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The purpose of the joint venture is to facilitate access to the Asian market, especially China. February: ErSol AG’s share capital is doubled from 7 5.25 million to 7 10.5 million. The new shares are acquired by an investment consortium. ErSol decides to increase production capacities for solar cells to up to 60 MWp. The expansion process is to be completed by the end of 2005. April: The environmental management system at ErSol is certified to DIN EN ISO 14001:2005. May: The Company processes the first 100 µm thin multicrystalline solar cells with the name E6+ Blue Power – a further demonstration of ErSol’s exceptional innovative power. June: ErSol introduces the world’s largest crystalline solar cell, the E12+, in 312 x 312 mm format. It is the result of a research project undertaken in collaboration with the SolarZentrum Erfurt and PV Crystalox Solar AG. C3 July: Arnstadt-based ASi Industries GmbH, manufacturer of ingots and wafers, and currently inactive ASi SILIZIUMTECHNOLOGY GmbH are purchased by ErSol and become wholly-owned subsidiaries. September: ErSol’s share capital is once again increased in advance of going public and now stands at 7 14,083,334. Jürgen Pressl, formerly Managing Director of ASi Industries, is appointed Member of the Board of Management of ErSol AG. ErSol goes public on 30 September 2005. The shares are 50 times oversubscribed and reach an opening price of 7 65 following an issue price of 7 42. December: ErSol founds ErSol New Technologies GmbH. The subsidiary focuses on the development of new photovoltaic technologies. On 19 December ErSol shares are admitted to the TecDAX at the German stock exchange. ErSol Solar Energy AG Annual Report 2005 I Key figures Group key figures 2005 2004 Sales in 7’000 64,385 37,646 EBITDA in 7’000 12,731 5,101 in % 19.8 13.6 in 7’000 9,458 3,368 EBITDA margin Operating result (EBIT) EBIT margin in % 14.7 8.9 Profit after tax in 7’000 5,922 1,810 Number of shares in 7’000 6,394 2,625 Earnings per share in 7 0.93 0.69 in 7’000 84,443 5,596 in % 11.2 60.2 in 7’000 51,423 1,746 Balance sheet total in 7’000 235,494 17,619 Equity in 7’000 162,885 6,018 Equity ratio in % 69.2 34.2 Return on equity in % 3.6 30.1 in 7’000 -106,749 82 in % -65.5 1.4 4,172 Capital employed Return on capital employed (ROCE) Investments Net debt Gearing ratio Cash flow from operating activities in 7’000 9,364 Free cash flow in 7’000 -34,012 2,127 Capex in 7’000 19,942 1,744 265 125 Employees Meilensteine 2005 C2 Annual Report 2005 I Contents ErSol Solar Energy AG Contents Group key figures C2 Management report 28 Milestones 2005 C3 Business and environment 30 Sales, earnings development Introduction To our shareholders 2 and income situation 37 Financial position 40 Supplementary report 43 Risk report 44 4 Forecast report 47 Letter to our shareholders 6 Remuneration report 49 Members of the Board of Management 8 Employees 50 Report by the Supervisory Board 10 Environmental report 51 Members of the Supervisory Board / Other appointments 12 Corporate Governance 14 Consolidated financial statements 52 The ErSol share 15 Balance sheet 54 Income statement 56 Cash flow statement 57 The Company 18 Statement of changes in equity 58 Group strategy 20 Notes 60 Additional information 94 Auditor’s report 96 Glossary 97 Wafers 22 Solar Cells 24 Trading 26 Imprint 99 Financial calendar 100 Contact details 100 Group 4-year review C5 Index C6 1 ErSol Solar Energy AG Annual Report 2005 I Introduction ® Solarzellen CellsCorporate Governance Konzernlagebericht Bilanz The ErSo GuV Brief anOutlook die Income Aktionäre Mitarb Facts and The company Statement Wa Entwicklung des 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The Company is one of the quality leaders in its industry and as an integrated supplier it covers the major part of the value chain – from silicon to the production of ingots and wafers to solar cells. Our energies today – your energy tomorrow. “Excellent product quality, social responsibility, increasing corporate value and a lasting long-term future are the cornerstones of our corporate philosophy – the goals to which we align both our corporate strategy and our business operations. At the same time these values exemplify the standards we set ourselves, and for the benchmark against which you as a customer, shareholder or other stakeholder may gauge us. ErSol is one of the leading players in the photovoltaic industry. However, our intention is not to rest on our laurels – we will use this market position to get ahead. By 2008 we propose to hold a share of about 5% in the world PV market, and by 2010 about 10%. In the same periods we want to increase solar cell production capacity to 110 MWp and 400 MWp respectively. These efforts are aimed at steadily increasing the earning capacity and value of our Company, providing secure job prospects for our employees and offering our shareholders and lenders a lucrative investment. Ultimately, however, our work has another, more sustainable quality above and beyond simple economic factors. We develop safe energy sources that will be available to humanity without risk far into the future. The development of our corporate value is thus a critical factor in securing our joint future. In the spirit of: “Our energies today – your energy tomorrow.” 3 ErSol Solar Energy AG Annual Report 2005 I To our shareholders ® Solarzellen CellsCorporate Governance Konzernlagebericht Bilanz The ErSo GuV Brief anOutlook die Income Aktionäre Mitarb Facts and The company Statement Wa Entwicklung des Eigenkapitals ® Kontaktdaten GuV Bericht des Aufsichtsrats Mitarbeiter Anhang Letter toAnhang the shareholders Kontaktdaten Financial statement Cash Flow Statement Aktio Income Statem ® Mitarb Financial position Mitarbeiter Mitarbeiter GroupFinanzlage management report Income Statement Mitarbeiter Aktionärsstruktur Konze Risk managemen Balance Sheet Vermögenslage Zukunftssicherung Fi® Risk management ® Financial statement Bilanz Sh Vermögenslage Letter to the shareholders Solid Zukunftssicherung Notes Balance Sheet Financial statement Othe Solid Vermögens Outlook Solid Solid Safeguarding the future Risk management Solid M Solid Weiere Informationen Aktionärsstruktur Anhang Bilanz Bala 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We have already achieved a lot. And we have made considerable plans for the next few years. Our goal is to boost your shareholder value. 5 ErSol Solar Energy AG Annual Report 2005 I To our shareholders I Letter to our shareholders Letter to our shareholders Dr. Claus Beneking Dear shareholders, dear friends of ErSol Solar Energy AG, 2005 was an exciting year for ErSol. A year full of challenges – and many successes. It was a year in which we re-set our course for the future, with a company acquisition and the conclusion of long-term purchase and sales contracts, not to mention our initial public offering and accelerated admission to the TecDAX. Much has changed in 2005 – and yet other things have remained the same. Our approach to providing for a secure future and environmental protection, for instance. This is manifested in the continued development of environmentally benign and manageable energy sources. This corporate philosophy enables us to act for the long-term and utilise our personal resources together with our excellent technological development potential for renewable energies. To us “Our energies today – your energy tomorrow” is consequently much more than a fine-sounding play on words or a catchy slogan. It is a pledge for our common future that we make good day after day. 6 Annual Report 2005 I To our shareholders I Letter to our shareholders ErSol Solar Energy AG For ErSol AG 2005 was the most successful year to date. There was a sharp rise in sales and profits before tax, the Company’s earning capacity grew significantly. Earnings per share stand at 7 0.93. The reason for this positive trend is increased capacities due to higher production efficiency, which has enabled us to meet the sustained high demand for photovoltaic products. Not only did we produce and sell more – we were able to produce it more cheaply. This was despite the fact that purchase prices remained at the same high level due to the continued scarceness of raw materials. Nevertheless, this efficiency and profit situation does not make us complacent. On the contrary, it motivates us even more! We aim to, and indeed will, continue to grow – faster than the market. Our goal is to become an international player in new and lucrative target markets all over the world. We are expanding our production capacities, the main focus being on monocrystalline cell technology, which we intend to refine and develop in terms of quantity. We are also endeavouring to produce even more efficiently and by doing so to come close to the price levels of conventional energy sources in the medium-term. Only those who are competitive will be able to survive long-term in the energy sector. Our goals are clearly defined: greater output, increased efficiency, larger market share – by 2010 our aim is to have conquered a share of at least 10% of the world market. Looking back at 2005, we have several times received confirmation that we are on the right track. With the acquisition of ASi Industries we increased our share in the value chain to include the demanding and high-margin ingot and wafer production stage. The IPO provided us with the funds required to actively pursue our long-term strategy. Our production for the next ten years has been largely secured by long-term supply contracts for raw materials and solar cells. By setting up a joint venture in China and founding ErSol New Technologies we are now in an excellent position to explore the international growth markets and further develop photovoltaic technology. In 2006 we are optimistic and motivated, we are eager to enter into a commitment for the future and for sustainable energy. The resolve to outstanding performance that has always been the hallmark of our corporate success, coupled with social responsibility, will enable us to achieve increased corporate value and growing shareholder value for you in future. Sunny greetings from Erfurt, Dr. Claus Beneking CEO – Chairman of the Board of Management 7 ErSol Solar Energy AG Annual Report 2005 I To our shareholders I Members of the Board of Management Board of Management Jürgen Pressl Dr. Claus Beneking Dr. Claus Beneking, Graduate in Physics Frank Müllejans solar cells at the Institute for Semiconductor Technology at the Technical University of Aachen. There, he successfully completed development projects for the CEO, born 1955, member of the Board of Management state of North Rhine-Westphalia for the development of since 2001, appointed until 22 June 2011. Responsible high-efficiency processes for multicrystalline silicon solar for Group strategy and the Solar Cells business segment cells. In 2000, he became Managing Director at ErSol Solarstrom GmbH & Co. KG. Since June of 2001, he has 8 Dr. Claus Beneking studied Physics at the Technical been a member of the Board of Management of the University of Aachen. After earning his doctorate in 1985 Company. Dr. Beneking is also the majority shareholder he spent six years as a research assistant with Philips and CEO of Aixcell Solar Technology GmbH, Weimar, GmbH at the company's research laboratories in Aachen which provides consulting services in the field of and Eindhoven (Netherlands), working in the field of photovoltaics, production and systems engineering. Dr. light and gas discharge technology. In 1991, Dr. Claus Beneking is also Managing Director of ErSol Solarstrom Beneking began work at the research centre Jülich GmbH, the previous partner of ErSol Solarstrom GmbH & GmbH. There, he was responsible for establishing and Co. KG, which no longer conducts any active business. directing a laboratory for silicon thin-film solar cells. On 30 August 2005, the Company's Supervisory Board From 1998 to 2000, he headed a laboratory for the appointed Dr. Beneking as Chief Executive Officer of the processing and characterisation of multicrystalline silicon Board of Management. Annual Report 2005 I To our shareholders I Members of the Board of Management Frank Müllejans, Graduate in Economics ErSol Solar Energy AG Jürgen Pressl Born 1966, member of the Board of Management Born 1965, member of the Board of Management since 2005, appointed until 7 September 2010. since 2002, appointed until 31 March 2008. Respon- Responsible for the Wafers business segment sible for Finance, Controlling, Legal and HR and Investor Relations Jürgen Pressl studied business management at the University of Cooperative Education in Stuttgart. From Frank Müllejans studied economics at the Technical 1988 to 1992, he was a corporate client manager at the University of Aachen, where he focused on international Volksbank in Öhringen, and from 1992 to 1993, he auditing, controlling and corporate financing. From 1995 worked as a credit specialist for the Commerzbank in to 2000, he worked for BFJM, a Cologne-based firm of Stuttgart. Following a period as company secretary of certified public accountants, tax advisors and lawyers. At Göpfert + Klenk Unternehmensgruppe, Jürgen Pressl BFJM, he directed audits and performed special was appointed head of the private clients business of the management consultancy tasks such as managing Nordmärkische Bank in Pritzwalk in 1995. From 1995 to merger audits, creating and assessing business plans 1999, Jürgen Pressl worked at the Volksbank in Erfurt, and conducting corporate appraisals. He was also where he was “Prokurist” (company officer) and headed involved in a number of financial transactions. He the corporate clients/private clients market segments. subsequently joined aerome scent technology AG, From 1999 to 2000 he worked as a corporate client Düsseldorf, a German-American technology start-up manager for the Volksbank Strohgäu, Korntal- company, where he was responsible for finance and Münchingen. In 2000, he was appointed company administration. In the course of his duties here, he was secretary and “Prokurist” for the Volksbank Erfurt. From involved in concluding a trade sale transaction with a 2001 to 2004, Jürgen Pressl was a management board listed US company. In April 2002, he was appointed to member of Sementis Capital AG in Erfurt and CEO of the Company's Board of Management. Quarzschmelze Ilmenau GmbH in Langewiesen. In 2005, he became the CEO of ingot and wafer manufacturer ASi Industries GmbH. Following the company's acquisition by ErSol Solar Energy AG, he was appointed to the Board of Management of ErSol Solar Energy AG in September 2005. Other appointments held by members of the Board of Management Jürgen Pressl was a member of the Supervisory Board of Sementis Capital AG from November 2004 to November 2005. 9 ErSol Solar Energy AG Annual Report 2005 I To our shareholders I Report by the Supervisory Board Report by the Supervisory Board Dr. Helmut Vorndran Dear shareholders, During the financial year 2005, the Supervisory Board met its responsibilities as defined by law and by the Company's Articles of Association. It regularly advised the Board of Management, monitored the Company in the performance of its business and was involved in all decisions of key importance to the Company. The Board of Management provided regular, timely and detailed reports to the Supervisory Board during the financial year 2005, especially in relation to all company-strategic questions of planning, business development, the risk situation, risk management and important business transactions and projects. Where business development was not in line with objectives, this was also reported and discussed. All measures requiring approval, and matters regarding the Company's strategic direction, were also deliberated in detail. The Board of Management regularly informed the Supervisory Board Chairman, even outside of Supervisory Board meetings, of important business issues and pending decisions. The Supervisory Board held five meetings during the financial year 2005. During these meetings, the Board also debated key events in the Company during the financial year such as ErSol Solar Energy AG's investment in Shanghai Electric Solar Energy Co. Ltd., the acquisition of ASi Industries GmbH and the formation of ErSol New Technologies GmbH (ENT). The Company's successful IPO on 30 September 2005 and the two share capital increases in the run-up to the IPO were also major themes at these meetings. 10 Annual Report 2005 I To our shareholders I Report by the Supervisory Board ErSol Solar Energy AG Three new members joined the Company's Supervisory Board with effect from 26 September. On 6 September 2005, the General Meeting had resolved a corresponding amendment to the Articles of Association increasing the number of Supervisory Board members to six. Due to the size of the Company, there is no need to appoint committees. The Company's auditors have examined ErSol Solar Energy AG's annual financial statements and consolidated financial statements, including the management report, for the financial year 2005 and issued them with an unqualified audit certificate. PricewaterhouseCoopers AG reported on the results of its audit and issued the following audit certificate: "Following our duly completed audit and assessment, we confirm that: 1. the information given in this report is correct and 2. the payments made by the Company for the legal transactions discussed in the report were not disproportionately high." The annual financial statements of ErSol Solar Energy AG and the consolidated financial statements, management report and audit reports of the auditors have been presented to all of the Supervisory Board members and were inspected by the Supervisory Board. Discussions in relation to these were conducted together with the auditors, who reported on their most important audit findings and answered all related questions. The Supervisory Board agrees with and acknowledges the results of the audit. Following detailed examination, the Supervisory Board has no objections to raise and approves the annual and consolidated financial statements. The composition of the Supervisory Board changed as follows during the financial year: Mr. Heiko Piossek stepped down with effect from 28 February 2005. He was replaced by Mr. Ralf Paslack, who joined the Supervisory Board with effect from 10 March 2005. Mr. Hans Hofstetter, Prof. Dr. Fritz Vahrenholt and Prof. Dr. Hartmut Griepentrog were newly appointed as from 26 September 2006. The Supervisory Board would like to take this opportunity to thank the retired Supervisory Board member, the members of the Board of Management and all of the employees in the ErSol Group for their hard work during the financial year 2005. Their full commitment and motivation have fuelled the outstanding success of our Company. Erfurt, March 2006 On behalf of the Supervisory Board Dr. Helmut Vorndran Chairman of the Supervisory Board 11 ErSol Solar Energy AG Annual Report 2005 I To our shareholders I Members of the Supervisory Board Supervisory Board / Other appointments Dr. Helmut Vorndran 2000 he was Investment Director of KDV Kapitalbeteiligungsgesellschaft der Deutschen Versicherungs- Chairman wirtschaft AG, a capital investment company for the Management Board spokesman for Ventizz Capital German insurance industry. For KDV, Reinhard Löchner Partners Advisory AG held the position of Managing Director of ANCO Other appointments held: Beteiligungs GmbH and ACTe GmbH from 1999 to 2000. Member of the Supervisory Board of Medos In 2000, together with Dr. Helmut Vorndran and NPM Medizintechnik AG, Capital N.V. he founded Ventizz Capital Partners AG. He Member of the Supervisory Board of Innovatis AG, was a member of the Management Board for this Member of the Supervisory Board of Smart.IPO AG. company from 2000 to 31 December 2004. He has been a shareholder and Management Board member of From 1980 to 1985, Dr. Helmut Vorndran completed his Ventizz Capital Partners Advisory AG since its formation degree in business management and in 1991 he received in 2004. his doctorate ('Dr. rer. pol.') from the University of Würzburg. He was a research assistant at the University Dr. Vorndran was first an employee and later a partner Ralf Paslack, Graduate in Business Management and Vice-President of A.T. Kearney GmbH and A.T. (since 10 March 2005) of Würzburg from 1985 to 1987. From 1987 to 1997, Kearney Inc. From 1997 to 1999 he was Managing Director and sole proprietor of Bühnenbau Rolf Head of the Corporate Finance division of the Sparkasse Schnakenberg GmbH & Co. KG. Dr. Vorndran is currently Bremen, Managing Director of nwk nordwest Kapital- a shareholder and Management Board spokesman for beteiligungsgesellschaft der Sparkasse Bremen mbH Ventizz Capital Partners Advisory AG. Other appointments held: Chairman of the Supervisory Board of engram GmbH, Deputy Supervisory Board Chairman of JOKE Event AG. Reinhard Löchner, Graduate in Industrial Engineering Following his training as a banker at the Sparkasse Bremen from 1985 to 1988, Ralf Paslack studied Deputy Chairman business management from 1988 to 1994 at the Management Board member of Ventizz Capital Partners Wilhelms Advisory AG international marketing and international economic Other appointments held: relations. From 1994 to 2000 Ralf Paslack worked in the Chairman of the Supervisory Board of Medos specialist financing/corporate customers area at the Medizintechnik AG, Sparkasse Bremen. Starting in 2000, he helped to build Deputy Supervisory Board Chairman of Innovatis AG, up the Corporate Finance division of the Sparkasse Deputy Supervisory Board Chairman of CardFactory AG. Bremen, which he then headed from the beginning of University in Münster, focusing on 2003. In this role he is Managing Director of the capital 12 Reinhard Löchner completed his studies in industrial investment company nwk nordwest Kapitalbeteiligungs- engineering, where he focused on the field of engine gesellschaft der Sparkasse Bremen mbH and of the construction, at the Technical University of Darmstadt. holding company nwu nordwest Unternehmens- From 1992 to 1995 he worked as a sales engineer at beteiligungsgesellschaft der Sparkasse Bremen mbH. SCHULER SMG Pressen AG, and from 1995 to 1999 as a Ralf Paslack is also a member of the Advisory Board of project manager at Robert Bosch GmbH. From 1999 to Georg Schünemann GmbH. Annual Report 2005 I To our shareholders I Members of the Supervisory Board Prof. Dr. Hartmut Griepentrog Hans Hofstetter completed his legal studies at the Uni- (since 6 September 2005) versity of St. Gallen. He was awarded his licentiate in 1987 ErSol Solar Energy AG and was admitted to the bar in 1989. From 1989 to 1994 Chairman of the Managing Board of GI Stiftung, he began as an appointed attorney, and then from 1994 Mulheim to 1997 he was a partner, at the joint legal practice of Gross, Lindner and Hofstetter in St. Gallen. Since 1996 he Prof. Griepentrog studied mechanical engineering at the has been a public defence counsel appointed by the canton University of Hanover and was awarded his doctorate government of St. Gallen. From 1998 to 2000 he was a from the University of Liège, Belgium. From 1970 to partner in the joint legal practice of Hofstetter, Gründler 1988 he worked in a variety of positions in the field of and Neff in St. Gallen. Since 2000 he has been attorney mechanical engineering both in Germany and abroad, and partner at the legal practice of Schoch, Auer and most recently as Management Board member of Partner in St. Gallen. Babcock Maschinenbau AG. From 1989 to 1998 he chaired the Management Board of CUBIS AG, Essen. Prof. Griepentrog then moved to Gelsenwasser AG, Prof. Dr. Fritz Vahrenholt where he chaired the Management Board until his (since 6 September 2005) departure in June 2004. Prof. Griepentrog is currently Supervisory Board Chairman of ee energy engineers Chairman of the Management Board of REpower GmbH, Essen, Supervisory Board Chairman of Jordan Systems AG, Hamburg GmbH, Siegburg, Management Board Chairman of GI Other appointments held: Stiftung, Mülheim an der Ruhr, and also heads the Supervisory Board member at ThyssenKrupp “Landesinitiative Zukunftsenergien NRW” (NRW State Technologies AG, Initiative on Future Energies) for the German state of Supervisory Board member at Norddeutsche Affinerie AG. North Rhein Westphalia. Prof. Fritz Vahrenholt began his career by completing a degree in chemistry. After completing his doctorate in Hans Hofstetter, Attorney Münster and a period of research at the Max-Planck (since 6 September 2005) Institute for Carbon Research in Mühlheim, he worked at the Umweltbundesamt (German Federal Environmental Attorney, Partner at Sozietät Schoch, Auer & Partner, St. Agency) in Berlin, in the Umweltministerium (Department Gallen, Switzerland of the Environment) for the state of Hesse and as state Other appointments held: councillor for the environmental authorities in Hamburg. In Member of the Administrative Board of the following 1990/91, Prof. Vahrenholt was Head of the Senatskanzlei companies: (senate offices) and from 1991 to 1997 he was Senator ACREMA AG, and Präses (head of department) for the environmental CWL Holding AG, authorities of the Free and Hanseatic City of Hamburg. CWL Sports AG, He was also Supervisory Board Chairman of HEW. From Qualita Beratungs- und Verkaufs AG, 1998 to 2000, Prof. Vahrenholt sat on the Management Paracelsus-Klinik Lustmühle AG, Board of Deutsche Shell AG and until 2001 he has sat on PRO-ACTIV IMMO INVEST AG, the Supervisory Board of Deutsche Shell AG. Since 2001 he SM-Cyclo Switzerland AG, has been Chairman of the Management Board of REpower Swiss Optic AG, Systems AG. Furthermore, he is a member of the Sustain- VEOLIA Water System Schweiz AG, able Panel of the French energy supplier EDF, member of PENTAXON Investment Technologies AG. the senate commission of the Helmholtz Association of German Research Centres and member of the Federal Government’s Council for Sustainable Development. 13 ErSol Solar Energy AG Annual Report 2005 I To our shareholders I Corporate Governance Corporate Governance Corporate Governance at ErSol for exclusions or prejudice, unless these can be promptly dealt with. The same also applies to any findings or The German Corporate Governance Code allows for incidents of relevance to the responsibilities of the openness and transparency in the management and Supervisory Board. The Supervisory Board must also be controlling of listed companies in Germany. To achieve informed of any findings that contradict the Company's this, the Code gives companies guidelines and Declaration of Conformity under Art. 161 AktG. recommendations in line with recognised national and Corporate Governance Code to a large extent. Exceptions to the Company's Declaration of Conformity For ErSol, the German Corporate Governance Code has As a listed company, ErSol AG has issued a Declaration always been a standard for responsible corporate of Conformity as per Art. 161 of the German Stock management. At the highest management levels, this is Corporation Act (Aktiengesetz, AktG) and meets the manifested for instance by the intensive cooperation provisions of the German Corporate Governance Code, between the Supervisory Board and the Board of with the following exceptions: international standards. ErSol adheres to the German Management, which seeks to ensure the sustained growth of corporate value. The Board of Management and Supervisory Board remain in regular and close – ErSol AG's General Meeting is not broadcast on the Internet (figure 2.3.4). contact. The Board of Management reports regularly to – The D&O liability insurance for Board of the Supervisory Board, even outside the context of Management and Supervisory Board members does Supervisory Board meetings, and consults regularly with not provide for any excess (figure 3.8). it in relation to its pending decisions, plans or measures. – The main features of the remuneration system, and the specific details of a share option plan, are neither published in an easily understood form on Open, transparent communication the Company's website nor explained in detail in the annual report (figure 4.2.3). The need for good corporate governance also flows into – The information on the remuneration for the Board all of the other areas within the Company. The core of Management members in the Notes to the mission in the field of Investor Relations, for example, is consolidated financial statements, divided according to provide transparency and openness for the Company's to a fixed salary, performance-related components shareholders. One example of this is the extensive and components that provide long-term incentives, information resources pooled on ErSol's website, and by is not itemised for each individual (figure 4.2.4). the comprehensive service provided to shareholders. It However, this annual report does provide a separate should also be noted here, for instance, that ErSol makes remuneration report (page 49). its annual and interim reports available online, as well as information on the Supervisory Board, General Meeting and other bodies. – There is no age limit for members of the Board of Management (figure 5.1.2). – Due to its size, the Supervisory Board will not form any committees (figure 5.3). – Remuneration for the Supervisory Board members is PricewaterhouseCoopers appointed as Company auditors not individually itemised (figure 5.4.7). – The Company exceeds the prescribed time frame for publication of the consolidated financial statements PricewaterhouseCoopers AG ("PwC"), Erfurt, have been and the interim reports (figure 7.1.2). appointed as auditors for the financial year 2005. ErSol 14 has agreed with PwC that the Chairman of the Super- The Declaration of Conformity is published on our visory Board will be immediately informed of any reasons website at www.ersol.de. Annual Report 2005 I To our shareholders I The ErSol share ErSol Solar Energy AG ® Solarzellen ellsCorporate Governance ernlagebericht Bilanz The ErSol share Outlook GuV die Income Aktionäre Mitarbeiter Facts and figures Statement Wafers ung des Eigenkapitals ® Bilanz Cells GuV Mitarbeiter htsrats Anhang er Flow to the shareholders Kontaktdaten nancial Anhang statement sh Statement Aktionärsstruktur Income Statement ® Mitarbeiter Mitarbeiter alVermögenslage position Mitarbeiter report rent ncome Statement tionärsstruktur Risk management Konzernkennzahlen Balance Sheet Zukunftssicherung Finanzlage anagement GuV ® Financial statement Shareholder structure ®information Outlook Vermögenslage ssicherung Solid al statement alance Sheet Other Solid Vermögenslage Solid ® Solid agement Safeguarding the future Solid Milestones 2005 Solid Balance Sheet Solid lid Solid Income Statement dnt nslage Financial statement Solid Solid cherung Solid Solid Solid SStatement olid Solid Solid Solid Solid 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2005 Shareholder structure Group management Income Statement Risk management Solid Zukunftssicherung Solid Financial position ErSol Wafers olar Solarzellen 2005 Wafers Wafers olar Cells Solar Ingots s Geschäftsbericht cht Cells ls Cells Sol Energy ellen Solarzellen Solarzellen s ergy 2005 Annual Solar Wafers Wafers ErSol 2005 häftsbericht Ingots rgy ots ol ErSol Wafers Solar 2005 2005 Wafers ftsbericht ErSol ar Cells Annual Energy Solar Solar Ingots ErSol Ingots 2005 Cells Wafers 2005 Solar Solarzellen Ingots ErSol Annual Wafers 2005 Energy Solar Solar Die ErSol Aktie Geschäftsbericht Ingots Wafers Ingots Energy Solar Solarzellen Annual CellsAktionäre An unsere Report ® Energy Geschäftsbericht New technologies Cells Ingots Wafers Cells Ingots ErSol Solar Annual Solar Solarzellen Report Konzernabschluss Wafers Solarzellen Cells share Solar Ingots Report ® Geschäftsbericht Wafers Solarzellen Unternehmensbereich ErSol Solar Annual Ingots Report 2005 AG Wafers ® Wafers Energy Unternehmen 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Aktionärsstruktur Notes StatementSafeguarding ofCorporate Changes in Equity the future Solid Balance Sheet Vermögenslage Safeguarding the future2005 Milestones Income Statement Mitarbeiter Solid Anhang Zukunftssicherung Risk management Solid Report by the supervisory board Dividendenpolitik Vermögenslage Solid Shareholder structure Financial statement Anhang Finanzkalender Corporate Solid Governance Safeguarding the future Solid Dividend policy Risk management Bericht des Aufsichtsrats Notes Statement of Changes in Equity Financial position Safeguarding the future Solid GuV Statement of Changes in Notes Equity Solid Vermögenslage Aktionärsstruktur Solid One of the outstanding events The ErSol Financial statement Solid Safeguarding the future Balance Sheet Risk management Bilanz Mitarbeiter Solid Letter to the forshareholders ErSol in the financial year 2005 Kontaktdaten Anhang Dividend policy Solid RiskVermögenslage management Income Statement was the initial public offering on Bericht des Aufsichtsrats Solid Aktionärsstruktur Shareholder structure Solid Finanzlage Bilanz Dividendenpolitik Outlook Solid Dividend policy 30 September. Solid Balance Sheet The lead-up to this Financial statement Zukunftssicherung Bilanz Konzernkennzahlen Investor Relations successful launch was an equally Solid Vermögenslage Safeguarding the future Aktionärsstruktur Solid Cash Flow Statement Our employees Income Statement Solid Dividendenpolitik Solid Solid impressive company history. The latter Financial statement Solid Briefpolicy an die Aktionäre Solid Statement ofRisk Changes in Equity Dividend Solid with its founding as ErSol management Notes started Kontaktdaten Report by the supervisory board Solid Dividendenpolitik Solarstrom GmbH & Co. KG in 1997 FinancialOur position employees GuV Zukunftssicherung Vermögenslage Dividendenpolitik Solid Solid Anhang Income Statement and conversion to an AG in 2001. Bericht des Aufsichtsrats Safeguarding the future Solid Risk management Statement of Changes inSheet Equity Solid Solid Extensive shareholder restructuring Solid Investor Relations Balance Dividend policy Solid Financial statement Meilensteine 2005 Notestook place in 2004, followed by the Solid CashKontaktdaten Flow Statement Finanzlage Bilanz Vermögenslage Solid Safeguarding the future Facts and figures acquisition of ASi Industries in 2005. Prognosebericht Anhang Financial statement Solid Safeguarding the future Solid Risk management Investor Relations Solid tement of Changes in an Equity Brief die Aktionäre The success story continued with Our employees Balance Sheet Dividendenpolitik Cash Flow Statement Konzernkennzahlen Solid Finanzlage the IPO in the Prime Standard Solid Kontaktdaten Prognosebericht GuV Risk management Solid Solid Solid Dividend policy in September and a further milestone Financial position Report by the supervisory board Solid Vermögenslage Financial statement Mitarbeiter Solid Balance Sheet in the form of swift admission to Solid Dividend policy Solid anagement Solid vestor Relations Solid Solid Milestones 2005 Solid the TecDAX in December 2005. Bilanz Relations mögenslage al position e future olid Notes olid Meilensteine 2005 Outlook tSolid or Relations Financial olid tatement calendar e Equity ericht des Aufsichtsrats ees onzernkennzahlen ng Zukunftssicherung die Aktionäre Contact ons 15 ErSol Solar Energy AG Annual Report 2005 I To our shareholders I The ErSol share The ErSol share Key figures of our shares Share capital (in 7) 2005 2004 Change in % 373% 19,600,000 5,250,000 Number of shares issued 9,800,000 5,250,000 187% Earnings per share (in 7) 0.93 0.69 135% Highest price (in 7) 65.00 – – Lowest price (in 7) 39.12 – – P/E ratio* Market capitalisation (in 7)* Average trading volume (shares) 46.77 – – 426,300,000 – – 59,522 – – * As per XETRA closing price of 7 43.50 on 30 December 2005 The share ErSol’s shareholder structure The initial offering of ErSol shares on 30 September 2005 The major ErSol shareholders were and still are Ventizz was 50 times oversubscribed. In the already positive Capital Fund II LP, which now holds 51.20% of the stock exchange climate of the past year, an environment equity (79.72% prior to IPO), equitrust AG 3.72% in which special recognition was given to shares in the (7.51% prior to IPO) and nordwest Kapital- regenerative energy field, ErSol impressed investors with beteiligungsgesellschaft 2.46% (4.98% prior to IPO). its high-value product portfolio and strategic far- Free float, meaning all shareholders with a holding of sightedness. Long-term supply agreements for silicon less than 5% of the share capital, have risen significantly and multi-year purchase commitments from renowned to almost 50%. module manufacturers for the solar cells manufactured by ErSol guarantee high visibility of the proposed growth and hold promise of an increase in corporate value above market level. Stock data of our shares ISIN IPO proceeds used to promote corporate growth Securities Code Number Stock exchange abbreviation Reuters ticker symbol Bloomberg ticker symbol The emission price was 7 42, the opening price 7 65. A Stock exchanges total of 3.7 million ErSol shares with the international securities identification number (ISIN) “DE0006627532” were offered, of which 3 million were generated by a capital increase and 700,000 originated from the holdings of former shareholders. After deducting transaction costs, net proceeds accruing to the Company from Prime sector Industry group Listed on the following indexes of the German Stock Exchange the IPO totalled 7116.2 million. The aim was to accelerate internal and external corporate growth – predominantly by expanding manufacturing capacities, securing silicon supplies, international expansion, research and development projects – including activities in the field of new technologies - and possible company acquisitions. 16 Other indices DE0006627532 662 753 ES6 ES6G.F ES6 GR Frankfurt, Berlin/Bremen, Dusseldorf, Hamburg, Munich, Stuttgart and Xetra Industrial Renewables Prime All Share, TecDAX, CDAX, HDAX, Midcap Market Index, Technology All Share PPVX Annual Report 2005 I To our shareholders I The ErSol share Admission to the TecDAX ErSol Solar Energy AG They provide analysts, shareholders and other interested parties with reliable information about the Company and The brilliant premiere on the Frankfurt trading floor was its performance – for example on the Company’s followed by a temporary slackening of interest on the Website, but frequently upon specific request by phone, capital market: on 8 November 2005 the share value fell e-mail or post. A further IR focus is placed on visits by to its year’s low of 739.12 – only to take off again shortly investors and analysts. About 70 people were received at afterwards. The highlight in December was the admission the Erfurt and Arnstadt facilities in 2005. The IPO was of the shares to the TecDAX, in which ErSol has been accompanied by a roadshow throughout Europe. Within listed since 19 December. Here ErSol has turned in a very the space of nine days it was presented 52 times to positive performance, in part substantially better than institutional investors in eleven cities. other tech or comparable industry stocks. Between the initial listing date and the end of 2005 the trading Dividend policy volume averaged 59,522 shares per day, reflecting the sustained high level of interest shown by investors in ErSol shares. The distribution of a dividend to shareholders closely depends on the earnings situation of the ErSol Group. Besides the current economic and financial situation, Focus on stakeholders other factors are scheduled liquidity requirements, future prospects, company strategies and general developments in the market and industry. Solar shares are currently being met with considerable interest – both from investors and analysts. ErSol is being observed, analysed and evaluated by renowned banks Against this background ErSol is proposing to use the and equity houses, including Deutsche Bank, Sal. annual surplus – as in the following years – primarily to Oppenheim and Bayerische Hypo- und Vereinsbank. This consolidate its own market position and to implement its analysts’ coverage is steadily growing; a further strategic goals. Over the next few years ErSol’s sights will substantial increase is anticipated for 2006. be set on growing significantly faster than the market. If profits continue to grow, the distribution of a dividend is conceivable in the medium term. Investor relations play an important role as a communications link between Ersol AG and their stakeholders. High and low / moving average 2005 (in €) 70 65 60 Average 57.63 55 48.47 50 43.74 45 40 35 39.12 39.3 October 2005 November 2005 41.7 30 December 2005 17 ErSol Solar Energy AG Annual Report 2005 I The Company ® Solarzellen CellsCorporate Governance Konzernlagebericht Bilanz The ErSo GuV Brief anOutlook die Income Aktionäre Mitarb Facts and The company Statement Wa Entwicklung des Eigenkapitals ® Kontaktdaten GuV Bericht des Aufsichtsrats Mitarbeiter Anhang Letter toAnhang the shareholders Kontaktdaten Financial statement Cash Flow Statement Aktio Income Statem ® Mitarb Financial position Mitarbeiter Mitarbeiter GroupFinanzlage management report Income Statement Mitarbeiter Aktionärsstruktur Konze Risk managemen Balance Sheet Vermögenslage Zukunftssicherung Fi® Risk management ® Financial statement Bilanz Sh Vermögenslage Letter to the shareholders Solid Zukunftssicherung Notes Balance Sheet Financial statement Othe Solid Vermögens Outlook Solid Solid Safeguarding the future Risk 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Unternehmensbereich Energy Solarzellen Facts and figures Ingots Contact Bericht des Aufsichtsrats 2005 Zukunftssicherung Mitarbeiter Outlook The company Konzernlagebericht Milestones 2005 IngotsWafers Investor Relations Solar Group strategy 20 Target markets with great potential 21 Wafers 22 Further optimised production processes 23 Solar Cells 24 Significant boost in production capacities 25 Figures that speak for themselves 25 Trading 26 Sharp rise in sales revenues 27 Raw material scarcity places a burden on buying 18 27 Annual Report 2005 I The Company ErSol Solar Energy AG ol share beiter figures afers Bilanz Cells GuV onärsstruktur ment tnanzlageGuV ernkennzahlen beiter hareholder structure ® Outlook rance information lage ® Milestones 2005 Sheet nt ement cherung Statement Solar Notes rSolid to the shareholders Finanzlage dolid sstruktur Prognosebericht eanagement Statement olid cial statement dSolid d ®board sstruktur yolid the supervisory Solid dSolid financial statements Solid 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Company acquisition. Extension of the value chain. Our strategy is growth and added value – throughout the group, in all segments, on markets with potential. Our success is proof that we are on the right course. 19 ErSol Solar Energy AG Annual Report 2005 I The Company I Group strategy Group strategy A will to innovation and future orientation are the The ErSol group strategy is defined by three basic goals: guiding principles of the ErSol Group. Since the expansion of the core areas Wafers and Solar Cells, founding of the Company they have formed the basis internationalisation of business operations, constant for steady technological progress. They are also the improvement of technology – extremely ambitious goals basis of the “spirit” that is driving the Company ahead driven by the clear endeavour to achieve corporate and determining its strategic alignment. growth above market level. This strategy has had a profound influence on the founding of ENT, ErSol New Technologies GmbH, in December 2005. The ErSol subsidiary will mainly focus on the development of technologies and concepts for the production and marketing of new photovoltaic products. 20 Annual Report 2005 I The Company I Group strategy ErSol Solar Energy AG ErSol Group strategy ErSol strategy Expansion of core business – Rapid organic growth of core business up to 110 MWp capacity until the end of 2007 planned – Annual cost reduction target until 2010 above EEG 5% target Internationalisation Further improving technology – Further diversification of customer base – Development of thinner wafers – down to 100 µm – Move to other high growth PV markets – Development of larger cells – Cell efficiency above 20% – Establish further JVs and/or alliances in target markets – Increased focus on monocrystalline cell technology – Exploit new technologies e.g. thin-film technology In the years to come the focus of the Company’s activities (California and other federal states), Asia (Thailand, will lie in monocrystalline technology. A considerable South Korea, India) and Southern Europe (Italy, Spain, expansion of this core business is proposed. Organic Portugal, Greece, Cyprus). Joint ventures and corporate growth up to a solar cell production capacity of alliances in these target markets may follow. 110 MWp is scheduled by the end of 2007. Parallel to this, the Company intends to step up cost reduction On the technology side the Company is striving for measures, enabling it to be more competitive with other greater efficiency and competitiveness: increased yield conventional energy resources and to draw level with with less use of materials. This will be achieved, for these in important market sectors by the year 2010. example, by developing wafers up to 100 µm thick, larger cells or solar cells with an efficiency level of 20% and more. Beyond the core business, ErSol is currently Target markets with great potential contemplating an entry into new photovoltaic technologies. All these steps will secure our competitive strength in the future and create new growth options. On the demand side, the intention is to create a balanced relationship between a small number of key customers and a broad basis of smaller customers. In addition, an advance into further, fast-growing photovoltaic markets with considerable potential is planned: USA 21 ErSol Solar Energy AG Annual Report 2005 I The Company I Wafers Wafers “To start with a wafer is nothing more than common Wafers represent a stage in the production of a solar cell. sand – sand that is refined to form a premium product Solar grade silicon is manufactured from the raw in a high-tech process.” Quite simple, really – yet material quartz, which is nothing other than sand. The extremely intricate. Only high-quality wafers can silicon is subsequently drawn out to form mono- be used to make premium class solar cells, products crystalline silicon bars, or ingots, more than a metre in that conform to the standards and objectives of the length. These are then sawn into thin silicon slices using ErSol Group. extremely fine wire and a cutting fluid (slurry). The result is so-called “wafers”, now produced by ErSol with a remarkable thickness of only 240 to 200 µm. The Company’s sights are now set on 180 µm. This technological progress is thus particularly important, because the thinner the wafer, the higher the yield per ingot. 22 Annual Report 2005 I The Company I Wafers Wafers segment information Total sales revenues Intersegmental revenues External sales revenue Germany Europe Asia/Pacific, Africa EBIT EBITDA Investments Employees The wafers are produced by ErSol’s subsidiary ASi Industries in Arnstadt, and sold worldwide. The sales ErSol Solar Energy AG 2005 7 ‘000 2004 7 ‘000 6,348 – 851 – 5,497 – 2,100 – 186 – 3,211 – 573 – 1,894 – 37,817 – 73 – Further optimised production processes figures for the financial year 2005, in which 25 MWp were sold, clearly attest to the success of the ErSol wafer. Besides the expansion of production facilities, efforts are At 6 MWp the production figures for the 4th quarter being concentrated on optimisation of the production 2005 were the highest in the Company’s history thus far. process. At the pulling stage it has been possible to With sales of 7 6.3 million in the financial year 2005 (on increase the net weight and yield, and to reduce a pro-rata basis, beginning 8 September 2005), this processing times. In wafering, a thinner wire and finer division has already made a sizeable contribution within grain result in less cutting loss. The cutting fluid, or slurry, the ErSol Group. has also been further optimised in in-house facilities in cooperation with Castrol, a member of the BP Group. The boom in the solar industry is further stimulating the demand for wafers. To cope with this demand, the In the next few years ErSol intends to invest heavily in the expansion of production facilities at ASi Industries has wafer production sector at ASi Industries in order to cater already begun. Starting with 25 MWp in the reporting for the increased demand for high-quality products. year, production capacities are to be increased to 45 MWp The focus will, however, not only be on expansion. in the course of 2006. Cost reduction and simultaneous productivity increases are aimed at improving efficiency in the long term. The development and production target is wafers with a thickness of 100 µm from 300 mm ingots, ASi Industries will be one of the first companies to introduce them onto the market. 23 ErSol Solar Energy AG Annual Report 2005 I The Company I Solar Cells Solar Cells ErSol’s solar cells have a surface area of 156 mm2 The production of solar cells has always been one of and are only a few hundred micrometres thick – an ErSol’s key competencies. The Company thereby places its extremely delicate product, yet capable of peak focus on one of the most demanding production stages in performance. High, stable efficiency levels within strict performance tolerances and high yield, even at the value-added process of photovoltaic systems. ErSol products include both multicrystalline (E6+ BluePower) low sun intensity, are their main characteristics. And and monocrystalline (E6M+ BlackPower) cells. The main they embody the high quality standards the Company feature of the latter is an efficiency level of over 17%, sets itself. compared to the 16% currently achieved by multicrystalline solar cells. Due to their higher efficiency and a significantly greater development potential, ErSol intends to step up production of monocrystalline cells. In 2005 they represented 10% of total output, and in 2006 this figure will rise to about 50%. A strategic milestone in this connection was the acquisition of ASi Industries, a company dedicated to the production of monocrystalline wafers. 24 Annual Report 2005 I The Company I Solar Cells ErSol Solar Energy AG Solar Cells segment information 2005 7 ‘000 2004 7 ‘000 Change in % Total sales revenues 45,651 29,382 155% Intersegmental revenues 12,145 5,370 226% External sales revenue 33,506 24,012 140% Germany 22,257 11,957 186% Europe 6,862 7,634 90% Asia/Pacific, Africa 4,387 4,421 99% 8,241 3,641 226% EBITDA 10,175 5,374 189% Investments 12,931 1,746 741% 184 125 147% EBIT Employees Significant boost in production capacities However, these investments are not only aimed at increased output. We are also striving for cost reductions, as well as quality and customer satisfaction – and Whereas the production capacity at ErSol in early 2002 even greater efficiency. Efficiency that, in the face of scarce was no more than 10 MWp, by the end of 2005 it had resources, is an essential prerequisite for profit growth. already increased sixfold to 60 MWp. With this substantial boost in production capacity, ErSol has responded to the strong demand for solar cells, a Figures that speak for themselves demand that will outstrip supply in the medium-term and can only be absorbed by further expanding Even during the capacity building period, ErSol was able production. to manufacture 20 MWp solar cells in the financial year 2005, compared to 16 MWp in 2004. About 75% of For this purpose, the Company is planning to increase total output was sold on the domestic market. There capacity to 110 MWp by the year 2008. As early as was a substantial increase in sales in the solar cell sector 2005, production was expanded into new factory to 7 45.7 million after 7 29.4 million in 2004. In the buildings with a floor space of over 5,000 m2 and most same period income more than doubled from 7 3.6 to of the machines have been re-equipped to reflect the 7 8.2 million. latest generation of manufacturing. New employee recruitments have also been started. 25 ErSol Solar Energy AG Annual Report 2005 I The Company I Trading Trading No two solar modules are the same: aimex products Trading with photovoltaic products has always been one are distinguished by a high level of efficiency and an of the business activities of ErSol. In early 2005 the excellent cost-performance ratio. Four different Company greatly expanded this line of business and at product series are available, depending on the number around the same time transferred it to aimex-solar and quality of high-efficiency monocrystalline and GmbH (“aimex”). Since this time, the Erfurt-based ErSol multicrystalline silicon solar cells. subsidiary has been trading with solar modules, inverters and other photovoltaic components. 26 Annual Report 2005 I The Company I Trading ErSol Solar Energy AG Trading segment information 2005 7 ‘000 2004 7 ‘000 Change in % Total sales revenues 26,186 13,488 194% 804 0 – 25,382 13,488 188% Intersegmental revenues External sales revenue Germany 24,382 13,488 181% Europe 872 0 – Asia/Pacific, Africa 128 0 – EBIT 942 745 126% EBITDA 960 745 129% Investments 675 0 – 8 3 267% Employees Sharp rise in sales revenues aimex is currently focusing on the German market. Up until now the export rate has been no more than 4%, Sales revenues of aimex almost doubled to 7 26.2 but this figure is to be increased to 25% in 2006. A start million compared to the previous year (2004: 7 13.49 has already been made with the first customers in Italy million) before it was hived off as a separate company. and Spain. In marketing its products, the Company is This growth was driven by intensified supplies of solar focusing on a fixed customer base, mainly project devel- cells from ErSol and increased business with third-party opers and installation companies. On foreign target products. About 55% of aimex’s sales revenues were markets aimex proposes to concentrate on strategically generated through trading with modules based on ErSol important, strong customers. solar cells. About 43% originated from other manufacturers, a business sector that aimex has been 2% was generated by the sale of system components. Raw material scarcity places a burden on buying In 2005 the EBIT margin amounted to 4% (5% in 2004). Buying continues to be difficult – and it will remain so in The slight decrease in the margin was due to the fact the next few years – with limited availability of raw that it was not possible to pass on the full extent of materials on both the domestic and foreign markets. increased purchase prices to the customer. However, for This not only places a burden on the delivery reliability 2006 the Company anticipates stable sales and an of suppliers, it also has the effect of boosting prices. improvement in the EBIT margin. With falling feed-in tariffs in Germany, other target expanding since the beginning of 2005. The remaining markets such as Spain and Italy will become increasingly important. 27 ErSol Solar Energy AG Annual Report 2005 I Management report ® Solarzellen CellsCorporate Governance Konzernlagebericht Bilanz The ErSo GuV Brief anOutlook die Income Aktionäre Mitarb Facts and The company Statement Wa Entwicklung des Eigenkapitals ® Kontaktdaten GuV Bericht des Aufsichtsrats Mitarbeiter Anhang Letter toAnhang the shareholders Kontaktdaten Financial statement Cash Flow Statement Aktio Income Statem ® Mitarb Financial position Mitarbeiter Mitarbeiter GroupFinanzlage management report Income Statement Mitarbeiter Aktionärsstruktur Konze Risk managemen Balance Sheet Vermögenslage Zukunftssicherung Fi® Risk management ® Financial statement Bilanz Sh Vermögenslage Letter to the shareholders Solid Zukunftssicherung Notes Balance Sheet Financial statement Othe Solid Vermögens Outlook Solid Solid Safeguarding the future Risk management Solid M Solid Weiere Informationen Aktionärsstruktur 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Informationen Solid Solid Prognosebericht Investor Relations Geschäftsbericht Solid Solid Anhang ternehmensbereich Ingots Statement of Changes in Equity GuV Solid AG Solid Konzernkennzahlen Solar Solid Solid ® Bericht des Aufsichtsrats Solar ErSol ErSol Solid Energy Financial position Bilanz Annual Solarzellen ® Solar Financial position Safeguarding the future Bilanz Mitarbeiter Solar Mitarbeiter Wafers Finanzlage ErSol lls Wafers Solid 2005 Financial statement Income Statement ErSol ErSol 2005 Solar Mitarbeiter Outlook Konzernkennzahlen Our employees Anhang Balance Sheet Ingots Wafers Vermögenslage NeuetoTechnologien Solid Letter the shareholders AG Other information Cells Solarzellen Cells Cash Flow Statement ErSol Annual Zukunftssicherung Wafers Brief an die Aktionäre ErSol Corporate Governance Wafers Prognosebericht Geschäftsbericht 2005 Solar 2005 Solarzellen Wafers 2005 Solar 2005 Wafers Unternehmensbereich Energy Solarzellen Facts and figures Ingots Contact Bericht des Aufsichtsrats 2005 Zukunftssicherung Mitarbeiter Outlook The company Konzernlagebericht Milestones 2005 IngotsWafers Investor Relations Solar Business and environment 30 Core photovoltaic business 30 Group structure and subsidiaries 30 Economy and sector 31 Implications for business development 32 Sales markets / Competitive situation 32 Value-driven management 33 Research and development 34 Important events during the financial year 2005 36 Sales, earnings development and income situation 37 Income increasing 37 Purchase prices remain at high levels 37 Almost constant material costs rate 38 Operating result on the up 38 Pro forma figures for ASi Industries 38 Financial results significantly increased 38 Income taxes 39 Segment reporting: Wafers form new business segment 39 Financial position 40 Principles and objectives of the 28 Company's financial management 40 Asset structure and situation 40 Financing analysis / Investment analysis 41 Liquidity analysis / Depreciation policy 42 Supplementary report 43 Risk report 44 Risk management 44 Environmental and industry risks 44 Risks associated with the Company's strategy 46 Financial risks / Personnel risks 46 Risks relating to information technology 46 Other risks 46 Forecast report 47 Remuneration report 49 Employees 50 Environmental report 51 Annual Report 2005 I Management report ErSol Solar Energy AG ol share beiter figures afers Bilanz Cells GuV onärsstruktur ment tnanzlageGuV ernkennzahlen beiter hareholder structure ® Outlook rance information lage ® Milestones 2005 Sheet nt ement cherung Statement Solar Notes rSolid to the shareholders Finanzlage dolid sstruktur Prognosebericht eanagement Statement olid cial statement dSolid d ®board sstruktur yolid the supervisory Solid dSolid financial statements Solid Balance Sheet lid mögenslage anagement Solid Solid Solid anzkalender Solid Solid Solid ding the future Anhang Solid Solid Solid Konzernkennzahlen Solid Changes in Equity GuV vidend policy Notes 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Letter to the shareholders Report Kontaktdaten Konzernabschluss Anhang Dividend policy Solid management Income Statement Wafers Solarzellen Vermögenslage Cells report Bericht des Aufsichtsrats Solar Solid Aktionärsstruktur Shareholder structure Solid Ingots Finanzlage Report Bilanz ® videndenpolitik Outlook äftsbericht Solid vidend policy Solid Balance Sheet Wafers nancial statement unftssicherung olarzellen Bilanz nternehmensbereich Konzernkennzahlen estor Relations Solid ermögenslage ing the future ionärsstruktur Solid ow Statement Our employees Income Statement Solid ErSol denpolitik Solid Solid nancial statement Solar Annual Solid Brief an die Aktionäre Report Ingots 2005 Solid nges in Equity nd policy AG Solid anagement Wafers ® Wafers Notes ntaktdaten rgy y the supervisory board Unternehmen arzellen Solar Solid 2005 ndenpolitik cial position Our employees GuV cherung Wafers enpolitik enslage Ingots Solid olid Anhang me Statement 2005 rSol des Aufsichtsrats ture ngots olid Solar Wafers ement in Equity lid Solid elations er information nnual yeten idSheet Notes2005 ment Meilensteine yafers port ement ®figures ere Bilanz nslage ls ellen d Cells and rognosebericht ang 005 ent tns richt The company® fers ity lar ie Aktionäre ® ol 05 ployees nzahlen ots s rzellen board al ErSol sareholders n 5 fers dar Management In 2005 ErSol experienced its most successful year since its founding. There were increases in production, sales and income – accompanied by improved efficiency. ErSol is one of the leading companies in its industry. We are set on a path of success. 29 ErSol Solar Energy AG Annual Report 2005 I Management report I Business and environment Business and environment Core photovoltaic business The segment rather provides more of a service for customers, and allows the Company to keep an "ear to Since its formation in 1997, the Erfurt-based company the ground" in its markets. ErSol Solar Energy AG (“ErSol”, “ErSol Group”, The “Company”) has developed, manufactured and distributed innovative, top-quality photovoltaic products. The Group structure and subsidiaries Group's core business is the manufacture of wafers and solar cells using crystalline silicon. Through its subsidiary The Group's parent company is ErSol Solar Energy AG: ASi Industries, ErSol's wafer activities involve the field of This is where ErSol's core business of solar cell produc- large surface area monocrystalline wafers. The Company tion is based. is one of the global market leaders in this area. The Company's subsidiaries are ASi Industries GmbH ErSol solar cells are high-performance, stable cells with (Arnstadt, Germany) and aimex-solar GmbH (Erfurt, low tolerances. The high efficiency level of the ErSol cells, Germany), which are each 100% consolidated, as well and their excellent performance in low light conditions, as Shanghai Electric Solar Energy Co., Ltd. (Shanghai, enables outstanding yields even in diffuse light. People's Republic of China) as an associated company in which ErSol holds 35% interests. Another of ErSol's business segments is trading with solar modules, power inverters and other components The Group's accounts also include 100% interests in required for building photovoltaic plants. At the end of the newly-formed Group subsidiary ErSol New Tech- 2004, this business segment was transferred to the nologies GmbH (Erfurt), which will commence its subsidiary aimex-solar GmbH. However, if one looks at activities during 2006, and the currently inactive ASi ErSol Group's economic activities as a whole, its system SILIZIUMTECHNOLOGY GmbH (Arnstadt). components business is not of great significance. ErSol Group structure ErSol Solar Energy AG Production and distribution of solar cells (Erfurt, Germany) 30 100% 100% 35% 100% 100% SRS Silicon Recycling Services, Inc. ASi Industries GmbH Shanghai Electric Solar Energy Co., Ltd. aimex-solar GmbH ErSol New Technologies GmbH Camarillo, California, USA Arnstadt, Germany Shanghai, P.R. China Erfurt, Germany Erfurt, Germany Recycling of silicon Mono-crystalline ingots and wafers (production & distribution) Solar module production Marketing of solar modules Development of new photovoltaic technologies Annual Report 2005 I Management report I Business and environment The ASi Industries subsidiary has specialised in the The price increases from conventional energy suppliers production of monocrystalline ingots and wafers: also fuelled demand. In overall terms, the cost margin Ingots are manufactured from solar grade silicon and between conventional and renewable energies is are then in turn converted into wafers, which ErSol becoming ever-narrower, since conventional raw needs to produce solar cells. ASi Industries also sells a materials are becoming scarcer and therefore more substantial volume of wafers to outside companies. expensive, while energy from renewable sources is ErSol Solar Energy AG simultaneously becoming increasingly cost-effective, aimex's core business is the trading with photovoltaic thanks to economies of scale and more efficient products, though it primarily sells modules containing production methods. ErSol cells. aimex also trades with certified solar modules containing cells from other recognised manufacturers. aimex also sells small numbers of Priority given to alternative energies abroad system components. Other countries are also increasingly promoting the use of renewable energy sources. A prime example here is Economy and sector Italy, where very advantageous regulations have been passed for the feeding-in of solar-generated electricity, or While the global economy has boomed, Germany's GDP the Far East (South Korea, China, Thailand and others), again only experienced a moderate increase of 0.9%. which have comprehensive and very ambitious support The photovoltaic sector underwent strong growth, in programmes in place. Even the US is set to turn away contrast to the development of the economy as a whole. from conventional fuels in favour of alternative energy sources. Overall, the market for solar energy is increasingly developing into a global movement. This popularity EEG (German Act on Granting Priority to Renewable is in turn making the technology more sustainable and Energy Sources) causes demand to grow less dependent on state support programmes. These developments were supported by the amendment A factor currently inhibiting further market growth is the to the German Act on Granting Priority to Renewable worldwide capacity to manufacture solar grade silicon. Energy Sources (EEG) in 2004, which also proved a Securing the production of this raw material is therefore strong demand driver in the year under review. This law a decisive factor in the further development of the entire aims to increase Germany's energy supply from solar energy sector, including ErSol. The sector producing renewable energy sources to 12.5% by 2010 and to at this raw silicon material is therefore already seeing least 20% by 2020. In order to achieve these targets, intensive investment. Nevertheless, the whole process grid operators have been legally obliged, among other from the foundation to the commissioning of new things, to connect photovoltaic electricity plants to their production facilities can take two years and even more. grids, and to feed this power into their grids to minimum For its part, ErSol has succeeded in securing a large part prices that are guaranteed for the long term. While these of the supplies it needs for the next few years at least: In feed-in tariffs were statutorily reduced by 5% at the turn 2005, the Company concluded long-term supply of 2005, demand for photovoltaic products nevertheless contracts with leading silicon manufacturers. remained unchanged. 31 ErSol Solar Energy AG Annual Report 2005 I Management report I Business and environment Implications for business development Thanks to the current supply / demand situation, which works in favour of the seller, the market for photovoltaic products is characterised by a relatively low level of Sales by sales region 2005 7 '000 2004 7 '000 Germany 48,739 25,478 Europe 7,920 7,669 Asia/Pacific and Africa 7,726 4,499 competition. The situation on the procurement side is quite the reverse: Here, photovoltaic companies are Deliveries of wafers within Germany amounted to 11 MWp. competing very intensively for access to existing sources The exported share accounted for 50% and therefore of raw materials, and to secure the fastest possible remained at the same level as for 2004. However, due to expansion of their manufacturing capacities. the time of consolidation the sales figures for wafers were only shown as from 8 September 2005. As a result of the For the ErSol Group this means, on the one hand, that huge domestic demand, the export quota for trading with this high level of demand has been accelerating the sale solar modules was only 1%. of its products. On the other hand, if sufficient raw materials were available, the Company's sales figures could easily have been even higher. Competitive situation On the capital markets, PV companies have been Within the photovoltaic products market, some benefiting from the favourable light in which renewable "integrated" providers cover the entire value chain from energy sources are being viewed. This has worked in the ingot through to the finished solar module, while favour of ErSol shares, and thereby boosted the others in turn only cover certain production phases. Until Company's value: Since its first issue, the share recently, ErSol's activities were limited to the price has increased from 7 42 to 7 53.76 by 28% (as of manufacture of solar cells. With the purchase of ASi 1 March 2006). Industries, the Company has expanded its manufacturing range and now also produces the ingots and wafers it needs to produce the cells. After silicon production, ErSol Sales markets therefore now covers the most technically demanding and margin-intensive part of the value chain, right Based on preliminary figures, approximately 1,000 to through to the solar cells. At the same time, with its 1,200 MWp of capacity was installed around the world acquisition of ASi Industries the Group has secured the in 2005. Germany was the largest single market. availability of raw materials that are crucial to solar cell production. For ErSol, Germany was also the most important sales market during the reporting period. Around 15 MWp of According to a study by the magazine Photon capacity was sold here in 2005. Of this amount, 76% of International, the Company is ranked fourth in total sales relates to Germany, 26 % points more than in comparison with its German competitors for the 2004. Of the exported portion, about 12% went to other production of solar cells, and it is ranked sixth within countries in Europe and 12% to the Asia/Pacific and Europe. Internationally, ErSol ranks among the top 20. Africa regions. ErSol is thus one of the leading companies in the photovoltaic industry. 32 Annual Report 2005 I Management report I Business and environment Value-driven management ErSol Solar Energy AG The capital employed is derived from the total capital minus short-term borrowed capital and cash. The ROCE ErSol's primary corporate mission is to steadily grow the is calculated as a quotient from EBIT and total capital Group's value and to sustain this growth into the future. minus short-term liabilities and cash. Against this background, ErSol has developed a management system that identifies and develops business The control system also includes segment-specific areas that are highly efficient and that show outstanding business risks, and in seeking to achieve the agreed potential: Defined management and control instruments target efficiencies, is guided by the best relevant are used to allow all activities to be coordinated, competitor or an external industry benchmark. synchronised and made transparent across the Group as a whole, and within the individual segments. This allows In the last four financial years the Company's control ErSol not only to rapidly identify markets and business figures have developed as follows: areas that show potential for the future, but also to identify strategic and operational problem areas in good time. 2002 7 '000 2003 7 '000 2004 7 '000 2005 7 '000 4,965 4,250 10,739 22,483 The bedrock for this is the Company's highly informative reporting and controlling system, which covers both Gross profit present and forecast accounting and internal and Gross profit margin (in %) 29.2 24.2 28.5 34.9 external reporting: Based on IFRS, key figures are EBIT -380 -2,195 3,368 9,458 determined for each reporting unit and quickly linked to EBIT margin (in %) both a strategic and operational controlling system and Capital Employed to a task-oriented communication system. ROCE (in %) -2.2 -12.5 8.9 14.7 4,879 5,525 5,596 84,443 -7.8 -39.7 60.2 11.2 As well as its goal of adding value, the ErSol Group attaches great importance to the sales revenues it gener- ErSol's strategic portfolio management is based on an ates. Only if these twin corporate objectives are achieved analysis of these control figures: This analysis identifies in the right balance will the Company build the foun- business fields that contribute to ErSol's goal of adding dations it needs for sustained growth in its individual value to the Company, and which therefore should be business fields and in the Group as a whole, while also further developed, while at the same time highlighting increasing shareholder value. activities that do not have sufficient potential for the Company's value, allowing the Group to withdraw from ErSol applies the following control figures: such activities as early as possible. – Gross profit – Gross profit margin – EBIT – EBIT margin – Capital Employed – ROCE (Return on Capital Employed) 33 ErSol Solar Energy AG Annual Report 2005 I Management report I Business and environment Research and development In the Solar Cells segment, development focused on the further optimisation of production processes. To good Research activities expanded effect: The efficiency of the solar cells was further improved and yields were increased. The ongoing quality The Company spent 7 325 thousand on research and controls during the manufacturing process were also development in 2005, 7 149 thousand more than in improved: In the Company's new production line, wafers 2004. In recent years, ErSol has consistently expanded its undergo quality checks after each individual manu- research activities and intends to continue doing so into facturing stage. If problems occur, the cause can be the future. Continuity is vital in the R&D area because easily determined via batch tracing. projects generally run over several years and therefore depend on long-term financing. ErSol is also working on further developing highly efficient solar cells using a minimum of materials. These solar cells will enable cheaper production coupled with higher performance. Development of monocrystalline cell technology 156mm x 156mm Average cell efficiency in % Cell thickness in µm 17.00 16.60 16.50 16.40 16.00 15.50 16.00 15.70 16.10 16.83 16.70 260 270 260 16.50 16.50 250 16.40 240 16.10 230 15.80 220 220 15.50 210 15.00 200 190 14.50 Jan 05 34 Feb 05 Mar 05 Apr 05 May 05 Jun 05 Jul 05 Aug 05 Sep 05 Oct 05 Nov 05 Dec 05 Jan 06 Annual Report 2005 I Management report I Business and environment Solar cells: Research cooperation initiatives are technologies for mass production. Together with three successful other solar cell manufacturers, ErSol also concluded a ErSol Solar Energy AG licensing agreement for "Laser-Fired-Contact" technology. ErSol has been working intensively with renowned research institutions in order to intensify its R&D Research successes in the area of solar cells were activities and make them more effective. These presented at the 20th European Photovoltaic Conference institutions include the Fraunhofer Institute for Solar in Barcelona: Here, ErSol publicly displayed both the Energy Systems (Fraunhofer Institut für Solare 100 µm-thin cell and the world's largest multicrystalline Energiesysteme, ISE), the Institute for Solar Energy 12-inch cell based on wire slicing technology, which Research (Institut für Solarenergieforschung, ISFH) and were developed in together with the SolarZentrum Erfurt the University of Konstanz. Together with SolarZentrum and PV Crystalox Solar AG. Erfurt, a division of CiS Institut für Mikrosensorik gGmbH, the Company applied for assistance for a project to develop innovative new solar cell processes for Wafers: Production processes optimised wafers with an initial thickness of 150 µm. This was approved by the German Federal Ministry for the In the Wafers segment, research efforts are directed Environment, Nature Conservation and Nuclear Safety towards achieving higher yields in the ingots area and in (Bundesministerium für Umwelt, Naturschutz und further optimising the pulling rate. Visible results were Reaktorsicherheit, BMU), which offered a total grant of already achieved during 2005: Net weight and yield 7 1 million. Other projects involving ErSol funded by the went up, while process times were reduced. By using a BMU include SOLPRO, a project for optimising solar cell thinner wire and a finer grain, the kerf loss was cut and module production, and the "Characterisation of PV down. The Company succeeded in optimising the cutting modules in production". The goal of these development fluid ("slurry") using the in-house facilities of Castrol, a activities is to work in close cooperation with customers member of the BP Group. ErSol is also intensifying its who produce modules to develop a product that development activities for using thinner wafers. optimally suits their needs. Other cooperation partners are the Institut für ErSol New Technologies established Physikalische Hochtechnologie e. V. in Jena (IPHT Jena) with a project for thin film technology, and Fraunhofer As well as conventional crystalline technology, the ISE, whose Photovoltaic Technology Evaluation Centre Company is further pursuing new technologies based on (PV-TEC) launched at the beginning of 2006 is being crystalline silicon and thin film technology. ErSol New used by ErSol for its development: In the PV-TEC centre, Technologies GmbH (ENT) was established for this solar companies are able to test the suitability of new purpose in December 2005. 35 ErSol Solar Energy AG Annual Report 2005 I Management report I Business and environment Important events during the financial year 2005 Long-term solar cell supply contracts concluded ErSol primarily supplies its solar cells to module ErSol acquires ASi Industries manufacturers without their own solar cell production facilities. The Company has concluded long-term supply With effect from 1 July, the ErSol Group acquired contracts with selected globally-active customers that ASi Industries GmbH in Arnstadt on 29 July 2005. ASi are financially strong – such as MSK Corporation Industries was first consolidated following the economic (Japan), Solon AG and Solarwatt Solar-Systeme AG – transfer of rights and obligations on 8 September 2005. with a total volume of approximately 7 1 billion until This company numbers among the top quality com- 2015. This means that the turnover of solar cells and panies in the manufacturing of monocrystalline ingots corresponding flow of payments have been secured for and wafers for the photovoltaic industry. many years. The acquisition of this company has allowed ErSol, In October 2005, ErSol signed a long-term contract with against the current background of scarce resources, to an Italian module manufacturer for the supply of solar secure the availability of silicon, a key raw material, as cells. This contract also runs until 2015 and involves a well as ingots and wafers, vital primary products for the total sales volume of around 7 100 million. manufacturing of solar cells. ErSol has thus integrated the preliminary processes in solar cell production and substantially increased its share of the value chain. Successful IPO ErSol Group has been listed on the Prime Standard of Silicon supply until 2015 largely secured the German stock exchange (Deutsche Börse) since 30 September 2005. The issue price of this share was In 2005, the Company concluded long-term contracts 7 42, and the opening price was 7 65. The shares were with two well-known polysilicon manufacturers for the included in the TecDAX on 19 December 2005. supply of solar grade silicon until the year 2015. The supply of solar grade silicon for the manufacturing of After deduction of IPO costs, net proceeds from the ingots and wafers at ASi Industries has thus been initial public offering were 7116.2 million. The Company guaranteed for many years, and the full utilisation and will use this money to secure and further drive its further expansion of its production capacities has been internal and external growth: The IPO proceeds will largely secured. mainly be used to develop the Company's production capacities at its plants in Germany, and to safeguard its silicon supplies. Funds from the IPO will also be directed at developing new markets abroad, research and development, and at developing new technologies. Further acquisitions may also be considered. 36 Annual Report 2005 I Management report I Sales, earnings development and income situation ErSol Solar Energy AG Sales, earnings development and income situation Selected key figures on the income situation 2005 7 '000 Return on sales (based on EBITDA) EBITDA EBIT 2004 7 '000 20% 14% 12,731 5,101 9,458 3,368 Labour costs quota 10% 9% Material costs rate 72% 70% Return on equity* 4% 30% Income taxes 3,597 1,134 Taxation ratio 37.79% 38.52% Income/ loss after tax 5,922 1,810 Earnings per share (7) 0.93 0.69 *Key figure for a company's income situation that presents the earnings (net income for the year) in relation to the equity committed. Here: Earnings as a percentage of the average equity committed for the year. Income increasing consolidation of ASi Industries GmbH, whose revenues accounted for around 8.5% of consolidated sales, had a During the financial year 2005, the ErSol Group's income positive effect on sales growth. situation was characterised by a demand that was well in excess of supply. ErSol products were very much in Consolidated sales rose significantly as a result: This demand in Germany in particular. New feed-in tariff laws amounted to 7 64.4 million, 7 26.7 million or 71% and other support programmes in the Mediterranean higher than 2004. and Far East began to have a greater impact. Overall, the excess demand led to sustained high price levels for the sale of ErSol photovoltaic products. Purchase prices remain at high levels Part of the reason the Company benefited from the strong demand was that investments made during 2003 Nevertheless, the scarcity of raw materials means that and 2004 had produced additional manufacturing the Company's high sales revenues are coupled with capacity for solar cells. The production of solar cells was increasing purchase prices. The Company seeks to increased, and sales significantly increased accordingly compensate for this by adjusting its sales prices: Price from 16 to 20 MWp. escalation clauses for wafers in most of its solar cell supply agreements allow the Company to at least partially pass on price increases for wafers to its Furthermore, the transfer of the module trading business customers. into a separate company also assisted in promoting this sales growth: Trading with products from other ErSol purchases its raw materials on international manufacturers generated additional revenues for the markets, but uses hedging instruments to compensate Company. Contacts with dealers were intensified during for exchange rate fluctuations. In the future, the 2005. Overall, trading activities accounted for 39% of proportion of purchases made in US dollars will increase total sales, compared with 36% in 2004. The first-time significantly. 37 ErSol Solar Energy AG Annual Report 2005 I Management report I Sales, earnings development and income situation Almost constant material costs rate Pro forma figures for ASi Industries The consolidated material costs rate for 2005 remained Only following the acquisition of ASi Industries in July constant at 72%, despite the limited availability of 2005 and the first consolidation on 8 September of the silicon. This corresponds to a gross profit margin of 35%. reporting year did wafers become part of ErSol's product ErSol's forward-looking corporate policy and early, portfolio and one of its three business segments. During comprehensive safeguarding of the raw materials it the reporting year (as from 8 September 2005), the requires worked to great effect here. If one looks at the Wafers segment contributed 7 32 thousand to earnings. individual Company segments, the material costs rate in If the Wafers segment had been part of the ErSol Group the Wafers area was 65%, 70% for Solar Cells and 93% during the full financial year, the overall result for the for Trading. In the previous year, the material costs rate year, without taking the date of first consolidation into was 59% for the Solar Cells segment and 93% in the account, would have been 7 6.1 million. Trading segment. The growth in the Solar Cells segment is attributable to increased purchase prices, which could not be fully passed on to customers. Financial results significantly increased Operating result on the up Financial results experienced strong growth year-onyear: Profits of 7 132 thousand were achieved in 2005, The operating result (EBIT) rose by 181% compared with following a loss of 7 424 thousand the previous year. 2004 to 7 9.5 million. The EBIT margin also rose: from This positive development is due to financial revenues 9% in 2004 to 15% in the year under review. This resulting from the capital investment from the proceeds increase is attributable to economies of scale resulting of the Company's IPO. At the same time, these revenues from the growth in the Company's capacity. While meant that the Company required less loan capital for its output went up, relative fixed costs fell in the operating investments. These financial revenues were set against expenses, administrative and sales expenses and expenses arising from interest payments – primarily for personnel expenses areas. long-term loans in connection with the Company's further expansion and for the acquisition of ASi Industries GmbH. 38 Annual Report 2005 I Management report I Sales, earnings development and income situation Income taxes ErSol Solar Energy AG On the expenses side, personnel expenses and write-offs on production facilities are assigned as individual costs The ErSol Group is reporting income taxes (according to to the individual segments. Similarly, all other operating IFRS) for the year 2005 amounting to 7 3.6 million. Of expenses have been segmented, including administrative the reported tax expenses, 7 2.9 million relate to current costs or rather proportional personnel costs for admin- taxes. The remaining tax expenses are accounted for by istration. Expenses and income that is not apportionable deferred tax effects. For a more detailed presentation and to the core activities of the relevant segments is reported further explanation, see the Notes on page 76, point 3.8. separately. At the secondary reporting levels, figures are given for Segment reporting: Wafers form new business segment the different geographic regions. This allows country- At its primary reporting level, the ErSol Group is divided The EBIT margin in the Solar Cells business segment rose into the following business segments: Firstly, the area by 5.7 % points to 18.1% compared with 2004. This involving the "development, manufacturing and positive development can be explained by the increased distribution of cells" ("Solar Cells"), and secondly, the capacity and resultant production expansion during the "Trading with modules and system components" current reporting year. specific opportunities and risks to be clearly illustrated. ("Trading"). A third area, the "Wafers" segment, was introduced following the acquisition of ASi Industries. The Trading segment recorded sales growth of 194% Between the "Solar Cells" and "Trading" segments, compared with 2004, though the EBIT margin fell from sales totalling 7 12.3 million were generated in 2005, 5.5% to 3.6% due to a significant rise in purchase while sales totalling 7 1.5 million were generated prices. These price increases could not be fully passed on between "Solar Cells" and "Wafers". The pricing applied to the end customers. here is guided by the market price. The Wafers segment was only included in the consolidated accounts as of 8 September 2005. Up to the end of the financial year, this segment returned EBIT of 7 573 thousand, while the EBIT margin was 9.0%. 39 ErSol Solar Energy AG Annual Report 2005 I Management report I Financial position Financial position Selected key figures on the Company's financial situation 2005 7 '000 2004 7 '000 Equity ratio (in %) 69.2 34.2 Net financial debt -106,749 82 -65.5 1.4 Gearing Ratio* (in %) *Total financial liabilities (both current and noncurrent) minus cash and cash equivalents, divided by equity in percent Principles and objectives of the Company's financial management in particular, the injection of funds from the IPO of 7 116.2 million after deduction of IPO costs, which boosted short-term assets. For this reason, the equity In the context of the Company's new Group structure, ratio increased from 34.2% in 2004 to 69% in 2005. ErSol AG has set an objective of ensuring the liquidity of each of its individual companies by, for example, The Group's asset situation was affected by two major providing the financial resources to fund investment factors in 2005: initiatives for its subsidiaries. To this end, the Company produces rolling monthly liquidity plans for each – The first-time consolidation of ASi Industries, which subsidiary, as well as its medium-term financial led to an inflow of intangible assets (around 7 13 planning. Throughout the Group, the Company secures million) and goodwill (around 7 18 million), its financing using instruments from the finance and capital markets, as well as bank loans. – Downpayments made for inventories, particularly silicon (approximately 7 10 million), which is shown under 'Other assets'. Asset structure and situation A possible off-balance financing through leasing In the financial year 2005 one-third of the Company's business was not taken; exceptions were the vehicle fleet asset structure consisted of noncurrent assets and two- and IT communications facilities. thirds consisted of current assets. This ratio reflects, 40 Annual Report 2005 I Management report I Financial position Financing analysis ErSol Solar Energy AG therefore invested in expanding the capacity of its plant in Erfurt, up to and including January 2006. The first For its acquisition of ASi Industries and in order to secure phase of this is now complete. With an investment the further expansion of the Company, the Group took volume totalling 712.8 million, production capacity was out a syndicated loan valued at 7 21.1 million at the increased in the space of one year from 25 MWp to balance-sheet date. Thanks to the Company's changed 60 MWp by establishing the solar cell production line II. financial structure after the IPO – its liquidity had greatly Further investments are also planned for this plant for improved – the Company had to obtain less financing 2006. This investment volume here amounts to around than planned. 719 million.This investment will primarily be used to again increase production capacity from 60 MWp to 110 MWp Investments for the Group subsidiary ASi Industries are by establishing the solar cell production line III. currently fully financed by ErSol, without using borrowed capital (aside from the funds used from the syndicated A further investment phase was concluded for ASi loan). In the context of the syndicated loan, ErSol acquired Industries in the course of expanding its capacity. In compensation of 7 4.6 million from ASi Industries. 2005, 7 6.9 million was invested in the Arnstadt plant. ErSol currently only uses off-balance-sheet financing 2006. A further approximately 7 18 million is planned for instruments to a very small extent. The funds for the investments that have been made No changes are anticipated to the Company's loan come from the syndicated loan, the proceeds of the IPO conditions. During the reporting period, the interest or were taken from the Company's own resources rate was 200 base points above the refinancing rate, on through its cash flow. The proportion financed from average. loans amounts to about 7 4.6 million. There were no liabilities from these investments, other than the orders that were made amounting to 7 13.5 million. Investment analysis The Company's free cash flow is negative, due to its high ErSol only engages in investments for the benefit of the level of investment activity. In 2005, this amounted to Company's future. Replacement investments are 7 -34 million. In 2004, the free cashflow was positive, at performed to the degree necessary. The Company has 7 2 million. 41 ErSol Solar Energy AG Annual Report 2005 I Management report I Financial position Liquidity analysis Depreciation policy The liquidity of the ErSol Group has significantly The Group uses the straight-line depreciation method for improved as a result of the IPO: While cash to the its fixed assets: In the case of property, plant and amount of 7 4 million was available in 2004, this figure equipment depreciation is calculated based on the amounted to 7 129 million in the reporting year. Thanks expected useful life and taking the relevant balance into to the growth in liquid funds, the Company's net account. In measuring the useful life, the four-shift financial debt (after subtracting cash from financial system applied at plant level is taken into account. liabilities) amounted to 7 -106.7 million. The gearing ratio developed accordingly from +1% to -65%. As a In the case of the intangible assets, it is first established result, the ErSol Group has no difficulties in meeting its whether they have a limited or unlimited useful life. In payment obligations. the case of limited useful life (for instance, for software or computer licences), the planned straight-line amor- The Company is not bound by any contracts involving tisation method is used throughout the useful life; in the extensive repayment obligations. During the year under case of unlimited useful life (for example, goodwill), review, the Company concluded purchase contracts for there is no amortisation: instead, an impairment test is solar grade silicon and wafers that will remain effective, conducted at least once a year. and to which the parties involved will be bound, for many years. However, these agreements are coupled All assets are assessed according to the fair value with sales contracts that have been concluded at principle, that is, neither higher nor lower market values equivalent MWp volumes and that are valid for an are applied. equivalent period. ErSol primarily works in euros, and to a limited extent in US dollars. The Company regularly hedges against exchange rate fluctuations in order to minimise its exposure to currency risk in the course of its international business activities. For detailed information on exchange hedging, see the Notes on page 90, point 5.1.2. 42 Annual Report 2005 I Management report I Supplementary report ErSol Solar Energy AG Supplementary report Company acquisition secures additional raw materials The acquisition of SRS has allowed ErSol to secure additional silicon. As a result of this initiative, the Company expects to increase its output by 15 MWp by On 24 February 2006, ErSol acquired a 100% interest in the end of 2007. The acquisition also allows the US company Silicon Recycling Services Inc. (“SRS”). This Company rapid entry to the lucrative US market. silicon recycling firm from Camarillo, California, was founded in 1996 and processes by-products and waste products from companies in the silicon semiconductor industry and from the photovoltaic sector. Since 2004, SRS has also been running an office in Beijing and coordinates commissioned production for the Chinese market from here. The company has recorded two-digit growth rates since its foundation and recycled and sold several hundred tonnes of silicon in both 2004 and 2005. 43 ErSol Solar Energy AG Annual Report 2005 I Management report I Risk report Risk report Risk management If the EEG were to be rendered ineffective, or were to be abolished or changed, for instance as a result of legal Like any other company, ErSol is exposed to a wide variety proceedings, this could adversely affect ErSol's business of different commercial risks. The Company applies a activities, particularly in view of the fact that Germany is comprehensive and systematic risk management system currently the primary market for ErSol products and to minimise these risks: Risks at all levels of the changes in state support would have major implications Company and in all departments are identified early, for the Company. Renewable energy is also being allowing the Company to respond quickly and promoted elsewhere in Europe and further afield, effectively. however, with comparable repercussions if these subventions were to be removed or changed. Environmental and industry risks The same applies to state grants, which in the past have been of huge assistance to ErSol in expanding its pro- Statutory framework and subsidies duction capacities and in its research and development activities, and to investment premiums, for purchasing In its key home market of Germany, the business assets at ErSol and ASi Industries. These subsidies are activities of the ErSol Group depend on the promotion of linked to specified preconditions, the assessment of which renewable energy sources, as regulated by the EEG has not yet been fully completed. If the Group were to be (German Act on Granting Priority to Renewable Energy required to pay back some or all of these funds, this Sources). This law imposes obligations on operators of would place a financial burden on the ErSol Group. power supply grids to obtain electricity from renewable sources at fixed minimum prices. The Group believes it will continue to receive state support in the future. Nevertheless, it is not possible to To date, it is only this statutory framework that makes predict with certainty what support will be made electricity generated from photovoltaics competitive in available, if any. A reduction in or absence of state Germany's power supply grid in comparison with other, subsidies could adversely affect ErSol's business conventional energy sources. These statutory provisions activities and future competitiveness. will therefore support ErSol's continued business development, at least for the next few years. Nevertheless, the EEG provides for annual reductions to Silicon and wafer supplies the feed-in tariffs paid for this renewable energy. This has to be compensated for by corresponding improvements In manufacturing its products, the ErSol Group is to the efficiency of photovoltaics, with higher dependent on certain raw materials, including silicon performance being achieved at lower cost, so that the and wafers. ErSol obtains these raw materials from a returns for users remain constant. For this reason, small number of suppliers. The Company is therefore reductions in feed-in tariffs also put pressure on dependent on these suppliers, all the more so given the manufacturers such as ErSol to reduce prices. current excess demand for these materials. This dependency is mitigated by the fact that ErSol has secured silicon supplies until 2015 and is endeavouring to secure additional quantities to allow its further growth. 44 Annual Report 2005 I Management report I Risk report Even the acquisition of ASi Industries, which itself ErSol competes on the global market with international produces ingots and wafers for solar cell production, is corporations, some of which have substantial financial, nevertheless insufficient protection against this technical and personnel resources, as well as a large dependence, since the manufacturing of ingots and market share. These companies could be in a position to wafers itself requires silicon. It is therefore now all the react faster to changing market conditions, operate an more urgent that this resource be secured. aggressive pricing policy, or ultimately dominate the ErSol Solar Energy AG market through their greater capital muscle. In this Despite the long-term supply agreements the Company context, one should also consider in particular has concluded for silicon and wafers, it cannot be companies from countries with very low production costs guaranteed that the suppliers will always fully meet their (though often also with poorer quality), such as China or obligations. Delays in delivery, or failures to deliver, could the former CIS states. limit the utilisation of the Company's production plants and therefore negatively impact the Group's net worth, financial position and earnings. Acceptance and delivery obligations ErSol has agreed long-term fixed prices for silicon and In order to secure the manufacture of crystalline silicon wafers in several important procurement agreements. solar cells for the long term, the ErSol Group has Nevertheless, it cannot be ruled out that future market concluded delivery contracts relating to the purchase of prices for these raw materials at the time they are silicon, some of which extend until 2015. These purchase purchased may be lower than the price that has now commitments are coupled with contractual agreements been fixed. This could significantly impact the Group's with module manufacturers that offer approximately the competitiveness. same security to the purchase/sale of solar cells produced by ErSol as has been agreed for the supply of silicon. If the module manufacturers should not meet Competitive situation their obligations, or should not do so fully, this could adversely affect the Group's net worth, financial position The photovoltaic sector is characterised by stiff competi- and earnings. Above and beyond the sales volumes it has tion and an increasing process of concentration. This contractually agreed, there is a continued risk for ErSol in trend could become even more acute in the future, since having to find purchasers for the solar cells it produces the cost pressure for companies increases as the in the long term. minimum remuneration for feed-in decreases. Furthermore, there is a risk that the Company's forecast The high international demand also means that on technology and cost developments may not be companies, ErSol included, are striving to expand their achieved, which would adversely affect the Company's production capacities at all stages in the value chain. The income situation. limiting factor here is the manufacture of silicon, ingots and wafers, which means that at least in the short term, a supply bottleneck could occur leading to ErSol's existing production capacities not being fully exploited. 45 ErSol Solar Energy AG Annual Report 2005 I Management report I Risk report Risks associated with the Company's strategy and departmental managers have a decisive role to play in ensuring ErSol's success as a company. The loss of management positions and personnel in these key Customer structure positions could have a major adverse affect on the Company's net worth, financial position and earnings. ErSol has concluded framework agreements for Added to this is the fact that, as competition within the deliveries of solar cells with a small number of major industry increases, so the risk grows that employees may solar module manufacturers. Although the number of be poached and the Company may be unable to hire these major customers has increased recently, a risk new staff with comparable qualifications. nevertheless remains from this state of dependence: While the Company's relationships with these customers have been secured through long-term contracts, the possibility nevertheless cannot be ruled out that these Risks relating to information technology companies may fail to meet their contractual obligations. Information technology is the basis of many business processes. In the case of ErSol, IT not only links the Company growth processes within the Group, but also links the Company with its customers, suppliers and business partners. As ErSol is a rapidly growing company. This growth has these networks expand, so the risks also increase with further accelerated recently and has been further regard to data security. ErSol guards against these strengthened by the acquisition of ASi Industries. It potential dangers through ongoing checking and remains a challenge for the Company to develop monitoring of the information technology it uses, and of organisational, risk monitoring and risk management its IT processes, using a comprehensive IT management structures that can keep pace with this rapid growth. system. While the Group has now installed an efficient and sustainable risk monitoring and management system, it must continue to identify possible gaps and short- Other risks comings. It must also identify any new risks that may arise as a result of the Company's rapid growth in good Accidents and disruptions of operations time, and further develop its risk management system accordingly. As a manufacturing company, ErSol operates plants that rely on supplies of electricity and other media and that work using high temperatures, as well as with chemicals Financial risks that are dangerous and harmful to the environment. While the Group is insured against accidents and For information on these risks see the Notes on page 89, disruptions to its operations, nevertheless not all point 5.1. conceivable risks have been fully covered. Such events and possible resultant production downtime could therefore have a significant adverse effect on the Personnel risks The Company's growth also requires the sufficient availability of qualified personnel: the Board of Management, Managing Directors of the subsidiaries 46 Company's net worth, financial position and earnings. Annual Report 2005 I Management report I Forecast report ErSol Solar Energy AG Forecast report New markets The ErSol Group intends to develop new markets in order Bright prospects for ErSol's business development and the industry as a whole to secure and drive its medium- and long-term business development. As a result, the Company has already The economic prospects for the global photovoltaic concluded its first long-term supply agreements with industry are good: various industry studies estimate a companies in Italy and with one customer in Japan. The world market volume for 2010 of 3.5 to 6 GW. ErSol Company also has business relationships in China, intends to position itself among the ten leading through its Joint Venture SESE, among other channels. companies within this sector. To achieve this, it plans to Nevertheless, Germany remains the primary market for further develop its capacity for the forecast period 2006 ErSol products for the foreseeable future. and 2007 and further beyond. The Company plans business development above market levels with sustained high quality. Technological innovation In view of the strong industry conditions and improved As well as conventional crystalline technology, ErSol is subsidy framework, management's expectations are also pursuing the development of new photovoltaic positive with regard to the Company's business technologies based on crystalline silicon and thin film development. Economies of scale are also expected to technology. ErSol New Technologies GmbH (ENT) was bring dividends, bringing increased output and falling formed for this purpose in December 2005. production costs. 47 ErSol Solar Energy AG Annual Report 2005 I Management report I Forecast report Integration of additional manufacturing stages Growing sales and margins The Company's expansion activities in its Wafers and The ErSol Group is increasingly securing the Solar Cells segments are likely to lead to increasing manufacturing and sale of its products by integrating production figures, and thus increasing sales figures. The production stages right along the value chain. Its more Company anticipates that sales prices will remain at comprehensive manufacturing range also allows it to their current high levels for some time yet, but that they optimise processes, guarantee the uniform quality of its will then fall over the medium term. The Company tries products and, in the medium-term, use synergies in the to compensate for its high purchase prices, which may area of purchasing, administration and other areas rise further, by improving efficiency on the production within the Company. side so that its margins remain constant. However if it does not fully succeed in this, its margins could also fall. The Company expects its EBIT margin to improve with Strong growth in the business segments the positive effects of the economies of scale that will come with its higher production volumes, and also expects it to benefit from consolidation effects through The Wafers segment will experience disproportionate the increasing integration of its wafer deliveries. growth in the next two years, with expansion of production capacity of almost 400% planned by the end The Trading business segment plans to increase its sales of 2007. Equivalent economies of scale should increase from actual trading activity (by selling products from margins. other manufacturers) in proportion to the availability of these products. On the other hand, the finishing of ErSol The Solar Cells segment will also experience rapid products will not increase as strongly as overall Group growth in the next two years, with capacity increasing growth. from 60 MWp to 110 MWp. Developments in this area will be dominated by increasing efficiency levels coupled with a reduction in the amount of silicon used. The Company expects underproportional growth in the Trading segment, however. This is due, on the one hand, to the Group focusing its activities on the production area and on expanding its capacity for wafers and solar cells, and on the prioritising of external solar cell customers. On the other hand, it is also becoming more and more difficult to purchase third-party products on the open market. 48 Annual Report 2005 I Management report I Remuneration report ErSol Solar Energy AG Remuneration report The structure of the Company's remuneration system for The management bonus is granted as a performance- the Board of Management is fixed by the Supervisory related payment. It breaks down into three parts, Board and regularly examined. Remuneration for comprising the overall performance of the Company, the members of the Board of Management comprises both departmental results, and the personal performance of non-performance-related and performance-related the individual member of the Board of Management. The elements. The non-performance-related parts consist of a Supervisory Board applies objective criteria by agreeing fixed salary and payments in kind, while the individual objectives with each member of the Board of performance-related components comprise both the Management. management bonus and components that offer longterm incentives. Pension plans have not been granted to As a further element of the variable remuneration, the the members of the Board of Management. Supervisory Board grants stock options to act as a longterm incentive. (See the Notes for further information on The criteria used to determine the appropriate the Company's incentive system based on share option remuneration for the relevant member of the Board of programmes to retain key personnel). Management include his particular responsibilities, his personal performance, and the economic situation, The General Meeting of ErSol AG resolved on 6 September earnings position and future prospects of the Company. 2005 not to publish the salaries of the individual members The fixed sum, as the basic non-performance-related of the Board of Management. remuneration, is paid as a monthly salary. The members of the Board of Management also receive payments in Please refer to the Notes for information on the total kind, primarily relating to the use of company cars. These remunerations of the Board of Management and payments in kind must be taxed by the individual Board Supervisory Board. of Management members themselves. Loans or advances were not paid to the Board of Management members during the reporting period. 49 ErSol Solar Energy AG Annual Report 2005 I Management report I Employees Employees ErSol's success as a company depends on its employees, and Frank Müllejans as the CFO, received further support who are the cornerstone of every single development in the form of Jürgen Pressl, from the management of and every increase in the Company's value. The ASi Industries, who was appointed to the newly- appreciation that ErSol shows its employees in return is established Board of Management position of COO correspondingly high, as is the quality of the working (Head of the Wafers business segment). conditions and human resources development at ErSol. As of 31 December 2005, the ErSol Group employed a Company pension plan total of 265 people, 140 more than 2004. Of this number, 184 were employed at the parent company ErSol offers its employees three options for its pension ErSol AG, 73 at ASi Industries and 8 at aimex. 35.1% of plan: the staff pension fund, the pension trust and a all of ErSol's employees are women; 16.6% have a direct pension plan. The Company pays contributions to university education. an external pension fund on behalf of its employees, which are then paid out once the relevant conditions are The future development of employee numbers is met. These forms of retirement insurance are financed by characterised by the growth the Company has deferred compensation of the employees. announced: New personnel will be engaged both in the production area and in administration. As a leading company in a key industry of the future, ErSol feels it is incumbent upon it to provide training to young people: Employee compensation rewards performance Possible jobs requiring training include, for instance, microtechnologist and mechatronics specialist. ErSol ErSol employees contribute to the Company's success currently employs a total of 12 apprentices who are and are therefore rewarded for their involvement and being trained or retrained as specialists in these areas. their efforts. This further increases the motivation of employees and allows them to identify more strongly with ErSol. The Company has developed an option New management structure programme for employees in key positions, while production staff are rewarded for their production In conjunction with the IPO and acquisition of ASi successes through a monthly bonus that is fixed Industries, ErSol's management structure has also been according to clearly-defined production targets. The adapted to meet the requirements of a corporation that performance of sales staff is rewarded based on specific is globally active: Dr. Claus Beneking in his role as CEO, agreements on objectives. Development of employment figures 2005 2004 Change in % Business segment Wafers Solar cells Trading Group 50 73 – – 184 122 + 151% 8 3 + 267% 265 125 + 212% Annual Report 2005 I Management report I Environmental report ErSol Solar Energy AG Environmental report As a producer of renewable energy sources, ErSol has environmental management system. The Company has always considered itself as having particular respon- already implemented the necessary environmental sibilities to the environment. From an early stage, the protection procedures and structures, for instance by Company therefore set itself demanding environmental simulating and analysing emergency situations. These targets – well in excess of the statutory regulations – “exercises” are designed to prevent injury to both which have been laid down and documented under personnel and the environment. ISO 14001, and which also apply to the Company's further capacity growth. Results from ongoing test series are the basis for learning how to further improve production processes and procedures from an environmental point of view. Securing the future thanks to an integrated environmental protection system As a result of these initiatives, the Company has succeeded in dramatically reducing the amount of energy consumed, as opposed to energy generated, over the last five years. Against this background, ErSol has introduced a combined quality and environmental management At ErSol, environmental protection is not just an empty system that meets the requirements of DIN EN ISO phrase or a bureaucratic gesture – it is a living value in 14001:2005. The Company also appointed an the Company's daily activities. All of the Company's environmental protection officer and provided the employees are therefore called upon to actively play necessary resources to establish and develop an their part. 51 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements ® Solarzellen CellsCorporate Governance Konzernlagebericht Bilanz The ErSo GuV Brief anOutlook die Income Aktionäre Mitarb Facts and The company Statement Wa Entwicklung des Eigenkapitals ® Kontaktdaten GuV Bericht des Aufsichtsrats Mitarbeiter Anhang Letter toAnhang the shareholders Kontaktdaten Financial statement Cash Flow Statement Aktio Income Statem ® Mitarb Financial position Mitarbeiter Mitarbeiter GroupFinanzlage management report Income Statement Mitarbeiter Aktionärsstruktur Konze Risk managemen Balance Sheet Vermögenslage Zukunftssicherung Fi® Risk management ® Financial statement Bilanz Sh Vermögenslage Letter to the shareholders Solid Zukunftssicherung Notes Balance Sheet Financial statement Othe Solid Vermögens 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2005 Solarzellen Wafers 2005 Solar 2005 Wafers Unternehmensbereich Energy Solarzellen Facts and figures Ingots Contact Bericht des Aufsichtsrats 2005 Zukunftssicherung Mitarbeiter Outlook The company Konzernlagebericht Milestones 2005 IngotsWafers Investor Relations Solar 52 Balance sheet 54 Income statement 56 Cash flow statement 57 Statement of changes in equity 58 Notes 60 1. General information 60 2. Accounting and valuation principles 61 3. Notes to the income statement 73 4. Notes to the balance sheet 80 5. Other disclosures 89 Annual Report 2005 I Consolidated financial statements ErSol Solar Energy AG ol share beiter figures afers Bilanz Cells GuV onärsstruktur ment tnanzlageGuV ernkennzahlen beiter hareholder structure ® Outlook rance information lage ® Milestones 2005 Sheet nt ement cherung Statement Solar Notes rSolid to the shareholders Finanzlage dolid sstruktur Prognosebericht eanagement Statement olid cial statement dSolid d ®board sstruktur yolid the supervisory Solid dSolid financial statements Solid Balance Sheet lid mögenslage anagement Solid Solid Solid anzkalender Solid Solid Solid ding the future Anhang Solid Solid Solid Konzernkennzahlen Solid Changes in Equity GuV vidend policy Notes Finanzkalender Solid ermögenslage Solid Solid Solarzellen ukunftssicherung Solid Solid h Flow Statement Solid ncome Statement Mitarbeiter Wafers Solid Financial position Vermögenslage Kontaktdaten Kontaktdaten cial statement Solid ® report Meilensteine 2005 lder structure up management Income Statement isk management Solid Zukunftssicherung Solid Financial position n rs äftsbericht ells ells gy llen 05 nual olar rs 05 tWafers Wafers 2005 2005 Sol Cells Annual Energy Solar olar Ingots ErSol Ingots 2005 Cells Wafers 2005 Solar Solarzellen Ingots Solid of Changes in Equity Solid Solid Mitarbeiter Notes sh Flow Statement Bilanz Vermögenslage cht des Aufsichtsrats kunftssicherung ErSol Solid Wafers inancial statement Risk management Annual Finanzkalender Outlook Balance Sheetboard Zukunftssicherung Solid port by the supervisory 2005 inancial statement Energy Solar Vermögenslage Solar Solid Dividendenpolitik ErSol Aktie Solid Risk management Letter toDie the shareholders Outlook Cash Flow Statement häftsbericht GuV Finanzkalender hareholder structure Ingots Solid Wafers Governance Solid Aktionärsstruktur Notes fCorporate Changes in Equity Ingots Energy afeguarding the future Solid Balance Sheet Vermögenslage Safeguarding the future2005 Solar Milestones Income Statement Mitarbeiter Solarzellen Annual Solid Anhang Zukunftssicherung Risk management Solid ort by the supervisory board Dividendenpolitik Vermögenslage Cells An unsere Aktionäre Solid Shareholder structure Financial statement Anhang Report ®the future Energy Finanzkalender äftsbericht Corporate Governance Solid Safeguarding Solid Dividend policy New technologies Risk management Cells Bericht des Aufsichtsrats Ingots Wafers Notes Changes in Equity Cells Financial position guarding the future Solid Ingots ErSol GuV tFinancial ofSolar Changes in Equity Solid Vermögenslage Aktionärsstruktur Solid Notes statement Annual Solar Solid eguarding the future Balance Sheet k management Bilanz Mitarbeiter Solid olarzellen Letter to the shareholders Report Kontaktdaten Konzernabschluss Anhang Dividend policy Solid management Income Statement Wafers Solarzellen Vermögenslage Cells financial Bericht des Aufsichtsrats Solar Solid Aktionärsstruktur Shareholder structure Solid Ingots Finanzlage Report Bilanz ® videndenpolitik Outlook äftsbericht Solid vidend policy Solid Balance Sheet Wafers nancial statement unftssicherung olarzellen Bilanz nternehmensbereich Konzernkennzahlen statements estor Relations Solid ermögenslage ing the future ionärsstruktur Solid ow Statement Our employees Income Statement Solid ErSol denpolitik Solid Solid nancial statement Solar Annual Solid Brief an die Aktionäre Report Ingots 2005 Solid nges in Equity nd policy AG Solid anagement Wafers ® Wafers Notes ntaktdaten rgy y the supervisory board Unternehmen arzellen Solar Solid 2005 ndenpolitik cial position Our employees GuV cherung Wafers enpolitik enslage Ingots Solid olid Anhang me Statement 2005 rSol des Aufsichtsrats ture ngots olid Solar Wafers ement in Equity lid Solid elations er information nnual yeten idSheet Notes2005 ment Meilensteine yafers port ement ®figures ere Bilanz nslage ls ellen d Cells and rognosebericht ang 005 ent tns richt The company® fers ity lar ie Aktionäre ® ol 05 ployees nzahlen ots s rzellen board al ErSol sareholders n 5 fers dar Consolidated (IFRS) The figures speak for themselves: in 2005 ErSol generated a healthy profit and steadily increased its corporate value. At the same time it created a basis for further growth. Here you can obtain detailed information on our corporate position. 53 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Balance sheet Balance sheet as of 31 December 2005 Notes 31.12.2005 7 ‘000 31.12.2004 7 ‘000 Cash and cash equivalents 4.1 129,155 4,112 Trade receivables 4.2 5,026 2,786 Receivables from related parties 5.5 176 0 Other assets 4.4 4,779 1,199 Advances paid 4.3 775 103 Inventories 4.3 14,139 2,130 154,050 10,330 Assets Current assets Total Noncurrent assets 54 Advances paid 4.3 9,376 0 Intangible assets 4.5 12,255 4 Property, plant and equipment 4.5 40,121 5,727 Investments in associates 4.5 589 0 Goodwill 4.5 17,983 0 Deferred tax assets 4.6 1,120 1,558 Total 81,444 7,289 Total assets 235,494 17,619 Annual Report 2005 I Consolidated financial statements I Balance sheet ErSol Solar Energy AG Notes 31.12.2005 7 ‘000 31.12.2004 7 ‘000 Liabilities Current liabilities Trade payables 4.7 11,723 3,970 4.9, 5.5 0 25 4.3 1,223 0 Provisions 4.10 206 630 Financial liabilities 1,616 Liabilities to related parties Advances received on orders 4.11 4,802 Current income tax liabilities 3.8 764 281 Other liabilities 4.8 1,886 774 16 95 4.12 1,277 520 21,896 7,911 Derivative financial instruments Accrued subsidies Total Noncurrent liabilities Advances received on orders 4.3 18,892 0 Financial liabilities 4.11 17,604 2,578 Accrued subsidies 4.12 9,504 1,015 4.6 4,713 97 50,713 3,690 72,609 11,601 Deferred tax liabilities Total Total liabilities Shareholders’ equity Subscribed capital Capital reserves Difference from currency translation Profit carryforward and other reserves Net income for the year Total equity Total equity and liabilities 4.13 19,600 5,250 140,715 4,150 30 0 -3,382 -5,192 5,922 1,810 162,885 6,018 235,494 17,619 55 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Income statement Income statement from 1 January to 31 December 2005 Notes 01.01. – 31.12.2005 7 ’000 01.01. – 31.12.2004 7 ’000 Sales revenues 3.1 64,385 37,646 Other operating income 3.1 2,618 767 Change in inventories 4.3 1,952 -1,169 68,955 37,244 Cost of materials 3.3 -46,472 -26,505 Personnel expenses 3.4 -6,319 -3,558 Depreciation, amortisation and impairment 3.5 -3,273 -1,733 Other operating expenses 3.6 -3,433 -2,080 -59,497 -33,876 9,458 3,368 Operating result (EBIT) Income from financing activities 747 26 Expenses from financing activities -848 -371 Gains on foreign currency exchange Financial result 3.7 Profit from associates 3.8 Profit after taxes 56 -79 -424 -71 Profit before income taxes Income taxes 233 132 9,519 2,944 -3,597 -1,134 5,922 1,810 Weighted average, ordinary shares 6,393 2,625 Weighted average, ordinary shares and potential shares 6,394 2,625 0.69 Earnings per share, undiluted, in € 3.10 0.93 Earnings per share, diluted, in € 3.10 0.93 Annual Report 2005 I Consolidated financial statements I Cash flow statement ErSol Solar Energy AG Cash flow statement from 1 January to 31 December 2005 Notes 01.01. – 31.12.2005 7 ‘000 01.01. – 31.12.2004 7 ‘000 9,458 3,368 Cash flow from operating activities Profit before income taxes and interest Adjustments for: Depreciation and amortisation Change in provisions Profit / loss from the disposal of assets 3.5 3,273 1,733 4.10 -425 370 4.5 44 0 -226 -18 -765 -482 -79 95 1,822 1,698 Unrealised gains / losses on foreign currency exchange Other non-cash income/expenses 4.14 Change in value due to derivative financial instruments Changes in working capital: Change in inventories 4.3 -10,386 584 -2,078 -1,430 2,845 1,583 692 -216 Other current assets 9,156 -716 Other current liabilities -1,857 -945 Increase in operating receivables Increase in operating liabilities Change in cash balances unavailable 4.1 Other changes in working capital Interest paid 3.7 Interest payments received 3.7 Net cash from operating activities 0 459 -912 -239 624 26 9,364 4,172 Cash flow from investing activities Payments to acquire assets 4.5 -16,521 -2,045 Payments to acquire subsidiaries and equity interests 4.5 -27,871 0 4.12 1,016 0 -43,376 -2,045 Receipts from investment subsidies Cash used in investing activities Cash flow from financing activities Receipts from the assumption of loans 20,559 0 Loan repayments -8,787 -966 Receipts from appropriations to equity 147,735 0 Net cash flows from financing activities 159,507 -966 125,495 1,161 Net change in cash and cash equivalents available Foreign currency translation of cash and cash equivalents Available cash and cash equivalents at beginning of period Cash acquired from the intraperiod acquisition of subsidiaries Available cash and cash equivalents at period end 233 -79 3,389 2,307 7 0 129,124 3,389 Cash and cash equivalents unavailable 31 723 Cash and cash equivalents at period end 129,155 4,112 57 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Statement of changes in equity Statement of changes in equity from 1 January to 31 December 2005 Issued and fully paid shares Subscribed capital in thousands 7 ‘000 As of 1 January 2005 5,250 5,250 Cash capital increase (resolution of the General Meeting on 8 Dec. 2004) 5,250 5,250 Cash capital increase (resolution of the General Meeting on 6 Sep. 2005) 2,605 2,605 583 583 Capital increase against contribution in kind (resolution of the General Meeting on 6 Sep. 2005) 13,688 Share consolidation 6,844 Capital increase in connection with the IPO on 30 September 2005 2,956 5,912 Elimination of costs of raising equity capital less attributable tax 0 Net profit / loss 0 Increase due to issue of stock options to employees pursuant to IFRS 2 0 Difference from currency translation As of 31 Dec. 2005 0 9,800 19,600 Issued and fully paid shares Subscribed capital in thousands 7 ‘000 4,000 4,000 from 1 January to 31 December 2004 As of 1 January 2002 Subscription and payment for 500,000 shares by New Mine Energy GmbH 0 0 Waiver of interest on dormant holding of shareholders 0 0 Net profit /loss As of 31 December 2002 Entry of the capital increase in the commercial register by New Mine Energy GmbH Contribution of a dormant holding against issue of 750,000 shares 0 0 4,000 4,000 500 500 0 0 Waiver of interest as part of contribution of the dormant holding Net profit / loss As of 31 December 2003 Entry of the capital increase by contribution of the dormant holding in the commercial register Net profit / loss As of 31 December 2004 58 0 0 4,500 4,500 750 750 0 0 5,250 5,250 Annual Report 2005 I Consolidated financial statements I Statement of changes in equity Capital reserves ErSol Solar Energy AG Profit carryforward and other reserves and net profit / loss 7 ‘000 Total equity 7 ‘000 Difference from currency translation 7 ‘000 4,150 0 -3,382 6,018 7 ‘000 7,875 0 0 13,125 13,025 0 0 15,631 2,917 0 0 3,500 118,232 0 0 124,143 -7,934 -7,934 2,431 2,431 112,729 0 0 118,640 0 0 5,922 5,922 19 0 0 19 0 30 0 30 140,715 30 2,540 162,885 Paid-in capital Capital reserves Total equity 7 ‘000 7 ‘000 Profit carryforward and other reserves 7 ‘000 0 0 -3,390 610 2,000 0 0 2,000 0 113 0 113 0 0 -373 -373 2,000 113 -3,763 2,350 -2,000 1,500 0 0 3,000 0 0 3,000 7 ‘000 287 0 287 0 0 -1,429 -1,429 3,000 1,900 -5,192 4,208 -3,000 2,250 0 0 0 0 1,810 1,810 0 4,150 -3,382 6,018 59 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes Notes to the ErSol consolidated financial statements as of 31 December 2005 1. General information ErSol Solar Energy Aktiengesellschaft, Erfurt, is obliged, pursuant to Art. 315a German Commercial Code (Handelsgestzbuch, HGB), to prepare consolidated financial statements and a management report in compliance with International Financial Reporting Standards (IFRS) as they are applicable in the European Union. 1.1 Companies consolidated The present consolidated financial statements as of 31 December 2005 were prepared in accordance with the IFRSs. They include ErSol Solar Energy Aktiengesellschaft, Wilhelm-Wolff-Straße 23, Erfurt, Germany, as parent company (hereinafter referred to as “ErSol”), as well as fully consolidated subsidiaries, aimex-solar GmbH, In den Weiden 7, Erfurt, Germany, founded in October 2004 (hereinafter referred to as “aimex”), and ASi Industries GmbH, August-BroemelStraße 6 (hereinafter referred to as “ASi”) in Arnstadt, Germany, acquired by way of a purchase agreement dated 29 July 2005 (for more details see: 2.2.3 Changes in companies consolidated). The holding in the inactive ASi SILIZIUMTECHNOLOGY GmbH, August-Broemel-Straße 6, Arnstadt, Germany, also acquired by way of a purchase agreement dated 29 July 2005, was included in the companies consolidated. ErSol New Technologies GmbH, Wilhelm-WolffStraße 23, Erfurt, Germany (hereinafter referred to as “ENT”), founded in December 2005, is also consolidated. ErSol holds 100% of the shares in each of these subsidiaries. The ErSol Group operates in three main business areas. ASi manufactures monocrystalline silicon ingots and wafers. ErSol AG produces and distributes mono- and multicrystalline solar cells. aimex deals in both solar modules manufactured from ErSol cells and products from other manufacturers. aimex’s business activities were conducted by the parent company in the first six months of 2004. The increase in sales and the cost of materials between 2004 and 2005 is attributable Group-wide to the expansion of capacities in the 2nd half of 2005. ASi was included in the consolidated financial statements from the date of its initial consolidation (8 September 2005). The Group’s comparative figures for the previous year are thus only comparable to a limited extent. The business of the ErSol Group is currently only subject to insignificant seasonal influences. In the past financial year, ErSol began to expand its production capacities at its existing site to around 60 MWp and to expand the production capacities of ASi to 45 MWp. A substantial proportion of the production output has been sold until the year 2015 by way of long-term supply agreements; a supply of raw materials has also largely been secured until 2015 with the acquisition of ASi and the conclusion of several long-term supply contracts. 60 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG 2. Accounting and valuation principles 2.1 Principles behind the preparation of the financial statements The consolidated financial statements of ErSol AG were prepared in compliance with the IFRSs applicable in the EU. All valid and compulsory standards applicable as of 31 December 2005 were applied. Adjustments to the accounting and valuation principles used the previous year were not necessary, since the Company made use of the option to apply all the standards to be applied for the first time on 1 January 2005 ahead of schedule, and applied the standards voluntarily from 31 December 2004. The following standards and interpretations already published by the IASB, but only compulsory from 1 January 2006, were not applied by the Company ahead of schedule. Any effects of their first application from 1 January 2006 are described below: – IAS 19 (amended) Employee benefits: this amendment relates in particular to an alternative way of recognising actuarial gains and losses, as well as additional disclosure obligations. As the Company does not intend to amend its accounting and valuation policies, the effects will only apply to the Notes to the financial statements. The ErSol Group will apply the amendment from 1 January 2006. – IAS 39 (amended) Hedge accounting for future, doubtful payment flows from planned intragroup transactions: this amendment is not relevant for the ErSol Group, since there were no intragroup transactions and none are planned for the near future, thus no hedges were set up for these. – IAS 39 (amended) Provisions for the use of the fair value option: this amendment relates to the definition of financial instruments qualified as financial instruments to be measured at fair value through profit or loss. The ErSol Group assumes that this amendment will have no significant effect on the classification of its financial instruments and that it is thus in compliance with the amended criteria. The amendments will be taken into account from 1 January 2006. – IAS 39 and IFRS 4 (amended) Financial guarantees: This amendment of IAS 39 and IFRS 4 is not relevant for the ErSol Group. – IFRS 1 (amended) First-time application of IFRS and IFRS 6 (amended) Exploration and Evaluation of Mineral Resources: these amendments are irrelevant, since the Group is not applying the IFRS for the first time and IFRS 6 is not relevant to the business of the ErSol Group. – IFRS 7 Financial Instruments – Information on and a further amendment to IAS 1: Presentation of Financial Statements – Capital Disclosures (applicable from 1 January 2007): IFRS 7 introduces new requirements for the disclosure of financial instruments, which supersede the disclosure obligations in IAS 30 and supplement the disclosure obligations set forth in IASs 32 and 39. The amendments to IAS 1 relate to disclosure obligations concerning the aims, methods and processes of capital management. ErSol will apply this standard from 1 January 2006. Changes will only arise for the accompanying Notes to the financial statements, however. 61 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes – IFRIC 4 Determining Whether an Arrangement Contains a Lease: the Company is currently investigating to what extent this interpretation is applicable to the ErSol Group. – IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds: this statement is not applicable to the ErSol Group. – IFRIC 6 Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment: this statement is not applicable to the ErSol Group. The consolidated financial statements are generally prepared in euros on the basis of amortised cost. All figures are in 7 ’000, unless specified otherwise. 2.2 Consolidation methods The companies consolidated include the parent company and the subsidiaries listed below. All key intragroup balances and transactions were eliminated. 2.2.1 Information on the subsidiaries Subsidiary, headquarters Holdings in the subsidiary aimex-solar GmbH, Erfurt 100% ASi Industries GmbH, Arnstadt 100% ErSol New Technologies GmbH, Erfurt 100% ASi SILIZIUMTECHNOLOGY GmbH, Arnstadt 100% Subsidiaries are all companies (including purpose-built companies), at which the Group has control over the financial and business policy – regularly accompanied by a majority of the voting rights of more than 50%. When evaluating whether control is present, account is taken of the existence and effect of potential voting rights currently exercisable or convertible. Subsidiaries are included in the consolidated financial statements (full consolidation) from the point at which control is transferred to the Group. They are deconsolidated at the point at which control ends. The acquisition method is used for the accounting of acquired subsidiaries. The costs of the acquisition correspond to the fair value of the assets pledged, the equity instruments issued and the debts arising or assumed at the date of the transaction, plus the costs directly attributable to the acquisition. Assets, debts and contingent liabilities identifiable within the scope of a company merger are measured at their respective fair values at the date of acquisition at the time of their initial consolidation, irrespective of the scope of minority interests. The excess costs of the acquisition over the Group’s holding in the net assets to be measured at fair value are recognised as goodwill. 62 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG If the acquisition costs are lower than the fair value of the net assets of the acquired subsidiary, the difference is recorded directly in the income statement. Intragroup transactions, balances and unrealised gains from transactions between Group companies are eliminated. Unrealised losses are also eliminated, unless the transaction indicates impairment of the transferred asset. The accounting and valuation principles of the subsidiaries were amended, insofar as necessary, to ensure uniform accounting throughout the Group. 2.2.2 Associates The company Shanghai Electric Solar Energy Co., Ltd., which was co-founded in 2005 and has since been operated with two Chinese partners, is consolidated at equity at in line with the holding of 35%. 2.2.3 Changes in companies consolidated Besides ErSol as parent company and the subsidiary aimex, which has been fully consolidated since its foundation in October 2004, companies consolidated include the subsidiaries ASi, ENT and ASi SILIZIUMTECHNOLOGY GmbH, acquired in the third quarter of 2005. By way of a contract of sale and assignment dated 29 July 2005, ErSol acquired 100% holdings in ASi Industries GmbH (hereinafter referred to as "ASi") and ASi SILIZIUMTECHNOLOGY GmbH. The costs of purchasing these holdings amounted to a total of 7 30,491 thousand (thereof ASi SILIZIUMTECHNOLOGY GmbH 7 25 thousand). The purchase price was calculated taking various adjustments into account, and amounts to 7 30,181 thousand. Directly attributable incidental acquisition costs of 7 310 thousand were also incurred. In accordance with the terms of the agreement, ErSol authorised the seller – with respect to a part-payment of the purchase price of 7 3,500 thousand – to subscribe to a total of 583,334 new no-par value bearer shares, each with a proportional interest in the share capital of 7 1.00, at an issuing price of 7 6.00 per share, corresponding to a total issuing price of 7 3,500 thousand, by way of a capital increase against contribution in kind from authorised capital. No market price was available at the time of purchase. The issuing price was based on a simplified company valuation and corresponds to the capitalised earnings value. This was based on the purchase price of ErSol for the majority shareholder Ventizz, taking into account any interim changes in general terms and conditions (Renewable Energy Sources Act, EEG). The residual amount of the purchase price was to be paid in full in cash by 31 December 2005. The initial consolidation of ASi took place at the time of acquisition on 8 September 2005. Within the scope of the initial consolidation of ASi, hidden reserves of 7 12,857 thousand for intangible assets million were discovered in the consolidated financial statements. These consisted of 7 11,784 thousand for process technology in the pulling and slicing process, 71,014 thousand for supply agreements, and 7 59 thousand for an existing order backlog. Taking into account deferred tax liabilities on these hidden reserves (7 4,969 thousand), as well as a fair value of the financial liabilities 7 213 thousand higher than their book value, the goodwill remaining upon initial consolidation amounted to 7 17,983 thousand. This goodwill is based on future earnings expectations of ASi within the ErSol Group. A considerable portion of this goodwill is also attributable to the know-how of the regular staff with respect to ASi’s manufacturing processes. 63 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes At the time of initial consolidation, the acquisition of ASi affected ErSol’s balance sheet as follows: Addition in 7 ‘000 Goodwill from capital consolidation 17,983 Intangible assets 12,868 Property, plant and equipment 17,143 Other assets 3,298 Total assets 51,292 Financial liabilities 6,469 Accrued subsidies 7,388 Deferred taxes 5,045 Other liabilities 2,039 Total liabilities 20,941 Consolidated net profit as of 31 December 2005 contains an earnings contribution of ASi of 7 32 thousand. Assuming that the acquisition of ASi had already taken place as of 1 January 2005, pro forma consolidated sales would have amounted to 7 72,030 thousand and consolidated net profit to 7 6,086 thousand. ASi SILIZIUMTECHNOLOGY GmbH is not operational. The goodwill of 710 thousand arising from its initial consolidation was therefore written off. ErSol New Technologies GmbH, which was founded on 2 December 2005, is also included in the consolidated financial statements. The ordinary share capital of this company of 7 250 thousand is held in its entirety by ErSol and was fully paid up as of 31 December 2005. Shanghai Electric Solar Energy Co., Ltd. (SESE) is consolidated at equity in line with the holding of 35%. Its ordinary share capital amounted to 7 1,800 thousand as of 31 December 2005. The pro-rata ordinary share capital of ErSol AG amounts – in accordance with the holding of 35% – to 7630 thousand (corresponds to acquisition costs of ErSol AG). SESE made a loss of 7 202 thousand (translation at the average exchange rate) in the period under review, with ErSol AG accounting for 7 71 thousand. SESE’s equity amounted to 71,670 thousand as of 31 December 2005 (translation at the market rate on the balance sheet date). At the balance sheet date SESE had assets totalling 72,020 thousand and debts totalling 7 349 thousand. The last available annual financial statements are dated 31 December 2005. 2.3 Intangible assets Individually acquired intangible assets are capitalised at cost. Intangible assets acquired within the scope of a company merger are capitalised at their respective fair values at the time of acquisition. After their first entry in the books the historical cost model is applied. Amortisation of intangible assets with limited useful lives is recorded under “Depreciation and amortisation” in the income statement. 64 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG Impairment tests are carried out at least once a year on intangible assets, either on individual assets or on the level of the cash-generating unit (CGU). The useful lives of the assets are also reviewed annually; prospective adjustments are made, if necessary. Acquired computer software licences are capitalised at the costs that were necessary to purchase the licences and make the software usable. The capitalised costs are written down using the straight-line method over the expected economic life of the software (3 to 5 years). Of the intangible assets that arose in connection with the initial consolidation of ASi, the drawing technology will be written down over 7 years and the basic technology will be written down over 15 years. Most of the remaining intangible assets will be written down by the end of the following financial year. As of 31 December 2005, the residual book value of the process technology to be written down over 7 or 15 years amounted to 711,254 thousand. No extraordinary write-downs were carried out in the period under review. 2.4 Property, plant and equipment Property, plant and equipment are measured at cost less accumulated depreciation and impairment expenses. In the event of an item of property, plant and equipment being sold or scrapped, its respective costs and accumulated depreciation will be written off; any gain or loss realised on its disposal will be reflected in the income statement. The costs of acquiring or producing an item of property, plant and equipment comprise the purchase price, as well as all directly attributable costs incurred in transferring the asset to its location and making it operational for its intended purpose. Subsequent expenses, such as maintenance and repair costs incurred after the assets have been commissioned, are recorded as expenses in the period in which they arise. Subsequent costs were capitalised within the scope of the component-based approach. Interest costs incurred in financing the asset during the acquisition or production phase were recognised as expenses and not capitalised for the respective asset. Depreciation is calculated on the straight-line basis over an estimated useful life, taking account of the respective residual value. Depreciation is currently being calculated irrespective of a residual value, since utilisation is unlikely after the useful life has expired. Insofar as assets contain several components with different economic lives, the components are written down individually over their respective economic lives. The following useful lives are estimated for the individual asset groups: Technical plant and machinery 5 to 10 years Other office equipment, fixtures and fittings 3 to 23 years The useful life, estimated residual values and the method of depreciation for property, plant and equipment are reviewed periodically to ensure that the method and period of depreciation is in keeping with the expected useful life of the items of property, plant and equipment. 65 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes 2.5 Research and development expenses Research and development expenses are recorded as expenses as they occur. Expenses in connection with development projects (relating to the design and testing of new or improved products) are recorded as intangible assets, if – taking economic and technical feasibility into account – it is likely that the project will be successful and if the expenses can be reliably determined; otherwise, the development costs are recorded as expenses. Development costs previously recorded as expenses are no longer carried as assets in subsequent periods. Capitalised development costs with a limited useful life are regularly written down on a straight-line basis over their expected useful life from the beginning of commercial production of the product. No development costs have been capitalised to date, as the future utility is not sufficiently certain. 2.6 Impairment of property, plant and equipment, intangible assets and goodwill Intangible assets that have an indeterminate useful life or are not yet ready for use and goodwill are not amortised on a scheduled basis, but are subject to annual impairment testing. Assets subject to scheduled amortisation, on the other hand, are only subjected to an impairment test, if events or indicators suggest that their book value may no longer be achievable. An impairment expense is recorded in the amount by which the book value of an asset exceeds its achievable amount; the latter corresponds to the higher of the fair value of the asset less selling costs, and its utility value. In order to evaluate impairment, the assets are grouped on the lowest level for which cash flows can be identified separately (“cash-generating unit” (CGU)). In the period under review, the smallest, separately identifiable CGUs were the segments Solar Cells, Trading and Wafers. Impairments were not necessary in the period under review. The goodwill from the purchase price allocation of ASi GmbH is allocated in full to the Wafers segment. The utility value was determined using the discounted cash flow method based on ASi’s budget planning. The calculation was based on the following assumptions: a) The starting point was the Company’s budget for the years 2006 to 2008 with subsequent extrapolation; the potential free cash flows were then determined on this basis. The sales and earning trends underlying the budget plan take account of the market situation, which is currently characterised by considerable surplus demands. b) The discount interest rate was determined based on a basic interest rate of 4.25% and a risk premium of 6.80%. This gives a discount interest rate of 11.05% for the planning period for the years 2006 to 2008; growth allowance of 1.0% was also applied for the years from 2009. 66 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG 2.7 Leases When using leased property, plant and equipment, the requirements of the finance lease pursuant to IAS 17 “Leases” are fulfilled if all major risks and opportunities related to the property were transferred to the relevant Group company. All other leases are classified as operating leases. Since its foundation, the ErSol Group has only entered into operating leases (primarily leasing of office and production areas, leasing of cars and office equipment, fixtures and fittings). Lease payments arising from operating leases are recognised in income on a straight-line basis over the term of the respective lease. Any concessions received or to be awarded as an incentive to enter into an operating lease agreement are also recognised on a straight-line basis over the term of the lease. 2.8 Cash and cash equivalents Cash and cash equivalents (cash) are cash-in-hand, cheques and immediately available bank balances with an original term of up to three months. Cash and cash equivalents are valued at their nominal value. 2.9 Financial instruments A financial instrument is a contract that simultaneously leads to a financial asset at one company and to a financial liability or an equity instrument at another company. These include original financial instruments, such as cash and cash equivalents, trade receivables and payables, and other receivables or liabilities. They also include derivative financial instruments, which can be used to hedge against risks of currency exchange rate and interest rate fluctuation. Financial instruments are recognised in the consolidated financial statements from the time the Group becomes a contracting party to the respective financial instrument. Financial assets are classified into the following categories: financial assets recognisable in income at their respective fair values, loans and receivables, held-to-maturity and available-for-sale financial assets. The classification depends on the respective purpose for which the relevant financial asset was acquired. Financial assets are classified the first time they are recorded and are reviewed at each balance sheet date. Besides the accounting of cash and cash equivalents, the only other categories of financial assets of relevance in the period under review were those recognisable in income at their respective fair values due to derivative financial instruments entered into, and loans and receivables. The Company did not hold any financial assets that would have been attributable to another category. Financial liabilities primarily consist of just those liabilities to be valued at amortised cost in compliance with the effective interest method. Liabilities recognisable in income at their respective fair values only arise from derivative financial instruments with a negative market value. 67 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes All purchases and disposals of financial instruments are recorded on the day of trading, i.e. on the day the Group commits itself to purchasing or selling the asset. Financial assets and financial liabilities not classified as “recognisable in income at their fair value”, are initially recorded at their respective fair value plus transaction costs. Financial assets and financial liabilities in the category “recognisable in income at fair value” are initially recorded at their respective fair value. Financial assets are written off if the rights to payments expire or were transferred, and the Group has essentially transferred all risks and opportunities connected with the property. Financial liabilities are written off if these are settled, i.e. if the obligations set forth in the contract are honoured, revoked or have lapsed. Loans and receivables and financial liabilities not recognisable in income at their respective fair value, are carried at amortised cost in compliance with the effective interest method. The amortised cost of a financial asset or financial liability is the term used to describe that amount at which a financial asset or liability was valued when first recorded, less repayments, plus or minus the accumulated amortisation of a potential difference between the original amount and the amount repayable on the final due date (agio, disagio, transaction costs), in compliance with the effective interest method and, less any loss for impairment or uncollectibility. Financial assets and financial liabilities in the category “recognisable in income at fair value” are measured at their respective fair value after being entered in the accounts for the first time. Realised and unrealised gains and losses arising from the change in the fair value of assets in the category “recognisable in income at their respective fair value” are recognised in income in the period in which they arise. There is no active market for the financial instruments held or the instruments in question are not listed financial instruments. The fair values are calculated using appropriate valuation methods. These include references to recent transactions between independent business partners, the use of current market prices of other financial instruments essentially similar to the financial instrument in question, discounted cash flow methods, as well as option price models that take into account the special circumstances of the issuer. Due to their maturity and the application of standard market interest rates, the amortised cost of current assets and liabilities are generally equivalent to their fair value and the nominal or repayment amount. If the fair value of other financial instruments deviates from the book value, this is stated accordingly. It is reviewed at each balance sheet date whether there are objective indicators for impairment of a financial asset or a group of financial assets. 2.10 Trade receivables Trade receivables are initially recorded at fair value and subsequently valued at amortised cost in compliance with the effective interest method, less impairment. Impairment of trade receivables is recorded if there are objective indicators that suggest that the debts are not fully recoverable. 68 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG 2.11 Inventories Inventories are valued at cost upon acquisition. The first-in, first-out principle is applied to determine the cost of production supplies. Production costs comprise full production-related costs. Interest costs are not capitalised. Subsequent evaluation is based in each case on the lower of cost and the realisable sale price, less production and selling expenses still accruing. A lower valuation was not necessary due to the market situation. 2.12 Financial liabilities Financial liabilities are valued at their first inclusion in the financial statements at their fair value, less transaction costs. In subsequent periods, they are measured at amortised cost. The transaction costs are carried as an expense using the effective interest method over the term of the respective financial liability. Noncurrent financial liabilities are charged with a variable interest rate. Due to the variable interest rate charged on financial liabilities, the amortised cost correspond to the fair value. Loans payable are classified as current liabilities, provided the Group does not have the unconditional right to postpone paying off the liability until a date at least 12 months after the balance sheet date. 2.13 Income taxes The amount of income taxes depends on the profit level and takes deferred taxes into account. Deferred taxes are calculated using the asset and liability method. Deferred income taxes reflect the net tax effect of temporary differences between the book value of an asset or a liability in the balance sheet and the tax value. In accordance with IFRS, the expected tax rebates from the elimination of tax loss carryforwards are also capitalised. Deferred tax assets and liabilities are valued using the tax rates anticipated for the period in which the temporary differences are expected to reverse. The expected tax rate is determined on the basis of the tax rates converted to applicable law for these periods as of the balance sheet date. Deferred tax assets and liabilities are recorded irrespective of the point at which temporary accounting differences are expected to reverse. Deferred tax assets are set up to the extent to which it is likely that a future taxable profit will be achieved, against which temporary differences and loss carryforwards could be used. The deferred tax assets and liabilities are not discounted and are carried in the balance sheet as net noncurrent assets or net noncurrent liabilities. 69 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes 2.14 Equity The subscribed capital of 7 19,600 thousand (31 December 2004: 7 5,250 thousand) is composed of 9.8 million (31 December 2004: 5.25 million) no-par value bearer shares with a value of 7 2 per share. Each no-par value share entitles the bearer to one vote at the General Meeting. Ordinary shares are classified as equity. Costs directly attributable to the issue of new shares or options are carried under net equity after taxes deducted from the proceeds of the issue. Costs directly attributable to the issue of new shares or options, or costs directly connected to a company acquisition, are included in the cost of the respective company acquisition as part of the consideration for the acquisition. 2.15 Public subsidies Within the scope of its investment activities, the ErSol Group receives both investment subsidies and investment grants. The investment grants and subsidies for property, plant and equipment are carried as liabilities under the item “accrued subsidies” and written back in income over the useful life of the subsidised asset under the item “Other operating income”. The ErSol Group meets the criteria for receiving investment allowances: a requirement is that a plant must be located in the development area and operate, for example, in the manufacturing industry. A greater allowance is approved for small and medium-sized companies. ErSol met these requirements by 2004. Eligible for subsidies are commodities that are new from a structural perspective. Eligibility commences with the procurement of new commodities. 2.16 Provisions Provisions are set up insofar as a present obligation to a third party arises from a past event that is likely to lead to an outflow of resources, the amount of which can be reliably estimated. This means that the probability of occurrence has to be greater than 50%. Other provisions are only set up for legal or constructive obligations towards third parties. Provisions that do not lead to an outflow of resources as early as the following year are shown at the discounted amount payable as of the balance sheet date, if the interest effect is significant. The discount rate is based on interest rates before taxes, which reflect current market expectations with respect to the interest effect and the risks specific to the particular liability. The amount payable also includes the anticipated cost increases. Provisions are not offset against claims for recourse. Due to the maturity of the provisions no discounting was necessary in the period under review. 2.17 Contingent liabilities Contingent liabilities are potential obligations that may arise from past events, the existence of which is only confirmed by the occurrence of one or several uncertain future events outside the Group’s sphere of influence. In addition, present liabilities may become contingent liabilities if the probability of the outflow of resources is not sufficiently likely to warrant the creation of a provision and/or the extent of the liabilities cannot be estimated with enough certainty. The value of the contingent liabilities corresponds to the scope of liability that exists on the balance sheet date. 70 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG 2.18 Revenue recognition Sales revenues are recognised if the following conditions are cumulatively fulfilled: – the primary risks and opportunities connected with the ownership of the goods and products sold have been transferred to the buyer; – the Company retains neither a continuous right of disposal, as is common with equitable property, nor effective control over the items and rights sold; – the amount of revenue can be reliably determined; – it is sufficiently likely that the economic benefit from the sale will accrue to the Company; – the costs incurred or still to be incurred in connection with the sale can be reliably determined. These principles apply to all segments. ErSol outsourced certain parts of production to external companies. In these cases, in which ErSol retains power of disposal, a sale is only recognised according to IFRS when the final product is sold. Revenue reductions, such as bonuses, discounts or rebates, reduce sales revenue accordingly. 2.19 Foreign currency translation The consolidated financial statements are prepared in euros, which is the functional currency and the reporting currency of ErSol. Transactions in foreign currency are translated at the exchange rate prevailing when they occur. Foreign currency monetary assets and liabilities are translated into euros using the exchange rate at the balance sheet date. Shanghai Electric Solar Energy Co., Ltd. is an economically independent foreign entity pursuant to IAS 21. The financial statements of the economically independent foreign entity were translated according to the functional currency concept as set forth in IAS 21: – both monetary and non-monetary assets and liabilities were translated at the exchange rate as of the balance sheet date, – the income and expenses items were translated using the weighted-average exchange rate for the year, – equity was translated using the historical exchange rates. Based on the financial statements, exchange differences are recorded from: – the translation of income and expenses items using the average exchange rate for the year and the translation of assets and liabilities using the rate prevailing on the balance sheet date, – changes in equity. These changes are recognised in equity with no effect on the operating result. 71 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes 2.20 Derivative financial instruments The Group employs derivative financial instruments to hedge against the risks of exchange rate fluctuation. Derivative financial instruments are valued and recognised for the first time on the day the contract is concluded and in subsequent periods at their respective fair value. The method for recording gains or losses depends on whether the derivative was qualified as a hedging instrument and, if this is the case, on the hedged item. No derivative financial instruments were designated as hedging instruments as defined by IAS 39 in the periods under review. Changes in the fair value of such derivatives are thus recorded directly in the income statement. 2.21 Segment reporting A business segment is a group of assets and operating activities that provides products or services, which differ in terms of their risks and opportunities from those of other areas of business. A geographical segment provides products or services within a certain economic environment with risks and opportunities different from those in other economic environments. 2.22 Critical estimates and assumptions in the accounting The Group makes certain estimates and assumptions concerning the future. Naturally, it is extremely rare for the estimates derived from this to correspond to actual events later. The estimates and assumptions that bear a significant, inherent risk in the form of a major adjustment of the book values of assets and liabilities within the next financial year are presented below: The tax loss carryforwards from 2004 were lost due to the issue of new shares and the subsequent acquisition of equity holdings in February and April 2005, as well as the continuation of business operations with predominantly new operating assets on 29 September 2005, and are thus no longer usable in future. The estimation with regard to deferred taxes on tax loss carryforwards (see 4.6) is critical in terms of their future usability. If, within a period of three years, there is a change in shareholders holding more than 50% and predominantly new operating assets are brought in, the tax loss carryforwards arising after 29 September 2005 will no longer be usable from the point of the cumulative coincidence of the facts of this change pursuant to Art. 8 (4) German Corporation Tax Law (Körperschaftsteuergesetz, KStG). ErSol assumes that these facts will not coincide before full utilisation of the loss carryforwards. The estimates concerning the useful lives of the property, plant and equipment are based on past experiences and manufacturers’ instructions. Should the useful lives be curtailed as a result of technical advancement or be extended as a result of better usage, this would have a significant effect on the presentation of net assets and results of operations. 72 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG 2.23 Employee benefits In the case of defined contributions plans, ErSol pays contributions to the statutory pension fund, as well as private pension funds and pension insurance schemes under the terms of a statutory or contractual obligation, or on a voluntary basis. ErSol does not have any other payment obligations beyond the payment of these contributions. The contributions are recognised under personnel expenses as due. Advance contribution payments are recognised as assets to the extent to which a right to claim repayment or reduce future payments exists. For information on the stock option programme see section 4.13 Equity. 3. Notes to the income statement 3.1 Sales revenues Sales revenues are generated from the sale of multi- and monocrystalline ingots, wafers and solar cells, as well as solar modules and system components. For information on the distribution of revenue by segment, please refer to the section on segment reporting. 3.2 Other operating income Other operating income 2005 7 ‘000 2004 7 ‘000 Reversal of deferred subsidies 800 482 Expense allowances 108 94 Valuation allowances 0 9 Investment subsidies 76 0 Insurance rebates 74 5 364 74 Prior-period income Other 1,196 103 2,618 767 The ErSol Group received various public subsidies for investments made in the development area East that will be reversed over the useful life of the subsidised assets (see 4.12). Research and development activities, including the related personnel expenses of around 7 108 thousand (2004: 7 348 thousand), were also subsidised in 2005. The item “Other” contains a contractually agreed one-time licence fee for an asset (7 250 thousand), as well as the remuneration of a supplier due to incomplete fulfilment of a contract (7 730 thousand). 73 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes 3.3 Cost of materials The cost of materials is attributable to the consumption of silicon, ingots, wafers and chemicals, as well as the purchase of merchandise. Purchased services are also allocated to cost of materials. Foreign currency gains and losses from the settlement or valuation of liabilities were allocated to cost of materials and amounted to 7 -37 thousand in 2005 (2004: 7 -87 thousand). 3.4 Personnel expenses Personnel expenses 2005 7 ‘000 2004 7 ‘000 Wages and salaries -5,384 -3,131 -894 -461 Social security Public subsidies 29 57 Other -58 -23 Rent allowance -12 -6,319 3,558 The ErSol Group had 265 employees as of 31 December 2005 (2004: 125 employees). ErSol employed an average of 180 staff in 2005 (2004: 107). The public subsidy offset against personnel expenses relates to public subsidies received for integration measures for employees joining the Company from unemployment. A total of 7 292 thousand (2004: 7 218 thousand) was paid into the statutory pension fund in connection with defined contributions pension plans. The contributions to direct insurance funds amounted to 7 6 thousand (2004: 7 5 thousand) in 2005. A total of 7 11 thousand (2004: 7 4 thousand) was paid into a pension fund in 2005. 3.4.1 Share-based remuneration of employees The Company issued 42,750 stock options to members of the Board of Management and employees of the Company and Group companies on 17 November 2005. To exercise this option the recipient must remain with the Company for three years and the strike price of the share must increase by 25% over the reference price when the subscription right is exercised. The strike price was fixed at the time of commitment; the options have a term of 36 months. The Company estimates the fair value of each option issued at 7 15.58. The fair value was calculated on the basis of the Black-Scholes option price model. The model calculations are based on the following assumptions: – share price at the time of granting, strike price 7 41.75, – expected volatility of the share price 60%, – risk-free interest rate 2.42%, – expected share dividend 0.0%. 74 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG The volatility was determined on the basis of the arithmetic mean of the volatility on the stock exchange index “Prime IG Renewable Energies”, since the Company does not have any previous values. The risk-free interest correspond to the return on a government zero bond with a residual term of three years. Since market conditions have no significant effect on value, these were not considered in the determination of the fair value on the basis of the Black-Scholes model. 3.5 Depreciation, amortisation and impairment Depreciation and amortisation mainly consist of scheduled amortisation of intangible assets and depreciation of property, plant and equipment. In 2005, the goodwill of ASi SILIZIUMTECHNOLOGY GmbH was amortised by 7 10 thousand, due to the company being inactive. Information on the amortisation of intangible assets from the purchase price allocation of ASi Industries GmbH can be found in the Notes on assets. 3.6 Other operating expenses Other operating expenses 2005 7 ‘000 2004 7 ‘000 Administration -2,228 -1,273 Sales and marketing -683 -487 Research and development -325 -176 0 -25 Valuation allowances on receivables Maintenance costs -413 0 Other 216 -119 -3,433 -2,080 The administrative costs include lease payments for the production and administration premises of the ErSol Group in Erfurt of 7 298 thousand (2004: 7 197 thousand) for 2005, monetary transaction costs of 7 317 thousand, as well as auditing, legal and consultancy fees amounting to 7 425 thousand. Selling and marketing costs mainly include the costs of product marketing and logistics. Research and development costs relate to the expenditure in connection with the basic development of solar cells and silicon wafers and are primarily incurred within the scope of a cooperation with the SolarZentrum in Erfurt supported by the Free State of Thuringia. The Company also receives support from a renowned institute with respect to optimising processes for the production of large, monocrystalline silicon wafers. The income under “Other” is mainly the result of the reversal of provisions. 75 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes 3.7 Financial result Financial result 2005 7 ‘000 2004 7 ‘000 Interest income 747 26 Interest expense -848 -276 0 -95 Cost of the fair value valuation Foreign currency gains /losses 233 -79 132 -424 Finance costs include interest payments on loans to finance investments, as well as a working capital line of credit. The forex result stems from the translation of foreign currency balances at German banks. The financial income mainly results from the investment of the proceeds of the IPO. The financial result arising from relations with related persons is explained under the Note “Related party disclosures”. 3.8 Income taxes Income taxes in the period under review are composed of the following, ongoing German corporation tax and trade income tax (paid or owing) and deferred tax assets: Current taxes Deferred taxes Tax expense 76 2005 7 ‘000 2004 7 ‘000 2,868 289 729 845 3,597 1,134 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG The corporation tax rate in 2004 and 2005 was 25% plus the solidarity surcharge of 5.5% of corporation tax. This resulted in an effective corporation tax rate of 26.4%. The effective trade income tax amounted to 16.66%. Taking into account the deductibility of trade income tax from corporation tax, the total tax rate for the companies ErSol and aimex was 38.65%. The total tax rate for ASi GmbH was 37.11%. The following table shows the tax reconciliation account of the tax expense expected in the respective financial year and the actual tax expense reported. For simplicity, a combined tax rate of 38.65% is applied to all reporting periods. 2005 7 ‘000 2004 7 ‘000 Profit before tax 9,519 2,944 Expected tax expense at 38.65% 3,678 1,137 Income from reversal of tax provision previous year -192 0 0 39 Tax-free income 0 -57 Other tax effects 111 15 3,597 1,134 Non-deductible expenses Tax expense 3.9 Segment reporting The segments are defined on the basis of the internal organisational and management structure and on the internal reporting to the Board of Management and the Supervisory Board. The primary reporting format has defined two segments since 1 January 2004. A distinction is made, on the one hand, between the development, manufacture and distribution of cells (Solar Cells) and business with modules and system components (Trading) on the other. The acquisition of ASi (see Changes in companies consolidated) brought with it the segment Wafers. This segment deals with the manufacture and distribution of monocrystalline silicon ingots and wafers. The secondary reporting format is geared towards geographical aspects. These consider country-specific risks and opportunities. 77 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes Segment information 2005 Wafer Solar Cells Trading 7 ‘000 7 ‘000 7 ‘000 5,497 33,506 25,382 851 12,145 804 Sales revenues, total 6,348 45,651 26,186 Germany 2,100 22,257 24,382 48,739 186 6,862 872 7,920 Asia/Pacific, Africa 3,211 4,387 128 Cost of materials 4,122 31,718 24,381 13,749 46,472 573 8,241 942 -299 9,457 Sales revenues, external Intersegment sales Europe Operating result = Segment result Elimination/ unallocated items 7 ‘000 Group 7 ‘000 64,385 13,800 64,385 7,726 Financial result 133 Profit from associates -71 Profit before tax 9,519 Taxes -3,597 Consolidated net profit for the year Segment assets 5,922 58,755 40,787 5,728 -16,076 -48,769 -3,052 Unallocated assets Segment liabilities -51 105,219 130,275 130,275 -67,897 Unallocated liabilities 4,713 4,713 Segment investments 37,817 12,931 675 51,423 Segment depreciation and amortisation 1,321 1,934 18 3,273 Solar Cells 7 ‘000 Trading 7 ‘000 Unallocated 7 ‘000 Segment information 2004 Group 7 ‘000 Sales revenues 24,012 13,488 146 37,646 Germany 11,957 13,488 33 25,478 Europe 7,634 0 35 7,669 Asia/Pacific, Africa 4,421 0 78 4,499 Segment result 3,641 745 -1,018 3,368 Financial result -424 -424 Profit before tax 2,944 2,944 Taxes -1,134 -1,134 Consolidated net profit for the year 1,810 1,810 Segment assets 10,331 1,427 5,861 17,619 Segment liabilities 4,012 1,885 5,704 11,601 Segment investments 1,746 1,746 Segment depreciation and amortisation 1,733 1,733 Unallocated assets include cash and cash equivalents (7 129,155 thousand) and deferred taxes (7 1,120 thousand). Unallocated liabilities include deferred taxes. Intragroup transfer prices are geared towards the market price. Intersegment sales of 7 12,307 thousand (2004: 7 5,370 thousand) were generated between the Trading and Solar Cells segments in 2005. 78 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG Sales of 7 1,493 thousand were generated between the Wafers and Solar Cells segments. Individual costs directly attributable to the segment are personnel expenses and the depreciation of production facilities. All assets and investments are only documented in Germany. A detailed geographical segmentation was not selected, since no other segment would exceed the 10% limit within the segmentation. 3.10 Earnings per share The undiluted earnings per share were calculated by forming the quotient of the profit attributable to the equity providers and the average number of shares issued during the financial year – with the exception of treasury shares, which the Company itself holds. The diluted earnings per share are calculated by adding all conversion rights and options to the average number of shares in circulation and adjusting the net profit for interest expense and the tax effect. The Company issued 42,750 stock options to members of the Board of Management and employees in 2005. Calculation of the weighted average of outstanding shares Date Days from by to 7 ‘000 7 ‘000 7 ‘000 Denominator weighted average 7 ‘000 Numerator profit after taxes EPS 7 ‘000 7 5,922 0.93 5,922 0.93 Undiluted EPS* 01.01.05 Subscribed capital (period-end) 2,625 124 18.01.05 Cash capital increase 17 2,625 2,625 5,250 3,310 06.09.05 Cash capital increase 227 5,250 1,303 6,553 36 08.09.05 Capital increase against contribution in kind 2 6,553 292 6,844 418 30.09.05 IPO capital increase 22 6,844 2,956 9,800 2,504 31.12.05 92 Undiluted EPS as of 31 Dec. 2005 6,393 Diluted EPS Issuing price (subscription price) Last day subscription period, 1st tranche Average market price between 30 Nov. 2005 – 31 Dec. 2005 Number of shares for stock option Number of shares issued 41.75 30.11.2005 45.18 150,000 42,750 Adjustment of denominator: Potential shares to be recognised 0.3 Weighted shares* 6,393 Diluted EPS as of 31 Dec. 2005 6,394 *Share consolidation taken into account from 1 January 2005 due to IAS 33.28 and IAS 33.29 (calculation based on 360 days) 79 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes The calculation of diluted earnings per share took into consideration both the weighted average of the ordinary shares and the weighted average of potential shares from the stock option plan. 2005 Consolidated net income for the year in €’000 Weighted average ordinary shares, undiluted per share in EUR, undiluted Weighted average ordinary shares and potential shares, diluted per share in EUR, diluted 2004 5,922 1,810 6,393,480 5,250,000 0.93 0.34 6,393,773 0.93 Weighted average of remaining shares with presumed capitalisation 2,625,000 per share in EUR, undiluted 0.69 If the shares had already been consolidated in 2004, earnings per share would have amounted to 7 0.69. 4. Notes to the balance sheet 4.1 Cash and cash equivalents Restricted cash includes amounts restricted as collateral for exports, bank balances held in escrow, as well as letters of credit, rent deposits and similar securities and agreements. Bank balances Cash-in-hand thereof: restricted cash 2005 7 ‘000 2004 7 ‘000 129,154 4,111 1 1 129,155 4,112 31 723 Restricted cash includes amounts restricted as collateral for exports, bank balances held in escrow, as well as letters of credit, rent deposits and similar securities and agreements. 4.2 Trade receivables Trade receivables arise from the sale of solar cells, solar modules and system components. The average term of payment for customers was 22.1 days in 2005 (2004: 23.5 days). The entire amount of the receivable has been assigned to a reinsurer to secure bank loans. 80 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG 4.3 Inventories Inventories include finished goods and work in progress (ingots, wafers, solar cells), merchandise (solar modules and system components), as well as production supplies (silicon, wafers, and conductive pastes). The change in inventories reported in the income statement includes the additions and disposals under the items “finished goods” and “work in progress”. ErSol has concluded long-term supply agreements with selected customers and has received advance payments (downpayments) of 7 19,118 thousand, which are disclosed under short-term and long-term advances received on orders. In order to ensure the raw material supply the advance payments received are partly used to finance solar grade silicon. A sum of 7 9,722 thousand was paid as of the balance sheet date. The above amount is reported under current and noncurrent advances paid. 2005 7 ‘000 2004 7 ‘000 Production supplies 6,286 832 Work in progress 1,338 135 Finished goods and merchandise 6,514 1,163 14,138 2,130 2005 7 ‘000 2004 7 ‘000 No valuation allowances were made on inventories in the period under review. 4.4 Other current assets Subsidy claims 2,730 1,049 Prepaid expenses 265 134 Sales tax accruals 514 0 0 103 1,270 16 4,779 1,302 Advances on inventories Other The subsidy claims include claims for the granting of investment grants in accordance with the German Investment Subsidy Act (Investitionszulagengesetz). 4.5 Intangible assets, property, plant and equipment and investments in associates Property, plant and equipment serves as collateral for the full amount of the long-term loan granted to the Group. 81 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes Consolidated statement of changes in assets for financial year 2005: Acquisition costs as of 01.01.2005 Acquisition by business combinations Additions Reclassifi cations Disposals as of 31.12.2005 7 ‘000 7 ‘000 7 ‘000 7 ‘000 7 ‘000 7 ‘000 I. Intangible assets Pulling process technology Other II. Goodwill 0 11,784 0 0 11,784 215 1,084 221 0 1,520 215 12,868 221 0 13,304 0 17,994 0 0 17,994 0 17,994 0 0 17,994 0 III. Property, plant and equipment Buildings, including buildings on third-party land Technical plant and machinery Other office equipment, fixtures and fittings Advances paid and construction in progress 132 3,765 738 3 0 4,639 9,894 11,472 6,248 0 45 27,568 797 260 704 12 8 1,764 15 1,646 12,031 -15 0 13,677 10,838 17,143 19,721 0 53 47,648 11,053 48,004 19,942 0 53 78,946 Consolidated statement of changes in assets for financial year 2004: Acquisition costs I. Intangible assets as of 01.01.2004 7 ‘000 Additions Disposals 7 ‘000 Reclassification 7 ‘000 7 ‘000 as of 31.12.2004 7 ‘000 213 2 0 0 215 II. Property, plant and equipment Buildings, including buildings on third-party land Technical plant and machinery Other office equipment, fixtures and fittings Advances paid 116 17 0 0 133 7,211 1,380 1,303 0 9,894 796 464 332 0 0 1,303 15 -1,303 0 15 9,094 1,744 0 0 10,838 9,307 1,746 0 0 11,053 Additions in the financial year included investments in associates of 7 630 thousand. The disposals (7 41 thousand) contain the associates’ share in the loss (7 -71 thousand) and the difference from the currency translation (7 +30 thousand). 82 Annual Report 2005 I Consolidated financial statements I Notes Depreciation and amortisation ErSol Solar Energy AG Book values as of 01.01.2005 Additions Valuation allowances Disposals Appreciation as of 31.12.2005 as of 31.12.2005 as of 31.12.2004 7 ‘000 7 ‘000 7 ‘000 7 ‘000 7 ‘000 7 ‘000 7 ‘000 7 ‘000 0 502 0 0 0 502 11,282 0 211 336 0 0 0 547 973 4 211 838 0 0 0 1,049 12,255 4 0 0 10 0 0 10 17,983 0 0 0 10 0 0 10 17,983 0 63 88 0 -2 0 153 4,485 70 4,525 2,154 0 2 0 6,677 20,892 5,369 523 182 0 9 0 697 1,067 273 0 0 0 0 0 0 13,677 15 5,111 2,424 0 9 0 7,527 40,121 5,727 5,322 3,263 10 9 0 8,586 70,359 5,731 Depreciation and amortisation Book values as of 01.01.2004 7 ‘000 Additions Disposals 7 ‘000 Stand 31.12.2005 7 ‘000 as of 31.12.2004 7 ‘000 as of 31.12.2003 7 ‘000 7 ‘000 206 5 0 211 4 7 48 15 0 63 70 68 3,037 1,488 0 4,525 5,369 4,174 298 225 0 523 273 166 0 0 0 0 15 1,303 3,383 1,728 0 5,111 5,727 5,711 3,589 1,733 0 5,322 5,731 5,718 83 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes 4.6 Deferred taxes The following deferred tax assets and liabilities are attributable to accounting and valuation differences in the individual balance sheet items and tax loss carryforwards. The use of the tax loss carryforwards depends on future taxable profits realisable in Germany. 2005 7 ‘000 2004 7 ‘000 Deferred tax assets - current Inventories Tax loss carryforwards Other 0 15 1,072 0 50 0 Deferred tax liabilities - current Other current liabilities and provisions -102 -51 Other current assets -228 -54 0 -7 Other current liabilities and provisions Other current assets -225 0 Total current deferred taxes 567 -97 Deferred tax assets - noncurrent Tax loss carryforwards 0 786 Tax-deductible goodwill 398 435 Property, plant and equipment 146 413 9 0 Intangible assets Deferred tax liabilities - noncurrent Deferred subsidies 0 -76 Total deferred tax assets 1,120 0 Intangible assets / Purchase price allocation -4,653 0 -60 0 Total noncurrent deferred taxes -4,713 1,558 Total deferred taxes -3,593 1,461 2005 7 ‘000 2004 7 ‘000 11,318 3,598 Property, plant and equipment 4.7 Trade payables Trade payables are payment obligations arising from common business transactions. Trade payables Accruals 84 405 372 11,723 3,970 GAnnual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG 4.8 Other liabilities Other liabilities of 7 1,886 thousand (2004: 7 774 thousand) in 2005 are primarily the result of liabilities arising from sales and income taxes. Personnel expense accruals are also disclosed. The year-on-year increase is due to the Group’s sales growth and staff recruitment at the end of 2005. 4.9 Liabilities to related persons The Company had no liabilities to related persons as of the balance sheet date. 4.10 Provisions Provisions developed as follows: Warranty provisions 2005 7 ‘000 2004 7 ‘000 206 193 Production risks 0 114 Other 0 323 206 630 as of 01.01.2005 Warranty provisions 7 ‘000 Production risks Other Total 7 ‘000 7 ‘000 7 ‘000 630 193 114 323 Appropriation 13 0 0 13 Consumption 0 0 -73 -73 0 -114 -250 -364 206 0 0 206 Reversal as of 31.12.2005 The warranty provisions for the Solar Cells segment cover long-term, specific ex-gratia payments customary in the industry (20 years). Selected individual risks were also recorded. The warranty for the Trading segment includes – in addition to individually presented (project) risks – a provision for the estimated shortfall of 0.1% of the supply volume within this goodwill period of 20 years, taking into consideration a potential shortage of suppliers. 4.11 Financial liabilities Financial liabilities consist of bank loans taken out in euros and similar credit facilities. 85 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes The following loans existed as of the balance sheet date: 2005 7 ‘000 2004 7 ‘000 Loan 1 0 1,605 Loan 2 0 0 Loan 3 900 950 Loan 4 0 639 Loan 5 0 1,000 Loan 6 11,666 0 Loan 7 1,100 0 Loan 8 5,000 0 Loan 9 2,752 0 Loan 10 805 0 Accrued interest 183 0 22,406 4,194 Noncurrent and current loans Current portion Noncurrent portion 4,802 1,616 17,604 2,578 The loans amounting to 7 21,100 thousand are attributable to liabilities to Deutsche Bank AG, Jena, arising from the syndicated credit agreement concluded in financial year 2005. A portion of 7 500 thousand of Loan 3 reaches maturity in 2013 and is discounted at a rate of 8.62% p.a.; 7 400 thousand is discounted at a rate of 4.55% p.a. and paid off in equal six-monthly instalments until 2013. Loan 6 is subject to a variable interest rate of 220 base points above the refinancing rate, has a term until 30 September 2009 and is released in full. Loan 7 is subject to a variable interest rate of 220 base points above the refinancing rate, has a term until 30 September 2006 and is released in full. Loan 8 is subject to a variable interest rate of 220 base points above the refinancing rate, has a term until 30 September 2009 and is released in full. A partial amount of 7 816 thousand is already to be paid off on 15 March 2006. Loan 9 is subject to a variable interest rate of 220 base points above the refinancing rate, has a term of 48 months and is released in full. The financial liabilities are secured as follows: Collateral assignment of the entire assets, collateral assignment of the entire inventories as well as global cession of trade receivables. 4.12 Deferred subsidies The granting of subsidies by government institutions is bound to concrete terms and conditions by legal requirements. The ErSol Group is thus obliged to observe retention periods of five years in the case of assets subsidised by investment 86 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG subsidies and of three years for assets promoted by investment grants, and to retain jobs at the respective location. If, in hindsight, these conditions are not adhered to, the allowances received must be partly repaid. These conditions were adhered to in the period under review and up until these financial statements were prepared; it is assumed that adherence to these conditions will continue in future. The deferred subsidies in the period under review consist of the following: 2005 7 ‘000 2004 7 ‘000 Investment grant 5,635 185 Investment allowance 5,146 1,350 10,781 1,535 Current portion 1,277 520 Noncurrent portion 9,504 1,015 4.13 Equity The subscribed capital of 7 19,600 thousand (31 December 2004: 7 5,250 thousand) is composed of 9.8 million (31 December 2004: 5.25 million) no-par value bearer shares with an arithmetical value of 7 2 per share. Each no-par value share entitles the bearer to one vote at the General Meeting. The following changes in capital structure took place in the financial year: By way of a resolution dated 8 December 2004, entered in the commercial register on 22 February 2005, the Company increased its share capital against cash contributions by a further 7 5,250 thousand to a total of 7 10,500 thousand. This was accompanied by an appropriation to capital reserves of 7 7,875 thousand. By way of a resolution of the General Meeting on 12 May 2005, additional authorised capital was created and corresponding amendments to the Articles of Association resolved. Authorised Capital II also amounts to 7 2,625 thousand. These resolutions authorise the Board of Management to increase the share capital on one or several occasions within the legal period of five years against cash or contributions in kind by a total of up to 7 2,625 thousand, by issuing new, no-par value bearer shares with an interest in the share capital of 7 1 per share. By way of a resolution dated 6 September 2005, the Board of Management, with the approval of the Supervisory Board, made use of it authorisation to increase the Company’s share capital by a total of up to 7 3,583 thousand by issuing up to 3,583,334 no-par value bearer shares with a proportional interest in the share capital of 7 1. The actual capital increase was performed against cash contributions to the value of 7 2,605,086 and against contribution in kind to the value of 7 583,334. The issuing price was 7 6, thus an additional payment of 7 5 per share was appropriated to capital reserves. The capital increase was used to finance the acquisition of ASi Industries GmbH. Following the entry in the commercial register on 20 September 2005, the Company’s share capital increased to 7 13,688 thousand. 87 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes The Company’s General Meeting on 6 September 2005 resolved the share consolidation and a corresponding amendment to the Articles of Association. According to this, two shares, each with a proportional interest in the share capital of 7 1, are consolidated into one share with a proportional interest in the share capital of 7 2. The total share capital is not affected by this share consolidation. Following the entry in the commercial register of the resolution of the Company’s General Meeting on 6 September to consolidate two shares with a proportional interest in the share capital of 7 1 per share into one share with a proportional interest in the share capital of 7 2, the share capital is composed of 6.8 million no-par value bearer shares (no-par value shares). By way of a resolution dated 6 September 2005 the Ordinary General Meeting of the Company revoked the remaining authorisations to increase the share capital (Authorised Capital I and II) and created a new Authorised Capital. It authorised the Board of Management, with the approval of the Supervisory Board, to increase the Company’s share capital on one or several occasions during the period until 30 June 2010 against cash or contributions in kind by up to a total of 7 6,792 thousand, by issuing new, no-par value bearer shares with an interest in the share capital of 72 per share. The capital increase by up to 7 6,000 thousand resolved for the IPO by the Company’s General Meeting on 6 September 2005 was only performed by up to 7 5,912 thousand in order to achieve a rounded share capital figure after the IPO. The Company’s share capital therefore amounts to 7 19,600 thousand and is composed of 9.8 million no-par value bearer shares, each with a proportional interest in the share capital of 7 2. The performance of the capital increase for the IPO was entered in the commercial register on 27 September 2005. The IPO on 30 September 2005 brought the Company proceeds of 7 124,143 thousand from the placement of 2,955,790 shares at an issuing price of 7 42 per share. IPO costs of 7 7,934 thousand less the attributable income tax benefit of 7 2,431 thousand were charged to equity. The General Meeting on 6 September 2005 resolved a contingent capital increase by up to 7 300 thousand, composed of 150,000 no-par value bearer shares, by issuing new shares. This contingent capital increase is exclusively for the purposes of granting up to 150,000 subscription rights (stock options) to members of the Company’s Board of Management (up to 60,000 shares) and to employees of the Group companies (up to 90,000 shares) on the basis of the resolved stock option plan. The fair value of the services provided by the employees in return for the granting of options is recognised as an expense. The total expense to be recorded over the period until non-forfeiture of the options is calculated from the fair value of the options. 4.14 Cash flow statement Key non-cash transactions include the deferral of subsidy claims of 7 800 thousand (2004: 7 599 thousand). In addition, 583,334 shares with a value of 7 3,500 thousand were transferred within the scope of the acquisition of ASi. As part of 88 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG the acquisition, cash and cash equivalents with a value of 7 5 thousand were assumed from ASi Industries GmbH, as well as 7 2 thousand from ASi SILIZIUMTECHNOLOGY GmbH. The payments made for the acquisition of subsidiaries are as follows: 7 26,966 thousand, acquisition of ASi; 7 25 thousand, acquisition of ASi Silizium, 7 250 thousand, foundation of ENT; 7 630 thousand, foundation of SESE. In addition, differences between the additions to property, plant and equipment in the balance sheet and the payments made for assets in the cash flow statement result from advance payments paid on machines or capitalised items of property, plant and equipment that had not yet been paid in full as of the respective balance sheet date. The cash flow statement was prepared in compliance with IAS 7. The cash flow from operating activities is presented according to the indirect method. The liquidity fund is defined as the balance of cash and cash equivalents less the liabilities arising from mutual accounts contained under current financial liabilities. All liabilities to banks are considered to be financial liabilities in the sense of the cash flow statement. Interest and dividend income are disclosed under cash flow from operating activities, while interest and dividend payments are recognised under cash flow from financing activities. Tax payments are reported in their full amounts under operating activities, since it is practically impossible to allocate these payments to individual business segments. Cash and cash equivalents consisted of the following as of 31 December 2005: 7 31 thousand restricted cash, 7 129,124 thousand available cash. The composition of the liquidity fund, the general presentation of the cash flow statement and the the accounting option remain unchanged from the previous period. 5. Other disclosures 5.1 Risk management and hedging strategies As a group with international operations, ErSol is exposed to various financial risks: default, exchange rate fluctuation and interest rate fluctuation. The Group-wide risk management system focuses on the development of the financial markets and its objective is to minimise the potentially negative effects on the financial position of the Group. Risk management is carried out in regular cycles in compliance with the adopted guidelines and with cooperation between the finance department and the specialist departments. 89 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes 5.1.1 Default risks Default risks mainly relate to trade receivables. Temporarily free liquid assets are invested for a short time with financial institutions with a highly rated creditworthiness. In order to reduce the risk of default on receivables, guidelines have been laid down for monitoring credit limits and continuously reviewing customer creditworthiness. Products and services supplied by the Company are subject to reservation of title until the receivable has been paid in full. Further securities are not generally required for intra-European commerce. In non-European commerce, transactions are usually secured with advance payments or letters of credit. No significant bad debt losses were recorded in the past. In 2005, 31% of sales (2004: 43%) were generated with the five largest customers. 5.1.2 Exchange rate fluctuation risks A portion of sales revenue is invoiced in foreign currency, thus potentially exposing the ErSol Group to exchange rate risks. In financial year 2005, about 7 5,036 thousand of the Company’s sales were generated in foreign currencies (mainly US$). Expenses of US$ 6,753 thousand were allocated to cost of materials. The ErSol Group employs currency forward contracts to provide a global hedge against future risks arising from cash flow denominated in US dollars. The book and fair value of the contracts as of 31 December 2005 is 7 -16 thousand. Changes in value are reflected in income under expenses from financing activities. These are due in 2006. 5.1.3 Interest fluctuation risks The ErSol Group is exposed to a small extent to cash flow interest rate fluctuation risks, since the loan agreements are generally subject to variable interest rates. No swaps have been used to hedge against these risks to date. For more information on fair value interest rate risks, please refer to the notes on financial liabilities. The fair value of fixed-interest loans is determined based on the fluctuation of the interest rate. This risk does not affect the balance sheet, since loans payable are carried at amortised cost. 5.2 Calculation of fair value The fair value of publicly traded financial instruments (e.g. publicly trade derivatives and securities held for trading and available-for-sale securities) and of derivatives not traded in the standard way is based on the listed market price as of the balance sheet date or on the use of current market prices essentially similar to the financial instruments in question. The fair value of noncurrent loans is determined using the DCF procedure, taking account of the current market interest rate. 5.3 Contingent liabilities The ErSol Group did not assume any contingent liabilities for third parties. No litigation is pending at the current time. 90 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG 5.4 Other financial obligations 5.4.1 Lease agreements (operating leases) The sum of future lease payments for binding leases is composed of rent expenses of around 7 2,316 thousand and lease agreements for office equipment, fixtures and fittings to the value of 7 261 thousand. The leases have terms of no more than five years. Rent Leasing office equipment, fixtures and fittings / vehicles 2006 7 ‘000 2007 – 2010 7 ‘000 565 1,751 77 184 5.4.2 Equipment purchase commitments Orders of around 7 13,500 thousand were made on 31 December, over and above advance payments paid, in order to further the investment in the expansion of production. 5.4.3 Supply agreements Advance payments totalling around 7 18,000 thousand are due in 2006 for long-term supply agreements concluded for the delivery of raw silicon. In order to secure future purchasing, long-term general agreements were concluded with suppliers of wafers and modules. Besides the above-mentioned lease agreements, the ErSol Group has also concluded several long-term sales agreements, some of which apply until 2015. 5.5 Related party disclosures Transactions with related parties are presented below. The new parent company of ErSol is Ventizz Capital Fund II LP (Delaware, USA), which is the majority shareholder with a 51.23% interest following the acquisition of new shares issued for the last capital increase (entry in the commercial register on 22 February 2005) and the acquisition of additional shares on 20 April 2005. Until 22 February 2005 New Mine Energy GmbH (Erkelenz, Germany) was the Company’s majority shareholder. In addition to the current majority shareholders and senior executives of the Group, ErSol also defines companies that these persons could have a significant influence on as related parties. Accordingly, the Group parent company of New Mine Energy GmbH (Umweltkontor Renewable Energy AG, Erkelenz), its subsidiaries and natural persons with a significant influence on the parent company of New Mine Energy GmbH and its subsidiaries are defined as related parties until 21 February 2005. 91 ErSol Solar Energy AG Annual Report 2005 I Consolidated financial statements I Notes All transactions with related parties are concluded under normal market conditions. Expenses for valuation allowances or uncollectible receivables from related parties were not necessary or not available. A consultancy agreement was concluded in 2004 for research and development in the field of module technology with Aixcell Solar Technology GmbH, where Board of Management member Dr. Beneking is majority shareholder and managing director with sole power of representation. This contract amounts to 7 31 thousand a year and may be terminated by either contracting party with 3 months’ notice to the end of the year. No member of management held an equity interest in Eepro GmbH anymore at the end of financial year 2005. Receivables from Shanghai Electric Solar Energy Co., Ltd. (associate of ErSol AG) amounted to 7 176 thousand as of 31 December 2005. 5.6 Information on the Supervisory Board and Board of Management The members of the Board of Management of ErSol AG are: – Dr. Claus Beneking, Weimar, – Frank Müllejans, Erfurt, – Jürgen Pressl, Elxleben (since 8 September 2005). The remuneration of the Board of Management amounted to 7 612 thousand in 2005; in 2004, they amounted to 7 621 thousand. Long-term benefits due and stock-based remuneration agreements exist with the members of the Board of Management in the form of stock options. The Board of Management holds 20,000 stock options. The accounting for these stock options resulted in an expense of around 7 9 thousand in the financial year. Members of the Supervisory Board in the period under review were: – Dr. Helmut Vorndran, Düsseldorf, – Reinhard Löchner, Düsseldorf, – Ralf Paslack, Bremen (since 10 March 2005), – Prof. Dr. Hartmut Griepentrog, Mühlheim a. d. Ruhr (since 6 September 2005), – Prof. Dr. Fritz Vahrenholt, Hamburg (since 6 September 2005), – Hans Hofstetter, Rehetobel, CH (since 6 September 2005) – Heiko Piossek, Löningen (until 28 February 2005). The payments to the Supervisory Board amounted to 7 45 thousand. 92 Annual Report 2005 I Consolidated financial statements I Notes ErSol Solar Energy AG 5.7 Information on the auditor’s fee The following auditor’s fees were recorded as expenses in financial year 2005 in the sense of Art. 319 (1), sentence 1, 2 German Commercial Code (Handelsgesetzbuch, HGB): 2005 7 ‘000 Audit 141 Other auditing services 699 Tax consultancy services 20 Other services 2 5.8 Corporate Governance As a listed company, ErSol AG issued a declaration of conformity pursuant to Art. 161 German Stock Corporation Act (Aktiengesetz, AktG), which it made permanently available to shareholders on its Web site. 5.9 Events after the balance sheet date With effect from 24 February 2006, the ErSol Group acquired 100% of the shares in Silicon Recycling Services Incorporated, Camarillo, USA. The company is one of the leading providers of silicon recycling services and will already make a positive contribution to the Group’s raw materials supplies in the second half of 2006. A purchase price of US$ 20,500 thousand has been agreed. This was paid in cash. Acquisition costs of 7 45 thousand have been incurred to date. A purchase price allocation is not possible at this point, since not all the necessary data is available. 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And our contact details, in the event that you wish to reach us in person. Simply check us out and get the full picture. 95 ErSol Solar Energy AG Annual Report 2005 I Additional information I Auditor’s report Auditor’s report on the consolidated financial statements On completion of our audit, we issued the following unqualified auditor’s report dated 17 March 2006: “Auditor’s report We have audited the consolidated financial statements prepared by ErSol Solar Energy AG, Erfurt, comprising the balance sheet, income statement, statement of changes in equity, cash flow statement and notes, together with the group management report for the financial year from 1 January to 31 December 2005. The preparation of the consolidated financial statements and the group management report in accordance with the IFRSs, as adopted by the EU, and the additional requirements of the German commercial law pursuant to Art. 315a (1) HGB (Handelsgesetzbuch: German Commercial Code) are the responsibility of the Company’s Board of Management. Our responsibility is to express an opinion on the consolidated financial statements and on the group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with Art. 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW: Institute of Public Auditors in Germany). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation, the determination of the entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by the Company’s Board of Management, as well as evaluating the overall presentation of the consolidated financial statements and the group management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, based on the findings of our audit, the consolidated financial statements comply with the IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to Art. 315a (1) HGB and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development.” Erfurt, 17 March 2006 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft 96 Stockmeyer ppa. Peters Wirtschaftsprüfer Wirtschaftsprüfer (German public auditor) (German public auditor) Annual Report 2005 I Additional information I Glossary ErSol Solar Energy AG Glossary Financial glossary (A– F) Financial glossary (F– V) Amortisation ~ “Depreciation and amortisation” Free float ~ The proportion of an issuer's shares not in fixed ownership, measured against the entire share capital. Balance sheet ~ Comparison of a company's assets and capital as at a particular reporting date. Capital increase ~ Increase of a public company's equity through the issue of new shares. Cash flow statement ~ Used to determine and show the flow of payments that a company has generated or expended during a financial year from ongoing business activities, investment activities and financing activities. Cash flow ~ Cash surplus generated from ordinary business activities. Used as a measure of a company's organic financial strength. CEO ~ Chief Executive Officer. CFO ~ Chief Financial Officer. Consolidated net income/loss for the year ~ Consolidated net income or loss, taken from the income statement for the Group as a whole. COO ~ Chief Operating Officer. Cost of capital ~ Capital costs for the capital used are determined as a weighted average of equity and borrowed capital costs (Weighted Average Cost of Capital – WACC). Equity costs correspond to the returns that investors anticipate when they purchase shares. The costs of borrowed capital are guided by market conditions for loans and bonds. The borrowed capital costs take into account the fact that loan interest is tax deductible (tax shield). Cumulated ~ Accrued, total. Deferred taxes ~ Income tax to be paid or received in the future as a result of differences in the carrying amounts between the tax balance sheet and the commerical balance sheet. At the time of reporting, this does not represent any actual receivables or liabilities towards the tax authorities. Depreciation and amortisation ~ Book value presentation of an asset's loss in value. The acquisition cost of an investment or asset is spread as an expense over several years. Designated sponsor ~ Financial institution that ensures the liquidity of a company's shares. Directors’ dealings ~ Share transactions by members of the Board of Management or Supervisory Board and their partners or relatives requiring mandatory disclosure. Regulated in Article 15a of the Wertpapierhandelsgesetz (German Securities Trading Act). EBIT ~ Earnings Before Interest and Taxes. EBITDA ~ Earnings Before Interest, Taxes, Depreciation and Amortisation. Equity ~ Capital invested by the owners (shareholders) and other reserves available to the company. Equity ratio ~ Key figure that indicates the equity as a proportion of total capital. Used to assess the strength of a company's financial resources. Free cash flow ~ Operative cash flow after deduction of investments in intangible and fixed assets. German Corporate Governance Code ~ This German code contains recommendations and internationally recognised standards for high-quality, responsible corporate management. Through the 'Declaration of Conformity' (Art. 161), this code is embedded in the German Aktiengesetz (Stock Corporation Act). Impairment test ~ Test whereby the book value of an asset is compared with its fair value. If the fair value is less than the book value, an impairment charge must be recorded against the asset. This is particularly significant for goodwill, which as from 1 January 2002 is no longer periodically amortised and must undergo such an impairment test at least once a year. Income statement ~ Comparison of a company's income and expenses, broken down by time period. Intangible assets ~ The intangible assets include concessions, industrial property rights, patents, licences, goodwill, etc. International Financial Reporting Standards (IFRS) ~ A collection of standards and interpretations that sets out regulations governing the external reporting of listed companies. Investment ~ Long-term placement of funds in assets expected to yield returns in the future. IPO ~ Initial Public Offering. The initial floatation of a company on the stock market. Joint venture ~ Economic cooperation of companies with the aim of making better use of expertise and resources. Market cap ~ Market capitalisation. Exchange rate times the number of a company's shares. No-par shares ~ Shares without any par value and that simply represent a specific share in a company's share capital. PPVX ~ Photon-Photovoltaik-Aktien-Index (German photonphotovoltaic share index). Prime Standard ~ Listing segment of the Frankfurt Stock Exchange for companies that meet particularly high international standards of transparency. This is a prerequisite for admission to the DAX, TecDAX, MDAX or SDAX. Return on equity ~ This is essentially a key figure indicating a company's income situation that presents the earnings (net income for the year) in relation to the equity committed. Here: earnings as a percentage of the average equity committed for the year. Risk management ~ System for identifying, assessing, and avoiding or reducing risks and for taking appropriate measures in response to these risks. Roadshows ~ On-site presentation of the company before investors or analysts. Share capital ~ Total par value of all of a company's issued shares. TecDAX ~ Contains the 30 largest technology companies listed on the Prime Standard. Total assets ~ Total of all assets and liabilities on a balance sheet. Value chain ~ The product's entire cycle through all processing stages from the raw silicon material through the cells and modules to assembly by the end customer. 97 ErSol Solar Energy AG Annual Report 2005 I Additional information I Glossary Photovoltaics glossary (A–M) Photovoltaics glossary (M–R) Amorphous silicon ~ A silicon modification without a regular crystal structure used as a base material for thin-film solar cells. Megawatt hour ~ Unit of energy. The consumption of electrical energy is also measured in megawatt hours. One megawatt hour corresponds to 1,000 kilowatts for a period of one hour. Back-contact cell ~ With this photovoltaic cell, an innovative new procedure is used to only apply the contacts to the back of the photovoltaic cell, thereby reducing the shadow effect (the solar irradiation absorbed by the contact surface). Cell ~ See photovoltaic cell. Crystalline silicon ~ A silicon modification where the silicon atoms are arranged in the form of a regular crystal lattice. Base material for both multi- and monocrystalline silicon solar cells. EEG ~ Erneuerbare-Energien-Gesetz, German Act on Granting Priority to Renewable Energy Sources. This act regulates the use of and compensation for electricity that has been exclusively derived from renewable energies (solar energy, hydropower, wind energy, geothermal energy, biomass energy) by power supply companies operating networks for general electricity supply (grid operators). Germany has set a target of increasing the amount of renewable energy it uses to at least 20% of total German electricity consumption by 2020. Efficiency ~ In processes where energy is converted, this refers to the relationship between the useful energy output to the energy consumed (in other words, the performance). Feed-in tariffs ~ Renewable energy subsidies, compensation fixed under the EEG for electricity generated by renewable energies that is fed into the public grid. Gigawatt (GW)A ~ unit of output. 1 gigawatt = 1,000,000,000 watts, 1,000,000 kilowatts or 1,000 megawatts. Ingot ~ Block produced from raw silicon used to make silicon wafers. Inverter ~ Photovoltaic modules generate direct current. An inverter converts this direct current into alternating current. This allows the electrical power derived from solar energy to be used as alternating voltage by end consumers of electricity, or to be fed into the public electricity grid. Central inverters are used in large photovoltaic plants, while string inverters are used in smaller photovoltaic plants. Kilowatt (kW) ~ 1,000 watts. Unit of measure for assessing the performance of photovoltaic devices. Kilowatt hour (kWh) ~ Unit of energy. The consumption of electrical energy is measured in kilowatt hours. 1 kWh = 1,000 watts for a period of one hour. Kilowatt peak (kWp) ~ Unit of measure for the nominal output of a photovoltaic cell or a photovoltaic module. The value given for the module relates to its performance under standard test conditions that are not identical to normal daily operation. These test conditions are used to provide norms for comparing different photovoltaic cells or photovoltaic modules. The electrical values for the components under these conditions are given in the data specifications. Measurements are made at a module temperature of 25°C and with an irradiance of 1,000 W/m2 (these are STCs, or Standard Test Conditions). This represents full sunlight at midday, though at a temperature of 25°C. kW ~ Abbreviation for kilowatt. kWh ~ Abbreviation for kilowatt hour. kWp ~ Abbreviation for kilowatt peak. Megawatt (MW) ~ A unit of output. 1 megawatt = 1,000 kilowatts or 1,000,000 watts. 98 Megawatt peak (MWp) ~ 1 megawatt peak corresponds to 1,000 kilowatt peak. Micrometer (µm) ~ Abbreviation for micrometer. 1 micrometer corresponds to one-thousandth of a millimetre. Module ~ See photovoltaic module. Module and inverter technology ~ Solar cells and modules generate direct current. This must be converted into alternating current so that the solar power can be fed into the public power grid. This conversion is done by the 'inverter'. Monocrystalline silicon ~ The prevailing conditions during crystallisation cause the silicon to solidify into a single, large, regular crystal. Multicrystalline silicon ~ Here, the silicon material is composed of the small, individual and variously oriented crystals. Sometimes also referred to as polycrystalline or semicrystalline. See also polycrystalline silicon. Photovoltaic module ~ Module that obtains direct current from the sun. A photovoltaic module, or solar module, is made up of several connected photovoltaic cells that are installed behind glass or plastic panes to protect them against the weather. Numerous photovoltaic cells are joined together within a solar module to achieve sufficient voltage. Photovoltaic modules are usually mounted into a framework on a roof or on a mounting system. Photovoltaic plant ~ Facilities (power plants) for generating electrical power from solar energy. The direct current generated by photovoltaic modules can be used to run motors or to charge batteries, for example. If it is fed into the public power grid or used to operate common electrical appliances, an inverter is required to convert the direct current into alternating current. Photovoltaics ~ The direct conversion of light into electrical power within a solid (i.e. a solar cell). Photovoltaics involve the conversion of radiant energy, principally solar energy, into electrical energy and has been used to generate energy since 1958 (initially for satellites). The name is derived from 'photo', the Greek word for 'light', and 'volta', after Alessandro Volta, the pioneer of electricity. Photovoltaic cell (solar cell) ~ Photovoltaic cells convert light energy (usually sunlight) into direct current by using the photovoltaic effect. The photons hitting the cell generate an electrical voltage that produces a flow of electricity when the photovoltaic cell is connected to an electrical device. Solar cells are the core element in solar plants. They generate electricity from the sun and are manufactured from the preliminary wafers product in a semiconductor process. Photovoltaics Interim Law ~ Part of the EEG amendment that was brought forward and regulated solar cell subsidies following the end of Germany's '100,000 Roofs Programme'. Polycrystalline silicon ~ The prevailing conditions during crystallization cause the silicon to solidify into a silicon block that consists of several smaller crystals and, as a whole, does not display a regular arrangement of atoms. Renewable ~ Regenerative, inexhaustible. Renewable energy ~ Renewable energy describes energy that is generated from sustainable sources that either grow again or are inexhaustible, in human terms. Renewable energy is primarily used in the form of solar energy, biomass, geothermal power, hydropower and wind energy. Annual Report 2005 I Additional information I Glossary / Imprint Photovoltaics glossary (S) Photovoltaics glossary (T–W ) Saw slurry ~ Silicon blocks are cut into wafer-thin slices (wafers) using a wire saw. Cutting fluids (known as 'slurry') are used to assist this sawing process. This slurry is composed of oil-based or glycol-based silicon carbide. Thin-film technology ~ Alternative manufacturing method for photovoltaic solar elements that is not based on established wafer technology techniques using crystalline silicon. There are various different approaches here. The worldwide market share of thin-film technologies is well under 10%. (Raw) silicon ~ In the form of silicon dioxide, the chemical element silicon is the second-most plentiful element of the Earth's crust and is thus, quite literally, as 'common as dirt'. As the primary raw material for the silicon industry, raw silicon is produced from silicon dioxide, in the form of quartz. ErSol Solar Energy AG W ~ Abbreviation for 'watt'. (Silicon) Wafer ~ Wafers are razor-thin slices (approximately 0.2-0.35mm thick) made from silicon, used to make solar cells. Watt ~ Unit of measure that allows the performance of photovoltaic devices to be measured very accurately. Solar cell ~ See photovoltaic cell. Solar energy ~ Electromagnetic energy that is beamed from the sun to the Earth. Watt peak (Wp) ~ Unit of measure for the nominal output of a photovoltaic cell or a photovoltaic module. Module prices are usually given in 7/Wp. 1000 watt peak = 1 kilowatt peak. Solar plant ~ See photovoltaic plant. Wp ~ Abbreviation for 'watt peak'. Imprint Published by: ErSol Solar Energy AG Investor Relations Wilhelm-Wolff-Strasse 23 99099 Erfurt, Germany March 2006 Responsible for content: Sonja Teurezbacher, Investor Relations . This Annual Report is also published in German. Both versions may be downloaded on the internet. Coordination/Editors: Sonja Teurezbacher and Susanne Ackstaller Finanzkommunikation, Kirchdorf Design and layout: ErSol AG and db Graphic Design Services, Jena Printed by: Druckhaus Gera GmbH, Gera English translation by: Herold Fachübersetzungen, Bad Vilbel Photos by: Alfred Tolksdorf, Dusseldorf Andreas Hultsch, Erfurt Thomas Härtrich, Leipzig Paul Langrock, Berlin www.digitalvisiononline.co.uk Rounding differences may occur. This Annual Report contains certain statements that are neither reported financial results nor other historical information. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Many of these risks and uncertainties relate to factors that are beyond ErSol’s ability to control or estimate precisely, such as future market and economic conditions, the behaviour of other market participants, the ability to successfully integrate acquired businesses and achieve anticipated synergies and the actions of government regulators. Readers are cautioned not to place undue reliance on these forwardlooking statements, which apply only as of the date of this presentation. ErSol does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Annual Report. 99 ErSol Solar Energy AG Annual Report 2005 I Additional information I Financial calendar / Contact details Financial Calendar 05 April 2006 Publishing of the annual report 2005 Capital Markets Day with annual press conference and analyst conference in Erfurt 31 May 2006 Publishing of the interim report for Q1/2006 (January to March) 13 June 2006 Annual general meeting in Erfurt 23 August 2006 Publishing of the interim report for Q2/2006 (April to June) 16 November 2006 Publishing of the interim report for Q3/2006 (July to September) Analyst conference as part of the 7th Forum Solarpraxis in Berlin All information is subject to correction and may be changed at short notice Contact Details ErSol Solar Energy AG ErSol online Wilhelm-Wolff-Strasse 23 www.ersol.de 99099 Erfurt Germany You can find up-to-date news regarding the Group and as well as our stock and investor events on our website at www.ersol.de/investor_relations. All the documents Investor Relations Phone: +49 (0)361/2195-130 Fax: +49 (0)361/2195-133 E-mail: ir@ersol.de Press Office Phone: +49 (0)361/2195-100 Fax: +49 (0)361/2195-133 E-mail: presse@ersol.de 100 can also be downloaded from there. Annual Report 2005 I Additional information I Group 4-year review ErSol Solar Energy AG Group 4-year review 2002 2003 2004 2005 Earnings position Sales 7 ‘000 17,023 17,561 37,646 64,385 Gross profit 7 ‘000 4,965 4,250 10,739 22,483 EBITDA 7 ‘000 700 -902 5,101 12,731 EBIT 7 ‘000 -380 -2,195 3,368 9,458 EBT 7 ‘000 -647 -2,343 2,944 9,519 Profit after tax 7 ‘000 -373 -1,429 1,810 5,922 Earnings per share in EUR -0.1 -0.3 0.7 0.9 Gross profit margin in % 29.2 24.2 28.5 34.9 EBITDA margin in % 4.1 -5.1 13.5 19.8 EBIT margin in % -2.2 -12.5 8.9 14.7 EBT margin in % -3.8 -13.3 7.8 14.8 91 100 125 265 2,159 2,429 3,558 6,319 Number of employees as of the balance-sheet date Personnel expenses 7 ‘000 Per capita personnel expenses 7 ‘000 24 24 28 24 Revenue per employee 7 ‘000 187 176 301 243 Asset and liability structure Fixed assets 7 ‘000 6,468 8,023 7,289 81,443 Current assets (including deferred taxes and prepaid expenses) 7 ‘000 7,387 7,691 10,330 154,050 Inventories 7 ‘000 2,037 2,714 2,130 14,139 Trade receivables 7 ‘000 1,747 1,356 2,786 5,026 Cash and cash equivalents 7 ‘000 3,469 2,814 4,112 129,155 Balance sheet total 7 ‘000 13,855 15,714 17,619 235,494 Equity 7 ‘000 2,350 4,208 6,018 162,885 Borrowed capital 7 ‘000 11,505 11,506 11,601 72,609 Trade payables 7 ‘000 2,149 2,492 3,970 11,723 Financial liabilities 22,406 7 ‘000 2,759 5,101 4,194 Equity ratio in % 17.0 26.8 34.2 69.2 Gearing Ratio in % -30.2 54.3 1.4 -65.5 ROE in % -15.9 -34.0 30.1 3.6 ROCE in % -7.8 -39.7 60.2 11.2 Stichwortverzeichnis C5 Index A F Act on granting priority to Feed-in tariffs . . . . . . . . . . . . . . . . . . . .27, 31, 37, 44 Renewable Energy Resources (EEG) . . . . . . .31, 44, 98 Financial calendar . . . . . . . . . . . . . . . . . . . . . . . .100 Auditor’s report . . . . . . . . . . . . . . . . . . . . . . . . . . .96 Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 Forecast report . . . . . . . . . . . . . . . . . . . . . . . . . . .47 B Fraunhofer Institute for Solar Energy Systems (ISE) . .35 Balance sheet . . . . . . . . . . . . . . . . . . . . . . .54, 64, 80 Board of Management . . . . . . . . . . .8, 14, 46, 49, 92 G C Group 4-year review . . . . . . . . . . . . . . . . . . . . . . .C5 Capacity expansion . . . . . . . . . . . . . . . . . . . . .41, 48 Group key figures . . . . . . . . . . . . . . . . . . . . . . . . .C2 Capital expenditure (capex) . . . . . . . . . . . . . . . . . .C2 Group strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Cash flow statement . . . . . . . . . . . . . . . . . . . .57, 89 Group structure . . . . . . . . . . . . . . . . . . . . . . . . . . .30 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97 Cash flow . . . . . . . . . . . . . . . . . . . . . . .41, 57, 66, 88 Cell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24, 35 I Consolidated subsidiaries . . . . . . . . . . . . . . . . . . . .60 Income statement . . . . . . . . . . . . . . . . . . . . . .56, 73 Contact details . . . . . . . . . . . . . . . . . . . . . . . . . .100 Income taxes . . . . . . . . . . . . . . . . . . . .37, 39, 69, 76 Corporate Governance . . . . . . . . . . . . . . . . . . .14, 93 Income/loss after tax . . . . . . . . . . . . . . . . . . . . . . .37 Cost of materials . . . . . . . . . . . . . . . . .56, 60, 74, 90 Ingots . . . . . . . . . . . . . . . . . . . . . . . . .22, 31, 36, 45 Customer (groups) . . . . . . . . . . . . .21, 25, 27, 36, 46 Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . .20, 47 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . .48, 74 D Investments . . . . . . . . . . . . . . .37, 41, 54, 73, 81, 82 Declaration of Conformity . . . . . . . . . . . . . . . . .14, 93 Investor Relations . . . . . . . . . . . . . . . . . . . . .9, 14, 17 Depreciation . . . . . . . . . . . . . . . . . .42, 56, 57, 65, 75 Dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 K Key figures of the share . . . . . . . . . . . . . . . . . . . . .16 E Earnings per share (EPS) . . . . . . .7, 16, 37, 56, 79, 80 M EBIT . . . . . . . . . . . . . . .23, 25, 33, 37, 38, 39, 48, 56 Market capitalisation . . . . . . . . . . . . . . . . . . . . . . .16 EBITDA . . . . . . . . . . . . . . . . . . . . . . . .23, 25, 27, 37 Mission Statement . . . . . . . . . . . . . . . . . . . . . . . . . .3 Efficiency level . . . . . . . . . . . . . . . . . . .21, 24, 30, 48 Efficiency . . . . . . . . . . . .21, 23, 24, 25, 30, 34, 44, 48 N Employees . . . . . . . . . . . . . . . .23, 25, 27, 46, 50, 74 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60 ENT GmbH (ErSol New Technologies GmbH) . .10, 20, 35, 47, 60, 63 Environmental protection . . . . . . . . . . . . . . . . . .6, 51 Annual Report 2005 I Additional information I Index ErSol Solar Energy AG O T Other appointments held by TecDAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 members of the Board of Management . . . . . . . . . . .9 Thin film technology . . . . . . . . . . . . . . . . . .21, 35, 47 Other appointments held by Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26, 48 members of the Supervisory Board . . . . . . . . . . . . .12 V P Value added . . . . . . . . . . . . . . . . . . . . . . . . . .24, 33 Personnel expenses . . . . . . . . . .38, 39, 56, 73, 74, 79 Value chain . . . . . . . . . . . . . . . . . . . . . .3, 32, 45, 48 Photon-Photovoltaik-Aktien-Index (PPVX) . . . . . . . .16 Value-driven management . . . . . . . . . . . . . . . . . . .33 Photovoltaic . . . . . . . . . . . . . . . . . .20, 21, 24, 30, 35 Prime Standard . . . . . . . . . . . . . . . . . . . . . . . .15, 36 W Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 Wafers . . . . . . . . . . . . . . . . . . . . . .22, 35, 39, 44, 48 Website . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100 R Raw material . . . . . .36, 37, 38, 43, 44, 45, 60, 81, 93 Recycling . . . . . . . . . . . . . . . . . . . . . . . . . .30, 43, 93 Remuneration . . . . . . . . . . . . . . . . . . . .14, 49, 74, 92 Renewable . . . . . . . . . .16, 31, 32, 44, 51, 63, 75, 91 Report by the Supervisory Board . . . . . . . . . . . . . . .10 Research and development . .34, 36, 44, 66, 73, 75, 92 Risk management . . . . . . . . . . . . . . . . . . . .44, 46, 89 Risk report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 S Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37, 56, 73 Securing the future . . . . . . . . . . . . . . . . . . . . . . . .51 Share capital . . . . . . . . . . . . . . . . . . . . . . .16, 64, 87 Share price development . . . . . . . . . . . . . . . . . . . .17 Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15, 79 Shareholder structure . . . . . . . . . . . . . . . . . . . . . . .16 Silicon . . . . . . . . . . . . . . . .22, 31, 36, 38, 42, 43, 44 Solar Cells . . . . . . . . . . . . . . . . . . . . . . . . . . . .20, 24 Statement of changes in equity . . . . . . . . . . . . . . . .58 Supervisory Board . . . . . . . . . . . . . . . . . . . . . . . . .12 Supplementary report . . . . . . . . . . . . . . . . . . . . . . .43 C6 The Kontakt Ber Group Geschäf Letter to thC Outlook So Weiere Inform Akti Bilanz A Bala A Konzernkennza GuV Fin Sola Risk Prognoseb V Cash Flo Kontaktdate Balance Wafers G Finan Solarzellen Cells An Anhang Verm Report GuV by the superv Stateme In AG ErS State Ingots Aktio So Solar Income Sol Notes Zukunftss Solar So E Risk man Solid Solid Financial st ErS Facts and figures Balance Sheet Vermögens Cells 2005 Our employees Ingot So Solid Solid Zellen Kontaktdaten Annu Aktion Solid Wafer Financial pos Solar W Solid Bilanz Income Stateme Vermögenslag Zukunftssicherung 2005 Flow Statemen Cells Mitarbeiter Report byCash the supervisory boa Anhang Risikobericht GuV Solid Solid Geschäftsb Finanzlage An Aktionärsstruktur unsere Aktionäre Risk management Aktionärsst Energ Solid Financial statemen Wafers AG ErSol Income Statement Anhang Outlook Solar Solar Wafers Notes Zukunftssicherun Solid Solid 2005 Solid Meilensteine 2005 ® Solar Solar Kapitalflussrechnung Statement Changes Prognosebericht Balance Sheet GuV Solidof Finanzkalender Risikobericht Risk management Solid Annual Geschäftsber Financial statement Solar Cells Aktionärsstruktur Flow Statement Vermögenslage Brief an dieCash Aktionäre Solid Finanzkalender ErSol Ingots Bilanz Dividend policy in Solid Unternehmensbereich Mitarbeiter Income Statement Bilanz Shareholder structure Wafers Wafers Solid Statement of Changes 2005 Notes Risikobericht Solid Milestones 2005 Zukunftssicherung Cells AG Finanzlage Balance Sheet ®Financial s Anhang Risikobericht Ingots Annual Mitarbeiter Report GuV Finanzlage Financial position Zukunftssicherung Financial statement Statement of Changes in Equ Solid Bilanz Letter to the shareholders Solarzellen Solarzellen Solid Solar Cells Cells 2005 Finanzkalender Cash Flow Statement Solid Solid ErSol Solid GuV Financial position Aktionärsstruktur Financial statement Finanzkalender Balance Sheet Solar Consolidated financial statemen Wafers Solid Zellen Energy Finanzlage Kapitalflussrechnung Facts and figures Outlook Solid ® Finanzlage Zukunftssicherung Solid 2005 Income Statement Ingots Financial statement Statement of Changes in Equity Solid Financial statement Annual Dividend policy Wafers Solid Cells Investor Relations Solar Prognosebericht Financial position Anhang Solar Report by the supervisory board Solid Bilanz Kontaktdaten New technologies AG Finanzlage ErSol Balance Sheet Cells Zukunftssicherung ® Risikobericht Solid statement Solid Outlook Wafers Statement of Changes in Equity Konzernabschluss Financial Energy Bilanz Solid Bilanz Ingots Finanzkalender Financial position Bericht des Aufsichtsrats Safeguarding the future Balance Sheet Anhang Die ErSol Aktie Wafers 2005 Mitarbeiter Energy Financial statement Solid Vermögenslage ® ErSol Risikobericht Balance Sheet Solid Financial statement Corporate Governance Solar Statement of Changes Dividend policy in Equity Solid ® Ingots Financial statement Solar Wafers Financial position Balance Sheet Shareholder structure 2005 ErSol 2005 Solid Solid Konzernkennzahlen Energy Wafers Anhang Safeguarding the future New technologies Bilanz Income Statement Anhang Cells ErSol Risk management Solid Solid Solid ® structure Solid Solid Kapitalflussrechnung AG Aktionärsstruktur Solarzellen Facts and figures Ingots Shareholder Solid Solid Neue Technologien Risikobericht Financial position Our employees Cells Solid GuV Risk management Safeguarding the future Report Risk management ErSol Ingots Solar ® Kapitalflussrechnung Energy Solid Meilensteine 2005 Bilanz Shareholder AG Annual Solid Sheetstructure Vermögenslage Solid Balance Notes Solar Our employees Solid Brief an die Aktionäre Financial position Ingots AG Zukunftssicherung Kapitalflussrechnung Cells GuV ErSol Solid Financial statement Shareholder structure Solid Solid Wafers Consolidated financial statements Milestones 2005 Solid Ingots Vermögenslage Prognosebericht Energy Solid Kapitalflussrechnung ® Balance Sheet Annual Vermögenslage Dividend policy Solid Ingots Solid Cells AG Prognosebericht Solar Zukunftssicherung Bilanz Report by the supervisory Solid board Risk management Dividendenpolitik Income Statement Solid Solid Solar Solid Solid Solid Solid Wafers Zukunftssicherung Financial position Ingots ErSol Solar Solid Energy Investor Relations Wafers Solid Solid Solid Solid Entwicklung des Eigenkapitals Vermögenslage Financial statement Brief an die Aktionäre Cells Ingots Solid Investor Relations ® in Equity Bilanz Ingots Weiere Informationen Solid Statement of Changes Solid Solid Geschäftsbericht Solid Solar Energy Vermögenslage Dividend policy Solid Solid Notes Mitarbeiter Contact Solid Solid Balance Sheet Letter to management the shareholders GuV Aktionärsstruktur Solid 2005 Solid Financial position Group report Solid Shareholder structure Solar Solid Solid ErSol Wafers Solid Bilanz Safeguarding the future Solid Solid Solid Solid Solid Outlook Bilanz AG Dividend policy ® Vermögenslage Risk management 2005 Solid Solid Energy Income Statement Ingots Solid Solid Wafers Milestones 2005 Ingots Cells Solid Solid Risk management Dividendenpolitik Solid Statement of Changes in Equ Solid Solid AG Solid Solar Outlook Solid Solid Solid Solid Solid Solid Financial statement Solar Solid Solid Solid Facts and figures Solid Energy Contact So Solid Solid Solid ® Solid Solid ® Entwicklung des Eigenkap ErSol So Solid Investor Rela Finanzlage Solid Solid Sa Solid Sol Solid Solid Solid Solid Financial position Wafers Wafers Solar Soli Weiere Informationen 2005 Vermögenslage Annual Solid Dividendenp Ri Cells Solid Ingots Cells So Solid Brief an die Aktionäre S Solid Notes Notes Zukunftssicherung Solid Solid GuV Risk managem Solid Zukunfts Solid Solid Prognosebericht Inve Gesc Solid Anhang Unternehmensbereich Statement Solid So Konzernkennzahlen Solar Solid ® ErSol ErSol Energ Financial p Solarzellen Fina Safeguard Bilanz Solar Mitarbeiter Finanzlag Cells Wafe 2005 Fina ErSol ErSo Inco Mitarbeiter Outlook Ingo Balance Shee Wafers Vermögens Neue Technologien Solid Letter to the shareholders S Cells ErSol Cash Flo Annual Wafe Corporate Governance Wafe Prog Geschäftsb 20 So 2005 Wafers 2005 Solar Wafers Unternehmensbereich Solarzel Fact In Bericht desThe Aufsichtsrats 200 Zukunftssicherung Mita Outlook company Kon Milestones 200 Ingots Wafers So

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