LDK Solar Co., Ltd. - Asia Europe Clean Energy (Solar) Advisory Co ...

LDK SOLAR CO., LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
FOR THE PERIOD FROM JULY 5, 2005 TO DECEMBER 31, 2005
AND THE YEAR ENDED DECEMBER 31, 2006
(Amounts in US$ thousands, except share and per share data)
shares of the Company's capital stock in a private placement prior to the Qualified IPO (as defined in
note 16) of up to 20,420,000 preferred shares with a per share price of no less than US$5.00 and an initial
conversion rate of 1:1. The holders are entitled to purchase such amount of additional Series A-1 and A-2
preferred shares at the initial purchase price of US$2.67 and US$4.43 per share respectively, so that after
acquiring such number of Series A preferred shares, the ownership of the Series A-1 share and Series
A-2 share holders in the Company will be no less than 3% and 1.58% respectively on a fully diluted basis.
The warrants permit the holders to acquire Series A Shares that may require redemption at a future date
at the holder's option, and therefore embody conditional obligations to repurchase the Company's shares.
Therefore the warrants are classified separately as liabilities (with a corresponding reduction to the carrying
amount of Series A shares) on the date of issuance at its fair value in accordance with SFAS No. 150
""Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity''. Change in
fair value of warrants was credited to other income. The fair value of the warrants was approximately US$11
and US$2 at the grant date and December 31, 2006 respectively, estimated on the basis of Black-Scholes
model with the following assumptions and the probability of the exercisability of the warrants:
July 28, 2006 December 31, 2006
Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64% 52%
Expected dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% 0%
Expected term ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1Y3 years 1Y3 years
Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.93Y5.11% 4.62Y4.91%
Management assessed that the probability of the exercisability for the Series A-1 and A-2 preferred
shares warrants was 50% and 10% on July 28, 2006 and December 31, 2006 respectively.
(16) REDEEMABLE CONVERTIBLE PREFERRED SHARES
(a) Series A redeemable convertible preferred shares
Pursuant to the Series A redeemable convertible preferred shares purchase agreement dated July 28,
2006 (""Series A Agreement''), the Company issued 3,000,000 Series A-1 redeemable convertible preferred
shares (""Series A-1 Shares'') on July 31, 2006 as a result of conversion of the US$8,000 exchangeable notes
by the holders (see note 14). The Company also issued 1,580,000 Series A-2 redeemable convertible preferred
shares (""Series A-2 Shares'') to a group of unrelated investors at US$4.43 per share for total cash
consideration of US$7,000. Pursuant to the Series A Agreement, as amended by the third amended and
restated memorandum of association dated December 19, 2006, the holders of both Series A-1 Shares and
Series A-2 Shares (collectively ""Series A Shares'') have the right to redeem the Series A Shares after
36 months of the date of issuance of Series C redeemable convertible preferred shares at the option of the
holders of Series A Shares then outstanding if a Qualified IPO has not occurred. A Qualified IPO refers to an
initial public offering on a Qualified Exchange that values the Company at no less than US$1,210,000
immediately prior to the initial public offering with a per share offering price of no less than US$11.00 and
that results in aggregate proceeds to the Company of at least US$300,000. In the event of a redemption under
this right, the Company shall redeem all of the outstanding Series A Shares at a redemption price equal to
150% of the original issue cost of Series A Shares, plus any declared, accrued but unpaid dividends and
interests thereon, (the ""Series A Preference Amount'') proportionally adjusted for share subdivisions, share
dividends, reorganizations, reclassifications, consolidations or mergers. The accretion to the redemption value
is reflected as a reduction to net income to arrive at net income available to ordinary shareholders in the
accompanying consolidated statement of operations and amounted to US$814 for the year ended Decem-
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