form_10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM
10-Q
_____________________
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended June 29, 2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ______________ to ______________
Commission
file number 000-51593
SunPower
Corporation
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
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94-3008969
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(State
or Other Jurisdiction of
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
No.)
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3939
North First Street, San Jose, California 95134
(Address
of Principal Executive Offices and Zip Code)
(408)
240-5500
(Registrant’s
Telephone Number, Including Area Code)
_____________________
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated Filer x
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Accelerated
Filer ¨
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Non-accelerated
filer ¨
(Do
not check if a smaller reporting company)
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Smaller
reporting company ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
The total
number of outstanding shares of the registrant’s class A common stock as of
August 1, 2008 was 40,542,667.
The total number of outstanding shares of the
registrant’s class B common stock as of August 1, 2008 was 44,533,287.
INDEX
TO FORM 10-Q
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Page
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3
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Item 1.
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3
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3
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4
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5
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6
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Item 2.
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32
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Item 3.
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48
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Item 4.
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49
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50
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Item 1.
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50
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Item 1A.
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50
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Item 4.
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84
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Item 6.
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85
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86
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87
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Item 1.
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Financial
Statements
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SunPower
Corporation
Condensed
Consolidated Balance Sheets
(In
thousands, except share data)
(unaudited)
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June
29,
2008
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December 30,
2007
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Cash and cash
equivalents
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Restricted cash,
current portion
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Costs and estimated
earnings in excess of billings
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Advances to
suppliers, current portion
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Prepaid expenses
and other current assets
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Restricted
cash, net of current portion
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Property,
plant and equipment, net
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Advances
to suppliers, net of current portion
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Liabilities
and Stockholders’ Equity
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Accounts payable to
Cypress
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Billings in excess
of costs and estimated earnings
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Customer advances,
current portion
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Total
current liabilities
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Customer
advances, net of current portion
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Other
long-term
liabilities
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Commitments
and Contingencies (Note 8)
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Preferred stock,
$0.001 par value, 10,042,490 shares authorized; none issued and
outstanding
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Common stock,
$0.001 par value, 375,000,000 shares authorized: 85,533,004 and 84,803,006
shares issued; 85,365,521 and 84,710,244 shares outstanding, at June 29,
2008 and December 30, 2007, respectively
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Additional paid-in
capital
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Accumulated other
comprehensive income
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Accumulated
earnings (deficit)
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Less: shares of
common stock held in treasury, at cost; 167,483 and 112,762 shares at June
29, 2008 and December 30, 2007, respectively
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Total
stockholders’ equity
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Total
liabilities and stockholders’ equity
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed
Consolidated Statements of Operations
(In
thousands, except per share data)
(unaudited)
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Three
Months Ended
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Six
Months Ended
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June
29,
2008
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July 1,
2007
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June
29,
2008
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July 1,
2007
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Cost of components
revenue
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Sales, general and
administrative
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Purchased
in-process research and development
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Impairment of
acquisition-related intangibles
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Other
income (expense), net
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Income
(loss) before income taxes
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Income tax
provision (benefit)
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Net
income (loss) per share:
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed
Consolidated Statements of Cash Flows
(In
thousands)
(unaudited)
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Six
Months Ended
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June
29,
2008
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July
1,
2007
Note
1
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Cash
flows from operating activities:
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Adjustments to reconcile net
income (loss) to net cash used in operating
activities:
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Impairment of
long-lived assets
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Amortization of
intangible assets
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Impairment of
acquisition-related intangibles
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Amortization of debt
issuance costs
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Purchased in-process
research and development
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Share in net income
of joint venture
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Excess tax benefits
from stock-based award activity
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Deferred income taxes
and other tax liabilities
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Changes in operating
assets and liabilities, net of effect of
acquisitions:
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Costs and estimated
earnings in excess of billings
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Prepaid expenses and other
assets
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Accounts payable and other
accrued liabilities
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Accounts payable to
Cypress
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Billings in excess of costs
and estimated earnings
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Net
cash used in operating activities
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Cash
flows from investing activities:
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Decrease (increase) in
restricted cash
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Purchases of property, plant
and equipment
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Purchases of
available-for-sale securities
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Proceeds from sales or
maturities of available-for-sale securities
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Cash paid for acquisition,
net of cash acquired
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Cash paid for investments in
joint ventures and other private companies
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Net
cash used in investing activities
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Cash
flows from financing activities:
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Proceeds from exercises of
stock options
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Excess tax benefits from
stock-based award activity
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Purchases of stock for tax
withholding obligations on vested restricted stock
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Proceeds from issuance of
convertible debt
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Convertible debt issuance
costs
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Principal payments on line
of credit and notes payable
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Net
cash provided by financing activities
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Effect
of exchange rate changes on cash and cash
equivalents
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Net
decrease in cash and cash equivalents
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Cash
and cash equivalents at beginning of period
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Cash
and cash equivalents at end of period
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Additions to
property, plant and equipment acquired under accounts payable and other
accrued liabilities
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Change in goodwill
relating to adjustments to acquired net assets
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Issuance of common
stock for purchase acquisition
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Stock options
assumed in relation to acquisition
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1. THE COMPANY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The
Company
SunPower
Corporation (together with its subsidiaries, the “Company” or “SunPower”), a
majority-owned subsidiary of Cypress Semiconductor Corporation (“Cypress”), was
originally incorporated in the State of California on April 24, 1985. In
October 1988, the Company organized as a business venture to commercialize
high-efficiency solar cell technologies. The Company designs, manufactures and
markets high-performance solar electric power technologies. The Company’s solar
cells and solar panels are manufactured using proprietary processes and
technologies based on more than 15 years of research and development. The
Company’s solar power products are sold through its components and systems
business segments.
On
November 10, 2005, the Company reincorporated in Delaware and filed an
amendment to its certificate of incorporation to effect a 1-for-2 reverse stock
split of the Company’s outstanding and authorized shares of common stock. All
share and per share figures presented herein have been adjusted to reflect the
reverse stock split.
In
November 2005, the Company raised net proceeds of $145.6 million in an initial
public offering (the “IPO”) of 8.8 million shares of class A common stock
at a price of $18.00 per share. In June 2006, the Company completed a follow-on
public offering of 7.0 million shares of its class A common stock, at a per
share price of $29.50, and received net proceeds of $197.4 million. In July
2007, the Company completed a follow-on public offering of 2.7 million shares of
its class A common stock, at a discounted per share price of $64.50, and
received net proceeds of $167.4 million.
In
February 2007, the Company issued $200.0 million in principal amount of its
1.25% senior convertible debentures to Lehman Brothers Inc. (“Lehman Brothers”)
and lent 2.9 million shares of its class A common stock to an affiliate of
Lehman Brothers. Net proceeds from the issuance of senior convertible debentures
in February 2007 were $194.0 million. The Company did not receive any proceeds
from the 2.9 million lent shares of its class A common stock, but received a
nominal lending fee (see Note 10). In July 2007, the Company issued $225.0
million in principal amount of its 0.75% senior convertible debentures to Credit
Suisse Securities (USA) LLC (“Credit Suisse”) and lent 1.8 million shares of its
class A common stock to an affiliate of Credit Suisse. Net proceeds from the
issuance of senior convertible debentures in July 2007 were $220.1 million. The
Company did not receive any proceeds from the 1.8 million lent shares of class A
common stock, but received a nominal lending fee (see Note 10).
In
January 2007, the Company completed the acquisition of PowerLight Corporation
(“PowerLight”), a privately-held company which developed, engineered,
manufactured and delivered large-scale solar power systems for residential,
commercial, government and utility customers worldwide. These activities are now
performed by the Company’s systems business segment. As a result of the
acquisition, PowerLight became an indirect wholly-owned subsidiary of the
Company. In June 2007, the Company changed PowerLight’s name to SunPower
Corporation, Systems (“SP Systems”), to capitalize on SunPower’s name
recognition.
Cypress
made a significant investment in the Company in 2002. On November 9, 2004,
Cypress completed a reverse triangular merger with the Company in which all of
the outstanding minority equity interest of SunPower was retired, effectively
giving Cypress 100% ownership of all of the Company’s then outstanding shares of
capital stock but leaving its unexercised warrants and options outstanding.
After completion of the Company’s IPO in November 2005, Cypress held, in the
aggregate, approximately 52.0 million shares of class B common stock. On
May 4, 2007, Cypress completed the sale of 7.5 million shares of the
Company’s class B common stock in an offering pursuant to Rule 144 of the
Securities Act. Such shares converted to 7.5 million shares of class A common
stock upon the sale. As of June 29, 2008, Cypress owned approximately 44.5
million shares of the Company’s class B common stock, which represented
approximately 55% of the total outstanding shares of the Company’s common stock,
or approximately 52% of such shares on a fully diluted basis after taking into
account outstanding stock options (or 49% of such shares on a fully diluted
basis after taking into account outstanding stock options and shares loaned to
underwriters of the Company’s convertible indebtedness), and 90% of the voting
power of the Company’s total outstanding common stock.
The
condensed consolidated financial statements include purchases of goods and
services from Cypress, including wafers, employee benefits and other Cypress
corporate services and infrastructure costs. The expenses allocations have been
determined based on a method that Cypress and the Company consider to be a
reasonable reflection of the utilization of services provided or the benefit
received by the Company. See Note 2 for additional information on the
transactions with Cypress.
The
Company is subject to a number of risks and uncertainties including, but not
limited to, an industry-wide shortage of polysilicon, potential downward
pressure on product pricing as new polysilicon manufacturers begin operating and
the worldwide supply of solar cells and panels increases, the possible reduction
or elimination of government and economic incentives that encourage industry
growth, the challenges of achieving our goal to reduce costs of installed solar
systems by 50% by 2012 to maintain competitiveness, the continued availability
of third-party financing for the Company’s customers, difficulties in
maintaining or increasing the Company’s growth rate and managing such growth,
and accurately predicting warranty claims.
Summary
of Significant Accounting Policies
Fiscal
Years
The
Company reports on a fiscal-year basis and ends its quarters on the Sunday
closest to the end of the applicable calendar quarter, except in a 53-week
fiscal year, in which case the additional week falls into the fourth quarter of
that fiscal year. Both fiscal 2008 and 2007 consist of 52 weeks. The second
quarter of fiscal 2008 ended on June 29, 2008 and the second quarter of fiscal
2007 ended on July 1, 2007.
Basis
of Presentation
The
accompanying condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”) regarding interim financial reporting. The year-end Condensed
Consolidated Balance Sheets data was derived from audited financial statements.
Accordingly, these financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the Financial
Statements and notes thereto included in the Company’s Annual Report on Form
10-K for the year ended December 30, 2007.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates in these financial statements include
the “percentage-of-completion” revenue recognition method for construction
projects, allowances for doubtful accounts receivable and sales returns,
inventory write-downs, estimates for future cash flows and economic useful lives
of property, plant and equipment, asset impairments, valuation of auction rate
securities, certain accrued liabilities including accrued warranty reserves and
income taxes and tax valuation allowances. Actual results could differ from
those estimates.
In the
opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, which the Company believes are necessary for a fair statement of
the Company’s financial position as of June 29, 2008 and its results of
operations for the three and six months ended June 29, 2008 and July 1, 2007 and
its cash flows for the six months ended June 29, 2008 and July 1, 2007. These
condensed consolidated financial statements are not necessarily indicative of
the results to be expected for the entire year.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair
Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles in the United States ("U.S. GAAP"), and expands
disclosures about fair value instruments. This statement does not require any
new fair value measurements; rather, it applies other accounting pronouncements
that require or permit fair value measurements. The provisions of this statement
are to be applied prospectively at the beginning of the fiscal year in which
this statement is initially applied, with any transition adjustment recognized
as a cumulative effect adjustment to the opening balance of retained earnings.
The provisions of SFAS No. 157 were effective for fiscal years beginning
after November 15, 2007. In February 2008, the FASB released FASB Staff
Position FAS 157-b—Effective Date of FASB Statement No. 157, delaying
the effective date of SFAS No. 157 for one year for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
The Company does not presently hold any financial assets or financial
liabilities that would require recognition under SFAS No. 157 other than
available-for-sale investments and foreign currency derivatives. With the
exception of investments and foreign currency derivatives held, this deferral
makes SFAS No. 157 effective for the Company beginning in the first quarter of
fiscal 2009. The adoption of the relevant provisions under SFAS No. 157 in
the first quarter of fiscal 2008 did not have a material impact on the Company’s
financial position or results of operations (see Note 5). The Company is
currently evaluating the potential impact, if any, of the adoption of
SFAS No. 157 on measurement of fair value of its nonfinancial assets,
including goodwill, and nonfinancial liabilities.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which provides
companies an option to report selected financial assets and liabilities at fair
value. SFAS No. 159 requires companies to provide information helping financial
statement users to understand the effect of a company’s choice to use fair value
on its earnings, as well as to display the fair value of the assets and
liabilities a company has chosen to use fair value
for on
the face of the balance sheet. Additionally,
SFAS No. 159 establishes presentation and disclosure requirements designed
to simplify comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The statement was
effective for fiscal years beginning after November 15, 2007 and was
adopted by the Company in the first quarter of fiscal 2008. The Company did
not elect the fair value option for any of its financial assets or liabilities,
and therefore, the adoption of SFAS No. 159 had no impact on the Company’s
consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”), which replaces SFAS No. 141,
"Business Combinations" ("SFAS No. 141"). SFAS No. 141(R) will
significantly change the accounting for business combinations in a number of
areas including the treatment of contingent consideration, contingencies,
acquisition costs, in-process research and development and restructuring costs.
In addition, under SFAS No. 141(R), changes in deferred tax asset valuation
allowances and acquired income tax uncertainties in a business combination after
the measurement period will impact income tax expense. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008 and will be
adopted by the Company for any purchase business combinations consummated
subsequent to December 28, 2008.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of Accounting Research
Bulletin No. 51” (“SFAS No. 160”), which will change the
accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of equity. This new
consolidation method will significantly change the accounting for transactions
with minority interest holders. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008. The Company is currently evaluating the
potential impact, if any, of the adoption of SFAS No. 160 on its financial
position and results of operations.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an amendment of SFAS
No. 133” (“SFAS No. 161”), which expands the disclosure requirements for
derivative instruments and hedging activities. SFAS No. 161 specifically
requires entities to provide enhanced disclosures addressing the following:
(a) how and why an entity uses derivative instruments; (b) how
derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations; and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS No. 161 is effective for fiscal
years and interim periods beginning after November 15, 2008. The Company is
currently evaluating the potential impact, if any, of the adoption of
SFAS No. 161 on its financial position, results of operations and
disclosures.
In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination
of Useful Life of Intangible Assets” (“FSP FAS 142-3”), which amends the
factors that should be considered in developing the renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3
also requires expanded disclosure related to the determination of intangible
asset useful lives. FSP FAS 142-3 is effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the potential
impact, if any, of the adoption of FSP FAS 142-3 on its financial position
and results of operations.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”), which identifies the sources of
accounting principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP. This
Statement is effective 60 days following the SEC's approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles.” The
Company currently adheres to the hierarchy of U.S. GAAP as presented in SFAS No.
162, and does not expect its adoption will have a material impact on its
financial position, results of operations and disclosures.
In
May 2008, the FASB issued FSP APB 14-1, which clarifies the accounting for
convertible debt instruments that may be settled in cash upon conversion. FSP
APB 14-1 significantly impacts the accounting for instruments commonly referred
to as Instruments B, Instruments C and Instruments X from Emerging Issue Task
Force (“EITF”) Issue No. 90-19, “Convertible Bonds with Issuer Option to Settle
for Cash upon Conversion,” and any other convertible debt instruments that allow
settlement in any combination of cash and shares at the issuer’s option. The new
guidance requires the issuer to separately account for the liability and equity
components of the instrument in a manner that reflects interest expense equal to
the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for
fiscal years and interim periods beginning after December 15, 2008, and
retrospective application will be required for all periods presented. The new
guidance may have a significant impact on the Company’s outstanding convertible
debt balance of $425.0 million, potentially resulting in significantly higher
non-cash interest expense on our convertible debt (see Note 10). The Company is
currently evaluating the potential impact of the new guidance on its results of
operations and financial condition.
Revision
of Statement of Cash Flow Presentation Related to Purchases of Property, Plant
and Equipment
The
Company has corrected its Condensed Consolidated Statements of Cash Flows for
the six months ended July 1, 2007 to exclude the impact of purchases of
property, plant and equipment that remain unpaid and as such are included in
“accounts payable and other accrued liabilities” at the end of the reporting
period. Historically, changes in “accounts payable and other
accrued
liabilities” related to such purchases were included in cash flows from
operations, while the investing activity caption "Purchase of property, plant
and equipment" included these purchases. As these unpaid purchases do not
reflect cash transactions, the Company has revised its cash flow presentations
to exclude them. The correction resulted in a decrease to the previously
reported amount of cash used for operating activities of $3.7 million in the six
months ended July 1, 2007, resulting from a reduction in the amount of cash used
from the change in accounts payable and other accrued liabilities in that
period. The corresponding correction in the investing section was to increase
cash used for investing activities by $3.7 million in the six months ended July
1, 2007, as a result of the increase in the amount of cash used for purchases of
property, plant and equipment in that period. These corrections had no impact on
previously reported results of operations, working capital or stockholders’
equity of the Company. The Company concluded that these corrections were not
material to any of its previously issued condensed consolidated financial
statements, based on SEC Staff Accounting Bulletin No.
99-Materiality.
Note
2. TRANSACTIONS WITH
CYPRESS
Purchases
of Imaging and Infrared Detector Products from Cypress
The
Company purchased fabricated semiconductor wafers from Cypress at intercompany
prices consistent with Cypress’ internal transfer pricing methodology. In
December 2007, Cypress announced the planned closure of its Texas wafer
fabrication facility that manufactured the Company’s imaging and infrared
detector products. The planned closure is expected to be completed in the
fourth quarter of fiscal 2008. The Company evaluated its alternatives relating
to the future plans for this business and decided to wind-down its activities
related to the imaging detector product line in the first quarter of fiscal
2008. Accordingly, in the three-months ended March 30, 2008, cost of revenue
included a $2.2 million impairment charge to long-lived assets primarily related
to manufacturing equipment located in the Texas wafer fabrication facility. The
Company did not purchase wafers from Cypress in the three months ended June 29,
2008. Wafer purchases totaled $0.6 million for the six months ended June
29, 2008 and $1.6 million and $3.1 million for the three and six months
ended July 1, 2007, respectively.
Administrative
Services Provided by Cypress
Cypress
has seconded employees and consultants to the Company for different time periods
for which the Company pays their fully-burdened compensation. In addition,
Cypress personnel render services to the Company to assist with administrative
functions such as employee benefits and other Cypress corporate services and
infrastructure. Cypress bills the Company for a portion of the Cypress
employees’ fully-burdened compensation. In the case of the Philippines
subsidiary, which entered into a services agreement for such secondments and
other consulting services in January 2005, the Company pays the fully burdened
compensation plus 10%. The amounts that the Company has recorded as general and
administrative expenses in the accompanying statements of operations for these
services was approximately $1.6 million and $2.1 million for the three and
six months ended June 29, 2008, respectively, and $0.4 million and $0.8
million for the three and six months ended July 1, 2007,
respectively.
Leased
Facility in the Philippines
In 2003,
the Company and Cypress reached an understanding that the Company would build
out and occupy a building owned by Cypress for its solar cell manufacturing
facility in the Philippines. The Company entered into a lease agreement for this
facility and a sublease for the land under which the Company paid Cypress at a
rate equal to the cost to Cypress for that facility (including taxes, insurance,
repairs and improvements). Under the lease agreement, the Company had the right
to purchase the facility and assume the lease for the land from Cypress at any
time at Cypress’ original purchase price of approximately $8.0 million, plus
interest computed on a variable index starting on the date of purchase by
Cypress until the sale to the Company, unless such purchase option was exercised
after a change of control of the Company, in which case the purchase price would
be at a market rate, as reasonably determined by Cypress. Rent expense paid to
Cypress for this building and land was not material for the three months ended
June 29, 2008 and July 1, 2007. Rent expense paid to Cypress for this building
and land was approximately $0.1 million in each of the six months ended
June 29, 2008 and July 1, 2007. In May 2008, the Company exercised its right to
purchase the facility from Cypress and assumed the lease for the land from an
unaffiliated third party for a total purchase price of $9.5 million. The lease
for the land expires in May 2048 and is renewable for an additional 25
years.
Leased
Headquarters Facility in San Jose, California
In
May 2006, the Company entered into a lease agreement for its 43,732 square
foot headquarters, which is located in a building owned by Cypress in San Jose,
California, for $6.0 million over the five-year term of the lease. In
December 2006 and July 2007, the Company amended the lease agreement,
increasing the rentable square footage and the total lease obligations to 51,228
and $6.9 million, respectively, over the five-year term of the lease. In the
event Cypress decides to sell the building, the Company has the right of first
refusal to purchase the building at a fair market price which will be based on
comparable sales in the area. Rent expense paid to Cypress for this facility was
approximately $0.4 million and $0.7 million for the three and six months
ended June 29, 2008, respectively, and $0.3 million and $0.6 million for the
three and six months ended July 1, 2007, respectively.
2005
Separation and Service Agreements
In
October 2005, the Company entered into a series of separation and services
agreements with Cypress. Among these agreements are a master separation
agreement, a sublease of the land and a lease for the building in the
Philippines (see above); a three-year wafer manufacturing agreement for detector
products at inter-company pricing; a three-year master transition services
agreement under which Cypress would allow the Company to continue to utilize
services provided by Cypress such as corporate accounting, legal, tax,
information technology, human resources and treasury administration at Cypress’
cost; an asset lease under which Cypress leased certain manufacturing assets
from the Company; an employee matters agreement under which the Company’s
employees would be allowed to continue to participate in certain Cypress health
insurance and other employee benefits plans; an indemnification and insurance
matters agreement; an investor rights agreement; and a tax sharing agreement.
All of these agreements, except the tax sharing agreement and the manufacturing
asset lease agreement, became effective at the time of completion of the
Company’s IPO in November 2005. Since the Company’s IPO, the Company has hired
and continues to hire additional personnel to perform services previously
provided by Cypress in preparation of the expiration of the three-year master
transition services agreement.
Master
Separation Agreement
In
October 2005, the Company entered into a master separation agreement containing
the framework with respect to the Company’s separation from Cypress. The master
separation agreement provides for the execution of various ancillary agreements
that further specify the terms of the separation.
Master
Transition Services Agreement
The
Company has also entered into a master transition services agreement which would
govern the provisions of services provided by Cypress, such as: financial
services; human resources; legal matters; training programs; and information
technology.
For a
period of three years following the Company’s November 2005 IPO or earlier if a
change of control of the Company occurs, Cypress would provide these services
and the Company would pay Cypress for services provided to the Company, at
Cypress’ cost (which, for purposes of the master transition services agreement,
will mean an appropriate allocation of Cypress’ full salary and benefits costs
associated with such individuals as well as any out-of-pocket expenses that
Cypress incurs in connection with providing the Company those services) or at
the rate negotiated with Cypress. Cypress will have the ability to deny requests
for services under this agreement if, among other things, the provisions of such
services creates a conflict of interest, causes an adverse consequence to
Cypress, requires Cypress to retain additional employees or other resources or
the provision of such services become impracticable as a result or cause outside
of the control of Cypress. In addition, Cypress will incur no liability in
connection with the provision of these services. The master transition services
agreement also contains provides indemnities by the Company for the benefit of
Cypress.
Lease
for Manufacturing Assets
In 2005
the Company entered into a lease with Cypress under which Cypress leased from
the Company certain manufacturing assets owned by the Company and located in
Cypress’ Texas manufacturing facility. The term of the lease was 27 months, and
it expired on December 31, 2007. Under this lease, Cypress reimbursed the
Company approximately $0.7 million representing the net book value of the assets
divided by the life of the leasehold improvements.
Employee
Matters Agreement
In
October 2005, the Company entered into an employee matters agreement with
Cypress to allocate assets, liabilities and responsibilities relating to its
current and former U.S. and international employees and its participation in the
employee benefits plans that Cypress currently sponsors and
maintains.
The
Company’s eligible employees generally will remain able to participate in
Cypress’ benefit plans, as they may change from time to time. The Company will
be responsible for all liabilities incurred with respect to the Cypress plans by
the Company as a participating company in such plans. The Company intends to
have its own benefit plans established by the time its employees are no longer
eligible to participate in Cypress’ benefit plans. Once the Company has
established its own benefit plans, the Company will have the ability to modify
or terminate each plan in accordance with the terms of those plans and its
policies. It is the Company’s intent that employees not receive duplicate
benefits as a result of participation in its benefit plans and the corresponding
Cypress benefit plans.
All of
the Company’s eligible employees will be able to continue to participate in
Cypress’ health plans, life insurance and other benefit plans as they may change
from time to time, until the earliest of, (1) a change of control of the
Company occurs, which includes such time as Cypress ceases to own at least a
majority of the aggregate number of shares of all classes of our common stock
then outstanding, (2) such time as the Company’s status as a participating
company under the Cypress plans is not permitted by a Cypress plan or by
applicable law, (3) such time as Cypress determines in its reasonable
judgment that its status as
a
participating company under the Cypress plans has or will adversely affect
Cypress, or its employees, directors, officers, agents, affiliates or its
representatives, or (4) such earlier date as the Company and Cypress
mutually agree. The Company’s employees are precluded from participating in
Cypress’ stock option plans and stock purchase plans.
In July
2008, the Company transferred all accounts in the Cypress 401(k) Plan held by
the Company’s employees to its recently established SunPower 401(k) Savings
Plan.
Indemnification
and Insurance Matters Agreement
The
Company will indemnify Cypress and its affiliates, agents, successors and
assigns from all liabilities arising from environmental conditions: existing on,
under, about or in the vicinity of any of the Company’s facilities, or arising
out of operations occurring at any of the Company’s facilities, including its
California facilities, whether prior to or after the separation; existing on,
under, about or in the vicinity of the Philippines facility which the Company
occupies, or arising out of operations occurring at such facility, whether prior
to or after the separation, to the extent that those liabilities were caused by
the Company; arising out of hazardous materials found on, under or about any
landfill, waste, storage, transfer or recycling site and resulting from
hazardous materials stored, treated, recycled, disposed or otherwise handled by
any of the Company’s operations or the Company’s California and Philippines
facilities prior to the separation; and arising out of the construction activity
conducted by or on behalf of us at Cypress’ Texas facility.
The
indemnification and insurance matters agreement and the master transition
services agreement also contains provisions governing the Company’s insurance
coverage, which shall be under the Cypress insurance policies (other than our
directors and officers insurance and insurance for our systems segment business,
for which the Company intends to obtain its own separate
policies) until the earliest of (1) a change of control of the Company
occurs, which includes such time as Cypress ceases to own at least a majority of
the aggregate number of shares of all classes of the Company’s common stock then
outstanding, (2) the date on which Cypress’ insurance carriers do not
permit the Company to remain on Cypress policies, (3) the date on which
Cypress’ cost of insurance under any particular insurance policy increases,
directly or indirectly, due to the Company's inclusion or
participation in such policy, (4) the date on which the
Company's coverage under the Cypress policies causes a real or potential
conflict of interest or hardship for Cypress, as determined solely by Cypress or
(5) the date on which Cypress and the Company mutually agree to terminate
this arrangement. Prior to that time, Cypress will maintain insurance policies
on the Company’s behalf, and the Company shall reimburse Cypress for expenses
related to insurance coverage during this period. The Company will
work with Cypress to secure additional insurance if desired and cost
effective.
Investor
Rights Agreement
The
Company has entered into an investor rights agreement with Cypress providing for
specified (1) registration and other rights relating to the Company’s
shares of the Company’s common stock, (2) information and inspection
rights, (3) coordination of auditing practices and (4) approval rights
with respect to certain transactions.
Tax
Sharing Agreement
The
Company has entered into a tax sharing agreement with Cypress providing for each
of the party’s obligations concerning various tax liabilities. The tax sharing
agreement is structured such that Cypress will pay all federal, state, local and
foreign taxes that are calculated on a consolidated or combined basis (while
being a member of Cypress’ consolidated or combined group pursuant to federal,
state, local and foreign tax law). The Company’s portion of such tax liability
or benefit will be determined based upon its separate return tax liability as
defined under the tax sharing agreement. Such liability or benefit will be based
on a pro forma calculation as if the Company were filing a separate income tax
return in each jurisdiction, rather than on a combined or consolidated basis
with Cypress subject to adjustments as set forth in the tax sharing
agreement.
After the
date the Company ceases to be a member of Cypress’ consolidated group for
federal income tax purposes and most state income tax purposes, as and to the
extent that the Company becomes entitled to utilize on the Company’s separate
tax returns portions of those credit or loss carryforwards existing as of such
date, the Company will distribute to Cypress the tax effect, estimated to be 40%
for federal income tax purposes, of the amount of such tax loss carryforwards so
utilized, and the amount of any credit carryforwards so utilized. The Company
will distribute these amounts to Cypress in cash or in the Company’s shares, at
the Company’s option. As of December 30, 2007, the Company has $44.0
million of federal net operating loss carryforwards and approximately $73.5
million of California net operating loss carryforwards meaning that such
potential future payments to Cypress, which would be made over a period of
several years, would therefore aggregate approximately $19.1
million.
The
majority of these net operating loss carryforwards were created by employee
stock transactions. Because there is uncertainty as to the realizability of
these loss carryforwards, the portion created by employee stock transactions are
not reflected on the Company’s Condensed Consolidated Balance
Sheets.
Upon
completion of its follow-on public offering of common stock in June 2006, the
Company is no longer considered to be a member of Cypress’ consolidated group
for federal income tax purposes. Accordingly, the Company will be subject to the
obligations payable to Cypress for any federal income tax credit or loss
carryforwards utilized in its federal tax returns in subsequent periods, as
explained in the preceding paragraph.
The
Company will continue to be jointly and severally liable for any tax liability
as governed under federal, state and local law during all periods in which it is
deemed to be a member of the Cypress consolidated or combined group.
Accordingly, although the tax sharing agreement allocates tax liabilities
between Cypress and all its consolidated subsidiaries, for any period in which
the Company is included in Cypress’ consolidated group, the Company could be
liable in the event that any federal tax liability was incurred, but not
discharged, by any other member of the group.
Subject
to certain caveats, Cypress has obtained a ruling from the Internal Revenue
Service (“IRS”) to the effect that a distribution by Cypress of the Company’s
class B common stock to Cypress stockholders will qualify as a tax-free
distribution under Section 355 of the Internal Revenue Code (the “Code”).
Despite such ruling, the distribution may nonetheless be taxable to Cypress
under Section 355(e) of the Code if 50% or more of the Company’s voting
power or economic value is acquired as part of a plan or series of related
transactions that includes the distribution of the Company’s stock. The tax
sharing agreement includes the Company’s obligation to indemnify Cypress for any
liability incurred as a result of issuances or dispositions of the Company’s
stock after the distribution, other than liability attributable to certain
dispositions of the Company’s stock by Cypress, that cause Cypress’ distribution
of shares of the Company’s stock to its stockholders to be taxable to Cypress
under Section 355(e) of the Code.
The tax
sharing agreement further provides for cooperation with respect to tax matters,
the exchange of information and the retention of records which may affect the
income tax liability of either party. Disputes arising between Cypress and the
Company relating to matters covered by the tax sharing agreement are subject to
resolution through specific dispute resolution provisions contained in the
agreement.
Note
3. BUSINESS COMBINATION,
GOODWILL AND INTANGIBLE ASSETS
Business
Combination
On
January 8, 2008, the Company completed the acquisition of Solar Solutions, a
solar systems integration and product distribution company based in Faenza,
Italy. Solar Solutions was a division of Combigas S.r.l., a petroleum products
trading firm. Active since 2002, Solar Solutions distributes components such as
solar panels and inverters, and offers turnkey solar power systems and standard
system kits via a network of dealers throughout Italy. Prior to the acquisition,
Solar Solutions had been a customer of the Company since fiscal 2006. As a
result of the acquisition, Solar Solutions became a wholly-owned subsidiary of
the Company. In connection with the acquisition, the Company changed Solar
Solutions’ name to SunPower Italia S.r.l. (“SunPower Italia”). The acquisition
of SunPower Italia was not material to the Company’s financial position or
results of operations.
Goodwill
The
following table presents the changes in the carrying amount of goodwill under
the Company's reportable business segments:
(In
thousands)
|
|
Components
Business
Segment
|
|
|
Systems
Business
Segment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
to goodwill during the six months ended June 29, 2008 resulted from the
acquisition of SunPower Italia. Approximately $10.3 million had been allocated
to goodwill within the components segment, which represents the excess of the
purchase price over the fair value of the underlying net tangible and intangible
assets of SunPower Italia. SunPower Italia is a Euro functional currency
subsidiary, therefore, the Company records a translation adjustment for the
revaluation of the subsidiary’s goodwill and intangible assets into U.S. dollar.
As of June 29, 2008, the cumulative translation adjustment increased the balance
of goodwill by $0.8 million. Also during the six months ended June 29, 2008, the
Company recorded an adjustment to increase goodwill by $0.2 million to adjust
the value of acquired investments.
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,”
(“SFAS No. 142”), goodwill will not be amortized but instead will be tested for
impairment at least annually, or more frequently if certain indicators are
present. The Company conducts its annual impairment test of goodwill as of the
Sunday closest to the end of the third calendar quarter of each year. Based on
its last impairment test as of September 30, 2007, the Company determined
there was no impairment. There were no events or circumstances from that date
through June 29, 2008 indicating that an interim assessment was necessary. In
the event that management determines that the value of goodwill has become
impaired, the Company will incur an accounting charge for the amount of the
impairment during the fiscal quarter in which the determination is
made.
Intangible
Assets
The
following tables present details of the Company's acquired identifiable
intangible assets:
(In
thousands)
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
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|
Patents and purchased
technology
|
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Customer relationships and
other
|
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Patents and purchased
technology
|
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Customer relationships and
other
|
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In
connection with the acquisition of SunPower Italia, the Company recorded $2.7
million of intangible assets and $0.2 million of cumulative translation
adjustment for acquired intangibles in the six months ended June 29, 2008. In
connection with the acquisition of SP Systems, the Company recorded
$79.5 million of intangible assets in the first quarter of fiscal 2007, of
which $15.5 million was related to the PowerLight tradename. The
determination of the fair value and useful life of the tradename was based on
the Company’s strategy of continuing to market its systems products and services
under the PowerLight brand. Based on the Company’s change in branding strategy
and changing PowerLight’s name to SunPower Corporation, Systems, during the
quarter ended July 1, 2007, the Company recognized an impairment charge of $14.1
million, which represented the net book value of the PowerLight
tradename.
All of
our acquired identifiable intangible assets are subject to amortization.
Aggregate amortization expense for intangible assets totaled $4.0 million and
$8.4 million for the three and six months ended June 29, 2008, respectively, and
$7.7 million and $14.6 million for the three and six months ended July 1, 2007,
respectively. As of June 29, 2008, the estimated future amortization expense
related to intangible assets is as follows (in thousands):
2008
(remaining six months)
|
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Note
4. BALANCE SHEET
COMPONENTS
(In
thousands)
|
|
June
29,
2008
|
|
|
December 30,
2007
|
|
Costs
and estimated earnings in excess of billings on contracts in progress and
billings in excess of costs and estimated earnings on contracts in
progress consists of the following:
|
|
|
|
|
|
|
Costs and estimated
earnings in excess of billings on contracts in
progress
|
|
|
|
|
|
|
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|
Billings in excess
of costs and estimated earnings on contracts in
progress
|
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Estimated earnings
to date
|
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|
|
|
|
|
Contract revenue
earned to date
|
|
|
|
|
|
|
|
|
Less: Billings to
date, including earned incentive rebates
|
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(1) In addition to
polysilicon and other raw materials for solar cell manufacturing, raw
materials includes solar panels purchased from third-party vendors and
installation materials for systems projects.
|
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Prepaid
expenses and other current assets:
|
|
|
|
|
|
|
|
|
VAT receivables,
current portion
|
|
|
|
|
|
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|
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Deferred tax
assets, current portion
|
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|
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|
|
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Property,
plant and equipment, net:
|
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|
|
|
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|
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|
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|
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Manufacturing
equipment held for sale(2)
|
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Construction-in-process
(manufacturing facility in the Philippines)
|
|
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|
|
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|
|
|
|
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|
|
|
Less: Accumulated
depreciation(3)
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
(In
thousands)
|
|
June
29,
2008
|
|
|
December 30,
2007
|
|
(2) During the
three months ended March 30, 2008, certain manufacturing equipment
with a net book value of $4.1 million were replaced with new processes.
The Company determined that the expected realizable value for the resale
of such manufacturing equipment is $0.8 million, therefore, the Company
incurred an impairment charge of $3.3 million in the first quarter of
fiscal 2008.
|
|
|
|
|
|
|
|
|
(3) Total depreciation
expense was $11.9 million and $22.0 million for the three and
six months ended June 29, 2008, respectively, and $5.9 million and
$11.5 million for the three and six months ended July 1, 2007,
respectively.
|
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|
|
VAT receivable, net
of current portion
|
|
|
|
|
|
|
|
|
Investments in
joint ventures
|
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|
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|
(4) In June 2008, the
Company loaned $10.0 million to a third-party private company pursuant to
a three-year interest-bearing note receivable that is convertible into
equity at the Company’s option.
|
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|
|
|
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|
|
|
Employee
compensation and employee benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Foreign exchange
derivative liability
|
|
|
|
|
|
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|
|
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|
|
Note
5. INVESTMENTS
On
December 31, 2007, the Company adopted SFAS No. 157, which refines the
definition of fair value, provides a framework for measuring fair value and
expands disclosures about fair value measurements. SFAS No. 157 establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy assigns the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities ("Level 1")
and the lowest priority to unobservable inputs ("Level 3"). Level 2 measurements
are inputs that are observable for assets or liabilities, either directly or
indirectly, other than quoted prices included within Level 1. The following
table presents information about the Company’s available-for-sale securities
measured at fair value on a recurring basis as of June 29, 2008 and indicates
the fair value hierarchy of the valuation techniques utilized by the Company to
determine such fair value in accordance with the provisions of SFAS
No. 157:
(In thousands)
|
|
Quoted
Prices in Active
Markets
for Identical
Instruments
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Balance
as of
June
29, 2008
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
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|
|
|
|
|
|
Total
available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Available-for-sale
securities utilizing Level 3 inputs to determine fair value are comprised of
auction rate securities which are bought and sold in the marketplace through a
bidding process sometimes referred to as a “Dutch auction,” and which are
classified as short-term investments or long-term investments and carried at
their market values. After the initial issuance of the auction rate securities,
the interest rate on the securities resets periodically, at intervals set at the
time of issuance (e.g., every seven, twenty-eight, or thirty-five days; every
six-months; etc.), based on the market demand at the reset period. The “stated”
or
“contractual”
maturities for these securities generally are between 20 to 30 years. The
Company classifies auction rate securities as available-for-sale securities
under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities” (“SFAS No. 115”).
At June
29, 2008, the Company had $25.1 million invested in auction rate securities as
compared to $50.8 million invested in auction rate securities at December 30,
2007. These auction rate securities are typically over collateralized and
secured by pools of student loans originated under the Federal Family Education
Loan Program (“FFELP”) that are guaranteed by the U.S. Department of Education,
and insured. In addition, all auction rate securities held are rated by one or
more of the Nationally Recognized Statistical Rating Organizations (“NRSRO”) as
triple-A. Beginning in February 2008, the auction rate securities market
experienced a significant increase in the number of failed auctions, resulting
from a lack of liquidity, which occurs when sell orders exceed buy orders, and
does not necessarily signify a default by the issuer.
As of
August 8, 2008, all of the Company’s auction rate securities invested in at June
29, 2008 had failed to clear at auctions. For failed auctions, the Company
continues to earn interest on these investments at the maximum contractual rate
as the issuer is obligated under contractual terms to pay penalty rates should
auctions fail. Historically, failed auctions have rarely occurred, however, such
failures could continue to occur in the future. In the event the Company needs
to access these funds, the Company will not be able to do so until a future
auction is successful, the issuer redeems the securities, a buyer is found
outside of the auction process or the securities mature. Accordingly, auction
rate securities at June 29, 2008 and December 30, 2007 that were not sold in a
subsequent period totaling $25.1 million and $29.1 million, respectively, are
classified as long-term investments on the Condensed Consolidated Balance
Sheets, because they are not expected to be used to fund current operations and
consistent with the stated contractual maturities of the
securities.
The
Company determined that use of a valuation model was the best available
technique for measuring the fair value of its auction rate securities. The
Company used an income approach valuation model to estimate the price that would
be received to sell its securities in an orderly transaction between market
participants ("exit price") as of June 29, 2008. The exit price was derived as
the weighted average present value of expected cash flows over various periods
of illiquidity, using a risk adjusted discount rate that was based on the credit
risk and liquidity risk of the securities. While the valuation model was
based on both Level 2 (credit quality and interest rates) and Level 3 inputs,
the Company determined that the Level 3 inputs were the most significant to the
overall fair value measurement, particularly the estimates of risk adjusted
discount rates and ranges of expected periods of illiquidity. The valuation
model also reflected the Company's intention to hold its auction rate securities
until they can be liquidated in a market that facilitates orderly transactions.
The following key assumptions were used in the valuation model:
· 5
years to liquidity;
· continued
receipt of contractual interest which provides a premium spread for failed
auctions; and
· discount
rates ranging from 3.8% to 5.9%, which incorporate a spread for both credit and
liquidity risk.
Based on
these assumptions, the Company estimated that the auction rate securities would
be valued at approximately 96% of their stated par value, representing a decline
in value of approximately $1.0 million. The following table provides a
summary of changes in fair value of the Company’s available-for-sale securities
utilizing Level 3 inputs as of June 29, 2008:
(In thousands)
|
|
Auction
Rate Securities
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
|
|
Transfers from
Level 2 to Level 3
|
|
|
|
|
Purchases of
auction rate securities
|
|
|
|
|
Unrealized loss
included in other comprehensive income
|
|
|
|
|
Balance
at March 30, 2008
|
|
|
|
|
Sales of auction
rate securities
|
|
|
|
|
Unrealized gain
included in other comprehensive income
|
|
|
|
|
|
|
|
|
|
In the second
quarter of fiscal 2008, the Company sold auction rate securities with a carrying
value of $12.5 million for their stated par value of $13.0 million. The
following
table summarizes the fair value and gross unrealized losses of the Company’s
available-for-sale securities, aggregated by type of investment instrument and
length of time that individual securities have been in a continuous unrealized
loss position:
|
|
As
of June 29, 2008
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
(In thousands)
|
|
Fair
Value
|
|
|
Gross
Unrealized Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 30, 2007
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
(In thousands)
|
|
Fair
Value
|
|
|
Gross
Unrealized Losses
|
|
|
Fair
Value
|
|
|
Gross Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $1.1
million gross unrealized losses of the Company’s corporate securities, $1.0
million resulted from the decline in the estimated fair value of auction rate
securities primarily due to their lack of liquidity. The decline in fair value
for the remaining available-for-sale securities was primarily related to changes
in interest rates. The Company has concluded that no other-than-temporary
impairment losses occurred in the six months ended June 29, 2008 because the
lack of liquidity in the market for auction rate securities and changes in
interest rates are considered temporary in nature for which the Company has
recorded an unrealized loss within comprehensive income (loss), a component of
stockholders' equity. The Company has the ability and intent to hold these
securities until a recovery of fair value. In addition, the Company evaluated
the near-term prospects of the available-for-sale securities in relation to the
severity and duration of the impairment. Based on that evaluation and the
Company’s ability and intent to hold these investments for a reasonable period
of time, the Company did not consider these investments to be
other-than-temporarily impaired. If it is determined that the fair value of
these securities is other-than-temporarily impaired, the Company would record a
loss in its Condensed Consolidated Statements of Operations in the future, which
could be material.
The
classification and contractual maturities of available-for-sale securities is as
follows:
(In thousands)
|
|
June
29,
2008
|
|
|
December 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term restricted
cash(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term restricted
cash(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in less than one
year
|
|
|
|
|
|
|
|
|
Due from one to two years
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
Company provided security in the form of cash collateralized bank standby
letters of credit for advance payments received from
customers.
|
(2)
|
The
Company classifies all available-for-sale securities that are intended to
be available for use in current operations as short-term
investments.
|
Note
6. ADVANCES TO
SUPPLIERS
The
Company has entered into agreements with various polysilicon, ingot, wafer,
solar cells and solar module vendors and manufacturers. These agreements specify
future quantities and pricing of products to be supplied by the vendors for
periods up to 12 years. Certain agreements also provide for penalties or
forfeiture of advanced deposits in the event the Company terminates the
arrangements (see Note 8). Under certain of these agreements, the Company is
required to make prepayments to the vendors over the terms of the arrangements.
As of June 29, 2008, advances to suppliers totaled $158.5 million, the current
portion of which is $62.1 million.
The
Company’s future prepayment obligations related to these agreements as of June
29, 2008 are as follows (in thousands):
2008
(remaining six months)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June
30, 2008, the Company paid an advance of $5.6 million in accordance with the
terms of an existing supply agreement.
Note
7. STOCK-BASED
COMPENSATION
During the
preparation of its condensed consolidated financial statements for the six
months ended June 29, 2008, the Company identified errors in its financial
statements related to the year ended December 30, 2007, which resulted in $1.3
million overstatement of stock-based compensation expense. The Company corrected
these errors in its condensed consolidated financial statements for the six
months ended June 29, 2008, which resulted in a $1.3 million credit to income
before income taxes and net income. The out-of-period effect is not expected to
be material to estimated full-year 2008 results, and, accordingly has been
recognized in accordance with APB 28, Interim Financial Reporting, paragraph 29
as the error is not material to any financial statements of prior
periods.
The
following table summarizes the consolidated stock-based compensation expense, by
type of awards:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
June
29,
2008
|
|
|
July 1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
and options released from re-vesting restrictions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in stock-based compensation capitalized in inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
connection with the acquisition of SP Systems on January 10, 2007, 1.1 million
shares of the Company’s class A common stock and 0.5 million stock options
issued to employees of SP Systems, which were valued at $60.4 million, are
subject to certain transfer restrictions and a repurchase option held by the
Company. The Company is recognizing expense as the re-vesting restrictions of
these shares lapse over the two-year period beginning on the date of
acquisition. The value of shares released from such re-vesting restrictions are
included in stock-based compensation expense in the table above.
The
following table summarizes the consolidated stock-based compensation expense by
line items in the Condensed Consolidated Statements of Operations:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
June
29,
2008
|
|
|
July 1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of components revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based
compensation expense before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
effect on stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based
compensation expense after income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
net cash proceeds from the issuance of shares in connection with exercises of
stock options under the Company’s employee stock plans were $1.2 million and
$2.3 million for the three and six months ended June 29, 2008, respectively, and
$3.0 million and $5.0 million for the three and six months ended July 1,
2007, respectively. The Company recognized an income tax benefit from stock
option exercises of $10.2 million and $14.6 million for the three and six months
ended June 29, 2008, respectively. No income tax benefit was realized from stock
option exercises during the three and six months ended July 1, 2007. As
required, the Company presents excess tax benefits from the exercise of stock
options, if any, as financing cash flows rather than operating cash
flows.
The
following table summarizes the unrecognized stock-based compensation cost by
type of awards:
(In
thousands, except years)
|
|
As
of
June
29,
2008
|
|
|
Weighted-Average
Amortization Period
(in
years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
subject to re-vesting restrictions
|
|
|
|
|
|
|
|
|
Total unrecognized
stock-based compensation cost
|
|
|
|
|
|
|
|
|
For stock
options issued prior to the adoption of SFAS No. 123(revised 2004),
“Share-Based Payment” (“SFAS No. 123(R)”) and for performance based awards, the
Company recognizes its stock-based compensation cost using the graded
amortization method. For all other awards, stock-based compensation cost is
recognized on a straight-line basis. Additionally, the Company issues new shares
upon exercises of options by employees.
Valuation
Assumptions
The
Company estimates the fair value of its stock-based awards using the
Black-Scholes valuation model (the "Black-Scholes model"). The determination of
fair value of share-based payment awards on the date of grant using the
Black-Scholes model is affected by the stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables
include, but are not limited to, expected stock price volatility over the term
of the awards, and actual and projected employee stock option exercise
behaviors.
Assumptions
used in the determination of fair value of share-based payment awards using the
Black-Scholes model were as follows:
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
July 1, 2007
|
|
July 1, 2007
|
|
|
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No
stock options were granted in the six months ended June 29,
2008.
|
|
|
|
|
|
|
|
|
For
the Three and Six Months Ended July 1, 2007:
The
Company utilized the simplified method under the provisions of Staff Accounting
Bulletin No. 107 (“SAB No. 107”) for estimating expected term, instead
of its historical exercise data. The Company elected not to base the expected
term on historical data because of the significant difference in its status
before and after the effective date of SFAS No. 123(R). The Company was a
privately-held company until its IPO, and the only available liquidation event
for option holders was Cypress’s buyout of minority interests in November 2004.
At all other times, optionees could not cash out on their vested options. From
the time of the Company’s IPO in November 2005 through May 2006 when lock-up
restrictions expired, a majority of the optionees were unable to exercise and
sell vested options.
Because
of the limited history of its stock trading publicly, the Company does not
believe that its historical volatility would be representative of the expected
volatility for its equity awards. Accordingly, the Company has chosen to use the
historical volatility rates for a publicly-traded U.S.-based direct competitor
as the basis for calculating the volatility for its granted
options.
The
interest rate is based on the U.S. Treasury yield curve in effect at the time of
grant. Since the Company does not pay and does not expect to pay dividends, the
expected dividend yield is zero.
Equity
Incentive Programs
Second
Amended and Restated 2005 SunPower Corporation Stock Incentive
Plan:
In May 2008,
the Company’s stockholders approved an increase of 1.7 million shares and
an automatic annual increase beginning in fiscal 2009 in the number of shares
available for grant under the Company’s Second Amended and Restated 2005
SunPower Corporation Stock Incentive Plan under which the Company may issue
incentive or non-statutory stock options, restricted stock awards, restricted
stock units, or stock appreciation rights to directors, employees and
consultants. The majority of shares issued are net of the minimum statutory
withholding requirements that the Company pays on behalf of its employees.
During the three and six months ended June 29, 2008, the Company withheld
approximately 15,000 shares and 52,000 shares, respectively, to satisfy
$0.9 million and $4.2 million, respectively, of employees’ tax obligations.
The Company paid this amount in cash to the appropriate taxing authorities.
Shares withheld are treated as common stock repurchases for accounting and
disclosure purposes and reduce the number of shares outstanding upon
vesting.
The following
table summarizes the Company’s stock option activities:
|
|
Shares
(in thousands)
|
|
|
Weighted-
Average
Exercise
Price Per Share
|
|
Outstanding
as of December 30, 2007
|
|
|
|
|
|
|
|
|
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|
|
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|
|
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Outstanding
as of June 29, 2008
|
|
|
|
|
|
|
|
|
Exercisable
as of June 29, 2008
|
|
|
|
|
|
|
|
|
The following
table summarizes the Company’s non-vested stock options and restricted stock
activities thereafter:
|
|
Stock
Options
|
|
|
Restricted
Stock Awards and Units
|
|
|
|
Shares
(in thousands)
|
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
|
Shares
(in thousands)
|
|
|
Weighted-
Average
Grant Date Fair
Value Per Share
|
|
Outstanding
as of December 30, 2007
|
|
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Outstanding
as of June 29, 2008
|
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|
|
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|
(1)
Restricted stock awards and units vested includes shares withheld on
behalf of employees to satisfy the minimum statutory tax withholding
requirements.
|
|
Information
regarding the Company’s outstanding stock options as of June 29, 2008
follows:
|
Options
Outstanding
|
|
Options
Exercisable
|
Range of Exercise Price
|
Shares
(in
thousands)
|
Weighted-
Average
Remaining
Contractual
Life
(in years)
|
Weighted-
Average
Exercise
Price per
Share
|
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
Shares
(in
thousands)
|
Weighted-
Average
Remaining
Contractual
Life
(in years)
|
Weighted-
Average
Exercise
Price per
Share
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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The
aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on the Company’s closing stock price of $72.71 at June
29, 2008, which would have been received by the option holders had all option
holders exercised their options as of that date. The total number of
in-the-money options exercisable was 1.3 million shares as of June 29,
2008.
Stock
Unit Plan:
As of
June 29, 2008, the Company has granted approximately 236,000 stock units to
2,200 employees in the Philippines at an average unit price of $39.80 in
relation to its 2005 Stock Unit Plan, under which participants are awarded the
right to receive cash payments from the Company in an amount equal to the
appreciation in the Company’s common stock between the award date and the date
the employee redeems the award. A maximum of 300,000 stock units may be subject
to stock unit awards granted under the 2005 Stock Unit Plan. Pursuant to a
voluntary exchange offer that concluded in November 2007, approximately 53,000
stock units were exchanged for approximately 32,000 restricted stock units
issued under the Company’s Second Amended and Restated 2005 SunPower Corporation
Stock Incentive Plan. The Company conducted a second voluntary exchange offer
that concluded in May 2008, in which approximately 109,000 stock units were
exchanged for approximately 50,000 restricted stock units issued under the
Company’s Second Amended and Restated 2005 SunPower Corporation Stock Incentive
Plan. For the three and six months ended June 29, 2008, total
compensation expense associated with the 2005 Stock Unit Plan was zero as
compared to $0.4 million and $0.8 million in the three and six months ended July
1, 2007, respectively.
Note
8. COMMITMENTS AND
CONTINGENCIES
Operating
Lease Commitments
The
Company leases its San Jose, California facility under a non-cancelable
operating lease from Cypress, which expires in April 2011 (see Note 2). The
lease requires the Company to pay property taxes, insurance and certain other
costs. In addition, the Company leases its Richmond, California facility under a
non-cancelable operating lease from an unaffiliated third party, which expires
in September 2018. In December 2005, the Company entered into a 5-year operating
lease from an unaffiliated third party for a solar panel assembly facility in
the Philippines. The Company also has various lease arrangements, including its
European headquarters located in Geneva, Switzerland under a lease that expires
in September 2012, as well as sales and support offices in Southern California,
New Jersey, Germany, Spain, Italy and South Korea, all of which are leased from
unaffiliated third parties. Future minimum obligations under all non-cancelable
operating leases as of June 29, 2008 are as follows (in thousands):
2008
(remaining six months)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
expense, including the rent paid to Cypress for the San Jose, California
facility and the solar cell manufacturing facility in the Philippines (see
Note 2), was $1.6 million and $3.5 million for the three and
six months ended June 29, 2008, respectively, and $0.8 million and $1.4
million for the three and six months ended July 1, 2007,
respectively.
Purchase
Commitments
The
Company purchases raw materials for inventory, services and manufacturing
equipment from a variety of vendors. During the normal course of business, in
order to manage manufacturing lead times and help assure adequate supply, the
Company enters into agreements with contract manufacturers and suppliers that
either allow them to procure goods and services based upon specifications
defined by the Company, or that establish parameters defining the Company’s
requirements. In certain instances, these agreements allow the Company the
option to cancel, reschedule or adjust the Company’s requirements based on its
business needs prior to firm orders being placed. Consequently, only a portion
of the Company’s recorded purchase commitments arising from these agreements are
firm, non-cancelable and unconditional commitments.
The
Company also has agreements with several suppliers, including joint ventures,
for the procurement of polysilicon, ingots, wafers, solar cells and solar panels
which specify future quantities and pricing of products to be supplied by the
vendors for periods up to 12 years and provide for certain consequences, such as
forfeiture of advanced deposits and liquidated damages relating to previous
purchases, in the event that the Company terminates the arrangements (see Note
6).
At June
29, 2008, total obligations related to such supplier agreements was $3.5 billion
and non-cancelable purchase orders related to equipment and building
improvements totaled approximately $155.2 million. In addition, the Company has
entered into agreements to purchase solar renewable energy certificates
(“SRECs”) from solar installation owners in New Jersey. The Company primarily
sells SRECs to entities that must either retire a certain volume of SRECs each
year or face much higher alternative compliance payments. At June 29, 2008,
total obligations related to future purchases of SRECs was $2.7
million.
Future
minimum obligations under supplier agreements, non-cancelable purchase orders
and SRECs as of June 29, 2008 are as follows (in thousands):
2008
(remaining six months)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint Ventures
Woongjin
Energy Co., Ltd (“Woongjin Energy”)
In the
third quarter of fiscal 2006, the Company entered into an agreement with
Woongjin Coway Co., Ltd. (“Woongjin”), a provider of environmental products
located in Korea, to form Woongjin Energy, a joint venture to manufacture
monocrystalline silicon ingots. Under the joint venture, the Company and
Woongjin have funded the joint venture through capital investments. In addition,
Woongjin Energy obtained a $33.0 million loan originally guaranteed by Woongjin.
The Company supplies polysilicon and technology required for the silicon ingot
manufacturing to the joint venture, and the Company procures the manufactured
silicon ingots from the joint venture under a five-year agreement. Woongjin
Energy began manufacturing in the third quarter of fiscal 2007. For the
three and six months ended June 29, 2008, the Company paid $9.2 million and
$15.0 million, respectively, to Woongjin Energy for manufacturing polysilicon
into silicon ingots. As of June 29, 2008 and December 30, 2007, $4.0
million and $2.4 million, respectively, remained due and payable to Woongjin
Energy.
In
October 2007, the Company entered into an agreement with Woongjin and Woongjin
Holdings Co., Ltd. (“Woongjin Holdings”), whereby Woongjin transferred its
equity investment held in Woongjin Energy to Woongjin Holdings and Woongjin
Holdings assumed all rights and obligations formerly owned by Woongjin under the
joint venture agreement described above, including the $33.0 million loan
guarantee. In January 2008, the Company and Woongjin Holdings provided Woongjin
Energy with additional funding through capital investments in which the Company
invested an additional $5.4 million in the joint venture.
As of
June 29, 2008, the Company had an $11.7 million investment in the joint venture
on its Condensed Consolidated Balance Sheets which consisted of a 27.4% equity
investment valued at $8.4 million and a $3.3 million convertible note that is
convertible at the Company’s option into an additional 12.6% equity ownership in
the joint venture. As of December 30, 2007, the Company had a $4.4 million
investment in the joint venture on its Condensed Consolidated Balance Sheets
which consisted of a 19.9% equity investment valued at $1.1 million and a $3.3
million convertible note that is convertible at the Company’s option into an
additional 20.1% equity ownership in the joint venture. The Company accounts for
this investment in Woongjin Energy using the equity method of accounting, in
which the entire investment is classified as “Other long-term assets” in the
Condensed
Consolidated
Balance Sheets and the Company’s share of Woongjin Energy’s income totaling $1.3
million and $1.9 million for the three and six months ended June 29, 2008,
respectively, and none in each of the three and six months ended July 1, 2007,
is included in “Other, net” in the Condensed Consolidated Statements of
Operations. Neither party has contractual obligations to provide any additional
funding to the joint venture.
In the
first half of fiscal 2008, the Company conducted other related-party
transactions with Woongjin Energy. For the three and six months ended June 29,
2008, the Company recognized zero and $0.6 million, respectively, in components
revenue related to the sale of solar modules. As of June 29, 2008 and
December 30, 2007, zero and $3.2 million, respectively, remained due and
receivable from Woongjin Energy related to the sale of solar
modules.
First
Philec Solar Corporation (“First Philec Solar”)
In
October 2007, the Company entered into an agreement with First Philippine
Electric Corporation (“First Philec”) to form First Philec Solar, a joint
venture to provide wafer slicing services of silicon ingots to the Company. The
Company and First Philec have funded the joint venture through capital
investments. The Company supplies silicon ingots and technology required for the
slicing of silicon to the joint venture, and the Company procures the silicon
wafers from the joint venture under a five-year wafering supply and sales
agreement. This joint venture is located in the Philippines and became
operational in the second quarter of fiscal 2008.
As of
June 29, 2008, the Company had a $3.1 million investment in the joint
venture on its Condensed Consolidated Balance Sheets which consisted of a 20.6%
equity investment. As of December 30, 2007, the Company had a $0.9 million
investment in the joint venture on its Condensed Consolidated Balance Sheets
which consisted of a 16.9% equity investment. The Company accounts for
this investment using the equity method of accounting, in which the entire
investment is classified as “Other long-term assets” in the Condensed
Consolidated Balance Sheets.
The
Company periodically evaluates the qualitative and quantitative attributes of
the joint ventures to determine whether the joint ventures need to be
consolidated into the Company’s financial statements in accordance with FSP FASB
Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FSP FIN
46(R)”).
NorSun
AS (“NorSun”)
In
January 2008, the Company entered into an Option Agreement with NorSun pursuant
to which the Company will deliver cash advance payments to NorSun for the
purchase of polysilicon under a long-term polysilicon supply agreement with
NorSun, which NorSun will use to partly fund its portion of the equity
investment in the joint venture with Swicorp Joussour Company and Chemical
Development Company for the construction of a new polysilicon manufacturing
facility in Saudi Arabia. The Company will provide a letter of credit or deposit
funds in an escrow account to secure NorSun’s right to such advance payments.
NorSun will initially hold a fifty percent equity interest in the joint venture.
Under the terms of the Option Agreement, the Company may exercise a call
option and apply the advance payments to purchase half, subject to certain
adjustments, of NorSun’s fifty percent equity interest in the joint
venture. The Company may exercise its option at any time until six months
following the commercial operation of the Saudi Arabian polysilicon
manufacturing facility. The Option Agreement also provides NorSun an option
to put half, subject to certain adjustments, of its fifty percent equity
interest in the joint venture to the Company. NorSun’s option is
exercisable commencing July 1, 2009 through six months following commercial
operation of the polysilicon manufacturing facility. The Company accounts
for the put and call options as one instrument, which will be measured at fair
value at each reporting period. The changes in the fair value of the combined
option will be recorded as other income in the Condensed Consolidated Statements
of Operations. The fair value of the combined option at June 29, 2008 was not
material.
Product
Warranties
The
Company warrants or guarantees the performance of the solar panels that the
Company manufactures at certain levels of power output for extended periods,
usually 25 years. It also warrants that the solar cells will be free from
defects for at least ten years. In addition, it passes through to customers
long-term warranties from the original equipment manufacturers of certain system
components. Warranties of 20 to 25 years from solar panel suppliers are
standard, while inverters typically carry two-, five- or ten-year warranties.
The Company maintains warranty reserves to cover potential liabilities that
could result from these guarantees. The Company’s potential liability is
generally in the form of product replacement or repair. Warranty reserves are
based on the Company’s best estimate of such liabilities and are recognized as a
cost of revenue. The Company continuously monitors product returns for warranty
failures and maintains a reserve for the related warranty expenses based on
historical experience of similar products as well as various other assumptions
that are considered reasonable under the circumstances.
The
Company generally warrants or guarantees systems installed for a period of five
to ten years. The Company’s estimated warranty cost for each project is accrued
and the related costs are charged against the warranty accrual when incurred. It
is not possible to predict the maximum potential amount of future
warranty-related expenses under these or similar contracts due to the
conditional nature of the Company’s obligations and the unique facts and
circumstances involved in each particular contract. Historically, warranty costs
related to contracts have been within the range of management’s
expectations.
Provisions
for warranty reserves charged to cost of revenue were $4.9
million and $9.8 million for the three and six months ended June 29, 2008,
respectively, and $1.4 million and $5.6 million during the three and six months
ended July 1, 2007, respectively. Activity within accrued warranty for the three
and six months ended June 29, 2008 and July 1, 2007 is summarized as
follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
June
29,
2008
|
|
|
July 1,
2007
|
|
Balance
at the beginning of the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SP Systems accrued balance
at date of acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals for warranties
issued during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty claims made during
the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the end of the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accrued warranty balance at June 29, 2008 and December 30, 2007 includes $9.1
million and $6.7 million, respectively, of accrued costs primarily related to
servicing the Company’s obligations under long-term maintenance contracts
entered into under the systems segment and the balance is included in “Other
long-term liabilities” in the Condensed Consolidated Balance
Sheets.
FIN
48 Uncertain Tax Positions
As of
June 29, 2008 and December 30, 2007, total liabilities associated with FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, and Related
Implementation Issues,” (“FIN 48”), uncertain tax positions were $5.7
million and $4.1 million, respectively, and are included in "Other long-term
liabilities" on our Condensed Consolidated Balance Sheets at June 29, 2008 and
December 30, 2007, respectively, as they are not expected to be paid within the
next twelve months. Due to the complexity and uncertainty associated with our
tax positions, the Company cannot make a reasonably reliable estimate of the
period in which cash settlement will be made for our liabilities associated with
uncertain tax positions in "Other long-term liabilities."
Royalty
Obligations
As of
January 10, 2007, the Company assumed certain royalty obligations related to
existing agreements entered into by PowerLight before the date of acquisition.
In September 2002, PowerLight entered into a Technology Assignment and Services
Agreement and other ancillary agreements, subsequently amended in
December 2005, with Jefferson Shingleton and MaxTracker Services, LLC, a New
York limited liability company controlled by Mr. Shingleton. Under the
agreements, the PowerTracker®, now referred to as SunPower™ Tracker, was
acquired through an assignment and acquisition of the patents associated with
the product from Mr. Shingleton and the Company is obligated to pay Mr.
Shingleton royalties on the tracker systems that it sells. In addition, several
of the systems segment’s government awards require the Company to pay royalties
based on specified formulas related to sales of products developed or enhanced
from such government awards. The Company incurred royalty expense totaling $0.4
million and $1.0 million for the three and six months ended June 29, 2008,
respectively, and $0.6 million and $1.3 million during the three and six months
ended July 1, 2007, respectively, which were charged to cost of systems revenue.
As of June 29, 2008 and December 30, 2007, the Company’s royalty
liabilities totaled $0.3 million.
Indemnifications
The
Company is a party to a variety of agreements pursuant to which it may be
obligated to indemnify the other party with respect to certain matters.
Typically, these obligations arise in connection with contracts and license
agreements or the sale of assets, under which the Company customarily agrees to
hold the other party harmless against losses arising from a breach of
warranties, representations and covenants related to such matters as title to
assets sold, negligent acts, damage to property, validity of certain
intellectual property rights, non-infringement of third-party rights and certain
tax related matters. In each of these circumstances, payment by the Company is
typically subject to the other party making a claim to the Company pursuant to
the procedures specified in the particular contract. These procedures usually
allow the Company to challenge the other party’s claims or, in case of breach of
intellectual property representations or covenants, to control the defense or
settlement of any third-party claims brought against the other party. Further,
the Company’s obligations under these agreements may be limited in terms of
activity (typically to replace or correct the products or terminate the
agreement with a refund to the other party), duration and/or amounts. In some
instances, the Company may have recourse against third parties and/or insurance
covering certain payments made by the Company.
Legal
Matters
From time
to time the Company is a party to litigation matters and claims that are normal
in the course of its operations. While the Company believes that the ultimate
outcome of these matters will not have a material adverse effect on the Company,
the outcome of these matters is not determinable and negative outcomes may
adversely affect the Company’s financial position, liquidity or results of
operations.
Note
9. LINE OF
CREDIT
In July
2007, the Company entered into a credit agreement with Wells Fargo and has
entered into amendments to the credit agreement from time to time. As of June
29, 2008, the credit agreement provides for a $50.0 million unsecured revolving
credit line, with a $50.0 million unsecured letter of credit subfeature, and a
separate $150.0 million secured letter of credit facility. The Company may
borrow up to $50.0 million and request that Wells Fargo issue up to $50.0
million in letters of credit under the unsecured letter of credit subfeature
through April 4, 2009. Letters of credit issued under the subfeature reduce the
Company’s borrowing capacity under the revolving credit line. The Company may
request that Wells Fargo issue up to $150.0 million in letters of credit under
the secured letter of credit facility through July 31, 2012. As detailed in the
agreement, the Company will pay interest on outstanding borrowings and a fee for
outstanding letters of credit. At any time, the Company can prepay outstanding
loans. All borrowings must be repaid by April 4, 2009, and all letters of credit
issued under the unsecured letter of credit subfeature expire on or before April
4, 2009 unless the Company provides by such date collateral in the form of cash
or cash equivalents in the aggregate amount available to be drawn under letters
of credit outstanding at such time. All letters of credit issued under the
secured letter of credit facility expire no later than July 31, 2012. The
Company concurrently entered into a security agreement with Wells Fargo,
granting a security interest in a securities account and deposit account to
secure its obligations in connection with any letters of credit that might be
issued under the credit agreement. In connection with the credit agreement,
SunPower North America, Inc., a wholly-owned subsidiary of the Company, SP
Systems, an indirect wholly-owned subsidiary of the Company, and SunPower
Systems SA, another indirect wholly-owned subsidiary of the Company, entered
into an associated continuing guaranty with Wells Fargo. The terms of the credit
agreement include certain conditions to borrowings, representations and
covenants, and events of default customary for financing transactions of this
type.
As of
June 29, 2008 and December 30, 2007, 6 letters of credit totaling $41.5 million
and 4 letters of credit totaling $32.0 million, respectively, were issued by
Wells Fargo under the unsecured letter of credit subfeature. In addition, 22
letters of credit totaling $63.8 million and 8 letters of credit totaling
$47.9 million, were issued by Wells Fargo under the secured letter of credit
facility as of June 29, 2008 and December 30, 2007, respectively. On June
29, 2008 and December 30, 2007, cash available to be borrowed under the
unsecured revolving credit line was $8.5 million and $18.0 million,
respectively, and includes letter of credit capacities available to be issued by
Wells Fargo under the unsecured letter of credit subfeature of $8.5 million and
$8.0 million, respectively. Letters of credit available under the secured letter
of credit facility at June 29, 2008 and December 30, 2007 totaled $86.2 million
and $2.1 million, respectively.
Note
10. SENIOR CONVERTIBLE
DEBENTURES AND SHARE LENDING ARRANGEMENTS
February
2007 and July 2007 Debt Issuance
In
February 2007, the Company issued $200.0 million in principal amount of its
1.25% senior convertible debentures. Interest on the February 2007 debentures is
payable on February 15 and August 15 of each year, commencing
August 15, 2007. The February 2007 debentures will mature on
February 15, 2027. Holders may require the Company to repurchase all or a
portion of their February 2007 debentures on each of February 15,
2012, February 15, 2017 and February 15, 2022, or if the Company
experiences certain types of corporate transactions constituting a fundamental
change. In addition, the Company may redeem some or all of the February 2007
debentures on or after February 15, 2012. The February 2007 debentures are
initially convertible, subject to certain conditions, into cash up to the lesser
of the principal amount or the conversion value. If the conversion value is
greater than $1,000, then the excess conversion value will be convertible into
common stock. The initial effective conversion price of the February 2007
debentures is approximately $56.75 per share, which represented a premium of
27.5% to the closing price of the Company's common stock on the date of
issuance. The applicable conversion rate will be subject to customary
adjustments in certain circumstances.
In July
2007, the Company issued $225.0 million in principal amount of its 0.75% senior
convertible debentures. Interest on the July 2007 debentures is payable on
February 1 and August 1 of each year, commencing February 1,
2008. The July 2007 debentures will mature on August 1, 2027. Holders may
require the Company to repurchase all or a portion of their July 2007 debentures
on each of August 1, 2010, August 1, 2015, August 1, 2020, and August 1, 2025,
or if the Company is involved in certain types of corporate transactions
constituting a fundamental change. In addition, the Company may redeem some or
all of the July 2007 debentures on or after August 1, 2010. The July 2007
debentures are initially convertible, subject to certain conditions, into cash
up to the lesser of the principal amount or the conversion value. If the
conversion value is greater than $1,000, then the excess conversion value will
be convertible into cash, common stock or a combination of cash and common
stock, at the Company’s election. The initial effective conversion price of the
February 2007 debentures is approximately $82.24 per share, which represented a
premium of 27.5% to the closing price of the Company's common stock on the
date of issuance. The applicable conversion rate will be subject to customary
adjustments in certain circumstances.
The
February 2007 debentures and July 2007 debentures are senior, unsecured
obligations of the Company, ranking equally with all existing and future senior
unsecured indebtedness of the Company. The February 2007 debentures and July
2007 debentures are effectively subordinated to the Company’s secured
indebtedness to the extent of the value of the related collateral and
structurally subordinated to indebtedness and other liabilities of the Company’s
subsidiaries. The February 2007 debentures and July 2007 debentures do not
contain any covenants or sinking fund requirements.
As of
December 30, 2007, the closing price of the Company’s class A common stock
equaled or exceeded 125% of the $56.75 per share initial effective conversion
price governing the February 2007 debentures and the closing price of the
Company’s class A common stock equaled or exceeded 125% of the $82.24 per share
initial effective conversion price governing the July 2007 debentures, for 20
out of 30 consecutive trading days ending on December 30, 2007, thus satisfying
the market price conversion trigger pursuant to the terms of the debentures. As
of the first trading day of the first quarter in fiscal 2008, holders of the
February 2007 debentures and July 2007 debentures were able to exercise their
right to convert the debentures any day in that fiscal quarter. Therefore, since
holders of the February 2007 debentures and July 2007 debentures were able to
exercise their right to convert the debentures in the first quarter of fiscal
2008, the Company classified the $425.0 million in aggregate convertible debt as
short-term debt in its Condensed Consolidated Balance Sheets as of December 30,
2007. In addition, the Company wrote off $8.2 million and $1.0 million of
unamortized debt issuance costs in the fourth fiscal quarter of 2007 and first
fiscal quarter of 2008, respectively. No holders of the February 2007
debentures and July 2007 debentures exercised their right to convert the
debentures in the first quarter of fiscal 2008.
For the
quarter ended June 29, 2008, the closing price of the Company’s class A common
stock equaled or exceeded 125% of the $56.75 per share initial effective
conversion price governing the February 2007 debentures for 20 out of 30
consecutive trading days ending on June 29, 2008, thus satisfying the market
price conversion trigger pursuant to the terms of the February 2007
debentures. As of the first trading day of the third quarter in fiscal
2008, holders of the February 2007 debentures are able to exercise their right
to convert the debentures any day in that fiscal quarter. Therefore, since
holders of the February 2007 debentures are able to exercise their right to
convert the debentures in the third quarter of fiscal 2008, the Company
classified the $200.0 million in aggregate convertible debt as short-term debt
in its Condensed Consolidated Balance Sheets as of June 29, 2008.
Because
the closing stock price did not equal or exceed 125% of the initial effective
conversion price governing the July 2007 debentures for 20 out of 30 consecutive
trading days during the quarter ended June 29, 2008, holders of the debentures
did not have the right to convert the debentures, based on the market price
conversion trigger, any day in the third fiscal quarter beginning on June 30,
2008. Accordingly, the Company classified the $225.0 million in aggregate
convertible debt as long-term debt in its Condensed Consolidated Balance Sheets
as of June 29, 2008. This test is repeated each fiscal quarter, therefore,
if the market price conversion trigger is satisfied in a subsequent quarter, the
debentures may again be re-classified as short-term debt.
As of
June 29, 2008, the estimated fair value of the February 2007 debentures and July
2007 debentures was approximately $283.0 million and $261.9 million,
respectively, based on quoted market prices. As of December 30, 2007, the
estimated fair value of the February 2007 debentures and July 2007 debentures
was approximately $465.6 million and $366.3 million, respectively, based on
quoted market prices. The fair market value of the senior convertible debentures
is expected to increase as interest rates fall and/or as the market price of our
class A common stock increases. Conversely, the fair market value of the
senior convertible debentures is expected to decrease as interest rates rise
and/or as the market price of our class A common stock falls.
February
2007 Amended and Restated Share Lending Arrangement and July 2007 Share Lending
Arrangement
Concurrent
with the offering of the February 2007 debentures, the Company lent
2.9 million shares of its class A common stock, all of which are being
borrowed by an affiliate of Lehman Brothers Inc. (“LBIE”), one of the
underwriters of the February 2007 debentures. The lent shares are to be used to
facilitate the establishment by investors in the February 2007 debentures and
July 2007 debentures of hedged positions in the Company’s class A common stock.
Under the share lending agreement, LBIE has the ability to offer any of the 1.0
million shares that remain in LBIE’s possession to facilitate hedging
arrangements for subsequent purchasers of both the February 2007 debentures and
July 2007 debentures and, with the Company’s consent, purchasers of securities
the Company may issue in the future. Concurrent with the offering of the July
2007 debentures, the Company also lent 1.8 million shares of its class A
common stock, all of which are being borrowed by an affiliate of Credit Suisse
Securities (USA) LLC (“CSI”), one of the underwriters of the July 2007
debentures. The Company did not receive any proceeds from these offerings of
class A common stock, but received a nominal lending fee of $0.001 per
share for each share of common stock that is loaned pursuant to the share
lending agreements described below.
Share
loans under the share lending agreement will terminate and the borrowed shares
must be returned to the Company under the following circumstances: (i) LBIE
and CSI may terminate all or any portion of a loan at any time; (ii) the
Company may terminate any or all of the outstanding loans upon a default by LBIE
and CSI under the share lending agreement, including a breach by LBIE and CSI of
any of its representations and warranties, covenants or agreements under the
share lending agreement, or the bankruptcy of LBIE and CSI; or (iii) if the
Company enters into a merger or similar business combination transaction with an
unaffiliated third party (as defined in the agreement). In addition, CSI has
agreed to return to the Company any borrowed shares in its possession on the
date anticipated to be five business days before the closing of certain merger
or similar business combinations described in the share lending agreement.
Except in limited circumstances, any such shares returned to the Company cannot
be re-borrowed.
Any
shares loaned to LBIE and CSI will be issued and outstanding for corporate law
purposes and, accordingly, the holders of the borrowed shares will have all of
the rights of a holder of the Company’s outstanding shares, including the right
to vote the shares on all matters submitted to a vote of the Company’s
stockholders and the right to receive any dividends or other distributions that
the Company may pay or make on its outstanding shares of class A common
stock.
While the
share lending agreement does not require cash payment upon return of the shares,
physical settlement is required (i.e., the loaned shares must be returned at the
end of the arrangement). In view of this and the contractual undertakings of
LBIE and CSI in the share lending agreement, which have the effect of
substantially eliminating the economic dilution that otherwise would result from
the issuance of the borrowed shares, the borrowed shares are not considered
outstanding for the purpose of computing and reporting earnings per share.
Notwithstanding the foregoing, the shares will nonetheless be issued and
outstanding and will be eligible for trading on The Nasdaq Global
Market.
Note
11. COMPREHENSIVE INCOME
(LOSS)
Comprehensive
income (loss) is defined as the change in equity of a business enterprise during
a period from transactions and other events and circumstances from non-owner
sources. Comprehensive income (loss) includes unrealized gains and losses on the
Company’s available-for-sale investments, foreign currency derivatives
designated as cash flow hedges and cumulative translation adjustments. The
components of comprehensive income (loss), net of tax, were as
follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
June
29,
2008
|
|
|
July 1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
12. FOREIGN CURRENCY
DERIVATIVES
The
Company has non-U.S. subsidiaries that operate and sell the Company’s products
in various global markets, primarily in Europe. As a result, the Company is
exposed to risks associated with changes in foreign currency exchange rates. It
is the Company’s policy to use various hedge instruments to manage the exposures
associated with purchases of foreign sourced equipment, net asset or liability
positions of its subsidiaries and forecasted revenues and expenses. The Company
does not enter into foreign currency derivative financial instruments for
speculative or trading purposes.
The
Company calculates the fair value of its forward contracts based on market
volatilities, spot rates and interest differentials from published sources. The
following table presents information about the Company’s hedge instruments
measured at fair value on a recurring basis as of June 29, 2008 and indicates
the fair value hierarchy of the valuation techniques utilized by the Company to
determine such fair value in accordance with the provisions of SFAS
No. 157:
(In thousands)
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
|
|
|
|
Foreign currency
forward exchange contracts
|
|
|
|
|
|
|
|
|
|
Foreign currency
forward exchange contracts
|
|
|
|
|
In
accordance with SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” (“SFAS No. 133”), the Company accounts for its hedges of
forecasted foreign currency revenue and cost of revenue as cash flow hedges and
hedges of firmly committed purchase contracts denominated in foreign currency as
fair value hedges.
Cash Flow
Hedges: Hedges of forecasted foreign currency denominated revenues are
designated as cash flow hedges and changes in fair value of the effective
portion of hedge contracts are recorded in accumulated other comprehensive
income in stockholders’ equity in the Condensed Consolidated Balance Sheets.
Amounts deferred in accumulated other comprehensive income are reclassified to
other, net in the Condensed Consolidated Statements of Operations in the periods
in which the hedged exposure impacts earnings. The effective portion of
unrealized losses recorded in accumulated other comprehensive income, net
of tax,
were losses of $0.3 million and $1.3 million for the six months ended June
29, 2008 and July 1, 2007, respectively. As of June 29, 2008 and December 30,
2007, the Company had outstanding cash flow hedge forward contracts with an
aggregate notional value of $6.9 million and $140.1 million, respectively.
The maturity dates of the outstanding contracts do not extend beyond July 2008.
At June 29, 2008, the Company discontinued a portion of an existing cash flow
hedge of foreign currency revenue when it determined that it was probable the
original forecasted transaction would not occur by the end of the originally
specified time period. The amount of derivative loss, $0.8 million, was
reclassified from accumulated other comprehensive income to other, net in
the Condensed Consolidated Statements of Operations as a result of the
discontinuance of the cash flow hedge.
Fair
Value Hedges: On occasion, the Company commits to purchase equipment in foreign
currency, predominantly Euros. When these purchases are hedged and qualify as
firm commitments under SFAS No. 133, they are designated as fair value
hedges and changes in the fair value of the firm commitment derivative contract
are recognized in the Condensed Consolidated Statements of Operations. Under
fair value hedge treatment, the changes in the firm commitment on a spot to spot
basis are recorded in property, plant and equipment, net, in the Condensed
Consolidated Balance Sheets and in other, net, in the Condensed Consolidated
Statements of Operations. As of June 29, 2008 and December 30, 2007, the Company
had no outstanding fair value hedges.
Both cash
flow hedges and fair value hedges are tested for effectiveness each period on a
spot to spot basis using the dollar-offset method. Both the excluded time value
and any ineffectiveness, which were not significant for all periods, are
recorded in other, net.
In
addition, the Company began hedging the net balance sheet effect of foreign
currency denominated assets and liabilities in 2005 primarily for intercompany
transactions, receivables from customers, prepayments to suppliers and advances
received from customers. The Company records its hedges of foreign currency
denominated monetary assets and liabilities at fair value with the related gains
or losses recorded in other, net. The gains or losses on these contracts are
substantially offset by transaction gains or losses on the underlying balances
being hedged. As of June 29, 2008 and December 30, 2007, the Company held
forward contracts with an aggregate notional value of $160.9 million and $62.7
million, respectively, to hedge the risks associated with foreign currency
denominated assets and liabilities.
Note
13. INCOME
TAXES
The
Company’s effective rate of income tax provision was 34% and 33% for the three
and six months ended June 29, 2008, respectively, and the effective rate of
income tax benefit was 58% and 71% for the three and six months ended
July 1, 2007, respectively. The tax provision for the three and six months
ended June 29, 2008 was primarily attributable to the consumption of non-stock
net operating loss carryforwards, net of foreign income taxes in profitable
jurisdictions where the tax rates are less than the U.S. statutory rate. The tax
benefit for the three and six months ended July 1, 2007 was primarily the
result of recognition of deferred tax assets to the extent of deferred tax
liabilities created by the acquisition of SP Systems, net of foreign income
taxes in profitable jurisdictions where the tax rates are less than the U.S.
statutory rate.
Unrecognized
Tax Benefits
On
January 1, 2007, the Company adopted the provisions for FIN 48, which is an
interpretation of SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”).
FIN 48 prescribes a recognition threshold that a tax position is required to
meet before being recognized in the financial statements and provides guidance
on de-recognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition issues. FIN 48 contains
a two-step approach to recognizing and measuring uncertain tax positions
accounted for in accordance with SFAS No. 109. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit as the largest amount that is more
than 50% likely of being realized upon ultimate settlement.
The total
amount of unrecognized tax benefits recorded in the Condensed Consolidated
Balance Sheets at the date of adoption was approximately $1.1 million, which, if
recognized, would affect the Company’s effective tax rate. The additional amount
of unrecognized tax benefits accrued during the year ended December 30, 2007 was
$3.1 million. A reconciliation of the beginning and ending amount of
unrecognized tax benefits for the six months ended June 29, 2008 is as
follows:
(In
thousands)
|
|
June
29,
2008
|
|
Balance
at December 30, 2007
|
|
|
|
|
Additions based on tax
positions related to the current period
|
|
|
|
|
|
|
|
|
|
Management
believes that events that could occur in the next 12 months and cause a change
in unrecognized tax benefits include, but are not limited to, the
following:
|
•
|
commencement,
continuation or completion of examinations of the Company’s tax returns by
the U.S. or foreign taxing authorities;
and
|
|
•
|
expiration
of statutes of limitation on the Company’s tax
returns.
|
The
calculation of unrecognized tax benefits involves dealing with uncertainties in
the application of complex global tax regulations. Uncertainties include, but
are not limited to, the impact of legislative, regulatory and judicial
developments, transfer pricing and the application of withholding taxes.
Management regularly assesses the Company’s tax positions in light of
legislative, bilateral tax treaty, regulatory and judicial developments in the
countries in which the Company does business. Management determined that an
estimate of the range of reasonably possible change in the amounts of
unrecognized tax benefits within the next 12 months cannot be made.
Classification
of Interest and Penalties
The
Company accrues interest and penalties on tax contingencies as required by FIN
48 and SFAS No. 109. This interest and penalty accrual is classified as
income tax provision (benefit) in the Condensed Consolidated Statements of
Operations and was not material.
Tax
Years and Examination
The
Company files tax returns in each jurisdiction in which they are registered to
do business. In the U.S. and many of the state jurisdictions, and in many
foreign countries in which the Company files tax returns, a statute of
limitations period exists. After a statute of limitations period expires, the
respective tax authorities may no longer assess additional income tax for the
expired period. Similarly, the Company is no longer eligible to file claims for
refund for any tax that it may have overpaid. The following table summarizes the
Company’s major tax jurisdictions and the tax years that remain subject to
examination by these jurisdictions as of December 31,
2007:
Tax Jurisdictions
|
Tax Years
|
|
|
|
|
|
|
|
|
Additionally,
while years prior to 2003 for the U.S. corporate tax return are not open for
assessment, the IRS can adjust net operating loss and research and development
carryovers that were generated in prior years and carried forward to
2003.
The IRS
is currently conducting an audit of SP Systems’ federal income tax returns for
fiscal 2005 and 2004. As of June 29, 2008, no material adjustments have been
proposed by the IRS. If material tax adjustments are proposed by the IRS and
acceded to by the Company, an adjustment to goodwill and income taxes payable
may result.
Note
14. NET INCOME (LOSS) PER
SHARE
Basic net
income (loss) per share is computed using the weighted-average of the combined
class A and class B common shares outstanding. Diluted net income (loss) per
share is computed using the weighted-average common shares outstanding plus any
potentially dilutive securities outstanding during the period using the treasury
stock method, except when their effect is anti-dilutive. Potentially dilutive
securities include stock options, restricted stock and senior convertible
debentures.
Holders
of the Company’s senior convertible debentures may, under certain circumstances
at their option, convert the senior convertible debentures into cash and, if
applicable, shares of the Company’s class A common stock at the applicable
conversion rate, at any time on or prior to maturity (see Note 10). Pursuant to
EITF 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon
Conversion” (“EITF 90-19”), the senior convertible debentures are included in
the calculation of diluted net income (loss) per share if their inclusion is
dilutive under the treasury stock method.
The
following is a summary of all outstanding anti-dilutive potential common
shares:
|
|
As
of
|
(In
thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table sets forth the computation of basic and diluted weighted-average
common shares:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(In
thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
June
29,
2008
|
|
|
July 1,
2007
|
|
Basic
weighted-average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares subject to re-vesting
restrictions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares for diluted computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted-average common shares excludes 2.9 million shares of class A common
stock lent to LBIE in connection with the February 2007 debentures and 1.8
million shares of class A common stock lent to CSI in connection with the July
2007 debentures (see Note 10).
Dilutive
potential common shares includes approximately 1.1 million shares in each of the
three and six months ended June 29, 2008 for the impact of the February 2007
debentures as the Company has experienced a substantial increase in its common
stock price. Similarly, dilutive potential common shares includes
approximately 59,000 shares and 30,000 shares for the three and six months
ended June 29, 2008, respectively, for the impact of the July 2007
debentures. Under the treasury stock method, such senior convertible
debentures will generally have a dilutive impact on net income per share if the
Company’s average stock price for the period exceeds the conversion price for
the senior convertible debentures.
Note
15. SEGMENT AND GEOGRAPHICAL
INFORMATION
The
Company operates in two business segments: systems and components. The systems
segment generally represents sales directly to systems owners of engineering,
procurement, construction and other services relating to solar electric power
systems that integrate the Company’s solar panels and balance of systems
components, as well as materials sourced from other manufacturers. The
components segment primarily represents sales of the Company’s solar cells,
solar panels and inverters to solar systems installers and other resellers. The
Chief Operating Decision Maker (“CODM”), as defined by SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information” (“SFAS No.
131”), is the Company’s Chief Executive Officer. The CODM assesses the
performance of both operating segments using information about their revenue and
gross margin.
The
following tables present revenue by geography and segment, gross margin by
segment, revenue by significant customer and property, plant and equipment
information based on geographic region. Revenue is based on the destination of
the shipments. Property, plant and equipment are based on the physical location
of the assets:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
(As a percentage of total
revenue) |
|
|
June 29,
2008
|
|
|
|
July 1,
2007
|
|
|
June 29,
2008
|
|
|
July 1,
2007
|
|
Revenue
by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Significant
Customers:
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Three
Months Ended
|
|
Six
Months Ended
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|
(As a percentage of total
revenue)
|
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June
29,
2008
|
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July
1,
2007
|
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June
29,
2008
|
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July
1,
2007
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Business
Segment
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* denotes
less than 10% during the period
(In thousands)
|
|
June
29,
2008
|
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|
December 30,
2007
|
|
Property,
plant and equipment by geography:
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Note
16. SUBSEQUENT
EVENTS
Florida
Power & Light Project
In July
2008, SP Systems entered into an engineering, procurement and construction
agreement (the “EPC Agreement”) with Florida Power and Light
Company. The EPC Agreement sets forth the material terms and
conditions pursuant to which SP Systems would design and construct a solar
photovoltaic plant representing approximately 25 megawatts net power in DeSoto
County, Florida. The EPC Agreement is a material revenue opportunity
for SunPower on a consolidated basis.
Cypress
Announced Decision to Pursue Tax-Free Distribution of the Company’s Class B
Common Stock
In July
2008, Cypress’ Board of Directors authorized management to proceed with Cypress’
plan to pursue the tax-free distribution of the class B common stock of SunPower
held by Cypress, with the objective of having the transaction completed by the
end of fiscal 2008, or sooner if possible. In August 2008, Cypress’ Board of
Directors further authorized management to take additional steps in anticipation
of the proposed spin-off and sell up to 3.0 million shares of SunPower class B
common stock held by Cypress prior to the completion date of the proposed
spin-off.
Emmanuel
Hernandez has communicated his intent to retire as Chief Financial Officer
of the Company
In July
2008, the Company announced that Emmanuel Hernandez had communicated his
intent to retire as Chief Financial Officer of the Company. Mr.
Hernandez has agreed to remain fully engaged in his current role until a new
Chief Financial Officer is appointed, into 2009 if needed.
Mr. Hernandez was identified in the Company’s 2008 proxy statement as one
of the Company’s named executive officers.
Acquisition
of Solar Sales Pty Ltd.
In July
2008, the Company completed the acquisition of Solar Sales Pty Ltd. (“Solar
Sales”), a solar systems integration and product distribution company based in
Australia. Solar Sales distributes components such as solar panels and inverters
via a national network of 30 dealers throughout Australia, and designs, builds
and commissions large-scale commercial systems. As a result of the
acquisition, Solar Sales became a wholly-owned subsidiary of the Company. The
acquisition is not expected to be material to the Company’s consolidated
financial condition and results of operations.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Cautionary
Statement Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are statements that
do not represent historical facts. We use words such as ““may,” “will,”
“should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “predict,” “potential” and “continue” and similar expressions to
identify forward-looking statements. Forward-looking statements in this
Quarterly Report on Form 10-Q include, but are not limited to, our plans and
expectations regarding our ability to obtain polysilicon ingots or wafers,
future financial results, operating results, business strategies, projected
costs, products, competitive positions and management’s plans and
objectives for future operations, and industry trends. These forward-looking
statements are based on information available to us as of the date of this
Quarterly Report on Form 10-Q and current expectations, forecasts and
assumptions and involve a number of risks and uncertainties that could cause
actual results to differ materially from those anticipated by these
forward-looking statements. Such risks and uncertainties include a variety of
factors, some of which are beyond our control. Please see “PART II. OTHER
INFORMATION, Item 1A: Risk Factors” and our other filings with the Securities
and Exchange Commission for additional information on risks and uncertainties
that could cause actual results to differ. These forward-looking statements
should not be relied upon as representing our views as of any subsequent date,
and we are under no obligation, and expressly disclaim any responsibility, to
update or alter our forward-looking statements, whether as a result of new
information, future events or otherwise.
The
following information should be read in conjunction with the Condensed
Consolidated Financial Statements and the accompanying Notes to Condensed
Consolidated Financial Statements included in this Quarterly Report on Form
10-Q. Our fiscal quarters end on the Sunday closest to the end of the applicable
calendar quarter. All references to fiscal periods apply to our fiscal quarters
or fiscal year which end on the Sunday closest to the calendar quarter
end.
Overview
We are a
vertically integrated solar products and services company that designs,
manufactures, markets and installs high-performance solar electric power
technologies. Our solar cells and solar panels are manufactured using
proprietary processes and technologies based on more than 15 years of
research and development. We believe our solar cells have the highest conversion
efficiency, a measurement of the amount of sunlight converted by the solar cell
into electricity, of all the solar cells available for the mass market. Our
solar power products are sold through our components business segment, or our
components segment. In January 2007, we acquired PowerLight Corporation, or
PowerLight, now known as SunPower Corporation, Systems, or SP Systems,
which developed, engineered, manufactured and delivered large-scale solar power
systems. These activities are now performed by our systems business segment, or
our systems segment. Our solar power systems, which generate electricity,
integrate solar cells and panels manufactured by us as well as other
suppliers.
Components
segment: Our components segment sells solar power products,
including solar cells, solar panels and inverters, which convert sunlight to
electricity compatible with the utility network. We believe our solar cells
provide the following benefits compared with conventional solar
cells:
·
|
superior
performance, including the ability to generate up to 50% more power per
unit area;
|
·
|
superior
aesthetics, with our uniformly black surface design that eliminates highly
visible reflective grid lines and metal interconnect ribbons;
and
|
·
|
efficient
use of silicon, a key raw material used in the manufacture of solar
cells.
|
We sell
our solar components products to installers and resellers for use in residential
and commercial applications where the high efficiency and superior aesthetics of
our solar power products provide compelling customer benefits. We also sell
products for use in multi-megawatt solar power plant applications. In many
situations, we offer a materially lower area-related cost structure for our
customers because our solar panels require a substantially smaller roof or land
area than conventional solar technology and half or less of the roof or land
area of commercial solar thin film technologies. We sell our products primarily
in Asia, Europe and North America, principally in regions where government
incentives have accelerated solar power adoption.
We
manufacture our solar cells at our two solar cell manufacturing facilities in
the Philippines. We currently operate eight cell manufacturing lines in our
solar cell manufacturing facilities, with a total rated manufacturing capacity
of 254 megawatts per year. By the end of 2008, we plan to operate 12 solar cell
manufacturing lines with an aggregate manufacturing capacity of 414 megawatts
per year. We plan to begin production as soon as the first quarter of 2010 on
the first line of our third solar cell manufacturing facility in Malaysia, which
is expected to have an aggregate manufacturing capacity of more than 1 gigawatt
per year when completed.
We
manufacture our solar panels at our solar panel assembly facility located in the
Philippines. Our solar panels are also manufactured for us by a third-party
subcontractor in China. We currently operate four solar panel manufacturing
lines with a rated manufacturing capacity of 120 megawatts of solar panels per
year. In addition, our SunPower branded inverters are manufactured for us by
multiple suppliers.
Systems
segment: Our systems segment generally sells solar power
systems directly to system owners and developers. When we sell a solar power
system it may include services such as development, engineering, procurement of
permits and equipment, construction management, access to financing, monitoring
and maintenance. We believe our solar systems provide the following benefits
compared with competitors’ systems:
·
|
superior
performance delivered by maximizing energy delivery and financial return
through systems technology design;
|
·
|
superior
systems design to meet customer needs and reduce cost, including
non-penetrating, fast roof installation technologies;
and
|
·
|
superior
channel breadth and delivery capability including turnkey
systems.
|
Our
systems segment is comprised primarily of the business we acquired from SP
Systems in January 2007. Our customers include commercial and governmental
entities, investors, utilities and production home builders. We work with
development, construction, system integration and financing companies to deliver
our solar power systems to customers. Our solar power systems are designed to
generate electricity over a system life typically exceeding 25 years and
are principally designed to be used in large-scale applications with system
ratings of typically more than 500 kilowatts. Worldwide, more than 450 SunPower
solar power systems have been constructed or are under contract, rated in
aggregate at more than 350 megawatts of peak capacity.
We have
solar power system projects completed or in the process of being completed in
various countries including Germany, Italy, Portugal, South Korea, Spain and the
United States. We sell distributed rooftop and ground-mounted solar power
systems as well as central-station power plants. Distributed solar power systems
are typically rated at more than 500 kilowatts of capacity to provide a
supplemental, distributed source of electricity for a customer’s facility. Many
customers choose to purchase solar electricity from our systems under a power
purchase agreement with a financing company which buys the system from us. In
Europe, South Korea and the United States, our products and systems are
typically purchased by a financing company and operated as a central station
solar power plant. These power plants are rated with capacities of approximately
one to 20 megawatts, and generate electricity for sale under tariff to private
and public utilities.
We
manufacture certain of our solar power system products at our manufacturing
facilities in Richmond, California and at other facilities located close to our
customers. Some of our solar power system products are also manufactured for us
by third-party suppliers.
Relationship
with Cypress Semiconductor Corporation, or Cypress
Cypress
made a significant investment in SunPower in 2002. On November 9, 2004,
Cypress completed a reverse triangular merger with us in which all of the
outstanding minority equity interest of SunPower was retired, effectively giving
Cypress 100% ownership of all of our then outstanding shares of capital stock
but leaving our unexercised warrants and options outstanding. After completion
of our initial public offering in November 2005, Cypress held, in the aggregate,
52.0 million shares of class B common stock. On May 4, 2007, Cypress
completed the sale of 7.5 million shares of class B common stock in an offering
pursuant to Rule 144 of the Securities Act. Such shares converted to 7.5 million
shares of class A common stock upon the sale.
In April
2008, Cypress received a favorable ruling from the IRS with respect to certain
tax issues arising under Section 355 of the Internal Revenue Code in connection
with the potential tax-free spin-off to its stockholders of its ownership of
SunPower class B common stock.
In July 2008,
Cypress’ Board of Directors authorized management to proceed with Cypress’ plan
to pursue the tax-free distribution of the class B common stock of SunPower held
by Cypress, with the objective of having the transaction completed by the end of
fiscal 2008, or sooner if possible. In August 2008, Cypress’ Board of Directors
further authorized management to take additional steps in anticipation of the
proposed spin-off and sell up to 3.0 million shares of SunPower class B common
stock held by Cypress prior to the completion date of the proposed
spin-off.
As of
June 29, 2008, Cypress owned approximately 44.5 million shares of class B common
stock, which represented approximately 55% of the total outstanding shares of
our common stock, or approximately 52% of such shares on a fully diluted basis
after taking into account outstanding stock options (or 49% of such shares on a
fully diluted basis after taking into account outstanding stock options and
shares loaned to underwriters of our convertible indebtedness), and 90% of the
voting power of our total outstanding common stock. Cypress, its successors in
interest or its subsidiaries may convert their shares of class B common
stock into shares of class A common stock on a one-for-one basis at any
time.
Critical
Accounting Policies
The
Company’s critical accounting policies are disclosed in the Company’s Form 10-K
for the year ended December 30, 2007 and have not changed materially as of
June 29, 2008, with the exception of the following:
Fair Value of
Financial Instruments: Effective December 31, 2007, we adopted the
provisions of Statement of Financial Accounting Standards, or
SFAS, No. 157, “Fair Value Measurements,” or SFAS No. 157, which
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. Our financial assets and financial liabilities that
require recognition under SFAS No. 157 include available-for-sale investments
and foreign currency derivatives. In determining fair value, we use various
valuation techniques, including market and income approaches to value
available-for-sale investments and foreign currency derivatives. SFAS No. 157
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the observable inputs be used when available. Observable inputs
are inputs that market participants would use in pricing the asset or liability
developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the
assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. As such,
fair value is a market-based measure considered from the perspective of a market
participant who holds the asset or owes the liability rather than an
entity-specific measure. The hierarchy is broken down into three levels based on
the reliability of inputs as follows:
|
·
|
|
Level
1—Valuations based on quoted prices in active markets for identical assets
or liabilities that the Company has the ability to access. Since
valuations are based on quoted prices that are readily and regularly
available in an active market, valuation of these products does not entail
a significant degree of judgment. Financial assets utilizing Level 1
inputs include money market funds.
|
|
·
|
|
Level
2—Valuations based on quoted prices in markets that are not active or for
which all significant inputs are observable, directly or indirectly.
Financial assets utilizing Level 2 inputs include some corporate
securities, commercial paper and foreign currency forward exchange
contracts.
|
|
·
|
|
Level
3—Valuations based on inputs that are unobservable and significant to the
overall fair value measurement. Financial assets utilizing Level 3 inputs
include corporate securities comprised of auction rate securities. We use
an income approach valuation model to estimate the price that would be
received to sell our securities in an orderly transaction between market
participants ("exit price"). The exit price is derived as the weighted
average present value of expected cash flows over various periods of
illiquidity, using a risk adjusted discount rate that is based on the
credit risk and liquidity risk of the
securities.
|
The
availability of observable inputs can vary from instrument to
instrument and to the extent that valuation is based on inputs that are
less observable or unobservable in the market, the determination of fair value
requires more judgment. Accordingly, the degree of judgment exercised by our
management in determining fair value is greatest for instruments categorized in
Level 3. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for
disclosure purposes the level in the fair value hierarchy within which the fair
value measurement in its entirety falls is determined based on the lowest level
input that is significant to the fair value measurement in its entirety. In
regards to our auction rate securities, the income approach valuation model was
based on both Level 2 (credit quality and interest rates) and Level 3 inputs. We
determined that the Level 3 inputs were the most significant to the overall fair
value measurement, particularly the estimates of risk adjusted discount rates
and ranges of expected periods of illiquidity.
Results
of Operations for the Three Months and Six Months Ended June 29, 2008 and July
1, 2007
Correction
of Errors Identified in our Financial Statements for the Year Ended December 30,
2007
During
the preparation of our condensed consolidated financial statements for the six
months ended June 29, 2008, we identified errors in our financial statements
related to the year ended December 30, 2007, which resulted in $1.3 million
overstatement of stock-based compensation expense. We corrected these errors in
our condensed consolidated financial statements for the six months ended June
29, 2008, which resulted in a $1.3 million credit to income before income taxes
and net income. The out-of-period effect is not expected to be material to
estimated full-year 2008 results, and, accordingly has been recognized in
accordance with APB 28, Interim Financial Reporting, paragraph 29 as the error
is not material to any financial statements of prior periods.
Revenue
Revenue
and the year-over-year change were as follows:
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
(Dollars
in thousands)
|
|
June 29,
2008
|
|
|
July 1,
2007
|
|
Year-over-
Year Change
|
|
June 29,
2008
|
|
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July 1,
2007
|
|
Year-over-
Year Change
|
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We
generate revenue from two business segments, as follows:
Systems
Segment Revenue: Our systems revenue represents sales of engineering,
procurement and construction, or EPC, projects and other services relating to
solar electric power systems that integrate our solar panels and balance of
systems components, as well as materials sourced from other manufacturers. In
the United States where customers often utilize rebate and tax credit programs
in connection with projects rated one megawatt or less of capacity, we typically
sell solar systems rated up to one megawatt of capacity to provide a
supplemental, distributed source of electricity for a customer’s facility. In
Europe, South Korea and the United States, our systems are often purchased by
third-party investors as central station solar power plants, typically rated
from one to 20 megawatts, which generate electricity for sale under tariff to
regional and public utilities. We also sell our solar systems under
materials-only sales contracts in Asia, Europe and the United States. The
balance of our systems revenues are generally derived from sales to new home
builders for residential applications and maintenance revenue from servicing
installed solar systems.
Systems
segment revenue for the three and six months ended June 29, 2008 were
$270.6 million and $449.4 million, respectively, and accounted for 71% and 68%,
respectively, of our total revenue. Systems segment revenue for the three and
six months ended July 1, 2007 were $104.0 million and $182.5 million,
respectively, and accounted for 60% and 58%, respectively, of our total revenue.
Our systems segment revenue is largely dependent on the timing of revenue
recognition on large construction projects and, accordingly, will fluctuate from
period to period. For the three and six months ended June 29, 2008, our
systems segment benefited from strong power plant scale demand in Europe,
primarily in Spain, and reflected the significant completion of Spain based
projects in the second quarter of fiscal 2008 before the expiration of the
current feed-in tariff which is expected in September 2008.
Components
Segment Revenue: Our components revenue represents sales of our solar
cells, solar panels and inverters to solar systems installers and other
resellers. Factors affecting our components revenue include unit volumes of
solar cells and modules produced and shipped, average selling prices, product
mix, product demand and the percentage of our construction projects sourced with
SunPower solar panels sold through the systems segment which reduces the
inventory available to sell through our components segment. We have experienced
quarter-over-quarter unit volume increases in shipments of our solar power
products since we began commercial production in the fourth quarter of 2004.
From fiscal 2005 through the second quarter of fiscal 2008, we have experienced
increases in average selling prices for our solar power products primarily due
to the strength of end-market demand and favorable currency exchange rates.
Accordingly, our components segment's average selling prices were slightly
higher during the three and six months ended June 29, 2008 compared to the
same period of 2007. Over the next several years, we expect average selling
prices for our solar power products to decline as the market becomes more
competitive, as certain products mature and as manufacturers are able to lower
their manufacturing costs and pass on some of the savings to their
customers.
Components
segment revenue for the three and six months ended June 29, 2008 were
$112.2 million and $207.0 million, respectively, and accounted for 29% and 32%,
respectively, of our total revenue. Components segment revenue for the three and
six months ended July 1, 2007 were $69.7 million and $133.6 million,
respectively, and accounted for 40% and 42%, respectively, of our total revenue.
For the three and six months ended June 29, 2008, our components segment
benefited from strong demand in the residential and small commercial roof-top
markets through our dealer network in both Europe and the United
States.
Total
Revenue: During the three and six months ended June 29, 2008,
our total revenue of approximately $382.8 million and $656.5 million,
respectively, represented an increase of 120% and 108%, respectively, from total
revenue reported in the comparable period of 2007. The increase in total revenue
during the three and six months ended June 29, 2008 compared to the same period
of 2007 is attributable to the systems business segment’s installation of
more than 40 megawatts for several large-scale solar power plants in Spain in
the first half of 2008, the components business segment’s continued increase in
the demand for our solar cells and solar panels and the continued increases
in unit production and unit shipments of both solar cells and solar panels as we
have expanded our solar manufacturing capacity. During the first quarter of
2007, we had four solar cell manufacturing lines in operation with annual
production capacity of 108 megawatts. Since then, we began commercial production
on our 5th, 6th and 7th solar cell lines during the third and fourth quarters of
fiscal 2007 and 8th solar cell line during the second quarter of fiscal 2008.
Lines five and six have a rated solar cell production capacity of 33 megawatts
per year and lines seven and eight have a rated solar cell production capacity
of 40 megawatts per year.
Concentrations: We
have six customers that each accounted for more than 10 percent of our total
revenue in one or more of the three and six months ended June 29, 2008 and
July 1, 2007, as follows:
Significant
Customers:
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
(As a percentage of total
revenue)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
|
Business
Segment
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* denotes
less than 10% during the period
Effective
February 6, 2008, the New York Stock Exchange, or NYSE, delisted the common
stock of MuniMae, or MMA, the parent company of one of our systems segment
customers, MMA Renewable Ventures, because MMA did not expect to file its
audited 2006 financial statements by March 3, 2008, the deadline imposed by the
NYSE. In connection with completing the restatement and filing their Annual
Report on Form 10-K for the year ended December 31, 2006, MMA has disclosed
that it incurred substantial accounting costs. In addition, MMA has disclosed
that recent credit market disruption has negatively affected many aspects of
MMA’s business. MMA Renewable Ventures accounted for less than 10% of our total
revenue in the three and six months ended June 29, 2008. MMA Renewable
Ventures accounted for 10% of our total revenue in the three months ended
July 1, 2007 and less than 10% of our total revenue in the six months ended
July 1, 2007. In the event MMA Renewable Ventures ceases to be a significant
customer of ours or fails to pay us in a timely manner, it could have a
significant adverse effect on our future results of operations.
International
sales comprise the majority of revenue for both our systems and components
segments. International sales represented approximately 85% and 82% of our total
revenue for the three and six months ended June 29, 2008, respectively, as
compared to 63% and 62% of our total revenue for the three and six months
ended July 1, 2007, respectively, and we expect international sales to remain a
significant portion of overall sales for the foreseeable future. International
sales as a percentage of our total revenue increased approximately 22% and 20%
for the three and six months ended June 29, 2008, respectively, compared to
the same period of 2007, as our systems business segment significantly completed
the construction of several large-scale solar power plants in Spain in the first
half of fiscal 2008.
Cost
of Revenue
Cost of
revenue as a percentage of revenue and the year-over-year change were as
follows:
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
(Dollars
in thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of components revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of revenue as a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gross margin percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details
to cost of revenue by segment and the year-over-year change were as
follows:
|
|
Systems
Segment
|
|
|
|
Components
Segment
|
|
|
|
|
Three
Months Ended
|
|
|
|
Three
Months Ended
|
|
|
(Dollars
in thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
Amortization
of purchased intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factory
pre-operating costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
other cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of revenue as a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gross margin percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
Segment
|
|
|
|
Components
Segment
|
|
|
|
|
Six
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
(Dollars
in thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
Amortization
of purchased intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factory
pre-operating costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
other cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of revenue as a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gross margin percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the three and six months ended June 29, 2008, our total cost of revenue was
approximately $289.7 million and $510.1 million, respectively, which represented
increases of 101% compared to total cost of revenue reported in the comparable
period of 2007. The increase in total cost of revenue resulted from increased
costs in all cost of revenue spending categories and corresponds with an
increase of 120% and 108% in total revenue during the three and six months
ended June 29, 2008, respectively, from total revenue reported in the comparable
period of 2007.
As a
percentage of total revenue, our total cost of revenue decreased to 76% and 78%
in the three and six months ended June 29, 2008, respectively, compared to 83%
and 80% for the three and six months ended July 1, 2007, respectively. This
decrease in total cost of revenue as a percentage of total revenue is reflective
of decreased costs of polysilicon beginning in the second quarter of fiscal 2008
and improved manufacturing economies of scale associated with markedly higher
production volume. This decrease in total cost of revenue as a percentage of
total revenue was partially offset by (i) one-time asset impairment
charges of $5.5 million in the six months ended June 29, 2008 relating
to the wind-down of our imaging detector product line and for the
write-down of certain solar product manufacturing equipment which became
obsolete due to new processes; (ii) a more favorable mix of business in our
systems segment that benefited gross margin by approximately four percentage
points during the six months ended July 1, 2007; and (iii) the $2.7 million
settlement received from one of our suppliers in the components segment during
the six months ended July 1, 2007 in connection with defective materials sold to
us during 2006 that was reflected as a reduction to total cost of
revenue.
Systems
Segment: Our cost of systems revenue consists primarily of solar
panels, mounting systems, inverters and subcontractor costs. Other factors
contributing to cost of revenue include amortization of intangible assets,
depreciation, provisions for warranty, salaries, personnel-related costs,
freight, royalties and manufacturing supplies associated with contracting
revenues. The cost of solar panels is the single largest cost element in our
cost of systems revenue. We expect our cost of systems revenue to fluctuate as a
percentage of revenue depending on many factors such as the cost of solar
panels, the cost of inverters, subcontractor costs, freight costs and other
project related costs. In particular, our systems segment generally experiences
higher gross margin on construction projects that utilize SunPower solar panels
compared to construction projects that utilize solar panels purchased from third
parties. For the three and six months ended June 29, 2008, gross margin for
the systems segment was $61.5 million
and $97.1
million, respectively, or 23% and 22% of systems segment revenue,
respectively. Gross margin for the systems segment was $12.5 million and $28.5
million for the three and six months ended July 1, 2007, respectively, or
12% and 16% of systems segment revenue, respectively. Gross margin in our
systems segment increased eleven percentile points in the three months
ended June 29, 2008 as compared to the three months ended July, 2007 and
six percentile points in the six months ended June 29, 2008 as compared to
the six months ended July, 2007 due to higher percentage of SunPower solar
panels used in its projects as well as cost savings we realized from more
efficient field implementation of our systems trackers.
Our
systems segment sourced approximately 61% and 52% of its solar panel
installations with SunPower products in the three and six months ended June
29, 2008, respectively, compared to 21% and 28% for the three and
six months ended July 1, 2007, respectively. We expect that our systems
segment will continue to source more than 50% of its projects with SunPower
solar panels during the second half of fiscal 2008. Our cost of systems revenue
will also fluctuate from period to period due to the mix of projects completed
and recognized as revenue, in particular between large projects and large
commercial installation projects that may or may not include SunPower solar
panels. Our gross profit each quarter is affected by a number of factors,
including the types of projects in process and their various stages of
completion, the gross margins estimated for those projects in progress and the
actual system group department overhead costs. Historically, revenues from
materials-only sales contracts generate a higher gross margin percentage for our
systems segment than revenue generated from turnkey contracts which generate
higher revenue per watt from providing both materials as well as engineering,
procurement and construction management services.
In
connection with the acquisition of SP Systems in January 2007, there were $79.5
million of identifiable purchased intangible assets, of which $56.8 million was
being amortized to cost of systems revenue on a straight-line basis over periods
ranging from one to five years. As a result of our new branding strategy, during
the quarter ended July 1, 2007, the PowerLight tradename asset with a net book
value of $14.1 million was written off as an impairment of acquisition-related
intangible assets. As such, the remaining balance of $41.2 million relating to
purchased patents, technology and backlog will be amortized to cost of systems
revenue on a straight-line basis over periods ranging from one to four
years.
Almost
all of our systems segment construction contracts are fixed price contracts.
However, we have in several instances obtained change orders that reimburse us
for additional unexpected costs due to various reasons. The systems segment also
has long-term agreements for solar cell and panel purchases with several major
solar panel manufacturers, some with liquidated damages and/or take-or pay-type
arrangements. An increase in project costs, including solar panel, inverter and
subcontractor costs, over the term of a construction contract could have a
negative impact on our systems segment’s overall gross profit. Our systems
segment gross profit may also be impacted by certain adjustments for inventory
reserves. We are seeking to improve gross profit over time as we implement cost
reduction efforts, improve manufacturing processes, and seek better and less
expensive materials globally, as we grow the business to attain economies of
scale on fixed costs. Any increase in gross profit based on these items,
however, could be partially or completely offset by increased raw material costs
or our inability to increase revenues in line with expectations, and other
competitive pressures on gross margin.
Components
Segment: Our cost of components revenue consists primarily of silicon
ingots and wafers used in the production of solar cells, along with other
materials such as chemicals and gases that are needed to transform silicon
wafers into solar cells. Other factors contributing to cost of revenue include
amortization of intangible assets, depreciation, provisions for estimated
warranty, salaries, personnel-related costs, facilities expenses and
manufacturing supplies associated with solar cell fabrication as well as factory
pre-operating costs associated with our new solar cell manufacturing
facility and solar panel assembly facility. Such pre-operating costs included
compensation and training costs for factory workers as well as utilities and
consumable materials associated with preproduction activities. For our solar
panels, our cost of revenue includes the cost of solar cells and raw materials
such as glass, frame, backing and other materials, as well as the assembly costs
we pay to our third-party subcontractor in China. Additionally, within our own
solar panel assembly facility in the Philippines we incur personnel-related
costs, depreciation, utilities and other occupancy costs.
On
November 9, 2004, Cypress completed a reverse triangular merger with us in
which each share of our then outstanding capital stock not owned by Cypress was
valued at $3.30 per share and exchanged for an equivalent number of shares of
Cypress common stock. This merger effectively gave Cypress 100% ownership of all
of our then outstanding shares of capital stock but left our unexercised
warrants and options outstanding. As a result of that transaction, we were
required to record Cypress’ cost of acquiring us in our financial statements,
including its equity investment and pro rata share of our losses by recording
intangible assets, including purchased technology, patents, trademarks and a
distribution agreement. The fair value for these intangibles is being amortized
as an element of cost of components revenue over two to six years on a
straight-line basis.
Our
components segment gross profit each quarter is affected by a number of factors,
including average selling prices for our products, our product mix, our actual
manufacturing costs, the utilization rate of our solar cell manufacturing
facility and changes in amortization of intangible assets. To date, demand for
our solar power products has been robust and our production output has increased
allowing us to spread a significant amount of our fixed costs over relatively
high production volume, thereby reducing our per unit fixed cost. Our solar
panel assembly facility began production in the first quarter of 2007 and our
second solar cell manufacturing facility began production in the third quarter
of 2007. We currently operate eight solar cell manufacturing lines with total
production capacity of 254 megawatts per year with the 5th, 6th, 7th and 8th
lines located in our second building in
the
Philippines that is expected to eventually house 12 solar cell production lines
with a total factory output capacity of 466 megawatts per year. As we build
additional manufacturing lines or facilities, our fixed costs will increase, and
the overall utilization rate of our solar cell manufacturing and solar panel
assembly facilities could decline, which could negatively impact our gross
profit. This decline may continue until a line’s manufacturing output reaches
its rated practical capacity.
Gross
margin for the components segment was $31.6 million and $49.3 million for the
three and six months ended June 29, 2008, respectively, or 28% and 24% of
components segment revenue, respectively. Gross margin for the components
segment was $17.3 million and $33.7 million for the three and six months ended
July 1, 2007, respectively, or 25% of components segment revenue for each of the
three and six months ended July 1, 2007, respectively. Gross margin in our
components segment increased three percentile points in the three months ended
June 29, 2008 as compared to the three months ended July, 2007 due to lower
polysilicon costs, sequential growth in volume and modestly higher average
selling prices. Gross margin in our components segment decreased one percentile
point in the six months ended June 29, 2008 as compared to the six months ended
July, 2007 due to increasing costs of raw materials through the first quarter
ended March 30, 2008 and one-time asset impairment charges of $5.5 million
incurred in the first quarter ended March 30, 2008.
From time
to time, we enter into agreements whereby the selling price for certain of our
solar power products is fixed over a defined period. An increase in our
manufacturing costs over such a defined period could have a negative impact on
our overall gross profit. Our gross profit may also be impacted by fluctuations
in manufacturing yield rates and certain adjustments for inventory reserves. We
expect our gross profit to increase over time as we improve our manufacturing
processes and as we grow our business and leverage certain of our fixed costs.
An expected increase in gross profit based on manufacturing efficiencies,
however, could be partially or completely offset by increased raw material costs
or decreased revenue.
Research
and Development
Research
and development expense as a percentage of revenue and the year-over-year change
were as follows:
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
(Dollars
in thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
& development as a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the three and six months ended June 29, 2008, our research and development
expense was $4.8 million and $9.5 million, respectively, which represents an
increase of 71% and 64%, respectively, from research and development expense
reported in the comparable period of fiscal 2007. Research and development
expense consists primarily of salaries and related personnel costs, depreciation
and the cost of solar cell and solar panel materials and services used for the
development of products, including experiment and testing. The increase in
research and development spending during the three and six months ended June 29,
2008 compared to the same period of fiscal 2007 resulted primarily from:
(i) increases in salaries, benefits and stock-based compensation costs as a
result of increased headcount; and (ii) additional material and equipment costs
incurred for the development of our next generation of more efficient solar
cells and thinner polysilicon wafers for solar cell manufacturing, as well as
development of new processes to automate solar panel assembly operations. These
increases were partially offset by a decrease in consulting service fees as well
as by cost reimbursements received from various government entities in the
United States.
Research
and development expense is reported net of any funding received under
contracts with governmental agencies because such contracts are considered
collaborative arrangements. In the third quarter of 2007, we signed a Solar
America Initiative agreement with the U.S. Department of Energy in which we were
awarded $8.5 million in the first budgetary period. Total funding for the
three-year effort is estimated to be $24.7 million. Our cost share requirement
under this program, including lower-tier subcontract awards, is anticipated to
be $27.9 million. Subject to final negotiations and settlement with the
government agencies involved, our existing governmental contracts are expected
to offset approximately $7.0 million to $10.0 million of our research and
development expense in each of 2007, 2008 and 2009. This contract replaced our
three-year cost-sharing research and development project with the National
Renewable Energy Laboratory, entered into in March 2005, to fund up to $3.0
million or half of the project costs to design the our next generation
solar panels. Funding from government contracts offset our research and
development expense by approximately $2.0 million and $3.7 million in the three
and six months ended June 29, 2008, respectively, as compared to
approximately $0.8 million and $1.0 million in the three and six months
ended July 1, 2007, respectively.
As a
percentage of total revenue, research and development expense decreased to
1% in each of the three and six months ended June 29, 2008, respectively,
compared to 2% in each of the three and six months ended July 1, 2007,
respectively, because these expenses increased at a substantially lower rate
than the rate of growth in our revenue. We expect our research and
development
expense to continually increase in absolute dollars as we continue to develop
new processes to further improve the conversion efficiency of our solar cells
and reduce their manufacturing cost, and as we develop new products to diversify
our product offerings.
Sales,
General and Administrative
Sales,
general and administrative expense as a percentage of revenue and the
year-over-year change were as follows:
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
(Dollars
in thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
Sales,
general & administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
general & administrative as a percentage of
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the three and six months ended June 29, 2008, our sales, general and
administrative expense was $43.2 million and $77.1 million, respectively, which
represents an increase of 65% and 59%, respectively, from sales, general and
administrative expense reported in the comparable period of fiscal 2007. Sales,
general and administrative expense for our business consists primarily of
salaries and related personnel costs, professional fees, insurance and other
selling and marketing expenses. The increase in our sales, general and
administrative expense during the three and six months ended June 29, 2008
compared to the same period of fiscal 2007 resulted primarily from higher
spending in all areas of sales, marketing, finance and information technology to
support the growth of our business, particularly increased headcount and payroll
related expenses, including stock-based compensation, as well as increased
expenses associated with deployment of a new enterprise resource planning
system, legal and accounting services. During the three and six months
ended June 29, 2008, stock-based compensation included in our sales, general and
administrative expense was approximately $12.5 million and $22.5 million,
respectively, as compared to approximately $9.7 million and $17.5 million in the
three and six months ended July 1, 2007, respectively. Also contributing to
our increased sales, general and administrative expense in the three and
six months ended June 29, 2008 compared to the same period of 2007 are
substantial increases in headcount and sales and marketing spending to expand
our value added reseller channel primarily in Europe and global branding
initiatives.
As a
percentage of total revenue, sales, general and administrative expense decreased
to 11% and 12% in the three and six months ended June 29, 2008,
respectively, compared to 15% in each of the three and six months ended
July 1, 2007, respectively, because these expenses increased at a substantially
lower rate than the rate of growth in our revenue. We expect our sales,
general and administrative expense to increase in absolute dollars as we expand
our sales and marketing efforts, hire additional personnel and improve our
information technology infrastructure to support our growth. However, assuming
our revenue increases as we expect, over time we anticipate that our sales,
general and administrative expense will continue to decrease as a percentage of
revenue.
Purchased
In-Process Research and Development, or IPR&D
Purchased
in-process research and development expense as a percentage of revenue and the
year-over-year change were as follows:
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
(Dollars
in thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
Purchased
in-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
in-process research and development as a percentage of
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
six months ended July 1, 2007, we recorded an IPR&D charge of $9.6
million in connection with the acquisition of SP Systems in January 2007, as
technological feasibility associated with the IPR&D projects had not been
established and no alternative future use existed. No in-process research and
development expense was recorded for the six months ended June 29,
2008.
These
IPR&D projects consisted of two components: design automation tool and
tracking systems and other. In assessing the projects, we considered key
characteristics of the technology as well as its future prospects, the rate
technology changes in the industry, product life cycles and the various
projects’ stage of development.
The value
of IPR&D was determined using the income approach method, which calculated
the sum of the discounted future cash flows attributable to the projects once
commercially viable using a 40% discount rate, which were derived from a
weighted-average cost of capital analysis and adjusted to reflect the stage of
completion and the level of risks associated with the projects. The percentage
of completion for each project was determined by identifying the research and
development expenses invested in the project as a ratio of the total estimated
development costs required to bring the project to technical and commercial
feasibility. The following table summarizes certain information related to
each project:
|
|
Stage
of Completion
|
|
Total Cost
Incurred to Date
|
|
Total
Remaining Costs
|
|
|
|
|
|
|
|
|
|
|
|
As
of January 10, 2007 (acquisition date)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tracking System and Other
|
|
|
|
|
|
|
|
|
|
As
of January 10, 2007 (acquisition date)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Status
of IPR&D Projects:
At the
close of the first quarter in fiscal 2008, the first release of the design
automation tool software was deployed to production. As of June 29, 2008, we
have incurred total project costs of $1.4 million, of which $1.2 million was
incurred after the acquisition, and total costs to complete the project was $1.2
million less than the original estimate of $2.6 million. We completed the design
automation tool project approximately two years and three quarters earlier than
the original estimated completion date of December 2010.
We
completed the tracking systems project in June 2007 and incurred total project
costs of $0.8 million, of which $0.6 million was incurred after the
acquisition. Both the actual completion date and the total projects costs
were in line with the original estimates.
Impairment
of Acquisition-Related Intangible Assets
Impairment
of acquisition-related intangible assets as a percentage of revenue and the
year-over-year change were as follows:
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
(Dollars
in thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
Impairment
of acquisition-related intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of acquisition-related intangible assets as a percentage of
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the three and six months ended July 1, 2007, we recognized a charge for the
impairment of acquisition-related intangible assets of $14.1 million. In
June 2007, we changed our branding strategy and consolidated all of our product
and service offerings under the SunPower tradename. To reinforce the new
branding strategy, we formally changed the name of PowerLight to SunPower
Corporation, Systems. The fair value of PowerLight tradenames was valued at
$15.5 million at the date of acquisition and ascribed a useful life of 5 years.
The determination of the fair value and useful life of the tradename was based
on our previous strategy of continuing to market our systems products and
services under the PowerLight brand. As a result of the change in our
branding strategy, during the quarter ended July 1, 2007, the net book value of
the PowerLight tradename of $14.1 million was written off as an impairment of
acquisition-related intangible assets. As a percentage of revenues, impairment
of acquisition related intangible assets was 8% and 4% in the three and six
months ended July 1, 2007.
Other
Income (Expense), Net
Interest
income, interest expense, and other, net as a percentage of revenue and the
year-over-year change were as follows:
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
(Dollars
in thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income as a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense as a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other,
net as a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income during the three and six months ended June 29, 2008 and July 1,
2007, primarily represents interest income earned on our cash, cash equivalents,
restricted cash and investments during these periods. The increase in interest
income of 4% and 54% during the three and six months ended June 29, 2008,
respectively, compared to the same period of 2007, is primarily the effect of
interest earned on $581.5 million in net proceeds from our class A common stock
and convertible debenture offerings in February and July 2007.
Interest
expense during the three and six months ended June 29, 2008 and July 1, 2007
relates to interest due on customer advance payments and convertible debt.
The increase in our interest expense of 30% in each of the three and
six months ended June 29, 2008, respectively, compared to the same period
of 2007, is primarily due to interest related to the aggregate of $425.0 million
in convertible debentures issued in February and July 2007. Our convertible debt
was used in part to fund our capital expenditures for our manufacturing capacity
expansion.
In May
2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff
Position, or FSP, APB 14-1, which clarifies the accounting for convertible debt
instruments that may be settled in cash upon conversion. FSP APB 14-1
significantly impacts the accounting for our convertible debt by requiring us to
separately account for the liability and equity components of the convertible
debt in a manner that reflects interest expense equal to our non-convertible
debt borrowing rate. FSP APB 14-1 may result in significantly higher non-cash
interest expense on our convertible debt. FSP APB 14-1 is effective for fiscal
years and interim periods beginning after December 15, 2008, and retrospective
application will be required for all periods presented.
The
following table summarizes the components of other, net:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
(Dollars
in thousands)
|
|
June 29,
2008
|
|
July 1,
2007
|
|
June 29,
2008
|
|
|
July 1,
2007
|
|
Write-off
of unamortized debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
in net income of joint venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on derivatives and foreign exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other,
net during the three and six months ended June 29, 2008 consists primarily
of losses from derivatives and foreign exchange and the write-off of unamortized
debt issuance costs as a result of the market price conversion trigger on our
senior convertible debentures being met in December 2007, offset slightly by our
share in the net income of Woongjin Energy Co., Ltd, a joint
venture. Other, net during the three and six months ended July 1, 2007
consists primarily of amortization of debt issuance costs and gains (losses)
from derivatives and foreign exchange.
Historically
through December 30, 2007, intercompany accounts payable denominated in U.S.
dollars and held by our Euro functional currency entities were not expected to
be settled in the foreseeable future. In accordance with SFAS
No. 52, “Foreign Currency Translation,” or SFAS No. 52, gains and losses on
the foreign currency translation of the intercompany accounts payable were
recorded in accumulated other comprehensive income (loss) in stockholders’
equity in the Condensed Consolidated Balance Sheets. Beginning in the first
quarter of fiscal 2008, management has determined that intercompany accounts
payable denominated in U.S. dollars and held by our Euro functional currency
entities will be settled within the foreseeable future as a result of our new
intercompany agreements. Therefore, gains and losses on the foreign currency
translation of the intercompany accounts payable will be recognized as a
component of other, net in the Condensed Consolidated Statements of
Operations.
Income
Taxes
Income
tax provision (benefit) as a percentage of revenue and the year-over-year change
were as follows:
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
(Dollars
in thousands)
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
|
June
29,
2008
|
|
|
July
1,
2007
|
|
Year-over-
Year Change
|
Income
tax provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision (benefit) as a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the
three and six months ended June 29, 2008, our income tax expense was provided
primarily for foreign income taxes in certain jurisdictions where our operations
are profitable. The Company’s interim period tax provision is estimated based on
the expected annual worldwide tax rate and takes into account the tax effect of
discrete items. In the three and six months ended July 1, 2007, our income tax
benefit was primarily the result of recognition of deferred tax assets to the
extent of deferred tax liabilities created by the acquisition of SP Systems in
January 2007, net of foreign income taxes in profitable jurisdictions where the
tax rates are less than the U.S. statutory rate.
For
financial reporting purposes, income tax expense and deferred income tax
balances were calculated as if we were a separate entity and had prepared our
own separate tax return. Deferred tax assets and liabilities are recognized for
temporary differences between financial statement and income tax bases of assets
and liabilities. We recorded a valuation allowance to the extent our net
deferred tax asset on all items except comprehensive income exceeded our net
deferred tax liability. We expect it is more likely than not that we will not
realize our net deferred tax asset as of June 29, 2008. In assessing the need
for a valuation allowance, we consider historical levels of income, expectations
and risks associated with the estimates of future taxable income and ongoing
prudent and feasible tax planning strategies. In the event we determine that we
would be able to realize additional deferred tax assets in the future in excess
of the net recorded amount, or if we subsequently determine that realization of
an amount previously recorded is unlikely, we would record an adjustment to the
deferred tax asset valuation allowance, which would change income in the period
of adjustment.
As
described in Note 2 of Notes to Condensed Consolidated Financial Statements, we
will pay federal and state income taxes in accordance with the tax sharing
agreement with Cypress. Effective with the closing of our public offering of
common stock in June 2006, we are no longer eligible to file federal and most
state consolidated tax returns with Cypress. Accordingly, we will be required to
pay Cypress for any federal income tax credit or net operating loss
carryforwards utilized in our federal tax returns in subsequent periods. Any
payments we make to Cypress when we utilize certain tax attributes will be
accounted for as an equity transaction with Cypress. As of December 30,
2007, we had federal net operating loss carryforwards of approximately $147.6
million. These federal net operating loss carryforwards will expire at various
dates from 2011 to 2027. We had California state net operating loss
carryforwards of approximately $73.5 million as of December 30, 2007, which
expire at various dates from 2011 to 2017. We also had research and development
credit carryforwards of approximately $3.9 million for both federal and state
tax purposes.
Liquidity
and Capital Resources
In
February 2007, we raised $194.0 million net proceeds from the issuance of 1.25%
senior convertible debentures. In July 2007, we raised $220.1 million net
proceeds from the issuance of 0.75% senior convertible debentures and $167.4
million net proceeds from the completion of a follow-on offering of 2.7 million
shares of our class A common stock.
Cash
Flows
A summary
of the sources and uses of cash and cash equivalents is as follows:
|
|
Six
Months Ended
|
|
(In
thousands)
|
|
June 29,
2008
|
|
|
July
1,
2007
|
|
Net
cash used in operating activities
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash
equivalents
|
|
|
|
|
|
|
|
|
Net decrease in
cash and cash equivalents
|
|
$ |
|
|
|
$
|
|
|
Operating
Activities
Net cash
used in operating activities of $39.4 million for the six months ended June 29,
2008 was primarily the result of decreases in billings in excess of costs and
estimated earnings of $38.9 million related to contractual timing of system
project billings, increases in costs and estimated earnings in excess of
billings of $10.1 million also related to contractual timing of system project
billings, as well as increases in accounts receivable of $103.1 million,
inventories of $53.0 million, prepaid expenses and other assets of $25.0 million
and deferred project costs of $14.8 million. These items were partially offset
by net income of $41.4 million, plus non-cash charges totaling $69.9 million for
depreciation, impairment of long-lived assets, amortization, write-off of debt
issuance costs and stock-based compensation expense, less non-cash income of
$1.9 million for our equity share in net income of joint venture. In
addition, these items were offset by increases in accounts payable and other
accrued liabilities of $81.8 million and other changes in operating assets and
liabilities totaling $14.3 million. The significant increases in substantially
all of our current assets and current liabilities resulted from our substantial
revenue increase in the six months ended June 29, 2008 compared to previous
quarters which impacted net income and working capital.
Net cash
used in operating activities of $0.9 million for the six months ended
July 1, 2007 was primarily the result of increases in inventories of
$49.4 million, advances to suppliers of $15.6 million, costs and estimated
earnings in excess of billings of $14.3 million and other changes in operating
assets and liabilities totaling $9.4 million. These items were partially offset
by net loss of $4.1 million, plus non-cash charges totaling $74.0 million for
depreciation, amortization, impairment of acquisition-related intangibles,
purchased in-process research and development expense and stock-based
compensation expense. In addition, these items were offset by increases in
accounts payable and other accrued liabilities of $17.9 million. The significant
increases in substantially all of our current assets and current liabilities
resulted from the acquisition of SP Systems in January 2007, as well as our
substantial revenue increase in the six months ended July 1, 2007 compared to
previous quarters which impacted net income and working capital.
Investing
Activities
Net cash
used in investing activities was $76.2 million for the six months ended June 29,
2008, which primarily relates to capital expenditures of $95.1 million incurred
during the six months ended June 29, 2008. Capital expenditures were mainly
associated with manufacturing capacity expansion in the Philippines. Although
the timing of our capital expansion plans may shift depending on many factors,
we currently expect fiscal 2008 capital expenditures to be approximately $300.0
million, primarily related to continued expansion of our manufacturing capacity.
Also during the six months ended June 29, 2008, (i) restricted cash
increased by $16.0 million for additional collateral securing outstanding
indebtedness to Wells Fargo related to the letter of credit line, to secure
advance payments received from customers; (ii) we paid cash of $13.5 million for
the acquisition of SunPower Italia, net of cash acquired; and (iii) we invested
an additional $22.6 million in joint ventures and other private companies. Cash
used in investing activities was partially offset by $71.0 million in proceeds
received from the sales of available-for-sale securities, net of
available-for-sale securities purchased during the period.
Net cash
used in investing activities was $210.6 million for the six months ended July 1,
2007, which primarily relates to (i) capital expenditures of $107.6
million; (ii) cash paid of $98.6 million for the acquisition of SP Systems, net
of cash acquired; and (iii) purchases of available-for-sale securities totaling
$9.1 million, net of proceeds received from sales of available-for-sale
securities during the period. Cash used in investing activities was partially
offset by $4.7 million decrease in restricted cash.
Financing
Activities
Net cash
provided by financing activities for the six months ended June 29, 2008 reflects
proceeds received of $2.3 million from stock option exercises and excess tax
benefits totaling $14.6 million from the exercise of stock options, partially
offset by cash paid of $4.2 million for treasury stock purchases that were used
to pay withholding taxes on vested restricted stock. Net cash provided by
financing activities for the six months ended July 1, 2007 primarily
reflects $194.0 million in net proceeds from the issuance of $200.0 million in
principal amount of 1.25% senior convertible debentures in February 2007. Also
during the six months ended July 1, 2007, we paid $3.6 million on an
outstanding line of credit and received $5.0 million in proceeds from stock
option exercises.
Revision
of Statement of Cash Flow Presentation Related to Purchases of Property, Plant
and Equipment
We have
corrected our Condensed Consolidated Statements of Cash Flows for the six months
ended July 1, 2007 to exclude the impact of purchases of property, plant and
equipment that remain unpaid and as such are included in “accounts payable and
other accrued liabilities” at the end of the reporting period. Historically,
changes in “accounts payable and other accrued liabilities” related to such
purchases were included in cash flows from operations, while the investing
activity caption "Purchase of property, plant and equipment" included these
purchases. As these unpaid purchases do not reflect cash transactions, we have
revised our cash flow presentations to exclude them. The correction resulted in
a decrease to the previously reported amount of cash used for operating
activities of $3.7 million in the six months ended July 1, 2007, resulting from
a reduction in the amount of cash used from the change in accounts payable and
other accrued liabilities in that period. The corresponding correction in the
investing section was to increase cash used for investing activities by $3.7
million in the six months ended July 1, 2007, as a
result of
the increase in the amount of cash used for purchases of property, plant and
equipment in that period. These corrections had no impact on our previously
reported results of operations, working capital or stockholders’ equity. We
concluded that these corrections were not material to any of our previously
issued condensed consolidated financial statements, based on SEC Staff
Accounting Bulletin No. 99-Materiality.
Debt
and Credit Sources
In
July 2007, we entered into a credit agreement with Wells Fargo Bank,
National Association, or Wells Fargo, that was amended from time to time,
providing for a $50.0 million unsecured revolving credit line, with a $50.0
million unsecured letter of credit subfeature, and a separate $150.0 million
secured letter of credit facility as of June 29, 2008. We may borrow up to $50.0
million and request that Wells Fargo issue up to $50.0 million in letters of
credit under the unsecured letter of credit subfeature through April 4, 2009.
Letters of credit issued under the subfeature reduce our borrowing capacity
under the revolving credit line. Additionally, we may request that Wells Fargo
issue up to $150.0 million in letters of credit under the secured letter of
credit facility through July 31, 2012. As detailed in the agreement, we will pay
interest on outstanding borrowings and a fee for outstanding letters of credit.
At any time, we can prepay outstanding loans. All borrowings must be repaid by
April 4, 2009, and all letters of credit issued under the unsecured letter of
credit subfeature expire on or before April 4, 2009 unless we provide by such
date collateral in the form of cash or cash equivalents in the aggregate amount
available to be drawn under letters of credit outstanding at such time. All
letters of credit issued under the secured letter of credit facility expire no
later than July 31, 2012. We concurrently entered into a security agreement with
Wells Fargo, granting a security interest in a securities account and deposit
account to secure our obligations in connection with any letters of credit that
might be issued under the credit agreement. In connection with the credit
agreement, SunPower North America, Inc., our wholly-owned subsidiary, SP
Systems, an indirect wholly-owned subsidiary of ours, and SunPower Systems SA,
another indirect wholly-owned subsidiary of the Company, entered into an
associated continuing guaranty with Wells Fargo. The terms of the credit
agreement include certain conditions to borrowings, representations and
covenants, and events of default customary for financing transactions of this
type.
As of
June 29, 2008 and December 30, 2007, 6 letters of credit totaling $41.5 million
and 4 letters of credit totaling $32.0 million, respectively, were issued by
Wells Fargo under the unsecured letter of credit subfeature. In addition, 22
letters of credit totaling $63.8 million and 8 letters of credit totaling
$47.9 million, were issued by Wells Fargo under the secured letter of credit
facility as of June 29, 2008 and December 30, 2007, respectively. On June 29,
2008 and December 30, 2007, cash available to be borrowed under the unsecured
revolving credit line was $8.5 million and $18.0 million, respectively, and
includes letter of credit capacities available to be issued by Wells Fargo under
the unsecured letter of credit subfeature of $8.5 million and $8.0 million,
respectively. Letters of credit available under the secured letter of credit
facility at June 29, 2008 and December 30, 2007 totaled $86.2 million and $2.1
million, respectively.
In
February 2007, we issued $200.0 million in principal amount of our 1.25% senior
convertible debentures, or the February 2007 debentures, and received net
proceeds of $194.0 million. Interest on the February 2007 debentures is payable
on February 15 and August 15 of each year, commencing August 15,
2007. The February 2007 debentures will mature on February 15, 2027.
Holders may require us to repurchase all or a portion of their February 2007
debentures on each of February 15, 2012, February 15, 2017 and
February 15, 2022, or if we experience certain types of corporate
transactions constituting a fundamental change. Any repurchase of the February
2007 debentures pursuant to these provisions will be for cash at a price equal
to 100% of the principal amount of the February 2007 debentures to be
repurchased plus accrued and unpaid interest. In addition, we may redeem some or
all of the February 2007 debentures on or after February 15, 2012 for cash
at a redemption price equal to 100% of the principal amount of the February 2007
debentures to be redeemed plus accrued and unpaid interest. See Note 10 of Notes
to our Condensed Consolidated Financial Statements.
In July
2007, we issued $225.0 million in principal amount of our 0.75% senior
convertible debentures, or the July 2007 debentures, and received net proceeds
of $220.1 million. Interest on the July 2007 debentures is payable on
February 1 and August 1 of each year, commencing February 1, 2008. The
July 2007 debentures will mature on August 1, 2027. Holders may require us
to repurchase all or a portion of their July 2007 debentures on each of
August 1, 2010, August 1, 2015, August 1, 2020 and August 1,
2025, or if we experience certain types of corporate transactions constituting a
fundamental change. Any repurchase of the July 2007 debentures pursuant to these
provisions will be for cash at a price equal to 100% of the principal amount of
the July 2007 debentures to be repurchased plus accrued and unpaid interest. In
addition, we may redeem some or all of the July 2007 debentures on or after
August 1, 2010 for cash at a redemption price equal to 100% of the
principal amount of the July 2007 debentures to be redeemed plus accrued and
unpaid interest. See Note 10 of Notes to our Condensed Consolidated Financial
Statements.
Liquidity
For the
year ended December 30, 2007, the closing price of our class A common stock
equaled or exceeded 125% of the $56.75 per share initial effective conversion
price governing the February 2007 debentures and the closing price of our class
A common stock equaled or exceeded 125% of the $82.24 per share initial
effective conversion price governing the July 2007 debentures, for 20 out of 30
consecutive trading days ending on December 30, 2007, thus satisfying the market
price conversion trigger pursuant to the terms of the debentures. As of the
first trading day of the first quarter in fiscal 2008, holders of the February
2007
debentures and July 2007 debentures were able to exercise their right to convert
the debentures any day in that fiscal quarter. Therefore, since holders of the
February 2007 debentures and July 2007 debentures were able to exercise their
right to convert the debentures in the first quarter of fiscal 2008, we
classified the $425.0 million in aggregate convertible debt as short-term debt
in our Condensed Consolidated Balance Sheets as of December 30, 2007. In
addition, we wrote off $8.2 million and $1.0 million of unamortized debt
issuance costs in the fourth fiscal quarter of 2007 and first fiscal quarter of
2008, respectively. No holders of the February 2007 debentures and July
2007 debentures exercised their right to convert the debentures in the first
quarter of fiscal 2008.
For the
quarter ended June 29, 2008, the closing price of our class A common stock
equaled or exceeded 125% of the $56.75 per share initial effective conversion
price governing the February 2007 debentures for 20 out of 30 consecutive
trading days ending on June 29, 2008, thus satisfying the market price
conversion trigger pursuant to the terms of the February 2007
debentures. As of the first trading day of the third quarter in fiscal
2008, holders of the February 2007 debentures are able to exercise their right
to convert the debentures any day in that fiscal quarter. Therefore, since
holders of the February 2007 debentures are able to exercise their right to
convert the debentures in the third quarter of fiscal 2008, we classified the
$200.0 million in aggregate convertible debt as short-term debt in our Condensed
Consolidated Balance Sheets as of June 29, 2008.
Because
the closing stock price did not equal or exceed 125% of the initial effective
conversion price governing the July 2007 debentures for 20 out of 30 consecutive
trading days during the quarter ended June 29, 2008, holders of the debentures
did not have the right to convert the debentures, based on the market price
conversion trigger, any day in the third fiscal quarter beginning on June 30,
2008. Accordingly, we re-classified the $225.0 million in aggregate convertible
debt from short-term debt to long-term debt in our Condensed Consolidated
Balance Sheets as of June 29, 2008. This test is repeated each fiscal
quarter; therefore, if the market price conversion trigger is satisfied in a
subsequent quarter, the debentures may again be re-classified as short-term
debt.
As
of June 29, 2008, we had cash and cash equivalents of $189.5 million as compared
to $285.2 million as of December 30, 2007. In addition, we had short-term
investments and long-term investments of $37.2 million and $25.1 million as of
June 29, 2008, respectively, as compared to $105.4 million and $29.1 million as
of December 30, 2007, respectively. Of these investments, we held five
auction rate securities totaling $25.1 million as of June 29, 2008 as compared
to ten auction rate securities totaling $50.8 million as of December 30, 2007.
These auction rate securities are typically over collateralized and secured by
pools of student loans originated under the Federal Family Education Loan
Program, or FFELP, and are guaranteed by the U.S. Department of Education, and
insured. In addition, all auction rate securities held are rated by one or more
of the Nationally Recognized Statistical Rating Organizations, or NRSROs, as
triple-A. Beginning in February 2008, the auction rate securities market
experienced a significant increase in the number of failed auctions, resulting
from a lack of liquidity, which occurs when sell orders exceed buy orders, and
does not necessarily signify a default by the issuer. As of August 8, 2008, all
auction rate securities invested in at June 29, 2008 had failed to clear at
auctions. For failed auctions, we continue to earn interest on these investments
at the maximum contractual rate as the issuer is obligated under contractual
terms to pay penalty rates should auctions fail. Historically, failed auctions
have rarely occurred, however, such failures could continue to occur in the
future. In the event we need to access these funds, we will not be able to do so
until a future auction is successful, the issuer redeems the securities, a buyer
is found outside of the auction process or the securities
mature. Accordingly, auction rate securities at June 29, 2008 and December
30, 2007 that were not sold in a subsequent period totaling $25.1 million and
$29.1 million, respectively, are classified as long-term investments on the
Condensed Consolidated Balance Sheets, because they are not expected to be used
to fund current operations and consistent with the stated contractual maturities
of the securities.
In the
second quarter of fiscal 2008, we sold auction rate securities with a carrying
value of $12.5 million for their stated par value of $13.0 million. We
have concluded that no other-than-temporary impairment losses occurred in the
three and six months ended June 29, 2008 because the lack of liquidity in the
market for auction rate securities is considered temporary in nature. If it is
determined that the fair value of these securities is other-than-temporarily
impaired, we would record a loss in our Condensed Consolidated Statements of
Operations in the third quarter of 2008, which could be material.
We
believe that our current cash and cash equivalents and funds available from the
credit agreement with Wells Fargo will be sufficient to meet our working capital
and capital expenditure commitments for at least the next 12 months. However,
there can be no assurance that our liquidity will be adequate over time. If our
capital resources are insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity securities or debt securities or obtain other
debt financing. The sale of additional equity securities or convertible debt
securities would result in additional dilution to our stockholders. Additional
debt would result in increased expenses and would likely impose new restrictive
covenants like the covenants under the credit agreement with Wells Fargo.
Financing arrangements may not be available to us, or may not be available in
amounts or on terms acceptable to us.
We expect
to experience growth in our operating expenses, including our research and
development, sales and marketing and general and administrative expenses, for
the foreseeable future to execute our business strategy. We may also be required
to purchase polysilicon in advance to secure our wafer supplies or purchase
third-party solar modules and materials in advance to support systems projects.
We intend to fund these activities with existing cash and cash equivalents, cash
generated from operations and, if necessary, borrowings under our credit
agreement with Wells Fargo. These anticipated increases in operating
expenses
may not result in an increase in our revenue and our anticipated revenue may not
be sufficient to support these increased expenditures. We anticipate that
operating expenses, working capital and capital expenditures will constitute a
significant use of our cash resources.
Contractual
Obligations
The
following summarizes our contractual obligations at June 29, 2008:
|
|
Payments Due by Period
|
|
(In thousands)
|
|
Total
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2008
(remaining
6
months)
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2009 – 2010
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2011 – 2012
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Beyond
2012
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Interest
on customer advances
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Interest
on convertible debt
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Non-cancelable
purchase orders
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Purchase
commitments under agreements
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Customer
advances and interest on customer advances relate to advance payments received
from customers for future purchases of solar power products or supplies.
Convertible debt and interest on convertible debt relate to the aggregate of
$425.0 million in principal amount of our senior convertible debentures. For the
purpose of the table above, we assume that (1) no holders of the February 2007
debentures will exercise their right to convert the debentures as a result
of the market price conversion trigger being met in the second quarter of
fiscal 2008 and (2) all holders of the convertible debt will hold the debentures
through the date of maturity in fiscal 2027 and upon redemption, the values of
the convertible debt are equal to the aggregate principal amount of $425.0
million with no premiums. Lease commitments primarily relate to our 5-year lease
agreement with Cypress for our headquarters in San Jose, California, an 11-year
lease agreement with an unaffiliated third party for our administrative,
research and development offices in Richmond, California, a 5-year lease
agreement with an unaffiliated third party for a solar panel assembly facility
in the Philippines and other leases for various office space. Utility
obligations relate to our 11-year lease agreement with an unaffiliated third
party for our administrative, research and development offices in Richmond,
California. Royalty obligations result from several of the systems segment
government awards and existing agreements. Non-cancelable purchase orders relate
to purchase commitments for equipment and building improvements for our solar
cell manufacturing and solar panel assembly facilities. Purchase commitments
under agreements relate to arrangements entered into with suppliers of
polysilicon, ingots, wafers, solar cells and solar modules as well as agreements
to purchase solar renewable energy certificates from solar installation owners
in New Jersey. These agreements specify future quantities and pricing of
products to be supplied by the vendors for periods up to 12 years and there are
certain consequences, such as forfeiture of advanced deposits
and liquidated damages relating to previous purchases, in the event
that we terminate the arrangements.
As of
June 29, 2008 and December 30, 2007, total liabilities associated with FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, and Related
Implementation Issues,” or FIN 48, uncertain tax positions were $5.7
million and $4.1 million, respectively, and are included in other long-term
liabilities on our Condensed Consolidated Balance Sheets at June 29, 2008 and
December 30, 2007, respectively, as they are not expected to be paid within the
next twelve months. Due to the complexity and uncertainty associated with our
tax positions, we cannot make a reasonably reliable estimate of the period in
which cash settlement will be made for our liabilities associated with uncertain
tax positions in other long-term liabilities, therefore, they have been excluded
from the table above.
Recent
Accounting Pronouncements
See Note
1 of Notes to our Condensed Consolidated Financial Statements for a description
of certain other recent accounting pronouncements including the expected dates
of adoption and effects on our results of operations and financial
condition.
|
Quantitative
and Qualitative Disclosure About Market
Risk
|
Interest
Rate Risk
Our
exposure to market risks for changes in interest rates relates primarily to our
cash equivalents, restricted cash and investment portfolio and convertible
debt.
As of
June 29, 2008, our investment portfolio consisted of a variety of financial
instruments, including, but not limited to, money market funds, commercial paper
and corporate securities. These investments are generally classified as
available-for-sale and, consequently, are recorded on our balance sheet at fair
market value with their related unrealized gain or loss reflected as a component
of accumulated other comprehensive income in stockholders’ equity. Due to the
relatively short-term nature of our investment portfolio, we do not believe that
an immediate 10% increase in interest rates would have a material effect on the
fair market value of our portfolio. Since we believe we have the ability to
liquidate this portfolio, we do not expect our operating results or cash flows
to be materially affected to any significant degree by a sudden change in market
interest rates on our investment portfolio.
Auction
rate securities are variable rate debt instruments with interest rates that,
unless they fail to clear at auctions, are reset approximately every seven days,
twenty-eight days, thirty-five days or six-months. The “stated” or “contractual”
maturities for these securities generally are between 20 to 30 years. The
auction rate securities are classified as available for sale under SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities,” or SFAS No.
115, and are recorded at fair value. Typically, the carrying value of auction
rate securities approximates fair value due to the frequent resetting of the
interest rates. At June 29, 2008, we had $25.1 million invested in auction rate
securities. As of August 8, 2008, all auction rate securities invested in at
June 29, 2008 had failed to clear at auctions. These auction rate securities
are typically over collateralized and secured by pools of student
loans originated under the FFELP and are guaranteed by the U.S. Department
of Education, and insured. In addition, all auction rate securities held are
rated by one or more of the NRSROs as triple-A. We continue to earn interest on
these investments at the maximum contractual rate as the issuer is obligated
under contractual terms to pay penalty rates should auctions fail. In the second
quarter of fiscal 2008, we sold auction rate securities with a carrying value of
$12.5 million for their stated par value of $13.0 million. We
have concluded that no other-than-temporary impairment losses occurred in the
three and six months ended June 29, 2008 because the lack of liquidity in the
market for auction rate securities is considered temporary in nature. We will
continue to analyze our auction rate securities each reporting period for
impairment and may be required to record an impairment charge if the issuer of
the auction rate securities is unable to successfully close future auctions or
does not redeem the securities.
The fair
market value of our 1.25% senior convertible debentures issued in February 2007
and 0.75% senior convertible debentures issued in July 2007 is subject to
interest rate and market price risk due to the convertible feature of the
debentures. The fair market value of the senior convertible debentures will
increase as interest rates fall and decrease as interest rates rise. In
addition, the fair market value of the senior convertible debentures will
increase as the market price of our class A common stock increases and decrease
as the market price falls. The interest and market value changes affect the fair
market value of the senior convertible debentures but do not impact our
financial position, cash flows or results of operations due to the fixed nature
of the debt obligations. As of June 29, 2008, the estimated fair value of the
senior convertible debentures was approximately $544.9 million based on quoted
market prices. A 10% increase in quoted market prices would increase the
estimated fair value of the senior convertible debentures to approximately
$599.4 million as of June 29, 2008 and a 10% decrease in the quoted market
prices would decrease the estimated fair value of the senior convertible
debentures to $490.4 million.
Equity
Price Risk
Our
exposure to equity price risk relate to investments held in private companies.
Nonpublicly traded investments of $5.0 million are accounted for using the cost
method and $14.8 million are accounted under APB Opinion No. 18, “The Equity
Method of Accounting for Investments in Common Stock.” These strategic
investments in third parties are subject to risk of changes in market
value, which if determined to be other than temporary, could result in
realized impairment losses. We generally do not attempt to reduce or
eliminate our market exposure in these cost and equity method investments. We
periodically reviews the carrying value of such investments to determine if
any valuation adjustments are appropriate under the applicable accounting
pronouncements.
Foreign
Currency Exchange Risk
Our
exposure to adverse movements in foreign currency exchange rates is primarily
related to sales to European customers that are denominated in Euros and
procurement of certain capital equipment in Euros. Our Switzerland subsidiary
has exposure to adverse movements in foreign currency exchange rates primarily
related to inventory purchases that are denominated in U.S. dollars. Revenue
generated outside the United States represented approximately 85% and 82% of our
total revenue for the three and six months ended June 29, 2008,
respectively, as compared to 63% and 62% of our total revenue for the three and
six months ended July 1, 2007, respectively. A hypothetical change of 10%
in foreign currency exchange rates as of June 29, 2008 could impact our
condensed consolidated financial statements or results of operations by $0.7
million based on our outstanding forward contracts of $167.8 million. We
currently conduct hedging activities, which involve the use of currency forward
contracts. We cannot predict the impact of future exchange rate fluctuations on
our business and operating results. In the past, we have experienced an adverse
impact on our revenue and profitability as a result of foreign currency
fluctuations. We believe that we may have increased risk associated with
currency fluctuations in the future.
Evaluation
of Disclosure Controls and Procedures
We
maintain “disclosure controls and procedures,” as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), that are designed to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing disclosure controls
and procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Based on
their evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q and subject to the foregoing, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were effective.
Changes
in Internal Control over Financial Reporting
There
were no material changes in our internal control over financial reporting that
occurred during the three and six months ended June 29, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM
1. LEGAL PROCEEDINGS
From time
to time we are a party to litigation matters and claims that are normal in the
course of our operations. While we believe that the ultimate outcome of these
matters will not have a material adverse effect on us, the outcome of these
matters is not determinable and negative outcomes may adversely affect our
financial position, liquidity or results of operations.
ITEM 1A:
RISK
FACTORS
The
following discussion of risk factors contains “forward-looking statements” as
discussed in “Item 2: Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” These risk factors may be important to
understanding any statement in this Quarterly Report on Form 10-Q or elsewhere.
The following information should be read in conjunction with “PART I. FINANCIAL
INFORMATION, Item 2: Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and “PART I. FINANCIAL INFORMATION, Item 1: Financial
Statements” and the accompanying Notes to Condensed Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q.
Our
operations and financial results are subject to various risks and uncertainties,
including those described below, that could adversely affect our business,
financial condition, results of operations, cash flows, and trading price of our
common stock. Although we believe that we have identified and discussed below
the key risk factors affecting our business, there may be additional risks and
uncertainties that are not presently known or that are not currently believed to
be significant that may also adversely affect our business, financial condition,
results of operations, cash flows, and trading price of our class A common
stock.
Risks
Related to Our Business
The
solar power industry is currently experiencing an industry-wide shortage of
polysilicon. This shortage poses several risks to our business, including
possible constraints on revenue growth and possible decreases in our gross
margins and profitability.
Polysilicon
is an essential raw material in our production of solar cells. Polysilicon is
created by refining quartz or sand. Polysilicon is melted and grown into
crystalline ingots by companies specializing in ingot growth. We procure silicon
ingots from these suppliers on a contractual basis and then slice the ingots
into wafers. The ingots are sliced and the wafers are processed into solar cells
in our Philippines manufacturing facility. We also purchase wafers and
polysilicon from third-party vendors.
There is
currently an industry-wide shortage of polysilicon, which has resulted in
significant price increases. Increases in polysilicon prices have in the past
increased our manufacturing costs and may impact our manufacturing costs and net
income in the future. With these price increases, demand for solar cells has
also increased, and many of our principal competitors have announced plans to
add additional manufacturing capacity. As this additional solar cell
manufacturing capacity becomes operational, it may increase the demand for
polysilicon in the near-term and further exacerbate the current shortage of
polysilicon. Polysilicon is also used in the semiconductor industry generally
and any increase in demand from that sector will compound the shortage of
polysilicon. The production of polysilicon is capital intensive and adding
additional capacity requires significant lead time. We are aware that several
new facilities for the manufacture of polysilicon are under construction, but we
believe that the supply imbalance will not be remedied in the near-term. We
expect that polysilicon demand will continue to outstrip supply through much of
2008 and potentially for a longer period, but we expect that the average market
price of polysilicon will decrease over time as new manufacturers enter the
market.
Although
we have arrangements with vendors for the supply of what we believe will be an
adequate amount of silicon ingots through 2010, our purchase orders
are sometimes non-binding in nature. Our estimates regarding our supply
needs may not be correct and our purchase orders or our contracts may be
cancelled by our suppliers. Additionally, the volume and pricing associated with
these purchase orders and contracts may be changed by our suppliers based on
market conditions or for other reasons. If our suppliers were to cancel our
purchase orders or change the volume or pricing associated with them, we may be
unable to meet customer demand for our products, which could cause us to lose
customers, market share and revenue. This would have a material negative impact
on our business and operating results. If our manufacturing yields decrease
significantly, we add manufacturing capacity faster than currently planned or
our suppliers cancel or fail to deliver, we may not have made adequate provision
for our polysilicon needs for our manufacturing plans through 2010.
In
addition, since some of our silicon ingot and wafer arrangements are with
suppliers who do not themselves manufacture polysilicon but instead purchase
their requirements from other vendors, these suppliers may not be able to obtain
sufficient polysilicon to satisfy their contractual obligations to
us.
There are
a limited number of polysilicon suppliers. Many of our competitors also purchase
polysilicon from our suppliers. Some of them also have inter-locking board
members with their polysilicon suppliers or have entered into joint ventures or
binding supply contracts with their suppliers. Additionally, a substantial
amount of our future polysilicon requirements are expected to be sourced by new
suppliers that have not yet proven their ability to manufacture large volumes of
polysilicon. In some cases we expect that new entrants will provide us with
polysilicon, ingots and wafers. The failure of these new entrants to produce
adequate supplies of polysilicon, ingots and/or wafers in the
quantities and quality we require could adversely affect our ability to grow
production volumes and revenues and could also result in a decline in our gross
profit margins. Since we have committed to significantly increase our
manufacturing output, an inadequate supply of polysilicon would harm us more
than it would harm some of our competitors.
Additionally,
the steps we have taken to further increase the efficiency of our polysilicon
utilization are unproven at volume production levels and may not enable us to
realize the cost reductions we anticipate. Given the current polysilicon
shortage, we believe the efficient use of polysilicon will be critical to our
ability to reduce our manufacturing costs. We continue to implement several
measures to increase the efficient use of polysilicon in our manufacturing
process. For example, we are developing processes to utilize thinner wafers
which require less polysilicon and improved wafer-slicing technology to reduce
the amount of material lost while slicing wafers, otherwise known as kerf loss.
Although we have implemented production using thinner wafers and anticipate
further reductions in wafer thickness, these methods may have unforeseen
negative consequences on our yields or our solar cell efficiency or reliability
once they are put into large-scale commercial production, or they may not enable
us to realize the cost reductions we hope to achieve.
Our
inability to obtain sufficient polysilicon, ingots or wafers at commercially
reasonable prices or at all for any of the foregoing reasons, or otherwise,
would adversely affect our ability to meet existing and future customer demand
for our products and could cause us to make fewer shipments, lose customers and
market share and generate lower than anticipated revenue, thereby seriously
harming our business, financial condition and results of
operations.
As
polysilicon supply increases, the corresponding increase in the global supply of
solar cells and panels may cause substantial downward pressure on the prices of
SunPower products, resulting in lower revenues and earnings.
The
scarcity of polysilicon has resulted in the underutilization of solar panel
manufacturing capacity at many competitors or potential competitors to SunPower,
particularly in China. As additional polysilicon becomes available over the
next 6 to 24 months, we expect solar panel production globally to
increase. Decreases in polysilicon pricing and increases in solar panel
production could each result in substantial downward pressure on the price of
solar cells and panels, including SunPower products. Such price reductions
could have a negative impact on our revenue and earnings, and materially
adversely affect our business and financial condition.
Long-term,
firm commitment supply agreements with polysilicon, ingot or wafer suppliers
could result in insufficient or excess inventory or place us at a competitive
disadvantage.
We
manufacture our solar cells utilizing ingots and wafers manufactured by third
parties, which in turn use polysilicon for their manufacturing process. We are
seeking to address the current polysilicon shortage by negotiating multi-year,
binding contractual commitments directly with polysilicon suppliers, and
supplying such polysilicon to third parties which provide us ingots and wafers.
Under such polysilicon agreements, we may be required to purchase a specified
quantity of polysilicon, ingots or wafers at fixed prices, in some cases subject
to upward inflation-related adjustments over a set period of time, which is
often a period of several years. We also may be required to make substantial
prepayments to these suppliers against future deliveries. For example, in
July 2007 we entered into a long-term supply agreement with Hemlock
Semiconductor Corporation, or Hemlock, a manufacturer of polysilicon. The
agreement requires us to purchase an amount of silicon that is expected to
support more than two gigawatts of solar cell production at fixed prices from
2010 to 2019. We are also required to make material aggregate cash prepayments
to Hemlock prior to 2010 in three equal installments. Such prepayments will be
used to fund the expansion of Hemlock’s polysilicon manufacturing capacity and
will be credited against future deliveries of polysilicon to us. The Hemlock
agreement, or any other “take or pay” agreement we enter into, allows the
supplier to invoice us for the full purchase price of polysilicon we are under
contract to purchase each year, whether or not we actually order the required
volume. If for any reason we fail to order the required annual volume under the
Hemlock or similar agreements, the resulting monetary damages could have a
material adverse effect on our business and results of operations.
We do not
obtain contracts or commitments from customers for all of the solar panels
manufactured with the polysilicon purchased under such firm commitment
contracts. Instead, we rely on our long-term internal forecasts to determine the
timing of our production schedules and the volume and mix of products to be
manufactured, including the estimated quantity of polysilicon, ingots and wafers
needed. The level and timing of orders placed by customers may vary for many
reasons. As a result, at any particular time, we may have insufficient or excess
inventory, which could render us unable to fulfill customer orders or increase
our cost of production. In addition, we have negotiated the fixed prices under
these supply contracts based on our long-term projections of the future price of
polysilicon. If the market price of polysilicon in future periods is less than
the price we have committed to pay either because of new technological
developments or any other reason, our cost of production could be comparatively
higher than that of competitors who buy polysilicon on the open market. This
would place us at a competitive disadvantage to these competitors, and could
materially and adversely affect our business and results of
operations.
Long-term
contractual commitments also expose us to specific counter-party risk, which can
be magnified when dealing with suppliers without a long, stable production and
financial history. For example, if one or more of our contractual counterparties
is unable or unwilling to provide us with the contracted amount of polysilicon,
wafers or ingots, we could be required to attempt to obtain polysilicon in the
open market, which could be unavailable at that time, or only available at
prices in excess of our contracted prices. In addition, in the event any such
supplier experiences financial difficulties, it may be difficult or impossible,
or may require substantial time and expense, for us to recover any or all of our
prepayments. Any of the foregoing could materially harm our financial condition
and results of operations.
The
reduction or elimination of government and economic incentives could cause our
revenue to decline and harm our financial results.
The
market for on-grid applications, where solar power is used to supplement a
customer’s electricity purchased from the utility network or sold to a utility
under tariff, depends in large part on the availability and size of government
and economic incentives that vary by geographic market. Because our sales are
into the on-grid market, the reduction or elimination of government and economic
incentives in one or more of these markets would adversely affect the growth of
this market or result in increased price competition, either of which could
cause our revenue to decline and harm our financial results.
Today,
the cost of solar power exceeds retail electric rates in many locations. As a
result, federal, state and local government bodies in many countries, most
notably Spain, the United States, Germany, Italy, South Korea, Canada, Japan,
Portugal, Greece and France, have provided incentives in the form of feed-in
tariffs, rebates, tax credits and other incentives and mandates to end users,
distributors, system integrators and manufacturers of solar power products to
promote the use of solar energy in on-grid applications and to reduce dependency
on other forms of energy. These government economic incentives could be reduced,
expire or be eliminated altogether reducing demand for our products in the
affected markets. In fact, some solar program incentives expire, decline over
time, are limited in total funding or require renewal of authority.
For
example, in the United States, the federal investment tax credit for solar
installations expires in its current form at year-end 2008. Without an extension
of the federal investment tax credit, many commercial customers and third-party
financiers will not contract to purchase solar systems. In addition,
Spain’s feed-in tariff expires in late September 2008. The government
has proposed a new, reduced, draft feed-in tariff to continue solar support
after the current tariff expires. Demand in Spain has been significantly reduced
as a result of uncertainty in the new tariff’s level of reduction and timing of
implementation.
For the
three months ended June 29, 2008, 15% and 66% of our total revenue was
generated in the United States and Spain, respectively, as compared to 37% and
38%, respectively, of our total revenue for the three months ended July 1,
2007. For the six months ended June 29, 2008, 18% and 60% of our total
revenue was generated in the United States and Spain, respectively, as compared
to 38% and 31%, respectively, of our total revenue for the six months ended
July 1, 2007.
In
California, the California Solar Initiative is designed to lower the stated
rebate level as market penetration increases. If system ASPs do
not decline as the rebate levels decline, demand may decline in California. Net
metering and other operational policies in California or other markets could
limit the amount of solar power installed there.
Reductions
in, or eliminations or expirations of, governmental incentives such as these
could result in decreased demand for and lower revenue from our products.
Changes in the level or structure of a renewable portfolio standard and similar
mandates could also result in decreased demand for and lower revenue or revenue
growth from our products.
The
execution of our growth strategy for our systems segment is dependent upon the
continued availability of third-party financing arrangements for our
customers.
For many
of our projects, our customers have entered into agreements to finance the power
systems over an extended period of time based on energy savings generated by our
solar power systems, rather than pay the full capital cost of purchasing the
solar power systems up front. For these types of projects, many of our customers
choose to purchase solar electricity under a power purchase agreement with a
financing company that purchases the system from us. In the three and
six months ended June 29, 2008, approximately 55% and 52%, respectively, of
our total revenue was derived from sales of systems to financing companies that
engage in power purchase agreements with end-users of electricity, as compared
to 26% and 22%, respectively, of our total revenue for the three and
six months ended July 1, 2007.
Of such
systems sales to financing companies that engage in power purchase agreements
with end-users of electricity, 5% and 95% of systems sales were derived in the
United States and Spain, respectively, in the three months ended June 29,
2008 as compared to 37% and 62%, respectively, of systems sales for the
three months ended July 1, 2007. For the six months ended June 29,
2008, 6% and 94% of systems sales to financing companies that engage in power
purchase agreements with end-users of electricity were derived in the United
States and Spain, respectively, as compared to 36% and 42%, respectively, of
systems sales for the six months ended July 1, 2007. These structured
finance arrangements are complex and may not be feasible in many situations. In
addition, customers opting to finance a solar power system may forgo certain tax
advantages associated with an outright purchase on an accelerated basis which
may make this alternative less attractive for certain potential customers. If
customers
are unwilling or unable to finance the cost of our products, or if the parties
that have historically provided this financing cease to do so, or only do so on
terms that are substantially less favorable for us or these customers, our
revenue and growth will be adversely affected.
The
success of our systems segment will depend in part on the continuing formation
of such financing companies and the potential revenue source they represent. In
deciding whether to form and invest in such financing companies, potential
investors weigh a variety of considerations, including their projected return on
investment. Such projections are based on current and proposed federal, state
and local laws, particularly tax legislation. Changes to these laws, including
amendments to existing tax laws or the introduction of new tax laws, tax court
rulings as well as changes in administrative guidelines, ordinances and similar
rules and regulations could result in different tax consequences which may
adversely affect an investor’s projected return on investment, which could have
a material adverse effect on our business and results of
operations.
MMA
Renewable Ventures (a subsidiary of MuniMae, or MMA), is a customer of our
systems segment, accounting for less than 10% of our total revenue in the three
and six months ended June 29, 2008. MMA Renewable Ventures accounted for
10% of our total revenue in the three months ended July 1, 2007 and less
than 10% of our total revenue in the six months ended July 1, 2007. MMA
Renewable Ventures is a financing company that purchases systems from us and
engages in power purchase agreements with end-users of electricity. Effective
February 6, 2008, the New York Stock Exchange, or NYSE, delisted the common
stock of MMA because MMA did not expect to file its audited 2006 financial
statements by March 3, 2008, the deadline imposed by the NYSE. In connection
with completing the restatement and filing the Annual Report on Form 10-K for
the year ended December 31, 2006, MMA has disclosed that it incurred substantial
accounting costs. In addition, MMA has disclosed that recent credit market
disruption has negatively affected many aspects of MMA’s business. In the event
MMA Renewable Ventures ceases to be a customer of ours or fails to pay us in a
timely manner, it could have a significant adverse effect on our future results
of operations.
We
may be unable to achieve our goal of reducing the cost of installed solar
systems by 50 percent by 2012, which may negatively impact our ability to sell
our products in a competitive environment, resulting in lower revenues, gross
margins and earnings.
To reduce
the cost of installed solar systems by 50 percent by 2012, as compared against
the cost in 2006, we will have to achieve cost savings across the entire value
chain from designing to manufacturing to distributing to selling and ultimately
to installing solar systems. We have identified specific areas of potential
savings and are pursuing targeted goals. However, such cost savings are
dependent upon decreasing silicon prices and lowering manufacturing costs. As
part of our announced strategy, we have entered into long-term silicon supply
agreements to promote an adequate supply of raw material as well as to reduce
the overall cost of such raw material. Additionally, we are increasing
production capacity at our existing manufacturing facilities while seeking to
improve efficiencies. We also expect to develop additional manufacturing
capacity. As a result, we expect these improvements will decrease our per unit
production costs. However, if we are unsuccessful in our efforts to reduce the
cost of installed solar systems by 50 percent by 2012, our revenues, gross
margins and earnings may be negatively impacted in the competitive environment
and particularly in the event that governmental and fiscal incentives are
reduced or an increase in the global supply of solar cells and solar panels
causes substantial downward pressure on prices of our products.
We
may not be able to increase or sustain our recent growth rate, and we may not be
able to manage our future growth effectively.
We may
not be able to continue to expand our business or manage future growth. We plan
to significantly increase our production capacity between 2008 and 2010. To do
so will require successful execution of expanding our existing manufacturing
facilities, developing new manufacturing facilities, ensuring delivery of
adequate polysilicon and ingots, developing more efficient wafer-slicing
methods, maintaining adequate liquidity and financial resources, and continuing
to increase our revenues from operations. Expanding our manufacturing facilities
or developing facilities may be delayed by difficulties such as unavailability
of equipment or supplies or equipment malfunction. Ensuring delivery of adequate
polysilicon and ingots is subject to many market risks including scarcity,
significant price fluctuations and competition. Maintaining adequate liquidity
is dependent upon a variety of factors including continued revenues from
operations and compliance with our indentures and credit agreements. In
addition, following any tax-free spin-off of our shares by Cypress, our ability
to issue equity for financing purposes would be subject to limits as described
in “Our agreements with Cypress require us to
indemnify Cypress for certain tax liabilities. These indemnification obligations
or related considerations may limit our ability to obtain additional financing,
participate in future acquisitions or pursue other business
initiatives.” If we are unsuccessful in any of these areas, we may
not be able to achieve our growth strategy and increase production capacity as
planned during the foreseeable future.
Prior to
our acquisition, SP Systems experienced significant revenue growth due primarily
to the development and market acceptance of its PowerGuard® roof system, the
acquisition and introduction of its PowerTracker® ground and elevated parking
systems, its development of other technologies and increasing global interest
and demand for renewable energy sources, including solar power generation. As a
result, SP Systems increased its revenues in a relatively short period of time.
Its annual revenue increased from $50.9 million in 2003 to $87.6 million in 2004
to $107.8 million in 2005 to $243.4 million in 2006. As a result of our
acquisition involving SP Systems, our systems segment revenue for the year ended
December 30, 2007 was $464.2 million and for the three and six months ended
June 29, 2008 was $270.6 million and $449.4 million, respectively. We may not
experience similar growth of our total revenue or even similar growth of our
systems segment revenue in future periods. Accordingly, investors should not
rely on the results of any prior quarterly or annual period as an indication of
our future operating performance.
Our
recent expansion has placed, and our planned expansion and any other future
expansion will continue to place, a significant strain on our management,
personnel, systems and resources. We plan to purchase additional equipment to
significantly expand our manufacturing capacity and to hire additional employees
to support an increase in manufacturing, research and development and our sales
and marketing efforts. We had approximately 4,660 full-time employees as of June
29, 2008, and we anticipate that we will need to hire a significant number of
highly skilled technical, manufacturing, sales, marketing, administrative and
accounting personnel. The competition for qualified personnel is intense in our
industry. We may not be successful in attracting and retaining sufficient
numbers of qualified personnel to support our anticipated growth. To
successfully manage our growth and handle the responsibilities of being a public
company, we believe we must effectively:
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hire,
train, integrate and manage additional qualified engineers for research
and development activities, sales and marketing personnel, and financial
and information technology
personnel;
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retain
key management and augment our management team, particularly if we lose
key members;
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continue
to enhance our customer resource management and manufacturing management
systems;
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implement
and improve additional and existing administrative, financial and
operations systems, procedures and controls, including the need to update
and integrate our financial internal control systems in SP Systems and in
our Philippines facility with those of our San Jose, California
headquarters;
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expand
and upgrade our technological capabilities;
and
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manage
multiple relationships with our customers, suppliers and other third
parties.
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We may
encounter difficulties in effectively managing the budgeting, forecasting and
other process control issues presented by rapid growth. If we are unable to
manage our growth effectively, we may not be able to take advantage of market
opportunities, develop new solar cells and other products, satisfy customer
requirements, execute our business plan or respond to competitive
pressures.
Since
we cannot test our solar panels for the duration of our standard 25-year
warranty period, we may be subject to unexpected warranty expense; if we are
subject to warranty and product liability claims, such claims could adversely
affect our business and results of operations.
The
possibility of future product failures could cause us to incur substantial
expense to repair or replace defective products. We have agreed to indemnify our
customers and our distributors in some circumstances against liability from
defects in our solar cells. A successful indemnification claim against us could
require us to make significant damage payments, which would negatively affect
our financial results.
In our
components segment, our current standard product warranty for our solar panels
includes a 10-year warranty period for defects in materials and workmanship and
a 25-year warranty period for declines in power performance as well as a
one-year warranty on the functionality of our solar cells. We believe our
warranty periods are consistent with industry practice. Due to the long warranty
period and our proprietary technology, we bear the risk of extensive warranty
claims long after we have shipped product and recognized revenue. We have sold
solar cells only since late 2004. Any increase in the defect rate of our
products would cause us to increase the amount of warranty reserves and have a
corresponding negative impact on our results. Although we conduct accelerated
testing of our solar cells and have several years of experience with our all
back contact cell architecture, our solar panels have not and cannot be tested
in an environment simulating the 25-year warranty period. As a result, we may be
subject to unexpected warranty expense, which in turn would harm our financial
results.
Like
other retailers, distributors and manufacturers of products that are used by
consumers, we face an inherent risk of exposure to product liability claims in
the event that the use of the solar power products into which our solar cells
and solar panels are incorporated results in injury. We may be subject to
warranty and product liability claims in the event that our solar power systems
fail to perform as expected or if a failure of our solar power systems results,
or is alleged to result, in bodily injury, property damage or other damages.
Since our solar power products are electricity producing devices, it is possible
that our products could result in injury, whether by product malfunctions,
defects, improper installation or other causes. In addition, since we only began
selling our solar cells and solar panels in late 2004 and the products we are
developing incorporate new technologies and use new installation methods, we
cannot predict whether or not product liability claims will be brought against
us in the future or the effect of any resulting negative publicity on our
business. Moreover, we may not have adequate resources in the event of a
successful claim against us. We have evaluated the potential risks we face and
believe that we have appropriate levels of insurance for product liability
claims. We rely on our general liability insurance to cover product liability
claims and have not obtained separate product liability insurance. However, a
successful warranty or product liability claim against us that is not covered by
insurance or is in excess of our available insurance limits could require us to
make significant payments of damages. In addition, quality issues can have
various other ramifications, including delays in the recognition of revenue,
loss of revenue, loss of future sales opportunities, increased costs associated
with repairing or replacing products, and a negative impact
on our
goodwill and reputation, which could also adversely affect our business and
operating results. Our exposure to warranty and product liability claims is
expected to increase significantly in connection with our planned expansion into
the new home development market.
Warranty
and product liability claims may result from defects or quality issues in
certain third-party technology and components that our systems segment
incorporates into its solar power systems, particularly solar cells and panels,
over which it has no control. While its agreements with its suppliers generally
include warranties, such provisions may not fully compensate us for any loss
associated with third-party claims caused by defects or quality issues in such
products. In the event we seek recourse through warranties, we will also be
dependent on the creditworthiness and continued existence of these
suppliers.
Our
current standard warranty for our solar power systems differs by geography and
end-customer application and includes either a one, two or five year
comprehensive parts and workmanship warranty, after which the customer may
typically extend the period covered by its warranty for an additional fee. Due
to the warranty period, we bear the risk of extensive warranty claims long after
we have completed a project and recognized revenues. Future product failures
could cause us to incur substantial expenses to repair or replace defective
products. While we generally pass through manufacturer warranties we receive
from our suppliers to our customers, we are responsible for repairing or
replacing any defective parts during our warranty period, often including those
covered by manufacturers’ warranties. If the manufacturer disputes or otherwise
fails to honor its warranty obligations, we may be required to incur substantial
costs before we are compensated, if at all, by the manufacturer. Furthermore,
our warranties may exceed the period of any warranties from our suppliers
covering components included in our systems, such as inverters.
Prior to
our acquisition of SP Systems, one of SP System’s major panel suppliers at the
time, AstroPower, Inc., filed for bankruptcy in February 2004. SP Systems had
installed solar systems incorporating over 30,000 AstroPower panels, of which
approximately 12,000 panels were still under warranty as of June 29, 2008. The
majority of these warranties expire by 2022. While we have not experienced a
significant number of warranty or other claims related to the installed
AstroPower panels, we may in the future incur significant unreimbursable
expenses in connection with the repair or replacement of these panels, which
could have a material adverse effect on our business and results of operations.
In addition, another major supplier of solar panels notified us of a product
defect that may affect a substantial number of panels installed by SP Systems
between 2002 and September 2006. If the supplier does not perform its
contractual obligations to remediate the defective panels, we will be exposed to
those costs it would incur under the warranty with SP Systems’
customers.
The
competitive environment in which our systems business operates often requires us
to arrange financing for our customer’s projects and/or undertake post-sale
customer obligations. If we are unable to arrange adequate financing
or if our post-sale customer obligations are more costly than expected, our
revenue and financial results could be materially adversely
affected.
We
arrange third-party financing for most of our end customer’s solar projects that
we install through our systems segment. Additionally, we are often required as a
condition of financing or at the request of our end customer to undertake
certain post-sale obligations such as:
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System
output performance guaranties;
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Liquidated
damage payments or customer termination rights if the system we are
constructing is not commissioned within specified
timeframes;
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Guaranties
of certain minimum residual value of the system at specified future dates;
and
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System
put-rights whereby we could be required buy-back a customer’s system at
fair value on specified future
dates.
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Such
financing arrangements and post-sale obligations involve complex accounting
analyses and judgments regarding the timing of revenue and expense recognition
and in certain situations these factors may require us to defer revenue
recognition until projects are completed, which could adversely affect revenue
and profits in a particular period.
In
addition, under our power purchase business model, branded as our SunPower
Access™ PPA program, we often execute power purchase agreements directly with
the end-user customer purchasing solar electricity, with the expectation that we
will later assign the power purchase agreement to a financier. Under
such arrangements, the financier separately contracts with SunPower to build and
acquire the solar system, and then sells the electricity to the end-user
customer under the assigned power purchase agreement. When executing
power purchase agreements with the end-user customers, SunPower seeks to
mitigate the risk that a financier will not be available for the project by
allowing termination of the power purchase agreement in such event without
penalty. However, SunPower may not always be successful in
negotiating for penalty-free termination rights for failure to secure financing,
and certain end-user customers have required substantial financial penalties in
exchange for such rights.
If we are
unable to arrange adequate financing or if our post-sale customer obligations
are more costly than expected, our revenue and financial results could be
materially adversely affected.
Our
systems segment acts as the general contractor for our customers in connection
with the installations of our solar power systems and is subject to risks
associated with construction, cost overruns, delays and other contingencies tied
to performance bonds and letters of credit, which could have a material adverse
effect on our business and results of operations.
Our
systems segment acts as the general contractor for our customers in connection
with the installation of our solar power systems. All essential costs are
estimated at the time of entering into the sales contract for a particular
project, and these are reflected in the overall price that we charge our
customers for the project. These cost estimates are preliminary and may or may
not be covered by contracts between us or the other project developers,
subcontractors, suppliers and other parties to the project. In addition, we
require qualified, licensed subcontractors to install most of our systems.
Shortages of such skilled labor could significantly delay a project or otherwise
increase our costs. Should miscalculations in planning a project or defective or
late execution occur, we may not achieve our expected margins or cover our
costs. Also, some systems customers require performance bonds issued by a
bonding agency or letters of credit issued by financial institutions. Due to the
general performance risk inherent in construction activities, it has become
increasingly difficult recently to secure suitable bonding agencies willing to
provide performance bonding, and obtaining letters of credit requires adequate
collateral because we have not obtained a credit rating. In the event we are
unable to obtain bonding or sufficient letters of credit, we will be unable to
bid on, or enter into, sales contracts requiring such bonding.
In
addition, some of our larger systems customers require that we pay substantial
liquidated damages for each day or other period its solar installation is not
completed beyond an agreed target date, up to and including the return of the
entire project sale price. This is particularly true in Europe, where long-term,
fixed feed-in tariffs available to investors are typically set during a
prescribed period of project completion, but the fixed amount declines over time
for projects completed in subsequent periods. We face material financial
penalties in the event we fail to meet the September completion deadlines,
including but not limited a full refund of the contract price paid by the
customers. In certain cases we do not control all of the events which
could give rise to these penalties, such as reliance on the local utility to
timely complete electrical substation construction.
In
addition, investors often require that the solar power system generate specified
levels of electricity in order to maintain their investment returns, allocating
substantial risk and financial penalties to us if those levels are not achieved,
up to and including the return of the entire project sale price. Furthermore,
our customers often require protections in the form of conditional payments,
payment retentions or holdbacks, and similar arrangements that condition its
future payments on performance. Delays in solar panel or other supply shipments,
other construction delays, unexpected performance problems in electricity
generation or other events could cause us to fail to meet these performance
criteria, resulting in unanticipated and severe revenue and earnings losses and
financial penalties. Construction delays are often caused by inclement weather,
failure to timely receive necessary approvals and permits, or delays in
obtaining necessary solar panels, inverters or other materials. All such risks
could have a material adverse effect on our business and results of
operations.
A
limited number of components customers are expected to continue to comprise a
significant portion of our revenues and any decrease in revenue from these
customers could have a significant adverse effect on us.
Even
though our customer base is expected to increase and our revenue streams to
diversify, a substantial portion of our net revenues could continue to depend on
sales to a limited number of customers. Currently, our largest components
segment customers are Solon and Conergy. The loss of sales to either of these
customers would have a significant negative impact on our business. Our
agreements with these customers may be cancelled if we fail to meet certain
product specifications or materially breach the agreement or in the event of
bankruptcy, and our customers may seek to renegotiate the terms of current
agreements or renewals. Most of the solar panels we sell to the European market
in our components business are sold to small numbers of German customers, and
this may continue into the foreseeable future.
Our
operating results will be subject to fluctuations and are inherently
unpredictable; if we fail to meet the expectations of securities analysts or
investors, our stock price may decline significantly.
We have
incurred net losses from inception through 2005 and for the quarter ended
July 1, 2007. On June 29, 2008, we had accumulated earnings of
approximately $18.5 million. To maintain our profitability, we will need to
generate and sustain higher revenue while maintaining reasonable cost and
expense levels. We do not know if our revenue will grow, or if it will grow
sufficiently to outpace our expenses, which we expect to increase as we expand
our manufacturing capacity. We may not be able to sustain or increase
profitability on a quarterly or an annual basis. Our quarterly revenue and
operating results will be difficult to predict and have in the past fluctuated
from quarter to quarter. It is possible that our operating results in some
quarters will be below market expectations. In particular, our systems segment
is difficult to forecast and is susceptible to large fluctuations in financial
results. The amount, timing and mix of sales of our systems segment, often for a
single medium or large-scale project, may cause large fluctuations in our
revenue and other financial results. Further, our revenue mix of high margin
material sales versus lower margin projects in the systems business segment can
fluctuate dramatically quarter to quarter, which may adversely
affect
our revenue and financial results in any given period. Finally, our
ability to meet project completion schedules for an individual project and the
corresponding revenue impact under the percentage-of-completion method of
recognizing revenue, may similarly cause large fluctuations in our revenue and
other financial results. This may cause us to miss analysts’ guidance or any
future guidance announced by us.
In
addition, our quarterly operating results will also be affected by a number of
other factors, including:
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the
average selling price of our solar cells, solar panels and solar power
systems;
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the
availability and pricing of raw materials, particularly
polysilicon;
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the
availability, pricing and timeliness of delivery of raw materials and
components, particularly solar panels and balance of systems components,
including steel, necessary for our solar power systems to
function;
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the
rate and cost at which we are able to expand our manufacturing and product
assembly capacity to meet customer demand, including costs and timing of
adding personnel;
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construction
cost overruns, including those associated with the introduction of new
products;
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the
impact of seasonal variations in demand and/or revenue recognition linked
to construction cycles and weather
conditions;
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timing,
availability and changes in government incentive
programs;
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unplanned
additional expenses such as manufacturing failures, defects or
downtime;
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acquisition
and investment related costs;
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unpredictable
volume and timing of customer orders, some of which are not fixed by
contract but vary on a purchase order
basis;
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the
loss of one or more key customers or the significant reduction or
postponement of orders from these
customers;
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geopolitical
turmoil within any of the countries in which we operate or sell
products;
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foreign
currency fluctuations, particularly in the Euro, Philippine peso or South
Korean won;
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the
effect of currency hedging
activities;
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our
ability to establish and expand customer
relationships;
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changes
in our manufacturing costs;
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changes
in the relative sales mix of our systems, solar cells and solar
panels;
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the
availability, pricing and timeliness of delivery of other products, such
as inverters and other balance of systems materials necessary for our
solar power products to function;
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our
ability to successfully develop, introduce and sell new or enhanced solar
power products in a timely manner, and the amount and timing of related
research and development costs;
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the
timing of new product or technology announcements or introductions by our
competitors and other developments in the competitive
environment;
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the
willingness of competing solar cell and panel suppliers to continue
product sales to our systems
segment;
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increases
or decreases in electric rates due to changes in fossil fuel prices or
other factors; and
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We base
our planned operating expenses in part on our expectations of future revenue,
and a significant portion of our expenses will be fixed in the short-term. If
revenue for a particular quarter is lower than we expect, we likely will be
unable to proportionately reduce our operating expenses for that quarter, which
would harm our operating results for that quarter. This may cause us
to miss analysts’ guidance or any guidance announced by us. If we fail to meet
or exceed analyst or investor expectations or our own future guidance, even by a
small amount, our stock price could decline, perhaps substantially.
Our
solar cell production lines are located in our manufacturing facilities in the
Philippines, and if we experience interruptions in the operation of these
production lines or are unable to add additional production lines, it would
likely result in lower revenue and earnings than anticipated.
We
currently have eight solar cell manufacturing lines in production which are
located at our manufacturing facilities in the Philippines. If our current or
future production lines were to experience any problems or downtime, we would be
unable to meet our production targets and our business would suffer. If any
piece of equipment were to break down or experience downtime, it could cause our
production lines to go down. We have started operations in our second solar cell
manufacturing facility nearby our existing facility in the Philippines. This
expansion has required and will continue to require significant management
attention, a significant investment of capital and substantial engineering
expenditures and is subject to significant risks including:
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we
may experience cost overruns, delays, equipment problems and other
operating difficulties;
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we
may experience difficulties expanding our processes to larger production
capacity;
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our
custom-built equipment may take longer and cost more to engineer than
planned and may never operate as designed;
and
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we
are incorporating first-time equipment designs and technology
improvements, which we expect to lower unit capital and operating costs,
but this new technology may not be
successful.
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If we
experience any of these or similar difficulties, we may be unable to complete
the addition of new production lines on schedule in order to expand our
manufacturing facilities and our manufacturing capacity could be substantially
constrained. If this were to occur, our per-unit manufacturing costs would
increase, we would be unable to increase sales or gross margins as planned and
our earnings would likely be materially impaired.
Our
systems segment recognizes revenue on a “percentage-of-completion” basis and
upon the achievement of contractual milestones and any delay or cancellation of
a project could adversely affect our business.
Our
systems segment recognizes revenue on a “percentage-of-completion” basis and, as
a result, the revenue from this segment is driven by the performance of our
contractual obligations, which is generally driven by the timelines of
installation of our solar power systems at customer sites. The
percentage-of-completion method of accounting for revenue recognition is
inherently subjective because it relies on management estimates of total project
cost as a basis for recognizing revenue and profit. Accordingly, revenue
and profit we have recognized under the percentage-of-completion method are
potentially subject to adjustments in subsequent periods based on refinements in
estimated costs of project completion that could materially impact our future
revenue and profit.
In
connection with our acquisition of SP Systems, we do not recognize revenue from
intercompany sales by our components segment to our systems segment. Instead,
the sale of our solar panels used for construction projects are included in
system segment revenues. This could result in unpredictability of revenue and,
in the near term, a revenue decrease. As with any project-related business,
there is the potential for delays within any particular customer project.
Variation of project timelines and estimates may impact our ability to recognize
revenue in a particular period. Moreover, incurring penalties involving the
return of the contract price to the customer for failure to timely install one
project could negatively impact our ability to continue to recognize revenue on
a “percentage-of-completion” basis generally for other projects. In addition,
certain customer contracts may include payment milestones due at specified
points during a project. Because our systems segment usually must invest
substantial time and incur significant expense in advance of achieving
milestones and the receipt of payment, failure to achieve such milestones could
adversely affect our business and results of operations.
We
established a captive solar panel assembly facility, and, if this panel
manufacturing facility is unable to produce high quality solar panels at
commercially reasonable costs, our revenue growth and gross margin could be
adversely affected.
We
currently run four solar panel assembly lines in the Philippines with 120
megawatts of production capacity. This factory commenced commercial production
during the fourth quarter of 2006. Much of the manufacturing equipment and
technology in this factory is new and ramping to achieve their full rated
capacity. In the event that this factory is unable to ramp production with
commercially reasonable yields and competitive production costs, our anticipated
revenue growth and gross margin will be adversely affected.
Expansion
of our manufacturing capacity has and will continue to increase our fixed costs,
which increase may have a negative impact on our financial condition if demand
for our products decreases.
We have
recently expanded, and plan to continue to expand, our manufacturing facilities.
For example, on May 19, 2008, we announced plans to construct our third solar
cell manufacturing facility based in Malaysia. At capacity, the
facility will have nameplate production capacity of more than 1 gigawatt.
Initial production is scheduled to begin as early as the first quarter of 2009.
As we build additional manufacturing lines or facilities, our fixed costs will
increase. If the demand for our solar power products or our production output
decreases, we may not be able to spread a significant amount of our fixed costs
over the production volume, thereby increasing our per unit fixed cost, which
would have a negative impact on our financial condition and results of
operations.
We
depend on a third-party subcontractor in China to assemble a significant
portion of our solar cells into solar panels and any failure to obtain
sufficient assembly and test capacity could significantly delay our ability to
ship our solar panels and damage our customer relationships.
Historically,
we have relied on Jiawei, a third-party subcontractor in China, to assemble
a significant portion of our solar cells into solar panels and perform
panel testing and to manage packaging, warehousing and shipping of our solar
panels. We do not have a long-term agreement with Jiawei and we typically obtain
its services based on short-term purchase orders that are generally aligned with
timing specified by our customers’ purchase orders and our sales forecasts. If
the operations of Jiawei were disrupted or its financial stability impaired, or
if it should choose not to devote capacity to our solar panels in a timely
manner, our business would suffer as we may be unable to produce finished solar
panels on a timely basis. In addition, we supply inventory to Jiawei and we bear
the risk of loss, theft or damage to our inventory while it is held in its
facilities.
As a
result of outsourcing a significant portion of this final step in our
production, we face several significant risks, including:
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limited
assembly and testing capacity and potentially higher
prices;
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limited
control over delivery schedules, quality assurance and control,
manufacturing yields and production costs;
and
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delays
resulting from an inability to move production to an alternate
provider.
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The
ability of our subcontractor to perform assembly and test is limited by its
available capacity. We do not have a guaranteed level of production capacity
with our subcontractor, and our production needs for solar panels may differ
from our forecasts provided to Jiawei. Other customers of Jiawei that are larger
and better financed than we are, or that have long-term agreements in place, may
induce Jiawei to reallocate capacity to them. Any reallocation could impair our
ability to secure the supply of solar panels that we need for our customers. In
addition, interruptions to the panel manufacturing processes caused by a natural
or man-made disaster could result in partial or complete disruption in supply
until we are able to shift manufacturing to another facility. It may not be
possible to obtain sufficient capacity or comparable production costs at another
facility. Migrating our design methodology to a new third-party subcontractor or
to a captive panel assembly facility could involve increased costs, resources
and development time. Utilizing additional third-party subcontractors could
expose us to further risk of losing control over our intellectual property and
the quality of our solar panels. Any reduction in the supply of solar panels
could impair our revenue by significantly delaying our ability to ship products
and potentially damage our relationships with existing customers.
If
we do not achieve satisfactory yields or quality in manufacturing our solar
cells, our sales could decrease and our relationships with our customers and our
reputation may be harmed.
The
manufacture of solar cells is a highly complex process. Minor deviations in the
manufacturing process can cause substantial decreases in yield and in some
cases, cause production to be suspended or yield no output. We have from time to
time experienced lower than anticipated manufacturing yields. This often occurs
during the production of new products or the installation and start-up of new
process technologies or equipment. For example, we recently acquired a building
to house our second solar cell manufacturing facility near our existing
facility. As we expand our manufacturing capacity and bring additional lines or
facilities into production, we may experience lower yields initially as is
typical with any new equipment or process. We also expect to experience lower
yields as we continue the initial migration of our manufacturing processes to
thinner wafers. If we do not achieve planned yields, our product costs could
increase, and product availability would decrease resulting in lower revenues
than expected.
Additionally,
products as complex as ours may contain undetected errors or defects, especially
when first introduced. For example, our solar cells and solar panels may contain
defects that are not detected until after they are shipped or are installed
because we cannot test for all possible scenarios. These defects could cause us
to incur significant re-engineering costs, divert the attention of our
engineering personnel from product development efforts and significantly affect
our customer relations and business reputation. If we deliver solar cells or
solar panels with errors or defects, including cells or panels of third-party
manufacturers, or if there is a perception that such solar cells or solar panels
contain errors or defects, our credibility and the market acceptance and sales
of our products could be harmed.
Existing
regulations and policies and changes to these regulations and policies may
present technical, regulatory and economic barriers to the purchase and use of
solar power products, which may significantly reduce demand for our products and
services.
The
market for electricity generation products is heavily influenced by foreign,
U.S. federal, state and local government regulations and policies concerning the
electric utility industry, as well as policies promulgated by electric
utilities. These regulations and policies often relate to electricity pricing
and technical interconnection of customer-owned electricity generation. In the
U.S. and in a number of other countries, these regulations and policies are
being modified and may continue to be modified. Customer purchases of, or
further investment in the research and development of, alternative energy
sources, including solar power technology, could be deterred by these
regulations and policies, which could result in a significant reduction in the
potential demand for our solar power products. For example, without a regulatory
mandated exception for solar power systems, utility customers are often charged
interconnection or standby fees for putting distributed power generation on the
electric utility network. These fees could increase the cost to our customers of
using our solar power products and make them less desirable, thereby harming our
business, prospects, results of operations and financial condition.
We
anticipate that our solar power products and their installation will be subject
to oversight and regulation in accordance with national and local ordinances
relating to building codes, safety, environmental protection, utility
interconnection and metering and related matters. It is difficult to track the
requirements of individual states and design equipment to comply with the
varying standards. Any new government regulations or utility policies pertaining
to our solar power products may result in significant additional expenses to us
and our resellers and their customers and, as a result, could cause a
significant reduction in demand for our solar power products.
We
will continue to be dependent on a limited number of third-party suppliers for
key components for our solar systems products during the near-term, which could
prevent us from delivering our products to our customers within required
timeframes, which could result in installation delays, cancellations, liquidated
damages and loss of market share.
In
addition to our reliance on a small number of suppliers for our solar cells and
panels, we rely on third-party suppliers for key components for our solar power
systems, such as inverters that convert the direct current electricity generated
by solar panels into alternating current electricity usable by the customer. For
the six months ended June 29, 2008, two suppliers accounted for most of our
inverter purchases for domestic projects, two suppliers accounted for most of
our inverter purchases for European projects and one supplier accounted for all
of the inverter purchases for our Asia projects. In addition, one vendor
supplies all of the foam required to manufacture our PowerGuard® roof
system.
If we
fail to develop or maintain our relationships with our limited suppliers, we may
be unable to manufacture our products or our products may be available only at a
higher cost or after a long delay, which could prevent us from delivering our
products to our customers within required timeframes and we may experience order
cancellation and loss of market share. To the extent the processes that our
suppliers use to manufacture components are proprietary, we may be unable to
obtain comparable components from alternative suppliers. The failure of a
supplier to supply components in a timely manner, or to supply components that
meet our quality, quantity and cost requirements, could impair our ability to
manufacture our products or decrease their costs. If we cannot obtain substitute
materials on a timely basis or on acceptable terms, we could be prevented from
delivering our products to our customers within required timeframes, which could
result in installation delays, cancellations, liquidated damages and loss of
market share, any of which could have a material adverse effect on our business
and results of operations.
We
obtain capital equipment used in our manufacturing process from sole suppliers
and if this equipment is damaged or otherwise unavailable, our ability to
deliver products on time will suffer, which in turn could result in order
cancellations and loss of revenue.
Some of
the capital equipment used in the manufacture of our solar power products and in
our wafer-slicing operations have been developed and made specifically for us,
is not readily available from multiple vendors and would be difficult to repair
or replace if it were to become damaged or stop working. In addition, we
currently obtain the equipment for many of our manufacturing processes from sole
suppliers and we obtain our wafer-slicing equipment from one supplier. If any of
these suppliers were to experience financial difficulties or go out of business,
or if there were any damage to or a breakdown of our manufacturing or
wafer-slicing equipment at a time when we are manufacturing commercial
quantities of our products, our business would suffer. In addition, a supplier’s
failure to supply this equipment in a timely manner, with adequate quality and
on terms acceptable to us, could delay our capacity expansion of our
manufacturing facility and otherwise disrupt our production schedule or increase
our costs of production.
Acquisitions
of other companies or investments in joint ventures with other companies could
adversely affect our operating results, dilute our stockholders’ equity, or
cause us to incur additional debt or assume contingent liabilities.
To
increase our business and maintain our competitive position, we may acquire
other companies or engage in joint ventures in the future. Acquisitions and
joint ventures involve a number of risks that could harm our business and result
in the acquired business or joint venture not performing as expected,
including:
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insufficient
experience with technologies and markets in which the acquired business is
involved, which may be necessary to successfully operate and integrate the
business;
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problems
integrating the acquired operations, personnel, technologies or products
with the existing business and
products;
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diversion
of management time and attention from the core business to the acquired
business or joint venture;
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potential
failure to retain key technical, management, sales and other personnel of
the acquired business or joint
venture;
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difficulties
in retaining relationships with suppliers and customers of the acquired
business, particularly where such customers or suppliers compete with
us;
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reliance
upon joint ventures which we do not
control;
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subsequent
impairment of the acquired assets, including intangible assets;
and
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assumption
of liabilities including, but not limited to, lawsuits, tax examinations,
warranty issues, etc.
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We may
decide that it is in our best interests to enter into acquisitions or joint
ventures that are dilutive to earnings per share or that negatively impact
margins as a whole. In addition, acquisitions or joint ventures could require
investment of significant financial resources and require us to obtain
additional equity financing, which may dilute our stockholders’ equity, or
require us to incur additional indebtedness.
To the
extent that we invest in upstream suppliers or downstream channel capabilities,
we may experience competition or channel conflict with certain of our existing
and potential suppliers and customers. Specifically, existing and potential
suppliers and customers may perceive that we are competing directly with them by
virtue of such investments and may decide to reduce or eliminate their supply
volume to us or order volume from us. In particular, any supply reductions from
our polysilicon, ingot or wafer suppliers could materially reduce manufacturing
volume.
For
example, as a result of our acquisition of SP Systems, we now directly compete
with some of our own suppliers of solar cells and panels. As a result, the
acquisition could cause one or more solar cell and panel suppliers to reduce or
terminate their business relationship with us. Since the acquisition closed, we
have discontinued our purchasing relationship with certain suppliers of panels.
Other reductions or terminations, which may be significant, could occur. Any
such reductions or terminations could adversely affect our ability to meet
customer demand for solar power systems, and materially adversely affect our
results of operations and financial condition, which would likely materially
adversely affect our results of operations and financial condition. We will use
commercially reasonable efforts to replace any lost solar cells or panels with
our own inventory to mitigate the impact on us. However, such replacements may
not be sufficient to fully address solar supply shortfalls, and in any event
could negatively impact our revenue and earnings as we forego selling such
inventory to third parties.
Similarly,
in 2007, we entered into a joint venture agreement to form a new company in the
Philippines named First Philec Solar Corporation, and, in 2006, we entered into
a joint venture agreement to form a new company in South Korea named Woongjin
Energy. First Philec Solar was formed to perform wafer-slicing
operations for us, and Woongjin Energy was formed to convert polysilicon that we
provide into silicon ingots that we will procure under a five-year agreement.
First Philec Solar began manufacturing in the second quarter of fiscal 2008, and
Woongjin Energy began manufacturing in the third quarter of fiscal 2007.
Because these are not wholly owned subsidiaries, they have their own respective
employees and management teams, and we do not control their
operations. While we have long-term supply agreements with both First
Philec Solar and Woongjin Energy, we significantly depend on their performing
under the agreements. If they or our other third-party vendors
increase their prices or decrease or discontinue their shipments to us, as a
result of equipment malfunctions, competing purchasers or otherwise, and we are
unable to obtain substitute wafers and ingots from other vendors on acceptable
terms, or we are unable to increase our own wafer-slicing and develop our own
ingot-pulling operations on a timely basis, our sales may decrease, our costs
may increase or our business could otherwise be harmed.
In July 2008,
Cypress’ Board of Directors authorized management to proceed with Cypress’ plan
to pursue the tax-free distribution of the class B common stock of SunPower held
by Cypress, with the objective of having the transaction completed by the end of
fiscal 2008, or sooner if possible. Following any such spin-off, our ability to
issue equity, including to acquire companies or assets, would be subject to
limits as described in “Our agreements with
Cypress require us to indemnify Cypress for certain tax liabilities. These
indemnification obligations or related considerations may limit our ability to
obtain additional financing, participate in future acquisitions or pursue other
business initiatives.” To the extent these limits prevent us from
pursuing acquisitions or investments that we would otherwise pursue, our growth
and strategy could be impaired.
We
could be adversely affected by violations of the U.S. Foreign Corrupt Practices
Act and similar worldwide anti-bribery laws.
The U.S.
Foreign Corrupt Practices Act ("FCPA") and similar anti-bribery laws in other
jurisdictions generally prohibit companies and their intermediaries from making
improper payments to non-U.S. officials for the purpose of obtaining or
retaining business. Our policies mandate compliance with these anti-bribery
laws. We operate in many parts of the world that have experienced governmental
corruption to some degree and, in certain circumstances, strict compliance with
anti-bribery laws may conflict with local customs and practices. We train our
key staff concerning FCPA issues, and we also inform many of our partners,
subcontractors, agents and others who work for us or on our behalf that they
must comply with FCPA requirements. We
cannot
assure you that our internal controls and procedures always will protect us from
the reckless or criminal acts committed by our employees or, in particular,
our subcontractors and agents. If we are found to be liable for FCPA
violations (either due to our own acts or our inadvertence, or due to the acts
or inadvertence of others), we could suffer from criminal or civil penalties or
other sanctions which could have a material adverse effect on our
business.
We
have significant international activities and customers, and plan to continue
these efforts, which subject us to additional business risks, including
logistical complexity and political instability.
For the
six months ended June 29, 2008, a substantial portion of our sales were made to
customers outside of the United States. Historically, we have had significant
sales in Spain, Germany, Austria, Italy and South Korea. We currently have eight
solar cell production lines in operation, which are located at our manufacturing
facilities in the Philippines. In addition, a majority of our assembly functions
have historically been conducted by a third-party subcontractor in China. Risks
we face in conducting business internationally include:
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multiple,
conflicting and changing laws and regulations, export and import
restrictions, employment laws, regulatory requirements and other
government approvals, permits and
licenses;
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difficulties
and costs in staffing and managing foreign operations as well as cultural
differences;
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difficulties
and costs in recruiting and retaining individuals skilled in international
business operations;
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increased
costs associated with maintaining international marketing
efforts;
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potentially
adverse tax consequences associated with our permanent establishment of
operations in more countries;
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inadequate
local infrastructure;
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financial
risks, such as longer sales and payment cycles and greater difficulty
collecting accounts receivable; and
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political
and economic instability, including wars, acts of terrorism, political
unrest, boycotts, curtailments of trade and other business
restrictions.
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We
particularly face risks associated with political and economic instability and
civil unrest in the Philippines. In addition, in the Asia/Pacific region
generally, we face risks associated with tensions between countries in that
region, such as political tensions between China and Taiwan, the ongoing
discussions with North Korea regarding its nuclear weapons program, potentially
reduced protection for intellectual property rights, government-fixed foreign
exchange rates, relatively uncertain legal systems and developing
telecommunications infrastructures. In addition, some countries in this region,
such as China, have adopted laws, regulations and policies which impose
additional restrictions on the ability of foreign companies to conduct business
in that country or otherwise place them at a competitive disadvantage in
relation to domestic companies.
In
addition, although base wages are lower in the Philippines than in the United
States, wages for our employees in the Philippines are increasing, which could
result in increased costs to employ our manufacturing engineers. As of June 29,
2008, approximately 88% of our employees were located in the Philippines. We
also are faced with competition in the Philippines for employees, and we expect
this competition to increase as additional manufacturing companies enter the
market and expand their operations. In particular, there may be limited
availability of qualified manufacturing engineers. We have benefited from an
excess of supply over demand for college graduates in the field of engineering
in the Philippines. If this favorable imbalance changes due to increased
competition, it could affect the availability or cost of qualified employees,
who are critical to our performance. This could increase our costs and turnover
rates.
Currency
fluctuations in the Euro, Philippine peso or the South Korean won relative to
the U.S. dollar could decrease revenue or increase expenses.
During
the three and six months ended June 29, 2008, approximately 85% and 82%,
respectively, of our total revenue was generated outside the United States as
compared to approximately 63% and 62%, respectively, during the three and six
months ended July 1, 2007. We presently have currency exposure arising from
sales, capital equipment purchases, prepayments and customer advances
denominated in foreign currencies. A majority of our revenue is denominated in
Euros, including fixed price agreements with Solon and Conergy, and a
significant portion is denominated in U.S. dollars, while a portion of our costs
are incurred and paid in Euros and a smaller portion of our expenses are paid in
Philippine pesos and Japanese yen. In addition, our prepayments to Wacker-Chemie
AG, a polysilicon supplier, and our customer advances from Solon are denominated
in Euros.
We are
exposed to the risk of a decrease in the value of the Euro relative to the U.S.
dollar, which would decrease our total revenue. Changes in exchange rates
between foreign currencies and the U.S. dollar may adversely affect our
operating margins. For example, if these foreign currencies continue to
appreciate against the U.S. dollar, it will make it more expensive in terms of
U.S.
dollars to purchase inventory or pay expenses with foreign currencies. In
addition, currency devaluation can result in a loss to us if we hold deposits of
that currency as well as make our products, which are usually purchased with
U.S. dollars, relatively more expensive than products manufactured locally. An
increase in the value of the U.S. dollar relative to foreign currencies could
make our solar cells more expensive for international customers, thus
potentially leading to a reduction in our sales and profitability. Furthermore,
many of our competitors will be foreign companies that could benefit from such a
currency fluctuation, making it more difficult for us to compete with those
companies. We currently conduct hedging activities, which involve the use of
currency forward contracts and options. We cannot predict the impact of future
exchange rate fluctuations on our business and operating results. In the past,
we have experienced an adverse impact on our total revenue and profitability as
a result of foreign currency fluctuations.
Our
current tax holidays in the Philippines will expire within the next several
years.
We
currently benefit from income tax holiday incentives in the Philippines in
accordance with our subsidiary’s registrations with the Board of Investments and
Philippine Economic Zone Authority, which provide that we pay no income tax in
the Philippines for four years under our Board of Investments non-pioneer status
and Philippine Economic Zone Authority registrations, and six years under our
Board of Investments pioneer status registration. Our current income tax
holidays expire in 2010, and we intend to apply for extensions. However, these
tax holidays may or may not be extended. We believe that as our Philippine tax
holidays expire, (a) gross income attributable to activities covered by our
Philippine Economic Zone Authority registrations will be taxed at a 5%
preferential rate, and (b) our Philippine net income attributable to all
other activities will be taxed at the statutory Philippine corporate income tax
rate of 32%. Fiscal 2007 was the first year for which profitable operations
benefitted from the Philippine tax ruling.
Our
systems segment sales cycles for projects can be longer than our components
segment sales cycle for our solar cells and panels and may require significant
upfront investment which may not ultimately result in signing of a sales
contract and could have a material adverse effect on our business and results of
operations.
Our
systems segment sales cycles, which measure the time between its first contact
with a customer and the signing of a sales contract for a particular project,
vary substantially and average approximately eight months. Sales cycles for our
systems segment are lengthy for a number of reasons, including:
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our
customers often delay purchasing decisions until their eligibility for an
installation rebate is confirmed, which generally takes several
months;
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the
long time required to secure adequate financing for system purchases on
terms acceptable to customers; and
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the
customer’s review and approval processes for system purchases are lengthy
and time consuming.
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As a
result of these long sales cycles, we must make significant upfront investments
of resources in advance of the signing of sales contracts and the receipt of any
revenues, most of which are not recognized for several additional months
following contract signing. Accordingly, we must focus our limited resources on
sales opportunities that we believe we can secure. Our inability to enter into
sales contracts with potential customers after we make such an investment could
have a material adverse effect on our business and results of
operations.
We
generally do not have long-term agreements with our customers and accordingly
could lose customers without warning.
In our
components segment, our solar cells and solar panel products are generally not
sold pursuant to long-term agreements with customers, but instead are sold on a
purchase order basis. In our systems segment, we typically contract to perform
large projects with no assurance of repeat business from the same customers in
the future. Although we believe that cancellations on our purchase orders to
date have been insignificant, our customers may cancel or reschedule purchase
orders with us on relatively short notice. Cancellations or rescheduling of
customer orders could result in the delay or loss of anticipated sales without
allowing us sufficient time to reduce, or delay the incurrence of, our
corresponding inventory and operating expenses. In addition, changes in
forecasts or the timing of orders from these or other customers expose us to the
risks of inventory shortages or excess inventory. This, in addition to the
completion and non-repetition of large systems projects, in turn could cause our
operating results to fluctuate.
Our
systems segment could be adversely affected by seasonal trends and construction
cycles.
Our
systems segment is subject to significant industry-specific seasonal
fluctuations. Its sales have historically reflected these seasonal trends with
the largest percentage of total revenues being realized during the last two
calendar quarters. Low seasonal demand normally results in reduced shipments and
revenues in the first two calendar quarters. There are various reasons for this
seasonality, mostly related to economic incentives and weather patterns. For
example, in European countries with feed-in tariffs, the construction of solar
power systems may be concentrated during the second half of the
calendar year, largely due to the annual reduction of the applicable minimum
feed-in tariff and the fact that the coldest winter months are January through
March. In the United States, customers will sometimes make purchasing decisions
towards the end of the year in order to take advantage of tax credits or for
other budgetary reasons.
In
addition, to the extent we are successful in implementing our strategy to enter
the new home development market, we expect the seasonality of our business and
financial results to become more pronounced as sales in this market are often
tied to construction market demands which tend to follow national trends in
construction, including declining sales during cold weather months.
The
new homebuilder residential market may increase our exposure to certain
risks.
Our
systems segment is active in the residential market by selling our systems to
large production homebuilders. As part of this strategy, we developed SunTile®,
a product that integrates a solar panel into a roof tile. The current credit
crisis and demand decline in the housing market in the United States is
adversely affecting sales of new homes and may have a negative impact on our
near term ability to generate material revenue and earnings in this
market.
The
residential construction market has also characteristics that may increase our
exposure to certain risks we currently face or expose us to new risks. These
risks include increased seasonality, sensitivity to interest rates and other
macroeconomic conditions, as well as enhanced legal exposure. In particular, new
home developments often result in class action litigation when one or more homes
within a development experiences construction problems. Unlike our systems
segment commercial business, where we typically act as the general contractor,
we will be generally acting as subcontractor to homebuilders overseeing the
development projects. In many instances subcontractors may be held liable for
work of the homebuilder or other subcontractors. In addition, homebuilders often
require onerous indemnification obligations that effectively allocate most of
the potential liability from homeowner or class action lawsuits to
subcontractors, including us. Insurance policies for residential work have
significant limitations on coverage that may render such policies inapplicable
to these lawsuits. If we are not successful in entering the new residential
construction market, or if as a result of the litigation and indemnification
risks associated with such market, we incur significant costs, our business and
results of operations could be materially adversely affected.
If
we fail to successfully develop and introduce new products and services or
increase the efficiency of our products, we will not be able to compete
effectively, and our ability to generate revenues will suffer; technological
changes in the solar power industry could render our solar power products
uncompetitive or obsolete, which could reduce our market share and cause our
sales to decline.
As we
introduce new or enhanced products or integrate new technology into our
products, we will face risks relating to such transitions including, among other
things, technical challenges, disruption in customers’ ordering patterns,
insufficient supplies of new products to meet customers’ demand, possible
product and technology defects arising from the integration of new technology
and a potentially different sales and support environment relating to any new
technology. Our failure to manage the transition to newer products or the
integration of newer technology into our products could adversely affect our
business’ operating results and financial results.
The solar
power market is characterized by continually changing technology requiring
improved features, such as increased efficiency and higher power output and
improved aesthetics. This will require us to continuously develop new solar
power products and enhancements for existing solar power products to keep pace
with evolving industry standards and changing customer requirements.
Technologies developed by our direct competitors, including thin film solar
panels, concentrating solar cells, solar thermal electric and other solar
technologies, may provide power at lower costs.
Our
failure to further refine our technology and develop and introduce new solar
power products could cause our products to become uncompetitive or obsolete,
which could reduce our market share and cause our sales to decline. We will need
to invest significant financial resources in research and development to
maintain our market position, keep pace with technological advances in the solar
power industry and effectively compete in the future.
Evaluating
our business and future prospects may be difficult due to our limited history in
producing and shipping solar cells and solar panels in commercial
volumes.
There is
limited historical information available about our company upon which investors
can base their evaluation of our business and prospects. Although we began to
develop and commercialize high-efficiency solar cell technology for use in solar
concentrators in 1988 and began shipping product from our pilot manufacturing
facility in 2003, we shipped our first commercial A-300 solar cells from our
Philippines manufacturing facility in late 2004. Relative to the entire solar
industry, we have shipped only a limited number of solar cells and solar panels
and have recognized limited revenue. Our future success will require us to
continue to scale our Philippines facilities significantly beyond their current
capacity and successfully build and deploy our new solar cell manufacturing
facility in Malaysia. In addition, our business model, technology and ability to
achieve satisfactory manufacturing yields at higher volumes are unproven at
significant scale. As a result, investors should consider our business and
prospects in light of the risks, expenses and challenges that we will face as an
early-stage company seeking to develop and manufacture new products in a rapidly
growing market.
Our
reliance on government programs to partially fund our research and development
programs could impair our ability to commercialize our solar power products and
services and increase our research and development expenses.
We intend
to continue our policy of selectively pursuing contract research, product
development and market development programs funded by various agencies of the
federal and state governments to complement and enhance our own resources.
Funding from government grants is generally recorded as an offset to our
research and development expense. During the six months ended June 29, 2008 and
July 1, 2007, funding from government grants, agreements and contracts offset
approximately 28% and 15%, respectively, our total research and development
expense, excluding in-process research and development. In addition, in the
third quarter of 2007, we signed a Solar America Initiative agreement with the
U.S. Department of Energy in which we were awarded $8.5 million in the first
budgetary period. Total funding for the three-year effort is estimated to be
$24.7 million. Our cost share requirement under this program, including
lower-tier subcontract awards, is anticipated to be $27.9 million.
These
government agencies may not continue their commitment to programs relevant to
our development projects. Moreover, we may not be able to compete successfully
to obtain funding through these or other programs. A reduction or discontinuance
of these programs or of our participation in these programs would materially
increase our research and development expenses, which would adversely affect our
profitability and could impair our ability to develop our solar power products
and services. In addition, contracts involving government agencies may be
terminated or modified at the convenience of the agency. Many of our systems
segment government awards also contain royalty provisions that require it to pay
certain amounts based on specified formulas. Government awards are subject to
audit and governmental agencies may dispute its royalty calculations. Any such
dispute could result in fines, increased royalty payments, cancellation of the
agreement or other penalties, which could have material adverse effect on our
business and results of operations.
Our
systems segment government-sponsored research contracts require that we provide
regular written technical updates on a monthly, quarterly or annual basis, and,
at the conclusion of the research contract, a final report on the results of our
technical research. Because these reports are generally available to the public,
third parties may obtain some aspects of its sensitive confidential information.
Moreover, the failure to provide accurate or complete reports may provide the
government with rights to any intellectual property arising from the related
research. Funding from government awards also may limit when and how we can
deploy our products and services developed under those contracts. For example,
government awards may require that the manufacturing of products developed with
federal funding be substantially conducted in the United States. In addition,
technology and intellectual property that we develop with government funding
provides the government with “march-in” rights. March-in rights refer to the
right of the government or a government agency to require us to grant a license
to the developed technology or products to a responsible applicant or, if it
refuses, the government may grant the license itself. The government can
exercise its march-in rights if it determines that action is necessary because
we fail to achieve practical application of the technology or because action is
necessary to alleviate health or safety needs, to meet requirements of federal
regulations or to give the United States industry preference. In addition,
government awards may include a provision providing the government with a
nonexclusive, nontransferable, irrevocable, paid-up license to practice or have
practiced each subject invention developed under an award throughout the world
by or on behalf of the government. Additional rights to technical data may
be granted to the government in recognition of funding.
Because
the markets in which we compete are highly competitive, we may not be able to
compete successfully and we may lose or be unable to gain market
share.
Our
components solar products compete with a large number of competitors in the
solar power market, including BP Solar International Inc., Evergreen Solar,
Inc., First Solar, Inc., Kyocera Corporation, Mitsubishi Electric Corporation,
Motech Industries, Inc., Q-Cells AG, Sanyo Corporation, Sharp Corporation,
SolarWorld AG and Suntech Power Holdings Co., Ltd. In addition, universities,
research institutions and other companies such as First Solar have brought to
market alternative technologies such as thin films and concentrators, which may
compete with our technology in certain applications. We expect to face increased
competition in the future. Further, many of our competitors are developing and
are currently producing products based on new solar power technologies that may
ultimately have costs similar to, or lower than, our projected
costs.
Our
systems solar power products and services also compete against other power
generation sources including conventional fossil fuels supplied by utilities,
other alternative energy sources such as wind, biomass, CSP and emerging
distributed generation technologies such as micro-turbines, sterling engines and
fuel cells. In the large-scale on-grid solar power systems market, we will face
direct competition from a number of companies that manufacture, distribute, or
install solar power systems. Many of these companies sell our products as well
as their own or those of other manufacturers. Our systems segment primary
competitors in the United States include BP Solar International, Inc., a
subsidiary of BP p.l.c., Conergy Inc., DT Solar, EI Solutions, Inc., GE Energy,
a subsidiary of General Electric Corporation, Schott Solar, Inc., Solar
Integrated Technologies, Inc., SPG Solar, Inc., Sun Edison LLC, Sunlink
Corporation, SunTechnics Installation & Services, Inc., Thompson
Technology Industries, Inc. and WorldWater & Power Corporation. Our
systems segment primary competitors in Europe include BP Solar, City Solar AG,
Conergy (through its subsidiaries AET Alternitive Energie Technik GmbH,
SunTechnics Solartechnik GmbH and voltwerk AG), PV-Systemtechnik Gbr, SAG
Solarstrom AG, Solon AG and Taufer Solar GmbH. In addition, we will occasionally
compete with distributed generation equipment suppliers such as Caterpillar,
Inc. and Cummins, Inc. Other existing and potential competitors in
the solar
power market include universities and research institutions. We also expect that
future competition will include new entrants to the solar power market offering
new technological solutions. As we enter new markets and pursue additional
applications for our systems products and services, we expect to face increased
competition, which may result in price reductions, reduced margins or loss of
market share.
Competition
is intense, and many of our competitors have significantly greater access to
financial, technical, manufacturing, marketing, management and other resources
than we do. Many also have greater name recognition, a more established
distribution network and a larger installed base of customers. In addition, many
of our competitors have well-established relationships with our current and
potential suppliers, resellers and their customers and have extensive knowledge
of our target markets. As a result, these competitors may be able to devote
greater resources to the research, development, promotion and sale of their
products and respond more quickly to evolving industry standards and changing
customer requirements than we will be able to. Consolidation or strategic
alliances among such competitors may strengthen these advantages and may provide
them greater access to customers or new technologies. Following any separation
of our company from Cypress, customer perception of these differences may be
magnified. We may also face competition from some of our systems
segment resellers, who may develop products internally that compete with our
systems product and service offerings, or who may enter into strategic
relationships with or acquire other existing solar power system providers. To
the extent that government funding for research and development grants, customer
tax rebates and other programs that promote the use of solar and other renewable
forms of energy are limited, we will compete for such funds, both directly and
indirectly, with other renewable energy providers and their
customers.
If we
cannot compete successfully in the solar power industry, our operating results
and financial condition will be adversely affected. Furthermore, we expect
competition in systems markets to increase, which could result in lower prices
or reduced demand for our systems services and have a material adverse effect on
our business and results of operations.
We
expect to continue to make significant capital expenditures, particularly
in our manufacturing facilities, and if adequate funds are not available or
if the covenants in our credit agreements impair our ability to raise
capital when needed, our ability to expand our manufacturing capacity and
our business will suffer.
We expect
to continue to make significant capital expenditures, particularly in our
manufacturing facilities, including, for example, through building purchases or
long-term leases. On May 19, 2008, we announced plans to construct our third
solar cell manufacturing facility in Malaysia with an expected nameplate rating
in excess of one gigawatt of annual generating capacity. The Malaysian
Industrial Development Authority, or MIDA, is arranging an incentive package for
SunPower to promote SunPower’s investment in the new manufacturing
plant. The incentive package is conditional upon SunPower meeting
certain capital investment, employment, and research and development expenditure
commitments.
We
anticipate that our expenses will increase substantially in the foreseeable
future as we expand our manufacturing operations, hire additional
personnel, pay more or make advance payments for raw material, especially
polysilicon, increase our sales and marketing efforts, invest in joint
ventures and acquisitions, and continue our research and development
efforts with respect to our products and manufacturing technologies. We
expect total capital expenditures of approximately $300.0 million in 2008
as we continue to increase our solar cell and solar panel manufacturing
capacity. These expenditures would be greater if we decide to
bring capacity on line more rapidly. We believe that our current cash and
cash equivalents, cash generated from operations and, if necessary, borrowings
under our credit agreement with Wells Fargo Bank, N.A., or Wells Fargo, and/or
potential availability of future sources of funding will be sufficient to fund
our capital and operating expenditures over the next 12 months. However, if our
financial results or operating plans change from our current assumptions, or if
the holders of our outstanding convertible debentures elect to convert the
debentures, we may not have sufficient resources to support our business plan.
For more information on our credit agreement with Wells Fargo and our
outstanding convertible debentures, please see “Debt and Credit Sources” and
“Liquidity” within “Item 2: Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” If our capital resources are insufficient
to satisfy our liquidity requirements, we may seek to sell
additional equity securities or debt securities or obtain other debt
financing. We may also issue equity securities in the future to suppliers of raw
materials in order to secure adequate materials to satisfy our production
needs. The sale of additional equity securities or convertible debt
securities would result in additional dilution to our stockholders. Cypress
Semiconductor Corporation, which retains voting control over us, may be
unwilling to permit us to engage in dilutive financing events for tax-related or
other reasons. In addition, following any tax-free spin-off of our shares by
Cypress, our ability to issue equity for financing purposes would be subject to
limits as described in “Our agreements with
Cypress require us to indemnify Cypress for certain tax liabilities. These
indemnification obligations or related considerations may limit our ability to
obtain additional financing, participate in future acquisitions or pursue other
business initiatives.” Additional debt would result in increased expenses
and could require us to abide by covenants that would restrict our
operations. Our credit facilities contain customary covenants and defaults,
including, among others, limitations on dividends, incurrence of
indebtedness and liens and mergers and acquisitions and may restrict our
operating flexibility. If adequate funds are not available on acceptable terms,
our ability to fund our operations, develop and expand our manufacturing
operations and distribution network, maintain our research and development
efforts or otherwise respond to competitive pressures would be significantly
impaired. See also “Risk Factors - We currently
have a significant amount of debt outstanding. Our substantial indebtedness,
along with our other contractual commitments, could adversely affect our
business, financial condition and results of operations, as well as our ability
to meet any of our payment obligations under the debentures and our other
debt.”
The
demand for products requiring significant initial capital expenditures such as
our solar power products and services are affected by general economic
conditions, such as increasing interest rates that may decrease the return on
investment for certain customers or investors in projects, which could decrease
demand for our systems products and services and which could have a material
adverse effect on our business and results of operations.
The
United States and international economies have recently experienced a period of
slow economic growth. A sustained economic recovery is uncertain. In particular,
terrorist acts and similar events, continued turmoil in the Middle East or war
in general could contribute to a slowdown of the market demand for products that
require significant initial capital expenditures, including demand for solar
cells and solar power systems and new residential and commercial buildings. If
the economic recovery slows down as a result of the recent economic, political
and social turmoil, or if there are further terrorist attacks in the United
States or elsewhere, we may experience decreases in the demand for our solar
power products, which may harm our operating results.
We have
benefited from historically low interest rates in recent years, as these rates
have made it more attractive for our customers to use debt financing to purchase
our solar power systems. Interest rates have fluctuated recently and may
eventually continue to rise, which will likely increase the cost of financing
these systems and may reduce an operating company’s profits and investors’
expected returns on investment. This risk is becoming more significant to our
systems segment, which is placing increasing reliance upon direct sales to
financial institutions which sell electricity to end customers under a power
purchase agreement. This sales model is highly sensitive to interest rate
fluctuations and the availability of liquidity, and would be adversely affected
by increases in interest rates or liquidity constraints. Rising interest rates
may also make certain alternative investments more attractive to investors, and
therefore lead to a decline in demand for our solar power systems, which could
have a material adverse effect on our business and results of
operations.
One
of our key products, the PowerTracker®, now referred to as SunPower tracker, was
acquired through an assignment and acquisition of the patents associated with
the product from a third-party individual, and if we are unable to continue to
use this product, our business, prospects, operating results and financial
condition would be materially harmed.
In
September 2002, PowerLight entered into a Technology Assignment and Services
Agreement and other ancillary agreements, subsequently amended in December 2005,
with Jefferson Shingleton and MaxTracker Services, LLC, a New York limited
liability company controlled by Mr. Shingleton. These agreements form the
basis for its intellectual property rights in its PowerTracker® products. Under
such agreements, as later amended, Mr. Shingleton assigned to PowerLight
all right, title and interest in his MaxTracker ™, MaxRack ™, MaxRack Ballast ™
and MaxClip ™ products and all related intellectual property rights.
Mr. Shingleton is obligated to provide consulting services to PowerLight
related to such technology until December 31, 2012 and is required to
assign to PowerLight any enhancements he makes to the technology while providing
such consulting services. Mr. Shingleton retains a first security interest
in the patents and patent applications assigned until the earlier of the
expiration of the patents, full payment by PowerLight to Mr. Shingleton of
all of the royalty obligations under the Technology Assignment and Services
Agreement, or the termination of the Technology Assignment and Services
Agreement. In the event of PowerLight’s’ default under the Technology Assignment
and Services Agreement, MaxTracker Services and Mr. Shingleton may
terminate the agreements and the related assignments and cause the intellectual
rights assigned to it to be returned to Mr. Shingleton or MaxTracker
Services, including patents related to SunPower tracker. In addition, upon such
termination, PowerLight must grant Mr. Shingleton a perpetual,
non-exclusive, royalty-free right and license to use, sell, and otherwise
exploit throughout the world any intellectual property MaxTracker Services or
Mr. Shingleton developed during the provision of consulting services to
PowerLight. Events of default by PowerLight which could enable
Mr. Shingleton or Max Tracker Services to terminate the agreements and the
related assignments and cause the intellectual rights assigned to it to be
returned to Mr. Shingleton or MaxTracker Services include the
following:
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if PowerLight
files a petition in bankruptcy or equivalent order or petition under the
laws of any jurisdiction;
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if
a petition in bankruptcy or equivalent order or petition under the laws of
any jurisdiction is filed against it which is not dismissed within 60 days
of such filing;
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if
PowerLight’s assets are assigned for the benefit of
creditors;
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if PowerLight
voluntarily or involuntarily
dissolves;
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if PowerLight
fails to pay any amount due under the agreements when due and does not
remedy such failure to pay within 10 days of written notice of such
failure to pay; or
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if PowerLight
defaults in the performance of any of its material obligations under the
agreements when required (other than payment of amounts due under the
agreements), and such failure is not remedied within 30 days of written
notice to it of such default from Mr. Shingleton or MaxTracker
Services. However, if such a default can reasonably be cured after the
30-day period, and PowerLight commences cure of such default within
30-day period and diligently prosecutes that cure to completion, such
default does not trigger a termination right unless and
until PowerLight ceases commercially reasonable efforts to cure such
default.
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If we are
unable to continue to use and sell SunPower tracker as a result of the
termination of the agreements and the related assignment or any other reason,
our business, prospects, operating results and financial condition would be
materially harmed.
We
are dependent on our intellectual property, and we may face intellectual
property infringement claims that could be time-consuming and costly to defend
and could result in the loss of significant rights.
From time
to time, we, our respective customers or third-parties with whom we work may
receive letters, including letters from various industry participants, alleging
infringement of their patents. Although we are not currently aware of any
parties pursuing or intending to pursue infringement claims against us, we
cannot assure investors that we will not be subject to such claims in the
future. Additionally, we are required by contract to indemnify some of our
customers and our third-party intellectual property providers for certain costs
and damages of patent infringement in circumstances where our solar cells are a
factor creating the customer’s or these third-party providers’ infringement
liability. This practice may subject us to significant indemnification claims by
our customers and our third-party providers. We cannot assure investors that
indemnification claims will not be made or that these claims will not harm our
business, operating results or financial condition. Intellectual property
litigation is very expensive and time-consuming and could divert management’s
attention from our business and could have a material adverse effect on our
business, operating results or financial condition. If there is a successful
claim of infringement against us, our customers or our third-party intellectual
property providers, we may be required to pay substantial damages to the party
claiming infringement, stop selling products or using technology that contains
the allegedly infringing intellectual property, or enter into royalty or license
agreements that may not be available on acceptable terms, if at all. Parties
making infringement claims may also be able to bring an action before the
International Trade Commission that could result in an order stopping the
importation into the United States of our solar cells. Any of these judgments
could materially damage our business. We may have to develop non-infringing
technology, and our failure in doing so or in obtaining licenses to the
proprietary rights on a timely basis could have a material adverse effect on our
business.
We
have filed, and, may continue to file claims against other parties for
infringing our intellectual property that may be very costly and may not be
resolved in our favor.
To
protect our intellectual property rights and to maintain our competitive
advantage, we have, and may continue to, file suits against parties who we
believe infringe our intellectual property. Intellectual property litigation is
expensive and time consuming and could divert management’s attention from our
business and could have a material adverse effect on our business, operating
results or financial condition, and our enforcement efforts may not be
successful. Our participation in intellectual property enforcement actions may
negatively impact our financial results.
We
may not be able to prevent others from using the SunPower name or similar marks
in connection with their solar power products which could adversely affect the
market recognition of our name and our revenue.
“SunPower”
is our registered trademark in the United States and the European Community for
use with solar cells and solar panels. We are seeking similar registration of
the “SunPower” trademark in foreign countries but we may not be successful in
some of these jurisdictions. In the foreign jurisdictions where we are unable to
obtain this registration or have not tried, others may be able to sell their
products using trademarks compromising or incorporating “SunPower,” which could
lead to customer confusion. In addition, if there are jurisdictions where
another proprietor has already established trademark rights in marks containing
“SunPower,” we may face trademark disputes and may have to market our products
with other trademarks, which also could hurt our marketing efforts. We may
encounter trademark disputes with companies using marks which are confusingly
similar to the SunPower mark which if not resolved favorably could cause our
branding efforts to suffer. In addition, we may have difficulty in establishing
strong brand recognition with consumers if others use similar marks for similar
products.
We hold
registered trademarks for SunPower®, PowerLight®, PowerGuard®, PowerTracker®,
SunTile®, PowerTilt® and Smarter Solar® in certain countries. We have not
registered, and may not be able to register, these trademarks in other key
countries.
We
rely substantially upon trade secret laws and contractual restrictions to
protect our proprietary rights, and, if these rights are not sufficiently
protected, our ability to compete and generate revenue could
suffer.
We seek
to protect our proprietary manufacturing processes, documentation and other
written materials primarily under trade secret and copyright laws. We also
typically require employees and consultants with access to our proprietary
information to execute confidentiality agreements. The steps taken by us to
protect our proprietary information may not be adequate to prevent
misappropriation of our technology. In addition, our proprietary rights may not
be adequately protected because:
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people
may not be deterred from misappropriating our technologies despite the
existence of laws or contracts prohibiting
it;
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policing
unauthorized use of our intellectual property may be difficult, expensive
and time-consuming, and we may be unable to determine the extent of any
unauthorized use; and
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the
laws of other countries in which we market our solar cells, such as some
countries in the Asia/Pacific region, may offer little or no protection
for our proprietary technologies.
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Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technologies could enable third parties to benefit from our technologies without
paying us for doing so. Any inability to adequately protect our proprietary
rights could harm our ability to compete, to generate revenue and to grow our
business.
We
may not obtain sufficient patent protection on the technology embodied in the
solar cells or solar system components we currently manufacture and market,
which could harm our competitive position and increase our
expenses.
Although
we substantially rely on trade secret laws and contractual restrictions to
protect the technology in the solar cells and solar system components we
currently manufacture and market, our success and ability to compete in the
future may also depend to a significant degree upon obtaining patent protection
for our proprietary technology. As of June 29, 2008, including the United States
and foreign countries, we owned 85 issued patents, jointly owned another four
patents, and had over 120 pending patent applications across the entire company.
These patent applications cover aspects of the technology in the solar cells we
currently manufacture and market. Material patents that relate to our systems
products and services primarily relate to our rooftop mounting products and
ground-mounted tracking products. We intend to continue to seek patent
protection for those aspects of our technology, designs, and methodologies and
processes that we believe provide significant competitive
advantages.
Our
patent applications may not result in issued patents, and even if they result in
issued patents, the patents may not have claims of the scope we seek. In
addition, any issued patents may be challenged, invalidated or declared
unenforceable. The term of any issued patents would be 20 years from their
filing date and if our applications are pending for a long time period, we may
have a correspondingly shorter term for any patent that may issue. Our present
and future patents may provide only limited protection for our technology and
may not be sufficient to provide competitive advantages to us. For example,
competitors could be successful in challenging any issued patents or,
alternatively, could develop similar or more advantageous technologies on their
own or design around our patents. Also, patent protection in certain foreign
countries may not be available or may be limited in scope and any patents
obtained may not be as readily enforceable as in the United States, making it
difficult for us to effectively protect our intellectual property from misuse or
infringement by other companies in these countries. Our inability to obtain and
enforce our intellectual property rights in some countries may harm our
business. In addition, given the costs of obtaining patent protection, we may
choose not to protect certain innovations that later turn out to be
important.
If
our ability to effectively obtain patents is decreased due to changes in patent
laws or changes in the rules propagated by the US Patent and Trademark Office,
or if we need to re-file some of our patent applications due to newly discovered
prior art, the value of our patent portfolio and the revenue we derive from
products protected by the patents may significantly decrease.
Current
legislation is being considered which would make numerous changes to the patent
laws, including forcing patent litigation to be filed in the defendant’s home
venue, reducing damage awards for infringement, limiting enhanced damages, an
expanded post-grant opposition procedure, expanding rights for third parties to
submit prior art and changing to a first-to-file
system. Additionally, based on situations such as newly discovered
prior art, we may need to seek re-examination some of our patent
applications. If our ability to effectively obtain patents is decreased due to
these or similar changes, or if we need to re-file some of our patent
applications due to newly discovered prior art, the value of our patent
portfolio and the revenue we derive from products protected by the patents may
significantly decrease.
Our
success depends on the continuing contributions of our key
personnel.
We rely
heavily on the services of our key executive officers and the loss of services
of any principal member of our management team could adversely impact our
operations. In addition, our technical personnel represent a significant asset
and serve as the source of our technological and product innovations. We believe
our future success will depend upon our ability to retain these key employees
and our ability to attract and retain other skilled managerial, engineering and
sales and marketing personnel. However, we cannot guarantee that any employee
will remain employed at the Company for any definite period of time since all of
our employees, including our key executive officers, serve at-will and may
terminate their employment at any time for any reason.
In July
2008, Emmanuel Hernandez has communicated his intent to retire as Chief
Financial Officer. Mr. Hernandez has agreed to remain fully engaged
in his current role until a new Chief Financial Officer is appointed, into 2009
if needed. Mr. Hernandez was previously identified in our 2008 proxy
statement as one of the our named executive officers.
We
may be harmed by liabilities arising out of our acquisition of SP Systems and
the indemnity the selling stockholders have agreed to provide may be
insufficient to compensate us for these damages.
On
January 10, 2007, we completed our acquisition of SP Systems, formerly
known as PowerLight Corporation. SP Systems’ former stockholders made
representations and warranties to us in the acquisition agreement, including
those relating to
the
accuracy of its financial statements, the absence of litigation and
environmental matters and the consents needed to transfer permits, licenses and
third-party contracts in connection with our acquisition of SP Systems. To the
extent that we are harmed by a breach of these representations and warranties,
SP Systems’ former stockholders have agreed to indemnify us for monetary damages
from an escrowed proceeds account. In most cases we are required to absorb
approximately the first $2.4 million before we are entitled to
indemnification.
As of
December 30, 2007, the escrow proceeds account was comprised of approximately
$23.7 million in cash and approximately 0.7 million shares of our class A common
stock, with a total aggregate value of $118.1 million. Following the first
anniversary of the closing date, we authorized the release of approximately
one-half of the original escrow amount, leaving approximately $12.9 million in
cash and approximately 0.4 million shares of our class A common stock, with a
total aggregate value of $38.9 million as of June 29, 2008. Our rights to
recover damages under several provisions of the acquisition agreement also
expired on the first anniversary of the closing date. As a result, we
are now entitled to recover only limited types of losses, and our recovery will
be limited to the amount available in the escrow fund at the time of a claim.
The amount available in the escrow fund will be progressively reduced to zero on
each anniversary of the closing date over a period of five years since the date
of acquisition. We may incur liabilities from this acquisition which are not
covered by the representations and warranties set forth in the agreement or
which are non-monetary in nature. Consequently, our acquisition of SP Systems
may expose us to liabilities for which we are not entitled to indemnification or
our indemnification rights are insufficient.
Charges
to earnings resulting from the application of the purchase method of accounting
to the acquisition may adversely affect the market value of our class A common
stock.
In
accordance with Statement of Financial Accounting Standards, or SFAS, No. 141,
“Business Combinations”, or SFAS No. 141, we accounted for the acquisition using
the purchase method of accounting. Further, a portion of the purchase price paid
in the acquisition has been allocated to in-process research and development.
Under the purchase method of accounting, we allocated the total purchase price
to SP Systems’ net tangible assets and intangible assets based on their fair
values as of the date of completion of the acquisition and recorded the excess
of the purchase price over those fair values as goodwill. We will incur
amortization expense over the useful lives of amortizable intangible assets
acquired in connection with the acquisition. In addition, to the extent the
value of goodwill and long lived assets becomes impaired, we may be required to
incur material charges relating to the impairment of those assets. Further, we
may be impacted by nonrecurring charges related to reduced gross profit margins
from the requirement to adjust SP Systems’ inventory to fair value. Finally, we
will incur ongoing compensation charges associated with assumed options, equity
held by employees of SP Systems and subjected to equity restriction agreements,
and restricted stock granted to employees of our SP Systems business. We
estimate that these charges will be approximately $75.0 million in the
aggregate, a majority of which will be recognized in the first two years
beginning on January 10, 2007 and lesser amounts in the succeeding two years.
Any of the foregoing charges could have a material impact on our results of
operations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations”, or SFAS No. 141(R), which replaces SFAS No. 141.
SFAS No. 141(R) will significantly change the accounting for business
combinations in a number of areas including the treatment of contingent
consideration, contingencies, acquisition costs, in-process research and
development and restructuring costs. In addition, under SFAS No. 141(R),
changes in deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination after the measurement period will impact
income tax expense. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008 and will be adopted for any purchase business
combinations consummated subsequent to December 28, 2008.
Our
headquarters and other facilities, as well as the facilities of certain of our
key subcontractors, are located in regions that are subject to earthquakes and
other natural disasters.
Our
headquarters, including research and development operations, our manufacturing
facilities and the facilities of our subcontractor upon which we rely to
assemble and test our solar panels are located in countries that are subject to
earthquakes and other natural disasters. Our headquarters and research and
development operations are located in California, our manufacturing facilities
are located in the Philippines, and the facilities of our subcontractor for
assembly and test of solar panels are located in China. Since we do not have
redundant facilities, any earthquake, tsunami or other natural disaster in these
countries could materially disrupt our production capabilities and could result
in our experiencing a significant delay in delivery, or substantial shortage, of
our solar cells.
Compliance
with environmental regulations can be expensive, and noncompliance with these
regulations may result in adverse publicity and potentially significant monetary
damages and fines.
We are
required to comply with all foreign, U.S. federal, state and local laws and
regulations regarding pollution control and protection of the environment. In
addition, under some statutes and regulations, a government agency, or other
parties, may seek recovery and response costs from operators of property where
releases of hazardous substances have occurred or are ongoing, even if the
operator was not responsible for such release or otherwise at fault. We use,
generate and discharge toxic, volatile and otherwise hazardous chemicals and
wastes in our research and development and manufacturing activities. Any failure
by us to control the use of, or to restrict adequately the discharge of,
hazardous substances could subject us to potentially
significant
monetary damages and fines or suspensions in our business operations. In
addition, if more stringent laws and regulations are adopted in the future, the
costs of compliance with these new laws and regulations could be substantial. To
date such laws and regulations have not had a significant impact on our
operations, and we believe that we have all necessary permits to conduct their
respective operations as they are presently conducted. If we fail to comply with
present or future environmental laws and regulations, however, we may be
required to pay substantial fines, suspend production or cease operations. Under
our separation agreement with Cypress, we will indemnify Cypress from any
environmental liabilities associated with our operations and facilities in San
Jose, California and the Philippines.
We
maintain self-insurance for certain indemnities we have made to our officers and
directors.
Our
certificate of incorporation, by-laws and indemnification agreements require us
to indemnify our officers and directors for certain liabilities that may arise
in the course of their service to us. We primarily self-insure with respect to
potential indemnifiable claims. Although we have insured our officers and
directors against certain potential third-party claims for which we are legally
or financially unable to indemnify them, we intend to primarily self-insure with
respect to potential third-party claims which give rise to direct liability to
such third-party or an indemnification duty on our part. We currently pool our
resources with those of Cypress for self-insurance
purposes. Following any separation of our company from Cypress this
would no longer be possible and we would be subject to heightened self-insurance
risk. If we were required to pay a significant amount on account of these
liabilities for which we self-insure, our business, financial condition and
results of operations could be seriously harmed.
Changes
to financial accounting standards may affect our combined results of operations
and cause us to change our business practices.
We
prepare our financial statements to conform with U.S. GAAP. These accounting
principles are subject to interpretation by the American Institute of Certified
Public Accountants, the SEC and various bodies formed to interpret and create
appropriate accounting policies. A change in those policies can have a
significant effect on our combined reported results and may affect our reporting
of transactions completed before a change is announced. Changes to those rules
or the questioning of current practices may adversely affect our reported
financial results or the way we conducts our business. For example, accounting
policies affecting many aspects of our business, including rules relating to
employee stock option grants and existing joint ventures, have recently been
revised, or new guidance relating to outstanding convertible debt are being
proposed.
The
Financial Accounting Standards Board, or the FASB, and other agencies have made
changes to U.S. GAAP, that required U.S. companies, starting in the first
quarter of fiscal 2006, to record a charge to earnings for employee stock option
grants and other equity incentives. We may have significant and ongoing
accounting charges resulting from option grant and other equity awards that
could reduce our net income or increase our net loss. In addition, since we have
historically used equity-related compensation as a component of our total
employee compensation program, the accounting change could make the use of
equity-related compensation less attractive to us and therefore make it more
difficult to attract and retain employees. In December 2003, the FASB issued the
FASB Staff Position FASB Interpretation No. 46 “Consolidation of Variable
Interest Entities”, or FSP FIN 46(R). The accounting method under FSP FIN 46(R)
may impact our accounting for certain existing or future joint ventures or
project companies for which we retain an ownership interest. In the event that
we are deemed the primary beneficiary of a Variable Interest Entity (VIE)
subject to the accounting of FSP FIN 46(R), we may have to consolidate the
assets, liabilities and financial results of the joint venture. This could have
an adverse impact on our financial position, gross margin and operating
results.
With
respect to our existing debt securities, we are not required under U.S. GAAP as
presently in effect to record any interest or other expense in connection with
our obligation to deliver upon conversion a number of shares (or an equivalent
amount of cash) having a value in excess of the outstanding principal amount of
the debentures. We refer to this obligation as our “net share obligation”. The
accounting method for net share settled convertible securities such as ours is
currently under consideration by the FASB. In May 2008, the FASB issued
FASB Staff Position APB 14-1, which clarifies the accounting for convertible
debt instruments that may be settled in cash upon conversion. FSP APB 14-1
significantly impacts the accounting for our existing debt securities by
requiring us to separately account for the liability and equity components of
our existing debt securities in a manner that reflects interest expense equal to
our non-convertible debt borrowing rate. The new guidance is expected to cause
us to incur additional interest expense and potentially increase our cost of
capital equipment and future depreciation expense due to capitalized interest,
thereby reducing our operating results. FSP APB 14-1 is effective for fiscal
years and interim periods beginning after December 15, 2008, and retrospective
application will be required for all periods presented.
In
addition, because the 1.8 million shares of class A common stock loaned to an
affiliate of Credit Suisse Securities (USA) LLC in July 2007 must be returned to
us prior to August 1, 2027, we believe that under U.S. GAAP as presently in
effect, the borrowed shares will not be considered outstanding for the purpose
of computing and reporting our earnings per share. We have a similar belief with
respect to the 2.9 million shares of class A common stock we loaned to an
affiliate of Lehman Brothers Inc. in connection with our February 2007 offering
of 1.25% senior convertible debentures due 2027. This accounting method is also
subject to change. If we become required to treat the borrowed shares as
outstanding for purposes of computing earnings per share, our earnings per share
would be reduced. Any reduction in our earnings per share could cause our stock
price to decrease, possibly significantly.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud. As a result,
current and potential stockholders could lose confidence in our financial
reporting, which could harm our business and the trading price of our common
stock.
Section 404
of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our
internal control over financial reporting and have our independent registered
public accounting firm annually attest to the effectiveness of our internal
control over financial reporting. We have in the past discovered, and may in the
future discover, areas of our internal controls that need improvement. We are
complying with Section 404 by strengthening, assessing and testing our
system of internal controls to provide the basis for our report. However, the
continuous process of strengthening our internal controls and complying with
Section 404 is expensive and time consuming, and requires significant
management attention. We cannot be certain that these measures will ensure that
we will maintain adequate control over our financial processes and reporting, or
that we or our independent registered public accounting firm will be able to
provide the attestation and opinion required under Section 404 in our
Annual Reports on Form 10-K. If we or our independent registered public
accounting firm discover a material weakness, the disclosure of that fact, even
if quickly remedied, could reduce the market’s confidence in our financial
statements and harm our stock price. In addition, future non-compliance with
Section 404 could subject us to a variety of administrative sanctions,
including the suspension or delisting of our common stock from The Nasdaq Global
Market and the inability of registered broker-dealers to make a market in our
common stock, which would further reduce our stock price.
The
development of a unified system of control over financial reporting may take a
significant amount of management’s time and attention and, if not completed in a
timely manner, could negatively impact us.
Prior to
our acquisition of SP Systems in January 2007, SP Systems was not required to
report on the effectiveness of its internal control over financial reporting
because it was not subject to the requirements of the Securities Exchange Act of
1934, as amended, or the Exchange Act. In August 2006, the audit committee
of SP Systems received a letter from that company’s independent auditors
identifying certain material weaknesses in that company’s internal control over
financial reporting relating to that company’s audits of its Consolidated
Financial Statements for 2005, 2004 and 2003. These material weaknesses included
problems with financial statement close processes and procedures, inadequate
accounting resources, unsatisfactory application of the percentage-of-completion
accounting method, inaccurate physical inventory counts, incorrect accounting
for complex capital transactions and inadequate disclosure of related party
transactions. In addition, SP Systems had to restate its 2004 and 2003 financial
statements to correct previously reported amounts primarily related to its
contract revenue, contract costs, accrued warranty, California state sales taxes
and inventory items. In July 2007, subsequent to our acquisition of SP
Systems, its independent auditors completed their audit of SP Systems’ 2006
financial statements. In connection with that audit, our audit committee
received a letter from the independent auditors of SP Systems identifying
significant deficiencies in SP Systems’ internal control over financial
reporting.
As we
would for any other significant deficiencies identified by our external auditors
from time to time, we have begun remediation efforts with respect to the
significant deficiencies identified by SP Systems’ independent auditors.
Although initiated, our plans to improve these internal controls and processes
are not complete. While we expect to complete this remediation process as
quickly as possible, doing so depends on several factors beyond our control,
including the hiring of additional qualified personnel and, as a result, we
cannot at this time estimate how long it will take to complete the steps
identified above. Our management will continue to evaluate the effectiveness of
the control environment in our systems segment as well the Company overall and
will continue to develop and enhance internal controls. We cannot assure
investors that the measures we have taken to date or any future measures will
remediate the significant deficiencies reported by the Company’s independent
auditors. Any failure to develop or maintain effective controls, or any
difficulties encountered in their implementation or improvement, could harm our
operating results or cause us to fail to meet our reporting obligations and may
result in a restatement of our prior period financial statements. Ineffective
internal controls could also cause investors to lose confidence in our reported
financial information, which would likely have a negative effect on the trading
price of our securities.
Our
report on internal control over financial reporting in our annual reports on
Form 10-K for the fiscal years ended December 30, 2007 and
December 31, 2006 did not include an assessment of SP Systems’ internal
controls. We are not required to include SP Systems, which now makes up our
systems segment, in our report on internal controls until our annual report on
Form 10-K for the fiscal year ending December 28, 2008. Unanticipated
factors may hinder the effectiveness or delay the integration of our combined
internal control systems post-acquisition. We cannot be certain as to whether we
will be able to establish an effective, unified system of internal controls over
financial reporting in a timely manner, or at all.
Our
credit agreement with Wells Fargo contains covenant restrictions that may limit
our ability to operate our business.
Our
Credit Agreement with Wells Fargo contains, and any of our other future debt
agreements may contain, covenant restrictions that limit our ability to operate
our business, including restrictions on our ability to:
• incur
additional debt or issue guarantees;
• create
liens;
• make
certain investments or acquisitions;
• enter
into transactions with our affiliates;
• sell
certain assets;
• redeem
capital stock or make other restricted payments;
• declare
or pay dividends or make other distributions to stockholders; and
• merge
or consolidate with any person.
In
addition, our credit agreement contains additional affirmative and negative
covenants that are more restrictive than those contained in the indenture
governing the debentures. Our ability to comply with these covenants is
dependent on our future performance, which will be subject to many factors, some
of which are beyond our control, including prevailing economic
conditions.
As a
result of these covenants, our ability to respond to changes in business and
economic conditions and to obtain additional financing, if needed, may be
significantly restricted, and we may be prevented from engaging in transactions
that might otherwise be beneficial to us. In addition, our failure to comply
with these covenants could result in a default under the debentures and our
other debt, which could permit the holders to accelerate such debt. If any of
our debt is accelerated, we may not have sufficient funds available to repay
such debt.
If
the recent worsening of credit market conditions continues or increases, it
could have a material adverse impact on our investment portfolio and on our
sales of residential solar systems.
Recent
U.S. sub-prime mortgage defaults have had a significant impact across various
sectors of the financial markets, causing global credit and liquidity issues.
Beginning in February 2008, the auction rate securities market experienced a
significant increase in the number of failed auctions, resulting from a lack of
liquidity, which occurs when sell orders exceed buy orders, and does not
necessarily signify a default by the issuer. As of June 29, 2008, we held five
auction rate securities totaling $25.1 million. As of August 8, 2008, all
auction rate securities invested in at June 29, 2008 had failed to clear at
auctions. These auction rate securities are typically over collateralized
and secured by pools of student loans originated under the Federal Family
Education Loan Program, or FFELP, and are guaranteed by the U.S. Department of
Education, and insured. In addition, all auction rate securities held are rated
by one or more of the Nationally Recognized Statistical Rating Organizations, or
NRSRO, as triple-A. For failed auctions, we continue to earn interest on these
investments at the maximum contractual rate as the issuer is obligated under
contractual terms to pay penalty rates should auctions fail. In the event we
need to access these funds, we will not be able to do so until a future auction
is successful, the issuer redeems the securities, a buyer is found outside of
the auction process or the securities mature. If these auction rate securities
are unable to successfully clear at future auctions or issuers do not redeem the
securities, we may be required to adjust the carrying value of the securities
and record an impairment charge. If we determine that the fair value of these
auction rate securities is temporarily impaired, we would record a temporary
impairment within Condensed Consolidated Statements of Comprehensive Income
(Loss), a component of stockholders' equity. If it is determined that the
fair value of these securities is other-than-temporarily impaired, we would
record a loss in our Condensed Consolidated Statements of Operations, which
could materially adversely impact our results of operations and financial
condition.
Sales of
our solar systems to new homebuilders, residential and commercial customers is
also affected by the availability of credit financing and the general strength
of the housing market and the overall economy. Continued distress in the
credit markets, the housing market and the overall economy could materially
adversely impact our results of operations and financial condition.
We
are in the process of implementing a new enterprise resource planning (ERP)
system to manage our worldwide financial, accounting and operations
reporting.
We have
been preparing for the ERP system implementation for over a year and are taking
appropriate measures to ensure the successful and timely implementation
including but not limited to hiring qualified consultants and performing
extensive testing. However, implementations of this scope have inherent risks
that in the extreme could lead to a disruption in our financial, accounting and
operations reporting as well as the inability to obtain access to key financial
data.
Risks
Related to Our Debentures and Class A Common Stock
Conversion
of our outstanding debentures will dilute the ownership interest of existing
stockholders, including holders who had previously converted their
debentures.
To the
extent we issue class A common stock upon conversion of debentures, the
conversion of some or all of such debentures will dilute the ownership interests
of existing stockholders, including holders who had previously converted their
debentures. Any sales in the public market of the class A common stock
issuable upon such conversion could adversely affect prevailing market prices of
our class A common stock. In addition, the existence of our outstanding
debentures may encourage short selling of our common stock by market
participants who expect that the conversion of the debentures could depress the
price of our class A common stock.
As of the
first trading day of the third quarter in fiscal 2008, holders of the 1.25%
outstanding debentures were able to exercise their right to convert the
debentures any day in that fiscal quarter because the closing price of our class
A common stock on at least 20 of the last 30 trading days during the fiscal
quarter ending June 29, 2008 has equaled or exceeded $70.94, which represents
more than 125% of the applicable conversion price for our 1.25% outstanding
debentures. Because the closing price of our class A common stock on at least 20
of the last 30 trading days during the fiscal quarter ending June 29, 2008 did
not equal or exceed $102.80, or 125% of the applicable conversion price
governing the 0.75% outstanding debentures, holders of the 0.75% outstanding
debentures are unable to exercise their right to convert the debentures, based
on the stock trading price trigger, any day in the third fiscal quarter
beginning on June 30, 2008. This test is repeated each fiscal quarter, and prior
to August 1, 2025, holders of our outstanding debentures may only exercise their
right to convert during a fiscal quarter in which this test is met. After August
1, 2025, the debentures are convertible at any time.
In the
event of conversion by holders of the outstanding debentures, the principal
amount must be settled in cash and to the extent that the conversion obligation
exceeds the principal amount of any debentures converted, we must satisfy the
remaining conversion obligation of the February 2007 debentures in shares of our
class A common stock, and we maintain the right to satisfy the remaining
conversion obligation of the July 2007 debentures in shares of our class A
common stock or cash. We intend to fund such obligations, if any, through
existing cash and cash equivalents, cash generated from operations and, if
necessary, borrowings under our credit agreement with Wells Fargo and/or
potential availability of future sources of funding.
As of
June 29, 2008, we had cash and cash equivalents of $189.5 million, while the
aggregate outstanding principal balance due under the debentures was $425.0
million. For more information about our convertible debentures, please see “Liquidity” within “Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Substantial
future sales or other dispositions of our class A or class B common stock
or other securities, or short selling activity, could cause our stock price to
fall.
Sales of
our class A common stock in the public market or sales of any of our other
securities, or the perception that such sales could occur, could cause the
market price of our class A common stock to decline. As of June 29, 2008,
we had approximately 40.8 million shares of class A common stock
outstanding, and Cypress owned the 44.5 million outstanding shares of our
class B common stock, representing approximately 55% of the total
outstanding shares of our common stock. Cypress, its successors in interest and
its subsidiaries may convert their shares of our class B common stock into
class A common stock at any time. Subject to applicable United States
federal and state securities laws, Cypress may sell or distribute to its
stockholders any or all of the shares of our common stock that it owns, which
may or may not include the sale of a controlling interest in us. In late 2006,
Cypress announced that it was exploring ways in which to allow its stockholders
to fully realize the value of its investment in our company. Since that date,
Cypress has made public statements and taken actions that are consistent with
these announcements. In July 2008, Cypress announced that its Board of Directors
had authorized management to pursue the tax-free distribution to its
stockholders of our class B common stock, with the objective of having the
transaction completed by the end of 2008, or sooner if possible. In August 2008,
Cypress’ Board of Directors further authorized management to take additional
steps in anticipation of the proposed spin-off and sell up to 3.0 million shares
of SunPower class B common stock held by Cypress prior to the completion date of
the proposed spin-off. Such a distribution would significantly change the
profile of our stockholders.
If
Cypress elects to convert its shares of our class B common stock into
shares of our class A common stock, an additional 44.5 million shares of
our class A common stock will be available for sale, subject to customary
sales restrictions. In addition, except in limited circumstances, Cypress has
the right to cause us to register the sale of its shares of our class B
common stock or class A common stock under the Securities Act. Registration
of these shares under the Securities Act would result in these shares, other
than shares purchased by our affiliates, becoming freely tradable without
restriction under the Securities Act.
If Cypress
distributes to its stockholders the shares of our class B common stock that it
owns, substantially all of these shares would be eligible for immediate resale
in the public market. We are unable to predict whether significant amounts of
our common stock would be sold in the open market in anticipation of, or after,
any such distribution. If a number of our new stockholders chose to sell their
shares, or if there were a perception that such sales might occur, this might
cause volatility in the trading volume, and downward pressure on the market
price of, our common stock. We also are unable to predict whether a sufficient
number of buyers for shares of our common stock would be in the market at that
time.
Some of
the aggregate of approximately 4.7 million shares of class A common stock that
we lent to underwriters of our debenture offerings are being held by such
underwriters to facilitate later hedging arrangements of future purchases for
debentures in the after-market. These shares may be freely sold into the market
by the underwriters at any time, and such sales could depress our stock price.
In addition, any hedging activity facilitated by our debenture underwriters
would involve short sales or privately negotiated derivatives transactions.
These or other similar transactions could further negatively affect our stock
price.
If
securities or industry analysts do not publish research or reports about us, our
business or our market, or if they change their recommendations regarding our
stock adversely, our securities prices and trading volumes could
decline.
The
trading markets for our class A common stock and debentures are influenced
by the research and reports that industry or securities analysts publish about
us, our business or our market. If one or more of the analysts who cover us
change their recommendation regarding our stock adversely, our stock and
debenture prices would likely decline. If one or more of these analysts cease
coverage of our company or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could cause our
securities prices or trading volumes to decline.
The
price of our class A common stock, and therefore of our outstanding
debentures, may fluctuate significantly, and a liquid trading market for our
class A common stock may not be sustained.
Our
class A common stock has a limited trading history in the public markets,
and during that period has experienced extreme price and volume fluctuations. In
addition, if Cypress distributes to its stockholders its shares of our class B
common stock, the prior performance of our class A common stock may not be
indicative of the performance of our common stock after the distribution by
Cypress to its stockholders of its shares of our class B common
stock. The trading price of our class A common stock could be
subject to wide fluctuations due to the factors discussed in this risk factors
section. In addition, the stock market in general, and The Nasdaq Global Market
and the securities of technology companies and solar companies in particular,
have experienced severe price and volume fluctuations. These trading prices and
valuations, including our own market valuation and those of companies in our
industry generally, may not be sustainable. These broad market and industry
factors may decrease the market price of our class A common stock,
regardless of our actual operating performance. Because the debentures are
convertible into our class A common stock, volatility or depressed prices
of our class A common stock could have a similar effect on the trading
price of these debentures. In addition, in the past, following periods of
volatility in the overall market and the market price of a company’s securities,
securities class action litigation has often been instituted against these
companies. This litigation, if instituted against us, could result in
substantial costs and a diversion of our management’s attention and
resources.
The
difference in the voting rights of our class A and our class B common
stock may reduce the value and liquidity of our class A common
stock.
The
rights of class A and class B common stock are substantially similar,
except with respect to voting, conversion and other protective provisions. The
class B common stock is entitled to eight votes per share and the
class A common stock is entitled to one vote per share. Following any
tax-free spin-off of our shares by Cypress, our class B common stock would be
freely tradable in the market. The difference in the voting rights of our
class A and class B common stock could reduce the value of our
class A common stock to the extent that any investor or potential future
purchaser of our common stock ascribes value to the right of our class B
common stock to eight votes per share. In addition, following a tax-free
spin-off, we would be subject to the risk that an investor could acquire a
degree of influence over our affairs disproportionate to its economic investment
by accumulating class B common stock.
Delaware
law and our certificate of incorporation and bylaws contain anti-takeover
provisions that could delay or discourage takeover attempts that stockholders
may consider favorable.
Provisions
in our restated certificate of incorporation and bylaws may have the effect of
delaying or preventing a change of control or changes in our management. These
provisions include the following:
• the
right of the board of directors to elect a director to fill a vacancy created by
the expansion of the board of directors;
• the
prohibition of cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
• the
requirement for advance notice for nominations for election to the board of
directors or for proposing matters that can be acted upon at a stockholders’
meeting;
• the
ability of the board of directors to issue, without stockholder approval, up to
approximately 10.0 million shares of preferred stock with terms set by the board
of directors, which rights could be senior to those of common stock;
and
• in
the event that Cypress distributes to its stockholders the shares of our common
stock that it owns or Cypress, its successors in interest and its subsidiaries
otherwise no longer collectively own shares of our common stock equal to at
least 40% of the shares of all classes of our common stock then outstanding and
Cypress is no longer consolidating us for accounting purposes:
• our
board of directors will be divided into three classes of directors, with the
classes to be as nearly equal in number as possible;
• no
action can be taken by stockholders except at an annual or special meeting of
the stockholders called in accordance with our bylaws, and stockholders may not
act by written consent;
• stockholders
may not call special meetings of the stockholders; and
• our
board of directors will be able to alter our bylaws without obtaining
stockholder approval.
It is
possible that we could implement additional measures that could delay or prevent
a change of control in preparation for a possible tax-free spin-off by Cypress.
Until
such time as Cypress distributes to its stockholders the shares of our
common stock that it owns or Cypress, its successor in interest and its
subsidiaries otherwise collectively own less than 40% of the shares of all
classes of our common stock then outstanding and Cypress is no longer
consolidating us for accounting purposes, the affirmative vote of at least 75%
of the then-authorized number of members of our board of directors will be
required to: (1) adopt, amend or repeal our bylaws or certificate of
incorporation; (2) appoint or remove our chief executive officer;
(3) designate, appoint or allow for the nomination or recommendation for
election by our stockholders of an individual to our board of directors;
(4) change the size of our board of directors to be other than in the range
of five to seven members; (5) form a committee of our board of
directors or establish or change a charter, committee responsibilities or
committee membership of any committee of our board of directors; (6) adopt
any stockholder rights plan, “poison pill” or other similar arrangement; or
(7) approve any transactions that would involve a merger, consolidation,
restructuring, sale of substantially all of our assets or any of our
subsidiaries or otherwise result in any person or entity obtaining control of us
or any of our subsidiaries. Cypress may at any time in its sole discretion waive
this requirement to obtain such a supermajority vote of our board of
directors.
In
addition, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, or the DGCL. These provisions may prohibit large
stockholders, in particular those owning 15% or more of our outstanding voting
stock, from merging or combining with us. These provisions in our restated
certificate of incorporation, bylaws and under Delaware law could discourage
potential takeover attempts and could reduce the price that investors might be
willing to pay for shares of our common stock in the future and result in the
market price being lower than they would without these provisions.
Provisions
of our outstanding debentures could discourage an acquisition of us by a third
party.
Certain
provisions of our outstanding debentures could make it more difficult or more
expensive for a third party to acquire us. Upon the occurrence of certain
transactions constituting a fundamental change, holders of our outstanding
debentures will have the right, at their option, to require us to repurchase, at
a cash repurchase price equal to 100% of the principal amount plus accrued and
unpaid interest on the debentures, all of their debentures or any portion of the
principal amount of such debentures in integral multiples of $1,000. We may also
be required to issue additional shares of our class A common stock upon
conversion of such debentures in the event of certain fundamental
changes.
We
currently have a significant amount of debt outstanding. Our substantial
indebtedness, along with our other contractual commitments, could adversely
affect our business, financial condition and results of operations, as well as
our ability to meet any of our payment obligations under the debentures and our
other debt.
We
currently have a significant amount of debt and debt service requirements. As of
June 29, 2008, after giving effect to our July 2007 offering of debentures, we
had $425.0 million of outstanding debt for borrowed money.
This
level of debt could have significant consequences on our future operations,
including:
• making
it more difficult for us to meet our payment and other obligations under the
debentures and our other outstanding debt;
• resulting
in an event of default if we fail to comply with the financial and other
restrictive covenants contained in our debt agreements, which event of default
could result in all of our debt becoming immediately due and
payable;
• reducing
the availability of our cash flow to fund working capital, capital expenditures,
acquisitions and other general corporate purposes, and limiting our ability to
obtain additional financing for these purposes;
• subjecting
us to the risk of increased sensitivity to interest rate increases on our
indebtedness with variable interest rates, including borrowings under our new
credit facility;
• limiting
our flexibility in planning for, or reacting to, and increasing our
vulnerability to, changes in our business, the industry in which we operate and
the general economy; and
• placing
us at a competitive disadvantage compared to our competitors that have less debt
or are less leveraged.
Any of
the above-listed factors could have an adverse effect on our business, financial
condition and results of operations and our ability to meet our payment
obligations under the debentures and our other debt.
In
addition, we also have significant contractual commitments for the purchase of
polysilicon, some of which involve prepayments, and we may enter into
additional, similar agreements in the future. These commitments could have an
adverse effect on our liquidity and our ability to meet our payment obligations
under the debentures and our other debt.
Our
ability to meet our payment and other obligations under our debt instruments
depends on our ability to generate significant cash flow in the future. This, to
some extent, is subject to general economic, financial, competitive, legislative
and regulatory factors as well as other factors that are beyond our control. We
cannot assure investors that our business will generate cash flow from
operations, or that future borrowings will be available to us under our existing
or any future credit facilities or otherwise, in an amount sufficient to enable
us to meet our payment obligations under our outstanding debentures and our
other debt and to fund other liquidity needs. If we are not able to generate
sufficient cash flow to service our debt obligations, we may need to refinance
or restructure our debt, including our outstanding debentures, sell assets,
reduce or delay capital investments, or seek to raise additional capital. If we
are unable to implement one or more of these alternatives, we may not be able to
meet our payment obligations under the debentures and our other debt and other
obligations.
As of the
first trading day of the third quarter in fiscal 2008, holders of the 1.25%
outstanding debentures were able to exercise their right to convert the
debentures any day in that fiscal quarter because the closing price of our class
A common stock on at least 20 of the last 30 trading days during the fiscal
quarter ending June 29, 2008 has equaled or exceeded $70.94, which represents
more than 125% of the applicable conversion price for our 1.25% outstanding
debentures. Because the closing price of our class A common stock on at least 20
of the last 30 trading days during the fiscal quarter ending June 29, 2008 did
not equal or exceed $102.80, or 125% of the applicable conversion price
governing the 0.75% outstanding debentures, holders of the 0.75% outstanding
debentures are unable to exercise their right to convert the debentures, based
on the stock trading price trigger, any day in the third fiscal quarter
beginning on June 30, 2008. This test is repeated each fiscal quarter, and prior
to August 1, 2025, holders of our outstanding debentures may only exercise their
right to convert during a fiscal quarter in which this test is met. After August
1, 2025, the debentures are convertible at any time.
In the
event of conversion by holders of the outstanding debentures, the principal
amount must be settled in cash and to the extent that the conversion obligation
exceeds the principal amount of any debentures converted, we must satisfy the
remaining conversion obligation of the February 2007 debentures in shares of our
class A common stock, and we maintain the right to satisfy the remaining
conversion obligation of the July 2007 debentures in shares of our class A
common stock or cash. We intend to fund such obligations, if any, through
existing cash and cash equivalents, cash generated from operations and, if
necessary, borrowings under our credit agreement with Wells Fargo and/or
potential availability of future sources of funding.
As of
June 29, 2008, we had cash and cash equivalents of $189.5 million, while the
aggregate outstanding principal balance due under the debentures was $425.0
million. For more information about our convertible debentures, please see “Liquidity” within “Item 2: Management’s Discussion and
Analysis of Financial
Condition and Results of Operations.” See also “Risk Factors - We expect to
continue to make significant capital expenditures, particularly in our
manufacturing facilities, and if adequate funds are not available or if the
covenants in our credit agreements impair our ability to raise capital when
needed, our ability to expand our manufacturing capacity and our business
will suffer.”
Our
outstanding debentures are effectively subordinated to any existing and future
secured indebtedness and structurally subordinated to existing and future
liabilities and other indebtedness of our subsidiaries.
Our
outstanding debentures are our general, unsecured obligations and rank equally
in right of payment with all of our existing and future unsubordinated,
unsecured indebtedness. All of our $425.0 million in outstanding principal
amount of debentures rate equally in right of payment. Our outstanding
debentures are effectively subordinated to our existing and any future secured
indebtedness we may have to the extent of the value of the assets securing such
indebtedness, and structurally subordinated to any existing and future
liabilities and other indebtedness of our subsidiaries. These liabilities may
include indebtedness, trade payables, guarantees, lease obligations and letter
of credit obligations. The debentures do not restrict us or our subsidiaries
from incurring indebtedness, including senior secured indebtedness in the
future, nor do they limit the amount of indebtedness we can issue that is equal
in right of payment.
The
terms of our outstanding debentures do not contain restrictive covenants and
provide only limited protection in the event of a change of
control.
The
indentures under which our outstanding debentures were issued do not contain
restrictive covenants that would protect holders from several kinds of
transactions that may adversely affect them. In particular, the indentures do
not contain covenants that will limit our ability to pay dividends or make
distributions on or redeem our capital stock or limit our ability to incur
additional indebtedness and, therefore, may not protect holders of our
debentures in the event of a highly leveraged transaction or other similar
transaction. The requirement that we offer to repurchase our outstanding
debentures upon a change of control is
limited
to the transactions specified in the definitions of a “fundamental change” in
the indentures. Similarly, the circumstances under which we are required to
adjust the conversion rate upon the occurrence of a “non-stock change of
control” are limited to circumstances where a debenture is converted in
connection with such a transaction as set forth in the
indentures.
Accordingly,
subject to restrictions contained in our other debt agreements, we could enter
into certain transactions, such as acquisitions, refinancings or
recapitalizations, that could affect our capital structure and the value of the
debentures and our class A common stock but would not constitute a
fundamental change under the debentures.
We
may be unable to repurchase the debentures for cash when required by the
holders, including following a fundamental change.
Holders
of our outstanding debentures have the right to require us to repurchase such
debentures on specified dates or upon the occurrence of a fundamental change
prior to maturity as described in the indentures governing such debentures. We
may not have sufficient funds to make the required repurchase in cash at such
time or the ability to arrange necessary financing on acceptable terms. In
addition, our ability to repurchase the debentures in cash may be limited by law
or the terms of other agreements relating to our debt outstanding at the time,
including our current credit facility which limits our ability to purchase the
debentures for cash in certain circumstances. If we fail to repurchase the
debentures in cash as required by the indenture governing the debentures, it
would constitute an event of default under each indenture governing our
outstanding debentures, which, in turn, would constitute an event of default
under our credit facility and the other indenture.
Some
significant restructuring transactions may not constitute a fundamental change,
in which case we would not be obligated to offer to repurchase our outstanding
debentures.
Upon the
occurrence of a fundamental change, holders of our debentures will have the
right to require us to repurchase their debentures. However, the fundamental
change provisions of our indentures will not afford protection to holders of
debentures in the event of certain transactions. For example, transactions such
as leveraged recapitalizations, refinancings, restructurings or acquisitions
initiated by us, as well as stock acquisitions by certain companies, would not
constitute a fundamental change requiring us to repurchase the debentures. In
the event of any such transaction, holders of debentures would not have the
right to require us to repurchase their debentures, even though each of these
transactions could increase the amount of our indebtedness, or otherwise
adversely affect our capital structure or any credit ratings, thereby adversely
affecting the holders of our debentures.
The
adjustment to the conversion rates of our outstanding debentures upon the
occurrence of certain types of fundamental changes may not adequately compensate
holders for the lost option time value of their debentures as a result of such
fundamental change.
If
certain types of fundamental changes occur prior to August 1, 2010 with
respect to our 0.75% debentures or prior to February 13, 2012 with respect to
our 1.25% debentures, we may adjust the conversion rate of the debentures to
increase the number of shares issuable upon conversion. The number of additional
shares to be added to the conversion rate will be determined based on the date
on which the fundamental change becomes effective and the price paid per share
of our class A common stock in the fundamental change as described in the
indentures for such debentures. Although this adjustment is designed to
compensate holders for the lost option value of their debentures as a result of
certain types of fundamental changes, the adjustment is only an approximation of
such lost value based upon assumptions made at the time when their debentures
were issued and may not adequately compensate them for such loss. In addition,
with respect to our 0.75% debentures, if the price paid per share of our
class A common stock in the fundamental change is less than $64.50 or
more than $155.00 (subject to adjustment), or if such transaction occurs on
or after August 1, 2010, there will be no such adjustment. Moreover, in no
event will the total number of shares issuable upon conversion as a result of
this adjustment exceed 15.5039 per $1,000 principal amount of the
0.75% debentures, subject to adjustment for stock splits, combinations and the
like. With respect to our 1.25% debentures, if the price paid per share of our
class A common stock in the fundamental change is less than $44.51 or more
than $135.00 (subject to adjustment), or if such transaction occurs on or after
February 15, 2012, there will be no such adjustment. Moreover, in no event will
the total number of shares issuable upon conversion as a result of this
adjustment exceed 22.4668 per $1,000 principal amount of the 1.25% debentures,
subject to adjustment for stock splits, combinations and the like.
There
is currently no public market for our outstanding debentures, and an active
trading market may not develop for these debentures. The failure of a market to
develop for our debentures could adversely affect the liquidity and value of our
debentures.
We do not
intend to apply for listing of the debentures on any securities exchange or for
quotation of the debentures on any automated dealer quotation system. Although
we have been advised by the underwriters that the underwriters intend to make a
market in the debentures, none of the underwriters is obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market, if any, for the
debentures.
An active
market may not develop for any of our outstanding debentures, and there can be
no assurance as to the liquidity of any market that may develop for the
debentures. If active, liquid markets do not develop for our debentures, the
market price and liquidity of the affected debentures may be adversely affected.
Any of the debentures may trade at a discount from their initial offering
price.
The
liquidity of the trading market and future trading prices of our debentures will
depend on many factors, including, among other things, the market price of our
class A common stock, prevailing interest rates, our operating results,
financial performance and prospects, the market for similar securities and the
overall securities market, and may be adversely affected by unfavorable changes
in these factors. Historically, the market for convertible debt has been subject
to disruptions that have caused volatility in prices. It is possible that the
market for our debentures will be subject to disruptions which may have a
negative effect on the holders of these debentures, regardless of our operating
results, financial performance or prospects.
Upon
any conversion of our outstanding debentures, we will pay cash in lieu of
issuing shares of our class A common stock with respect to an amount up to
the principal amount of debentures converted. We retain the right to satisfy any
remaining conversion obligation, in whole or part, in additional shares of
class A common stock or, in the case of our 0.75% debentures, in cash,
based upon a predetermined formula. Therefore, upon conversion, holders of our
debentures may not receive any shares of our class A common stock, or may
receive fewer shares than the number into which their debentures would otherwise
be convertible.
Upon any
conversion of debentures, we will pay cash in lieu of issuing shares of our
common stock with respect to an amount up to the principal amount of debentures
converted. We retain the right to satisfy any remaining conversion obligation,
in whole or part, in additional shares of our class A common stock or, in
the case of our 0.75% debentures, in cash, with respect to the conversion value
in excess thereof, based on a daily conversion value (as defined herein)
calculated based on a proportionate basis for each day of the 20 trading day
conversion period. Accordingly, upon conversion of debentures, holders may not
receive any shares of our class A common stock. In addition, because of the
20 trading day calculation period, in certain cases, settlement will be delayed
until at least the 26th trading day following the related conversion date.
Moreover, upon conversion of debentures, holders may receive less proceeds than
expected because the price of our class A common stock may decrease (or not
appreciate as much as they may expect) between the conversion date and the day
the settlement amount of their debentures is determined. Further, as a result of
cash payments, our liquidity may be reduced upon conversion of the debentures.
In addition, in the event of our bankruptcy, insolvency or certain similar
proceedings during the conversion period, there is a risk that a bankruptcy
court may decide a holder’s claim to receive such cash and/or shares could be
subordinated to the claims of our creditors as a result of such holder’s claim
being treated as an equity claim in bankruptcy.
As of the
first trading day of the third quarter in fiscal 2008, holders of the 1.25%
outstanding debentures were able to exercise their right to convert the
debentures any day in that fiscal quarter because the closing price of our class
A common stock on at least 20 of the last 30 trading days during the fiscal
quarter ending June 29, 2008 has equaled or exceeded $70.94, which represents
more than 125% of the applicable conversion price for our 1.25% outstanding
debentures. Because the closing price of our class A common stock on at least 20
of the last 30 trading days during the fiscal quarter ending June 29, 2008 did
not equal or exceed $102.80, or 125% of the applicable conversion price
governing the 0.75% outstanding debentures, holders of the 0.75% outstanding
debentures are unable to exercise their right to convert the debentures, based
on the stock trading price trigger, any day in the third fiscal quarter
beginning on June 30, 2008. This test is repeated each fiscal quarter, and prior
to August 1, 2025, holders of our outstanding debentures may only exercise their
right to convert during a fiscal quarter in which the test was met. After August
1, 2025, the debentures are convertible at any time.
In the
event of conversion by holders of the outstanding debentures, the principal
amount must be settled in cash and to the extent that the conversion obligation
exceeds the principal amount of any debentures converted, we must satisfy the
remaining conversion obligation of the February 2007 debentures in shares of our
class A common stock, and we maintain the right to satisfy the remaining
conversion obligation of the July 2007 debentures in shares of our class A
common stock or cash. We intend to fund such obligations, if any, through
existing cash and cash equivalents, cash generated from operations and, if
necessary, borrowings under our credit agreement with Wells Fargo and/or
potential availability of future sources of funding.
As of
March 30, 2008, we had cash and cash equivalents of $189.5 million, while the
aggregate outstanding principal balance due under the debentures was $425.0
million. For more information about our convertible debentures, please see “Liquidity” within “Item 2: Management’s Discussion and
Analysis of Financial
Condition and Results of Operations.”
The
conditional conversion features of our outstanding debentures could result in
holders receiving less than the value of the class A common stock into
which a debenture would otherwise be convertible.
At
certain times, the debentures are convertible into cash and, if applicable,
shares of our class A common stock only if specified conditions are met. If
these conditions are not met, holders will not be able to convert their
debentures at that time, and, upon a later conversion, holders may not be able
to receive the value of the class A common stock into which the debentures
would otherwise have been convertible had such conditions been met.
The
conversion rate of our outstanding debentures may not be adjusted for all
dilutive events that may adversely affect their trading prices or the
class A common stock issuable upon conversion of these
debentures.
The
conversion rates of our outstanding debentures are subject to adjustment upon
certain events, including the issuance of stock dividends on our class A
common stock, the issuance of rights or warrants, subdivisions, combinations,
distributions of capital stock, indebtedness or assets, cash dividends and
issuer tender or exchange offers. The conversion rates will not be adjusted for
certain other events, including, for example, upon the issuance of additional
shares of stock for cash, any of which may adversely affect the trading price of
our debentures or the class A common stock issuable upon conversion of the
debentures. Even if the conversion price is adjusted for a dilutive event, such
as a leveraged recapitalization, it may not fully compensate holders for their
economic loss.
Holders
of our debentures will not be entitled to any rights with respect to our
class A common stock, but they will be subject to all changes made with
respect to our class A common stock.
Holders
of our debentures will not be entitled to any rights with respect to our
class A common stock (including, without limitation, voting rights and
rights to receive any dividends or other distributions on our class A
common stock), but they will be subject to all changes affecting our
class A common stock. Holders will have rights with respect to our
class A common stock only if they convert their debentures, which they are
permitted to do only in limited circumstances. For example, in the event that an
amendment is proposed to our certificate of incorporation or bylaws requiring
stockholder approval and the record date for determining the stockholders of
record entitled to vote on the amendment occurs prior to delivery of our
class A common stock to holders, they will not be entitled to vote on the
amendment, although they will nevertheless be subject to any changes in the
powers, preferences or rights of our class A common stock.
Our
outstanding debentures may not be rated or may receive lower ratings than
anticipated.
We do not
intend to seek a rating on any of our outstanding debentures. However, if one or
more rating agencies rates these debentures and assigns them a rating lower than
the rating expected by investors, or reduces their ratings in the future, the
market price of the affected debentures and our class A common stock could
be reduced.
Risks
Related to Our Relationship with Cypress Semiconductor Corporation
As
long as Cypress controls us, the ability of our other stockholders to influence
matters requiring stockholder approval will be limited.
As of
June 29, 2008, Cypress owned all 44.5 million shares of outstanding our
class B common stock, representing approximately 55% of the total
outstanding shares of our common stock, or approximately 52% of such shares on a
fully diluted basis after taking into account outstanding options (or 49% of
such shares on a fully diluted basis after taking into account outstanding stock
options and loaned shares to underwriters of our convertible indebtedness), and
90% of the voting power of our outstanding capital stock.
Shares of
our class A common stock and our class B common stock have
substantially similar rights, preferences and privileges except with respect to
certain voting and conversion rights and other protective provisions. Shares of
our class B common stock are entitled to eight votes per share of
class B common stock, and shares of our class A common stock are
entitled to one vote per share of class A common stock. Cypress, its
successors in interest or its subsidiaries may convert their shares of our
class B common stock into shares of our class A common stock on a
one-for-one basis at any time. Prior to a tax-free distribution by Cypress of
its shares of our class B common stock to its stockholders, the
class B common shares will automatically convert into shares of
class A common stock if such shares are transferred to a person other than
Cypress, its successors in interest or its subsidiaries. In most circumstances
in the event that Cypress owns less than 40% of the shares of all classes of our
common stock then outstanding, each outstanding share of class B common
stock will automatically convert into one share of class A common stock. By
virtue of its ownership of class B common stock, Cypress is able to elect all of
the members of our board of directors.
In
addition, until such time as Cypress distributes to its stockholders the
shares of our common stock that it owns or Cypress, its successors in interest
and its subsidiaries otherwise collectively own less than 40% of the shares of
all classes of our common stock then outstanding and Cypress is no longer
consolidating us for accounting purposes, Cypress will have the ability to take
stockholder action without the vote of any other stockholder and, by virtue of
the voting power afforded the shares of our class B common stock, investors
will not be able to affect the outcome of any stockholder vote during this
period. As a result, Cypress will have the ability to control all matters
affecting us, including:
• the
composition of our board of directors and, through the board of directors, any
determination with respect to the combined company’s business plans and
policies, including the appointment and removal of officers;
• any
determinations with respect to mergers and other business
combinations;
• our
acquisition or disposition of assets;
• our
financing activities;
• changes
to the agreements providing for our separation from Cypress;
• the
allocation of business opportunities that may be suitable for us;
• the
payment of dividends on our class A common stock; and
• the
number of shares available for issuance under our stock plans.
For the
reasons described above, Cypress may be unwilling to support certain corporate
transactions proposed by us that could dilute its ownership below 40%, including
financings or acquisitions effected through the issuance of our securities. In
addition, Cypress may have tax-related or other objectives that cause it to be
unwilling to support these or other transactions that dilute its ownership below
50%. Cypress’s voting control may also discourage transactions involving a
change of control of SunPower, including transactions in which holders of our
class A common stock might otherwise receive a premium for their shares
over the then current market price. Cypress is not prohibited from selling a
controlling interest in us to a third party and may do so without approval of
holders of our class A common stock and without providing for a purchase of
our class A common stock. Accordingly, shares of our class A common
stock may be worth less than they would be if Cypress did not maintain voting
control over us.
Our
agreements with Cypress require us to indemnify Cypress for certain tax
liabilities. These indemnification obligations or related considerations may
limit our ability to obtain additional financing, participate in future
acquisitions or pursue other business initiatives.
We have
entered into a tax sharing agreement with Cypress, under which we and Cypress
agree to indemnify one another for certain taxes and similar obligations that
the other party could incur under certain circumstances. In general, we will be
responsible for taxes relating to our business. Furthermore, we may be held
jointly and severally liable for taxes determined on a consolidated basis for
the entire Cypress group for any particular taxable year that we are a member of
the group even though Cypress is required to indemnify us for its taxes pursuant
to the tax sharing agreement. As of June 2006, we ceased to be a member of
the Cypress consolidated group for federal income tax purposes and most state
income tax purposes. Thus, to the extent that we become entitled to utilize on
our separate tax returns portions of those credit or loss carryforwards existing
as of such date, we will distribute to Cypress the tax effect (estimated to be
40% for federal and state income tax purposes) of the amount of such tax loss
carryforwards so utilized and the amount of any credit carryforwards so
utilized. We will distribute these amounts to Cypress in cash or in our shares,
at our option. Accordingly, we will be subject to the obligations payable to
Cypress for any federal income tax credit or loss carryforwards utilized in our
federal tax returns. As of December 30, 2007, we had $44.0 million of
federal net operating loss carryforwards and approximately $73.5 million of
California net operating loss carryforwards, meaning that such potential future
payments to Cypress, which would be made over a period of several years, would
therefore aggregate to approximately $19.1 million. The majority of these
net operating loss carryforwards were created by employee stock
transactions. Because there is uncertainty as to the realizability of
these loss carryforwards, the portion created by employee stock transactions are
not reflected on the Company’s Condensed Consolidated Balance Sheets. If these
losses were reflected on the Condensed Consolidated Balance Sheets, to the
extent the deductions were not matched against previous stock-based compensation
charges, the loss carryforwards would be accounted for as an increase to
deferred tax assets and stockholders’ equity.
Subject
to certain caveats, Cypress has obtained a ruling from the Internal Revenue
Service (“IRS”) to the effect that a distribution by Cypress of the our class B
common stock to Cypress stockholders will qualify as a tax-free distribution
under Section 355 of the Internal Revenue Code (the “Code”). Despite such
ruling, the distribution may nonetheless be taxable to Cypress under
Section 355(e) of the Code if 50% or more of our voting power or economic
value is acquired as part of a plan or series of related transactions that
includes the distribution of our stock. The tax sharing agreement includes our
obligation to indemnify Cypress for any liability incurred as a result of
issuances or dispositions of our stock after the distribution, other than
liability attributable solely to certain dispositions of our stock by Cypress,
that cause Cypress’ distribution of shares of our stock to its stockholders to
be taxable to Cypress under Section 355(e) of the Code. Under current law,
following a distribution by Cypress and for up to two years thereafter (or
possibly longer if we are acting pursuant to a preexisting plan), our obligation
to indemnify Cypress will be triggered only if we issue stock or otherwise
participate in one or more transactions other than the distribution in which 50%
or more of our voting power or economic value is acquired in financing or
acquisition transactions that are part of a plan or series of related
transactions that includes the distribution. If such an indemnification
obligation is triggered, the extent of our liability to Cypress will generally
equal the product of (a) Cypress’ top marginal federal and state income tax
rate for the year of the distribution, and (b) the difference between the
fair market value of our class B common stock distributed to Cypress
stockholders and Cypress’ tax basis in such stock as determined on the date of
the distribution.
For
example, under the current tax rules, if Cypress was to make a complete
distribution of its shares of our class B common stock, and our total
outstanding capital stock at the time of such distribution were 84 million
shares, unless we qualified for one of several safe harbor exemptions available
under the Treasury Regulations, in order to avoid our indemnification obligation
to Cypress, we could not, for up two years (or possibly longer if we are acting
pursuant to a preexisting plan) from the date of Cypress’ distribution, issue
84 million or more shares of our class A common stock, nor could we
participate in one or more transactions (excluding the distribution itself) in
which 42 million or more shares of our then-existing class A common
stock were to be acquired in connection with a plan or series of related
transactions that includes the distribution. In addition, these limits could be
lower depending on certain actions that we or Cypress might take before or after
a distribution. If we were to participate in such a transaction, assuming
Cypress distributed 44.5 million shares, Cypress’ top marginal income tax rate
was 40% for federal and state income tax purposes, the fair market value of our
class B common stock was $80.00 per share and Cypress’ tax basis in such
stock was $5.00 per share on the date of their distribution, then our liability
under our indemnification obligation to Cypress would be approximately
$1.3 billion.
In order
to preserve various options for the separation of our two companies, we and
Cypress may seek to preserve Cypress’ ownership of our company at certain
levels. Any such effort could limit our ability to use our equity to raise
capital, pursue acquisitions, compensate employees or engage in other business
initiatives. In addition, our ability to use our equity to obtain additional
financing or to engage in acquisition transactions for a period of time after a
tax-free distribution of our shares by Cypress will be restricted if we can only
sell or issue a limited amount of our stock before triggering our obligation to
indemnify Cypress for taxes it incurs under Section 355(e) of the Code.
Separation of the two companies is dependent, to a large degree, on the tax
efficient provisions within the tax law. Changes to these provisions, either
through change of statute or judicial interpretation, may render the separation
strategy less attractive.
Third
parties may seek to hold us responsible for liabilities of Cypress.
Under our
separation agreements with Cypress, Cypress will indemnify us for claims and
losses relating to liabilities related to Cypress’ business and not related to
our business. However, if those liabilities are significant and we are
ultimately held liable for them, we cannot assure investors that we will be able
to recover the full amount of our losses from Cypress.
Our
inability to resolve any disputes that arise between us and Cypress with respect
to our past and ongoing relationships may harm our business.
Disputes
may arise between Cypress and us in a number of areas relating to our past and
ongoing relationships, including:
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labor,
tax, employee benefit, indemnification and other matters arising from our
separation from Cypress;
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employee
retention and recruiting;
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business
combinations involving us;
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pricing
for transitional services;
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sales
or distributions by Cypress of all or any portion of its ownership
interest in us;
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the
nature, quality and pricing of services Cypress has agreed to provide us;
and
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business
opportunities that may be attractive to both Cypress and
us.
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We may
not be able to resolve any potential conflicts, and even if we do, the
resolution may be less favorable than if we were dealing with an unaffiliated
party.
The
agreements we entered into with Cypress may be amended upon agreement between
the parties. While we are controlled by Cypress, we may not have the leverage to
negotiate amendments to these agreements if required on terms as favorable to us
as those we would negotiate with an unaffiliated third party.
Our
ability to operate our business effectively may suffer if we are unable to
cost-effectively establish our own administrative and other support functions in
order to operate as a stand-alone company after the expiration of our services
agreements with Cypress.
As a
subsidiary of Cypress, we have relied on administrative and other resources of
Cypress to operate our business. In connection with our initial public offering,
we entered into various service agreements to retain the ability for specified
periods to use these Cypress resources. These agreements will expire upon the
earlier of November 2009 or a change of control of our company. We will need to
operate our own administrative and other support systems or contract with third
parties to replace Cypress’ systems. These services may not be provided at the
same level as when we were a wholly owned subsidiary of Cypress, and we may not
be able to obtain the same benefits that we received prior to the
separation. Any failure or significant downtime in our own
administrative systems or in Cypress’ administrative systems during the
transitional period could result in unexpected costs, impact our results and/or
prevent us from paying our suppliers or employees and performing other
administrative services on a timely basis.
Some
of our directors and executive officers may have conflicts of interest because
of their ownership of Cypress common stock, options to acquire Cypress common
stock or their positions as executives or directors at Cypress.
Some of
our directors and executive officers own Cypress common stock and/or options to
purchase Cypress common stock. In addition, some of our directors are executive
officers and/or directors of Cypress. Ownership of Cypress common stock and
options to purchase Cypress common stock by our directors and officers and the
presence of executive officers or directors of Cypress on our board of directors
could create, or appear to create, conflicts of interest with respect to matters
involving both us and Cypress. For example, corporate opportunities may arise
that concern both of our businesses, such as the potential acquisition of a
particular business or technology that is complementary to both of our
businesses. In these situations, our amended and
restated
certificate of incorporation provides that directors and officers who are also
directors or officers of Cypress have no duty to communicate or present such
corporate opportunity to us unless it is specifically applicable to the solar
energy business and not applicable to or reasonably related to any business
conducted by Cypress, have the right to deal with such corporate opportunity in
their sole discretion and shall not be liable to us or our stockholders for
breach of fiduciary duty by reason of the fact that such director or officer
pursues or acquires such corporate opportunity for itself or for Cypress. In
addition, we have not established at this time procedural mechanisms to address
all actual or perceived conflicts of interest of these directors and officers
and expect that our board of directors, in the exercise of its fiduciary duties,
will determine how to address any actual or perceived conflicts of interest on a
case-by-case basis. If any corporate opportunity arises and if our directors and
officers do not pursue it on our behalf pursuant to the provisions in our
amended and restated certificate of incorporation, we may not become aware of,
and may potentially lose, a significant business opportunity.
Because
Cypress is not obligated to distribute to its stockholders or otherwise dispose
of our common stock that it owns, we will continue to be subject to the risks
described above relating to Cypress’ control of us if Cypress does not complete
such a transaction.
Cypress is
not obligated to distribute to its stockholders or otherwise dispose of the
shares of our class B common stock that it beneficially owns, although it might
elect to do so in the future. Completion of any distribution transaction could
be contingent upon, among other things, the receipt of a favorable tax ruling
from the Internal Revenue Service, or IRS, and/or a favorable opinion of
Cypress’ tax advisor as to the tax-free nature of such a transaction for U.S.
federal income tax purposes. The provisions allowing for a tax efficient
distribution may be amended by legislative or judicial interpretation in the
future, affecting Cypress’ willingness to distribute or dispose of our class B
common stock. In July 2008, Cypress announced that its Board of Directors
had authorized management to pursue the tax-free distribution to its
stockholders of our class B common stock, with the objective of having the
transaction completed by the end of 2008, or sooner if possible. In August
2008, Cypress’ Board of Directors further authorized management to take
additional steps in anticipation of the proposed spin-off and sell up to 3.0
million shares of SunPower class B common stock held by Cypress prior to the
completion date of the proposed spin-off.
Unless
and until such a distribution occurs or Cypress otherwise disposes of shares so
that it, its successors in interest and its subsidiaries collectively own less
than 40% of the shares of all classes of our common stock then outstanding, we
will continue to face the risks described above relating to Cypress’ control of
us and potential conflicts of interest between Cypress and us. We may be unable
to realize potential benefits that could result from such a distribution by
Cypress, such as greater strategic focus, greater access to capital markets,
better incentives for employees and more accountable management, although we
cannot guarantee that we would realize any of these potential benefits if such a
distribution did occur. In addition, speculation by the press, investment
community, our customers, our competitors or others regarding whether Cypress
intends to complete such a distribution or otherwise dispose of its controlling
interest in us could harm our business or lead to volatility in our stock
price.
So long
as Cypress continues to hold a controlling interest in us or is otherwise a
significant stockholder, the liquidity and market price of our class A common
stock may be adversely impacted. In addition, there can be no assurance that
Cypress will distribute or otherwise dispose of any of its remaining shares of
our class B common stock.
Cypress
may not complete its proposed spin-off of our class B common stock.
In April
2008, Cypress announced that it received a favorable ruling from the Internal
Revenue Service with respect to certain tax issues relating to a potential
spin-off to its stockholders of its current ownership of the class B common
stock of SunPower. In July 2008, Cypress announced that its Board of
Directors had authorized management to pursue the tax-free distribution to its
stockholders of our class B common stock, with the objective of having the
transaction completed by the end of 2008, or sooner if possible. Cypress’ Board
of Directors has not definitively determined to effect such a distribution and
has not established a record date for the payment to its stockholders of a
dividend of our class B common stock. The proposed distribution may not be
effected for a number of reasons, including if unexpected challenges arise in
connection with the necessary steps required for the distribution. In addition,
Cypress’ Board of Directors may reconsider the proposed distribution under
certain circumstances, including if a significant change in the trading price of
either Cypress or SunPower common stock were to occur. Any decision
not to pursue the proposed distribution could adversely affect the trading price
for our common stock.
Cypress’
ability to replace our board of directors may make it difficult for us to
recruit independent directors.
Cypress
may at any time replace our entire board of directors. Furthermore, some actions
of our board of directors require the approval of 75% of our directors except to
the extent this condition is waived by Cypress. As a result, unless and until
Cypress, its successors in interest and its subsidiaries collectively own less
than 40% of the shares of all classes of our common stock then outstanding and
Cypress is no longer consolidating us for accounting purposes, Cypress could
exercise significant control over our board of directors. As such, individuals
who might otherwise accept a board position at SunPower may decline to serve,
and Cypress may be able to control important decisions made by our Board of
Directors.
|
Submission
of Matters to a Vote of Security
Holders
|
At our
Annual Meeting of Stockholders on May 8, 2008, stockholders
(1) elected each of the director nominees; (2) ratified the
appointment of PricewaterhouseCoopers LLP as our independent registered public
accounting firm for the fiscal year ending December 28, 2008; (3) approved
the Second Amended and Restated SunPower Corporation 2005 Stock Incentive Plan
that (a) increased the number of shares of class A common stock reserved for
issuance under the stock plan by 1,700,000, (b) provided, beginning in 2009, for
the automatic annual increase in the total number of shares of class A common
stock reserved for issuance under the stock plan, (c) made certain changes to
the permitted qualifying criteria for performance-based equity awards under the
stock plan, (d) made certain changes to the compensation of directors under the
stock plan, and (e) made certain other conforming and technical amendments to
the stock plan; and (4) approved the Amended and Restated SunPower Corporation
Annual Key Employee Bonus Plan. Each holder of shares of class A common stock
was entitled to one vote for each share of class A common stock held as of the
record date of March 12, 2008, and each holder of shares of class B common
stock was entitled to eight votes for each share of class B common stock held as
of such date. After giving effect to the increased voting power of class B
common stock, all of which was held by Cypress, the voting results were as
follows:
1.
|
Proposal
One — Election of Directors:
|
|
Number
of Votes
|
|
For
|
|
Withheld
|
W.
Steve Albrecht
|
386,310,192
|
|
1,134,550
|
Betsy
S. Atkins
|
386,414,648
|
|
1,030,094
|
T.
J. Rodgers
|
386,564,818
|
|
879,923
|
Thomas
H. Werner
|
386,575,016
|
|
869,725
|
Pat
Wood III
|
386,481,353
|
|
963,389
|
2.
|
Proposal
Two — Ratification of PricewaterhouseCoopers
LLP:
|
Number
of Votes
|
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-Votes
|
387,043,732
|
|
121,059
|
|
279,950
|
|
0
|
3.
|
Proposal
Three — Approval of the Second Amended and Restated SunPower Corporation
2005 Stock Incentive Plan:
|
Number
of Votes
|
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-Votes
|
361,922,345
|
|
16,240,587
|
|
288,695
|
|
8,993,115
|
4.
|
Proposal
Four — Approval of the Amended and Restated SunPower Corporation Annual
Key Employee Bonus Plan:
|
Number
of Votes
|
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-Votes
|
386,183,068
|
|
924,985
|
|
336,688
|
|
0
|
Exhibit
Number
|
|
Description
|
3.1
|
|
Form
of Restated Certificate of Incorporation of SunPower Corporation
(incorporated by reference to Exhibit 3.(i)2 to the Registrant’s
Registration Statement on Form S-1/A filed with the Securities and
Exchange Commission on November 15, 2005).
|
3.2
|
|
Form
of By-laws of SunPower Corporation (incorporated by reference to Exhibit
3.(ii)2 to the Registrant’s Registration Statement on Form S-1/A filed
with the Securities and Exchange Commission on October 11,
2005).
|
10.1†
|
|
Fourth
Amendment to Credit Agreement, dated April 4, 2008, by and between
SunPower Corporation and Wells Fargo Bank, National
Association.
|
10.2†
|
|
First
Amendment to Security Agreement: Deposit Account, dated April
4, 2008, by and between SunPower Corporation and Wells Fargo Bank,
National Association.
|
10.3†
|
|
Securities
Account Control Agreement: Securities Account, dated April
4, 2008, by and between SunPower Corporation and Wells Fargo Bank,
National Association.
|
10.4†
|
|
Addendum
to Security Agreement: Securities Account, dated April 4, 2008,
by and between SunPower Corporation and Wells Fargo Bank, National
Association.
|
10.5
|
|
Joinder
to Continuing Guaranty, dated April 4, 2008, by SunPower Systems
SA.
|
10.6
|
|
Third
Amendment to Lease, dated April 7, 2008, between SunPower Corporation and
Cypress Semiconductor Corporation.
|
10.7
|
|
Amended
and Restated SunPower Corporation Annual Key Employee Bonus
Plan.
|
10.8
|
|
Second
Amended and Restated SunPower Corporation 2005 Stock Incentive Plan and
forms of agreements thereunder (incorporated by reference to Exhibit 4.3
to the Registrant’s Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on May 9, 2008).
|
10.9
|
|
Offer
Letter, dated May 13, 2008, by and between SunPower Corporation and Marty
Neese.
|
10.10†
|
|
First
Amendment to Ingot and Wafer Agreement, dated May 14, 2008, by and between
SunPower Corporation and Jiawei SolarChina Co., Ltd.
|
10.11
|
|
Fifth
Amendment to Credit Agreement, dated May 19, 2008, by and between SunPower
Corporation and Wells Fargo Bank, National Association.
|
10.12†
|
|
Amended
and Restated Addendum to Security Agreement: Securities Account, dated May
19, 2008, between SunPower Corporation and Wells Fargo Bank National
Association.
|
10.13
|
|
Third
Amendment to Lease, dated May 23, 2008, by and between SunPower
Corporation, Systems and FPOC, LLC.
|
31.1
|
|
Certification
by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
31.2
|
|
Certification
by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
32.1
|
|
Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
A cross
(†) indicates that confidential treatment has been requested for portions of the
marked exhibits.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized.
|
|
SUNPOWER CORPORATION
|
|
|
|
Dated:
August 8, 2008
|
|
By:
|
|
/s/ EMMANUEL T. HERNANDEZ
|
|
|
|
|
|
|
|
|
|
Emmanuel
T. Hernandez
|
|
|
|
|
Chief
Financial Officer
|
Exhibit
Number
|
|
Description
|
3.1
|
|
Form
of Restated Certificate of Incorporation of SunPower Corporation
(incorporated by reference to Exhibit 3.(i)2 to the Registrant’s
Registration Statement on Form S-1/A filed with the Securities and
Exchange Commission on November 15, 2005).
|
3.2
|
|
Form
of By-laws of SunPower Corporation (incorporated by reference to Exhibit
3.(ii)2 to the Registrant’s Registration Statement on Form S-1/A filed
with the Securities and Exchange Commission on October 11,
2005).
|
10.1†
|
|
Fourth
Amendment to Credit Agreement, dated April 4, 2008, by and between
SunPower Corporation and Wells Fargo Bank, National
Association.
|
10.2†
|
|
First
Amendment to Security Agreement: Deposit Account, dated April
4, 2008, by and between SunPower Corporation and Wells Fargo Bank,
National Association.
|
10.3†
|
|
Securities
Account Control Agreement: Securities Account, dated April
4, 2008, by and between SunPower Corporation and Wells Fargo Bank,
National Association.
|
10.4†
|
|
Addendum
to Security Agreement: Securities Account, dated April 4, 2008,
by and between SunPower Corporation and Wells Fargo Bank, National
Association.
|
10.5
|
|
Joinder
to Continuing Guaranty, dated April 4, 2008, by SunPower Systems
SA.
|
10.6
|
|
Third
Amendment to Lease, dated April 7, 2008, between SunPower Corporation and
Cypress Semiconductor Corporation.
|
10.7
|
|
Amended
and Restated SunPower Corporation Annual Key Employee Bonus
Plan.
|
10.8
|
|
Second
Amended and Restated SunPower Corporation 2005 Stock Incentive Plan and
forms of agreements thereunder (incorporated by reference to Exhibit 4.3
to the Registrant’s Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on May 9, 2008).
|
10.9
|
|
Offer
Letter, dated May 13, 2008, by and between SunPower Corporation and Marty
Neese.
|
10.10†
|
|
First
Amendment to Ingot and Wafer Agreement, dated May 14, 2008, by and between
SunPower Corporation and Jiawei SolarChina Co., Ltd.
|
10.11
|
|
Fifth
Amendment to Credit Agreement, dated May 19, 2008, by and between SunPower
Corporation and Wells Fargo Bank, National Association.
|
10.12†
|
|
Amended
and Restated Addendum to Security Agreement: Securities Account, dated May
19, 2008, between SunPower Corporation and Wells Fargo Bank National
Association.
|
10.13
|
|
Third
Amendment to Lease, dated May 23, 2008, by and between SunPower
Corporation, Systems and FPOC, LLC.
|
31.1
|
|
Certification
by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
31.2
|
|
Certification
by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
32.1
|
|
Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
A cross
(†) indicates that confidential treatment has been requested for portions of the
marked exhibits.
Unassociated Document
EXHIBIT
10.1
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
FOURTH
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT TO CREDIT AGREEMENT
(this "Amendment") is entered into as of April 4, 2008, by and between SUNPOWER
CORPORATION, a Delaware corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted
to Bank pursuant to the terms and conditions of that certain Credit Agreement
between Borrower and Bank dated as of July 13, 2007, as amended by that certain
First Amendment to Credit Agreement, dated August 14, 2007, that certain Second
Amendment to Credit Agreement, dated August 31, 2007, that certain Waiver
Agreement, dated January 18, 2008, and that certain Third Amendment to Credit
Agreement, dated February 13, 2008, and as may be amended from time to time
("Credit Agreement").
WHEREAS, Bank and Borrower have agreed
to certain changes in the terms and conditions set forth in the Credit Agreement
and have agreed to amend the Credit Agreement to reflect said
changes.
NOW, THEREFORE, for valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree that the Credit Agreement shall be amended as
follows:
1. Section
1.1 (a) is hereby amended by deleting "July 31, 2008" as the last day on which
Bank will make advances under the Line of Credit, and by substituting for said
date "April 4, 2009," with such change to be effective upon the execution
and delivery to Bank of a promissory note dated as of April 4, 2008 (which
promissory note shall replace and be deemed the Line of Credit Note defined in
and made pursuant to the Credit Agreement) and all other contracts, instruments
and documents required by Bank to evidence such change.
2. Section 1.2
(a) is hereby amended by deleting "Fifty Million Dollars ($50,000,000.00)" as
the maximum principal amount available under the Letter of Credit Line, and by
substituting for said amount "One Hundred and Fifty Million Dollars
($150,000,000.00)."
3. Section 1.3
(c) is hereby deleted in its entirety, and the following substituted
therefor:
“(c) Letter of Credit
Fees. Borrower shall pay to Bank (i) fees upon the
issuance and each annual renewal, if any, of each Letter of Credit equal to
two-tenths of one percent (0.20%) per annum (computed on the basis of a 360-day
year, actual days elapsed) of the face amount thereof, (ii) fees upon the
issuance of each Subfeature Letter of Credit equal to one percent (1.00%) per
annum (computed on the basis of a 360-day year, actual days elapsed) of the face
amount thereof, and (iii) fees upon the payment or negotiation of each
drawing under any Letter of Credit or Subfeature Letter of Credit and fees upon
the occurrence of any other activity with respect to any Letter of Credit or
Subfeature Letter of Credit (including without limitation, the transfer,
amendment or cancellation of any Letter of Credit or Subfeature Letter of
Credit) determined in accordance with Bank's standard fees and charges then in
effect for such activity. The standard
fees and charges in effect as of the date hereof are set forth in Schedule 1.3
hereto.”
Schedule 1.3 is hereby deleted in its
entirety and Schedule 1.3 attached hereto is substituted therefor.
4. Sections 1.5
and 1.6 are hereby deleted in their entirety, and the following substituted
therefor:
“SECTION
1.5. COLLATERAL.
As security for all indebtedness of
Borrower to Bank in connection with Letters of Credit issued (or deemed issued)
under the Letter of Credit Line, Borrower shall grant to Bank security interests
in Borrower’s deposit account * * * maintained at Bank and Borrower’s investment
account * * * maintained at Bank, in each case with including renewals thereof,
together with all proceeds thereof.
All of
the foregoing shall be evidenced by and subject to the terms of a security
agreement dated as of the date hereof. Borrower shall pay to Bank
immediately upon demand the full amount of all charges, costs and expenses (to
include fees paid to third parties and all allocated costs of Bank personnel),
expended or incurred by Bank in connection with any of the foregoing
security.
SECTION
1.6. GUARANTIES. The
payment and performance of all indebtedness and other obligations of Borrower to
Bank under the Line of Credit shall be jointly and severally guaranteed by
SunPower Corporation, Systems (formerly known as PowerLight Corporation), a
Delaware corporation, SunPower North America, Inc., a Delaware corporation and
SunPower Systems SA, a Swiss corporation in the principal amount of Fifty
Million Dollars ($50,000,000.00) each, as evidenced by and subject to the terms
of a guaranty in form and substance satisfactory to Bank. Borrower
shall cause each newly-acquired or newly-formed Domestic Material Subsidiary (as
defined in Section 2.12) to execute a joinder to said guaranty within 30 days
after its qualifying as a Domestic Material Subsidiary. Each
Subsidiary which executes or is required to execute such guaranty or a joinder
thereto shall be referred to as a “Third Party Obligor.””
Borrower
shall deliver to Bank a legal opinion from Swiss counsel to SunPower Systems SA
in form and substance acceptable to Bank.
Borrower represents and warrants that Borrower is relying upon its
own expertise or has obtained independent advice with respect to tax law and
regulations concerning guarantees from foreign subsidiaries.
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
5. Section 4.3
(c) is hereby deleted in its entirety, and the following substituted
therefor:
"(c) not
later than 15 days after and as of the end of each month, bank and/or brokerage
statements reflecting compliance with the Liquidity covenant set forth in
Section 4.9 (a) below;"
6. Sections 4.9
(a), (b) and (c) are hereby deleted in their entirety, and the following
substituted therefor:
“(a) Minimum
Liquidity (defined as unencumbered and unrestricted cash, cash equivalents, and
marketable securities acceptable to Bank, which, if cash, is U.S. Dollar
denominated, or if held in an account not maintained in the United States, is
denominated in any currency for which a U.S. Dollar equivalent is routinely
calculated by Bank, and, if other than cash, consist of financial instruments or
securities, acceptable to Bank, collectively, “Eligible Assets”) equal to or
greater than two (2.00) times the Bank’s commitment under the Line of Credit
with a minimum of $75,000,000.00 of such liquidity to be held in accounts
maintained in the United States, determined as of the end of each calendar
month. For purposes of calculating U.S. Dollar equivalent value of
Eligible Assets not denominated in U.S. Dollars, Bank will convert the value of
such assets as of the applicable statement date based on Bank’s foreign exchange
closing rates for such date. Without limiting the foregoing,
"Eligible Assets" shall include Borrower's auction rate securities listed on
Schedule 4.9(a) (each such security, an “Auction Rate”), subject to the terms of
the next paragraph.
So long as Borrower maintains Minimum
Liquidity (including Auction Rates) equal to or greater than three (3.00) times
the Bank's commitment under the Line of Credit, Bank shall value each Auction
Rate at the market rate bid for such Auction Rate at each month’s end, as (i)
communicated to Bank by Wells Capital Management Incorporated (“WCMI”), or (ii)
in the event that WCMI is unable to determine a market rate bid, as determined
and publicly announced by such other source as Bank in its sole discretion
considers acceptable. In the event that Borrower's Minimum Liquidity
(including Auction Rates) is less that three (3.00) times the Bank’s commitment
under the Line of Credit, Bank reserves the right to discount the WCMI (or, as
applicable, other source’s) value in Bank’s reasonable
discretion. The foregoing terms of this paragraph shall cease to be
effective at such time that Bank in good faith determines that liquidity has
been restored to the auction rate market in the United States and that the
auction rate securities market is functioning substantially as it did prior to
the current auction rate liquidity crisis. Following such
determination, "Eligible Assets" shall include Borrower's auction rate
securities to the extent permissible under Bank’s policies at such
time.
(b) Total
Liabilities divided by Tangible Net Worth not greater than 2.00 to 1.0,
determined as of the end of each fiscal quarter, with "Total Liabilities"
defined as the aggregate of current liabilities and non-current liabilities less
subordinated debt, and with "Tangible Net Worth" defined as the aggregate of
total stockholders' equity plus subordinated debt less any intangible assets and
less any loans or advances to, or investments in, any related entities or
individuals. Without limitation of the foregoing, Total Liabilities
shall include the amount available to be drawn under all outstanding letters of
credit (including Letters of Credit) issued for the account of Borrower and/or
any Subsidiary.
(c) Net
Income after taxes not less than $1.00 in each period of four consecutive fiscal
quarters, determined as of each fiscal quarter end on a rolling 4-quarter basis,
and with “Net Income” defined as net income on a GAAP basis plus (i)
amortization of intangibles and in-process research and development expenses
related to the acquisition of PowerLight Corporation, a California corporation,
by Borrower on January 10, 2007, and (ii) any amortization of intangibles and or
one time charges due to permitted acquisitions after the date
hereof. Borrower shall not have a single quarterly net loss of more
than $35,000,000.00 or consecutive quarterly net losses in aggregate of more
than $35,000,000.00, in each case calculated on a GAAP basis as adjusted
herein.”
7. Section
4.10 is hereby deleted in its entirety and the following substituted
therefore:
SECTION
4.10. NOTICE
TO BANK. Promptly (but in no event more than ten (10) business days
after an officer of Borrower first has knowledge of the occurrence of each such
event or matter) give written notice to Bank in reasonable detail
of: (a) the occurrence of any Event of Default, or any condition,
event or act which with the giving of notice or the passage of time or both
would constitute an Event of Default; (b) any change in the name or the
organizational structure of Borrower or any Third Party Obligor; (c) the
occurrence and nature of any Reportable Event or Prohibited Transaction, each as
defined in ERISA, or any funding deficiency with respect to any Plan; (d) any
termination or cancellation of any insurance policy which Borrower or any Third
Party Obligor is required to maintain, or any uninsured or partially uninsured
loss through liability or property damage, or through fire, theft or any other
cause affecting Borrower's property which could reasonably be expected to have a
Material Adverse Effect, or (e) any request for Borrower to perform under the
terms of any guaranty permitted under Section 5.4(i).
8. Sections
5.2, 5.3 and 5.4 are hereby deleted in their entirety, and the following
substituted therefor:
“SECTION 5.2. CAPITAL EXPENDITURES. Make any additional
investment in fixed assets in fiscal year ending December 28, 2008
in excess of an aggregate of Three Hundred Fifty Million Dollars
($350,000,000.00), on a consolidated basis.
SECTION
5.3.
OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except (a) the liabilities of Borrower or such Third Party
Obligor to Bank, and (b) Permitted Indebtedness. “Permitted
Indebtedness” shall mean (i) indebtedness of Borrower or a Third Party Obligor
to Borrower or any Subsidiary in the ordinary course of business,
(ii) indebtedness in favor of Solon AG and its affiliates under the
Amended and Restated Supply Agreement, dated as of April 14, 2005, as amended,
between Borrower and Solon AG fur Solartechnik; (iii) indebtedness in favor of
customers and suppliers of the Borrower and its Subsidiaries in connection with
supply and purchase agreements in an aggregate principal amount not to exceed
Two Hundred Million dollars ($200,000,000.00) at any one time and any
refinancings, refundings, renewals or extensions thereof (without shortening the
maturity thereof or increasing the principal amount thereof); (iv) 1.25% senior
convertible debentures issued in February 2007 in the aggregate principal amount
of Two Hundred Million dollars ($200,000,000.00) plus accrued interest thereon;
(v) obligations owed to Travelers Casualty and Surety Company of America and St.
Paul Fire and Marine Insurance Company, and their affiliates (collectively,
“Travelers”) in connection with obligations under the General Contract of
Indemnity with Travelers, pursuant to which Travelers issues bonds or otherwise
secures performance of Borrower and Subsidiaries for the benefit of their
customers and contract counterparties; (vi) 0.75% senior convertible debentures
issued in August 2007 in the aggregate principal amount of Two Hundred
Twenty-Five Million Dollars ($225,000,000.00) plus accrued interest thereon; and
(vii) additional indebtedness of Borrower and Third Party Obligors in an
aggregate principal amount not to exceed Fifty Million Dollars ($50,000,000.00)
outstanding at any one time.”
SECTION
5.4. GUARANTIES. Guarantee
or become liable in any way as surety, endorser (other than as endorser of
negotiable instruments for deposit or collection in the ordinary course of
business), accommodation endorser or otherwise for, nor pledge or hypothecate
any assets of Borrower or such Third Party Obligor as security for, any
liabilities or obligations of any person or entity, other than (i) in the
ordinary course of business (x) Borrower may guarantee the obligations of any
Third Party Obligor or any other Subsidiary, and (y) any Third Party Obligor may
guarantee (A) the obligations of Borrower or (B) the obligations of other Third
Party
Obligors
or any other Subsidiary, in each case for any obligation other than obligations
for borrowed money, (ii) any guaranty in favor of Bank, (iii) and guaranties in
favor of Travelers Casualty and Surety Company of America and St. Paul Fire and
Marine Insurance Company (together with their affiliates, collectively,
“Travelers”) in connection with obligations
under the General Contract of Indemnity with Travelers, pursuant to which
Travelers issues bonds or otherwise secures performance of Borrower and
Subsidiaries for the benefit of their customers and contract counterparties, and
(iv) guaranties and liabilities that constitute Permitted
Indebtedness.
9. Section
5.5 is hereby deleted in its entirety, and the following substituted
therefor:
“SECTION 5.5. LOANS,
ADVANCES, INVESTMENTS. Make any loans or advances to or investments
in any person or entity, except (a) any of the foregoing existing as of, and
disclosed to Bank prior to, the date hereof, (b) additional loans or advances by
Borrower or such Third Party Obligor to employees and officers in the ordinary
course of business and in amounts not to exceed an aggregate of Five Million
Dollars ($5,000,000.00) outstanding at any time, (c) investments which are made
in accordance with Borrower’s Investment Policy as from time to time adopted by
its Board of Directors, (d) investments which constitute Specified Transactions,
as defined in Section 5.8, below, (e) any of the foregoing that constitute
Permitted Indebtedness, (f) advances to, or investments in, a Subsidiary or in
Woongjin Energy by Borrower or any Third Party Obligor in the ordinary course of
business; and (g)
prepayment of obligations to vendors and suppliers in the ordinary course in an
amount not to exceed Three Hundred Million Dollars
($300,000,000.00).”
10. Section
5.8 is hereby deleted in its entirety, and the following substituted
therefor:
“SECTION 5.8. SPECIFIED
TRANSACTIONS. Enter into any Specified Transaction with respect to
which the Total Non-Stock Consideration paid or payable by Borrower and/or any
Subsidiary exceeds Two Hundred Million Dollars ($200,000,000.00) in the
aggregate per fiscal year; provided, however, that Borrower and any Third Party
Obligor may enter into a Specified Transaction regardless of the value of Total
Non-Stock Consideration so long as such Specified Transaction involves no
unaffiliated third parties and involves only (i) the Borrower and one or more
Subsidiaries or (ii) two or more Subsidiaries. “Specified
Transaction” means any of the following, provided that the applicable
transaction has been approved by the Board of Directors of the entity (i) whose
assets or equity interests are being acquired, or (ii) which is merging with
Borrower or a Third Party Obligor:
(a) the
acquisition by Borrower or a Third Party Obligor of all or substantially all of
the assets of another entity or division of such entity;
(b) the
merger or consolidation of any Third Party Obligor with or into any other
entity, provided that the surviving entity shall be a Third Party
Obligor;
(c) the
acquisition by Borrower or any Third Party Obligor of a controlling or majority
interest in any other entity; and
(d) investments
in other entities, including joint ventures.
“Total
Non-Stock Consideration” means all consideration whatsoever (other than stock in
Borrower or a Subsidiary) and shall include, without limitation, cash, other
property, assumed indebtedness, amounts payable, whether evidenced by notes or
otherwise and “earn-out” payments.”
11. Section
5.10 is hereby deleted in its entirety, and the following substituted
therefor:
“SECTION
5.10. CASH
LIMIT. Cause or permit SunPower Philippines Manufacturing, Ltd.’s
cash, cash equivalents and marketable securities at any time to exceed an
aggregate of Twenty-five Million Dollars ($25,000,000.00).”
12. Section
6.1(g) is hereby deleted in its entirety, and following substituted
therefore:
“(g) Borrower
is called upon to satisfy any guaranty obligation or simultaneous guaranty
obligations permitted under Section 5.4(i) with an aggregate liability in excess
of $10,000,000.00, where Borrower's performance of such obligations, as
substantiated by the beneficiary thereof, is not contingent on any additional
condition, including the passage of time.”
13. Except as
specifically provided herein, all terms and conditions of the Credit Agreement
remain in full force and effect, without waiver or modification. All
terms defined in the Credit Agreement shall have the same meaning when used in
this Amendment. This Amendment and the Credit Agreement shall be read
together, as one document.
14. Borrower
hereby remakes all representations and warranties contained in the Credit
Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
IN WITNESS WHEREOF, the parties hereto
have caused this Amendment to be executed as of the day and year first written
above.
SUNPOWER
CORPORATION |
|
|
WELLS
FARGO BANK,
NATIONAL ASSOCIATION
|
|
/s/
Emmanuel T. Hernandex
|
|
|
/s/ Matthew
Servatius
|
|
Emmanuel
T. Hernandez
|
|
|
Matthew
Servatius
|
|
Chief
Financial Officer
|
|
|
Vice
President
|
|
Schedule
1.3
Price
Schedule — Trade Services
As
of April 2008
|
Services
|
Price
|
STANDBY
LC
|
|
Issuance
|
20
bps p.a.
|
Amendment—Increase
|
20
bps p.a.
|
Amendment—No
Increase
|
$65.00
min.
|
Examination/Payment
|
20
bps, $250.00 min.
|
Transfer
|
20
bps, $250.00 min.
|
Assignment
|
$500.00
($750.00 with LC copy)
|
Consultation
to Structure LC
|
$200.00/hr.
|
Special
Handling
|
$250.00
min.
|
Cancellation
|
$100.00
|
Schedule
4.9(a)
SPWR-CITI
|
106238FJ2
|
BRAZOS
HGR ED-ARS-A5
|
SPWR-CITI
|
268440AM6
|
EFSI
2005-1 A4
|
SPWR-CITI
|
78442GFW1
|
SLM
STUDENT LOAN TRUST
|
SPWR-MONEYMARKETONE
|
19458LAW0
|
COLLEGIATE
FUNDING SERVICES ED
|
SPWR-MONEYMARKETONE
|
280907BH8
|
ELI
2004-1 A3
|
SPWR-MONEYMARKETONE
|
78442GFW1
|
SLM
STUDENT LOAN TRUST
|
SPWR-MONEYMARKETONE
|
19458LAN0
|
COELT
2003-B A6
|
Unassociated Document
EXHIBIT
10.2
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
FIRST
AMENDMENT TO
SECURITY
AGREEMENT: DEPOSIT ACCOUNT
Amendment
Agreement dated April 4, 2008 made by SunPower Corporation (“Debtor”) and Wells
Fargo Bank, National Association
(“Bank”).
WHEREAS
Debtor executed and delivered a security agreement dated as of July 13, 2007 in
favor of Bank (as amended from time to time, the “Security Agreement”) and Bank
has requested certain amendments to the Security Agreement (to which Debtor has
consented) and the parties wish to set out the terms of such
amendment;
NOW
THEREFORE THIS AGREEMENT WITNESSETH that, in consideration of the foregoing
premises and other good and valuable consideration (the receipt and sufficiency
of which are hereby acknowledged by each of the parties), the parties hereby
agree as follows:
Section
1. Bank and
Debtor agree that Section 5(b) of the Security Agreement is hereby amended as
follows:
“(b) Debtor
agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise
in writing: (i) that Bank is authorized to file financing statements in the name
of Debtor to perfect Bank's security interest in Collateral and Proceeds; (ii)
not to permit any lien on the Collateral or Proceeds, except in favor of Bank;
(iii) not to permit the principal amount of Collateral to be less than the
Required Amount, provided, however, that if the Required Amount is in excess of
$100,000,000.00, Debtor may maintain such principal amount in excess of
$100,000,000.00 either (x) as Collateral in the Deposit Account or (y) as
collateral in Debtor’s Securities Account; and (iv) to provide any service and
do any other acts which may be necessary to keep all Collateral and Proceeds
free and clear of all defenses, rights of offset and counterclaims.
Amounts
maintained in the Securities Account shall be measured as of each month end
according to the monthly Securities Account statement issued by Wells Capital
Management Incorporated. To the extent that Debtor requires assets in
the Securities Account to cover the Required Amount (permitted only when the
Deposit Account contains $100,000,000.00 or more), and such month end valuation,
together with amounts in the Deposit Account, falls short of the Required
Amount, Debtor shall promptly deposit additional assets of a nature satisfactory
to Bank into the Deposit or Securities Account, in either case so that (i)
aggregate amounts in such accounts meet or exceed the Required Amount, and (ii)
the first $100,000,000.00 is in the Deposit Account.
“Required
Amount” means the amount available to be drawn under outstanding Letters of
Credit, issued by Bank pursuant to Section 1.2 of that certain Credit Agreement
under the Letter of Credit Line, plus the amount drawn and not yet reimbursed
under such Letters of Credit. “Deposit Account” means Debtor’s
deposit account * * * maintained at Bank. “Securities Account” means
Debtor’s investment account * * * maintained at Bank, in which Debtor hereby
grants Bank a security interest of first priority.”
Section 2. Acknowledgement. The
parties acknowledge that other than as indicated herein, the Security Agreement
shall continue unamended and remain in full force and effect.
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
Section
3. Successors
and Assigns. This Agreement shall be binding upon Debtor and its
respective successors and permitted assigns and shall inure to the benefit of
Bank and its successors and assigns.
Section
4. Governing
Law. This Agreement shall be governed by and construed in accordance
with the laws of the State of California.
Section
5. Counterparts. This
Agreement may be executed in counterparts and by different parties in separate
counterparts, each of which when so executed shall be deemed an original and all
of which, taken together, shall constitute one and the same
instrument.
IN
WITNESS WHEREOF the parties hereto have hereunto set their hands and seals as of
the day and year first above written.
SUNPOWER
CORPORATION |
|
|
WELLS
FARGO BANK,
NATIONAL ASSOCIATION
|
|
By:
/s/ Emmanuel T.
Hernandez
|
|
|
By:
/s/ Matthew
Servatius
|
|
Emmanuel
T. Hernandez
|
|
|
Matthew
Servatius
|
|
Chief
Financial Officer
|
|
|
Vice
President
|
|
2
Unassociated Document
EXHIBIT
10.3
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
|
SECURITIES ACCOUNT CONTROL
AGREEMENT
|
WELLS
FARGO |
(Wells
Fargo Lender Intermeadiary) |
THIS
SECURITIES ACCOUNT CONTROL AGREEMENT (this “Agreement”) is entered into as of
April 4, 2008 by and among SunPower
Corporation (“Customer”),
WELLS FARGO BANK, NATIONAL ASSOCIATION, acting through its Investment
Management and Trust Group (“Intermediary”), and WELSS FARGO BANK, NATIONAL
ASSOCIATION, acting through its Peninsula Technology RCBO
Office (“Secured Party”).
RECITALS
A. Customer
maintains that certain Account no. * * *, and may now or
hereafter maintain sub-accounts thereunder or consolidated therewith
(collectively, the “Securities Account”) with Intermediary pursuant to an
agreement between Intermediary and Customer dated as of __________________,
_____ (the “Account Agreement”), and Customer has granted to Secured Party a
security interest in the Securities Account and all financial assets and other
property now or at any time hereafter held in the Securities
Account.
B. Secured
Party, Customer and Intermediary have agreed to enter into this Agreement to
perfect Secured Party’s security interests in the Collateral, as defined
below.
NOW,
THEREFORE, in consideration of their mutual covenants and promises, the partied
agree as follows:
1. DEFINITIONS.
As used herein:
1.1 the
term “Collateral shall mean: (a) the Securities Account; (b) all financial
assets credited to the Securities
Account; (c) all security entitlements with respect to the financial assets
credited to the Securities Account; (d) any and all other
investment property or assets maintained or recorded in the Securities
Account; and (e) all replacements
or substitutions for, and proceeds of the sale or other disposition of, any of
the foregoing, including
without limitation, cash proceeds; and
1.2 the
terms “investment property,” “entitlement order,” “financial asset” and
“security entitlement” shall have the respective meanings set
forth in the California Uniform Commercial Code. The parties hereby
expressly agree that all property,
including without limitation, cash, certificates of deposit and mutual funds, at
any time held in the Securities Account is
to be treated as a “financial asset”.
2. AGREEMENT
FOR CONTROL. Intermediary is authorized by Customer and agrees to
comply with all entitlement orders originated by Secured Party with respect to
the Securities Account, and all other requests or instructions from Secured
Party regarding disposition and/or delivery of the Collateral; without further
consent or direction from Customer or any other party.
3. CUSTOMER’S
RIGHTS WITH RESPECT TO THE COLLATERAL.
3.1 Until
Intermediary is notified otherwise by Secured Party: (a) Customer, or
any party authorized by Customer to act with respect to the
Securities Account, may give trading instructions to Intermediary with
respect to Collateral in the Securities
Account; and (b) Intermediary may distribute to Customer or any other party in
accordance with Customer’s directions only that portion of the Collateral which
consists of interest and/or cash dividends earned on financial assets maintained
in the Securities Account.
3.2 Without
Secured Party’s prior written consent, except to the extent permitted by the
preceding paragraph: (a) neither Customer nor any party
other than Secured Party may withdraw any Collateral from the Securities
Account; and (b) Intermediary will not comply with any entitlement order or
request to withdraw any
Collateral from the Securities
Account given by any party other than Secured Party.
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
3.3 Upon
receipt of either written or oral notice from Secured Party: (a) Intermediary
shall promptly cease complying with entitlement orders and other instructions
concerning the Collateral, including the
Securities Account from all parties
other than Secured Party; and (b) Intermediary shall not make any further
distributions of and
Collateral to any party other than Secured Party, nor permit any further
voluntary changes in the financial assets.
4.
INTERMEDIARY’S ACKNOWLEDGMENTS. Intermediary acknowledges
that:
4.1
The Securities Account is maintained with the Intermediary solely in Customer’s
name.
4.2 Intermediary
has no knowledge of any claim to, security interest in or lien upon any of the
Collateral except: (a) the security interest
in favor of Secured Party; and (b) Intermediary’s liens securing fees
and charges, or
payment for open trade commitments, as described in the last paragraph of this
Section.
4.3 Any
claim to, security interest in or lien upon any of the Collateral which
Intermediary now has or at any time hereafter
acquires shall be junior and subordinate to the security interests of Secured
Party in the Collateral, except for Intermediary’s liens securing; (a) fees and
charges owned by Customer with respect to the operation of the
Securities Account; and (b) payment owed to Intermediary for open trade
commitments for purchases in and for the
Securities Account.
5. AGREEMENTS
OF INTERMEDIARY AND CUSTOMER. Intermediary and Customer agree
that:
5.1 Intermediary
shall flag its books, records and systems to reflect Secured Party’s security
interests in the Collateral, and shall provide notice thereof to any party
making inquiry as to Customer’s accounts
with Intermediary to whom or which
Intermediary is legally required or permitted to provide
information.
5.2 Intermediary
shall send copies of all statements relating to the Securities Account
simultaneously to Customer and Secured Party
5.3
Intermediary shall promptly notify Secured Party if any other party asserts any
claim to, security interest in or lien upon any of the
Collateral, and Intermediary shall not enter into any control, custodial or
other similar agreement with any other party that would create or acknowledge
the existence of any such other claim, security interest or lien.
5.4 Without
Secured Party’s prior written consent, Intermediary and Customer shall not
amend, modify or terminate the Account Agreement, other than: (a)
amendments to reflect ordinary and reasonable changes in Intermediary’s fees and
charges for handling the Securities Account; and (b) operational changes
initiated by Intermediary as long as they do not alter any of the Secured
Party’s rights hereunder.
6. MISCELLANEOUS.
6.1 This
Agreement shall not create any obligation or duty of Intermediary except as
expressly set forth herein.
6.2 In
the event of any conflict between this Agreement and the Account Agreement or
any other agreement between Intermediary and Customer, the terms of this
Agreement shall control.
6.3 All
notices, requests and demands which any party is required or may desire to give
to any other party under any provision of this Agreement
must be in writing (unless otherwise specifically provided) and delivered to
each party at the address of facsimile number set forth below its signature, or
to such other address or facsimile number as any party may designate by written
notice to all other parties. Each such notice, request and
demand shall be deemed given or made as follows: (a) if sent by
hand delivery, upon delivery; (b) if sent by
facsimile, upon receipt; and (c)
if sent by mail, upon the earlier of the date of receipt or 3 days after deposit
in the U.S. mail, first class and postage prepaid.
6.4 This
Agreement shall be binding upon and inure to the benefit of the heirs,
executors, administrators, legal representatives, successors and assigns of the
parties. This Agreement may be amended or modified only
in writing signed by all parties
hereto.
6.5 This
Agreement shall terminate upon Intermediary’s receipt of written notice from
Secured Party expressly stating that Secured Party no longer claims any security
interest in the Collateral.
6.6 This
Agreement shall be governed by and construed in accordance with the laws of the
State of California.
IN
WITNESS WHEREOF, the parties have executed this Agreement as of the date first
set forth above.
INTERMEDIARY: |
SECURED
PARTY: |
|
|
WELLS
FARGO BANK,
NATIONAL ASSOCIATION
|
WELLS FARGO
BANK,
NATIONAL ASSOCIATION
|
|
|
By: /s/ Karen
Norton |
By: /s/ Matthew
Servatius |
|
Matthew
Servatius, Relationship Manager |
|
|
Title: Manager |
Address: 400 Hamilton
Avenue |
|
Palo Alto, CA
94301 |
Address: |
|
525 Market Street, 10th
Floor
San
Francisco, CA 94105
|
FAX
No.:
|
FAX No.:
|
|
CUSTOMER: |
|
|
|
SunPower
Corporation |
|
|
|
By: /s/ Emmanuel T.
Hernandez |
|
Emmanuel T.
Hernandez, Chief Financial Officer |
|
|
|
Address: 3939 N First
St. |
|
San Jose, CA
95134 |
|
|
|
FAX
No.: |
|
Unassociated Document
EXHIBIT 10.4
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
ADDENDUM
TO SECURITY AGREEMENT: SECURITIES ACCOUNT
THIS ADDENDUM is attached to and made a
part of that certain Security Agreement: Securities Account executed by SUNPOWER
CORPORATION ("Debtor") in favor of WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank"), dated as of April 4, 2008 (the "Agreement").
The following provisions are hereby
incorporated into the Agreement:
1. Securities Account
Activity. So long as no Event of Default exists, Debtor, or
any party authorized by Debtor to act with respect to the Securities Account,
may (a) receive payments of interest and/or cash dividends earned on financial
assets maintained in the Securities Account, (b) subject to the limitation in
the following sentence (and, unless and until Bank sends notice pursuant to
Section 3.3 of the Securities Account Control Agreement dated April 4, 2008,
notwithstanding any provision to the contrary in said Securities Account Control
Agreement), withdraw Collateral, and (c) trade financial assets maintained in
the Securities Account. Without Bank's prior written consent, except
as permitted by the preceding sentence, neither Debtor nor any party other than
Bank may withdraw or receive any distribution of any Collateral from the
Securities Account. The Collateral Value of the Securities Account
shall at all times be equal to or greater than one hundred percent (100%) of the
aggregate amount available to be drawn under outstanding Letters of Credit plus
the amount drawn and not yet reimbursed under Letters of Credit (the “Exposure
Amount”), less the amount then in Debtor’s deposit account * * * (the “Deposit
Account”) at Bank (such result, the “Required Amount”.)
Debtor
understands that Bank will not consider the Collateral Value of the Securities
Account unless and until Debtor has at least $100,000,000.00 in the Deposit
Account. If the $100,000,000.00 Deposit Account balance condition in
the preceding sentence is satisfied and the Collateral Value, for any reason and
at any month end (as reflected in the monthly Securities Account statement
issued by Wells Capital Management Incorporated) is less than the Required
Amount, Debtor shall promptly deposit additional assets of a nature satisfactory
to Bank into the Securities Account or Deposit Account, in either case in
amounts or with values sufficient to achieve the Required Amount. If
the Deposit Account balance is greater than or equal to the Exposure Amount,
Debtor has no obligation to maintain Collateral in the Securities
Account.
2. ”Collateral Value"
means 100% of the market value of the Securities Account, with market value in
all instances determined by Bank in its sole discretion, and excluding from such
computation all WF Securities and Collective Investment
Funds. Notwithstanding the foregoing, Bank shall exclude from the
determination of Collateral Value, at Bank's sole discretion (a) any stock with
a market value of $10.00 or less, and (b) all investment property from an issuer
if Bank determines such issuer to be ineligible.
3. Exclusion from
Collateral. Notwithstanding anything herein to the contrary,
the terms "Collateral" and "Proceeds" do not include, and Bank disclaims a
security interest in all WF Securities and Collective Investment Funds now or
hereafter maintained in the Securities Account.
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
4. "Collective Investment
Funds" means collective investment funds as described in 12 CFR 9.18 and
includes, without limitation, common trust funds maintained by Bank for the
exclusive use of its fiduciary clients.
5. "WF Securities" means
stock, securities or obligations of Wells Fargo & Company or of any
affiliate thereof (as the term affiliate is defined in Section 23A of the
Federal Reserve Act (12 USC 371(c), as amended from time to
time).
6. Limitation on
Indebtedness. Notwithstanding anything in this Agreement to
the contrary, the obligations secured hereby are limited to all present and
future Indebtedness of Debtor to Bank arising under or in connection with the
Letter of Credit Line and all Letters of Credit issued thereunder, as such terms
are defined in a Credit Agreement dated as of July 13, 2007 between Bank and
Debtor (as amended, extended or renewed – the “Credit Agreement).
7. Events of
Default. Notwithstanding anything in this Agreement to the
contrary, only the occurrence of any of the following shall constitute an "Event
of Default" under this Agreement: (a) any defined event of default, under the
Credit Agreement, as defined above; (b) any representation or warranty made by
Debtor herein shall prove to be incorrect, false or misleading in any material
respect when made; (c) Debtor shall fail to observe or perform any obligation or
agreement contained herein; or (d) any impairment of the rights of Bank in any
Collateral or Proceeds, or any attachment or like levy on any Collateral or
Proceeds.
IN WITNESS WHEREOF, this Addendum has
been executed as of the same date as the Agreement.
SUNPOWER
CORPORATION |
|
|
WELLS
FARGO BANK,
NATIONAL ASSOCIATION
|
|
By:
/s/ Emmanuel T.
Hernandez
|
|
|
By:
/s/ Matthew
Servatius
|
|
Emmanuel
T. Hernandez
|
|
|
Matthew
Servatius
|
|
Chief
Financial Officer
|
|
|
Vice
President
|
|
ex10-5.htm
EXHIBIT 10.5
JOINDER
TO CONTINUING GUARANTY DATED AS OF JULY 13, 2007
IN FAVOR
OF WELLS FARGO BANK, NATIONAL ASSOCIATION
This
Joinder is executed by SunPower Systems SA (“SUN SA”), an indirect subsidiary of
SunPower Corporation, as of this 4th day of April, 2008. SUN SA
executes this joinder in connection with and as a condition to various credit
accommodations extended under the terms and conditions of that certain Credit
Agreement dated as of July 13, 2007 between SunPower Corporation (“Borrower”)
and Wells Fargo Bank, National Association (“Bank”) (as such Credit Agreement
may be amended or replaced form time to time).
By
executing in the space provided below, SUN SA agrees that it assumes liability
to Bank under the terms of the Continuing Guaranty dated as of July 13, 2007
(“Guaranty”) executed by certain of Borrower’s Subsidiaries in favor of Bank
relative to the obligations of Borrower to Bank as though it had executed said
Guaranty as a Guarantor thereunder and it shall for all purposes be deemed a
Guarantor under said Guaranty.
SUN SA further agrees that the
following is added to and made part of the Guaranty. Capitalized
terms used without definition herein shall have the meanings assigned to them in
the Guaranty.
1. Additional
Representations. SUN SA represents and warrants to Bank
that:
(a) No
approval, consent or authorization of, order, registration or license by, filing
with, giving notice to, or taking any other action by or in respect of any
governmental or regulatory authority or central bank or other fiscal, monetary
or other authority is required in connection with the execution and delivery of,
or performance of SUN SA's obligations under this Guaranty or for the validity,
enforceability or admissibility in evidence of this Guaranty.
(b) In
the event a final judgment of any court in the United States of America is
obtained after service of process in the manner specified in this Guaranty,
then, subject to the provisions of the Law for the Enforcement of Foreign
Judgments, 1958, and applicable case law, and provided that a petition for the
authorization of such judgment is filed with the appropriate Swiss court(s),
subject to specified time limitations the same would be enforceable
by the courts of Switzerland, provided that: (a) adequate service of process has
been effected and the defendant has had a reasonable opportunity to be heard;
(b) the judgment and its enforcement are not contrary to the law, public policy,
security or sovereignty of Switzerland; (c) the judgment was obtained after due
process before a court of competent jurisdiction according to the rules of
private international law prevailing in Switzerland; (d) the judgment was not
obtained by fraudulent means and does not conflict with any other valid judgment
in the same matter between the same parties; (e) an action between the same
parties in the same matter is not pending in any Swiss court at the time the
lawsuit is instituted in the U.S. court; and (f) the U.S. court is not
prohibited from enforcing the judgments of the courts of
Switzerland.
(c) This
Guaranty is not subject to any registration, stamp, documentary or similar tax,
other than stamp duty, should the Swiss tax authorities determine that stamp
duty is applicable to the Guaranty.
(d) Neither
SUN SA nor any of SUN SA's assets enjoys any right of immunity from suit,
attachment or execution in aid of a judgment in respect of SUN SA's obligations
under this Guaranty.
2. Waiver. To
the extent SUN SA or any assets of SUN SA enjoys any right of immunity from
suit, attachment or execution in aid of a judgment in respect of SUN SA’s
obligations under this Guaranty, and if SUN SA or any assets of SUN SA should
become entitled to any such right of immunity, then SUN SA hereby waives such
right or rights.
3. Payments. Any
payments made to Bank by SUN SA pursuant to this Guaranty shall be free and
clear of any deductions or withholdings for or on account of any taxes, levies,
imposts, duties or other charges of whatever nature imposed by any government,
political subdivision, bank or taxing authority. SUN SA shall pay to
Bank such amounts as may be necessary in order that every payment made by
Guarantor hereunder, after SUN SA makes any required deductions or withholding
for or on account of any taxes, levies, imposts, duties or other charges of
whatever nature imposed by any government, political subdivision, bank or taxing
authority, shall not be less than the payment otherwise required
hereunder.
4. Withholding. Without
limiting Bank's rights under any of the other provisions of this Guaranty, in
the event any taxes, levies, imposts, duties or other charges of whatever nature
are assessed against Bank in connection with payments to Bank by SUN SA
hereunder or otherwise in connection with this Guaranty, then SUN SA shall pay
when due, and indemnify and hold Bank harmless from, such charges, without
reducing the net amount of such payments to be made to Bank below that amount
which Bank would have received had such taxes or charges not been
assessed. SUN SA shall furnish to Bank a receipt evidencing payment
of any such taxes or charges promptly after such payment, and the tax return or
other report filed with respect to any such taxes or charges promptly after such
filing, and, in any event, shall provide each such receipt and each such return
or report within 10 days after receipt of Bank’s request therefor from time to
time.
5. Indemnity. SUN
SA agrees to pay, and to indemnify and hold Bank harmless from, any present or
future claim or liability for any registration, stamp, documentary, court, or
similar taxes, fees or charges, or any penalties or interest with respect
thereto, which may be assessed, levied or collected by Switzerland, any state or
other political subdivision of Switzerland, any other country or other
jurisdiction in which SUN SA now or in the future maintains any property or
assets, or any governmental agency of any of the foregoing, or otherwise in
connection with the execution, notarization, formalization, issuance, delivery,
filing, registration or enforcement of this Guaranty. If Bank
requests, SUN SA shall furnish to Bank a receipt evidencing payment of any such
taxes or other amounts, and the tax returns or other reports filed with respect
to such taxes or other amounts, within 30 days after receipt of such
request.
6. Registration. If
requested by Bank at any time, SUN SA shall cause this Guaranty to be
registered, notarized or otherwise formalized to the extent at any time required
by the applicable laws of Switzerland, the applicable laws of any province or
other political subdivision of Switzerland, or the applicable laws of any other
country or other jurisdiction in which SUN SA now or in the future maintains any
property or assets, and SUN SA shall pay, and indemnify and hold Bank harmless
from, any liability for any stamp taxes or any registration, documentation or
other types of fees, charges, taxes or fines in connection with any such
registration, notarization or formalization. SUN SA shall provide
Bank with evidence of such registration within 45 days after Bank’s request for
such evidence, which evidence shall be in form and substance satisfactory to
Bank.
7. Suit;
Service. Any suit, action or proceeding against SUN SA with respect
to this Guaranty may be brought in (a) the courts of the State of California,
(b) the United States District Court for the Northern District of California, or
(c) the courts of the country of SUN SA's incorporation, as Bank may elect in
its sole discretion, and SUN SA hereby submits to any such suit, action,
proceeding or judgment and waives any other preferential jurisdiction by reason
of domicile. SUN SA hereby agrees that service of all writs,
processes and summonses in any suit, action or proceeding brought in the State
of California may be made upon Borrower, presently located at 3939 N. First
Street, San Jose, CA 95134 (the "Process Agent"). SUN SA hereby
irrevocably appoints the Process Agent its agent and true and lawful
attorney-in-fact while any of SUN SA 's obligations under this Guaranty remain
unsatisfied, in its name, place and stead only to accept such service of any and
all such writs, processes and summonses,
and
agrees that the failure of the Process Agent to give any notice of any such
service of process to SUN SA shall not impair or affect the validity of such
service or of any judgment based thereon. SUN SA hereby further
irrevocably consents to the service of process in any suit, action or proceeding
in the above specified courts by the mailing thereof by Bank by registered or
certified mail, postage prepaid, to SUN SA at the address specified below SUN SA
's signature. Nothing herein shall in any way be deemed to limit the
ability of Bank to serve any writs, processes or summonses in any other manner,
as may be permitted by applicable law. SUN SA irrevocably waives any objection
which it may now or hereafter have to the laying of the venue of any suit,
action or proceeding arising out of or relating to this Guaranty brought in the
courts of the State of California or of the United States District Court for the
Northern District of California, or the courts in the country of SUN SA 's
incorporation, and also irrevocably waives any claim that any such suit, action
or proceeding brought in any of those courts has been brought in an inconvenient
forum.
8. Judgment
Currency. Notwithstanding any judgment rendered in a currency other
than United States Dollars, SUN SA shall not be relieved of any obligations with
respect to any amount owed by it to Bank under this Guaranty except to the
extent of the amount in United States Dollars which Bank is able to acquire with
such amount of such currency on the Banking Day (a day when Bank is open for
business in San Francisco, California, U.S.A.) following receipt of such amount
by Bank. If the amount in United States Dollars so acquired is less
than the amount initially due to Bank, SUN SA shall indemnify Bank by paying the
difference between such amounts in United States Dollars. The payment
of any additional amount so required of SUN SA under this Section shall
constitute an independent obligation of SUN SA, the enforcement of which
obligation may not be impeded by SUN SA.
Date:
April 4, 2008
SUNPOWER
SYSTEMS SA
By: /s/ Thomas L.
Dinwoodie
Title:
Thomas L. Dinwoodie, Director
By: Tom
Dinwoodie
Title:
CTO
Address:
SunPower
Systems SA
c/o
SunPower Corporation
Attn: Corporate
Secretary
3939
North First Street
San Jose,
CA 95134
Unassociated Document
EXHIBIT 10.6
THIRD
AMENDMENT TO LEASE
THIS
THIRD AMENDMENT TO LEASE (this “Third Amendment”) is dated as of April 7, 2008
and is made between CYPRESS SEMICONDUCTOR CORPORATION, as Landlord, and SUNPOWER
CORPORATION, as Tenant, to be a part of that certain Office Lease Agreement and
all exhibits thereto, dated for reference purposes only as of May 15, 2006 (the
“Original Lease”), concerning approximately 43,732 rentable square feet (“RSF”),
located within the Premises stated in the Original Lease. The Premises are
located within the Building commonly known as Building #3, (the“Building”),
located at 3939 N. First Street (the “Land”) as shown on the floor plan on Exhibit
A to the Original Lease.
Landlord
and Tenant now desire to modify the Original Lease and, in consideration of the
mutual promises contained herein and for the other good and valuable
consideration, the receipt and sufficiency of which the parties hereby
acknowledge, Landlord and tenant hereby agree, intending to be bound thereby,
that the Original Lease is modified and supplemented in accordance with the
terms and conditions set forth below:
1.
|
Basic
Terms Item #9 of the Original Lease is hereby amended to state in its
entirety as follows:
|
Lease |
Monthly
Base |
Rentable |
Monthly |
Months |
Rent /
SF |
Square Feet |
Base |
1-2 |
$0.00/SF |
43,732 |
$- |
3-8 |
$2.16/SF |
43,732 |
$94,461 |
9-12 |
$2.16/SF |
45,840 |
$99,014 |
13-14 |
$2.25/SF |
45,840 |
$103,140 |
15-24 |
$2.25/SF |
51,228 |
$115,263 |
25-36 |
$2.34/SF |
51,228 |
$119,873 |
37-48 |
$2.43/SF |
51,228 |
$124,484 |
49-60 |
$2.53/SF |
51,228 |
$129,606 |
2.
|
The
monthly Base Rent remains unchanged through the 8th
month (or December 31, 2006) as per Original Lease. However,
Article 2, Section 2.1, is hereby amended such that the monthly Base Rent
shall be adjusted to include the additional space added pursuant to
Section 1 of this Third Amendment. Effective during the 9th
month of the term (or January 1, 2007), the monthly Base Rent shall be
adjusted to include the additional 2,108 RSF, and, effective during the
15th
month of the term (or July 1, 2007), the monthly Base Rent shall be
adjusted to include the additional 5,388 RSF, in each case as shown in the
Base Rent Table in Basic Terms Item #9 as amended by this Third
Amendment.
|
3.
|
In
the event of any inconsistency between this Third Amendment and the
Original Lease, the terms in this Third Amendment shall prevail. Except as
modified herein, the Original Lease remains in full force and
effect.
|
4.
|
The
Original Lease, as amended by this Third Amendment, constitutes the entire
agreement between the parties and supersedes any previous agreements
between the parties with respect to the subject matter of this Third
Amendment. If any provision of this Third Amendment is held to
be illegal, invalid or unenforceable, in whole or in part, such provision
will be modified to the minimum extent necessary to make it legal, valid
and enforceable, and the legality, validity and enforceability of the
remaining provisions will not be affected
thereby.
|
IN
WITNESS WHEREOF, the parties hereto have executed this Third Amendment as of the
date first set forth above.
|
CYPRESS
SEMICONDUCTOR CORP: |
|
|
|
|
|
|
By:
|
/s/ Neil
Weiss |
|
|
Name |
Neil
Weiss |
|
|
Title |
Sr.
Vice President, Treasurer |
|
|
Date |
4/7/08 |
|
|
SUNPOWER
CORPORATION: |
|
|
|
|
|
|
By:
|
/s/ Emmanuel
Hernandez |
|
|
Name |
Emammuel
Hernandez |
|
|
Title |
CFO |
|
|
Date |
4/8/08 |
|
Unassociated Document
AMENDED
AND RESTATED SUNPOWER CORPORATION
ANNUAL KEY EMPLOYEE
BONUS PLAN
(Amended
Effective January 31, 2008)
SECTION
1: BACKGROUND, PURPOSE AND DURATION
1.1 Effective
Date The amendment and restatement of this Plan is effective as of
January 31, 2008, subject to ratification by an affirmative vote of the holders
of a majority of the Shares that are present in person or by proxy and entitled
to vote at the 2008 Annual Meeting of Stockholders of the Company.
1.2 Purpose of
the Plan The Plan is intended to increase stockholder value and the
success of the Company by motivating Participants (1) to perform to the
best of their abilities, and (2) to achieve the Company’s objectives. The
Plan’s goals are to be achieved by providing Participants with the opportunity
to earn incentive awards for the achievement of goals relating to the
performance of the Company. The Plan is intended to permit the payment of
bonuses that qualify as performance-based compensation under Section 162(m)
of the Code.
SECTION
2: DEFINITIONS
The
following words and phrases shall have the following meanings unless a different
meaning is plainly required by the context:
2.1 “Actual
Award” means as to any Performance Period, the actual award (if any)
payable to a Participant for the Performance Period. Each Actual Award is
determined by the Payout Formula for the Performance Period, subject to the
Committee’s authority under Section 3.6 to eliminate or reduce the award
otherwise determined by the Payout Formula.
2.2 “Affiliate”
means any corporation or other entity (including, but not limited to,
partnerships and joint ventures) controlled by the Company.
2.3 “Base
Salary” means as to any Performance Period, the Participant’s earned
salary during the Performance Period. Such Base Salary shall be before both
(a) deductions for taxes or benefits, and (b) deferrals of
compensation pursuant to Company-sponsored plans and Affiliate-sponsored
plans.
2.4 “Board”
means the Board of Directors of the Company.
2.5 “Code”
means the Internal Revenue Code of 1986, as amended. Reference to a specific
section of the Code or regulation thereunder shall include such section or
regulation, any valid regulation promulgated thereunder, and any comparable
provision of any future legislation or regulation amending, supplementing or
superseding such section or regulation.
2.6 “Committee”
means the committee appointed by the Board (pursuant to Section 5.1) to
administer the Plan.
2.7 “Company”
means SunPower Corporation, a Delaware corporation, or any successor
thereto.
2.8 “Determination
Date” means the latest possible date that will not jeopardize a Target
Award or Actual Award’s qualification as performance-based compensation under
Section 162(m) of the Code.
2.9 “Disability”
means a permanent disability in accordance with a policy or policies established
by the Committee (in its discretion) from time to time.
2.10
“Employee”
means any employee of the Company or of an Affiliate, whether such employee is
so employed at the time the Plan is adopted or becomes so employed subsequent to
the adoption of the Plan.
2.11
“Fiscal
Quarter” means a fiscal quarter within a Fiscal Year of the
Company.
2.12
“Fiscal
Year” means the fiscal year of the Company.
2.13
“Maximum
Award” means as to any Participant during any period of three
(3) consecutive Fiscal Years, $9 million.
2.14
“Participant”
means as to any Performance Period, an Employee who has been selected by the
Committee for participation in the Plan for that Performance
Period.
2.15
“Payout
Formula” means as to any Performance Period, the formula or payout matrix
established by the Committee pursuant to Section 3.4 in order to determine
the Actual Awards (if any) to be paid to Participants. The formula or matrix may
differ from Participant to Participant.
2.16
“Performance
Period” means any Fiscal Year or such other period longer or shorter than
a Fiscal Year but not shorter than a Fiscal Quarter or longer than three Fiscal
Years, as determined by the Committee in its sole discretion.
2.17
“Performance
Goals” means the goal(s) (or combined goal(s)) determined by the
Committee (in its discretion) to be applicable to a Participant for a Target
Award for a Performance Period. As determined by the Committee, the Performance
Goals for any Target Award applicable to a Participant may be made subject to
the attainment of performance goals for a specified period of time relating to
one or more of the following performance criteria, either individually,
alternatively or in any combination, applied to either the Company as a whole or
to a business unit or Subsidiary, either individually, alternatively or in any
combination, and measured either annually or cumulatively over a period of
years, on an absolute basis or relative to a pre-established target, to previous
years’ results or to a designated comparison group or index, in each case as
specified by the Committee: (a) cash flow, (b) earnings per share, (c) earnings
before interest, taxes and amortization, (d) return on equity, (e) total
stockholder return, (f) share price performance, (g) return on capital, (h)
return on assets or net assets, (i) revenue, (j) income or net income, (k)
operating income or net operating income, (l) operating profit or net operating
profit, (m) operating margin or profit margin, (n) return on operating revenue,
(o) return on invested capital, or (p) market segment shares. The Committee may
provide for the adjustment of any evaluation of performance against
the Performance Goals to exclude any objective and measurable events
specified at the time the Performance Goals are established, including but not
limited to any of the following events that occurs during a Performance
Period: (i) asset write-downs, (ii) litigation or claim judgments or
settlements, (iii) the effect of changes in tax law, accounting principles or
other such laws or provisions affecting reported results, (iv) accruals for
reorganization and restructuring programs, (v) acceleration of amortization of
debt issuance costs, (vi) stock-based compensation charges, (vii)
purchase-accounting related charges, including amortization of intangible
purchased assets, acquired in-process research and development charges, and
similar charges associated with purchase accounting, (viii) any extraordinary
nonrecurring items as described in Accounting Principles Board Opinion No. 30,
and (ix) the related tax effects associated with each of the adjustments listed
in clauses (i) through (viii) above.
2.18
“Plan”
means this Amended and Restated SunPower Corporation Annual Key Employee Bonus
Plan, as set forth in this instrument and as hereafter amended from time to
time.
2.19
“Progress
Payment” means a portion of the Target Award or Actual Award for which
the Committee has determined in accordance with Section 3.6 has been earned
by the Participant as of the end of the Progress Period based on achievement of
the applicable Performance Goals and thereby may be paid to the Participant
during the Performance Period.
2.20
“Progress
Period” means a period shorter than and within the Performance Period for
which a Progress Payment may be made.
2.22
“Target
Award” means the target award payable under the Plan to a Participant for
the Performance Period, expressed as a percentage of his or her Base Salary or a
specific dollar amount, as determined by the Committee in accordance with
Section 3.3.
2.23
“Termination
of Employment” means a cessation of the employee-employer relationship
between an Employee and the Company or an Affiliate for any reason, including,
but not by way of limitation, a termination by resignation, discharge, death,
Disability, retirement (occurring in accordance with the policies established by
the Committee (in its discretion) from time to time, or the disaffiliation of an
Affiliate, but excluding any such termination where there is a simultaneous
reemployment by the Company or an Affiliate.
SECTION
3: SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS
3.1 Selection of
Participants The Committee, in its sole discretion, shall select the
Employees who shall be Participants for any Performance Period. The Committee,
in its sole discretion, also may designate as Participants one or more
individuals (by name or position) who are expected to become Employees during a
Performance Period. Participation in the Plan is in the sole discretion of the
Committee, and shall be determined on a Performance Period by Performance Period
basis. Accordingly, an Employee who is a Participant for a given Performance
Period in no way is guaranteed or assured of being selected for participation in
any subsequent Performance Period.
3.2 Determination
of Performance Goals The Committee (or its designee described in Section
5.4), in its sole discretion, shall establish the Performance Goals for each
Participant for the Performance Period. Such Performance Goals shall be set
forth in writing.
3.3 Determination
of Target Awards The Committee, in its sole discretion, shall establish a
Target Award for each Participant. Each Participant’s Target Award shall be
determined by the Committee in its sole discretion, and each Target Award shall
be set forth in writing.
3.4 Determination
of Payout Formula or Formulae On or prior to the Determination Date, the
Committee, in its sole discretion, shall establish a Payout Formula or Formulae
for purposes of determining the Actual Award (if any) payable to each
Participant. Each Payout Formula shall (a) be in writing, (b) be based
on a comparison of actual performance to the Performance Goals, (c) provide
for the payment of a Participant’s Target Award if the Performance Goals for the
Performance
Period are achieved at the predetermined level, and (d) provide for the
payment of an Actual Award greater than or less than the Participant’s Target
Award, depending upon the extent to which actual performance exceeds or falls
below the Performance Goals. Notwithstanding the preceding, in no event shall a
Participant’s Actual Award for any Performance Period exceed the Maximum
Award.
3.5 Date for
Determinations The Committee shall make all determinations under
Sections 3.1 through 3.4 on or before the Determination Date.
3.6 Determination
of Actual Awards After the end of each Performance Period or, to the
extent Progress Payments will be made, after the end of the Progress Period, the
Committee (or its designee described in 5.4) shall certify in writing the extent
to which the Performance Goals applicable to each Participant for the
Performance Period or Progress Period, as applicable, were achieved or exceeded,
as determined by the Committee. The Actual Award for each Participant shall be
determined by applying the Payout Formula to the level of actual performance
that has been certified in writing by the Committee. Notwithstanding any
contrary provision of the Plan, the Committee, in its sole discretion, may
(a) eliminate or reduce the Actual Award payable to any Participant below
that which otherwise would be payable under the Payout Formula, and
(b) determine whether or not any Participant will receive an Actual Award
in the event the Participant incurs a Termination of Employment prior to the
date the Actual Award is to be paid pursuant Section 4.2
below.
SECTION
4: PAYMENT OF AWARDS
4.1 Right to
Receive Payment Each Actual Award that may become payable under the Plan
shall be paid solely from the general assets of the Company or the Affiliate
that employs the Participant (as the case may be), as determined by the
Committee. Nothing in this Plan shall be construed to create a trust or to
establish or evidence any Participant’s claim of any right to payment of an
Actual Award other than as an unsecured general creditor with respect to any
payment to which he or she may be entitled. A Participant must be
employed by the Company at the time of the payment to receive such payment,
unless the Participant has died or become Disabled.
4.2 Timing of
Payment Subject to Section 3.6, payment of each Actual Award shall
be made as soon as administratively practicable, but in no event later than two
and one-half months after the end of the applicable Performance Period or
Progress Period.
4.3 Form of
Payment Each Actual Award shall be paid in cash (or its equivalent) in a
single lump sum.
4.4 Payment in
the Event of Death If a Participant dies prior to the payment of an
Actual Award (determined under Section 3.6) that was scheduled to be paid
to him or her prior to death for a prior Performance Period, the Award shall be
paid to his or her designated beneficiary or, if no beneficiary has been
designated, to his or her estate.
SECTION
5: ADMINISTRATION
5.1 Committee is
the Administrator The Plan shall be administered by the Committee. The
Committee shall consist of not less than two (2) members of the Board. The
members of the Committee shall be appointed from time to time by, and serve at
the pleasure of, the Board. Each member of the Committee shall qualify as an
“outside director” under Section 162(m) of the Code. If it is later
determined that one or more members of the Committee do not so qualify, actions
taken by the Committee prior to such determination shall be valid despite such
failure to qualify. Any member of the Committee may resign at any time by notice
in writing mailed or delivered to the Secretary of the Company. As of the
Effective Date of the Plan, the Plan shall be administered by the Compensation
Committee of the Board.
5.2 Committee
Authority It shall be the duty of the Committee to administer the Plan in
accordance with the Plan’s provisions. The Committee shall have all powers and
discretion necessary or appropriate to administer the Plan and to control its
operation, including, but not limited to, the power to (a) determine which
Employees shall be granted awards, (b) prescribe the terms and conditions
of awards, (c) interpret the Plan and the awards, (d) adopt such
procedures and subplans as are necessary or appropriate to permit participation
in the Plan by Employees who are foreign nationals or employed outside of the
United States, (e) adopt rules for the administration, interpretation and
application of the Plan as are consistent therewith, and (f) interpret,
amend or revoke any such rules.
5.3 Decisions
Binding All determinations and decisions made by the Committee, the
Board, and any delegate of the Committee pursuant to the provisions of the Plan
shall be final, conclusive, and binding on all persons, and shall be given the
maximum deference permitted by law.
5.4 Delegation
by the Committee The Committee, in its sole discretion and on such terms
and conditions as it may provide, may delegate all or part of its authority and
powers under the Plan to one or more directors and/or officers of the Company;
provided, however, that the Committee may not delegate its authority and/or
powers with respect to awards that are intended to qualify as performance-based
compensation under Section 162(m) of the Code.
SECTION
6: GENERAL PROVISIONS
6.1 Tax
Withholding The Company or an Affiliate, as determined by the Committee,
shall withhold all applicable taxes from any Actual Award, including any
federal, state, local and other taxes.
6.2 No Effect on
Employment Nothing in the Plan shall interfere with or limit in any way
the right of the Company or an Affiliate, as applicable, to terminate any
Participant’s employment or service at any time, with or without cause. For
purposes of the Plan, transfer of employment of a Participant between the
Company and any one of its Affiliates (or between Affiliates) shall not be
deemed a Termination of Employment. Employment with the Company and its
Affiliates is on an at-will basis only. The Company expressly reserves the
right, which may be exercised at any time and without regard to when during or
after a Performance Period such exercise occurs, to terminate any individual’s
employment with or without cause, and to treat him or her without regard to the
effect which such treatment might have upon him or her as a
Participant.
6.3 Participation
No Employee shall have the right to be selected to receive an award under this
Plan, or, having been so selected, to be selected to receive a future
award.
6.4 Indemnification
Each person who is or shall have been a member of the Committee, or of the
Board, shall be indemnified and held harmless by the Company against and from
(a) any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, action, suit, or proceeding to which he or she may be a party or in which
he or she may be involved by reason of any action taken or failure to act under
the Plan or any award, and (b) from any and all amounts paid by him or her
in settlement thereof, with the Company’s approval, or paid by him or her in
satisfaction of any judgment in any such claim, action, suit, or proceeding
against him or her, provided he or she shall give the Company an opportunity, at
its own expense, to handle and defend the same before he or she undertakes to
handle and defend it on his or her own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification to
which such persons may be entitled under the Company’s Certificate of
Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under
any power that the Company may have to indemnify them or hold them
harmless.
6.5 Successors
All obligations of the Company and any Affiliate under the Plan, with respect to
awards granted hereunder, shall be binding on any successor to the Company
and/or such Affiliate, whether the existence of such successor is the result of
a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business or assets of the Company or such
Affiliate.
6.6 Beneficiary
Designations
a. Designation.
Each Participant may, pursuant to such uniform and nondiscriminatory procedures
as the Committee may specify from time to time, designate one or more
Beneficiaries to receive any Actual Award payable to the Participant at the time
of his or her death. Notwithstanding any contrary provision of this
Section 6.6 shall be operative only after (and for so long as) the
Committee determines (on a uniform and nondiscriminatory basis) to permit the
designation of Beneficiaries.
b. Changes.
A Participant may designate different Beneficiaries (or may revoke a prior
Beneficiary designation) at any time by delivering a new designation (or
revocation of a prior designation) in like manner. Any designation or revocation
shall be effective only if it is received by the Committee. However, when so
received, the designation or revocation shall be effective as of the date the
designation or revocation is executed (whether or not the Participant still is
living), but without prejudice to the Committee on account of any payment made
before the change is recorded. The last effective designation received by the
Committee shall supersede all prior designations.
c. Failed
Designation. If the Committee does not make this Section 6.6
operative or if Participant dies without having effectively designated a
Beneficiary, the Participant’s Account shall be payable to the general
beneficiary shown on the records of the Employer. If no Beneficiary survives the
Participant, the Participant’s Account
shall be payable to his or her estate.
6.7 Nontransferability
of Awards No award granted under the Plan may be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated, other than by will,
by the laws of descent and distribution, or to the limited extent provided in
Section 6.6. All rights with respect to an award granted to a Participant
shall be available during his or her lifetime only to the
Participant.
6.8 Deferrals
The Committee, in its sole discretion, may permit a Participant to defer receipt
of the payment of cash that would otherwise be delivered to a Participant under
the Plan. Any such deferral elections shall be subject to such rules and
procedures as shall be determined by the Committee in its sole
discretion.
SECTION
7: AMENDMENT, TERMINATION AND DURATION
7.1 Amendment,
Suspension or Termination The Board or the Committee, each in its sole
discretion, may amend or terminate the Plan, or any part thereof, at any time
and for any reason. The amendment, suspension or termination of the Plan shall
not, without the consent of the Participant, alter or impair any rights or
obligations under any Target Award theretofore granted to such Participant. No
award may be granted during any period of suspension or after termination of the
Plan.
7.2 Duration of
the Plan The Plan shall commence on the date specified herein, and
subject to Section 7.1 (regarding the Board or the Committee’s right to
amend or terminate the Plan), shall remain in effect thereafter.
SECTION
8: LEGAL CONSTRUCTION
8.1 Gender and
Number Except where otherwise indicated by the context, any masculine
term used herein also shall include the feminine; the plural shall include the
singular and the singular shall include the plural.
8.2 Severability
In the event any provision of the Plan shall be held illegal or invalid for any
reason, the illegality or invalidity shall not affect the remaining parts of the
Plan, and the Plan shall be construed and enforced as if the illegal or invalid
provision had not been included.
8.3 Requirements
of Law The granting of awards under the Plan shall be subject to all
applicable laws, rules and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be
required.
8.4 Governing
Law The Plan and all awards shall be construed in accordance with and
governed by the laws of the State of California, but without regard to its
conflict of law provisions.
8.5 Captions
Captions are provided herein for convenience only, and shall not serve as a
basis for interpretation or construction of the Plan.
Unassociated Document
EXHIBIT 10.9
May 13,
2008
Marty
Neese
715
Fremont Street
Menlo
Park, CA 94025
Employment
with SunPower Corporation
Dear
Marty:
SunPower
Corporation is embarking on a once in a lifetime, winner take all expansion in
the solar power industry. We have the unique opportunity to grow a great
business, and, at the same time, to help solve one of mankind’s biggest
challenges—environmentally friendly energy sources.
We are
pleased to offer you the position of Chief Operating Officer. This
position reports to Tom Werner, CEO. Your specific responsibilities
shall include, but not be limited to those that are outlined in the attached job
description.
Should
you accept our offer, SunPower will compensate you $15,385.00 bi-weekly
($400,000.00 when computed annually) for your services in accordance with its
normal payroll practices.
Following
the start of your employment, you will also receive 50,000 Restricted Stock
Units, and a non-qualified stock options to purchase 100,000 shares of SunPower
Class A common stock at a price to be determined at the next Board of Directors
meeting following the start of your employment. The Restricted Stock
Units will vest in equal annual installments over a three-year period and the
stock options will vest in equal annual installments over a four-year
period. The first vesting of both the Restricted Stock Units
and the stock options will occur on the one-year anniversary following the date
of each grant.
You will
also be a participant in the SunPower Key Employee Bonus Program (KEBP) at a
target incentive of 60% of base salary. Your actual incentive will be
based on both company and individual performance.
In the
event that your employment is involuntarily terminated without Cause by the
Company before the first vesting date of your Restricted Stock Units and stock
options, the Company shall pay you a sum of $1,500,000.00 within 30 days
following such involuntarily termination without cause. The
definition of “Cause” for purposes of this paragraph shall be defined by the
Compensation Committee of the Board of Directors.
The
Company will provide you with a “Change of Control” employment agreement with a
double trigger provision. Additionally, for fiscal year 2008 there will be no
pro-rata reduction in your participation level for the Evergreen stock award
program and annual merit review process.
As an
employee of SunPower, you will be eligible for group insurance benefits in
accordance with the terms and limitations applicable to such
coverage. SunPower also provides Personal Time Off (PTO) to its
employees. If you elect to join us, you will begin to accrue PTO at a
rate of 3 weeks per year upon commencement of employment.
Except
for the CEO of SunPower, no manager, supervisor or other representative of the
Company has authority to agree on behalf of SunPower to employ any employee for
any specific period of time or to employ any employee on other than an at-will
basis. Any agreement to employ an employee for a specific time or on
other than at-will basis is effective only if signed by the CEO of
SunPower.
To attain
a leadership position in the photovoltaic industry, SunPower embraces new
challenges and opportunities from time to time as the company develops and
grows. The Company expects the same commitment and resultant
flexibility from its employees. Although the Company does not have
any immediate plans to modify your defined job responsibilities or alter your
specific job assignment, the Company retains the right to make such
modifications in the future to satisfy ongoing developing
business
needs. Nothing in this letter limits the Company’s ability to modify
your job duties or change your assignment.
As an
employee of SunPower, you may work with and/or develop information, which is
considered confidential by the Company. As a result, SunPower
requires all employees to agree not to use or disclose any such confidential
information for the benefit of anyone other than SunPower. Should you
accept our offer of employment, SunPower will require you to sign an agreement
describing your obligations with respect to confidentiality in greater
detail.
This
offer is contingent upon your ability to present documents establishing your
right to work in the United States as required by the 1986 Federal Immigration
Reform and Control Act. Please be prepared to present documents demonstrating
your right to work upon your first date of employment.
This
offer shall be good through close of business on May 20, 2008. On
your official start date, you will be entitled to participate in our benefits
programs. We will provide you with full information regarding the
applicable health insurance offered as well as other pertinent information
regarding the benefit package that is offered to SunPower
employees.
We are
excited about the prospect of working with you and hope that you will decide to
join us. In order to memorialize your acceptance of this offer,
please sign and date one copy of this offer letter confirming your start date as
June 15, 2008. You are also welcome to fax these documents to me at
408-240-5404. If you have any questions about our offer or employment
at SunPower, I encourage you to call me at 408-240-5570 or Doug Richards, Vice
President, Human Resources at 650-799-4500.
Sincerely,
/s/ Tom
Werner
Tom
Werner
CEO
I accept
the offer of employment set forth above:
5/15/08 |
/s/ M. Neese |
June 15, 2008 |
Date |
Signature |
Start
Date |
|
|
or
T.B.D. |
ex10-10.htm
EXHIBIT 10.10
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
FIRST
AMENDMENT
TO
INGOT
AND WAFER SUPPLY AGREEMENT
|
THIS FIRST AMENDMENT TO INGOT AND
WAFER SUPPLY AGREEMENT (the “Amendment”) is made
as of May 13, 2008, by and between SUNPOWER CORPORATION (“SunPower”), a
Delaware corporation, and JIAWEI SOLARCHINA CO., LTD.
(“Jiawei”), a
Chinese company.
WHEREAS, SunPower and Jiawei
previously entered into that certain Ingot and Wafer Supply Agreement (the
“Original
Agreement”) dated December 3, 2007;
WHEREAS, SunPower and Jiawei
desire to amend the Original Agreement as set forth herein;
NOW, THEREFORE, FOR VALUABLE
CONSIDERATION, including, without limitation, the covenants set forth
herein, SunPower and Jiawei hereby agree as follows:
1.
|
Section
3.3. The following new Subsection 3.3 is added to the
end of Section 3 of the Original
Agreement:
|
3.
|
Miscellaneous. Except
as amended hereby, the Original Agreement shall continue in full force and
effect.
|
IN WITNESS WHEREOF, SunPower
and Jiawei have executed this Amendment as of the date first above
written.
SUNPOWER
CORPORATION,
a Delaware corporation
|
|
|
JIAWEI SOLARCHINA CO.,
LTD.,
a Chinese company
|
|
By:
/s/ Jon
Whiteman
|
|
|
By:
/s/ Ding Kong
Xian
|
|
Name:
Jon
Whiteman
|
|
|
Name:
Ding Kong
Xian
|
|
Title:
VP Strategic
Supply
5-14-08
|
|
|
Title:
President
5-14-08
|
|
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
Unassociated Document
EXHIBIT
10.11
FIFTH
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT TO CREDIT AGREEMENT
(this "Amendment") is entered into as of May 19, 2008, by and between SUNPOWER
CORPORATION, a Delaware corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted
to Bank pursuant to the terms and conditions of that certain Credit Agreement
between Borrower and Bank dated as of July 13, 2007, as amended by that certain
First Amendment to Credit Agreement, dated August 20, 2007, that certain Second
Amendment to Credit Agreement, dated August 31, 2007, that certain Waiver
Agreement, dated January 18, 2008, that certain Third Amendment to Credit
Agreement, dated February 13, 2008, and that certain Fourth Amendment to Credit
Agreement, dated April 4, 2008, and as amended from time to time ("Credit
Agreement").
WHEREAS, Bank and Borrower have agreed
to certain changes in the terms and conditions set forth in the Credit Agreement
and have agreed to amend the Credit Agreement to reflect said
changes.
NOW, THEREFORE, for valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree that the Credit Agreement shall be amended as
follows:
1.
|
Section
4.9(a) is hereby amended to read as
follows:
|
“(a) Minimum
Liquidity (defined as unencumbered and unrestricted cash, cash equivalents, and
marketable securities acceptable to Bank, which, if cash, is U.S. Dollar
denominated, or if held in an account not maintained in the United States, is
denominated in any currency for which a U.S. Dollar equivalent is routinely
calculated by Bank, and, if other than cash, consist of financial instruments or
securities, acceptable to Bank, collectively, “Eligible Assets”) equal to or
greater than (i) two
(2.00) times the Bank’s commitment under the Line of Credit with a minimum of
$75,000,000.00 of such liquidity to be held in accounts maintained in the United
States (“U.S. Domiciled Liquidity”), or (ii) if the amount of U.S Domiciled
Liquidity is less than $75,000,000.00, three (3.00) times the Bank’s commitment
under the Line of Credit, in all instances determined as of the end of each
calendar month, provided, however, that in no event shall the amount
of U.S Domiciled Liquidity be less than $50,000,000.00. For purposes
of calculating U.S. Dollar equivalent value of Eligible Assets not denominated
in U.S. Dollars, Bank will convert the value of such assets as of the applicable
statement date based on Bank’s foreign exchange closing rates for such
date. Without limiting the foregoing, "Eligible Assets" shall include
Borrower's auction rate securities listed on Schedule 4.9(a) (each such
security, an “Auction Rate”), subject to the terms of the next
paragraph.
So long as Borrower maintains Minimum
Liquidity (including Auction Rates) equal to or greater than three (3.00) times
the Bank's commitment under the Line of Credit, Bank shall value each Auction
Rate at the market rate bid for such Auction Rate at each month’s end, (i) as
communicated to Bank by Wells Capital Management Incorporation (“WCMI”), or (ii)
in the event that WCMI is unable to determine a market rate bid, as determined
and publicly announced by such other source as Bank in its sole discretion
considers acceptable. In the event that Borrower's Minimum Liquidity
(including Auction Rates) is less than three (3.00) times the Bank’s commitment
under the Line of Credit, Bank reserves the right to discount the WCMI (or, as
applicable, other source’s) value in Bank’s reasonable
discretion. The foregoing terms of this paragraph shall cease to be
effective at such time that Bank in good faith determines that liquidity has
been restored to the auction rate market in the United States and that the
auction rate securities market is functioning substantially as it did prior to
the current auction rate liquidity crisis. Following such
determination, "Eligible Assets" shall include Borrower's auction rate
securities to the extent permissible under Bank’s policies at such
time.”
2. Section 5.3
is hereby deleted in its entirety, and the following substituted
therefor:
“SECTION 5.3. OTHER
INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except (a) the liabilities of Borrower or such Third Party
Obligor to Bank, and (b) Permitted Indebtedness. “Permitted
Indebtedness” shall mean (i) indebtedness of Borrower or a Third Party Obligor
to Borrower or any Subsidiary in the ordinary course of business,
(ii) indebtedness in favor of Solon AG and its affiliates under the
Amended and Restated Supply Agreement, dated as of April 14, 2005, as amended,
between Borrower and Solon AG fur Solartechnik; (iii) indebtedness in favor of
customers and suppliers of the Borrower and its Subsidiaries in connection with
supply and purchase agreements in an aggregate principal amount not to exceed
Two Hundred Million dollars ($200,000,000.00) at any one time and any
refinancings, refundings, renewals or extensions thereof (without shortening the
maturity thereof or increasing the principal amount thereof); (iv) 1.25% senior
convertible debentures issued in February 2007 in the aggregate principal amount
of Two Hundred Million Dollars ($200,000,000.00) plus accrued interest thereon;
(v) obligations owed to Travelers Casualty and Surety Company of America and St.
Paul Fire and Marine Insurance Company, and their affiliates (collectively,
“Travelers”) in connection with obligations under the General Contract of
Indemnity with Travelers, pursuant to which Travelers issues bonds or otherwise
secures performance of
Borrower
and Subsidiaries for the benefit of their customers and contract counterparties;
(vi) 0.75% senior convertible debentures issued in August 2007 in the aggregate
principal amount of Two Hundred Twenty-Five Million Dollars ($225,000,000.00)
plus accrued interest thereon; and (vii) additional indebtedness of Borrower and
Third Party Obligors in an aggregate principal amount not to exceed Fifty
Million Dollars ($50,000,000.00) outstanding at any one time. For
clarity, Bank and Borrower agree that Borrower’s trade payables incurred in the
ordinary course of business do not constitute indebtedness prohibited or
restricted by the terms of this Section 5.3.”
3. Section 5.5
is hereby deleted in its entirety, and the following substituted
therefor:
“SECTION 5.5. LOANS,
ADVANCES, INVESTMENTS. Make any loans or advances to or investments
in any person or entity, except (a) any of the foregoing existing as of, and
disclosed to Bank prior to, the date hereof, (b) additional loans or advances by
Borrower or such Third Party Obligor to employees and officers in the ordinary
course of business and in amounts not to exceed an aggregate of Fifteen Million
Dollars ($15,000,000.00) outstanding at any time (c) investments which are made
in accordance with Borrower’s Investment Policy as from time to time adopted by
its Board of Directors, (d) investments which constitute Specified Transactions,
as defined in Section 5.8, below, (e) any of the foregoing that constitute
Permitted Indebtedness, (f) advances to, or investments in, a Subsidiary or in
Woongjin Energy by Borrower or any Third Party Obligor in the ordinary course of
business; and (g) prepayment of obligations to vendors and suppliers in the
ordinary course in an amount not to exceed Three Hundred Million Dollars
($300,000,000.00).”
4. Concurrently
with its execution and as a condition precedent to the effectiveness of this
Amendment, Borrower shall execute and deliver to Bank an Amended and Restated
Addendum to Security Agreement: Securities Account in form and content
acceptable to Bank and Borrower.
5. Except
as specifically provided herein, all terms and conditions of the Credit
Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have
the same meaning when used in this Amendment. This Amendment and the
Credit Agreement shall be read together, as one document.
6. Borrower
hereby remakes all representations and warranties contained in the Credit
Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
IN WITNESS WHEREOF, the parties hereto
have caused this Amendment to be executed as of the day and year first written
above.
SunPower
Corporation |
|
|
WELLS
FARGO BANK, NATIONAL ASSOCIATION |
|
/s/
Emmanuel T. Hernandez
|
|
|
/s/
Matthew Servatius
|
|
Emmanuel
T. Hernandez
|
|
|
Matthew
Servatius
|
|
Chief
Financial Officer
|
|
|
Vice
President
|
|
Unassociated Document
EXHIBIT 10.12
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
AMENDED
AND RESTATED ADDENDUM TO SECURITY AGREEMENT: SECURITIES ACCOUNT
THIS AMENDED AND RESTATED ADDENDUM,
dated as of May 19, 2008, is attached to and made a part of that certain
Security Agreement: Securities Account executed by SUNPOWER CORPORATION
("Debtor") in favor of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"), dated as
of April 4, 2008 (the "Agreement") and amends and restates the Addendum to the
Agreement dated as of April 4, 2008.
The following provisions are hereby
incorporated into the Agreement:
1. Securities Account
Activity. So long as no Event of Default exists, Debtor, or
any party authorized by Debtor to act with respect to the Securities Account,
may (a) receive payments of interest and/or cash dividends earned on financial
assets maintained in the Securities Account, (b) subject to the limitation in
the following sentence (and, unless and until Bank sends notice pursuant to
Section 3.3 of the Securities Account Control Agreement dated March 18, 2008,
notwithstanding any provision to the contrary in said Securities Account Control
Agreement), withdraw Collateral, and (c) trade financial assets maintained in
the Securities Account. Without Bank's prior written consent, except
as permitted by the preceding sentence, neither Debtor nor any party other than
Bank may withdraw or receive any distribution of any Collateral from the
Securities Account. The Collateral Value of the Securities Account
shall at all times be equal to or greater than one hundred percent (100%) of the
aggregate amount available to be drawn under outstanding Letters of Credit plus
the amount drawn and not yet reimbursed under Letters of Credit (the “Exposure
Amount”), less the amount then in Debtor’s deposit account * * * (the “Deposit
Account”) at Bank (such result, the “Required Amount”.)
Debtor
understands that Bank will not consider the Collateral Value of the Securities
Account unless and until Debtor has at least $100,000,000.00 in the Deposit
Account. If the $100,000,000.00 Deposit Account balance condition in
the preceding sentence is satisfied and the Collateral Value, for any reason and
at any month end (as reflected in the monthly Securities Account statement
issued by Wells Capital Management Incorporated) is less than the Required
Amount, Debtor shall promptly deposit additional assets of a nature satisfactory
to Bank into the Securities Account or Deposit Account, in either case in
amounts or with values sufficient to achieve the Required Amount. If
the Deposit Account balance is greater than or equal to the Exposure Amount,
Debtor has no obligation to maintain Collateral in the Securities
Account.
2. ”Collateral Value"
means the percentage set forth below of the lower of the face or market value,
or the lower of the face or redemption value, as appropriate, for each type of
investment property held in the Securities Account at the time of computation,
with such value and the classification of any particular investment property in
all instances determined by Bank in its sole discretion, and excluding from such
computation all WF Securities and Collective Investment
Funds. Notwithstanding the foregoing, Bank shall exclude from the
determination of Collateral Value, at Bank's sole discretion (a) any stock with
a market value of $10.00 or less, and (b) all investment property from an issuer
if Bank determines such issuer to be ineligible:
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
Listed
Money Market (MM)
|
95%
|
U.S.
Government Bills, Notes and Bonds and U.S. Government sponsored agency
securities with maturities =/< 5 years
|
90%
|
U.S.
Government Bills, Notes and Bonds and U.S. Government sponsored agency
securities with maturities > 5 years, but =/< 10
years
|
85%
|
U.S.
Government Bills, Notes and Bonds and U.S. Government sponsored agency
securities with maturities > 10 years
|
80%
|
High
Grade Corporate or Municipal Bonds/Notes (AAA/Aaa, AA/Aa, SP-1) with
maturities =/< 5 years
|
85%
|
High
Grade Corporate or Municipal Bonds/Notes (AAA/Aaa, AA/Aa, SP-1) with
maturities > 5 years, but =/< 10 years
|
80%
|
High
Grade Corporate or Municipal Bonds/Notes (AAA/Aaa, AA/Aa, SP-1) with
maturities > 10 years
|
75%
|
Intermediate
Grade Corporate or Municipal Bonds/Notes (A, Baa, BBB, SP-2) with
maturities =/< 5 years
|
75%
|
Intermediate
Grade Corporate or Municipal Bonds/Notes (A, Baa, BBB, SP-2) with
maturities > 5 years, but =/< 10 years
|
70%
|
Intermediate
Grade Corporate or Municipal Bonds/Notes (A, Baa, BBB, SP-2) with
maturities > 10 years
|
65%
|
A1
and P1 Graded Commercial Paper
|
85%
|
MUTUAL
FUNDS:
|
|
Short
Term Corporate Taxable Bond
|
90%
|
Short
Term Municipal Bond
|
90%
|
Short
Term U.S. Taxable Bond
|
90%
|
Intermediate
Term Municipal Bond
|
85%
|
Intermediate
Term Corporate Taxable Bond
|
85%
|
Intermediate
U.S. Taxable Bond
|
85%
|
General
U.S. Taxable Bond
|
80%
|
Long
Term U.S. Taxable Bond
|
80%
|
Long
Term Corporate Taxable Bond
|
75%
|
General
Municipal or Insured All Maturities or Single State Bonds
|
75%
|
3. Exclusion from
Collateral. Notwithstanding anything herein to the contrary,
the terms "Collateral" and "Proceeds" do not include, and Bank disclaims a
security interest in all WF Securities and Collective Investment Funds now or
hereafter maintained in the Securities Account.
4. "Collective Investment
Funds" means collective investment funds as described in 12 CFR 9.18 and
includes, without limitation, common trust funds maintained by Bank for the
exclusive use of its fiduciary clients.
5. "WF Securities" means
stock, securities or obligations of Wells Fargo & Company or of any
affiliate thereof (as the term affiliate is defined in Section 23A of the
Federal Reserve Act (12 USC 371(c), as amended from time to
time).
6. Limitation on
Indebtedness. Notwithstanding anything in this Agreement to
the contrary, the obligations secured hereby are limited to all present and
future Indebtedness of Debtor to Bank arising under or in connection with the
Letter of Credit Line and all Letters of Credit issued thereunder, as such terms
are defined in a Credit Agreement dated as of July 13, 2007 between Bank and
Debtor (as amended, extended or renewed – the “Credit Agreement).
7. Events of
Default. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement: (a) any defined event of
default, under the Credit Agreement, as defined above; (b) any representation or
warranty made by Debtor herein shall prove to be incorrect, false or misleading
in any material respect when made; (c) Debtor shall fail to observe or perform
any obligation or agreement contained herein; or (d) any impairment of the
rights of Bank in any Collateral or Proceeds, or any attachment or like levy on
any Collateral or Proceeds.
IN WITNESS WHEREOF, this Addendum has
been executed as of the date indicated above.
SUNPOWER
CORPORATION |
|
|
WELLS
FARGO BANK,
NATIONAL ASSOCIATION
|
|
By:
/s/ Emmanuel T.
Hernandez
|
|
|
By:
/s/ Matthew
Servatius
|
|
Emmanuel
T. Hernandez
|
|
|
Matthew
Servatius
|
|
Chief
Financial Officer
|
|
|
Vice
President
|
|
ex10-13.htm
EXHIBIT
10.13
THIRD AMENDMENT TO
LEASE
(Confirmation of Commencement
Dates)
This
Third Amendment to Lease (“Amendment”) is made and
entered into as of the 23rd day of
May, 2008 by and between FPOC, LLC, a California limited liability company
(“Landlord” or “Lessor”), and Sunpower
Corporation, Systems, a Delaware corporation (“Tenant” or “Lessee”),
successor-in-interest to PowerLight Corporation.
R E C I T A L S
A. Landlord
and PowerLight Corporation (“Powerlight”) entered into that
certain Standard Multi-Tenant Industrial Lease – Net dated as of December 15,
2006 (together with the Addendum thereto, the “Original Lease”) pursuant to which
Tenant leases certain premises containing approximately 175,802 square feet (the
“Current Premises”) in
that certain commercial building known as Ford Point (the “Building”) and located at 1414
Harbour Way South, Richmond, California. The Current Premises
consist of approximately 110,522 square feet of space (the “Existing Premises”) and
approximately 65,280 square feet (the “Expansion Premises” identified
as “Tranche 5” on the attached Exhibit
A-1). Landlord and Powerlight entered into that certain First
Amendment to Lease dated as of May 24, 2007 (the “First Amendment”). Landlord
and Tenant entered into that certain second Amendment to Lease dated as of
December 18, 2007 (the “Second
Amendment”). The Original Lease as amended by the First
Amendment and the Second Amendment is hereinafter referred to as the “Lease”. Tenant has
assumed the obligations of Powerlight as “tenant” under the Lease.
B. Landlord
and Tenant presently desire to amend the Lease to provide, among other things,
for the Commencement Date of the Lease, as more fully set forth
below.
A
G
R
E
E
M
E
N
T
NOW,
THEREFORE, in consideration of the foregoing Recitals and the mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Defined
Terms. All capitalized terms not defined herein shall have the
same respective meanings as are given such terms in the Lease unless expressly
provided otherwise in this Amendment.
2. Confirmation
of the Commencement Dates.
(a) Commencement
Dates. The parties hereto acknowledge that the Commencement
Date for the portion of the Existing Premises which Tenant occupied as of
December 17, 2007 (the “December 17 Increment” and
shown as “Tranche 1” on the attached Exhibit
A-2) shall be deemed to be December 17, 2007 (the “December 17 Commencement
Date”). The Commencement Date for the remainder of the First
Increment (the “Remaining
Increment”) occurred on three separate dates as follows: (i) December 24,
2007 with respect to the space consisting of 7,325 square feet located on the
first floor of the Building and shown as “Tranche 2” on the attached Exhibit
A; (ii) January 14, 2008 with respect to the space consisting of 8,444
square feet located on the first floor of the Building and shown as “Tranche 3”
on the attached
Exhibit
A, and (iii) February 4, 2008 with respect to the space consisting of
20,125 square feet located on the first floor of the Building and shown as
“Tranche 4” on the attached Exhibit
A. The Second Increment consists of 26,423 square feet located
on the second floor of the Building and is shown as “Tranche 7” on the attached
Exhibit
A-2. The 8,310 SF Increment consists of 8,310 square feet
located on the second floor of the Building and is shown as “Tranche 8” on the
attached Exhibit
A-2. Notwithstanding the fact that the Remaining Increment was
delivered on three separate dates, for purposes of commencing the calculation
and payment of Rent under the Lease, as amended hereby, the “Remaining Increment Commencement
Date” shall mean January 1, 2008; provided, however, that Base Rent with
respect to each increment of the Remaining Increment shall be as set forth in
the schedules attached hereto as Exhibit
#2. The following schedule is set forth herein for the
convenience of the parties.
Premises
|
Square
Footage
|
Commencement
Date
|
December 17
Increment
|
50,000
sf of 2nd
floor office
|
December
17, 2007
|
|
|
|
Remaining Increment:
(1)
|
7,325
1st
floor office
|
December
24, 2007
|
|
|
|
(2)
|
8,444
sf of remaining 1st
floor office
|
January
14, 2008
|
|
|
|
(3)
|
20,125
sf industrial
|
February
4, 2008
|
|
|
|
Expansion
Premises
|
65,280
sf manufacturing
|
November
25, 2007
Expansion
Commencement Date
(which
date is three months prior to the earlier of the actual delivery date of
the Expansion Premises or Tenant operating its business in the Expansion
Premises)
|
|
|
|
8,310
SF Increment
|
8,310
sf
2nd
floor office
|
Second
Increment Commencement Date
Dec.
17, 2008
|
Second
Increment
|
26,423
sf
2nd
floor office
|
Dec.
17, 2008
Second
Increment Commencement Date
|
|
|
|
R&D
Space
(Yard)
|
21,000
sf
|
March
1, 2008
R&D
Commencement Date
|
(b) Substantially
Completed. The parties acknowledge that the Lessor’s Work in
the December 17 Increment, the Remaining Increment, the Second Increment and the
Expansion Premises has been Substantially Completed. Each of Landlord
and Tenant hereby waives any
claims
against the other for delays in connection with the delivery of the First
Increment (the combined December 17 Increment and the Remaining Increment), the
8,310 SF Increment, the Second Increment, the Expansion Premises, and the
R&D Space.
(c) Early Termination
Right. For purposes of Section 76 of the Original Lease, the
references to the Commencement Date shall refer to the Remaining Increment
Commencement Date or January 1, 2008. Therefore, the last day of the
76th
full calendar months following the Commencement Date shall be April 30,
2014.
(d) Warranty
Periods. For purposes of the warranty periods set forth in
Sections 2.2, 2.3 and 51(b) of the Original Lease, the respective warranty
periods shall commence as of January 1, 2008.
3. Term. Section
1.3 of the Original Lease is hereby deleted in its entirety and replaced with
the following language: “Approximately eleven (11) years commencing on December
17, 2007 and ending on December 31, 2018 (“Expiration
Date”).”
4. Base
Rent. Notwithstanding anything to the contrary set forth in
the Lease, Base Rent shall be payable with respect to the Premises as set forth
in Exhibit
#2 attached hereto. The following schedule sets forth the
accrued Base Rent through March 31, 2008:
Premises
|
Square
Footage
|
Commencement
Date
|
Base
Rent
Accrued
through 3/31/08
|
December 17
Increment
|
50,000
sf of 2nd
floor office
|
December
17, 2007
Base
Rent commences: 4/17/08
|
$0.00
|
|
|
|
|
Remaining Increment:
(1)
|
7,325
1st
floor office
|
December
24, 2007
Base
Rent commences: 4/24/08
|
$0.00
|
|
|
|
|
(2)
|
8,444
sf of remaining 1st
floor office
|
January
14, 2008
Base
Rent commences: 5/14/08
|
$0.00
|
|
|
|
|
(3)
|
20,125
sf industrial
|
February
4, 2008
Base
Rent commences: 6/4/08
|
$0.00
|
|
|
|
|
Expansion
Premises
|
65,280
sf
manufacturing
|
November
25, 2007
Expansion
Commencement Date
Base
Rent commences: 11/25/07
|
$156,280.32
|
|
|
|
|
8,310
SF Increment
|
8,310
sf
2nd
floor office
|
Second
Increment Commencement Date
Base Rent commences:
Dec. 17, 2008
|
$0.00
|
Second
Increment
|
26,423
sf
2nd
floor office
|
Second
Increment Commencement Date
Base Rent commences:
Dec. 17, 2008
|
$0.00
|
|
|
|
|
R&D
Space
(yard)
|
21,000
sf
|
March
1, 2008
R&D
Commencement Date
Base
Rent commences: 3/1/08
|
$3,150.00
|
|
|
Total:
|
$159,430.32
|
|
|
Prepaid Credit:
|
$100,269.05
|
|
|
Amount Due:
|
$59,161.27
|
5. Common
Area Operating Expenses. The parties hereto acknowledge that
Tenant’s obligation to pay Common Area Operating Expenses commences on the
relevant Commencement Date for the subject increment of the
Premises. The following schedule sets forth the accrued estimated
Common Area Operating Expenses through March 31, 2008:
Premises
|
Square
Footage
|
Commencement
Date
|
Estimated
Common Area Operating Expenses
Accrued
through 3/31/08
|
December 17
Increment
|
50,000
sf of 2nd
floor office
|
December
17, 2007
|
$26,000.00
|
|
|
|
|
Remaining Increment:
(1)
|
7,325
1st
floor office
|
December
24, 2007
|
$3,552.63
|
|
|
|
|
(2)
|
8,444
sf of remaining 1st
floor office
|
January
14, 2008
|
$3,250.37
|
|
|
|
|
(3)
|
20,125
sf industrial
|
February
4, 2008
|
$5,735.63
|
|
|
|
|
Expansion
Premises
|
65,280
sf
manufacturing
|
November
25, 2007
Expansion
Commencement Date
|
$41,126.00
|
|
|
|
|
8,310
SF Increment
|
8,310
sf
2nd
floor office
|
Dec.
17, 2007
|
$4,321.20
|
Second
Increment
|
26,423
sf
2nd
floor office
|
Dec.
17, 2007
|
$13,739.96
|
|
|
Total:
|
$97,725.79
|
|
|
Prepaid Credit:
|
$14,367.86
|
|
|
Amount Due:
|
$83,357.93
|
R&D
Space
(yard)
|
21,000
sf
|
March
1, 2008
R&D
Commencement Date
|
Not
Applicable
|
6. Accrued
Rental Amounts. Concurrently with Tenant’s execution of this
Amendment, Tenant shall deliver the amount of $142,519.20 which represents the
amount of accrued Base Rent and estimated Common Area Operating Expenses through
March 31, 2008.
7. Reimbursement
of Buildout Costs.
(a) Current
Amount. Pursuant to the Work Letter attached as Exhibit B to
the Original Lease, Tenant has agreed to reimburse Landlord for Tenant
Improvement Costs as well as Above-Standard Base Building Costs less the amount
of Standard Base Building Costs incurred in connection with Lessor’s Work, as
such terms are defined in the Work Letter (collectively, “Tenant’s Share of Buildout
Costs”). Landlord and Tenant agree that the total amount of
Tenant’s Share of Buildout Costs for the December 17 Increment, the Remaining
Increment, the Second Increment and the Expansion Premises is $3,800,000.00 (the
“Current
Amount”). To date, Landlord has received the amount of
$2,690,000 toward the Tenant’s Share of Buildout Costs and thus the amount owed
by Tenant for Tenant’s Share of Buildout Costs is $1,110,000.00 (“Current Amount
Due”). Paragraph 51(d) of the Lease is hereby deleted in its
entirety.
(b) Payment
Due. Within ten (10) business days following the full
execution of this Amendment, Tenant shall pay to Landlord the amount of
$895,000.00 with respect to the Tenant’s Share of Buildout Costs. Tenant shall
pay the remaining $215,000.00 to Landlord within ten (10) business days
following the date on which Landlord has completed all work listed on the Punch
List.
8. Remeasurement. Section
72 of the Lease is hereby deleted in its entirety. Within ten (10) business days
following the date on which this Amendment is fully executed by Landlord and
Tenant, each of Landlord and Tenant shall have the right to cause its architect
or consultant to measure the actual square feet of rentable area within the
Premises and Building in accordance with the rentable standards set forth in
ANSI/BOMA Z65.1-1996, as promulgated by the Building Owners and Managers
Association (“BOMA
Standard”), and all provisions of this Lease which are dependent upon the
number of square feet (e.g.; Base Rent, Lessee’s
Share) shall be appropriately adjusted.
9. Authority. Tenant
and each person executing this Amendment on behalf of Tenant hereby covenants
and warrants that (a) Tenant is duly organized and validly existing
under the
laws of the State of Delaware, (b) Tenant has full power and authority to enter
into this Amendment and to perform all Tenant’s obligations under the Lease,
as amended by this Amendment, and (c) each person (and all of the persons
if more than one signs) signing this Amendment on behalf of Tenant is duly and
validly authorized to do so. Landlord and each person executing this
Amendment on behalf of Landlord hereby covenants and warrants that (a) Landlord
is duly organized and validly existing under the laws of the State of
California, (b) Landlord has full power and authority to enter into this
Amendment and to perform all Landlord’s obligations under the Lease,
as amended by this Amendment, and (c) each person (and all of the persons
if more than one signs) signing this Amendment on behalf of Landlord is duly and
validly authorized to do so.
10. Exhibits. Exhibit #2 attached
hereto shall be incorporated into the Lease, as amended hereby. Exhibit D to the
Original Lease is hereby deleted in its entirety. Exhibit A (Outline of
Premises) attached to the Original Lease is hereby deleted and the attached
Exhibit
A and Exhibit
A-2 are hereby substituted therefor. Exhibit A-1 (Outline
of Expansion Premises) attached to the First Amendment is hereby deleted and the
attached Exhibit
A-1 is hereby substituted therefor. Exhibit A-3 (Outline
of 8,310 SF Increment) attached to the Second Amendment is hereby deleted and
the attached Exhibit
A-2 is hereby substituted therefor.
[Remainder of Page Intentionally Left
Blank]
11. Lease in
Full Force and Effect. This Amendment contains the entire
understanding between the parties with respect to the matters contained
herein. No representations, warranties, covenants or agreements
have been made concerning or affecting the subject matter of this Amendment,
except as are contained herein and in the Lease. This Amendment
may not be changed orally, but only by an agreement in writing signed by the
party against whom enforcement of any waiver, change or modification or
discharge is sought.
IN
WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date
first set forth above.
LANDLORD:
|
|
|
TENANT: |
|
FPOC,
LLC,
a California Limited Liability company
|
|
|
Sunpower
Corporation, Systems,
a Delaware corporation
|
|
BY:
FP Management, LLC, a California
limited liability company, its
Manager
|
|
|
By:
/s/ Tom Dinwoodie
Name: Tom Dinwoodie
Its: Founder &
CTO
|
|
By: /s/ J.R. Orton, III
|
|
|
By:
|
|
J.R. Orton, III, Manager
|
|
|
Name:
Its:
|
|
Exhibit
#2
Rent
Schedules
Period:
December 17, 2007
December 17 Increment
50,000 sf
|
Monthly Base Rent per SF
|
Monthly Base Rent
|
12/17/07
– 4/16/08
|
$0.00
|
$0.00
|
4/17/08
– 12/31/08
|
$1.4000
|
$70,000.00
|
1/1/09
– 12/31/09
|
$1.4420
|
$72,100.00
|
1/1/10
– 12/31/10
|
$1.4853
|
$74,263.00
|
1/1/11
– 12/31/11
|
$1.5298
|
$76,490.89
|
1/1/12
– 12/31/12
|
$1.5757
|
$78,785.62
|
1/1/13
– 12/31/13
|
$1.6230
|
$81,149.19
|
1/1/14
– 12/31/14
|
$1.6717
|
$83,583.66
|
1/1/15
– 12/31/15
|
$1.7218
|
$86,091.17
|
1/1/16
– 12/31/16
|
$1.7735
|
$88,673.91
|
1/1/17
– 12/31/17
|
$1.8267
|
$91,334.12
|
1/1/18
– 12/31/18
|
$1.8815
|
$94,074.15
|
Period:
December 24, 2007
7,325 sf
|
Monthly Base Rent per SF
|
Monthly Base Rent
|
12/24/07
– 4/23/08
|
$0.00
|
$0.00
|
4/24/08
– 12/31/08
|
$1.4000
|
$10,255.00
|
1/1/09
– 12/31/09
|
$1.4420
|
$10,562.65
|
1/1/10
– 12/31/10
|
$1.4853
|
$10,879.53
|
1/1/11
– 12/31/11
|
$1.5298
|
$11,205.92
|
1/1/12
– 12/31/12
|
$1.5757
|
$11,542.09
|
1/1/13
– 12/31/13
|
$1.6230
|
$11,888.36
|
1/1/14
– 12/31/14
|
$1.6717
|
$12,245.01
|
1/1/15
– 12/31/15
|
$1.7218
|
$12,612.36
|
1/1/16
– 12/31/16
|
$1.7735
|
$12,990.73
|
1/1/17
– 12/31/17
|
$1.8267
|
$13,380.45
|
1/1/18
– 12/31/18
|
$1.8815
|
$13,781.86
|
Period:
January 14, 2008
8,444 sf
|
Monthly Base Rent per SF
|
Monthly Base Rent
|
1/14/08
– 5/13/08
|
$0.00
|
$0.00
|
5/14/08
– 12/31/08
|
$1.4000
|
$11,821.60
|
1/1/09
– 12/31/09
|
$1.4420
|
$12,176.25
|
1/1/10
– 12/31/10
|
$1.4853
|
$12,541.54
|
1/1/11
– 12/31/11
|
$1.5298
|
$12,917.78
|
1/1/12
– 12/31/12
|
$1.5757
|
$13,305.31
|
1/1/13
– 12/31/13
|
$1.6230
|
$13,704.47
|
1/1/14
– 12/31/14
|
$1.6717
|
$14,115.61
|
1/1/15
– 12/31/15
|
$1.7218
|
$14,539.08
|
1/1/16
– 12/31/16
|
$1.7735
|
$14,975.25
|
1/1/17
– 12/31/17
|
$1.8267
|
$15,424.51
|
1/1/18
– 12/31/18
|
$1.8815
|
$15,887.24
|
Period:
February 4, 2008
20,125 sf
|
Monthly Base Rent Per SF
|
Monthly Base Rent for R&D
Portion
|
2/4/08
– 6/3/08
|
$0.00
|
$0.00
|
6/4/08
– 12/31/08
|
$0.5250
|
$10,565.63
|
1/1/09
– 12/31/09
|
$0.5408
|
$10,882.59
|
1/1/10
– 12/31/10
|
$0.5570
|
$11,209.07
|
1/1/11
– 12/31/11
|
$0.5737
|
$11,545.34
|
1/1/12
– 12/31/12
|
$0.5909
|
$11,891.70
|
1/1/13
– 12/31/13
|
$0.6086
|
$12,248.46
|
1/1/14
– 12/31/14
|
$0.6269
|
$12,615.91
|
1/1/15
– 12/31/15
|
$0.6457
|
$12,994.38
|
1/1/16
– 12/31/16
|
$0.6651
|
$13,384.21
|
1/1/17
– 12/31/17
|
$0.6850
|
$13,785.74
|
1/1/18
– 12/31/18
|
$0.7056
|
$14,199.31
|
Period:
December 17, 2008
8,310 increment
|
Monthly Base Rent per SF
|
Monthly Base Rent:
|
12/17/08
– 12/31/08
|
$1.4420
|
$11,983.02
|
1/1/09
– 12/31/09
|
$1.4420
|
$11,983.02
|
1/1/10
– 12/31/10
|
$1.4853
|
$12,342.51
|
1/1/11
– 12/31/11
|
$1.5298
|
$12,712.79
|
1/1/12
– 12/31/12
|
$1.5757
|
$13,094.17
|
1/1/13
– 12/31/13
|
$1.6230
|
$13,486.99
|
1/1/14
– 12/31/14
|
$1.6717
|
$13,891.60
|
1/1/15
– 12/31/15
|
$1.7218
|
$14,308.35
|
1/1/16
– 12/31/16
|
$1.7735
|
$14,737.60
|
1/1/17
– 12/31/17
|
$1.8267
|
$15,179.73
|
1/1/18
– 12/31/18
|
$1.8815
|
$15,635.12
|
Period:
December 17, 2008
Second Increment
26,423 sf
|
Monthly Base Rent per SF
|
Monthly Base Rent:
|
12/17/08
– 12/31/08
|
$1.4420
|
$38,101.97
|
1/1/09
– 12/31/09
|
$1.4420
|
$38,101.97
|
1/1/10
– 12/31/10
|
$1.4853
|
$39,245.02
|
1/1/11
– 12/31/11
|
$1.5298
|
$40,422.38
|
1/1/12
– 12/31/12
|
$1.5757
|
$41,635.05
|
1/1/13
– 12/31/13
|
$1.6230
|
$42,884.10
|
1/1/14
– 12/31/14
|
$1.6717
|
$44,170.62
|
1/1/15
– 12/31/15
|
$1.7218
|
$45,495.74
|
1/1/16
– 12/31/16
|
$1.7735
|
$46,860.61
|
1/1/17
– 12/31/17
|
$1.8267
|
$48,266.43
|
1/1/18
– 12/31/18
|
$1.8815
|
$49,714.42
|
Period:
Expansion Premises
65,280 sf
|
Monthly Base Rent per SF
|
Base Rent Per Month:
|
11/25/07
– 12/31/07
|
$0.5700
|
$37,209.60
|
1/1/08
– 12/31/08
|
$0.5700
|
$37,209.60
|
1/1/09
– 12/31/09
|
$0.5871
|
$38,325.89
|
1/1/10
– 12/31/10
|
$0.6047
|
$39,475.66
|
1/1/11
– 12/31/11
|
$0.6229
|
$40,659.93
|
1/1/12
– 12/31/12
|
$0.6415
|
$41,879.73
|
1/1/13
– 12/31/13
|
$0.6608
|
$43,136.12
|
1/1/14
– 12/31/14
|
$0.6806
|
$44,430.21
|
1/1/15
– 12/31/15
|
$0.7010
|
$45,763.11
|
1/1/16
– 12/31/16
|
$0.7221
|
$47,136.01
|
1/1/17
– 12/31/17
|
$0.7437
|
$48,550.09
|
1/1/18
– 12/31/18
|
$0.7660
|
$50,006.59
|
Period:
R&D Space
(yard)
|
Base Rent Per Month PSF:
|
Monthly Base Rent:
|
3/1/08–
12/31/08
|
$0.1500
|
$3,150.00
|
1/1/09
– 12/31/09
|
$0.1545
|
$3,244.50
|
1/1/10
– 12/31/10
|
$0.1591
|
$3,341.84
|
1/1/11
– 12/31/11
|
$0.1639
|
$3,442.09
|
1/1/12
– 12/31/12
|
$0.1688
|
$3,545.35
|
1/1/13
– 12/31/13
|
$0.1739
|
$3,651.71
|
1/1/14
– 12/31/14
|
$0.1791
|
$3,761.26
|
1/1/15
– 12/31/15
|
$0.1845
|
$3,874.10
|
1/1/16
– 12/31/16
|
$0.1900
|
$3,990.33
|
1/1/17
– 12/31/17
|
$0.1957
|
$4,110.04
|
1/1/18
– 12/31/18
|
$0.2016
|
$4,233.34
|
Exhibit
A
Portion
of the Premises Located on the First Floor
Remaining
Increment:
7,325 sf located on the 1st floor
and shown as “Tranche 2”
8,444 sf located on the 1st floor
and shown as “Tranche 3”
20,125 sf
located on the 1st floor
and shown as “Tranche 4”
Exhibit
A-1
Expansion
Premises [Wine.com space]
Expansion Premises = 65,280 sf
and shown as “Tranche 5”
Exhibit
A-2
Portion
of the Premises Located on the Second Floor
December 17 Increment = 50,000 sf located on
the 2nd floor
and shown as “Tranche 1”
Second Increment = 26,423 sf
located on the 2nd floor
and shown as “Tranche 7”
8,310 SF Increment = 8,310 sf
located on the 2nd floor
and shown as “Tranche 8”
ex31-1.htm
EXHIBIT
31.1
CERTIFICATIONS
1.
|
I
have reviewed this Quarterly Report on Form 10-Q of SunPower
Corporation;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
Date: August
8, 2008
|
/S/ THOMAS H. WERNER
|
|
Thomas
H. Werner
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
ex31-2.htm
EXHIBIT
31.2
CERTIFICATIONS
1.
|
I
have reviewed this Quarterly Report on Form 10-Q of SunPower
Corporation;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
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4.
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The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
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(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
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The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
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(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
Date: August
8, 2008
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/S/ EMMANUEL T. HERNANDEZ
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Emmanuel
T. Hernandez
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Chief
Financial Officer
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(Principal
Financial and Accounting Officer)
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ex32-1.htm
EXHIBIT
32.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER AND
CHIEF
FINANCIAL OFFICER PURSUANT TO
18
U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the quarterly report of SunPower Corporation (the “Company”) on
Form 10-Q for the period ended June 29, 2008 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), each of Thomas H. Werner,
Chief Executive Officer, and Emmanuel T. Hernandez, Chief Financial Officer, of
the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the
best of his knowledge and belief:
(1) The
Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and result of operations of the Company.
Dated: August 8, 2008
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/S/ THOMAS H. WERNER
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Thomas
H. Werner
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Chief
Executive Officer
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(Principal
Executive Officer)
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|
|
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/S/ EMMANUEL T. HERNANDEZ
|
|
Emmanuel
T. Hernandez
|
|
Chief
Financial Officer
|
|
(Principal
Financial and Accounting Officer)
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The
foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure statement.