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

value of the our business. Under the income approach, Sallmanns performed a discounted cash flow analysis
based on our projected cash flows through 2011. The cash flow projections were formulated to take into
consideration the nature of our company, our relatively limited operating history, the growth prospects of our
company and the business risks associated with our operations.
In addition to business specific assumptions, the following major assumptions have been adopted in
calculating the fair value of our business, including:
‚ WACC: WACC of 17% was applied. This was the combined result of the risk-free rate, market return
rate, industry average beta, and our company-specific risk premium that reflects the risks associated
with achieving the projections at various stages of development.
‚ Lack of Marketability Discount, or LOMD: Sallmanns considered both the option method and the
quantitative marketability discount model to quantify the LOMD. Both methods provided similar
results on LOMD, which decreased from 35% as at June 28, 2006, which was the commitment date of
the issuance of our exchangeable notes, to 20% as at September 15, 2006, which was the commitment
date of the issuance of our Series B preferred shares, and to 10% as at December 15, 2006, which was
the commitment date of the issuance of our Series C preferred shares. The decrease in LOMD was
primarily attributable to our achievements in company restructuring and fund raising, which increased
our resources to carry through this initial public offering.
The value of our business was then allocated to the fair value of our preferred shares and ordinary shares.
Sallmanns considered the liquidation preference and conversion feature of our preferred shares under the
allocation method. To determine the fair market value of the securities underlying our convertible instruments
requires us to make complex and subjective judgments regarding projected financial and operating results, our
unique business risks, the liquidity of our various instruments including preferred shares, ordinary shares, share
options and warrants, and our operating history and prospects at respective commitment dates of our
convertible instruments.
Income taxes
We recognize deferred tax assets for temporary differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements. Deferred tax assets are reduced by a valuation
allowance when, in our opinion, it is likely that some portion or all of the deferred tax assets will not be
realized. Current income taxes are provided for in accordance with the laws of the relevant taxing jurisdictions.
We continue to assess, on an ongoing basis, the degree of certainty regarding the realization of deferred tax
assets and whether a valuation allowance is required.
Internal Control Over Financial Reporting
In the course of auditing our consolidated financial statements for the year ended December 31, 2006, our
independent registered public accounting firm noted and communicated to us a significant deficiency and
other weaknesses in our internal control over financial reporting. The significant deficiency identified by our
independent registered public accounting firm is that our chief financial officer joined us in August 2006 and
that we did not previously have any personnel who were familiar with U.S. GAAP. We currently do not have
sufficient personnel with adequate expertise to ensure that we can produce financial statements in accordance
with U.S. GAAP on a timely basis.
Following the identification of this significant deficiency and other weaknesses, we have adopted certain
steps, and we plan to implement additional steps, to address them and to improve our internal control over
financial reporting generally. In particular, we are committed to building a strong financial reporting, analysis
and internal control team to ensure our full compliance with U.S. GAAP. We have hired a U.S. certified
public accountant with more than 15 years of experience in financial reporting under U.S. GAAP as our
financial controller. In addition, we intend to hire a senior manager for financial reporting and analysis, who
will be a U.S. certified public accountant and have extensive experience in financial reporting under
U.S. GAAP. To complement our own recruiting efforts, we have retained recruiting firms to search for
additional qualified personnel to further strengthen our finance and accounting team. We plan to approximately
double our finance and accounting staff by the end of 2007 by recruiting personnel who possess U.S.
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