Quarterly Report
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM
10-Q
_____________________
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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 March 30, 2008
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OR
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||
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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)
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Delaware
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94-3008969
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|
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(State
or Other Jurisdiction of
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(I.R.S.
Employer
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|
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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):
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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 May
2, 2008 was 40,133,840.
The total
number of outstanding shares of the registrant’s class B common stock as of May
2, 2008 was 44,533,287.
SunPower
Corporation
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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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|||
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4
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|||
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5
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|||
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6
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|||
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Item 2.
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30
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Item 3.
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45
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Item 4.
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46
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47
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Item 1.
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47
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Item 1A.
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47
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Item 6.
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81
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82
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83
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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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March 30,
2008
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December 30,
2007
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|||||||
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Assets
|
||||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$
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132,522
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$
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285,214
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||||
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Restricted
cash
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30,727
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—
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||||||
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Short-term
investments
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63,531
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105,453
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||||||
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Accounts
receivable, net
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159,083
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138,250
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||||||
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Costs
and estimated earnings in excess of billings
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61,675
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39,136
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||||||
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Inventories
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188,203
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140,504
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||||||
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Deferred
project costs
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7,101
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8,316
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||||||
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Advances to
suppliers, current portion
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59,612
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52,277
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||||||
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Prepaid
expenses and other current assets
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55,343
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33,110
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||||||
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Total
current assets
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757,797
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802,260
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||||||
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Restricted
cash
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92,710
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67,887
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||||||
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Long-term
investments
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37,605
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29,050
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||||||
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Property,
plant and equipment, net
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420,124
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377,994
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||||||
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Goodwill
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195,891
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184,684
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||||||
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Intangible
assets, net
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49,525
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50,946
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||||||
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Advances
to suppliers, net of current portion
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105,066
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108,943
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||||||
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Other
long-term assets
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33,227
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31,974
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||||||
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Total
assets
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$
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1,691,945
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$
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1,653,738
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||||
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Liabilities
and Stockholders’ Equity
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||||||||
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Current
liabilities:
|
||||||||
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Accounts
payable
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$
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152,558
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$
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119,869
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||||
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Accounts
payable to Cypress
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3,846
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4,854
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||||||
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Accrued
liabilities
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87,633
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79,434
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||||||
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Billings in
excess of costs and estimated earnings
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28,251
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69,900
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||||||
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Customer
advances, current portion
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11,490
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9,250
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||||||
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Convertible
debt
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—
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425,000
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||||||
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Total
current liabilities
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283,778
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708,307
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||||||
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Convertible
debt
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425,000
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—
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||||||
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Deferred
tax liability
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6,771
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6,213
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||||||
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Customer
advances, net of current portion
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58,320
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60,153
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||||||
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Other
long-term
liabilities
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16,493
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14,975
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||||||
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Total
liabilities
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790,362
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789,648
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||||||
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Commitments
and Contingencies (Note 8)
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||||||||
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Stockholders’
Equity:
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||||||||
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Preferred
stock, $0.001 par value, 10,042,490 shares authorized; none issued and
outstanding
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—
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—
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||||||
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Common
stock, $0.001 par value, 375,000,000 and 375,000,000 shares authorized;
85,288,731 and 84,803,006 shares issued; 85,136,368 and 84,710,244 shares
outstanding, at March 30, 2008 and December 30, 2007,
respectively
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85
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85
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||||||
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Additional
paid-in capital
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903,625
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883,033
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||||||
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Accumulated
other comprehensive income
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13,240
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5,762
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||||||
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Accumulated
deficit
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(10,058
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)
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(22,815
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)
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||||
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906,892
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866,065
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|||||||
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Less:
shares of common stock held in treasury, at cost; 152,363 and 112,762
shares at March 30, 2008 and December 30, 2007,
respectively
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(5,309
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)
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(1,975
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)
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||||
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Total
stockholders’ equity
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901,583
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864,090
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||||||
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Total
liabilities and stockholders’ equity
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$
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1,691,945
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$
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1,653,738
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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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||||||||
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March 30,
2008
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April 1,
2007
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|||||||
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Revenue:
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||||||||
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Systems
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$ | 178,851 | $ | 78,495 | ||||
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Components
|
94,850 | 63,852 | ||||||
| 273,701 | 142,347 | |||||||
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Costs
and expenses:
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||||||||
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Cost of
systems revenue
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143,213 | 62,443 | ||||||
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Cost of
components revenue
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77,168 | 47,479 | ||||||
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Research and
development
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4,642 | 2,936 | ||||||
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Sales,
general and administrative
|
33,858 | 22,371 | ||||||
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Purchased
in-process research and development
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— | 9,575 | ||||||
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Total
costs and expenses
|
258,881 | 144,804 | ||||||
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Operating
income (loss)
|
14,820 | (2,457 | ) | |||||
|
Interest
income
|
4,147 | 1,984 | ||||||
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Interest
expense
|
(1,464 | ) | (1,119 | ) | ||||
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Other
income, net
|
287 | 274 | ||||||
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Income
(loss) before income taxes
|
17,790 | (1,318 | ) | |||||
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Income
tax provision (benefit)
|
5,033 | (2,558 | ) | |||||
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Net
income
|
$ | 12,757 | $ | 1,240 | ||||
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Net
income per share:
|
||||||||
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Basic
|
$ | 0.16 | $ | 0.02 | ||||
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Diluted
|
$ | 0.15 | $ | 0.02 | ||||
|
Weighted-average
shares:
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||||||||
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Basic
|
78,965 | 73,732 | ||||||
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Diluted
|
83,661 | 79,126 | ||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed
Consolidated Statements of Cash Flows
(In
thousands)
(unaudited)
|
Three
Months Ended
|
||||||||
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March
30,
2008
|
April
1,
2007
Note
1
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|||||||
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Cash
flows from operating activities:
|
||||||||
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Net
income
|
$
|
12,757
|
$
|
1,240
|
||||
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Adjustments to
reconcile net income to net cash used in operating
activities:
|
||||||||
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Depreciation
|
10,085
|
5,724
|
||||||
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Impairment of
long-lived assets
|
5,489
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—
|
||||||
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Loss on
retirement of long-lived assets
|
17
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—
|
||||||
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Amortization of
intangible assets
|
4,317
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6,911
|
||||||
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Amortization of
debt issuance costs
|
972
|
178
|
||||||
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Stock-based
compensation
|
14,508
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10,603
|
||||||
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Purchased
in-process research and development
|
—
|
9,575
|
||||||
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Excess
tax benefits from stock-based award activity
|
(4,361
|
)
|
—
|
|||||
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Deferred income
taxes and other tax liabilities
|
2,773
|
(3,165
|
)
|
|||||
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Changes
in operating assets and liabilities, net of effect of
acquisition:
|
||||||||
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Accounts
receivable
|
(17,162
|
)
|
8,992
|
|||||
|
Costs
and estimated earnings in excess of billings
|
(20,709
|
)
|
(9,960
|
)
|
||||
|
Inventories
|
(40,745
|
)
|
(22,187
|
)
|
||||
|
Prepaid
expenses and other assets
|
(14,492
|
)
|
4,035
|
|||||
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Deferred
project costs
|
1,215
|
(6,204
|
)
|
|||||
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Advances to
suppliers
|
(2,559
|
)
|
(8,642
|
)
|
||||
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Accounts
payable and other accrued liabilities
|
23,991
|
(62
|
)
|
|||||
|
Accounts
payable to Cypress
|
(1,008
|
)
|
2,882
|
|||||
|
Billings in
excess of costs and estimated earnings
|
(43,663
|
)
|
2,500
|
|||||
|
Customer
advances
|
(786
|
)
|
(7,479
|
)
|
||||
|
Net
cash used in operating activities
|
(69,361
|
)
|
(5,059
|
)
|
||||
|
Cash
flows from investing activities:
|
||||||||
|
Increase in
restricted cash
|
(55,550
|
)
|
(417
|
)
|
||||
|
Purchase of
property, plant and equipment
|
(50,790
|
)
|
(60,915
|
)
|
||||
|
Purchase of
available-for-sale securities
|
(50,970
|
)
|
—
|
|||||
|
Proceeds from
sales of available-for-sale securities
|
84,106
|
16,496
|
||||||
|
Cash
paid for acquisition, net of cash acquired
|
(13,484
|
)
|
(98,645)
|
|||||
|
Investment in
joint venture
|
(5,625
|
)
|
—
|
|||||
|
Net
cash used in investing activities
|
(92,313
|
)
|
(143,481
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds from
exercise of stock options
|
1,138
|
1,999
|
||||||
|
Excess
tax benefits from stock-based award activity
|
4,361
|
—
|
||||||
|
Purchases of
stock for tax withholding obligations on vested restricted
stock
|
(3,334
|
)
|
—
|
|||||
|
Proceeds from
issuance of convertible debt
|
—
|
200,000
|
||||||
|
Convertible
debt issuance costs
|
—
|
(6,030
|
)
|
|||||
|
Principal
payments on line of credit and notes payable
|
—
|
(3,563
|
)
|
|||||
|
Net
cash provided by financing activities
|
2,165
|
192,406
|
||||||
|
Effect
of exchange rate changes on cash and cash
equivalents
|
6,817
|
—
|
||||||
|
Net
increase in cash and cash equivalents
|
(152,692
|
)
|
43,866
|
|||||
|
Cash
and cash equivalents at beginning of period
|
285,214
|
165,596
|
||||||
|
Cash
and cash equivalents at end of period
|
$
|
132,522
|
$
|
209,462
|
||||
|
Non-cash
transactions:
|
||||||||
|
Additions to
property, plant and equipment acquired under accounts payable and other
accrued liabilities
|
$
|
4,446
|
$
|
(4,707
|
)
|
|||
|
Change
in goodwill relating to adjustments to acquired net
assets
|
231
|
—
|
||||||
|
Issuance of
common stock for purchase acquisition
|
—
|
111,266
|
||||||
|
Stock
options assumed in relation to acquisition
|
—
|
21,280
|
||||||
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 the components business
segment.
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 March 30, 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
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.
As of
March 30, 2008, the Company had an accumulated deficit of $10.1 million and has
a history of operating losses through fiscal 2005. 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 manufactures 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 to reducing 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 first
quarter of fiscal 2008 ended on March 30, 2008 and the first quarter of fiscal
2007 ended on April 1, 2007.
Basis
of Presentation
The
accompanying condensed consolidated interim 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
“percentage-of-completion” 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 March 30, 2008 and its results of
operations for the three-month periods ended March 30, 2008 and April 1,
2007 and its cash flows for the three-month periods ended March 30, 2008 and
April 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, 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 as of 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 are 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 is effective as of the beginning of an entity’s first
fiscal year 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 as of the beginning of an entity’s first fiscal year beginning after
December 15, 2008. The Company is currently evaluating the potential
impact of the adoption of SFAS No. 141(R) on its financial position and
results of operations.
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 as of the
beginning of an entity’s first fiscal year 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.
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 three months ended April 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 $4.7 million in the
three months ended April 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 $4.7 million in the three months
ended April 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 purchases fabricated semiconductor wafers from Cypress at intercompany
prices which are consistent with Cypress’ internal transfer pricing methodology.
Wafer purchases totaled $0.6 million and $1.5 million for the three-month
periods ended March 30, 2008 and April 1, 2007, respectively. In December 2007,
Cypress announced the planned closure of its Texas wafer fabrication facility
that manufactures 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 has decided to wind down its activities related to the imaging
detector product line in the first quarter of fiscal 2008. As such, in the
three-month period 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.
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 $0.5 million and $0.4 million for the three-month
periods ended March 30, 2008 and April 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 wafer fabrication facility in
the Philippines. The Company entered into a lease agreement for this facility
and a sublease for the land in 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 approximately $0.1 million for each of the
three-month periods ended March 30, 2008 and April 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 partyfor 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 (see Note 17).
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 $0.3 million for each of the three-month periods ended March 30,
2008 and April 1, 2007.
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 will lease 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
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. However, to avoid redundant benefits, the Company’s
employees will generally be precluded from participating in Cypress’ stock
option plans and stock purchase plans.
With
respect to the Cypress 401(k) Plan, the Company will be obligated to establish
its own 401(k) Plan within 90 days of separation from Cypress, and Cypress will
transfer all accounts in the Cypress 401(k) Plan held by the Company’s employees
to its 401(k) 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”)
(see Note 17). 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 distributed components such as
solar panels and inverters, and offered 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
|
|||||||||
|
As
of December 30, 2007
|
$ | 2,883 | $ | 181,801 | $ | 184,684 | ||||||
|
Goodwill
acquired
|
10,284 | — | 10,284 | |||||||||
|
Adjustments
|
923 | — | 923 | |||||||||
|
As
of March 30, 2008
|
$ | 14,090 | $ | 181,801 | $ | 195,891 | ||||||
Changes
to goodwill during the three months ended March 30, 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 March 30, 2008, the cumulative translation adjustment increased the
balance of goodwill by $0.7 million. Also during the three months ended March
30, 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 March 30, 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
|
|||||||||
|
As
of March 30, 2008
|
||||||||||||
|
Patents
and purchased technology
|
$
|
51,398
|
$
|
(23,303
|
)
|
$
|
28,095
|
|||||
|
Tradenames
|
2,215
|
(1,018
|
)
|
1,197
|
||||||||
|
Backlog
|
11,787
|
(11,787
|
)
|
—
|
||||||||
|
Customer
relationships and other
|
25,477
|
(5,244
|
)
|
20,233
|
||||||||
|
$
|
90,877
|
$
|
(41,352
|
)
|
$
|
49,525
|
||||||
|
As
of December 30, 2007
|
||||||||||||
|
Patents
and purchased technology
|
$
|
51,398
|
$
|
(20,630
|
)
|
$
|
30,768
|
|||||
|
Tradenames
|
1,603
|
(808
|
)
|
795
|
||||||||
|
Backlog
|
11,787
|
(11,460
|
)
|
327
|
||||||||
|
Customer
relationships and other
|
23,193
|
(4,137
|
)
|
19,056
|
||||||||
|
$
|
87,981
|
$
|
(37,035
|
)
|
$
|
50,946
|
||||||
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 first quarter of fiscal 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 $4.3 million
and $6.9 million for the three months ended March 30, 2008 and April
1, 2007, respectively. As of March 30, 2008, the estimated future
amortization expense related to intangible assets is as follows (in
thousands):
|
2008
(remaining nine months)
|
$
|
12,039
|
||
|
2009
|
15,420
|
|||
|
2010
|
13,907
|
|||
|
2011
|
4,137
|
|||
|
2012
|
3,917
|
|||
|
Thereafter
|
105
|
|||
|
$
|
49,525
|
|||
Note
4.
BALANCE SHEET
COMPONENTS
|
(In thousands)
|
March 30,
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
|
$
|
61,675
|
$
|
39,136
|
||||
|
Billings in
excess of costs and estimated earnings on contracts in
progress
|
28,251
|
69,900
|
||||||
|
$
|
33,424
|
$
|
(30,764
|
)
|
||||
|
Costs incurred
to date on contracts in progress
|
$
|
540,870
|
$
|
481,340
|
||||
|
Estimated
earnings to date
|
170,053
|
145,643
|
||||||
|
Contract
revenue earned to date
|
710,923
|
626,983
|
||||||
|
Less: Billings
to date, including earned incentive rebates, on contracts in
progress
|
(677,499
|
)
|
(657,747
|
)
|
||||
|
$
|
33,424
|
$
|
(30,764
|
)
|
||||
|
Inventories:
|
||||||||
|
Raw
materials*
|
$
|
95,189
|
$
|
89,604
|
||||
|
Work-in-process
|
4,549
|
2,027
|
||||||
|
Finished
goods
|
88,465
|
48,873
|
||||||
|
$
|
188,203
|
$
|
140,504
|
|||||
|
* 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.
|
||||||||
|
Prepaid
expenses and other current assets:
|
||||||||
|
VAT receivable,
current portion
|
$
|
29,007
|
$
|
7,266
|
||||
|
Deferred tax
asset, current portion
|
8,438
|
8,437
|
||||||
|
Prepaid
materials
|
1,523
|
4,652
|
||||||
|
Other
receivables
|
10,340
|
9,946
|
||||||
|
Other prepaid
expenses
|
6,035
|
2,809
|
||||||
|
$
|
55,343
|
$
|
33,110
|
|||||
|
Property,
plant and equipment, net:
|
||||||||
|
Land and
buildings
|
$
|
7,482
|
$
|
7,482
|
||||
|
Manufacturing
equipment
|
238,858
|
194,963
|
||||||
|
Manufacturing
equipment held for sale**
|
768
|
—
|
||||||
|
Computer
equipment
|
13,843
|
12,399
|
||||||
|
Furniture
and fixtures
|
3,607
|
2,648
|
||||||
|
Leasehold
improvements
|
123,603
|
113,801
|
||||||
|
Construction-in-process
(manufacturing facility in the Philippines)
|
95,037
|
99,945
|
||||||
|
483,198
|
431,238
|
|||||||
|
Less:
Accumulated depreciation***
|
(63,074
|
)
|
(53,244
|
)
|
||||
| $ |
420,124
|
$
|
377,994
|
|||||
|
(In thousands)
|
March 30,
2008
|
December 30,
2007
|
|||||||
|
**
During the three-month period 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.
|
|||||||||
|
***
Total depreciation expense was $10.1 million and $5.6 million for the
three months ended March 30, 2008 and April 1, 2007,
respectively.
|
|||||||||
|
Other
long-term assets:
|
|||||||||
|
VAT
receivable, net of current portion
|
$
|
17,968
|
$
|
24,269
|
|||||
|
Investment in
joint venture
|
11,473
|
5,304
|
|||||||
|
Other
|
3,786
|
2,401
|
|||||||
|
$
|
33,227
|
$
|
31,974
|
||||||
|
Accrued
liabilities:
|
|||||||||
|
VAT
payable
|
$
|
17,649
|
$
|
18,138
|
|||||
|
Employee
compensation and employee benefits
|
13,945
|
15,338
|
|||||||
|
Income
taxes payable
|
11,760
|
11,106
|
|||||||
|
Warranty
|
12,194
|
10,502
|
|||||||
|
Foreign
exchange derivative liability
|
13,956
|
8,920
|
|||||||
|
Unearned
income
|
2,357
|
159
|
|||||||
|
Solar
renewable energy certificates purchase obligations
|
460
|
571
|
|||||||
|
Royalty
obligations
|
284
|
275
|
|||||||
|
Other
|
15,028
|
14,425
|
|||||||
|
$
|
87,633
|
$
|
79,434
|
||||||
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 March 30, 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
March
30, 2008
|
||||||||||||
|
Asset
|
||||||||||||||||
|
Money
market securities
|
$
|
165,075
|
$
|
—
|
$
|
—
|
$
|
165,075
|
||||||||
|
Corporate
securities
|
—
|
45,038
|
37,605
|
82,643
|
||||||||||||
|
Commercial
paper
|
—
|
38,493
|
—
|
38,493
|
||||||||||||
|
Total
available-for-sale securities
|
$
|
165,075
|
$
|
83,531
|
$
|
37,605
|
286,211
|
|||||||||
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 March
30, 2008, the Company had $37.6 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 May 9, 2008, all auction rate securities invested in at March
30, 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 March 30, 2008 and December 30, 2007 that were not sold in a
subsequent period totaling $37.6 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 March 30, 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 $1.4 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 March 30, 2008:
|
(In thousands)
|
Auction
Rate Securities
|
|||
|
Balance
at December 31, 2007
|
$
|
—
|
||
|
Transfers from
Level 2 to Level 3
|
29,050
|
|||
|
Purchases of
auction rate securities
|
10,000
|
|||
|
Unrealized loss
included in other comprehensive income
|
(1,445
|
)
|
||
|
Balance
at March 30, 2008
|
$
|
37,605
|
||
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 March 30, 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
|
||||||||||||||||||
|
Corporate
securities
|
$
|
75,870
|
$
|
(1,540
|
)
|
$
|
—
|
$
|
—
|
$
|
75,870
|
$
|
(1,540
|
)
|
||||||||||
|
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
|
||||||||||||||||||
|
Corporate
securities
|
$
|
25,536
|
$
|
(50
|
)
|
$
|
—
|
$
|
—
|
$
|
25,536
|
$
|
(50
|
)
|
||||||||||
|
Commercial
paper
|
24,002
|
(2
|
)
|
—
|
—
|
24,002
|
(2
|
)
|
||||||||||||||||
|
$
|
49,538
|
$
|
(52
|
)
|
$
|
—
|
$
|
—
|
$
|
49,538
|
$
|
(52
|
)
|
|||||||||||
Of the $1.5
million gross unrealized losses of the Company’s corporate securities, $1.4
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 three months ended March 30, 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)
|
March 30,
2008
|
December 30,
2007
|
||||||
|
Included
in:
|
||||||||
|
Cash
equivalents
|
$ | 61,638 | $ | 249,582 | ||||
|
Short-term
restricted cash*
|
30,727 | — | ||||||
|
Short-term
investments
|
63,531 | 105,453 | ||||||
|
Long-term
restricted cash*
|
92,710 | 67,887 | ||||||
|
Long-term
investments
|
37,605 | 29,050 | ||||||
| $ | 286,211 | $ | 451,972 | |||||
|
Contractual
maturities:
|
||||||||
|
Due in
less than one year
|
$ | 150,600 | $ | 396,228 | ||||
|
Due
from one to two years **
|
7,278 | 4,994 | ||||||
|
Due
from two to 30 years
|
128,333 | 50,750 | ||||||
| $ | 286,211 | $ | 451,972 | |||||
|
*
|
The
Company provided security for advance payments received from
customers.
|
|
**
|
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).
Furthermore,
under certain of these agreements, the Company is required to make prepayments
to the vendors over the terms of the arrangements. In January 2008, the Company
paid an advance of 1.6 million Euros (approximately $2.4 million) in accordance
with the terms of an existing supply agreement. As of March 30, 2008, advances
to suppliers totaled $164.7 million, the current portion of which is $59.6
million.
The
Company’s future prepayment obligations related to these agreements as of March
30, 2008 are as follows (in thousands):
|
2008
(remaining nine months)
|
$
|
56,040
|
||
|
2009
|
78,006
|
|||
|
2010
|
59,642
|
|||
|
2011
|
19,792
|
|||
|
$
|
213,480
|
|||
Note
7.
STOCK-BASED
COMPENSATION
During the
preparation of its Condensed Consolidated Financial Statements for the
three-month period ended March 30, 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 three-month period ended March 30, 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
|
||||||||
|
(In
thousands)
|
March 30,
2008
|
April 1,
2007
|
||||||
|
Employee
stock options
|
$
|
1,187
|
$
|
4,746
|
||||
|
Restricted
stock
|
7,901
|
1,254
|
||||||
|
Shares
released from re-vesting restrictions
|
6,006
|
4,722
|
||||||
|
Change
in stock-based compensation capitalized in inventory
|
(586
|
)
|
(119
|
)
|
||||
|
Total
stock-based compensation expense
|
$
|
14,508
|
$
|
10,603
|
||||
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 by the Company.
As the re-vesting restrictions of these shares lapse over the two-year
period beginning on the date of acquisition, the fair value of the shares is
being expensed over a two-year period. Shares released from such re-vesting
restrictions are included in stock-based compensation expense per 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
|
||||||||
|
(In
thousands)
|
March 30,
2008
|
April 1,
2007
|
||||||
|
Cost
of systems revenue
|
$
|
2,511
|
$
|
1,997
|
||||
|
Cost
of components revenue
|
1,203
|
253
|
||||||
|
Research
and development
|
811
|
501
|
||||||
|
Sales,
general and administrative
|
9,983
|
7,852
|
||||||
|
Total
stock-based compensation expense before income taxes
|
14,508
|
10,603
|
||||||
|
Tax
effect on stock-based compensation expense
|
—
|
—
|
||||||
|
Total
stock-based compensation expense after income taxes
|
$
|
14,508
|
$
|
10,603
|
||||
SFAS
No. 123(revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”), requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.
Consolidated
net cash proceeds from the issuance of shares under the Company’s employee stock
plans were $1.1 million and $2.0 million for the three months ended March 30,
2008 and April 1, 2007, respectively. The Company recognized an income tax
benefit from stock option exercises of $4.4 million during the three months
ended March 30, 2008. No income tax benefit was realized from stock option
exercises during the three months ended April 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
March 30,
2008
|
Weighted-Average
Amortization
Period
(in
years)
|
||||||
|
Stock
options
|
$
|
11,630
|
1.3
|
|||||
|
Restricted
stock
|
84,355
|
3.0
|
||||||
|
Shares
subject to re-vesting restrictions
|
21,429
|
0.7
|
||||||
|
Total
unrecognized stock-based compensation cost
|
$
|
117,414
|
||||||
The
Company recognizes its stock-based compensation cost on a straight-line
recognition basis, except for stock options issued prior to the adoption of SFAS
No. 123(R), which are recognized on an accelerated recognition basis.
Additionally, the Company issues new shares upon option exercises 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
|
||||
|
April
1,
200
7
|
||||
|
Expected
term
|
6.5 years
|
|||
|
Risk-free
interest rate
|
4.68%
|
|||
|
Volatility
|
51%
|
|||
|
Dividend
yield
|
0%
|
|||
|
No
stock options were granted in the three months ended March 30,
2008.
|
||||
For
the Three Months Ended April 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 price returns, 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
Amended
and Restated 2005 Stock Incentive Plan:
In May
2007, the Company’s stockholders approved an increase in the number of
shares available for grant under the Company’s Amended and Restated 2005 Stock
Incentive Plan of 925,000 shares 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 first fiscal quarter in
2008, the Company withheld approximately 37,000 shares to satisfy
$3.3 million of employees’ tax obligations. The Company paid this amount in
cash to the appropriate taxing authorities. Although shares withheld are not
issued, they are treated as common stock repurchases for accounting and
disclosure purposes, as they reduce the number of shares that would have been
issued upon vesting.
The
following table summarizes the Company’s stock option activities:
|
Three
Months Ended
March
30, 2008
|
||||||||
|
Shares
(in thousands)
|
Weighted-
Average
Exercise
Price Per Share
|
|||||||
|
Outstanding
as of December 30, 2007
|
3,701 | $ | 5.44 | |||||
|
Granted
|
— | — | ||||||
|
Exercised
|
(449 | ) | 2.53 | |||||
|
Forfeited
|
(27 | ) | 5.48 | |||||
|
Outstanding
as of March 30, 2008
|
3,225 | 5.85 | ||||||
|
Exercisable
as of March 30, 2008
|
1,283 | 3.97 | ||||||
The
following table summarizes the Company’s non-vested stock options and restricted
stock activities thereafter:
Information
regarding the Company’s outstanding stock options as of March 30, 2008 was as
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)
|
||||||||||||||
|
$
|
0.04—
|
0.75
|
515
|
3.9
|
$
|
0.31
|
$
|
37,773
|
270
|
4.6
|
$
|
0.46
|
$
|
19,761
|
||||||||
|
0.88—
|
2.66
|
195
|
6.6
|
2.08
|
13,955
|
57
|
6.2
|
1.95
|
4,084
|
|||||||||||||
|
3.30—
|
4.95
|
1,818
|
6.6
|
3.33
|
127,812
|
819
|
6.6
|
3.31
|
57,566
|
|||||||||||||
|
7.00—
|
16.20
|
347
|
7.4
|
8.46
|
22,598
|
94
|
7.4
|
8.64
|
6,085
|
|||||||||||||
|
17.00—
|
56.20
|
350
|
8.3
|
26.59
|
16,457
|
43
|
8.2
|
30.87
|
1,851
|
|||||||||||||
|
3,225
|
$
|
218,595
|
1,283
|
$
|
89,347
|
|||||||||||||||||
The
aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on the Company’s closing stock price of $73.63 at March
30, 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 March 30,
2008.
Stock
Unit Plan:
As of
March 30, 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 conducted in November 2007, approximately 53,000 stock
units were exchanged for approximately 32,000 restricted stock units issued
under the Company’s Amended and Restated 2005 Stock Incentive Plan. For the
three months ended March 30, 2008 and April 1, 2007, total compensation expense
associated with the 2005 Stock Unit Plan was zero and $0.4 million,
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. Through the quarter ended March 30, 2008, the Company also
leased its first solar cell manufacturing facility in the Philippines from
Cypress, under a lease which expires in July 2021 (see Note 2). In December
2005, the Company entered into a 5-year operating lease from an unaffiliated
third party for a second solar cell manufacturing 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 March 30, 2008 are as follows (in
thousands):
|
2008
(remaining nine months)
|
$ | 3,654 | ||
|
2009
|
5,203 | |||
|
2010
|
5,505 | |||
|
2011
|
4,350 | |||
|
2012
|
3,988 | |||
|
Thereafter
|
23,933 | |||
| $ | 46,633 |
Rent
expense, including the rent paid to Cypress for the San Jose, California
facility and the wafer fabrication facility in the Philippines (see
Note 2), was $1.9 million and $0.6 million for the three months ended March
30, 2008 and April 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 March
30, 2008, total obligations related to such supplier agreements was $3.6 billion
and non-cancelable purchase orders related to equipment and building
improvements totaled approximately $151.7 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 March 30, 2008,
total obligations related to future purchases of SRECs was $1.6
million.
Future
minimum obligations under supplier agreements, non-cancelable purchase orders
and SRECs as of March 30, 2008 are as follows (in thousands):
|
2008
|
$ | 364,001 | ||
|
2009
|
431,540 | |||
|
2010
|
531,510 | |||
|
2011
|
542,176 | |||
|
2012
|
343,348 | |||
|
Thereafter
|
1,527,346 | |||
| $ | 3,739,921 |
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 will supply polysilicon and technology required for the silicon
ingot manufacturing to the joint venture, and the Company will procure the
manufactured silicon ingots from the joint venture under a five-year agreement.
Woongjin Energy began manufacturing in the third quarter of fiscal
2007.
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
March 30, 2008, the Company had a $10.4 million minority investment in the joint
venture on the Condensed Consolidated Balance Sheets which consisted of a 27.4%
equity investment valued at $7.1 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 minority investment in the joint venture on the 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 accounted for its joint venture in Woongjin Energy using the equity
method of accounting, in which the entire minority 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 $0.5 million and zero for
the three months ended March 30, 2008 and April 1, 2007, respectively, is
included in “Other income, net” in the Condensed Consolidated Statements of
Operations. Neither party has contractual obligations to provide any additional
funding to the joint venture.
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.
Under the joint venture, the Company and First Philec have funded the joint
venture through capital investments. The Company will supply silicon ingots and
technology required for the slicing of silicon to the joint venture, and the
Company will procure the silicon wafers from the joint venture under a five-year
wafering supply and sales agreement. This joint venture will operate in the
Philippines and is expected to become operational in the second half of
2008.
As of
March 30, 2008, the Company had a $1.1 million minority investment in the
joint venture on the Condensed Consolidated Balance Sheets which consisted of a
20.0% equity investment. As of December 30, 2007, the Company had a $0.9 million
minority investment in the joint venture on the Condensed Consolidated Balance
Sheets which consisted of a 16.9% equity investment. The Company accounted for
its joint venture using the equity method of accounting, in which the entire
minority investment is classified as “Other long-term assets” in the Condensed
Consolidated Balance Sheets. As of March 30, 2008, the joint venture was in the
development stage and had no operations.
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.
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 March 30, 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 panels suppliers are
standard, while inverters typically carry a two-, five- or ten-year warranty.
The Company maintains warranty reserves to cover potential liability 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
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 management’s expectations.
Provisions
for warranty reserves charged to cost of revenue were $4.9
million and $4.1 million during the three-month periods ended March 30, 2008 and
April 1, 2007, respectively. Activity within accrued warranty for the three
months ended March 30, 2008 and April 1, 2007 is summarized as
follows:
|
(In
thousands)
|
March
30,
200
8
|
April
1,
200
7
|
||||||
|
Balance
at the beginning of the period
|
$
|
17,194
|
$
|
3,446
|
||||
|
SP
Systems accrued balance at date of acquisition
|
—
|
6,542
|
||||||
|
Accruals for
warranties issued during the period
|
4,899
|
4,147
|
||||||
|
Settlements
made during the period
|
(2,576
|
)
|
(575
|
)
|
||||
|
Balance
at the end of the period
|
$
|
19,517
|
$
|
13,560
|
||||
The
accrued warranty balance at March 30, 2008 and December 30, 2007 includes $7.3
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
March 30, 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 $4.6
million and $4.1 million, respectively, none of which was included in "Accrued
liabilities" on the Condensed Consolidated Balance Sheets, as it is not expected
to be paid within the next twelve months. Total liabilities associated with
uncertain tax positions of $4.6 million and $4.1 million is included in "Other
long-term liabilities" on our Condensed Consolidated Balance Sheets at March 30,
2008 and December 30, 2007, respectively. 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. For the three months ended March 30, 2008 and April
1, 2007, the Company incurred royalty expense totaling $0.6 million and $0.7
million, respectively, which was charged to cost of systems revenue. As of March
30, 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
December 2005, the Company entered into a $25.0 million three-year revolving
credit facility with affiliates of Credit Suisse and Lehman Brothers, of which
there were no borrowings ever made under the facility. The Company terminated
its agreement with affiliates of Credit Suisse and Lehman Brothers in July
2007.
In
connection with the SP Systems acquisition on January 10, 2007, the Company
assumed a line of credit SP Systems had with Union Bank of California, N.A.
(“UBOC”) with an outstanding balance of approximately $3.6 million. During the
first quarter of fiscal 2007, the Company paid off the outstanding balance in
full.
Also on
January 10, 2007, the Company amended and restated the loan agreement with
UBOC. The amended and restated loan agreement provided for a $10.0 million
trade finance credit facility, which was scheduled to expire on April 30,
2007. This facility allowed the Company to issue commercial and standby letters
of credit, but did not provide for any loans. All of the assets of SP Systems
secured this trade finance facility. In addition, the agreement required that SP
Systems maintain cash equal to the value of letters of credit outstanding in
restricted accounts as collateral for letters of credit issued by the bank. In
April 2007, the Company amended the loan agreement to, among other things,
extend the maturity date to July 31, 2007, and remove the requirement to
have cash collateral for letters of credit. The Company guaranteed $10.5
million in connection with the April 2007 amendment including the $10.0 million
trade credit facility and a separate $0.5 million credit card facility through
UBOC. The Company’s line of credit with UBOC expired on July 31,
2007.
In July
2007, the Company entered into a credit agreement with Wells Fargo that replaced
the credit lines with Credit Suisse, Lehman Brothers and UBOC. The Company has
entered into amendments to the credit agreement from time to time. As of March
30, 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 $50.0 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 July
31, 2008. 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 $50.0 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. The Company has the ability at any time to prepay
outstanding loans. All borrowings must be repaid by July 31, 2008, and all
letters of credit issued under the unsecured letter of credit subfeature expire
on or before July 31, 2008 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 (these dates were
subsequently extended as described below). 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 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, and SP Systems, another
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.
For the
year ended December 30, 2007, the Company was not compliant with two debt
covenants. The Company had failed to deliver in a timely manner a certificate of
the chief executive officer or chief financial officer that the financial
statements in its prior Quarterly Report on Form 10-Q were accurate and that
there existed no event of default with debt covenants. The Company also entered
into corporate guaranties on construction project deals in Europe that exceeded
the allowed amount under the debt covenants. In January 2008, the Company
entered into an agreement with Wells Fargo to amend the existing credit
agreement. Under the amended credit agreement, Wells Fargo waived
compliance requirements with certain restrictive covenants, including the
prohibition against the Company providing corporate guaranties supporting
contracts between its subsidiaries and third parties. In exchange for waiving
compliance with such restrictive covenants, the Company agreed to maintain a
balance of funds in a deposit account with Wells Fargo, in an amount no less
than the aggregate outstanding indebtedness owed by the Company to Wells Fargo
under both the line of credit, including its letter of credit subfeature, and
the letter of credit line, as collateral securing such outstanding indebtedness.
Had Wells Fargo not waived this violation, the Company would have been in
default of its debt covenants and the Company may have been required to
immediately repay the aggregate outstanding indebtedness owed by the Company to
Wells Fargo under both the line of credit, including its letter of credit
subfeature, and the letter of credit line.
As of
March 30, 2008 and December 30, 2007, 8 letters of credit totaling $46.3 million
and 4 letters of credit totaling $32.0 million, respectively, were issued by
Wells Fargo under the unsecured letter of credit subfeature. As of March 30,
2008, 17 letters of credit totaling $52.3 million were issued by Wells
Fargo under the secured letter of credit facility, exceeding the amount the
Company may request Wells Fargo to issue under the credit agreement by $2.3
million. On March 27, 2008, Wells Fargo issued an additional secured letter of
credit outside of the line totaling $4.8 million as temporary accommodation
while the Company negotiated amended terms of the credit agreement with Wells
Fargo. As of December 30, 2007, 8 letters of credit totaling $47.9 million were
issued by Wells Fargo under the secured letter of credit facility. On March 30,
2008 and December 30, 2007, cash available to be borrowed under the unsecured
revolving credit line was $3.7 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 $3.7 million and $8.0 million,
respectively. Letters of credit available under the secured letter of credit
facility at March 30, 2008 and December 30, 2007 totaled zero and $2.1 million,
respectively.
On April
4, 2008, the Company entered into an amendment to the credit agreement with
Wells Fargo that increased the amount available under the secured letter of
credit facility from $50.0 million to $150.0 million, extended the expiration
date of the unsecured revolving credit line from July 31, 2008 to April 4, 2009,
and modified certain restrictive covenants. In addition, the Company granted to
Wells Fargo a security interest in a securities account to secure its
obligations in connection with any letters of credit that might be issued under
the secured letter of credit line and SunPower Systems SA, an indirect
wholly-owned subsidiary of the Company, entered into an associated continuing
guaranty with Wells Fargo. As a result of the increased availability in the
secured letter of credit facility, the $4.8 million secured letter of credit
that was previously issued outside the line as temporary accommodation was
reclassified as a letter of credit under the secured letter of credit
facility.
Until
April 4, 2009, the Company may borrow up to $50.0 million under the credit
agreement’s unsecured line of credit and request that Wells Fargo issue up to
$50.0 million in letters of credit under the unsecured letter of credit
subfeature, provided that any letters of credit issued and outstanding under the
unsecured letter of credit subfeature will reduce the Company’s borrowing
capacity. Until July 31, 2012, the Company may request that Wells Fargo
issue up to $150.0 million in letters of credit under the credit agreement’s
secured letter of credit line. As detailed in the credit agreement, the Company
will pay interest on outstanding borrowings and a fee for issued and outstanding
letters of credit. The Company has the ability at any time to 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 line expire no later than July 31, 2012. The loan
documents include certain conditions to borrowings, representations and
covenants, and events of default customary for financing transactions of this
type (see Note 17).
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.
For the
year ended 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. For the
quarter ended March 30, 2008, no holders of the February 2007 debentures and
July 2007 debentures exercised their right to convert the debentures. Because
the closing stock price did not equal or exceed 125% of the initial effective
conversion price governing both the February 2007 debentures and July 2007
debentures for 20 out of 30 consecutive trading days during the quarter ended
March 30, 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 second
fiscal quarter beginning on March 31, 2008. Accordingly, the Company
re-classified the $425.0 million in aggregate convertible debt from short-term
debt to long-term debt in its Condensed Consolidated Balance Sheets as of March
30, 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
March 30, 2008, the estimated fair value of the February 2007 debentures and
July 2007 debentures was approximately $304.4 million and $258.8 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
Comprehensive
income 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 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, net of tax, were as follows:
|
Three
Months Ended
|
||||||||
| (In thousands) |
March
30,
200
8
|
April
1,
200
7
|
||||||
|
Net
income
|
$ | 12,757 | $ | 1,240 | ||||
|
Other
comprehensive income:
|
||||||||
|
Cumulative
translation adjustment
|
10,405 | 336 | ||||||
|
Unrealized gain
(loss) on investments, net of tax
|
(1,471 | ) | 4 | |||||
|
Unrealized gain
(loss) on derivatives, net of tax
|
(1,456 | ) | 451 | |||||
|
Total
comprehensive income
|
$ | 20,235 | $ | 2,031 | ||||
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 March 30, 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)
|
|||
|
Liability
|
||||
|
Foreign
currency forward exchange contracts
|
$
|
13,956
|
||
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 revenues 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 into
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
$5.4 million and $1.6 million for the three months ended March 30, 2008 and
April 1, 2007, respectively. As of March 30, 2008 and December 30, 2007, the
Company had outstanding cash flow hedge forward contracts with an aggregate
notional value of $87.0 million and $140.1 million, respectively. The
maturity dates of the outstanding contracts ranged from April 2008 to July
2008.
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 income, net, in the Condensed
Consolidated Statements of Operations. As of March 30, 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 income, net.
In
addition, the Company began hedging the net balance sheet effect of Euro
denominated assets and liabilities in 2005 primarily for Euro denominated
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 income, net. The gains or losses on these contracts are
substantially offset by transaction gains or losses on the underlying balances
being hedged. As of March 30, 2008 and December 30, 2007, the Company held
forward contracts with an aggregate notional value of $43.9 million and $62.7
million, respectively, to hedge the risks associated with Euro foreign currency
denominated assets and liabilities.
Note
13.
INCOME
TAXES
The
Company’s effective rate of income tax provision was 28% for the three months
ended March 30, 2008 and the effective rate of income tax benefit was 194%
for the three months ended April 1, 2007. The tax provision for the first
quarter of fiscal 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 first quarter of fiscal 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 quarter ended March 30, 2008 is as
follows:
|
(In
thousands)
|
March 30,
2008
|
|||
|
Balance
at December 30, 2007
|
$
|
4,172
|
||
|
Additions based
on tax positions related to the current quarter
|
424
|
|||
|
Balance
at March 30, 2008
|
$
|
$4,596
|
||
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
|
|
United
States
|
2004
and onward
|
|
California
|
2003
and onward
|
|
Switzerland
|
2004
and onward
|
|
Philippines
|
2004
and onward
|
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 March 30, 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 income tax expense and income taxes
payable may result.
Note
14.
NET INCOME PER
SHARE
Basic net
income per share is computed using the weighted-average of the combined class A
and class B common shares outstanding. Diluted net income 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 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)
|
March
30,
2008
|
April
1,
200
7
|
||||||
|
Stock
options
|
17
|
335
|
||||||
|
Restricted
stock
|
463
|
—
|
||||||
The
following table sets forth the computation of basic and diluted weighted-average
common shares:
|
Three Months
Ended
|
||||||||
|
(In
thousands)
|
March
30,
200
8
|
April
1,
200
7
|
||||||
|
Basic
weighted-average common shares
|
78,965
|
73,732
|
||||||
|
Effect
of dilutive securities:
|
||||||||
|
Stock
options
|
3,038
|
5,023
|
||||||
|
Restricted
stock
|
346
|
112
|
||||||
|
Shares
subject to re-vesting restrictions
|
352
|
259
|
||||||
|
February 2007
debentures
|
960
|
—
|
||||||
|
Weighted-average
common shares for diluted computation
|
83,661
|
79,126
|
||||||
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).
For the
three months ended March 30, 2008, dilutive potential common shares includes
approximately 1.0 million shares for the impact of the February 2007 debentures
as the Company has experienced a substantial increase in its common stock
price. 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. As of March 30, 2008, dilutive potential common shares
did not include the impact of the July 2007 debentures as the Company’s average
stock price for the period did not exceed 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 its 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
|
||||||||
|
March
30,
200
8
|
April
1,
200
7
|
|||||||
|
Revenue
by geography:
|
||||||||
|
United
States
|
21 | % | 39 | % | ||||
|
Europe:
|
||||||||
|
Spain
|
52 | % | 22 | % | ||||
|
Germany
|
8 | % | 14 | % | ||||
|
Other
|
7 | % | 15 | % | ||||
|
Rest
of world
|
12 | % | 10 | % | ||||
| 100 | % | 100 | % | |||||
|
Revenue
by segment:
|
||||||||
|
Systems
|
65 | % | 55 | % | ||||
|
Components
|
35 | % | 45 | % | ||||
| 100 | % | 100 | % | |||||
|
Gross
margin by segment:
|
||||||||
|
Systems
|
20 | % | 20 | % | ||||
|
Components
|
19 | % | 26 | % | ||||
| Significant Customers: |
Three
Months Ended
|
||||||||
|
March
30,
200
8
|
April
1,
200
7
|
||||||||
|
Business
Segment
|
|||||||||
|
Sedwick
Corporate, S.L.
|
Systems
|
30%
|
*
|
||||||
|
Naturener
Group
|
Systems
|
13%
|
*
|
||||||
|
Elecnor
|
Systems
|
*
|
19%
|
||||||
|
Conergy
AG
|
Components
|
*
|
10%
|
||||||
|
Solon
AG
|
Components
|
*
|
12%
|
||||||
* denotes
less than 10% during the period
|
(In thousands)
|
March 30,
2008
|
December 30,
2007
|
||||||
|
Property,
plant and equipment by geography:
|
||||||||
|
United
States
|
$ | 24,285 | $ | 18,026 | ||||
|
Philippines
|
395,686 | 359,968 | ||||||
|
Italy
|
153 | — | ||||||
| $ | 420,124 | $ | 377,994 | |||||
Note
16.
RELATED-PARTY
TRANSACTIONS
In the
first quarter of fiscal 2008, the Company conducted related-party transactions
with Woongjin Energy, a joint venture with whom the Company entered into, to
manufacture monocrystalline silicon ingots. For the quarter ended March 30,
2008, the Company recognized $0.6 million in components revenue related to the
sale of solar modules to Woongjin Energy. As of March 30, 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. For the quarter ended
March 30, 2008, the Company paid $5.8 million to Woongjin Energy for
manufacturing polysilicon into silicon ingots. As of March 30, 2008 and
December 30, 2007, $1.2 million and $2.4 million, respectively, remained due and
payable to Woongjin Energy related to silicon ingot
manufacturing.
Note
17.
SUBSEQUENT
EVENTS
Amendment
to Wells Fargo Credit Agreement
On April
4, 2008, the Company entered into an amendment to the credit agreement with
Wells Fargo that increased the credit agreement’s secured letter of credit line
from $50.0 million to $150.0 million, extended the expiration date of the
unsecured line of credit line from July 31, 2008 to April 4, 2009 and modified
certain restrictive covenants (see Note 9).
IRS
Tax Ruling
On April
16, 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
current ownership of SunPower class B common shares (see Note 2).
No
decision to effect a separation of Cypress and SunPower has been made by Cypress
at this time and no assurance can be given that such a decision will be
made. In addition, if a separation is effected, no assurance can be
given as to the number of shares to be distributed, the costs or effects on
SunPower of effecting the separation, and the impact of the separation on
trading price for SunPower’s common stock.
JP
Morgan Chase Bank, National Association to Buy Student Loan Auction Rate
Securities
On April 22,
2008, JPMorgan Chase Bank, National Association offered to purchase for cash as
much as $1.1 billion in auction rate securities issued by three student loan
trusts issued by Collegiate Funding Services at par value. The offer to buy
back the auction rate securities from Collegiate Funding Services trusts
expires May 20, 2008 and is expected to be settled on May 21, 2008. On
April 25, 2008, the Company tendered auction rate securities totaling $13.0
million.
Purchased
Facility from Cypress 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 wafer fabrication facility in
the Philippines. The Company entered into a lease agreement for this facility
and a sublease for the land in which 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. 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
(see Note 2).
|
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 year which ends on the Sunday closest to the calendar month end.
Overview
We are a
vertically integrated solar products and services company that designs,
manufactures and markets 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 electric energy, 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 manufacturing facilities in the Philippines.
We currently operate seven cell manufacturing lines in our solar cell
fabrication facilities, with a total rated manufacturing capacity of
approximately 214 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 a third solar cell manufacturing facility expected to
have an aggregate manufacturing capacity of 500 megawatts per year.
We
manufacture our solar panels at our panel manufacturing factory located in the
Philippines. Our solar panels are also manufactured for us by a third-party
subcontractor in China. We currently operate three solar panel manufacturing
lines with a rated manufacturing capacity of 90 megawatts of solar panels per
year. In addition, our SunPower branded inverters are manufactured for us by
multiple suppliers.
Systems
segment:
Our systems segment sells solar power systems and
system technology directly to system owners. 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-install technology; 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 and South Korea, 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.
As of
March 30, 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. Cypress is continuing to analyze the steps
necessary to effect the distribution of its SunPower shares in numerous areas,
including but not limited to, the review of the impact of Cypress’s taxing
jurisdictions, its current and future capital structure, its employee equity
plans, its outstanding convertible indebtedness and transactions and
relationships with SunPower.
In April
2008, Cypress received a favorable ruling from the Internal Revenue Service
(“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 current ownership of SunPower class B common
shares.
No
decision to effect a separation of Cypress and SunPower has been made by Cypress
at this time and no assurance can be given that such a decision will be
made. In addition, if a separation is effected, no assurance can be
given as to the number of shares to be distributed, the costs or effects on
SunPower of effecting the separation, and the impact of the separation on
trading price for SunPower’s common stock.
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
March 30, 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, respectively. 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 securities and some corporate
securities.
|
||
|
·
|
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 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-Month Periods Ended March 30, 2008 and April 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 three-month period ended March 30, 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 three-month period ended March 30, 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
|
|||||||||
|
(Dollars
in thousands)
|
March
30,
200
8
|
April
1,
200
7
|
Year-over-
Year
Change
|
||||||
|
Systems
revenue
|
$
|
178,851
|
$
|
78,495
|
128%
|
||||
|
Components
revenue
|
94,850
|
63,852
|
49%
|
||||||
|
Total
revenue
|
$
|
273,701
|
$
|
142,347
|
92%
|
||||
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 and South Korea, 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 the United States, Europe and Asia. 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 months ended March 30, 2008 and April 1, 2007 was
$178.9 million and $78.5 million, respectively, which accounted for 65% and 55%,
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. Gross margin for the
systems segment was $35.6 million and $16.1 million for the three months ended
March 30, 2008 and April 1, 2007, respectively, or 20% each, of systems segment
revenue. Gross margin in our systems segment is affected by a number of factors,
particularly the mix of projects sourced with our panels versus projects using
solar panels purchased from other suppliers.
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 first 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, favorable currency exchange rates, as well
as an increase in raw material prices used in the manufacture of our products.
Accordingly, our components segment's average selling prices were slightly
higher during the quarter ended March 30, 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 to unaffiliated customers for the three months ended March 30,
2008 and April 1, 2007 was $94.8 million and $63.9 million, respectively, which
accounted for 35% and 45%, respectively, of our total revenue. Gross margin for
the components segment was $17.7 million and $16.4 million for the three months
ended March 30, 2008 and April 1, 2007, respectively, or 19% and 26%,
respectively, of components segment revenue. Gross margin in our components
segment decreased 7% in the first quarter of fiscal 2008 as compared to the
first quarter of fiscal 2007 due to increasing costs of raw materials and
one-time asset impairment charges of $5.5 million.
Total
Revenue: During the three-month period ended March 30, 2008, our
total revenue of approximately $273.7 million represented an increase of 92%
from total revenue reported in the comparable period of 2007. The increase in
total revenue during the three-month period ended March 30, 2008 compared to the
same period of 2007 is attributable to the systems business segment’s
ongoing construction of several large-scale solar power plants in Spain which
are expected to aggregate approximately 39 megawatts of peak capacity output
when completed during the second and third quarters 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 5
th
, 6
th
and 7
th
solar cell lines during the
third and fourth quarters of 2007. Lines five and six have a rated solar cell
production capacity of 33 megawatts per year and line seven has a rated solar
cell production capacity of 40 megawatts per year.
|
Three
Months Ended
|
|||||||||
|
March
30,
200
8
|
April
1,
200
7
|
||||||||
|
Significant
customers:
|
Business
Segment
|
||||||||
|
Sedwick
Corporate, S.L.
|
Systems
|
30%
|
*
|
||||||
|
Naturener
Group
|
Systems
|
13%
|
*
|
||||||
|
Elecnor
|
Systems
|
*
|
19%
|
||||||
|
Conergy
AG
|
Components
|
*
|
10%
|
||||||
|
Solon
AG
|
Components
|
*
|
12%
|
||||||
* denotes
less than 10% during the period
Effective
February 6, 2008, the New York Stock Exchange, or NYSE, suspended the trading of
the common stock of MuniMae, or MMA, the parent company of one of our systems
segment customers, MMA Renewable Ventures, because MMA did not file its audited
2006 financial statements by March 3, 2008, the deadline imposed by the NYSE.
MMA Renewable Ventures accounted for less than 10% of our total revenue in the
first quarters of 2008 and 2007 and approximately 16% of our total revenue in
fiscal 2007. In connection with completing the restatement and filing their
Annual Report on Form 10-K for the year ended December 31, 2006, MMA
incurred substantial accounting costs. In addition, general economic conditions
have led to a severe capital and credit downturn, resulting in a slow-down to at
least one element of MMA’s business. MMA’s management has evaluated their
financial situation and determined it is not reasonably likely that the current
reduction in net cash generated from operations will negatively impact its
ability to remain a going concern. However, 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 material adverse effect on our future results of
operations.
In
November 2007, Conergy AG, or Conergy, one of our components segment customers
announced that it was experiencing a liquidity shortfall. These liquidity
issues were subsequently resolved through interim financing from banks. In
addition, Conergy is currently undergoing a reorganization which includes
changes in the composition of management, discontinuation of certain non-core
businesses and headcount reductions. Conergy accounted for less than 10% of
our total revenue in the first quarter of fiscal 2008, approximately 10% of our
total revenue in the first quarter of 2007 and less than 10% of our total
revenue in fiscal 2007. Conergy’s management has evaluated their financial
situation and determined it is not reasonably likely that the recently
experienced shortfall in liquidity and restructuring activities will negatively
impact its ability to remain a going concern. However, in the event Conergy
ceases to be a significant customer of ours or fails to pay us in a timely
manner, it could have a material 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 79% and 61% of our total
revenue for the three months ended March 30, 2008 and April 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 18% for the three-month period
ended March 30, 2008, as compared to the three-month period ended April 1, 2007,
as we are currently constructing several large-scale solar power plants in Spain
which are expected to aggregate approximately 39 megawatts of peak capacity
output when completed during the second and third quarters of 2008 within the
systems business segment.
Cost
of Revenue
Cost of
revenue as a percentage of revenue and the year-over-year change were as
follows:
|
Three
Months Ended
|
|||||||||
|
(Dollars
in thousands)
|
March
30,
200
8
|
April
1,
200
7
|
Year-over-
Year
Change
|
||||||
|
Cost
of systems revenue
|
$
|
143,213
|
$
|
62,443
|
129%
|
||||
|
Cost
of components revenue
|
77,168
|
47,479
|
63%
|
||||||
|
Total
cost of revenue
|
$
|
220,381
|
$
|
109,922
|
100%
|
||||
|
Total
cost of revenue as a percentage of revenue
|
81
|
%
|
77
|
%
|
|||||
|
Total
gross margin percentage
|
19
|
%
|
23
|
%
|
|||||
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)
|
March
30,
2008
|
April
1,
2007
|
Year-over-
Year
Change
|
March
30,
2008
|
April
1,
2007
|
Year-over-
Year
Change
|
||||||||||||
|
Amortization
of purchased intangible assets
|
$
|
2,168
|
$
|
4,946
|
(56%)
|
$
|
1,044
|
$
|
1,123
|
(7%)
|
||||||||
|
Stock-based
compensation
|
2,511
|
1,997
|
26%
|
1,203
|
253
|
375%
|
||||||||||||
|
Impairment
of long-lived assets
|
1,343
|
—
|
n.a.
|
4,146
|
—
|
n.a.
|
||||||||||||
|
Factory
pre-operating costs
|
267
|
—
|
n.a.
|
386
|
1,216
|
(68%)
|
||||||||||||
|
All
other cost of revenue
|
136,924
|
55,500
|
147%
|
70,389
|
44,887
|
57%
|
||||||||||||
|
Total
cost of revenue
|
$
|
143,213
|
$
|
62,443
|
129%
|
$
|
77,168
|
$
|
47,479
|
63%
|
||||||||
|
Total
cost of revenue as a percentage of revenue
|
80
|
%
|
80
|
%
|
81
|
%
|
74
|
%
|
||||||||||
|
Total
gross margin percentage
|
20
|
%
|
20
|
%
|
19
|
%
|
26
|
%
|
||||||||||
During
the three months ended March 30, 2008 and April 1, 2007, our total cost of
revenue was $220.4 million and $109.9 million, respectively. The 100%
increase in total cost of revenue during the three-month period ended March 30,
2008 compared to the same period of 2007 resulted from increased costs in
all cost of revenue spending categories and corresponds with a 92% increase in
revenue during the same period.
As a
percentage of total revenue, our total cost of revenue increased to 81% in the
first quarter of fiscal 2008 compared to 77% in the first quarter of fiscal
2007. This increase in total cost of revenue as a percentage of total revenue is
reflective of increased costs of raw materials, particularly polysilicon, and
one-time asset impairment charges of $5.5 million 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. In addition, during the first quarter of fiscal
2007, our systems segment gross margin was substantially higher than in the
first quarter of fiscal 2008 as a result of a more favorable mix of business
than is typical of this business. This favorable mix of business improved our
overall gross margin for the fiscal quarter ended April 1, 2007 by approximately
six percentage points above what we expected for our systems segment. In
addition, during the first quarter of fiscal 2007, we received a $2.7 million
settlement from one of our suppliers in the components segment in connection
with defective materials sold to us during 2006. This settlement was reflected
as a reduction to total cost of revenue in the fiscal quarter ended April 1,
2007. The additional cost of revenue in the first quarter of fiscal 2008 was
only partially offset by improved manufacturing economies of scale associated
with markedly higher production volume and improved yields.
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. Our systems segment sourced approximately 38% of its solar panel
installations with SunPower products in the three months ended March 30, 2008.
Over time, we expect that our systems segment will increase the percentage of
its projects sourced with SunPower solar panels from approximately 27% in fiscal
2007 to as much as 50% in 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 revenues 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 and solar panel
manufacturing facilities. 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 component 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 wafer fabrication 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
manufacturing facility began production in the first quarter of 2007 and our new
solar cell line began production in the third quarter of 2007. We currently
operate seven solar cell manufacturing lines with total production capacity of
214 megawatts per year with the 5
th
, 6
th
and 7
th
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 approximately 466
megawatts per year. As we build additional manufacturing lines or facilities,
our fixed costs will increase, and the overall utilization rate of our wafer
fabrication 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.
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, including raw polysilicon, silicon ingots and wafers, 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
|
|||||||||
|
(Dollars
in thousands)
|
March
30,
200
8
|
April
1,
200
7
|
Year-over-
Year
Change
|
||||||
|
Research
& development
|
$
|
4,642
|
$
|
2,936
|
58%
|
||||
|
Research
& development as a percentage of revenue
|
2
|
%
|
2
|
%
|
|||||
During
the three-month period ended March 30, 2008, our research and development
expense was $4.6 million, which represents an increase of 58% 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 cells 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-month period
ended March 30, 2008 compared to the same period of fiscal 2007 resulted
primarily from increases in: (i) 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 $1.7 million and $0.2 million in the three
months ended March 30, 2008 and April 1, 2007, respectively.
As a
percentage of total revenue, research and development expense totaled 2% in
each of the quarters ended March 30, 2008 and April 1, 2007 because these
expenses increased at approximately the same 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. However, we expect our research and
development expense to decrease as a percentage of revenue over time, assuming
our revenue increases as we expect.
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
|
|||||||||
|
(Dollars
in thousands)
|
March
30,
200
8
|
April
1,
200
7
|
Year-over-
Year
Change
|
||||||
|
Sales,
general & administrative
|
$
|
33,858
|
$
|
22,371
|
51%
|
||||
|
Sales,
general & administrative as a percentage of
revenue
|
12
|
%
|
16
|
%
|
|||||
During
the three-month period ended March 30, 2008, our sales, general and
administrative expense was $33.9 million, which represents an increase of 51%
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-month period ended March 30,
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
outside professional fees for legal and accounting services. During the three
months ended March 30, 2008 and April 1, 2007, stock-based compensation included
in our sales, general and administrative expense was $10.0 million and $7.9
million, respectively. Also contributing to our increased sales, general and
administrative expense in the first quarter of fiscal 2008 compared to the first
quarter of fiscal 2007 are substantial increases in headcount and sales and
marketing spending to expand our value added reseller channel and global
branding initiatives.
As a
percentage of total revenue, sales, general and administrative expense decreased
from 16% in the first quarter of fiscal 2007 to 12% in the first quarter of
fiscal 2008 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, improve our
information technology infrastructure and incur expenditures necessary to fund
the anticipated growth of our business. We also expect sales, general and
administrative expense to increase to support our operations as a public
company, including compliance-related costs. However, assuming our revenue
increases as we expect, over time we anticipate that our sales, general and
administrative expense will 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
|
|||||||||
|
(Dollars
in thousands)
|
March
30,
200
8
|
April
1,
200
7
|
Year-over-
Year
Change
|
||||||
|
Purchased
in-process research and development
|
$
|
—
|
$
|
9,575
|
n.a.
|
||||
|
Purchased
in-process research and development as a percentage of
revenue
|
n.a.
|
7
|
%
|
||||||
For the
three months ended April 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 three months ended March 30,
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
|
||||||||||||||||
|
Design Automation Tool
|
||||||||||||||||||
|
As
of January 10, 2007 (acquisition date)
|
8%
|
$
|
0.2 million
|
$
|
2.4 million
|
|||||||||||||
|
As
of March 30, 2008
|
100%
|
$
|
1.4 million
|
$
|
—
|
|||||||||||||
| Tracking System and Other | ||||||||||||||||||
| As of January 10, 2007 (acquisition date) |
25%
|
$ |
0.2 million
|
$ |
0.6 million
|
|||||||||||||
| As of March 30, 2008 |
100%
|
$ |
0.8
million
|
$ |
—
|
|||||||||||||
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 March 30, 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.
Interest
and Other Income, Net
Interest
income, interest expense, and other income, net as a percentage of revenue and
the year-over-year change were as follows:
|
Three
Months Ended
|
|||||||||
|
(Dollars
in thousands)
|
March
30,
200
8
|
April
1,
200
7
|
Year-over-
Year
Change
|
||||||
|
Interest
income
|
$
|
4,147
|
$
|
1,984
|
109%
|
||||
|
Interest
income as a percentage of revenue
|
2
|
%
|
1
|
%
|
|||||
|
Interest
expense
|
$
|
1,464
|
$
|
1,119
|
31%
|
||||
|
Interest
expense as a percentage of revenue
|
1
|
%
|
1
|
%
|
|||||
|
Other
income, net
|
$
|
287
|
$
|
274
|
5%
|
||||
|
Other
income, net as a percentage of revenue
|
—
|
%
|
—
|
%
|
|||||
Interest
income during the three-month periods ended March 30, 2008 and April 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 109% from the first quarter in fiscal 2008 compared to the same period
of fiscal 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-month periods ended March 30, 2008 and April 1, 2007
relates to interest due on customer advance payments and convertible debt.
The increase in our interest expense of 31% from the first quarter in fiscal
2008 compared to the same period of fiscal 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
September 2007, the Financial Accounting Standards Board, or FASB, issued a
proposed FASB Staff Position APB 14-a, which clarifies the accounting for
convertible debt instruments that may be settled in cash upon conversion. The
proposed guidance would significantly impact 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. The proposed guidance will
result in significantly higher non-cash interest expense on our convertible
debt. If the proposed guidance is adopted, it will be effective for fiscal years
beginning after December 15, 2008, and retrospective application would be
required for all periods presented.
The
following table summarizes the components of other income, net:
|
Three
Months Ended
|
||||||||
|
(In
thousands)
|
March
30,
200
8
|
April
1, 2007
|
||||||
|
Write-off
of unamortized debt issuance costs
|
$
|
(972
|
)
|
$
|
—
|
|||
|
Amortization
of debt issuance costs
|
—
|
(178
|
)
|
|||||
|
Share
in net income of joint venture
|
544
|
—
|
||||||
|
Gain
on derivatives and foreign exchange
|
756
|
452
|
||||||
|
Other
expense,
net
|
(41
|
)
|
—
|
|||||
|
Total
other income, net
|
$
|
287
|
$
|
274
|
||||
Other
income, net during the three-month period ended March 30, 2008 consists
primarily of our share in the net income of Woongjin Energy Co., Ltd, a joint
venture, and gains from derivatives and foreign exchange, offset slightly by 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. Other income, net during the three-month period ended April 1, 2007
consists primarily of gains from derivatives and foreign exchange, offset
slightly by amortization of debt issuance costs.
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 that are created subsequent to December 30, 2007 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 created subsequent to December 30, 2007 will be
recognized as a component of other income (expense), net in the Condensed
Consolidated Statements of Operations. As such, we expect activity for gains and
losses on derivatives and foreign exchange, net of tax within other income
(expense), net to increase in fiscal 2008 as compared to prior
periods.
Income
Taxes
Income
tax provision (benefit) as a percentage of revenue and the year-over-year change
were as follows:
|
Three
Months Ended
|
|||||||||
|
(Dollars
in thousands)
|
March
30,
200
8
|
April
1,
200
7
|
Year-over-
Year
Change
|
||||||
|
Income
tax provision (benefit)
|
$
|
5,033
|
$
|
(2,558
|
)
|
n.a.
|
|||
|
Income
tax provision (benefit) as a percentage of revenue
|
2
|
%
|
(2
|
%)
|
|||||
In the
three-month period ended March 30, 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-month period ended April 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 March 30, 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:
|
Three
Months Ended
|
||||||||
|
(In
thousands)
|
March
30,
200
8
|
April
1, 2007
|
||||||
|
Net
cash used in operating activities
|
$
|
(69,361
|
)
|
$
|
(5,059
|
)
|
||
|
Net
cash used in investing activities
|
(92,313
|
)
|
(143,481
|
)
|
||||
|
Net
cash provided by financing activities
|
2,165
|
192,406
|
||||||
Operating
Activities
Net cash
used in operating activities of $69.4 million for the three months ended March
30, 2008 was primarily the result of decreases in billings in excess of costs
and estimated earnings of $43.7 million related to contractual timing of system
project billings, increases in costs and estimated earnings in excess of
billings of $20.7 million also related to contractual timing of system project
billings, as well as increases in inventories of $40.7 million, accounts
receivable of $17.2 million, prepaid expenses and other assets of $14.5 million
and other changes in operating assets and liabilities totaling $4.8 million.
These items were partially offset by net income of $12.8 million, plus non-cash
charges totaling $35.4 million for depreciation, impairment of long-lived
assets, amortization, write-off of debt issuance costs and stock-based
compensation expense. In addition, these items were offset by increases in
accounts payable and other accrued liabilities of $24.0 million. The significant
increases in substantially all of our current assets and current liabilities
resulted from our substantial revenue increase in the three months ended March
30, 2008 compared to previous quarters which impacted net income and
working capital.
Net cash
used in operating activities of $5.1 million for the three months ended
April 1, 2007 was primarily the result of increases in inventories of
$22.2 million, costs and estimated earnings in excess of billings of $10.0
million, advance payments to suppliers of $8.6 million related to our existing
supply agreements and deferred project costs of $6.2 million, as well as
decreases in advances from customers of $7.5 million. These items were partially
offset by net income of $1.2 million, plus non-cash charges totaling $33.0
million for depreciation, amortization, purchased in-process research and
development and stock-based compensation expense. In addition, these items were
offset by decreases in accounts receivable of $9.0 million, prepaid expenses and
other assets of $4.0 million and other changes in operating assets and
liabilities totaling $2.2 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 three months ended April 1, 2007 compared to previous quarters which
impacted net income and working capital.
Investing
Activities
Net cash
used in investing activities was $92.3 million for the three months ended March
30, 2008, which primarily relates to capital expenditures of $50.8 million
incurred during the first quarter of fiscal 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 between
approximately $250.0 million and $300.0 million, primarily related to continued
expansion of our manufacturing capacity. Also during the three-month period
ended March 30, 2008, (i) restricted cash increased by $55.6 million for
additional collateral securing outstanding indebtedness to Wells Fargo related
to both the line of credit, including our letter of credit subfeature, and 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 $5.6 million in joint
ventures. Cash used in investing activities was partially offset by $33.1
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 $143.5 million for the three months ended April
1, 2007, which primarily relates to cash paid of $98.6 million for the
acquisition of SP Systems, net of cash acquired, and capital expenditures of
$60.9 million incurred during the first quarter of fiscal 2007. Also during the
three months ended April 1, 2007, we received proceeds of $16.5 million from the
sale of available-for-sale securities.
Financing
Activities
Net cash
provided by financing activities for the three months ended March 30, 2008
reflects proceeds received of $1.1 million from stock option exercises and
excess tax benefits totaling $4.4 million from the exercise of stock options,
partially offset by cash paid of $3.3 million for treasury stock purchases that
were used to pay withholding taxes on vested restricted stock. Net cash
provided by financing activities for the three months ended April 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 three months ended April 1, 2007, we paid $3.6
million on an outstanding line of credit and received $2.0 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 three
months ended April 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 $4.7 million in the three months ended April 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 $4.7
million in the three months ended April 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
December 2005, we entered into a $25.0 million three-year revolving credit
facility with affiliates of Credit Suisse Securities (USA) LLC, or Credit
Suisse, and Lehman Brothers Inc., or Lehman Brothers, of which there were no
borrowings ever made under the facility. We terminated our agreement with
affiliates of Credit Suisse and Lehman Brothers in July 2007.
In
connection with the acquisition of SP Systems on January 10, 2007, we assumed a
line of credit SP Systems had with Union Bank of California, N.A., or UBOC, with
an outstanding balance of approximately $3.6 million. During the first quarter
of fiscal 2007, we paid off the outstanding balance in full.
Also on
January 10, 2007, we amended and restated the loan agreement with
UBOC. The amended and restated loan agreement provided for a $10.0 million
trade finance credit facility, which was scheduled to expire on April 30,
2007. This facility allowed us to issue commercial and standby letters of
credit, but did not provide for any loans. All of the assets of SP Systems
secured this trade finance facility. In addition, the agreement required that SP
Systems maintain cash equal to the value of letters of credit outstanding in
restricted accounts as collateral for letters of credit issued by the bank. In
April 2007, we amended the loan agreement to, among other things, extend
the maturity date to July 31, 2007, and remove the requirement to have cash
collateral for letters of credit. We guaranteed $10.5 million in connection
with the April 2007 amendment including the $10 million trade credit
facility and a separate $0.5 million credit card facility through UBOC. Our line
of credit with UBOC expired on July 31, 2007.
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 $50.0 million
secured letter of credit facility as of March 30, 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 July 31, 2008.
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 $50.0 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.
We have the ability at any time to prepay outstanding loans. All borrowings must
be repaid by July 31, 2008, and all letters of credit issued under the
unsecured letter of credit subfeature expire on or before July 31, 2008 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 (these dates were subsequently extended as described below). 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 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, and SP Systems, another wholly-owned
subsidiary of ours, 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.
For the
year ended December 30, 2007, we were not compliant with two debt covenants. We
had failed to deliver in a timely manner a certificate of the chief executive
officer or chief financial officer that the financial statements in its prior
Quarterly Report on Form 10-Q were accurate and that there existed no event of
default with debt covenants. We also entered into corporate guaranties on
construction project deals in Europe that exceeded the allowed amount under the
debt covenants. In January 2008, we entered into an agreement with Wells Fargo
to amend the existing credit agreement. Under the amended credit agreement,
Wells Fargo waived compliance requirements with certain restrictive covenants,
including the prohibition against our providing corporate guaranties supporting
contracts between our subsidiaries and third parties. In exchange for waiving
compliance with such restrictive covenants, we agreed to maintain a balance of
funds in a deposit account with Wells Fargo, in an amount no less than the
aggregate outstanding indebtedness we owed to Wells Fargo under both the line of
credit, including our letter of credit subfeature, and the letter of credit
line, as collateral securing such outstanding indebtedness. Had Wells Fargo not
waived this violation, we would have been in default of our debt covenants and
may have been required to immediately repay the aggregate outstanding
indebtedness we owed to Wells Fargo under both the line of credit, including our
letter of credit subfeature, and the letter of credit line.
As of
March 30, 2008 and December 30, 2007, 8 letters of credit totaling $46.3 million
and 4 letters of credit totaling $32.0 million, respectively, were issued by
Wells Fargo under the unsecured letter of credit subfeature. As of March 30,
2008, 17 letters of credit totaling $52.3 million were issued by Wells Fargo
under the secured letter of credit facility, exceeding the amount we may request
Wells Fargo to issue under the credit agreement by $2.3 million. On March 27,
2008, Wells Fargo issued an additional secured letter of credit outside of the
line totaling $4.8 million as temporary accommodation while we negotiated
amended terms of the credit agreement with Wells Fargo. As of December 30, 2007,
8 letters of credit totaling $47.9 million were issued by Wells Fargo under the
secured letter of credit facility. On March 30, 2008 and December 30, 2007, cash
available to be borrowed under the unsecured revolving credit line was $3.7
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 $3.7 million and $8.0 million, respectively. Letters of
credit available under the secured letter of credit facility at March 30, 2008
and December 30, 2007 totaled zero and $2.1 million, respectively.
On April
4, 2008, we entered into an amendment to the credit agreement with Wells Fargo
that increased the amount available under the secured letter of credit facility
from $50.0 million to $150.0 million, extended the expiration date of the
unsecured revolving credit line from July 31, 2008 to April 4, 2009, and
modified certain restrictive covenants. In addition, we granted to Wells
Fargo a security interest in a securities account to secure our obligations in
connection with any letters of credit that might be issued under the secured
letter of credit line and SunPower Systems SA, an indirect wholly-owned
subsidiary, entered into an associated continuing guaranty with Wells Fargo. As
a result of the increased availability in the secured letter of credit facility,
the $4.8 million secured letter of credit that was previously issued outside the
line as temporary accommodation was reclassified as a letter of credit under the
secured letter of credit facility.
Until
April 4, 2009, we may borrow up to $50.0 million under the credit agreement’s
unsecured line of credit and request that Wells Fargo issue up to $50.0 million
in letters of credit under the unsecured letter of credit subfeature, provided
that any letters of credit issued and outstanding under the unsecured letter of
credit subfeature will reduce our borrowing capacity. Until July 31, 2012,
we may request that Wells Fargo issue up to $150.0 million in letters of credit
under the credit agreement’s secured letter of credit line. As detailed in the
credit agreement, we will pay interest on outstanding borrowings and a fee for
issued and outstanding letters of credit. We have the ability at any time to
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 line expire no later than
July 31, 2012. The loan documents include certain conditions to borrowings,
representations and covenants, and events of default customary for financing
transactions of this type.
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 its 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. For the quarter ended March 30, 2008, no holders of the
February 2007 debentures and July 2007 debentures exercised their right to
convert the debentures. Because the closing stock price did not equal or exceed
125% of the initial effective conversion price governing both the February 2007
debentures and July 2007 debentures for 20 out of 30 consecutive trading days
during the quarter ended March 30, 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 second fiscal quarter beginning on March 31, 2008.
Accordingly, we re-classified the $425.0 million in aggregate convertible debt
from short-term debt to long-term debt in its Condensed Consolidated Balance
Sheets as of March 30, 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 March
30, 2008, we had cash and cash equivalents of $132.5 million as compared to
$285.2 million as of December 30, 2007. In addition, we had short-term
investments and long-term investments of $63.5 million and $37.6 million as of
March 30, 2008, respectively, as compared to $105.4 million and $29.1 million as
of December 30, 2007, respectively. Of these investments, we held seven
auction rate securities totaling $37.6 million as of March 30, 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 May 9, 2008, all
auction rate securities invested in at March 30, 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 March 30, 2008 and December
30, 2007 that were not sold in a subsequent period totaling $37.6 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.
We have
concluded that no other-than-temporary impairment losses occurred in the three
months ended March 30, 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 second 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 March 30,
2008:
|
Payments Due by Period
|
||||||||||||||||||||
|
(In thousands)
|
Total
|
2008
(remaining
9
months)
|
2009 – 2010 | 2011 – 2012 |
Beyond
2012
|
|||||||||||||||
|
Obligation
to Cypress
|
$ | 3,846 | $ | 3,846 | $ | — | $ | — | $ | — | ||||||||||
|
Customer
advances
|
69,810 | 11,490 | 26,320 | 16,000 | 16,000 | |||||||||||||||
|
Interest
on customer advances
|
2,294 | 1,053 | 1,241 | — | — | |||||||||||||||
|
Convertible
debt
|
425,000 | — | — | — | 425,000 | |||||||||||||||
|
Interest
on convertible debt
|
79,806 | 3,141 | 8,375 | 8,375 | 59,915 | |||||||||||||||
|
Lease
commitments
|
46,633 | 3,654 | 10,708 | 8,338 | 23,933 | |||||||||||||||
|
Utility
obligations
|
750 | — | — | — | 750 | |||||||||||||||
|
Royalty
obligations
|
284 | 284 | — | — | — | |||||||||||||||
|
Non-cancelable
purchase orders
|
151,742 | 150,858 | 884 | — | — | |||||||||||||||
|
Purchase
commitments under agreements
|
3,588,179 | 213,143 | 962,166 | 885,524 | 1,527,346 | |||||||||||||||
|
Total
|
$ | 4,368,344 | $ | 387,469 | $ | 1,009,694 | $ | 918,237 | $ | 2,052,944 | ||||||||||
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 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, a 15-year lease agreement with Cypress for our manufacturing
facility in the Philippines that was subsequently purchased in May 2008 (See
Note 17 of Notes to our Condensed Consolidated Financial Statements), 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 second 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
manufacturing 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
March 30, 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 $4.6
million and $4.1 million, respectively, none of which was included in "Accrued
liabilities" on the Condensed Consolidated Balance Sheets, as it is not expected
to be paid within the next twelve months. Total liabilities associated with
uncertain tax positions of $4.6 million and $4.1 million is included in "Other
long-term liabilities" on our Condensed Consolidated Balance Sheets at March 30,
2008 and December 30, 2007, respectively. 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
March 30, 2008, our investment portfolio consisted of a variety of financial
instruments, including, but not limited to, money market securities, 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 March 30, 2008, we had $37.6 million invested in auction rate
securities. As of May 9, 2008, all auction rate securities invested in at March
30, 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. We have
concluded that no other-than-temporary impairment losses occurred in the three
months ended March 30, 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 March 30, 2008, the estimated fair value of the
senior convertible debentures was approximately $563.2 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
$619.5 million as of March 30, 2008 and a 10% decrease in the quoted market
prices would decrease the estimated fair value of the senior convertible
debentures to $506.9 million.
Equity
Price Risk
Our
exposure to equity price risk relate to equity method investments we
hold, generally as the result of strategic investments in third parties
that are subject to considerable market risk due to their volatility.
We generally do not attempt to reduce or eliminate our market exposure in
these equity method investments. At March 30, 2008, the total carrying value of
our equity method investments was $11.5 million.
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. For the
three-month periods ended March 30, 2008 and April 1, 2007, approximately 79%
and 61%, respectively, of our total revenue was generated outside the United
States. A hypothetical change of 10% in foreign currency exchange rates as of
March 30, 2008 could impact our Condensed Consolidated Financial Statements or
results of operations by $9.3 million based on our outstanding forward contracts
of $130.9 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.
|
Controls
and Procedures
|
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 first quarter of fiscal 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 2008, 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 2008.
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, Spain’s feed-in tariff expires in late September, 2008. The
government has proposed a new draft feed-on tariff to continue solar support
after the current tariff expires, but if the Spanish government does not
implement a new feed-in tariff at all, or with sufficient time for the market to
respond, demand in Spain could be significantly reduced until the new tariff
goes into effect. If the government substantially reduces the new
feed-in tariff beyond the solar-adjusted feed-in tariff of other markets, demand
may decline under a new feed-in tariff as the market moves to more attractive
markets.
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
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. For the three-month period
ended March 30, 2008, 21% and 52% of our total revenue was generated in the
United States and Spain, respectively, as compared to 39% and 22%, respectively,
of our total revenue for the three-month period ended April 1,
2007.
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-month periods
ended March 30, 2008 and April 1, 2007, approximately 46% and 16%, 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.
Of such
systems sales to financing companies that engage in power purchase agreements
with end-users of electricity, 7% and 93% of systems sales were derived in the
United States and Spain, respectively, in the three months ended March 30, 2008
as compared to 36% and 5%, respectively, of systems sales for the three months
ended April 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 first
quarters of 2008 and 2007 and approximately 16% of our total revenue in fiscal
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, suspended the
trading of the common stock of MMA because MMA did not 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 incurred substantial accounting
costs. In addition, general economic conditions have led to a severe capital and
credit downturn, resulting in a slow-down to at least one element of MMA’s
business. MMA’s management has evaluated their financial situation and
determined it is not reasonably likely that the current reduction in net cash
generated from operations will negatively impact its ability to remain a going
concern. However, 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 material
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. 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 first quarter ended March 30,
2008 was $178.9 million. 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 3,740 full-time employees as of March 30, 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 19,000 panels are still under warranty. 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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System
maintenance;
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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. For example, we are currently
constructing several large-scale solar power plants in Spain which are expected
to aggregate approximately 39 megawatts of peak capacity output when completed
during the second and third quarters of 2008. The economic viability
of these projects relies on their completion and registration under the Spanish
Royal Decree before the feed-in tariff expires in September 2008. 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 material 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 Conergy and Solon. Conergy and Solon individually
accounted for less than 10% of total revenue for the three-month period ended
March 30, 2008 as compared to 10% and 12%, respectively, of total revenue for
the three-month period ended April 1, 2007. 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
are sold through our agreement with Conergy, and we may enter into similar
agreements in the future.
In
November 2007, Conergy announced that it was experiencing a liquidity
shortfall. These liquidity issues were subsequently resolved through
interim financing from banks. In addition, Conergy is currently undergoing a
reorganization which includes changes in the composition of management,
discontinuation of certain non-core businesses and headcount
reductions. Conergy’s management has evaluated their financial situation
and determined it is not reasonably likely that the recently experienced
shortfall in liquidity and restructuring activities will negatively impact its
ability to remain a going concern. However, in the event Conergy ceases to
be a significant customer of ours or fails to pay us in a timely manner, it
could have a material adverse effect on our future results of
operations.
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 March 30, 2008, we had an accumulated deficit of
approximately $10.1 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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shipping
delays.
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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 seven 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
have recently established a captive solar panel assembly factory, and, if this
panel manufacturing factory 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 three solar panel assembly lines in the Philippines with 90
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.
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 its 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 first quarter ended March 30, 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
depend on a combination of our own wafer-slicing operations and those of other
vendors for the wafer-slicing stage of our manufacturing, and any technical
problems, breakdowns, delays or cost increases could significantly delay our
manufacturing operations, decrease our output and increase our
costs.
We have
historically depended on the wafer-slicing operations of third-party vendors to
slice a portion of our ingots into wafers. In the first quarter ended March 30,
2008, we sliced approximately 40% of our wafers. In October 2007, we announced
our entry into a joint venture agreement to form a new company in the
Philippines named First Philec Solar Corporation. This new company was formed to
perform wafer-slicing operations for us. If our 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 wafer-slicing from another vendor on acceptable terms, or
increase our own wafer-slicing operations on a timely basis, our sales will
decrease, our costs may increase or our business will otherwise be
harmed.
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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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.
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
first quarter ended March 30, 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, Portugal and South Korea. We currently have seven 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 spread of the avian flu, 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 March 30,
2008, approximately 87% 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-month periods ended March 30, 2008 and April 1, 2007, approximately
79% and 61%, respectively, of our total revenue was generated outside the United
States. 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 Conergy and Solon, 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.
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. 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 expansion of our business into the new homebuilder residential market may increase our exposure to certain risks.
Our
systems segment has expanded into 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. To date we
have focused on large-scale commercial applications and have limited experience
serving the new homebuilder residential market.
The
residential construction market has 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. 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 first quarter ended March 30, 2008 and April 1, 2007, funding from government grants, agreements and contracts offset approximately 27% and 7%, 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. 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. 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 between approximately
$250.0 million and $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. 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
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 the SunPower trademark which could lead to customer confusion. In
addition, if there are jurisdictions where someone else has already established
trademark rights in the SunPower name, 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 SunPower 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 specific 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 March 30, 2008, including the United
States and foreign countries, we owned 85 issued patents, jointly owned another
four patents, and had over 100 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.
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 $12.8 million in
cash and approximately 0.4 million shares of our class A common stock, with a
total aggregate value of $39.8 million as of March 30, 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. 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 generally accepted accounting principles in the United States,
or U.S. GAAP, 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 $75.1 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.
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. 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 September 2007, the FASB issued a
proposed FASB Staff Position APB 14-a, which clarifies the accounting for
convertible debt instruments that may be settled in cash upon conversion. The
proposed guidance would significantly impact 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. If the
proposed position were adopted, it 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. The proposed guidance, if approved, would be effective for
fiscal years beginning after December 15, 2008, and retrospective application
would 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 controls over financial reporting and have our independent registered
public accounting firm annually attest to the effectiveness of our internal
controls 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 controls 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 controls 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 controls 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 controls 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 controls 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 March 30, 2008, we held seven auction
rate securities totaling $37.6 million. As of May 9, 2008, all auction rate
securities invested in at March 30, 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 first quarter in fiscal 2008, holders of the
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 equaled or exceeded $70.94 and $102.80, which represents more
than 125% of the applicable conversion price for our 1.25% and 0.75% outstanding
debentures, respectively, for at least 20 of the last 30 trading days during the
preceding fiscal quarter. For the quarter ended March 30, 2008, no holders of
our outstanding debentures exercised their right to convert the debentures.
Because the closing price of our class A common stock did not equal or exceed
125% of the applicable conversion price governing both the 1.25% and 0.75%
outstanding debentures for 20 out of 30 consecutive trading days during the
quarter ended March 30, 2008, holders of the outstanding debentures are unable
to exercise their right to convert the debentures, based on the stock trading
price trigger, any day in the second fiscal quarter beginning on March 31, 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
March 30, 2008, we had cash and cash equivalents of $132.5 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 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 March 30, 2008,
we had approximately 40.6 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. As recently as April 17, 2008, Cypress announced that it
had received a favorable ruling from the Internal Revenue Service regarding the
distribution of its shares of class B common stock to its stockholders prior to
November 2009. In May 2007, Cypress sold 7.5 million shares
of our class B common stock to an unaffiliated third party in an offering
pursuant to Rule 144 under the Securities Act. Upon the completion of that
sale, such shares automatically, by their terms, converted into 7.5 million
shares of our class A common stock.
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 shares of our 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. 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.
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.
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. 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.
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, its successors in interest and its subsidiaries 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.
Until
such time as Cypress, its successor 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, 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
March 30, 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 first quarter in fiscal 2008, holders of the
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 equaled or exceeded $70.94 and $102.80, which represents more
than 125% of the applicable conversion price for our 1.25% and 0.75% outstanding
debentures, respectively, for at least 20 of the last 30 trading days during the
preceding fiscal quarter. For the quarter ended March 30, 2008, no holders of
our outstanding debentures exercised their right to convert the debentures.
Because the closing price of our class A common stock did not equal or exceed
125% of the applicable conversion price governing both the 1.25% and 0.75%
outstanding debentures for 20 out of 30 consecutive trading days during the
quarter ended March 30, 2008, holders of the outstanding debentures are unable
to exercise their right to convert the debentures, based on the stock trading
price trigger, any day in the second fiscal quarter beginning on March 31, 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
March 30, 2008, we had cash and cash equivalents of $132.5 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 first quarter in fiscal 2008, holders of the
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 equaled or exceeded $70.94 and $102.80, which represents more
than 125% of the applicable conversion price for our 1.25% and 0.75% outstanding
debentures, respectively, for at least 20 of the last 30 trading days during the
preceding fiscal quarter. For the quarter ended March 30, 2008, no holders of
our outstanding debentures exercised their right to convert the debentures.
Because the closing price of our class A common stock did not equal or exceed
125% of the applicable conversion price governing both the 1.25% and 0.75%
outstanding debentures for 20 out of 30 consecutive trading days during the
quarter ended March 30, 2008, holders of the outstanding debentures are unable
to exercise their right to convert the debentures, based on the stock trading
price trigger, any day in the second fiscal quarter beginning on March 31, 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 $132.5 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.
As
long as Cypress controls us, the ability of our other stockholders to influence
matters requiring stockholder approval will be limited.
As of
March 30, 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, 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 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 $90.00 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
$1.5 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 result in a significant reduction of our revenue.
Disputes
may arise between Cypress and us in a number of areas relating to our past and
ongoing relationships, including:
|
|
•
|
labor,
tax, employee benefit, indemnification and other matters arising from our
separation from Cypress;
|
|
|
•
|
employee
retention and recruiting;
|
|
|
•
|
business
combinations involving us;
|
|
|
•
|
pricing
for transitional services;
|
|
|
•
|
sales
or distributions by Cypress of all or any portion of its ownership
interest in us;
|
|
|
•
|
the
nature, quality and pricing of services Cypress has agreed to provide us;
and
|
|
|
•
|
business
opportunities that may be attractive to both Cypress and
us.
|
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.
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. On April 17, 2008, Cypress announced that it had received a
favorable ruling from the Internal Revenue Service regarding the distribution of
its shares of class B common stock to its stockholders prior to November
2009.
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 distribute to its stockholders shares of SunPower class B common stock
it holds and if it does distribute such shares, no assurance can be given as to
the number of shares to be distributed, the costs or effects on SunPower of
effecting the spin-off or the impact of the spin-off on the trading price for
our 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. Cypress also announced at that time that it had
not completed its analysis of the effects of the possible distribution of its
SunPower shares in numerous areas, including but not limited to, tax
considerations in other jurisdictions, current and post-spin-off Cypress capital
structure, Cypress employee equity plans, outstanding Cypress convertible
indebtedness and transactions and relationships with SunPower. No
decision to effect a separation of Cypress and SunPower has been made by Cypress
at this time and no assurance can be given that such a decision will be
made. Further, if a separation is effected, no assurance can be given
as to the number of shares to be distributed, the costs or effects on SunPower
of effecting a separation or the impact of a separation on trading price for
SunPower’s 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.
|
Ite
m 6.
|
Exhibits
|
|
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
|
SunPower
Corporation Quarterly Key Initiative Bonus Plan.
|
|
|
10.2
|
First
Amendment to Lease, dated December 12, 2006, by and between SunPower
Corporation and Cypress Semiconductor Corporation.
|
|
|
10.3
|
Second
Amendment to Lease, dated July 1, 2007, by and between SunPower
Corporation and Cypress Semiconductor Corporation.
|
|
|
10.4†
|
Amendment
to Polysilicon Suppy Agreement, dated January 8, 2008, by and between
SunPower Philippines Manufacturing, Ltd. and Woongjin Energy Co.,
Ltd.
|
|
|
10.5†
|
Long-Term
Polysilicon Supply Agreement, dated January 10, 2008, by and between
SunPower Corporation and NorSun AS.
|
|
|
10.6†
|
Form
of Long-Term Polysilicon Supply Agreement, by and between SunPower
Corporation and a joint venture to be formed by NorSun AS, Swicorp
Joussour Company and Chemical Development Company.
|
|
|
10.7†
|
Waiver
Agreement, dated January 18, 2008, by and between SunPower
Corporation and Wells Fargo Bank, National Association.
|
|
|
10.8†*
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated January 31, 2008, by and between SunPower Energy Systems Spain S.L.
and Solargen Proyetos e Instalaciones, S.L.
|
|
|
10.9*
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated dated February 8, 2008, by and between SunPower Energy Systems Spain
S.L. and Solargen Proyectos e Instalaciones, S.L.
|
|
|
10.10†
|
Poly
Silicon Supply Agreement, dated February 8, 2008, by and between SunPower
Corporation and Jupiter Corporation Ltd.
|
|
|
10.11
|
Third
Amendment to Credit Agreement, dated February 13, 2008, by and beween
SunPower Corporation and Wells Fargo Bank, National
Association.
|
|
|
10.12*
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated dated March 5, 2008, by and between SunPower Energy Systems Spain
S.L. and Solargen Proyectos e Instalaciones, S.L.
|
|
|
10.13†
|
Amendment
to Supply Agreement, dated March 5, 2008, by and between SunPower
Corporation and Solon AG fur Solartechnik.
|
|
|
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.
An
asterisk (*) indicates that the submission is an English translation of the
original document.
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:
May 9, 2008
|
By:
|
/s/ E
MMANUEL
T. H
ERNANDEZ
|
||
|
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
|
SunPower
Corporation Quarterly Key Initiative Bonus Plan.
|
|
|
10.2
|
First
Amendment to Lease, dated December 12, 2006, by and between SunPower
Corporation and Cypress Semiconductor Corporation.
|
|
|
10.3
|
Second
Amendment to Lease, dated July 1, 2007, by and between SunPower
Corporation and Cypress Semiconductor Corporation.
|
|
|
10.4†
|
Amendment
to Polysilicon Suppy Agreement, dated January 8, 2008, by and between
SunPower Philippines Manufacturing, Ltd. and Woongjin Energy Co.,
Ltd.
|
|
|
10.5†
|
Long-Term
Polysilicon Supply Agreement, dated January 10, 2008, by and between
SunPower Corporation and NorSun AS.
|
|
|
10.6†
|
Form
of Long-Term Polysilicon Supply Agreement, by and between SunPower
Corporation and a joint venture to be formed by NorSun AS, Swicorp
Joussour Company and Chemical Development Company.
|
|
|
10.7†
|
Waiver
Agreement, dated January 18, 2008, by and between SunPower
Corporation and Wells Fargo Bank, National Association.
|
|
|
10.8†*
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated January 31, 2008, by and between SunPower Energy Systems Spain S.L.
and Solargen Proyetos e Instalaciones, S.L.
|
|
|
10.9*
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated dated February 8, 2008, by and between SunPower Energy Systems Spain
S.L. and Solargen Proyectos e Instalaciones, S.L.
|
|
|
10.10†
|
Poly
Silicon Supply Agreement, dated February 8, 2008, by and between SunPower
Corporation and Jupiter Corporation Ltd.
|
|
|
10.11
|
Third
Amendment to Credit Agreement, dated February 13, 2008, by and beween
SunPower Corporation and Wells Fargo Bank, National
Association.
|
|
|
10.12*
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated dated March 5, 2008, by and between SunPower Energy Systems Spain
S.L. and Solargen Proyectos e Instalaciones, S.L.
|
|
|
10.13†
|
Amendment
to Supply Agreement, dated March 5, 2008, by and between SunPower
Corporation and Solon AG fur Solartechnik.
|
|
|
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.
An
asterisk (*) indicates that the submission is an English translation of the
original document.
SUNPOWER
CORPORATION
QUARTERLY
KEY INITIATIVE BONUS PLAN
(
Changes effective
January
3
1, 2008
)
Article 1 - KI Plan
Objective
|
|
1.1
The objective of this Quarterly Key Initiative Bonus Plan (“KI
Plan”) is to provide incentives to employees of SunPower Corporation and
its subsidiaries (collectively, the “Company”) based on the Company’s
quarterly corporate milestones and an individual's performance against set
individual key initiatives (KIs). The KI Plan shall be
administered by the Compensation Committee appointed by the Board of
Directors of SunPower Corporation.
|
Article 2 - Effective
Date
|
|
2.1
This quarterly program will be effective as of January 1,
2008. ”Plan Periods” under the KI Plan will correspond to the
fiscal quarters of the Company.
|
Article 3 - Eligibility for
KI Plan Participation
3.1 All executive officers of the Company, as well as any other employees
approved by the Chief Executive Officer of the Company, shall participate in the
KI Plan, except those on a sales compensation or project compensation
plan.
Article 4 - Target Bonus
Percentages and Calculations
|
4.1
|
KI
Target Bonus
Percentages
. Each KI Plan participant will be allocated
a KI target bonus expressed as a percentage of his or her base salary. The
Compensation Committee may, in its discretion, set maximum caps on the
payout amount for KI bonuses. The Compensation Committee may
delegate establishing KI target bonus percentages to officers of the
Company; provided that executive officer KI target bonus percentages must
be approved by the Compensation
Committee.
|
|
4.2
|
KI
Plan
Components
.
|
|
4.2.1
|
Quarterly KI
Score
. At the start of each quarter the participant will
formulate with his or her supervisor a list of key initiatives for such
quarter. Each initiative will be allocated a certain number of
points, and the quarterly scorecard shall total 100 points. Following each
quarter the participant’s supervisor will score the participant’s
achievement of key initiatives (expressed as a
percentage).
|
|
4.2.2
|
Company Milestone
Score
. With respect to each quarter the Board of
Directors will establish quarterly corporate milestones for such
quarter. Each company milestone will be allocated a certain
number of points. Following each quarter, the executive
officers of the Company will score the achievement of company milestones
(expressed as a percentage).
|
|
4.2.3
|
PBT
Score
. At the start of each quarter the executive
officers will establish an internal profit before tax financial target for
the Company (“Plan PBT”). Following each quarter the actual
profit before tax of the Company for such quarter will be determined
(“Actual PBT”).
|
|
4.3
|
Quarterly
bonuses under this KI Plan are based on a combination of (a) the
participant’s number of points achieved on his or her key initiative
scorecard for the quarter (expressed as a percentage), (b) the percentage
of company milestones achieved for the quarter, and (c) the Actual PBT for
such quarter. In particular, the bonus payout is calculated as
follows:
|
|
(i)
|
If
the Actual PBT is less than 100% of the Plan PBT, no KI bonus payout will
be made for the quarter.
|
|
(ii)
|
If
the Actual PBT is equal to or greater than 100% of the Plan PBT, but the
company milestone score is equal to or less than 60%, no KI bonus payout
will be made for the quarter.
|
|
(iii)
|
If
both the Actual PBT is equal to or greater than 100%
AND
the company
milestone score is greater than 60%, the quarterly KI bonus will be paid
as follows:
|
a.
Corporate Milestone Score
greater than
80%
: Full
KI score payout. For example, if an individual has a $20,000
quarterly base salary, 10% KI target bonus and a KI score of 80%, s/he would
receive a quarterly bonus of 20,000 x .10 x .80 = $1,600.
b.
Company
Milestone Score less than
or equal to 80%
: One-half KI score payout. In
the above example, the individual would receive a quarterly bonus of
$800.
|
(iv)
|
If
both the Actual PBT is equal to or greater than 80% and the company
milestone score is greater than 100%, the quarterly KI bonus may be paid
above 100%, subject to any maximum cap established by the Compensation
Committee. For 2008, the maximum cap is
110%.
|
Article 5 - Effect of Base
Salary on Target Bonus Adjustments.
|
5.1
|
Payout
calculations under the KI Plan will be based on the plan participant's
base salary at the end of the quarter being measured and not the base
salary at the time the milestone and KI portion of the bonus is
paid.
|
|
5.2
|
In
the event a participant’s KI target bonus percentage is changed during the
quarter, the new KI target bonus will be effective at the beginning of the
immediately following quarter. The participant’s KI payout for
the current quarter shall be based on the KI target bonus in effect at the
beginning of that quarter.
|
Article 6 - KI
Achievement
|
6.1
|
KI
attainment for the completed quarter and proposed KI for the next quarter
are reviewed at the end of each quarter no later than the third Friday of
the first month of the quarter.
|
|
6.2
|
In
setting KIs, a 0% threshold may be defined for each KI. This
threshold, which could be timing and/or deliverable-based, is a point at
which a KI score starts to be earned. If a participant does not
reach/complete the minimum threshold, such KI will be scored 0%
(zero). Progress beyond the threshold earns the participant a
pro-rated score up to 110%. The score for a particular KI item
cannot exceed 110%. Scoring greater than 100% for a KI item is
usually limited to numeric or quantitative
goals.
|
|
6.3
|
The
Chief Executive Officer’s quarterly KI score is the actual corporate
milestone score for such quarter.
|
Article 7 - Eligibility for
Payment
7.1
Newly hired employees must be employed by the second Monday of the quarter to be
eligible for that quarter’s bonus payout. Employees hired after this
period must still submit KIs within 10 days of hire and scored KI forms as
normally scheduled.
|
|
7.2
Employment: To be eligible for any portion of the bonus
payment, the participant must be employed by the Company at the scheduled
payment date. A participant who terminates employment prior to
the payment date will be ineligible for any and all bonuses not yet paid,
except as otherwise provided in this article or any separate agreement
approved by the Compensation
Committee.
|
|
|
7.3
Disability
: If
a participant is unable to perform the essential functions of his or her
job with or without a reasonable accommodation and is eligible to receive
disability benefits under the standards used by the Company's disability
benefit plan, the participant will receive a bonus calculated as follows:
the quarter in which the disability begins will be considered a completed
quarter and the KI bonus for that quarter will be paid as though KI
attainment was 100%.
|
|
|
7.4
Retirement
: If
a participant retires, i.e. permanent termination of employment with the
Company in accordance with the Company's retirement policies, the
participant will receive a bonus calculated as follows: the quarter in
which the retirement begins will be considered a completed quarter and the
KI bonus for that quarter will be paid as though KI attainment was
100%. Thereafter, quarterly participation
ceases.
|
|
|
7.5
Death:
If
a participant dies, awards will be paid to the beneficiary designated by
the participant or, if no such designation has been made, to the persons
entitled thereto as determined by a court of competent
jurisdiction. The bonus will be calculated as
follows: the quarter in which death occurred will be considered
a completed quarter and the KI bonus for that quarter will be paid as
though KI attainment was 100%. Thereafter, quarterly
participation ceases.
|
|
|
7.6
Lay-off
: If
a participant is terminated by lay-off during a Plan Period, the quarter
in which the lay-off occurred will be considered a completed quarter and
the KI bonus for that quarter will be paid as though KI attainment was
100%. Thereafter, quarterly participation
ceases.
|
7.7 No bonus will be paid to employees who are terminated for
cause.
|
|
7.8
All qualified bonus payments including future scheduled payments pursuant
to Section’s 8.2, 8.3, and 8.4 will be paid in
lump-sum.
|
|
|
7.9
The Chief Executive Officer reserves the right to reduce the bonus award
of a participant on a pro-rata basis to reflect a participant's leave of
absence during the applicable Plan
Period.
|
Article 8 -
Miscellaneous
|
|
8.1
Unless as defined in article 8.4, no right or interest in this KI Plan is
transferable or assignable except by will or laws of descent and
distribution.
|
|
|
8.2
Participation in this KI Plan does not guarantee any right to continued
employment with the Company.
|
|
|
8.3
Participation in the KI Plan in a particular Plan Period is not a
guarantee to participate in subsequent Plan
Periods.
|
|
|
8.4
Management reserves the right to discontinue participation of any
participant in this KI Plan, at any time, and for whatever
reasons.
|
|
|
8.5
This KI Plan is unfunded and the Company does not intend to set up a
sinking fund. Consequently, payments arising out of bonus
earned shall be paid out of the Company's general
assets. Accounts recognized by the Company for book purposes
are not an indication of funds set aside for payment. KI Plan
participants are considered as general creditors of the Company and the
obligation of the Company is purely contractual and is not secured by any
particular Company asset.
|
|
|
8.6
The provision of this KI Plan shall not limit the Compensation Committee
(or its designees) to modify said KI Plan, or adopt such other plans on
matters of compensation, bonus or incentive, which in its own judgment it
deems proper, at any time.
|
3
FIRST
AMENDMENT
THIS
FIRST AMENDMENT TO LEASE is dated as of December 12, 2006 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"
. (See Section
1.1).
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:
A.
BASIC TERMS:
(Page 1 & 2
of the Original Lease Agreement)
Item#7.
Premises:
“Approximately 43,732
rentable square feet. The Premises are located within the Building as
shown on Exhibit “A” (See Section 1.1)” shall be changed
to: “Approximately 45,840 rentable square feet. The
Premises are located within the Building as shown on Exhibit “A-1” (See attached
Exhibit “A-1”.”
Item#9.
Base
Rent
: The
Base Rent Table in the Original Lease shall be amended as follows:
| Lease Months | Monthly Base Rent / SF | Monthly Base Rent |
| 1-8 | $2.16 / SF | $ 94,461 |
| 9-12 | $2.16 / SF | $ 99,014 |
| 13-24 | $2.25 / SF | $ 103,140 |
| 25-36 | $2.34 / SF | $ 107,266 |
| 37-48 | $2.43/ SF | $ 111,391 |
| 49-60 | $2.53 / SF | $ 115,975 |
B.
ARTICLES:
|
|
1.
|
Article
1 Section 1.1- line 7 delete “A”, change to:
“A-1”
|
|
|
2.
|
Article
1 Section 1.1- delete last sentence “The Premises…” shall be changed to:”
The Premises shall contain approximately 45,840 square
feet.”
|
|
|
3.
|
Article
2, Section 2.1, Base Rent, the monthly base rent remains up to the 8
th
month or December 31, 2006 as per Original Lease . The monthly
base rent shall be adjusted to include the additional space rent effective
on the 9
th
month of the Original Lease or January 1, 2007, as shown in the Base Rent
Table (b) of the Basic Terms of this First
Amendment.
|
C.
EXHIBITS
|
|
4.
|
Exhibit
“A”, the Floor Plan shall be amended as shown in Exhibit “A-1” of the
First Amendment.
|
|
|
5.
|
In
the event of any inconsistency between this First Amendment and the
Original Lease, the terms in this First Amendment shall
prevail. Except as modified herein, the Original Lease remains
in full force and effect.
|
IN
WITNESS WHEREOF, the parties hereto have executed this First Amendment to Lease
as of the date first set forth above.
|
Signed, sealed
and delivered
in the presence of:
|
CYPRESS SEMICONDUCTOR CORP: |
| By: /s/ NEIL H. WEISS | |
| Name: | Name: Neil H. Weiss |
|
(Print or Type
Name)
|
Title: Vice President Treasurer |
| Name: | |
|
(Print or Type
Name)
|
Dated: 2/27/07 |
| SUNPOWER CORPORATION: |
| By: /s/ E. HERNANDEZ | |
| Name: | Name: E. Hernandez |
|
(Print or Type
Name)
|
Title: CFO |
| Name: | |
|
(Print or Type
Name)
|
Dated: 2/27/07 |
EXHIBIT
"A-1"
FLOOR
PLAN
SECOND AMENDMENT
THIS
SECOND AMENDMENT TO LEASE is dated as of July 1, 2007 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”), and
concerning cubicle space approximately 3,732 USF, and open space for 2,066
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"
.
(See
Section 1.1).
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:
|
|
a.
|
Premises:
Approximately
51,228 rentable square feet. The Premises are located within
the Building as shown on Exhibit “A-1” (See revisions on Section
1.1)
|
|
b.
|
Base
Rent
:
|
| Lease Months | Monthly Base Rent / SF | Monthly Base |
| 1-8 | $2.16 / SF | $ 94,461 |
| 9-12 | $2.16 / SF | $ 94,461 |
| 13 | $2.25 / SF | $ 98,397 |
| 14 | $2.25 / SF | $ 106,830 |
| 15-24 | $2.25 / SF | $ 115,263 |
| 25-36 | $2.34 / SF | $ 119,873 |
| 37-48 | $2.43 / SF | $ 124,484 |
| 49-60 | $2.53 / SF | $ 129,606 |
|
2.
|
Article
1 Section 1.1, Premises, the Premises is hereby expanded to include
additional cubicle and open space consisting of approximately 5,388 usable
square feet (“USF”) effective July 1, 2007. The Premises shall
now contain approximately 51,228 square
feet.
|
|
3.
|
Article
2, Section 2.1, Base Rent, the monthly base rent remains up to the 8
th
month or December 31, 2006 as per Original Lease . The monthly
base rent shall be adjusted to include the additional space
rent effective on the 15
th
month of the Original Lease or July 1, 2007 as shown in the Base Rent
Table (b) of the Basic Terms of this First
Amendment.
|
|
4.
|
Exhibit
“A”, the Floor Plan shall be amended as shown in Exhibit A-1 of the First
Amendment.
|
|
5.
|
In
the event of any inconsistency between this Second Amendment and the
Original Lease, the terms in this Second Amendment shall
prevail. Except as modified herein, the Original Lease remains
in full force and effect.
|
IN
WITNESS WHEREOF, the parties hereto have executed this Second Amendment to Lease
as of the date first set forth above.
|
Signed, sealed
and delivered
in the presence of:
|
CYPRESS SEMICONDUCTOR CORP: |
| By: /s/ CHRIS FORD | |
| Name: | Name: Chris Ford |
|
(Print or Type
Name)
|
Title: Facilities Manager |
| Name | |
|
(Print ot Type
Name)
|
Dated: 10/2/07 |
| SUNPOWER CORPORATION: |
| By: /s/ | |
| Name: | Name: |
|
(Print or Type
Name)
|
Title: |
| Name | |
|
(Print ot Type
Name)
|
Dated: 10/2/07 |
|
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
EXECUTION
COPY
AMENDMENT TO POLYSILICON
SUPPLY AGREEMENT
This Amendment to Polysilicon Supply
Agreement (this “Amendment”) is entered into as of January __, 2008, by and
between SunPower Philippines Manufacturing, Ltd., a company organized under the
laws of the Philippines and having its principal office located at #100 East
Main Street, Special Export Processing Zone, Laguna Techno Park, Binan Laguna,
Philippines (“SunPower Philippines”), and Woongjin Energy Co., Ltd., a company
organized under the laws of Korea and having its principal office located at
Daedeok Techno Valley, I 3-16 Block, Kwanpyung Dong, Yuseong Gu, Daejeon
Korea (the “
JVC
”). SunPower
Philippines and the JVC may be referred to herein individually as a “
Party
” or
collectively as the “
Parties
.”
RECITALS
A. SunPower
Corporation, a Delaware corporation (“
SunPower
”),
the JVC and Woongjin Coway Co., Ltd., a company organized under the laws of
Korea (“
Woongjin
”),
entered into that certain Joint Venture Agreement dated as of September 29,
2006, as amended by the Amendment No. 1 to Joint Venture Agreement dated as of
December 22, 2006 (the “
JV
Agreement
”), for the establishment and operation of the JVC.
B. Pursuant
to the JV Agreement, SunPower Philippines and the JVC entered to the Polysilicon
Supply Agreement dated as of December 22, 2006 (the “
Polysilicon
Supply Agreement
”), under which SunPower Philippines shall supply to the
JVC polycrystalline silicon required for the manufacture and supply of Ingot as
contemplated under the Ingot Supply Agreement by and among SunPower, the JVC and
Woongjin.
C. Based
on certain changes in the circumstances, the Parties recognized certain required
amendments to the Polysilicon Supply Agreement to reflect the Parties’ intent,
including (i) the addition of a definition for the term “Initial Ingot Pullers,”
and (ii) the amended description of the circumstances triggering SunPower’s
obligation to pay the JVC *** percent (***%) of the JVC’s fixed costs for its
Ingot manufacturing facilities that stay idle due to SunPower’s failure to sell,
supply and deliver the applicable Quarterly Requirement as set out in Section
2.2.1 of the Polysilicon Supply Agreement.
D. The
Parties wish to amend the Polysilicon Supply Agreement to reflect the required
changes described above.
AGREEMENT
NOW, THEREFORE, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Parties agree as follows:
1.
Definitions
1.1
The terms defined hereinabove shall
have the meanings set forth therein.
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
1.2
Except as otherwise defined in this
Amendment, the terms used but not defined herein shall have the respective
meanings ascribed to them in the JV Agreement and the Polysilicon Supply
Agreement.
2.
Amendments to the
Polysilicon
Supply Agreement
2.1
New Section
1.7
. The definition for the term “Initial Ingot Pullers” shall
be hereby added to the Polysilicon Supply Agreement as Section 1.7 to read as
follows, and each of the original Sections from 1.7 through 1.20 of the
Polysilicon Supply Agreement shall be re-numbered accordingly.
1.7 “
Initial Ingot Pullers
” means
*** Ingot pullers that have been installed as part of the JVC’s Initial
Capacity.
2.2
Amendment to Section
2.2.1
. The last phrase in the third sentence of Section 2.2.1
of the Polysilicon Supply Agreement is hereby revised and amended
by:
|
(a)
|
deleting “
SunPower shall pay to the JVC
*** percent (***%) of the JVC’s fixed costs for Ingot pullers that are
idle due to SunPower’s failure to sell, supply and deliver the applicable
Quarterly Requirement.
”; and
|
|
(b)
|
inserting “
SunPower shall pay to the JVC
*** percent (***%) of the JVC’s fixed costs for the Initial Ingot Pullers
that are then operational but stay idle solely due to SunPower’s failure
to sell, supply and deliver the applicable Quarterly Requirement;
provided
,
however
, that any Product sold,
supplied and delivered by SunPower during the Initial Requirements Period
shall be first used to fully utilize the Initial Ingot Pullers before
being used to utilize any other Ingot
Pullers.
”
|
3.
Effect of Amendment and
Continuing Effect of the Polysilicon Supply Agreement
3.1
Effectiveness of
Amendment
. The Polysilicon Supply Agreement shall be deemed to
have been revised and amended in accordance with this Amendment as of the date
of the Polysilicon Supply Agreement.
3.2
Continuing Effect of the
Polysilicon Supply Agreement
. Except as expressly amended and
modified by this Amendment, the Polysilicon Supply Agreement (including all
rights and obligations of the parties thereunder existing prior to the execution
and delivery of this Amendment) shall continue to be, and shall remain, in full
force and effect in accordance with the terms thereof.
3.3
References to the
Polysilicon Supply Agreement
. Each reference, whether direct
or indirect, in the Polysilicon Supply Agreement to the Polysilicon Supply
Agreement (including, without limitation, references to “this Agreement” in the
Polysilicon Supply Agreement) shall mean and be a reference to the Polysilicon
Supply Agreement, as amended by this Amendment.
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
3.4
Conflicts
. To
the extent that there are any inconsistencies or ambiguities between this
Amendment and the Polysilicon Supply Agreement, the terms of this Amendment
shall supercede the Polysilicon Supply Agreement.
4.
Miscellaneous
4.1
Governing
Law
. This Amendment and all disputes arising out of or in
connection with this Amendment shall be governed by, interpreted under, and
construed and enforceable in accordance with, the laws of the Republic of Korea
without regard to conflicts of laws principles. The dispute
resolution provisions in the Polysilicon Supply Agreement (including the
arbitration provision) are hereby incorporated into this Amendment,
mutatis
mutandis
.
4.2
Counterparts
. This
Amendment may be executed in one or more counterparts, each of which shall be
deemed as an original, but all of which together shall constitute one and the
same instrument.
[Signature
Pages Follow]
IN WITNESS WHEREOF, the Parties have
caused this Amendment to Polysilicon Supply Agreement to be executed by their
respective representatives thereunto duly authorized as of the date first set
forth above.
|
SUNPOWER
PHILIPPINES MANUFACTURING LTD.
By: /s/
THOMAS H. WERNER
Name: Thomas
H. Werner
Title: Director
|
|
WOONGJIN
ENERGY CO., LTD.
By: /s/
HAK DO YOO
Name: Hak
Do Yoo
Title: CEO/President
|
4
|
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
|
|
Long-term
Polysilicon Supply Agreement
|
|
|
between
|
|
|
JVCo
|
|
|
and
|
|
|
SunPower
Corporation
|
| 1. | Introduction | 2 |
| 2. | Definitions | 2 |
| 3. | Obligations to sell and purchase Polysilicon, forecasts and delivery schedule | 3 |
| 4. | Price and quantity | 3 |
| 5. | Purchase Orders | 4 |
| 6. | Payment. | 5 |
| 7. | Delivery; Warranty; Inspection. | 5 |
| 8. | Packaging and Shipping | 6 |
| 9. | Term | 6 |
| 10. | Completion of Initial Plant. | 6 |
| 11. | Termination. | 7 |
| 12. | Confidentiality. | 7 |
| 13. | Damages Limitation. | 8 |
| 14. | Intellectual Property Indemnity. | 8 |
| 15. | Taxes. | 8 |
| 16. | Force Majeure. | 9 |
| 17. | Choice of Law. | 10 |
| 18. | Waiver | 10 |
| 19. | Severability. | 10 |
| 20. | Attorney Fees and Costs. | 10 |
| 21. | Dollars. | 10 |
| 22. | Agreement Preparation. | 11 |
| 23. | Assignment. | 11 |
| 24. | Audit Rights | 11 |
| EXHIBIT A | 13 | |
| EXHIBIT B | 14 | |
| EXHIBIT C | 15 |
|
1
|
Introduction
|
_________________________,
a Saudi Arabia limited liability company with its principal place of business at
______________________________________ (“JVCo”) and SunPower Corporation, a
Delaware corporation with its principal place of business at 3939 North First
Street, San Jose, California 95134 (“SunPower”) hereby enter into this Long-Term
Polysilicon Supply Agreement (the “Agreement”) effective as of 10 January, 2008
(the “Effective Date”).
WHEREAS
, JVCo is in the
process of erecting a manufacturing facility for polycrystalline silicon
(“Polysilicon”) in Saudi Arabia with an expected annual production of ***MT
(“Initial Plant Capacity”) from 2010 onwards;
WHEREAS
, SunPower utilized
polycrystalline silicon in its production of Photovoltaic Solar panels;
and
WHEREAS
, SunPower has entered
into an option agreement whereby SunPower subject to certain terms and
conditions has the right and / or obligation to purchase up to 25% of the shares
in JVCo from NorSun; and
WHEREAS
, on the terms and
conditions set forth herein, JVCo wishes to sell and SunPower wishes to purchase
Polysilicon on a long term basis.
|
|
NOW,
THEREFORE, the parties agree as
follows:
|
|
2
|
Definitions
|
|
2.1
|
“Annual
Quantity” shall mean annual quantities of Polysilicon to be sold by JVCo
and purchased by SunPower in accordance with this Agreement, expressed as
a fraction of the initial plant output volume set forth in Exhibit
B
|
|
2.2
|
“Commercial
Operation Date” shall mean the date when JVCo has made its first
commercial sale of Polysilicon produced at the Initial Plant, meeting the
technical specifications set forth in Exhibit
A.
|
|
2.3
|
“Business
Year” shall mean the period beginning on January 1
st
and ending on December 31
st
of the same year.
|
|
2.4
|
“Initial
Plant” shall mean the first Polysilicon plant to be erected by JVCo in
Jubail Industrial City with an expected production capacity of a total of
*** metric tons (MT) per year.
|
|
2.5
|
“Initial
Plant Output” shall mean the total quantity of Polysilicon produced at the
Initial Plant during one Business
Year.
|
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
|
2.6
|
“Polysilicon”
shall mean the polycrystalline silicon, meeting the technical
specifications set forth in Exhibit A, manufactured by JVCo and sold to
SunPower hereunder.
|
|
3
|
Obligations
to sell and purchase Polysilicon, forecasts and delivery
schedule
|
|
3.1
|
For
the period from the Commercial Operation Date through 31 December 2019,
JVCo shall be obliged to sell and SunPower shall be obliged to purchase
Polysilicon in the quantities (expressed as a fraction of the Initial
Plant Output) and in accordance with the schedule set forth in Exhibit
B. The specifications for the Polysilicon are set forth in
Exhibit A, as such specifications may be amended from time to time by
mutual written agreement of the parties. SunPower shall have
the right to reject Polysilicon (in accordance with Sections
7.3
and
7.4
below)
which does not meet such specification. Any such rejected
quantities shall not constitute “actually delivered” pursuant to Section
3.2
(ii)
below.
|
|
3.2
|
This
Agreement is a “take or pay agreement” such that JVCo is required to
deliver and sell and SunPower is required to accept and pay for quantities
of Polysilicon set forth in the third column of Exhibit B at the prices
set forth in the second column of Exhibit B, subject only to i) the
adjustments set forth in this Agreement and ii) with respect to SunPower’s
obligation to accept and pay for the Polysilicon, that JVCo actually
delivers such quantities at the agreed dates (“Delivery Dates”) set forth
in Exhibit B.
|
|
3.3
|
In
the event that SunPower fails to order and take delivery of its contracted
volume in a given Business Year, and such failure is not otherwise excused
under this Agreement, JVCo shall invoice SunPower for the differential at
full contract price and SunPower will pay the same within 30 days of
invoice date. SunPower specifically acknowledges and accepts
that it will be liable for the full purchase price of volume differential
between the quantity ordered and the contracted volume.
|
|
3.4
|
In
the event that JVCo fails to deliver Polysilicon contracted by SunPower in
accordance with section
3.1
above and Exhibit
B, and such failure is not triggered by a Force Majeure event or delay in
the completion of the Initial Plant as set forth in section
10
, SunPower has the right to purchase the
relevant quantity of Polysilicon from any third party provider (“Third
Party Polysilicon”) and to have JVCo reimburse SunPower for the reasonable
price difference, if any, between the price set forth in Exhibit B and the
price SunPower has paid the said third party provider. SunPower
shall use commercially reasonable efforts to mitigate its damages in
procuring Polysilicon from any third party in such circumstances.
|
|
4
|
Price
and quantity
|
|
4.1
|
The
price and quantity of Polysilicon to be purchased by SunPower from JVCo
are as set forth in the second and third column of Exhibit B. All prices
are FCA JVCo, Jubail, Saudi
|
| Arabia (Incoterms 2000). Subject only to the price adjustments set forth in Section 4.2 , these prices are fixed for the term of this Agreement set forth in Section 9 below. |
|
4.2
|
On
January 1 of each year beginning January 1, 2015, JVCo shall adjust prices
on the Polysilicon on an annual basis to account for changes in JVCo’s
cost structure relative to the manufacture of the Polysilicon. Such price
adjustments shall however be limited to changes relating to electricity,
raw materials (metallurgical grade silicon) and employment cost, and shall
be calculated in accordance with Exhibit
C.
|
|
5
|
Purchase
Orders
|
|
5.1
|
SunPower
shall issue to JVCo monthly purchase orders (hereinafter referred to as
“Purchase Orders”). Except as otherwise expressly provided in this
Agreement, SunPower shall in each Business Year issue Purchase Orders for
a total of the Annual Quantity applicable to each Business
Year.
|
|
5.2
|
The
quantity of Polysilicon to be delivered in each calendar month shall be
specified in the Purchase Orders. SunPower shall issue the
Purchase Orders on a monthly basis, no later than three (3) months before
the actual delivery month starts. Together with each Purchase Order,
SunPower shall also provide an estimate of the quantity of Polysilicon to
be delivered during the two successive months after the actual delivery
month, provided, however, that such estimate shall not be binding upon
SunPower or JVCo. Under no circumstances shall the quantity of Polysilicon
to be ordered each month be less than eight percent (8%) of the Annual
Quantity for that Business Year.
|
|
5.3
|
SunPower
shall ensure that the Purchase Orders, unless otherwise agreed in writing
between the parties, are issued monthly and shall, at a minimum, contain
the following information: (i) reference to this Agreement, (ii)
identification of the Polysilicon by proper name, price, and quantities,
(iii) delivery instruction and delivery place, (iv) delivery date and (v)
issue date. SunPower shall send Purchase Orders by ordinary
registered mail or comparable means allowing tracking, and SunPower shall
send a copy to SunPower on the issue date either by e-mail or
telefax.
|
|
5.4
|
A
Purchase Order shall be binding for JVCo only after it is received and its
conditions have been confirmed by JVCo. JVCo shall send
confirmation of a Purchase Order by e-mail, or alternatively telefax, and
registered letter. If JVCo fails to object to the Purchase Order within 15
days after SunPower’s issue date, then such Purchase Order shall be deemed
accepted by JVCo. Notwithstanding the foregoing, JVCo shall not reject the
quantity in a Purchase Order as long as such quantity is not more than 10%
of the Annual Quantity.
|
|
5.5
|
In
the event of a discrepancy between the terms and conditions of this
Agreement and an individual Purchase Order, the terms and conditions of
this Agreement shall prevail unless the parties in writing agree
otherwise.
|
|
6
|
Payment.
|
|
6.1
|
Payment
terms are net 30 days from the date of each undisputed
invoice. Finance charges of ***% per month (***% per annum) may
be assessed on payment past due from the payment due date to the date
payment is received.
|
|
6.2
|
If
SunPower fails to pay invoices when due or finance charges when assessed,
JVCo may delay future shipments.
|
|
7
|
Delivery;
Warranty; Inspection.
|
|
7.1
|
Title
and risk of loss with respect to all Polysilicon shall pass to SunPower at
Jubail harbor, Saudi Arabia, in accordance with the FCA, (Incoterms 2000)
rules.
|
|
7.2
|
If
Polysilicon is not delivered within six (6) weeks following the requested
delivery date, JVCo will pay SunPower liquidated damages at a
rate of *** percent (***%) of the gross purchase price applicable to such
shipment per week thereafter, up to a maximum of *** percent (***%).The
foregoing liquidated damages address late delivery shipments only and are
independent of JVCo’s liability (if any), and SunPower’s corresponding
ability to recover damages, for JVCo’s failure to deliver its commitments
pursuant to this Agreement (including pursuant to Section
3.4
).
|
|
7.3
|
JVCo
warrants that the Polysilicon will be free from defects and conform to the
specifications set forth in Exhibit A, provided that JVCo is notified of
any defects or non-conformity within thirty (30) days after the relevant
Polysilicon has arrived at the SunPower Delivery Point, however no later
than three (3) months after delivery in accordance with Section 8, and
that the defect or non-conformity is shown to be due to JVCo’s faulty
design, workmanship, material or packaging. An inspection of the
appearance of each Polysilicon delivery package shall be made by SunPower
within 30 days after arrival of Polysilicon at the SunPower Delivery
Point. In the event of any warranty claims, SunPower shall notify JVCo
whereupon JVCo shall have the right to undertake its own
inspection. If JVCo has not received a written notification
within the time limits set forth in this section
7.3
, the Polysilicon shall be regarded as
accepted. For the purpose of this section
7.3
, the “SunPower Delivery Point” shall be
identified no later than thirty days prior to the first scheduled delivery
date, and SunPower may modify such location with at least 30 days prior
written notice to JVCo.
|
|
7.4
|
In
the event that the Polysilicon does not meet the Exhibit A specifications,
SunPower shall have the right to reject such defective Polysilicon and
return them to JVCo. JVCo shall examine and judge the returned Polysilicon
within thirty (30) days after receipt. JVCo shall bear any and
all costs and expenses incurred by SunPower related to the return of the
defective Polysilicon and shall provide such remedies as set forth in
Section
7.2
and (if applicable) Section
3.4
.
|
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
|
8
|
Packaging
and Shipping
|
|
8.1
|
JVCo
shall bear all costs associated with packaging or storing the Polysilicon
until delivery to SunPower pursuant to the delivery terms specified in
Section
7.1
. All Polysilicon shall be
packaged, marked, and otherwise prepared in accordance with good
commercial practices to reduce the risk of damage and to be packaged in
the smallest commercially acceptable form in order to enable SunPower to
obtain the lowest shipping rates possible (based on volume metric
dimensions) and in accordance with all applicable federal, state and local
packaging and transportation laws and regulations. An itemized packing
list shall accompany each shipment.
|
|
8.2
|
JVCo
shall establish reasonable control routines in order to ensure punctual
delivery of the Polysilicon at the agreed time and without any defects or
non-conformities.
|
|
8.3
|
A
shipment notice shall be submitted from JVCo to SunPower by telefax or
other means of communications, at the latest on the shipment date,
including:
|
a)
Purchase
Order No.
b)
Brief
description of Polysilicon
c)
Invoice
amount
d)
Number of
packages
e)
Gross
weight (total) kilos
f)
Packing
list describing in detail the content of each package
|
8.4
|
A
delivery certificate shall be issued by JVCo to SunPower for each shipment
of Polysilicon.
|
|
9
|
Term
|
|
9.1
|
The
term of this Agreement shall be from the Effective Date through December
31, 2019 (the “Term”). The Agreement may not be terminated prior to the
scheduled expiration of the Term except as expressly set forth in Section
11 and
16
.
|
|
10
|
Completion
of Initial Plant.
|
|
10.1
|
SunPower
acknowledges that JVCo must erect and complete the Initial Plant in order
to produce the Polysilicon to be supplied under this
Agreement. The estimated Commercial Operation Date for the
Initial Plant is January 1, 2010 with an estimated annual production
capacity of *** metric tons (MT). The Parties estimate that the
Initial Plant will achieve full commercial production of ***MT per year by
1 January 2011. Except
|
*** CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION.
| pursuant to section 3.4 above, JVCo shall have no liability to SunPower for any delay or failure to achieve the estimated production capacities by such dates, including shortfalls in delivery of Polysilicon resulting therefrom. |
|
10.2
|
If
the Commercial Operation Date of the Initial Plant is delayed for more
than one year SunPower shall have the right, at its sole discretion, to
extend the Term set forth in Section
9
commensurately with the period of
delay.
|
|
11
|
Termination.
|
|
11.1
|
A
party may, in its sole discretion, terminate this Agreement only upon the
event of a material breach by the other party of its obligations under
this Agreement, provided that (i) the non-breaching party submits a
written notice of such breach to the breaching party, and (ii) the
breaching party fails to cure such breach within sixty (60) days of
receipt of the written notice of breach. If the breaching Party
rectifies any such breach within the said period, then the breach shall be
deemed cured with respect to this section
11
and the non-breaching shall not be entitled to terminate this
Agreement.
|
|
12
|
Confidentiality.
|
|
12.1
|
Definition. ”Confidential
Information” means any information disclosed (whether prior to the
Effective Date, on the Effective Date or after the Effective Date) by a
Party (the “Disclosing Party”) to another Party (the “Receiving Party”),
either directly or indirectly, in writing, orally or by drawings or
observation of tangible objects such as documents, prototypes, samples,
products and facilities, including, but not limited to, trade secrets,
know-how and other intellectual property or information relating to the
Disclosing Party’s business, operations, products, technology, together
with any and all analyses, or other documents prepared by the Disclosing
Party or any of its Representatives that contain or otherwise reflect any
of the foregoing information. “Representatives” of any Party
means such Party’s directors, officers, employees, reinsurers, agents and
advisors (including, without limitation, attorneys, accountants,
consultants, bankers, financial advisors or lending
institutions).
|
|
12.2
|
Confidential
Information and Exclusions. Notwithstanding Section
12.1
above,
Confidential Information shall exclude information that: (i) was
independently developed by the Receiving Party without using any of the
Disclosing Party’s Confidential Information; (ii) becomes known to the
Receiving Party, without restriction, from a source other than the
Disclosing Party that had a right to disclose it; (iii) was in the public
domain at the time it was disclosed or becomes in the public domain
through no act or omission of the Receiving Party; or (iv) was rightfully
known to the Receiving Party, without restriction, at the time of
disclosure.
|
|
12.3
|
Confidentiality
Obligation. The Receiving Party shall treat as confidential all
of the Disclosing Party’s Confidential Information and shall not use such
Confidential Information except as expressly permitted under this
Agreement. Without limiting the foregoing, the Receiving Party
shall use at least the same degree of care that it uses to prevent the
disclosure of its own confidential information of like importance, but in
no event with less than reasonable care, to prevent the disclosure of the
Disclosing Party’s Confidential Information, subject to Section
12.4
below.
|
|
12.4
|
Legal
Disclosure. Notwithstanding anything herein to the contrary, a
Receiving Party has the right to disclose Confidential Information without
the prior written consent of the Disclosing Party: (i) as required by any
court or other governmental authority, or by any stock exchange the shares
of any Party are listed on; (ii) as otherwise required by law, or (iii) as
advisable or required in connection with any government or regulatory
filings, including without limitation, filings with any regulating
authorities covering the relevant financial markets. If a
Receiving Party believes that it will be compelled by a court or other
authority to disclose Confidential Information of the Disclosing Party, it
shall give the Disclosing Party prompt written notice so that the
Disclosing Party may take steps to oppose such
disclosure.
|
|
12.5
|
Remedies. If
a Receiving Party breaches any of its obligations under this Section
12
, the
Disclosing Party shall be entitled to seek equitable relief to protect its
interest therein, including injunctive relief, as well as money
damages.
|
|
13
|
Damages
Limitation.
|
|
13.1
|
NEITHER
PARTY SHALL BE LIABLE FOR ANY, SPECIAL, PUNITIVE, CONSEQUENTIAL OR
INDIRECT DAMAGES ARISING OUT OF THIS
AGREEMENT.
|
|
14
|
Intellectual
Property Indemnity.
|
|
14.1
|
JVCo
shall indemnify, defend, save and hold harmless and pay any award of
damages assessed against SunPower in any suit or cause of action alleging
that the use of the Polysilicon infringes any patent or other intellectual
property right of any third party.
|
|
15
|
Taxes.
|
|
15.1
|
Any
tax or other government charge now or in the future levied upon the
production or sale of the Polysilicon in Saudi Arabia in accordance with
this Agreement, shall be paid by
JVCo.
|
|
16
|
Force
Majeure.
|
|
16.1
|
Neither
party shall be responsible for any delay in or failure to carry out his
duties under the Agreement if such a delay or failure results from a
reason of Force Majeure.
|
|
16.2
|
If
the party will be delayed in completing its obligations by Force Majeure
there shall be granted such an extension of time as may be reasonably
required to allow such party to perform so long as the party is using
reasonable efforts to resolve the circumstances constituting a Force
Majeure. If the delay in performance continues beyond 30 days,
the parties shall meet monthly to discuss the event of Force Majeure and
progress by the party claiming Force Majeure in its resolution of such
circumstances and resumption of
performance.
|
|
16.3
|
“Force
Majeure” means any event or circumstance which wholly or partly prevents
or delays the performance of any material obligation arising under this
Agreement, but only if and to the extent (i) such event is not within the
reasonable control, directly or indirectly, of the Party seeking to have
its performance obligation(s) excused thereby, (ii) the Party seeking to
have its performance obligation(s) excused thereby has taken all
reasonable precautions and measures in order to prevent or avoid such
event or mitigate the effect of such event on such Party’s ability to
perform its obligations under this Agreement and which by the exercise of
due diligence such Party could not reasonably have been expected to avoid
and which by the exercise of due diligence it has been unable to overcome,
and (iii) such event is not the direct or indirect result of the
negligence or the failure of, or caused by, the Party seeking to have its
performance obligations excused thereby. The following events
could be considered as Force Majeure: war, riot, disputes between national
labor market organizations directly involving the party claiming Force
Majeure, fire, earthquake, extreme and unusual weather, acts of God, or
any other causes designated Force Majeure by a court of law or arbitrator
appointed in accordance with Section
17.2
below.
|
|
16.4
|
Delay
or failure of the performance of a party's sub-supplier, subcontractor or
lender, or the failure to obtain financing, government permits or license,
shall not create a reason of Force Majeure, unless such reason occurs as a
result of one of the events listed in Section
16.3
above.
|
|
16.5
|
In
the event of Force Majeure the party invoking a Force Majeure event shall
notify the other party in writing thereof within seven (7) days from the
incident in question. In such notice, the party shall inform, if possible,
of the time when performance in accordance with this Agreement will be
resumed.
|
|
17
|
Choice
of Law.
|
|
17.1
|
The
Agreement is made in, and shall be governed and controlled in all respects
by the laws of the England.
|
|
17.2
|
Any
conflicts arising under this Agreement shall be resolved by arbitration
under the rules of the International Chamber of Commerce (ICC). The
arbitration shall be conducted in English and shall take place in London,
England.
|
|
18
|
Waiver.
|
|
18.1
|
Either
party’s failure to exercise a right or remedy or such party’s acceptance
of a partial or delinquent payment shall not operate as a waiver of any of
such party’s rights or the other party’s obligations under the Agreement
and shall not constitute a waiver of such party’s right to declare an
immediate or a subsequent default.
|
|
19
|
Severability.
|
|
19.1
|
If
one or more of the provisions of this Agreement shall be found, by a court
with jurisdiction, to be illegal, invalid or unenforceable, it shall not
affect the legality, validity or enforceability of any of the remaining
provisions of this Agreement. The parties agree to attempt to
substitute for any illegal, invalid or unenforceable provision a legal,
valid or enforceable provision that achieves to the greatest extent
possible the economic objectives of the illegal, invalid or unenforceable
provision.
|
|
20
|
Attorney
Fees and Costs.
|
|
20.1
|
The
parties shall bear their own expenses incurred in connection with the
negotiation and execution of this Agreement. In the event that
a dispute leads to litigation or arbitration, the prevailing party shall
be entitled to reasonable costs and fees incurred, including attorneys’
fees.
|
|
21
|
Dollars.
|
|
21.1
|
All
references to monetary amounts shall be in U.S.
Dollars.
|
|
22
|
Agreement
Preparation.
|
|
22.1
|
This
Agreement shall be considered for all purposes as prepared through the
joint efforts of the parties and shall not be construed against one party
or the other as a result of the manner in which this Agreement was
negotiated, prepared, drafted or
executed.
|
|
23
|
Assignment.
|
|
23.1
|
Neither
party may assign its rights or obligations under this Agreement without
the consent of the other party
|
|
24
|
Audit
Rights.
|
|
24.1
|
JVCo
agrees its books and records (including without limitation all quality
assurance records) and its factories and plants, or such parts thereof
that may be relevant for any Polysilicon quality control or technical
specification compliance test, shall at all reasonable times be subject to
inspection and audit by SunPower or its third party
representatives.
|
|
SUNPOWER
CORPORATION:
By: /s/
THOMAS WERNER
Print
Name: Thomas Werner
Title: Chief
Executive Officer
Date: Jan.
10, 2008
|
[_____________]*
By:
Print
Name:__________________________
Title:_______________________________
Date:
|
|
|
* To
be completed upon formation of JVCo (see following
page)
|
The
undersigned, in our capacity as Parties to the JV Agreement
(JVA)
entered into on this date, hereby approve this Long Term Polysilicon Supply
Agreement (Agreement) and confirm that we will use our full power as parties to
the JVA and future shareholders of the JVCo to ensure that this Agreement is
ratified and signed by the JVCo immediately after execution and formal
registration of the JVCo constitutional documents, in accordance with Section
13.2.6 of the JVA .
|
Chemical
Development Company
|
Swicorp
JOUSSOUR Company
|
|
By: /s/
WALID S. AL SHOAIBI
|
By: /s/
FAYSAL HAMZA
|
|
Name: Walid
S. Al Shoaibi
|
Name: Faysal
Hamza
|
|
Title: Chairman
|
Title: Executive
Director
|
|
NorSun
AS
|
|
|
By:/s/
JON HINDAR
|
|
|
Name:Jon
Hindar
|
|
|
Title:CEO
|
|
|
|
EXHIBIT
A
|
|
|
POLYSILICON
SPECIFICATIONS
|
|
|
Exhibit
to detail the poly specs:
|
|
|
PRODUCT
CODE: ________________________
|
|
1.
|
Description
|
|
2.
|
Bulk
& Surface Impurity
Specifications
|
|
3.
|
Size
Specification
|
|
4.
|
Certification
|
|
5.
|
Packaging
and labelling
|
|
|
EXHIBIT
B
|
|
|
PRICES,
PAYMENT, and DELIVERY VOLUME
|
|
Year
|
Price
|
Volume
[expressed
as a fraction of the Initial Plant Output]
|
Expected
volumes MT (2)
[assuming
full production of *** MT per year]
|
|
2010
|
$***/kg
|
***
|
***
|
|
2011
|
$***/kg
|
***
|
***
|
|
2012
|
$***/kg
|
***
|
***
|
|
2013
|
$***/kg
|
***
|
***
|
|
2014
|
$***/kg
|
***
|
***
|
|
2015
|
$***/kg
(1)
|
***
|
***
|
|
2016
|
$***/kg
(1)
|
***
|
***
|
|
2017
|
$***/kg
(1)
|
***
|
***
|
|
2018
|
$***/kg
(1)
|
***
|
***
|
|
2019
|
$***/kg
(1)
|
***
|
***
|
|
|
(1)
Subject to price
adjustments in accordance with section
4.2
|
(2)
In accordance with the Joint
Venture Agreement between the initial shareholders of the JVCo, SunPower have
been granted a right to purchase *** of the Initial Plant Output. The metric
tons volume set forth in column four of the table above is based on the
assumption that the Initial Plant Output will be *** MT per year. This is
however only a production target in the sense that if the Initial Output is more
or less than *** MT, SunPower’s right to purchase and JVCo’s obligation to sell
Polysilicon under this Agreement shall still be *** of all polysilicon produced
at the Initial Plant during the relevant year.
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
|
|
EXHIBIT
C
|
Electricity,
raw materials and the labour expense adjustments
The
assumed base production cost of polysilicon in year 2010 is $*** per kg is
consisting of the following cost components (in USD per kg produced
polysilicon):
| Electricity component | $ *** |
| Raw materials component | $ *** |
| Labour expense component | $ *** |
| Other elements | $ *** |
| Baseline transfer price | $*** (fully loaded) |
In
accordance with Section 4.5 of this Agreement, JVCo shall adjust the price for
Polysilicon on an annual basis starting 1 January 2015. Such adjustments shall
account for annual changes in JVCo’s cost structure relative to the manufacture
of the polysilicon, however limited to cost for electricity, raw materials and
labour. The adjusted price (“Adjusted Price”) shall be made effective every year
on 1 January, starting 1 January 2015. On 1 January 2015 the Adjusted Price
shall account for changes in the said cost elements from 1 January 2011 through
31 December 2014. The Adjusted Price shall be calculated as
follows.
| New contract price = | Other elements ( = $*** ) |
| + adjusted electricity component | |
| + adjusted raw materials component | |
| + adjusted labour expense component |
Electricity
component:
The base electrical cost is $ *** per kWh (***US
dollar cent per kilowatt-hour). The electricity usage per produced kg
of Polysilicon is baselined to *** kWh, giving an electricity cost of $*** per
kg produced Polysilicon.
The
electricity adjustment is computed as follows (NEC means New Electricity Cost
measured in $/kWh for the coming year in question):
Adjusted electricity component = $*** +
(NEC - ***) $/kWh * *** kWh
Raw
Materials component:
The baseline raw materials cost per kg
produced polysilicon is $*** per kg produced material. The three largest items
(comprising ca ***%) of the $*** are:
| Aluminum powder | ***MT at $*** per kg = | $*** per year |
| Dimethoxymethane | ***MT at $*** per kg = | $*** per year |
| Sodium | ***MT at $*** per kg = | $*** per year |
| Sum | $*** per year | |
| Cost per kg Si at ***MTY | $*** per kg produced Si |
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
When for
a given upcoming year JVCo makes a similar calculation, the cost per kg produced
Polysilicon will go up or down depending on the actual raw materials price
contracts is has negotiated and agreed in writing. The actual cost for JVCo for
these three raw materials calculated per kg produced Polysilicon (***MTY),
denoted ACTUAL
ads
for
“actual cost per kg produced Polysilicon, aluminum, dimethoxymethane and sodium”
below, makes up the raw materials component. It is calculated as
follows:
Adjusted raw materials component = $***
– $*** + ACTUAL
ads
Labour
expense component:
The Base Employment Cost (base year = 2010)
is estimated at *** $/kg produced polysilicon. Subject to changes in
the Consumer Price Index for Saudi Arabia as published by the World Bank Group
(eg http://devdata.worldbank.org/), JVCo shall change the labour
expense component of Polysilicon as follows:
|
Year
|
Adjusted
labour expense component
|
|
2010
|
$***
|
|
2011
|
$***
* (1+CPI
2010
)
|
|
2012
|
$***
* (1+CPI
2010
)
* (1+CPI
2011
)
|
|
20(N),
N = 13 to
last
year of contract
|
$***
* (1+CPI
2010
)
* (1+CPI
2011
)
* … (1+CPI
20(N-1)
)
|
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
16 of
16
JVCo and SunPower Confidential
|
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
|
|
Long-term
Polysilicon Supply Agreement
|
|
|
between
|
|
|
NorSun
AS
|
|
|
and
|
|
|
SunPower
Corporation
|
| 1. | Introduction | 2 |
| 2. | Definitions | 2 |
| 3. | Obligations to sell and purchase Polysilicon, forecasts and delivery schedule | 3 |
| 4. | Price and quantity | 3 |
| 5. | Purchase Orders | 4 |
| 6. | Payment. | 5 |
| 7. | Delivery; Warranty; Inspection. | 5 |
| 8. | Packaging and Shipping | 6 |
| 9. | Term | 6 |
| 10. | Completion of Initial Plant. | 6 |
| 11. | Termination. | 7 |
| 12. | Confidentiality. | 7 |
| 13. | Damages Limitation. | 8 |
| 14. | Intellectual Property Indemnity. | 8 |
| 15. | Taxes. | 8 |
| 16. | Force Majeure. | 9 |
| 17. | Choice of Law. | 10 |
| 18. | Waiver | 10 |
| 19. | Severability. | 10 |
| 20. | Attorney Fees and Costs. | 10 |
| 21. | Dollars. | 10 |
| 22. | Agreement Preparation. | 11 |
| 23. | Assignment. | 11 |
| 24. | Audit Rights | 11 |
| EXHIBIT A | 13 | |
| EXHIBIT B | 14 | |
| EXHIBIT C | 15 |
|
1
|
Introduction
|
NorSun
AS, a Norwegian company with its principal place of business at Bankplassen 1,
0151 OSLO Norway (“NorSun”), and SunPower Corporation, a Delaware company with
its principal place of business at 3939 North First Street, San Jose, California
95134 (“SunPower”) hereby enter into this Long-Term Polysilicon Supply Agreement
(the “Agreement”) effective as of January 10, 2008 (the “Effective
Date”).
WHEREAS
, NorSun, Chemical
Development Company and Swicorp Joussour are in the process of establishing a
Saudi Arabia limited liability company (“JVCo”) as a joint venture that will
erect a manufacturing facility for polycrystalline silicon (“Polysilicon”) in
Saudi Arabia with an expected annual production of ***MT (“Initial Plant
Capacity”) from 2010 onwards;
WHEREAS
, the NorSun has signed
a Joint Venture Agreement (the “JVA”) whereby NorSun owns 50% of the shares in
JVCo and NorSun is entitled and obligated to purchase up to *** of the Initial
Plant Capacity for the period from 2010 through 2019 and SunPower wishes to
purchase from NorSun a fraction of such polysilicon; and
WHEREAS
, on the terms and
conditions set forth herein, NorSun wishes to sell and SunPower wishes to
purchase Polysilicon on a long term basis.
|
|
NOW,
THEREFORE, the parties agree as
follows:
|
|
2
|
Definitions
|
|
2.1
|
“Annual
Quantity” shall mean annual quantities of Polysilicon to be sold by NorSun
and purchased by SunPower in accordance with this Agreement, expressed as
a fraction of the output from JVCo initial plant set forth in Exhibit
B
|
|
2.2
|
“Commercial
Operation Date” shall mean the date when JVCo has made its first
commercial sale of polysilicon produced at its initial plant, meeting the
technical specifications set forth in Exhibit
A.
|
|
2.3
|
“Business
Year” shall mean the period beginning on January 1
st
and ending on December 31
st
of the same year.
|
|
2.4
|
“Initial
Plant” shall mean the first Polysilicon plant to be erected by JVCo in
Jubail Industrial City with an expected production capacity of a total of
*** metric tons (MT) per year.
|
|
2.5
|
“Initial
Plant Output” shall mean the total quantity of Polysilicon produced at the
Initial Plant during one Business
Year.
|
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
|
2.6
|
“Polysilicon”
shall mean the polycrystalline silicon, meeting the technical
specifications set forth in Exhibit A, manufactured by JVCO and sold to
NorSun who in turn sells such polycrystalline silicon to SunPower
hereunder.
|
|
3
|
Obligations
to sell and purchase Polysilicon, forecasts and delivery
schedule
|
|
3.1
|
For
the period from the Commercial Operation Date through 31 December 2019,
NorSun shall be obliged to sell and SunPower shall be obliged to purchase
Polysilicon in the quantities (expressed as a fraction of the Initial
Plant Output) and in accordance with the schedule set forth in Exhibit
B. The specifications for the Polysilicon are set forth in
Exhibit A, as such specifications may be amended from time to time by
mutual written agreement of the parties. SunPower shall have
the right to reject Polysilicon (in accordance with Sections
7.3
and
7.4
below)
which does not meet such specification. Any such rejected
quantities shall not constitute “actually delivered” pursuant to Section
3.2
(ii)
below.
|
|
3.2
|
This
Agreement is a “take or pay agreement” such that NorSun is required to
deliver and sell and SunPower is required to accept and pay for quantities
of Polysilicon set forth in the third column of Exhibit B at the prices
set forth in the second column of Exhibit B, subject only to i) the
adjustments set forth in this Agreement and ii) with respect to SunPower’s
obligation to accept and pay for the Polysilicon, that NorSun actually
delivers such quantities at the agreed dates (“Delivery Dates”) set forth
in Exhibit B; provided, however, in the event that JVCo fails to sell and
deliver polysilicon to NorSun under the NorSun II Offtake Agreement (as
defined in the JVA), NorSun shall be relieved from any delay or failure to
fulfill its corresponding obligations hereunder except as provided in
Section 3.4 below.
|
|
3.3
|
In
the event that SunPower fails to order and take delivery of its contracted
volume in a given Business Year, and such failure is not otherwise excused
under this Agreement, NorSun shall invoice SunPower for the differential
at full contract price and SunPower will pay the same within 30 days of
invoice date. SunPower specifically acknowledges and accepts
that it will be liable for the full purchase price of volume differential
between the quantity ordered and the contracted volume.
|
|
3.4
|
In
the event that NorSun fails to deliver polysilicon contracted by SunPower
in accordance with section
3.1
above and
Exhibit B, and such failure is not triggered by (i) JVCo’s failure to
deliver polysilicon to NorSun under the NorSun II Offtake agreement as set
forth in section
3.2
above, (ii) a Force
Majeure event or (iii) delay in the completion of the Initial Plant as set
forth in section
10
, SunPower has the right
to purchase the relevant quantity of Polysilicon from any third party
provider (“Third Party Polysilicon”) and to have NorSun reimburse SunPower
for the reasonable price difference, if any, between the price set forth
in Exhibit B and the price SunPower has paid the said third party
provider. Notwithstanding clause (i) above, if JVCo fails
to deliver polysilicon to NorSun under the NorSun II Offtake Agreement,
NorSun shall be obligated to, at the cost of SunPower, exercise its rights
to recover monetary damages from JVCo in connection therewith and
|
| forward the amount of such recovery to SunPower up to the price difference described in the preceding sentence. SunPower shall use commercially reasonable efforts to mitigate its damages in procuring Polysilicon from any third party in such circumstances. |
|
4
|
Price
and quantity
|
|
4.1
|
The
price and quantity of Polysilicon to be purchased by SunPower from NorSun
are as set forth in the second and third column of Exhibit B. All prices
are FCA NorSun, Jubail, Saudi Arabia (Incoterms 2000). Subject
only to the price adjustments set forth in Section
4.2
, these prices are fixed for the term of this
Agreement set forth in Section
9
below.
|
|
4.2
|
On
January 1 of each year beginning January 1, 2015, NorSun shall adjust
prices on the Polysilicon on an annual basis to reflect any change in the
price of polysilicon under the NorSun II Off-take Agreement, Exhibit
C.
|
|
5
|
Purchase
Orders
|
|
5.1
|
SunPower
shall issue to NorSun monthly purchase orders (hereinafter referred to as
“Purchase Orders”). Except as otherwise expressly provided in this
Agreement, SunPower shall in each Business Year issue Purchase Orders for
a total of the Annual Quantity applicable to each Business
Year.
|
|
5.2
|
The
quantity of Polysilicon to be delivered in each calendar month shall be
specified in the Purchase Orders. SunPower shall issue the
Purchase Orders on a monthly basis, no later than three (3) months before
the actual delivery month starts. Together with each Purchase Order,
SunPower shall also provide an estimate of the quantity of Polysilicon to
be delivered during the two successive months after the actual delivery
month, provided, however, that such estimate shall not be binding upon
SunPower or NorSun. Under no circumstances shall the quantity of
Polysilicon to be ordered each month be less than eight percent (8%) of
the Annual Quantity for that Business
Year.
|
|
5.3
|
SunPower
shall ensure that the Purchase Orders, unless otherwise agreed in writing
between the parties, are issued monthly and shall, at a minimum, contain
the following information: (i) reference to this Agreement, (ii)
identification of the Polysilicon by proper name, price, and quantities,
(iii) delivery instruction and delivery place, (iv) delivery date and (v)
issue date. SunPower shall send Purchase Orders by ordinary
registered mail or comparable means allowing tracking, and SunPower shall
send a copy to SunPower on the issue date either by e-mail or
telefax.
|
|
5.4
|
A
Purchase Order shall be binding for NorSun only after it is received and
its conditions have been confirmed by NorSun. NorSun shall send
confirmation of a Purchase Order by e-mail, or alternatively telefax, and
registered letter. If NorSun fails to object to the Purchase Order within
15 days after SunPower’s issue date, then such Purchase Order shall be
deemed accepted by NorSun. Notwithstanding the foregoing, NorSun shall not
|
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
| reject the quantity in a Purchase Order as long as such quantity is not more than 10% of the Annual Quantity. |
|
5.5
|
In
the event of a discrepancy between the terms and conditions of this
Agreement and an individual Purchase Order, the terms and conditions of
this Agreement shall prevail unless the parties in writing agree
otherwise.
|
|
6
|
Payment.
|
|
6.1
|
Payment
terms are net 30 days from the date of each undisputed
invoice. Finance charges of ***% per month (***% per annum) may
be assessed on payment past due from the payment due date to the date
payment is received.
|
|
6.2
|
If
SunPower fails to pay invoices when due or finance charges when assessed,
NorSun may delay future shipments.
|
|
7
|
Delivery;
Warranty; Inspection.
|
|
7.1
|
Title
and risk of loss with respect to all Polysilicon shall pass to SunPower at
Jubail harbor, Saudi Arabia, in accordance with the FCA, (Incoterms 2000)
rules.
|
|
7.2
|
If
Polysilicon is not delivered within six (6) weeks following the requested
delivery date, NorSun will pay SunPower liquidated damages at a
rate of *** percent (***%) of the gross purchase price applicable to such
shipment per week thereafter, up to a maximum of *** percent (***%).The
foregoing liquidated damages address late delivery shipments only and are
independent of NorSun’s liability (if any), and SunPower’s corresponding
ability to recover damages, for NorSun’s failure to deliver its
commitments pursuant to this Agreement (including pursuant to Section
3.4
).
|
|
7.3
|
NorSun
warrants that the Polysilicon will be free from defects and conform to the
specifications set forth in Exhibit A, provided that NorSun is notified of
any defects or non-conformity within thirty (30) days after the relevant
Polysilicon has arrived at the SunPower Delivery Point, however no later
than three (3) months after delivery in accordance with Section
0
, and that the defect or non-conformity is
shown to be due to NorSun’s faulty design, workmanship, material or
packaging. An inspection of the appearance of each Polysilicon delivery
package shall be made by SunPower within 30 days after arrival of
Polysilicon at the SunPower Delivery Point. In the event of any warranty
claims, SunPower shall notify NorSun whereupon NorSun shall have the right
to undertake its own inspection. If NorSun has not received a
written notification within the time limits set forth in this section
7.3
, the Polysilicon shall be regarded as
accepted. For the purpose of this section
7.3
, the “SunPower Delivery Point” shall be
identified no later than thirty days prior to the first scheduled delivery
date, and SunPower may modify such location with at least 30 days prior
written notice to NorSun.
|
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
|
7.4
|
In
the event that the Polysilicon does not meet the Exhibit A specifications,
SunPower shall have the right to reject such defective Polysilicon and
return them to NorSun. NorSun shall examine and judge the returned
Polysilicon within thirty (30) days after receipt. NorSun shall
bear any and all costs and expenses incurred by SunPower related to the
return of the defective Polysilicon and shall provide such remedies as set
forth in Section
7.2
and (if applicable)
Section
3.4
.
|
|
8
|
Packaging
and Shipping
|
|
8.1
|
NorSun
shall bear all costs associated with packaging or storing the Polysilicon
until delivery to SunPower pursuant to the delivery terms specified in
Section
7.1
. All Polysilicon shall be
packaged, marked, and otherwise prepared in accordance with good
commercial practices to reduce the risk of damage and to be packaged in
the smallest commercially acceptable form in order to enable SunPower to
obtain the lowest shipping rates possible (based on volume metric
dimensions) and in accordance with all applicable federal, state and local
packaging and transportation laws and regulations. An itemized packing
list shall accompany each shipment.
|
|
8.2
|
NorSun
shall establish reasonable control routines in order to ensure punctual
delivery of the Polysilicon at the agreed time and without any defects or
non-conformities.
|
|
8.3
|
A
shipment notice shall be submitted from NorSun to SunPower by telefax or
other means of communications, at the latest on the shipment date,
including:
|
a)
Purchase
Order No.
b)
Brief
description of Polysilicon
c)
Invoice
amount
d)
Number of
packages
e)
Gross
weight (total) kilos
f)
Packing
list describing in detail the content of each package
|
8.4
|
A
delivery certificate shall be issued by NorSun to SunPower for each
shipment of Polysilicon.
|
|
9
|
Term
|
|
9.1
|
The
term of this Agreement shall be from the Effective Date through December
31, 2019 (the “Term”). The Agreement may not be terminated prior to the
scheduled expiration of the Term except as expressly set forth in Section
11 and
16
.
|
|
10
|
Completion
of Initial Plant.
|
|
10.1
|
SunPower
acknowledges that JVCo must erect and complete the Initial Plant in order
to produce the Polysilicon to be supplied under this
Agreement. The estimated Commercial Operation Date for the
Initial Plant is January 1, 2010 with an estimated annual production
capacity of *** metric tons (MT). The Parties estimate that the
Initial Plant will achieve full commercial production of ***MT per year by
1 January 2011. Except pursuant to section
3.4
above, NorSun shall have no liability to
SunPower for any delay or failure to achieve the estimated production
capacities by such dates, including shortfalls in delivery of Polysilicon
resulting therefrom.
|
|
10.2
|
If
the Commercial Operation Date of the Initial Plant is delayed for more
than one year SunPower shall have the right, at its sole discretion, to
extend the Term set forth in Section
9
commensurately with the period of
delay.
|
|
11
|
Termination.
|
|
11.1
|
A
party may, in its sole discretion, terminate this Agreement only upon the
event of a material breach by the other party of its obligations under
this Agreement, provided that (i) the non-breaching party submits a
written notice of such breach to the breaching party, and (ii) the
breaching party fails to cure such breach within sixty (60) days of
receipt of the written notice of breach. If the breaching Party
rectifies any such breach within the said period, then the breach shall be
deemed cured with respect to this section
11
and the non-breaching shall not be entitled to terminate this
Agreement.
|
|
12
|
Confidentiality.
|
|
12.1
|
Definition. ”Confidential
Information” means any information disclosed (whether prior to the
Effective Date, on the Effective Date or after the Effective Date) by a
Party (the “Disclosing Party”) to another Party (the “Receiving Party”),
either directly or indirectly, in writing, orally or by drawings or
observation of tangible objects such as documents, prototypes, samples,
products and facilities, including, but not limited to, trade secrets,
know-how and other intellectual property or information relating to the
Disclosing Party’s business, operations, products, technology, together
with any and all analyses, or other documents prepared by the Disclosing
Party or any of its Representatives that contain or otherwise reflect any
of the foregoing information. “Representatives” of any Party
means such Party’s directors, officers, employees, reinsurers, agents and
advisors (including, without limitation, attorneys, accountants,
consultants, bankers, financial advisors or lending
institutions).
|
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
|
12.2
|
Confidential
Information and Exclusions. Notwithstanding Section
12.1
above,
Confidential Information shall exclude information that: (i) was
independently developed by the Receiving Party without using any of the
Disclosing Party’s Confidential Information; (ii) becomes known to the
Receiving Party, without restriction, from a source other than the
Disclosing Party that had a right to disclose it; (iii) was in the public
domain at the time it was disclosed or becomes in the public domain
through no act or omission of the Receiving Party; or (iv) was rightfully
known to the Receiving Party, without restriction, at the time of
disclosure.
|
|
12.3
|
Confidentiality
Obligation. The Receiving Party shall treat as confidential all
of the Disclosing Party’s Confidential Information and shall not use such
Confidential Information except as expressly permitted under this
Agreement. Without limiting the foregoing, the Receiving Party
shall use at least the same degree of care that it uses to prevent the
disclosure of its own confidential information of like importance, but in
no event with less than reasonable care, to prevent the disclosure of the
Disclosing Party’s Confidential Information, subject to Section
12.4
below.
|
|
12.4
|
Legal
Disclosure. Notwithstanding anything herein to the contrary, a
Receiving Party has the right to disclose Confidential Information without
the prior written consent of the Disclosing Party: (i) as required by any
court or other Governmental Authority, or by any stock exchange the shares
of any Party are listed on; (ii) as otherwise required by law, or (iii) as
advisable or required in connection with any government or regulatory
filings, including without limitation, filings with any regulating
authorities covering the relevant financial markets. If a
Receiving Party believes that it will be compelled by a court or other
authority to disclose Confidential Information of the Disclosing Party, it
shall give the Disclosing Party prompt written notice so that the
Disclosing Party may take steps to oppose such
disclosure.
|
|
12.5
|
Remedies. If
a Receiving Party breaches any of its obligations under this Section
12
, the
Disclosing Party shall be entitled to seek equitable relief to protect its
interest therein, including injunctive relief, as well as money
damages.
|
|
13
|
Damages
Limitation.
|
|
13.1
|
NEITHER
PARTY SHALL BE LIABLE FOR ANY, SPECIAL, PUNITIVE, CONSEQUENTIAL OR
INDIRECT DAMAGES ARISING OUT OF THIS
AGREEMENT.
|
|
14
|
Intellectual
Property Indemnity.
|
|
14.1
|
NorSun
shall indemnify, defend, save and hold harmless and pay any award of
damages assessed against SunPower in any suit or cause of action alleging
that the use of the Polysilicon infringes any patent or other intellectual
property right of any third party.
|
|
15
|
Taxes.
|
|
15.1
|
Any
tax or other government charge now or in the future levied upon the
production or sale of the Polysilicon in Saudi Arabia in accordance with
this Agreement, shall be paid by
NorSun.
|
|
16
|
Force
Majeure.
|
|
16.1
|
Neither
party shall be responsible for any delay in or failure to carry out his
duties under the Agreement if such a delay or failure results from a
reason of Force Majeure.
|
|
16.2
|
If
the party will be delayed in completing its obligations by Force Majeure
there shall be granted such an extension of time as may be reasonably
required to allow such party to perform so long as the party is using
reasonable efforts to resolve the circumstances constituting a Force
Majeure. If the delay in performance continues beyond 30 days,
the parties shall meet monthly to discuss the event of Force Majeure and
progress by the party claiming Force Majeure in its resolution of such
circumstances and resumption of
performance.
|
|
16.3
|
“Force
Majeure” means any event or circumstance which wholly or partly prevents
or delays the performance of any material obligation arising under this
Agreement, but only if and to the extent (i) such event is not within the
reasonable control, directly or indirectly, of the Party seeking to have
its performance obligation(s) excused thereby, (ii) the Party seeking to
have its performance obligation(s) excused thereby has taken all
reasonable precautions and measures in order to prevent or avoid such
event or mitigate the effect of such event on such Party’s ability to
perform its obligations under this Agreement and which by the exercise of
due diligence such Party could not reasonably have been expected to avoid
and which by the exercise of due diligence it has been unable to overcome,
and (iii) such event is not the direct or indirect result of the
negligence or the failure of, or caused by, the Party seeking to have its
performance obligations excused thereby. The following events
could be considered as Force Majeure: war, riot, disputes between national
labor market organizations directly involving the party claiming Force
Majeure, fire, earthquake, extreme and unusual weather, acts of God, or
any other causes designated Force Majeure by a court of law or arbitrator
appointed in accordance with Section
17.2
below.
|
|
16.4
|
Delay
or failure of the performance of a party's sub-supplier, subcontractor or
lender, or the failure to obtain financing, government permits or license,
shall not create a reason of Force Majeure, unless such reason occurs as a
result of one of the events listed in Section
16.3
above.
|
|
16.5
|
In
the event of Force Majeure the party invoking a Force Majeure event shall
notify the other party in writing thereof within seven (7) days from the
incident in question. In such
|
| notice, the party shall inform, if possible, of the time when performance in accordance with this Agreement will be resumed. |
|
17
|
Choice
of Law.
|
|
17.1
|
The
Agreement is made in, and shall be governed and controlled in all respects
by the laws of the England.
|
|
17.2
|
Any
conflicts arising under this Agreement shall be resolved by arbitration
under the rules of the International Chamber of Commerce (ICC). The
arbitration shall be conducted in English and shall take place in London,
England.
|
|
18
|
Waiver.
|
|
18.1
|
Either
party’s failure to exercise a right or remedy or such party’s acceptance
of a partial or delinquent payment shall not operate as a waiver of any of
such party’s rights or the other party’s obligations under the Agreement
and shall not constitute a waiver of such party’s right to declare an
immediate or a subsequent default.
|
|
19
|
Severability.
|
|
19.1
|
If
one or more of the provisions of this Agreement shall be found, by a court
with jurisdiction, to be illegal, invalid or unenforceable, it shall not
affect the legality, validity or enforceability of any of the remaining
provisions of this Agreement. The parties agree to attempt to
substitute for any illegal, invalid or unenforceable provision a legal,
valid or enforceable provision that achieves to the greatest extent
possible the economic objectives of the illegal, invalid or unenforceable
provision.
|
|
20
|
Attorney
Fees and Costs.
|
|
20.1
|
The
parties shall bear their own expenses incurred in connection with the
negotiation and execution of this Agreement. In the event that
a dispute leads to litigation or arbitration, the prevailing party shall
be entitled to reasonable costs and fees incurred, including attorneys’
fees.
|
|
21
|
Dollars.
|
|
21.1
|
All
references to monetary amounts shall be in U.S.
Dollars.
|
|
22
|
Agreement
Preparation.
|
|
22.1
|
This
Agreement shall be considered for all purposes as prepared through the
joint efforts of the parties and shall not be construed against one party
or the other as a result of the manner in which this Agreement was
negotiated, prepared, drafted or
executed.
|
|
23
|
Assignment.
|
|
23.1
|
Neither
party may assign its rights or obligations under this Agreement without
the consent of the other party.
|
|
24
|
Audit
Rights.
|
|
24.1
|
NorSun
shall to the extent permissible under the NorSun II Offtake Agreement
allow SunPower to exercise the same audits rights for JVCo books and
records (including without limitation all quality assurance records) and
its factories and plants, or such parts thereof that may be relevant for
any Polysilicon quality control or technical specification compliance
test, as NorSun have under the NorSun II Offtake Agreement. Such audit
rights shall, if not otherwise agreed, be exercised upon SunPower’s
request and sole expense either directly by SunPower or by NorSun on
behalf of SunPower.
|
|
SUNPOWER
CORPORATION:
By: /s/
THOMAS WERNER
Print
Name: Thomas Werner
Title: Chief
Executive officer
Date: Jan.
10, 2008
|
NORSUN
AS
By: /s/
JON HINDAR
Print
Name: Jon Hindar
Title:
CEO
Date: 10
January, 2008
|
|
|
EXHIBIT
A
|
|
|
POLYSILICON
SPECIFICATIONS
|
|
|
Exhibit
to detail the poly specs:
|
|
|
PRODUCT
CODE: ________________________
|
|
1.
|
Description
|
|
2.
|
Bulk
& Surface Impurity
Specifications
|
|
3.
|
Size
Specification
|
|
4.
|
Certification
|
|
5.
|
Packaging
and labelling
|
|
|
EXHIBIT
B
|
|
|
PRICES,
PAYMENT, and DELIVERY VOLUME
|
|
Year
|
Price
|
Volume
[expressed
as a fraction of the Initial Plant Output]
|
Expected
volumes MT (2)
[assuming
full production of *** MT per year]
|
|
2010
|
$***/kg
|
***
|
***
|
|
2011
|
$***/kg
|
***
|
***
|
|
2012
|
$***/kg
|
***
|
***
|
|
2013
|
$***/kg
|
***
|
***
|
|
2014
|
$***/kg
|
***
|
***
|
|
2015
|
$***/kg
(1)
|
***
|
***
|
|
2016
|
$***/kg
(1)
|
***
|
***
|
|
2017
|
$***/kg
(1)
|
***
|
***
|
|
2018
|
$***/kg
(1)
|
***
|
***
|
|
2019
|
$***/kg
(1)
|
***
|
***
|
|
|
(1)
Subject to price
adjustments in accordance with section
4.2
|
(2)
The metric tons volume set
forth in column four of the table above is based on the assumption that the
Initial Plant Output will be *** MT per year. This is however only a production
target in the sense that if the Initial Output is more or less than *** MT,
SunPower’s right to purchase and NorSun’s obligation to sell Polysilicon under
this Agreement shall still be *** of all polysilicon produced at the Initial
Plant during the relevant year.
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
|
|
EXHIBIT
C
|
NorSun
Offtake II Agreement
14 of
14
JVCo and
NorSun Confidential
|
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
WAIVER
AGREEMENT
THIS WAIVER AGREEMENT (this
"Agreement") is entered into as of January 18, 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 from time to
time ("Credit Agreement").
NOW, THEREFORE, for valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
|
1.
|
So
long as Borrower deposits funds in a deposit account maintained by Borrow
with Bank (account number *** – the “Cash Collateral Account”) on or
before
|
January
18, 2008, in an amount no less than the amount of all outstanding indebtedness
of Borrower to Bank in connection with the Line of Credit and the Letter of
Credit Line under the Credit Agreement, including the aggregate amount available
to be drawn under Subfeature Letters of Credit and Letters of Credit (with all
such indebtedness, whether contingent or liquidated, referred to as the “Secured
Obligations”), Bank hereby waives, effective as of the occurrence of each such
event, Borrower’s failure to comply with the following covenants set forth in
the Credit Agreement:
|
(a)
|
Section
4.3(d)
. Borrower’s failure to deliver in a timely manner
a certificate of the chief executive officer or chief financial officer of
Borrower that financial statement, delivered under Section 4.3 of the
Credit Agreement were accurate and that there existed no Event of Default
nor any condition, act or event which with the giving of notice or the
passage of time or both would constitute an Event of Default, and with
supporting calculations showing compliance with financial
covenants;
|
|
(b)
|
Section
5.4
. Borrower’s and Third Party Obligors’ guaranteeing
or becoming liable in any way as surety, endorser, accommodation endorser
or otherwise for, or pledging or hypothecating any assets of Borrower or
such Third Party Obligor as security for, any liabilities or obligations
of Borrower’s Subsidiaries, with the principal amount of such
Subsidiaries’ obligations subject hereto exceeding an aggregate of Fifty
Million Dollars ($50,000,000.00) outstanding at any time;
and
|
|
(c)
|
Section
5.5
. Borrower’s entering into an Option Agreement, dated
as of January 10, 2008, with NorSun AS pursuant to which Borrower could
acquire a partial ownership interest in a joint venture company to be
established by NorSun AS and its joint venture partners pursuant to the
Joint Venture Agreement, of the same date, by and among such
parties.
|
|
(d)
|
With
respect to Section 5.4 of the Credit Agreement, Bank acknowledges that
Borrower and Third Party Obligors may continue to enter into guaranties in
excess of the aggregate amount permitted thereunder and Bank agrees to
waive
|
compliance
with Section 5.4 on an ongoing basis with respect to such guaranties so long as
(i) no other Event of Default occurs, and (ii) Borrower continues to maintain
funds in the Cash Collateral Account in the amounts required under Section 2
hereof.
|
2.
|
The
waiver granted by Bank under Section 1(b) above (a) is limited to the
specific items described above as the same existed as of the date hereof,
and (b) shall continue in full force and effect only so long as (i)
Borrower deposits and maintains funds in the Cash Collateral Account
(which Borrower hereby agrees to do) in an amount no less than the amount
of Secured Obligations, or (ii) until such time as such waiver is
superseded by the parties’ agreement to amend the Credit Agreement to
address the question of corporate guaranties, whichever occurs
first. Borrower hereby agrees that, effective as of and after
the date hereof, the Cash Collateral Account shall secure not only the
Letter of Credit Line (and all Letters of Credit issued thereunder), but
also the Line of Credit (and all advances made and Subfeature Letters of
Credit issued thereunder). Section 1.5 of the Credit Agreement
(“Collateral”) and the Security Agreement (Deposit Account) executed in
connection therewith are hereby deemed amended accordingly. In
the event that Bank determines that due to currency fluctuations the
amount on deposit in the Cash Collateral Account falls below 100% of the
amount of the Secured Obligations, Borrower shall, within 5 days after
Bank’s written demand therefor, deposit funds into the Cash Collateral
Account in the amount of such
shortfall.
|
|
3.
|
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
Agreement.
|
|
4.
|
Borrower
hereby remakes all representations and warranties contained in the Credit
Agreement and reaffirms all covenants set forth therein, except as Bank
expressly waives compliance in this Agreement. Borrower further
certifies that as of the date of this Agreement, 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, except as such circumstances as to
which Bank expressly waives compliance in this
Agreement.
|
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
IN WITNESS WHEREOF, the parties hereto
have caused this Agreement to be executed as of the day and year first written
above.
WELLS FARGO BANK,
SUNPOWER
CORPORATION NATIONAL
ASSOCIATION
By:
/s/ EMMANUEL T.
HERNANDEZ
By:
/s/ MATTHEW A.
SERVATIUS
Emmanuel
T.
Hernandez Matthew
A. Servatius
Chief
Financial
Officer
Vice President
2
|
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
In
Madrid, on January 31, 2008
APPEARING
PARTIES
|
(1)
|
SUNPOWER ENERGY SYSTEMS SPAIN,
S.L.
(the
“Contractor”
), with
corporate domicile in Madrid, Paseo de la Castellana
86.
|
|
(2)
|
SOLARGEN PROYECTOS E
INSTALACIONES, S.L.
(the
“Owner”
), with corporate
domicile in C/ Núñez de Balboa, 120, 7º, 28006, Madrid y CIF número
B-84299767.
|
The
entities above mentioned shall be jointly referred as the
“Parties”
.
RECITALS
|
I.
|
Whereas
on December 28, 2007 the Owner and the Contrator entered into a turnkey
agreement (the
“Construction Contract”
)
for the construction of a solar park in Las Casas de Don Pedro (Badajoz),
formed by seventy (70) Solar Facilities having between 115 and 122 kWp of
peak power and 100 kWe at the inverter. The solar park is divided in two
(2) phases, the first phase (the “
Fisrt Phase
”) to be
developed in Site 1 and the second one (the “
Second Phase
”) to be
developed in Site 2.
|
|
II.
|
Whereas
Clause 3 of the Construction Contract sets forth, amongst others, the
following Conditions Precedent for the beginning of works of each
Phase:
|
|
(i)
|
a
letter signed by the agent of the Financial Institutions has been
delivered to the Contractor confirming the availability of the financing
related to the relevant Phase
|
|
(ii)
|
a
copy of all the licences and authorisations specified in Clause 3(1)(ii)
of the Construction Contract necessary for the commencement of the
construction of the relevant Phase has been delivered to the
Contractor
|
|
(iii)
|
the
Contractor and the Owner agree:
(a)
the dimension of
each of the Phases,
(b)
the definition of
Systemic Defect applicable if only Phase 1 of the Solar Park is executed,
(c)
the price of
the perimeter fences and the monitoring system (Scada) of the tracker hubs
(cajas de concentración
de los seguidores)
,
(d)
the increase of the
Contract Price if applicable, arising from to the samples on the Site set
forth in Clause 3(3) and the review of the licences and authorisations
mentioned in section (ii) of Clause 3(1), and
(e)
the Contract Price
for each of the Phases as an exclusive consequence of the abovementioned
items.
|
|
III.
|
Whereas
the Owner has delivered to the Contractor documents set forth in sections
(i) and (ii) of Whereas II above relating to Phase 1 and Parties have
reached an agreement regarding items set forth in section (iii) of Whereas
II above.
|
|
IV.
|
Whereas
in order to formalize the agreement reached by the Parties on items
mentioned in Whereas above, the Parties agree to execute this Contract in
accordance with the following
|
CLAUSES
1. DEFINED
TERMS
All terms
in capital letters not expressly defined in this Contract should have the
meaning they have in the Construction Contract.
2. AMENDMENTS
AND ADDITIONS TO THE CONSTRUCTION CONTRACT
|
(1)
|
Authorizations and
licenses
: The Contractor declares that the Owner has delivered it
all authorizations and licenses mentioned in Clause 3(1)(ii) of the
Construction Contract regarding Phase 1 of the Solar Park (except for
those that are intrinsic to the construction activity and ***) and, in
particular, the following:
|
|
1.
|
Letter
from the Industry, Energy and Environmental Extremadura Ministry dated
January 22, 2008 (sending stamp January 23,
2008).
|
|
2.
|
Decision
of the General Directorate of Industrial and Energetic Planning of the
Industry, Energy and Environmental Extremadura Ministry granting the
condition of installation under the special regime dated September 27,
2007.
|
|
3.
|
Decision
of the General Directorate of Industrial and Energetic Planning of the
Industry, Energy and Environmental Extremadura Ministry regarding
administrative authorization and approval of the execution project dated
December 13, 2007.
|
|
4.
|
Advertisement
in the DOE of the administrative authorization and approval of the
execution project (number 145 dated December 20,
2007).
|
|
5.
|
Evidence
of bank guarantee issued by “Caja de Depósitos de la Junta de Extremadura”
(º70002339).
|
|
6.
|
Bank
Guarantee issued by Caja Cantabria for amount of Euro 3,500,000 dated
August 27, 2007.
|
|
7.
|
Letter
from Iberdrola to Solargen Proyectos e Instalaciones Solares dated
September 7, 2007, regarding the connection
point.
|
|
8.
|
Letter
from Solargen Proyectos e Instalaciones Solares to Iberdrola Distribución
Eléctrica, dated November 17, 2007 (re.: execution Project already
certified).
|
|
9.
|
Letter
from Solargen Proyectos e Instalaciones Solares to Iberdrola Distribución
Eléctrica dated August 28, 2007.
|
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
|
10.
|
Decision
of the General Directorate of Environmental Quality and Evaluation of
Extremadura dated November 20, 2007 by means of which the DIA is
formulated.
|
|
11.
|
Advertisement
in the DOE if the project environmental impact declaration (number 142,
December 13, 2007).
|
|
12.
|
Decision
of the General Directorate of Town Landing of the Public Works Extremadura
Ministry dated December 11, 2007.
|
|
13.
|
Works
license granted by the Municipality of Casas de Don Pedro dated December
12, 2007.
|
|
14.
|
Report
issued by the Development and Infrastructure Service of the Rural
Development and Agriculture Extremadura Ministry dated January 21,
2008.
|
|
15.
|
Certificate
issued by the Municipality of Casas de Don Pedro dated January 17,
2008.
|
|
16.
|
Reporto
n measures to reduce arqueological impact issued by the Culture and
Tourism Extremadura Ministry dated August 23,
2007.
|
|
17.
|
Due
diligence report on the project issued by Ramon & Cajal on January 30,
2008.
|
|
18.
|
Archeological
search draft report issued by TERA dated January 22,
2008.
|
|
19.
|
Letter
from Ramón & Cajal to Solargen Proyectos e Instalaciones Solares dated
January 31, 2008.
|
|
20.
|
Letter
issued by the Technical Advisor to Solargen Proyectos e Instalaciones
Solares dated January 31, 2008.
|
|
|
The
Contractor declares to agree with the contents of the abovementioned
documents being obliged to carry out workscorresponding to Phase 1
according to the amendment to the original project of such Phase delivered
to the Contractor by the Owner.
|
Furthermore,
the Contractor declares that it is not necessary to amend the Contract Price for
Phase 1 on the basis of the contents of the abovementioned
documents.
|
(2)
|
Perimeter fences and
the monitoring system
: The Parties agree to increase the Contract
Price by Euro *** euros. Such amount includes the price asked by the
Contractor for the perimeter fences (Euro *** euros) and the monitoring
system (Scada) of the tracker hubs (Euro *** euros) for both Phases of the
solar Park.
|
For the
seek of clarity, the Contractor delcares that the inlcusion of the perimeter
fences and the monitoring system in the Scope of the Work do not imply any
amendment except for the Contract Price increase mentioned in the paragraph
above (in particular, it does not imply any amendmet of terms set forth in the
Construction Contract).
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
|
(3)
|
Site
: The
Contractor declares that it has carried out the samples in Site 1 and Site
2 refered in Clause 3(3) of the Construction Contract and that it has
received from the Owner and that it agrees on the content of the final
geotechnic reports on Site 1 and Site 2. Based on the above, statements
contained in Clause 3(3) of the Construction Contract will be effective as
of today for Site 1 and Site 2. Furthermore, for purposes of Clause 3 (1)
(iii) of the Construction Contract, the Contractor declares that as of
today Site 1 is entirely available and accessible for the commencement of
the Work of that Site.
|
Notwithstanding
the above, the Owner and the Contractor have agreed that Site conditions arising
from samples imply additional Works to be carried out by the Contractor and,
therefore, an increase of the Contract Price by Euro ***.
|
(4)
|
Phases dimensión and
definition of Systemic Defect
Dimensión de las Fases
y definición de Defecto Sistémico
: The Parties have agreed that the
Solar Park Phases will have the following size: (i) Phase 1, 40 Solar
Facilities to be installed on Site 1, and (ii) Phase 2 (in case conditions
set forth in the Construction Contract for this Phase being installed are
fulfilled) 30 Solar Facilities to be installed on Site
2.
|
|
|
On
the basis of the size of each Phase, the definition of Systemic Defect in
the Construction Contract is replace by the
following:
|
|
|
Systemic Defect:
is an
operational failure of the Solar Facilities of the Solar Park occurring
during the Production Guarantee Period that (i) is not caused by
non-conforming performance of the Work by the Contractor under this
Contract, the Technical Specifications, the Construction Model or the
regulations applicable to the Work (in accordance with the terms of this
Contract), and (ii) that:
|
|
(a)
|
is
the same failure or is a failure that affects, at least: 0.5% of the solar
modules, 7 or more inverters or their corresponding peripheral systems, 7
or more trackers, or 4 or more transformers (including breakers and
switches) supplied by the same manufacturer for the Solar Park.
In case only Phase 1
is executed according to Clause 3(2),the failure should affect at least:
0.5% of the solar modules, 4 or more inverters or their corresponding
peripheral systems, 4 or more trackers, or 4 or more transformers
(including breakers and switches) supplied by the same manufacturer for
the Solar Park
; or
|
|
(b)
|
the
relevant supplier or well-known independent third party in the solar
industry reports that at least 1% of worldwide production of the
corresponding model of solar module, inverter, tracker or transformer is
affected by the same operational failure and advises replacement thereof
(in which event the Owner must receive proof in the form of delivery of a
document signed by the manufacturer or of a report from an
independent third party which confirms the existence of said systemic
failure with reference to the model and series of the affected
equipment).
|
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
|
(5)
|
Based
on the above, the Parties agree that the Contract Price amounts up to EURO
*** (Euro ***€). References to Contract Price contained in Clause
4.1(1) of
the Construction Contract shall be deemed as references made to this
amount.
|
The
Contract Price is divided between the Phases as follows: Euro
*** for Phase 1 of the
Solar Park, and Euro *** for Phase 2 of the Solar Park (in case Phase 2 is
executed, without taking into account the price increase for Phase 2 that may
arise from licenses review according to Clause 3(1)(ii) of the Construction
Contract).
3. CONDITIONS
PRECEDENT FULFILLMENT
|
(1)
|
The
Contractor and the Owner declare and accept, for all purposes contained in
the Construction Contract, that Conditions Precedent set forth in sections
(i) to (iv) of Clause 3(1) regarding commencement of Works of Phase 1 of
the Solar Park have been fulfilled. Based on the above, commencement of
the Works of Phase 1 is only subject to the fulfillment of section (v) of
the abovementioned Clause within the term set forth in the Construction
Contract.
|
|
(2)
|
Likewise,
the Contractor and the Owner declare and accept, regarding Conditions
Precedent for the commencement of the Works of Pahse 2, that they have
already agreed on the price of the perimeter fence and the monitoring
system and the cost arising for samples of Site 2. Therefore, without
perjudice of the remaining Conditions Precedent for the commencement of
the Works being fullfiled (i.e. conditions set forth in sections (i),
(ii), (iii) and (v)), the Contractor accepts that no amendment to the
Contract Price for Phase 2 should apply in any event for items regulated
in section (iv) of Clause 3(1).
|
4. CONSTRUCTION
CONTRACT VALIDITY
The
Construction Contract will remain in full force and effect except where
expressly amended according to this Contract.
5. LAW
AND JURISDICTION
|
(1)
|
This
Contract and all issues that may arise between the Parties in relation
hereto or in connection herewith shall be exclusively governed by
generally applicable Spanish legislation, to which the Contractor and the
Owner expressly submit.
|
|
(2)
|
The
Parties agree that any litigation, dispute, issue or claim resulting from
the performance or interpretation of this Contract, or directly or
indirectly related hereto, shall be definitively resolved by arbitration
at law before the Civil and Commercial Court of Arbitration
(Corte Civil y Mercantil de
Arbitraje (CIMA))
of Madrid in accordance with the Procedural
Regulations thereof.
|
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
|
(3)
|
The
Arbitral Tribunal shall be composed of three (3) arbitrators appointed
from CIMA’s list of arbitrators: one by the Contractor and the other by
the Owner, and the two arbitrators so appointed shall appoint the third
one, who shall act as chairman of the arbitral tribunal. Should the two
first arbitrators fail to reach an agreement on the appointment of the
third arbitrator within ten (10) Business Days following the date of
acceptance of office by the second arbitrator, such arbitrator shall be
appointed by CIMA.
|
|
(4)
|
The
arbitration shall be conducted, and the award shall be rendered, in Madrid
(Spain) and in the Spanish
language.
|
|
(5)
|
The
Parties therefore expressly waive any other jurisdiction to which they may
be entitled under Law, and commit to abide by and submit to the
arbitration award that may be
rendered.
|
|
(6)
|
The
Parties expressly waive any other jurisdiction that may apply and submit
to the jurisdiction of the Courts and Tribunals of the city of Madrid for
any litigation, dispute or claim that by mandate of law may not be
resolved by, or submitted to, the arbitration provided under this Clause
or, if applicable, for the formalization of the arbitration or the
enforcement of the arbitral award.
|
In
witness whereof, the Parties execute this Contract in two (2) counterparts, each
of them being an original and having the same effect, in the place and on the
date first set forth above.
____________________________
SOLARGEN
PROYECTOS E INSTALACIONES SOLARES, S.L.
Signed
Rafael Sánchez Castillo
_____________________________
SUNPOWER
ENERGY SYSTEMS SPAIN, S.L.
Signed D.
Marco Antonio Northland
6
In
Madrid, on February 8, 2008
APPEARING
PARTIES
|
(1)
|
SUNPOWER ENERGY SYSTEMS SPAIN,
S.L.
(the
“Contractor”
), with
corporate domicile in Madrid, Paseo de la Castellana
86.
|
|
(2)
|
SOLARGEN PROYECTOS E
INSTALACIONES, S.L.
(the
“Owner”
), with corporate
domicile in C/ Núñez de Balboa, 120, 7º, 28006, Madrid y CIF número
B-84299767.
|
The
entities above mentioned shall be jointly referred as the
“Parties”
.
RECITALS
|
I.
|
Whereas
on December 28, 2007 the Owner and the Contrator entered into a turnkey
agreement (the
“Construction Contract”
)
for the construction of a solar park in Las Casas de Don Pedro (Badajoz),
formed by seventy (70) Solar Facilities having between 115 and 122 kWp of
peak power and 100 kWe at the inverter. The solar park is divided in two
(2) phases, the first phase (the “
Fisrt Phase
”) to be
developed in Site 1 and the second one (the “
Second Phase
”) to be
developed in Site 2.
|
|
II.
|
Whereas
on January 31, 2008 the Contractor and the Owner entered into a contract
amending the Construction Contract by virtue of which Conditions Precedent
set forth in Clause 3.1 sections (i), (ii), (iii) and (iv), were declared
fulfilled.
|
|
III.
|
Whereas
according to Clause 3 of the Construction Contract, within the period
between the sixth (6
th
)
and ninth (9
th
)
Business Day following the date on which the conditions established in (i)
to (iv) are met, the Owner should pay the Contractor the amount set forth
in Clause 4.2(i) for Phase I in return for the simultaneous granting by
the Contractor of the corresponding Performance Bond for such
Phase.
|
|
IV.
|
Whereas
the Parties have agreed to extend the abovementioned period and to such
effects the Parties agree to execute this Contract in accordance with the
following
|
CLAUSES
1. DEFINED
TERMS
All terms
in capital letters not expressly defined in this Contract should have the
meaning they have in the Construction Contract.
2. AMENDMENTS
TO THE CONSTRUCTION CONTRACT
The
Parties agree to extend the period set forth in Clause 3 of the Construction
Contract for the payment of the amount set forth in Clause 4.2(i) for Phase I in
return for the simultaneous granting by the Contractor of the corresponding
Performance Bond for such Phase so that such payment may be done until the
twelfth (12
th
)
Business Day following the date on which the conditions established in (i) to
(iv) of Clause 3.1 were met, that is until Monday February 18,
2008.
3. CONSTRUCTION
CONTRACT VALIDITY
The
Construction Contract will remain in full force and effect except where
expressly amended according to this Contract. In particular, this Contract does
not amend the execution dates contained in the Implementation Schedule nor may
justify any delay in the performance by the Contarctor of its obligations under
the Construction Contract.
5. LAW
AND JURISDICTION
|
(1)
|
This
Contract and all issues that may arise between the Parties in relation
hereto or in connection herewith shall be exclusively governed by
generally applicable Spanish legislation, to which the Contractor and the
Owner expressly submit.
|
|
(2)
|
The
Parties agree that any litigation, dispute, issue or claim resulting from
the performance or interpretation of this Contract, or directly or
indirectly related hereto, shall be definitively resolved by arbitration
at law before the Civil and Commercial Court of Arbitration
(Corte Civil y Mercantil de
Arbitraje (CIMA))
of Madrid in accordance with the Procedural
Regulations thereof.
|
|
(3)
|
The
Arbitral Tribunal shall be composed of three (3) arbitrators appointed
from CIMA’s list of arbitrators: one by the Contractor and the other by
the Owner, and the two arbitrators so appointed shall appoint the third
one, who shall act as chairman of the arbitral tribunal. Should the two
first arbitrators fail to reach an agreement on the appointment of the
third arbitrator within ten (10) Business Days following the date of
acceptance of office by the second arbitrator, such arbitrator shall be
appointed by CIMA.
|
|
(4)
|
The
arbitration shall be conducted, and the award shall be rendered, in Madrid
(Spain) and in the Spanish
language.
|
|
(5)
|
The
Parties therefore expressly waive any other jurisdiction to which they may
be entitled under Law, and commit to abide by and submit to the
arbitration award that may be
rendered.
|
|
(6)
|
The
Parties expressly waive any other jurisdiction that may apply and submit
to the jurisdiction of the Courts and Tribunals of the city of Madrid for
any litigation, dispute or claim that by mandate of law may not be
resolved by, or submitted to, the arbitration provided under this Clause
or, if applicable, for the formalization of the arbitration or the
enforcement of the arbitral award.
|
In
witness whereof, the Parties execute this Contract in two (2) counterparts, each
of them being an original and having the same effect, in the place and on the
date first set forth above.
____________________________
SOLARGEN
PROYECTOS E INSTALACIONES SOLARES, S.L.
Signed
Rafael Sánchez Castillo
_____________________________
SUNPOWER
ENERGY SYSTEMS SPAIN, S.L.
Signed D.
Marco Antonio Northland
|
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
POLY
SILICON SUPPLY AGREEMENT
Jupiter
CORPORATION LTD, a Hong Kong corporation with its principal place of business at
Rm 1206-7 12F, New Victory House, 93-103 Wing Lok Street, Central, Hong Kong
(“Jupiter”), and SunPower Corporation, a United States corporation with its
principal place of business at 3939 North First Street, San Jose, California
95134 (“SunPower”) hereby enter into this Long-Term Supply Agreement (the
“Agreement”) effective as of the date of SunPower’s execution of this Agreement
(the “Effective Date”).
WHEREAS,
SunPower desires to purchase and Jupiter agrees to sell Products (herein
defined) pursuant to the terms and conditions of this Agreement.
NOW,
THEREFORE, the parties agree as follows:
1.
Products
. As
used in this Agreement, “Product” or “Products” shall mean the polycrystalline
silicon manufactured by Jupiter. The specifications for the Product
will be mutually agreed by the parties from time to time (the “Jupiter Product
Specifications”).
2.
Price and
Quantity; Purchase Orders
.
|
|
(a)
|
Price
and Quantity
.
For
the time period January 1, 2010 through December 31, 2016, Jupiter agrees
to sell SunPower Products pursuant to the terms and conditions of this
Agreement. The price and quantity of Products to be sold to
SunPower is as set forth in
Exhibit
A
. Unit prices for shipment of Product are FCA Jupiter,
China (Incoterms 2000). Subject only to the price adjustments
set forth in Section 3, these prices are fixed for the term of this
Agreement. SunPower may require an audit of Jupiter’s
supporting documentation validating the price adjustments permitted under
Exhibit
B
. Any such audit shall be conducted by a qualified
independent third party who shall be granted access, under a
confidentiality agreement, to all relevant documentation it reasonably
requests for such verification. Any such audit shall be paid
for by SunPower.
|
|
|
(b)
|
SunPower
Purchase Discretion
. Notwithstanding anything to the
contrary in this Agreement, SunPower assumes no obligation to purchase any
Products under this Agreement unless and until SunPower has confirmed, in
its sole and absolute discretion, that the Products meet both SunPower’s
then current quality standards for the Products (including but not limited
to satisfying “N” type ingot manufacturing requirements), and that the
Products meet the technical specification criteria agreed to by
SunPower. SunPower may modify its quality standards from time
to time in its sole and absolute discretion, and may apply such revised
standards to any future purchases of Products
hereunder.
|
|
|
(c)
|
Purchase
Orders
. The parties acknowledge their standard practice
in which SunPower, after establishing that the Products have met its then
applicable quality standards and the technical specification criteria
agreed to by SunPower, may periodically issue purchase orders, and
occasionally change orders thereto, for Products requesting specified
quantities, delivery dates and delivery
locations.
|
|
|
(d)
|
Right
of First Refusal
.
In
the event Jupiter makes commercially available any quantifies of Products
in addition to the quantities described on
Exhibit A
for the
periods specified, Jupiter shall provide written notice to SunPower of
such availability and the price applicable thereto prior to offering such
Products to third parties. SunPower shall have fourteen (14)
days to notify Jupiter in writing of its decision whether to accept the
offer for all or a portion of such additional
Products.
|
3.
Price
Adjustments
. Jupiter may adjust prices on an annual
basis to account for changes in Jupiter’s cost structure relative to the
manufacture of the Products, including changes relating to electricity, raw
materials and the Employment Cost Index. On January 1 of each year
beginning with January 1, 2011, prices may be increased pursuant to the
mechanism set forth in
Exhibit
B
.
4.
Firm
Commitment Agreement
. This Agreement is a firm commitment
agreement such that SunPower is required to pay for the contracted volume of
Products per year over a 7-year period at the prices set forth in
Exhibit A
, subject to the
adjustments described in Section 4 above; provided, however, that
notwithstanding the foregoing SunPower shall in no event be required to purchase
Products which have not been determined by SunPower to satisfy its quality
standards or the agreed technical specifications pursuant to Section
2(b). Subject to the foregoing, in the event that SunPower fails to
order and take delivery of its contracted volume in a given year, Jupiter shall
invoice SunPower for the differential at full contract price and SunPower will
pay the same within 30 days of invoice date. SunPower specifically
acknowledges and accepts that it will be liable for the full purchase price of
volume differential between the quantity ordered and the contracted volume with
respect to Products which SunPower has determined satisfy its quality standards
and the agreed technical specifications pursuant to Section 2(b).
In the
event that Jupiter fails to deliver Products pursuant to Section 2(a), and such
failure is not triggered by a Force Majeure Event or delay in the completion of
the NEW Manufacturing Facility described in Section 8, SunPower has the right to
purchase the relevant quantity of substitute polysilicon from any third party
provider and Jupiter shall immediately reimburse SunPower for the price
difference, if any, between the price applicable to the Products Jupiter failed
to deliver and the price SunPower has paid the said third party
provider.
5.
Payment
. Payment
terms are 6 months in advance of scheduled product shipment for shipments during
2010 and 2011, and net 30 days following the date of the invoice issued upon
shipment from 2012. Finance charges of ***% per month (***% per
annum) may be assessed on payment past due from the payment due date to the date
payment is received. Failure to pay invoices when due or finance
charges when assessed may result in delayed or cancelled
shipments. No unauthorized deductions from invoices are
permitted.
6.
Title and
Risk of Loss; Packaging; Late Delivery Charges
.
(a)
Title; Risk of
Loss
. SunPower shall purchase the Products from Jupiter FCA
Jupiter (Incoterms 2000) with title and risk of loss with respect to all
Products passing to SunPower when the goods have been delivered to the carrier
at Jupiter, China.
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
(b)
Packaging
.
Jupiter shall bear all costs associated with packaging or storing the Products
until delivery to SunPower pursuant to the delivery terms specified in Section
6(a). All Products shall be packaged, marked, and otherwise prepared in
accordance with good commercial practices to reduce the risk of damage and to be
packaged in the smallest commercially acceptable form in order to enable
SunPower to obtain the lowest shipping rates possible (based on volume metric
dimensions) and in accordance with all applicable federal, state and local
packaging and transportation laws and regulations. An itemized packing list
shall accompany each shipment. Jupiter shall establish reasonable
control routines in order to ensure punctual delivery of the Products at the
agreed time and without any defects or non-conformities. A delivery
certificate shall be issued by Jupiter to SunPower for each shipment of
Products. A shipment notice shall be submitted from Jupiter to
SunPower by telefax or other means of communications, at the latest on the
shipment date, including:
(i)
Purchase
Order No.
(ii)
Brief
description of Products
(iii)
Invoice
amount
(iv)
Number
of packages
(v)
Gross
weight (total) kilos
(vi)
Packing
list describing in detail the content of each package
(c)
Late Delivery
Charges
. If Products are not delivered within six (6) weeks
following the requested delivery date, Jupiter will pay SunPower liquidated
damages at a rate of *** percent (***%) of the gross purchase price
applicable
to such
shipment per week thereafter, up to a maximum of *** percent (***%). The
foregoing liquidated damages address late delivery shipments only and are
independent of Jupiter’s liability (if any), and SunPower’s corresponding
ability to recover damages, for Jupiter’s failure to deliver its commitments
pursuant to this Agreement (including pursuant to Section 4).
7.
Term
. The
term of this Agreement shall be from the Effective Date through December 31,
2016 (the “Initial Term”). The Agreement may not be terminated during
the Initial Term, except as expressly set forth in Section 10. Following the
Initial Term Jupiter and SunPower may renew for the Agreement
upon mutual agreement.
8.
NEW
Manufacturing
Facility
. SunPower acknowledges that Jupiter will be building its
manufacturing facilities (the “NEW Manufacturing Facility”) in order to produce
the Products to be supplied under this Agreement. SunPower acknowledges the
possibility of delays in completing the manufacturing facility and expressly
agrees that Jupiter SHALL HAVE NO LIABILITY TO SUNPOWER FOR ANY SUCH DELAY
(without limiting SunPower’s ability to terminate this Agreement for such delay
to the extent permitted by Section 9(a)).
Jupiter
agrees that the NEW Manufacturing Facility shall be subject to bi-annual
inspections by SunPower. Said inspections shall be subject to
Jupiter’s confidentiality and security policies for site visits. Any fees and
costs associated with such inspection shall be borne by SunPower.
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
9.
Termination
. The
basis and circumstances under which the parties can terminate this Agreement
prior to the expiration of the Initial Term of this Agreement is expressly
limited to the terms of this Section 9.
(a)
Termination by
SunPower
. SunPower may, at its option, terminate this
Agreement only upon the occurrence of all of the following
events: (i)(1) once production of Products has commenced at the NEW
Manufacturing Facility, a failure by Jupiter to deliver the
contracted amount of Products properly ordered by SunPower, (2) other material
breach of this Agreement by Jupiter, or (3) Jupiter’s failure to
complete the NEW Manufacturing Facility by July 1, 2010 (provided that
SunPower’s sole remedy for such failure shall be the right to terminate this
Agreement without further liability or obligation on the part of either party),
(ii) service of written notice of such failure to Jupiter, and (iii)
a failure by Jupiter to cure such delivery deficiency or material
breach (in the case of subclause (1) and (2) above) within ninety (90) days of
receipt of the written notice of such event. If Jupiter rectifies any
such failure of delivery or material breach within such period (in the case of
subclause (1) and (2) above), then Jupiter’s deficiency of
performance shall be deemed cured and SunPower shall not be entitled to
terminate this Agreement. In the event of a termination pursuant to
subclause (a)(i)(1) or (2) above, in addition to any other damages that can be
established by SunPower, Jupiter shall be liable to SunPower for the
cost of substitute polysilicon pursuant to Section 4 for the full quantity of
Products set forth on
Exhibit
A
and not delivered by Jupiter as of the date of
termination.
(b)
Termination by
Jupiter
. Jupiter may, at its option, terminate this
Agreement only upon the occurrence of all of the following
events: (i) in the event of a failure to pay or other material breach
of this Agreement by SunPower, (ii) service of written notice of such failure to
SunPower, and (iii) a failure by SunPower to cure such breach within ninety (90)
days after receipt of written notice of such breach. If SunPower
rectifies any such payment failure or material breach within such period, then
SunPower’s deficiency of performance shall be deemed cured and SunPower shall
not be entitled to terminate this Agreement. In the event of a
termination due to SunPower’s breach, in addition to any other damages that can
be established by Jupiter, SunPower shall be liable to Jupiter for
the purchase price of Products which SunPower has previously determined satisfy
its quality standards and the agreed technical specifications pursuant to
Section 2(b).
10.
Confidentiality
. The
parties acknowledge and agree that the terms of this Agreement and certain
information exchanged between them pertaining to this Agreement, including
information regarding research, technology, product developments, marketing
plans or conditions, products, business strategies, and the like, constitutes
“Confidential Information” of the party disclosing the
information. The purpose of the exchange of the Confidential
Information” is to allow the parties to meet their obligations and
responsibilities under this Agreement. During the term of this
Agreement, and for a period of 5 years following its termination or expiration,
except as required by applicable law, regulation or rules of any securities
exchange, the party receiving any Confidential Information, and its employees,
attorneys, financial advisors, officers, directors and shareholders who shall
receive such Confidential Information shall not, except with the prior written
consent of the disclosing party, use, divulge, disclose or communicate, to any
person, firm, corporation or entity, in any manner whatsoever, the terms of this
Agreement
or any
Confidential Information of the disclosing party; provided, however, that each
party may use, divulge, disclose or communicate the terms of this Agreement or
Confidential Information of the disclosing party to Affiliates (as defined in
Section 24) undertake to keep such information strictly confidential in
accordance with this Section 10 and such Affiliates have a “need to
know”. The parties will be liable for any breach of this Section 10
by any of their respective Affiliates. Each party further agrees to
use the same degree of care to avoid publication or dissemination of the
Confidential Information disclosed to such party under this Agreement as it
employs with respect to its own Confidential Information, but at all times shall
use at least reasonable care to protect against
disclosure. Confidential Information does not and shall not include
information that:
(a)
Was
already known to the receiving party at the time such information is disclosed
by the other party;
(b)
Was or
became publicly known through no wrongful act of the receiving
party;
(c)
Was
rightfully received from a third party without restriction;
(d)
Was
independently developed by the receiving party;
(e)
Was
approved for release by written authorization of the party disclosing such
information under this Agreement; or
(f)
was
required by legal or financial reporting purposes to be disclosed; provided,
however, that the party being required to disclose shall, if circumstances
permit, provide advanced notice to the other party and shall allow the other
party a reasonable opportunity to oppose such disclosure, if
appropriate.
11.
Limited
Warranty
. Jupiter warrants that the Products will be
free from defects and conform to the applicable technical specifications,
provided that Jupiter is notified of any defects or non-conformity within thirty
(30) days after the relevant Products has arrived at the designated delivery
destination, and that the defect or non-conformity is shown to be due to
Jupiter’s faulty design, workmanship, material or packaging. In the event of any
warranty claims, SunPower shall notify Jupiter whereupon Jupiter shall have the
right to undertake its own inspection. .
12.
Warranty
Disclaimer
. THIS LIMITED WARRANTY IS IN LIEU OF ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, SAID WARRANTIES BEING
EXPRESSLY DISCLAIMED.
13.
Limited
Remedy
. If any Products fail to conform to this
warranty, then Jupiter will, at SunPower’s option, either refund or replace such
Products. For valid warranty claims all associated shipping and
return costs shall be paid by Jupiter.
14.
Damages
Limitation
. Jupiter SHALL NOT BE LIABLE FOR ANY LOSS, DAMAGE,
OR INJURY RESULTING FROM DELAY IN DELIVERY OF THE PRODUCTS, OR FOR ANY FAILURE
TO PERFORM WHICH IS DUE TO A FORCE MAJEURE EVENT (AS DEFINED IN SECTION
18). IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY
INCIDENTAL,
CONSEQUENTIAL,
OR SPECIAL DAMAGES, INCLUDING WITHOUT LIMITATION LOST REVENUES AND PROFITS, EVEN
IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THESE
LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF THE
LIMITED REMEDY SET FORTH ABOVE.
15.
Patents
. If
any suit is brought against SunPower for infringement of any United States
Letters Patent alleging that the Products or Jupiter’s methods of
manufacturing them infringe any United States Letters Patent, Jupiter
shall, at its own expense, defend and control the suit against these allegations
only, and shall pay any award of damages assessed against SunPower in the suit
to the extent only that the damages are awarded in connection specifically with
the alleged infringement, provided that SunPower gives Jupiter prompt
notice in writing of the institution of the suit and, to the full extent of
SunPower’s power to do so, SunPower permits Jupiter to defend and
control the suit against these allegations. The above fully expresses
SunPower’s exclusive remedy and Jupiter’s sole responsibility with respect to
infringement of any patent by the Products, and Jupiter EXPRESSLY DISCLAIMS ANY
OTHER WRITTEN OR UNWRITTEN, EXPRESS OR IMPLIED WARRANTY AGAINST INFRINGEMENT
with respect to the Products. In no case shall Jupiter be liable to
defend or pay any award of damages assessed against SunPower to the extent any
suit or cause of action alleges that the nature of SunPower’s use of the
Products (or the use of the Products by SunPower’s customers) infringes any
patent.
16.
Taxes
. Any
tax or other government charge now or in the future levied upon the production,
sale, use or shipment of the Products (except Jupiter’s income tax obligations)
may, at Jupiter’s option, be added to the purchase price.
17.
Fair
Labor Standards Act
. Jupiter hereby certifies that the
Products shall be produced in compliance with the Fair Labor Standards Act, as
amended, and of regulations and orders of the United States Department of Labor
issued under that Act.
18.
Force
Majeure
. Neither party shall be liable for delays or
failures in performance of its obligations hereunder arising out of or resulting
from acts of God, acts of the other party, acts of the government or the public
enemy, fire, flood, epidemics, quarantine restrictions, strikes, freight
embargoes, severe weather, equipment breakage or default of suppliers due to any
of such causes (each a “Force Majeure Event”). In the event of any such delay of
an affected party’s performance, the other party shall honor its obligations
hereunder as soon as the affected party is able to perform.
19.
Choice of
Law
. The Agreement is made in, and shall be governed and
controlled in all respects by the laws of the UNITED KINGDOM (UK) (specifically
disclaiming the U.N. Convention Contracts for the International Sale of Goods)
and all disputes, including interpretation, enforceability, validity, and
construction, shall be determined under the law of the United Kingdom (UK),
without regard to any conflict of law provisions.
20.
Choice of
Forum
. The parties submit to the exclusive jurisdiction of the
UNITED KINGDOM (UK) for all disputes arising, directly or indirectly, under this
Agreement.
21.
Waiver
. Either
party’s failure to exercise a right or remedy or such party’s acceptance of a
partial or delinquent payment shall not operate as a waiver of any of such
party’s rights or the other party’s obligations under the Agreement and shall
not constitute a waiver of such party’s right to declare an immediate or a
subsequent default.
22.
Severability
. If
one or more of the provisions of this Agreement shall be found, by a court with
jurisdiction, to be illegal, invalid or unenforceable, it shall not affect the
legality, validity or enforceability of any of the remaining provisions of this
Agreement. The parties agree to attempt to substitute for any
illegal, invalid or unenforceable provision a legal, valid or enforceable
provision that achieves to the greatest extent possible the economic objectives
of the illegal, invalid or unenforceable provision.
23.
Integration
. The
Agreement constitutes the entire understanding between the parties with respect
to the subject matter of the Agreement and supersedes any prior discussions,
negotiations, agreements, memoranda of understanding and the
like. Modifications to the Agreement may be made only in writing and
signed by each party.
24.
Assignments
. No
assignment of the Agreement or of any right or obligation under the Agreement
shall be made by either party without the prior written consent of the other
party, said consent shall not be unreasonably withheld; provided, however, that
each party may assign this Agreement without any such consent to its Affiliates
or in connection with a merger, acquisition, change of control or sale of
substantially all of the assets of the assigning party. As used
herein, an “Affiliate” of a party means any other party controlling, controlled
by, or under common control with, such party. In the event of a
proper assignment, the Agreement shall be binding upon and inure to the benefit
of the assigning party’s successors and assigns.
25.
Attorney
Fees and Costs
. In the event of either party’s
enforcement of any term or condition in the Agreement, the prevailing party
shall be entitled to recover from the non-prevailing party all costs, including
attorney fees, incurred by the prevailing party in connection with such
enforcement action.
26.
Dollars
. All
references to monetary amounts shall be in U.S. Dollars.
27.
Agreement
Preparation
. This Agreement shall be considered for all
purposes as prepared through the joint efforts of the parties and shall not be
construed against one party or the other as a result of the manner in which this
Agreement was negotiated, prepared, drafted or executed.
|
SUNPOWER:
SUNPOWER
CORPORATION.
3939
NORTH FIRST STREET,
SAN
JOSE,
CALIFORNIA
95134.
UNITED
STATES (USA).
By: /s/
THOMAS H. WERNER
Print
Name: Thomas H. Werner
Title: CEO
Date: 8
th
FEBRUARY 2008
|
JUPITER:
JUPITER
CORPORATION LTD.
RM
1206-7 12F, NEW VICTORY HOUSE.
93-103
WING LOK STREET.
CENTRAL.
HONG
KONG (HK).
By: /s/
I. S. SOHAL
Print
Name: I. S. Sohal
Title: CEO
Date: 8
th
FEBRUARY 2008
|
EXHIBIT
A
POLYSILICON
ANTICIPATED DELIVERY SCHEDULE AND PRICING
Start of
January –
2010 ***mt $***/kilogram
2011 ***mt $***/kilogram
2012 ***mt $***/kilogram
2013 ***mt $***/kilogram
2014 ***mt $***/kilogram
2015 ***mt $***/kilogram
2016 ***mt $***/kilogram
*** CONFIDENTIAL MATERIAL REDACTED AND
SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
EXHIBIT
B
Electrical
Costs
:
No price
adjustments will be made for increases in electrical costs for 2010 and
2011. Annual price adjustments for 2012 onwards will be based solely
on *** and negotiated through good faith discussions 6 months prior to the start
of each such year.
Labor Cost
Inflation
:
No price
adjustments will be made for increases in labor costs for 2010 and
2011. Annual price adjustments for 2012 onwards will be based solely
on *** and negotiated through good faith discussions 6 months prior to the start
of each such year.
Raw Material Cost
Inflation
:
No price
adjustments will be made for increases in raw material costs for 2010 and
2011. Annual price adjustments for 2012 onwards will be based solely
on *** and negotiated through good faith discussions 6 months prior to the start
of each such year.
_______________________________________________________________________
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
10
|
CONFIDENTIAL
TREATMENT REQUESTED
--
CONFIDENTIAL
PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
|
POLY
SILICON SUPPLY AGREEMENT
Jupiter
CORPORATION LTD, a Hong Kong corporation with its principal place of business at
Rm 1206-7 12F, New Victory House, 93-103 Wing Lok Street, Central, Hong Kong
(“Jupiter”), and SunPower Corporation, a United States corporation with its
principal place of business at 3939 North First Street, San Jose, California
95134 (“SunPower”) hereby enter into this Long-Term Supply Agreement (the
“Agreement”) effective as of the date of SunPower’s execution of this Agreement
(the “Effective Date”).
WHEREAS,
SunPower desires to purchase and Jupiter agrees to sell Products (herein
defined) pursuant to the terms and conditions of this Agreement.
NOW,
THEREFORE, the parties agree as follows:
1.
Products
. As
used in this Agreement, “Product” or “Products” shall mean the polycrystalline
silicon manufactured by Jupiter. The specifications for the Product
will be mutually agreed by the parties from time to time (the “Jupiter Product
Specifications”).
2.
Price and
Quantity; Purchase Orders
.
|
|
(a)
|
Price
and Quantity
.
For
the time period January 1, 2010 through December 31, 2016, Jupiter agrees
to sell SunPower Products pursuant to the terms and conditions of this
Agreement. The price and quantity of Products to be sold to
SunPower is as set forth in
Exhibit
A
. Unit prices for shipment of Product are FCA Jupiter,
China (Incoterms 2000). Subject only to the price adjustments
set forth in Section 3, these prices are fixed for the term of this
Agreement. SunPower may require an audit of Jupiter’s
supporting documentation validating the price adjustments permitted under
Exhibit
B
. Any such audit shall be conducted by a qualified
independent third party who shall be granted access, under a
confidentiality agreement, to all relevant documentation it reasonably
requests for such verification. Any such audit shall be paid
for by SunPower.
|
|
|
(b)
|
SunPower
Purchase Discretion
. Notwithstanding anything to the
contrary in this Agreement, SunPower assumes no obligation to purchase any
Products under this Agreement unless and until SunPower has confirmed, in
its sole and absolute discretion, that the Products meet both SunPower’s
then current quality standards for the Products (including but not limited
to satisfying “N” type ingot manufacturing requirements), and that the
Products meet the technical specification criteria agreed to by
SunPower. SunPower may modify its quality standards from time
to time in its sole and absolute discretion, and may apply such revised
standards to any future purchases of Products
hereunder.
|
|
|
(c)
|
Purchase
Orders
. The parties acknowledge their standard practice
in which SunPower, after establishing that the Products have met its then
applicable quality standards and the technical specification criteria
agreed to by SunPower, may periodically issue purchase orders, and
occasionally change orders thereto, for Products requesting specified
quantities, delivery dates and delivery
locations.
|
|
|
(d)
|
Right
of First Refusal
.
In
the event Jupiter makes commercially available any quantifies of Products
in addition to the quantities described on
Exhibit A
for the
periods specified, Jupiter shall provide written notice to SunPower of
such availability and the price applicable thereto prior to offering such
Products to third parties. SunPower shall have fourteen (14)
days to notify Jupiter in writing of its decision whether to accept the
offer for all or a portion of such additional
Products.
|
3.
Price
Adjustments
. Jupiter may adjust prices on an annual
basis to account for changes in Jupiter’s cost structure relative to the
manufacture of the Products, including changes relating to electricity, raw
materials and the Employment Cost Index. On January 1 of each year
beginning with January 1, 2011, prices may be increased pursuant to the
mechanism set forth in
Exhibit
B
.
4.
Firm
Commitment Agreement
. This Agreement is a firm commitment
agreement such that SunPower is required to pay for the contracted volume of
Products per year over a 7-year period at the prices set forth in
Exhibit A
, subject to the
adjustments described in Section 4 above; provided, however, that
notwithstanding the foregoing SunPower shall in no event be required to purchase
Products which have not been determined by SunPower to satisfy its quality
standards or the agreed technical specifications pursuant to Section
2(b). Subject to the foregoing, in the event that SunPower fails to
order and take delivery of its contracted volume in a given year, Jupiter shall
invoice SunPower for the differential at full contract price and SunPower will
pay the same within 30 days of invoice date. SunPower specifically
acknowledges and accepts that it will be liable for the full purchase price of
volume differential between the quantity ordered and the contracted volume with
respect to Products which SunPower has determined satisfy its quality standards
and the agreed technical specifications pursuant to Section 2(b).
In the
event that Jupiter fails to deliver Products pursuant to Section 2(a), and such
failure is not triggered by a Force Majeure Event or delay in the completion of
the NEW Manufacturing Facility described in Section 8, SunPower has the right to
purchase the relevant quantity of substitute polysilicon from any third party
provider and Jupiter shall immediately reimburse SunPower for the price
difference, if any, between the price applicable to the Products Jupiter failed
to deliver and the price SunPower has paid the said third party
provider.
5.
Payment
. Payment
terms are 6 months in advance of scheduled product shipment for shipments during
2010 and 2011, and net 30 days following the date of the invoice issued upon
shipment from 2012. Finance charges of ***% per month (***% per
annum) may be assessed on payment past due from the payment due date to the date
payment is received. Failure to pay invoices when due or finance
charges when assessed may result in delayed or cancelled
shipments. No unauthorized deductions from invoices are
permitted.
6.
Title and
Risk of Loss; Packaging; Late Delivery Charges
.
(a)
Title; Risk of
Loss
. SunPower shall purchase the Products from Jupiter FCA
Jupiter (Incoterms 2000) with title and risk of loss with respect to all
Products passing to SunPower when the goods have been delivered to the carrier
at Jupiter, China.
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
(b)
Packaging
.
Jupiter shall bear all costs associated with packaging or storing the Products
until delivery to SunPower pursuant to the delivery terms specified in Section
6(a). All Products shall be packaged, marked, and otherwise prepared in
accordance with good commercial practices to reduce the risk of damage and to be
packaged in the smallest commercially acceptable form in order to enable
SunPower to obtain the lowest shipping rates possible (based on volume metric
dimensions) and in accordance with all applicable federal, state and local
packaging and transportation laws and regulations. An itemized packing list
shall accompany each shipment. Jupiter shall establish reasonable
control routines in order to ensure punctual delivery of the Products at the
agreed time and without any defects or non-conformities. A delivery
certificate shall be issued by Jupiter to SunPower for each shipment of
Products. A shipment notice shall be submitted from Jupiter to
SunPower by telefax or other means of communications, at the latest on the
shipment date, including:
(i)
Purchase
Order No.
(ii)
Brief
description of Products
(iii)
Invoice
amount
(iv)
Number
of packages
(v)
Gross
weight (total) kilos
(vi)
Packing
list describing in detail the content of each package
(c)
Late Delivery
Charges
. If Products are not delivered within six (6) weeks
following the requested delivery date, Jupiter will pay SunPower liquidated
damages at a rate of *** percent (***%) of the gross purchase price
applicable
to such
shipment per week thereafter, up to a maximum of *** percent (***%). The
foregoing liquidated damages address late delivery shipments only and are
independent of Jupiter’s liability (if any), and SunPower’s corresponding
ability to recover damages, for Jupiter’s failure to deliver its commitments
pursuant to this Agreement (including pursuant to Section 4).
7.
Term
. The
term of this Agreement shall be from the Effective Date through December 31,
2016 (the “Initial Term”). The Agreement may not be terminated during
the Initial Term, except as expressly set forth in Section 10. Following the
Initial Term Jupiter and SunPower may renew for the Agreement
upon mutual agreement.
8.
NEW
Manufacturing
Facility
. SunPower acknowledges that Jupiter will be building its
manufacturing facilities (the “NEW Manufacturing Facility”) in order to produce
the Products to be supplied under this Agreement. SunPower acknowledges the
possibility of delays in completing the manufacturing facility and expressly
agrees that Jupiter SHALL HAVE NO LIABILITY TO SUNPOWER FOR ANY SUCH DELAY
(without limiting SunPower’s ability to terminate this Agreement for such delay
to the extent permitted by Section 9(a)).
Jupiter
agrees that the NEW Manufacturing Facility shall be subject to bi-annual
inspections by SunPower. Said inspections shall be subject to
Jupiter’s confidentiality and security policies for site visits. Any fees and
costs associated with such inspection shall be borne by SunPower.
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
9.
Termination
. The
basis and circumstances under which the parties can terminate this Agreement
prior to the expiration of the Initial Term of this Agreement is expressly
limited to the terms of this Section 9.
(a)
Termination by
SunPower
. SunPower may, at its option, terminate this
Agreement only upon the occurrence of all of the following
events: (i)(1) once production of Products has commenced at the NEW
Manufacturing Facility, a failure by Jupiter to deliver the
contracted amount of Products properly ordered by SunPower, (2) other material
breach of this Agreement by Jupiter, or (3) Jupiter’s failure to
complete the NEW Manufacturing Facility by July 1, 2010 (provided that
SunPower’s sole remedy for such failure shall be the right to terminate this
Agreement without further liability or obligation on the part of either party),
(ii) service of written notice of such failure to Jupiter, and (iii)
a failure by Jupiter to cure such delivery deficiency or material
breach (in the case of subclause (1) and (2) above) within ninety (90) days of
receipt of the written notice of such event. If Jupiter rectifies any
such failure of delivery or material breach within such period (in the case of
subclause (1) and (2) above), then Jupiter’s deficiency of
performance shall be deemed cured and SunPower shall not be entitled to
terminate this Agreement. In the event of a termination pursuant to
subclause (a)(i)(1) or (2) above, in addition to any other damages that can be
established by SunPower, Jupiter shall be liable to SunPower for the
cost of substitute polysilicon pursuant to Section 4 for the full quantity of
Products set forth on
Exhibit
A
and not delivered by Jupiter as of the date of
termination.
(b)
Termination by
Jupiter
. Jupiter may, at its option, terminate this
Agreement only upon the occurrence of all of the following
events: (i) in the event of a failure to pay or other material breach
of this Agreement by SunPower, (ii) service of written notice of such failure to
SunPower, and (iii) a failure by SunPower to cure such breach within ninety (90)
days after receipt of written notice of such breach. If SunPower
rectifies any such payment failure or material breach within such period, then
SunPower’s deficiency of performance shall be deemed cured and SunPower shall
not be entitled to terminate this Agreement. In the event of a
termination due to SunPower’s breach, in addition to any other damages that can
be established by Jupiter, SunPower shall be liable to Jupiter for
the purchase price of Products which SunPower has previously determined satisfy
its quality standards and the agreed technical specifications pursuant to
Section 2(b).
10.
Confidentiality
. The
parties acknowledge and agree that the terms of this Agreement and certain
information exchanged between them pertaining to this Agreement, including
information regarding research, technology, product developments, marketing
plans or conditions, products, business strategies, and the like, constitutes
“Confidential Information” of the party disclosing the
information. The purpose of the exchange of the Confidential
Information” is to allow the parties to meet their obligations and
responsibilities under this Agreement. During the term of this
Agreement, and for a period of 5 years following its termination or expiration,
except as required by applicable law, regulation or rules of any securities
exchange, the party receiving any Confidential Information, and its employees,
attorneys, financial advisors, officers, directors and shareholders who shall
receive such Confidential Information shall not, except with the prior written
consent of the disclosing party, use, divulge, disclose or communicate, to any
person, firm, corporation or entity, in any manner whatsoever, the terms of this
Agreement
or any
Confidential Information of the disclosing party; provided, however, that each
party may use, divulge, disclose or communicate the terms of this Agreement or
Confidential Information of the disclosing party to Affiliates (as defined in
Section 24) undertake to keep such information strictly confidential in
accordance with this Section 10 and such Affiliates have a “need to
know”. The parties will be liable for any breach of this Section 10
by any of their respective Affiliates. Each party further agrees to
use the same degree of care to avoid publication or dissemination of the
Confidential Information disclosed to such party under this Agreement as it
employs with respect to its own Confidential Information, but at all times shall
use at least reasonable care to protect against
disclosure. Confidential Information does not and shall not include
information that:
(a)
Was
already known to the receiving party at the time such information is disclosed
by the other party;
(b)
Was or
became publicly known through no wrongful act of the receiving
party;
(c)
Was
rightfully received from a third party without restriction;
(d)
Was
independently developed by the receiving party;
(e)
Was
approved for release by written authorization of the party disclosing such
information under this Agreement; or
(f)
was
required by legal or financial reporting purposes to be disclosed; provided,
however, that the party being required to disclose shall, if circumstances
permit, provide advanced notice to the other party and shall allow the other
party a reasonable opportunity to oppose such disclosure, if
appropriate.
11.
Limited
Warranty
. Jupiter warrants that the Products will be
free from defects and conform to the applicable technical specifications,
provided that Jupiter is notified of any defects or non-conformity within thirty
(30) days after the relevant Products has arrived at the designated delivery
destination, and that the defect or non-conformity is shown to be due to
Jupiter’s faulty design, workmanship, material or packaging. In the event of any
warranty claims, SunPower shall notify Jupiter whereupon Jupiter shall have the
right to undertake its own inspection. .
12.
Warranty
Disclaimer
. THIS LIMITED WARRANTY IS IN LIEU OF ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, SAID WARRANTIES BEING
EXPRESSLY DISCLAIMED.
13.
Limited
Remedy
. If any Products fail to conform to this
warranty, then Jupiter will, at SunPower’s option, either refund or replace such
Products. For valid warranty claims all associated shipping and
return costs shall be paid by Jupiter.
14.
Damages
Limitation
. Jupiter SHALL NOT BE LIABLE FOR ANY LOSS, DAMAGE,
OR INJURY RESULTING FROM DELAY IN DELIVERY OF THE PRODUCTS, OR FOR ANY FAILURE
TO PERFORM WHICH IS DUE TO A FORCE MAJEURE EVENT (AS DEFINED IN SECTION
18). IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY
INCIDENTAL,
CONSEQUENTIAL,
OR SPECIAL DAMAGES, INCLUDING WITHOUT LIMITATION LOST REVENUES AND PROFITS, EVEN
IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THESE
LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF THE
LIMITED REMEDY SET FORTH ABOVE.
15.
Patents
. If
any suit is brought against SunPower for infringement of any United States
Letters Patent alleging that the Products or Jupiter’s methods of
manufacturing them infringe any United States Letters Patent, Jupiter
shall, at its own expense, defend and control the suit against these allegations
only, and shall pay any award of damages assessed against SunPower in the suit
to the extent only that the damages are awarded in connection specifically with
the alleged infringement, provided that SunPower gives Jupiter prompt
notice in writing of the institution of the suit and, to the full extent of
SunPower’s power to do so, SunPower permits Jupiter to defend and
control the suit against these allegations. The above fully expresses
SunPower’s exclusive remedy and Jupiter’s sole responsibility with respect to
infringement of any patent by the Products, and Jupiter EXPRESSLY DISCLAIMS ANY
OTHER WRITTEN OR UNWRITTEN, EXPRESS OR IMPLIED WARRANTY AGAINST INFRINGEMENT
with respect to the Products. In no case shall Jupiter be liable to
defend or pay any award of damages assessed against SunPower to the extent any
suit or cause of action alleges that the nature of SunPower’s use of the
Products (or the use of the Products by SunPower’s customers) infringes any
patent.
16.
Taxes
. Any
tax or other government charge now or in the future levied upon the production,
sale, use or shipment of the Products (except Jupiter’s income tax obligations)
may, at Jupiter’s option, be added to the purchase price.
17.
Fair
Labor Standards Act
. Jupiter hereby certifies that the
Products shall be produced in compliance with the Fair Labor Standards Act, as
amended, and of regulations and orders of the United States Department of Labor
issued under that Act.
18.
Force
Majeure
. Neither party shall be liable for delays or
failures in performance of its obligations hereunder arising out of or resulting
from acts of God, acts of the other party, acts of the government or the public
enemy, fire, flood, epidemics, quarantine restrictions, strikes, freight
embargoes, severe weather, equipment breakage or default of suppliers due to any
of such causes (each a “Force Majeure Event”). In the event of any such delay of
an affected party’s performance, the other party shall honor its obligations
hereunder as soon as the affected party is able to perform.
19.
Choice of
Law
. The Agreement is made in, and shall be governed and
controlled in all respects by the laws of the UNITED KINGDOM (UK) (specifically
disclaiming the U.N. Convention Contracts for the International Sale of Goods)
and all disputes, including interpretation, enforceability, validity, and
construction, shall be determined under the law of the United Kingdom (UK),
without regard to any conflict of law provisions.
20.
Choice of
Forum
. The parties submit to the exclusive jurisdiction of the
UNITED KINGDOM (UK) for all disputes arising, directly or indirectly, under this
Agreement.
21.
Waiver
. Either
party’s failure to exercise a right or remedy or such party’s acceptance of a
partial or delinquent payment shall not operate as a waiver of any of such
party’s rights or the other party’s obligations under the Agreement and shall
not constitute a waiver of such party’s right to declare an immediate or a
subsequent default.
22.
Severability
. If
one or more of the provisions of this Agreement shall be found, by a court with
jurisdiction, to be illegal, invalid or unenforceable, it shall not affect the
legality, validity or enforceability of any of the remaining provisions of this
Agreement. The parties agree to attempt to substitute for any
illegal, invalid or unenforceable provision a legal, valid or enforceable
provision that achieves to the greatest extent possible the economic objectives
of the illegal, invalid or unenforceable provision.
23.
Integration
. The
Agreement constitutes the entire understanding between the parties with respect
to the subject matter of the Agreement and supersedes any prior discussions,
negotiations, agreements, memoranda of understanding and the
like. Modifications to the Agreement may be made only in writing and
signed by each party.
24.
Assignments
. No
assignment of the Agreement or of any right or obligation under the Agreement
shall be made by either party without the prior written consent of the other
party, said consent shall not be unreasonably withheld; provided, however, that
each party may assign this Agreement without any such consent to its Affiliates
or in connection with a merger, acquisition, change of control or sale of
substantially all of the assets of the assigning party. As used
herein, an “Affiliate” of a party means any other party controlling, controlled
by, or under common control with, such party. In the event of a
proper assignment, the Agreement shall be binding upon and inure to the benefit
of the assigning party’s successors and assigns.
25.
Attorney
Fees and Costs
. In the event of either party’s
enforcement of any term or condition in the Agreement, the prevailing party
shall be entitled to recover from the non-prevailing party all costs, including
attorney fees, incurred by the prevailing party in connection with such
enforcement action.
26.
Dollars
. All
references to monetary amounts shall be in U.S. Dollars.
27.
Agreement
Preparation
. This Agreement shall be considered for all
purposes as prepared through the joint efforts of the parties and shall not be
construed against one party or the other as a result of the manner in which this
Agreement was negotiated, prepared, drafted or executed.
|
SUNPOWER:
SUNPOWER
CORPORATION.
3939
NORTH FIRST STREET,
SAN
JOSE,
CALIFORNIA
95134.
UNITED
STATES (USA).
By: /s/
THOMAS H. WERNER
Print
Name: Thomas H. Werner
Title: CEO
Date: 8
th
FEBRUARY 2008
|
JUPITER:
JUPITER
CORPORATION LTD.
RM
1206-7 12F, NEW VICTORY HOUSE.
93-103
WING LOK STREET.
CENTRAL.
HONG
KONG (HK).
By: /s/
I. S. SOHAL
Print
Name: I. S. Sohal
Title: CEO
Date: 8
th
FEBRUARY 2008
|
EXHIBIT
A
POLYSILICON
ANTICIPATED DELIVERY SCHEDULE AND PRICING
Start of
January –
2010 ***mt $***/kilogram
2011 ***mt $***/kilogram
2012 ***mt $***/kilogram
2013 ***mt $***/kilogram
2014 ***mt $***/kilogram
2015 ***mt $***/kilogram
2016 ***mt $***/kilogram
*** CONFIDENTIAL MATERIAL REDACTED AND
SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
EXHIBIT
B
Electrical
Costs
:
No price
adjustments will be made for increases in electrical costs for 2010 and
2011. Annual price adjustments for 2012 onwards will be based solely
on *** and negotiated through good faith discussions 6 months prior to the start
of each such year.
Labor Cost
Inflation
:
No price
adjustments will be made for increases in labor costs for 2010 and
2011. Annual price adjustments for 2012 onwards will be based solely
on *** and negotiated through good faith discussions 6 months prior to the start
of each such year.
Raw Material Cost
Inflation
:
No price
adjustments will be made for increases in raw material costs for 2010 and
2011. Annual price adjustments for 2012 onwards will be based solely
on *** and negotiated through good faith discussions 6 months prior to the start
of each such year.
_______________________________________________________________________
***
CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
THIRD
AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT
AGREEMENT (this "Amendment") is entered into as of February 13, 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 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. The
maximum principal amount available under the Letter of Credit Subfeature of the
Line of Credit is hereby increased from $40,000,000.00 to
$50,000,000.00. Section 1.1(b) (entitled “Letter of Credit
Subfeature”) is hereby deemed amended accordingly.
2. Borrower
agrees that the terms of the Waiver Agreement dated as of January 18, 2008
remain in full force and effect. Without limiting the generality of
the foregoing, it is understood and agreed that all of Borrower’s Secured
Obligations (as defined in said Waiver Agreement) are and shall remain secured
pursuant to the terms of the Security Agreement (Deposit Account) dated as of
July 13, 2007, as amended by the terms of said Waiver
Agreement. Borrower shall, as a condition to each advance under the
Line of Credit and the issuance of each Letter of Credit or Subfeature Letter of
Credit, cause the amount maintained in the deposit account described in the
Security Agreement to be equal to or greater than 100% of the aggregate amount
of such Secured Obligations (after giving effect to the proposed advance, Letter
of Credit or Subfeature Letter of Credit).
3. 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.
4. 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 | ||||
|
By:
/s/ Emmanuel T. Hernandez
|
/s/
Matthew A. Servatius
|
|||
|
Emmanuel
T. Hernandez
|
Matthew
A. Servatius
|
|||
|
Chief
Financial Officer
|
Vice
President
|
2
SOLARGEN
PROYECTOS E INSTALACIONES, S.L.
Núñez de
Balboa 120
Madrid
March 5,
2008
Dear
Sirs:
Construction
Contract for the Solar Park located in Casas de Don Pedro
We hereby
refer to the turnkey contract entered into between SunPower Energy Systems
Spain, S.L. and Solargen Proyectos e Instalaciones, S.L. on December 28, 2007,
as amended by two amendment contracts entered into between both parties on
January 31 and February 8, 2008 (jointly referred as the “
Construction Contract”
). Terms
in capital letters not expressly defined in this letter should have the meaning
they have in the Construction Contract.
By virtue
of this letter we confirm you that we have accepted to extend the term agreed by
the Parties for the fulfillment of Conditions Precedent of Phase 2 until March
30, 2008. Based on the above, references made in Clause 3(2) to March 3, 2008
should be deemed as references to March 30, 2008.
We kindly
request you to send us a copy of this letter signed by an attorney of Solargen
Proyectos e Instalaciones, S.L. in order to document your acceptance of the
abovementioned amendment.
Sincerily,
SunPower
Energy Systems Spain, S.L.
Signed
Marco Antonio Northland
Received and
agreed:
Solargen
Proyectos e Instalaciones, S.L.
Signed D.
Rafael Sánchez-Castillo Lodares
March 5,
2008
EXHIBIT
31.1
CERTIFICATIONS
I, Thomas
H. Werner, certify that:
|
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: May
9, 2008
|
/
S
/ T
HOMAS
H. W
ERNER
|
|
|
Thomas
H. Werner
|
|
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
EXHIBIT
31.2
CERTIFICATIONS
I,
Emmanuel T. Hernandez, certify that:
|
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: May
9, 2008
|
/
S
/ E
MMANUEL
T. H
ERNANDEZ
|
|
|
Emmanuel
T. Hernandez
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
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 March 30, 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: May 9, 2008
|
/
S
/ T
HOMAS
H. W
ERNER
|
|
|
Thomas
H. Werner
|
|
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
/
S
/ E
MMANUEL
T. H
ERNANDEZ
|
|
|
Emmanuel
T. Hernandez
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
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.