16 to our combined annual financial statements
as well as pursuant to the transfer to us of the assets of our
business referred to under “Our Relationship With
ATS — Agreements Between ATS and Us —
Transfer Agreements”.
*
Represents shares equal to less than 1% of our total outstanding
shares.
None of our shareholders has, or after the closing of this
offering will have, different voting rights from other
shareholders. We are not aware of any arrangement that may, at a
subsequent date, result in a change of control of our company.
We contemplate entering into certain separation agreements,
including a shareholder agreement, with ATS immediately prior to
the completion of this offering that will provide certain rights
to ATS. See “Our Relationship with ATS —
Agreements Between ATS and Us.”
The following is a summary description of our share capital, our
certificate and articles of incorporation and by-laws and are
qualified by reference to our certificate and articles of
incorporation and by-laws, copies of which have been filed with
the SEC as exhibits to our registration statement of which this
prospectus forms a part and with Canadian provincial securities
regulators.
We are a Canadian corporation and our affairs are governed by
our certificate and articles of incorporation, our by-laws and
the CBCA.
Under our articles of incorporation, we are authorized to issue
an unlimited number of common shares and an unlimited number of
preference shares, issuable in series, each without par value.
Upon completion of this offering, we will
have common
shares outstanding
( common
shares if the underwriters exercise their over-allotment option
in full) and no preference shares outstanding.
Common Shares
As of the date of this prospectus, and before giving effect to
this offering, all of our outstanding common shares were owned
directly or indirectly by ATS.
Holders of common shares are entitled to one vote per share on
all matters to be voted on at all meetings of shareholders
except meetings at which only holders of a specified class of
shares are entitled to vote. The holders of common shares are
not entitled to cumulative voting rights. The election of
directors is based on plurality voting and, in general, all
fundamental matters as specified in the CBCA to be voted on by
shareholders must be approved by not less than two thirds of the
votes cast by holders of common shares present in person or
represented by proxy, voting together as a single class, at a
duly called meeting of shareholders, subject to any voting
rights granted to holders of any preference shares.
Holders of common shares have no pre-emptive rights and there
are no redemptive or sinking fund provisions applicable to the
common shares.
Holders of common shares will share in an equal amount per share
in any dividend declared by us, subject to any preferential
rights of any outstanding preference shares.
Upon liquidation, dissolution or winding up of our affairs, our
creditors and any holders of preference shares with preferential
rights will be paid before any distribution to holders of common
shares. The holders of common shares would be entitled to
receive a pro rata distribution of any of our remaining
property. All outstanding common shares are, and the common
shares offered in this offering when issued and paid for will
be, fully paid and non-assessable.
The rights, preferences and privileges of holders of common
shares are subject to, and may be adversely affected by, the
rights of holders of shares of any series of preference shares
which our board of directors may designate and issue in the
future.
Preference Shares
The preference shares may at any time and from time to time be
issued in one or more series. Subject to the CBCA, the directors
may fix the number of preference shares of each series,
designation, rights, privileges, restrictions and conditions
attaching to the preference shares of each series, including,
without limitation, any voting rights, any right to receive
dividends or the means for determining such dividends, the dates
of payment, any terms and conditions of redemption or purchase,
any conversion rights, and any rights on the liquidation,
dissolution or winding up of our company, any sinking fund or
other provisions. The preference shares of each series will rank
on par with the preference shares of every other series and be
entitled to preference over the common shares with respect to
the payment of dividends and the distribution of assets in the
event of liquidation, dissolution or winding up of our company.
The issuance of preference shares and the terms selected by the
board could decrease the amount of earnings and assets available
for distribution to the holders of our common shares or
adversely affect the rights and powers, including voting rights,
of the holders of our common shares without any further vote or
action by the common shareholders.
Provisions of our articles of incorporation and by-laws and of
the CBCA summarized below may be deemed to have an anti-takeover
effect and may delay, deter or prevent a tender offer or
takeover attempt that a shareholder might consider in its best
interest, including those attempts that might result in a
premium over the market price for the common shares held by
shareholders.
No cumulative voting. Under the CBCA, the right to vote
cumulatively does not exist unless the articles of incorporation
specifically authorize cumulative voting. Our articles of
incorporation do not grant shareholders the right to vote
cumulatively.
Authorized but unissued shares. Our authorized but
unissued common shares are available for future issuance without
shareholder approval. These additional common shares may be
utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. Our articles of
incorporation authorizes our board to issue an unlimited number
of preference shares and to determine the number, rights,
privileges, restrictions and conditions, including voting
rights, qualifications, limitations and restrictions attaching
to each series of preference shares. The existence or issuance
of authorized but unissued common and preference shares could
have the effect of delaying, deterring or preventing an attempt
to obtain control of us by means of a proxy contest, tender
offer, merger or otherwise, or an unsolicited acquisition
proposal or of making the removal of management more difficult.
Additionally, the issuance of preference shares may have the
effect of decreasing the market price of our common shares.
Meeting of shareholders. The CBCA provides that meetings
of our shareholders may be requisitioned or called by a
shareholder or shareholders holding not less than five percent
of our issued and outstanding common shares. Such a shareholder
or shareholders must deliver a requisition to the directors
setting out the business to be transacted at the requested
meeting. The directors may refuse to call the meeting if, among
other things, they determine that the shareholder or
shareholders are attempting to enforce a personal claim or
abusing their requisition rights to secure publicity. Unless the
directors are otherwise entitled to do so, if the directors do
not call a meeting of shareholders within 21 days after
receiving the requisition, any shareholder who signed the
requisition may call the meeting.
Amendment to our governing documents. For so long as ATS
and its subsidiaries beneficially own common shares representing
at least two-thirds of the total voting power of the outstanding
common shares, ATS will have enough common shares to amend our
articles of incorporation, subject to certain circumstances
which would permit holders of preference shares to vote as a
separate class. In addition, for as long as ATS and its
subsidiaries beneficially own common shares representing at
least 40% of our outstanding common shares, ATS will be
entitled to designate, pursuant to the Shareholder Agreement,
25% of the nominees for election to our board of directors. Our
board may unilaterally amend or repeal our by-laws with the
affirmative vote of a majority of the entire board. Such
amendment or repeal is effective upon such board approval, but
is subject to confirmation by a majority of the votes entitled
to be cast by holders of our common shares present in person or
represented by proxy at our next meeting.
Indemnification of Directors and Executive Officers and
Limitation of Liability
We have included in our by-laws provisions to generally
eliminate the personal liability of our directors and officers
to the full extent permitted by the CBCA. In addition, our
by-laws provide that we are required to advance moneys to pay
costs, charges and expenses to our directors and officers as
incurred in connection with proceedings against them for which
they may be indemnified in advance of a final determination of
their entitlement to indemnification. These provisions, however,
do not eliminate or limit liability of a director or officer,
and will require that a director or officer repay any advanced
costs, charges or expenses, if the director or officer
(i) did not act honestly and in good faith with a view to
our best interest, and (ii) in the
case of a criminal or administrative action or proceeding that
is enforced by monetary penalty, did not have reasonable grounds
for believing that his or her conduct was lawful.
We are not currently aware of any pending or threatened
litigation or proceeding involving a director, officer, employee
or agent of ours in which indemnification would be required or
permitted. We believe these indemnification provisions are
necessary to attract and retain qualified persons as directors
and officers.
We have entered into indemnification agreements with our
directors, executive officers and with certain other officers
and employees (including officers and employees of our
subsidiaries). The indemnification agreements generally require
that we indemnify and hold an indemnitee harmless to the
greatest extent permitted by law for liabilities arising out of
the indemnitee’s service to us as a director, officer or
employee, if the indemnitee acted honestly and in good faith and
in a manner the indemnitee reasonably believed to be in or not
opposed to our best interests and, with respect to criminal and
administrative actions or proceedings that are enforced by
monetary penalty, if the indemnitee had no reasonable grounds to
believe that his or her conduct was unlawful. The
indemnification agreements also provide for the advancement of
defense expenses by us.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers or
persons controlling us under these indemnification agreements,
we have been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable as a matter of
United States law.
The foregoing is a summary of the indemnification agreements and
is qualified in its entirety by reference to the full text of
the indemnification agreements, a sample of which is attached as
exhibits to the registration statement of which this prospectus
is a part and copies of which have been filed with Canadian
provincial securities regulators.
Directors’ and Officers’ Fiduciary Duties
Under the CBCA, all of our directors and officers, in exercising
their powers and discharging their duties, are required to act
honestly and in good faith with a view to our best interests and
to exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances.
Ownership and Exchange Controls
Limitations on the ability to acquire and hold our common shares
may be imposed by the Competition Act (Canada). This
legislation permits the Commissioner of Competition of Canada
(the “Commissioner”) to review any acquisition of
control over or a significant interest in us. This legislation
grants the Commissioner jurisdiction, for up to three years, to
challenge this type of acquisition before the Canadian
Competition Tribunal on the basis that it would, or would be
likely to, substantially prevent or lessen competition in any
market in Canada.
This legislation also requires any person who intends to acquire
our common shares to file a notification with the Canadian
Competition Bureau if certain financial thresholds are exceeded
and if that person would hold more than 20% of our common
shares. If a person already owns 20% or more of our common
shares, a notification must be filed when the acquisition of
additional common shares would bring that person’s holdings
to over 50%. Where a notification is required, the legislation
prohibits completion of the acquisition until the expiration of
a statutory waiting period, unless the Commissioner provides
written notice that she does not intend to challenge the
acquisition, or waives the obligation to submit a notification.
There is no limitation imposed by Canadian law or our articles
of incorporation on the right of non-residents to hold or vote
our common shares, other than those imposed by the Investment
Canada Act.
Investment Canada Act
Under the Investment Canada Act, a direct acquisition of
control of an existing Canadian business by a
“non-Canadian” as defined in the Investment Canada
Act, is subject to review where the book value of the
assets or the Canadian business exceeds a specified monetary
threshold. A reviewable acquisition cannot be implemented unless
the Minister responsible for the Investment Canada Act
(the “Minister”) is satisfied that the transaction
is likely to be of “net benefit to Canada” (a
“Reviewable Transaction”).
The prescribed factors of assessment to be considered by the
Minister to determine whether the Reviewable Transaction is
likely to be of net benefit to Canada include, among other
things, the effect of the investment on the level and nature of
economic activity in Canada (including the effect on employment,
resource processing, utilization of Canadian products and
services and exports), the degree and significance of
participation by Canadians in the acquired business, the effect
of the investment on productivity, industrial efficiency,
technological development, product innovation and product
variety in Canada, the effect of industrial, economic and
cultural policies (taking into consideration corresponding
provincial policies), and the contribution of the investment to
Canada’s ability to compete in world markets.
Where the acquisition of control of an existing Canadian
business by a non-Canadian is not a Reviewable Transaction, a
notification must be filed with the Investment Review Division
of Industry Canada.
Under the Investment Canada Act the acquisition of
control of us (either through the acquisition of our common
shares or all or substantially all our assets) by a non-Canadian
who is a World Trade Organization member country investor,
including U.S. investors, would be reviewable only if the
value of our assets was equal to or greater than a specified
amount. The specified amount for 2006 is C$265 million. The
threshold amount is subject to an annual adjustment on the basis
of a prescribed formula in the Investment Canada Act to
reflect changes in Canadian gross domestic product. For
non-World Trade Organization member investors, the corresponding
threshold is C$5 million.
The acquisition of a majority of the voting interests of an
entity is deemed to be acquisition of control of that entity.
The acquisition of less than a majority but one-third or more of
the voting shares of a corporation or of an equivalent undivided
ownership interest in the voting shares of the corporation is
presumed to be an acquisition of control of that corporation
unless it can be established that, on the acquisition, the
corporation is not controlled in fact by the acquiror through
the ownership of voting shares. The acquisition of less than
one-third of the voting shares of a corporation is deemed not to
be an acquisition of control of that corporation. Certain
transactions in relation to our common shares would be exempt
from review from the Investment Canada Act including:
•
the acquisition of our common shares by a person in the ordinary
course of that person’s business as a trader or dealer in
securities;
•
the acquisition or control of us in connection with the
realization of security granted for a loan or other financial
assistance and not for any purpose related to the provisions of
the Investment Canada Act; and
•
the acquisition or control of us by reason of an amalgamation,
merger, consolidation or corporate reorganization following
which the ultimate direct or indirect control in fact of us,
through the ownership of voting interests, remains unchanged.
There is no law, governmental decree or regulation in Canada
that restricts the export or import of capital, or which would
affect the remittance of dividends or other payments by us to
non-resident holders of our common shares, other than
withholding tax requirements.
Listing
We have applied to list our common shares on The Nasdaq Global
Market and on the Toronto Stock Exchange. Any such listing will
be subject to the approval of the relevant stock exchange, and
any such approval would not be given unless all of the original
listing requirements were met.
,
located
in ,
Ontario is the transfer agent and registrar for our common
shares in
Canada. ,
located
in , ,
is the transfer agent and registrar for our common shares in the
United States.
KPMG LLP, located in Waterloo, Ontario is our independent
auditor.
Prior to this offering, there has been no public market for our
common shares. The sale of a substantial amount of our common
shares in the public market after this offering, or the
perception that such sales may occur, could adversely affect the
prevailing market price of our common shares. Furthermore,
because some of our shares will not be available for sale after
this offering due to the contractual and legal restrictions on
resale described below, the sale of a substantial amount of
common shares in the public market after these restrictions
lapse could adversely affect the prevailing market price of our
common shares and our ability to raise equity capital in the
future.
Upon the completion of this offering, we expect to have a total
of outstanding common shares, which includes
the common
shares sold by us in this offering.
All of the common shares sold in this offering will be freely
tradable without restriction or further registration under the
Securities Act or applicable Canadian securities laws, except
for shares held by persons who may be deemed our
“affiliates,” as that term is defined under
Rule 144 of the Securities Act. An “affiliate” is
a person that directly, or indirectly through one or more
intermediaries, controls or is controlled by us or is under
common control with us.
The common shares held by ATS are deemed “restricted
securities” as that term is defined in Rule 144 under
the Securities Act. These restricted securities may be sold in
the public market by ATS only if they are registered or if they
qualify for an exemption from registration under Rule 144
or Rule 144(k) under the Securities Act. These rules are
summarized below. For the reasons set forth below, we expect
that the following common shares will be eligible for sale in
the public market at the following times:
Number of Shares Eligible for
Date
Sale in U.S. Public Market
Comment
On the date of this prospectus
Common shares sold in this offering
180 days after the date of this prospectus
Lock-up agreements expire
Rule 144
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this prospectus, a
person who has beneficially owned “restricted
securities” for at least one year would be entitled to sell
in the United States, within any three-month period, a number of
shares that does not exceed the greater of:
•
1.0% of the number of our common shares then outstanding which
will equal
approximately common
shares immediately after this offering ; and
•
the average weekly reported trading volume of our common shares
on The Nasdaq Global Market during the four calendar weeks
preceding the date on which a notice of the sale on
Form 144 is filed with the SEC by such person.
Sales under Rule 144 are also subject to
manner-of-sale
provisions, notice requirements and the availability of current
public information about us. However, these shares would remain
subject to lock-up
arrangements and would only become eligible for sale when the
lock-up period expires.
Persons who are not our affiliates may be exempt from these
restrictions under Rule 144(k) discussed below.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been
our affiliate at any time during the three months preceding a
sale, and who has beneficially owned the common shares proposed
to be sold for at least two years from the later of the date
these shares were acquired from us or from our affiliate,
including the holding period of any prior owner other than an
affiliate, is entitled to sell those shares in the United States
immediately following this offering without complying with the
manner-of-sale, public
information, volume limitation or notice provisions of
Rule 144. However, if these shares are subject to
lock-up arrangements,
such shares would only become eligible for sale when the
lock-up period expires.
Generally, an employee, officer, director or consultant who
purchased our common shares before the effective date of the
registration statement of which this prospectus is a part, or
who holds options as of that date, pursuant to a written
compensatory plan or contract, may rely on the resale provisions
of Rule 701 under the Securities Act. Under Rule 701,
these persons who are not our affiliates may generally sell
their eligible securities, commencing 90 days after the
effective date of the registration statement of which this
prospectus is a part, without having to comply with the public
information, holding period, volume limitation or notice
provisions of Rule 144.
Lock-up Agreements
We, our directors and executive officers and ATS have entered
into lock-up agreements
with the underwriters. Under these agreements, we, our directors
and executive officers and ATS may not, without the prior
written approval of BMO Nesbitt Burns Inc. and UBS Securities
LLC, subject to limited exceptions, offer, sell, contract to
sell or otherwise dispose of or hedge our common shares or
securities convertible into or exercisable or exchangeable for
our common shares, other than any common shares that are sold by
ATS in the event of exercise of the over-allotment option by the
underwriters. These restrictions will be in effect for a period
of 180 days after the date of this prospectus. At any time
and without public notice, BMO Nesbitt Burns Inc. and UBS
Securities LLC may, in their sole discretion, release all or
some of the securities from these
lock-up agreements.
Registration Rights
After the completion of this offering and the expiration of the
lock-up period
described above, ATS will be entitled to certain rights with
respect to the registration of our common shares under the
Securities Act, under the terms of a registration rights
agreement between us and ATS. See “Our Relationship with
ATS — Agreements Between ATS and Us —
Registration Rights Agreement.”
Additional Restrictions for Sales in Canada
The sale of any of our common shares in the public market in
Canada by ATS (as our controlling shareholder) will be subject
to restrictions under applicable Canadian securities laws in
addition to those restrictions noted above, unless the sale is
qualified under a prospectus filed with Canadian securities
regulatory authorities or if the following conditions are
fulfilled:
•
such sale occurs only after four months have lapsed from the
date of a final receipt issued by Canadian securities regulatory
authorities in respect of the final Canadian prospectus relating
to the offering; and
•
prior notice of the sale must be filed with Canadian securities
regulatory authorities at least seven days before any sale.
Sales under the procedure noted above are also subject to other
requirements and restrictions regarding the manner of sale,
payment of commissions, reporting and availability of current
public information about us and compliance with applicable
Canadian securities laws.
The following summarizes the principal Canadian federal income
tax considerations under the Income Tax Act (Canada) (the
“Tax Act”) generally applicable to the holding and
disposition of common shares by a holder who acquires common
shares in this offering.
This summary is based on the current provisions of the Tax Act
and the regulations thereunder, all specific proposals (the
“Tax Proposals”) to amend the Tax Act and regulations
publicly announced by or on behalf of the Minister of Finance
(Canada) prior to the date hereof, the current provisions of the
Canada-United States
Income Tax Convention, as amended (the “Treaty”), and
the administrative policies and assessing practices of the
Canada Revenue Agency (“CRA”) made publicly available
prior to the date hereof. While this summary assumes that the
Tax Proposals will be enacted as currently proposed, no
assurance can be given in this respect. Except as set forth in
“Taxation of Resident Holders — Dividends”
the tax summary set out below would not be materially different
if the Tax Proposals were not assumed to be enacted as currently
proposed.
This summary is not exhaustive of all possible Canadian federal
income tax considerations and, except for any Tax Proposals,
does not take into account or anticipate any changes in law,
whether by legislative, governmental or judicial decision or
action, or any changes in the Treaty or administrative practices
of the CRA. This summary does not take into account provincial,
territorial, U.S. or other foreign income tax
considerations, which may differ significantly from those
discussed herein. Provisions of provincial income tax
legislation vary from province to province in Canada and may
differ from federal income tax legislation.
This summary does not discuss all aspects of Canadian federal
income taxation that may be relevant to a particular holder of
common shares in light of such holder’s particular
circumstances. The tax consequences to any particular holder of
common shares will vary according to that holder’s
particular circumstances. Each holder should consult the
holder’s own tax advisor with respect to the income tax
consequences applicable to the holder’s own particular
circumstances. This summary is not applicable to a holder that
is a trader or dealer in securities, tax-exempt entity, insurer,
financial institution (including those to which the
mark-to-market
provisions of the Tax Act apply), nor is it applicable to any
holder of common shares, an interest in which is a “tax
shelter investment” for the purposes of the Tax Act.
For purposes of the Tax Act, all amounts relevant in computing a
holder’s liability under the Tax Act must be computed in
Canadian dollars. Amounts denominated in United States dollars
including adjusted cost base, proceeds of disposition and
dividends must be converted into Canadian dollars based on the
prevailing exchange rate at the relevant time.
Taxation of Resident Holders
The summary under the heading “Taxation of Resident
Holders” is applicable to a holder who at all relevant
times for purposes of the Tax Act, is or is deemed to be
resident in Canada, deals at arm’s length with and is not
affiliated with us and acquires and holds the common shares as
capital property (a “Resident Holder”). Generally,
common shares will be considered to be capital property to a
holder thereof provided that the holder does not use the common
shares in the course of carrying on a business and such holder
has not acquired them in one or more transactions considered to
be an adventure or concern in the nature of trade. Certain
Resident Holders who might not otherwise be considered to hold
their common shares as capital property may, in certain
circumstances, be entitled to have their common shares and all
other “Canadian securities” (as defined in the Tax
Act) owned by such Resident Holder, treated as capital property
by making the irrevocable election permitted by
subsection 39(4) of the Tax Act. Resident Holders should
consult their own tax advisors for advice as to whether an
election under subsection 39(4) of the Tax Act is available
and/or advisable in their particular circumstances.
In the case of a Resident Holder who is an individual, any
dividends received or deemed to be received on the common shares
will be required to be included in computing the Resident
Holder’s income and will be subject to the
gross-up and dividend
tax credit rules normally applicable to taxable dividends
received from taxable Canadian corporations. Draft legislation
released by the Minister of Finance (Canada) on June 29,2006, proposes to enhance such
gross-up and dividend
tax credit for “eligible dividends” paid after 2005.
Under the draft legislation, a dividend will be eligible for the
enhanced gross-up and
dividend tax credit if the dividend recipient receives written
notice from the paying corporation designating the dividend as
an eligible dividend. There may be limitations on the ability of
a corporation to designate dividends as eligible dividends.
Dividends received or deemed to be received by a Resident Holder
that is a corporation will be included in income and normally
will be deductible in computing such corporation’s taxable
income. A Resident Holder that is a “private
corporation” or a “subject corporation,” as such
terms are defined in the Tax Act, may be liable under
Part IV of the Tax Act to pay a refundable tax of
331/3%
on dividends received or deemed to be received on the common
shares to the extent that such dividends are deductible in
computing such Resident Holder’s taxable income.
Dispositions
A disposition, or a deemed disposition (including the deemed
disposition on death), of a common share by a Resident Holder
will generally give rise to a capital gain (or a capital loss)
equal to the amount by which the proceeds of disposition of the
common share, net of any reasonable costs of disposition, exceed
(or are less than) the adjusted cost base of the common share to
the Resident Holder. For this purpose, the adjusted cost base to
a Resident Holder of a common share at any particular time will
be determined by averaging the cost of that common share with
the adjusted cost base of all of our other common shares held as
capital property at that time by the Resident Holder.
One-half of any capital gain realized by a Resident Holder will
be included in computing the Resident Holder’s income as a
taxable capital gain in the year of disposition or deemed
disposition. One-half of any capital loss realized by a Resident
Holder may generally be deducted against taxable capital gains
realized in that year, in the three preceding taxation years or
in any subsequent taxation year, subject to detailed rules
contained in the Tax Act in this regard. A capital loss realized
by certain Resident Holders may be reduced in certain
circumstances by the amount of any dividends received or deemed
to have been received by such holders on the common shares to
the extent and in the manner provided for in the Tax Act. A
Resident Holder that is a “Canadian-controlled private
corporation,” as defined in the Tax Act, may be liable to
pay an additional refundable tax of
62/3%
on certain investment income, including taxable capital gains.
Capital gains realized by a Resident Holder that is an
individual may give rise to a liability for alternative minimum
tax. Resident Holders should consult their own tax advisors with
respect to alternative minimum tax.
Taxation of U.S. Holders
The summary under the heading “Taxation of
U.S. Holders” is applicable to a holder who at all
relevant times for purposes of the Tax Act, is not resident or
deemed to be resident in Canada, deals at arm’s length with
and is not affiliated with us, acquires and holds the common
shares as capital property and does not use or hold the common
shares in the course of carrying on, or otherwise in connection
with, a business in Canada and who, for purposes of the Treaty,
is a resident of the United States, has never been a resident of
Canada, and has not held or used (and does not hold or use) the
common shares in connection with a permanent establishment or
fixed base in Canada (a “U.S. Holder”). Special
rules, which are not discussed in this summary, may apply to a
non-resident that is a “registered non-resident
insurer” for the purposes of the Tax Act.
The current published policy of the CRA is that most limited
liability companies that are treated as being fiscally
transparent for United States federal income tax purposes will
not be entitled to the benefits of the Treaty.
Dividends paid or credited or deemed to be paid or credited to a
U.S. Holder by us will be subject to Canadian withholding
tax at a rate of 25% unless reduced under the provisions of an
applicable income tax treaty or convention. Under the Treaty,
the rate of withholding tax on dividends paid or credited to a
U.S. Holder is generally reduced to 15% of the gross amount
of the dividends (or 5% in the case of a U.S. Holder that
is a corporation beneficially owning at least 10% of our voting
shares).
Dispositions
A U.S. Holder will generally not be subject to tax under
the Tax Act in respect of any capital gain realized on the
disposition or deemed disposition (including the deemed
disposition on death) of the common shares unless, at the time
of disposition, the common shares constitute “taxable
Canadian property” of the U.S. Holder for the purposes
of the Tax Act. Generally, the common shares will not constitute
“taxable Canadian property” to a U.S. Holder
provided that (i) the common shares are, at the time of
disposition, listed on a prescribed stock exchange (which
currently includes the Toronto Stock Exchange and The Nasdaq
Global Market) for purposes of the Tax Act; and (ii) at no
time during the
60-month period
immediately preceding the disposition of the common shares did
the U.S. Holder, persons with whom the U.S. Holder did
not deal at arm’s length, or the U.S. Holder together
with such persons, own 25% or more of the issued shares of any
class or series of our capital stock.
Pursuant to the Treaty, even if the common shares constitute
“taxable Canadian property” of a particular
U.S. Holder, any capital gain realized on the disposition
of the common shares by the U.S. Holder generally will be
exempt from tax under the Tax Act, unless, at the time of
disposition, the common shares derive their value principally
from real property situated in Canada within the meaning of the
Treaty. We are of the view that the value of the common shares
is not derived principally from real property situated in Canada.
Provided the common shares are listed on a prescribed stock
exchange (which currently includes the Toronto Stock Exchange
and The Nasdaq Global Market) for purposes of the Tax Act, at
the time of disposition the preclearance provisions of
Section 116 of the Tax Act will not apply to a disposition
of common shares.
U.S. Federal Income Tax Considerations
The following summary describes the U.S. federal income tax
considerations generally applicable to U.S. Holders (as
defined below) of the purchase, ownership, and disposition of
common shares. This summary is based upon the Code,
U.S. Treasury regulations under the Code, administrative
rulings and judicial decisions, all as in effect as of the date
of this document and all of which are subject to change
(possibly with retroactive effect) or to differing
interpretations. This summary applies only to holders of common
shares that hold their common shares as capital assets within
the meaning of Section 1221 of the Code. This summary does
not discuss all aspects of U.S. federal income taxation
that may be relevant to a particular holder of common shares in
light of its particular circumstances or to holders of common
shares subject to special treatment under the U.S. federal
income tax laws, including:
•
banks, insurance companies, trusts and financial institutions;
•
tax-exempt organizations;
•
mutual funds, real estate investment trusts and regulated
investment companies;
•
pass-through entities and investors in such entities;
•
persons that have a functional currency other than the
U.S. dollar;
•
persons liable for the alternative minimum tax;
•
traders in securities who elect to apply a
mark-to-market method
of accounting;
•
brokers or dealers in securities or foreign currency;
holders of common shares who hold their common shares as part of
a hedge, straddle, constructive sale, conversion transaction or
other integrated investment; and
•
holders who own (actually or constructively) 10% or more of our
common shares.
This summary does not discuss any state, local,
non-U.S. or estate
and gift tax considerations applicable to holders of common
shares. Prospective purchasers of common shares should consult
their tax advisors regarding the U.S. federal income tax
consequences applicable to their particular circumstances.
For purposes of this summary, a U.S. Holder is a beneficial
owner of common shares that is:
•
an individual who is a U.S. citizen or resident alien for
U.S. federal income tax purposes;
•
a corporation, or entity treated as a corporation for
U.S. federal income tax purposes, created or organized in
or under the laws of the United States, any state thereof, or
the District of Columbia;
•
an estate the income of which is subject to U.S. federal
income taxation regardless of its source; or
•
a trust if (i) a U.S. court is able to exercise
primary supervision over the administration of the trust and one
or more U.S. persons have the authority to control all
substantial decisions of the trust or (ii) the trust has a
valid election in effect to be treated as a U.S. person for
U.S. federal income tax purposes.
If a partnership holds common shares, the U.S. federal
income tax treatment of a partner in the partnership generally
will depend upon the status of the partner and the activities of
the partnership. Partners of partnerships that hold common
shares should consult their tax advisors regarding the
U.S. federal income tax consequences to them of the
purchase, ownership, and disposition of common shares.
Distributions on common shares
Subject to the passive foreign investment company
(“PFIC”) rules discussed below, the gross amount of
any distribution with respect to common shares, before reduction
for Canadian withholding tax, will be taxable to
U.S. Holders of common shares as a dividend to the extent
of our current and accumulated earnings and profits, as
determined under U.S. federal income tax principles. To the
extent that the amount of any cash exceeds our current and
accumulated earnings and profits, as determined under
U.S. federal income tax principles, such distribution will
first be treated as a tax-free return of capital to the extent
of your adjusted tax basis in the common shares causing a
reduction in the adjusted basis of the common shares, (thereby
increasing the amount of gain or decreasing the amount of loss
that a U.S. Holder would recognize on a subsequent
disposition of common shares). Any balance in excess of the
adjusted basis will be subject to tax as capital gain.
Subject to certain limitations, dividends paid to non-corporate
U.S. Holders, including individuals, in taxable years
beginning before January 1, 2009, may be eligible for a
reduced rate of taxation if we are deemed to be a
“qualified foreign corporation” for U.S. federal
income tax purposes and such U.S. Holder has owned the
common shares for more than 60 days in the
121-day period
beginning 60 days before the date on which the common
shares become ex-dividend. A qualified foreign corporation
includes a
non-U.S. corporation
that is eligible for the benefits of a comprehensive income tax
treaty with the United States that includes an exchange of
information program and that the U.S. Treasury Department
has determined to be satisfactory for purposes of the qualified
dividend provisions of the Code. The U.S. Treasury
Department has determined that the income tax treaty between the
United States and Canada is satisfactory for purposes of the
qualified dividend provisions of the Code. A qualified foreign
corporation does not include a
non-U.S. corporation
that is a PFIC for the taxable year in which a dividend is paid
or was a PFIC for the preceding taxable year. Distributions on
the common shares will be eligible for this reduced rate of
taxation as long as we are not, and was not in the preceding
taxable year, a PFIC and are eligible for the benefits of the
income tax treaty between the United States and Canada.
Distributions will be includable in a U.S. Holder’s
gross income on the date actually or constructively received by
the U.S. Holder. These dividends will not be eligible for
the dividends received deduction generally allowed to
U.S. corporations in respect of dividends received from
other U.S. corporations.
If we pay dividends on the common shares in Canadian dollars,
the U.S. dollar value of such dividends will be calculated
by reference to the exchange rate prevailing on the date of
actual or constructive receipt of the dividend, regardless of
whether the Canadian dollars are converted into
U.S. dollars at that time. If Canadian dollars are
converted into U.S. dollars on the date of actual or
constructive receipt of such dividends, a
U.S. Holder’s tax basis in such Canadian dollars will
be equal to their U.S. dollar value on that date and, as a
result, the U.S. Holder generally will not be required to
recognize any foreign currency exchange gain or loss. Any gain
or loss recognized on a subsequent conversion or other
disposition of the Canadian dollars generally will be treated as
ordinary income or loss from sources within the United States
for U.S. foreign tax credit limitation purposes.
A U.S. Holder may be entitled to claim a U.S. foreign
tax credit for, or deduct, Canadian taxes that are withheld on
dividends received by the U.S. Holder, subject to
applicable limitations in the Code. For taxable years beginning
on or before December 31, 2006, dividends paid on the
common shares generally will constitute “passive
income” and will be treated as foreign source income for
U.S. foreign tax credit limitation purposes. For taxable
years beginning after December 31, 2006, dividends paid on
the common shares generally will be “passive category
income” or “general category income” and will be
treated as foreign source income for U.S. foreign tax
credit limitation purposes. The amount of foreign income taxes
that may be claimed as a credit in any year is subject to
complex limitations and restrictions, which must be determined
on an individual basis by each holder. U.S. Holders are
urged to consult their tax advisors regarding the availability
of the U.S. foreign tax credit in their particular
circumstances.
Sale, exchange or other disposition of common
shares
Subject to the PFIC rules discussed below, upon the sale,
exchange or other disposition of common shares, a
U.S. Holder generally will recognize capital gain or loss
equal to the difference between the amount realized upon the
sale, exchange or other disposition of common shares and the
U.S. Holder’s adjusted tax basis in the common shares.
The capital gain or loss generally will be long-term capital
gain or loss if, at the time of sale, exchange or other
disposition, the U.S. Holder has held the common shares for
more than one year. Net long-term capital gains of non-corporate
U.S. Holders, including individuals, are eligible for
reduced rates of taxation. The deductibility of capital losses
is subject to limitations. Any gain or loss that a
U.S. Holder recognizes generally will be treated as gain or
loss from sources within the United States for U.S. foreign
tax credit limitation purposes.
PFIC rules
Based on the projected composition on our income and our assets,
we do not expect to be a PFIC for our taxable year ending
March 31, 2007. Because this conclusion is a factual
determination that is made annually, and is subject to change,
there can be no assurance that we will not be a PFIC for our
taxable year ending March 31, 2007 or any future taxable
year. Special, generally adverse, U.S. federal income tax
rules would apply to a U.S. Holder if we were a PFIC at any
time during which a U.S. Holder held common shares. A
non-U.S. corporation
generally is classified as a PFIC for U.S. federal income
tax purposes in any taxable year if, either (i) at least
75% of its gross income is “passive” income (the
“income test”), or (ii) on average at least 50%
of the gross value of its assets is attributable to assets that
produce passive income or are held for the production of passive
income (the “asset test”). Passive income generally
includes dividends, interest, royalties, rents (other than rents
and royalties derived in the active conduct of a trade or
business and not derived from a related person), certain net
gains from the sales of commodities, annuities and gains from
assets that produce passive income. For purposes of the income
test and the asset test, if a
non-U.S. corporation
owns directly or indirectly at least 25% (by value) of the stock
of another corporation, the
non-U.S. corporation
will be treated as if it held its proportionate share of the
assets of the latter corporation, and received directly its
proportionate share of the income of the latter corporation.
If we were a PFIC, a U.S. Holder of common shares would be
taxed at ordinary income tax rates on any gain realized on the
sale or exchange of the common shares and on any “excess
distributions” received. Excess distributions are amounts
received by a U.S. Holder with respect to its common shares
in any taxable year that exceed 125% of the average
distributions received by the U.S. Holder in the shorter of
either the three previous years or, if shorter, the
U.S. Holder’s holding period for the shares before the
current taxable year. Gain and excess distributions would be
allocated ratably to each day that the U.S. Holder held
common shares. Amounts allocated to that taxable year and to
years before we became a PFIC would be treated as ordinary
income. In addition, amounts allocated to each taxable year
beginning with the year we first became a PFIC would be taxed at
the highest rate in effect for that year on ordinary income and
the tax would be subject to an interest charge at the rate
applicable to underpayments of income tax. If we were a PFIC,
U.S. Holders would be required to file U.S. Internal
Revenue Service Form 8621 for each year in which they held
common shares.
Under certain circumstances, a U.S. person may make certain
elections to mitigate some of the tax consequences of holding
shares of a PFIC (including a qualified electing fund election
and a mark-to-market
election). U.S. Holders are urged to consult their tax
advisors regarding our possible classification as a PFIC and the
adverse tax consequences that would result from such
classification.
Information reporting and backup withholding
In general, unless a U.S. Holder belongs to a category of
certain exempt recipients (such as corporations), information
reporting requirements will apply to dividends as well as
proceeds of sales of common shares that are effected through the
U.S. office of a broker or the
non-U.S. office of
a broker that has certain connections with the United States.
Backup withholding may apply to these payments if a
U.S. Holder fails to provide a correct taxpayer
identification number or certification of exempt status, fails
to report in full dividend and interest income or, in certain
circumstances, fails to comply with applicable certification
requirements. Any amounts withheld under the backup withholding
rules will be allowed as a refund or credit against a
U.S. Holder’s U.S. federal income tax, provided
the U.S. Holder furnishes the required information to the
U.S. Internal Revenue Service in a timely manner.
We are offering the common shares described in this prospectus
through the underwriters named below. BMO Nesbitt Burns Inc. and
UBS Securities LLC are the joint book-running managers of this
offering. We and ATS have entered into an underwriting agreement
with the underwriters. Subject to the terms and conditions of
the underwriting agreement, each of the underwriters has
severally agreed to purchase the number of common shares listed
next to its name in the following table:
Number of
Underwriters
Shares
BMO Nesbitt Burns Inc.
UBS Securities LLC
Total
The underwriting agreement provides that the underwriters must
buy all of the shares if they buy any of them. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters’ over-allotment option
described below.
Our common shares are offered subject to a number of conditions,
including:
•
receipt and acceptance of our common shares by the
underwriters, and
•
the underwriters’ right to reject orders in whole or in
part.
In connection with this offering, certain of the underwriters or
securities dealers may distribute prospectuses electronically.
This offering is being made concurrently in the United States
and in each of the provinces and territories of Canada. The
common shares will be offered in the United States through those
underwriters or their U.S. affiliates who are registered to
offer the common shares for sale in the United States and such
other registered dealers as may be designated by the
underwriters. The common shares will be offered in each of the
provinces and territories of Canada through those underwriters
or their Canadian affiliates who are registered to offer the
common shares for sale in such provinces and territories and
such other registered dealers as may be designated by the
underwriters. Subject to applicable law, the underwriters may
offer the common shares outside of the United States and Canada.
Over-Allotment Option
ATS has granted the underwriters an option to buy up
to additional
common shares. The underwriters may exercise this option solely
for the purpose of covering over-allotments, if any, made in
connection with this offering. The underwriters have
30 days from the date of this prospectus to exercise this
option. If the underwriters exercise this option, they will each
purchase additional shares approximately in proportion to the
amounts specified in the table above. If this option is
exercised in full, ATS will receive net proceeds of
$ after
underwriting commissions. We will not receive any proceeds from
the sale of common shares by ATS in the event that this option
is exercised. This prospectus also qualifies the grant of this
option and the distribution of the commons shares transferable
upon the exercise of this option.
Commissions
Shares sold by the underwriters to the public will initially be
offered at the offering price set forth on the cover of this
prospectus. Any shares sold by the underwriters to securities
dealers may be sold at a discount of up to
$ per
share from the public offering price. Any of these securities
dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to
$ per
share from the public offering price. If all the shares are not
sold at the public offering price, the representatives may
change the offering price and the other selling terms. The
public offering price for the common shares offered in the
United States is payable in U.S. dollars and the public
offering price for the common shares offered in Canada is
payable in Canadian dollars. The Canadian dollar amount is the
equivalent of the
U.S. price of the common shares based on the prevailing
U.S.-Canadian dollar
exchange rate on the date of the underwriting agreement.
The following table shows the per share and total underwriting
commissions we or ATS will pay to the underwriters, assuming
both no exercise and full exercise of the underwriters’
option to purchase up to common shares:
Over-
Over-
Allotment
Allotment not
Fully
Exercised
Exercised
Per share
$
$
Total
$
$
We estimate that the total expenses of this offering payable by
us, not including the underwriting commissions, will be
approximately
$ .
ATS will pay the underwriting commissions applicable to the
common shares that they sell if the over-allotment option is
exercised.
No Sales of Similar Securities
We, our directors and executive officers and ATS have entered
into lock-up agreements
with the underwriters. Under these agreements, we, our directors
and executive officers and ATS may not, without the prior
written approval of BMO Nesbitt Burns Inc. and UBS Securities
LLC, subject to limited exceptions, offer, sell, contract to
sell or otherwise dispose of or hedge our common shares or
securities convertible into or exercisable or exchangeable for
our common shares. These restrictions will be in effect for a
period of 180 days after the date of this prospectus. At
any time and without public notice, BMO Nesbitt Burns Inc. and
UBS Securities LLC may, in their sole discretion, release all or
some of the securities from these
lock-up agreements.
Indemnification and Contribution
We have agreed to indemnify the underwriters and their
controlling persons against certain liabilities, including
liabilities under the U.S. Securities Act and applicable
securities laws in Canada. If we are unable to provide this
indemnification, we will contribute to payments the underwriters
and their controlling persons may be required to make in respect
of those liabilities.
We have applied to list our common shares on The Nasdaq Global
Market under the symbol “PHWT” and on the Toronto
Stock Exchange under the symbol “PHW.” Any such
listing will be subject to the approval of the relevant stock
exchange, and any such approval would not be given unless all of
the original listing requirements were met.
Price Stabilization, Short Positions and Passive
Market Making
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the
price of our common shares, including:
•
stabilizing transactions;
•
short sales;
•
purchases to cover positions created by short sales;
•
imposition of penalty bids;
•
syndicate covering transactions; and
•
passive market making.
Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of our common shares while this offering is in progress.
These transactions may
also include making short sales of our common shares, which
involve the sale by the underwriters of a greater number of
common shares than they are required to purchase in this
offering. Short sales may be “covered short sales,”
which are short positions in an amount not greater than the
underwriters’ over-allotment option referred to above, or
may be “naked short sales,” which are short positions
in excess of that amount.
The underwriters may close out any covered short position either
by exercising their over-allotment option, in whole or in part,
or by purchasing shares in the open market. In making this
determination, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market compared to the price at which they may purchase shares
through the over-allotment option. The underwriters must close
out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the common shares in the open market
that could adversely affect investors who purchased in this
offering.
The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of that underwriter in stabilizing or short covering
transactions.
As a result of these activities, the price of our common shares
may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. The underwriters
may carry out these transactions on The Nasdaq Global Market,
the Toronto Stock Exchange, in the
over-the-counter market
or otherwise.
In addition, in accordance with rules and policy statements of
certain Canadian provincial securities commissions, the
underwriters may not, throughout the period of distribution, bid
for or purchase the common shares. Exceptions, however, exist
where the bid or purchase is not made for the purpose of
creating actual or apparent active trading in, or raising prices
of, the common shares. These exceptions include a bid or
purchase permitted under the by-laws and rules of applicable
regulatory authorities, The Nasdaq Global Market and the Toronto
Stock Exchange relating to market stabilization and passive
market making activities and a bid or purchase made for and on
behalf of a customer where the order was not solicited during
the period of distribution. Subject to the foregoing and
applicable laws, in connection with the offering and pursuant to
the first exception mentioned above, the underwriters may
overallot or effect transactions that stabilize or maintain the
market price of the common shares at levels other than those
which might otherwise prevail on the open market. Any of the
foregoing activities may have the effect of preventing or
slowing a decline in the market price of the common shares. They
may also cause the price of the common shares to be higher than
the price that would otherwise exist in the open market in the
absence of these transactions. If the underwriters commence any
of these transactions, they may discontinue them at any time.
The underwriters may conduct these transactions on The Nasdaq
Global Market, the Toronto Stock Exchange or in the over-the
counter market, or otherwise.
Pricing of the Offering
Prior to this offering, there was no public market for our
common shares. The initial public offering price will be
determined by negotiations between us, ATS and the underwriters.
Among the factors considered in determining the initial public
offering price will be our future prospects and future prospects
of our industry in general, our sales, earnings and other
financial and operating information in recent periods, and the
price-earnings ratios, market prices of securities and financial
and operating information of companies engaged in activities
similar to ours. The estimated initial public offering price
range set forth on the cover page of this prospectus is subject
to change as a result of market conditions and other factors.
Directed Share Program
At our request, the underwriters have reserved up
to common
shares,
or %
of the shares offered by this prospectus, for sale under a
directed share program to our and ATS’ officers, directors,
employees and related parties, immediate family members and
entities of which employees or family members are the sole
beneficiaries. All of the persons purchasing the reserved shares
must commit to
purchase no earlier than the effective time of the registration
statement on the date of this prospectus but no later than the
close of business on the day following that date. The number of
common shares available for sale to the general public will be
reduced to the extent these persons purchase the reserved
shares. Common shares committed to be purchased by directed
share program participants which are not so purchased will be
reallocated for sale to the general public in this offering. All
sales of common shares pursuant to the directed share program
will be made at the initial public offering price set forth on
the cover page of this prospectus.
Affiliations
The underwriters and their affiliates have provided and may
provide certain commercial banking, financial advisory and
investment banking services for us for which they receive fees.
The underwriters and their affiliates may from time to time in
the future engage in transactions with us and perform services
for us in the ordinary course of their business.
Expenses Related to this Offering
Set forth below is an itemization of the total expenses,
excluding underwriting discounts and commissions, which are
expected to be incurred in connection with our offer and sale of
our common shares. With the exception of the SEC registration
fee and the National Association of Securities Dealers, Inc.
filing fee, all amounts are estimates.
SEC registration fee
$
26,750
Nasdaq Global Market and Toronto Stock Exchange listing fees
Printing and engraving expenses
Legal fees and expenses
Accounting fees and expenses
National Association of Securities Dealers, Inc. filing fee
Miscellaneous
Total
$
The address of BMO Nesbitt Burns Inc. is 1 First Canadian
Place,
4th Floor,
P.O. Box 150, Toronto, Ontario, Canada M5X 1H3. The address
of UBS Securities LLC is One North Wacker Drive, Chicago,
Illinois, 60606.
With respect to each Member State of the European Economic Area
which has implemented Prospectus Directive 2003/71/ EC,
including any applicable implementing measures, from and
including the date on which the Prospectus Directive is
implemented in that Member State, the offering of our common
shares in this offering is only being made:
(1) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(2) to any legal entity which has two or more of
(1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than
€43,000,000 and
(3) an annual net turnover of more than
€50,000,000, as
shown in its last annual or consolidated accounts; or
(3) in any other circumstances which do not require the
publication by the Issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive.
United Kingdom
Our common shares may not be offered or sold and will not be
offered or sold to any persons in the United Kingdom other than
to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or
as agent) for the purposes of their businesses and in compliance
with all applicable provisions of the FSMA with respect to
anything done in relation to our common shares in, from or
otherwise involving the United Kingdom. In addition, any
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) in
connection with the issue or sale of our common shares may only
be communicated in circumstances in which Section 21(1) of
the FSMA does not apply to us. Without limitation to the other
restrictions referred to herein, this offering circular is
directed only at (1) persons outside the United Kingdom;
(2) persons having professional experience in matters
relating to investments who fall within the definition of
“investment professionals” in Article 19(5) of
the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005; or (3) high net worth bodies
corporate, unincorporated associations and partnerships and
trustees of high value trusts as described in Article 49(2)
of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005. Without limitation to the other
restrictions referred to herein, any investment or investment
activity to which this offering circular relates is available
only to, and will be engaged in only with, such persons, and
persons within the United Kingdom who receive this communication
(other than persons who fall within (2) or (3) above)
should not rely or act upon this communication.
Switzerland
Our common shares may be offered in Switzerland only on the
basis of a non-public offering. This prospectus does not
constitute an issuance prospectus according to articles 652a or
1156 of the Swiss Federal Code of Obligations or a listing
prospectus according to article 32 of the Listing Rules of the
Swiss exchange. Our common shares may not be offered or
distributed on a professional basis in or from Switzerland and
neither this prospectus nor any other offering material relating
to our common shares may be publicly issued in connection with
any such offer or distribution. The shares have not been and
will not be approved by any Swiss regulatory authority. In
particular, the shares are not and will not be registered with
or supervised by the Swiss Federal Banking Commission, and
investors may not claim protection under the Swiss Investment
Fund Act.
The validity of the issuance and sale of the common shares will
be passed upon for us by Blake, Cassels & Graydon LLP.
Certain U.S. legal matters relating to this offering will
be passed upon for us by Shearman & Sterling LLP.
Certain legal matters relating to this offering will be passed
upon for the underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP, as to U.S. legal matters, and
Davies Ward Phillips & Vineberg LLP, as to
Canadian legal matters. The partners and associates of Blake,
Cassels & Graydon LLP, collectively, beneficially own,
directly and indirectly, (i) less than 1% of our
outstanding common shares; and (ii) less than 1% of the
outstanding common shares of ATS. The partners and associates of
Davies Ward Phillips & Vineberg LLP, collectively,
beneficially own, directly and indirectly, (i) less than 1%
of our outstanding common shares; and (ii) less than 1% of
the outstanding common shares of ATS.
EXPERTS
Our combined financial statements as of March 31, 2006 and
2005, and for each of the three years in the period ended
March 31, 2006, included in this prospectus have been
audited by KPMG LLP, an independent registered public accounting
firm, as stated in their report appearing herein and have been
so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The offices of KPMG LLP are located at 115 King Street
South, Waterloo, Ontario, Canada, N2J 5A3.
We have filed a registration statement on
Form F-1 with the
SEC regarding this offering. This prospectus, which is part of
the registration statement, does not contain all of the
information included in the registration statement, and you
should refer to the registration statement and its exhibits to
read that information.
Any statement in this prospectus about any of our contracts or
other documents is not necessarily complete. If the contract or
document is filed as an exhibit to the registration statement,
you must review the exhibits themselves for a complete
description of the contract or document. You may review a copy
of the registration statement, including the exhibits and
schedules filed with it at the public reference facilities
maintained by the SEC at 100 F Street, N.E., Washington D.C.
20549. Copies of all or a part of the registration statement may
be obtained from this office after payment at prescribed rates.
You may call the SEC at
1-800-SEC-0330 for
further information on the public reference rooms. You may also
obtain a free copy of the registration statement, including the
schedules and exhibits, from the SEC website at www.sec.gov.
We are not currently subject to the informational requirements
of the Exchange Act. As a result of this offering, we will
become subject to the informational requirements of the Exchange
Act and, in accordance therewith, will file reports and other
information with the SEC. The registration statement, such
reports and other information can be inspected and copied at the
public reference facilities of the SEC described above. As a
foreign private issuer, we are exempt from the U.S. rules
under the Exchange Act prescribing the furnishing and content of
proxy statements and our officers, directors and principal
shareholders are exempt from the reporting and short-swing
profit recovery provisions contained in Section 16 of the
Exchange Act. Under the Exchange Act, as a foreign private
issuer, we may not be required to publish financial statements
as frequently or as promptly as United States companies.
We will also be subject to the full informational requirements
of the securities commissions in all provinces and territories
of Canada. You are invited to read and copy any reports,
statements or other information, other than confidential
filings, that we intend to file with the Canadian securities
regulatory authorities. These filings are electronically
available from the Canadian System for Electronic Document
Analysis and Retrieval (SEDAR) at http://www.sedar.com, the
Canadian equivalent of the SEC electronic document gathering and
retrieval system.
NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
(IN UNITED STATES THOUSANDS OF DOLLARS)
1.
FORMATION OF PHOTOWATT TECHNOLOGIES INC.:
Photowatt Technologies Inc. is a wholly owned subsidiary of ATS
Automation Tooling Systems Inc. (“ATS” or the
“Parent”). Upon the completion of the initial public
offering of Photowatt Technologies Inc. (“IPO”), ATS
will transfer into Photowatt Technologies Inc. its interests in
the assets and liabilities that are used in the solar business
conducted by ATS and its subsidiaries, subject to certain
excluded assets including the premises and building related to
the Spheral Solar manufacturing facility and ATS solar
automation know-how. The solar business is comprised of Spheral
Solar, a division of ATS, Photowatt International S.A.S.,
Spheral Solar Power Inc. and Matrix Solar Technologies, Inc.,
all of which are divisions or subsidiaries of ATS (collectively
with Photowatt Technologies Inc. known as the
“Company”). For the convenience of the reader, the
combined financial statements refer to Photowatt Technologies
Inc. and use “the Company” even though the
transfer has not been consummated at June 30, 2006. As the
transfer is not consummated, the financial statements are
referred to as combined financial statements. Minority interests
are held by third parties in Matrix Solar Technologies Inc.,
which owns a portion of Photowatt International S.A.S. and
Spheral Solar Power Inc.
The Company’s principal business activity is the design,
manufacture and sale of photovoltaic products.
2.
BASIS OF PRESENTATION:
These combined financial statements present the historical
financial position, results of operations, changes in net
investment and cash flows on a carve-out basis from ATS as if
the Company had operated as a stand-alone entity subject to
ATS’ control prior to this reorganization.
A portion of ATS’ corporate selling and administrative
expenses have been allocated to the Company, based on
management’s estimates of expenses attributable to the
Company. Shared services provided include strategic,
operational, human resources, accounting, information systems,
facility, legal, taxation and treasury services. Property, plant
and equipment and other services purchased from ATS are recorded
at the exchange amount.
The Company’s surplus funds are transferred to ATS and the
Company’s financing requirements are provided by ATS as
reflected through ATS’ net investment account and due to
parent. Related party interest expense recorded in the Combined
Statements of Earnings represents charges from ATS as
historically reflected in the accounts of subsidiaries.
Income taxes have been recorded at statutory rates based on
income taxes as reported in the Combined Statements of Earnings
as though the Company was a separate tax paying entity. Income
taxes payable or recoverable in respect of the components which
were not historically separate tax paying legal entities have
been included in ATS’ net investment. Future income taxes
have been presented in the Combined Balance Sheets for each
temporary difference between the financial reporting and tax
basis of the assets and liabilities. In addition, future income
tax assets have been recognized to the extent that they would
have been realized as though the Company was a separate tax
paying group of entities. Future income tax assets are
recognized only to the extent that management determines that it
is more likely than not that future income tax assets will be
realized in the foreseeable future.
As a result of the basis of presentation described above, the
combined financial statements may not necessarily be indicative
of the results that would have been obtained if the Company had
operated as a stand-alone group of entities or indicative of the
results for any future periods.
The accompanying unaudited interim combined financial statements
are prepared in accordance with accounting principles generally
accepted in Canada (“GAAP”) and the accounting
policies are consistent with those described in the combined
financial statements for the year ended March 31, 2006 and
which
NOTES TO THE UNAUDITED COMBINED FINANCIAL
STATEMENTS — (Continued)
conforms in all material respects with United States GAAP,
except as presented in note 14. The unaudited interim
combined financial statements do not contain all the disclosures
required by generally accepted accounting principles for annual
financial statements and should be read in conjunction with the
Company’s fiscal 2006 audited combined financial
statements. Amounts are stated in United States dollars.
In the opinion of management, the unaudited interim combined
financial statements reflect all of the adjustments, which
consist only of normal and recurring adjustments, necessary to
present fairly the financial position at June 30, 2006 and
the results of operations and cash flows for the three-month
periods ended June 30, 2006 and 2005. Interim results are
not necessarily indicative of annual or longer term results as
the solar market served by the Company tends to be cyclical in
nature. Both revenues and earnings for the Company typically
decline during the second quarter as a result of the normal
Photowatt International S.A.S. annual three week shutdown.
General economic trends, product life cycles and product changes
may impact the Company’s volumes and earnings.
Raw materials inventory includes supply inventories of $3,849 as
at June 30, 2006 (March 31, 2006 — $3,201)
which are consumed in the production process. The provision for
excess and obsolete inventory was $984 at June 30, 2006
(March 31, 2006 — $606).
NOTES TO THE UNAUDITED COMBINED FINANCIAL
STATEMENTS — (Continued)
5.
INTANGIBLE ASSETS:
The intangible assets were not amortized prior to
October 1, 2005, when the Company was in the development
stage of its Spheral Solar initiative. Subsequent to
September 30, 2005, amortization began on the intangible
assets on a straight-line basis over their estimated remaining
useful lives of 10 to 17 years.
The weighted average remaining contractual life of options
outstanding is 1.24 years as of June 30, 2006
(March 31, 2006 — 1.49 years).
The holders of 195 of these options have the right to require
the Company to settle the value of the vested portion of the
shares under option in cash based on a formula linked to the net
book value of the granting company. A liability has been
recognized for the vested portion of the cash settlement value.
The amount of the recognized liability was $153, as at
June 30, 2006 and March 31, 2006.
During fiscal 2006, ATS issued 50,000 stock options on its
common shares to an employee of the Company. The Company
recognized compensation expense based on the fair value over the
vesting period of these options. Compensation expense of $12 was
recorded in the three-months ended June 30, 2006
(June 30, 2005 — nil). As of June 30,2006, there was $201 of unrecognized stock-based compensation
expense related to unvested stock options which is expected to
be expensed over the vesting period of approximately
3.93 years.
8.
INCOME TAXES:
For the period ended June 30, 2006, income tax expense
differs from the amounts which would be obtained by applying the
combined Canadian basic federal and provincial income tax rate
to earnings before income taxes and minority interest. The
Company has not recognized potential benefits related to loss
carryforward amounts and other temporary differences primarily
in its Spheral Solar segment as management
Other includes costs that have been allocated to the Company in
connection with the preparation of these combined financial
statements (note 2 and 10).
Purchase of raw materials and other services — ATS
63
486
Development services — ATS
172
—
Initial public offering expenditures — ATS
—
1,275
Shared corporate costs — ATS
122
249
Interest expense — ATS
272
963
Sale of product — other related party
15
10
As noted in note 2, ATS provides strategic, operational and
administrative services to the Company. Furthermore, the Company
purchases property, plant and equipment, development services,
raw materials and other services from affiliated companies.
“Sale of product” pertains to sales to a business
controlled by a senior executive. These transactions have been
reflected at their exchange amount.
As at June 30, 2006, included in accounts payable and
accrued liabilities are amounts due to other subsidiaries of ATS
in the amount of $1,231 (March 31, 2006 — $192).
These amounts are payable on demand and do not bear interest,
other than as noted below.
The amount payable to ATS included in the Company’s balance
sheet under net investment represents a net balance as the
result of various transactions between the Company and its
Parent. There are no terms of settlement or interest charges
associated with the account balance other than described below.
The Company’s surplus funds are transferred to ATS, and the
Company’s financing requirements are funded by ATS. At
June 30, 2006, two intercompany amounts were outstanding in
the amounts of Euro 27,945 ($35,667 USD), and $50,246 CDN
($45,015 USD) on which interest of Euro LIBOR rate plus 1.25%
and Canadian dollar prime rate is charged, respectively. Both
amounts have been included in ATS’ net investment in the
Company.
NOTES TO THE UNAUDITED COMBINED FINANCIAL
STATEMENTS — (Continued)
On completion of the IPO, the Company will repay ATS for amounts
funded by ATS during fiscal 2007 up to the date of closing. As
at June 30, 2006, the amount funded by ATS during fiscal
2007 to be repaid was $8,550. This amount is included as due to
parent on the Combined Balance Sheets.
Other transactions include intercompany purchases and sales and
miscellaneous other administrative expenses incurred by the
Parent on behalf of the Company.
An analysis of transactions in the intercompany account for the
three month periods ended June 30, 2006 and June 30,2005 follows:
2005
2006
Balance at beginning of period
$
1,313
$
192
Net cash funded by Parent
(2,852
)
(308
)
Net intercompany purchases
2,167
135
Other administrative expenses
394
1,212
Balance at end of period
$
1,022
$
1,231
Average balance during the period
$
1,168
$
712
11.
COMMITMENTS:
As at June 30, 2006, the Company had issued purchase
commitments of $8,828 for production equipment. In May 2006, the
Company announced the capacity expansion plan for Photowatt
International for the facility near Lyon, France at an expected
cost
of €25,000.
Subsequent to period end, the Company issued purchase orders to
acquire approximately $8,000 of refined metallurgical silicon
which will be delivered through to fiscal 2008.
12.
SEGMENTED DISCLOSURE:
The Company evaluates performance based on two reportable
segments. The Photowatt International segment consists of
Photowatt International S.A.S. in France and the module
assembly business of Matrix Solar Technologies, Inc. Photowatt
International, our core business that is based on a wafer
technology, designs, manufactures and sells modules and
installation kits, and provides solar power design and other
value-added services. The Spheral Solar segment is a development
project that is based on a spheral technology using thousands of
tiny silicon spheres instead of silicon wafers.
Inter-segment revenues are accounted for at current market
rates, negotiated between the segments.
NOTES TO THE UNAUDITED COMBINED FINANCIAL
STATEMENTS — (Continued)
2005
Photowatt
Spheral
International
Solar
Combined
Total Company revenue
$
34,484
$
—
$
34,484
Earnings from operations
$
5,503
$
20
$
5,523
Corporate costs
(122
)
Total Company earnings from operations
$
5,401
Total Company assets
$
74,406
$
96,822
$
171,228
Total net foreign exchange gains (losses) recognized for the
three months ended June 30, 2006 were ($201) (June 30,2005 — $3) and are included in selling and
administrative expenses on the Combined Statements of Earnings.
13.
SUBSEQUENT EVENTS:
In August 2006, the Board of Directors approved the issuance of
a preliminary prospectus in connection with the Company’s
IPO in the United States and Canada. Upon the closing of the
IPO, certain of ATS’ solar business interests will be
transferred to the Company.
In September 2006, the Company approved the grant of options to
two executive officers of the Company to purchase, in aggregate,
302,860 of the Company’s common shares at an exercise price
of C$5.00 per share. The aggregate number of common shares
underlying each of these options is subject to an automatic
adjustment that will increase or decrease the number such that
it is equal to 0.6883% of the common shares in the Company held
by ATS immediately prior to the closing of the initial public
offering (the “IPO”).
The option to purchase 160,000 common shares granted to one
executive vests as to 20% on the completion of the IPO and 20%
on each anniversary date of the completion of the IPO. The
option to purchase 142,860 common shares granted to the second
executive vests as to 20% on each anniversary date of the
completion of the IPO.
In addition to the above mentioned grants, the two executives
are eligible to receive a cash payment upon any exercise of
these options if the number of shares underlying these options
exceeds 302,860 after the adjustment described above.
In the event that a change of control occurs and the employment
of the option holder is terminated or they resign, in either
case within three months from the date of such change of
control, the options granted to the two executive officers will
accelerate and become fully vested.
Furthermore, the Company has approved the grant to certain
directors, officers, employees and other key personnel of the
Company, including one of the executives referred to above, of
options to purchase an aggregate of 844,000 common shares
exercisable at the public offering price at the closing of the
IPO. Included in the 844,000 above are options to purchase
292,000 common shares that vest on the achievement of specific
defined performance objectives related to the development of
Spheral Solar and options to purchase 552,000 common shares that
vest as to 20% on each anniversary date of the completion of the
IPO.
In September 2006, the Company entered into an agreement with
three other partners for a project whose primary objective is to
develop a commercial process for the production of solar grade
silicon derived from metallurgical silicon with a capacity of
200 tonnes per year. Pursuant to the agreement, the
Company’s role in the project is to contribute certain
expertise and non-financial resources in order to improve and
enhance the silicon material developed during the project’s
development phase. Under the contract, the
NOTES TO THE UNAUDITED COMBINED FINANCIAL
STATEMENTS — (Continued)
Company is to be supplied, at predetermined prices, with at
least 80% of the volume of solar grade silicon or ingots
produced by the project through to April 20, 2008.
In October 2006, the Company entered into a 10 year
irrevocable commitment to purchase approximately
4,000,000 silicon wafers per annum commencing in calendar
2009. Advance payments are required which will be applied
against the price of silicon wafers that will be received during
the life of the commitment and can only be refunded in the event
of the supplier’s failure to deliver silicon wafers in
accordance with the agreement. Commencing in 2009, the price of
the silicon wafers will be adjusted at the beginning of each
calendar year based on a pre-agreed formula.
14.
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
The combined financial statements of the Company have been
prepared in accordance with the accounting principles generally
accepted in Canada (“Canadian GAAP”) as discussed in
note 2. The Company’s accounting policies reflected in
these combined financial statements do not materially differ
from United States Generally Accepted Accounting Principles
(“U.S. GAAP”) except for:
(a) Research and Development Costs: Under Canadian
GAAP, the Company has deferred development costs which have met
generally accepted criteria for deferral. Under U.S. GAAP,
Statement of Financial Standards No. 2, “Accounting
for Research and Development Costs”, the Company is
required to charge all development costs to expense as incurred.
(b) Amortization of intangible assets: Under
Canadian GAAP, the Company has deferred amortization of the cost
of acquired patents until the technology related to such patents
is put into use. Under US GAAP,
NOTES TO THE UNAUDITED COMBINED FINANCIAL
STATEMENTS — (Continued)
the Company is required to amortize such costs from the date of
acquisition. As the intangible assets were written off at
March 31, 2006 for both U.S. and Canadian GAAP purposes,
there is no GAAP difference in the period ended June 30,2006.
(c) Stock-Based Compensation:The Company
prospectively adopted the Canadian GAAP requirements related to
stock-based compensation for all options granted to employees on
or after April 1, 2003.
Under U.S. GAAP, in the first quarter of fiscal 2007, the
Company is required to adopt the provisions of amended Statement
of Financial Standards No. 123, “Accounting for
Stock-Based Compensation”, (“SFAS 123R”).
SFAS 123R requires all companies to use a fair value based
method of accounting for stock-based compensation. The Company
is using the modified prospective transition (“MPT”)
method to record stock compensation. Stock compensation expense
calculated using the MPT method is recognized on a prospective
basis in the combined financial statements over the estimated
service life. As a result of adoption of SFAS 123R, the
Company’s net income was $12 lower than if the Company had
continued to account for share-based payments under Accounting
Principles Board Opinion 25 for the period ended June 30,2006.
For the period ended June 30, 2005, the Company’s
proforma net income adjusted for 50,000 stock options granted by
ATS to an employee as disclosed in note 7, using the
Black-Scholes option pricing model to determine fair value,
resulted in pro forma stock compensation expense of $nil and
proforma net loss of $2,759.
The fair value of options granted during the period ended
June 30, 2005 was calculated using the Black-Scholes option
pricing model with the following assumptions:
Weighted average Black-Scholes value of options
$
4.10
Assumptions:
Risk free interest
3.23
%
Expected life in years
5.0
Expected dividend yield
0.0
%
Volatility
31.0
%
The risk free interest rate utilized during the life of the
stock option is based on a Canadian government security for an
equivalent period. Expected volatility is based on historical
volatility of ATS. Historical data is used to estimate the
expected term.
(d) Comprehensive income: Under U.S. GAAP,
Statement of Financial Standards No. 130, “Reporting
Comprehensive Income”, establishes standards for the
reporting and display of comprehensive income and its components
in general-purpose financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise
during a period from transactions and other events and
circumstances from non-owner sources, and includes all changes
in equity during a period except those resulting from
investments by owners and distributions to owners. The
reportable item of comprehensive income is the translation
adjustments on the conversion of self-sustaining entities
included in these combined financial statements that have a
functional currency other than the reporting currency of the
United States dollar.
(e) Investment tax credits: Under Canadian GAAP,
investment tax credits are accounted for as a reduction in the
cost of the related asset or expense. Under U.S. GAAP,
Accounting Principle Board Opinion No. 2, “Accounting
for the Investment Tax Credit”, permits the company to
recognize the full tax credit against the tax provision in the
year the credit arises. As the Company does not believe there is
reasonable assurance that the credits will be realized, no
benefits have been recognized under U.S. or Canadian GAAP.
NOTES TO THE UNAUDITED COMBINED FINANCIAL
STATEMENTS — (Continued)
(f) Recently issued pronouncements:
Canadian GAAP Standards:
In January 2005, the CICA approved Handbook Sections 1530,
“Comprehensive Income”, 3855, “Financial
Instruments — Recognition and Measurement” and
3865, “Hedges”. The new standards are intended to
harmonize Canadian GAAP with U.S. GAAP. The new standards
will be effective for the first quarter of fiscal 2008.
United States GAAP Standards:
In June, 2006 the FASB issued Interpretation No. 48
(“FIN 48”), “Accounting for Uncertainty in
Income Taxes”. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement 109.
The interpretation is effective for fiscal years beginning after
December 15, 2006, with earlier adoption encouraged. The
Company is currently evaluating the impact of adoption on the
combined financial statements.
In November 2004, the FASB issued Statement of Financial
Standards No. 151, “Inventory Costs, and amendment of
ARB No. 43, Chapter 4”,
(“SFAS 151”). SFAS 151 clarifies that
abnormal amounts of idle facility expense, freight and handling
costs, and wasted materials should be recognized as current
period charges. The standard is effective for fiscal years
beginning after June 15, 2005. The adoption of the standard
did not have a significant impact on the combined financial
statements.
In September, 2006, the FASB issued Statement of Financial
Standard No. 157, “Fair Value Measurement”
(“SFAS 157”). SFAS 157 provides guidance for
using fair value to measure assets and liabilities. The
Statement also expands disclosures about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair
value measurement on earnings. The Statement is effective for
fiscal years beginning on or after January 1, 2008. The
Company is currently evaluating the impact of adoption on the
combined financial statements.
Report of Independent Registered Public Accounting Firm
The Board of Directors of Photowatt Technologies Inc. and ATS
Automation Tooling Systems Inc.:
We have audited the accompanying combined balance sheets of
Photowatt Technologies Inc. (as described in note 1), as of
March 31, 2006 and 2005, and the related combined
statements of earnings (loss), net investment, and cash flows
for each of the years in the three-year period ended
March 31, 2006. These combined financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to
above present fairly, in all material respects, the financial
position of Photowatt Technologies Inc. as of March 31,2006 and 2005, and the results of its operations and its cash
flows for each of the years in the three-year period ended
March 31, 2006, in conformity with Canadian generally
accepted accounting principles.
Accounting principles generally accepted in Canada vary in
certain significant respects from U.S. generally accepted
accounting principles. Information related to the nature and
effect of such differences is presented in Note 20 to the
combined financial statements.
Photowatt Technologies Inc. is a wholly owned subsidiary of ATS
Automation Tooling Systems Inc. (“ATS” or the
“Parent”). Upon the completion of the initial public
offering of Photowatt Technologies Inc. (“IPO”), ATS
will transfer into Photowatt Technologies Inc. its interests in
the assets and liabilities that are used in the solar business
conducted by ATS and its subsidiaries, subject to certain
excluded assets including the premises and building related to
the Spheral Solar manufacturing facility and ATS solar
automation know-how. The solar business is comprised of Spheral
Solar, a division of ATS, Photowatt International S.A.S.,
Spheral Solar Power Inc. and Matrix Solar Technologies, Inc.,
all of which are divisions or subsidiaries of ATS (collectively
with Photowatt Technologies Inc. known as the
“Company”). For the convenience of the reader, the
combined financial statements refer to Photowatt Technologies
Inc. and use “the Company” even though the transfer
has not been consummated at March 31, 2006. As the transfer
is not consummated, the financial statements are referred to as
combined financial statements. Minority interests are held by
third parties in Matrix Solar Technologies, Inc., which owns a
portion of Photowatt International S.A.S. and Spheral Solar
Power Inc.
The Company’s principal business activity is the design,
manufacture and sale of photovoltaic products.
2.
BASIS OF ACCOUNTING:
These combined financial statements present the historical
financial position, results of operations, changes in net
investment and cash flows on a carve-out basis from ATS as if
the Company had operated as a stand-alone entity subject to
ATS’ control prior to this reorganization.
The combined financial statements have been prepared in
accordance with Canadian generally accepted accounting
principles, which conform in all material respects with United
States generally accepted accounting principles, except as
presented in note 20. Amounts are stated in United States
dollars.
A portion of ATS’ corporate selling and administrative
expenses have been allocated to the Company, based on
management’s estimates of expenses attributable to the
Company. Shared services provided include strategic,
operational, human resources, accounting, information systems,
facility, legal, taxation and treasury services. Property, plant
and equipment and other services purchased from ATS are recorded
at the exchange amount.
The Company’s surplus funds are transferred to ATS and the
Company’s financing requirements are provided by ATS as
reflected through ATS’ net investment account. Related
party interest expense recorded in the Combined Statements of
Earnings (Loss) represents charges from ATS as historically
reflected in the accounts of subsidiaries.
Income taxes have been recorded at statutory rates based on
income taxes as reported in the Combined Statements of Earnings
(Loss) as though the Company was a separate tax paying entity.
Income taxes payable or recoverable in respect of the components
which were not historically separate tax paying legal entities
have been included in ATS’ net investment. Future income
taxes have been presented in the Combined Balance Sheets for
each temporary difference between the financial reporting and
tax basis of the assets and liabilities. In addition, future
income tax assets have been recognized to the extent that they
would have been realized as though the Company was a separate
tax paying group of entities. Future income tax assets are
recognized only to the extent that management determines that it
is more likely than not that future income tax assets will be
realized in the foreseeable future.
As a result of the basis of presentation described above, the
combined financial statements may not necessarily be indicative
of the results that would have been obtained if the Company had
operated as a stand-alone group of entities or indicative of the
results for any future periods.
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
3.
SIGNIFICANT ACCOUNTING POLICIES:
(a) Principles of consolidation: The combined
financial statements include the accounts of the Company, as
described in note 1. All significant intercompany
transactions and balances between these entities have been
eliminated.
(b) Foreign currency translation: The functional
currency of Photowatt International S.A.S., Spheral
Solar Power Inc. and Matrix Solar Technologies, Inc. are
the Euro, Canadian dollar and United States dollar respectively.
The functional currency of Spheral Solar is the Canadian dollar.
For the purposes of the combined financial statements, the
functional currency is the Canadian dollar and the reporting
currency is the United States dollar. As the subsidiaries are
self-sustaining, the accounts of the Company’s foreign
subsidiaries are translated into United States dollars using the
current rate method under which assets and liabilities are
translated at the exchange rate prevailing at the year-end and
revenues and expenses at average rates during the year. Gains or
losses on translation are not included in the Combined
Statements of Earnings (Loss) but are deferred and included in
cumulative translation adjustment, a separate component of group
equity.
Other monetary assets and liabilities, including long-term
monetary assets and liabilities, which are denominated in
foreign currencies, are translated into the respective
functional currency of each entity at year-end exchange rates,
and transactions included in earnings are translated at rates
prevailing during the year. Exchange gains and losses resulting
from the translation of monetary assets and liabilities are
included in the Combined Statements of Earnings (Loss).
(c) Derivative financial instruments:The Company
employs derivative financial instruments, primarily forward
foreign exchange rate contracts, to manage exposure to
fluctuations in foreign currency exchange rates. The Company
does not hold derivative financial instruments for trading
purposes. The Company has in place policies and procedures with
respect to the required approvals for the use of derivative
financial instruments and specifically ties their use to the
mitigation of foreign currency risk. When applicable, the
Company identifies relationships between its risk management
objective and the strategy for undertaking the hedge transaction.
Although management considers its derivative portfolio to be an
effective risk management tool, the Company does not apply hedge
accounting. Such derivative instruments are
marked-to-market and
are recorded in the Combined Balance Sheets as either an asset
or liability, with changes in fair value recognized in the
Combined Statements of Earnings (Loss) in selling and
administrative expenses.
Cash flows arising in respect of hedging transactions are
recognized in cash flows from operating activities.
(d) Cash and cash equivalents: Cash and cash
equivalents consist of cash and highly liquid money market
instruments with maturities of three months or less at the time
of acquisition.
(e) Inventories: Raw materials are valued at the
lower of cost and replacement cost.
Work-in-process and
finished goods inventory are stated at the lower of cost and net
realizable value. Cost includes the cost of materials plus
direct labor applied to the product and applicable share of
manufacturing overhead. Cost is determined on a
first-in, first-out
basis.
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
(f) Property, plant and equipment: Property, plant
and equipment are recorded at cost. Amortization is computed
using the following methods and annual rates:
Asset
Basis
Rate
Buildings
Straight-line
15 years
Production equipment
Straight-line
5 to 10 years
Other equipment and furniture
Declining-balance
20%
Straight-line
5 to 7 years
(g) Goodwill: Goodwill represents the excess of the
cost of an acquired enterprise over the net of the fair values
assigned to assets acquired and liabilities assumed, less any
subsequent impairment write-down. Goodwill is subject to an
impairment test on at least an annual basis or upon the
occurrence of certain events or circumstances. Goodwill
impairment is assessed based on a comparison of the fair value
of a reporting unit to the underlying carrying value of the
reporting unit’s net assets, including goodwill. When the
carrying amount of the reporting unit exceeds its fair value,
the implied fair value of the reporting unit’s goodwill is
compared with its carrying amount to measure the amount of
impairment loss, if any. Goodwill presented in the combined
financial statements relates to the Company’s purchase of
Photowatt International S.A.S.
(h) Intangible assets: Intangible assets, which are
patents and licences on technologies, are recorded at cost and
amortized over their estimated economic life of 10 to
17 years.
(i) Impairment of long-lived assets:The Company
reviews long-lived assets such as property, plant and equipment
and intangible assets with finite useful lives for impairment
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. If the total of the
expected undiscounted cash flows is less than the carrying value
of the asset, a loss, if any, is recognized for the excess of
the carrying value over the fair value of the asset. During the
year ended March 31, 2006, the Company determined that the
carrying value of certain property, plant and equipment and
intangible assets was in excess of their associated estimated
undiscounted future cash flows and the assets were written-down
to their fair value as further described in note 15.
(j) Income taxes:The Company uses the liability
method of accounting for income taxes. Under the liability
method of accounting for income taxes, future income tax assets
and liabilities are determined based on differences between the
financial reporting and tax basis of assets and liabilities and
are measured using the substantively enacted tax rates and laws
that will be in effect when the differences are expected to
reverse.
The Company continues to assess, on an ongoing basis, the degree
of certainty regarding the realization of future income tax
assets and whether a valuation allowance is required.
(k) Revenue recognition: Revenue is recognized when
earned, which is generally at the time of shipment and when
title is transferred to the customer, provided that collection
is reasonably assured, the sales price is fixed and
determinable, and the rights and risks of ownership have passed
to the customer.
The Company maintains an allowance for doubtful accounts
primarily based on an assessment of historical bad debts,
factors surrounding the credit risk of specific customers and
current economic trends. If there is a deterioration of a major
customer’s creditworthiness or actual defaults are higher
than our historical experience, the Company may be required to
increase the allowance for doubtful accounts.
The Company provides for the costs of product warranties at the
time revenue is recognized. Estimates of product warranty costs
are based upon historical experience and expectations of future
return rates and unit warranty repair costs. To the extent
actual product failure rates and associated costs differ from
our estimates, revisions to the estimated warranty liability
would be required.
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
(l) Research and development costs: Research costs
are expensed as incurred. Development costs which meet generally
accepted criteria for deferral are deferred and amortized over
the period over which the Company expects to benefit from the
resulting product or process. Subject to meeting the generally
accepted criteria for deferral, the Company capitalizes both
direct and indirect costs with respect to ventures which are in
the development stage.
Deferred development costs are reviewed annually for
recoverability or whenever events or circumstances indicate that
the carrying value may not be recoverable. When the criteria
that previously justified the deferral of costs are no longer
met, the unamortized balance is written-off as a charge to
earnings in that period. When the criteria for deferral continue
to be met, but the amount of deferred development costs that can
reasonably be regarded as assured through recovery of related
future revenues less relevant costs is exceeded by the
unamortized balance of such costs, the excess is written-off as
a charge to earnings in that period. During the year ended
March 31, 2006, the Company determined that the carrying
value of certain deferred development costs was in excess of
their associated estimated undiscounted future cash flows and
the assets were written-down as further described in
note 15.
(m) Investment tax credits and government
assistance: Investment tax credits and government assistance
are accounted for as a reduction in the cost of the related
asset or expense when there is reasonable assurance that such
credits or assistance will be realized.
(n) Stock-based compensation plans: For all employee
stock option awards granted on or after April 1, 2003, the
Company recognizes compensation using the fair value based
method of accounting for stock-based compensation.
The Company has accounted for all employee stock options granted
before April 1, 2003 as capital transactions with the
provision of pro forma disclosure for those awards granted
between April 1, 2002 and March 31, 2003. Pro forma
disclosures present net earnings as if the compensation cost for
the Company’s stock option plan had been determined and
recorded based on the fair value of options awarded for the year
ended March 31, 2003. No pro forma disclosure is provided
for stock options awarded prior to April 1, 2002.
The fair value of stock options is estimated at the grant date
using the Black-Scholes option pricing model. Although the
assumptions used reflect management’s best estimates, they
involve inherent uncertainties based on market conditions
generally outside of the control of the Company. If other
assumptions were used, stock-based compensation expense could be
significantly impacted. As stock options are exercised, the
proceeds received on exercise, in addition to the previously
recognized expense related to those stock options, are credited
to net investment.
For those options which can be settled in cash at the
holder’s option, a liability is recognized for the cash
settlement value. This liability is adjusted each reporting
period with the corresponding charge to the Combined Statements
of Earnings (Loss).
(o) Asset retirement obligations: Liabilities
related to legal obligations associated with the retirement of
tangible long-lived assets are initially measured at fair value
and subsequently adjusted for the passage of time and any
changes in the underlying cash flows. The asset retirement cost
is capitalized to the related asset and amortized into earnings
over time.
(p) Use of estimates: The preparation of these
combined financial statements in conformity with Canadian
generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the combined
financial statements and the reported amount of revenue and
expenses during the reporting period. Actual results could
differ from these estimates. Significant estimates and
assumptions are used when accounting for items such as
impairment of long-lived assets, recoverability of deferred
development costs, income taxes, valuation of future income tax
assets, determination of estimated useful lives of intangible
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
assets and property, plant and equipment, inventory provisions,
warranty reserves, revenue recognition, contingent liabilities,
and allowances for doubtful accounts.
4.
FINANCIAL INSTRUMENTS:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts
receivable. The Company provides credit terms to its customers
and generally requires no collateral.
At March 31, 2006, two customers accounted for
approximately 30.7% of the combined balance of accounts
receivable (2005 — 41.1%). The allowance for doubtful
accounts balance at March 31, 2006 was $183 (March 31,2005 — $146). The provision for bad debt expense for
the year ended March 31, 2006 was $29 (2005 —
$63, 2004 — $8).
The carrying amounts reported in the Combined Balance Sheets for
cash and cash equivalents, accounts receivable, and accounts
payable and accrued liabilities approximate their fair values,
due to the short-term nature of those instruments.
Total net foreign exchange gains (losses) recognized in the year
ended March 31, 2006 were $91 (2005 — $613,
2004 — ($140)) and are included in selling and
administrative expenses on the Combined Statements of Earnings
(Loss).
5.
INVENTORIES:
At March 31
2005
2006
Inventories are summarized as follows:
Raw materials
$
14,699
$
19,275
Work-in-process
6,204
8,038
Finished goods available for sale
4,378
6,128
$
25,281
$
33,441
Raw materials inventory includes supply inventories of $3,201
(2005 — $1,654) which are consumed in the production
process. The provision for excess and obsolete inventory was
$606 at March 31, 2006 (2005 — $509).
During the year ended March 31, 2006, the Company recorded
an impairment charge on property, plant and equipment of $51,881
(note 15).
At March 31, 2005, $47,060 of property, plant and equipment
was not amortized as it was not in service. During the year
ended March 31, 2006, the Company recorded amortization of
property, plant and equipment of $9,472 (2005 —
$5,293, 2004 — $4,415).
7.
INTANGIBLE ASSETS:
During the year ended March 31, 2006, the Company recorded
a full impairment charge on intangible assets of $1,432
(note 15).
The intangible assets were not amortized prior to
October 1, 2005, when the Company was in the development
stage of its Spheral Solar initiative. Subsequent to
September 30, 2005, amortization began on the intangible
assets on a straight-line basis over their estimated remaining
useful lives. Amortization recorded on these assets was $76 in
fiscal 2006.
8.
DEFERRED DEVELOPMENT COSTS:
At March 31
2005
2006
Deferred development costs — Spheral Solar Power
$
31,001
$
—
Deferred development costs — other programs
21
123
$
31,022
$
123
During the year ended March 31, 2006, the Company deferred
$10,671 of net development costs (2005 — $17,657,
2004 — $6,242). Amortization of deferred development
costs was $132 (2005 — $127, 2004 — $51).
During the year ended March 31, 2006, the Company recorded
an impairment charge on deferred development costs of $40,977
(note 15).
9.
OTHER ASSETS:
Other assets are comprised of a $2,531 Technology Partnerships
Canada (“TPC”) holdback receivable in regards to
funding contributions toward the Company’s development of a
new photovoltaic energy technology. Final payment of the TPC
holdback receivable is expected to be made during fiscal 2008.
10.
STOCK-BASED COMPENSATION PLANS:
Stock Option Plan: In 1997, a company within Photowatt
Technologies Inc. authorized a stock option plan and reserved
3,000 shares for issuance under the plan. Incentive stock
options have been granted of that company’s common stock to
certain key employees. These stock options vested over five
years. Options granted under this plan may be exercised during a
period not exceeding ten years from the date of grant,
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
subject to earlier termination upon the optionee ceasing to be a
director, officer or employee of that company. The stock option
exercise price was the estimated fair value of that
company’s common shares at the date of grant. No stock
option grants have been made from this plan since fiscal 2001.
The following is a continuity schedule of options outstanding at
this company:
2004
2005
2006
Number
Weighted
Number
Weighted
Number
Weighted
of Stock
Average
of Stock
Average
of Stock
Average
Years Ended March 31
Options
Exercise Price
Options
Exercise Price
Options
Exercise Price
Stock options outstanding at beginning of year
1,195
$
674.02
1,195
$
674.02
1,195
$
674.02
Granted
—
—
—
—
—
—
Exercised
—
—
—
—
—
—
Forfeited/ Cancelled
—
—
—
—
—
—
Stock options outstanding, end of year
1,195
$
674.02
1,195
$
674.02
1,195
$
674.02
Stock options exercisable, end of year
1,156
$
679.36
1,195
$
674.02
1,195
$
674.02
The weighted average remaining contractual life of options
outstanding is 1.49 years (2005 —
2.49 years, 2004 — 3.49 years).
The holders of 195 of these options had the right to require the
Company to settle the value of the vested portion of the shares
under option in cash based on a formula linked to the net book
value of the granting company. A liability has been recognized
for the vested portion of the cash settlement value. The amount
of the recognized liability of March 31, 2006 was $153
(2005 — $153, 2004 — $126). The changes in
this liability have been charged to compensation expense.
During 2006, ATS issued 50,000 stock options on its common
shares to employees of the Company. The Company recognized
compensation expense based on the fair value over the vesting
period of these options. Compensation expense of $35 was
recorded in 2006 (2005 — nil, 2004 — nil).
The fair value of options granted during the year was calculated
using the Black-Scholes option pricing model with the following
assumptions related to underlying ATS shares:
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
11.
CUMULATIVE TRANSLATION ADJUSTMENT:
The cumulative translation adjustment balance reflects
unrealized translation adjustments arising on the translation of
foreign currency denominated assets and liabilities of
self-sustaining foreign operations. These translation
adjustments are realized in earnings when there is a reduction
in the Company’s investment in the respective foreign
operation. The decrease in the cumulative translation adjustment
during the current year resulted primarily from the weakening of
the Euro against the United States dollar.
12.
INCOME TAXES
(i) Reconciliation of income taxes: Income tax expense
differs from the amounts which would be obtained by applying the
combined Canadian basic federal and provincial income tax rate
to earnings (loss) before income taxes and minority interest.
These differences result from the following items:
Years Ended March 31
2004
2005
2006
Earnings (loss) before provision for income taxes and minority
interest
Canadian
$
(415
)
$
(401
)
$
(111,522
)
Foreign
2,650
10,945
18,752
Earnings (loss) before provision for income taxes and minority
interest
$
2,235
$
10,544
$
(92,770
)
Combined Canadian basic federal and provincial income tax rate
36.50
%
36.12
%
36.12
%
Income taxes based on combined Canadian basic federal and
provincial income tax rate
$
816
$
3,808
$
(33,509
)
Increase (decrease) in income taxes resulting from:
Increase in valuation allowance
86
122
38,652
Manufacturing and processing allowance
14
11
896
Income of foreign subsidiaries taxed at different rates
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
(ii) Components of future income tax assets and
liabilities: Future income taxes are provided for temporary
differences. Future income tax assets and liabilities are
comprised of the following:
Years Ended March 31
2005
2006
Future income tax assets:
Loss carryforwards
$
12,255
$
23,017
Property, plant and equipment
—
11,498
Expenditures not yet deducted for tax
3,371
5,065
Other
150
—
15,776
39,580
Less valuation allowance
928
39,580
Future income tax assets, net
$
14,848
$
—
Future income tax liabilities:
Property, plant and equipment
$
4,611
$
—
Deferred development costs
9,257
—
Other
28
584
Future income tax liabilities
$
13,896
$
584
Net future income tax asset (liability)
$
952
$
(584
)
The Company determined that it was not more likely than not that
it will realize on its future income tax assets relating to
Spheral Solar, Matrix Solar Technologies, Inc. and Spheral Solar
Power Inc. Accordingly, a valuation allowance of $39,580 as at
March 31, 2006 (2005 — $928) was established.
(iii) Loss carryforwards: As at March 31, 2006,
the Company has the following net operating loss carryforwards
which are not recognized for accounting purposes and are
scheduled to expire in the following years:
Non-Canadian
Canadian
2010
$
—
$
22
2011
—
6,104
2015
—
26,069
2017
201
—
2019
93
—
2021
1,418
—
2022
53
—
2023
430
—
2024
154
—
2025
228
—
2026
265
29,250
$
2,842
$
61,445
(iv) Investment Tax Credits: At March 31, 2006,
the Company had Canadian and provincial investment tax credits
of $4,898 (2005 — $3,260), which expire in 2010
through 2026. The Company has determined that it does not have
reasonable assurance of realization in respect to these
investment tax credits. Accordingly no asset has been recognized.
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
(v) Completion of Arrangement: Following the
completion of the proposed transaction described in notes 1
and 19, none of the benefit of Canadian and United States
tax loss carryforwards, Canadian tax credits or related
valuation allowance will remain with the Company or any of its
successors.
(vi) Other: Cash paid for income taxes was $183 for
the year ended March 31, 2006 (2005 — $154,
2004 — $90) and cash paid relating to interest charges
was $683 for the year ended March 31, 2006
(2005 — $125, 2004 — $67).
13.
COMMITMENTS:
The minimum operating lease payments related primarily to
facilities and equipment in each of the next five years are as
follows:
Year
Amount
2007
$
486
2008
464
2009
314
2010
165
2011
241
During the year ended March 31, 2006, the Company incurred
rental expense of $620 (2005 — $523, 2004 —
$401). As at March 31, 2006, the Company had issued
purchase commitments of $10,588 for production equipment and
services.
Subsequent to year-end, the Company issued purchase orders to
acquire approximately $8,000 of refined metallurgical silicon
which will be delivered through to fiscal 2008. In
May 2006, the Company announced the capacity expansion plan
for Photowatt International for the facility near Lyon, France,
at an expected cost
of €25,000.
14.
GOVERNMENT ASSISTANCE:
During the year ended March 31, 2003, the Company entered
into an agreement with TPC which provides funding of up to
$25,257 (C$29,500) as a contribution towards the Company’s
development of a new photovoltaic energy technology, Spheral
Solar technology. As at March 31, 2006, total TPC funding
of $25,257 (2005 — $24,142) has been applied to reduce
the deferred development expenses and capital expenditures
incurred related to Spheral Solar technology, of which $2,997
remains receivable (2005 — $4,814) including the
current portion of $466 which is included in accounts
receivable. Cumulative funding of $8,803 and $16,454 has been
applied to deferred development expenditures and property, plant
and equipment, respectively.
As consideration for the TPC funding, the Company is required to
pay royalties of 1.8% on our future revenues resulting from the
sale, licensing or other transfer of Spheral Solar products and
related services. These royalties commence in the first year
that such future annual revenues exceed $17,100 (C$20,000) and
continue for a total of 10 years. If the cumulative
royalties exceed $72,340 (C$84,493) during this 10 year
period, the royalty rate declines to 0.35% for the remaining
term. If at the end of 10 years the cumulative royalties
have not reached $72,340 (C$84,493), the royalty payment term is
extended for the lesser of a further five years or once
cumulative royalties of $72,340 (C$84,493) have been reached.
The Company has not recorded any liability amounts with respect
to the TPC funding since the conditions for royalty payments
have not yet been met.
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
During the year ended March 31, 2006the Company applied
$1,311 of other sources of government funding against deferred
development expenses and research and development expenses
(2005 — $830, 2004 — $515) with respect to
Photowatt International S.A.S. of which $873 remains receivable
at March 31, 2006 (2005 — $791).
15.
ASSET IMPAIRMENT CHARGE:
The Company regularly reviews the net recoverable amount of its
deferred development costs and long-lived assets. As a result of
this review, in the year ended March 31, 2006, deferred
development costs in the Spheral Solar segment were written-down
by $40,977, property, plant and equipment was written-down by
$51,881, and intangible assets were written-down by $1,432, for
a total impairment expense of $94,290. The impairment resulted
due to uncertainty and delays in realizing cash flows from the
investment in the Spheral Solar technology. Fair value was
determined based on estimated discounted cash flows.
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
17.
RELATED PARTY TRANSACTIONS:
2004
2005
2006
Transactions
Purchase of property, plant and equipment — ATS
$
19,128
$
18,691
$
5,725
Purchase of raw materials and other services — ATS
240
330
343
Development services — ATS
1,482
213
292
Shared corporate costs — ATS
415
589
717
Interest expense — ATS
—
—
1,686
Sale of product — other related party
—
61
150
As noted in note 2, ATS provides strategic, operational and
administrative services to the Company. Furthermore, the Company
purchases property, plant and equipment, development services,
raw materials and other services from affiliated companies.
“Sale of product” pertains to sales to EPISOL
s.a.r.l., a company controlled by Eric Laborde, a consultant who
serves as our managing director, Europe (acting) of Photowatt
France. These transactions have been reflected at their exchange
amount.
As at March 31, 2006, included in accounts payable and
accrued liabilities are amounts due to ATS in the amount of $192
(2005 — $1,313). These amounts are payable on demand
and do not bear interest, other than as noted below.
The amount payable to ATS included in the Company’s
Combined Balance Sheets under net investment represents a net
balance as the result of various transactions between the
Company and its Parent. There are no terms of settlement or
interest charges associated with the account balance other than
described below. The Company’s surplus funds are
transferred to ATS, and the Company’s financing
requirements are funded by ATS. At March 31, 2006, two
intercompany amounts were outstanding in the amounts of Euro
25,043 ($30,381 USD), and C$45,975 ($39,362 USD) on which
interest of Euro LIBOR rate plus 1.25% and Canadian dollar prime
rate is charged, respectively. Both amounts have been included
in ATS’ net investment in the Company. Other transactions
include intercompany purchases and sales and miscellaneous other
administrative expenses incurred by the Parent on behalf of the
Company.
An analysis of transactions in the intercompany account for each
of the three years in the period ended March 31, 2006
follows:
2004
2005
2006
Balance at beginning of year
$
384
$
2,230
$
1,313
Net cash funded by Parent
(19,419
)
(20,740
)
(9,884
)
Net intercompany purchases
20,850
19,234
6,360
Other administrative expenses
415
589
2,403
Balance at end of year
$
2,230
$
1,313
$
192
Average balance during the year
$
1,307
$
1,772
$
753
18.
SEGMENTED DISCLOSURE:
The Company evaluates performance based on two reportable
segments. The Photowatt International segment consists of
Photowatt International S.A.S. in France and the module assembly
business of Matrix Solar Technologies, Inc. Photowatt
International, our core business that is based on a wafer
technology, designs, manufactures and sells solar modules and
installation kits, and provides solar power design and other
value-added services. The Spheral Solar segment is a development
project that is based on a spheral technology using thousands of
tiny silicon spheres instead of silicon wafers.
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
2004
2005
2006
Total Long-
Total Long-
Revenue
Revenue
Lived Assets
Revenue
Lived Assets
Europe
$
59,807
$
105,406
$
30,088
$
97,507
$
38,222
United States
4,415
5,360
2,409
17,499
2,121
Canada
750
150
49,284
23
4,167
Other
883
2,103
—
6,887
—
Total Company
$
65,855
$
113,019
$
81,781
$
121,916
$
44,510
Geographic segmentation of revenue is determined based on the
customer’s installation site. Long-lived assets represent
property, plant and equipment, goodwill and intangible assets
that are attributable to individual geographic segments, based
on location of the respective operations.
During the year ended March 31, 2006, the Photowatt
International segment had revenue from three customers which
amounted to 17.8%, 16.5% and 11.2% of Company revenue
(2005 — two customers comprised 30.1% and 24.7%,
2004 — two customers comprised 23.6% and 17.6%).
19.
SUBSEQUENT EVENT:
In August 2006, the Board of Directors approved the issuance of
a preliminary prospectus in connection with the Company’s
initial public offering (the “IPO”) in the United
States and Canada. Upon the closing of the IPO, certain of
ATS’ solar business interests will be transferred to the
Company.
In September 2006, the Company approved the grant of options to
two executive officers of the Company to purchase, in aggregate,
302,860 of the Company’s common shares at an exercise price
of C$5.00 per share. The aggregate number of common shares
underlying each of these options is subject to an automatic
adjustment that will increase or decrease the number such that
it is equal to 0.6883% of the common shares in the Company held
by ATS immediately prior to the closing of the IPO.
The option to purchase 160,000 common shares granted to one
executive vests as to 20% on the completion of the IPO and 20%
on each anniversary date of the completion of the IPO. The
option to purchase 142,860 common shares granted to the second
executive vests as to 20% on each anniversary date of the
completion of the IPO.
In addition to the above mentioned grants, the two executives
are eligible to receive a cash payment upon any exercise of
these options if the number of shares underlying these options
exceeds 302,860 after the adjustment described above.
In the event that a change of control occurs and the employment
of the option holder is terminated or they resign, in either
case within three months from the date of such change of
control, the options granted to the two executive officers will
accelerate and become fully vested.
Furthermore, the Company has approved the grant to certain
directors, officers, employees and other key personnel of the
Company, including one of the executives referred to above, of
options to purchase an aggregate of 844,000 common shares
exercisable at the public offering price at the closing of the
IPO. Included in the 844,000 above are options to purchase
292,000 common shares that vest on the achievement of specific
defined performance objectives related to the development of
Spheral Solar and options to purchase 552,000 common shares that
vest as to 20% on each anniversary date of the completion of the
IPO.
In September 2006, the Company entered into an agreement with
three other partners for a project whose primary objective is to
develop a commercial process for the production of solar grade
silicon derived from metallurgical silicon with a capacity of
200 tonnes per year. Pursuant to the agreement, the
Company’s
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
role in the project is to contribute certain expertise and
non-financial resources in order to improve and enhance the
silicon material developed during the project’s development
phase. Under the contract, the Company is to be supplied, at
predetermined prices, with at least 80% of the volume of solar
grade silicon or ingots produced by the project through to
April 20, 2008.
In October 2006, the Company entered into a 10 year
irrevocable commitment to purchase approximately 4,000,000
silicon wafers per annum commencing in calendar 2009. Advance
payments are required which will be applied against the price of
silicon wafers that will be received during the life of the
commitment and can only be refunded in the event of the
supplier’s failure to deliver silicon wafers in accordance
with the agreement. Commencing in 2009, the price of the silicon
wafers will be adjusted at the beginning of each calendar year
based on the agreed upon formula.
20.
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Combined Financial Statements of the Company have been
prepared in accordance with the accounting principles generally
accepted in Canada (“Canadian GAAP”). The
Company’s accounting policies reflected in these Combined
Financial Statements do not materially differ from United States
generally accepted accounting principles
(“U.S. GAAP”) except for:
Combined Group Equity
2004
2005
2006
Total accumulated comprehensive income under Canadian GAAP
$
—
$
—
$
—
Adjustments:
Foreign currency translation related to U.S. GAAP
adjustments(a),(b),(d)
(1,060
)
(2,967
)
(2,792
)
Foreign currency translation adjustment(d)
2,841
3,640
458
Total accumulated comprehensive income (loss) under
U.S. GAAP
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
Combined Statements of Earnings (Loss)
2004
2005
2006
Net earnings (loss) under Canadian GAAP
$
1,064
$
6,658
$
(98,373
)
Adjustments:
Deferred development(a)
(6,180
)
(17,441
)
30,697
Amortization of intangible assets(b)
(78
)
(82
)
—
Intangible asset impairment charge(b)
—
—
704
Stock-based compensation(c)
—
—
35
Net loss under U.S. GAAP
(5,194
)
(10,865
)
(66,937
)
Other comprehensive income (loss):
Foreign currency translation adjustment(d)
1,532
(1,108
)
(3,007
)
Comprehensive income under U.S. GAAP
$
(3,662
)
$
(11,973
)
$
(69,944
)
(a) Research and Development Costs: Under Canadian
GAAP, the Company has deferred development costs which have met
generally accepted criteria for deferral. Under U.S. GAAP,
Statement of Financial Standards No. 2, “Accounting
for Research and Development Costs,”the Company is
required to charge all development costs to expense as incurred.
(b) Amortization of intangible assets and intangible
asset impairment charge: Under Canadian GAAP, the Company
has deferred amortization of the cost of acquired patents until
the technology related to such patents is put into use. Under
U.S. GAAP, the Company is required to amortize such costs
from the date of acquisition, which reduced the carrying value
of the asset subject to the asset impairment charge at
March 31, 2006.
(c) Stock-Based Compensation:The Company
prospectively adopted the Canadian GAAP requirements related to
stock-based compensation for all options granted to employees on
or after April 1, 2003.
Under U.S. GAAP, Accounting Principle Board Opinion
No. 25, “Accounting for Stock Issued to
Employees,” for any stock option with an exercise price
that is less than the market price on the date of grant, the
difference between the exercise price and the market price on
the date of grant is recorded as compensation expense
(“intrinsic value based method”). The Company grants
stock options at the fair market value of the shares,
consequently no compensation expense is recognized under
U.S. GAAP.
Statement of Financial Standards No. 123, “Accounting
for Stock-Based Compensation,” requires pro forma
disclosures of net income as if the fair value based method as
opposed to the intrinsic value based method of accounting for
stock options had been applied. The disclosures in the following
table show the Company’s net income on a pro forma basis
using the fair value method as determined by using the
Black-Scholes option pricing model:
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
The fair value of options granted during year was calculated
using the Black-Scholes option pricing model with the following
assumptions:
2006
Weighted average Black-Scholes value of options
$
4.10
Assumptions:
Risk free interest rate
3.2
%
Expected life in years
5.0
Expected dividend yield
0.0
%
Volatility
31.0
%
(d) Comprehensive income: Under U.S. GAAP,
Statement of Financial Standards No. 130, “Reporting
Comprehensive Income,” establishes standards for the
reporting and display of comprehensive income and its components
in general-purpose financial statements. Comprehensive income is
defined as the change in net assets of a business enterprise
during a period from transactions and other events and
circumstances from non-owner sources, and includes all changes
in equity during a period except those resulting from
investments by owners and distributions to owners. The
reportable item of comprehensive income is the translation
adjustments on the conversion of self-sustaining entities
included in these combined financial statements that have a
functional currency other than the reporting currency of the
United States dollar.
(e) Investment tax credits: Under Canadian GAAP,
investment tax credits are accounted for as a reduction in the
cost of the related asset or expense. Under U.S. GAAP,
Accounting Principle Board Opinion No. 2, “Accounting
for the Investment Tax Credit,” permits the company to
recognize the full tax credit against the tax provision in the
year the credit arises. As the Company does not believe there is
reasonable assurance that the credits will be realized, no
benefits have been recognized.
(f) Recently issued pronouncements:
Canadian GAAP Standards:
In January 2005, the CICA approved Handbook Sections 1530,
“Comprehensive Income,” 3855, “Financial
Instruments — Recognition and Measurement” and
3865, “Hedges.” The new standards are intended to
harmonize Canadian GAAP with U.S. GAAP. The new standards
will be effective for the first quarter of fiscal 2008.
United States GAAP Standards:
In December 2004, the FASB issued amended Statement of Financial
Standards No. 123, “Accounting for Stock-Based
Compensation,” (“SFAS 123R”). SFAS 123R
requires our companies to use the fair value based method of
accounting for stock-based compensation and is in effect for all
interim reporting periods beginning in fiscal 2007. Stock
compensation expense would be recognized on a prospective basis
in the financial statements over the estimated service life. The
Company is currently evaluating the impact of adoption on the
combined financial statements.
In June, 2006 the FASB issued Interpretation No. 48
(“FIN 48”), “Accounting for Uncertainty in
Income Taxes.” FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement 109.
The interpretation is effective for fiscal years beginning after
December 15, 2006, with earlier adoption encouraged. The
Company is currently evaluating the impact of adoption on the
combined financial statements.
In November 2004, the FASB issued Statement of Financial
Standards No. 151, “Inventory Costs, and amendment of
ARB No. 43, Chapter 4,”
(“SFAS 151”). SFAS 151 clarifies that
abnormal amounts of idle
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
facility expense, freight and handling costs, and wasted
materials should be recognized as current period charges. The
standard is effective for fiscal years beginning after
June 15, 2005.
In September, 2006, the FASB issued Statement of Financial
Standard No. 157, “Fair Value Measurement”
(“SFAS 157”). SFAS 157 provides guidance for
using fair value to measure assets and liabilities. The
Statement also expands disclosures about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair
value measurement on earnings. The Statement is effective for
fiscal years beginning on or after January 1, 2008. The
Company is currently evaluating the impact of adoption on the
combined financial statements.
We have included in our by-laws provisions to generally
eliminate the personal liability of our directors and officers
to the full extent permitted by the CBCA. In addition, our
by-laws provide that we are required to advance moneys to pay
costs, charges and expenses to our directors and officers as
incurred in connection with proceedings against them for which
they may be indemnified in advance of a final determination of
their entitlement to indemnification. These provisions, however,
do not eliminate or limit liability of a director or officer,
and will require that a director or officer repay any advanced
costs, charges or expenses, if the director or officer
(i) did not act honestly and in good faith with a view to
our best interest, and (ii) in the case of a criminal or
administrative action or proceeding that is enforced by monetary
penalty, did not have reasonable grounds for believing that his
or her conduct was lawful.
Currently, there is no pending litigation or proceeding where a
current or past director, officer or employee is seeking
indemnification, nor are we aware of any threatened litigation
that may result in claims for indemnification. We have purchased
a liability insurance policy covering our directors and officers
and the directors and officers of our subsidiaries against
liability incurred by, arising from, or against them for certain
of their acts, errors or omissions.
The form of underwriting agreement to be filed herewith as
Exhibit 1.1 is expected to contain provisions by which the
underwriters agree to indemnify us, each person who controls us
within the meaning of the U.S. Securities Act of 1933, as
amended, and each of our officers and directors, with respect to
information furnished by the underwriters for use in this
Registration Statement.
Reference is made to Item 9 for the undertakings of the
Registrant with respect to indemnification for liabilities
arising under the U.S. Securities Act of 1933.
Item 7.
Recent Sales of Unregistered Securities
The Registrant was incorporated on July 10, 2006 under the
CBCA. In connection with its formation, the Registrant issued
one common share for C$1 to ATS Automation Tooling Systems Inc.,
pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
U.S. Securities Act of 1933, the information omitted from
the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the
U.S. Securities Act of 1933 shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
U.S. Securities Act of 1933, each post effective amendment
that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) It will provide to the underwriters at the closing
specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(4) For the purpose of determining liability under the
Securities Act of 1933 to any purchaser, each prospectus filed
pursuant to Rule 424(b) as part of this registration
statement, other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in
the registration statement as of the date it is first used after
effectiveness; provided, however, that no statement made in the
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such date of first use.
(5) For the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities, in a primary
offering of securities of the undersigned registrant pursuant to
this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any
of the following communications, the undersigned registrant will
be a seller to the purchaser and will be considered to offer or
sell such securities to such purchaser:
(i)
Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed
pursuant to Rule 424 (§230.424 of this chapter);
(ii)
Any free writing prospectus relating to the offering prepared by
or on behalf of the undersigned registrant or used or referred
to by the undersigned registrant;
(iii)
The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv)
Any other communication that is an offer in the offering made by
the undersigned registrant to the purchaser.
(6) Insofar as indemnification for liabilities arising
under the U.S. Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the U.S. Securities
Act of 1933 and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the U.S. Securities Act of 1933 and will be governed by the
final adjudication of such issue.
Pursuant to the requirements of the U.S. Securities Act of
1933, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on
Form F-1 and has
duly caused this amendment no. 1 to the registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cambridge, Province of
Ontario, on October 16, 2006.
Pursuant to the requirements of the U.S. Securities Act of
1933, this Registration Statement has been signed by the
following persons on October 16, 2006 in the capacities
indicated.
Name
Title
By:
*
Silvano
Ghirardi
President and Chief Executive Officer
(principal executive officer) and Director
By:
*
David
L. Adams
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
Pursuant to the requirements of Section 6(a) of the
U.S. Securities Act of 1933, the undersigned has caused
this Registration Statement to be signed solely in the capacity
as the duly authorized representative of Photowatt Technologies
Inc. in the United States, in the City of Cambridge, Province of
Ontario on October 16, 2006.
