Opportunity and risk report
Opportunity and risk management system
SYSTAIC’s opportunity and risk management system is an integral part of its corporate strategy and is geared to ensuring the continued existence of the Company and increasing shareholder value. It is structured in such a way as to identify and monitor significant risks. Group Controlling creates the basis for assessing the effect of identified opportunities and risks on the Company’s net assets, financial position and results of operations. Risk management incorporates all fully consolidated companies of the SYSTAIC Group.
Opportunities
Opportunities for SYSTAIC arise from the positioning it has already achieved in the market for roof-integrated solar systems and from the continuous further development of our products, and the advancement of their technological lead. In the Automotive division Webasto Solar GmbH, a joint venture between systaic AG and Webasto AG, is currently seeing a substantial increase in development contracts from the automotive industry and thus expects a significantly larger volume of business in future. The preparations currently underway for a strategic cooperation with Saint-Gobain have created a basis for SYSTAIC to collaborate with a strong distribution partner in its Energy Roof and Automotive divisions. In the Solar Power Plants division partnerships with project developers and well-heeled investors offer good opportunities for further business expansion, particularly abroad.
Other opportunities are carefully evaluated and those which are not outweighed by opposing risks are exploited accordingly.
Risks
The occurrence of one or more of the risks described below could have material adverse effects on the net assets, financial position and results of operations of systaic AG. The market price of the Company share could fall as a result of these risks and investors could lose part or all of their invested capital. The risks described below are not the only risks to which systaic AG is exposed. Other risks and uncertainties, of which the Company is currently unaware, could also impair the business operations of systaic AG and have adverse effects on the net assets, financial position and results of operations of systaic AG. The order in which the following risks are listed is no indication of the probability of their occurrence or the scope of their potential economic effects. The range and content of these risk factors is also based on assumptions, which may subsequently prove to be incorrect.
Macroeconomic risks
The international financial crisis, which was triggered by an undesirable trend on the US property market, has already affected macroeconomic development, particularly in the USA and other industrialised countries. After global economic growth of just 3.7% in 2008, there is a risk of a global economic recession in 2009. Should the economic and financial measures that have been resolved fail to help gradually restore confidence in the financial markets, there will be a greater risk of an even deeper and longer-lasting recession.
Industry-related risks
Dependency on general regulatory conditions and government subsidisation of the photovoltaic industry
As a photovoltaic plant manufacturer the SYSTAIC Group is dependent on economic development in the photovoltaic market. The rapid growth in this market over the past few years is attributable to a large extent to general regulatory conditions and subsidisation of photovoltaics in Germany and other countries. Without government subsidisation, power generation from photovoltaics would still be unable to compete, as a general rule, against other forms of power generation. The business activities of the SYSTAIC Group are thus influenced by the continuation of government subsidisation of photovoltaics.
The business activities of the SYSTAIC Group are not only dependent on the continuation of government subsidisation of photovoltaics, however, but also on government assistance for renewable energy sources as a whole; since not only the abolition of the government subsidy regime, but also a reweighting of the subsidisation of individual (renewable) energy sources could have a direct impact on the Company’s business. In Germany, the legal basis for this government support is provided, among other things, by the law prioritising renewable energies, the German Renewable Energy Sources Act (EEG) in its current version dated 25 October 2008. In addition to other regenerative energy sources, this law promotes in particular photovoltaics, which are the focus of the SYSTAIC Group’s business. This support is provided, on the one hand, by the general obligation imposed upon network operators to immediately prioritise the purchase of all available power from renewable energies, and to transfer it and distribute it. This ensures that the solar energy produced in this way is actually purchased. The EEG also contains regulations pertaining to the minimum price for electricity generated from renewable energy sources. This tariff is payable from the time from which the generator produces electricity exclusively from renewable energies for the first time, for a period of 20 years in each case, plus the year of commissioning. Without this government-regulated support of power produced with photovoltaics, this form of power generation would not be able to compete in the foreseeable future in Germany – in the sphere of plants like these, which are connected to a power network (on-grid) – with other grid-connected energy sources. In Germany, in particular, government subsidisation is currently an essential requirement for the business activities of the SYSTAIC Group. Even though the subsidisation of renewable energies, including photovoltaics and solar-thermal energy, has political support in the European Union and Germany, this is no guarantee that this politically desired support of renewable energies will always be maintained at a level necessary to make these energy sources competitive. The German subsidy system provides for a continuous annual reduction of the minimum tariff for the electricity produced and fed in. The feed-in tariffs for plants commissioned before 1 January 2010 have been reduced to between 31.94 and 43.01 cents per kWh, depending on the type of plant. The feed-in tariff will continue to be reduced further. To date, there is no guarantee that the efficiency of photovoltaics can be improved through improved performance and reduced production costs to such an extent as to compensate for the reduction in the feed-in tariffs.
There is nothing in place to protect the continued existence of the subsidisation of solar energy. A decline in political support and the financial implications this would have could have a negative impact on demand in Germany. This could endanger the continued existence of the SYSTAIC Group.
Other European countries (e.g. Italy, Spain, Portugal, France, Greece) also have political systems for promoting photovoltaics. Restrictions or even termination of political subsidisation in these countries could also impact demand and endanger the existence of the SYSTAIC Group.
Risk of a possible drop in prices of conventional energy sources influencing the demand for photovoltaic plants and thus for associated products and services
The current strong demand for photovoltaic plants is partly attributable to hikes in conventional energy prices in the past. The higher the price of energy generated from conventional energy sources, the more financially appealing the alternative generation of energy from photovoltaics seems. Conversely, a drop in the market prices of conventional energy sources, such as crude oil or natural gas, or a cut in electricity prices, could make energy generation from photovoltaics seem like the less attractive option economically, which could lead to a decline in the demand for photovoltaics. Such a decline in demand could result in considerable price pressure on photovoltaic products and reduce the market sales volume. A fall in the prices of conventional energy sources could have material adverse effects on the business and thus, among other things, on the net assets, financial position and results of operations of the SYSTAIC Group and, hence, systaic AG.
Power generation from other renewable energy sources could impact photovoltaics
Power generation from photovoltaics currently competes to some extent, and could, in future, find itself competing even more fiercely with other methods to generate power from other renewable energy sources, such as wind power, biomass or geothermal energy. These other methods could exert a strong competition pressure on photovoltaics, if, for instance, as a result of technological advancement, these methods prove to be more economical, or receive stronger regulatory support for political reasons. This could impair the further growth of the photovoltaic industry and could also lead to a decline in demand for photovoltaic products.
Risks associated with the Company’s strategy
Risks associated with expansion of activities in the SYSTAIC Energy Roof division
One of the SYSTAIC Group’s strategic objectives is to expand its activities in the SYSTAIC Energy Roof division and increase the share of total revenue this division generates. The SYSTAIC Group needs to take a number of measures in order to achieve this strategic objective. These measures include plans to expand the distribution activities for the energy roof system.
Until now, the Company has marketed its energy roof system by way of direct distribution. It is planned to increasingly shift the marketing of the energy roof system to multipliers such as architects, property developers, prefabricated housing manufacturers and craftsman’s businesses. The first energy roof systems were installed at a prefabricated housing manufacturer. No assurance can be given, however, that the intensification of distribution activities will lead to an increase in the share of total revenue generated by the Energy Roof division or that the distribution activities will heighten interest and attract more attention to the energy roof system and thus enable the achievement of the strategic objective being pursued within the scope of planning.
As part of the planned expansion of the SYSTAIC Energy Roof division the SYSTAIC Group must adapt the installation of the SYSTAIC energy roof system to the respective local requirements of the power supply companies, which differ significantly in some cases. In the event of further growth the SYSTAIC Group will have to expand its capacities for installing the SYSTAIC energy roof system or engage the services of external partners. It cannot be ruled out that this could lead, during a transitional period at least, to harmonisation problems, capacity bottlenecks or, potentially, a reduction in the quality of installation of the SYSTAIC energy roof system.
The financial and other costs of implementing this strategic objective may be substantial and could also be in vain, if the energy roof system is not accepted by the customers.
Dependency on individual customers
The SYSTAIC Group’s Automotive division currently only has one customer, Webasto AG. The SYSTAIC Group and Webasto AG have concluded a general supply agreement, which does not, however, specify any purchase obligations. While Webasto AG is a partner of systaic AG and for a period of two years thereafter the SYSTAIC Group is not permitted to supply competitors of Webasto AG in the transport sector. No assurance can be given that Webasto AG will purchase the expected quantity of solar modules for the automotive industry from the SYSTAIC Group. Insolvency or a cessation of business activities on the part of Webasto AG would have a material adverse effect on the revenue of the SYSTAIC Automotive division.
In the Solar Power Plants division revenue of € 70 million – most of which has not yet been recognised in assets – was realised in financial year 2008 with an acquisition vehicle of KG Allgemeine Leasing GmbH & Co. (KGAL), Grünwald, and € 65 million with a German financial investor.
Insolvency, a cessation of business or financial difficulties at even just one of the above-mentioned customers would have a material adverse effect on the business of the SYSTAIC Group and would thus have material adverse effects on the net assets, financial position and results of operations of the SYSTAIC Group and, hence, systaic AG.
Risks of international business operations
The Company intends to develop and expand its business in other EU member states and win customers for photovoltaic plants in other European countries. The expansion of the SYSTAIC Group's business operations into other geographical regions could be adversely affected by a number of factors, such as general political, economic, legal and tax conditions, unexpected changes in regulatory conditions and tariffs, recessions, limited protection of intellectual property, difficulties with filling and managing positions at foreign subsidiaries, or government subsidisation of competitor companies. In addition, national or international competitors may be in a position to better satisfy demand for photovoltaic plants, since they benefit from better production facilities and market outlets due to their greater familiarity with the local conditions and markets. The development of new markets could also lead to start-up losses. Such factors could complicate the expansion of the Company’s business operations in these regions or make it impossible, which could have an adverse effect on the planned growth and thus on the general business and net assets, financial position and results of operations of the SYSTAIC Group and, hence, systaic AG.
Risks of rapid technological change
The solar energy industry is characterised by dynamic technological change. The photovoltaics market, in particular, is influenced by a continuous improvement and advancement of the system technology, as well as constantly changing customer demands.
The business success of the SYSTAIC Group therefore depends, among other things, on having to invest in fulfilling these constantly growing technological demands and in further developing its service offering. The success of the SYSTAIC Group will in future significantly depend on its ability to continuously improve the service offering of the SYSTAIC Group and to launch or purchase new products and services at the right time, in order to be able to keep up with the rapid technological change and react to the needs and requirements of the market. No assurance can be given that the SYSTAIC Group will be able to cope with these demands.
There is a particular risk of competitors of the SYSTAIC Group launching similar products, especially products such as the SYSTAIC energy roof system, making improvements to existing service and product ranges, or announcing or launching new services or products with new functionalities. These may be less expensive than the products and services offered by the SYSTAIC Group or may be based on new technologies or changed customer requirements, and may thus supersede the existing service offering of the SYSTAIC Group, or they may represent cheaper alternatives to the existing services offered by the SYSTAIC Group and may be able to achieve higher efficiencies and performance levels. This could lead to the existing service offering of the SYSTAIC Group becoming outdated and no longer marketable.
In addition, competitors could secure exclusive property rights to the newly developed technologies and thus impair the competitive position of the SYSTAIC Group.
This constant technological change and continuous further development require a considerable amount of know-how, qualified specialists and development expenditure. No assurance can be given that the necessary resources needed to stay abreast of technological change and advancement will be sufficiently available. Furthermore, the challenges brought on by such rapid technological change could lead to changes in the current product structure of the SYSTAIC Group, should the demand for the services offered by the SYSTAIC Group decrease or cease completely.
The Company is also unable to give any assurance that the services offered by the SYSTAIC Group, particularly in its SYSTAIC Energy Roof and SYSTAIC Automotive divisions, will not be squeezed out of the market by other technologies which the SYSTAIC Group has no access to or could only gain access to by investing a substantial amount of time and money.
There is also a risk of investments in new procedures, technologies, products and services proving later to be bad investments, because development projects turn out to be unfeasible or they fail to deliver commercially useful results, rendering the financial costs associated with the development pointless.
Risks of infringements or loss of intellectual property belonging to SYSTAIC
The SYSTAIC Group relies on the protection of its intellectual property rights and rights of use. No assurance can be given that it will be possible to effectively defend all rights necessary for the continued operation and development of the Energy Roof division of the SYSTAIC Group in future. A considerable portion of the special features of the SYSTAIC energy roof system are not protected by intellectual property rights. This enables imitations; if bearers of know-how were to move to competitors, this would facilitate imitations.
No assurance can be given that third parties will not develop a product in the long term that is similar to the SYSTAIC energy roof system, without infringing upon the property rights of the SYSTAIC Group.
In addition, protection of intellectual property is meant to be achieved via the conclusion of confidentiality agreements with employees and third parties. The employment contracts of the employees of the SYSTAIC Group contain confidentiality clauses regarding business secrets of which they gain knowledge during their working relationship with the Group. The SYSTAIC Group is entitled to the customary rights to employee inventions and employee product developments and to the customary allocation of rights of use to copyrights and other ancillary copyrights. No assurance can be given, however, that the agreements concluded by the Company to protect its intellectual property will be adequate.
Risks arising from the existing internal organisation and its adjustment to current and planned growth
The current growth and the planned expansion of the SYSTAIC Group’s business requires – in addition to an expansion of production and distribution capacities – the development and further development of an appropriate internal organisation that is fitting for this growth and which includes risk monitoring, accounting, controlling and management structures that enable, among other things, early recognition of undesirable trends and risks. With this in mind, the Company is continuing to recruit new (managerial) staff in all the relevant areas. However, expanding business operations and growing the internal and external organisation requires financial and human resources. If the SYSTAIC Group fails to sufficiently expand its internal operational and organisational structure, this could result in undesirable trends or entrepreneurial or administrative failures, which could have material adverse effects on the net assets, financial position and results of operations of the SYSTAIC Group.
Risks associated with the construction of a production facility and capacity utilisation
The SYSTAIC Group produces the units of energy it requires to build SYSTAIC energy roofs itself, provided these are used for photovoltaics and not solar thermal energy. To this end the SYSTAIC Group has built an automated production facility with a capacity of around 40 MWp, in addition to its existing production facility in Landsberg. This production facility was commissioned in the 2nd half of 2008. In the Company’s estimation, this production plant conforms to the current technical standard. Nevertheless, the SYSTAIC Group may be forced to make investments to upgrade the production facility to meet the demands of current technological advancement, in order to provide the market with the expected quality and quantity of products. If SYSTAIC is unable to do this, this could impair its competitive position.
There is also a risk that the SYSTAIC Group may, by incorrectly assessing the market trend, build production capacities that cannot be utilised in full. A lack of production capacity utilisation could lead to extraordinary write-downs, which could have adverse effects on the Company's earnings.
Risks of potential future company acquisitions
The Company plans to further expand and increase its presence in the domestic and international market over the next few years. The Company is not excluding the possibility of acquiring companies and equity interests in companies as part of this expansion. Acquisitions, particularly foreign acquisitions, can present a considerable business risk. Especially in the case of smaller companies, it may only be possible to conduct a very limited audit of the company in question; the costs of a thorough audit may be unreasonably high. No assurance can be given, particularly in cases such as these, that risks not identified – or not identified in terms of their significance – in connection with the acquisition of a company or the equity holding in such a company will not materialise, or that the acquisition of such companies or equity interests will achieve the desired results.
Performance-related risks
Competition risks
The SYSTAIC Group competes in its various business fields with other suppliers. The growing competition in the area of photovoltaic plants and services could result, in particular, in price reductions, lower sales revenues and profit margins, and in an inability to expand, as well as a potential loss of market share for the SYSTAIC Group. Current and potential competitors include companies with, in some cases, substantial financial, technical and human resources at their disposal and a large market share. New competitors, particularly former suppliers of the Company, or affluent corporate groups with international operations could enter the market and quickly gain significant market shares.
No assurance can be given that the Company will be able to hold its own in the current or stronger competition anticipated in the future. Competitors may also be in a position to react faster than the Company to new or changing market conditions, conduct more extensive and more cost-intensive marketing campaigns, pursue a more aggressive pricing policy, and offer customers more favourable conditions than the Company. In particular, competitors could copy the SYSTAIC Group’s product and/or business model in its SYSTAIC Energy Roof division or Automotive division, resulting in the SYSTAIC Group losing what it considers to be its unique selling points. Furthermore, no assurance can be given that competitors will not develop and market products or services which are superior to the product and services offered by the Company or which achieve a greater market acceptance.
No assurance can be given that competitors will not gain control over the Company's suppliers, which would have a negative impact on the Company's supplier relationships.
Financial risks
Dependency on future capital requirements
The SYSTAIC Group operates in a field which is currently characterised to a large extent by growth. In concrete terms for the SYSTAIC Group, this growth means a substantial funding requirement in a number of different respects. In addition to expanding the necessary capacities, there are projects to be financed, particularly in the Solar Power Plants division. In the past, negotiations concerning financing for solar power plants have proved difficult for the SYSTAIC Group, and it is not foreseeable at the present time whether it will be possible to negotiate sources of finance in general or at conditions that the SYSTAIC Group finds acceptable.
In addition to financing the project business, financing the procurement of the necessary components is also becoming increasingly more important. The SYSTAIC Group takes out loans from suppliers and banks and also uses the instrument of factoring. In addition, in June 2008 the Company and an investment company co-founded systaic sourcing AG & Co. KG, a purchasing agency. The purpose of this company, among other things, is the purchase and trade of solar cells and modules. systaic sourcing AG & Co. KG has equity of € 5 million; there are also plans to take out a loan of € 8 to 10 million with a bank. At the present time, however, it is uncertain whether the SYSTAIC Group will be able to take out this loan of € 10 million, which it has budgeted into its purchasing finance. Some financing is only agreed for the short term and may, in some cases, also be terminated, if the SYSTAIC Group’s financial situation deteriorates. There is no guarantee that it will be possible to obtain subsequent financing in general or at similar conditions. Financing requirements currently depend mainly on the project business.
If the SYSTAIC Group assumes additional funds via public or private forms of financing, including borrowing or equity financing, or makes other agreements, raising additional equity capital may have a dilutive effect for shareholders; in the case of borrowings, the SYSTAIC Group may be subject to restrictions with regard to dividend distribution, or other restrictions.
Currency risks
The SYSTAIC Group generated a significant portion of its revenue abroad in financial year 2008, but invoiced all its sales in euros. Purchases were also transacted in euros. It cannot be ruled out that sales or purchases might be invoiced in other currencies in future, however. In this event, the Company would be exposed to a risk of currency fluctuation.
Tax risks, particularly associated with the merger of systaic Deutschland GmbH with systaic AG, the interest barrier rules and intragroup cost allocations
The development of the prevailing tax law is subject – including in its administrative application – to continuous change. The tax information presented here thus reflects the current legal situation, current legal practice and the commentary in the tax literature at the date of our annual report. Future amendments to the law, deviating interpretations of the law by tax authorities and finance courts cannot be ruled out. The SYSTAIC Group is exposed to tax risks to the extent that tax assessments and external audits may lead to arrears payments or taxation laws may result in unfavourable amendments.
Tax assessments and external audits in the area of corporate income tax, trade tax and value-added tax have not been conducted within the SYSTAIC Group to date, with the exception of a special VAT audit conducted at systaic Deutschland GmbH and rentaic GmbH, respectively, nor are any pending as of the date of our annual report. In the Company’s opinion the tax returns prepared together with the accountants for the SYSTAIC Group and submitted were complete and correct. Nevertheless, there is a risk that the fiscal authorities may take a different view of some of the information provided, which could result in significant tax arrears payments for the SYSTAIC Group. This could be the case, for example, if, in the opinion of the fiscal authorities, performance relationships with partners or persons related to these partners and with subsidiaries were not billed in the past at normal market conditions, at the expense of the SYSTAIC Group, or the documentation required according to tax regulations cannot be adequately provided. In financial year 2008 systaic Deutschland GmbH was merged with systaic AG retrospectively as of 31 December 2007. It cannot be ruled out that this may have resulted in the tax loss carryforwards and the current losses incurred by systaic AG in 2008 up until 26 June 2008 being lost, meaning that these may no longer be offset against income. This could result in a higher tax burden and future tax arrears payments for systaic AG, which could, in turn, also have a negative impact on cash flow.
The Company assumes that it will be able to deduct on an accrual basis the full amount of expenses incurred from its financing activities after the SYSTAIC Group completes its current and planned borrowing. Under the interest barrier rules, however, it is possible – subject to a high level of debt financing and the fulfilment of additional requirements – that the relevant expenses from financing activities may only be partially deducted in the period in which they were incurred. This may result in a higher tax burden.
systaic AG assumes that it can be classed for VAT purposes as an entrepreneur for the entire period of its existence. It cannot be ruled out that systaic AG’s classification as an entrepreneur may not be recognised, at least in part, until entry in the commercial register of the merger of systaic Deutschland GmbH with systaic AG, with the result that (at least part of) the VAT paid up until this point may not be deducted as input tax.
There is a risk associated with the construction of solar power plants in Spain of a transfer tax being charged on the value of the solar power plant; such a tax may also be incurred multiple times.
Liquidity risk
The liquidity risk, in other words, the risk of SYSTAIC not being able to meet its financial obligations, is controlled by the creation of the necessary financial flexibility, as well as by efficient cash management. As of 31 December 2008, SYSTAIC had at its disposal cash and cash equivalents amounting to € 2,676 thousand, as well as free cash lines of credit totalling € 0.7 million.
A number of relevant agreements have been concluded with banks and certain suppliers to bridge the financing requirement until the final payment for the Guadalin/Antolin project is received. There is a significant risk of substantial portions of the final payment on the Guadalin/Antolin project being delayed. It is necessary to agree appropriate extensions of the lines of credit with the banks and suppliers to avoid a potential liquidity risk.
Risks from reduced financing options for solar products and increased financing costs for customers
Generally speaking, grid-connected photovoltaic plants are mainly financed with borrowed capital. The historically low interest rate at present and the resulting low borrowing costs have had a positive influence on the profitability of photovoltaic plants, and have thus contributed significantly to the growth in demand for them. An increase in interest rates, which would lead to higher borrowing costs, would reduce the profitability of photovoltaic plants and thus impact demand. It has also become generally much more difficult for customers to obtain financing in some cases, also because banks are demanding higher and higher amounts of equity. This makes it less attractive, more difficult or even impossible for many customers to assume a planned source of financing.
Risks due to banks’ reluctance to lend for corporate financing
There is a risk associated with the financial market crisis of banks being reluctant to lend money for corporate financing and demanding higher collateral. Financing costs may also be significantly higher. This could have material adverse effects on corporate financing, which could endanger the continued existence of the SYSTAIC Group.
Risks from obligations to Group companies or their creditors
systaic AG or individual subsidiaries may be obliged vis-à-vis (other) subsidiaries, their creditors or fellow partners to pay a loss adjustment or fulfil other compensatory measures, insofar as certain measures that are unfavourable for the subsidiaries are or were taken. systaic AG could also be obliged to furnish subsidiaries with sufficient financial resources. This is due, on the one hand, to the fact that systaic AG has issued some subsidiaries with letters of responsibility or has assumed letters of credit or joint liabilities towards subsidiary creditors. In addition, systaic AG has undertaken vis-à-vis Webasto Solar GmbH, a majority-owned subsidiary of systaic AG, to finance replacement investments totalling up to € 1 million p.a. relating to the business operations of Webasto Solar GmbH, and to cover other borrowing requirements arising from the investment plan presented by the management of Webasto Solar GmbH and adopted with the votes of all shareholders. The possibility cannot be ruled out that these various financing commitments may give rise to considerable payment obligations for systaic AG vis-à-vis individual or a number of subsidiaries.
Personnel risks
Dependency on certain key personalities and the ability to retain qualified external and internal personnel
The future success of the SYSTAIC Group is significantly influenced by the activities of a number of key personalities. These include in particular the members of the Executive Board and the members of senior management, as well as a number of technical experts. The loss at short notice of one of these key personalities could have an adverse effect on the general business and the net assets, financial position and results of operations of the SYSTAIC Group and thus systaic AG.
There is currently a high demand for qualified specialists to develop and distribute solar systems and communicate the accompanying information. Accordingly, there is a strong demand for specialists in these areas and the search for new employees is difficult for the entire industry. The SYSTAIC Group plans to increase the number of salaried employees it currently has on its payroll. It is particularly necessary to expand installation capacities by recruiting more staff and committing and training external technicians, in order to ensure the planned expansion of the SYSTAIC Energy Roof division. However, no assurance can be given that the Company will succeed in obtaining additional capacities; or it may only be able to obtain them at a high cost.
IT risks
The information technologies used are regularly checked to ensure that they are processing IT-assisted business processes securely. SYSTAIC takes information security very seriously; the systems are therefore upgraded and monitored on an ongoing basis.
Legal risks
Risks of SYSTAIC breaching third-party intellectual property rights
The possibility cannot be ruled out that the SYSTAIC Group may infringe upon patents or other third-party industrial property rights, since competitors also patent their inventions and obtain other industrial property right protection. Defending such claims could result in considerable costs for the SYSTAIC Group. This could have a material adverse effect on its net assets, financial position and results of operations. If the SYSTAIC Group were to infringe upon third-party industrial property rights, the Group would be prevented from using the protected technologies in the countries in which property rights were granted. This applies irrespective of whether the SYSTAIC Group has previously used these technologies in other countries in a permissible way, and, for reasons of secrecy, for instance, refrained from obtaining industrial property right protection.
In these cases, the SYSTAIC Group may be banned from manufacturing or marketing products, and it may be forced to purchase licenses or alter its production processes. The SYSTAIC Group may also be exposed to liability for damages. In addition, competitors of the Company could impose a ban on the production or distribution of such products in countries where preferential patent protection or other industrial property right protection exists in favour of these competitors. The SYSTAIC Group may, however, also depend on being able to utilise third-party technologies by purchasing licenses, which would mean paying the relevant costs. There is no guarantee, however, that the Company will obtain sufficient licenses in future to ensure its business success or that it will obtain these at acceptable conditions.
Risks due to product defects and warranties granted
The services offered by the SYSTAIC Group, particularly the planning of solar energy plants, and the products it offers could be flawed. Such flaws may, among other things, cause damage to the customer’s property and – if they arise during an early phase of the market launch of the SYSTAIC energy roof system, which can happen with a new product launch – could also prevent or delay the establishment of this product on the market. The risk increases due to a potential series of related claims as a result of the new production method. In the event of a series of related claims, the SYSTAIC Group may be forced to assume the costs of exchange or recall campaigns. Such measures could also result in the spread of negative information about the SYSTAIC Group and its products, which could impair the market acceptance of the photovoltaic plants. No assurance can be given, therefore, that the SYSTAIC Group will not be exposed to substantial warranty and/or damages claims in future. Provisions for this eventuality are set up in the SYSTAIC Energy Roof division, currently at 1.5% of the selling price. However, these provisions may still prove to be insufficient to cover the respective claims.
The warranties issued by suppliers fall significantly short of the warranties issued to customers. Recourse to suppliers will therefore only be possible in the fewest of cases. In addition, the Company is dependent on the creditworthiness of its suppliers in the event of warranty recourse; if the respective supplier is not sufficiently creditworthy, this may result in defaults on any recourse claims by the SYSTAIC Group.
Furthermore, the SYSTAIC Group often outsources services to be rendered, in particular plant installation, and hires subcontractors to complete such tasks. If product defects or deficiencies arise, for which the subcontractors are responsible, there is no guarantee that the SYSTAIC Group will be able to take recourse to the subcontractor. Even if recourse claims do exist, these may only cover part of the damage; there is also no guarantee that it will be possible to enforce such claims.
Warranty
The SYSTAIC Group grants customers who conclude a service and warranty agreement with the SYSTAIC Group a 20-year warranty with certain restrictions for the SYSTAIC energy roof systems it supplies, which is valid from the date of delivery. The SYSTAIC Group provides its customers with a 24-year power output warranty against the payment of a fee. The reference value for the warranty is based on a specific calculation of the expected minimum output of the installed systems at the defined location. It cannot be ruled out that the SYSTAIC Group may be faced with claims from these warranties, if, for example, the SYSTAIC energy roof system fails to yield the expected output for technical reasons, or it generates less electricity due to weather conditions, or the calculations prove to be incorrect. The SYSTAIC Group sets up provisions for any claims related to the power output warranty; these could prove to be inadequate, however.
Procurement and purchasing risks
Dependency on the supplier industry and raw materials
The Company does not manufacture key plant components, in particular solar cells, for its solar energy systems itself, but purchases these from a small number of suppliers. The Company therefore depends on its suppliers to a certain extent. The sale of photovoltaic plants, currently the focus of the Company's business activities, depends on the availability of these plant components. Tension on the market for solar cells and modules has eased noticeably since the fourth quarter of 2008. Due to the current supply surplus, including photovoltaic modules, the Company may be able to procure the quantity and quality of materials it needs from suppliers at satisfactory conditions. We therefore assume that the SYSTAIC Group will, at any given time, be able to procure the required solar cells and modules at competitive prices.
Overall assertion
The continued existence of systaic AG is not in any danger at the present time; overall, the risks are surmountable. We do not expect the risk situation to change significantly.
The future growth of systaic AG and its subsidiaries depends to a great extent on the continuation of the business to plan and construct solar power plants and on the ability to increase demand on the market for the SYSTAIC energy roof – the strategic core product of the SYSTAIC Group.
Updated on 30 March 2009
