UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM
10-K
_____________________
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 30, 2007
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ______________ to ______________
Commission
file number 000-51593
SunPower
Corporation
(Exact
name of registrant as specified in its charter)
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Delaware
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94-3008969
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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3939
North First Street, San Jose, California 95134
(Address
of principal executive offices and zip code)
(408)
240-5500
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Class
A Common Stock. $0.001 par value
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NASDAQ
Global Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of Class)
_____________________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 of Section 15(d) of the Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
Accelerated Filer x
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Accelerated
Filer ¨
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Non-accelerated
filer ¨
(Do
not check if a smaller reporting company)
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Smaller
reporting company ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant on July 1, 2007 was $2.0 billion. Such aggregate market value was
computed by reference to the closing price of the common stock as reported on
the Nasdaq Global Market on July 1, 2007. For purposes of determining this
amount only, the registrant has defined affiliates as including the executive
officers and directors of registrant on July 1, 2007.
The
total number of outstanding shares of the registrant’s class A common stock as
of February 22, 2008 was 39,855,258.
The
total number of outstanding shares of the registrant’s class B common stock as
of February 22, 2008 was 44,533,287.
DOCUMENTS
INCORPORATED BY REFERENCE
Parts
of the registrant’s definitive proxy statement for the registrant’s Annual
Meeting of Stockholders for the fiscal year ended December 30, 2007 are
incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this
Annual Report on Form 10-K.
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- 2
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Cautionary
Statement Regarding Forward-Looking Statements
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are statements that
do not represent historical facts. We use words such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“predict,” “potential,” “continue” and similar expressions to identify
forward-looking statements. Forward-looking statements in this Annual Report on
Form 10-K include, but are not limited to, our plans and expectations regarding
our ability to obtain polysilicon ingots or wafers, future financial results,
operating results, business strategies, projected costs, products, competitive
positions, management’s plans and objectives for future operations, and industry
trends. These forward-looking statements are based on information available to
us as of the date of this Annual Report on Form 10-K and current expectations,
forecasts and assumptions and involve a number of risks and uncertainties that
could cause actual results to differ materially from those anticipated by these
forward-looking statements. Such risks and uncertainties include a variety of
factors, some of which are beyond our control. Please see “Item 1A: Risk
Factors” and our other filings with the Securities and Exchange Commission for
additional information on risks and uncertainties that could cause actual
results to differ. These forward-looking statements should not be relied upon as
representing our views as of any subsequent date, and we are under no obligation
to, and expressly disclaim any responsibility to, update or alter our
forward-looking statements, whether as a result of new information, future
events or otherwise.
The
following information should be read in conjunction with the Consolidated
Financial Statements and the accompanying Notes to Consolidated Financial
Statements included in this Annual Report on Form 10-K. Our fiscal year ends on
the Sunday closest to the end of the applicable calendar year. All references to
fiscal periods apply to our fiscal quarters or year which ends on the Sunday
closest to the calendar month end.
ITEM 1: BUSINESS
We
are a vertically integrated solar products and services company that designs,
manufactures and markets high-performance solar electric power technologies. Our
solar cells and solar panels are manufactured using proprietary processes and
technologies based on more than 15 years of research and development. We
believe our solar cells have the highest conversion efficiency, a measurement of
the amount of sunlight converted by the solar cell into electricity, of all the
solar cells available for the mass market. Our solar power products are sold
through our components business segment, or our components segment. In
January 2007, we acquired PowerLight Corporation, or PowerLight, now known
as SunPower Corporation, Systems, or SP Systems, which developed, engineered,
manufactured and delivered large-scale solar power systems. These activities are
now performed by our systems business segment, or our systems segment. Our solar
power systems, which generate electric energy, integrate solar cells and panels
manufactured by us as well as other suppliers. For more information about
financial condition and results of operations of each segment, please see “Item 7: Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Item 8: Financial Statements and
Supplementary Data.”
Business
Segments Overview
Components
segment: Our components segment sells solar power products,
including solar cells, solar panels and inverters, which convert sunlight to
electricity compatible with the utility network. We believe our solar cells
provide the following benefits compared with conventional solar
cells:
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superior
performance, including the ability to generate up to 50% more power per
unit area;
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•
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superior
aesthetics, with our uniformly black surface design that eliminates highly
visible reflective grid lines and metal interconnect ribbons;
and
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•
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efficient
use of silicon, a key raw material used in the manufacture of solar
cells.
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We
sell our solar components products to installers and resellers for use in
residential and commercial applications where the high efficiency and superior
aesthetics of our solar power products provide compelling customer benefits. We
also sell products for use in multi-megawatt solar power plant applications. In
many situations, we offer a materially lower area-related cost structure for our
customers because our solar panels require a substantially smaller roof or land
area than conventional solar technology and half or less of the roof or land
area of commercial solar thin film technologies. We sell our products primarily
in Asia, Europe and North America, principally in regions where government
incentives have accelerated solar power adoption. In fiscal 2007, 2006 and 2005,
components revenue represented approximately 40%, 100% and 100%, respectively,
of total revenue.
- 3
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We
manufacture our solar cells at our manufacturing facilities in the Philippines.
We currently operate seven cell manufacturing lines in our solar cell
fabrication facilities, with a total rated manufacturing capacity of
approximately 214 megawatts per year. By the end of 2008, we plan to operate 12
solar cell manufacturing lines with an aggregate manufacturing capacity of 414
megawatts per year. We plan to begin production as soon as the first quarter of
2010 on the first line of a third solar cell manufacturing facility designed to
have an aggregate manufacturing capacity of 500 megawatts per year.
We
manufacture our solar panels at our panel manufacturing factory located in the
Philippines. Our solar panels are also manufactured for us by a third-party
subcontractor in China. We currently operate three solar panel manufacturing
lines with a rated manufacturing capacity of 90 megawatts of solar panels per
year. In addition, our SunPower branded inverters are manufactured for us by
multiple suppliers.
Systems
segment: Our systems segment sells solar power systems and
system technology directly to system owners. When we sell a solar power system
it may include services such as development, engineering, procurement of permits
and equipment, construction management, access to financing, monitoring and
maintenance. We believe our solar systems provide the following benefits
compared with competitors’ systems:
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superior
performance delivered by maximizing energy delivery and financial return
through systems technology design;
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superior
systems design to meet customer needs and reduce cost, including
non-penetrating, fast-install technology;
and
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superior
channel breadth and delivery capability including turnkey
systems.
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Our
systems segment is comprised primarily of the business we acquired from SP
Systems in January 2007. Our customers include commercial and governmental
entities, investors, utilities and production home builders. We work with
development, construction, system integration and financing companies to deliver
our solar power systems to customers. Our solar power systems are designed to
generate electricity over a system life typically exceeding 25 years and
are principally designed to be used in large-scale applications with system
ratings of typically more than 500 kilowatts. Worldwide,
more than 400 SunPower solar power systems are commissioned or in construction,
rated in aggregate at more than 300 megawatts of peak
capacity.
In fiscal 2007, systems revenue represented approximately 60% of total
revenue.
We
have solar power system projects completed or in the process of being completed
in various countries including Germany, Italy, Portugal, South Korea, Spain and
the United States. We sell distributed rooftop and ground-mounted solar power
systems as well as central-station power plants. Distributed solar power systems
are typically rated at more than 500 kilowatts of capacity to provide a
supplemental, distributed source of electricity for a customer’s facility. Many
customers choose to purchase solar electricity from our systems under a power
purchase agreement with a financing company which buys the system from us. For
example, we recently completed the construction of an approximately 14 megawatt
solar power plant at Nellis Air Force Base in Nevada, which will be operated
under a power purchase agreement structure with a financier. In Europe and South
Korea, our products and systems are typically purchased by a financing company
and operated as a central station solar power plant. These power plants are
rated with capacities of approximately one to 20 megawatts, and generate
electricity for sale under tariff to private and public utilities.
We
manufacture certain of our solar power system products at our manufacturing
facilities in California and at other facilities located close to our customers.
Some of our solar power system products are also manufactured for us by
third-party suppliers.
Our
Products and Services
Products
Sold Through Our Components Segment
Our
solar power products include solar cells and solar panels manufactured using
proprietary processes and technologies based on more than 15 years of
research and development. We also sell a line of branded inverters.
Solar
Cells
Solar
cells are semiconductor
devices that directly convert sunlight into electricity. Our A-300 solar cell is
a silicon solar cell with a specified power value of 3.1 watts and a conversion
efficiency of between 20% and 21.5%. Our next generation solar cell delivers 3.3
watts with efficiency of up to 22.7% and started shipping in 2007. Our solar
cells are designed without highly reflective metal contact grids or current
collection ribbons on the front of the solar cells. This feature enables our
solar cells to be assembled into solar panels that exhibit a more uniform
appearance than conventional solar panels.
- 4
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Solar
Panels
Solar
panels are solar cells electrically connected together and encapsulated in a
weatherproof package. We believe solar panels made with our solar cells are the
highest efficiency solar panels available for the mass market. Because our solar
cells are more efficient relative to conventional solar cells, when our solar
cells are assembled into panels, the assembly cost per watt is less because more
power can be incorporated into a given size package. Higher solar panel
efficiency allows installers to mount a solar power system with more power
within a given roof or site area and can reduce per watt installation
costs.
Inverters
Inverters
transform direct current, or DC, electricity produced by solar panels into the
more common form of alternating current, or AC, electricity. Inverters are used
in virtually every on-grid solar power system and typically feed power either
directly into the home electrical circuit or into the utility grid. In North
America, we sell a line of branded inverters specifically designed for use in
residential and commercial systems. Our inverter product line currently includes
approximately twelve models spanning a power range of 2.5 to 5.2 kilowatts. Our
packaged system designs optimize performance through the appropriate combination
of these inverters with our solar panels. Our units are highly efficient,
possessing above-average DC to AC conversion efficiency compared to other
commercially available units in their class, according to the California Energy
Commission. Our inverters are manufactured for us by Xantrex, SMA Technologie AG
and PV Powered. Xantrex is a worldwide leader in power electronics with a
specialization in solar power conditioning components, while SMA Technologie AG
and PV Powered concentrate specifically in the manufacturing of inverters for
the solar electric market.
Products
Sold Through Our Systems Segment
Our
solar electric power system technology integrates solar cells and solar panels
to convert sunlight to electricity. Our systems are principally designed to be
used in large-scale utility, commercial, public sector and production home
applications.
PowerGuard® Roof
System
The
PowerGuard® Roof
System is a roof-mounted solar panel mounting system that delivers reliable,
clean electricity while insulating and protecting the roof. PowerGuard® is a
proprietary, pre-engineered solar power roofing tile system. Each
PowerGuard® tile
consists of a solar laminate, lightweight cement substrate and styrofoam base.
Designed for quick and easy installation, PowerGuard® tiles
fit together with interlocking tongue-and-groove side surfaces. In addition to
generating electricity, PowerGuard® roof
systems also insulate and protect the roof membrane from ultraviolet rays and
thermal degradation. This saves both heating and cooling energy expenses and
extends the roof life. The PowerGuard® roof
system has been tested and certified by Underwriters Laboratories Inc., or UL,
and has received a UL Class B fire rating which we believe facilitates obtaining
building permits and inspector approvals.
The
PowerGuard® system
resists wind uplift without compromising the rooftop’s structural integrity. In
comparison, conventional solar power systems typically penetrate the roof.
Systems that require drilling many holes into rooftops to install and secure
solar panels may compromise the integrity of the roof and reduce its life span.
To avoid drilling holes, certain other conventional systems add weight for
stability against wind and weather, which may exceed weight limits for some
commercial buildings’ roofs.
PowerGuard® tiles
typically weigh approximately four pounds per square foot, which is supported by
most commercial rooftops. Our technology integrates this lightweight
construction with a patented pressure equalizing design that has been tested to
withstand winds of up to 140 mph. PowerGuard® roof
systems have been installed in a broad range of climates, including California,
Illinois, Hawaii, Massachusetts, Nevada, New Jersey, New York, Canada and
Switzerland and a wide variety of building types, from rural single story
warehouses to urban high rise structures.
SunPower
T-10 Commercial Solar Roof Tiles
SunPower
T-10 commercial solar roof tiles are pre-engineered solar panels that tilt at a
10-degree angle to generate up to 10% more annual energy output than traditional
flat roof-mounted systems depending on geographic location and local climate
conditions. These non-penetrating panels interlock for secure, rapid
installation on rooftops without compromising the structural integrity of the
roof.
Similar
to our PowerGuard® product,
the SunPower T-10 commercial roof tile is lightweight, weighing less than four
pounds per square foot, and is installed without penetrating the roof surface.
Sloped side and rear wind deflectors improve wind performance, allowing T-10
arrays to withstand winds up to 120 miles per hour.
Whereas
PowerGuard®
performance is optimized in constrained rooftop environments where it
contributes to maximum power density, commercial roof tile performance is
optimized for larger roofs with less space constraints as well as underutilized
tracks of land, such as ground reservoirs.
- 5
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SunTile® Roof
Integrated System for Residential Market
SunTile® is a
highly efficient solar power shingle roofing system utilizing our A-300 solar
cell technology that is designed to integrate with conventional residential
roofing materials. SunTile® solar
shingles are designed to replace multiple types of roof panels, including the
most common concrete flat, low and high profile “S” tile and composition
shingles. We believe that SunTile® is less
visible on a roof than conventional solar technology because the solar panel is
integrated directly into the roofing material instead of mounted onto the roof.
SunTile® has a
UL-listed Class A fire rating, which is the highest level of fire rating
provided by Underwriters Laboratories Inc. SunTile® is
designed to be incorporated by production home builders into the construction of
their new homes communities.
Ground
Mounted SunPowerTM Tracker
Systems
We
offer several types of ground-mounted solar power systems using our
PowerTracker®
technology, now referred to as SunPowerTM
Tracker. SunPowerTM Tracker
is a single-axis tracking system that automatically pivots solar panels to track
the sun’s movement throughout the day. We believe this tracking feature
increases the amount of sunlight that is captured and converted into energy by
up to 35% over flat or fixed-tilt systems depending on geographic location and
local climate conditions. A single motor and drive mechanism can control 10 to
20 rows or more than 200 kilowatts of solar panels. The multi-row feature
represents a cost advantage for our customers over dual axis tracking systems,
as such systems require more motors, drives, land, and power to operate per
kilowatt capacity. The SunPowerTM Tracker
system can be assembled onsite, and is easily scalable. We have installed
ground-mounted systems integrating SunPowerTM Tracker
in a wide range of geographical markets including Arizona, California, Hawaii,
Nevada, New Jersey, Germany, Portugal, Spain and South Korea.
Fixed
Tilt and SunPowerTM Tracker
Systems for Parking Structures
We
have developed and patented several designs for solar power systems for parking
structures in multiple configurations. These dual use systems typically
incorporate solar panels into the roof of a carport or similar structure to
deliver onsite solar power while providing shade and protection. Aesthetically
pleasing, standardized and scalable, they are well suited for parking lots
adjacent to facilities. In addition, we have incorporated our SunPowerTM Tracker
technology into certain of our systems for elevated parking structures to
provide a differentiated product offering to our customers. We have completed
complex parking structure-based systems for clients such as the U.S. Navy, the
U.S. Postal Service and Johnson & Johnson.
Other
System Offerings
We
have other products that leverage our core systems. For example, our metal roof
system is designed for sloped-metal roof buildings, which are used in some
winery and warehouse applications. This solar power system is designed for rapid
installation. We also offer other architectural products such as day lighting
with translucent solar panels.
Client
Services Sold Through Our Systems Segment
We
provide our customers and partners with a variety of services, including system
design, energy efficiency, financial consulting and analysis, construction
management and maintenance and monitoring.
System
Design
We
design solar power systems taking into account the customer’s location, site
conditions and energy needs. During the preliminary design phase, we conduct a
site audit and building assessment for onsite generation feasibility and
identify energy efficiency savings opportunities. We model the performance of a
proposed system design taking into account variables such as local weather
patterns, utility rates and other relevant factors at the customer’s location.
We also identify necessary permits and design our systems to comply with
applicable building codes and other regulations.
Financial
Consulting and Analysis
We
offer financial consulting services to our customers using various financing
vehicles and government programs. We assist our customers in developing funding
strategies for solar power projects depending on a customer’s size, cash flow
and tax status. We have partnered with financial companies and organizations
such as Morgan Stanley, GE Commercial Finance and MMA Renewable Ventures (a
subsidiary of MuniMae), which provide project development financing and bonding
for our customers. To date, we have successfully arranged financing for clients
ranging from simple loans and tax-advantaged operating leases to long-term,
multi-party power purchase agreements.
Construction
Management
We
offer general contracting services and employ project managers to oversee all
aspects of system installation, including securing necessary permits and
approvals. Subcontractors, typically electricians and roofers, usually provide
the construction labor, tools and heavy equipment for solar system installation.
We have developed relationships with subcontractors in many target markets, and
require subcontractors to be licensed, carry appropriate insurance and adhere to
the local labor and payroll requirements. Our construction management services
include system testing, commissioning and management of utility network
interconnection.
- 6
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Maintenance
and Monitoring
We
also offer post-installation services in support of our solar power systems,
including:
Operations
and Maintenance: Our systems have a design life in excess of 25 years. We
typically provide our customers with a one-, two-, five- or ten-year parts and
workmanship system warranty, after which the customer may extend the period
covered by our warranty for an additional fee. We also pass through to customers
long-term warranties from the original equipment manufacturers of certain system
components. Warranties of 20 to 25 years from solar panel suppliers are
standard, while inverters typically carry a two-, five- or ten-year warranty. We
offer our customers a series of maintenance services ranging from our Standard
Service level to our Plus Service level. Standard Service includes continuous
remote monitoring of system performance and 72-hour on-site response to any
system problem through a qualified local service technician. Plus Service
includes annual preventive maintenance as well as certain forms of system
testing.
Monitoring:
We have developed our proprietary Data Acquisition System, or DAS, to monitor
system performance used in most of the commercial systems we install. The DAS
continuously scans the performance of the system and local weather data and
stores average data for the past 15 minutes in a data logger. An automated daily
algorithm determines if systems are performing per specification, and an
automated report is generated for our customer service department, allowing for
proactive performance diagnostics and maintenance. Customers can access
historical or daily system performance data through our customer website
www.sunpowermonitor.com. Our customers often choose to install electronic kiosks
for flat-panel displays to track performance information at their facility. We
believe these displays enhance our brand and educate the public and prospective
customers about solar power.
Energy
Efficiency Consulting and Related Services Sold Through Our Systems
Segment
In
addition to our solar power systems, we provide related Energy Efficiency
services designed to increase the total return on investment through an
integrated, seamless solution. We provide custom solar power generation and
demand side management solutions to minimize facility energy use and demand,
improve building operation controls and increase the comfort level of building
occupants. Our experienced personnel have completed projects that
include:
Heating,
ventilation and air conditioning upgrades: reduces energy use, facilitates
building operations and improves the comfort level of inhabitants.
Variable
frequency drives: reduces energy use by controlling motors installed on pumps,
fans, compressors, chillers and boilers to optimize motor performance and reduce
load.
Lighting
efficiency services: reduces energy use by determining the optimal mix of energy
efficient lighting though comprehensive assessment of light levels, spectrum and
energy consumption.
Energy
management systems: minimizes costs by balancing energy consumption and supply;
achieves energy savings through equipment scheduling, automated controls/alarms
and performance monitoring.
Building
retro commissioning: offers a building “tune-up” to ensure optimal performance,
specifically focusing on equipment scheduling and diagnostics, sequence of
operations and control set points.
Corporate
History
We
were incorporated as a California Corporation in 1985 by Dr. Richard
Swanson to develop and commercialize high-efficiency photovoltaic solar electric
cell technology. Cypress Semiconductor Corporation, or Cypress, made a
significant investment in SunPower in 2002. On November 9, 2004,
Cypress completed a reverse triangular merger with us in which all of the
outstanding minority equity interest of SunPower was retired, giving Cypress
100% ownership of all of our then outstanding shares of capital stock but
leaving our unexercised warrants and options outstanding. In November
2005, we reincorporated in Delaware, created two classes of common stock and
held the initial public offering, or IPO, of our class A common
stock. After completion of our IPO, Cypress held approximately 52.0
million shares of our class B common stock, representing all the outstanding
shares of our class B common stock. Shares of our class A common
stock trade on the Nasdaq Global Market.
- 7
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Relationship
with Cypress Semiconductor Corporation
On
May 4, 2007, Cypress completed the sale of 7.5 million shares of class B
common stock in an offering pursuant to Rule 144 of the Securities Act. Such
shares converted to 7.5 million shares of class A common stock upon the sale. As
of December 30, 2007, including the effect of the sale completed in May 2007,
public offerings of class A common stock in June 2006 and July 2007, and
issuance of senior convertible debentures in February 2007 and July 2007,
Cypress owned approximately 44.5 million shares of class B common stock, which
represented approximately 56% of the total outstanding shares of our common
stock, or approximately 51% of such shares on a fully diluted basis after taking
into account outstanding stock options (or 49% of such shares on a fully diluted
basis after taking into account outstanding stock options and
shares loaned to underwriters of our convertible indebtedness). Cypress also
holds approximately 90% of the voting power of our total outstanding common
stock, as our class B common stock has 8 votes per share compared to one vote
per share for our class A common stock. Cypress, its successors in interest or
its subsidiaries may convert their shares of class B common stock into
shares of class A common stock on a one-for-one basis at any time. Cypress
announced on October 6, 2006 and reiterated on October 19, 2006 that
it was exploring ways in which to allow its stockholders to fully realize the
value of its investment in SunPower. Cypress has made public statements since
October 19, 2006 that were consistent with these
announcements.
We
have entered into various agreements with Cypress including a master separation
agreement, an employee matters agreement, a tax sharing agreement, a master
transition services agreement, a wafer manufacturing agreement, a lease for
certain manufacturing assets, an investor rights agreement, and an
indemnification and insurance matters agreement. Our lease of a Cypress facility
which we use for manufacturing in the Philippines contains an option for us to
purchase the facility. See Note 3 of Notes to our Consolidated Financial
Statements.
Under
the terms of the master transition services agreement, we will pay Cypress for
the services provided to us, at Cypress’ cost or at the rate negotiated with
Cypress for a period of three years following November 22, 2005 or until a
change of control, whichever occurs first. Under the terms of our lease
agreement, we will pay Cypress a rate equal to the cost to Cypress for the lease
of our Philippines facility until the earlier of 10 years after
November 22, 2005 or a change of control of our company. Thereafter, we
will pay market rate rent for the facility for the remainder of the 15-year
lease. Under the terms of the wafer manufacturing agreement, we pay Cypress to
make infrared and imaging detector products for us at prices consistent with the
then current Cypress transfer pricing, which is equal to the forecasted cost to
Cypress to manufacture the wafers for the next three years or until a change of
control of our company. See Note 3 of Notes to our Consolidated Financial
Statements.
Cypress
delivers high-performance, mixed-signal, programmable solutions that provide
customers with rapid time-to-market and exceptional system value. Cypress
offerings include the PSoC Programmable System-on-Chip, USB controllers,
general-purpose programmable clocks and memories. Cypress also offers wired and
wireless connectivity solutions that enhance connectivity and performance in
multimedia handsets. Cypress serves numerous markets including consumer,
computation, data communications, automotive, industrial and solar power.
Cypress trades on the NYSE under the ticker symbol "CY."
PowerLight
Acquisition
On
January 10, 2007, we completed the acquisition of PowerLight Corporation, or
PowerLight. PowerLight was incorporated in California on January 25, 1995 to
design, manufacture and install grid-connected commercial solar electric
products and systems. PowerLight was the earliest system integrator for
commercial applications and developed a broad portfolio of patented designs for
rooftop, ground-mounted and tracking system technologies. In connection with the
acquisition, total purchase consideration and future stock compensation for the
transaction was $334.4 million, consisting of $120.7 million in cash and $213.7
million in common stock, restricted stock, stock options and related acquisition
costs. In June 2007, we changed PowerLight’s name to SunPower Corporation,
Systems, to capitalize on our strong name recognition.
Research
and Development
We
engage in extensive research and development efforts to improve solar cell
efficiency, enhance our system segment products and reduce manufacturing cost
and complexity. Our research and development organization works closely with our
manufacturing facility, our equipment suppliers and our customers to improve our
solar cell design and lower cell, panel and system product manufacturing and
assembly costs. In addition, we have dedicated employees who work closely with
our current and potential suppliers of silicon ingots, a key raw material used
in the manufacture of our solar cells, to develop specifications that meet our
standards and ensure the high quality we require, while at the same time
controlling costs.
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Our
research and development expenditures were approximately $13.6 million, $9.7
million and $6.5 million for the years ended December 30, 2007, December
31, 2006 and January 1, 2006, respectively. We have government contracts that
enable us to more rapidly develop new technologies and pursue additional
research opportunities while helping to offset our research and development
expense. Payments received under these contracts offset our research and
development expense by approximately 21%, 8% and 7% in fiscal 2007, 2006 and
2005, respectively. In the third quarter of 2007, we signed a Solar America
Initiative agreement with the U.S. Department of Energy in which we were awarded
$8.5 million in the first budgetary period. Total funding for the three-year
effort is estimated to be $24.7 million. Our cost share requirement under this
program, including lower-tier subcontract awards, is anticipated to be $27.9
million. This contract replaced our three-year cost-sharing research and
development project with the National Renewable Energy Laboratory, entered into
in March 2005, to fund up to $3.0 million or half of the project costs to
design our next generation solar panels.
For
more information about these grants, including the government’s limited rights
to use technology developed as a result of such grants, please see “Item 1A: Risk Factors”
including “– Our reliance on
government programs to partially fund our research and development programs
could impair our ability to commercialize our solar power products and services
and increase our research and development expenses.”
Manufacturing
We
manufacture our solar cells through our subsidiary, SunPower Philippines
Manufacturing Limited, in a 215,000 square foot facility located near Manila in
the Philippines. This plant began operations in the fall of 2004 where we
currently operate four solar cell manufacturing lines, with a total rated
manufacturing capacity of approximately 108 megawatts per year. In August 2006,
we purchased a 344,000 square foot building in the Philippines. This facility is
approximately 20 miles from our existing facility and is being constructed to
house up to 12 solar cell manufacturing lines. We recently began operating three
manufacturing lines in the new facility, resulting in a total of seven
manufacturing lines with an aggregate production capacity of 214 megawatts per
year. By the end of 2008, we plan to operate 12 solar cell manufacturing lines
with an aggregate manufacturing capacity of 414 megawatts per year. We plan to
begin production as soon as the first quarter of 2010 on the first line of a
third solar cell manufacturing facility designed to have an aggregate
manufacturing capacity of 500 megawatts per year.
We
manufacture our solar panels at our panel manufacturing factory located in the
Philippines. Our solar panels are also manufactured for us by a third-party
subcontractor in China. We currently operate three solar panel manufacturing
lines with a rated manufacturing capacity of 90 megawatts of solar panels per
year. In addition, our SunPower branded inverters are manufactured for us by
multiple suppliers.
The
solar cell value chain starts with high purity silicon called polysilicon.
Polysilicon is created by refining quartz or sand. Polysilicon is melted and
grown into crystalline ingots by companies specializing in ingot growth. We
procure silicon ingots from these suppliers on a contractual basis and then
slice the ingots into wafers. The ingots are sliced and the wafers are processed
into solar cells in our Philippines manufacturing facility. We also purchase
wafers and polysilicon from third-party vendors on a purchase order or contract
basis.
Over
the past 15 years, we have developed a core competency in processing thin
silicon wafers. This proprietary semiconductor processing expertise involves
specialized equipment and facilities that we believe allow us to process thin
wafers while minimizing breakage and accurately controlling the effect of
metallic contaminants and other non-desirable process conditions.
We
source the balance of system components based on quality, performance and cost
considerations using solar cells and solar panels supplied internally as well as
from other third-party suppliers. “Balance of system components” are components
of a solar power system other than the solar panels, including mounting
structures, SunPowerTM
Tracker, inverters, charge controllers, grid interconnection equipment and other
devices depending upon the specific requirements of a particular system and
project. We generally assemble proprietary components, such as cementitious
coatings and certain adhesive applications, while we purchase generally
available components from third-party suppliers.
Certain
of our products, such as our PowerGuard® and
SunTile®
products, are assembled at our or a third-party contractor’s assembly plant
prior to shipment to the project location. Other products such as our
SunPowerTM Tracker
and T-10 commercial roof tiles are field assembled with components shipped
directly from suppliers. We currently have the capacity to produce up to an
aggregate of 20 megawatts of our PowerGuard® and
SunTile® products
per year, depending on product mix, in our California assembly plant or
third-party contractor’s assembly plant.
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Supplier
Relationships
Crystalline
silicon is the leading commercial material for solar cells and is used in
several forms, including single-crystalline, or monocrystalline silicon,
multicrystalline, or polycrystalline silicon, ribbon and sheet silicon and
thin-layer silicon. There is currently an industry-wide shortage of polysilicon,
an essential raw material in the production of silicon solar cells. We believe
that this shortage will continue through 2008, or potentially for a longer
period. The price that we paid for polysilicon increased during 2005 through
2007. We expect our average polysilicon prices to decrease in 2008 based on our
existing supply arrangements with vendors. For more information about the
general availability of polysilicon, ingots and wafers, and our procurement
efforts, please see “Item 1A:
Risk Factors” including
“– The solar power
industry is currently experiencing an industry-wide shortage of polysilicon.
This shortage poses several risks to our business, including possible
constraints on revenue growth and possible decreases in our gross margins and
profitability.”
With
respect to supplies for our components segment, we purchase polysilicon, silicon
ingots, inverters, solar panels and a balance of system components on both a
contracted and a purchase order basis. We have contracted with some of our
suppliers for multi-year supply agreements. Under such agreements, we have
annual minimum purchase obligations. Many of these agreements include liquidated
damages if either party fails to perform. To date, we have experienced minimal
shipment delays in ingot and wafer supply under these multi-year supply
agreements.
With
respect to supplies for our systems segment, we are able to utilize solar panels
from various manufacturers depending on power, performance and cost requirements
for our construction projects. We historically partnered, and intend to continue
to partner, with solar cell and panel manufacturers that offer the most advanced
solar panel technologies and the highest quality products, including Evergreen
Solar, Inc., Mitsui Comtek Corp., a distributor for Sanyo
Electronics Co., Ltd and Q-Cells Aktiengesellschaft.
For
suppliers operating under purchase orders, we structure our agreements as firm
purchase orders at a predetermined price or non-binding forecasts of our annual
or quarterly product needs to our suppliers and then periodically issue purchase
orders for specific projects. These suppliers are generally under no legal
obligation to supply inverters, solar panels or other components or raw
materials to us until they have accepted our purchase orders. We have
experienced situations in which pricing terms and quantity commitments under
accepted purchase orders were not honored as a result of the polysilicon
shortage.
Customers
Components
Customers
We
currently sell our solar power products to system integrators and original
equipment manufacturers, or OEMs. System integrators typically design and sell
complete systems that include our solar panels along with other system
components. Our system integrators also incorporate inverters we provide for
their system offerings. OEMs typically incorporate our A-300 solar cells into
specialty solar panels designed for specific applications. We sell our products
in countries in Europe, Asia and North America, principally in regions where
government incentives have accelerated solar power adoption.
We
currently work with a number of customers who have specific expertise and
capabilities in a given market segment or geographic region. As we expand our
manufacturing capacity, we anticipate developing additional customer
relationships in other markets and geographic regions to continue to decrease
our customer concentration and dependence. To date, a substantial amount of our
components revenue from our solar power products has been generated from two
systems integrator customers in Europe, Conergy AG, or Conergy, and Solon AG, or
Solon. Conergy accounted for approximately 7%, 25% and 45% of our total revenue
in fiscal 2007, 2006 and 2005, respectively. Solon accounted for approximately
9%, 24% and 16% of our total revenue in fiscal 2007, 2006 and 2005,
respectively. Before our acquisition of PowerLight, PowerLight accounted for 16%
of our total combined revenue in fiscal 2006. International sales comprise the
majority of component revenue and represented approximately 64%, 68% and 70% of
component revenue in fiscal 2007, 2006 and 2005, respectively. We anticipate
that a significant amount of our total revenue will continue to be generated by
sales to customers outside the United States. A significant portion of our sales
are denominated in Euros. A table providing total revenue by geography for the
last three fiscal years is found in Note 18 to Consolidated Financial Statements
in "Item
8: Financial Statements and Supplementary Data."
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Systems
Customers
Our
direct and indirect customers include commercial and governmental entities,
investors, electric utilities, production home builders and homeowners. We work
with construction, system integration and financing companies to deliver our
solar power systems to the end-users of electricity. We often work with
financing companies that purchase solar power systems from us, and then sell
solar electricity generated from these systems under power purchase agreements
to end-users. Under power purchase agreements, the end-users pay the
financing companies over an extended period of time based on energy they consume
from the solar power systems, rather than paying for the full capital cost of
purchasing the solar power systems up front. Worldwide, more than 400 SunPower
solar power systems are commissioned or in construction, rated in aggregate at
more than 300 megawatts of peak capacity. In addition, our new homes division
and our dealer network have deployed thousands of SunPower rooftop solar systems
to residential customers. We have solar power system projects completed or in
the process of being completed in various countries including Germany, Italy,
Portugal, South Korea, Spain and the United States.
Domestic
and international systems sales represented approximately 51% and 49%,
respectively, of our systems segment’s revenue in fiscal 2007. Installations in
Spain, California and Nevada accounted for 46%, 24% and 22%, respectively, of
our systems revenue for the year ended December 30, 2007. In January 2007, we
completed the installation of a single system in Serpa, Portugal, rated at over
eleven megawatts. In December 2007, we completed the construction of an
approximately 14 megawatt solar power plant at Nellis Air Force Base in Nevada
that currently represents the largest installed solar power project in North
America. During fiscal 2007, approximately 60% of our United States systems
revenue was derived from public sector projects and the other 40% was derived
from the private sector. We have developed long-standing relationships with many
of our customers. For the year ended December 30, 2007, an estimated 85% of
our systems segment revenues came from pre-existing direct or indirect
customers. Our largest systems customers for fiscal 2007 were SolarPack
Corporacion Technologica, S.L. in Spain and MMA Renewable Ventures (a subsidiary
of MuniMae), whose revenue accounted for approximately 18% and 16%,
respectively, of our total revenue in fiscal 2007.
Marketing
and Sales
We
market and sell solar electric power technologies worldwide through a direct
sales force. We have direct sales personnel or representatives in Spain,
Germany, Italy, Singapore, Switzerland, Korea and the United States. We also
partner with certain value-added resellers, or VARs, throughout the world.
Approximately 85%, 73% and 98% of our revenue for the years ended
December 30, 2007, December 31, 2006 and January 1, 2006, respectively,
were derived through our direct sales force and sales affiliates, with the
remainder from VARs. We provide warranty coverage on systems we sell through our
direct sales force, sales affiliates and VARs. To the extent we sell through
VARs, we may provide system design and support services while the VARs are
responsible for construction, maintenance and service.
Our
marketing programs include conferences and technology seminars, sales training,
public relations and advertising. Our sales and marketing group works closely
with our research and development and manufacturing groups to align our product
development roadmap. Our sales and marketing group also coordinates our product
launches and ongoing demand and supply planning with our development, operations
and sales groups, as well as with our customers, direct sales representatives
and distributors. We support our customers through our field application
engineering and customer support organizations. Please see Note 18 of Notes to
our Consolidated Financial Statements for information regarding our revenue by
geographic region.
Backlog
Components
Segment: Our solar cell, solar panel and inverter sales within the
components segment are typically ordered by customers under standard purchase
orders with relatively short delivery lead-times. We have entered into long-term
supply agreements with certain customers that contain minimum firm purchase
commitments. However, products to be delivered and the related delivery
schedules under these long-term contracts are generally subject to revision by
our customers. Accordingly, our backlog at any particular date is not
necessarily representative of actual sales for any succeeding period and we
believe that our backlog is not a meaningful indicator of future component
revenue.
Systems
Segment: Our systems segment revenue is primarily comprised of
engineering, procurement and construction, or EPC, projects which are governed
by customer contracts that require us to deliver functioning solar power systems
and are generally completed within 6 to 36 months from the date of the contract
signing. In addition, our systems segment also derives revenues from sales of
certain solar power products and services that are smaller in scope than an EPC
project. Our systems segment backlog represents the uncompleted
portion of contracted projects and totaled approximately $521.2 million as of
December 30, 2007, of which approximately $510.2 million is expected to be
completed during fiscal 2008. Our systems segment’s backlog does not
include orders for contracts that do not have readily determinable pricing or
which are not considered firm by management, such
as contracts in our new homes group that are generally
changeable and cancelable at the customer’s option.
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Our
EPC contracts are often cancelable by our customers under certain
situations. In addition, systems project revenues and related costs
are often subject to delays or scope modifications based on change orders agreed
to with our customers, or changes in the estimated construction costs to be
incurred in completing the project. Accordingly, our systems segment backlog may
not be a meaningful indicator of future systems revenue for any particular
period of time.
Competition
The
market for solar electric power technologies is competitive and continually
evolving. We expect to face increased competition, which may result in price
reductions, reduced margins or loss of market share. Our components solar
products compete with a large number of competitors in the solar power market,
including BP Solar International Inc., Evergreen Solar, Inc., First Solar Inc.,
Kyocera Corporation, Mitsubishi Electric Corporation, Motech Industries Inc.,
Q-Cells AG, Sanyo Corporation, Sharp Corporation, SolarWorld AG and Suntech
Power Holdings Co., Ltd. Some of our competitors have established a stronger
market position than ours and have larger resources and recognition than we
have. In addition, universities, research institutions and other companies such
as First Solar have brought to market alternative technologies such as thin
films and concentrators, which may compete with our technology in certain
applications. Furthermore, the solar power market in general competes with other
sources of renewable energy and conventional power generation.
We
believe that the key competitive factors in the market for solar cells and solar
panels include:
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power
efficiency and performance;
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price;
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aesthetic
appearance of solar cells and
panels;
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strength
of distribution relationships; and
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timeliness
of new product introductions.
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We
believe that we compete favorably with respect to these factors.
We
may also face competition from some of our customers which may develop products
or technologies internally which are competitive with our products, or which may
enter into strategic relationships with or acquire existing solar power product
providers.
Our
systems solar power products and services also compete against other power
generation sources including conventional fossil fuels supplied by utilities,
other alternative energy sources such as wind, biomass, concentrated solar
power and emerging distributed generation technologies such as
micro-turbines, sterling engines and fuel cells. We believe solar power has
certain advantages when compared to these other power generating technologies.
We believe solar power offers a stable power price compared to utility network
power, which typically increases as fossil fuel prices increase. In addition,
solar power systems are deployed in many sizes and configurations and do not
produce air, water and noise emissions. Most other distributed generation
technologies create environmental impacts of some sort. The high up-front cost
of solar relative to utility network power, however, is the primary market
barrier for on-grid applications.
In
the large-scale on-grid solar power systems market, we face direct competition
from a number of companies, including those that manufacture, distribute, or
install solar power systems as well as construction companies that have expanded
into the renewable sector. Many of these companies sell our products as well as
their own or those of other manufacturers. Our systems segment primary
competitors in the United States include BP Solar International, Inc., a
subsidiary of BP p.l.c., Conergy Inc., DT Solar, EI Solutions, Inc., GE Energy,
a subsidiary of General Electric Corporation, Schott Solar, Inc., Solar
Integrated Technologies, Inc., SPG Solar, Inc., Sun Edison LLC, Sunlink
Corporation, SunTechnics Installation & Services, Inc., Thompson
Technology Industries, Inc. and WorldWater & Power Corporation. Our
systems segment primary competitors in Europe include BP Solar, City Solar AG,
Conergy (through its subsidiaries AET Alternitive Energie Technik GmbH,
SunTechnics Solartechnik GmbH and voltwerk AG), PV-Systemtechnik Gbr, SAG
Solarstrom AG, Solon AG and Taufer Solar GmbH. We also compete with several
country specific system integrators and large construction companies, such as
Fomento de Construccion y Contratas, Elecnor, S.A. and Iberinco in Spain to name
a few. In each country where we enter as an EPC contractor we face new
competitors who may have strong prior experience in developing energy projects
or generally large scale construction projects. In addition, we will
occasionally compete with distributed generation equipment suppliers such as
Caterpillar, Inc. and Cummins, Inc.
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Competition
is intense, and many of our competitors have significantly greater access to
financial, technical, manufacturing, marketing, management and other resources
than we do. Many also have greater name recognition, a more established
distribution network and a larger installed base of customers. In addition, many
of our competitors have well-established relationships with our current and
potential suppliers, resellers and their customers and have extensive knowledge
of our target markets. As a result, our competitors may be able to
devote greater resources to the research, development, promotion and sale of
their products and respond more quickly to evolving industry standards and
changing customer requirements than we can. Consolidation or strategic alliances
among our competitors may strengthen these advantages and may provide them
greater access to customers or new technologies. We may also face competition
from some of our resellers, who may develop products internally that compete
with our product and service offerings, or who may enter into strategic
relationships with or acquire other existing solar power system providers. To
the extent that government funding for research and development grants, customer
tax rebates and other programs that promote the use of solar and other renewable
forms of energy are limited, we compete for such funds, both directly and
indirectly, with other renewable energy providers and customers.
The
principal elements of competition in the solar systems market include technical
expertise, experience, delivery capabilities, diversity of product offerings,
financing structures, marketing and sales, price, product performance, quality
and reliability, and technical service and support. We believe that we compete
favorably with respect to each of these factors, although we may be at a
disadvantage in comparison to larger companies with broader product lines and
greater technical service and support capabilities and financial resources. If
we cannot compete successfully in the solar power industry, our operating
results and financial condition will be adversely affected.
Intellectual
Property
We
rely on a combination of patent, copyright, trade secret, trademark and
contractual protection to establish and protect our proprietary rights.
“SunPower” is our registered trademark in the United States and the European
Community for solar cells and panels. We also hold registered trademarks for
PowerLight®,
PowerGuard®,
PowerTracker® and
SunTile® in the
United States and registered trademarks for PowerLight® and
PowerGuard® in the
European Community. We are seeking registration of SunPower® marks in
a number of foreign jurisdictions where we conduct business. We require our
customers to enter into confidentiality and nondisclosure agreements before we
disclose any sensitive aspects of our solar cells, technology or business plans,
and we typically enter into proprietary information agreements with employees
and consultants. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
technology. It is difficult to monitor unauthorized use of technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as laws in the United States. In addition, our competitors may
independently develop technology similar to ours.
Although
we apply for patents to protect our technology, our revenue is not dependent on
any particular patent we own. As of December 30, 2007, including the United
States and foreign countries, we had 80 issued patents and over 100 patent
applications pending across the entire company. We are co-owners of three
additional patents with Honda Giken Kogyo Kabushiki Kaisha. Pending patent
applications or any future patent application may or may not result in a patent
being issued with the scope of the claims we seek, and issued patents may be
challenged, invalidated or declared unenforceable. We intend to continue
assessing appropriate opportunities for patent protection of those aspects of
our technology, designs, and methodologies and processes that we believe provide
significant competitive advantages to us, and for licensing opportunities of new
technologies relevant to our business. We additionally rely on trade secret
rights to protect our proprietary information and know-how. We employ
proprietary processes and customized equipment in our manufacturing
facility.
Our
precautions may not prevent misappropriation or infringement of our intellectual
property. Third parties could infringe or misappropriate our patents,
copyrights, trademarks, trade secrets and other proprietary rights. Our failure
or inability to adequately protect our intellectual property could materially
harm our business. For more information about risks related to our intellectual
property, please see “Item 1A:
Risk Factors” including
“– We are dependent on our intellectual property, and we may face intellectual
property infringement claims that could be time-consuming and costly to defend
and could result in the loss of significant rights.” and “– One of our key products, the
PowerTracker ®, now referred to as
SunPowerTM Tracker, was acquired through an
assignment and acquisition of the patents associated with the product from a
third-party individual, and if we are unable to continue to use this product,
our business, prospects, operating results and financial condition would be
materially harmed.” and “– We rely substantially upon trade
secret laws and contractual restrictions to protect our proprietary rights, and,
if these rights are not sufficiently protected, our ability to compete and
generate revenue could suffer.” and “– We may not obtain sufficient
patent protection on the technology embodied in the solar cells or solar system
components we currently manufacture and market, which could harm our competitive
position and increase our expenses.”
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Public
Policy Considerations
Different
policy mechanisms have been used by governments to accelerate the adoption of
solar power. Examples of customer-focused financial mechanisms include capital
cost rebates, performance-based incentives, feed-in tariffs, tax credits and net
metering. Capital cost rebates provide funds to customers based on the cost of
size of a customer’s solar power system. Performance-based incentives
provide funding to a customer based on the energy produced by their solar
system. Feed-in tariffs pay customers for solar power system generation based on
kilowatt-hours produced, at a rate generally guaranteed for a period of time.
Tax credits reduce a customer’s taxes at the time the taxes are due. In the
United States and other countries, net metering has often been used as a
supplemental program in conjunction with other policy mechanisms. Under net
metering, a customer can generate more energy than used, during which periods
the electricity meter will spin backwards. During these periods, the customer
“lends” electricity to the grid, retrieving an equal amount of power at a later
time. Net metering encourages customers to size their systems to match their
electricity consumption over a period of time, for example over a month or a
year, rather than limiting solar generation to matching customers’ instantaneous
electricity use.
In
addition to the mechanisms described above, new market development mechanisms to
encourage the use of renewable energy sources continue to emerge. For example,
several states in the United States have adopted renewable portfolio standards,
or RPS, which mandate that a certain portion of electricity delivered to
customers come from a set of eligible renewable energy resources. In certain
developing countries, governments are establishing initiatives to expand access
to electricity, including initiatives to support off-grid rural electrification
using solar power.
Environmental
Regulations
We
use, generate and discharge toxic, volatile or otherwise hazardous chemicals and
wastes in our research and development and manufacturing activities. We are
subject to a variety of foreign, federal, state and local governmental laws and
regulations related to the purchase, storage, use and disposal of hazardous
materials. If we fail to comply with present or future environmental laws and
regulations, we could be subject to fines, suspension of production or a
cessation of operations. In addition, under some foreign, federal, state and
local statutes and regulations, a governmental agency may seek recovery and
response costs from operators of property where releases of hazardous substances
have occurred or are ongoing, even if the operator was not responsible for the
release or otherwise was not at fault.
We
believe that we have all environmental permits necessary to conduct our business
and expect to obtain all necessary environmental permits for our new facility.
We believe that we have properly handled our hazardous materials and wastes and
have appropriately remediated any contamination at any of our premises. We are
not aware of any pending or threatened environmental investigation, proceeding
or action by foreign, federal, state or local agencies, or third parties
involving our current facilities. Any failure by us to control the use of, or to
restrict adequately the discharge of, hazardous substances could subject us to
substantial financial liabilities, operational interruptions and adverse
publicity, any of which could materially and adversely affect our business,
results of operations and financial condition.
Employees
As
of December 30, 2007, we had approximately 3,530 employees worldwide,
including approximately 380 employees located in the United States, 3,110
employees located in the Philippines and 40 employees located in other
countries. Of these employees, approximately 3,130 were engaged in
manufacturing, 90 employees in construction projects, 10 employees in product
assembly, 70 employees in research and development, 150 employees in sales and
marketing and 80 employees in general and administrative. None of our employees
is covered by a collective bargaining agreement. Some of our services, including
certain information technology, legal, tax, treasury and human resources
services, are provided by Cypress pursuant to a master transition services
agreement between us and Cypress, as further described in Note 3 of Notes to
Consolidated Financial Statements. We have never experienced a work stoppage and
we believe relations with our employees are good.
Available
Information
We
make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934 free of charge on our website at www.sunpowercorp.com, as soon as
reasonably practicable after they are electronically filed or furnished to the
Securities and Exchange Commission, or the SEC. Additionally, copies of
materials filed by us with the SEC may be accessed at the SEC’s Public Reference
Room at 100 F Street NE, Washington, D.C. or at the SEC’s website at
http://www.sec.gov. For information about the SEC’s Public Reference Room, the
public may contact 1-800-SEC-0330. Copies of material filed by us with the SEC
may also be obtained by writing to us at our corporate headquarters, SunPower
Corporation, Attention: Investor Relations, 3939 North First Street,
San Jose, California 95134, or by calling (408) 240-5500. The contents of our
website are not incorporated into, or otherwise to be regarded as a part of,
this Annual Report on Form 10-K.
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ITEM 1A: RISK FACTORS
The
following discussion of risk factors contains “forward-looking statements” as
discussed in “Item 1: Business” and “Item 7: Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” These risk factors
may be important to understanding any statement in this Annual Report on Form
10-K or elsewhere. The following information should be read in conjunction with
“Item 1: Business” and “Item 7: Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the accompanying Notes to
Consolidated Financial Statements included in this Annual Report on Form
10-K.
Our
operations and financial results are subject to various risks and uncertainties,
including those described below, that could adversely affect our business,
financial condition, results of operations, cash flows, and trading price of our
common stock. Although we believe that we have identified and discussed below
the key risk factors affecting our business, there may be additional risks and
uncertainties that are not presently known or that are not currently believed to
be significant that may also adversely affect our business, financial condition,
results of operations, cash flows, and trading price of our class A common
stock.
Risks
Related to Our Business
The
solar power industry is currently experiencing an industry-wide shortage of
polysilicon. This shortage poses several risks to our business, including
possible constraints on revenue growth and possible decreases in our gross
margins and profitability.
Polysilicon
is an essential raw material in our production of solar cells. Polysilicon is
created by refining quartz or sand. Polysilicon is melted and grown into
crystalline ingots by companies specializing in ingot growth. We procure silicon
ingots from these suppliers on a contractual basis and then slice the ingots
into wafers. The ingots are sliced and the wafers are processed into solar cells
in our Philippines manufacturing facility. We also purchase wafers and
polysilicon from third-party vendors.
There
is currently an industry-wide shortage of polysilicon, which has resulted in
significant price increases. We expect that the average spot price of
polysilicon will continue to increase in the near-term. Increases in polysilicon
prices have in the past increased our manufacturing costs and may impact our
manufacturing costs and net income in the future. Even with these price
increases, demand for solar cells has increased, and many of our principal
competitors have announced plans to add additional manufacturing capacity. As
this manufacturing capacity becomes operational, it may increase the demand for
polysilicon in the near-term and further exacerbate the current shortage.
Polysilicon is also used in the semiconductor industry generally and any
increase in demand from that sector will compound the shortage. The production
of polysilicon is capital intensive and adding additional capacity requires
significant lead time. While we are aware that several new facilities for the
manufacture of polysilicon are under construction, we do not believe that the
supply imbalance will be remedied in the near-term. We expect that polysilicon
demand will continue to outstrip supply through much of 2008 and potentially for
a longer period.
Although
we have arrangements with vendors for the supply of what we believe will be an
adequate amount of silicon ingots through 2008, our purchase orders
are sometimes non-binding in nature. Our estimates regarding our supply
needs may not be correct and our purchase orders or our contracts may be
cancelled by our suppliers. Additionally, the volume and pricing associated with
these purchase orders and contracts may be changed by our suppliers based on
market conditions or for other reasons. If our suppliers were to cancel our
purchase orders or change the volume or pricing associated with them, we may be
unable to meet customer demand for our products, which could cause us to lose
customers, market share and revenue. This would have a material negative impact
on our business and operating results. If our manufacturing yields decrease
significantly, we add manufacturing capacity faster than currently planned or
our suppliers cancel or fail to deliver, we may not have made adequate provision
for our polysilicon needs for our manufacturing plans through 2008.
In
addition, since some of our silicon ingot and wafer arrangements are with
suppliers who do not themselves manufacture polysilicon but instead purchase
their requirements from other vendors, these suppliers may not be able to obtain
sufficient polysilicon to satisfy their contractual obligations to
us.
There
are a limited number of polysilicon suppliers. Many of our competitors also
purchase polysilicon from our suppliers. Some of them also have inter-locking
board members with their polysilicon suppliers or have entered into joint
ventures or binding supply contracts with their suppliers. Additionally, a
substantial amount of our future polysilicon requirements are expected to be
sourced by new suppliers that have not yet proven their ability to manufacture
large volumes of polysilicon. In some cases we expect that new entrants will
provide us with polysilicon, ingots and wafers. The failure of these new
entrants to produce adequate supplies of polysilicon,
ingots and/or wafers in the quantities and quality we require could
adversely affect our ability to grow production volumes and revenues and could
also result in a decline in our gross profit margins. Since we have committed to
significantly increase our manufacturing output, an inadequate supply of
polysilicon would harm us more than it would harm some of our
competitors.
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Additionally,
the steps we have taken to further increase the efficiency of our polysilicon
utilization are unproven at volume production levels and may not enable us to
realize the cost reductions we anticipate. Given the polysilicon shortage, we
believe the efficient use of polysilicon will be critical to our ability to
reduce our manufacturing costs. We continue to implement several measures to
increase the efficient use of polysilicon in our manufacturing process. For
example, we are developing processes to utilize thinner wafers which require
less polysilicon and improved wafer-slicing technology to reduce the amount of
material lost while slicing wafers, otherwise known as kerf loss. Although we
have implemented production using thinner wafers and anticipate further
reductions in wafer thickness, these methods may have unforeseen negative
consequences on our yields or our solar cell efficiency or reliability once they
are put into large-scale commercial production, or they may not enable us to
realize the cost reductions we hope to achieve.
Our
inability to obtain sufficient polysilicon, ingots or wafers at commercially
reasonable prices or at all for any of the foregoing reasons, or otherwise,
would adversely affect our ability to meet existing and future customer demand
for our products and could cause us to make fewer shipments, lose customers and
market share and generate lower than anticipated revenue, thereby seriously
harming our business, financial condition and results of
operations.
As
polysilicon supply increases, the corresponding increase in the global supply of
solar cells and panels may cause substantial downward pressure on the prices of
SunPower products, resulting in lower revenues and earnings.
The
scarcity of polysilicon has resulted in the underutilization of solar panel
manufacturing capacity at many competitors or potential competitors to SunPower,
particularly in China. As additional polysilicon becomes available over the
next 6 to 24 months, we expect solar panel production globally to
increase. Decreases in polysilicon pricing and increases in solar panel
production could each result in substantial downward pressure on the price of
solar cells and panels, including SunPower products. Such price reductions
could have a negative impact on our revenue and earnings, and materially
adversely affect our business and financial condition.
Long-term,
firm commitment supply agreements with polysilicon, ingot or wafer suppliers
could result in insufficient or excess inventory or place us at a competitive
disadvantage.
We
manufacture our solar cells utilizing ingots and wafers manufactured by third
parties, which in turn use polysilicon for their manufacturing process. We are
seeking to address the current polysilicon shortage by negotiating multi-year,
binding contractual commitments directly with polysilicon suppliers, and
supplying such polysilicon to third parties which provide us ingots and wafers.
Under such polysilicon agreements, we may be required to purchase a specified
quantity of polysilicon, ingots or wafers at fixed prices, in some cases subject
to upward inflation-related adjustments over a set period of time, which is
often a period of several years. We also may be required to make substantial
prepayments to these suppliers against future deliveries. For example, in
July 2007 we entered into a long-term supply agreement with Hemlock
Semiconductor Corporation, or Hemlock, a manufacturer of polysilicon. The
agreement requires us to purchase an amount of silicon that is expected to
support more than two gigawatts of solar cell production, at fixed prices from
2010 to 2019. We are also required to make prepayments to Hemlock prior to 2010
in the aggregate amount of $113.2 million in three equal installments. Such
prepayments will be used to fund the expansion of Hemlock’s polysilicon
manufacturing capacity and will be credited against future deliveries of
polysilicon to us. The Hemlock agreement, or any other “take or pay” agreement
we enter into, allows the supplier to invoice us for the full purchase price of
polysilicon we are under contract to purchase each year, whether or not we
actually order the required volume. If for any reason we fail to order the
required annual volume under the Hemlock or similar agreements, the resulting
monetary damages could have a material adverse effect on our business and
results of operations.
We
do not obtain contracts or commitments from customers for all of the solar
panels manufactured with the polysilicon purchased under such firm commitment
contracts. Instead, we rely on our long-term internal forecasts to determine the
timing of our production schedules and the volume and mix of products to be
manufactured, including the estimated quantity of polysilicon, ingots and wafers
needed. The level and timing of orders placed by customers may vary for many
reasons. As a result, at any particular time, we may have insufficient or excess
inventory, which could render us unable to fulfill customer orders or increase
our cost of production. In addition, we have negotiated the fixed prices under
these supply contracts based on our long-term projections of the future price of
polysilicon. If the spot price of polysilicon in future periods is less than the
price we have committed to pay either because of new technological developments
or any other reason, our cost of production could be comparatively higher than
that of competitors who buy polysilicon on the spot market. This would place us
at a competitive disadvantage to these competitors, and could materially and
adversely affect our business and results of operations.
Long-term
contractual commitments also expose us to specific counter-party risk, which can
be magnified when dealing with suppliers without a long, stable production and
financial history. For example, if one or more of our contractual counterparties
is unable or unwilling to provide us with the contracted amount of polysilicon,
wafers or ingots, we could be required to attempt to obtain polysilicon in the
spot market, which could be unavailable at that time, or only available at
prices in excess of our contracted prices. In addition, in the event any such
supplier experiences financial difficulties, it may be difficult or impossible,
or may require substantial time and expense, for us to recover any or all of our
prepayments. Any of the foregoing could materially harm our financial condition
and results of operations.
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The
reduction or elimination of government and economic incentives could cause our
revenue to decline and harm our financial results.
The
market for on-grid applications, where solar power is used to supplement a
customer’s electricity purchased from the utility network or sold to a utility
under tariff, depends in large part on the availability and size of government
and economic incentives. Because a majority of our sales are in the on-grid
market, the reduction or elimination of government and economic incentives would
adversely affect the growth of this market or result in increased price
competition, either of which could cause our revenue to decline and harm our
financial results.
Today,
the cost of solar power exceeds retail electric rates in many locations. As a
result, federal, state and local government bodies in many countries, most
notably Germany, Japan, Spain, Italy, Portugal, France, South Korea and the
United States, have provided incentives in the form of feed-in tariffs, rebates,
tax credits and other incentives to end users, distributors, system integrators
and manufacturers of solar power products to promote the use of solar energy in
on-grid applications and to reduce dependency on other forms of energy. These
government economic incentives could be reduced or eliminated altogether. For
example, Spain has been a strong supporter of solar power products and systems
and political changes in Spain could result in significant reductions or
eliminations of incentives, including the reduction of feed-in tariffs. In the
United States, the federal incentive tax credit for solar installations expires
in its current form at year-end 2008, and many commercial customers and
third-party financiers are increasingly unwilling to purchase solar systems
unless this tax credit is extended. Some solar program incentives expire,
decline over time, are limited in total funding or require renewal of authority.
Net metering and other operational policies in California or other markets could
limit the amount of solar power installed there. For
the year ended December 30, 2007, approximately 51% and 46% of our systems
segment revenue was generated in the United States and Spain, respectively.
Reductions in, or eliminations or expirations of, governmental incentives
could result in decreased demand for and lower revenue from our products.
Changes in the level or structure of a renewable portfolio standard could also
result in decreased demand for and lower revenue or revenue growth from our
products.
During
the year ended December 30, 2007, a significant share of systems segment
revenues were derived from sales of solar power systems to companies formed to
develop and operate solar power generation facilities. Such companies have been
formed by third-party investors with some frequency in the United States, Spain,
South Korea, and Portugal, as these investors seek to benefit from government
mandated feed-in tariffs and similar legislation. Our business depends in part
on the continuing formation of such companies and the potential revenue source
they represent. In deciding whether to form and invest in such companies,
potential investors weigh a variety of considerations, including their projected
return on investment. Such projections are based on current and proposed
federal, state and local laws, particularly tax legislation. Expiration of or
changes to these laws, including expiration of the U.S. solar incentive tax
credit, amendments to existing tax laws or the introduction of new tax laws, tax
court rulings as well as changes in interest rates, administrative guidelines,
ordinances and similar rules and regulations could result in different tax
assessments and may adversely affect an investor’s projected return on
investment, which could have a material adverse effect on our business and
results of operations.
The
execution of our growth strategy for our systems segment is dependent upon the
continued availability of third-party financing arrangements for our
customers.
For
many of our projects, our customers have entered into agreements to finance the
power systems over an extended period of time based on energy savings generated
by our solar power systems, rather than pay the full capital cost of purchasing
the solar power systems up front. For these types of projects, many of our
customers choose to purchase solar electricity under a power purchase agreement
with a financing company that purchases the system from us. In the year ended
December 30, 2007, approximately 54% of our systems revenue was derived from
sales of systems to financing companies that engage in power purchase agreements
with end-users of electricity. Of such
systems sales to financing companies that engage in power purchase agreements
with end-users of electricity, 52% and 43% of systems sales were derived in the
United States and Spain, respectively, in fiscal 2007. These structured
finance arrangements are complex and may not be feasible in many situations. In
addition, customers opting to finance a solar power system may forgo certain tax
advantages associated with an outright purchase on an accelerated basis which
may make this alternative less attractive for certain potential customers. If
customers are unwilling or unable to finance the cost of our products, or if the
parties that have historically provided this financing cease to do so, or only
do so on terms that are substantially less favorable for us or these customers,
our growth will be adversely affected.
The
success of our systems segment will depend in part on the continuing formation
of such financing companies and the potential revenue source they represent. In
deciding whether to form and invest in such financing companies, potential
investors weigh a variety of considerations, including their projected return on
investment. Such projections are based on current and proposed federal, state
and local laws, particularly tax legislation. Changes to these laws, including
amendments to existing tax laws or the introduction of new tax laws, tax court
rulings as well as changes in administrative guidelines, ordinances and similar
rules and regulations could result in different tax consequences which may
adversely affect an investor’s projected return on investment, which could have
a material adverse effect on our business and results of
operations.
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MMA
Renewable Ventures (a subsidiary of MuniMae, or MMA), is a significant customer
of our systems segment, accounting for approximately 16% of our total revenue in
fiscal 2007. MMA Renewable Ventures is a financing company that purchases
systems from us and engages in power purchase agreements with end-users of
electricity. Effective February 6, 2008, the New York Stock Exchange, or NYSE,
suspended the trading of the common stock of MMA because MMA announced it will
be unable to file its audited 2006 financial statements by March 3, 2008, the
deadline imposed by the NYSE. In connection with completing the restatement and
filing the Annual Report on Form 10-K for the year ended December 31, 2006, MMA
incurred substantial accounting costs. In addition, general economic conditions
have led to a severe capital and credit downturn, resulting in a slow-down to at
least one element of MMA’s business. MMA’s management has evaluated their
financial situation and determined it is not reasonably likely that the current
reduction in net cash generated from operations will negatively impact its
ability to remain a going concern. However, in the event MMA
Renewable Ventures ceases to be a significant customer of ours or fails to pay
us in a timely manner, it could have a material adverse effect on our future
results of operations.
We
may be unable to achieve our goal of reducing the cost of installed solar
systems by 50 percent by 2012, which may negatively impact our ability to sell
our products in a competitive environment, resulting in lower revenues, gross
margins and earnings.
To
reduce the cost of installed solar systems by 50 percent by 2012, as compared
against the cost in 2006, we will have to achieve cost savings across the entire
value chain from designing to manufacturing to distributing to selling and
ultimately to installing solar systems. We have identified specific areas of
potential savings and are pursuing targeted goals. However, such cost savings
are dependent upon decreasing silicon prices and lowering manufacturing costs.
As part of our announced strategy, we have entered into long-term silicon supply
agreements to promote an adequate supply of raw material as well as to reduce
the overall cost of such raw material. Additionally, we are increasing
production capacity at our existing manufacturing facilities while seeking to
improve efficiencies. We also expect to develop additional manufacturing
capacity. As a result, we expect these improvements will decrease our per unit
production costs. However, if we are unsuccessful in our efforts to reduce the
cost of installed solar systems by 50 percent by 2012, our revenues, gross
margins and earnings may be negatively impacted in the competitive environment
and particularly in the event that governmental and fiscal incentives are
reduced or an increase in the global supply of solar cells and solar panels
causes substantial downward pressure on prices of our products.
We
may not be able to increase or sustain our recent growth rate, and we may not be
able to manage our future growth effectively.
We
may not be able to continue to expand our business or manage future growth. We
plan to significantly increase our production capacity between 2008 and 2010. To
do so will require successful execution of expanding our existing manufacturing
facilities, developing new manufacturing facilities, ensuring delivery of
adequate polysilicon and ingots, developing more efficient wafer-slicing
methods, maintaining adequate liquidity and financial resources, and continuing
to increase our revenues from operations. Expanding our manufacturing facilities
or developing facilities may be delayed by difficulties such as unavailability
of equipment or supplies or equipment malfunction. Ensuring delivery of adequate
polysilicon and ingots is subject to many market risks including scarcity,
significant price fluctuations and competition. Maintaining adequate liquidity
is dependent upon a variety of factors including continued revenues from
operations and compliance with our indentures and credit agreements. If we are
unsuccessful in any of these areas, we may not be able to achieve our growth
strategy and increase production capacity as planned during the foreseeable
future.
Prior
to our acquisition, SP Systems experienced significant revenue growth due
primarily to the development and market acceptance of its PowerGuard ® roof
system, the acquisition and introduction of its PowerTracker ® ground
and elevated parking systems, its development of other technologies and
increasing global interest and demand for renewable energy sources, including
solar power generation. As a result, SP Systems increased its revenues in a
relatively short period of time. Its annual revenue increased from $50.9 million
in 2003 to $87.6 million in 2004 to $107.8 million in 2005 to $243.4 million in
2006. As a result of our acquisition involving SP Systems, our systems segment
revenue for the year ended December 30, 2007 was $464.2 million. We may not
experience similar growth of our total revenue or even similar growth of our
systems segment revenue in future periods. Accordingly, investors should not
rely on the results of any prior quarterly or annual period as an indication of
our future operating performance.
Our
recent expansion has placed, and our planned expansion and any other future
expansion will continue to place, a significant strain on our management,
personnel, systems and resources. We plan to purchase additional equipment to
significantly expand our manufacturing capacity and to hire additional employees
to support an increase in manufacturing, research and development and our sales
and marketing efforts. We had approximately 3,530 full-time employees as of
December 30, 2007, and we anticipate that we will need to hire a significant
number of highly skilled technical, manufacturing, sales, marketing,
administrative and accounting personnel. The competition for qualified personnel
is intense in our industry. We may not be successful in attracting and retaining
sufficient numbers of qualified personnel to support our anticipated growth. To
successfully manage our growth and handle the responsibilities of being a public
company, we believe we must effectively:
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hire,
train, integrate and manage additional qualified engineers for research
and development activities, sales and marketing personnel, and financial
and information technology
personnel;
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retain
key management and augment our management team, particularly if we lose
key members;
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continue
to enhance our customer resource management and manufacturing management
systems;
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implement
and improve additional and existing administrative, financial and
operations systems, procedures and controls, including the need to update
and integrate our financial internal control systems in SP Systems and in
our Philippines facility with those of our San Jose, California
headquarters;
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expand
and upgrade our technological capabilities;
and
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manage
multiple relationships with our customers, suppliers and other third
parties.
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We
may encounter difficulties in effectively managing the budgeting, forecasting
and other process control issues presented by rapid growth. If we are unable to
manage our growth effectively, we may not be able to take advantage of market
opportunities, develop new solar cells and other products, satisfy customer
requirements, execute our business plan or respond to competitive
pressures.
Since
we cannot test our solar panels for the duration of our standard 25-year
warranty period, we may be subject to unexpected warranty expense; if we are
subject to warranty and product liability claims, such claims could adversely
affect our business and results of operations.
The
possibility of future product failures could cause us to incur substantial
expense to repair or replace defective products. We have agreed to indemnify our
customers and our distributors in some circumstances against liability from
defects in our solar cells. A successful indemnification claim against us could
require us to make significant damage payments, which would negatively affect
our financial results.
In
our components segment, our current standard product warranty for our solar
panels includes a 10-year warranty period for defects in materials and
workmanship and a 25-year warranty period for declines in power performance as
well as a one-year warranty on the functionality of our solar cells. We believe
our warranty periods are consistent with industry practice. Due to the long
warranty period and our proprietary technology, we bear the risk of extensive
warranty claims long after we have shipped product and recognized revenue. We
have sold solar cells only since late 2004. Any increase in the defect rate of
our products would cause us to increase the amount of warranty reserves and have
a corresponding negative impact on our results. Although we conduct accelerated
testing of our solar cells and have several years of experience with our all
back contact cell architecture, our solar panels have not and cannot be tested
in an environment simulating the 25-year warranty period. As a result of the
foregoing, we may be subject to unexpected warranty expense, which in turn would
harm our financial results.
Like
other retailers, distributors and manufacturers of products that are used by
consumers, we face an inherent risk of exposure to product liability claims in
the event that the use of the solar power products into which our solar cells
and solar panels are incorporated results in injury. We may be subject to
warranty and product liability claims in the event that our solar power systems
fail to perform as expected or if a failure of our solar power systems results,
or is alleged to result, in bodily injury, property damage or other damages.
Since our solar power products are electricity producing devices, it is possible
that our products could result in injury, whether by product malfunctions,
defects, improper installation or other causes. In addition, since we only began
selling our solar cells and solar panels in late 2004 and the products we are
developing incorporate new technologies and use new installation methods, we
cannot predict whether or not product liability claims will be brought against
us in the future or the effect of any resulting negative publicity on our
business. Moreover, we may not have adequate resources in the event of a
successful claim against us. We have evaluated the potential risks we face and
believe that we have appropriate levels of insurance for product liability
claims. We rely on our general liability insurance to cover product liability
claims and have not obtained separate product liability insurance. However, a
successful warranty or product liability claim against us that is not covered by
insurance or is in excess of our available insurance limits could require us to
make significant payments of damages. In addition, quality issues can have
various other ramifications, including delays in the recognition of revenue,
loss of revenue, loss of future sales opportunities, increased costs associated
with repairing or replacing products, and a negative impact on our goodwill and
reputation, which could also adversely affect our business and operating
results. Our exposure to warranty and product liability claims is expected to
increase significantly in connection with our planned expansion into the new
home development market.
Warranty
and product liability claims may result from defects or quality issues in
certain third-party technology and components that our systems segment
incorporates into its solar power systems, particularly solar cells and panels,
over which it has no control. While its agreements with its suppliers generally
include warranties, such provisions may not fully compensate us for any loss
associated with third-party claims caused by defects or quality issues in such
products. In the event we seek recourse through warranties, we will also be
dependent on the creditworthiness and continued existence of these
suppliers.
Our
current standard warranty for our solar power systems differs by geography and
end-customer application and includes either a one, two or five year
comprehensive parts and workmanship warranty, after which the customer may
typically extend the period covered by its warranty for an additional fee. Due
to the warranty period, we bear the risk of extensive warranty claims long after
we have completed a project and recognized revenues. Future product failures
could cause us to incur substantial expenses to repair or replace defective
products. While we generally pass through manufacturer warranties we receive
from our suppliers to our customers, we are responsible for repairing or
replacing any defective parts during our warranty period, often including those
covered by manufacturers’ warranties. If the manufacturer disputes or otherwise
fails to honor its warranty obligations, we may be required to incur substantial
costs before we are compensated, if at all, by the manufacturer. Furthermore,
our warranties may exceed the period of any warranties from our suppliers
covering components included in our systems, such as inverters.
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Prior
to our acquisition of SP Systems, one of SP System’s major panel suppliers at
the time, AstroPower, Inc., filed for bankruptcy in February 2004. SP Systems
had installed solar systems incorporating over 30,000 AstroPower panels, of
which approximately 19,000 panels are still under warranty. The majority of
these warranties expire by 2022. While we have not experienced a significant
number of warranty or other claims related to the installed AstroPower panels,
we may in the future incur significant unreimbursable expenses in connection
with the repair or replacement of these panels, which could have a material
adverse effect on our business and results of operations. In addition, another
major supplier of solar panels notified us of a product defect that may affect a
substantial number of panels installed by SP Systems between 2002 and September
2006. If the supplier does not perform its contractual obligations to remediate
the defective panels, we will be exposed to those costs it would incur under the
warranty with SP Systems’ customers.
The
competitive environment in which our systems business operates often requires us
to arrange financing for our customer’s projects and/or undertake post-sale
customer obligations. If we are unable to arrange adequate financing
or if our post-sale customer obligations are more costly than expected, our
revenue and financial results could be materially adversely
affected.
We
arrange third-party financing for most of our end customer’s solar projects that
we install through our systems segment. Additionally, we are often required as a
condition of financing or at the request of our end customer to undertake
certain post-sale obligations such as:
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System
output performance
guaranties;
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System
maintenance;
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Liquidated
damage payments or customer termination rights if the system we are
constructing is not commissioned within specified
timeframes;
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Guaranties
of certain minimum residual value of the system at specified future dates;
and
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System
put-rights whereby we could be required buy-back a customer’s system at
fair value on specified future
dates.
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Such
financing arrangements and post-sale obligations involve complex accounting
analyses and judgments regarding the timing of revenue and expense recognition
and in certain situations these factors may require us to defer revenue
recognition until projects are completed, which could adversely affect revenue
and profits in a particular period. Moreover, if we are unable to
arrange adequate financing or if our post-sale customer obligations are more
costly than expected, our revenue and financial results could be materially
adversely affected.
Our
systems segment acts as the general contractor for our customers in connection
with the installations of our solar power systems and is subject to risks
associated with construction, cost overruns, delays and other contingencies tied
to performance bonds and letters of credit, which could have a material adverse
effect on our business and results of operations.
Our
systems segment acts as the general contractor for our customers in connection
with the installation of our solar power systems. All essential costs are
estimated at the time of entering into the sales contract for a particular
project, and these are reflected in the overall price that we charge our
customers for the project. These cost estimates are preliminary and may or may
not be covered by contracts between us or the other project developers,
subcontractors, suppliers and other parties to the project. In addition, we
require qualified, licensed subcontractors to install most of our systems.
Shortages of such skilled labor could significantly delay a project or otherwise
increase our costs. Should miscalculations in planning a project or defective or
late execution occur, we may not achieve our expected margins or cover our
costs. Also, some systems customers require performance bonds issued by a
bonding agency or letters of credit issued by financial institutions. Due to the
general performance risk inherent in construction activities, it has become
increasingly difficult recently to secure suitable bonding agencies willing to
provide performance bonding, and obtaining letters of credit requires adequate
collateral because we have not obtained a credit rating. In the event we are
unable to obtain bonding or sufficient letters of credit, we will be unable to
bid on, or enter into, sales contracts requiring such bonding.
In
addition, some of our larger systems customers require that we pay substantial
liquidated damages for each day or other period its solar installation is not
completed beyond an agreed target date, up to and including the return of the
entire project sale price. This is particularly true in Europe, where long-term,
fixed feed-in tariffs available to investors are typically set during a
prescribed period of project completion, but the fixed amount declines over time
for projects completed in subsequent periods. In addition, investors often
require that the solar power system generate specified levels of electricity in
order to maintain their investment returns, allocating substantial risk and
financial penalties to us if those levels are not achieved, up to and including
the return of the entire project sale price. Furthermore, our customers often
require protections in the form of conditional payments, payment retentions or
holdbacks, and similar arrangements that condition its future payments on
performance. Delays in solar panel or other supply shipments, other construction
delays, unexpected performance problems in electricity generation or other
events could cause us to fail to meet these performance criteria, resulting in
unanticipated and severe revenue and earnings losses and financial penalties.
Construction delays are often caused by inclement weather, failure to timely
receive necessary approvals and permits, or delays in obtaining necessary solar
panels, inverters or other materials. All such risks could have a material
adverse effect on our business and results of operations.
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A
limited number of components customers are expected to continue to comprise a
significant portion of our revenues and any decrease in revenue from these
customers could have a material adverse effect on us.
Even
though our customer base is expected to increase and our revenue streams to
diversify, a substantial portion of our net revenues could continue to depend on
sales to a limited number of customers. Currently, our largest components
segment customers are Conergy and Solon. Conergy and Solon individually
accounted for less than 10% of total revenue for the year ended December 30,
2007. However, the loss of sales to either of these customers would have a
significant negative impact on our business. Our agreements with these customers
may be cancelled if we fail to meet certain product specifications or materially
breach the agreement or in the event of bankruptcy, and our customers may seek
to renegotiate the terms of current agreements or renewals. Most of the solar
panels we sell to the European market are sold through our agreement with
Conergy, and we may enter into similar agreements in the future.
In
November 2007, Conergy announced that it was experiencing a liquidity
shortfall. These liquidity issues were subsequently resolved through
interim financing from banks. In addition, Conergy is currently undergoing a
reorganization which includes changes in the composition of management,
discontinuation of certain non-core businesses and headcount
reductions. Conergy’s management has evaluated their financial situation
and determined it is not reasonably likely that the recently experienced
shortfall in liquidity and restructuring activities will negatively impact its
ability to remain a going concern. However, in the event Conergy ceases to
be a significant customer of ours or fails to pay us in a timely manner, it
could have a material adverse effect on our future results of
operations.
Our
operating results will be subject to fluctuations and are inherently
unpredictable; if we fail to meet the expectations of securities analysts or
investors, our stock price may decline significantly.
Our
quarterly revenue and operating results will be difficult to predict and have in
the past fluctuated from quarter to quarter. It is possible that our operating
results in some quarters will be below market expectations. In particular, our
systems segment is difficult to forecast and is susceptible to severe
fluctuations in financial results. The amount, timing and mix of
sales of our systems segment, often for a single medium or large-scale project,
may cause severe fluctuations in our revenue and other financial results.
Further, our
revenue mix of high margin material sales versus lower margin projects in the
systems business segment can fluctuate dramatically quarter to quarter, which
may adversely affect our revenue and financial results in any given
period. Finally, our ability to meet project completion
schedules for an individual project and the corresponding revenue impact under
the percentage-of-completion method of recognizing revenue, may similarly cause
severe fluctuations in our revenue and other financial results. This may cause
us to miss analysts’ guidance or any future guidance announced by
us.
In
addition, our quarterly operating results will also be affected by a number of
other factors, including:
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the
average selling price of our solar cells, solar panels and solar power
systems;
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the
availability and pricing of raw materials, particularly
polysilicon;
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the
availability, pricing and timeliness of delivery of raw materials and
components, particularly solar panels and balance of systems components,
including steel, necessary for our solar power systems to
function;
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the
rate and cost at which we are able to expand our manufacturing and product
assembly capacity to meet customer demand, including costs and timing of
adding personnel;
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construction
cost overruns, including those associated with the introduction of new
products;
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the
impact of seasonal variations in demand and/or revenue recognition linked
to construction cycles and weather
conditions;
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timing,
availability and changes in government incentive
programs;
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unplanned
additional expenses such as manufacturing failures, defects or
downtime;
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acquisition
and investment related costs;
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unpredictable
volume and timing of customer orders, some of which are not fixed by
contract but vary on a purchase order
basis;
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the
loss of one or more key customers or the significant reduction or
postponement of orders from these
customers;
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geopolitical
turmoil within any of the countries in which we operate or sell
products;
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foreign
currency fluctuations, particularly in the Euro, Philippine peso or South
Korean won;
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the
effect of currency hedging
activities;
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our
ability to establish and expand customer
relationships;
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changes
in our manufacturing costs;
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changes
in the relative sales mix of our systems, solar cells and solar
panels;
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the
availability, pricing and timeliness of delivery of other products, such
as inverters and other balance of systems materials necessary for our
solar power products to function;
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our
ability to successfully develop, introduce and sell new or enhanced solar
power products in a timely manner, and the amount and timing of related
research and development costs;
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the
timing of new product or technology announcements or introductions by our
competitors and other developments in the competitive
environment;
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the
willingness of competing solar cell and panel suppliers to continue
product sales to our systems
segment;
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increases
or decreases in electric rates due to changes in fossil fuel prices or
other factors; and
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shipping
delays.
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We
base our planned operating expenses in part on our expectations of future
revenue, and a significant portion of our expenses will be fixed in the
short-term. If revenue for a particular quarter is lower than we expect, we
likely will be unable to proportionately reduce our operating expenses for that
quarter, which would harm our operating results for that quarter. This may cause
us to miss analysts’ guidance or any guidance announced by us. If we fail to
meet or exceed analyst or investor expectations or our own future guidance, even
by a small amount, our stock price could decline, perhaps
substantially.
Our
solar cell production lines are located in our manufacturing facilities in the
Philippines, and if we experience interruptions in the operation of these
production lines or are unable to add additional production lines, it would
likely result in lower revenue and earnings than anticipated.
We
currently have seven solar cell manufacturing lines in production which are
located at our manufacturing facilities in the Philippines. If our current or
future production lines were to experience any problems or downtime, we would be
unable to meet our production targets and our business would suffer. If any
piece of equipment were to break down or experience downtime, it could cause our
production lines to go down. We have started operations in our second solar cell
manufacturing facility nearby our existing facility in the Philippines. This
expansion has required and will continue to require significant management
attention, a significant investment of capital and substantial engineering
expenditures and is subject to significant risks including:
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we
may experience cost overruns, delays, equipment problems and other
operating difficulties;
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we
may experience difficulties expanding our processes to larger production
capacity;
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our
custom-built equipment may take longer and cost more to engineer than
planned and may never operate as designed;
and
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we
are incorporating first-time equipment designs and technology
improvements, which we expect to lower unit capital and operating costs,
but this new technology may not be
successful.
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If
we experience any of these or similar difficulties, we may be unable to complete
the addition of new production lines on schedule in order to expand our
manufacturing facilities and our manufacturing capacity could be substantially
constrained. If this were to occur, our per-unit manufacturing costs would
increase, we would be unable to increase sales or gross margins as planned and
our earnings would likely be materially impaired.
Our
systems segment recognizes revenue on a “percentage-of-completion” basis and
upon the achievement of contractual milestones and any delay or cancellation of
a project could adversely affect our business.
Our
systems segment recognizes revenue on a “percentage-of-completion” basis and, as
a result, the revenue from this segment is driven by the performance of our
contractual obligations, which is generally driven by the timelines of
installation of our solar power systems at customer sites. The
percentage-of-completion method of accounting for revenue recognition is
inherently subjective because it relies on management estimates of total project
cost as a basis for recognizing revenue and profit. Accordingly, revenue
and profit we have recognized under the percentage-of-completion method are
potentially subject to adjustments in subsequent periods based on refinements in
estimated costs of project completion that could materially impact our future
revenue and profit.
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In
connection with our acquisition of SP Systems, we do not recognize revenue from
intercompany sales by our components segment to our systems segment. Instead,
the sale of our solar panels used for construction projects are included in
system segment revenues. This could result in unpredictability of revenue and,
in the near term, a revenue decrease. As with any project-related business,
there is the potential for delays within any particular customer project.
Variation of project timelines and estimates may impact our ability to recognize
revenue in a particular period. Moreover, incurring penalties involving the
return of the contract price to the customer for failure to timely install one
project could negatively impact our ability to continue to recognize revenue on
a “percentage-of-completion” basis generally for other projects. In addition,
certain customer contracts may include payment milestones due at specified
points during a project. Because our systems segment usually must invest
substantial time and incur significant expense in advance of achieving
milestones and the receipt of payment, failure to achieve such milestones could
adversely affect our business and results of operations.
We
have recently established a captive solar panel assembly factory, and, if this
panel manufacturing factory is unable to produce high quality solar panels at
commercially reasonable costs, our revenue growth and gross margin could be
adversely affected.
We
currently run three solar panel assembly lines in the Philippines with 90
megawatts of production capacity. This factory commenced commercial production
during the fourth quarter of 2006. Much of the manufacturing equipment and
technology in this factory is new and ramping to achieve their full rated
capacity. In the event that this factory is unable to ramp production with
commercially reasonable yields and competitive production costs, our anticipated
revenue growth and gross margin will be adversely affected.
Expansion
of our manufacturing capacity has and will continue to increase our fixed costs,
which increase may have a negative impact on our financial condition if demand
for our products decreases.
We
have recently expanded, and plan to continue to expand, our manufacturing
facilities. As we build additional manufacturing lines or facilities, our fixed
costs will increase. If the demand for our solar power products or our
production output decreases, we may not be able to spread a significant amount
of our fixed costs over the production volume, thereby increasing our per unit
fixed cost, which would have a negative impact on our financial condition and
results of operations.
We
depend on a third-party subcontractor in China to assemble a significant
portion of our solar cells into solar panels and any failure to obtain
sufficient assembly and test capacity could significantly delay our ability to
ship our solar panels and damage our customer relationships.
Historically,
we have relied on Jiawei, a third-party subcontractor in China, to assemble
a significant portion of our solar cells into solar panels and perform
panel testing and to manage packaging, warehousing and shipping of our solar
panels. We do not have a long-term agreement with Jiawei and we typically obtain
its services based on short-term purchase orders that are generally aligned with
timing specified by our customers’ purchase orders and our sales forecasts. If
the operations of Jiawei were disrupted or its financial stability impaired, or
if it should choose not to devote capacity to our solar panels in a timely
manner, our business would suffer as we may be unable to produce finished solar
panels on a timely basis. In addition, we supply inventory to Jiawei and we bear
the risk of loss, theft or damage to our inventory while it is held in its
facilities.
As
a result of outsourcing a significant portion of this final step in our
production, we face several significant risks, including:
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limited
assembly and testing capacity and potentially higher
prices;
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limited
control over delivery schedules, quality assurance and control,
manufacturing yields and production costs;
and
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delays
resulting from an inability to move production to an alternate
provider.
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The
ability of our subcontractor to perform assembly and test is limited by its
available capacity. We do not have a guaranteed level of production capacity
with our subcontractor, and our production needs for solar panels may differ
from our forecasts provided to Jiawei. Other customers of Jiawei that are larger
and better financed than we are, or that have long-term agreements in place, may
induce Jiawei to reallocate capacity to them. Any reallocation could impair our
ability to secure the supply of solar panels that we need for our customers. In
addition, interruptions to the panel manufacturing processes caused by a natural
or man-made disaster could result in partial or complete disruption in supply
until we are able to shift manufacturing to another facility. It may not be
possible to obtain sufficient capacity or comparable production costs at another
facility. Migrating our design methodology to a new third-party subcontractor or
to a captive panel assembly facility could involve increased costs, resources
and development time. Utilizing additional third-party subcontractors could
expose us to further risk of losing control over our intellectual property and
the quality of our solar panels. Any reduction in the supply of solar panels
could impair our revenue by significantly delaying our ability to ship products
and potentially damage our relationships with existing customers.
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If
we do not achieve satisfactory yields or quality in manufacturing our solar
cells, our sales could decrease and our relationships with our customers and our
reputation may be harmed.
The
manufacture of solar cells is a highly complex process. Minor deviations in the
manufacturing process can cause substantial decreases in yield and in some
cases, cause production to be suspended or yield no output. We have from time to
time experienced lower than anticipated manufacturing yields. This often occurs
during the production of new products or the installation and start-up of new
process technologies or equipment. For example, we recently acquired a building
to house our second solar cell manufacturing facility near our existing
facility. As we expand our manufacturing capacity and bring additional lines or
facilities into production, we may experience lower yields initially as is
typical with any new equipment or process. We also expect to experience lower
yields as we continue the initial migration of our manufacturing processes to
thinner wafers. If we do not achieve planned yields, our product costs could
increase, and product availability would decrease resulting in lower revenues
than expected.
Additionally,
products as complex as ours may contain undetected errors or defects, especially
when first introduced. For example, our solar cells and solar panels may contain
defects that are not detected until after they are shipped or are installed
because we cannot test for all possible scenarios. These defects could cause us
to incur significant re-engineering costs, divert the attention of our
engineering personnel from product development efforts and significantly affect
our customer relations and business reputation. If we deliver solar cells or
solar panels with errors or defects, including cells or panels of third-party
manufacturers, or if there is a perception that such solar cells or solar panels
contain errors or defects, our credibility and the market acceptance and sales
of our products could be harmed.
Existing
regulations and policies and changes to these regulations and policies may
present technical, regulatory and economic barriers to the purchase and use of
solar power products, which may significantly reduce demand for our products and
services.
The
market for electricity generation products is heavily influenced by foreign,
U.S. federal, state and local government regulations and policies concerning the
electric utility industry, as well as policies promulgated by electric
utilities. These regulations and policies often relate to electricity pricing
and technical interconnection of customer-owned electricity generation. In the
U.S. and in a number of other countries, these regulations and policies are
being modified and may continue to be modified. Customer purchases of, or
further investment in the research and development of, alternative energy
sources, including solar power technology, could be deterred by these
regulations and policies, which could result in a significant reduction in the
potential demand for our solar power products. For example, without a regulatory
mandated exception for solar power systems, utility customers are often charged
interconnection or standby fees for putting distributed power generation on the
electric utility network. These fees could increase the cost to our customers of
using our solar power products and make them less desirable, thereby harming our
business, prospects, results of operations and financial condition.
We
anticipate that our solar power products and their installation will be subject
to oversight and regulation in accordance with national and local ordinances
relating to building codes, safety, environmental protection, utility
interconnection and metering and related matters. It is difficult to track the
requirements of individual states and design equipment to comply with the
varying standards. Any new government regulations or utility policies pertaining
to our solar power products may result in significant additional expenses to us
and our resellers and their customers and, as a result, could cause a
significant reduction in demand for our solar power products.
We
incurred net losses from inception through 2005 and for the quarter ended July
1, 2007 and we may not be able to generate sufficient revenue and gross margin
in the future to achieve or sustain profitability.
We
have incurred net losses from inception through 2005 and for the quarter ended
July 1, 2007. On December 30, 2007, we had an accumulated deficit of
approximately $22.8 million. To maintain our profitability, we will need to
generate and sustain higher revenue while maintaining reasonable cost and
expense levels. We do not know if our revenue will grow, or if it will grow
sufficiently to outpace our expenses, which we expect to increase as we expand
our manufacturing capacity. We may not be able to sustain or increase
profitability on a quarterly or an annual basis. If we do not sustain
profitability or otherwise meet the expectations of securities analysts or
investors, the market price of our common stock will likely
decline.
We
will continue to be dependent on a limited number of third-party suppliers for
key components for our solar systems products during the near-term, which could
prevent us from delivering our products to our customers within required
timeframes, which could result in installation delays, cancellations, liquidated
damages and loss of market share.
In
addition to our reliance on a small number of suppliers for its solar cells and
panels, we rely on third-party suppliers for key components for our solar power
systems, such as inverters that convert the direct current electricity generated
by solar panels into alternating current electricity usable by the customer. For
the year ended December 30, 2007, one supplier accounted for most of our
inverter purchases for domestic projects, two suppliers accounted for most of
our inverter purchases for European projects and one supplier accounted for all
of the inverter purchases for our Asia projects. In addition, one vendor
supplies all of the foam required to manufacture our PowerGuard ® roof
system.
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If
we fail to develop or maintain our relationships with our limited suppliers, we
may be unable to manufacture our products or our products may be available only
at a higher cost or after a long delay, which could prevent us from delivering
our products to our customers within required timeframes and we may experience
order cancellation and loss of market share. To the extent the processes that
our suppliers use to manufacture components are proprietary, we may be unable to
obtain comparable components from alternative suppliers. The failure of a
supplier to supply components in a timely manner, or to supply components that
meet our quality, quantity and cost requirements, could impair our ability to
manufacture our products or decrease their costs. If we cannot obtain substitute
materials on a timely basis or on acceptable terms, we could be prevented from
delivering our products to our customers within required timeframes, which could
result in installation delays, cancellations, liquidated damages and loss of
market share, any of which could have a material adverse effect on our business
and results of operations.
We
depend on a combination of our own wafer-slicing operations and those of other
vendors for the wafer-slicing stage of our manufacturing, and any technical
problems, breakdowns, delays or cost increases could significantly delay our
manufacturing operations, decrease our output and increase our
costs.
We
have historically depended on the wafer-slicing operations of third-party
vendors to slice a portion of our ingots into wafers. In the year ended December
30, 2007, we sliced approximately 44% of our wafers. In October 2007, we
announced our entry into a joint venture agreement to form a new company in the
Philippines named First Philec Solar Corporation. This new company was formed to
perform wafer-slicing operations for us. If our third-party vendors increase
their prices or decrease or discontinue their shipments to us, as a result of
equipment malfunctions, competing purchasers or otherwise, and we are unable to
obtain substitute wafer-slicing from another vendor on acceptable terms, or
increase our own wafer-slicing operations on a timely basis, our sales will
decrease, our costs may increase or our business will otherwise be
harmed.
We
obtain capital equipment used in our manufacturing process from sole suppliers
and if this equipment is damaged or otherwise unavailable, our ability to
deliver products on time will suffer, which in turn could result in order
cancellations and loss of revenue.
Some
of the capital equipment used in the manufacture of our solar power products and
in our wafer-slicing operations have been developed and made specifically for
us, is not readily available from multiple vendors and would be difficult to
repair or replace if it were to become damaged or stop working. In addition, we
currently obtain the equipment for many of our manufacturing processes from sole
suppliers and we obtain our wafer-slicing equipment from one supplier. If any of
these suppliers were to experience financial difficulties or go out of business,
or if there were any damage to or a breakdown of our manufacturing or
wafer-slicing equipment at a time when we are manufacturing commercial
quantities of our products, our business would suffer. In addition, a supplier’s
failure to supply this equipment in a timely manner, with adequate quality and
on terms acceptable to us, could delay our capacity expansion of our
manufacturing facility and otherwise disrupt our production schedule or increase
our costs of production.
Acquisitions
of other companies or investments in joint ventures with other companies could
adversely affect our operating results, dilute our stockholders’ equity, or
cause us to incur additional debt or assume contingent liabilities.
To
increase our business and maintain our competitive position, we may acquire
other companies or engage in joint ventures in the future. Acquisitions and
joint ventures involve a number of risks that could harm our business and result
in the acquired business or joint venture not performing as expected,
including:
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insufficient
experience with technologies and markets in which the acquired business is
involved, which may be necessary to successfully operate and integrate the
business;
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problems
integrating the acquired operations, personnel, technologies or products
with the existing business and
products;
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diversion
of management time and attention from the core business to the acquired
business or joint venture;
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potential
failure to retain key technical, management, sales and other personnel of
the acquired business or joint
venture;
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difficulties
in retaining relationships with suppliers and customers of the acquired
business, particularly where such customers or suppliers compete with
us;
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subsequent
impairment of the acquired assets, including intangible assets;
and
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assumption
of liabilities including, but not limited to, lawsuits, tax examinations,
warranty issues, etc.
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We
may decide that it is in our best interests to enter into acquisitions or joint
ventures that are dilutive to earnings per share or that negatively impact
margins as a whole. In addition, acquisitions or joint ventures could require
investment of significant financial resources and require us to obtain
additional equity financing, which may dilute our stockholders’ equity, or
require us to incur additional indebtedness.
To
the extent that we invest in upstream suppliers or downstream channel
capabilities, we may experience competition or channel conflict with certain of
our existing and potential suppliers and customers. Specifically, existing and
potential suppliers and customers may perceive that we are competing directly
with them by virtue of such investments and may decide to reduce or eliminate
their supply volume to us or order volume from us. In particular, any supply
reductions from our polysilicon, ingot or wafer suppliers could materially
reduce manufacturing volume.
For
example, as a result of our acquisition of SP Systems, we now directly compete
with some of our own suppliers of solar cells and panels. As a result, the
acquisition could cause one or more solar cell and panel suppliers to reduce or
terminate their business relationship with us. Since the acquisition closed, we
have discontinued our purchasing relationship with certain suppliers of panels.
Other reductions or terminations, which may be significant, could occur. Any
such reductions or terminations could adversely affect our ability to meet
customer demand for solar power systems, and materially adversely affect our
results of operations and financial condition, which would likely materially
adversely affect our results of operations and financial condition. We will use
commercially reasonable efforts to replace any lost solar cells or panels with
our own inventory to mitigate the impact on us. However, such replacements may
not be sufficient to fully address solar supply shortfalls, and in any event
could negatively impact our revenue and earnings as we forego selling such
inventory to third parties.
We
have significant international activities and customers, and plan to continue
these efforts, which subject us to additional business risks, including
logistical complexity and political instability.
For
the year ended December 30, 2007, a substantial portion of our sales were made
to customers outside of the United States. Historically, we have had significant
sales in Germany, Portugal, Spain and South Korea. We currently have seven solar
cell production lines in operation, which are located at our manufacturing
facilities in the Philippines. In addition, a majority of our assembly functions
have historically been conducted by a third-party subcontractor in China. Risks
we face in conducting business internationally include:
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multiple,
conflicting and changing laws and regulations, export and import
restrictions, employment laws, regulatory requirements and other
government approvals, permits and
licenses;
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difficulties
and costs in staffing and managing foreign operations as well as cultural
differences;
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difficulties
and costs in recruiting and retaining individuals skilled in international
business operations;
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increased
costs associated with maintaining international marketing
efforts;
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potentially
adverse tax consequences associated with our permanent establishment of
operations in more countries;
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inadequate
local infrastructure;
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financial
risks, such as longer sales and payment cycles and greater difficulty
collecting accounts receivable; and
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political
and economic instability, including wars, acts of terrorism, political
unrest, boycotts, curtailments of trade and other business
restrictions.
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We
particularly face risks associated with political and economic instability and
civil unrest in the Philippines. In addition, in the Asia/Pacific region
generally, we face risks associated with spread of the avian flu, tensions
between countries in that region, such as political tensions between China and
Taiwan, the ongoing discussions with North Korea regarding its nuclear weapons
program, potentially reduced protection for intellectual property rights,
government-fixed foreign exchange rates, relatively uncertain legal systems and
developing telecommunications infrastructures. In addition, some countries in
this region, such as China, have adopted laws, regulations and policies which
impose additional restrictions on the ability of foreign companies to conduct
business in that country or otherwise place them at a competitive disadvantage
in relation to domestic companies.
In
addition, although base wages are lower in the Philippines than in the United
States, wages for our employees in the Philippines are increasing, which could
result in increased costs to employ our manufacturing engineers. As of December
30, 2007, approximately 88% of our employees were located in the Philippines. We
also are faced with competition in the Philippines for employees, and we expect
this competition to increase as additional manufacturing companies enter the
market and expand their operations. In particular, there may be limited
availability of qualified manufacturing engineers. We have benefited from an
excess of supply over demand for college graduates in the field of engineering
in the Philippines. If this favorable imbalance changes due to increased
competition, it could affect the availability or cost of qualified employees,
who are critical to our performance. This could increase our costs and turnover
rates.
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Currency
fluctuations in the Euro, Philippine peso or the South Korean won relative to
the U.S. dollar could decrease revenue or increase expenses.
During
the year ended December 30, 2007, approximately 64% of our components segment
revenue was generated outside the United States. We presently have currency
exposure arising from sales, capital equipment purchases, prepayments and
customer advances denominated in foreign currencies. A majority of our
components segment revenue is denominated in Euros, including fixed price
agreements with Conergy and Solon, and a significant portion is denominated in
U.S. dollars, while a portion of our components segment costs are incurred and
paid in Euros and a smaller portion of our components segment expenses are paid
in Philippine pesos and Japanese yen. In addition, our prepayments to
Wacker-Chemie AG, a polysilicon supplier, and our customer advances from Solon
are denominated in Euros. For the year ended December 30, 2007, approximately
49% of our systems segment revenue was generated outside the U.S., of which 47%
was denominated in Euros and a significant portion of its costs are incurred and
paid in Euros.
We
are exposed to the risk of a decrease in the value of the Euro relative to the
U.S. dollar, which would decrease our total revenue. Changes in exchange rates
between foreign currencies and the U.S. dollar may adversely affect our
operating margins. For example, if these foreign currencies appreciate against
the U.S. dollar, it will make it more expensive in terms of U.S. dollars to
purchase inventory or pay expenses with foreign currencies. In addition,
currency devaluation can result in a loss to us if we hold deposits of that
currency as well as make our products, which are usually purchased with U.S.
dollars, relatively more expensive than products manufactured locally. An
increase in the value of the U.S. dollar relative to foreign currencies could
make our solar cells more expensive for international customers, thus
potentially leading to a reduction in our sales and profitability. Furthermore,
many of our competitors will be foreign companies that could benefit from such a
currency fluctuation, making it more difficult for us to compete with those
companies. We currently conduct hedging activities, which involve the use of
currency forward contracts and options. We cannot predict the impact of future
exchange rate fluctuations on our business and operating results. In the past,
we have experienced an adverse impact on our total revenue and profitability as
a result of foreign currency fluctuations.
Our
current tax holidays in the Philippines will expire within the next several
years.
We
currently benefit from income tax holiday incentives in the Philippines in
accordance with our subsidiary’s registrations with the Board of Investments and
Philippine Economic Zone Authority, which provide that we pay no income tax in
the Philippines for four years under our Board of Investments non-pioneer status
and Philippine Economic Zone Authority registrations, and six years under our
Board of Investments pioneer status registration. Our current income tax
holidays expire in 2010, and we intend to apply for extensions. However, these
tax holidays may or may not be extended. We believe that as our Philippine tax
holidays expire, (a) gross income attributable to activities covered by our
Philippine Economic Zone Authority registrations will be taxed at a 5%
preferential rate, and (b) our Philippine net income attributable to all
other activities will be taxed at the statutory Philippine corporate income tax
rate of 32%. Fiscal
2007 was the first year for which profitable operations benefitted from the
Philippine tax ruling.
Our
systems segment sales cycles for projects can be longer than our components
segment sales cycle for our solar cells and panels and may require significant
upfront investment which may not ultimately result in signing of a sales
contract and could have a material adverse effect on our business and results of
operations.
Our
systems segment sales cycles, which measure the time between its first contact
with a customer and the signing of a sales contract for a particular project,
vary substantially and average approximately eight months. Sales cycles for our
systems segment are lengthy for a number of reasons, including:
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our
customers often delay purchasing decisions until their eligibility for an
installation rebate is confirmed, which generally takes several
months;
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the
long time required to secure adequate financing for system purchases on
terms acceptable to customers; and
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the
customer’s review and approval processes for system purchases are lengthy
and time consuming.
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As
a result of these long sales cycles, we must make significant upfront
investments of resources in advance of the signing of sales contracts and the
receipt of any revenues, most of which are not recognized for several additional
months following contract signing. Accordingly, we must focus our limited
resources on sales opportunities that we believe we can secure. Our inability to
enter into sales contracts with potential customers after we make such an
investment could have a material adverse effect on our business and results of
operations.
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We
generally do not have long-term agreements with our customers and accordingly
could lose customers without warning.
Our
solar cells and solar panel products are generally not sold pursuant to
long-term agreements with customers, but instead are sold on a purchase order
basis. We typically contract to perform large projects with no assurance of
repeat business from the same customers in the future. Although we believe that
cancellations on our purchase orders to date have been insignificant, our
customers may cancel or reschedule purchase orders with us on relatively short
notice. Cancellations or rescheduling of customer orders could result in the
delay or loss of anticipated sales without allowing us sufficient time to
reduce, or delay the incurrence of, our corresponding inventory and operating
expenses. In addition, changes in forecasts or the timing of orders from these
or other customers expose us to the risks of inventory shortages or excess
inventory. This, in addition to the completion and non-repetition of large
systems projects, in turn could cause our operating results to
fluctuate.
Our
systems segment could be adversely affected by seasonal trends and construction
cycles.
Our
systems segment is subject to significant industry-specific seasonal
fluctuations. Its sales have historically reflected these seasonal trends with
the largest percentage of total revenues being realized during the last two
calendar quarters. Low seasonal demand normally results in reduced shipments and
revenues in the first two calendar quarters. There are various reasons for this
seasonality, mostly related to economic incentives and weather patterns. For
example, in European countries with feed-in tariffs, the construction of solar
power systems may be concentrated during the second half of the
calendar year, largely due to the annual reduction of the applicable minimum
feed-in tariff and the fact that the coldest winter months are January through
March. In the United States, customers will sometimes make purchasing decisions
towards the end of the year in order to take advantage of tax credits or for
other budgetary reasons.
In
addition, to the extent we are successful in implementing our strategy to enter
the new home development market, we expect the seasonality of our business and
financial results to become more pronounced as sales in this market are often
tied to construction market demands which tend to follow national trends in
construction, including declining sales during cold weather months.
The
expansion of our business into the new homebuilder residential market may
increase our exposure to certain risks.
Our
systems segment has expanded into the residential market by selling our systems
to large production homebuilders. As part of this strategy, we developed
SunTile®, a
product that integrates a solar panel into a roof tile. To date we have focused
on large-scale commercial applications and have limited experience serving the
new homebuilder residential market.
Our
new residential products and services may not gain market acceptance and thus
may not otherwise be successful in entering the residential market, which would
limit our growth and adversely affect our operating results. Furthermore, the
residential construction market has peculiar characteristics that may increase
our exposure to certain risks we currently face or expose us to new risks. These
risks include increased seasonality, sensitivity to interest rates and other
macroeconomic conditions, as well as enhanced legal exposure. In particular, new
home developments often result in class action litigation when one or more homes
within a development experiences construction problems. Unlike our systems
segment commercial business, where we typically act as the general contractor,
we will be generally acting as subcontractor to homebuilders overseeing the
development projects. In many instances subcontractors may be held liable for
work of the homebuilder or other subcontractors. In addition, homebuilders often
require onerous indemnification obligations that effectively allocate most of
the potential liability from homeowner or class action lawsuits to
subcontractors, including us. Insurance policies for residential work have
significant limitations on coverage that may render such policies inapplicable
to these lawsuits. If we are not successful in entering the new residential
construction market, or if as a result of the litigation and indemnification
risks associated with such market, we incur significant costs, our business and
results of operations could be materially adversely affected.
If
we fail to successfully develop and introduce new products and services or
increase the efficiency of our products, we will not be able to compete
effectively, and our ability to generate revenues will suffer; technological
changes in the solar power industry could render our solar power products
uncompetitive or obsolete, which could reduce our market share and cause our
sales to decline.
As
we introduce new or enhanced products or integrate new technology into our
products, we will face risks relating to such transitions including, among other
things, technical challenges, disruption in customers’ ordering patterns,
insufficient supplies of new products to meet customers’ demand, possible
product and technology defects arising from the integration of new technology
and a potentially different sales and support environment relating to any new
technology. Our failure to manage the transition to newer products or the
integration of newer technology into our products could adversely affect our
business’ operating results and financial results.
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The
solar power market is characterized by continually changing technology requiring
improved features, such as increased efficiency and higher power output and
improved aesthetics. This will require us to continuously develop new solar
power products and enhancements for existing solar power products to keep pace
with evolving industry standards and changing customer requirements.
Technologies developed by others, including thin film solar panels,
concentrating solar cells or other solar technologies, may prove more
advantageous than ours for the commercialization of solar power products and may
render our technology obsolete.
Our
failure to further refine our technology and develop and introduce new solar
power products could cause our products to become uncompetitive or obsolete,
which could reduce our market share and cause our sales to decline. We will need
to invest significant financial resources in research and development to
maintain our market position, keep pace with technological advances in the solar
power industry and effectively compete in the future.
Evaluating
our business and future prospects may be difficult due to our limited history in
producing and shipping solar cells and solar panels in commercial
volumes.
There
is limited historical information available about our company upon which
investors can base their evaluation of our business and prospects. Although we
began to develop and commercialize high-efficiency solar cell technology for use
in solar concentrators in 1988 and began shipping product from our pilot
manufacturing facility in 2003, we shipped our first commercial A-300 solar
cells from our Philippines manufacturing facility in late 2004. Relative to the
entire solar industry, we have shipped only a limited number of solar cells and
solar panels and have recognized limited revenue. Our future success will
require us to continue to scale our Philippines facilities significantly beyond
their current capacity. In addition, our business model, technology and ability
to achieve satisfactory manufacturing yields at higher volumes are unproven at
significant scale. As a result, investors should consider our business and
prospects in light of the risks, expenses and challenges that we will face as an
early-stage company seeking to develop and manufacture new products in a rapidly
growing market.
Our
reliance on government programs to partially fund our research and development
programs could impair our ability to commercialize our solar power products and
services and increase our research and development expenses.
We
intend to continue our policy of selectively pursuing contract research, product
development and market development programs funded by various agencies of the
federal and state governments to complement and enhance our own resources.
Funding from government grants is generally recorded as an offset to our
research and development expense. During the year ended December 30, 2007,
funding from government grants, agreements and contracts offset approximately
21% our total research and development expense, excluding in-process research
and development. In addition, in the third quarter of 2007, we signed a Solar
America Initiative agreement with the U.S. Department of Energy in which we were
awarded $8.5 million in the first budgetary period. Total funding for the
three-year effort is estimated to be $24.7 million. Our cost share requirement
under this program, including lower-tier subcontract awards, is anticipated to
be $27.9 million.
These
government agencies may not continue their commitment to programs relevant to
our development projects. Moreover, we may not be able to compete successfully
to obtain funding through these or other programs. A reduction or discontinuance
of these programs or of our participation in these programs would materially
increase our research and development expenses, which would adversely affect our
profitability and could impair our ability to develop our solar power products
and services. In addition, contracts involving government agencies may be
terminated or modified at the convenience of the agency. Many of our systems
segment government awards also contain royalty provisions that require it to pay
certain amounts based on specified formulas. Government awards are subject to
audit and governmental agencies may dispute its royalty calculations. Any such
dispute could result in fines, increased royalty payments, cancellation of the
agreement or other penalties, which could have material adverse effect on our
business and results of operations.
Our
systems segment government-sponsored research contracts require that we provide
regular written technical updates on a monthly, quarterly or annual basis, and,
at the conclusion of the research contract, a final report on the results of our
technical research. Because these reports are generally available to the public,
third parties may obtain some aspects of its sensitive confidential information.
Moreover, the failure to provide accurate or complete reports may provide the
government with rights to any intellectual property arising from the related
research. Funding from government awards also may limit when and how we can
deploy our products and services developed under those contracts. For example,
government awards may require that the manufacturing of products developed with
federal funding be substantially conducted in the United States. In addition,
technology and intellectual property that we develop with government funding
provides the government with “march-in” rights. March-in rights refer to the
right of the government or a government agency to require us to grant a license
to the developed technology or products to a responsible applicant or, if it
refuses, the government may grant the license itself. The government can
exercise its march-in rights if it determines that action is necessary because
we fail to achieve practical application of the technology or because action is
necessary to alleviate health or safety needs, to meet requirements of federal
regulations or to give the United States industry preference. In addition,
government awards may include a provision providing the government with a
nonexclusive, nontransferable, irrevocable, paid-up license to practice or have
practiced each subject invention developed under an award throughout the world
by or on behalf of the government. Additional rights to technical data may
be granted to the government in recognition of funding.
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Because
the markets in which we compete are highly competitive, we may not be able to
compete successfully and we may lose or be unable to gain market
share.
Our
components solar products compete with a large number of competitors in the
solar power market, including BP Solar International Inc., Evergreen Solar,
Inc., First Solar Inc., Kyocera Corporation, Mitsubishi Electric Corporation,
Motech Industries, Inc., Q-Cells AG, Sanyo Corporation, Sharp Corporation,
SolarWorld AG and Suntech Power Holdings Co., Ltd. In addition, universities,
research institutions and other companies such as First Solar have brought to
market alternative technologies such as thin films and concentrators, which may
compete with our technology in certain applications. We expect to face increased
competition in the future. Further, many of our competitors are developing and
are currently producing products based on new solar power technologies that may
ultimately have costs similar to, or lower than, our projected
costs.
Our
systems solar power products and services also compete against other power
generation sources including conventional fossil fuels supplied by utilities,
other alternative energy sources such as wind, biomass, CSP and emerging
distributed generation technologies such as micro-turbines, sterling engines and
fuel cells. In the large-scale on-grid solar power systems market, we will face
direct competition from a number of companies that manufacture, distribute, or
install solar power systems. Many of these companies sell our products as well
as their own or those of other manufacturers. Our systems segment primary
competitors in the United States include BP Solar International, Inc., a
subsidiary of BP p.l.c., Conergy Inc., DT Solar, EI Solutions, Inc., GE Energy,
a subsidiary of General Electric Corporation, Schott Solar, Inc., Solar
Integrated Technologies, Inc., SPG Solar, Inc., Sun Edison LLC, Sunlink
Corporation, SunTechnics Installation & Services, Inc., Thompson
Technology Industries, Inc. and WorldWater & Power Corporation. Our
systems segment primary competitors in Europe include BP Solar, City Solar AG,
Conergy (through its subsidiaries AET Alternitive Energie Technik GmbH,
SunTechnics Solartechnik GmbH and voltwerk AG), PV-Systemtechnik Gbr, SAG
Solarstrom AG, Solon AG and Taufer Solar GmbH. In addition, we will occasionally
compete with distributed generation equipment suppliers such as Caterpillar,
Inc. and Cummins, Inc. Other existing and potential competitors in the solar
power market include universities and research institutions. We also expect that
future competition will include new entrants to the solar power market offering
new technological solutions. As we enter new markets and pursue additional
applications for our systems products and services, we expect to face increased
competition, which may result in price reductions, reduced margins or loss of
market share.
Competition
is intense, and many of our competitors have significantly greater access to
financial, technical, manufacturing, marketing, management and other resources
than we do. Many also have greater name recognition, a more established
distribution network and a larger installed base of customers. In addition, many
of our competitors have well-established relationships with our current and
potential suppliers, resellers and their customers and have extensive knowledge
of our target markets. As a result, these competitors may be able to devote
greater resources to the research, development, promotion and sale of their
products and respond more quickly to evolving industry standards and changing
customer requirements than we will be able to. Consolidation or strategic
alliances among such competitors may strengthen these advantages and may provide
them greater access to customers or new technologies. We may also face
competition from some of our systems segment resellers, who may develop products
internally that compete with our systems product and service offerings, or who
may enter into strategic relationships with or acquire other existing solar
power system providers. To the extent that government funding for research and
development grants, customer tax rebates and other programs that promote the use
of solar and other renewable forms of energy are limited, we will compete for
such funds, both directly and indirectly, with other renewable energy providers
and their customers.
If
we cannot compete successfully in the solar power industry, our operating
results and financial condition will be adversely affected. Furthermore, we
expect competition in systems markets to increase, which could result in lower
prices or reduced demand for our systems services and have a material adverse
effect on our business and results of operations.
We
expect to continue to make significant capital expenditures, particularly
in our manufacturing facilities, and if adequate funds are not available or
if the covenants in our credit agreements impair our ability to raise
capital when needed, our ability to expand our manufacturing capacity and
our business will suffer.
We
expect to continue to make significant capital expenditures, particularly
in our manufacturing facilities, including, for example, through building
purchases or long-term leases. We anticipate that our expenses will
increase substantially in the foreseeable future as we expand our
manufacturing operations, hire additional personnel, pay more or make advance
payments for raw material, especially polysilicon, increase our sales and
marketing efforts, invest in joint ventures and acquisitions, and continue
our research and development efforts with respect to our products and
manufacturing technologies. We expect total capital expenditures between
approximately $250.0 million and $300.0 million in 2008 as we continue to
increase our solar cell and solar panel manufacturing capacity. These
expenditures would be greater if we decide to bring capacity on line more
rapidly. We believe that our current cash and cash equivalents, cash generated
from operations and, if necessary, borrowings under our credit agreement with
Wells Fargo Bank, N.A., or Wells Fargo, and/or potential availability of future
sources of funding will be sufficient to fund our capital and operating
expenditures over the next 12 months. However, if our financial results or
operating plans change from our current assumptions, or if the holders of our
outstanding convertible debentures elect to convert the debentures,
we may not have sufficient resources to support our business plan. For more
information on our credit agreement with Wells
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Fargo
and our outstanding convertible debentures, please see “Debt and Credit Sources” and
“Liquidity”
within
“Item 7: Management’s Discussion and Analysis of Financial Condition and Results
of Operations.” If our capital resources are insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity securities or
debt securities or obtain other debt financing. We may also issue equity
securities in the future to suppliers of raw materials in order to secure
adequate materials to satisfy our production needs. The sale of additional
equity securities or convertible debt securities would result in additional
dilution to our stockholders. Cypress Semiconductor Corporation, which
retains voting control over us, may be unwilling to permit us to engage in
dilutive financing events for tax-related or other reasons. Additional debt
would result in increased expenses and could require us to abide by
covenants that would restrict our operations. Our credit facilities contain
customary covenants and defaults, including, among others, limitations on
dividends, incurrence of indebtedness and liens and mergers and
acquisitions and may restrict our operating flexibility. If adequate funds
are not available on acceptable terms, our ability to fund our operations,
develop and expand our manufacturing operations and distribution network,
maintain our research and development efforts or otherwise respond to
competitive pressures would be significantly impaired. See also “Risk Factors - We currently have a
significant amount of debt outstanding. Our substantial indebtedness, along with
our other contractual commitments, could adversely affect our business,
financial condition and results of operations, as well as our ability to meet
any of our payment obligations under the debentures and our other
debt.”
The
demand for products requiring significant initial capital expenditures such as
our solar power products and services are affected by general economic
conditions, such as increasing interest rates that may decrease the return on
investment for certain customers or investors in projects, which could decrease
demand for our systems products and services and which could have a material
adverse effect on our business and results of operations.
The
United States and international economies have recently experienced a period of
slow economic growth. A sustained economic recovery is uncertain. In particular,
terrorist acts and similar events, continued turmoil in the Middle East or war
in general could contribute to a slowdown of the market demand for products that
require significant initial capital expenditures, including demand for solar
cells and solar power systems and new residential and commercial buildings. If
the economic recovery slows down as a result of the recent economic, political
and social turmoil, or if there are further terrorist attacks in the United
States or elsewhere, we may experience decreases in the demand for our solar
power products, which may harm our operating results.
We
have benefited from historically low interest rates in recent years, as these
rates have made it more attractive for our customers to use debt financing to
purchase our solar power systems. Interest rates have fluctuated recently and
may eventually continue to rise, which will likely increase the cost of
financing these systems and may reduce an operating company’s profits and
investors’ expected returns on investment. This risk is becoming more
significant to our systems segment, which is placing increasing reliance upon
direct sales to financial institutions which sell electricity to end customers
under a power purchase agreement. This sales model is highly sensitive to
interest rate fluctuations and the availability of liquidity, and would be
adversely affected by increases in interest rates or liquidity constraints.
Rising interest rates may also make certain alternative investments more
attractive to investors, and therefore lead to a decline in demand for our solar
power systems, which could have a material adverse effect on our business and
results of operations.
One
of our key products, the PowerTracker ®, now
referred to as SunPowerTM
Tracker, was acquired through an assignment and acquisition of the patents
associated with the product from a third-party individual, and if we are unable
to continue to use this product, our business, prospects, operating results and
financial condition would be materially harmed.
In
September 2002 and subsequently amended in December 2005, PowerLight entered
into a Technology Assignment and Services Agreement and other ancillary
agreements with Jefferson Shingleton and MaxTracker Services, LLC, a New York
limited liability company controlled by Mr. Shingleton. These agreements
form the basis for its intellectual property rights in its PowerTracker ®
products. Under such agreements, as later amended, Mr. Shingleton assigned
to PowerLight his MaxTracker ™, MaxRack ™, MaxRack Ballast ™ and MaxClip ™
products and all related intellectual property rights. Mr. Shingleton is
obligated to provide consulting services to PowerLight related to such
technology until December 31, 2012 and is required to assign to PowerLight
any enhancements he makes to the technology while providing such consulting
services. Mr. Shingleton retains a first security interest in the patents
and patent applications assigned until the earlier of the expiration of the
patents, full payment by PowerLight to Mr. Shingleton of all of the royalty
obligations under the Technology Assignment and Services Agreement, or the
termination of the Technology Assignment and Services Agreement. In the event of
PowerLight’s’ default under the Technology Assignment and Services Agreement,
MaxTracker Services and Mr. Shingleton may terminate the agreements and the
related assignments and cause the intellectual rights assigned to it to be
returned to Mr. Shingleton or MaxTracker Services, including patents
related to SunPowerTM
Tracker. In addition, upon such termination, PowerLight must grant
Mr. Shingleton a perpetual, non-exclusive, royalty-free right and license
to use, sell, and otherwise exploit throughout the world any intellectual
property MaxTracker Services or Mr. Shingleton developed during the
provision of consulting services to PowerLight. Events of default by PowerLight
which could enable Mr. Shingleton or Max Tracker Services to terminate the
agreements and the related assignments and cause the intellectual rights
assigned to it to be returned to Mr. Shingleton or MaxTracker Services
include the following:
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if PowerLight
files a petition in bankruptcy or equivalent order or petition under the
laws of any jurisdiction;
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if
a petition in bankruptcy or equivalent order or petition under the laws of
any jurisdiction is filed against it which is not dismissed within 60 days
of such filing;
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if
PowerLight’s assets are assigned for the benefit of
creditors;
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if PowerLight
voluntarily or involuntarily
dissolves;
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if PowerLight
fails to pay any amount due under the agreements when due and does not
remedy such failure to pay within 10 days of written notice of such
failure to pay; or
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if PowerLight
defaults in the performance of any of its material obligations under the
agreements when required (other than payment of amounts due under the
agreements), and such failure is not remedied within 30 days of written
notice to it of such default from Mr. Shingleton or MaxTracker
Services. However, if such a default can reasonably be cured after the
30-day period, and PowerLight commences cure of such default within
30-day period and diligently prosecutes that cure to completion, such
default does not trigger a termination right unless and
until PowerLight ceases commercially reasonable efforts to cure such
default.
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If
we are unable to continue to use and sell SunPowerTM Tracker
as a result of the termination of the agreements and the related assignment or
any other reason, our business, prospects, operating results and financial
condition would be materially harmed.
We
are dependent on our intellectual property, and we may face intellectual
property infringement claims that could be time-consuming and costly to defend
and could result in the loss of significant rights.
From
time to time, we, our respective customers or third-parties with whom we work
may receive letters, including letters from various industry participants,
alleging infringement of their patents. Although we are not currently aware of
any parties pursuing or intending to pursue infringement claims against us, we
cannot assure investors that we will not be subject to such claims in the
future. Additionally, we are required by contract to indemnify some of our
customers and our third-party intellectual property providers for certain costs
and damages of patent infringement in circumstances where our solar cells are a
factor creating the customer’s or these third-party providers’ infringement
liability. This practice may subject us to significant indemnification claims by
our customers and our third-party providers. We cannot assure investors that
indemnification claims will not be made or that these claims will not harm our
business, operating results or financial condition. Intellectual property
litigation is very expensive and time-consuming and could divert management’s
attention from our business and could have a material adverse effect on our
business, operating results or financial condition. If there is a successful
claim of infringement against us, our customers or our third-party intellectual
property providers, we may be required to pay substantial damages to the party
claiming infringement, stop selling products or using technology that contains
the allegedly infringing intellectual property, or enter into royalty or license
agreements that may not be available on acceptable terms, if at all. Parties
making infringement claims may also be able to bring an action before the
International Trade Commission that could result in an order stopping the
importation into the United States of our solar cells. Any of these judgments
could materially damage our business. We may have to develop non-infringing
technology, and our failure in doing so or in obtaining licenses to the
proprietary rights on a timely basis could have a material adverse effect on our
business.
We
may file claims against other parties for infringing our intellectual property
that may be very costly and may not be resolved in our favor.
To
protect our intellectual property rights and to maintain our competitive
advantage, we have, and may continue to, file suits against parties who we
believe infringe our intellectual property. Intellectual property litigation is
expensive and time consuming and could divert management’s attention from our
business and could have a material adverse effect on our business, operating
results or financial condition, and our enforcement efforts may not be
successful. Our participation in intellectual property enforcement actions may
negatively impact our financial results.
We
may not be able to prevent others from using the SunPower and PowerLight names
or similar marks in connection with their solar power products which could
adversely affect the market recognition of our name and our
revenue.
“SunPower”
is our registered trademark in the United States and the European Community for
use with solar cells and solar panels. We are seeking similar registration of
the “SunPower” trademark in foreign countries but we may not be successful in
some of these jurisdictions. In the foreign jurisdictions where we are unable to
obtain this registration or have not tried, others may be able to sell their
products using the SunPower trademark which could lead to customer confusion. In
addition, if there are jurisdictions where someone else has already established
trademark rights in the SunPower name, we may face trademark disputes and may
have to market our products with other trademarks, which also could hurt our
marketing efforts. We may encounter trademark disputes with companies using
marks which are confusingly similar to SunPower which if not resolved favorably
could cause our branding efforts to suffer. In addition, we may have difficulty
in establishing strong brand recognition with consumers if others use similar
marks for similar products.
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We
hold registered trademarks for SunPower®,
PowerLight®,
PowerGuard®,
PowerTracker® and
SunTile® in the
United States and registered trademarks for SunPower®,
PowerLight®, and
PowerGuard® in the
European Community. We have not registered, and may not be able to register,
these trademarks elsewhere.
We
rely substantially upon trade secret laws and contractual restrictions to
protect our proprietary rights, and, if these rights are not sufficiently
protected, our ability to compete and generate revenue could
suffer.
We
seek to protect our proprietary manufacturing processes, documentation and other
written materials primarily under trade secret and copyright laws. We also
typically require employees and consultants with access to our proprietary
information to execute confidentiality agreements. The steps taken by us to
protect our proprietary information may not be adequate to prevent
misappropriation of our technology. In addition, our proprietary rights may not
be adequately protected because:
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people
may not be deterred from misappropriating our technologies despite the
existence of laws or contracts prohibiting
it;
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policing
unauthorized use of our intellectual property may be difficult, expensive
and time-consuming, and we may be unable to determine the extent of any
unauthorized use; and
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the
laws of other countries in which we market our solar cells, such as some
countries in the Asia/Pacific region, may offer little or no protection
for our proprietary technologies.
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Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technologies could enable third parties to benefit from our technologies without
paying us for doing so. Any inability to adequately protect our proprietary
rights could harm our ability to compete, to generate revenue and to grow our
business.
We
may not obtain sufficient patent protection on the technology embodied in the
solar cells or solar system components we currently manufacture and market,
which could harm our competitive position and increase our
expenses.
Although
we substantially rely on trade secret laws and contractual restrictions to
protect the technology in the solar cells and solar system components we
currently manufacture and market, our success and ability to compete in the
future may also depend to a significant degree upon obtaining patent protection
for our proprietary technology. As of December 30, 2007, including the United
States and foreign countries, we owned 80 issued patents, jointly owned another
three patents, and had over 100 pending patent applications across the entire
company. These patent applications cover aspects of the technology in the solar
cells we currently manufacture and market. Material patents that relate to our
systems products and services primarily relate to PowerGuard ®,
SunPowerTilt™ and PowerTracker ® products
and services. We intend to continue to seek patent protection for those aspects
of our technology, designs, and methodologies and processes that we believe
provide significant competitive advantages.
Our
patent applications may not result in issued patents, and even if they result in
issued patents, the patents may not have claims of the scope we seek. In
addition, any issued patents may be challenged, invalidated or declared
unenforceable. The term of any issued patents would be 20 years from their
filing date and if our applications are pending for a long time period, we may
have a correspondingly shorter term for any patent that may issue. Our present
and future patents may provide only limited protection for our technology and
may not be sufficient to provide competitive advantages to us. For example,
competitors could be successful in challenging any issued patents or,
alternatively, could develop similar or more advantageous technologies on their
own or design around our patents. Also, patent protection in certain foreign
countries may not be available or may be limited in scope and any patents
obtained may not be as readily enforceable as in the United States, making it
difficult for us to effectively protect our intellectual property from misuse or
infringement by other companies in these countries. Our inability to obtain and
enforce our intellectual property rights in some countries may harm our
business. In addition, given the costs of obtaining patent protection, we may
choose not to protect certain innovations that later turn out to be
important.
If
our ability to effectively obtain patents is decreased due to changes in patent
laws or changes in the rules propagated by the US Patent and Trademark Office,
or if we need to re-file some of our patent applications, the value of our
patent portfolio and the revenue we derive from products protected by the
patents may be decreased.
Current
legislation is being considered which would make numerous changes to the patent
laws, including forcing patent litigation to be filed in the defendant’s home
court, reducing damage awards for infringement and require specific proof of
market value of invention as compared to the closest prior art, limiting
enhanced damages to only a small subset of willfully infringing actions,
creating a new, expanded post-grant opposition procedure, creating expanded
rights for third parties to submit prior art and changing to a first-to-file
system (creating a whole new set of prior art). Additionally, current rules
being promulgated by the U.S. Patent and Trademark Office may limit our ability
to extract inventions from pending U.S. patent applications. Additionally, based
on situations such as newly discovered prior art, we may need to re-file some of
our patent applications. In these situations, the patent term will be measured
from the date of the earliest priority application to which benefit is claimed
in such a patent application. This could shorten our period of patent
exclusivity. A shortened period of patent exclusivity may negatively impact our
revenue protected by our patents.
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Our
success depends on the continuing contributions of our key
personnel.
We
rely heavily on the services of our key executive officers and the loss of
services of any principal member of our management team could adversely impact
our operations. In addition, our technical personnel represent a significant
asset and serve as the source of our technological and product innovations. We
believe our future success will depend upon our ability to retain these key
employees and our ability to attract and retain other skilled managerial,
engineering and sales and marketing personnel. However, we cannot guarantee that
any employee will remain employed at the Company for any definite period of time
since all of our employees, including our key executive officers, serve at-will
and may terminate their employment at any time for any reason.
We
may be harmed by liabilities arising out of our acquisition of SP Systems and
the indemnity the selling stockholders have agreed to provide may be
insufficient to compensate us for these damages.
On
January 10, 2007, we completed our previously announced acquisition of SP
Systems, formerly known as PowerLight Corporation. SP Systems’ former
stockholders made representations and warranties to us in the acquisition
agreement, including those relating to the accuracy of its financial statements,
the absence of litigation and environmental matters and the consents needed to
transfer permits, licenses and third-party contracts in connection with our
acquisition of SP Systems. To the extent that we are harmed by a breach of these
representations and warranties, SP Systems’ former stockholders have agreed to
indemnify us for monetary damages from an escrowed proceeds account. In most
cases we are required to absorb approximately the first $2.4 million before we
are entitled to indemnification. As of December 30, 2007, the escrow proceeds
account was comprised of approximately $23.7 million in cash and approximately
0.7 million shares, with a total aggregate value of $118.1 million. Following
the first anniversary of the closing date, we authorized the release
of approximately one-half of the original escrow amount leaving
approximately $11.8 million in cash and approximately 0.4 million shares of our
class A common stock. Our rights to recover damages under several
provisions of the acquisition agreement also expired on the first anniversary of
the closing date. As a result, we are now entitled to recover only
limited types of losses, and our recovery will be limited to the amount
available in the escrow fund at the time of a claim. The amount available in the
escrow fund will be progressively reduced to zero on each anniversary of the
closing date. We may incur liabilities from this acquisition which are not
covered by the representations and warranties set forth in the agreement or
which are non-monetary in nature. Consequently, our acquisition of SP Systems
may expose us to liabilities for which we are not entitled to indemnification or
our indemnification rights are insufficient.
Charges
to earnings resulting from the application of the purchase method of accounting
to the acquisition may adversely affect the market value of our class A common
stock.
In
accordance with generally accepted accounting principles in the United States,
or U.S. GAAP, we accounted for the acquisition using the purchase method of
accounting. Further, a portion of the purchase price paid in the acquisition has
been allocated to in-process research and development. Under the purchase method
of accounting, we allocated the total purchase price to SP Systems’ net tangible
assets and intangible assets based on their fair values as of the date of
completion of the acquisition and recorded the excess of the purchase price over
those fair values as goodwill. We will incur amortization expense over the
useful lives of amortizable intangible assets acquired in connection with the
acquisition. In addition, to the extent the value of goodwill and long lived
assets becomes impaired, we may be required to incur material charges relating
to the impairment of those assets. Further, we may be impacted by nonrecurring
charges related to reduced gross profit margins from the requirement to adjust
SP Systems’ inventory to fair value. Finally, we will incur ongoing compensation
charges associated with assumed options, equity held by employees of SP Systems
and subjected to equity restriction agreements, and restricted stock granted to
employees of our SP Systems business. We estimate that these charges will be
approximately $76.9 million in the aggregate, a majority of which will be
recognized in the first two years beginning on January 10, 2007 and lesser
amounts in the succeeding two years. Any of the foregoing charges could have a
material impact on our results of operations.
Our
headquarters and other facilities, as well as the facilities of certain of our
key subcontractors, are located in regions that are subject to earthquakes and
other natural disasters.
Our
headquarters, including research and development operations, our manufacturing
facilities and the facilities of our subcontractor upon which we rely to
assemble and test our solar panels are located in countries that are subject to
earthquakes and other natural disasters. Our headquarters and research and
development operations are located in California, our manufacturing facilities
are located in the Philippines, and the facilities of our subcontractor for
assembly and test of solar panels are located in China. Since we do not have
redundant facilities, any earthquake, tsunami or other natural disaster in these
countries could materially disrupt our production capabilities and could result
in our experiencing a significant delay in delivery, or substantial shortage, of
our solar cells.
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Compliance
with environmental regulations can be expensive, and noncompliance with these
regulations may result in adverse publicity and potentially significant monetary
damages and fines.
We
are required to comply with all foreign, U.S. federal, state and local laws and
regulations regarding pollution control and protection of the environment. In
addition, under some statutes and regulations, a government agency, or other
parties, may seek recovery and response costs from operators of property where
releases of hazardous substances have occurred or are ongoing, even if the
operator was not responsible for such release or otherwise at fault. We use,
generate and discharge toxic, volatile and otherwise hazardous chemicals and
wastes in our research and development and manufacturing activities. Any failure
by us to control the use of, or to restrict adequately the discharge of,
hazardous substances could subject us to potentially significant monetary
damages and fines or suspensions in our business operations. In addition, if
more stringent laws and regulations are adopted in the future, the costs of
compliance with these new laws and regulations could be substantial. To date
such laws and regulations have not had a significant impact on our operations,
and we believe that we have all necessary permits to conduct their respective
operations as they are presently conducted. If we fail to comply with present or
future environmental laws and regulations, however, we may be required to pay
substantial fines, suspend production or cease operations. Under our separation
agreement with Cypress, we will indemnify Cypress from any environmental
liabilities associated with our operations and facilities in San Jose,
California and the Philippines.
We
maintain self-insurance for certain indemnities we have made to our officers and
directors.
Our
certificate of incorporation, by-laws and indemnification agreements require us
to indemnify our officers and directors for certain liabilities that may arise
in the course of their service to us. We primarily self-insure with respect to
potential indemnifiable claims. Although we have insured our officers and
directors against certain potential third-party claims for which we are legally
or financially unable to indemnify them, we intend to primarily self-insure with
respect to potential third-party claims which give rise to direct liability to
such third-party or an indemnification duty on our part. If we were required to
pay a significant amount on account of these liabilities for which we
self-insure, our business, financial condition and results of operations could
be seriously harmed.
Changes
to financial accounting standards may affect our combined results of operations
and cause us to change our business practices.
We
prepare our financial statements to conform with U.S. GAAP. These accounting
principles are subject to interpretation by the American Institute of Certified
Public Accountants, the SEC and various bodies formed to interpret and create
appropriate accounting policies. A change in those policies can have a
significant effect on our combined reported results and may affect our reporting
of transactions completed before a change is announced. Changes to those rules
or the questioning of current practices may adversely affect our reported
financial results or the way we conducts our business. For example, accounting
policies affecting many aspects of our business, including rules relating to
employee stock option grants and existing joint ventures, have recently been
revised, or new guidance relating to outstanding convertible debt are being
proposed.
The
Financial Accounting Standards Board, or the FASB, and other agencies have made
changes to U.S. GAAP, that required U.S. companies, starting in the first
quarter of fiscal 2006, to record a charge to earnings for employee stock option
grants and other equity incentives. We may have significant and ongoing
accounting charges resulting from option grant and other equity awards that
could reduce our net income or increase our net loss. In addition, since we have
historically used equity-related compensation as a component of our total
employee compensation program, the accounting change could make the use of
equity-related compensation less attractive to us and therefore make it more
difficult to attract and retain employees. In December 2003, the FASB issued the
FASB Staff Position FASB Interpretation No. 46 “Consolidation of Variable
Interest Entities”, or FSP FIN 46(R). The accounting method under FSP FIN 46(R)
may impact our accounting for certain existing or future joint ventures or
project companies for which we retain an ownership interest. In the event that
we are deemed the primary beneficiary of a Variable Interest Entity (VIE)
subject to the accounting of FSP FIN 46(R), we may have to consolidate the
assets, liabilities and financial results of the joint venture. This could have
an adverse impact on our financial position, gross margin and operating
results.
With
respect to our existing debt securities, we are not required under U.S. GAAP as
presently in effect to record any interest or other expense in connection with
our obligation to deliver upon conversion a number of shares (or an equivalent
amount of cash) having a value in excess of the outstanding principal amount of
the debentures. We refer to this obligation as our “net share obligation”. The
accounting method for net share settled convertible securities such as ours is
currently under consideration by the FASB. In September 2007, the FASB issued a
proposed FASB Staff Position APB 14-a, which clarifies the accounting for
convertible debt instruments that may be settled in cash upon conversion. The
proposed guidance, if issued in final form, would significantly impact the
accounting for our existing debt securities by requiring us to separately
account for the liability and equity components of our existing debt securities
in a manner that reflects interest expense equal to our non-convertible debt
borrowing rate. If the proposed position were adopted, it is expected to cause
us to incur additional interest expense and potentially increase our cost of
capital equipment and future depreciation expense due to capitalized interest,
thereby
reducing
our operating results. The proposed guidance, if approved, would be effective
for fiscal years beginning after December 15, 2007, and retrospective
application would be required for all periods presented. In a November 2007
update to its website, the FASB announced it is expected to begin its
redeliberations of the guidance in the proposed FASB Staff Position APB 14-a in
January 2008. Therefore, final guidance will not be issued until at least the
first quarter of 2008.
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In
addition, because the 1.8 million shares of class A common stock loaned to an
affiliate of Credit Suisse Securities (USA) LLC in July 2007 must be returned to
us prior to August 1, 2027, we believe that under U.S. GAAP as presently in
effect, the borrowed shares will not be considered outstanding for the purpose
of computing and reporting our earnings per share. We have a similar belief with
respect to the 2.9 million shares of class A common stock we loaned to an
affiliate of Lehman Brothers Inc. in connection with our February 2007 offering
of 1.25% senior convertible debentures due 2027. This accounting method is also
subject to change. If we become required to treat the borrowed shares as
outstanding for purposes of computing earnings per share, our earnings per share
would be reduced. Any reduction in our earnings per share could cause our stock
price to decrease, possibly significantly.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud. As a result,
current and potential stockholders could lose confidence in our financial
reporting, which could harm our business and the trading price of our common
stock.
Section 404
of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our
internal controls over financial reporting and have our independent registered
public accounting firm annually attest to the effectiveness of our internal
control over financial reporting. We have in the past discovered, and may in the
future discover, areas of our internal controls that need improvement. We are
complying with Section 404 by strengthening, assessing and testing our
system of internal controls to provide the basis for our report. However, the
continuous process of strengthening our internal controls and complying with
Section 404 is expensive and time consuming, and requires significant
management attention. We cannot be certain that these measures will ensure that
we will maintain adequate control over our financial processes and reporting, or
that we or our independent registered public accounting firm will be able to
provide the attestation and opinion required under Section 404 in our
Annual Reports on Form 10-K. If we or our independent registered public
accounting firm discover a material weakness, the disclosure of that fact, even
if quickly remedied, could reduce the market’s confidence in our financial
statements and harm our stock price. In addition, future non-compliance with
Section 404 could subject us to a variety of administrative sanctions,
including the suspension or delisting of our common stock from The Nasdaq Global
Market and the inability of registered broker-dealers to make a market in our
common stock, which would further reduce our stock price.
The
development of a unified system of controls over financial reporting may take a
significant amount of management’s time and attention and, if not completed in a
timely manner, could negatively impact us.
Prior
to our acquisition of SP Systems in January 2007, SP Systems was not required to
report on the effectiveness of its internal controls over financial reporting
because it was not subject to the requirements of the Securities Exchange Act of
1934, as amended, or the Exchange Act. In August 2006, the audit committee
of SP Systems received a letter from that company’s independent auditors
identifying certain material weaknesses in that company’s internal controls over
financial reporting relating to that company’s audits of its Consolidated
Financial Statements for 2005, 2004 and 2003. These material weaknesses included
problems with financial statement close processes and procedures, inadequate
accounting resources, unsatisfactory application of the percentage-of-completion
accounting method, inaccurate physical inventory counts, incorrect accounting
for complex capital transactions and inadequate disclosure of related party
transactions. In addition, SP Systems had to restate its 2004 and 2003 financial
statements to correct previously reported amounts primarily related to its
contract revenue, contract costs, accrued warranty, California state sales taxes
and inventory items. In July 2007, subsequent to our acquisition of SP
Systems, its independent auditors completed their audit of SP Systems’ 2006
financial statements. In connection with that audit, our audit committee
received a letter from the independent auditors of SP Systems identifying
significant deficiencies in SP Systems’ internal controls over financial
reporting.
As
we would for any other significant deficiencies identified by our external
auditors from time to time, we have begun remediation efforts with respect to
the significant deficiencies identified by SP Systems’ independent auditors.
Although initiated, our plans to improve these internal controls and processes
are not complete. While we expect to complete this remediation process as
quickly as possible, doing so depends on several factors beyond our control,
including the hiring of additional qualified personnel and, as a result, we
cannot at this time estimate how long it will take to complete the steps
identified above. Our management will continue to evaluate the effectiveness of
the control environment in our systems segment as well the Company overall and
will continue to develop and enhance internal controls. We cannot assure
investors that the measures we have taken to date or any future measures will
remediate the significant deficiencies reported by the Company’s independent
auditors. Any failure to develop or maintain effective controls, or any
difficulties encountered in their implementation or improvement, could harm our
operating results or cause us to fail to meet our reporting obligations and may
result in a restatement of our prior period financial statements. Ineffective
internal controls could also cause investors to lose confidence in our reported
financial information, which would likely have a negative effect on the trading
price of our securities.
Our
report on internal controls over financial reporting in our annual reports on
Form 10-K for the fiscal years ended December 30, 2007 and
December 31, 2006 did not include an assessment of SP Systems’ internal
controls. We are not required to include SP Systems, which now makes up our
Systems Segment, in our report on internal controls until our annual report on
Form 10-K for the fiscal year ending December 28, 2008. Unanticipated
factors may hinder the effectiveness or delay the integration of our combined
internal control systems post-acquisition. We cannot be certain as to whether we
will be able to establish an effective, unified system of internal controls over
financial reporting in a timely manner, or at all.
Our
credit agreement with Wells Fargo contains covenant restrictions that may limit
our ability to operate our business.
Our
Credit Agreement with Wells Fargo contains, and any of our other future debt
agreements may contain, covenant restrictions that limit our ability to operate
our business, including restrictions on our ability to:
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• incur
additional debt or issue guarantees;
• create
liens;
• make
certain investments or acquisitions;
• enter
into transactions with our affiliates;
• sell
certain assets;
• redeem
capital stock or make other restricted payments;
• declare
or pay dividends or make other distributions to stockholders; and
• merge
or consolidate with any person.
In
addition, our credit agreement contains additional affirmative and negative
covenants that are more restrictive than those contained in the indenture
governing the debentures. Our ability to comply with these covenants is
dependent on our future performance, which will be subject to many factors, some
of which are beyond our control, including prevailing economic conditions. For
example, the credit agreement prohibited our providing corporate guaranties to
customers of our subsidiaries. However, in January 2008 Wells Fargo
agreed to waive compliance with the prohibition. In exchange, we
agreed to fund a deposit account to fully secure our repayment obligations to
Wells Fargo. Had Wells Fargo not waived this prohibition, we would have been in
default of our debt covenants, and we may have been required to immediately
repay the aggregate outstanding indebtedness we owed to Wells Fargo under both
the line of credit, including its letter of credit subfeature, and the letter of
credit line.
As
a result of these covenants, our ability to respond to changes in business and
economic conditions and to obtain additional financing, if needed, may be
significantly restricted, and we may be prevented from engaging in transactions
that might otherwise be beneficial to us. In addition, our failure to comply
with these covenants could result in a default under the debentures and our
other debt, which could permit the holders to accelerate such debt. If any of
our debt is accelerated, we may not have sufficient funds available to repay
such debt.
If
the recent worsening of credit market conditions continues or increases, it
could have a material adverse impact on our investment portfolio and on our
sales of residential solar systems.
Recent
U.S. sub-prime mortgage defaults have had a significant impact across various
sectors of the financial markets, causing global credit and liquidity issues. In
February 2008, the auction rate securities market experienced a significant
increase in the number of failed auctions, which occurs when sell orders exceed
buy orders resulting from lack of liquidity and does not necessarily signify a
default by the issuer. As of December 30, 2007, we held ten auction rate
securities totaling $50.8 million. As of February 29, 2008, four of these
auction rate securities totaling $24.1 million failed to clear at auctions and
such failures could continue to occur in the future. These auction rate
securities were student loans that are typically over collateralized by pools of
loans originated under the Federal Family Education Loan Program, or FFELP, and
are guaranteed by the U.S. Department of Education, and insured. In addition,
all auction rate securities held are rated by one or more of the Nationally
Recognized Statistical Rating Organizations, or NRSRO, as triple-A. For failed
auctions, we continue to earn interest on these investments at the maximum
contractual rate as the issuer is obligated under contractual terms to pay
penalty rates should auctions fail. In the event we need to access these funds,
we will not be able to do so until a future auction is successful, the issuer
redeems the securities, a buyer is found outside of the auction process or the
securities mature. If these auction rate securities are unable to successfully
clear at future auctions or issuers do not redeem the securities, we may be
required to adjust the carrying value of the securities and record an impairment
charge. If we determine that the fair value of these auction rate securities is
temporarily impaired, we would record a temporary impairment within Consolidated
Statements of Comprehensive Income (Loss), a component of stockholders' equity.
If it is determined that the fair value of these securities is
other-than-temporarily impaired, we would record a loss in our Consolidated
Statements of Operations, which could materially adversely impact our results of
operations and financial condition.
Sales of our
solar systems to new homebuilders, residential and commercial customers is also
affected by the availability of credit financing and the general strength of the
housing market and the overall economy. Continued distress in the credit
markets, the housing market and the overall economy could materially adversely
impact our results of operations and financial condition.
We
are in the process of implementing a new enterprise resource planning (ERP)
system to manage our worldwide financial, accounting and operations
reporting.
We
have been preparing for the ERP system implementation for over a year and are
taking appropriate measures to ensure the successful and timely implementation
including but not limited to hiring qualified consultants and performing
extensive testing. However, implementations of this scope have inherent risks
that in the extreme could lead to a disruption in our financial, accounting and
operations reporting as well as the inability to obtain access to key financial
data.
Risks
Related to Our Debentures and Class A Common Stock
Conversion
of our outstanding debentures will dilute the ownership interest of existing
stockholders, including holders who had previously converted their
debentures.
To
the extent we issue class A common stock upon conversion of debentures, the
conversion of some or all of such debentures will dilute the ownership interests
of existing stockholders, including holders who had previously converted their
debentures. Any sales in the public market of the class A common stock
issuable upon such conversion could adversely affect prevailing market prices of
our class A common stock. In addition, the existence of our outstanding
debentures may encourage short selling of our common stock by market
participants who expect that the conversion of the debentures could depress the
price of our class A common stock.
As
of the first trading day of the first quarter in fiscal 2008, holders of the
outstanding debentures are able to exercise their right to convert the
debentures any day in that fiscal quarter because the closing price of our class
A common stock equaled or exceeded $70.94 and $102.80, which represents more
than 125% of the applicable conversion price for our 1.25% and 0.75% outstanding
debentures, respectively, for at least 20 of the last 30 trading days during the
preceding fiscal quarter. This test is repeated each fiscal quarter, and prior
to August 1, 2025, holders of our outstanding debentures may only exercise their
right to convert during a fiscal quarter in which this test is met. After August
1, 2025, the debentures are convertible at any time.
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In
the event of conversion by holders of the outstanding debentures, the principal
amount must be settled in cash and to the extent that the conversion obligation
exceeds the principal amount of any debentures converted, we must satisfy the
remaining conversion obligation of the February 2007 debentures in shares of our
class A common stock, and we maintain the right to satisfy the remaining
conversion obligation of the July 2007 debentures in shares of our class A
common stock or cash. We intend to fund such obligations, if any, through
existing cash and cash equivalents, cash generated from operations and, if
necessary, borrowings under our credit agreement with Wells Fargo and/or
potential availability of future sources of funding. We believe that it is
unlikely that a significant percentage of holders of the outstanding debentures
will exercise their right to convert in the near future because they would
likely receive less value upon conversion than the current market value of the
debentures based on the debentures’ trading prices quoted on Bloomberg in
January and February 2008. However, there is no assurance that this will
continue to be the case. As of February 29, 2008, no holders of the outstanding
debentures exercised their right to convert the debentures.
As
of December 30, 2007, we had cash and cash equivalents of $285.2, while the
aggregate outstanding principal balance due under the debentures was $425.0
million. For more information about our convertible debentures, please see “Liquidity” within “Item 7:
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Substantial
future sales or other dispositions of our class A common stock or other
securities, or short selling activity, could cause our stock price to
fall.
Sales
of our class A common stock in the public market or sales of any of our
other securities, or the perception that such sales could occur, could cause the
market price of our class A common stock to decline. As of December 30,
2007, we had approximately 84.7 million shares of class A common stock
outstanding, and Cypress owned the 44.5 million outstanding shares of our
class B common stock, representing approximately 56% of the total
outstanding shares of our common stock. Cypress, its successors in interest and
its subsidiaries may convert their shares of our class B common stock into
class A common stock at any time. Subject to applicable United States
federal and state securities laws, Cypress may sell or distribute to its
stockholders any or all of the shares of our common stock that it owns, which
may or may not include the sale of a controlling interest in us. In late 2006,
Cypress announced that it was exploring ways in which to allow its stockholders
to fully realize the value of its investment in our company. Since that date,
Cypress has made public statements and taken actions that are consistent with
these announcements. In May 2007, Cypress sold 7.5 million shares of
our class B common stock to an unaffiliated third party in an offering
pursuant to Rule 144 under the Securities Act. Upon the completion of that
sale, such shares automatically, by their terms, converted into 7.5 million
shares of our class A common stock.
If
Cypress elects to convert its shares of our class B common stock into
shares of our class A common stock, an additional 44.5 million shares of
our class A common stock will be available for sale, subject to customary
sales restrictions. In addition, except in limited circumstances, Cypress has
the right to cause us to register the sale of its shares of our class B
common stock or class A common stock under the Securities Act. Registration
of these shares under the Securities Act would result in these shares, other
than shares purchased by our affiliates, becoming freely tradable without
restriction under the Securities Act.
If
Cypress distributes to its stockholders shares of our common stock that it owns,
substantially all of these shares would be eligible for immediate resale in the
public market. We are unable to predict whether significant amounts of our
common stock would be sold in the open market in anticipation of, or after, any
such distribution. We also are unable to predict whether a sufficient number of
buyers for shares of our common stock would be in the market at that
time.
We
have filed registration statements covering approximately 2.7 million shares of
class A common stock issuable under outstanding options under various
equity incentive plans and, as of December 30, 2007, have 0.7 million shares
reserved for future issuance under our Amended and Restated 2005 Stock Incentive
Plan. We have also registered for resale up to approximately 4.1 million shares
of class A common stock for resale by holders of former PowerLight shares.
Although some of these shares have already been sold into the market, the
remaining shares are available for sale, although sales of shares held by former
PowerLight shareholders who are now affiliates of SunPower are subject to sales
restrictions under the Securities Act. Some of the aggregate of approximately
4.7 million shares of class A common stock that we lent to underwriters of our
debenture offerings are being restricted by such underwriters to facilitate
later hedging arrangements of future purchases for debentures in the
after-market. These shares may be freely sold into the market by the
underwriters at any time, and such sales could depress our stock price. In
addition, any hedging activity facilitated by our debenture underwriters would
involve short sales or privately negotiated derivatives transactions. These or
other similar transactions could further negatively affect our stock
price.
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If
securities or industry analysts do not publish research or reports about us, our
business or our market, or if they change their recommendations regarding our
stock adversely, our securities prices and trading volumes could
decline.
The
trading markets for our class A common stock and debentures are influenced
by the research and reports that industry or securities analysts publish about
us, our business or our market. If one or more of the analysts who cover us
change their recommendation regarding our stock adversely, our stock and
debenture prices would likely decline. If one or more of these analysts cease
coverage of our company or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could cause our
securities prices or trading volumes to decline.
The
price of our class A common stock, and therefore of our outstanding
debentures, may fluctuate significantly, and a liquid trading market for our
class A common stock may not be sustained.
Our
class A common stock has a limited trading history in the public markets,
and during that period has experienced extreme price and volume fluctuations.
The trading price of our class A common stock could be subject to wide
fluctuations due to the factors discussed in this risk factors section. In
addition, the stock market in general, and The Nasdaq Global Market and the
securities of technology companies and solar companies in particular, have
experienced severe price and volume fluctuations. These trading prices and
valuations, including our own market valuation and those of companies in our
industry generally, may not be sustainable. These broad market and industry
factors may decrease the market price of our class A common stock,
regardless of our actual operating performance. Because the debentures are
convertible into our class A common stock, volatility or depressed prices
of our class A common stock could have a similar effect on the trading
price of these debentures. In addition, in the past, following periods of
volatility in the overall market and the market price of a company’s securities,
securities class action litigation has often been instituted against these
companies. This litigation, if instituted against us, could result in
substantial costs and a diversion of our management’s attention and
resources.
The
difference in the voting rights of our class A and our class B common
stock may reduce the value and liquidity of our class A common
stock.
The
rights of class A and class B common stock are substantially similar,
except with respect to voting, conversion and other protective provisions. The
class B common stock is entitled to eight votes per share and the
class A common stock is entitled to one vote per share. The difference in
the voting rights of our class A and class B common stock could reduce
the value of our class A common stock to the extent that any investor or
potential future purchaser of our common stock ascribes value to the right of
our class B common stock to eight votes per share.
Delaware
law and our certificate of incorporation and bylaws contain anti-takeover
provisions that could delay or discourage takeover attempts that stockholders
may consider favorable.
Provisions
in our restated certificate of incorporation and bylaws may have the effect of
delaying or preventing a change of control or changes in our management. These
provisions include the following:
• the
right of the board of directors to elect a director to fill a vacancy created by
the expansion of the board of directors;
• the
prohibition of cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
• the
requirement for advance notice for nominations for election to the board of
directors or for proposing matters that can be acted upon at a stockholders’
meeting;
• the
ability of the board of directors to issue, without stockholder approval, up to
approximately 10.0 million shares of preferred stock with terms set by the board
of directors, which rights could be senior to those of common stock;
and
• in
the event that Cypress, its successors in interest and its subsidiaries no
longer collectively own shares of our common stock equal to at least 40% of the
shares of all classes of our common stock then outstanding and Cypress is no
longer consolidating us for accounting purposes:
• our
board of directors will be divided into three classes of directors, with the
classes to be as nearly equal in number as possible;
• no
action can be taken by stockholders except at an annual or special meeting of
the stockholders called in accordance with our bylaws, and stockholders may not
act by written consent;
• stockholders
may not call special meetings of the stockholders; and
• our
board of directors will be able to alter our bylaws without obtaining
stockholder approval.
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Until
such time as Cypress, its successor in interest and its subsidiaries
collectively own less than 40% of the shares of all classes of our common stock
then outstanding and Cypress is no longer consolidating us for accounting
purposes, the affirmative vote of at least 75% of the then-authorized number of
members of our board of directors will be required to: (1) adopt, amend or
repeal our bylaws or certificate of incorporation; (2) appoint or remove
our chief executive officer; (3) designate, appoint or allow for the
nomination or recommendation for election by our stockholders of an individual
to our board of directors; (4) change the size of our board of directors to
be other than in the range of five to seven members; (5) form a
committee of our board of directors or establish or change a charter, committee
responsibilities or committee membership of any committee of our board of
directors; (6) adopt any stockholder rights plan, “poison pill” or other
similar arrangement; or (7) approve any transactions that would involve a
merger, consolidation, restructuring, sale of substantially all of our assets or
any of our subsidiaries or otherwise result in any person or entity obtaining
control of us or any of our subsidiaries. Cypress may at any time in its sole
discretion waive this requirement to obtain such a supermajority vote of our
board of directors.
In
addition, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, or the DGCL. These provisions may prohibit large
stockholders, in particular those owning 15% or more of our outstanding voting
stock, from merging or combining with us. These provisions in our restated
certificate of incorporation, bylaws and under Delaware law could discourage
potential takeover attempts and could reduce the price that investors might be
willing to pay for shares of our common stock in the future and result in the
market price being lower than they would without these provisions.
Provisions
of our outstanding debentures could discourage an acquisition of us by a third
party.
Certain
provisions of our outstanding debentures could make it more difficult or more
expensive for a third party to acquire us. Upon the occurrence of certain
transactions constituting a fundamental change, holders of our outstanding
debentures will have the right, at their option, to require us to repurchase, at
a cash repurchase price equal to 100% of the principal amount plus accrued and
unpaid interest on the debentures, all of their debentures or any portion of the
principal amount of such debentures in integral multiples of $1,000. We may also
be required to issue additional shares of our class A common stock upon
conversion of such debentures in the event of certain fundamental
changes.
We
currently have a significant amount of debt outstanding. Our substantial
indebtedness, along with our other contractual commitments, could adversely
affect our business, financial condition and results of operations, as well as
our ability to meet any of our payment obligations under the debentures and our
other debt.
We
currently have a significant amount of debt and debt service requirements. As of
December 30, 2007, after giving effect to our July 2007 offering of debentures,
we had $425.0 million of outstanding debt for borrowed money.
This
level of debt could have significant consequences on our future operations,
including:
• making
it more difficult for us to meet our payment and other obligations under the
debentures and our other outstanding debt;
• resulting
in an event of default if we fail to comply with the financial and other
restrictive covenants contained in our debt agreements, which event of default
could result in all of our debt becoming immediately due and
payable;
• reducing
the availability of our cash flow to fund working capital, capital expenditures,
acquisitions and other general corporate purposes, and limiting our ability to
obtain additional financing for these purposes;
• subjecting
us to the risk of increased sensitivity to interest rate increases on our
indebtedness with variable interest rates, including borrowings under our new
credit facility;
• limiting
our flexibility in planning for, or reacting to, and increasing our
vulnerability to, changes in our business, the industry in which we operate and
the general economy; and
• placing
us at a competitive disadvantage compared to our competitors that have less debt
or are less leveraged.
Any
of the above-listed factors could have an adverse effect on our business,
financial condition and results of operations and our ability to meet our
payment obligations under the debentures and our other debt.
In
addition, we also have significant contractual commitments for the purchase of
polysilicon, some of which involve prepayments, and we may enter into
additional, similar agreements in the future. These commitments could have an
adverse effect on our liquidity and our ability to meet our payment obligations
under the debentures and our other debt.
Our
ability to meet our payment and other obligations under our debt instruments
depends on our ability to generate significant cash flow in the future. This, to
some extent, is subject to general economic, financial, competitive, legislative
and regulatory factors as well as other factors that are beyond our control. We
cannot assure investors that our business will generate cash flow from
operations, or that future borrowings will be available to us under our existing
or any future credit facilities or otherwise, in an amount sufficient to enable
us to meet our payment obligations under our outstanding debentures and our
other debt and to fund other liquidity needs. If we are not able to generate
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sufficient
cash flow to service our debt obligations, we may need to refinance or
restructure our debt, including our outstanding debentures, sell assets, reduce
or delay capital investments, or seek to raise additional capital. If we are
unable to implement one or more of these alternatives, we may not be able to
meet our payment obligations under the debentures and our other debt and other
obligations.
As
of the first trading day of the first quarter in fiscal 2008, holders of the
outstanding debentures are able to exercise their right to convert the
debentures any day in that fiscal quarter because the closing price of our class
A common stock equaled or exceeded $70.94 and $102.80, which represents more
than 125% of the applicable conversion price for our 1.25% and 0.75% outstanding
debentures, respectively, for at least 20 of the last 30 trading days during the
preceding fiscal quarter. This test is repeated each fiscal quarter, and prior
to August 1, 2025, holders of our outstanding debentures may only exercise their
right to convert during a fiscal quarter in which this test is met. After August
1, 2025, the debentures are convertible at any time.
In
the event of conversion by holders of the outstanding debentures, the principal
amount must be settled in cash and to the extent that the conversion obligation
exceeds the principal amount of any debentures converted, we must satisfy the
remaining conversion obligation of the February 2007 debentures in shares of our
class A common stock, and we maintain the right to satisfy the remaining
conversion obligation of the July 2007 debentures in shares of our class A
common stock or cash. We intend to fund such obligations, if any, through
existing cash and cash equivalents, cash generated from operations and, if
necessary, borrowings under our credit agreement with Wells Fargo and/or
potential availability of future sources of funding. We believe that it is
unlikely that a significant percentage of holders of the outstanding debentures
will exercise their right to convert in the near future because they would
likely receive less value upon conversion than the current market value of the
debentures based on the debentures’ trading prices quoted on Bloomberg in
January and February 2008. However, there is no assurance that this will
continue to be the case. As of February 29, 2008, no holders of the outstanding
debentures exercised their right to convert the debentures.
As
of December 30, 2007, we had cash and cash equivalents of $285.2, while the
aggregate outstanding principal balance due under the debentures was $425.0
million. For more information about our convertible debentures, please see “Liquidity” within “Item 7: Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” See also
“Risk Factors - We expect to
continue to make significant capital expenditures, particularly in our
manufacturing facilities, and if adequate funds are not available or if the
covenants in our credit agreements impair our ability to raise capital when
needed, our ability to expand our manufacturing capacity and our business
will suffer.”
Our
outstanding debentures are effectively subordinated to any existing and future
secured indebtedness and structurally subordinated to existing and future
liabilities and other indebtedness of our subsidiaries.
Our
outstanding debentures are our general, unsecured obligations and rank equally
in right of payment with all of our existing and future unsubordinated,
unsecured indebtedness. All of our $425.0 million in outstanding principal
amount of debentures rate equally in right of payment. Our outstanding
debentures are effectively subordinated to our existing and any future secured
indebtedness we may have to the extent of the value of the assets securing such
indebtedness, and structurally subordinated to any existing and future
liabilities and other indebtedness of our subsidiaries. These liabilities may
include indebtedness, trade payables, guarantees, lease obligations and letter
of credit obligations. The debentures do not restrict us or our subsidiaries
from incurring indebtedness, including senior secured indebtedness in the
future, nor do they limit the amount of indebtedness we can issue that is equal
in right of payment.
The
terms of our outstanding debentures do not contain restrictive covenants and
provide only limited protection in the event of a change of
control.
The
indentures under which our outstanding debentures were issued do not contain
restrictive covenants that would protect holders from several kinds of
transactions that may adversely affect them. In particular, the indentures do
not contain covenants that will limit our ability to pay dividends or make
distributions on or redeem our capital stock or limit our ability to incur
additional indebtedness and, therefore, may not protect holders of our
debentures in the event of a highly leveraged transaction or other similar
transaction. The requirement that we offer to repurchase our outstanding
debentures upon a change of control is limited to the transactions specified in
the definitions of a “fundamental change” in the indentures. Similarly, the
circumstances under which we are required to adjust the conversion rate upon the
occurrence of a “non-stock change of control” are limited to circumstances where
a debenture is converted in connection with such a transaction as set forth in
the indentures.
Accordingly,
subject to restrictions contained in our other debt agreements, we could enter
into certain transactions, such as acquisitions, refinancings or
recapitalizations, that could affect our capital structure and the value of the
debentures and our class A common stock but would not constitute a
fundamental change under the debentures.
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We
may be unable to repurchase the debentures for cash when required by the
holders, including following a fundamental change.
Holders
of our outstanding debentures have the right to require us to repurchase such
debentures on specified dates or upon the occurrence of a fundamental change
prior to maturity as described in the indentures governing such debentures. We
may not have sufficient funds to make the required repurchase in cash at such
time or the ability to arrange necessary financing on acceptable terms. In
addition, our ability to repurchase the debentures in cash may be limited by law
or the terms of other agreements relating to our debt outstanding at the time,
including our current credit facility which limits our ability to purchase the
debentures for cash in certain circumstances. If we fail to repurchase the
debentures in cash as required by the indenture governing the debentures, it
would constitute an event of default under each indenture governing our
outstanding debentures, which, in turn, would constitute an event of default
under our credit facility and the other indenture.
Some
significant restructuring transactions may not constitute a fundamental change,
in which case we would not be obligated to offer to repurchase our outstanding
debentures.
Upon
the occurrence of a fundamental change, holders of our debentures will have the
right to require us to repurchase their debentures. However, the fundamental
change provisions of our indentures will not afford protection to holders of
debentures in the event of certain transactions. For example, transactions such
as leveraged recapitalizations, refinancings, restructurings or acquisitions
initiated by us, as well as stock acquisitions by certain companies, would not
constitute a fundamental change requiring us to repurchase the debentures. In
the event of any such transaction, holders of debentures would not have the
right to require us to repurchase their debentures, even though each of these
transactions could increase the amount of our indebtedness, or otherwise
adversely affect our capital structure or any credit ratings, thereby adversely
affecting the holders of our debentures.
The
adjustment to the conversion rates of our outstanding debentures upon the
occurrence of certain types of fundamental changes may not adequately compensate
holders for the lost option time value of their debentures as a result of such
fundamental change.
If
certain types of fundamental changes occur prior to August 1, 2010 with
respect to our 0.75% debentures or prior to February 13, 2012 with respect to
our 1.25% debentures, we may adjust the conversion rate of the debentures to
increase the number of shares issuable upon conversion. The number of additional
shares to be added to the conversion rate will be determined based on the date
on which the fundamental change becomes effective and the price paid per share
of our class A common stock in the fundamental change as described in the
indentures for such debentures. Although this adjustment is designed to
compensate holders for the lost option value of their debentures as a result of
certain types of fundamental changes, the adjustment is only an approximation of
such lost value based upon assumptions made at the time when their debentures
were issued and may not adequately compensate them for such loss. In addition,
with respect to our 0.75% debentures, if the price paid per share of our
class A common stock in the fundamental change is less than $64.50 or
more than $155.00 (subject to adjustment), or if such transaction occurs on
or after August 1, 2010, there will be no such adjustment. Moreover, in no
event will the total number of shares issuable upon conversion as a result of
this adjustment exceed 15.5039 per $1,000 principal amount of the
0.75% debentures, subject to adjustment for stock splits, combinations and the
like. With respect to our 1.25% debentures, if the price paid per share of our
class A common stock in the fundamental change is less than $44.51 or more
than $135.00 (subject to adjustment), or if such transaction occurs on or after
February 15, 2012, there will be no such adjustment. Moreover, in no event will
the total number of shares issuable upon conversion as a result of this
adjustment exceed 22.4668 per $1,000 principal amount of the 1.25% debentures,
subject to adjustment for stock splits, combinations and the like.
There
is currently no public market for our outstanding debentures, and an active
trading market may not develop for these debentures. The failure of a market to
develop for our debentures could adversely affect the liquidity and value of our
debentures.
We
do not intend to apply for listing of the debentures on any securities exchange
or for quotation of the debentures on any automated dealer quotation system.
Although we have been advised by the underwriters that the underwriters intend
to make a market in the debentures, none of the underwriters is obligated to do
so and may discontinue market making at any time without notice. No assurance
can be given as to the liquidity of the trading market, if any, for the
debentures.
An
active market may not develop for any of our outstanding debentures, and there
can be no assurance as to the liquidity of any market that may develop for the
debentures. If active, liquid markets do not develop for our debentures, the
market price and liquidity of the affected debentures may be adversely affected.
Any of the debentures may trade at a discount from their initial offering
price.
The
liquidity of the trading market and future trading prices of our debentures will
depend on many factors, including, among other things, the market price of our
class A common stock, prevailing interest rates, our operating results,
financial performance and prospects, the market for similar securities and the
overall securities market, and may be adversely affected by unfavorable changes
in these factors.
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Historically,
the market for convertible debt has been subject to disruptions that have caused
volatility in prices. It is possible that the market for our debentures will be
subject to disruptions which may have a negative effect on the holders of these
debentures, regardless of our operating results, financial performance or
prospects.
Upon
any conversion of our outstanding debentures, we will pay cash in lieu of
issuing shares of our class A common stock with respect to an amount up to
the principal amount of debentures converted. We retain the right to satisfy any
remaining conversion obligation, in whole or part, in additional shares of
class A common stock or, in the case of our 0.75% debentures, in cash,
based upon a predetermined formula. Therefore, upon conversion, holders of our
debentures may not receive any shares of our class A common stock, or may
receive fewer shares than the number into which their debentures would otherwise
be convertible.
Upon
any conversion of debentures, we will pay cash in lieu of issuing shares of our
common stock with respect to an amount up to the principal amount of debentures
converted. We retain the right to satisfy any remaining conversion obligation,
in whole or part, in additional shares of our class A common stock or, in
the case of our 0.75% debentures, in cash, with respect to the conversion value
in excess thereof, based on a daily conversion value (as defined herein)
calculated based on a proportionate basis for each day of the 20 trading day
conversion period. Accordingly, upon conversion of debentures, holders may not
receive any shares of our class A common stock. In addition, because of the
20 trading day calculation period, in certain cases, settlement will be delayed
until at least the 26th trading day following the related conversion date.
Moreover, upon conversion of debentures, holders may receive less proceeds than
expected because the price of our class A common stock may decrease (or not
appreciate as much as they may expect) between the conversion date and the day
the settlement amount of their debentures is determined. Further, as a result of
cash payments, our liquidity may be reduced upon conversion of the debentures.
In addition, in the event of our bankruptcy, insolvency or certain similar
proceedings during the conversion period, there is a risk that a bankruptcy
court may decide a holder’s claim to receive such cash and/or shares could be
subordinated to the claims of our creditors as a result of such holder’s claim
being treated as an equity claim in bankruptcy.
As
of the first trading day of the first quarter in fiscal 2008, holders of the
outstanding debentures are able to exercise their right to convert the
debentures any day in that fiscal quarter because the closing price of our class
A common stock equaled or exceeded $70.94 and $102.80, which represents more
than 125% of the applicable conversion price for our 1.25% and 0.75% outstanding
debentures, respectively, for at least 20 of the last 30 trading days during the
preceding fiscal quarter. This test is repeated each fiscal quarter, and prior
to August 1, 2025, holders of our outstanding debentures may only exercise their
right to convert during a fiscal quarter in which the test was met. After August
1, 2025, the debentures are convertible at any time.
In
the event of conversion by holders of the outstanding debentures, the principal
amount must be settled in cash and to the extent that the conversion obligation
exceeds the principal amount of any debentures converted, we must satisfy the
remaining conversion obligation of the February 2007 debentures in shares of our
class A common stock, and we maintain the right to satisfy the remaining
conversion obligation of the July 2007 debentures in shares of our class A
common stock or cash. We intend to fund such obligations, if any, through
existing cash and cash equivalents, cash generated from operations and, if
necessary, borrowings under our credit agreement with Wells Fargo and/or
potential availability of future sources of funding. We believe that it is
unlikely that a significant percentage of holders of the outstanding debentures
will exercise their right to convert in the near future because they would
likely receive less value upon conversion than the current market value of the
debentures based on the debentures’ trading prices quoted on Bloomberg in
January and February 2008. However, there is no assurance that this will
continue to be the case. As of February 29, 2008, no holders of the outstanding
debentures exercised their right to convert the debentures.
As
of December 30, 2007, we had cash and cash equivalents of $285.2, while the
aggregate outstanding principal balance due under the debentures was $425.0
million. For more information about our convertible debentures, please see “Liquidity” within “Item 7: Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
The
conditional conversion features of our outstanding debentures could result in
holders receiving less than the value of the class A common stock into
which a debenture would otherwise be convertible.
At
certain times, the debentures are convertible into cash and, if applicable,
shares of our class A common stock only if specified conditions are met. If
these conditions are not met, holders will not be able to convert their
debentures at that time, and, upon a later conversion, holders may not be able
to receive the value of the class A common stock into which the debentures
would otherwise have been convertible had such conditions been met.
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The
conversion rate of our outstanding debentures may not be adjusted for all
dilutive events that may adversely affect their trading prices or the
class A common stock issuable upon conversion of these
debentures.
The
conversion rates of our outstanding debentures are subject to adjustment upon
certain events, including the issuance of stock dividends on our class A
common stock, the issuance of rights or warrants, subdivisions, combinations,
distributions of capital stock, indebtedness or assets, cash dividends and
issuer tender or exchange offers. The conversion rates will not be adjusted for
certain other events, including, for example, upon the issuance of additional
shares of stock for cash, any of which may adversely affect the trading price of
our debentures or the class A common stock issuable upon conversion of the
debentures. Even if the conversion price is adjusted for a dilutive event, such
as a leveraged recapitalization, it may not fully compensate holders for their
economic loss.
Holders
of our debentures will not be entitled to any rights with respect to our
class A common stock, but they will be subject to all changes made with
respect to our class A common stock.
Holders
of our debentures will not be entitled to any rights with respect to our
class A common stock (including, without limitation, voting rights and
rights to receive any dividends or other distributions on our class A
common stock), but they will be subject to all changes affecting our
class A common stock. Holders will have rights with respect to our
class A common stock only if they convert their debentures, which they are
permitted to do only in limited circumstances. For example, in the event that an
amendment is proposed to our certificate of incorporation or bylaws requiring
stockholder approval and the record date for determining the stockholders of
record entitled to vote on the amendment occurs prior to delivery of our
class A common stock to holders, they will not be entitled to vote on the
amendment, although they will nevertheless be subject to any changes in the
powers, preferences or rights of our class A common stock.
Our
outstanding debentures may not be rated or may receive lower ratings than
anticipated.
We
do not intend to seek a rating on any of our outstanding debentures. However, if
one or more rating agencies rates these debentures and assigns them a rating
lower than the rating expected by investors, or reduces their ratings in the
future, the market price of the affected debentures and our class A common
stock could be reduced.
Risks
Related to Our Relationship with Cypress Semiconductor Corporation
As
long as Cypress controls us, the ability of our other stockholders to influence
matters requiring stockholder approval will be limited.
As
of December 30, 2007, Cypress owned all 44.5 million shares of outstanding our
class B common stock, representing approximately 56% of the total
outstanding shares of our common stock, or approximately 51% of such shares on a
fully diluted basis after taking into account outstanding options (or 49% of
such shares on a fully diluted basis after taking into account outstanding stock
options and loaned shares to underwriters of our convertible indebtedness), and
90% of the voting power of our outstanding capital stock.
Shares
of our class A common stock and our class B common stock have
substantially similar rights, preferences and privileges except with respect to
certain voting and conversion rights and other protective provisions. Shares of
our class B common stock are entitled to eight votes per share of
class B common stock, and shares of our class A common stock are
entitled to one vote per share of class A common stock. Cypress, its
successors in interest or its subsidiaries may convert their shares of our
class B common stock into shares of our class A common stock on a
one-for-one basis at any time. Prior to a tax-free distribution by Cypress of
its shares of our class B common stock to its stockholders, the
class B common shares will automatically convert into shares of
class A common stock if such shares are transferred to a person other than
Cypress, its successors in interest or its subsidiaries. In most circumstances
in the event that Cypress owns less than 40% of the shares of all classes of our
common stock then outstanding, each outstanding share of class B common
stock will automatically convert into one share of class A common stock. By
virtue of its ownership of class B common stock, Cypress is able to elect all of
the members of our board of directors.
In
addition, until such time as Cypress, its successors in interest and its
subsidiaries collectively own less than 40% of the shares of all classes of our
common stock then outstanding and Cypress is no longer consolidating us for
accounting purposes, Cypress will have the ability to take stockholder action
without the vote of any other stockholder and, by virtue of the voting power
afforded the shares of our class B common stock, investors will not be able
to affect the outcome of any stockholder vote during this period. As a result,
Cypress will have the ability to control all matters affecting us,
including:
• the
composition of our board of directors and, through the board of directors, any
determination with respect to the combined company’s business plans and
policies, including the appointment and removal of officers;
• any
determinations with respect to mergers and other business
combinations;
• our
acquisition or disposition of assets;
• our
financing activities;
• changes
to the agreements providing for our separation from Cypress;
• the
allocation of business opportunities that may be suitable for us;
• the
payment of dividends on our class A common stock; and
• the
number of shares available for issuance under our stock plans.
For
the reasons described above, Cypress may be unwilling to support certain
corporate transactions proposed by us that could dilute its ownership below 40%,
including financings or acquisitions effected through the issuance of our
securities. In addition, Cypress may have tax-related or other objectives that
cause it to be unwilling to support these or other transactions that dilute its
ownership below 50%. Cypress’s voting control may also discourage transactions
involving a change of control of SunPower, including transactions in which
holders of our class A common stock might otherwise receive a premium for
their shares over the then current market price. Cypress is not prohibited from
selling a controlling interest in us to a third party and may do so without
approval of holders of our class A common stock and without providing for a
purchase of our class A common stock. Accordingly, shares of our
class A common stock may be worth less than they would be if Cypress did
not maintain voting control over us.
Our
ability to continue to manufacture our solar cells in our current facilities
with our current and planned manufacturing capacities, and therefore to maintain
and increase revenue and achieve profitability, depends to a large extent upon
the continued success of our relationship with Cypress.
We
manufacture our solar cells in a Philippines manufacturing facility which we
lease from Cypress, with the option to purchase the facility. We are in the
process of expanding existing facilities for solar and panel assembly. If we are
unable to expand in our current facility or are required to move our
manufacturing facility, we would incur significant expenses as well as lost
sales. Furthermore, we may not be able to locate a facility that meets our needs
on terms acceptable to us. Any of these circumstances would increase our
expenses and decrease our total revenue and could prevent us from sustaining
profitability.
Our
ability to operate our business effectively may suffer if we are unable to
cost-effectively establish our own administrative and other support functions in
order to operate as a stand-alone company after the expiration of our services
agreements with Cypress.
As
a subsidiary of Cypress, we have relied on administrative and other resources of
Cypress to operate our business. In connection with our initial public offering,
we entered into various service agreements to retain the ability for specified
periods to use these Cypress resources. These agreements will expire upon the
earlier or November 2009 or a change of control of our Company. We need to
create our own administrative and other support systems or contract with third
parties to replace Cypress’ systems. In addition, we recently established
disclosure controls and procedures and internal control over financial reporting
as part of our becoming a separate public company in November 2005. These
services may not be provided at the same level as when we were a wholly owned
subsidiary of Cypress, and we may not be able to obtain the same benefits that
we received prior to the separation. These services may not be sufficient to
meet our needs, and after our agreements with Cypress expire, we may not be able
to replace these services at all or obtain these services at prices and on terms
as favorable as we currently have with Cypress. Any failure or significant
downtime in our own administrative systems or in Cypress’ administrative systems
during the transitional period could result in unexpected costs, impact our
results and/or prevent us from paying our suppliers or employees and performing
other administrative services on a timely basis.
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Our
agreements with Cypress require us to indemnify Cypress for certain tax
liabilities. These indemnification obligations or related considerations may
limit our ability to obtain additional financing, participate in future
acquisitions or pursue other business initiatives.
We
have entered into a tax sharing agreement with Cypress, under which we and
Cypress agree to indemnify one another for certain taxes and similar obligations
that the other party could incur under certain circumstances. In general, we
will be responsible for taxes relating to our business. Furthermore, we may be
held jointly and severally liable for taxes determined on a consolidated basis
for the entire Cypress group for any particular taxable year that we are a
member of the group even though Cypress is required to indemnify us for its
taxes pursuant to the tax sharing agreement. As of June 2006, we ceased to
be a member of the Cypress consolidated group for federal income tax purposes
and most state income tax purposes. Thus, to the extent that we become entitled
to utilize on our separate tax returns portions of those credit or loss
carryforwards existing as of such date, we will distribute to Cypress the tax
effect (estimated to be 40% for federal and state income tax purposes) of the
amount of such tax loss carryforwards so utilized and the amount of any credit
carryforwards so utilized. We will distribute these amounts to Cypress in cash
or in our shares, at our option. Accordingly, we will be subject to the
obligations payable to Cypress for any federal income tax credit or loss
carryforwards utilized in our federal tax returns. As of December 30, 2007,
we had $44.0 million of federal net operating loss carryforwards and
approximately $73.5 million of California net operating loss carryforwards,
meaning that such potential future payments to Cypress, which would be made over
a period of several years, would therefore aggregate 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 Consolidated
Balance Sheets. If these losses were reflected on the Consolidated Balance
Sheets, to the extent the deductions were not matched against previous
stock-based compensation charges, the loss carryforwards would be accounted for
as an increase to deferred tax assets and stockholders’ equity.
If
Cypress distributes our class B common stock to Cypress stockholders in a
transaction intended to qualify as a tax-free distribution under
Section 355 of the Internal Revenue Code, or the Code, Cypress intends to
obtain an opinion of counsel to the effect that such distribution qualifies
under Section 355 of the Code. Despite such an opinion, however, the
distribution may nonetheless be taxable to Cypress under Section 355(e) of
the Code if 50% or more of our voting power or economic value is acquired as
part of a plan or series of related transactions that includes the distribution
of our stock. The tax sharing agreement includes our obligation to indemnify
Cypress for any liability incurred as a result of issuances or dispositions of
our stock after the distribution, other than liability attributable solely to
certain dispositions of our stock by Cypress, that cause Cypress’ distribution
of shares of our stock to its stockholders to be taxable to Cypress under
Section 355(e) of the Code. Under current law, following a distribution by
Cypress and for up to two years thereafter (or possibly longer if we are acting
pursuant to a preexisting plan), our obligation to indemnify Cypress will be
triggered only if we issue stock or otherwise participate in one or more
transactions other than the distribution in which 50% or more of our voting
power or economic value is acquired in financing or acquisition transactions
that are part of a plan or series of related transactions that includes the
distribution. If such an indemnification obligation is triggered, the extent of
our liability to Cypress will generally equal the product of (a) Cypress’
top marginal federal and state income tax rate for the year of the distribution,
and (b) the difference between the fair market value of our class B
common stock distributed to Cypress stockholders and Cypress’ tax basis in such
stock as determined on the date of the distribution.
For
example, under the current tax rules, if Cypress was to make a complete
distribution of its shares of our class B common stock, and our total
outstanding capital stock at the time of such distribution were 84 million
shares, unless we qualified for one of several safe harbor exemptions available
under the Treasury Regulations, in order to avoid our indemnification obligation
to Cypress, we could not, for up two years (or possibly longer if we are acting
pursuant to a preexisting plan) from the date of Cypress’ distribution, issue
84 million or more shares of our class A common stock, nor could we
participate in one or more transactions (excluding the distribution itself) in
which 42 million or more shares of our then-existing class A common
stock were to be acquired in connection with a plan or series of related
transactions that includes the distribution. In addition, these limits could be
lower depending on certain actions that we or Cypress might take before or after
a distribution. If we were to participate in such a transaction, assuming
Cypress distributed 44.5 million shares, Cypress’ top marginal income tax rate
was 40% for federal and state income tax purposes, the fair market value of our
class B common stock was $70.00 per share and Cypress’ tax basis in such
stock was $5.00 per share on the date of their distribution, then our liability
under our indemnification obligation to Cypress would be approximately
$1.2 billion.
In
order to preserve various options for the separation of our two companies, we
and Cypress may seek to preserve Cypress’ ownership of our company at certain
levels. Any such effort could limit our ability to use our equity to raise
capital, pursue acquisitions, compensate employees or engage in other business
initiatives. In addition, our ability to use our equity to obtain additional
financing or to engage in acquisition transactions for a period of time after a
tax-free distribution of our shares by Cypress will be restricted if we can only
sell or issue a limited amount of our stock before triggering our obligation to
indemnify Cypress for taxes it incurs under Section 355(e) of the Code.
Separation of the two companies is dependent, to a large degree, on the tax
efficient provisions within the tax law. Changes to these provisions, either
through change of statute or judicial interpretation, may render the separation
strategy less attractive.
- 46
-
Third parties may
seek to hold us responsible for liabilities of Cypress.
Under
our separation agreements with Cypress, Cypress will indemnify us for claims and
losses relating to liabilities related to Cypress’ business and not related to
our business. However, if those liabilities are significant and we are
ultimately held liable for them, we cannot assure investors that we will be able
to recover the full amount of our losses from Cypress.
Our
inability to resolve any disputes that arise between us and Cypress with respect
to our past and ongoing relationships may result in a significant reduction of
our revenue.
Disputes
may arise between Cypress and us in a number of areas relating to our past and
ongoing relationships, including:
|
|
•
|
labor,
tax, employee benefit, indemnification and other matters arising from our
separation from Cypress;
|
|
|
•
|
employee
retention and recruiting;
|
|
|
•
|
business
combinations involving us;
|
|
|
•
|
pricing
for transitional services;
|
|
|
•
|
sales
or distributions by Cypress of all or any portion of its ownership
interest in us;
|
|
|
•
|
the
nature, quality and pricing of services Cypress has agreed to provide us;
and
|
|
|
•
|
business
opportunities that may be attractive to both Cypress and
us.
|
We
may not be able to resolve any potential conflicts, and even if we do, the
resolution may be less favorable than if we were dealing with an unaffiliated
party.
The
agreements we entered into with Cypress may be amended upon agreement between
the parties. While we are controlled by Cypress, we may not have the leverage to
negotiate amendments to these agreements if required on terms as favorable to us
as those we would negotiate with an unaffiliated third party.
Some
of our directors and executive officers may have conflicts of interest because
of their ownership of Cypress common stock, options to acquire Cypress common
stock or their positions as executives or directors at Cypress.
Some
of our directors and executive officers own Cypress common stock and/or options
to purchase Cypress common stock. In addition, some of our directors are
executive officers and/or directors of Cypress. Ownership of Cypress common
stock and options to purchase Cypress common stock by our directors and officers
and the presence of executive officers or directors of Cypress on our board of
directors could create, or appear to create, conflicts of interest with respect
to matters involving both us and Cypress. For example, corporate opportunities
may arise that concern both of our businesses, such as the potential acquisition
of a particular business or technology that is complementary to both of our
businesses. In these situations, our amended and restated certificate of
incorporation provides that directors and officers who are also directors or
officers of Cypress have no duty to communicate or present such corporate
opportunity to us unless it is specifically applicable to the solar energy
business and not applicable to or reasonably related to any business conducted
by Cypress, have the right to deal with such corporate opportunity in their sole
discretion and shall not be liable to us or our stockholders for breach of
fiduciary duty by reason of the fact that such director or officer pursues or
acquires such corporate opportunity for itself or for Cypress. In addition, we
have not established at this time any procedural mechanisms to address actual or
perceived conflicts of interest of these directors and officers and expect that
our board of directors, in the exercise of its fiduciary duties, will determine
how to address any actual or perceived conflicts of interest on a case-by-case
basis. If any corporate opportunity arises and if our directors and officers do
not pursue it on our behalf pursuant to the provisions in our amended and
restated certificate of incorporation, we may not become aware of, and may
potentially lose, a significant business opportunity.
Because
Cypress is not obligated to distribute to its stockholders or otherwise dispose
of our common stock that it owns, we will continue to be subject to the risks
described above relating to Cypress’ control of us if Cypress does not complete
such a transaction.
Cypress
is not obligated to distribute to its stockholders or otherwise dispose of the
shares of our class B common stock that it beneficially owns, although it might
elect to do so in the future. Completion of any distribution transaction could
be contingent upon, among other things, the receipt of a favorable tax ruling
from the Internal Revenue Service, or IRS, and/or a favorable opinion of
Cypress’ tax advisor as to the tax-free nature of such a transaction for U.S.
federal income tax purposes. The provisions allowing for a tax efficient
distribution may be amended by legislative or judicial interpretation in the
future, affecting Cypress’ willingness to distribute or dispose of our class B
common stock.
- 47
-
Unless
and until such a distribution occurs or Cypress otherwise disposes of shares so
that it, its successors in interest and its subsidiaries collectively own less
than 40% of the shares of all classes of our common stock then outstanding, we
will continue to face the risks described above relating to Cypress’ control of
us and potential conflicts of interest between Cypress and us. We may be unable
to realize potential benefits that could result from such a distribution by
Cypress, such as greater strategic focus, greater access to capital markets,
better incentives for employees and more accountable management, although we
cannot guarantee that we would realize any of these potential benefits if such a
distribution did occur. In addition, speculation by the press, investment
community, our customers, our competitors or others regarding whether Cypress
intends to complete such a distribution or otherwise dispose of its controlling
interest in us could harm our business or lead to volatility in our stock
price.
So
long as Cypress continues to hold a controlling interest in us or is otherwise a
significant stockholder, the liquidity and market price of our class A common
stock may be adversely impacted. In addition, there can be no assurance that
Cypress will distribute or otherwise dispose of any of its remaining shares of
our class B common stock.
Cypress’
ability to replace our board of directors may make it difficult for us to
recruit independent directors.
Cypress
may at any time replace our entire board of directors. Furthermore, some actions
of our board of directors require the approval of 75% of our directors except to
the extent this condition is waived by Cypress. As a result, unless and until
Cypress, its successors in interest and its subsidiaries collectively own less
than 40% of the shares of all classes of our common stock then outstanding and
Cypress is no longer consolidating us for accounting purposes, Cypress could
exercise significant control over our board of directors. As such, individuals
who might otherwise accept a board position at SunPower may decline to serve,
and Cypress may be able to control important decisions made by our Board of
Directors.
ITEM 1B: UNRESOLVED STAFF
COMMENTS
None.
ITEM 2: PROPERTIES
Our
corporate headquarters is located in San Jose, California, where we occupy
approximately 51,000 square feet under a lease from Cypress that expires in
April 2011. In Richmond, California, we occupy approximately 250,000 square feet
for office, light industrial and research and development use under a lease from
an unaffiliated third party that expires in September 2018. In addition to these
facilities, we also have our European headquarters located in Geneva,
Switzerland where we occupy approximately 4,000 square feet under a lease that
expires in September 2012 as well as sales and support offices in Southern
California, New Jersey, Germany, Italy, Spain, and South Korea, all of which are
leased from unaffiliated third parties.
We
also lease from Cypress approximately 215,000 square feet in the Philippines,
which serves as our solar cell manufacturing facility. This lease expires in
July 2021 and it contains a right to purchase the facility 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 us, unless such purchase option is exercised after a
change of control of our Company, in which case the purchase price shall be at a
market rate, as reasonably determined by Cypress. Under the lease, we would pay
Cypress a rate equal to the cost to Cypress for the facility until the earlier
of 10 years from November 22, 2005 or a change of control of our Company.
Thereafter, we will pay market rent for the facility. In December 2005 we leased
from an unaffiliated third party approximately 46,300 square foot building in
the Philippines for five years, with an option to extend the lease at market
rental rates when the term expires. In August 2006, we purchased a 344,000
square feet building in the Philippines. This facility is approximately 20 miles
from our existing facility and is being developed to house up to 12 solar cell
manufacturing lines. We recently began operating three manufacturing lines in
the new facility and expect to commence production of an additional five solar
cell lines during 2008. We plan to begin production as soon as the first quarter
of 2010 on the first line of a third solar cell manufacturing facility. We may
require additional space in the future, which may not be available on
commercially reasonable terms or in the location we desire.
Because
of the interrelation of our business segments, both the components segment and
systems segment use substantially all of the properties at least in part, and we
retain the flexibility to use each of the properties in whole or in part for
each of the segments. Therefore, we do not identify or allocate assets by
business segment. For more information on property, plant and
equipment by country, see Note 18 of Notes to our Consolidated Financial
Statements in "Item
8: Financial Statements and Supplemental Data."
ITEM 3: LEGAL
PROCEEDINGS
From
time to time we are a party to litigation matters and claims that are normal in
the course of our operations. While we believe that the ultimate outcome of
these matters will not have a material adverse effect on the Company, the
outcome of these matters is not determinable and negative outcomes may adversely
affect our financial position, liquidity or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
None.
- 48
-
ITEM 5: MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our
class A common stock is listed on the NASDAQ Global Market under the trading
symbol “SPWR.” The high and low trading prices of our class A common stock
during the fiscal years ended December 30, 2007 and December 31, 2006 are as
follows:
|
For
the year ended December 30, 2007
|
High
|
Low
|
||||||
|
First
quarter
|
$
|
48.11
|
$
|
35.40
|
||||
|
Second
quarter
|
65.55
|
45.84
|
||||||
|
Third
quarter
|
86.93
|
59.64
|
||||||
|
Fourth
quarter
|
164.49
|
81.50
|
||||||
|
For
the year ended December 31, 2006
|
High
|
Low
|
||||||
|
First
quarter
|
$
|
45.09
|
$
|
29.08
|
||||
|
Second
quarter
|
42.00
|
24.60
|
||||||
|
Third
quarter
|
34.25
|
23.75
|
||||||
|
Fourth
quarter
|
40.00
|
26.35
|
As
of February 22, 2008, there were approximately 38 record holders of
our class A common stock and there was one record holder of our class B common
stock. A substantially greater number of holders of our class A common stock are
in “street name” or beneficial holders, whose shares are held of record by
banks, brokers and other financial institutions.
Dividends
We
have never declared or paid any cash dividend on our capital stock, and we do
not currently intend to pay any cash or dividends on our common stock in the
foreseeable future. We intend to retain future earnings, if any, to finance the
operation and expansion of our business.
Our
bank credit facilities place restrictions on us and our subsidiaries’ ability to
pay cash dividends. Additionally, our debentures issued in February 2007 and
July 2007 allow the holders to convert their bonds into our common stock if we
declare a dividend that on a per share basis exceeds 10% of our common stock’s
market price.
Recent Sales of Unregistered
Securities
We conducted no
unregistered sales of equity securities during the fiscal year ended December
30, 2007.
Issuer
Purchases of Equity Securities
|
Period
|
Total Number of Shares
Purchased(1)
(in
thousands)
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Number of Shares That May Yet Be Purchased Under the Publicly Announced
Plans or Programs
|
||||||||||||
|
October
1, 2007 through October 28, 2007
|
1
|
$
|
127.71
|
—
|
—
|
|||||||||||
|
October
29, 2007 through November 25, 2007
|
—
|
—
|
—
|
—
|
||||||||||||
|
November
26, 2007 through December 30, 2007
|
7
|
|
132.49
|
—
|
—
|
|||||||||||
|
Total
|
8
|
|
132.02
|
—
|
—
|
|||||||||||
|
(1)
|
The
total number of shares purchased includes shares surrendered to satisfy
tax withholding obligations in connection with the vesting of restricted
stock issued to employees.
|
- 49
-
Equity
Compensation Plan Information
The
following table provides certain information as of December 30, 2007 with
respect to our equity compensation plans under which shares of class A common
stock are authorized for issuance (in thousands, except dollar
figures):
|
Plan
Category
|
Number of securities to
be issued upon exercise
of outstanding
options,
warrants
and rights
|
Weighted average
exercise
price of
outstanding
options,
warrants
and
rights
|
Number of securities remaining
available
for future issuance
under
equity compensation
plans
(excluding securities
reflected
in the first column)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
2,889
|
$
|
4.73
|
28
|
||||||||
|
Equity
compensation shares not approved by security holders
|
17
|
(1)
|
2.00
|
—
|
||||||||
|
Total
|
2,906
|
(2)
|
4.71
|
28
|
||||||||
|
(1)
|
Represents
one option to purchase shares of class A common stock issued to one
SunPower employee on June 17, 2004 with an exercise price of $2.00,
vesting over five years.
|
|
(2)
|
This
table excludes options to purchase an aggregate of approximately 795,000
shares of class A common stock, at a weighted average exercise price of
$8.09 per share, that we assumed in connection with the acquisition of SP
Systems in January 2007.
|
Company
Stock Price Performance
The
following graph compares the performance of an investment in our class A common
stock from the pricing of our IPO on November 17, 2005 through
December 30, 2007, with the NASDAQ Market Index and with four comparable
issuers: Evergreen Solar, Energy Conversion Devices, SolarWorld and Solon AG.
The graph assumes $100 was invested on November 17, 2005 in our class A
common stock at the closing price of $25.45 per share and at the closing prices
for the NASDAQ Market Index and each of our peer issuers. It also assumes that
any dividends were reinvested on the date of payment without payment of any
commissions. The performance shown in the graph represents past performance and
should not be considered an indication of future performance.
ASSUMES
$100 INVESTED ON NOVEMBER 17, 2005
ASSUMES
DIVIDEND REINVESTED
FISCAL
YEAR ENDED DECEMBER 30, 2007
|
11/17/05
|
12/30/05
|
12/31/06
|
12/30/07
|
|||||||||||||
|
SunPower
Corporation
|
$
|
100.00
|
$
|
133.56
|
$
|
146.05
|
$
|
514.93
|
||||||||
|
NASDAQ
Market Index
|
100.00
|
99.32
|
108.77
|
120.45
|
||||||||||||
|
Evergreen
Solar
|
100.00
|
89.27
|
63.45
|
144.34
|
||||||||||||
|
Energy
Conversion Devices
|
100.00
|
130.15
|
108.53
|
105.78
|
||||||||||||
|
SolarWorld
|
100.00
|
94.63
|
160.70
|
140.42
|
||||||||||||
|
Solon
AG
|
100.00
|
99.11
|
91.85
|
277.46
|
||||||||||||
- 50
-
ITEM 6: SELECTED CONSOLIDATED FINANCIAL
DATA
The
following selected consolidated financial data should be read together with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our Consolidated Financial Statements and related notes included
elsewhere in this Annual Report on Form 10-K.
On
November 9, 2004, Cypress completed a reverse triangular merger with us in
which each share of our then outstanding capital stock not owned by Cypress was
valued at $3.30 per share and exchanged for an equivalent number of shares of
Cypress common stock. This merger effectively gave Cypress 100% ownership of all
of our then outstanding shares of capital stock but left our unexercised
warrants and options outstanding. This transaction resulted in the “push down”
of the effect of the acquisition of SunPower by Cypress and created a new basis
of accounting. See Note 2 of Notes to our Consolidated Financial Statements. The
Consolidated Balance Sheets and Statements of Operations data in this Annual
Report on Form 10-K prior and up to November 8, 2004 refer to the
Predecessor Company and this period is referred to as the pre-merger period,
while the Consolidated Balance Sheets and Statements of Operations data
subsequent to November 8, 2004 refer to the Successor Company and this
period is referred to as the post-merger period. A black line has been drawn
between the accompanying financial statements to distinguish between the
pre-merger and post-merger periods.
Our
Consolidated Financial Statements include purchases of goods and services from
Cypress, including wafers, legal, tax, treasury, information technology,
employee benefits and other Cypress corporate services and infrastructure costs.
The expenses allocations have been determined based on a method that we and
Cypress consider to be a reasonable reflection of the utilization of services
provided or the benefit received by us. The financial information included
herein may not be indicative of our consolidated financial position, operating
results, and cash flows in the future, or what they would have been had we been
a separate stand-alone entity during the periods presented. See Note 3 of Notes
to our Consolidated Financial Statements for additional information on our
relationship with Cypress.
On
January 10, 2007, we completed the acquisition of PowerLight, a leading
global provider of large-scale solar power systems, which we renamed SunPower
Corporation, Systems, or SP Systems in June 2007. SP Systems designs,
manufactures, markets and sells solar electric power system technology that
integrates solar cells and solar panels manufactured by us and other suppliers
to convert sunlight to electricity compatible with the utility network. The
results of SP Systems have been included in the following selected consolidated
financial information from January 10, 2007.
We
report our results of operations on the basis of 52- or 53-week periods, ending
on the Sunday closest to December 31. Fiscal 2003 ended on
December 28, 2003 and included 52 weeks. The combined periods of fiscal
2004 ended on January 2, 2005 and included 53 weeks. Fiscal 2005 ended on
January 1, 2006, fiscal 2006 ended on December 31, 2006, fiscal 2007
ended on December 30, 2007 and each fiscal year included 52 weeks. Our fiscal
quarters end on the Sunday closest to the end of the applicable calendar
quarter, except in a 53-week fiscal year in which the additional week falls into
the fourth quarter of that fiscal year.
- 51
-
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||||||||||
|
Year Ended
|
Nov.
9, 2004
Through
Jan.
2, 2005
|
Dec.
29, 2003
Through
Nov.
8,
2004
|
Year
Ended December 28, 2003
|
|||||||||||||||||||||
|
(In
thousands, except per share data)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
|||||||||||||||||||||
|
Consolidated
Statements of Operations Data
|
||||||||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||||
|
Systems
|
$
|
464,178
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||||
|
Components
|
310,612
|
236,510
|
78,736
|
4,055
|
6,830
|
5,005
|
||||||||||||||||||
|
774,790
|
236,510
|
78,736
|
4,055
|
6,830
|
5,005
|
|||||||||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||||||
|
Cost
of systems revenue
|
386,511
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Cost
of components revenue
|
240,475
|
186,042
|
74,353
|
6,079
|
9,498
|
4,987
|
||||||||||||||||||
|
Research
and development
|
13,563
|
9,684
|
6,488
|
1,417
|
12,118
|
9,816
|
||||||||||||||||||
|
Sales,
general and administrative
|
108,256
|
21,677
|
10,880
|
1,111
|
4,713
|
3,238
|
||||||||||||||||||
|
Purchased
in-process research and development
|
9,575
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Impairment
of acquisition-related intangibles
|
14,068
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Total
costs and expenses
|
772,448
|
217,403
|
91,721
|
8,607
|
26,329
|
18,041
|
||||||||||||||||||
|
Operating
income (loss)
|
2,342
|
19,107
|
(12,985
|
)
|
(4,552
|
)
|
(19,499
|
)
|
(13,036
|
)
|
||||||||||||||
|
Interest
income
|
13,882
|
10,086
|
1,591
|
3
|
15
|
—
|
||||||||||||||||||
|
Interest
expense
|
(5,071
|
)
|
(1,809
|
)
|
(3,185
|
)
|
(1,072
|
)
|
(3,759
|
)
|
(1,509
|
)
|
||||||||||||
|
Other
income (expense), net
|
(7,871
|
)
|
1,077
|
(1,214
|
)
|
12
|
(59
|
)
|
—
|
|||||||||||||||
|
Income
(loss) before income taxes
|
3,282
|
28,461
|
(15,793
|
)
|
(5,609
|
)
|
(23,302
|
)
|
(14,545
|
)
|
||||||||||||||
|
Income
tax provision (benefit)
|
(5,920
|
)
|
1,945
|
50
|
—
|
—
|
—
|
|||||||||||||||||
|
Net
income (loss)
|
$
|
9,202
|
$
|
26,516
|
$
|
(15,843
|
)
|
$
|
(5,609
|
)
|
$
|
(23,302
|
)
|
$
|
(14,545
|
)
|
||||||||
|
Net
income (loss) per share:
|
||||||||||||||||||||||||
|
Basic(1)
|
$
|
0.12
|
$
|
0.40
|
$
|
(0.68
|
)
|
$
|
(2,804.50
|
)
|
$
|
(5.51
|
)
|
$
|
(3.50
|
)
|
||||||||
|
Diluted(1)
|
$
|
0.11
|
$
|
0.37
|
$
|
(0.68
|
)
|
$
|
(2,804.50
|
)
|
$
|
(5.51
|
)
|
$
|
(3.50
|
)
|
||||||||
|
Weighted-average
shares:
|
||||||||||||||||||||||||
|
Basic (1)
|
75,413
|
65,864
|
23,306
|
2
|
4,230
|
4,156
|
||||||||||||||||||
|
Diluted(1)
|
81,227
|
71,087
|
23,306
|
2
|
4,230
|
4,156
|
||||||||||||||||||
|
(1)
|
The
basic and diluted net income (loss) per share computation excludes
potential shares of common stock issuable upon conversion of convertible
preferred stock and exercise of options and warrants to purchase common
stock when their effect would be antidilutive. Basic and diluted net
income (loss) per share computation also excludes 2.9 million shares of
class A common stock lent to an affiliate of Lehman Brothers in connection
with the Company’s issuance of $200.0 million in principal amount of its
1.25% senior convertible debentures in February 2007 and 1.8 million
shares of class A common stock lent to an affiliate of Credit Suisse in
connection with the Company’s issuance of $225.0 million in principal
amount of its 0.75% senior convertible debentures in July 2007. See Note 6
of Notes to our Consolidated Financial Statements for a detailed
explanation of the determination of the shares used in computing basic and
diluted net income (loss) per
share.
|
|
Successor
Company
|
Predecessor
Company
|
|||||||||||||||||||
|
(In
thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
January
2,
2005
|
December
28,
2003
|
|||||||||||||||
|
Consolidated
Balance Sheets Data
|
||||||||||||||||||||
|
Cash,
cash equivalents and short-term investments
|
$
|
390,667
|
$
|
182,092
|
$
|
143,592
|
$
|
3,776
|
$
|
5,588
|
||||||||||
|
Working
capital (deficiency)
|
93,953
|
228,269
|
155,243
|
(54,314
|
)
|
(28,574
|
)
|
|||||||||||||
|
Total
assets
|
1,653,738
|
576,836
|
317,654
|
89,646
|
30,891
|
|||||||||||||||
|
Convertible
debt
|
425,000
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Deferred
tax liability
|
6,213
|
46
|
336
|
—
|
—
|
|||||||||||||||
|
Customer
advances, net of current portion
|
60,153
|
27,687
|
28,438
|
—
|
—
|
|||||||||||||||
|
Other
long-term liabilities
|
14,975
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Notes
payable to Cypress, net of current portion
|
—
|
—
|
—
|
21,673
|
5,312
|
|||||||||||||||
|
Convertible
preferred stock
|
—
|
—
|
—
|
8,552
|
9,366
|
|||||||||||||||
|
Total
stockholders’ equity (deficit)
|
864,090
|
488,771
|
258,650
|
(10,664
|
)
|
(20,479
|
)
|
|||||||||||||
- 52
-
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary
Statement Regarding Forward-Looking Statements
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are statements that
do not represent historical facts. We use words such as ““may,” “will,”
“should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “predict,” “potential” and “continue” and similar expressions to
identify forward-looking statements. Forward-looking statements in this Annual
Report on Form 10-K include, but are not limited to, our plans and expectations
regarding our ability to obtain polysilicon ingots or wafers, future financial
results, operating results, business strategies, projected costs, products,
competitive positions, management’s plans and objectives for future operations,
and industry trends. These forward-looking statements are based on information
available to us as of the date of this Annual Report on Form 10-K and current
expectations, forecasts and assumptions and involve a number of risks and
uncertainties that could cause actual results to differ materially from those
anticipated by these forward-looking statements. Such risks and uncertainties
include a variety of factors, some of which are beyond our control. Please see
“Item 1A: Risk Factors” and our other filings with the Securities and Exchange
Commission for additional information on risks and uncertainties that could
cause actual results to differ. These forward-looking statements should not be
relied upon as representing our views as of any subsequent date, and we are
under no obligation, and expressly disclaim any responsibility, to update or
alter our forward-looking statements, whether as a result of new information,
future events or otherwise.
The
following information should be read in conjunction with the Consolidated
Financial Statements and the accompanying Notes to Consolidated Financial
Statements included in this Annual Report on Form 10-K. Our fiscal year ends on
the Sunday closest to the end of the applicable calendar year. All references to
fiscal periods apply to our fiscal quarters or year which ends on the Sunday
closest to the calendar month end.
General
We
are a vertically integrated solar products and services company that designs,
manufactures and markets high-performance solar electric power technologies. Our
solar cells and solar panels are manufactured using proprietary processes and
technologies based on more than 15 years of research and development. We
believe our solar cells have the highest conversion efficiency, a measurement of
the amount of sunlight converted by the solar cell into electricity, of all the
solar cells available for the mass market. Our solar power products are sold
through our components business segment, or our components segment. In
January 2007, we acquired SP Systems, which developed, engineered,
manufactured and delivered large-scale solar power systems. These activities are
now performed by our systems business segment, or our systems segment. Our solar
power systems, which generate electric energy, integrate solar cells and panels
manufactured by us as well as other suppliers.
Components
segment: Our components segment sells solar power products,
including solar cells, solar panels and inverters, which convert sunlight to
electricity compatible with the utility network. We believe our solar cells
provide the following benefits compared with conventional solar
cells:
|
|
•
|
superior
performance, including the ability to generate up to 50% more power per
unit area;
|
|
|
•
|
superior
aesthetics, with our uniformly black surface design that eliminates highly
visible reflective grid lines and metal interconnect ribbons;
and
|
|
|
•
|
efficient
use of silicon, a key raw material used in the manufacture of solar
cells.
|
We
sell our solar components products to installers and resellers for use in
residential and commercial applications where the high efficiency and superior
aesthetics of our solar power products provide compelling customer benefits. We
also sell products for use in multi-megawatt solar power plant applications. In
many situations, we offer a materially lower area-related cost structure for our
customers because our solar panels require a substantially smaller roof or land
area than conventional solar technology and half or less of the roof or land
area of commercial solar thin film technologies. We sell our products primarily
in Asia, Europe and North America, principally in regions where government
incentives have accelerated solar power adoption. In fiscal 2007, 2006 and 2005,
components revenue represented approximately 40%, 100% and 100%, respectively,
of total revenue.
We
manufacture our solar cells at our manufacturing facilities in the Philippines.
We currently operate seven cell manufacturing lines in our solar cell
fabrication facilities, with a total rated manufacturing capacity of
approximately 214 megawatts per year. By the end of 2008, we plan to operate 12
solar cell manufacturing lines with an aggregate manufacturing capacity of 414
megawatts per year. We plan to begin production as soon as the first quarter of
2010 on the first line of a third solar cell manufacturing facility designed to
have an aggregate manufacturing capacity of 500 megawatts per year.
- 53
-
We
manufacture our solar panels at our panel manufacturing factory located in the
Philippines. Our solar panels are also manufactured for us by a third-party
subcontractor in China. We currently operate three solar panel manufacturing
lines with a rated manufacturing capacity of 90 megawatts of solar panels per
year. In addition, our SunPower branded inverters are manufactured for us by
multiple suppliers.
Systems
segment: Our systems segment sells solar power systems and
system technology directly to system owners. When we sell a solar power system
it may include services such as development, engineering, procurement of permits
and equipment, construction management, access to financing, monitoring and
maintenance. We believe our solar systems provide the following benefits
compared with competitors’ systems:
|
|
•
|
superior
performance delivered by maximizing energy delivery and financial return
through systems technology design;
|
|
|
•
|
superior
systems design to meet customer needs and reduce cost, including
non-penetrating, fast-install technology;
and
|
|
|
•
|
superior
channel breadth and delivery capability including turnkey
systems.
|
Our
systems segment is comprised primarily of the business we acquired from SP
Systems in January 2007. Our customers include commercial and governmental
entities, investors, utilities and production home builders. We work with
development, construction, system integration and financing companies to deliver
our solar power systems to customers. Our solar power systems are designed to
generate electricity over a system life typically exceeding 25 years and
are principally designed to be used in large-scale applications with system
ratings of typically more than 500 kilowatts. Worldwide, more than 400 SunPower
solar power systems are commissioned or in construction, rated in aggregate at
more than 300 megawatts of peak capacity. In fiscal 2007, systems revenue
represented approximately 60% of total revenue.
We
have solar power system projects completed or in the process of being completed
in various countries including Germany, Italy, Portugal, South Korea, Spain and
the United States. We sell distributed rooftop and ground-mounted solar power
systems as well as central-station power plants. Distributed solar power systems
are typically rated at more than 500 kilowatts of capacity to provide a
supplemental, distributed source of electricity for a customer’s facility. Many
customers choose to purchase solar electricity from our systems under a power
purchase agreement with a financing company which buys the system from us. For
example, we recently completed the construction of an approximately 14 megawatt
solar power plant at Nellis Air Force Base in Nevada, which will be operated
under a power purchase agreement structure with a financier. In Europe and South
Korea, our products and systems are typically purchased by a financing company
and operated as a central station solar power plant. These power plants are
rated with capacities of approximately one to 20 megawatts, and generate
electricity for sale under tariff to private and public utilities.
We
manufacture certain of our solar power system products at our manufacturing
facilities in California and at other facilities located close to our customers.
Some of our solar power system products are also manufactured for us by
third-party suppliers.
Overview
We
were incorporated in 1985 by Dr. Richard Swanson to develop and
commercialize high-efficiency photovoltaic solar electric cell technology. Our
solar cells were initially used in solar concentrator systems, which concentrate
sunlight to reflective dish systems. From 1988 to 2000, we focused our efforts
on developing our high-efficiency solar cells and marketing our infrared
detectors. In 2001, NASA used our solar cells in the Helios solar-powered
airplane to achieve a world record powered-flight altitude of 96,863 feet. For
the past several years, we have focused our efforts on building commercial
manufacturing capacity for our solar cells.
From
2002 until the closing of our IPO on November 22, 2005, we financed our
operations primarily through sale of equity to and borrowings from Cypress
totaling approximately $142.8 million. In November 2005, we raised net proceeds
of $145.6 million in an IPO of 8.8 million shares of class A common stock
at a price of $18.00 per share. In June 2006, we completed a follow-on public
offering of 7.0 million shares of our class A common stock, at a per share
price of $29.50, and received net proceeds of $197.4 million. In July 2007, we
completed a follow-on public offering of 2.7 million shares of our class A
common stock, at a discounted per share price of $64.50, and received net
proceeds of $167.4 million.
In
February 2007, we issued $200.0 million in principal amount of our 1.25% senior
convertible debentures to Lehman Brothers Inc., or Lehman Brothers, and lent 2.9
million shares of our 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. We did not receive any proceeds from the 2.9 million lent
shares of our class A common stock, but received a nominal lending fee. In July
2007, we issued $225.0 million in principal amount of our 0.75% senior
convertible debentures to Credit Suisse Securities (USA) LLC, or Credit Suisse,
and lent 1.8 million shares of our 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. We 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 15 of Notes to our Consolidated Financial Statements.
- 54
-
In
January 2007, we completed the acquisition of 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 our systems business
segment. As a result of the acquisition, PowerLight became our indirect wholly
owned subsidiary. In June 2007, we changed PowerLight’s name to SunPower
Corporation, Systems, or SP Systems, to capitalize on SunPower’s name
recognition. We believe the acquisition will enable us to develop the next
generation of solar products and solutions that will accelerate reduction in
solar system cost to compete with retail electric rates without incentives and
simplify and improve customer experience. The total purchase consideration and
future stock compensation for the transaction was $334.4 million, consisting of
$120.7 million in cash and $213.7 million in common stock, restricted stock,
stock options and related acquisition costs. See Note 4 of Notes to our
Consolidated Financial Statements.
After
completion of our IPO in November 2005, Cypress held, in the aggregate,
approximately 52.0 million shares of our class B common stock. On May 4,
2007, Cypress completed the sale of 7.5 million shares of our class B common
stock in an offering pursuant to Rule 144 of the Securities Act. Such shares
converted to 7.5 million shares of our class A common stock upon the sale. As of
December 30, 2007, including the effect of the sale completed in May 2007,
public offerings of our class A common stock in June 2006 and July 2007, and
issuance of senior convertible debentures in February 2007 and July 2007,
Cypress owned approximately 44.5 million shares of our class B common stock,
which represented approximately 56% of the total outstanding shares of our
common stock, or approximately 51% 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 loaned
shares to underwriters of our convertible indebtedness). Cypress also holds
approximately 90% of the voting power of our total outstanding common stock.
Cypress has agreed to provide specified manufacturing and support services such
as legal, tax, treasury and employee benefits services to us for a limited
period from the date of our IPO so long as Cypress owns a majority of the
aggregate number of shares of all classes of our common stock.
Our
employee base has increased from approximately 70 employees as of
December 31, 2002 to 3,530 as of December 30, 2007 with the increase
coming from hiring at our facilities in the Philippines related to our increased
manufacturing capacity, acquisition of SP Systems, and increased headcount in
research and development as well as sales and general and administrative
functions as we prepare for anticipated continuing growth of our
business.
Financial
Operations Overview
The
following describes certain line items in our Statements of
Operations:
Total
Revenue
Systems
Segment: Our systems segment generates revenue from sales of
engineering, procurement and construction, or EPC, projects and other services
relating to solar electric power systems that integrate our solar panels and
balance of systems components, as well as materials sourced from other
manufacturers. In the United States where customers often utilize rebate and tax
credit programs in connection with projects rated one megawatt or less of
capacity, we typically sell solar systems rated up to one megawatt of capacity
to provide a supplemental, distributed source of electricity for a customer’s
facility. In Europe and South Korea, our systems are often purchased by
third-party investors as central station solar power plants, typically rated
from one to 20 megawatts, which generate electricity for sale under tariff to
regional and public utilities. We also sell our solar systems through
value-added resellers, or VARs, and under materials-only sales contracts in the
United States, Europe and Asia. The balance of our systems revenues are
generally derived from sales to new home builders for residential applications
and maintenance revenue from servicing installed solar systems. Systems revenue
accounted for 60% of our total revenue for the year ended December 30, 2007. We
had no systems revenue in fiscal 2006 and 2005. Our systems revenue is largely
dependent on the timing of revenue recognition on large construction projects
and, accordingly, will fluctuate from period to period. For the year ended
December 30, 2007, 84% of systems segment’s revenue was from EPC construction
contracts, of which 40% were derived from international contracts and 60% from
construction contracts in the United States. The remaining 16% of systems
revenue were from materials-only sales contracts, of which 99% were derived from
international sales and 1% were sold in the United States.
Components
Segment: Components revenue primarily represents sales of our solar
cells, solar panels and inverters to solar systems installers and other
resellers. Components revenue accounted for 40% of our total revenue for the
year ended December 30, 2007 and 100% of our total revenue in each of fiscal
2006 and 2005. Components revenue from international sales represented 64%, 68%,
and 70% of our total components revenue for fiscal 2007, 2006 and 2005,
respectively. Components revenue from sales in the United States was 36%, 32%,
and 30% of our total components revenue for fiscal 2007, 2006 and 2005,
respectively. Factors affecting our components revenue include unit volumes of
solar cells and modules produced and shipped, average selling prices, product
mix, product demand and the percentage of our construction projects sourced with
SunPower solar panels sold through the systems segment which reduces the
inventory available to sell through our components segment. We have experienced
quarter-over-quarter unit volume increases in shipments of our solar power
products since we
- 55
-
began
commercial production in the fourth quarter of 2004. During this period, we have
experienced increases in average selling prices for our solar power products
primarily due to the strength of end-market demand, favorable currency exchange
rates, as well as an increase in raw material prices used in the manufacture of
our products. Over the next several years, we expect average selling prices for
our solar power products to decline as the market becomes more competitive, as
certain products mature and as manufacturers are able to lower their
manufacturing costs and pass on some of the savings to their customers.
Cost
of Revenue
Systems
Segment: Our cost of systems revenue consists primarily of solar
panels, mounting systems, inverters and subcontractor costs. Other factors
contributing to cost of revenue include amortization of intangible assets,
depreciation, provisions for warranty, salaries, personnel-related costs,
freight, royalties and manufacturing supplies associated with contracting
revenues. The cost of solar panels is the single largest cost element in our
cost of systems revenue. We expect our cost of systems revenue to fluctuate as a
percentage of revenue depending on many factors such as the cost of solar
panels, the cost of inverters, subcontractor costs, freight costs and other
project related costs. In particular, our systems segment generally experiences
higher gross margin on construction projects that utilize SunPower solar panels
compared to construction projects that utilize solar panels purchased from third
parties. Over time, we expect that our systems segment will increase the
percentage of its construction projects sourced with SunPower solar panels from
approximately 20% to 30% in 2007 to as much as 50% in 2008. Our cost of systems
revenue will also fluctuate from period to period due to the mix of projects
completed and recognized as revenue, in particular between large projects and
large commercial installation projects that may or may not include solar panels.
Our gross profit each quarter is affected by a number of factors, including the
types of projects in process and their various stages of completion, the gross
margins estimated for those projects in progress and the actual system group
department overhead costs. Generally, revenues from materials-only sales
contracts generate a higher gross margin percentage for our systems segment than
revenue generated from construction projects.
In
connection with the acquisition of SP Systems, there were $79.5 million of
identifiable purchased intangible assets, of which $56.8 million was being
amortized to cost of systems revenues on a straight-line basis over periods
ranging from one to five years. As a result of our new branding strategy, during
the quarter ended July 1, 2007, the PowerLight tradename asset with a net book
value of $14.1 million was written off as an impairment of acquisition-related
intangible assets. As such, the remaining balance of $41.2 million relating to
purchased patents, technology and backlog will be amortized to cost of systems
revenue on a straight-line basis over periods ranging from one to four
years.
Almost
all of our systems segment construction contracts are fixed price contracts.
However, we have in several instances obtained change orders that reimburse us
for additional unexpected costs due to various reasons. The systems segment also
has long-term agreements for solar cell and panel purchases with several major
solar panel manufacturers, some with liquidated damages and/or take or pay type
arrangements. An increase in project costs, including solar panel, inverter and
subcontractor costs, over the term of a construction contract could have a
negative impact on our systems segment’s overall gross profit. Our systems
segment gross profit may also be impacted by certain adjustments for inventory
reserves. We are seeking to improve gross profit over time as we implement cost
reduction efforts, improve manufacturing processes, and seek better and less
expensive materials globally, as we grow the business to attain economies of
scale on fixed costs. Any increase in gross profit based on these items,
however, could be partially or completely offset by increased raw material costs
or our inability to increase revenues in line with expectations, and other
competitive pressures on gross margin.
Components
Segment: Our cost of components revenue consists primarily of silicon
ingots and wafers used in the production of solar cells, along with other
materials such as chemicals and gases that are needed to transform silicon
wafers into solar cells. Other factors contributing to cost of revenue include
amortization of intangible assets, depreciation, provisions for estimated
warranty, salaries, personnel-related costs, facilities expenses and
manufacturing supplies associated with solar cell fabrication. For our solar
panels, our cost of revenue includes the cost of solar cells and raw materials
such as glass, frame, backing and other materials, as well as the assembly costs
we pay to our third-party subcontractor in China. Additionally, we recently
began production within our own solar panel assembly facility in the Philippines
which incurs labor, depreciation, utilities and other occupancy
costs.
On
November 9, 2004, Cypress completed a reverse triangular merger with us in
which each share of our then outstanding capital stock not owned by Cypress was
valued at $3.30 per share and exchanged for an equivalent number of shares of
Cypress common stock. This merger effectively gave Cypress 100% ownership of all
of our then outstanding shares of capital stock but left our unexercised
warrants and options outstanding. As a result of that transaction, we were
required to record Cypress’ cost of acquiring us in our financial statements,
including its equity investment and pro rata share of our losses by recording
intangible assets, including purchased technology, patents, trademarks and a
distribution agreement. The fair value for these intangibles is being amortized
as an element of cost of component revenue over two to six years on a
straight-line basis. For additional discussion regarding amortization of
acquired intangibles, see Note 2 of Notes to our Consolidated Financial
Statements.
- 56
-
Our
components segment gross profit each quarter is affected by a number of factors,
including average selling prices for our products, our product mix, our actual
manufacturing costs, the utilization rate of our wafer fabrication facility and
changes in amortization of intangible assets. To date, demand for our solar
power products has been robust and our production output has increased allowing
us to spread a significant amount of our fixed costs over relatively high
production volume, thereby reducing our per unit fixed cost. We currently
operate seven solar cell manufacturing lines with total production capacity of
214 megawatts per year with the 5th, 6th and
7th
lines located in our second building in the Philippines that is expected to
eventually house 12 solar cell production lines with a total factory output
capacity of approximately 466 megawatts per year. As we build additional
manufacturing lines or facilities, our fixed costs will increase, and the
overall utilization rate of our wafer fabrication facilities could decline,
which could negatively impact our gross profit. This decline may continue until
a line’s manufacturing output reaches its rated practical capacity.
From
time to time, we enter into agreements whereby the selling price for certain of
our solar power products is fixed over a defined period. An increase in our
manufacturing costs, including raw polysilicon, silicon ingots and wafers, over
such a defined period could have a negative impact on our overall gross profit.
Our gross profit may also be impacted by fluctuations in manufacturing yield
rates and certain adjustments for inventory reserves. We expect our gross profit
to increase over time as we improve our manufacturing processes and as we grow
our business and leverage certain of our fixed costs. An expected increase in
gross profit based on manufacturing efficiencies, however, could be partially or
completely offset by increased raw material costs or decreased revenue. Our
inventory policy is described in more detail under “Critical Accounting Policies
and Estimates.”
Operating
Expenses
Our
operating expenses include research and development expense, sales, general and
administrative expense, purchased in-process research and development expense
and impairment of acquisition-related intangibles. Research and development
expense consists primarily of salaries and related personnel costs, depreciation
and the cost of solar cells and solar panel materials and services used for the
development of products, including experiment and testing. We expect our
research and development expense to increase in absolute dollars as we continue
to develop new processes to further improve the conversion efficiency of our
solar cells and reduce their manufacturing cost, and as we develop new products
to diversify our product offerings. We expect our research and development
expense to decrease as a percentage of revenue over time, assuming our revenue
increases as we expect.
Research
and development expense is reported net of any funding received under
contracts with governmental agencies because such contracts are considered
collaborative arrangements. These awards are typically structured such that only
direct costs, research and development overhead, procurement overhead and
general and administrative expenses that satisfy government accounting
regulations are reimbursed. In addition, our government awards from state
agencies will usually require us to pay to the granting governmental agency
certain royalties based on sales of products developed with grant funding or
economic benefit derived from incremental improvements funded. Royalties paid to
governmental agencies will be charged to the cost of goods sold. Our funding
from government contracts offset our research and development expense by
approximately 21%, 8% and 7% in fiscal 2007, 2006 and 2005, respectively. In the
third quarter of 2007, we signed a Solar America Initiative agreement with the
U.S. Department of Energy in which we were awarded $8.5 million in the first
budgetary period. Total funding for the three-year effort is estimated to be
$24.7 million. Payments received under this contract offset our research and
development expense. Our cost share requirement under this program, including
lower-tier subcontract awards, is anticipated to be $27.9 million. Subject to
final negotiations and settlement with the government agencies involved, our
existing governmental contracts are expected to offset approximately $7.0
million to $10.0 million of our research and development expense in each of
2007, 2008 and 2009. This contract replaced our three-year cost-sharing research
and development project with the National Renewable Energy Laboratory, entered
into in March 2005, to fund up to $3.0 million or half of the project costs to
design the our next generation solar panels.
Sales,
general and administrative expense for our business consists primarily of
salaries and related personnel costs, professional fees, insurance and other
selling and marketing expenses. We expect our sales, general and administrative
expense to increase in absolute dollars as we expand our sales and marketing
efforts, hire additional personnel, improve our information technology
infrastructure and incur expenditures necessary to fund the anticipated growth
of our business. We also expect sales, general and administrative expense to
increase to support our operations as a public company, including
compliance-related costs. However, assuming our revenue increases as we expect,
over time we anticipate that our sales, general and administrative expense will
decrease as a percentage of revenue.
Purchased
in-process research and development expense for the year ended December 30, 2007
of $9.6 million resulted from the acquisition of SP Systems, as technological
feasibility associated with the in-process research and development projects had
not been established and no alternative future use existed. During fiscal 2007,
we also incurred a charge for the impairment of acquisition-related intangibles
of $14.1 million. In June 2007, we changed our branding strategy and
consolidated all of our product and service offerings under the SunPower
tradename. To reinforce the new branding strategy, we formally changed the
name of PowerLight to SunPower Corporation,
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Systems. The
fair value of PowerLight tradenames was $15.5 million at the date of acquisition
and ascribed a useful life of 5 years. The determination of the fair value and
useful life of the tradename was based on our previous strategy of continuing to
market our systems products and services under the PowerLight brand. As a
result of the change in our branding strategy, during the quarter ended July 1,
2007, the net book value of the PowerLight tradename of $14.1 million was
written off as an impairment of acquisition-related intangible
assets.
Interest
and Other Income (Expense), Net
Interest income
consists of interest earned on cash, cash equivalents, short-term investments
and long-term investments. Historically, interest expense consisted of interest
associated with indebtedness to Cypress and the fair value of warrants issued to
Cypress which were reflected as interest expense using the effective interest
method for financial reporting purposes. Interest expense also included expense
related to outstanding advances from customers (see Note 13 of Notes to our
Consolidated Financial Statements). In February 2007, we issued $200.0 million
in principal amount of our 1.25% senior convertible debentures and in July 2007,
we issued $225.0 million in principal amount of our 0.75% senior convertible
debentures (see Note 15 of Notes to our Consolidated Financial Statements). We
expect that interest expense on the aggregate of $425.0 million in convertible
debt will total approximately $1.0 million per quarter assuming that all of the
senior convertible debentures remain outstanding. Other income (expense), net
consists primarily of the write-off of unamortized debt issuance costs as a
result of the market price conversion trigger on our senior convertible
debentures being met, amortization of debt issuance costs, share in net loss of
joint venture, gains or losses from foreign exchange and foreign exchange
hedging contracts.
Income
Taxes
For
financial reporting purposes, income tax expense and deferred income tax
balances were calculated as if we were a separate entity and had prepared our
own separate tax return. Effective with the closing of our public offering of
common stock in June 2006, we are no longer eligible to file federal and most
state consolidated tax returns with Cypress. Deferred tax assets and liabilities
are recognized for temporary differences between financial statement and income
tax bases of assets and liabilities. Valuation allowances are provided against
deferred tax assets when management cannot conclude that it is more likely than
not that some portion or the entire deferred tax asset will be realized. Any
payments we make to Cypress when we utilize certain tax attributes will be
accounted for as an equity transaction with Cypress. See Notes 1, 3 and 10 of
Notes to our Consolidated Financial Statements.
As
of December 30, 2007, we had federal net operating loss carryforwards of
approximately $147.6 million. These federal net operating loss carryforwards
will expire at various dates from 2011 to 2027. We had California state net
operating loss carryforwards of approximately $73.5 million as of
December 30, 2007, which expire at various dates from 2011 to 2017. We also
had research and development credit carryforwards of approximately $3.9 million
for both federal and state tax purposes. We have provided a valuation allowance
on our deferred tax assets, consisting primarily of net operating loss
carryforwards, because of the uncertainty of their realizability. In the event
we determine that the realization of these deferred tax assets associated with
our acquisition of SP Systems and Cypress’ acquisition of us is more likely than
not, the reversal of the related valuation allowance will first reduce goodwill,
then intangible assets and lastly as a reduction to the provision for taxes. Due
in part to equity financings, we experienced “ownership changes” as defined in
Section 382 of the Internal Revenue Code. Accordingly, our use of a portion
of the net operating loss carryforwards and credit carryforwards is limited by
the annual limitations described in Sections 382 and 383 of the Internal
Revenue Code. The majority of the net operating loss carryforwards were created
by employee stock transactions. Because there is uncertainty as to the
realizability of the loss carryforwards, the portion created by employee stock
transactions are not reflected on the Company’s Consolidated Balance
Sheets.
We
currently benefit from income tax holiday incentives in the Philippines pursuant
to our Philippine subsidiary’s registrations with the Board of Investments and
Philippine Economic Zone Authority, which provide that we pay no income tax in
the Philippines for four years pursuant to our Board of Investments non-pioneer
status and Philippine Economic Zone Authority registrations, and six years
pursuant to our Board of Investments pioneer status registration. Our current
income tax holidays expire in 2010, and we intend to apply for extensions.
However, these tax holidays may or may not be extended. We believe that as our
Philippine tax holidays expire, (a) gross income attributable to activities
covered by our Philippine Economic Zone Authority registrations will be taxed at
a 5% preferential rate, and (b) our Philippine net income attributable to
all other activities will be taxed at the statutory Philippine corporate income
tax rate of 32%. Fiscal
2007 was the first year for which profitable operations benefitted from the
Philippine tax ruling.
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Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
generally accepted accounting principles in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. Our most
critical policies include: (a) revenue recognition, which impacts the
recording of revenue; (b) allowance for doubtful accounts and sales
returns, which impacts sales, general and administrative expense;
(c) warranty reserves, which impact cost of revenue and gross margin;
(d) valuation of inventories, which impacts cost of revenue and gross
margin; (e) stock option valuation, which impacts disclosure and cost of
revenue and operating expenses; (f) valuation of long-lived assets, which
impacts write-offs of goodwill and other intangible assets; (g) valuation
of goodwill impairment, which impacts operating expense; (h) purchase
accounting, which impacts fair value of goodwill, other intangible assets and
in-process research and development expense; (i) fair value of investments; and
(j) accounting for income taxes which impacts our tax provision (benefit).
We also have other key accounting policies that are less subjective and,
therefore, judgments in their application would not have a material impact on
our reported results of operations. The following is a discussion of our most
critical policies as of and for the year ended December 30, 2007, as well
as the estimates and judgments involved.
Revenue
Recognition
Our
systems segment revenue is primarily comprised of EPC projects which are
governed by customer contracts that require us to deliver functioning solar
power systems and are generally completed within 6 to 36 months from the date of
the contract signing. In addition, our systems segment also derives revenues
from sales of certain solar power products and services that are smaller in
scope than an EPC contract. We recognize revenues from fixed price construction
contracts under AICPA Statement of Position 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts,” using the
percentage-of-completion method of accounting. Under this method, systems
revenue arising from fixed price construction contracts is recognized as work is
performed based on the percentage of incurred costs to estimated total
forecasted costs utilizing the most recent estimates of forecasted
costs.
Incurred
costs include all direct material, labor, subcontract costs and those indirect
costs related to contract performance, such as indirect labor, supplies and
tools. Job material costs are included in incurred costs when the job materials
have been installed. Where construction contracts stipulate that title to job
materials transfers to the customer before installation has been performed,
systems revenue is deferred and recognized upon installation, in accordance with
the percentage-of-completion method of accounting. Job materials are considered
installed materials when they are permanently attached or fitted to the solar
power system as required by the job’s engineering design.
Due
to inherent uncertainties in estimating cost, job costs estimates are reviewed
and/or updated by management working within the systems segment. The systems
segment determines the completed percentage of installed job materials at the
end of each month; generally this information is also reviewed with the
customer’s on-site representative. The completed percentage of installed job
materials is then used for each job to calculate the month-end job material
costs incurred. Direct labor, subcontractor and other costs are charged to
contract costs as incurred. Provisions for estimated losses on uncompleted
contracts, if any, are recognized in the period in which the loss first becomes
probable and reasonably estimable. Contracts may include profit incentives such
as milestone bonuses. These profit incentives are included in the contract value
when their realization is reasonably assured.
As
of December 30, 2007, the asset, “Costs and estimated earnings in excess of
billings,” which represents revenues recognized in excess of amounts billed, was
$39.1 million. The liability, “Billings in excess of costs and estimated
earnings,” which represents billings in excess of revenues recognized, was $69.9
million. Ending balances in “Costs and estimated earnings in excess of billings”
and “Billings in excess of costs and estimated earnings” are highly dependent on
contractual billing schedules which are not necessarily related to the timing of
revenue recognition.
We
sell our components products, as well as our balance of systems projects from
the systems segment, to system integrators and OEMs and recognize revenue, net
of accruals for estimated sales returns, when persuasive evidence of an
arrangement exists, the product has shipped, title and risk of loss has passed
to the customer, the sales price is fixed and determinable, collectibility of
the resulting receivable is reasonably assured and the rights and risks of
ownership have passed to the customer. We do not currently have any significant
post-shipment obligations, including installation, training or customer
acceptance clauses with any of our customers, which could have an impact on
revenue recognition. As such, we record revenue and trade receivables for the
selling price when the above conditions are met. Our revenue recognition is
consistent across product lines and sales practices are consistent across all
geographic locations.
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We
also enter into development agreements with some of our customers. Components
revenue related to development agreements is recognized under the proportionate
performance method, with the associated costs included in cost of components
revenue. We estimate the proportionate performance of our development contracts
based on an analysis of progress toward completion.
Allowance
for Doubtful Accounts and Sales Returns
We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. We make our estimates
of the collectibility of our accounts receivable by analyzing historical bad
debts, specific customer creditworthiness and current economic trends. The
allowance for doubtful accounts was $1.4 million and $0.6 million as of December
30, 2007 and December 31, 2006, respectively. If the financial condition of
our customers were to deteriorate such that their ability to make payments was
impaired, additional allowances could be required. In addition, at the time
revenue is recognized, we simultaneously record estimates for sales returns
which reduces revenue. These estimates are based on historical sales returns,
analysis of credit memo data and other known factors. Actual returns could
differ from these estimates. The allowance for sales returns was $0.4 million as
of December 30, 2007 and December 31, 2006.
Warranty
Reserves
It
is customary in our business and industry to warrant or guarantee the
performance of our solar panels at certain levels of conversion efficiency for
extended periods, often as long as 25 years. It is also customary to warrant or
guarantee the functionality of our solar cells for at least ten years. In
addition, we generally provide a warranty on our systems for a period of five
years. We
also pass 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. We therefore maintain warranty reserves to cover
potential liability that could arise from these guarantees. Our potential
liability is generally in the form of product replacement or repair. Our
warranty reserves reflect our best estimate of such liabilities and are based on
our analysis of product returns, results of industry-standard accelerated
testing, unique facts and circumstances involved in each particular construction
contract and various other assumptions that we believe to be reasonable under
the circumstances. We have sold solar cells only since late 2004 and,
accordingly, have a limited history upon which to base our estimates of warranty
expense. We recognize our warranty reserve as a component of cost of revenue.
Our warranty reserve includes specific accruals for known product and system
issues and an accrual for an estimate of incurred but not reported product and
system issues based on historical activity. Due to effective product testing and
the short turnaround time between product shipment and the detection and
correction of product failures, warranty charges were limited to $10.8 million,
$3.2 million and $0.4 million during the fiscal years ended December 30, 2007,
December 31, 2006 and January 1, 2006, respectively.
Valuation
of Inventory
Inventory
is valued at the lower of cost or market. Certain factors could impact the
realizable value of our inventory, so we continually evaluate the recoverability
based on assumptions about customer demand and market conditions. The evaluation
may take into consideration historic usage, expected demand, anticipated sales
price, new product development schedules, the effect new products might have on
the sale of existing products, product obsolescence, customer concentrations,
product merchantability and other factors. The reserve or write-down is equal to
the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional inventory reserves or write-downs may be required that could
negatively impact our gross margin and operating results. If actual market
conditions are more favorable, we may have higher gross margin when products
that have been previously reserved or written down are eventually
sold.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (“SFAS”) No. 123(R), using the
modified prospective application transition method, and therefore have not
restated prior periods’ results. Under the fair value recognition provisions of
SFAS No. 123(R), we recognize stock-based compensation net of an estimated
forfeiture rate and only recognize compensation cost for those shares expected
to vest over the requisite service period of the award. Prior to the adoption of
SFAS No. 123(R), we accounted for share-based payments under APB
No. 25 and, accordingly, generally recognized compensation expense only
when we granted options with a discounted exercise price.
Determining
the appropriate fair value model and calculating the fair value of share-based
payment awards require the input of highly subjective assumptions, including the
expected life of the share-based payment awards and stock price volatility. The
assumptions used in calculating the fair value of share-based payment awards
represent management’s best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if
factors change and we use different assumptions, our stock-based
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compensation
expense could be materially different in the future. In addition, we are
required to estimate the expected forfeiture rate and only recognize expense for
those shares expected to vest. If our actual forfeiture rate is materially
different from our estimate, the stock-based compensation expense could be
significantly different from what we have recorded in the current period. See
Note 17 of Notes to our Consolidated Financial
Statements.
Valuation
of Long-Lived Assets
Our
long-lived assets include manufacturing equipment and facilities as well as
certain intangible assets. Our business requires heavy investment in
manufacturing facilities that are technologically advanced but can quickly
become significantly under-utilized or rendered obsolete by rapid changes in
demand for solar power products produced in those facilities. On
November 9, 2004, Cypress completed a reverse triangular merger with us,
and as a result of that transaction, we were required to record Cypress’ cost of
acquiring us in our financial statement by recording intangible assets including
purchased technology, patents, trademarks, distribution agreement and goodwill.
On January 10, 2007, we acquired PowerLight, which is now named SunPower
Corporation, Systems, or SP Systems, and in connection with that
transaction, we recorded all the acquired assets and liabilities at their fair
values on the date of the acquisition, including goodwill and identified
intangible assets.
We
evaluate our long-lived assets, including property, plant and equipment and
purchased intangible assets with finite lives, for impairment whenever events or
changes in circumstances indicate that the carrying value of such assets may not
be recoverable. Prior to fiscal 2007, we operated in one business segment,
therefore, impairment of long-lived assets was assessed at the enterprise level.
As a result of the acquisition of SP Systems, we began operating in two business
segments, the systems segment and components segment, and impairment of
long-lived assets is assessed at the business segment level. Factors considered
important that could result in an impairment review include significant
underperformance relative to expected historical or projected future operating
results, significant changes in the manner of use of acquired assets or the
strategy for our business and significant negative industry or economic trends.
Impairments are recognized based on the difference between the fair value of the
asset and its carrying value, and fair value is generally measured based on
discounted cash flow analyses.
In
fiscal 2007, we recorded $14.4 million of impairment charges relating to
long-lived assets, primarily related to a $14.1 million write-off of the
carrying value of the PowerLight tradename resulting from a change in our
branding strategy. During 2005, we recorded a $0.5 million impairment
charge in relation to certain decommissioned equipment that was in our pilot
wafer fab located in Cypress’ Round Rock, Texas facility.
Goodwill
Impairment
On
November 9, 2004, Cypress completed a reverse triangular merger with us,
and as a result of that transaction, we were required to record Cypress’ cost of
acquiring us, including its equity investment and pro rata share of our losses
in our financial statements by recording intangible assets including purchased
technology, patents, trademarks, distribution agreement and
goodwill. On January 10, 2007, we acquired SP Systems, and as a
result of that transaction, we were required to record all assets and
liabilities acquired under the purchase acquisition, including goodwill and
identified intangible assets, at fair value in our financial statements. We
perform a goodwill impairment test on an annual basis and will perform an
assessment between annual tests in certain circumstances. The process of
evaluating the potential impairment of goodwill is highly subjective and
requires significant judgment at many points during the analysis. In estimating
the fair value of our business, we make estimates and judgments about our future
cash flows. Our cash flow forecasts are based on assumptions that are consistent
with the plans and estimates we use to manage our business.
Purchase
Accounting
We
record all assets and liabilities acquired in purchase acquisitions, including
goodwill, identified intangible assets and in-process research and development,
at fair value as required by SFAS No. 141, “Business Combinations.” The
initial recording of goodwill, identified intangible assets and in-process
research and development requires certain estimates and assumptions especially
concerning the determination of the fair values and useful lives of the acquired
intangible assets. The judgments made in the context of the purchase price
allocation can materially impact our future results of operations. Accordingly,
for significant acquisitions, we obtain assistance from third-party valuation
specialists. The valuations are based on information available at the
acquisition date. Goodwill is not amortized but is subject to annual tests for
impairment or more often if events or circumstances indicate they may be
impaired. Other identified intangible assets are amortized over their estimated
useful lives and are subject to impairment if events or circumstances indicate a
possible inability to realize the carrying amount.
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Short-Term
and Long-Term Investments
Investments
designated as available-for-sale securities under SFAS No. 115, “Accounting
for Investment in Certain Debt and Equity Securities,” are carried at fair value
based on quoted market prices or estimated based on quoted market prices for
financial instruments with similar characteristics. Unrealized gains and losses
of our available-for-sale securities are excluded from earnings and reported as
a component of other comprehensive income (loss). Additionally, we assess
whether an other-than-temporary impairment loss on our available-for-sale
securities has occurred due to declines in fair value or other market
conditions. Declines in fair value that are considered other than temporary are
recorded as an impairment of investments in the Consolidated Statements of
Operations.
In
general, investments with original maturities of greater than ninety days and
remaining maturities of less than one year are classified as short-term
investments. Investments with maturities beyond one year may also be classified
as short-term based on their highly liquid nature and because such investments
represent the investment of cash that is available for current
operations.
We
also invest in auction rate securities that are typically over collateralized by
pools of loans originated under the Federal Family Education Loan Program, or
FFELP, and are guaranteed by the U.S. Department of Education, and insured. In
addition, all auction rate securities held are rated by one or more of the
Nationally Recognized Statistical Rating Organizations, or NRSRO, as triple-A.
Historically, all auction rate securities were classified as short-term
investments because we have been able to liquidate these at our direction on
seven day, twenty-eight day, thirty-five day or six-month auction cycles. When
auction rate securities fail to clear at auction, which occurred with respect
to six securities in February 2008, and we are unable to estimate when the
impacted auction rate securities will clear at the next auction, we classify
these as long-term, consistent with the stated contractual maturities of the
securities. The “stated” or “contractual” maturities for these securities
generally are between 20 to 30 years. A failed auction results in a lack of
liquidity in the securities but does not signify a default by the
issuer.
Accounting
for Income Taxes
Our
global operations involve manufacturing, research and development and selling
activities. Profit from non-U.S. activities is subject to local country taxes
but not subject to United States tax until repatriated to the United States. It
is our intention to indefinitely reinvest these earnings outside the United
States. We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. We consider historical
levels of income, expectations and risks associated with estimates of future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. Should we determine that we
would be able to realize deferred tax assets in the future in excess of the net
recorded amount, we would record an adjustment to the deferred tax asset
valuation allowance. This adjustment would increase income in the period such
determination is made.
The
calculation of tax liabilities involves dealing with uncertainties in the
application of complex global tax regulations. We recognize potential
liabilities for anticipated tax audit issues in the United States and other tax
jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If payment of these amounts ultimately proves to
be unnecessary, the reversal of the liabilities would result in tax benefits
being recognized in the period when we determine the liabilities are no longer
necessary. If the estimate of tax liabilities proves to be less than the
ultimate tax assessment, a further charge to expense would result. We
accrue 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 Consolidated Statements of Operations and is not
considered material.
Results
of Operations
Revenue
Revenue
and the year-over-year change were as follows:
|
Year Ended
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
December
30,
2007
|
December 31,
2006
|
January
1,
2006
|
2007
vs.
2006
Change
|
2006
vs.
2005
Change
|
|||||||||||||||
|
Systems
revenue
|
$ | 464,178 | $ | — | $ | — |
n.a.
|
n.a.
|
||||||||||||
|
Components
revenue
|
310,612 | 236,510 | 78,736 |
31%
|
200%
|
|||||||||||||||
|
Total
revenue
|
$ | 774,790 | $ | 236,510 | $ | 78,736 |
228%
|
200$
|
||||||||||||
We
generate revenue from two business segments, as follows:
Systems
segment revenue represents sales of engineering, procurement, construction
and other services relating to solar electric power systems that integrate our
solar panels and balance of systems components, as well as materials sourced
from other manufacturers. Systems segment revenue for the year ended December
30, 2007 was $464.2 million, which accounted for 60% of our total revenue. We
had no systems segment revenue in fiscal 2006 and 2005. Our systems segment
revenue is largely dependent on the timing of revenue recognition on large
construction projects and, accordingly, will fluctuate from period to period.
Gross margin for the systems segment was $77.7 million for the year ended
December 30, 2007, or 17% of systems segment revenue. Gross margin in our
systems segment is affected by a number of factors, particularly the mix of
projects sourced with our panels versus projects using solar panels purchased
from other suppliers.
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Components
segment revenue primarily represents sales of our solar cells, solar panels
and inverters to solar systems installers and other resellers. Components
segment revenue to unaffiliated customers for the year ended December 30, 2007
was $310.6 million, as compared to $236.5 million and $78.7 million in fiscal
2006 and 2005, respectively. The components segment accounted for 40% of our
total revenue for the year ended December 30, 2007 and 100% of our revenue in
fiscal 2006 and 2005. Gross margin for the components segment was $70.1 million
for the year ended December 30, 2007, or 23% of components segment revenue, as
compared to $50.5 million and $4.4 million in fiscal 2006 and 2005,
respectively, or 21% and 6% of revenue, respectively.
During
the years ended December 30, 2007 and December 31, 2006, our revenues were
$774.8 million and $236.5 million, respectively, which represent an increase of
228%. Our fiscal 2006 revenue increased 200% compared to our total revenue in
2005 of $78.7 million. The significant increase in our total revenue from fiscal
2006 to 2007 resulted from the combination of an increase in components revenue
of approximately $74.1 million during the year ended December 30, 2007, and the
addition of $464.2 million in systems revenue for the year ended December 30,
2007, as a result of the acquisition of SP Systems. The increase in components
revenue from fiscal 2005 through 2007 is attributable to the continued increase
in the demand for our solar cells and solar panels since we began commercial
production in late 2004 and continued increases in unit production and unit
shipments of both solar cells and solar panels as we have expanded our solar
manufacturing capacity. During the first three quarters of 2006, we had three
solar cell manufacturing lines in operation with an approximate annual
production capacity of 75 megawatts. Since then, we added a fourth 33 megawatt
line during the fourth quarter of 2006, and we recently began commercial
production on our 5th, 6th and
7th
solar cell lines during the third and fourth quarters of 2007. Lines five and
six have a rated solar cell production capacity of approximately 33 megawatts
per year and line seven has a rated solar cell production capacity of
approximately 40 megawatts per year.
From
fiscal 2005 through 2007, our components segment has experienced an increase in
average selling prices for our solar products, primarily relating to our solar
cells and solar panels. Accordingly, our components segment's average selling
prices were slightly higher during the year ended December 30, 2007 compared to
the same period of 2006. However, we expect average selling prices for our solar
power products to decline over time as the market becomes more competitive, as
new products are introduced and as manufacturers are able to lower their
manufacturing costs and pass on some of the savings to their
customers.
We
have six customers that each accounted for more than 10 percent of our total
revenue in one or more of the years ended December 30, 2007, December 31,
2006 and January 1, 2006 as follows:
|
Year Ended
|
||||||||||||||
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
||||||||||||
|
Significant
customers:
|
Business
Segment
|
|||||||||||||
|
SolarPack
|
Systems
|
18%
|
|
—%
|
|
—%
|
|
|||||||
|
MMA
Renewable Ventures
|
Systems
|
16%
|
|
—%
|
|
—%
|
|
|||||||
|
Conergy
AG
|
Components
|
*
|
25%
|
|
45%
|
|
||||||||
|
Solon
AG
|
Components
|
*
|
24%
|
|
16%
|
|
||||||||
|
SP
Systems**
|
Components
|
n.a.
|
16%
|
|
*
|
|||||||||
|
General
Electric Company***
|
Components
|
*
|
*
|
10%
|
|
|||||||||
|
*
|
denotes
less than 10% during the period
|
|
**
|
acquired
by us on January 10, 2007
|
|
***
|
includes
its subcontracting partner, Plexus
Corporation
|
Effective
February 6, 2008, the New York Stock Exchange, or NYSE, suspended the trading of
the common stock of MuniMae, or MMA, the parent company of one of our
significant systems segment customers, MMA Renewable Ventures, because MMA
announced it will be unable to file its audited 2006 financial statements by
March 3, 2008, the deadline imposed by the NYSE. MMA Renewable Ventures
accounted for approximately 16% of our total revenue in fiscal 2007. In
connection with completing the restatement and filing their Annual Report
on Form 10-K for the year ended December 31, 2006, MMA incurred substantial
accounting costs. In addition, general economic conditions have led to a severe
capital and credit downturn, resulting in a slow-down to at least one element of
MMA’s business. MMA’s management has evaluated their financial situation and
determined it is not reasonably likely that the current reduction in net cash
generated from operations will negatively impact its ability to remain a going
concern. However, in the event MMA Renewable Ventures ceases to be a
significant customer of ours or fails to pay us in a timely manner, it could
have a material adverse effect on our future results of
operations.
In
November 2007, Conergy announced that it was experiencing a liquidity
shortfall. These liquidity issues were subsequently resolved through
interim financing from banks. In addition, Conergy is currently undergoing a
reorganization which includes changes in the composition of management,
discontinuation of certain non-core businesses and headcount
reductions. Conergy accounted for approximately 25% and 45% of our total
revenue in fiscal 2006 and 2005, respectively. In the year ended December
30, 2007, Conergy accounted for less than 10% of our total revenue. Conergy’s
management has evaluated their financial situation and determined it is not
- 63
-
reasonably
likely that the recently experienced shortfall in liquidity and restructuring
activities will negatively impact its ability to remain a going
concern. However, in the event Conergy ceases to be a significant customer
of ours or fails to pay us in a timely manner, it could have a material adverse
effect on our future results of operations.
International
sales comprise the majority of revenue for both our systems and components
segments. International sales represented approximately 55%, 68% and 70% of our
total revenue for fiscal 2007, 2006 and 2005, respectively, and we expect
international sales to remain a significant portion of overall sales for the
foreseeable future. Domestic sales as a percentage of our total revenue
increased approximately 13% for the year ended December 30, 2007, as compared to
the year ended December 31, 2006, as a result of the inclusion of systems
segment revenue in 2007, and we expect domestic sales as a percentage of total
revenue to increase in the future.
Cost
of Revenue
Cost
of revenue as a percentage of revenue and the year-over-year change were as
follows:
|
Year Ended
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
2007
vs.
2006
Change
|
2007
vs.
2006
Change
|
||||||||||||||
|
Cost
of systems revenue
|
$
|
386,511
|
$
|
—
|
$
|
—
|
n.a.
|
n.a.
|
|||||||||||
|
Cost
of components revenue
|
240,475
|
186,042
|
74,353
|
29
|
%
|
150
|
%
|
||||||||||||
|
Total
cost of revenue
|
$
|
626,986
|
$
|
186,042
|
$
|
74,353
|
237
|
%
|
150
|
%
|
|||||||||
|
Total
cost of revenue as a percentage of revenue
|
81
|
%
|
79
|
%
|
94
|
%
|
|||||||||||||
|
Total
gross margin percentage
|
19
|
%
|
21
|
%
|
6
|
%
|
|||||||||||||
Details
to cost of revenue by segment and the year-over-year change were as
follows:
|
Systems
Segment*
|
|
Components
Segment
|
||||||||||||||||||||||
|
Year Ended
|
|
Year Ended
|
2007
vs.
2006
Change
|
2006
vs.
2005
Change
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
December
30,
2007
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
||||||||||||||||||||
|
Amortization
of purchased intangible assets
|
$
|
20,085
|
$
|
4,767
|
$
|
4,690
|
$
|
1,175
|
2%
|
|
299%
|
|
||||||||||||
|
Stock-based
compensation
|
8,187
|
4,213
|
846
|
155
|
398%
|
|
446%
|
|
||||||||||||||||
|
Factory
pre-operating costs
|
939
|
3,964
|
383
|
—
|
935%
|
|
n.a.
|
|||||||||||||||||
|
All
other cost of revenue
|
357,300
|
227,531
|
180,123
|
73,023
|
26%
|
|
147%
|
|
||||||||||||||||
|
Total
cost of revenue
|
$
|
386,511
|
$
|
240,475
|
$
|
186,042
|
$
|
74,353
|
29%
|
|
150%
|
|
||||||||||||
|
Total
cost of revenue as a percentage of revenue
|
83
|
%
|
77
|
%
|
79
|
%
|
94
|
%
|
||||||||||||||||
|
Total
gross margin percentage
|
17
|
%
|
23
|
%
|
21
|
%
|
6
|
%
|
||||||||||||||||
|
*
|
We
had no cost of systems revenue in fiscal 2006 and
2005.
|
During
fiscal 2007, 2006 and 2005, our total cost of revenue was $627.0 million, $186.0
million and $74.4 million, respectively. The marked annual increases in our cost
of revenue resulted from increased costs in all spending categories relating to
operating more production lines and producing and selling substantially higher
unit volumes of our components products, as well as the inclusion of cost of
systems revenue for the period subsequent to January 10, 2007. As a
percentage of sales, our total cost of revenues increased from fiscal 2006 to
2007 primarily due to a $20.1 million increase in amortization of intangible
assets charged to cost of systems revenue for the year ended December 30, 2007
and an additional $8.2 million in stock-based compensation expense charged to
cost of systems revenue incurred in fiscal 2007, both associated with our
acquisition of SP Systems. Additionally, costs of raw materials such as
polysilicon continued to increase from fiscal 2006 to 2007 and we began
incurring pre-operating costs associated with our new solar cell and solar panel
manufacturing facilities starting in the fourth quarter of 2006. Such
pre-operating costs, which included compensation and training costs for factory
workers as well as utilities and consumable materials associated with
preproduction activities, totaled $4.9 million and $0.4 million in the years
ended December 30, 2007 and December 31, 2006, respectively. Our solar panel
manufacturing facility began production in the first quarter of 2007 and our new
solar cell line began production in the third quarter of 2007. The additional
cost of revenue in fiscal 2007 were only partially offset by improved
manufacturing economies of scale associated with markedly higher production
volume and improved yields. As a percentage of sales, our total cost of revenues
declined from fiscal 2005 to 2006, due to economies of scale, improved yields
and declining fixed costs per unit associated with markedly higher production
volume in 2006 compared to 2005, although our raw materials costs continued to
increase.
- 64
-
Since
the second half of 2006, we have increased our estimated warranty reserve
provision rates based on results of our recent testing that simulates adverse
environmental conditions and potential failure rates our solar panels could
experience during their 25-year warranty period. Provisions for
warranty reserves charged to cost of revenue were $10.8 million, $3.2
million and $0.4 million during fiscal 2007, 2006 and 2005, respectively. As a
result of the acquisition of SP Systems, amortization of intangible assets
charged to cost of revenue increased to $24.9 million in fiscal 2007, as
compared to $4.7 million in fiscal 2006 and $1.2 million in 2005. Amortization
of intangible assets charges represent amortization of purchased technology,
patents, trademarks and other intangible assets. Stock-based compensation
charges to cost of revenue were $12.4 million, $0.8 million and $0.2 million
during fiscal 2007, 2006 and 2005, respectively. The substantial increase
in stock-based compensation expense between the year ended December 30, 2007 and
December 31, 2006 primarily relates to the acquisition of SP
Systems.
Our
gross margins were 19%, 21% and 6% during fiscal 2007, 2006 and 2005,
respectively. The reduction in gross margin during fiscal 2007 compared to 2006
is reflective of certain purchase accounting charges, an increase in stock-based
compensation expense as a result of the acquisition of SP Systems, higher
warranty and material costs, particularly costs of silicon ingots and wafers,
and increased factory pre-operating costs, only partially offset by improved
manufacturing economies of scale associated with markedly higher production
volume and improved yields. In the first and fourth quarters of 2007, our
systems segment gross margin was substantially higher than in the second and
third quarters of 2007 as a result of a favorable mix of business than is
typical of this business. This favorable mix of business improved our overall
gross margin for the year ended December 30, 2007 by approximately five
percentage points above what we expected for our systems segment. In addition,
during the first quarter of 2007, we received a $2.7 million settlement from one
of our suppliers in connection with defective materials sold to us during 2006.
This settlement was reflected as a reduction to cost of revenues in the year
ended December 30, 2007. The improvement in gross margin during fiscal 2006
compared to 2005 is reflective of improved manufacturing economies of scale
associated with markedly higher production volume and improved yields, offset
partially by higher warranty and material costs, particularly costs of silicon
ingots and wafers.
Research
and Development
Research
and development expense as a percentage of revenue and the year-over-year change
were as follows:
|
Year Ended
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
2007
vs.
2006
Change
|
2006
vs.
2005
Change
|
|||||||||||||||
|
Research
& development
|
$
|
13,563
|
$
|
9,684
|
$
|
6,488
|
40%
|
|
49%
|
|
||||||||||
|
Research
& development as a percentage of revenue
|
2
|
%
|
4
|
%
|
8
|
%
|
||||||||||||||
During
fiscal 2007, 2006 and 2005, our research and development expenses were $13.6
million, $9.7 million and $6.5 million, respectively. Our research and
development expense has steadily decreased as a percentage of revenues as a
result of the rapid increase in our total revenue. The increase in research and
development spending year-over-year resulted primarily from increases in:
(i) salaries, benefits and stock-based compensation costs as a result of
increased headcount, including headcount additions attributable to the
acquisition of SP Systems on January 10, 2007; (ii) stock-based compensation
expense resulting from both the Company’s adoption of SFAS No. 123(R) in
2006 and the acquisition of SP Systems; and (iii) additional material and
equipment costs incurred for the development of our next generation of more
efficient solar cells and thinner polysilicon wafers for solar cell
manufacturing, as well as development of new processes to automate solar panel
assembly operations. These increases were partially offset by a decrease in
consulting service fees as well as by cost reimbursements received from various
government entities in the United States. Additionally, during fiscal 2005, we
recognized a $0.5 million impairment charge related to certain equipment when we
decommissioned our pilot wafer lab located in Cypress’ Round Rock, Texas
facility. We expect our research and development expense to increase in absolute
dollars, but decrease slightly as a percentage of revenue, as we continue to
develop new processes to further improve the conversion efficiency of our solar
cells and reduce their manufacturing cost, and as we develop new products to
diversify our product offerings.
Sales,
General and Administrative
Sales,
general and administrative expense as a percentage of revenue and the
year-over-year change were as follows:
|
Year Ended
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
2007
vs.
2006
Change
|
2006
vs.
2005
Change
|
|||||||||||||||
|
Sales,
general & administrative
|
$
|
108,256
|
$
|
21,677
|
$
|
10,880
|
399%
|
|
99%
|
|
||||||||||
|
As
a percentage of revenue
|
14
|
%
|
9
|
%
|
14
|
%
|
||||||||||||||
During
fiscal 2007, 2006 and 2005, our sales, general and administrative expenses were
$108.3 million, $21.7 million, and $10.9 million, respectively. Sales, general
and administrative expense increased from $21.7 million in fiscal 2006 to $108.3
million in 2007, a 399% increase. The increase in our sales, general and
administrative expenses in fiscal 2007 compared to 2006 is the result of higher
spending in all areas of sales, marketing, finance and information technology to
support the growth of our business, particularly increased headcount and payroll
related expenses, including stock-based compensation, primarily due to the
acquisition and integration of SP Systems, as well as increased outside
professional fees for legal and accounting services. During fiscal 2007 and
2006, stock-based compensation included in our sales, general and administrative
expense were $37.0 million and $2.8 million, respectively. Also contributing to
our increased sales, general and administrative expense in fiscal 2007 compared
to 2006 are substantial increases in headcount and sales and marketing spending
to expand our value added reseller channel and global branding initiatives. As a
percentage of revenues, sales, general and administrative expenses increased to
14% in the year ended December 30, 2007 from 9% in the year ended December 31,
2006, because these expenses increased at a higher rate than the rate of growth
of our revenue.
Sales,
general and administrative expense increased from $10.9 million in fiscal 2005
to $21.7 million in 2006, a 99% increase. The increase in our sales, general and
administrative expenses in fiscal 2006 compared to 2005 was a result of higher
spending to support the growth of our business, particularly increased headcount
and payroll costs in all areas of sales, marketing, finance and information
technology. In addition, fiscal 2006 included stock-based compensation
expense resulting from the adoption of SFAS No. 123(R). Accounting and
legal fees had increased substantially in 2006 mainly due to compliance-related
costs of having publicly traded common stock since November 2005, including
Sarbanes-Oxley compliance costs. Also in 2006, our sales, general and
administrative expenses include increased legal costs incurred in relation to
due diligence activities and developing contracts and agreements. During 2006,
we had also continued to increase headcount and sales and marketing spending to
expand our North America sales channel initiative. As a percentage of revenue,
sales, general and administrative expense decreased from 14% in 2005 to 9% in
2006 because these expenses increased at a substantially lower rate than the
rate of growth in our revenue. In the future, we
anticipate that sales, general and administrative expense will increase in
absolute dollars, but will decrease as a percentage of sales, assuming our
revenue grows as we expect.
Purchased
In-Process Research and Development, or IPR&D
Purchased
in-process research and development expense as a percentage of revenue and the
year-over-year change were as follows:
|
Year Ended
|
|||||||||||||||
|
(Dollars
in thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
2007
vs.
2006
Change
|
|
2006
vs.
2005
Change
|
|||||||||
|
Purchased
in-process research and development
|
9,575
|
—
|
—
|
n.a.
|
|
n.a.
|
|||||||||
|
Purchased
in-process research & development as a percentage of
revenue
|
1
|
%
|
n.a.
|
n.a.
|
|||||||||||
In
connection with the acquisition of SP Systems, we recorded an IPR&D charge
of $9.6 million in the first quarter of fiscal 2007, as technological
feasibility associated with the IPR&D projects had not been established and
no alternative future use existed.
These
IPR&D projects consisted of two components: design automation tool and
tracking systems and other. In assessing the projects, we considered key
characteristics of the technology as well as its future prospects, the rate
technology changes in the industry, product life cycles and the various
projects’ stage of development.
The
value of IPR&D was determined using the income approach method, which
calculated the sum of the discounted future cash flows attributable to the
projects once commercially viable using a 40% discount rate, which were derived
from a weighted-average cost of capital analysis and adjusted to reflect the
stage of completion and the level of risks associated with the projects. The
percentage of completion for each project was determined by identifying the
research and development expenses invested in the project as a ratio of the
total estimated development costs required to bring the project to technical and
commercial feasibility. The following table summarizes certain
information related to each project:
- 66
-
|
|
Stage
of Completion
|
Total Cost
Incurred to Date
|
Total
Remaining Costs
|
||||||
| Design Automation Tool | |||||||||
|
As
of January 10, 2007 (acquisition date)
|
8%
|
|
$
|
0.2 million
|
$
|
2.4 million
|
|||
|
As
of December 30, 2007
|
35%
|
|
$
|
0.9 million
|
$
|
1.7
million
|
|||
| Tracking System and Other | |||||||||
|
As
of January 10, 2007 (acquisition date)
|
25%
|
|
$
|
0.2 million
|
$
|
0.6 million
|
|||
|
As
of December 30, 2007
|
100%
|
|
$
|
0.8
million
|
$
|
—
|
Status
of IPR&D Projects:
As
of December 30, 2007, we have incurred total post-acquisition costs of
approximately $0.7 million related to the design automation tool project and
estimate that an additional investment of $1.7 million will be required to
complete the project. We expect to complete the design automation tool project
by June 2009, approximately one and a half years earlier than the original
estimate.
We
completed the tracking systems project in June 2007 and incurred total project
costs of $0.8 million, of which $0.6 million was incurred after the
acquisition. Both the actual completion date and the total projects costs
were in line with the original estimates.
The
development of the design automation tool remains a significant risk due to
factors including the remaining efforts to achieve technical viability, rapidly
changing customer markets, uncertain standards for new products and competitive
threats. The nature of the efforts to develop these technologies into
commercially viable products consists primarily of planning, designing,
experimenting and testing activities necessary to determine that the
technologies can meet market expectations, including functionality and technical
requirements. Failure to bring these products to market in a timely manner could
result in a loss of market share or a lost opportunity to capitalize on emerging
markets and could have a material adverse impact on our business and operating
results.
Impairment
of Acquisition-Related Intangibles
Impairment
of acquisition-related intangibles as a percentage of revenue and the
year-over-year change were as follows:
|
Year Ended
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
2007
vs.
2006
Change
|
2006
vs.
2005
Change
|
|||||||||||||||
|
Impairment
of acquisition-related intangibles
|
$
|
14,068
|
$
|
—
|
$
|
—
|
n.a.
|
|
n.a.
|
|
||||||||||
|
As
a percentage of revenue
|
2
|
%
|
n.a.
|
|
n.a.
|
|
||||||||||||||
During
the year ended December 30, 2007, we recognized a charge for the impairment of
acquisition-related intangibles of $14.1 million. In June 2007, we changed
our branding strategy and consolidated all of our product and service offerings
under the SunPower tradename. To reinforce the new branding strategy, we
formally changed the name of PowerLight to SunPower Corporation,
Systems. The fair value of PowerLight tradenames was valued at $15.5
million at the date of acquisition and ascribed a useful life of 5 years. The
determination of the fair value and useful life of the tradename was based on
our previous strategy of continuing to market our systems products and services
under the PowerLight brand. As a result of the change in our branding
strategy, during the quarter ended July 1, 2007, the net book value of the
PowerLight tradename of $14.1 million was written off as an impairment of
acquisition-related intangible assets. As a percentage of revenues, impairment
of acquisition related intangibles was 2% for the year ended December 30,
2007.
Interest
and Other Income (Expense), Net
Interest
income, interest expense, and other income (expense), net as a percentage of
revenue and the year-over-year change were as follows:
|
Year Ended
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
2007
vs.
2006
Change
|
2006
vs.
2005
Change
|
|||||||||||||||
|
Interest
income
|
$
|
13,882
|
$
|
10,086
|
$
|
1,591
|
38%
|
|
534%
|
|
||||||||||
|
As
a percentage of revenue
|
2
|
%
|
4
|
%
|
2
|
%
|
||||||||||||||
|
Interest
expense
|
$
|
(5,071
|
)
|
$
|
(1,809
|
)
|
$
|
(3,185
|
)
|
180%
|
|
(43)%
|
|
|||||||
|
As
a percentage of revenue
|
(1
|
)%
|
(1
|
)%
|
(4
|
)%
|
||||||||||||||
|
Other
income (expense), net
|
$
|
(7,871
|
)
|
$
|
1,077
|
$
|
(1,214
|
)
|
(831)%
|
|
(189)%
|
|
||||||||
|
As
a percentage of revenue
|
(1
|
)%
|
0
|
%
|
(2
|
)%
|
||||||||||||||
- 67
-
Interest
income during the years ended December 30, 2007, December 31, 2006 and January
1, 2006 primarily represents interest income earned on our cash, cash
equivalents and investments during these periods. The increase in interest
income of 38% from fiscal 2006 to 2007 is primarily the effect of interest
earned on $581.5 million in net proceeds from our class A common stock and
convertible debenture offerings in February and July 2007. The increase in
interest income of 534% from fiscal 2005 to 2006 is primarily the effect of
interest earned on approximately $145.6 million in net proceeds from the public
issuance of our class A common stock at the close of our IPO in November 2005
and approximately $197.4 million in net proceeds from our follow-on public
offering completed in June 2006.
Interest
expense during the year ended December 30, 2007 relates to interest due on
customer advance payments and convertible debt. Interest expense during the
year ended December 31, 2006 primarily relates to customer advance payments. The
increase in our interest expense of 180% from fiscal 2006 to 2007 is primarily
due to interest related to the aggregate of $425.0 million in convertible
debentures issued in February and July 2007. During fiscal 2005, interest
expense primarily represents interest expense on borrowings and from warrants
held by Cypress. Interest expense attributed to debt we owed to Cypress was $1.9
million in 2005. Our convertible debt and borrowings from Cypress were used to
fund our capital expenditures for our manufacturing capacity
expansion.
In
September 2007, the FASB issued a proposed FASB Staff Position APB 14-a,
which clarifies the accounting for convertible debt instruments that may be
settled in cash upon conversion. The proposed guidance, if issued in final form,
would significantly impact the accounting for our convertible debt. The proposed
guidance would require us to separately account for the liability and equity
components of the convertible debt in a manner that reflects interest expense
equal to our non-convertible debt borrowing rate. The proposed guidance, if
issued in final form, will result in significantly higher non-cash interest
expense on our convertible debt.
The
following table summarizes the components of other income (expense),
net:
|
Year Ended
|
||||||||||||
|
(In
thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
|||||||||
|
Write-off
of unamortized debt issuance costs
|
$
|
(8,260
|
)
|
$
|
—
|
$
|
—
|
|||||
|
Amortization
of debt issuance costs
|
(1,710
|
)
|
—
|
—
|
||||||||
|
Share
in net loss of joint venture, net of tax
|
(278
|
)
|
—
|
—
|
||||||||
|
Gain
(loss) on derivatives and foreign exchange, net of tax
|
2,086
|
863
|
(1,441
|
)
|
||||||||
|
Other
income,
net
|
291
|
214
|
227
|
|||||||||
|
Total
other income (expense), net
|
$
|
(7,871
|
)
|
$
|
1,077
|
$
|
(1,214
|
)
|
||||
For
the year ended December 30, 2007, total other expense, net consists primarily of
the write-off of unamortized debt issuance costs as a result of the market price
conversion trigger on our senior convertible debentures being met, amortization
of debt issuance costs and share in net loss of Woongjin Energy Co., Ltd, a
joint venture, offset slightly by gains from foreign exchange hedging
contracts. For the years ended December 31, 2006 and January 1, 2006, total
other income (expense), net consists primarily of gains (losses) on foreign
exchange and hedging contracts.
Income
Taxes
Income
tax provision (benefit) as a percentage of revenue and the year-over-year change
were as follows:
|
Year Ended
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
2007
vs.
2006
Change
|
2006
vs.
2005
Change
|
|||||||||||||||
|
Income
tax provision (benefit)
|
$
|
(5,920
|
)
|
$
|
1,945
|
$
|
50
|
(404)%
|
|
3,790%
|
|
|||||||||
|
As
a percentage of revenue
|
(1
|
)%
|
1
|
%
|
0
|
%
|
||||||||||||||
In
fiscal 2007, our income tax benefit was primarily the result of recognition of
deferred tax assets to the extent of deferred tax liabilities created by the
acquisition of SP Systems, net of foreign income taxes in profitable
jurisdictions where the tax rates are less than the U.S. statutory rate. In
fiscal 2006 and 2005, our income tax expense was provided primarily for foreign
income taxes in certain jurisdictions where our operations are profitable. As
described in Note 3 of Notes to Consolidated Financial Statements, we will pay
federal and state income taxes in accordance with the tax sharing agreement with
Cypress. Since the completion of our follow-on public offering of common stock
in June 2006, we are no longer considered to be a member of Cypress’
consolidated group for federal income tax purposes. Accordingly, we will be
required to pay Cypress for any federal income tax credit or net operating loss
carryforwards utilized in our federal tax returns in subsequent periods. In the
event we determine that the realization of these deferred tax assets associated
with the SP Systems and Cypress acquisitions is more likely than not, the
reversal of the related valuation allowance will first reduce goodwill, then
intangible assets and lastly as a reduction to the provision for
taxes.
- 68
-
We
recorded a valuation allowance to the extent our net deferred tax asset on all
items except comprehensive income exceeded our net deferred tax liability. We
expect it is more likely than not that we will not realize our net deferred tax
asset as of December 30, 2007. In assessing the need for a valuation allowance,
we consider historical levels of income, expectations and risks associated with
the estimates of future taxable income and ongoing prudent and feasible tax
planning strategies. In the event we determine that we would be able to realize
additional deferred tax assets in the future in excess of the net recorded
amount, or if we subsequently determine that realization of an amount previously
recorded is unlikely, we would record an adjustment to the deferred tax asset
valuation allowance, which would change income in the period of adjustment. As
of December 30, 2007, we had federal net operating loss carryforwards of
approximately $147.6 million. These federal net operating loss carryforwards
will expire at various dates from 2011 to 2027. We had California state net
operating loss carryforwards of approximately $73.5 million as of
December 30, 2007, which expire at various dates from 2011 to 2017. We also
had research and development credit carryforwards of approximately $3.9 million
for both federal and state tax purposes.
Liquidity
and Capital Resources
From
2002 until the closing of our IPO of 8.8 million shares of class A common
stock on November 22, 2005, we financed our operations primarily through
sale of equity to and borrowings from Cypress totaling approximately
$142.8 million. We received net proceeds from our IPO of approximately
$145.6 million and in a follow-on offering of 7.0 million shares of common
stock in June 2006 we received net proceeds of approximately $197.4 million. In
February 2007, we raised $194.0 million net proceeds from the issuance of 1.25%
senior convertible debentures. In July 2007, we raised $220.1 million net
proceeds from the issuance of 0.75% senior convertible debentures and $167.4
million net proceeds from the completion of a follow-on offering of 2.7 million
shares of our class A common stock.
Cash
Flows
A
summary of the sources and uses of cash and cash equivalents is as
follows:
|
Year Ended
|
||||||||||||
|
(Dollars
in thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
|||||||||
|
Net
cash provided by (used in) operating activities
|
$
|
2,372
|
$
|
(45,966
|
)
|
$
|
15,903
|
|||||
|
Net
cash used in investing activities
|
(474,118
|
)
|
(133,330
|
)
|
(68,497
|
)
|
||||||
|
Net
cash provided by financing activities
|
584,625
|
201,300
|
192,410
|
|||||||||
Operating
Activities
Net
cash generated from operating activities of $2.4 million in fiscal 2007 was
primarily the result of net income of $9.2 million, plus non-cash charges
totaling $140.7 million for depreciation, amortization, purchased in-process
research and development, impairment of acquisition-related intangibles,
write-off of unamortized debt issuance costs and stock-based compensation
expense. In addition, cash provided by operating activities in fiscal 2007
resulted from increases in accounts payable and accrued liabilities of $40.3
million, billings in excess of costs and estimated earnings of $29.9 million
related to contractual timing of system project billings and customer advances
of $29.4 million. These items were partially offset by increases in inventory of
$87.0 million, advances to suppliers of $83.6 million related to our existing
supply agreements, accounts receivable of $42.7 million, costs and estimated
earnings in excess of billings of $32.6 million related to contractual timing of
system project billings and other changes in operating assets and liabilities
totaling $1.2 million. The significant increases in substantially all of our
current assets and current liabilities resulted from the acquisition of SP
Systems, as well as our substantial revenue increase in the year ended December
30, 2007 compared to previous years which impacted net income and working
capital.
Net
cash used in operating activities was $46.0 million in fiscal 2006, which
primarily represents our net income of $26.5 million, offset by $77.4 million of
advance payments to raw material suppliers. The net impact of all other sources
and uses of fiscal 2006 cash flows from operations was a net increase of $4.9
million comprised of non-cash charges for depreciation, amortization and
stock-based compensation and changes in operating assets and
liabilities.
Net
cash generated from operating activities was $15.9 million in fiscal 2005,
which reflects our net loss for the year of $15.8 million, which was
primarily offset by customer advances of $37.4 million to fund expansion of
our manufacturing capacity. In April 2005, we entered into an agreement with one
of our customers to supply solar cells. As part of this agreement, the customer
agreed to pre-fund the expansion of our manufacturing capacity to support this
customer’s solar cell product demand. Beginning January 1, 2006, we began
paying interest on the unpaid balance of this customer advance. We may repay all
or any portion of the unpaid principal and related interest on the advances at
any time without penalty through December 31, 2010. The net impact of all
other sources and uses of fiscal 2005 cash flows from operations was a net
decrease of $5.7 million comprised of changes in operating assets and
liabilities, partially offset by non-cash charges for depreciation, amortization
and stock-based compensation.
Investing
Activities
Net
cash used in investing activities was $474.1 million in fiscal 2007, which
primarily relates to capital expenditures of $193.5 million incurred during the
year ended December 30, 2007. Capital expenditures were mainly associated with
manufacturing capacity expansion in the Philippines. Although the timing of our
capital expansion plans may shift depending on many factors, we currently expect
2008 capital expenditures to be between approximately $250.0 million and $300.0
million, primarily related to continued expansion of our manufacturing capacity.
Also during the year ended December 30, 2007, we used (i) $118.0 million of cash
for purchases of available-for-sale securities, net of available-for-sale
securities sold during the year; (ii) had $63.2 million of restricted cash;
(iii) paid $98.6 million in cash for the acquisition of SP Systems, net of cash
acquired; and (iv) invested $0.9 million in a joint venture to provide wafer
slicing services of silicon ingots (the First Philec Solar joint venture—see
Note 11 of Notes to our Consolidated Financial Statements).
Net
cash used in investing activities was $133.3 million in fiscal 2006 and
primarily comprised of $100.3 million of capital expenditures relating to
manufacturing property, plant and equipment in the Philippines. Capital
equipment purchased in fiscal 2006 was primarily for our manufacturing
facilities in the Philippines. Also during the year ended December 31, 2006, we
used (i) $16.5 million to purchase short-term marketable investment
securities; (ii) $10.0 million loaned to SP Systems, which we subsequently
acquired on January 10, 2007 and (iii) $5.0 million investment in a joint
venture to manufacture mono-crystalline silicon ingots (the Woongjin Energy
joint venture—see Note 11 of Notes to our Consolidated Financial
Statements).
Net
cash used in investing activities was $68.5 million in fiscal 2005,
substantially all of which represented expenditures for manufacturing facilities
and equipment. Capital equipment purchased in fiscal 2005 was primarily for our
215,000 square foot solar cell manufacturing facility in the Philippines,
equipment for our first 25 megawatts per year production line and for our second
and third 25 megawatts per year production lines.
Financing
Activities
Net
cash provided by financing activities was $584.6 million in fiscal 2007, which
reflects $194.0 million in net proceeds from the issuance of $200.0 million in
principal amount of 1.25% senior convertible debentures in February 2007, $220.1
million in net proceeds from the issuance of $225.0 million in principal amount
of 0.75% senior convertible debentures in July 2007 and $167.4 million in net
proceeds from our follow-on public offering of 2.7 million shares of our class A
common stock in July 2007. Also during the year ended December 30, 2007, we paid
$3.6 million on an outstanding line of credit, paid $2.0 million for treasury
stock used to pay withholding taxes on vested restricted stock, received $8.5
million in proceeds from stock option exercises and received $0.2
million from employees for the conversion of stock appreciation rights to
restricted stock units.
Net
cash provided by financing activities was $201.3 million and 192.4 million
in fiscal 2006 and 2005, respectively. In June 2006, we raised $197.4 million in
net proceeds from our follow-on public offering of common stock and, in fiscal
2006, we received $3.9 million in proceeds from exercises of employee stock
options. During fiscal 2005 we raised $46.6 million of equity and debt financing
from Cypress and we raised $145.6 million of net proceeds from the initial
public offering of 8.8 million shares of our Series A common stock in
November 2005. We currently have no outstanding debt obligations to Cypress
apart from trade payables.
Revision
of Statement of Cash Flow Presentation Related to Purchases of Property, Plant
and Equipment
We
have corrected our Consolidated Statements of Cash Flows for 2006 and 2005 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 represent cash transactions, we are revising our
cash flow presentations to exclude them. These corrections resulted in an
increase to the previously reported amounts of cash used for operating
activities of $8.0 million in fiscal 2006 and a decrease to the cash provided
from operating activities of $1.9 million in fiscal 2005, resulting from a
reduction in the amount of cash provided from the change in accounts payable and
other accrued liabilities in those years. The corresponding correction in the
investing section was to decrease cash used for investing activities by $8.0
million and $1.9 million in fiscal 2006 and fiscal 2005, respectively, as a
result of the reduction in the amount of cash used for purchases of property,
plant and equipment in those years. These corrections had no impact on our
previously reported results of operations, working capital or stockholders’
equity. We concluded that these corrections were not material to any of our
previously issued consolidated financial statements, based on SEC Staff
Accounting Bulletin: No. 99-Materiality.
Debt
and Credit Sources
On
December 2, 2005, we 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. We terminated our agreement
with affiliates of Credit Suisse and Lehman Brothers on July 13,
2007.
In
connection with the acquisition of SP Systems on January 10, 2007, we assumed a
line of credit SP Systems had with Union Bank of California, N.A., or UBOC, with
an outstanding balance of approximately $3.6 million. During the first quarter
of fiscal 2007, we paid off the outstanding balance in full.
Also
on January 10, 2007, we amended and restated the loan agreement with
UBOC. The amended and restated loan agreement provided for a $10.0 million
trade finance credit facility, which was scheduled to expire on April 30,
2007. This facility allowed us to issue commercial and standby letters of
credit, but did not provide for any loans. All of the assets of SP Systems
secured this trade finance facility. In addition, the agreement required that SP
Systems maintain cash equal to the value of letters of credit outstanding in
restricted accounts as collateral for letters of credit issued by the bank. On
April 27, 2007, we amended the loan agreement to, among other things,
extend the maturity date to July 31, 2007, and remove the requirement to
have cash collateral for letters of credit. We guaranteed $10.5 million in
connection with the April 27, 2007 amendment including the $10 million
trade credit facility and a separate $0.5 million credit card facility through
UBOC. Our line of credit with UBOC expired on July 31, 2007.
- 70
-
On
July 13, 2007, we entered into a credit agreement with Wells Fargo Bank,
National Association, or Wells Fargo, that was amended on August 20, 2007,
providing for a $50.0 million unsecured revolving credit line, with a $40.0
million unsecured letter of credit subfeature, and a separate $50.0 million
secured letter of credit facility. We may borrow up to $50.0 million and request
that Wells Fargo issue up to $40.0 million in letters of credit under the
unsecured letter of credit subfeature through July 31, 2008. Letters of credit
issued under the subfeature reduce our borrowing capacity under the revolving
credit line. Additionally, we may request that Wells Fargo issue up to $50.0
million in letters of credit under the secured letter of credit facility through
July 31, 2012. As detailed in the agreement, we will pay interest on outstanding
borrowings and a fee for outstanding letters of credit. We have the ability at
any time to prepay outstanding loans. All borrowings must be repaid by
July 31, 2008, and all letters of credit issued under the unsecured letter
of credit subfeature shall expire on or before July 31, 2008 unless we provide
by such date collateral in the form of cash or cash equivalents in the aggregate
amount available to be drawn under letters of credit outstanding at such time.
All letters of credit issued under the secured letter of credit facility shall
expire no later than July 31, 2012. We concurrently entered into a security
agreement with Wells Fargo, granting a security interest in a deposit account to
secure our obligations in connection with any letters of credit that might be
issued under the credit agreement. In connection with the credit agreement,
SunPower North America, Inc., our wholly-owned subsidiary, and SP Systems,
another wholly-owned subsidiary of ours, entered into an associated continuing
guaranty with Wells Fargo. The terms of the credit agreement include certain
conditions to borrowings, representations and covenants, and events of default
customary for financing transactions of this type.
As
of December 30, 2007, four letters of credit totaling $32.0 million were issued
by Wells Fargo under the unsecured letter of credit subfeature and eight letters
of credit totaling $47.9 million were issued by Wells Fargo under the secured
letter of credit facility. On December 30, 2007, cash available to be borrowed
under the unsecured revolving credit line was $18.0 million and includes letter
of credit capacities available to be issued by Wells Fargo under the unsecured
letter of credit subfeature of $8.0 million. Letters of credit available under
the secured letter of credit facility at December 30, 2007 totaled $2.1
million.
As
of December 30, 2007, we were in compliance with all but two debt covenants. We
had failed to deliver in a timely manner a certificate of the chief executive
officer or chief financial officer that the financial statements in our prior
Quarterly Report on Form 10-Q were accurate and that there existed no event of
default with debt covenants. We also entered into corporate guaranties on
construction project deals in Europe that exceeded the allowed amount under the
debt covenants. On January 18, 2008, we entered into an agreement with Wells
Fargo to amend the existing credit agreement. Under the amended credit
agreement, Wells Fargo waived compliance requirements with certain restrictive
covenants, including the prohibition against us to provide corporate guaranties
that support contracts between our subsidiaries and third parties. In exchange
for waiving compliance with such restrictive covenants, we agreed to maintain a
balance of funds in a deposit account with Wells Fargo, in an amount no less
than the aggregate outstanding indebtedness we owed to Wells Fargo under both
the line of credit, including our letter of credit subfeature, and the letter of
credit line, as collateral securing such outstanding indebtedness. Had Wells
Fargo not waived this violation, we would have been in default of our debt
covenants and we may have been required to immediately repay the aggregate
outstanding indebtedness we owed to Wells Fargo under both the line of credit,
including our letter of credit subfeature, and the letter of credit line. See
Note 14 of Notes to our Consolidated Financial Statements.
In
January 2007, we completed the acquisition of SP Systems for a total purchase
consideration and future stock compensation of $334.4 million, consisting of
$120.7 million in cash and $213.7 million in common stock and related
acquisition costs. In conjunction with the acquisition of SP Systems, we entered
into a commitment letter with Cypress during the fourth quarter of fiscal 2006
under which Cypress agreed to lend us up to $130.0 million in cash in order to
facilitate the financing of acquisitions or working capital requirements. In
February 2007, the commitment letter was terminated. No borrowings were utilized
and no borrowings were outstanding at the termination date. See Note 16 of Notes
to our Consolidated Financial Statements for details on other borrowings from
Cypress, consisting of $76.0 million in promissory notes and related interest
and $14.7 million in payables that were converted into our class B common stock
in fiscal 2005. As of December 30, 2007, December 31, 2006 and January 1, 2006,
there were no amounts outstanding in relation to borrowings from
Cypress.
In
February 2007, we issued $200.0 million in principal amount of our 1.25% senior
convertible debentures, or the February 2007 debentures, to Lehman Brothers and
received net proceeds of $194.0 million. Interest on the February 2007
debentures is payable on February 15 and August 15 of each year,
commencing August 15, 2007. The February 2007 debentures will mature on
February 15, 2027. Holders may require us to repurchase all or a portion of
their February 2007 debentures on each of February 15,
2012, February 15, 2017 and February 15, 2022, or if we
experience certain types of corporate transactions constituting a fundamental
change. Any repurchase of the February 2007 debentures pursuant to these
provisions will be for cash at a price equal to 100% of the principal amount of
the February 2007 debentures to be repurchased plus accrued and unpaid interest.
In addition, we may redeem some or all of the February 2007 debentures on or
after February 15, 2012 for cash at a redemption price equal to 100% of the
principal amount of the February 2007 debentures to be redeemed plus accrued and
unpaid interest. See Note 15 of Notes to our Consolidated Financial
Statements.
- 71
-
In
July 2007, we issued $225.0 million in principal amount of our 0.75% senior
convertible debentures, or the July 2007 debentures, to Credit Suisse and
received net proceeds of $220.1 million. Interest on the July 2007 debentures is
payable on February 1 and August 1 of each year, commencing February
1, 2008. The July 2007 debentures will mature on August 1, 2027. Holders
may require us to repurchase all or a portion of their July 2007 debentures on
each of August 1, 2010, August 1, 2015, August 1, 2020 and
August 1, 2025, or if we experience certain types of corporate transactions
constituting a fundamental change. Any repurchase of the July 2007 debentures
pursuant to these provisions will be for cash at a price equal to 100% of the
principal amount of the July 2007 debentures to be repurchased plus accrued and
unpaid interest. In addition, we may redeem some or all of the July 2007
debentures on or after August 1, 2010 for cash at a redemption price equal
to 100% of the principal amount of the July 2007 debentures to be redeemed plus
accrued and unpaid interest. See Note 15 of Notes to our Consolidated Financial
Statements.
Liquidity
The
closing price of our class A common stock equaled or exceeded 125% of the $56.75
per share initial effective conversion price governing the February 2007
debentures and the closing price of our class A common stock equaled or exceeded
125% of the $82.24 per share initial effective conversion price governing the
July 2007 debentures, for 20 out of 30 consecutive trading days ending on
December 30, 2007, thus satisfying the market price conversion trigger pursuant
to the terms of the debentures. As of the first trading day of the first quarter
in fiscal 2008, holders of the February 2007 debentures and July 2007 debentures
are able to exercise their right to convert the debentures any day in that
fiscal quarter. This test is repeated each fiscal quarter. Therefore, since
holders of the February 2007 debentures and July 2007 debentures are able to
exercise their right to convert the debentures in fiscal 2008, as of December
30, 2007, we classified the $425.0 million in aggregate convertible debt as
short-term debt in our Consolidated Balance Sheets. In addition, we wrote off
$8.2 million of unamortized debt issuance costs in the fourth fiscal quarter of
2007 and will write off the remaining $1.0 million of unamortized debt issuance
costs in the first fiscal quarter of 2008. 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 quarters ended April 1, 2007, July 1, 2007
and September 30, 2007, holders of the debentures were not able to exercise
their right to convert the debentures in previous quarters. Accordingly, we
classified the $425.0 million in aggregate convertible debt as long-term debt in
previous Quarterly Reports on Form 10-Q.
In
the event of conversion by holders of the February 2007 debentures and July 2007
debentures, the principal amount must be settled in cash and to the extent that
the conversion obligation exceeds the principal amount of any debentures
converted, we must satisfy the remaining conversion obligation of the February
2007 debentures in shares of our class A common stock, and we maintain the right
to satisfy the remaining conversion obligation of the July 2007 debentures in
shares of our class A common stock or cash. We intend to fund such obligations,
if any, through existing cash and cash equivalents, cash generated from
operations and, if necessary, borrowings under our credit agreement with Wells
Fargo and/or potential availability of future sources of funding (see Note 14 of
Notes to our Consolidated Financial Statements). We believe that it is unlikely
that a significant percentage of holders of the February 2007 debentures and
July 2007 debentures will exercise their right to convert in the near future
because they would likely receive less value upon conversion than the current
market value of the debentures based on the debentures’ trading prices quoted on
Bloomberg in January and February 2008. However, there is no assurance that this
will continue to be the case. As of February 29, 2008, no holders of the
February 2007 debentures and July 2007 debentures exercised their right to
convert the debentures.
As
of December 30, 2007, we had cash and cash equivalents of $285.2 million as
compared to $165.6 million as of December 31, 2006. In addition, we had
short-term investments and long-term investments of $105.4 million and $29.1
million as of December 30, 2007, respectively, as compared to $16.5 million and
zero as of December 31, 2006, respectively. Of these investments, we held ten
auction rate securities totaling $50.8 million as of December 30, 2007. These
auction rate securities were student loans that are typically over
collateralized by pools of loans originated under the FFELP and are guaranteed
by the U.S. Department of Education, and insured. In addition, all auction rate
securities held are rated by one or more of the NRSROs as triple-A. In February
2008, the auction rate securities market experienced a significant increase in
the number of failed auctions, which occurs when sell orders exceed buy orders
resulting from lack of liquidity and does not necessarily signify a default by
the issuer. As of February 29, 2008, four of these auction rate securities
totaling $24.1 million failed to clear at auctions, four of these securities
totaling $21.7 million cleared at auctions, and one of these securities
totaling $5.0 million continued to be held. For failed auctions, we continue to
earn interest on these investments at the maximum contractual rate as the issuer
is obligated under contractual terms to pay penalty rates should auctions fail.
Historically, failed auctions have rarely occurred, however, such failures could
continue to occur in the future. In the event we need to access these funds, we
will not be able to do so until a future auction is successful, the issuer
redeems the securities, a buyer is found outside of the auction process or the
securities mature. Accordingly, auction rate securities that were not sold
subsequent to December 30, 2007 totaling $29.1 million are classified as
long-term investments on the Consolidated Balance Sheets, consistent with the
stated contractual maturities of the securities. The “stated” or “contractual”
maturities for these securities generally are between 20 to 30
years.
We have
concluded that no other-than-temporary impairment losses occurred in the year
ended December 30, 2007 because all holdings had successful auctions in
January 2008. However, if the issuers of these auction rate securities are
unable to successfully close future auctions or do not redeem the securities, we
may be required to adjust the carrying value of the securities and record an
impairment charge in the first quarter of fiscal 2008. If we determine that the
fair value of these auction rate securities is temporarily impaired, we would
record a temporary impairment within Consolidated Statements of Comprehensive
Income (Loss), a component of stockholders' equity in the first quarter of 2008.
If it is determined that the fair value of these securities is
other-than-temporarily impaired, we would record a loss in our Consolidated
Statements of Operations in the first quarter of 2008, which could be
material.
- 72
-
We
believe that our current cash and cash equivalents and funds available from the
credit agreement with Wells Fargo will be sufficient to meet our working capital
and capital expenditure commitments for at least the next 12 months. However,
there can be no assurance that our liquidity will be adequate over time. If our
capital resources are insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity securities or debt securities or obtain other
debt financing. The sale of additional equity securities or convertible debt
securities would result
in additional dilution to our stockholders. Additional debt would result in
increased expenses and would likely impose new restrictive covenants like the
covenants under the credit agreement with Wells Fargo. Financing arrangements
may not be available to us, or may not be available in amounts or on terms
acceptable to us.
We
expect to experience growth in our operating expenses, including our research
and development, sales and marketing and general and administrative expenses,
for the foreseeable future to execute our business strategy. We may also be
required to purchase polysilicon in advance to secure our wafer supplies or
purchase third-party solar modules and materials in advance to support systems
projects. We intend to fund these activities with existing cash and cash
equivalents, cash generated from operations and, if necessary, borrowings under
our credit agreement with Wells Fargo. These anticipated increases in operating
expenses may not result in an increase in our revenue and our anticipated
revenue may not be sufficient to support these increased expenditures. We
anticipate that operating expenses, working capital and capital expenditures
will constitute a significant use of our cash resources.
Contractual
Obligations
The
following summarizes our contractual obligations at December 30,
2007:
|
Payments Due by Period
|
||||||||||||||||
|
(In thousands)
|
Total
|
2008
|
2009 -2010
|
2011 -2012
|
Beyond 2012
|
|||||||||||
|
Obligation
to Cypress
|
$
|
4,854
|
$
|
4,854
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Customer
advances
|
69,404
|
9,250
|
28,154
|
16,000
|
16,000
|
|||||||||||
|
Interest
on customer advances
|
2,618
|
1,421
|
1,197
|
—
|
—
|
|||||||||||
|
Convertible
debt
|
425,000
|
—
|
—
|
—
|
425,000
|
|||||||||||
|
Interest
on convertible debt
|
80,853
|
4,187
|
8,375
|
8,375
|
59,916
|
|||||||||||
|
Lease
commitments
|
47,027
|
4,844
|
10,408
|
8,090
|
23,685
|
|||||||||||
|
Utility
obligations
|
750
|
—
|
—
|
—
|
750
|
|||||||||||
| Royalty obligations | 275 | 275 |
—
|
—
|
—
|
|||||||||||
|
Non-cancelable
purchase orders
|
161,751
|
160,867
|
884
|
—
|
—
|
|||||||||||
|
Purchase
commitments under agreements
|
2,099,495
|
263,150
|
744,880
|
518,103
|
573,362
|
|||||||||||
|
Total
|
$
|
2,892,027
|
$
|
448,848
|
$
|
793,898
|
$
|
550,568
|
$
|
1,098,713
|
||||||
Customer
advances and interest on customer advances relate to advance payments received
from customers for future purchases of solar power products or supplies.
Convertible debt and interest on convertible debt relate to the aggregate of
$425.0 million in principal amount of our senior convertible debentures. For the
purpose of the table above, we assume that (1) no holders of the convertible
debt will exercise their right to convert the debentures as a result of the
market price conversion trigger being met in the fourth quarter of fiscal 2007
and (2) all holders of the convertible debt will hold the debentures through the
date of maturity in fiscal 2027 and upon redemption, the values of the
convertible debt are equal to the aggregate principal amount of $425.0 million
with no premiums. Lease commitments primarily relate to our 5-year lease
agreement with Cypress for our headquarters in San Jose, California, a 15-year
lease agreement with Cypress for our manufacturing facility in the Philippines,
an 11-year lease agreement with an unaffiliated third party for our
administrative, research and development offices in Richmond, California, a
5-year lease agreement with an unaffiliated third party for a second facility in
the Philippines and other leases for various office space. Utility obligations
relate to our 11-year lease agreement with an unaffiliated third party for our
administrative, research and development offices in Richmond, California. Royalty
obligations result from several of the systems segment government awards
and existing agreements. Non-cancelable purchase orders relate to
purchase commitments for equipment and building improvements for our
manufacturing facilities. Purchase commitments under agreements relate to
arrangements entered into with suppliers of polysilicon, ingots, wafers, solar
cells and solar modules. These agreements specify future quantities and pricing
of products to be supplied by the vendors for periods up to 12 years and there
are certain consequences, such as forfeiture of advanced deposits
and liquidated damages relating to previous purchases, in the event
that we terminate the arrangements.
As
of December 30, 2007, total liabilities associated with FIN 48 uncertain tax
positions were $4.1 million, none of which was included in "Accrued liabilities"
on the Consolidated Balance Sheets, as it is not expected to be paid within the
next twelve months. Total liabilities associated with uncertain tax positions of
$4.1 million is included in "Other long-term liabilities" on our Consolidated
Balance Sheets at December 30, 2007. Due to the complexity and uncertainty
associated with our tax positions, we cannot make a reasonably reliable estimate
of the period in which cash settlement will be made for our liabilities
associated with uncertain tax positions in "Other long-term liabilities,"
therefore, they have been excluded from the table above.
- 73
-
Off-Balance-Sheet
Arrangements
As
of December 30, 2007, we did not have any significant off-balance-sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation
S-K.
Recent
Accounting Pronouncements
See
Note 1 of Notes to our Consolidated Financial Statements for a description of
certain other recent accounting pronouncements including the expected dates of
adoption and effects on our results of operations and financial
condition.
ITEM 7A: QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
Our
exposure to market risks for changes in interest rates relates primarily to our
cash equivalents, short-term investment and long-term investment portfolio and
convertible debt.
In
fiscal 2005 and 2006, our cash equivalents consisted of money market funds and
commercial paper. As of December 30, 2007, our investment portfolio consisted of
a variety of financial instruments, including, but not limited to, money market
securities, commercial paper and corporate securities. These investments are
generally classified as available-for-sale and, consequently, are recorded on
our balance sheet at fair market value with their related unrealized gain or
loss reflected as a component of accumulated other comprehensive income (loss)
in stockholders’ equity. Due to the relatively short-term nature of our
investment portfolio, we do not believe that an immediate 10% increase in
interest rates would have a material effect on the fair market value of our
portfolio. Since we believe we have the ability to liquidate this portfolio, we
do not expect our operating results or cash flows to be materially affected to
any significant degree by a sudden change in market interest rates on our
investment portfolio.
Auction
rate securities are variable rate debt instruments with interest rates that,
unless they fail to clear at auctions, are reset approximately every seven days,
twenty-eight days, thirty-five days or six-months. The “stated” or “contractual”
maturities for these securities generally are between 20 to 30 years. The
auction rate securities are classified as available for sale under SFAS No. 115
and are recorded at fair value. Typically, the carrying value of auction rate
securities approximates fair value due to the frequent resetting of the interest
rates. At December 30, 2007, we had $50.8 million invested in auction rate
securities as compared to $13.4 million invested in auction rate securities at
December 31, 2006. As of February 29, 2008, of the ten auction rate securities
invested on December 30, 2007, four of these auction rate securities
totaling $24.1 million failed to clear at auctions. These auction rate
securities were student loans that are typically over collateralized by
pools of loans originated under the FFELP and are guaranteed by the U.S.
Department of Education, and insured. In addition, all auction rate securities
held are rated by one or more of the NRSROs as triple-A. We continue to earn
interest on these investments at the maximum contractual rate as the issuer is
obligated under contractual terms to pay penalty rates should auctions fail. We
have concluded that no other-than-temporary impairment losses occurred in the
year ended December 30, 2007 because all holdings had successful auctions
in January 2008. We will continue to analyze our auction rate securities each
reporting period for impairment and may be required to record an impairment
charge if the issuer of the auction rate securities is unable to successfully
close future auctions or does not redeem the securities.
The fair market value of our 1.25%
senior convertible debentures issued in February 2007 and 0.75% senior
convertible debentures issued in July 2007 is subject to interest rate and
market price risk due to the convertible feature of the debentures. The fair
market value of the senior convertible debentures will increase as interest
rates fall and decrease as interest rates rise. In addition, the fair market
value of the senior convertible debentures will increase as the market price of
our class A common stock increases and decrease as the market price falls. The
interest and market value changes affect the fair market value of the senior
convertible debentures but do not impact our financial position, cash flows or
results of operations due to the fixed nature of the debt obligations. As of
December 30, 2007, the estimated fair value of the senior convertible debentures
was approximately $831.9 million based on quoted market prices. A 10% increase
in quoted market prices would increase the estimated fair value of the senior
convertible debentures to approximately $915.1 million, and a 10% decrease in
the quoted market prices would decrease the estimated fair value of the senior
convertible debentures to $748.7 million.
- 74
-
Equity
Price Risk
Our
exposure to equity price risk relate to equity method investments we
hold, generally as the result of strategic investments in third parties
that are subject to considerable market risk due to their volatility.
We generally do not attempt to reduce or eliminate our market exposure in
these equity method investments. At December 30, 2007, the total carrying value
of our equity method investments was $5.3 million.
Foreign
Currency Exchange Risk
Our
exposure to adverse movements in foreign currency exchange rates is primarily
related to sales to European customers that are denominated in Euros and
procurement of certain capital equipment in Euros. Our Switzerland subsidiary
has exposure to adverse movements in foreign currency exchange rates primarily
related to inventory purchases that are denominated in U.S. dollars. For the
years ended December 30, 2007, December 31, 2006 and January 1, 2006,
approximately 55%, 68% and 70%, respectively, of our total revenue was generated
outside the United States. A hypothetical change of 10% in foreign currency
exchange rates as of December 30, 2007 could impact our Consolidated Financial
Statements or results of operations by $14.5 million based on our outstanding
forward contracts of $149.6 million and outstanding option contracts of $53.2
million. For the year ended December 31, 2006, a hypothetical change of 10% in
foreign currency exchange rates could impact our Consolidated Financial
Statements or results of operations by $14.7 million based on our outstanding
forward contracts of $127.2 million and option contracts of $16.0 million. For
the year ended January 1, 2006, a hypothetical change of 10% in foreign currency
exchange rates could impact our Consolidated Financial Statements or results of
operations by $2.6 million based on our outstanding forward contracts of $26.6
million. We currently conduct hedging activities, which involve the use of
currency forward contracts and currency option contracts. We cannot predict the
impact of future exchange rate fluctuations on our business and operating
results. In the past, we have experienced an adverse impact on our revenue and
profitability as a result of foreign currency fluctuations. We believe that we
may have increased risk associated with currency fluctuations in the
future.
- 75
-
ITEM 8: FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
SUNPOWER
CORPORATION
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page(s)
|
|
|
77
|
|
|
FINANCIAL STATEMENTS
|
|
|
78
|
|
|
79
|
|
|
80
|
|
|
81
|
|
|
82
|
|
|
83
|
|
|
131
|
- 76
-
To
the Board of Directors and Stockholders of
SunPower
Corporation:
In
our opinion, the consolidated financial statements listed in the accompanying
index appearing under Item 8 present fairly, in all material respects, the
financial position of SunPower Corporation and its subsidiaries (the “Company”)
at December 30, 2007 and December 31, 2006, and the results of their operations
and their cash flows for each of the three years in the period ended December
30, 2007 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index appearing under Item 8
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 30,
2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for
these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management’s Report on Internal Control Over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company's internal
control over financial reporting based on our audits which were integrated
audits in 2007 and 2006. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.
As
discussed in Note 17 to the consolidated financial statements, the Company
changed the manner in which it accounts for stock-based compensation in 2006.
As
discussed in Note 10 to the consolidated financial statements, the Company
changed the manner in which it accounts for uncertain tax positions in
2007.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As
described in Management’s Report on Internal Control Over Financial Reporting
appearing under Item 9A, management has excluded SunPower Corporation, Systems,
or SP Systems, formerly known as PowerLight Corporation, from its assessment of
internal control over financial reporting as of December 30, 2007 because it was
acquired by the Company in a purchase business combination during 2007. We
have also excluded SP Systems from our audit of internal control over financial
reporting. SP Systems is a wholly-owned subsidiary whose total assets and
total revenues represent 35% and 60%, respectively, of the related consolidated
financial statement amounts as of and for the year ended December 30,
2007.
|
|
/s/ PricewaterhouseCoopers
LLP
|
| San Jose, California | |
|
|
March
2, 2008
|
- 77
-
Consolidated
Balance Sheets
(In
thousands, except share and per share data)
|
December 30,
2007
|
December 31,
2006
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$
|
285,214
|
$
|
165,596
|
||||
|
Short-term
investments
|
105,453
|
16,496
|
||||||
|
Accounts
receivable, net
|
138,250
|
51,680
|
||||||
|
Costs
and estimated earnings in excess of billings
|
39,136
|
—
|
||||||
|
Inventories
|
140,504
|
22,780
|
||||||
|
Deferred
project costs
|
8,316
|
—
|
||||||
|
Advances
to suppliers, current portion
|
52,277
|
15,394
|
||||||
|
Prepaid
expenses and other current assets
|
33,110
|
16,655
|
||||||
|
Total
current assets
|
802,260
|
288,601
|
||||||
|
Restricted
cash
|
67,887
|
—
|
||||||
| Long-term investments | 29,050 |
—
|
||||||
|
Property,
plant and equipment, net
|
377,994
|
202,428
|
||||||
|
Goodwill
|
184,684
|
2,883
|
||||||
|
Intangible
assets, net
|
50,946
|
14,049
|
||||||
|
Advances
to suppliers, net of current portion
|
108,943
|
62,242
|
||||||
|
Other
long-term assets
|
31,974
|
6,633
|
||||||
|
Total
assets
|
$
|
1,653,738
|
$
|
576,836
|
||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
119,869
|
$
|
26,534
|
||||
|
Accounts
payable to Cypress
|
4,854
|
2,909
|
||||||
|
Accrued
liabilities
|
79,434
|
18,585
|
||||||
|
Billings
in excess of costs and estimated earnings
|
69,900
|
—
|
||||||
|
Customer
advances, current portion
|
9,250
|
12,304
|
||||||
|
Convertible
debt
|
425,000
|
—
|
||||||
|
Total
current liabilities
|
708,307
|
60,332
|
||||||
|
Deferred
tax liability
|
6,213
|
46
|
||||||
|
Customer
advances, net of current portion
|
60,153
|
27,687
|
||||||
|
Other
long-term
liabilities
|
14,975
|
—
|
||||||
|
Total
liabilities
|
789,648
|
88,065
|
||||||
|
Commitments
and Contingencies (Note 11)
|
||||||||
|
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;
84,803,006 and 69,849,369 shares issued; 84,710,244 and 69,849,369 shares
outstanding at December 30, 2007 and December 31, 2006,
respectively
|
85
|
70
|
||||||
|
Additional
paid-in capital
|
883,033
|
522,819
|
||||||
|
Accumulated
other comprehensive income (loss)
|
5,762
|
(2,101
|
)
|
|||||
|
Accumulated
deficit
|
(22,815
|
)
|
(32,017
|
)
|
||||
|
866,065
|
488,771
|
|||||||
|
Less:
shares of common stock held in treasury, at cost; 112,762 shares and none
at December 30, 2007 and December 31, 2006, respectively
|
(1,975
|
)
|
—
|
|||||
|
Total
stockholders’ equity
|
864,090
|
488,771
|
||||||
|
Total
liabilities and stockholders’ equity
|
$
|
1,653,738
|
$
|
576,836
|
||||
The
accompanying notes are an integral part of these financial
statements.
- 78
-
Consolidated
Statements of Operations
(In
thousands, except per share data)
|
Year Ended
|
|||||||||||
|
December 30,
2007
|
December 31,
2006
|
January
1,
2006
|
|||||||||
|
Revenue:
|
|||||||||||
|
Systems
|
$
|
464,178
|
$
|
—
|
$
|
—
|
|||||
|
Components
|
310,612
|
236,510
|
78,736
|
||||||||
|
774,790
|
236,510
|
78,736
|
|||||||||
|
Costs
and expenses:
|
|||||||||||
|
Cost
of systems revenue
|
386,511
|
—
|
—
|
||||||||
|
Cost
of components revenue
|
240,475
|
186,042
|
74,353
|
||||||||
|
Research
and development
|
13,563
|
9,684
|
6,488
|
||||||||
|
Sales,
general and administrative
|
108,256
|
21,677
|
10,880
|
||||||||
|
Purchased
in-process research and development
|
9,575
|
—
|
—
|
||||||||
|
Impairment
of acquisition-related intangibles
|
14,068
|
—
|
—
|
||||||||
|
Total
costs and expenses
|
772,448
|
217,403
|
91,721
|
||||||||
|
Operating
income (loss)
|
2,342
|
19,107
|
(12,985
|
)
|
|||||||
|
Interest
income
|
13,882
|
10,086
|
1,591
|
||||||||
|
Interest
expense
|
(5,071
|
)
|
(1,809
|
)
|
(3,185
|
)
|
|||||
|
Other
income (expense), net
|
(7,871
|
)
|
1,077
|
(1,214
|
)
|
||||||
|
Income
(loss) before income taxes
|
3,282
|
28,461
|
(15,793
|
)
|
|||||||
|
Income
tax provision (benefit)
|
(5,920
|
)
|
1,945
|
50
|
|||||||
|
Net
income (loss)
|
$
|
9,202
|
$
|
26,516
|
$
|
(15,843
|
)
|
||||
|
Net
income (loss) per share:
|
|||||||||||
|
Basic
|
$
|
0.12
|
$
|
0.40
|
$
|
(0.68
|
)
|
||||
|
Diluted
|
$
|
0.11
|
$
|
0.37
|
$
|
(0.68
|
)
|
||||
|
Weighted-average
shares:
|
|||||||||||
|
Basic
|
75,413
|
65,864
|
23,306
|
||||||||
|
Diluted
|
81,227
|
71,087
|
23,306
|
||||||||
The
accompanying notes are an integral part of these financial
statements.
- 79
-
Consolidated
Statements of Stockholders’ Equity
(In
thousands)
|
Redeemable
Convertible
Preferred Stock
|
Common
Stock
|
|||||||||||||||||||||||||||||||||||
|
Shares
|
Value
|
Shares
|
Value
|
Additional
Paid-in
Capital
|
Treasury
Stock
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Accumulated
Deficit
|
Total
Stockholders’
Equity
(Deficit)
|
||||||||||||||||||||||||||||
|
Balances
at January 2, 2005
|
12,915 | $ | 8,552 | 2 | $ | — | $ | 34,367 | $ | — | $ | (2,341 | )) | $ | (42,690 | ) | $ | (10,664 | ) | |||||||||||||||||
|
Issuance
of common stock upon exercise of options
|
— | — | 217 | — | 177 | — | — | — | 177 | |||||||||||||||||||||||||||
|
Issuance
of common stock to Cypress upon conversion of debt
|
— | — | 20,169 | 20 | 68,310 | — | — | — | 68,330 | |||||||||||||||||||||||||||
|
Issuance
of common stock to Cypress upon conversion of accounts
payable
|
— | — | 3,060 | 3 | 14,712 | — | — | — | 14,715 | |||||||||||||||||||||||||||
|
Issuance
of common stock to Cypress
|
— | — | 6,346 | 6 | 27,366 | — | — | — | 27,372 | |||||||||||||||||||||||||||
|
Issuance
of series two preferred stock to Cypress
|
14,000 | 7,000 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Issuance
of series two preferred stock to Cypress upon conversion of
debt
|
18,000 | 9,000 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Issuance
of common stock to Cypress upon conversion of redeemable convertible
preferred stock
|
(44,915 | ) | (24,552 | ) | 22,458 | 23 | 24,529 | — | — | — | 24,552 | |||||||||||||||||||||||||
|
Issuance
of restricted stock to employees
|
— | — | 15 | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Compensation
on stock options issued to non-employees
|
— | — | — | — | 1,556 | — | — | — | 1,556 | |||||||||||||||||||||||||||
|
Proceeds
from initial public offering, net of offering expenses
|
— | — | 8,825 | 9 | 145,600 | — | — | — | 145,609 | |||||||||||||||||||||||||||
|
Net
unrealized gain on derivatives, net of tax
|
— | — | — | — | — | — | 2,846 | — | 2,846 | |||||||||||||||||||||||||||
|
Net
loss
|
— | — | — | — | — | — | — | (15,843 | ) | (15,843 | ) | |||||||||||||||||||||||||
|
Balances
at January 1, 2006
|
— | — | 61,092 | 61 | 316,617 | — | 505 | (58,533 | ) | 258,650 | ||||||||||||||||||||||||||
|
Issuance
of common stock upon exercise of options
|
— | — | 1,529 | 2 | 3,867 | — | — | — | 3,869 | |||||||||||||||||||||||||||
|
Issuance
of restricted stock to employees, net of cancellations
|
— | — | 228 | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Issuance
of common stock in relation to follow-on offering, net of offering
expenses
|
— | — | 7,000 | 7 | 197,424 | — | — | — | 197,431 | |||||||||||||||||||||||||||
|
Stock-based
compensation expense
|
— | — | — | — | 4,911 | — | — | — | 4,911 | |||||||||||||||||||||||||||
|
Net
unrealized loss on derivatives and investments, net of tax
|
— | — | — | — | — | — | (2,606 | )) | — | (2,606 | ) | |||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | — | — | 26,516 | 26,516 | |||||||||||||||||||||||||||
|
Balances
at December 31, 2006
|
— | — | 69,849 | 70 | 522,819 | — | (2,101 | )) | (32,017 | ) | 488,771 | |||||||||||||||||||||||||
|
Issuance
of common stock upon exercise of options
|
— | — | 2,817 | 3 | 8,718 | — | — | — | 8,721 | |||||||||||||||||||||||||||
|
Issuance
of restricted stock to employees, net of cancellations
|
— | — | 608 | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Issuance
of common stock in relation to follow-on offering, net of offering
expenses
|
— | — | 2,695 | 3 | 167,376 | — | — | — | 167,379 | |||||||||||||||||||||||||||
|
Issuance
of common stock in relation to share lending arrangements
|
— | — | 4,747 | 5 | — | — | — | — | 5 | |||||||||||||||||||||||||||
|
Issuance
of common stock for purchase acquisition
|
— | — | 4,107 | 4 | 111,262 | — | — | — | 111,266 | |||||||||||||||||||||||||||
|
Stock
options assumed in relation to acquisition
|
— | — | — | — | 21,280 | — | — | — | 21,280 | |||||||||||||||||||||||||||
|
Stock-based
compensation expense
|
— | — | — | — | 51,578 | — | — | — | 51,578 | |||||||||||||||||||||||||||
|
Purchases
of treasury stock
|
— | — | (113 | ) | — | — | (1,975 | ) | — | — | (1,975 | ) | ||||||||||||||||||||||||
|
Cumulative
translation adjustment
|
— | — | — | — | — | — | 9,746 | — | 9,746 | |||||||||||||||||||||||||||
|
Net
unrealized loss on derivatives and investments, net of tax
|
— | — | — | — | — | — | (1,883 | ) | — | (1,883 | ) | |||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | — | — | 9,202 | 9,202 | |||||||||||||||||||||||||||
|
Balances
at December 30, 2007
|
— | $ | — | 84,710 | $ | 85 | $ | 883,033 | $ | (1,975 | ) | $ | 5,762 | $ | (22,815 | ) | $ | 864,090 | ||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
- 80
-
Consolidated
Statements of Comprehensive Income (Loss)
(In
thousands)
|
Year Ended
|
||||||||||
|
December 30,
2007
|
December 31,
2006
|
January
1,
2006
|
||||||||
|
Net
income (loss)
|
$
|
9,202
|
$
|
26,516
|
$
|
(15,843
|
)
|
|||
|
Other
comprehensive income (loss):
|
||||||||||
|
Cumulative
translation adjustment
|
9,746
|
—
|
—
|
|||||||
|
Unrealized
gain (loss) on derivatives and investments, net of tax
|
(1,883
|
)
|
(2,606
|
)
|
2,846
|
|||||
|
Total
comprehensive income (loss)
|
$
|
17,065
|
$
|
23,910
|
$
|
(12,997
|
)
|
|||
The
accompanying notes are an integral part of these financial
statements.
- 81
-
Consolidated
Statements of Cash Flows
(In
thousands)
|
Year Ended
|
||||||||||||
|
December
30,
2007
|
December
31,
2006
Note
1
|
January
1,
2006
Note
1
|
||||||||||
|
Cash
flows from operating activities:
|
|
|
||||||||||
|
Net
income (loss)
|
$
|
9,202
|
$
|
26,516
|
$
|
(15,843
|
)
|
|||||
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||||||
|
Interest
expense related to warrants granted and accrued interest on notes
payable
|
—
|
—
|
3,381
|
|||||||||
|
Depreciation
|
27,335
|
16,363
|
7,147
|
|||||||||
|
Amortization
of intangible assets
|
28,540
|
4,690
|
4,704
|
|||||||||
|
Amortization
of debt issuance costs
|
1,710
|
—
|
—
|
|||||||||
|
Impairment
of acquisition-related intangibles
|
14,068
|
—
|
—
|
|||||||||
|
Write-off
of unamortized debt issuance costs
|
8,260
|
—
|
—
|
|||||||||
|
Impairment
charge related to equipment
|
—
|
—
|
461
|
|||||||||
|
Stock-based
compensation
|
51,212
|
4,864
|
1,556
|
|||||||||
|
Purchased
in-process research and development
|
9,575
|
—
|
—
|
|||||||||
|
(Gain)
loss on sale of fixed assets
|
(20
|
)
|
(16
|
)
|
82
|
|||||||
|
Deferred
income taxes and other tax liabilities
|
(9,424
|
)
|
(290
|
)
|
1,897
|
|||||||
|
Changes
in operating assets and liabilities, net of effect of
acquisition:
|
||||||||||||
|
Accounts
receivable
|
(42,749
|
)
|
(26,182
|
)
|
(20,940
|
)
|
||||||
|
Costs
and estimated earnings in excess of billings
|
(32,634
|
)
|
—
|
—
|
||||||||
|
Inventories
|
(87,033
|
)
|
(9,586
|
)
|
(8,731
|
)
|
||||||
|
Prepaid
expenses and other assets
|
(11,516
|
)
|
(3,697
|
)
|
63
|
|||||||
|
Deferred
project costs
|
17,804
|
—
|
—
|
|||||||||
|
Advances
to suppliers
|
(83,584
|
)
|
(77,358
|
)
|
(278
|
)
|
||||||
|
Accounts
payable and other accrued liabilities
|
40,346
|
15,763
|
(1,135
|
) | ||||||||
|
Accounts
payable to Cypress
|
1,945
|
376
|
6,139
|
|||||||||
|
Billings
in excess of costs and estimated earnings
|
29,923
|
—
|
—
|
|||||||||
|
Customer
advances
|
29,412
|
2,591
|
37,400
|
|||||||||
|
Net
cash provided by (used in) operating activities
|
2,372
|
(45,966
|
)
|
15,903
|
||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Increase
in restricted cash
|
(63,176
|
)
|
—
|
—
|
||||||||
|
Purchase
of property, plant and equipment
|
(193,484
|
)
|
(100,292
|
)
|
(69,748
|
)
|
||||||
|
Purchase
of available-for-sale securities
|
(209,607
|
)
|
(33,996
|
)
|
—
|
|||||||
|
Proceeds
from sales of available-for-sale securities
|
91,600
|
17,500
|
—
|
|||||||||
|
Proceeds
from sale of fixed assets
|
90
|
91
|
1,251
|
|||||||||
|
Note
receivable from SP Systems
|
—
|
(10,000
|
)
|
—
|
||||||||
|
Cash
paid for acquisition, net of cash acquired
|
(98,645
|
)
|
—
|
—
|
||||||||
|
Investment
in joint venture
|
(896
|
)
|
(4,994
|
)
|
—
|
|||||||
|
Other
long-term assets
|
—
|
(1,639
|
)
|
—
|
||||||||
|
Net
cash used in investing activities
|
(474,118
|
)
|
(133,330
|
)
|
(68,497
|
)
|
||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from issuance of convertible debt
|
425,000
|
—
|
—
|
|||||||||
|
Convertible
debt issuance costs
|
(10,942
|
)
|
—
|
—
|
||||||||
|
Proceeds
from issuance of common stock under share lending
arrangements
|
5
|
—
|
—
|
|||||||||
|
Proceeds
from debt obligations to Cypress
|
—
|
—
|
12,500
|
|||||||||
|
Proceeds
from issuance of preferred stock to Cypress
|
—
|
—
|
7,000
|
|||||||||
|
Proceeds
from issuance of common stock to Cypress
|
—
|
—
|
27,372
|
|||||||||
|
Proceeds
from public issuance of common stock, net of offering
expenses
|
—
|
—
|
145,609
|
|||||||||
|
Proceeds
from follow-on offering of common stock, net of offering
expenses
|
167,379
|
197,431
|
—
|
|||||||||
|
Principal
payments on notes payable to Cypress
|
—
|
—
|
(248
|
)
|
||||||||
|
Principal
payments on line of credit and notes payable
|
(3,563
|
)
|
—
|
—
|
||||||||
|
Proceeds
from exercise of stock options
|
8,721
|
3,869
|
177
|
|||||||||
|
Purchases
of stock for tax withholding obligations on vested restricted
stock
|
(1,975
|
)
|
—
|
—
|
||||||||
|
Net
cash provided by financing activities
|
584,625
|
201,300
|
192,410
|
|||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
6,739
|
—
|
—
|
|||||||||
|
Net
increase in cash and cash equivalents
|
119,618
|
22,004
|
139,816
|
|||||||||
|
Cash
and cash equivalents at beginning of period
|
165,596
|
143,592
|
3,776
|
|||||||||
|
Cash
and cash equivalents at end of period
|
$
|
285,214
|
$
|
165,596
|
$
|
143,592
|
||||||
|
Non-cash
transactions:
|
||||||||||||
|
Issuance
of common stock for purchase acquisition
|
$
|
111,266
|
$
|
—
|
$
|
—
|
||||||
|
Stock
options assumed in relation to acquisition
|
21,280
|
—
|
—
|
|||||||||
|
Additions
to property, plant and equipment acquired under accounts payable and other
accrued liabilities
|
8,436 | 8,015 | 1,868 | |||||||||
|
Change
in goodwill relating to adjustments to acquired net assets
|
6,640
|
—
|
—
|
|||||||||
|
Relative
fair value of warrants issued (reduction related to debt
conversion)
|
—
|
—
|
(7,706
|
)
|
||||||||
|
Conversion
of notes payable to preferred stock
|
—
|
—
|
9,000
|
|||||||||
|
Conversion
of notes payable to common stock
|
—
|
—
|
76,036
|
|||||||||
|
Conversion
of accounts payable to common stock
|
—
|
—
|
14,715
|
|||||||||
|
Conversion
of preferred stock to common stock
|
—
|
—
|
24,552
|
|||||||||
|
Supplemental
cash flow information:
|
||||||||||||
|
Cash
paid for interest
|
3,497
|
1,690
|
—
|
|||||||||
|
Cash
paid for income taxes
|
887
|
—
|
—
|
|||||||||
The
accompanying notes are an integral part of these financial
statements.
- 82
-
Notes
to Consolidated Financial Statements
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
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. The Company believes the acquisition will enable it to develop the
next generation of solar products and solutions that will accelerate reduction
in solar system cost to compete with retail electric rates without incentives
and simplify and improve customer experience. The total purchase consideration
and future stock compensation for the transaction was $334.4 million, consisting
of $120.7 million in cash and $213.7 million in common stock, restricted stock,
stock options and related acquisition costs (see Note 4).
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 December 30, 2007, Cypress owned approximately 44.5
million shares of the Company’s class B common stock, which represented
approximately 56% of the total outstanding shares of the Company’s common stock,
or approximately 51% 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, legal, tax, treasury, information technology, 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 3 for additional
information on the transactions with Cypress.
As
of December 30, 2007, the Company had an accumulated deficit of $22.8 million
and, with the exception of fiscal 2006 and 2007, has a history of operating
losses. The Company is subject to a number of risks 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, difficulties in maintaining or increasing the
Company’s growth rate and managing such growth, and accurately predicting
warranty claims.
Summary
of Significant Accounting Policies
Principles
of Consolidation
The
Consolidated Financial Statements are prepared in accordance with accounting
principles generally accepted in the United States of America ("United States"
or "U.S.") and include the accounts of the Company and all of its subsidiaries.
Intercompany transactions and balances have been eliminated in
consolidation.
- 83
-
Reclassifications
Certain
prior period balances have been reclassified to conform to the current period
presentation in our Consolidated Financial Statements and the accompanying
notes. Such reclassification had no effect on previously reported results of
operations or accumulated deficit.
Fiscal
Years
The
Company reports results of operations on the basis of 52- or 53-week periods,
ending on the Sunday closest to December 31. Fiscal 2007 ended on
December 30, 2007, fiscal 2006 ended on December 31, 2006 and fiscal 2005
ended on January 1, 2006. Each of fiscal 2007, 2006 and 2005 consisted of
52 weeks.
Management
Estimates
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, certain accrued liabilities including accrued warranty
reserves and income taxes and tax valuation allowances. Actual results could
differ from those estimates.
Fair
Value of Financial Instruments
The
fair value of a financial instrument is the amount at which the instrument could
be exchanged in a current transaction between willing parties. The carrying
values of cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate their respective fair values due to their
short-term maturities. The Company’s outstanding convertible debt is recorded at
its carrying values, not its estimated fair values. Investments in
available-for-sale securities are carried at fair value based on quoted market
prices or estimated based on quoted market prices for financial instruments with
similar characteristics. Unrealized gains and losses of the Company’s
available-for-sale securities are excluded from earnings and reported as a
component of other comprehensive income (loss). Additionally, the Company
assesses whether an other-than-temporary impairment loss on its
available-for-sale securities has occurred due to declines in fair value or
other market conditions. Declines in fair value that are considered other than
temporary are recorded as an impairment of investments in the Consolidated
Statements of Operations.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is defined as the change in equity during a period from non-owner
sources. The Company’s comprehensive income (loss) for each period presented is
comprised of (i) the Company’s net income (loss); (ii) foreign currency
translation adjustment of the Company’s wholly-owned foreign subsidiaries whose
assets and liabilities are translated from their respective functional
currencies at exchange rates in effect at the balance sheet date, and revenues
and expenses are translated at average exchange rates prevailing during the
applicable period and (iii) changes in unrealized gains or losses, net of tax,
for derivatives designated as cash flow hedges (see Note 12) and
available-for-sale investments carried at their fair value based on quoted
market prices as of the balance sheet dates (see Note 8). Comprehensive income
(loss) is presented in the Consolidated Statements of Comprehensive Income
(Loss).
Cash
and Cash Equivalents
Highly
liquid investments with original or remaining maturities of ninety days or less
at the date of purchase are considered cash equivalents.
Cash
in Restricted Accounts
As
of December 30, 2007, the Company provided security for advance
payments received from a customer in the form of $20.0 million held in
an escrow account. Commencing in 2010 and continuing through 2019, the balance
in the escrow account will be reduced as the advance payments are to be applied
as a credit against the customer’s polysilicon purchases from the Company. Such
polysilicon is expected to be used by the customer to manufacture ingots, and
potentially wafers, which are to be sold to the Company under an ingot supply
agreement. The funds held in the escrow account may be released in
exchange for letters of credit issued under the secured letter of credit
facility at any time. In addition, the Company enters into various contractual
agreements to build turnkey photovoltaic projects for customers in Europe, Korea
and the United States. As part of the contractual agreements with the
customers in Europe and Korea, the Company may receive advance payments that are
secured by providing letters of credit issued by Wells Fargo Bank, National
Association (“Wells Fargo”) to the customers. In certain customer contracts, the
Company is required to provide construction period letters of credit, to assure
the customers of contract completion, for a period of approximately one
year. In many cases, the Company is also asked to issue warranty period
letters of credit to assure the customers that the Company will meet its
warranty obligations, typically for the first two years after the project is
installed. The Company issues letters of credit for such purposes through
its line of credit facility with Wells Fargo. The credit agreement with
Wells Fargo requires the Company to
- 84
-
collateralize
the full value of letters of credit issued under the secured letter of credit
facility for such purposes with cash placed in an interest bearing restricted
account with Wells Fargo. As long as the secured letters of credit are
outstanding, the Company will not be able to withdraw the associated funds in
the restricted account, though all interest earned on such restricted funds can
be withdrawn periodically. As of December 30, 2007, outstanding secured letters
of credit issued by Wells Fargo totaled $47.9 million, of which $45.4 million
relate to contractual agreements with customers in Europe and Korea (see Note
14).
Short-Term
and Long-Term Investments
The
Company invests in auction rate securities which are classified as short-term
investments or long-term investments and carried at their market values. Such
securities are bought and sold in the marketplace through a bidding process
sometimes referred to as a “Dutch auction.” After the initial issuance of the
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. Historically, all auction rate securities were classified as
short-term investments because we have been able to liquidate these at our
direction at the reset period. When auction rate securities fail to clear at
auction, which occurred with respect to six securities in February 2008,
and we are unable to estimate when the impacted auction rate securities will
clear at the next auction, we classify these as long-term consistent with the
stated contractual maturities of the securities. The “stated” or “contractual”
maturities for these securities generally are between 20 to 30
years.
The
Company also invests in money market securities, commercial paper and corporate
securities with maturities greater than ninety days. In general, investments
with original maturities of greater than ninety days and remaining maturities of
less than one year are classified as short-term investments. Investments with
maturities beyond one year may be classified as short-term based on their highly
liquid nature and because such investments represent the investment of cash that
is available for current operations. Despite the long-term maturities, the
Company has the ability and intent, if necessary, to liquidate any of these
investments in order to meet the Company’s working capital needs within its
normal operating cycles. The Company has classified these investments as
available-for-sale securities under Statement of Financial Accounting Standards
(“SFAS”) No. 115, “Accounting for Investment in Certain Debt and Equity
Securities” (“SFAS No. 115”).
Inventories
Inventories
are stated at the lower of standard cost or net realizable value. Standard cost
approximates actual cost on a first-in, first-out basis. The Company routinely
evaluates quantities and values of inventory in light of current market
conditions and market trends, and records reserves for quantities in excess of
demand and product obsolescence. The evaluation may take into consideration
historic usage, expected demand, anticipated sales price, new product
development schedules, the effect new products might have on the sale of
existing products, product obsolescence, customer concentrations, product
merchantability and other factors. Market conditions are subject to change and
actual consumption of inventory could differ from forecasted demand. The
Company’s products have a long life cycle and obsolescence has not historically
been a significant factor in the valuation of inventories. The Company also
regularly reviews the cost of inventory against their estimated market value and
records a lower of cost or market reserve for inventories that have a cost in
excess of estimated market value. Inventory reserves, once recorded, are not
reversed until the inventories have been subsequently disposed of.
Deferred
Project Costs
Deferred
project costs represent uninstalled materials on contracts for which title had
transferred to the customer and are recognized as deferred assets until
installation. As of December 30, 2007, deferred project costs totaled $8.3
million.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed for financial reporting purposes using
the straight-line method over the estimated useful lives of the assets as
presented below. Leasehold improvements are amortized over the shorter of the
estimated useful lives of the assets or the remaining term of the lease. Repairs
and maintenance costs are expensed as incurred.
|
Useful Lives
in
Years
|
||||
|
Building
|
15
|
|||
|
Manufacturing
equipment
|
2 to 7
|
|||
|
Computer
equipment
|
2
to 7
|
|||
|
Furniture
and fixtures
|
3
to 5
|
|||
|
Leasehold
improvements
|
5 to 15
|
|||
Long-Lived
Assets
The
Company evaluates its long-lived assets, including property, plant and equipment
and intangible assets with finite lives, for impairment whenever events or
changes in circumstances indicate that the carrying value of such assets may not
be recoverable in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Factors
considered important that could result in an impairment review include
significant underperformance relative to expected historical or projected future
operating results, significant changes in the manner of use of acquired assets
and significant negative industry or economic trends. Impairments are recognized
based on the difference between the fair value of the asset and its carrying
value. Fair value is generally measured based on either quoted market prices, if
available, or discounted cash flow analyses.
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Goodwill
and Intangible Assets
The
Company accounts for goodwill and other intangibles in accordance with SFAS
No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Goodwill
and intangibles with indefinite lives are not amortized but are tested for
impairment on an annual basis or whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be recoverable. The
Company performs its annual test of impairment for goodwill in the third quarter
of its fiscal year. Intangible assets with finite useful lives are amortized
using the straight-line method over their useful lives ranging primarily from 2
to 6 years and are reviewed for impairment in accordance with SFAS
No. 144.
Product
Warranties
The
Company warrants or guarantees the performance of solar panels that the Company
manufactures at certain levels of conversion efficiency for extended periods,
often as long as 25 years. It also warrants that the solar cells will be free
from defects for at least ten years. In addition, the Company generally provides
warranty on systems they install for a period of five years. The
Company also 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. Therefore, 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 warranty reserve includes
specific accruals for known product and system issues and an accrual for an
estimate of incurred but not reported product and system issues based on
historical activity (see Note 11).
Revenue
Recognition
Construction
Contracts
Systems
segment revenue is primarily comprised of engineering, procurement and
construction (“EPC”) projects which are governed by customer contracts that
require the Company to deliver functioning solar power systems and are generally
completed within 6 to 36 months from the date of the contract signing. In
addition, the systems segment also derives revenues from sales of certain solar
power products and services that are smaller in scope than an EPC contract. The
Company recognizes revenues from fixed price contracts under AICPA Statement of
Position (“SOP”) 81-1, “Accounting for Performance of Construction-Type and
Certain Production-Type Contracts,” using the percentage-of-completion method of
accounting. Under this method, systems revenue arising from fixed price
construction contracts is recognized as work is performed based on the
percentage of incurred costs to estimated total forecasted costs utilizing the
most recent estimates of forecasted costs.
Incurred
costs include all direct material, labor, subcontract costs, and those indirect
costs related to contract performance, such as indirect labor, supplies and
tools. Job material costs are included in incurred costs when the job materials
have been installed. Where contracts stipulate that title to job materials
transfers to the customer before installation has been performed, revenue is
deferred and recognized upon installation, in accordance with the
percentage-of-completion method of accounting. Job materials are considered
installed materials when they are permanently attached or fitted to the solar
power system as required by the job’s engineering design.
Due
to inherent uncertainties in estimating cost, job costs estimates are reviewed
and/or updated by management working within the systems segment. The systems
segment determines the completed percentage of installed job materials at the
end of each month; generally this information is also reviewed with the
customer’s on-site representative. The completed percentage of installed job
materials is then used for each job to calculate the month-end job material
costs incurred. Direct labor, subcontractor, and other costs are charged to
contract costs as incurred. Provisions for estimated losses on uncompleted
contracts, if any, are recognized in the period in which the loss first becomes
probable and reasonably estimable. Contracts may include profit incentives such
as milestone bonuses. These profit incentives are included in the contract value
when their realization is reasonably assured.
As
of December 30, 2007, the asset “Costs and estimated earnings in excess of
billings,” which represents revenues recognized in excess of amounts billed, was
$39.1 million. The liability “Billings in excess of costs and estimated
earnings,” which represents billings in excess of revenues recognized, was $69.9
million. Ending balances in “Costs and estimated earnings in excess of billings”
and “Billings in excess of costs and estimated earnings” are highly dependent on
contractual billing schedules which are not necessarily related to the timing of
revenue recognition.
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Service
Agreements
The
Company recognizes revenues for service agreements related to construction
contracts ratably over the service agreement term and annual service agreement
fees are usually prepaid by customers. The Company recognizes revenues for
energy efficiency consulting services on a cost plus basis. Systems revenue from
these service agreements were not significant for the year ended December 30,
2007.
New
Jersey Renewable Energy Credits
Solar
renewable energy certificates (“SRECs”) are intangible assets, measured in
megawatt-hours, that encompass the environmental benefit associated with
producing solar energy. The Company purchases SRECs from solar installation
owners in New Jersey, and primarily sells SRECs to entities that must either
retire a certain volume of SRECs each year or face much higher alternative
compliance payments. The Company recognizes revenues for New Jersey renewable
energy credit (“REC”) sales when the RECs are delivered to the customers under
the contract terms and cash collections are reasonably assured. Systems revenue
from REC sales was not significant for the year ended December 30,
2007.
Components
Products
The
Company sells its components products, as well as balance of systems projects
from the systems segment, directly to system integrators, original equipment
manufacturers (“OEMs”) and value-added resellers (“VARs”) and
recognizes revenue, net of accruals for estimated sales returns, when persuasive
evidence of an arrangement exists, delivery of the product has occurred and
title and risk of loss has passed to the customer, the sales price is fixed or
determinable, collectibility of the resulting receivable is reasonably assured
and the rights and risks of ownership have passed to the customer. Other than
standard warranty obligations, there are no rights of return and there are no
significant post-shipment obligations, including installation, training or
customer acceptance clauses, with any of its customers that could have an impact
on revenue recognition. As such, the Company records a trade receivable for the
selling price when the above conditions are met, and reduces inventory for the
carrying value of goods shipped. The Company’s revenue recognition policy is
consistent across its product lines and sales practices are consistent across
all geographic areas. In addition, the Company records a charge to selling
expense and a credit to allowance for doubtful accounts when customer accounts
receivable are deemed uncollectible. Components revenues under VAR contracts
were $113.8 million, $63.6 million and $1.3 million in the years ended December
30, 2007, December 31, 2006 and January 1, 2006, respectively.
The
provision for estimated sales returns on product sales is recorded in the same
period the related revenues are recorded. These estimates are based on
historical sales returns, analysis of credit memo data and other known factors.
Actual returns could differ from these estimates. The Company recorded charges
for sales returns on product sales of $2.2 million, $0.8 million and $0.1
million in fiscal 2007, 2006 and 2005, respectively. Amounts utilized
against the sales return allowance aggregated $2.2 million, $0.5 million and
none in fiscal 2007, 2006 and 2005, respectively. The allowance for sales
returns was $0.4 million as of December 30, 2007 and December 31,
2006.
Shipping
and Handling Costs
The
Company records costs related to shipping and handling in cost of
revenue.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising expense totaled approximately $2.3
million, $0.8 million and $0.2 million in the years ended December 30,
2007, December 31, 2006 and January 1, 2006, respectively.
Research
and Development Costs
Research
and development costs consist primarily of compensation and related costs for
personnel, materials, supplies and equipment depreciation. All research and
development costs are expensed as incurred. In the third quarter of 2007, the
Company signed a Solar America Initiative agreement with the United
States Department of Energy in which it was awarded $8.5 million in the
first budgetary period. Total funding for the three-year effort is estimated to
be $24.7 million. The Company’s cost share requirement under this program,
including lower-tier subcontract awards, is anticipated to be $27.9 million.
This contract replaced its three-year cost-sharing research and development
project with the National Renewable Energy Laboratory, entered into in March
2005, to fund up to $3.0 million or half of the project costs to design the
Company’s next generation solar panels. Amounts invoiced under these
arrangements are offset against research and development expense as costs are
incurred in accordance with the agreements with the government agency. For the
fiscal years ended December 30, 2007, December 31, 2006 and January 1,
2006, the Company invoiced $3.6 million, $0.8 million and $0.5 million,
respectively, for work performed, which was recorded as an offset to research
and development expense.
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-
Translation
of Foreign Currencies
The
Company uses the United States dollar predominately as its functional
currency. Accordingly, assets and liabilities of its subsidiaries are translated
using exchange rates in effect at the end of the period, except for non-monetary
assets, such as property, plant and equipment, which are translated using
historical exchange rates. Revenues and costs are translated using average
exchange rates for the period, except for income items related to non-monetary
assets and liabilities, such as depreciation, that are translated using
historical exchange rates. The Company includes gains or losses from foreign
currency translation in other income (expense), net with the other hedging
activities described in Note 12 and were not significant to the Consolidated
Statements of Operations for the periods presented. Certain foreign subsidiaries
designate the local currency as their functional
currency, and the Company records the translation of their assets and
liabilities into U.S. dollars at the balance sheet date, and the
translation of their revenues and expenses into U.S. dollars using average
exchange rates for the period, as translation adjustments and includes them as a
component of accumulated other comprehensive income (loss) in the Consolidated
Balance Sheets. As of December 30, 2007 and December 31, 2006, the Company
had Euro-denominated accounts receivable of 53.7 million (approximately $79.0
million) and 20.2 million (approximately $26.6 million), respectively. In
addition, as of December 30, 2007 and December 31, 2006, the Company had a
Euro-denominated customer advance (see Note 13) of 19.7 million
(approximately $29.0 million) and 25.1 million (approximately $33.1
million), respectively.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are primarily cash, cash equivalents and investments, hedging instruments
and trade accounts receivable. The Company’s investment policy requires cash and
cash equivalents and investments to be placed with high-credit quality
institutions and to limit the amount of credit risk from any one issuer. The
Company performs ongoing credit evaluations of its customers’ financial
condition whenever deemed necessary and generally does not require collateral.
The Company maintains an allowance for doubtful accounts receivable based upon
the expected collectibility of all accounts receivable, which takes into
consideration an analysis of historical bad debts, specific customer
creditworthiness and current economic trends. The allowance for doubtful
accounts was $1.4 million and $0.6 million as of December 30, 2007 and
December 31, 2006, respectively. For the fiscal years ended December 30,
2007, December 31, 2006 and January 1, 2006, the Company provided $0.8
million, $0.3 million and $0.3 million, respectively, for allowance for doubtful
accounts. During the fiscal year ended December 30, 2007, December 31, 2006 and
January 1, 2006, the Company wrote off zero, $32,000 and zero of bad debts,
respectively. One customer accounted for 21% of accounts receivable as of
December 30, 2007. Three customers accounted for 34%, 33% and 12% of
accounts receivable as of December 31, 2006.
Income
Taxes
For
financial reporting purposes, income tax expense and deferred income tax
balances were calculated as if the Company were a separate entity and had
prepared its own separate tax return. Deferred tax assets and liabilities are
recognized for temporary differences between financial statement and income tax
bases of assets and liabilities. Valuation allowances are provided against
deferred tax assets when management cannot conclude that it is more likely than
not that some portion or all of the deferred tax asset will be realized. The
Company accrues interest and penalties on tax contingencies as required by the
Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes, and Related Implementation Issues” (“FIN 48”)
and SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). This
interest and penalty accrual is classified as income tax provision (benefit) in
the Consolidated Statements of Operations and was not material.
The
Company filed separate U.S. federal tax returns up to November 2004. From
November 8, 2004 through June 2006, the Company filed U.S. federal
consolidated tax returns with Cypress. From December 2002 through June
2006, the Company filed combined California returns with Cypress as a member of
Cypress’ entity group. Effective with the closing of our public offering of
common stock in June 2006, the Company no longer files federal and most state
consolidated tax returns with Cypress. Cypress and the Company have entered into
a tax sharing agreement providing for each company’s obligations concerning
various tax liabilities (see Notes 3 and 10).
Recent
Accounting Pronouncements
In
September 2006, the FASB issued 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 and will
- 88
-
be
adopted by the Company in the first quarter of fiscal 2008. In December 2007, the FASB
released FASB Staff Position FAS 157-b—Effective Date of FASB Statement
No. 157, which was adopted in February 2008, 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 is in the process of studying the impact of this interpretation on its
financial accounting and reporting.
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 will be adopted by the
Company in the first quarter of fiscal 2008. The Company is in the process
of studying the impact of this interpretation on its financial accounting and
reporting.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”), which replaces SFAS No. 141,
"Business Combinations" ("SFAS No. 141"). SFAS No. 141R 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. 141R, 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. 141R 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. 141R 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.
Revision
of Statement of Cash Flow Presentation Related to Purchases of Property, Plant
and Equipment
The
Company has corrected its Consolidated Statements of Cash Flows for 2006 and
2005 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 is revising its
cash flow presentations to exclude them. These corrections resulted in an
increase to the previously reported amounts of cash used for operating
activities of $8.0 million in fiscal 2006 and a decrease to the cash provided
from operating activities of $1.9 million in fiscal 2005, resulting from a
reduction in the amount of cash provided from the change in accounts payable and
other accrued liabilities in those years. The corresponding correction in the
investing section was to decrease cash used for investing activities by $8.0
million and $1.9 million in fiscal 2006 and fiscal 2005, respectively, as a
result of the reduction in the amount of cash used for purchases of property,
plant and equipment in those years. 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 consolidated financial statements,
based on SEC Staff Accounting Bulletin: No. 99-Materiality.
- 89
-
Note
2. CYPRESS STEP ACQUISITION OF
SUNPOWER
Effective
November 9, 2004, SunPower became a wholly owned subsidiary of Cypress when
Cypress exchanged Cypress common stock for all outstanding shares of SunPower
common stock. Outstanding options to purchase SunPower common stock held by the
Company’s officers, employees and other service providers and warrants held by
Cypress to purchase SunPower common stock remained outstanding as of the closing
of the merger.
Cypress
accounted for its acquisition of SunPower in accordance with SFAS No. 141.
Accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values as of the date of
investment, based on estimates made by the management of Cypress which
considered a number of factors, including valuations performed by outsiders.
Management based their decision to capitalize the purchased technology on SFAS
No. 141’s criteria that an intangible asset that arises from contractual or
other legal rights shall be recognized apart from goodwill only if it is
separable. These technology-based assets relate to innovations and technological
advances of the Company. The excess of the purchase price over the amounts
allocated to the assets acquired and liabilities assumed was recorded as
goodwill.
Push
down accounting requires an entity to establish a new cost basis of accounting
for assets and liabilities based on the amount paid for the stock. The amounts
pushed down to SunPower financial statements at November 9, 2004, derived
from the net carrying balance previously reported by Cypress on November 9,
2004, consisted of the following (in thousands):
|
(In
thousands)
|
Gross
|
Accumulated
Amortization
|
Net
|
|||||||||
|
As
of December 30, 2007
|
||||||||||||
|
Purchased
Technology
|
$
|
18,139
|
$
|
(11,376
|
)
|
$
|
6,763
|
|||||
|
Patents
|
3,811
|
(2,096
|
)
|
1,715
|
||||||||
|
Trademarks
and other
|
2,066
|
(1,263
|
)
|
803
|
||||||||
|
24,016
|
(14,735
|
)
|
9,281
|
|||||||||
|
Goodwill
|
2,883
|
—
|
2,883
|
|||||||||
|
$
|
26,899
|
$
|
(14,735
|
)
|
$
|
12,164
|
||||||
|
As
of December 31, 2006
|
||||||||||||
|
Purchased
Technology
|
$
|
18,139
|
$
|
(7,550
|
)
|
$
|
10,589
|
|||||
|
Patents
|
3,811
|
(1,423
|
)
|
2,388
|
||||||||
|
Trademarks
and other
|
2,066
|
(994
|
)
|
1,072
|
||||||||
|
24,016
|
(9,967
|
)
|
14,049
|
|||||||||
|
Goodwill
|
2,883
|
—
|
2,883
|
|||||||||
|
$
|
26,899
|
$
|
(9,967
|
)
|
$
|
16,932
|
||||||
Amortization
of these purchased intangible assets, which is included in cost of components
revenue in the accompanying Consolidated Statements of Operations, was $4.8
million and $4.7 million in the year ended December 30, 2007 and
December 31, 2006, respectively.
Note
3. 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 $4.7 million, $7.2 million and $5.3 million for the
fiscal years ended December 30, 2007, December 31, 2006 and January 1,
2006, 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 will be completed in the
fourth quarter of 2008 and SunPower is evaluating its alternatives relating to
future plans for this business.
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 legal, tax, treasury, information technology, employee
benefits and other Cypress corporate services and infrastructure. Cypress bills
the Company for a portion of the Cypress employees’ fully-burdened compensation.
In the case of the Philippines subsidiary, which entered into a services
agreement for such secondments and other consulting services in January 2005,
the Company pays the fully burdened compensation plus 10%. The amounts that the
Company has recorded as general and administrative expenses in the accompanying
statements of operations for these services was approximately $1.8 million, $1.5
million and $2.3 million for the fiscal years ended December 30, 2007,
December 31, 2006 and January 1, 2006, 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, which expires in July 2021. Under the lease, the Company will pay
Cypress at a rate equal to the cost to Cypress for that facility (including
taxes, insurance, repairs and improvements) until the earlier of November 2015
or a change in control of the Company occurs, which includes such time as
Cypress
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-
ceases
to own at least a majority of the aggregate number of shares of all classes of
the Company’s common stock then outstanding. Thereafter, the Company will pay
market rate rent for the facility. The Company will have the right to purchase
the facility 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 is exercised after a change of control of the Company, in which
case the purchase price shall be at a market rate, as reasonably determined by
Cypress. The lease agreement also contains certain indemnification and
exculpation provisions by the Company for the benefit of Cypress as lessor. Rent
expense paid to Cypress for this building was $0.3 million in each of the fiscal
years ended December 30, 2007, December 31, 2006 and January 1, 2006,
respectively.
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 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
$1.3 million and $0.6 million in fiscal years ended December 30, 2007 and
December 31, 2006.
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 agreements, became effective at the time of completion of the
Company’s initial public offering in November 2005.
Master
Separation Agreement
In
October 2005, the Company entered into a master separation agreement containing
the framework with respect to the Company’s separation from Cypress. The master
separation agreement provides for the execution of various ancillary agreements
that further specify the terms of the separation.
Master
Transition Services Agreement
The
Company has also entered into a master transition services agreement which would
govern the provisions of services provided by Cypress, such as: financial
services; human resources; legal matters; training programs; and information
technology.
For
a period of three years following the Company’s November 2005 IPO of
8.8 million shares of class A common stock 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 with 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 certain indemnification provisions by the Company for
the benefit of Cypress.
- 91
-
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 no longer are
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, for which the Company intends to
obtain its own separate policy) until the earliest of (1) a change of
control of the Company occurs, which includes such time as Cypress ceases to own
at least a majority of the aggregate number of shares of all classes of the
Company’s common stock then outstanding, (2) the date on which Cypress’
insurance carriers do not permit the Company to remain on Cypress policies,
(3) the date on which Cypress’ cost of insurance under any particular
insurance policy increases, directly or indirectly, due to the
Company's inclusion or participation in such policy, (4) the date on
which the Company's coverage under the Cypress policies causes a real
or potential conflict of interest or hardship for Cypress, as determined solely
by Cypress or (5) the date on which Cypress and the Company mutually agree
to terminate this arrangement. Prior to that time, Cypress will maintain
insurance policies on the Company’s behalf, and the Company shall reimburse
Cypress for expenses related to insurance coverage during this period. The
Company will work with Cypress to secure additional insurance if desired
and cost effective.
- 92
-
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 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.
If
Cypress distributes the Company’s class B common stock to Cypress stockholders
in a transaction intended to qualify as a tax-free distribution under
Section 355 of the Internal Revenue Code (the “Code”), Cypress intends to
obtain an opinion of counsel and/or a ruling from the Internal Revenue Service
(“IRS”) to the effect that such distribution qualifies under Section 355 of
the Code. Despite such an opinion or ruling, however, 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.
- 93
-
Note
4. BUSINESS
COMBINATION
PowerLight
Acquisition
On
January 10, 2007, the Company completed its acquisition of PowerLight. The
results of PowerLight have been included in the consolidated results of the
Company from January 10, 2007. As a result of the PowerLight acquisition,
all of the outstanding shares of PowerLight, and a portion of each vested option
to purchase shares of PowerLight, were cancelled, and all of the outstanding
options to purchase shares of PowerLight (other than the portion of each vested
option that was cancelled) were assumed by the Company in exchange for aggregate
consideration of (i) approximately $120.7 million in cash plus
(ii) approximately 5.7 million shares of the Company’s class A common
stock, inclusive of (a) approximately 1.6 million shares of the Company’s
class A common stock which may be issued upon the exercise of assumed vested and
unvested PowerLight stock options, which options vest on the same schedule as
the assumed PowerLight stock options, and (b) approximately 1.1 million
shares of the Company’s class A common stock issued to employees of PowerLight
in connection with the acquisition which, along with approximately 0.5 million
of the shares issuable upon exercise of assumed PowerLight stock options, are
subject to certain transfer restrictions and a repurchase option by the Company,
both of which lapse over a two-year period following the acquisition under the
terms of certain equity restriction agreements. The Company under the terms of
the acquisition agreement also issued an additional 0.2 million shares of
restricted class A common stock to certain employees of PowerLight, which shares
are subject to certain transfer restrictions which will lapse over 4 years
following the acquisition. In June 2007, the Company changed PowerLight’s name
to SunPower Corporation, Systems (“SP Systems”), to capitalize on SunPower’s
name recognition.
The
total consideration related to the acquisition is as follows:
|
(In thousands)
|
Shares
|
Fair Value at
January 10, 2007
|
||||
|
Purchase
consideration:
|
||||||
|
Cash
|
—
|
$
|
120,694
|
|||
|
Common
stock
|
2,961
|
111,266
|
||||
|
Stock
options assumed that are fully vested
|
618
|
21,280
|
||||
|
Direct
transaction costs
|
—
|
2,958
|
||||
|
Total
purchase consideration
|
3,579
|
256,198
|
||||
|
Future
stock compensation:
|
||||||
|
Shares
subject to re-vesting restrictions
|
1,146
|
43,046
|
||||
|
Stock
options assumed that are unvested
|
984
|
35,126
|
||||
|
Total
future stock compensation
|
2,130
|
78,172
|
||||
|
Total
purchase consideration and future stock compensation
|
5,709
|
$
|
334,370
|
|||
Of
the consideration issued for the acquisition, approximately $23.7 million
in cash and approximately 0.7 million shares, with a total aggregate value of
$118.1 million as of December 30, 2007, are being held in escrow as security for
the indemnification obligations of certain former SP Systems shareholders and
will be released over a period of five years ending January 10, 2012 (see Note
20).
Purchase
Price Allocation
Under
the purchase method of accounting, the total purchase price as shown in the
table above was allocated to SP Systems’ net tangible and intangible assets
based on their estimated fair values as of January 10, 2007. The purchase price
has been allocated based on management’s best estimates. The fair value of the
Company’s class A common stock issued was determined based on the average
closing prices for a range of trading days around the announcement date
(November 15, 2006) of the transaction. The fair value of stock options assumed
was estimated using the Black-Scholes valuation model (the "Black-Scholes
model") with the following assumptions: volatility of 90%, expected life ranging
from 2.7 years to 6.3 years, and risk-free interest rate of 4.6%.
The
allocation of the purchase price associated with certain assets on January 10,
2007 was as follows:
|
(In thousands)
|
Amount
|
|||
|
Net
tangible assets
|
$
|
13,925
|
||
|
Patents
and purchased technology
|
29,448
|
|||
|
Tradenames
|
15,535
|
|||
|
Backlog
|
11,787
|
|||
|
Customer
relationships
|
22,730
|
|||
|
In-process
research and development
|
9,575
|
|||
|
Unearned
stock compensation
|
78,172
|
|||
|
Deferred
tax liability
|
(21,964
|
)
|
||
|
Goodwill
|
175,162
|
|||
|
Total
purchase consideration and future stock compensation
|
$
|
334,370
|
||
- 94
-
Net
tangible assets acquired on January 10, 2007 consisted of the
following:
|
(In thousands)
|
Amount
|
|||
|
Cash
and cash equivalents
|
$
|
22,049
|
||
|
Restricted
cash
|
4,711
|
|||
|
Accounts
receivable, net
|
40,080
|
|||
|
Costs
and estimated earnings in excess of billings
|
9,136
|
|||
|
Inventories
|
28,146
|
|||
|
Deferred
project costs
|
24,932
|
|||
|
Prepaid
expenses and other assets
|
23,740
|
|||
|
Total
assets acquired
|
152,794
|
|||
|
Accounts
payable
|
(60,707
|
)
|
||
|
Billings
in excess of costs and estimated earnings
|
(35,887
|
)
|
||
|
Other
accrued expenses and liabilities
|
(42,275
|
)
|
||
|
Total
liabilities assumed
|
(138,869
|
)
|
||
|
Net
assets acquired
|
$
|
13,925
|
||
The
Company accounted for its acquisition of SP Systems in accordance with SFAS No.
141. Accordingly, all intercompany receivables and payables related to SP
Systems at the acquisition date were eliminated in purchase accounting effective
January 10, 2007.
Acquired
Identifiable Intangible Assets.
The
following table presents certain information on the acquired identifiable
intangible assets:
|
Intangible
Assets
|
Method
of Valuation
|
Discount
Rate
Used
|
Royalty
Rate
Used
|
Estimated
Useful Life
|
|
Patents
and purchased technology
|
Relief
from royalty method
|
25%
|
3%
|
4 years
|
|
Tradenames
|
Relief
from royalty method
|
25%
|
1%
|
5
years
|
|
Backlog
|
Income
approach
|
20%
|
—%
|
1
year
|
|
Customer
relationships
|
Income
approach
|
22%
|
—%
|
6
years
|
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.
Amortization
expense for the year ended December 30, 2007 was as follows:
|
(In thousands)
|
||||
|
Cost
of systems revenue
|
$
|
20,085
|
||
|
Sales,
general and administrative
|
3,688
|
|||
|
Total
amortization expense
|
$
|
23,773
|
||
In-Process
Research and Development (“IPR&D”) Charge
In
connection with the acquisition of SP Systems, the Company recorded an IPR&D
charge of $9.6 million in the first quarter of fiscal 2007, as technological
feasibility associated with the IPR&D projects had not been established and
no alternative future use existed.
These
IPR&D projects consisted of two components: design automation tool and
tracking systems and other. In assessing the projects, the Company considered
key characteristics of the technology as well as its future prospects, the rate
technology changes in the industry, product life cycles, and the various
projects’ stage of development.
The
value of IPR&D was determined using the income approach method, which
calculated the sum of the discounted future cash flows attributable to the
projects once commercially viable using a 40% discount rate, which were derived
from a weighted-average cost of capital analysis and adjusted to reflect the
stage of completion and the level of risks associated with the projects. The
percentage of completion for each project was determined by identifying the
research and development expenses invested in the project as a ratio of the
total estimated development costs required to bring the project to technical and
commercial feasibility. The following table summarizes certain
information related to each project:
|
|
Stage
of Completion
|
Total Cost
Incurred to Date
|
Total
Remaining Costs
|
||||||
| Design Automation Tool | |||||||||
|
As
of January 10, 2007 (acquisition date)
|
8%
|
|
$
|
0.2 million
|
$
|
2.4 million
|
|||
|
As
of December 30, 2007
|
35%
|
|
$
|
0.9 million
|
$
|
1.7
million
|
|||
| Tracking System and Other | |||||||||
|
As
of January 10, 2007 (acquisition date)
|
25%
|
|
$
|
0.2 million
|
$
|
0.6 million
|
|||
|
As
of December 30, 2007
|
100%
|
|
$
|
0.8
million
|
$
|
—
|
Status
of IPR&D:
As
of December 30, 2007, the Company has incurred total post-acquisition costs of
approximately $0.7 million related to the design automation tool project and
estimates that an additional investment of $1.7 million will be required to
complete the project. The Company expects to complete the design automation tool
project by June 2009, approximately one and a half years earlier than the
original estimate.
The
Company completed the tracking systems project in June 2007 and incurred total
project costs of $0.8 million, of which $0.6 million was incurred after the
acquisition. Both the actual completion date and the total projects
costs were in line with the original estimates.
Goodwill
Approximately
$175.2 million had been allocated to goodwill within the systems segment, which
represents the excess of the purchase price over the fair value of the
underlying net tangible and intangible assets of SP Systems. In accordance with
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. 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.
During the year ended December 30, 2007, the Company recorded adjustments
aggregating $6.6 million to increase goodwill related to the purchase of SP
Systems on January 10, 2007 to $181.8 million. The adjustments included a
change in the estimated receivable for an existing project as of the acquisition
date which was subsequently determined to be unearned and, thus, the receivable
will not be paid, an additional loss provision on a construction project
contracted as of the acquisition date and was subsequently determined to have a
larger loss than originally estimated, as well as adjustments to the value of
certain acquired assets and liabilities. Goodwill that resulted from the
acquisition of SP Systems is not deductible for tax purposes.
Financial
Commitment Letter
In
conjunction with the acquisition, Cypress entered into a commitment letter with
the Company during the fourth quarter of fiscal 2006 under which Cypress agreed
to lend to the Company up to $130.0 million in cash to be used to facilitate the
financing of the acquisition or working capital requirements. In February 2007,
Cypress and the Company mutually terminated the commitment letter. No borrowings
were outstanding at the termination date.
Pro
Forma Financial Information (Unaudited)
Supplemental
information on an unaudited pro forma basis, as if the acquisition of SP Systems
were completed at the beginning of fiscal years 2007 and 2006, is as
follows:
|
Year Ended
|
|||||||
|
(In thousands, except per share amounts)
|
December 30,
2007
|
December 31,
2006
|
|||||
|
Revenue
|
$
|
777,104
|
$
|
442,115
|
|||
|
Net
income (loss)
|
$
|
7,094
|
$
|
(57,635
|
)
|
||
|
Basic
net income (loss) per
share
|
$
|
0.09
|
$
|
(0.84
|
)
|
||
|
Diluted
net income (loss) per
share
|
$
|
0.09
|
$
|
(0.84
|
)
|
||
The
unaudited pro forma supplemental information is based on estimates and
assumptions, which the Company believes are reasonable. The unaudited pro forma
supplemental information includes non-recurring in-process research and
development charge of $9.6 million recorded in the first quarter ended April 1,
2007 and April 2, 2006. The unaudited pro forma supplemental information
prepared by management is not necessarily indicative of the consolidated
financial position or results of operations in future periods or the results
that actually would have been realized had the Company and SP Systems been a
combined company during the specified periods.
- 96
-
Note
5. OTHER INCOME (EXPENSE), NET
The
following table summarizes the components of other income (expense), net,
recorded in the Consolidated Statements of Operations:
|
Year Ended
|
||||||||||||
|
(In
thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
|||||||||
|
Write-off
of unamortized debt issuance costs
|
$
|
(8,260
|
)
|
$
|
—
|
$
|
—
|
|||||
|
Amortization
of debt issuance costs
|
(1,710
|
)
|
—
|
—
|
||||||||
|
Share
in net loss of joint venture, net of tax
|
(278
|
)
|
—
|
—
|
||||||||
|
Gain
(loss) on derivatives and foreign exchange, net of tax
|
2,086
|
863
|
(1,441
|
)
|
||||||||
|
Other
income,
net
|
291
|
214
|
227
|
|||||||||
|
Total
other income (expense), net
|
$
|
(7,871
|
)
|
$
|
1,077
|
$
|
(1,214
|
)
|
||||
Note
6. NET INCOME (LOSS) PER
SHARE
Basic
net income (loss) per share is computed using the weighted-average common shares
outstanding. Diluted net income (loss) per share is computed using the
weighted-average common shares outstanding plus any potentially dilutive
securities outstanding during the period using the treasury stock method, except
when their effect is anti-dilutive. Potentially dilutive securities include
stock options, restricted stock and senior convertible debentures.
Holders
of the Company’s senior convertible debentures may, under certain circumstances
at their option, convert the senior convertible debentures into cash and, if
applicable, shares of the Company’s class A common stock at the applicable
conversion rate, at any time on or prior to maturity (see Note 15). Pursuant to
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.
For
the fiscal year ended January 1, 2006, stock options to purchase common stock
were excluded from the calculation of diluted net loss per share as the Company
was in a net loss position and their inclusion would have been anti-dilutive.
The following is a summary of all outstanding anti-dilutive potential common
shares:
|
As
of
|
|||||||||||
|
(In
thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
||||||||
|
Stock
options
|
—
|
44
|
6,572
|
||||||||
The
following table sets forth the computation of basic and diluted weighted-average
common shares:
|
Year
Ended
|
|||||||||||
|
(In
thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
||||||||
|
Basic
weighted-average common shares
|
75,413
|
65,864
|
23,306
|
||||||||
|
Effect
of dilutive securities:
|
|||||||||||
|
Stock
options
|
4,203
|
5,147
|
—
|
||||||||
|
Restricted
stock
|
357
|
76
|
—
|
||||||||
|
Shares
subject to re-vesting restrictions
|
439
|
—
|
—
|
||||||||
|
February
2007 debentures
|
620
|
—
|
—
|
||||||||
|
July
2007 debentures
|
195
|
—
|
—
|
||||||||
|
Weighted-average
common shares for diluted computation
|
81,227
|
71,087
|
23,306
|
||||||||
Basic
weighted-average common shares excludes 2.9 million shares of class A common
stock lent to an affiliate of Lehman Brothers in connection with the Company’s
issuance of $200.0 million in principal amount of its 1.25% senior convertible
debentures in February 2007 and 1.8 million shares of class A common stock lent
to an affiliate of Credit Suisse in connection with the Company’s issuance of
$225.0 million in principal amount of its 0.75% senior convertible debentures in
July 2007 (see Note 15).
For
the year ended December 30, 2007, dilutive potential common shares includes
approximately 0.6 million shares for the impact of $200.0 million in principal
amount of the Company’s 1.25% senior convertible debentures issued in February
2007 and 0.2 million shares for the impact of $225.0 million in principal amount
of the Company’s 0.75% senior convertible debentures issued in July 2007, 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.
- 97
-
Note
7. BALANCE SHEET
COMPONENTS
|
(In thousands)
|
December 30,
2007
|
December 31,
2006
|
|||||
| 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
|
$
|
39,136
|
$
|
—
|
|||
|
Billings in
excess of costs and estimated earnings on contracts in
progress
|
69,900
|
—
|
|||||
|
$
|
(30,764
|
) |
$
|
—
|
|||
|
Costs
incurred to date on contracts in progress
|
$
|
481,340
|
$
|
—
|
|||
|
Estimated
earnings to date
|
145,643
|
—
|
|||||
|
Contract
revenue earned to date
|
626,983
|
—
|
|||||
|
Less:
Billings to date, including earned incentive rebates, on contracts in
progress
|
(657,747
|
) |
—
|
||||
|
$
|
(30,764
|
) |
$
|
—
|
|||
|
Inventories:
|
|||||||
|
Raw
materials*
|
$
|
89,604
|
$
|
8,703
|
|||
|
Work-in-process
|
2,027
|
79
|
|||||
|
Finished
goods
|
48,873
|
13,998
|
|||||
|
$
|
140,504
|
$
|
22,780
|
||||
| * In addition to polysilicon and other raw materials for solar cell manufacturing, raw materials as of December 30, 2007 includes solar panels purchased from third-party vendors and installation materials for systems projects. |
|
||||||
|
Prepaid
expenses and other current assets:
|
|||||||
|
Deferred tax
asset, current portion
|
$
|
8,437
|
$
|
1,446
|
|||
|
Note
receivable from SP Systems
|
—
|
10,000
|
|||||
|
VAT
receivable, current portion
|
7,266
|
48
|
|||||
|
Prepaid
materials
|
4,652
|
—
|
|||||
|
Other
receivables
|
9,946
|
3,556
|
|||||
|
Other
prepaid expenses
|
2,809
|
1,605
|
|||||
|
$
|
33,110
|
$
|
16,655
|
||||
|
Property,
plant and equipment, net:
|
|||||||
|
Land
and buildings
|
$
|
7,482
|
$
|
7,304
|
|||
|
Manufacturing
equipment
|
194,963
|
120,104
|
|||||
|
Computer
equipment
|
12,399
|
2,496
|
|||||
|
Furniture and
fixtures
|
2,648
|
83
|
|||||
|
Leasehold
improvements
|
113,801
|
45,175
|
|||||
|
Construction-in-process
(manufacturing facility in the Philippines)
|
99,945
|
53,252
|
|||||
|
431,238
|
228,414
|
||||||
|
Less:
Accumulated depreciation**
|
(53,244
|
)
|
(25,986
|
)
|
|||
|
$
|
377,994
|
$
|
202,428
|
||||
| ** Total depreciation expense was $27.3 million, $16.4 million and $7.1 million for the fiscal years ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively. |
|
||||||
|
Intangible
assets:
|
|||||||
|
Patents
and purchased technology
|
$
|
51,398
|
$
|
21,950
|
|||
|
Tradenames
|
1,603
|
1,603
|
|||||
|
Backlog
|
11,787
|
—
|
|||||
|
Customer
relationships and other
|
23,193
|
463
|
|||||
|
87,981
|
24,016
|
||||||
|
Accumulated
amortization of intangible assets:
|
|||||||
|
Patents
and purchased technology
|
(20,630
|
)
|
(8,973
|
)
|
|||
|
Tradenames
|
(808
|
)
|
(548
|
)
|
|||
|
Backlog
|
(11,460
|
)
|
—
|
||||
|
Customer
relationships and other
|
(4,137
|
)
|
(446
|
)
|
|||
|
(37,035
|
)
|
(9,967
|
)
|
||||
|
$
|
50,946
|
$
|
14,049
|
||||
- 98
-
|
(In thousands)
|
December 30,
2007
|
December 31,
2006
|
|||||
| The estimated future amortization expense related to intangible assets as of December 30, 2007 is as follows: |
|
||||||
|
2008
|
$
|
15,076
|
|||||
|
2009
|
14,740
|
||||||
|
2010
|
13,228
|
||||||
|
2011
|
4,008
|
||||||
|
2012
and beyond
|
3,894
|
||||||
|
$
|
50,946
|
||||||
|
Other
long-term assets:
|
|||||||
|
VAT
receivable, net of current portion
|
$
|
24,269
|
$
|
—
|
|||
|
Investment
in joint venture
|
5,304
|
4,994
|
|||||
|
Other
|
2,401
|
1,639
|
|||||
|
$
|
31,974
|
$
|
6,633
|
||||
|
Accrued
liabilities:
|
|||||||
|
VAT
payable
|
$
|
18,138
|
$
|
575
|
|||
|
Employee
compensation and employee benefits
|
15,338
|
3,961
|
|||||
|
Income
taxes payable
|
11,106
|
1,995
|
|||||
|
Warranty
|
10,502
|
3,446
|
|||||
|
Foreign
exchange derivative liability
|
8,920
|
4,849
|
|||||
|
Other
|
15,430
|
3,759
|
|||||
|
$
|
79,434
|
$
|
18,585
|
||||
Note 8. INVESTMENTS
Cash
and cash equivalents, short-term investments, restricted cash and long-term
investments classified as available-for-sale securities were comprised of the
following:
|
December 30, 2007
|
December 31, 2006
|
|||||||||||||||||||||||||
|
Unrealized
|
Unrealized
|
|||||||||||||||||||||||||
|
(In thousands)
|
Cost
|
Gross
Gains
|
Gross
Losses
|
Fair
Value
|
Cost
|
Gross
Gains
|
Gross
Losses
|
Fair
Value
|
||||||||||||||||||
|
Money
market securities
|
$
|
281,458
|
$
|
—
|
$
|
—
|
$
|
281,458
|
$
|
135,298
|
$
|
—
|
$
|
—
|
$
|
135,298
|
||||||||||
|
Corporate
securities
|
92,395
|
6
|
(50
|
)
|
92,351
|
13,400
|
—
|
—
|
13,400
|
|||||||||||||||||
|
Commercial
paper
|
78,163
|
2
|
(2
|
)
|
78,163
|
28,739
|
—
|
(4
|
)
|
28,735
|
||||||||||||||||
|
Total
available-for-sale securities
|
$
|
452,016
|
$
|
8
|
$
|
(52
|
)
|
$
|
451,972
|
$
|
177,437
|
$
|
—
|
$
|
(4
|
)
|
$
|
177,433
|
||||||||
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, at 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
|
)
|
|||||||||||
The
decline in fair value of the available-for-sale securities was primarily related
to changes in interest rates, which the Company considered to be temporary in
nature. The Company has the ability and intent to hold these securities until a
recovery of fair value, which is maturity. 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.
- 99
-
The
classification and contractual maturities of available-for-sale securities is as
follows:
|
(In thousands)
|
December 30,
2007
|
December 31,
2006
|
|||||
|
Included
in:
|
|||||||
|
Cash
and cash equivalents
|
$
|
249,582
|
$
|
160,937
|
|||
|
Short-term
investments
|
105,453
|
16,496
|
|||||
|
Restricted
cash
|
67,887
|
—
|
|||||
|
Long-term
investments
|
29,050 | ||||||
|
$
|
451,972
|
$
|
177,433
|
||||
|
Contractual
maturities:
|
|||||||
|
Due
in less than one year
|
$
|
396,228
|
$
|
164,033
|
|||
|
Due
from one to two years
|
4,994
|
—
|
|||||
|
Due
from two to 30 years
|
50,750
|
13,400
|
|||||
|
$
|
451,972
|
$
|
177,433
|
||||
The
Company classifies all available-for-sale securities that are intended to be
available for use in current operations as cash and cash equivalents, short-term
investments and/or restricted cash.
From
time to time the Company invests in 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 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.
At
December 30, 2007, the Company had $50.8 million invested in auction rate
securities as compared to $13.4 million invested in auction rate securities at
December 31, 2006. At December 30, 2007, these auction rate securities were
student loans that are typically over collateralized by pools of 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. In February
2008, the auction rate securities market experienced a significant increase in
the number of failed auctions, which occurs when sell orders exceed buy orders
resulting from lack of liquidity and does not necessarily signify a default by
the issuer. As of February 29, 2008, four of these auction rate securities
totaling $24.1 million failed to clear at auctions, four of these securities
totaling $21.7 million cleared at auctions, and one of these securities
totaling $5.0 million continued to be held. 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 that were not sold subsequent to December 30, 2007 totaling
$29.1 million are classified as long-term investments on the Consolidated
Balance Sheets, consistent with the stated contractual maturities of the
securities. The “stated” or “contractual” maturities for these securities
generally are between 20 to 30 years.
The
Company has concluded that no other-than-temporary impairment losses occurred in
the year ended December 30, 2007 because all holdings had successful
auctions in January 2008. If the issuers of these auction rate
securities are unable to successfully close future auctions or do not redeem the
securities, the Company may be required to adjust the carrying value of the
securities and record an impairment charge in the first quarter of fiscal 2008.
If the Company determines that the fair value of these auction rate securities
is temporarily impaired, the Company would record a temporary impairment within
Consolidated Statements of Comprehensive Income (Loss), a component of
stockholders' equity in the first quarter of 2008. If it is determined
that the fair value of these securities is other-than-temporarily impaired, the
Company would record a loss in its Consolidated Statements of Operations in the
first quarter of 2008, which could be material (see Note 20).
The Company
classifies auction rate securities as available-for-sale securities under SFAS
No. 115. As these securities trade at their par values, no gains or losses
are recorded in comprehensive income (loss).
Note
9. 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 11).
- 100
-
Furthermore,
under certain of these agreements, the Company is required to make prepayments
to the vendors over the terms of the arrangements. In the year ended December
30, 2007, the Company paid advances totaling $94.3 million in accordance with
the terms of existing supply agreements. As of December 30, 2007, advances to
suppliers totaled $161.2 million, the current portion of which is $52.3
million.
The
Company’s future prepayment obligations related to these agreements as of
December 30, 2007 are as follows (in thousands):
|
2008
|
$
58,433
|
|||
|
2009
|
48,840
|
|||
|
2010
|
11,100
|
|||
|
$
|
118,373
|
|||
On
January 10, 2008, the Company paid an additional advance of 1.6 million Euros
(approximately $2.4 million) in accordance with the terms of an existing supply
agreement.
Note
10. INCOME
TAXES
The
Company applies SFAS No. 109, which requires the Company to recognize
deferred tax assets and liabilities for expected future tax consequences of
events that have been recognized in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. SFAS No. 109 requires deferred tax
assets and liabilities to be adjusted when the tax rates or other provisions of
the income tax laws change.
The
geographic distribution of income (loss) before income taxes and the components
of provision for (benefit from) income taxes are summarized
below:
|
Year Ended
|
||||||||||||
|
(In
thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
|||||||||
|
Geographic
distribution of income (loss) before income taxes:
|
||||||||||||
|
U.S.
income (loss)
|
$
|
(93,881
|
)
|
$
|
3,419
|
$
|
(14,675
|
)
|
||||
|
Non-U.S.
income (loss)
|
97,163
|
25,042
|
(1,118
|
)
|
||||||||
|
Income
(loss) before income taxes
|
$
|
3,282
|
$
|
28,461
|
$
|
(15,793
|
)
|
|||||
|
Provision
for (benefit from) income taxes:
|
||||||||||||
|
Current
tax (benefit) expense
|
||||||||||||
|
Federal
|
$
|
(67
|
)
|
$
|
241
|
$
|
—
|
|||||
|
State
|
647
|
100
|
—
|
|||||||||
|
Foreign
|
12,319
|
1,604
|
50
|
|||||||||
|
Total
current tax expense
|
|
12,899
|
|
1,945
|
|
50
|
||||||
|
Deferred
tax benefit
|
||||||||||||
|
Federal
|
|
(14,499
|
)
|
|
—
|
|
—
|
|||||
|
State
|
(4,320
|
)
|
—
|
—
|
||||||||
|
Foreign
|
—
|
—
|
—
|
|||||||||
|
Total
deferred tax benefit
|
|
(18,819
|
)
|
|
—
|
|
—
|
|||||
|
Provision
for (benefit from) income taxes
|
$
|
(5,920
|
)
|
$
|
1,945
|
$
|
50
|
|||||
The
income tax provision (benefit) differs from the amounts obtained by applying the
statutory U.S. federal tax rate to income (loss) before taxes as shown
below:
|
Year Ended
|
||||||||||||
|
(In
thousands)
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
|||||||||
|
Statutory
rate
|
35
|
%
|
35
|
%
|
35
|
%
|
||||||
|
Tax
at U.S. statutory rate
|
$
|
1,149
|
$
|
9,961
|
$
|
(5,528
|
)
|
|||||
|
Foreign
rate differential
|
(20,731
|
)
|
(7,162
|
)
|
459
|
|||||||
|
State
income taxes, net of benefit
|
647
|
65
|
—
|
|||||||||
|
Recognition
of prior year benefits
|
—
|
(1,205
|
)
|
—
|
||||||||
|
Purchased
in-process research and development
|
3,351
|
—
|
—
|
|||||||||
|
Impairment
of acquisition-related intangibles
|
4,924
|
—
|
—
|
|||||||||
|
Alternative
minimum tax
|
67
|
—
|
—
|
|||||||||
|
Benefit
of net operating losses not recognized
|
1,329
|
—
|
4,617
|
|||||||||
|
Non-deductible
stock option compensation expense
|
3,227
|
241
|
502
|
|||||||||
|
Other,
net
|
117
|
45
|
—
|
|||||||||
|
Total
|
$
|
(5,920
|
)
|
$
|
1,945
|
$
|
50
|
|||||
- 101
-
Temporary
differences and carryforwards, which give rise to significant portions of
deferred tax assets and liabilities, are as follows:
|
(In
thousands)
|
December 30,
2007
|
December 31,
2006
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carryforwards
|
$
|
709
|
$
|
9,130
|
||||
|
Research
and development credit and California manufacturing
credit carryforwards
|
1,491
|
1,797
|
||||||
|
Reserves
and accruals
|
30,043
|
3,204
|
||||||
|
Capitalized
research and development expenses
|
43
|
1,023
|
||||||
|
Total
deferred tax asset
|
32,286
|
15,154
|
||||||
|
Valuation
allowance
|
(13,924
|
)
|
(9,836
|
)
|
||||
|
Total
deferred tax asset, net of valuation allowance
|
18,362
|
5,318
|
||||||
|
Deferred
tax liabilities:
|
||||||||
|
Intangible
assets
|
(16,138
|
)
|
(5,318
|
)
|
||||
|
Other
|
—
|
1,400
|
||||||
|
Total
deferred tax liabilities
|
(16,138
|
)
|
(3,918
|
)
|
||||
|
Net
deferred tax asset
|
$
|
2,224
|
$
|
1,400
|
||||
As
of December 30, 2007, the Company had federal net operating loss
carryforwards of approximately $147.6 million. These federal net operating loss
carryforwards will expire at various dates from 2011 to 2027. The
Company had California state net operating loss carryforwards of
approximately $73.5 million as of December 30, 2007, which expire at
various dates from 2011 to 2017. The Company also had research and
development credit carryforwards of approximately $3.9 million for both federal
and state tax purposes. The Company’s ability to utilize a portion of the net
operating loss carryforwards is dependent upon the Company being able to
generate taxable income in future periods and may be limited due to restrictions
imposed on utilization of net operating loss and credit carryforwards under
Federal and state laws upon a change in ownership, such as the transaction with
Cypress.
The
Company is subject to a tax holiday in the Philippines, where it manufactures
its products. This tax holiday is scheduled to expire in 2010, unless extended.
As of yet, no tax benefit has been realized from the income tax holiday due to
operating losses incurred in the Philippines.
Unrecognized
Tax Benefits
On
January 1, 2007, the Company adopted the provisions for FIN 48, which is an
interpretation of SFAS No. 109. FIN 48 prescribes a recognition threshold that a
tax position is required to meet before being recognized in the financial
statements and provides guidance on de-recognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure and transition
issues. FIN 48 contains a two-step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with SFAS No. 109. The first
step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as
the largest amount that is more than 50% likely of being realized upon ultimate
settlement.
The
total amount of unrecognized tax benefits recorded in the 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 is as follows:
|
(In
thousands)
|
December 30,
2007
|
|||
|
Balance
at January 1, 2007 (after adoption of FIN 48)
|
$
|
1,120
|
||
|
Additions
based on tax positions related to the current year
|
2,726
|
|||
|
Additions
for tax positions of prior years
|
326
|
|||
|
Reductions
for tax positions of prior years
|
—
|
|||
|
Settlements
and effective settlements with tax authorities and related
remeasurements
|
—
|
|||
|
Balance
at December 30, 2007
|
$
|
4,172
|
||
Of
the total unrecognized tax benefit, $0.3 million was accounted for as an
adjustment to goodwill as it related to unrecognized tax benefits resulting from
the acquisition of SP Systems. In addition to the amounts disclosed above, a
contra-asset of $0.4 million was netted against deferred tax assets as an
unrecognized tax benefit against income tax credits.
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 statute of limitations 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.
The
Company’s valuation allowance was determined in accordance with the provisions
of SFAS No. 109, which requires an assessment of both positive and negative
evidence. When determining whether it is more likely than not that deferred
assets are recoverable, with such assessment being required on a jurisdiction by
jurisdiction basis, management believes that sufficient uncertainty exists with
regard to the realizability of these assets such that a valuation allowance is
necessary. Factors considered in providing a valuation allowance include the
lack of a significant history of consistent profits, the lack of consistent
profitability in the solar industry, and the lack of carryback capacity to
realize these assets. Based on the absence of sufficient positive objective
evidence, management is unable to assert that it is more likely than not that
the Company will generate sufficient taxable income to realize these remaining
net deferred tax assets. The amount of the deferred tax asset valuation
allowance, however, could be reduced in future periods to the extent that future
taxable income is realized. A portion of the valuation allowance would be
released to goodwill as it offsets deferred tax assets acquired in the
acquisition of SP Systems.
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 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
|
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 2004 and 2005. As of December 30, 2007, no material adjustments have
been proposed by the IRS. Changes to SP Systems’ pre-acquisition tax
liabilities, if any, would be recorded as a purchase price adjustment.
Management believes that the ultimate outcome of the IRS examination will not
have a material impact on the Company’s financial position or results of
operations. If material tax adjustments are proposed by the IRS and acceded to
by the Company, an adjustment to goodwill and income taxes payable may
result.
Note
11. 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 3). 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. The Company also leases its solar cell manufacturing facility
in the Philippines from Cypress, under a lease which expires in July 2021 (see
Note 3). In December 2005, the Company entered into a 5-year operating
lease from an unaffiliated third party for an additional building in the
- 103
-
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 and South Korea, all of which are leased from unaffiliated third
parties. Future minimum obligations under all non-cancelable operating leases as
of December 30, 2007 are as follows (in thousands):
|
2008
|
$
|
4,844
|
|
|
2009
|
4,995
|
||
|
2010
|
5,413
|
||
|
2011
|
4,258
|
||
|
2012
|
3,832
|
||
|
Thereafter
|
23,685
|
||
|
$
|
47,027
|
Rent
expense, including the rent paid to Cypress for the California facility and the
wafer fabrication facility in the Philippines (see Note 3), was $3.3
million, $1.3 million and $0.6 million for the fiscal years ended December 30,
2007, December 31, 2006 and January 1, 2006, respectively.
Purchase
Commitments
The
Company purchases raw materials for inventory, services and manufacturing
equipment from a variety of vendors. During the normal course of business, in
order to manage manufacturing lead times and help assure adequate supply, the
Company enters into agreements with contract manufacturers and suppliers that
either allow them to procure goods and services based upon specifications
defined by the Company, or that establish parameters defining the Company’s
requirements. In certain instances, these agreements allow the Company the
option to cancel, reschedule or adjust the Company’s requirements based on its
business needs prior to firm orders being placed. Consequently, only a portion
of the Company’s recorded purchase commitments arising from these agreements are
firm, non-cancelable and unconditional commitments.
The
Company also has agreements with several suppliers 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 9).
At
December 30, 2007, total obligations related to such supplier agreements was
$2.1 billion, of which $250.3 million was related to a joint venture (discussed
below). The Company’s non-cancelable purchase orders related to equipment and
building improvements totaled approximately $161.8 million.
Future
minimum obligations under supplier agreements and non-cancelable purchase orders
as of December 30, 2007 are as follows (in thousands):
|
2008
|
$
|
424,017
|
|
|
2009
|
381,440
|
||
|
2010
|
364,324
|
||
|
2011
|
371,634
|
||
|
2012
|
146,469
|
||
|
Thereafter
|
573,362
|
||
|
$
|
2,261,246
|
Joint Ventures
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 Co., Ltd (“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. Woongjin Energy began manufacturing in the third quarter of fiscal
2007, and the Company expects to purchase approximately $250.3 million of
silicon ingots from Woongjin Energy under a five-year agreement.
As
of December 30, 2007, the Company had a $4.4 million investment in the joint
venture on the Consolidated Balance Sheets which comprised 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
- 104
-
minority
investment of $4.4 million is classified as “Other long-term assets” in the
Consolidated Balance Sheets and the Company’s share of Woongjin Energy’s losses
totaling $0.3 million for the year ended December 30, 2007 is included in “Other
income (expense), net” in the Consolidated Statements of Operations. Neither
party has contractual obligations to provide any additional funding to the joint
venture.
On
October 18, 2007, the Company entered into an agreement with Woongjin and
Woongjin Holdings Co., Ltd. (“Woongjin Holdings”), whereby Woongjin transferred
its 80.1% 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. On January 18, 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 January
18, 2008, the Company’s equity investment increased from 19.9% to 27.4%. In
addition, on or after January 18, 2008, if the Company elects to convert the
$3.3 million convertible note, its equity ownership in the joint venture would
increase an additional 12.6% (see Note 20). The Company has reviewed the
qualitative and quantitative attributes of this joint venture and determined
that it does not meet the criteria to be accounted for under FASB
Staff Position on FASB Interpretation No. 46 (revised December 2003),
“Consolidation of Variable Interest Entities,” therefore, this joint
venture is not consolidated into the Company’s financial
statements.
On
October 1, 2007, the Company entered into an agreement with First Philippine
Electric Corporation (“First Philec”) to form First Philec Solar Corporation
(“First Philec Solar”), a joint venture to provide wafer slicing services of
silicon ingots to the Company. This joint venture will operate in the
Philippines, with silicon ingots to be supplied primarily from the Company. The
Company expects to purchase an aggregate quantity of silicon wafers sufficient
to support up to approximately 660 megawatts annually of solar cell
manufacturing production based on the Company’s expected silicon utilization
through the five-year wafering supply and sales agreement, which is anticipated
to begin in the second half of 2008 when First Philec Solar’s proposed
manufacturing capacity is expected to become operational.
As
of December 30, 2007, the Company had invested $0.9 million in First Philec
Solar comprised 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 of $0.9 million is classified as “Other long-term assets” in
the Consolidated Balance Sheets. On January 18, 2008, the Company invested an
additional $0.2 million in the joint venture, increasing its equity investment
from 16.9% to 20.0% (see Note 20). The Company is currently reviewing the
qualitative and quantitative attributes of this joint venture that is in the
development stage to determine whether this joint venture will need to be
consolidated into the Company’s financial statements in the future.
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. Therefore, 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 provides warranty on 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 $10.8
million, $3.2 million and $0.4 million during the fiscal years ended December
30, 2007, December 31, 2006 and January 1, 2006, respectively. Activity within
accrued warranty for fiscal 2007, 2006 and 2005 is summarized as
follows:
|
(In
thousands)
|
December 30,
2007
|
December 31,
2006
|
January 1,
2006
|
|||||||||
|
Balance
at the beginning of the period
|
$
|
3,446
|
$
|
574
|
$
|
180
|
||||||
|
SP
Systems accrued balance at date of acquisition
|
6,542
|
—
|
—
|
|||||||||
|
Accruals
for warranties issued during the period
|
10,771
|
3,226
|
411
|
|||||||||
|
Settlements
made during the period
|
(3,565
|
)
|
(354
|
)
|
(17
|
)
|
||||||
|
Balance
at the end of the period
|
$
|
17,194
|
$
|
3,446
|
$
|
574
|
||||||
The
accrued warranty balance at December 30, 2007 includes $6.7 million 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 Consolidated Balance
Sheets.
- 105
-
FIN
48 Uncertain Tax Positions
As
of December 30, 2007, total liabilities associated with FIN 48 uncertain tax
positions were $4.1 million, none of which was included in "Accrued liabilities"
on the Consolidated Balance Sheets, as it is not expected to be paid within the
next twelve months. Total liabilities associated with uncertain tax positions of
$4.1 million is included in "Other long-term liabilities" on our Consolidated
Balance Sheets at December 30, 2007. Due to the complexity and uncertainty
associated with our tax positions, we cannot make a reasonably reliable estimate
of the period in which cash settlement will be made for our liabilities
associated with uncertain tax positions in "Other long-term
liabilities."
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 and subsequently amended in December 2005, PowerLight entered
into a Technology Assignment and Services Agreement and other ancillary
agreements 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 SunPowerTM
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. As of and for the fiscal year ended
December 30, 2007, the Company incurred royalty expense totaling $2.6 million
which was charged to cost of systems revenue and the Company’s total royalty
liabilities were $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
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.
As
of December 30, 2007, the Company’s hedge instruments consisted of foreign
currency option contracts and foreign currency forward exchange contracts. The
Company calculates the fair value of its option and forward contracts based on
market volatilities, spot rates and interest differentials from published
sources.
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 (loss) in stockholders’ equity in the Consolidated Balance Sheets.
Amounts deferred in accumulated other comprehensive income (loss) are
reclassified into the Consolidated Statements of Operations in the periods in
which the hedged exposure impacts earnings. The effective portion of unrealized
gains (losses) recorded in accumulated other comprehensive income (loss), net of
tax, was a $3.9 million loss, $2.1 million loss and a $0.5 million gain for the
years ended December 30, 2007, December 31, 2006 and January 1, 2006,
respectively. As of December 30, 2007 and December 31, 2006, the Company
had outstanding cash flow hedge forward contracts with an aggregate notional
value of $140.1 million and $89.6 million, respectively. As of December 30, 2007
and December 31, 2006, the Company had outstanding cash flow hedge option
contracts with an aggregate notional value of zero and $16.0 million,
respectively. The maturity dates of the outstanding contracts ranged from
January 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 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 Consolidated Balance
Sheets and in other income (expense), net, in the Consolidated Statements of
Operations. As of December 30, 2007 and December 31, 2006, the Company had no
outstanding fair value hedges.
- 106
-
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 (expense), 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 (loss). The gains or losses on these contracts are
substantially offset by transaction gains or losses on the underlying balances
being hedged. As of December 30, 2007 and December 31, 2006, the Company
held forward contracts with an aggregate notional value of $62.7 million and
$37.6 million, respectively, to hedge the risks associated with Euro foreign
currency denominated assets and liabilities.
Note
13. CUSTOMER
ADVANCES
From
time to time, the Company enters into agreements where customers make advances
for future purchases of solar power products. In general, the Company pays no
interest on the advances and applies the advances as shipments of product
occur.
In
August 2007, the Company entered into an agreement with one of its customers to
supply polysilicon. Under the polysilicon agreement, the customer has
agreed to make material aggregate cash advance payments to the Company in fiscal
2007 and 2008. Commencing in fiscal 2010 and continuing through 2019, these
advance payments are to be applied as a credit against the customer’s
polysilicon purchases from the Company. Such polysilicon is expected to be used
by the customer to manufacture ingots, and potentially wafers, which are to be
sold to the Company under an ingot supply agreement. As of December 30, 2007,
the Company received total advances of $40.0 million from this customer, all of
which is classified as long-term customer advances in the accompanying
Consolidated Balance Sheets.
In
April 2005, the Company entered into an agreement with one of its customers to
supply solar cells. As part of this agreement, the customer agreed to fund 30
million Euros (approximately $35.5 million) for the expansion of the Company’s
manufacturing capacity to support this customer’s solar cell product demand.
Beginning on January 1, 2006, the Company was obligated to pay interest at
a rate of 5.7% per annum on the remaining unpaid balance. The Company’s
settlement of principal on the advances is to be recognized over product
deliveries at a specified rate on a per-unit-of-product-delivered basis through
December 31, 2010. The Company paid interest on the remaining unpaid
balance of 1.4 million Euros (approximately $1.9 million) and 1.4 million Euros
(approximately $1.8 million) in fiscal 2007 and 2006, respectively. As of
December 31, 2006, the remaining outstanding advance was 25.1 million
Euros (approximately $33.1 million) of which $7.9 million had been classified in
current portion of customer advances and $25.2 million in long-term customer
advances in the accompanying Consolidated Balance Sheets, based on projected
product shipment dates. As of December 30,
2007, the remaining outstanding advance was 19.7 million Euros
(approximately $29.0 million) of which $8.8 million and $20.2 million has been
classified in current portion of customer advances and in long-term customer
advances, respectively. The Company has utilized
all funds advanced by this customer towards expansion of the Company’s
manufacturing capacity.
The
Company has also entered into agreements with other customers who have made
advance payments for solar products. These advances will be applied as shipments
of product occur. As of December 30, 2007 and December 31, 2006, such
customers had made advances of $0.4 million and $6.9 million,
respectively.
The
estimated utilization of advances from customers and the related interest of
$2.6 million thereto are (in thousands):
|
2008
|
$
|
10,671
|
||
|
2009
|
10,962
|
|||
|
2010
|
18,389
|
|||
|
2011
|
8,000
|
|||
|
2012
|
8,000
|
|||
|
Thereafter
|
16,000
|
|||
|
Total
|
$
|
72,022
|
Note 14. 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 on July 13,
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.
- 107
-
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. On April 27, 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 27, 2007 amendment
including the $10 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.
On
July 13, 2007, the Company entered into a credit agreement with Wells Fargo that
replaced the credit lines with Credit Suisse, Lehman Brothers and UBOC. On
August 20, 2007, the Company entered into an amendment to the credit agreement.
As amended, the credit agreement provides for a $50.0 million unsecured
revolving credit line, with a $40.0 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
$40.0 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 shall 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. All letters of credit issued under the secured letter
of credit facility shall 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.
As
of December 30, 2007, four letters of credit totaling $32.0 million were issued
by Wells Fargo under the unsecured letter of credit subfeature and eight letters
of credit totaling $47.9 million were issued by Wells Fargo under the secured
letter of credit facility. On December 30, 2007, cash available to be borrowed
under the unsecured revolving credit line was $18.0 million and includes letter
of credit capacities available to be issued by Wells Fargo under the unsecured
letter of credit subfeature of $8.0 million. Letters of credit available under
the secured letter of credit facility at December 30, 2007 totaled $2.1
million.
As
of December 30, 2007, the Company was in compliance with all but 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. On January 18, 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
(see Note 20). 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.
Note
15. 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 (the "February 2007 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
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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 (the "July 2007 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.
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 are able to exercise their right to convert the debentures
any day in that fiscal quarter. This test is repeated each fiscal quarter.
Therefore, since holders of the February 2007 debentures and July 2007
debentures are able to exercise their right to convert the debentures in fiscal
2008, as of December 30, 2007, the Company classified the $425.0 million in
aggregate convertible debt as short-term debt in its Consolidated Balance
Sheets. In addition, the Company wrote off $8.2 million of unamortized debt
issuance costs in the fourth fiscal quarter of 2007 and will write off the
remaining $1.0 million of unamortized debt issuance costs in the first fiscal
quarter of 2008. 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 quarters ended April 1, 2007, July 1, 2007 and September
30, 2007, holders of the debentures were not able to exercise their right to
convert the debentures in previous quarters. Accordingly, the Company classified
the $425.0 million in aggregate convertible debt as long-term debt in previous
Quarterly Reports on Form 10-Q.
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 will 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 will decrease as interest rates rise
and/or as the market price of our class A common stock falls.
As
of February 29, 2008, no holders of the February 2007 debentures and July 2007
debentures exercised their right to convert the debentures. In the event of
conversion by holders of the February 2007 debentures and July 2007 debentures,
the principal amount must be settled in cash and to the extent that the
conversion obligation exceeds the principal amount of any debentures converted,
the Company must satisfy the remaining conversion obligation of the February
2007 debentures in shares of its class A common stock, and the Company maintains
the right to satisfy the remaining conversion obligation of the July 2007
debentures in shares of its class A common stock or cash.
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
- 109
-
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), all outstanding loans
will terminate on the effective date of such event. In addition, LBIE and 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 reborrowed.
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
16. REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND COMMON STOCK
At
December 30, 2007, the Company was authorized to issue up to
375.0 million shares of $0.001 par value common stock and 10.0 million
shares of $0.001 par value preferred stock.
Shares
Reserved for Future Issuance
The
Company had shares of common stock reserved for future issuance as
follows:
|
(In
thousands)
|
December 30,
2007
|
December 31,
2006
|
||||||
|
Stock
option plans
|
3,982
|
5,127
|
||||||
Redeemable
Convertible Preferred Stock
At
December 31, 2004, the Company’s redeemable convertible preferred stock
consisted of two series designated as series one and series two preferred stock,
both of which were wholly owned by Cypress. In connection with the Company’s
initial public offering of common stock in November 2005, all redeemable
convertible preferred stock was converted into shares of class B common
stock.
Common
Stock
Until
November 8, 2004, there was only one class of common stock. After the
merger with Cypress on November 9, 2004, three classes of common stock were
authorized for issuance, classes A, B and C common stock. On September 30,
2005, SunPower amended and restated its Articles of Incorporation to change from
a three class common stock structure to a two class common stock (class A and
class B) structure, with the series one and two preferred stock convertible into
class B common stock. The two new classes of common stock have substantially
similar rights except as to voting, conversion and protective
provisions.
On
September 30, 2005, SunPower entered into an exchange agreement with
Cypress in which Cypress exchanged all of its outstanding shares of class A
common stock for an equal number of shares of class B common stock.
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-
On
November 10, 2005, the Company filed with the Delaware Secretary of State a
certificate of merger to merge into its wholly-owned subsidiary and thereby
reincorporate in Delaware. The Company is now incorporated in the state of
Delaware. In addition, on November 10, 2005 the Company filed an amendment
to the Company’s certificate of incorporation to effect a 2-for-1 reverse stock
split of the Company’s outstanding and authorized shares of common stock
following the Company’s reincorporation in Delaware. The conversion rate of the
series one and two preferred stock into class B common stock was adjusted to be
one share of class B common stock for every two shares of preferred stock. All
information related to common stock and options and warrants to purchase common
stock and earnings per share included in the accompanying Consolidated Financial
Statements has been retroactively adjusted to give effect to the reverse stock
split and the reincorporation of the Company in Delaware.
In
March 2005, the Company issued to Cypress 17.6 million shares of its class A
common stock at a price of $3.30 per share, the consideration for which was $7.1
million cash and the cancellation by Cypress of $50.9 million of promissory
notes and related interest held by Cypress. Accordingly, the net amount of
$47.4 million comprising of the $50.9 million debt less the unamortized
discount of $3.5 million was credited to equity. These shares were converted to
class B common stock on September 30, 2005.
In
July 2005, SunPower issued 12.0 million shares of class A common stock to
Cypress at a price of $7.00 per share, the consideration for which was $20.2
million cash, the cancellation by Cypress of $25.1 million promissory notes and
related interest held by Cypress, the cancellation of payables to Cypress of
$14.7 million and the cancellation of warrants to purchase 3.8 million
shares of SunPower class A common stock held by Cypress at an exercise price of
$0.14 per share. The Company also reduced the net carrying value of the
associated unamortized debt discount of $4.2 million, which was reflected in
equity as part of this conversion of related-party debt into class A common
stock. As a result, the net impact to equity for the issuance of common stock
upon cancellation of the related-party debt was approximately $21.0 million.
These shares were converted into class B common stock on September 30,
2005.
In
November 2005, SunPower issued approximately 8.8 million shares of class A
common stock in the Company’s IPO at a price of $18.00 per share. In addition,
the Company issued approximately 22.5 million shares of class B common stock to
Cypress to convert Cypress’ Series One and Series Two Redeemable Convertible
Preferred Stock.
In
June 2006, the Company completed a follow-on public offering of 7.0 million
shares of its class A common stock at a price of $29.50 per share. 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.
Common
stock consisted of the following:
|
(In
thousands, except share data)
|
December 30,
2007
|
December 31,
2006
|
||||||
|
Class A
common stock, $0.001 par value; 217,500,000 shares authorized and
40,176,957* and 17,816,082** shares issued and outstanding at December 30,
2007 and December 31, 2006, respectively
|
$
|
40
|
$
|
18
|
||||
|
Class
B common stock, $0.001 par value; 157,500,000 shares authorized and
44,533,287 and 52,033,287 shares issued and outstanding as of December 30,
2007 and December 31, 2006, respectively
|
45
|
52
|
||||||
|
Total
common stock
|
$
|
85
|
$
|
70
|
||||
|
*
|
Includes
approximately 0.7 million shares of restricted stock and a total of
4.7 million shares of class A common stock lent to LBIE and
CSI.
|
|
**
|
Includes
approximately 0.2 million shares of restricted stock.
|
As
of December 30, 2007, the voting and dividend rights of the common stock
were as follows:
Voting
Rights—Common Stock
The
class A common stock is entitled to one vote per share while the class B common
stock is entitled to eight votes per share on all matters to be voted on by the
Company’s stockholders. The class B common stock is initially held by Cypress,
is convertible at any time into class A common stock by its holder on a share
for share basis, and so converts automatically when transferred by Cypress other
than transfers to its subsidiaries or tax-free distributions to its stockholders
or when Cypress, its successors in interest and subsidiaries collectively own
less than 40% of the shares of all classes of Company common stock prior to
effecting a tax-free distribution to Cypress stockholders.
- 111
-
Dividends—Common
Stock
When
and if declared by the board of directors, and subject to the preferences
applicable to any preferred stock outstanding, the holders of class A and class
B common stock are entitled to receive equal per share dividends. In the case of
a dividend or distribution payable in the form of common stock, each holder of
class A and class B is only entitled to receive the class of stock that they
hold.
Other
Transactions
In
February 2003, in connection with the issuance of a $2.5 million promissory note
to Cypress maturing in March 2008, the Company granted a warrant to Cypress to
purchase approximately 0.2 million shares of its common stock with an exercise
price of $0.14 per share and a term of ten years. The fair value of the warrant
was estimated on the date of grant using the Black-Scholes pricing model with
the following assumptions: no dividend yield; risk-free rate of 3.95%;
volatility of 85% and expected life of five years. The Company recorded the
relative fair value of this warrant of $80,000 as a discount to debt. The fair
value of the warrant was amortized to interest expense over the original term of
the note (60 months) using the effective interest method. During the year ended
January 1, 2006, $7,000 of the amount relating to the warrants was amortized to
interest expense. The net unamortized discount of approximately $47,000 was
reflected in equity as part of the conversion of this related-party debt into
common stock in March 2005.
In
May 2004, the Company signed an amended note purchase and line of credit
agreement with Cypress, finalizing the terms of a $30.0 million loan from
Cypress which required principal payments between June 2007 and May 2012. In
November 2005 this facility was canceled. In connection with the issuance of
this line of credit (originally signed in May 2002), the Company granted
warrants to purchase approximately 2.1 million shares of its common stock with
an exercise price of $0.14 per share and a term of ten years. The fair value of
the warrants was estimated on the date of grant using the Black-Scholes pricing
model with the following assumptions: no dividend yield; risk free rate of
2.63%; volatility of 81.15% and expected life of three years. The Company
recorded the relative fair value of these warrants of $6.6 million as a discount
to the debt. The relative fair value of the warrant was amortized to interest
expense over the original term of the note using the effective interest method.
During the year ended January 1, 2006, $1.2 million of the amount relating to
the warrants was amortized to interest expense. The remaining $4.2 million of
the unamortized discount was reflected in equity as part of the conversion of
the related-party debt into common stock completed in July 2005.
From
March 2004 through June 2005, Cypress loaned the Company $36.5 million for
operations and equipment financing. These loans were demand loans bearing
interest at 7%. In conjunction with the issuance of these loans, the Company
granted warrants to Cypress to purchase 1.5 million shares of its common stock
with an exercise price of $0.14 per share and a term of ten years. The relative
fair value of the warrants was estimated on the date of grant using the
Black-Scholes pricing model with the following assumptions: no dividend yield;
risk free rate of 1.86% to 3.10%; volatility of 81.15% and expected life of
three years. The Company recorded the fair value of these warrants of $4.4
million as a discount to debt. The fair value of the warrant was amortized to
interest expense using the effective interest method. During the year ended
January 1, 2006, $0.3 million of the amount relating to the warrants was
amortized to interest expense. The remaining $3.5 million of the unamortized
discount was reflected in equity as part of the conversion of this related-party
debt into common stock in March 2005.
Note
17. STOCK-BASED COMPENSATION
AND OTHER EMPLOYEE BENEFIT PLANS
Adoption
of SFAS No. 123(R)
Effective
January 1, 2006, the Company adopted the provisions of SFAS No. 123
(revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which requires
the Company to measure the stock-based compensation costs of share-based
compensation arrangements based on the grant-date fair value and recognize the
costs in the financial statements over the employee requisite service period. As
permitted by SFAS No. 123(R), the Company elected to use the modified
prospective application transition method and has not restated its financial
results for prior periods. Under this transition method, stock-based
compensation expense for fiscal 2007 and 2006 included compensation expense for
all stock-based compensation awards granted prior to, but not yet vested as of
January 1, 2006, based on the grant-date fair value estimated in accordance
with the original provision of SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”). Stock-based compensation expense for all
stock-based compensation awards granted after January 1, 2006 was based on
the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123(R).
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-
The
following table summarizes the consolidated stock-based compensation expense, by
type of awards:
|
Year Ended
|
||||||||
|
(In
thousands)
|
December 30,
2007
|
December 31,
2006
|
||||||
|
Employee
stock options
|
$
|
17,819
|
$
|
3,930
|
||||
|
Non-employee
stock options
|
—
|
304
|
||||||
|
Restricted
stock
|
13,121
|
677
|
||||||
|
Shares
released from re-vesting restrictions
|
20,638
|
—
|
||||||
|
Change
in stock-based compensation capitalized in inventory
|
(366
|
)
|
(47
|
)
|
||||
|
Total
stock-based compensation expense
|
$
|
51,212
|
$
|
4,864
|
||||
In
connection with the acquisition of SP Systems (see Note 4), 1.1 million shares
of the Company’s class A common stock issued to employees of SP Systems, which
were valued at $42.0 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 Consolidated Statements of Operations:
|
Year Ended
|
||||||||
|
(In
thousands)
|
December 30,
2007
|
December 31,
2006
|
||||||
|
Cost
of systems revenue
|
$
|
8,187
|
$
|
—
|
||||
|
Cost
of components revenue
|
4,213
|
846
|
||||||
|
Research
and development
|
1,817
|
1,197
|
||||||
|
Sales,
general and administrative
|
36,995
|
2,821
|
||||||
|
Total
stock-based compensation expense before income taxes
|
51,212
|
4,864
|
||||||
|
Tax
effect on stock-based compensation expense
|
—
|
—
|
||||||
|
Total
stock-based compensation expense after income taxes
|
$
|
51,212
|
$
|
4,864
|
||||
As
stock-based compensation expense recognized in the Consolidated Statements of
Operations is based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures. 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 $8.5 million, $3.9 million and $0.2 million for the fiscal years
ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively. No
income tax benefit was realized from stock option exercises during fiscal 2007,
2006 and 2005. 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
December 30,
2007
|
Weighted-Average
Amortization Period
(in
years)
|
||||||
|
Stock
options
|
$
|
23,922
|
1.3
|
|||||
|
Restricted
stock
|
71,789
|
3.4
|
||||||
|
Shares
subject to re-vesting restrictions
|
21,338
|
1.0
|
||||||
|
Total
unrecognized stock-based compensation cost
|
$
|
117,049
|
2.3
|
|||||
The
Company recognizes its stock-based compensation cost on a straight-line
recognition basis. Additionally, the Company issues new shares upon option
exercises by employees.
Prior
to the Adoption of SFAS No. 123(R)
Prior
to the adoption of SFAS 123(R), the Company applied SFAS No. 123, as
amended by Statement of Financial Accounting Standards No. 148, “Accounting
for Stock-Based Compensation—Transition and Disclosure,” which allowed companies
to apply the accounting rules under Accounting Principles Board No. 25,
“Accounting for Stock Issued to Employees” (“APB No. 25”), and related
interpretations. The following table illustrates the effect on net loss after
tax and net loss per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based
compensation:
|
(In
thousands, except per share data)
|
Year Ended
January 1,
2006
|
|||
|
Net
loss—as reported
|
$
|
(15,843
|
)
|
|
|
Deduct:
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax
effects
|
(4,704
|
)
|
||
|
Non-deductible
stock option compensation expense
|
$
|
(20,547
|
)
|
|
|
Net
loss per share:
|
||||
|
Basic
and diluted—as reported
|
$
|
(0.68
|
)
|
|
|
Basic
and diluted—pro forma
|
$
|
(0.88
|
)
|
|
Valuation
Assumptions
The
Company estimates the fair value of its stock-based awards using 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:
|
Year Ended
|
||||||||||||
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
||||||||||
|
Expected
term
|
6.5 years
|
6.5 years
|
4.0 years
|
|||||||||
|
Risk-free
interest rate
|
4.58
- 4.68%
|
|
4.80
- 5.11%
|
|
3.63
- 4.36%
|
|
||||||
|
Volatility
|
90%
|
|
92%
|
|
92%
|
|
||||||
|
Dividend
yield
|
0%
|
|
0%
|
|
0%
|
|
||||||
For
Fiscal Year Ended January 1, 2006:
The
Company estimated the expected term based on an assumed exercise of vested
tranches at the earlier of one year after their vesting date or one year after
an assumed public offering. Volatility was based on Cypress’s volatility for all
periods through the third quarter of fiscal 2005, and from the fourth quarter of
fiscal 2005 onwards, on a publicly-traded U.S.-based direct competitor of the
Company. The interest rate was 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.
For
Fiscal Year Ended December 31, 2006 and December 30, 2007:
The
Company utilizes 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 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.
- 114
-
Equity
Incentive Programs
Stock
Option Plans:
The
Company has three stock option plans: the 1996 Stock Plan (“1996 Plan”), the
Amended and Restated 2005 Stock Incentive Plan (“2005 Plan”) and the PowerLight
Corporation Common Stock Option and Common Stock Purchase Plan (“PowerLight
Plan”). The PowerLight Plan was assumed by the Company by way of the
acquisition of PowerLight, or SP Systems, on January 10, 2007. Under the
terms of all three plans, the Company may issue incentive or non-statutory stock
options or stock purchase rights to directors, employees and consultants to
purchase common stock. The 2005 Plan was adopted by the Company’s board of
directors in August 2005, and was approved by shareholders in November 2005. The
2005 Plan replaced the 1996 Plan and allows not only for the grant of options,
but also for the grant of stock appreciation rights, restricted stock grants,
restricted stock units and other equity rights. The 2005 Plan also allows
for tax withholding obligations related to stock option exercises or restricted
stock awards to be satisfied through the retention of shares otherwise released
upon vesting. The PowerLight Plan was adopted by SP Systems’ board of
directors in October 2000. In May 2007 and May 2006, the Company’s stockholders
approved increases of 925,000 shares and 250,000 shares, respectively, in
the number of shares available for grant under the 2005 Plan. As of
December 30, 2007, approximately 281,000 shares were available for grant
under the 2005 Plan. No new awards are being granted under the 1996 Plan or
the PowerLight Plan.
Incentive
stock options may be granted at no less than the fair value of the common stock
on the date of grant. Non-statutory stock options and stock purchase rights may
be granted at no less than 85% of the fair value of the common stock at the date
of grant. The options and rights become exercisable when and as determined by
the Company’s board of directors, although these terms generally do not exceed
ten years for stock options. Under the 1996 and 2005 Plans, the options
typically vest over five years with a one-year cliff and monthly vesting
thereafter. Under the PowerLight Plan, the options typically vest over five
years with yearly cliff vesting.
The
following table summarizes the Company’s stock option activities:
|
Shares
(in thousands)
|
Weighted-
Average
Exercise
Price Per Share
|
||||||
|
Options
outstanding as of January 2, 2005
|
4,285
|
$
|
2.30
|
||||
|
Granted
|
2,581
|
4.98
|
|||||
|
Exercised
|
(217
|
)
|
0.82
|
||||
|
Forfeited
|
(77
|
)
|
1.91
|
||||
|
Outstanding
as of January 1, 2006
|
6,572
|
3.41
|
|||||
|
Granted
|
44
|
39.05
|
|||||
|
Exercised
|
(1,529
|
)
|
2.54
|
||||
|
Forfeited
|
(107
|
)
|
4.14
|
||||
|
Outstanding
as of December 31, 2006
|
4,980
|
3.97
|
|||||
|
Options
exchanged/assumed in connection with SP Systems
acquisition
|
1,602
|
5.54
|
|||||
|
Granted
|
18
|
56.20
|
|||||
|
Exercised
|
(2,817
|
)
|
3.01
|
||||
|
Forfeited
|
(82
|
)
|
13.36
|
||||
|
Outstanding
as of December 30, 2007
|
3,701
|
5.44
|
|||||
|
Exercisable
as of December 30, 2007
|
1,247
|
3.76
|
|||||
The
Company’s weighted average grant date fair value of options granted in fiscal
2007, 2006 and 2005 were $44.09, $31.02 and $2.96, respectively. For the year
ended December 30, 2007, the intrinsic value of options exercised and the
total fair value of options vested were $168.4 million and $7.2 million,
respectively. For the year ended December 31, 2006, the intrinsic value of
options exercised and the total fair value of options vested were $47.7 million
and $3.8 million, respectively.
In
December 2005, the Company granted 15,000 shares of restricted stock to one
employee. The following table summarizes the Company’s non-vested stock options
and restricted stock activities thereafter:
- 115
-
Table of Contents
|
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 January 1, 2006
|
4,789
|
$
|
3.82
|
15
|
$
|
30.04
|
|||||
|
Granted
|
44
|
39.05
|
230
|
35.43
|
|||||||
|
Forfeited
|
(1,692
|
)
|
3.56
|
(16
|
)
|
30.92
|
|||||
|
Outstanding
as of December 31, 2006
|
3,141
|
4.45
|
229
|
35.40
|
|||||||
|
Granted
|
1,620
|
6.10
|
1,141
|
71.64
|
|||||||
|
Vested
|
(2,225
|
)
|
3.28
|
(105
|
)
|
43.18
|
|||||
|
Forfeited
|
(82
|
)
|
12.94
|
(91
|
)
|
51.00
|
|||||
|
Outstanding
as of December 30, 2007
|
2,454
|
6.29
|
1,174
|
68.74
|
|||||||
Information
regarding the Company’s outstanding stock options as of December 30, 2007 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
|
649
|
4.06
|
$
|
0.30
|
$
|
84,845
|
256
|
4.95
|
$
|
0.50
|
$
|
33,445
|
||||||||
|
0.88—
|
2.66
|
247
|
6.93
|
2.08
|
31,905
|
58
|
6.71
|
2.00
|
7,478
|
|||||||||||||
|
3.30—
|
4.95
|
2,093
|
6.85
|
3.32
|
267,301
|
821
|
6.86
|
3.31
|
104,859
|
|||||||||||||
|
7.00—
|
16.20
|
359
|
7.66
|
8.43
|
43,980
|
79
|
7.67
|
8.59
|
9,710
|
|||||||||||||
|
17.00—
|
56.20
|
353
|
8.55
|
26.71
|
36,905
|
33
|
8.45
|
31.79
|
3,256
|
|||||||||||||
|
3,701
|
6.56
|
5.44
|
$
|
464,936
|
1,247
|
6.53
|
3.76
|
$
|
158,748
|
|||||||||||||
The
aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on the Company’s closing stock price of $131.05 at
December 30, 2007, which would have been received by the option holders had all
option holders exercised their options as of that date.
As
of December 30, 2007, stock options vested and expected to vest totaled
approximately 3.6 million shares, with weighted-average remaining
contractual life of 6.6 years and weighted-average exercise price of $5.40 per
share and an aggregate intrinsic value of approximately $447.9 million. The
total number of in-the-money options exercisable was 1.2 million shares as
of December 30, 2007.
Options
Issued to Non-Employees:
For
the years ended December 30, 2007 and December 31, 2006, there were no options
issued to non-employees. For the year ended January 1, 2006, the Company
granted options to consultants to purchase 23,000 shares of class A common stock
with a weighted average exercise price of $9.26 per share. The fair value of
options granted to consultants was estimated using the Black-Scholes model
resulting in stock-based compensation expense of $1.6 million for the fiscal
year ended January 1, 2006.
Stock
Unit Plan:
In
September 2005, the Company adopted the 2005 Stock Unit Plan in which all of the
Company’s employees except its executive officers and directors are eligible to
participate, although the Company currently intends to limit participation to
its non-U.S. employees who are not senior managers. Under the 2005 Stock Unit
Plan, the Company’s board of directors awards participants 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. The right to redeem the award typically vests in the same manner as
options vest under the 2005 Stock Unit Plan. In July 2006, the board of
directors amended the terms of the plan to increase the maximum number of stock
units that may be subject to stock unit awards granted under the 2005 Stock Unit
Plan from 100,000 to 300,000 stock units. As of December 30, 2007, the
Company has granted approximately 236,000 units to 2,200 employees in the
Philippines at an average unit price of $39.80. During the years ended December
30, 2007, December 31, 2006 and January 1, 2006, the Company recognized
$2.4 million, $0.6 million and $5,000, respectively, of total compensation
expense associated with the 2005 Stock Unit Plan.
- 116
-
Other
Employee Benefit Plans:
The
Company has a statutory pension plan covering its employees in the Philippines.
Consistent with the requirements of local law, the Company accrues for the
unfunded portion of the obligation and plans to appoint a third-party trustee of
the retirement funds by the end of fiscal 2008. The assumptions used in
calculating the obligation for this pension plan depends on Philippine
Accounting Standards No. 19. The outstanding liability of this pension plan was
$0.6 million and $0.1 million at December 30, 2007 and December 31, 2006,
respectively.
All
of the Company’s eligible employees participate in Cypress’ health plans, life
insurance and other benefit plans (other than the stock plans and stock purchase
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 the Company’s 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 the Company’s 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.
Note
18. SEGMENT AND GEOGRAPHICAL
INFORMATION
Prior
to fiscal year 2007, the Company operated in one business segment comprising the
design, manufacture and sale of solar electric power products based on its
proprietary processes and technologies. Following the acquisition of SP Systems,
the Company operated 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,” is the
Company’s Chief Executive Officer. The CODM assesses the performance of both
operating segments using information about its revenue and gross
margin.
The
following tables present revenue by geography and segment, gross margin by
segment, revenue by significant customer and property, plant and equipment
information based on geographic region. Revenue is based on the destination of
the shipments. Property, plant and equipment are based on the physical location
of the assets:
|
Year
Ended
|
|||||||
|
December 30,
2007
|
December 31,
2006
|
January
1,
2006
|
|||||
|
Revenue
by geography:
|
|||||||
|
United
States
|
45
|
%
|
32
|
%
|
30
|
%
|
|
|
Europe:
|
|||||||
|
Spain
|
29
|
%
|
—
|
%
|
—
|
%
|
|
|
Germany
|
10
|
%
|
49
|
%
|
61
|
%
|
|
|
Other
|
11
|
%
|
9
|
%
|
6
|
%
|
|
|
Rest
of world
|
5
|
%
|
10
|
%
|
3
|
%
|
|
|
100
|
%
|
100
|
%
|
100
|
%
|
||
|
Revenue
by segment:
|
|||||||
|
Systems
|
60
|
%
|
—
|
%
|
—
|
%
|
|
|
Components
|
40
|
%
|
100
|
%
|
100
|
%
|
|
|
100
|
%
|
100
|
%
|
100
|
%
|
||
|
Gross
margin by segment:
|
|||||||
|
Systems
|
17
|
%
|
—
|
%
|
—
|
%
|
|
|
Components
|
23
|
%
|
21
|
%
|
6
|
%
|
|
- 117
-
Significant
Customers:
|
Year Ended
|
||||||||||||||
|
December
30,
2007
|
December
31,
2006
|
January
1,
2006
|
||||||||||||
|
|
Business
Segment
|
|||||||||||||
|
SolarPack
|
Systems
|
18%
|
|
—%
|
|
—%
|
|
|||||||
|
MMA
Renewable Ventures
|
Systems
|
16%
|
|
—%
|
|
—%
|
|
|||||||
|
Conergy
AG
|
Components
|
*
|
25%
|
|
45%
|
|
||||||||
|
Solon
AG
|
Components
|
*
|
24%
|
|
16%
|
|
||||||||
|
SP
Systems**
|
Components
|
n.a.
|
16%
|
|
*
|
|||||||||
|
General
Electric Company***
|
Components
|
*
|
*
|
10%
|
|
|||||||||
|
*
|
denotes
less than 10% during the period
|
|
**
|
acquired
by us on January 10, 2007
|
|
***
|
includes
its subcontracting partner, Plexus
Corporation
|
|
(In thousands)
|
December 30,
2007
|
December 31,
2006
|
|||||
|
Property,
plant and equipment by geography:
|
|||||||
|
United
States
|
$
|
18,026
|
$
|
8,051
|
|||
|
Philippines
|
359,968
|
192,335
|
|||||
|
China
|
—
|
2,042
|
|||||
|
$
|
377,994
|
$
|
202,428
|
||||
Note
19. RELATED-PARTY
TRANSACTIONS
In
fiscal 2007, the Company conducted related-party transactions with Woongjin
Energy, a joint venture with whom the Company entered into, to manufacture
monocrystalline silicon ingots. For the year ended December 30, 2007, the
Company recognized $5.8 million in components revenue related to the sale of
solar modules to Woongjin Energy, of which $3.2 million remained due and
receivable as of December 30, 2007.
Note
20. SUBSEQUENT
EVENTS
Acquisition
of Solar Solutions
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 is a 14-person division of Combigas S.r.l., a petroleum
products trading firm. Active since 2002, Solar Solutions distributes components
such as solar panels and inverters, and offers turnkey solar power systems and
standard system kits via a network of dealers throughout Italy. Prior to the
acquisition, Solar Solutions had been a customer of the Company since fiscal
2006. As a result of the acquisition, Solar Solutions became a wholly-owned
subsidiary of the Company. In January 2008, the Company changed Solar Solutions’
name to SunPower Italia.
Polysilicon
Supply Agreement and Option Agreement with NorSun AS
On
January 10, 2008, the Company entered into a long-term polysilicon supply
agreement (the “First Polysilicon Agreement”) with NorSun AS
(“NorSun”). The First Polysilicon Agreement provides the general terms and
conditions pursuant to which NorSun is to sell and the Company is to purchase
specified annual quantities of polysilicon at specified prices from 2010 through
2019. The First Polysilicon Agreement provides that NorSun’s obligation to
sell polysilicon is conditioned upon receipt of polysilicon from NorSun’s joint
venture with Swicorp Joussour Company and Chemical Development Company for
the construction of a new polysilicon manufacturing facility in Saudi
Arabia. NorSun will initially hold a fifty percent equity interest in the
joint venture.
On
January 10, 2008, the Company and the anticipated shareholders of the joint
venture also agreed upon the terms and conditions of an additional long-term
polysilicon supply agreement (the “Second Polysilicon Agreement” and, together
with the First Polysilicon Agreement, the “Supply Agreements”) between the
Company and the joint venture, which is in the process of formation. The
Second Polysilicon Agreement provides the general terms and conditions pursuant
to which the joint venture is to sell and the Company is to purchase specified
annual quantities of polysilicon at specified prices from 2010 through
2019. The Second Polysilicon Agreement provides that the joint venture’s
obligation to sell polysilicon is conditioned upon the new polysilicon
manufacturing facility achieving commercial operation.
If
applicable conditions under the Supply Agreements are satisfied, the aggregate
quantity of polysilicon to be purchased by the Company from 2010 through 2019 is
expected to satisfy production requirements for up to approximately 2,500
megawatts of solar cell manufacturing based on the Company’s expected
polysilicon utilization during such period.
- 118
-
In
connection with the Supply Agreements, on January 10, 2008, NorSun and the
Company entered into an Option Agreement (the “Option Agreement”)which provides
the general terms and conditions pursuant to which the Company will
deliver cash advance payments to NorSun for the purchase of polysilicon under
the First Polysilicon Agreement, which NorSun will use to fund its portion of
the equity investment in the joint venture. The Company shall provide a
letter of credit or deposit funds in an escrow account to secure NorSun’s right
to such advance payments. Under the terms of the Option Agreement, the
Company may exercise a call option and apply the advance payments to purchase
fifty percent, subject to certain adjustments, of NorSun’s 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 fifty percent, subject to certain adjustments, of its 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. NorSun will grant a security interest
in its equity interest in the joint venture subject to the put-call option
to secure its obligations under the Option Agreement. If either the call
option or the put option is exercised, (i) the parties will credit any advance
payments for polysilicon against the option’s exercise price, (ii) the First
Polysilicon Agreement will terminate, and (iii) the Company will assume NorSun’s
rights and obligations under a long-term polysilicon supply agreement between
NorSun and the joint venture pursuant to which the joint venture will sell and
the Company will purchase specified annual quantities of polysilicon at
specified prices from 2010 through 2019, representing the same quantities and
prices under, and on terms and conditions substantially similar to, the First
Polysilicon Agreement.
Escrow
from the Acquisition of SP Systems
Of
the consideration issued for the acquisition of SP Systems,
approximately $23.7 million in cash and approximately 0.7 million shares, with a
total aggregate value of $118.1 million as of December 30, 2007, were held in
escrow as security for the indemnification obligations of certain former SP
Systems shareholders and would be released over a period of five years from the
acquisition date of January 10, 2007, ending on January 10, 2012. Following
the first anniversary of the closing date, the Company authorized the release
of approximately one-half of the original escrow amount leaving
approximately $11.8 million in cash and approximately 0.4 million shares
of the Company's class A common stock in escrow. The Company’s rights
to recover damages under several provisions of the acquisition agreement also
expired on January 10, 2008. As a result, the Company is now entitled to recover
only limited types of losses, and its recovery will be limited to the amount
available in the escrow fund at the time of a claim.
Additional
Capital Investment in Joint Ventures
On
January 18, 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 January 18,
2008, the Company’s equity investment increased from 19.9% to 27.4%. In
addition, on or after January 18, 2008, if the Company elects to convert the
$3.3 million convertible note, its equity ownership in the joint venture would
increase an additional 12.6%.
On
January 18, 2008, the Company invested an additional $0.2 million in First
Philec Solar, increasing its equity investment from 16.9% to 20.0% (see Note
11).
Waiver
Agreement with Wells Fargo
On
January 18, 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 (see Note 14).
Polysilicon
Supply Agreement with Jupiter Corporation Ltd.
On
February 8, 2008, the Company entered into a polysilicon supply agreement with
Jupiter Corporation Ltd. (“Jupiter”). The agreement provides the general terms
and conditions pursuant to which the Company will purchase fixed annual
quantities of polysilicon at specified prices from 2010 through 2016. The
Company expects to supply the polysilicon to third parties that will manufacture
ingots or using such polysilicon for the Company. The aggregate quantity of
polysilicon to be purchased over the term of the agreement is expected to
support more than 3 gigawatts of solar cell manufacturing production based on
the Company’s expected silicon utilization during such period. The
Company’s future purchase commitments under the agreement represent a material
financial obligation of the Company.
- 119
-
Auction
Rate Securities Failed to Trade
As
of December 30, 2007, the Company held ten auction rate securities totaling
$50.8 million. These auction rate securities were student loans that are
typically over collateralized by pools of loans originated under the FFELP and
are guaranteed by the U.S. Department of Education, and insured. In addition,
all auction rate securities held are rated by one or more of the NRSROs as
triple-A. In February 2008, the auction rate securities market experienced a
significant increase in the number of failed auctions, which occurs when sell
orders exceed buy orders resulting from lack of liquidity and does not
necessarily signify a default by the issuer. As of February 29, 2008, four
of these auction rate securities totaling $24.1 million failed to clear at
auctions, four of these securities totaling $21.7 million cleared at auctions,
and one of these securities totaling $5.0 million continued to be held. 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 that were not sold subsequent to
December 30, 2007 totaling $29.1 million are classified as long-term investments
on the Consolidated Balance Sheets, consistent with the stated contractual
maturities of the securities. The “stated” or “contractual” maturities for these
securities generally are between 20 to 30 years. The Company has concluded
that no other-than-temporary impairment losses occurred in the year ended
December 30, 2007 because all holdings had successful auctions in January
2008.
In January
2008, the Company purchased two additional auction rate securities totaling
$10.0 million that failed to clear at auction in February 2008. If the issuers
of these auction rate securities are unable to successfully close future
auctions or do not redeem the securities, the Company may be required to adjust
the carrying value of the securities and record an impairment charge in the
first quarter of fiscal 2008. If the Company determines that the fair value of
these auction rate securities is temporarily impaired, the Company would record
a temporary impairment within Consolidated Statements of Comprehensive Income
(Loss), a component of stockholders' equity, in the first quarter of 2008.
If it is determined that the fair value of these securities is
other-than-temporarily impaired, the Company would record a loss in its
Consolidated Statements of Operations in the first quarter of 2008, which could
be material (see Note 8).
Amended
Agreement with Wells Fargo
On
February 13, 2008, the Company entered into an amendment to the credit agreement
with Wells Fargo, increasing the unsecured letter of credit subfeature from
$40.0 million to $50.0 million. Under the new credit agreement, the Company may
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. In terms with
the waiver agreement entered into with Wells Fargo on January 18, 2008, 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 the letter of credit subfeature, as collateral
securing such outstanding indebtedness (see Note 14).
- 120
-
Revision
of Statement of Cash Flow Presentation Related to Purchases of Property, Plant
and Equipment
As
discussed in Note 1 to the consolidated financial statements, the Company has
corrected its Consolidated Statements of Cash Flows for 2006 and 2005 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 unfunded purchases do
not reflect cash transactions, the Company is revising its cash flow
presentations to exclude them. These corrections had no impact on previously
reported results of operations, working capital or stockholders’ equity of the
Company. The impact of the correction of this error on the previously reported
statements of cash flows included in the Company's Quarterly Reports on
Form 10-Q filed during 2006 and 2007 is included below. The Company
concluded that these corrections were not material to any of its previously
reported consolidated financial statements, based on SEC Staff Accounting
Bulletin: No. 99-Materiality.
|
Three
Months Ended
|
Six
Months Ended
|
Nine
Months Ended
|
||||||||||
|
(In
thousands)
|
April
2, 2006
|
July
2, 2006
|
October
1, 2006
|
|||||||||
|
Cash
flows from operations as reported
|
$
|
(6,630
|
)
|
$
|
(2,033
|
)
|
$
|
4,615
|
||||
|
Cash
flows from operations as corrected
|
(10,564
|
)
|
(4,014
|
)
|
3,166
|
|||||||
|
Cash
flows from investing activities as reported
|
(20,254
|
)
|
(63,284
|
)
|
(94,424
|
)
|
||||||
|
Cash
flows from investing activities as corrected
|
(16,320
|
)
|
(61,303
|
)
|
(92,975
|
)
|
||||||
|
April
1, 2007
|
July
1, 2007
|
September
30, 2007
|
||||||||||
|
Cash
flows from operations as reported
|
$
|
(9,766
|
)
|
$
|
(4,644
|
)
|
$
|
(18,557
|
)
|
|||
|
Cash
flows from operations as corrected
|
(5,059
|
)
|
(903
|
)
|
(26,447
|
)
|
||||||
|
Cash
flows from investing activities as reported
|
(138,774
|
)
|
(206,837
|
)
|
(327,691
|
)
|
||||||
|
Cash
flows from investing activities as corrected
|
(143,481
|
)
|
(210,578
|
)
|
(319,801
|
)
|
||||||
Consolidated
Statements of Operations
|
Three
Months Ended
|
|||||||||||||||
|
(In
thousands, except per share data)
|
December 30
(a)
|
September 30
|
July 1
(b)
|
April 1
(c)
|
|||||||||||
|
Fiscal
2007:
|
|||||||||||||||
|
Revenue
|
$
|
224,343
|
$
|
234,334
|
$
|
173,766
|
$
|
142,347
|
|||||||
|
Gross
margin
|
47,182
|
38,405
|
29,792
|
32,425
|
|||||||||||
|
Net
income (loss)
|
4,876
|
8,431
|
(5,345
|
)
|
1,240
|
||||||||||
|
Net
income (loss) per share, basic
|
0.06
|
0.11
|
(0.07
|
)
|
0.02
|
||||||||||
|
Net
income (loss) per share, diluted
|
0.06
|
0.10
|
(0.07
|
)
|
0.02
|
||||||||||
|
December 31
|
October
1
|
July
2
|
April 2
|
||||||||||||
|
Fiscal
2006:
|
|||||||||||||||
|
Revenue
|
$
|
74,509
|
$
|
65,348
|
$
|
54,695
|
$
|
41,958
|
|||||||
|
Gross
margin
|
18,145
|
15,184
|
11,447
|
5,692
|
|||||||||||
|
Net
income
|
11,309
|
9,568
|
5,384
|
255
|
|||||||||||
|
Net
income per share, basic
|
0.16
|
0.14
|
0.08
|
0.00
|
|||||||||||
|
Net
income per share, diluted
|
0.15
|
0.13
|
0.08
|
0.00
|
|||||||||||
|
(a)
|
Included
a charge of $8.3 million for the write-off of unamortized debt issuance
costs as a result of the market price conversion trigger on our senior
convertible debentures being met.
|
|
(b)
|
Included
a charge of $14.1 million for the impairment of acquisition-related
intangibles.
|
|
(c)
|
Included
a charge of $9.6 million for purchased in-process research and
development.
|
- 121
-
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A: CONTROLS AND
PROCEDURES
Disclosure
Controls and Procedures
We
maintain “disclosure controls and procedures,” as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), that are designed to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing disclosure controls
and procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Based
on their evaluation as of the end of the period covered by this Annual Report on
Form 10-K and subject to the foregoing, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were effective.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) of the Exchange
Act. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements and can only provide
reasonable assurance with respect to financial statement preparation. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
We
assessed the effectiveness of our internal control over financial reporting as
of December 30, 2007. In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal
Control—Integrated Framework. Based on our assessment using those
criteria, our management (including our Chief Executive Officer and Chief
Financial Officer) concluded that our internal control over financial reporting
was effective as of December 30, 2007.
The
effectiveness of our internal control over financial reporting as of
December 30, 2007 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
appears on page 77 of this Annual Report on Form 10-K.
The
Company’s evaluation of the effectiveness of its internal control over financial
reporting as of December 30, 2007 excluded the internal controls of
SunPower Corporation, Systems, or SP Systems, formerly known as PowerLight
Corporation, because SP Systems was acquired by the Company in a purchase
business combination during fiscal 2007. SP Systems is a wholly-owned subsidiary
whose total assets and total revenues represent 35% and 60%,
respectively, of the related consolidated financial statement amounts as
of and for the year ended December 30, 2007.
Changes
in Internal Control over Financial Reporting
There
were no material changes in our internal control over financial reporting that
occurred during the fourth quarter of fiscal 2007 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B: OTHER
INFORMATION
None.
- 122
-
Certain
information required by Part III is omitted from this Annual Report on Form
10-K. We intend to file a definitive Proxy Statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K, and certain information included therein is incorporated
herein by reference.
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
The
information required by this Item concerning our directors is incorporated by
reference from the information set forth in the section entitled “Proposal
One–Election of Directors” in our Proxy Statement.
The
information required by this Item concerning our executive officers is
incorporated by reference to the information set forth in the section entitled
“Security Ownership of Management and Certain Beneficial Owners–Executive
Officers of the Registrant” in our Proxy Statement.
The
information required by this Item concerning compliance with Section 16(a)
of the Securities Exchange Act of 1934 is incorporated by reference from the
information set forth in the section entitled “Other Disclosures–Section 16(a)
Beneficial Ownership Reporting Compliance in our Proxy Statement.
We
have adopted a code of ethics, entitled Code of Business Conduct and Ethics,
that applies to all of our directors, officers and employees, including our
principal executive officer, principal financial officer, and principal
accounting officer. We have made it available, free of charge, on our website at
www.sunpowercorp.com, and if we amend it or grant any waiver under it that
applies to our principal executive officer, principal financial officer, or
principal accounting officer, we will promptly post that amendment or waiver on
our website as well.
The
information required by this Item concerning our audit committee and audit
committee financial expert is incorporated by reference from the information set
forth in the section entitled “Corporate Governance–Committee Membership–Audit
Committee” in our Proxy Statement.
ITEM 11: EXECUTIVE
COMPENSATION
The
information required by this Item concerning executive compensation is
incorporated by reference from the information set forth in the sections
entitled “Compensation Discussion and Analysis,” “Executive Compensation,”
“Compensation Committee Report” and “Other Disclosures–Compensation Committee
Interlocks and Insider Participation” in our Proxy Statement.
The
information required by this item concerning compensation of directors is
incorporated by reference from the information set forth in the section entitled
“Director Compensation” in our Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
information required by this Item concerning equity compensation plan
information is incorporated by reference from the information set forth in the
section titled “Equity Compensation Plan Information” in our Proxy
Statement.
The
information required by this Item regarding security ownership of certain
beneficial owners, directors and executive officers is incorporated by reference
from the information set forth in the section entitled “Security Ownership of
Management and Certain Beneficial Owners” in our Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information
required by this Item regarding director independence and transactions with
related persons is incorporated by reference from the information set forth in
the sections entitled “Corporate Governance–Board Structure,” “Committee
Membership” and “Other Disclosures” in our Proxy Statement.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The
information required by this Item is incorporated by reference from the
information set forth in the sections entitled “Report of the Audit Committee of
the Board of Directors” and “Proposal Two–Ratification of the Selection of
Independent Registered Public Accountants” in our Proxy Statement.
- 123
-
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a)
The following documents are filed as a part of this Annual Report on Form
10-K:
1.
Financial
Statements:
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
77
|
|
Consolidated
Balance Sheets
|
78
|
|
Consolidated
Statements of Operations
|
79
|
|
Consolidated
Statements of Stockholders’ Equity
|
80
|
|
Consolidated
Statements of Comprehensive Income (Loss)
|
81
|
|
Consolidated
Statements of Cash Flows
|
82
|
|
Notes
to Consolidated Financial Statements
|
83
|
2.
Financial Statement
Schedule:
|
Page
|
|
|
Schedule II –
Valuation and Qualifying Accounts
|
131
|
All
other financial statement schedules are omitted as the required information is
inapplicable or the information is presented in the Consolidated Financial
Statements or Notes to Consolidated Financial Statements under Item 8 of
this Annual Report on Form 10-K.
3.
Exhibits:
See
(b) below.
(b)
Exhibits:
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
|
|
|
2.1
|
Agreement
and Plan of Merger, dated November 15, 2006, by and among SunPower
Corporation, Pluto Acquisition Company LLC, PowerLight Corporation and
Thomas L. Dinwoodie (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K/A filed with the Securities and
Exchange Commission on November 22, 2006).
|
|
|
2.2
|
First
Amendment to Agreement and Plan of Merger, dated December 21, 2006, by and
between SunPower Corporation and PowerLight Corporation (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 22,
2006).
|
|
|
3.1
|
Form
of Restated Certificate of Incorporation of SunPower Corporation
(incorporated by reference to Exhibit 3.(i)2 to the Registrant’s
Registration Statement on Form S-1/A filed with the Securities and
Exchange Commission on November 11, 2005).
|
|
|
3.2
|
Form
of By-laws of SunPower Corporation (incorporated by reference to Exhibit
3.(ii)2 to the Registrant’s Registration Statement on Form S-1/A filed
with the Securities and Exchange Commission on October 11,
2005).
|
|
|
4.1
|
Specimen
Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1
to the Registrant’s Registration Statement on Form S-1/A filed with the
Securities and Exchange Commission on November 14,
2005).
|
|
|
4.2
|
Indenture,
dated February 7, 2007, by and between SunPower Corporation and Wells
Fargo Bank, National Association (incorporated by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 8,
2007).
|
- 124
-
|
4.3
|
First
Supplemental Indenture, dated February 7, 2007, by and between SunPower
Corporation and Wells Fargo Bank, National Association (incorporated by
reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 8,
2007).
|
|
|
4.4
|
Form
of Second Supplemental Indenture, by and between SunPower Corporation and
Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 4.1 of Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 26, 2007).
|
|
|
4.5
|
Form
of Registration Rights Agreement (incorporated by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 22,
2006).
|
|
|
10.1
|
Share
Lending Agreement, dated July 25, 2007, by and among SunPower Corporation,
Credit Suisse International and Credit Suisse Securities (USA) LLC
(incorporated by reference to Exhibit 10.1 of Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on July 26,
2007).
|
|
|
10.2
|
Amended
and Restated Share Lending Agreement, dated July 25, 2007, by and among
SunPower Corporation, Lehman Brothers International (Europe) Limited and
Lehman Brothers Inc. (incorporated by reference to Exhibit 10.2 of
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 26, 2007).
|
|
|
10.3
|
SunPower
Corporation 1996 Stock Plan and form of agreements thereunder
(incorporated by reference to Exhibit 10.3 to the Registrant’s
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on August 25, 2005).
|
|
|
10.4
|
SunPower
Corporation 2005 Stock Unit Plan (incorporated by reference to Exhibit
10.28 to the Registrant’s Registration Statement on Form S-1/A filed with
the Securities and Exchange Commission on October 31,
2005).
|
|
|
10.5
|
Amended
and Restated SunPower Corporation 2005 Stock Incentive Plan and form of
agreements thereunder (incorporated by reference to Exhibit 4.3 to the
Registrant’s Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on May 7, 2007).
|
|
|
10.6
|
PowerLight
Corporation Common Stock Option and Common Stock Purchase Plan
(incorporated by reference to Exhibit 4.3 to the Registrant’s Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on
January 25, 2007).
|
|
|
10.7
|
Form
of PowerLight Corporation Incentive/Non-Qualified Stock Option, Market
Standoff and Stock Restriction Agreement (Employees) (incorporated by
reference to Exhibit 4.4 to the Registrant’s Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on January 25,
2007).
|
|
|
10.8
|
Form
of PowerLight Corporation Non-Qualified Stock Option, Market Standoff and
Stock Restriction Agreement (Directors and Consultants) (incorporated by
reference to Exhibit 4.5 to the Registrant’s Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on January 25,
2007).
|
|
|
10.9
|
Form
of Non-Qualified Stock Option Agreement, by and between PowerLight
Corporation and Gary Wayne (incorporated by reference to Exhibit 4.7 to
the Registrant’s Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on January 25,
2007).
|
|
|
10.10
|
Form
of Non-Qualified Stock Option Agreement, by and between PowerLight
Corporation and Dan Shugar (incorporated by reference to Exhibit 4.9 to
the Registrant’s Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on January 25,
2007).
|
|
|
10.11
|
Form
of Equity Restriction Agreement, by and between SunPower Corporation and
each of Messrs. Dinwoodie, Wenger, Ledesma and Shugar (incorporated
by reference to Exhibit 10.4 to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on January 17,
2007).
|
- 125
-
|
10.12
|
Form
of Indemnification Agreement, by and between SunPower Corporation and its
officers and directors (incorporated by reference to Exhibit 10.1 to the
Registrant’s Registration Statement on Form S-1 filed with the Securities
and Exchange Commission on August 25, 2005).
|
|
|
10.13
|
Offer
Letter, dated May 22, 2003, by and between SunPower Corporation and Thomas
Werner (incorporated by reference to Exhibit 10.8 to the Registrant’s
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on August 25, 2005).
|
|
|
10.14
|
Offer
Letter, dated January 14, 2005, by and between SunPower Corporation and PM
Pai (incorporated by reference to Exhibit 10.9 to the Registrant’s
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on August 25, 2005).
|
|
|
10.15
|
Offer
Letter, dated April 1, 2005, by and between SunPower Corporation and
Emmanuel Hernandez (incorporated by reference to Exhibit 10.10 to the
Registrant’s Registration Statement on Form S-1 filed with the Securities
and Exchange Commission on August 25, 2005).
|
|
|
10.16
|
SunPower
Corporation 2006 Key Employee Bonus Plan (KEBP) (incorporated by reference
to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 24,
2006).
|
|
|
10.17
|
Amended
and Restated Employment Agreement, effective as of January 11, 2007,
by and between Thomas L. Dinwoodie and PowerLight Corporation
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on
January 17, 2007).
|
|
|
10.18
|
Amended
and Restated Employment Agreement, effective as of January 11, 2007, by
and between Howard J. Wenger and PowerLight Corporation (incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 17,
2007).
|
|
|
10.19
|
Amended
and Restated Employment Agreement, effective as of January 11, 2007, by
and between Bruce R. Ledesma and PowerLight Corporation (incorporated by
reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 17,
2007).
|
|
|
10.20
|
Amended and Restated Employment Agreement, effective as of January 11, 2007, by and between Dan S. Shugar and PowerLight Corporation. | |
|
10.21
|
Industrial
Lease, dated May 12, 1999, between Temescal, L.P., Contra Costa Industrial
Park, Ltd. and PowerLight Corporation (as amended on November 6, 2000 and
January 22, 2004) (incorporated by reference to Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 11, 2007).
|
|
|
10.22
|
Standard
Industrial / Commercial Multi-Tenant Lease, dated December 15, 2006, by
and between PowerLight Corporation and FPOC, LLC (incorporated by
reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on May 11,
2007).
|
|
|
10.23
|
First
Amendment to Lease, dated May 24, 2007, by and between PowerLight
Corporation and FPOC, LLC (incorporated by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on August 7, 2007).
|
|
|
10.24
|
Second
Amendment to Lease, dated December 18, 2007, by and between SunPower
Corporation, Systems and FPOC, LLC.
|
|
|
10.25
|
PV
Risk Reduction Agreement, dated December 18, 2007, by and between SunPower
Corporation, Systems and FPOC, LLC.
|
|
|
10.26†
|
Credit
Agreement, dated July 13, 2007, by and between SunPower Corporation and
Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on November 9,
2007).
|
- 126
-
|
10.27
|
First
Amendment to Credit Agreement, dated August 20, 2007, by and between
SunPower Corporation and Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
November 9, 2007).
|
|
|
10.28
|
Second
Amendment to Credit Agreement, dated August 31, 2007, by and between
SunPower Corporation and Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
November 9, 2007).
|
|
|
10.29†
|
Security
Agreement, dated July 13, 2007, by and between SunPower Corporation and
Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on November 9,
2007).
|
|
|
10.30
|
Continuing
Guaranty, dated July 13, 2007, by and between SunPower North America,
Inc., SunPower Corporation, Systems and Wells Fargo Bank, National
Association (incorporated by reference to Exhibit 10.3 to the Registrant’s
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on November 9, 2007).
|
|
|
10.31†
|
Original
Equipment Manufacturer Production of Photovoltaic Modules Agreement, dated
December 6, 2006, by and between PowerLight Corporation and aleo solar AG
(as amended on March 21, 2007) (incorporated by reference to Exhibit 10.10
to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 11, 2007).
|
|
|
10.32†
|
Supply
Agreement, dated June 30, 2006, by and between SunPower Philippines
Manufacturing, Ltd. and DC Chemical Co., Ltd. (incorporated by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on August 16,
2006).
|
|
|
10.33†
|
Photovoltaic
Module Master Supply Agreement, dated November 3, 2005, by and among
PowerLight Corporation, PowerLight Systems AG and Evergreen Solar, Inc.
(incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
May 11, 2007).
|
|
|
10.34†
|
Amendment
One to Photovoltaic Module Master Supply Agreement, dated June 29, 2006,
by and among PowerLight Corporation, PowerLight Systems AG and Evergreen
Solar, Inc. (incorporated by reference to Exhibit 10.9 to the Registrant’s
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on May 11, 2007).
|
|
|
10.35†
|
Wafering
Supply and Sales Agreement, dated October 1, 2007, by and between SunPower
Philippines Manufacturing Ltd. and First Philec Solar Corp. (incorporated
by reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on November 9,
2007).
|
|
|
10.36†
|
Long-Term
Supply Agreement II, dated July 16, 2007, by and between SunPower
Corporation and Hemlock Semiconductor Corporation (incorporated by
reference to Exhibit 10.4 to the Registrant’s Quarterly Report filed with
the Securities and Exchange Commission on November 9,
2007).
|
|
|
10.37†
|
Ingot/Wafer
Agreement, dated December 3, 2007, by and between SunPower Corporation and
Jiawei SolarChina Co., LTD.
|
|
|
10.38†
|
Terms
and Conditions, dated January 1, 2006, by and between SunPower Philippines
Manufacturing Ltd. and M.Setek Company Ltd. (incorporated by reference to
Exhibit 10.35 to the Registrant’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on May 16,
2006).
|
|
|
10.39†
|
Long-Term
Ingot and Wafer Supply Agreement, dated August 9, 2007, by and between
SunPower Corporation and NorSun AS (incorporated by reference to Exhibit
10.7 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on November 9,
2007).
|
- 127
-
|
10.40†
|
Master
Supply Contract for Solar Cells, dated May 18, 2006, by and between
PowerLight Corporation and Q-Cells Aktiengesellschaft (incorporated by
reference to Exhibit 10.11 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on May 11,
2007).
|
|
|
10.41†
|
Supply
Agreement, dated August 21, 2005, by and between SunPower Corporation and
Wacker-Chemie GmbH (incorporated by reference to Exhibit 10.22 to the
Registrant’s Registration Statement on Form S-1/A filed with the
Securities and Exchange Commission on October 11,
2005).
|
|
|
10.42†
|
Supply
Agreement, dated August 3, 2006, by and between SunPower Corporation and
Wacker Chemie AG (incorporated by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 13, 2006).
|
|
|
10.43†
|
Ingot
Supply Agreement, dated December 22, 2006, by and between SunPower
Corporation and Woongjin Energy Co., Ltd. (incorporated by reference to
Exhibit 10.62 to the Registrant’s Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 2,
2007).
|
|
|
10.44†
|
Engineering,
Procurement and Construction Agreement, dated as of March 26, 2007, by and
among PowerLight Systems S.A., Agrupacion Solar Llerena-Badajoz 1, A.I.E.
and Solarpack Corporacion Tecnologica, S.L. (incorporated by reference to
Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on May 11,
2007).
|
|
|
10.45†
|
Supply
Agreement, dated April 17, 2004, by and between SunPower Corporation and
Conergy AG, and Appendixes thereto (incorporated by reference to Exhibit
10.24 to the Registrant’s Registration Statement on Form S-1/A filed with
the Securities and Exchange Commission on November 14,
2005).
|
|
|
10.46†
|
Amendment
to Supply Agreement, dated December 22, 2005, by and between SunPower
Corporation and Conergy AG (incorporated by reference to Exhibit 10.31 to
the Registrant’s Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 24, 2006).
|
|
|
10.47†
|
Amendment
to Supply Agreement, dated June 21, 2007, by and between SunPower
Corporation and Conergy AG (incorporated by reference to Exhibit 10.2 to
the Registrant’s Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on August 7, 2007).
|
|
|
10.48†
|
Long-Term
Polysilicon Supply Agreement, dated August 9, 2007, by and between
SunPower Corporation and NorSun AS (incorporated by reference to Exhibit
10.8 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on November 9,
2007).
|
|
|
10.49†
|
Turnkey
Construction Contract for the Construction of a Solar Park, dated December
28, 2007, by and between SunPower Energy Systems Spain, S.L. and Solargen
Proyectos e Instalaciones Solares, S.L.
|
|
|
10.50†
|
Amended
and Restated Supply Agreement, dated November 10, 2005, by and among
SunPower Corporation, SunPower Technology Limited and Solon AG fur
Solartechnik (incorporated by reference to Exhibit 10.23 to the
Registrant’s Registration Statement on Form S-1/A filed with the
Securities and Exchange Commission on November 14,
2005).
|
|
|
10.51†
|
Turnkey
Construction Contract for the Construction of a Solar Park, dated October
10, 2007, by and between SunPower Energy System Spain S.L. and Sedwick
Corporate, S.L.
|
|
|
10.52†
|
Polysilicon
Supply Agreement, dated December 22, 2006, by and between SunPower
Corporation Manufacturing, Ltd. and Woongjin Energy Co., Ltd.
(incorporated by reference to Exhibit 10.61 to the Registrant’s Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
March 2, 2007).
|
|
|
10.53†
|
Turnkey
Construction Contract for the Construction of a Solar Park, dated November
6, 2007, by and between SunPower Energy Systems Spain, S.L. and Almuradiel
Solar, S.L.
|
- 128
-
|
10.54†
|
Turnkey
Construction Contract for the Construction of a Solar Park, dated November
6, 2007, by and between SunPower Energy Systems Spain, S.L. and Moralas
Renovables, S.L.
|
|
|
10.55†
|
Turnkey
Construction Contract for the Construction of a Solar Park, dated November
6, 2007, by and between SunPower Energy Systems Spain, S.L. and Naturener
Solar Tinajeros, S.L.
|
|
|
10.56
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated November 21, 2007, by and among SunPower Energy Systems Spain, S.L.,
Almuradiel Solar, S.L., Moralas Renovables, S.L. and Naturener Solar
Tinajeros, S.L.
|
|
|
10.57†
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated November 29, 2007, by and between SunPower Energy Systems Spain,
S.L. and Almuradiel Solar, S.L.
|
|
|
10.58†
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated November 29, 2007, by and between SunPower Energy Systems Spain,
S.L. and Moralas Renovables, S.L.
|
|
|
10.59†
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated November 29, 2007, by and between SunPower Energy Systems Spain,
S.L. and Naturener Solar Tinajeros, S.L.
|
|
|
10.60
|
Master
Separation Agreement, dated October 6, 2005, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.12 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on October
11, 2005).
|
|
|
10.61
|
Indemnification
and Insurance Matters Agreement, dated October 6, 2005, by and between
SunPower Corporation and Cypress Semiconductor Corporation (incorporated
by reference to Exhibit 10.13 to the Registrant’s Registration Statement
on Form S-1/A filed with the Securities and Exchange Commission on October
11, 2005).
|
|
|
10.62
|
Investor
Rights Agreement, dated October 6, 2005, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.14 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on October
11, 2005).
|
|
|
10.63
|
Employee
Matters Agreement, dated October 6, 2005, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.15 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on October
11, 2005).
|
|
|
10.64
|
Tax
Sharing Agreement, dated October 6, 2005, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.16 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on
October 11, 2005).
|
|
|
10.65
|
Master
Transition Services Agreement, dated October 6, 2005, by and between
SunPower Corporation and Cypress Semiconductor Corporation (incorporated
by reference to Exhibit 10.17 to the Registrant’s Registration Statement
on Form S-1/A filed with the Securities and Exchange Commission on October
11, 2005).
|
|
|
10.66
|
Wafer
Manufacturing Agreement, dated October 6, 2005, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.18 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on October
11, 2005).
|
|
|
10.67
|
Contract
of Lease, dated October 6, 2005, by and between SunPower Philippines
Manufacturing Ltd. – Philippines Branch and Cypress Semiconductor
Corporation (incorporated by reference to Exhibit 10.19 to the
Registrant’s Registration Statement on Form S-1/A filed with the
Securities and Exchange Commission on October 11,
2005).
|
- 129
-
|
10.68
|
Services
Agreement, dated January 1, 2005, by and between Cypress
Semiconductor Philippines Headquarters Ltd. Regional Operating
Headquarters and SunPower Philippines Manufacturing Ltd. (incorporated by
reference to Exhibit 10.26 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on
October 31, 2005).
|
|
|
10.69
|
Asset
Lease, dated October 28, 2005, by and between SunPower Corporation and
Cypress Semiconductor Corporation (incorporated by reference to Exhibit
10.27 to the Registrant’s Registration Statement on Form S-1/A filed with
the Securities and Exchange Commission on October 31,
2005).
|
|
|
10.70
|
Office
Lease Agreement, dated May 15, 2006 between SunPower Corporation and
Cypress Semiconductor Corporation (incorporated by reference to Exhibit
10.36 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 16, 2006).
|
|
|
21.1
|
List
of Subsidiaries.
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
24.1
|
Power
of Attorney (set forth on the signature page of this
Report).
|
|
|
31.1
|
Certification
by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
31.2
|
Certification
by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
32.1
|
Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
A
cross (†) indicates that confidential treatment has been requested for portions
of the marked exhibits.
- 130
-
(c)
Financial Statement Schedules:
VALUATION
AND QUALIFYING ACCOUNTS
|
(In
thousands)
|
Balance at
Beginning of
Period
|
Charges
(Releases)
to
Expenses/Revenues
|
Deductions
|
Balance at End
of
Period
|
||||||||||||
|
Allowance
for doubtful accounts:
|
||||||||||||||||
|
Year ended
December 30, 2007
|
$
|
557
|
$
|
816
|
$
|
—
|
$
|
1,373
|
||||||||
|
Year ended December 31,
2006
|
317
|
272
|
(32
|
)
|
557
|
|||||||||||
|
Year ended January 1,
2006
|
59
|
258
|
—
|
317
|
||||||||||||
|
Allowance
for sales returns:
|
||||||||||||||||
|
Year ended
December 30, 2007
|
$
|
445
|
$
|
2,172
|
$
|
(2,249
|
)
|
$
|
368
|
|||||||
|
Year ended December 31,
2006
|
110
|
808
|
(473
|
)
|
445
|
|||||||||||
|
Year ended January 1,
2006
|
—
|
101
|
—
|
110
|
||||||||||||
|
Valuation
allowance for deferred tax asset:
|
||||||||||||||||
|
Year ended
December 30, 2007
|
$
|
9,836
|
$
|
4,088
|
$
|
—
|
$
|
13,924
|
||||||||
|
Year ended December 31,
2006
|
9,278
|
558
|
—
|
9,836
|
||||||||||||
|
Year ended January 1,
2006
|
5,049
|
4,229
|
—
|
9,278
|
||||||||||||
- 131
-
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized.
|
SUNPOWER CORPORATION
|
||||
|
Dated:
March 3, 2008
|
By:
|
/s/ EMMANUEL T. HERNANDEZ
|
||
|
Emmanuel
T. Hernandez
|
||||
|
Chief
Financial Officer
|
||||
POWER OF
ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENT: That the undersigned officers and directors of
SunPower Corporation do hereby constitute and appoint Thomas H. Werner, Emmanuel
T. Hernandez, and Bruce Ledesma, and each of them, the lawful attorney and agent
or attorneys and agents with power and authority to do any and all acts and
things and to execute any and all instruments which said attorneys and agents,
or either of them, determine may be necessary or advisable or required to enable
SunPower Corporation to comply with the Securities and Exchange Act of 1934, as
amended, and any rules or regulations or requirements of the Securities and
Exchange Commission in connection with this Report. Without limiting the
generality of the foregoing power and authority, the powers granted include the
power and authority to sign the names of the undersigned officers and directors
in the capacities indicated below to this Report or amendments or supplements
thereto, and each of the undersigned hereby ratifies and confirms all that said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof. This Power of Attorney may be signed in several
counterparts.
IN
WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as
of the date indicated opposite the name.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
THOMAS H. WERNER
|
Chief
Executive Officer and Director
|
March
3, 2008
|
||
|
Thomas
H. Werner
|
(Principal
Executive Officer)
|
|||
|
/s/
EMMANUEL T. HERNANDEZ
|
Chief
Financial Officer
|
March
3, 2008
|
||
|
Emmanuel
T. Hernandez
|
(Principal
Financial and Accounting Officer)
|
|||
|
/s/
T.J. RODGERS
|
Chairman
of the Board of Directors
|
March
3, 2008
|
||
|
T.J.
Rodgers
|
|
/s/
W. STEVE ALBRECHT
|
Director
|
March
3, 2008
|
||
|
W.
Steve Albrecht
|
||||
|
/s/
BETSY S. ATKINS
|
Director
|
March
3, 2008
|
||
|
Betsy
S. Atkins
|
||||
|
/s/
PATRICK WOOD
|
Director
|
March
3, 2008
|
||
|
Patrick
Wood
|
- 132
-
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
|
|
|
2.1
|
Agreement
and Plan of Merger, dated November 15, 2006, by and among SunPower
Corporation, Pluto Acquisition Company LLC, PowerLight Corporation and
Thomas L. Dinwoodie (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K/A filed with the Securities and
Exchange Commission on November 22, 2006).
|
|
|
2.2
|
First
Amendment to Agreement and Plan of Merger, dated December 21, 2006, by and
between SunPower Corporation and PowerLight Corporation (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 22,
2006).
|
|
|
3.1
|
Form
of Restated Certificate of Incorporation of SunPower Corporation
(incorporated by reference to Exhibit 3.(i)2 to the Registrant’s
Registration Statement on Form S-1/A filed with the Securities and
Exchange Commission on November 11, 2005).
|
|
|
3.2
|
Form
of By-laws of SunPower Corporation (incorporated by reference to Exhibit
3.(ii)2 to the Registrant’s Registration Statement on Form S-1/A filed
with the Securities and Exchange Commission on October 11,
2005).
|
|
|
4.1
|
Specimen
Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1
to the Registrant’s Registration Statement on Form S-1/A filed with the
Securities and Exchange Commission on November 14,
2005).
|
|
|
4.2
|
Indenture,
dated February 7, 2007, by and between SunPower Corporation and Wells
Fargo Bank, National Association (incorporated by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 8,
2007).
|
|
|
4.3
|
First
Supplemental Indenture, dated February 7, 2007, by and between SunPower
Corporation and Wells Fargo Bank, National Association (incorporated by
reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 8,
2007).
|
|
|
4.4
|
Form
of Second Supplemental Indenture, by and between SunPower Corporation and
Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 4.1 of Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 26, 2007).
|
|
|
4.5
|
Form
of Registration Rights Agreement (incorporated by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 22,
2006).
|
|
|
10.1
|
Share
Lending Agreement, dated July 25, 2007, by and among SunPower Corporation,
Credit Suisse International and Credit Suisse Securities (USA) LLC
(incorporated by reference to Exhibit 10.1 of Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on July 26,
2007).
|
|
|
10.2
|
Amended
and Restated Share Lending Agreement, dated July 25, 2007, by and among
SunPower Corporation, Lehman Brothers International (Europe) Limited and
Lehman Brothers Inc. (incorporated by reference to Exhibit 10.2 of
Registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 26, 2007).
|
|
|
10.3
|
SunPower
Corporation 1996 Stock Plan and form of agreements thereunder
(incorporated by reference to Exhibit 10.3 to the Registrant’s
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on August 25, 2005).
|
|
|
10.4
|
SunPower
Corporation 2005 Stock Unit Plan (incorporated by reference to Exhibit
10.28 to the Registrant’s Registration Statement on Form S-1/A filed with
the Securities and Exchange Commission on October 31,
2005).
|
|
10.5
|
Amended
and Restated SunPower Corporation 2005 Stock Incentive Plan and form of
agreements thereunder (incorporated by reference to Exhibit 4.3 to the
Registrant’s Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on May 7, 2007).
|
|
|
10.6
|
PowerLight
Corporation Common Stock Option and Common Stock Purchase Plan
(incorporated by reference to Exhibit 4.3 to the Registrant’s Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on
January 25, 2007).
|
|
|
10.7
|
Form
of PowerLight Corporation Incentive/Non-Qualified Stock Option, Market
Standoff and Stock Restriction Agreement (Employees) (incorporated by
reference to Exhibit 4.4 to the Registrant’s Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on January 25,
2007).
|
|
|
10.8
|
Form
of PowerLight Corporation Non-Qualified Stock Option, Market Standoff and
Stock Restriction Agreement (Directors and Consultants) (incorporated by
reference to Exhibit 4.5 to the Registrant’s Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on January 25,
2007).
|
|
|
10.9
|
Form
of Non-Qualified Stock Option Agreement, by and between PowerLight
Corporation and Gary Wayne (incorporated by reference to Exhibit 4.7 to
the Registrant’s Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on January 25,
2007).
|
|
|
10.10
|
Form
of Non-Qualified Stock Option Agreement, by and between PowerLight
Corporation and Dan Shugar (incorporated by reference to Exhibit 4.9 to
the Registrant’s Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on January 25,
2007).
|
|
|
10.11
|
Form
of Equity Restriction Agreement, by and between SunPower Corporation and
each of Messrs. Dinwoodie, Wenger, Ledesma and Shugar (incorporated by
reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 17,
2007).
|
|
|
10.12
|
Form
of Indemnification Agreement, by and between SunPower Corporation and its
officers and directors (incorporated by reference to Exhibit 10.1 to the
Registrant’s Registration Statement on Form S-1 filed with the Securities
and Exchange Commission on August 25, 2005).
|
|
|
10.13
|
Offer
Letter, dated May 22, 2003, by and between SunPower Corporation and Thomas
Werner (incorporated by reference to Exhibit 10.8 to the Registrant’s
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on August 25, 2005).
|
|
|
10.14
|
Offer
Letter, dated January 14, 2005, by and between SunPower Corporation and PM
Pai (incorporated by reference to Exhibit 10.9 to the Registrant’s
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on August 25, 2005).
|
|
|
10.15
|
Offer
Letter, dated April 1, 2005, by and between SunPower Corporation and
Emmanuel Hernandez (incorporated by reference to Exhibit 10.10 to the
Registrant’s Registration Statement on Form S-1 filed with the Securities
and Exchange Commission on August 25, 2005).
|
|
|
10.16
|
SunPower
Corporation 2006 Key Employee Bonus Plan (KEBP) (incorporated by reference
to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 24,
2006).
|
|
|
10.17
|
Amended
and Restated Employment Agreement, effective as of January 11, 2007,
by and between Thomas L. Dinwoodie and PowerLight Corporation
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on
January 17, 2007).
|
|
|
10.18
|
Amended
and Restated Employment Agreement, effective as of January 11, 2007, by
and between Howard J. Wenger and PowerLight Corporation (incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 17,
2007).
|
|
10.19
|
Amended
and Restated Employment Agreement, effective as of January 11, 2007, by
and between Bruce R. Ledesma and PowerLight Corporation (incorporated by
reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 17,
2007).
|
|
|
10.20
|
Amended and Restated Employment Agreement, effective as of January 11, 2007, by and between Dan S. Shugar and PowerLight Corporation. | |
|
10.21
|
Industrial
Lease, dated May 12, 1999, between Temescal, L.P., Contra Costa Industrial
Park, Ltd. and PowerLight Corporation (as amended on November 6, 2000 and
January 22, 2004) (incorporated by reference to Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 11, 2007).
|
|
|
10.22
|
Standard
Industrial / Commercial Multi-Tenant Lease, dated December 15, 2006, by
and between PowerLight Corporation and FPOC, LLC (incorporated by
reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on May 11,
2007).
|
|
|
10.23
|
First
Amendment to Lease, dated May 24, 2007, by and between PowerLight
Corporation and FPOC, LLC (incorporated by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on August 7, 2007).
|
|
|
10.24
|
Second
Amendment to Lease, dated December 18, 2007, by and between SunPower
Corporation, Systems and FPOC, LLC.
|
|
|
10.25
|
PV
Risk Reduction Agreement, dated December 18, 2007, by and between SunPower
Corporation, Systems and FPOC, LLC.
|
|
|
10.26†
|
Credit
Agreement, dated July 13, 2007, by and between SunPower Corporation and
Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on November 9,
2007).
|
|
|
10.27
|
First
Amendment to Credit Agreement, dated August 20, 2007, by and between
SunPower Corporation and Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
November 9, 2007).
|
|
|
10.28
|
Second
Amendment to Credit Agreement, dated August 31, 2007, by and between
SunPower Corporation and Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
November 9, 2007).
|
|
|
10.29†
|
Security
Agreement, dated July 13, 2007, by and between SunPower Corporation and
Wells Fargo Bank, National Association (incorporated by reference to
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on November 9,
2007).
|
|
|
10.30
|
Continuing
Guaranty, dated July 13, 2007, by and between SunPower North America,
Inc., SunPower Corporation, Systems and Wells Fargo Bank, National
Association (incorporated by reference to Exhibit 10.3 to the Registrant’s
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on November 9, 2007).
|
|
|
10.31†
|
Original
Equipment Manufacturer Production of Photovoltaic Modules Agreement, dated
December 6, 2006, by and between PowerLight Corporation and aleo solar AG
(as amended on March 21, 2007) (incorporated by reference to Exhibit 10.10
to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 11, 2007).
|
|
|
10.32†
|
Supply
Agreement, dated June 30, 2006, by and between SunPower Philippines
Manufacturing, Ltd. and DC Chemical Co., Ltd. (incorporated by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on August 16,
2006).
|
|
10.33†
|
Photovoltaic
Module Master Supply Agreement, dated November 3, 2005, by and among
PowerLight Corporation, PowerLight Systems AG and Evergreen Solar, Inc.
(incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on
May 11, 2007).
|
|
|
10.34†
|
Amendment
One to Photovoltaic Module Master Supply Agreement, dated June 29, 2006,
by and among PowerLight Corporation, PowerLight Systems AG and Evergreen
Solar, Inc. (incorporated by reference to Exhibit 10.9 to the Registrant’s
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on May 11, 2007).
|
|
|
10.35†
|
Wafering
Supply and Sales Agreement, dated October 1, 2007, by and between SunPower
Philippines Manufacturing Ltd. and First Philec Solar Corp. (incorporated
by reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on November 9,
2007).
|
|
|
10.36†
|
Long-Term
Supply Agreement II, dated July 16, 2007, by and between SunPower
Corporation and Hemlock Semiconductor Corporation (incorporated by
reference to Exhibit 10.4 to the Registrant’s Quarterly Report filed with
the Securities and Exchange Commission on November 9,
2007).
|
|
|
10.37†
|
Ingot/Wafer
Agreement, dated December 3, 2007, by and between SunPower Corporation and
Jiawei SolarChina Co., LTD.
|
|
|
10.38†
|
Terms
and Conditions, dated January 1, 2006, by and between SunPower Philippines
Manufacturing Ltd. and M.Setek Company Ltd. (incorporated by reference to
Exhibit 10.35 to the Registrant’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on May 16,
2006).
|
|
|
10.39†
|
Long-Term
Ingot and Wafer Supply Agreement, dated August 9, 2007, by and between
SunPower Corporation and NorSun AS (incorporated by reference to Exhibit
10.7 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on November 9,
2007).
|
|
|
10.40†
|
Master
Supply Contract for Solar Cells, dated May 18, 2006, by and between
PowerLight Corporation and Q-Cells Aktiengesellschaft (incorporated by
reference to Exhibit 10.11 to the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on May 11,
2007).
|
|
|
10.41†
|
Supply
Agreement, dated August 21, 2005, by and between SunPower Corporation and
Wacker-Chemie GmbH (incorporated by reference to Exhibit 10.22 to the
Registrant’s Registration Statement on Form S-1/A filed with the
Securities and Exchange Commission on October 11,
2005).
|
|
|
10.42†
|
Supply
Agreement, dated August 3, 2006, by and between SunPower Corporation and
Wacker Chemie AG (incorporated by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 13, 2006).
|
|
|
10.43†
|
Ingot
Supply Agreement, dated December 22, 2006, by and between SunPower
Corporation and Woongjin Energy Co., Ltd. (incorporated by reference to
Exhibit 10.62 to the Registrant’s Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 2,
2007).
|
|
|
10.44†
|
Engineering,
Procurement and Construction Agreement, dated as of March 26, 2007, by and
among PowerLight Systems S.A., Agrupacion Solar Llerena-Badajoz 1, A.I.E.
and Solarpack Corporacion Tecnologica, S.L. (incorporated by reference to
Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on May 11,
2007).
|
|
|
10.45†
|
Supply
Agreement, dated April 17, 2004, by and between SunPower Corporation and
Conergy AG, and Appendixes thereto (incorporated by reference to Exhibit
10.24 to the Registrant’s Registration Statement on Form S-1/A filed with
the Securities and Exchange Commission on November 14,
2005).
|
|
10.46†
|
Amendment
to Supply Agreement, dated December 22, 2005, by and between SunPower
Corporation and Conergy AG (incorporated by reference to Exhibit 10.31 to
the Registrant’s Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 24, 2006).
|
|
|
10.47†
|
Amendment
to Supply Agreement, dated June 21, 2007, by and between SunPower
Corporation and Conergy AG (incorporated by reference to Exhibit 10.2 to
the Registrant’s Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on August 7, 2007).
|
|
|
10.48†
|
Long-Term
Polysilicon Supply Agreement, dated August 9, 2007, by and between
SunPower Corporation and NorSun AS (incorporated by reference to Exhibit
10.8 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on November 9,
2007).
|
|
|
10.49†
|
Turnkey
Construction Contract for the Construction of a Solar Park, dated December
28, 2007, by and between SunPower Energy Systems Spain, S.L. and Solargen
Proyectos e Instalaciones Solares, S.L.
|
|
|
10.50†
|
Amended
and Restated Supply Agreement, dated November 10, 2005, by and among
SunPower Corporation, SunPower Technology Limited and Solon AG fur
Solartechnik (incorporated by reference to Exhibit 10.23 to the
Registrant’s Registration Statement on Form S-1/A filed with the
Securities and Exchange Commission on November 14,
2005).
|
|
|
10.51†
|
Turnkey
Construction Contract for the Construction of a Solar Park, dated October
10, 2007, by and between SunPower Energy System Spain S.L. and Sedwick
Corporate, S.L.
|
|
|
10.52†
|
Polysilicon
Supply Agreement, dated December 22, 2006, by and between SunPower
Corporation Manufacturing, Ltd. and Woongjin Energy Co., Ltd.
(incorporated by reference to Exhibit 10.61 to the Registrant’s Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
March 2, 2007).
|
|
|
10.53†
|
Turnkey
Construction Contract for the Construction of a Solar Park, dated November
6, 2007, by and between SunPower Energy Systems Spain, S.L. and Almuradiel
Solar, S.L.
|
|
|
10.54†
|
Turnkey
Construction Contract for the Construction of a Solar Park, dated November
6, 2007, by and between SunPower Energy Systems Spain, S.L. and Moralas
Renovables, S.L.
|
|
|
10.55†
|
Turnkey
Construction Contract for the Construction of a Solar Park, dated November
6, 2007, by and between SunPower Energy Systems Spain, S.L. and Naturener
Solar Tinajeros, S.L.
|
|
|
10.56
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated November 21, 2007, by and among SunPower Energy Systems Spain, S.L.,
Almuradiel Solar, S.L., Moralas Renovables, S.L. and Naturener Solar
Tinajeros, S.L.
|
|
|
10.57†
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated November 29, 2007, by and between SunPower Energy Systems Spain,
S.L. and Almuradiel Solar, S.L.
|
|
|
10.58†
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated November 29, 2007, by and between SunPower Energy Systems Spain,
S.L. and Moralas Renovables, S.L.
|
|
|
10.59†
|
Amendment
to Turnkey Construction Contract for the Construction of a Solar Park,
dated November 29, 2007, by and between SunPower Energy Systems Spain,
S.L. and Naturener Solar Tinajeros, S.L.
|
|
|
10.60
|
Master
Separation Agreement, dated October 6, 2005, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.12 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on October
11, 2005).
|
|
10.61
|
Indemnification
and Insurance Matters Agreement, dated October 6, 2005, by and between
SunPower Corporation and Cypress Semiconductor Corporation (incorporated
by reference to Exhibit 10.13 to the Registrant’s Registration Statement
on Form S-1/A filed with the Securities and Exchange Commission on October
11, 2005).
|
|
|
10.62
|
Investor
Rights Agreement, dated October 6, 2005, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.14 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on October
11, 2005).
|
|
|
10.63
|
Employee
Matters Agreement, dated October 6, 2005, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.15 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on October
11, 2005).
|
|
|
10.64
|
Tax
Sharing Agreement, dated October 6, 2005, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.16 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on
October 11, 2005).
|
|
|
10.65
|
Master
Transition Services Agreement, dated October 6, 2005, by and between
SunPower Corporation and Cypress Semiconductor Corporation (incorporated
by reference to Exhibit 10.17 to the Registrant’s Registration Statement
on Form S-1/A filed with the Securities and Exchange Commission on October
11, 2005).
|
|
|
10.66
|
Wafer
Manufacturing Agreement, dated October 6, 2005, by and between SunPower
Corporation and Cypress Semiconductor Corporation (incorporated by
reference to Exhibit 10.18 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on October
11, 2005).
|
|
|
10.67
|
Contract
of Lease, dated October 6, 2005, by and between SunPower Philippines
Manufacturing Ltd. – Philippines Branch and Cypress Semiconductor
Corporation (incorporated by reference to Exhibit 10.19 to the
Registrant’s Registration Statement on Form S-1/A filed with the
Securities and Exchange Commission on October 11,
2005).
|
|
|
10.68
|
Services
Agreement, dated January 1, 2005, by and between Cypress
Semiconductor Philippines Headquarters Ltd. Regional Operating
Headquarters and SunPower Philippines Manufacturing Ltd. (incorporated by
reference to Exhibit 10.26 to the Registrant’s Registration Statement on
Form S-1/A filed with the Securities and Exchange Commission on
October 31, 2005).
|
|
|
10.69
|
Asset
Lease, dated October 28, 2005, by and between SunPower Corporation and
Cypress Semiconductor Corporation (incorporated by reference to Exhibit
10.27 to the Registrant’s Registration Statement on Form S-1/A filed with
the Securities and Exchange Commission on October 31,
2005).
|
|
|
10.70
|
Office
Lease Agreement, dated May 15, 2006 between SunPower Corporation and
Cypress Semiconductor Corporation (incorporated by reference to Exhibit
10.36 to the Registrant’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 16, 2006).
|
|
|
21.1
|
List
of Subsidiaries.
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
24.1
|
Power
of Attorney (set forth on the signature page of this
Report).
|
|
|
31.1
|
Certification
by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
31.2
|
Certification
by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
32.1
|
Certification
Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
A
cross (†) indicates that confidential treatment has been requested for portions
of the marked exhibits.