form_10-q.htm

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
 
FORM 10-Q
_____________________
 
x
  
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
   
For the quarterly period ended March 30, 2008
     
OR
     
o
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to ______________
 
Commission file number 000-51593

SunPower Corporation
(Exact Name of Registrant as Specified in Its Charter)

Delaware
  
94-3008969
(State or Other Jurisdiction of
  
(I.R.S. Employer
Incorporation or Organization)
  
Identification No.)

3939 North First Street, San Jose, California 95134
(Address of Principal Executive Offices and Zip Code)

(408) 240-5500
(Registrant’s Telephone Number, Including Area Code)
_____________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x
Accelerated Filer  ¨
Non-accelerated filer  ¨
(Do not check if a smaller reporting company)
Smaller reporting company  ¨
 
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

INDEX TO FORM 10-Q

   
Page
3
     
Item 1.
3
     
 
3
       
 
4
     
 
5
     
 
6
     
Item 2.
30
     
Item 3.
45
     
Item 4.
46
     
47
       
Item 1.
  
47
       
Item 1A.
  
47
       
Item 6.
  
81
       
   
82
       
83

 
 
- 2 -

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements

SunPower Corporation 
 
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)

   
March 30,
2008
    
December 30,
2007
  
Assets
            
Current assets:
            
    Cash and cash equivalents
  
$
132,522
    
$
285,214
  
    Restricted cash
    
30,727
      
—
  
    Short-term investments
    
63,531
      
105,453
  
    Accounts receivable, net
    
159,083
      
138,250
  
    Costs and estimated earnings in excess of billings
    
61,675
      
39,136
  
    Inventories
    
188,203
      
140,504
  
    Deferred project costs
    
7,101
      
8,316
  
    Advances to suppliers, current portion
    
59,612
      
52,277
  
    Prepaid expenses and other current assets
    
55,343
      
33,110
  
Total current assets
    
757,797
      
802,260
  
Restricted cash
    
92,710
      
67,887
  
Long-term investments 
    
37,605
      
29,050 
  
Property, plant and equipment, net
    
420,124
      
377,994
  
Goodwill
    
195,891
      
184,684
  
Intangible assets, net
    
49,525
      
50,946
  
Advances to suppliers, net of current portion
    
105,066
      
108,943
  
Other long-term assets
    
33,227
      
31,974
  
Total assets
  
$
1,691,945
    
$
1,653,738
  
Liabilities and Stockholders’ Equity
                
Current liabilities:
                
    Accounts payable
  
$
152,558
    
$
119,869
  
    Accounts payable to Cypress
    
3,846
      
4,854
  
    Accrued liabilities
    
87,633
      
79,434
  
    Billings in excess of costs and estimated earnings
    
28,251
      
69,900
  
    Customer advances, current portion
    
11,490
      
9,250
  
    Convertible debt
    
—
      
425,000
  
Total current liabilities
    
283,778
      
708,307
  
Convertible debt
    
425,000
      
—
  
Deferred tax liability
    
6,771
      
6,213
  
Customer advances, net of current portion
    
58,320
      
60,153
  
Other long-term liabilities                                                                                      
    
16,493
      
14,975
  
Total liabilities
    
790,362
      
789,648
  
Commitments and Contingencies (Note 8)
                
Stockholders’ Equity:
                
    Preferred stock, $0.001 par value, 10,042,490 shares authorized; none issued and outstanding
    
—
      
—
  
    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
    
85
      
85
  
    Additional paid-in capital
    
903,625
      
883,033
  
    Accumulated other comprehensive income
    
13,240
      
5,762
  
    Accumulated deficit
    
(10,058
)
    
(22,815
)
     
906,892
      
866,065
  
    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
    
(5,309
)
    
(1,975
)
Total stockholders’ equity
    
901,583
      
864,090
  
Total liabilities and stockholders’ equity
  
$
1,691,945
    
$
1,653,738
  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
 
- 3 -

SunPower Corporation
 
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)

   
Three Months Ended
  
   
March 30,
2008
    
April 1,
2007
  
Revenue:
            
    Systems
   $ 178,851     $ 78,495  
    Components
     94,850       63,852  
      273,701       142,347  
Costs and expenses:
                
    Cost of systems revenue
     143,213       62,443  
    Cost of components revenue
     77,168       47,479  
    Research and development
     4,642       2,936  
    Sales, general and administrative
     33,858       22,371  
    Purchased in-process research and development
     —       9,575  
        Total costs and expenses
     258,881       144,804  
Operating income (loss)
     14,820       (2,457 )
Interest income
     4,147       1,984  
Interest expense
     (1,464 )     (1,119 )
Other income, net
     287       274  
Income (loss) before income taxes
     17,790       (1,318 )
    Income tax provision (benefit)
     5,033       (2,558 ) 
        Net income
   $ 12,757     $ 1,240  
Net income per share:
                
    Basic
   $ 0.16     $ 0.02  
    Diluted
   $ 0.15     $ 0.02  
Weighted-average shares:
                
    Basic
     78,965       73,732  
    Diluted
     83,661       79,126  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
 
- 4 -
 
SunPower Corporation
 
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)

   
Three Months Ended
  
   
March 30,
2008
    
April 1,
2007
Note 1
  
Cash flows from operating activities:
              
    Net income
  
$
12,757
    
$
1,240
  
    Adjustments to reconcile net income to net cash used in operating activities:
                
        Depreciation
    
10,085
      
5,724
  
        Impairment of long-lived assets
    
5,489
      
—
  
        Loss on retirement of long-lived assets
    
17
      
—
  
        Amortization of intangible assets
    
4,317
      
6,911
  
        Amortization of debt issuance costs
    
972
      
178
  
        Stock-based compensation
    
14,508
      
10,603
  
        Purchased in-process research and development
    
—
      
9,575
  
        Excess tax benefits from stock-based award activity
    
(4,361
)
    
—
  
        Deferred income taxes and other tax liabilities
    
2,773
      
(3,165
) 
        Changes in operating assets and liabilities, net of effect of acquisition:
                
            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
  
            Deferred project costs
    
1,215
      
(6,204
) 
            Advances to suppliers
    
(2,559
)
    
(8,642
)
            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.

 
- 5 -
 
SunPower Corporation
 
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.

 
- 6 -
 
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.

 
- 7 -
 
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.
 
- 8 -
 
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.
 
 
- 9 -
 
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
 
 
- 10 -
 
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.
 
 
- 11 -
 
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
  
 
 
- 12 -
 
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
  
 
 
- 13 -
 
(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.
 
 
- 14 -
 
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.
 
 
- 15 -
 
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
  
 
 
- 16 -
 
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, 2007
  
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.
        
 
 
- 17 -
  
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:
 
   
Stock Options
    
Restricted Stock Awards and Units
  
   
Shares
(in thousands)
    
Weighted-
Average
Exercise Price
Per Share
    
Shares
(in thousands)
    
Weighted-
Average
Grant Date Fair
Value Per Share
  
Outstanding as of December 30, 2007
     2,454     $ 6.29       1,174     $ 68.74  
    Granted
     —       —       235       77.31  
    Vested*
     (485 )     3.16       (120 )     52.61  
    Forfeited
     (27 )     5.48       (11 )     75.98  
Outstanding as of March 30, 2008
     1,942       7.08       1,278       76.97  
                                 
* Restricted stock awards and units vested includes shares withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.
  
 
 
- 18 -
 
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
 
 
- 19 -
 
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.
 
 
- 20 -
 
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, 2008
    
April 1, 2007
  
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.
 
 
- 21 -
 
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.
 
 
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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).
 
 
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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.
 
 
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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, 2008
    
April 1, 2007
  
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.
 
 
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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.
 
 
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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.
 
 
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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, 2007
  
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, 2008
    
April 1, 2007
  
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.