Edgar Filing: SUNPOWER CORP

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________

FORM 10-Q

_____________________

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 28, 2009

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 001-34166

SunPower Corporation

(Exact Name of Registrant as Specified in Its Charter)

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

3939 North First Street, San Jose, California 95134

(Address of Principal Executive Offices and Zip Code)

(408) 240-5500

(Registrant’s Telephone Number, Including Area Code)

_____________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No T

The total number of outstanding shares of the registrant’s class A common stock as of July 29, 2009 was 54,703,331.

The total number of outstanding shares of the registrant’s class B common stock as of July 29, 2009 was 42,033,287.

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SunPower Corporation

INDEX TO FORM 10-Q

		Page
PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements (unaudited)	3

	Condensed Consolidated Balance Sheets as of June 28, 2009 and December 28, 2008	3

	Condensed Consolidated Statements of Operations for the three and six months ended June 28, 2009 and June 29, 2008	4

	Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 2009 and June 29, 2008	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosure About Market Risks	42

Item 4.	Controls and Procedures	44

PART II. OTHER INFORMATION		45

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 4.	Submission of Matters to a Vote of Security Holders	46

Item 6.	Exhibits	47

Signatures		48

Index to Exhibits		49

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Index

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

SunPower Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)

	June 28, 2009			December 28, 2008(1)
Assets
Current assets:
Cash and cash equivalents	$	456,835		$	202,331
Restricted cash and cash equivalents, current portion		28,303			13,240
Short-term investments		796			17,179
Accounts receivable, net		219,644			194,222
Costs and estimated earnings in excess of billings		11,133			30,326
Inventories		262,893			251,542
Advances to suppliers, current portion		27,951			43,190
Prepaid expenses and other current assets		122,260			98,254
Total current assets		1,129,815			850,284

Restricted cash and cash equivalents, net of current portion		189,235			162,037
Long-term investments		18,482			23,577
Property, plant and equipment, net		683,011			629,247
Goodwill		197,693			196,720
Other intangible assets, net		33,089			39,490
Advances to suppliers, net of current portion		113,197			119,420
Other long-term assets		85,826			76,751
Total assets	$	2,450,348		$	2,097,526
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	151,987		$	263,241
Accrued liabilities		130,024			157,049
Billings in excess of costs and estimated earnings		50,710			11,806
Customer advances, current portion		19,005			19,035
Total current liabilities		351,726			451,131

Long-term debt		136,338			54,598
Convertible debt		532,840			357,173
Long-term deferred tax liability		9,279			8,141
Customer advances, net of current portion		83,211			91,359
Other long-term liabilities		24,569			25,950
Total liabilities		1,137,963			988,352
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.001 par value, 10,042,490 shares authorized; none issued and outstanding		—			—
Common stock, $0.001 par value, 150,000,000 shares of class B common stock authorized; 42,033,287 shares of class B common stock issued and outstanding; $0.001 par value, 217,500,000 shares of class A common stock authorized; 54,867,940 and 44,055,644 shares of class A common stock issued; 54,566,166 and 43,849,566 shares of class A common stock outstanding, at June 28, 2009 and December 28, 2008, respectively		97			86
Additional paid-in capital		1,263,166			1,065,745
Accumulated other comprehensive loss		(36,095	)		(25,611	)
Retained earnings		96,996			77,611
		1,324,164			1,117,831
Less: shares of class A common stock held in treasury, at cost; 301,774 and 206,078 shares at June 28, 2009 and December 28, 2008, respectively		(11,779	)		(8,657	)
Total stockholders’ equity		1,312,385			1,109,174
Total liabilities and stockholders’ equity	$	2,450,348		$	2,097,526

(1)	As adjusted to reflect the adoption of FSP APB 14-1 (see Note 1).

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

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Index

SunPower Corporation

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

	Three Months Ended						Six Months Ended
	June 28, 2009			June 29, 2008(1)			June 28, 2009			June 29, 2008(1)
Revenue:
Systems	$	108,724		$	270,593		$	214,821		$	449,444
Components		188,920			112,158			296,610			207,008
Total revenue		297,644			382,751			511,431			656,452
Operating costs and expenses:
Cost of systems revenue		91,793			209,223			180,144			352,487
Cost of components revenue		147,388			80,688			225,076			157,930
Research and development		6,853			4,813			14,817			9,455
Sales, general and administrative		41,755			43,208			84,038			77,066
Total operating costs and expenses		287,789			337,932			504,075			596,938
Operating income		9,855			44,819			7,356			59,514
Other income (expense):
Interest income		765			2,289			1,949			6,436
Interest expense		(9,528	)		(6,097	)		(15,649	)		(12,394	)
Gain on purchased options		21,193			—			21,193			—
Other, net		2,807			(3,570	)		(4,350	)		(2,855	)
Other income (expense), net		15,237			(7,378	)		3,143			(8,813	)
Income before income taxes and equity in earnings of unconsolidated investees		25,092			37,441			10,499			50,701
Income tax provision (benefit)		4,054			7,614			(4,508	)		9,419
Income before equity in earnings of unconsolidated investees		21,038			29,827			15,007			41,282
Equity in earnings of unconsolidated investees		3,133			1,330			4,378			1,874
Net income	$	24,171		$	31,157		$	19,385		$	43,156
Net income per share of class A and class B common stock:
Basic	$	0.27		$	0.39		$	0.22		$	0.54
Diluted	$	0.26		$	0.37		$	0.22		$	0.51
Weighted-average shares:
Basic		90,873			79,412			87,311			79,188
Diluted		98,412			83,365			89,110			83,182

(1)	As adjusted to reflect the adoption of FSP APB 14-1 and FSP EITF 03-6-1 (see Note 1).

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

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Index

SunPower Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

	Six Months Ended
	June 28, 2009			June 29, 2008(1)
Cash flows from operating activities:
Net income	$	19,385		$	43,156
Adjustments to reconcile net income to net cash used in operating activities:
Stock-based compensation		21,130			33,115
Depreciation		38,934			22,053
Amortization of other intangible assets		8,150			8,351
Impairment of long-lived assets		1,807			5,489
Non-cash interest expense		10,936			8,679
Amortization of debt issuance costs		1,721			1,074
Gain on purchased options		(21,193	)		—
Equity in earnings of unconsolidated investees		(4,378	)		(1,874	)
Excess tax benefits from stock-based award activity		(2,610	)		(14,639	)
Deferred income taxes and other tax liabilities		(9,874	)		10,080
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		(24,491	)		(103,132	)
Costs and estimated earnings in excess of billings		19,371			(10,144	)
Inventories		(8,063	)		(67,799	)
Prepaid expenses and other assets		(23,378	)		(25,032	)
Advances to suppliers		21,442			3,641
Accounts payable and other accrued liabilities		(129,458	)		82,366
Billings in excess of costs and estimated earnings		38,356			(38,886	)
Customer advances		(8,086	)		4,130
Net cash used in operating activities		(50,299	)		(39,372	)
Cash flows from investing activities:
Increase in restricted cash and cash equivalents		(42,336	)		(15,951	)
Purchases of property, plant and equipment		(103,765	)		(95,078	)
Purchases of available-for-sale securities		—			(50,970	)
Proceeds from sales or maturities of available-for-sale securities		19,678			121,921
Cash paid for acquisitions, net of cash acquired		—			(13,484	)
Cash paid for investments in joint ventures and other non-public companies		—			(22,625	)
Net cash used in investing activities		(126,423	)		(76,187	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of issuance costs		82,150			—
Proceeds from issuance of convertible debt, net of issuance costs		225,018			—
Proceeds from offering of class A common stock, net of offering expenses		218,895			—
Cash paid for repurchased convertible debt		(67,949	)		—
Cash paid for purchased options		(97,336	)		—
Proceeds from warrant transactions		71,001			—
Proceeds from exercises of stock options		838			2,335
Excess tax benefits from stock-based award activity		2,610			14,639
Purchases of stock for tax withholding obligations on vested restricted stock		(3,122	)		(4,194	)
Net cash provided by financing activities		432,105			12,780
Effect of exchange rate changes on cash and cash equivalents		(879	)		7,107
Net increase (decrease) in cash and cash equivalents		254,504			(95,672	)
Cash and cash equivalents at beginning of period		202,331			285,214
Cash and cash equivalents at end of period	$	456,835		$	189,542

Non-cash transactions:
Additions to property, plant and equipment included in accounts payable and other accrued liabilities	$	—		$	3,838
Non-cash interest expense capitalized and added to the cost of qualified assets		3,583			3,820
Change in goodwill relating to adjustments to acquired net assets		—			231

(1)	As adjusted to reflect the adoption of FSP APB 14-1 (see Note 1).

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

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Index

SunPower Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

SunPower Corporation (together with its subsidiaries, the “Company” or “SunPower”) designs, manufactures and markets high-performance solar electric power technologies. The Company’s solar cells and solar panels are manufactured using proprietary processes, and its technologies are based on more than 15 years of research and development. The Company operates in two business segments: systems and components. The Systems Segment generally represents sales directly to system 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, including the Company’s third-party global dealer network.

The Company was a majority-owned subsidiary of Cypress Semiconductor Corporation (“Cypress”) through September 29, 2008. After the close of trading on September 29, 2008, Cypress completed a spin-off of all of its shares of the Company’s class B common stock in the form of a pro rata dividend to the holders of Cypress common stock of record as of September 17, 2008. As a result, the Company’s class B common stock trades publicly and is listed on the Nasdaq Global Select Market, along with the Company’s class A common stock.

On May 4, 2009, the Company completed a public offering of 10.35 million shares of its class A common stock, at a per share price of $22.00, and received net proceeds of $218.9 million. Also on May 4, 2009, the Company issued $230.0 million in principal amount of its 4.75% senior convertible debentures (“4.75% debentures”) and received net proceeds, before payment of the cost of the convertible debenture hedge transactions, of $225.0 million. Concurrently with the issuance of the 4.75% debentures, the Company paid a net cost of $26.3 million for certain convertible debenture hedge transactions with respect to the Company’s class A common stock which are intended to effectively increase the conversion price of the 4.75% debentures (see Note 11).

Recently Adopted Accounting Pronouncements

Convertible Debt

On December 29, 2008, the Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) Accounting Principles Board (“APB”) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which requires recognition of both the liability and equity components of convertible debt instruments with cash settlement features. The debt component is required to be recognized at the fair value of a similar instrument that does not have an associated equity component. The equity component is recognized as the difference between the proceeds from the issuance of the convertible debt and the fair value of the liability, after adjusting for the deferred tax impact. FSP APB 14-1 also requires an accretion of the resulting debt discount over the expected life of the convertible debt. FSP APB 14-1 is required to be applied retrospectively to prior periods, and accordingly, financial statements for prior periods have been adjusted to reflect its adoption.

In February 2007, the Company issued $200.0 million in principal amount of its 1.25% senior convertible debentures (“1.25% debentures”). In July 2007, the Company issued $225.0 million in principal amount of its 0.75% senior convertible debentures (“0.75% debentures”). The 1.25% debentures and the 0.75% debentures contain partial cash settlement features and are therefore subject to FSP APB 14-1. As a result, the equity and debt components were retrospectively adjusted in accordance with FSP APB 14-1. As of December 28, 2008, the carrying value of the equity component was $61.8 million and the principal amount of the outstanding debentures, the unamortized discount and the net carrying value was $423.6 million, $66.4 million and $357.2 million, respectively (see Note 11). On a cumulative basis from the respective issuance dates of the 1.25% debentures and the 0.75% debentures through December 28, 2008, the Company has recognized $22.6 million in non-cash interest expense related to the adoption of FSP APB 14-1, excluding the related tax effects.

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Index

As a result of the Company’s adoption of FSP APB 14-1, the Company’s Condensed Consolidated Balance Sheet as of December 28, 2008 has been adjusted as follows:

(In thousands)	As Adjusted in this Quarterly Report on Form 10-Q		As Previously Reported in Annual Report on Form 10-K
Assets
Inventories	$	251,542	$	251,388
Prepaid expenses and other current assets		98,254		96,104
Property, plant and equipment, net		629,247		612,687
Other long-term assets		76,751		74,224
Total assets		2,097,526		2,076,135
Liabilities
Convertible debt		357,173		423,608
Deferred tax liability, net of current portion		8,141		8,115
Total liabilities		988,352		1,054,761
Stockholders’ Equity
Additional paid-in capital		1,065,745		1,003,954
Retained earnings		77,611		51,602
Total stockholders’ equity		1,109,174		1,021,374

As a result of the Company’s adoption of FSP APB 14-1, the Company’s Condensed Consolidated Statements of Operations for the three and six months ended June 29, 2008 have been adjusted as follows:

(In thousands)	Three Months Ended						Six Months Ended
	As Adjusted in this Quarterly Report on Form 10-Q			As Previously Reported in Quarterly Report on Form 10-Q			As Adjusted in this Quarterly Report on Form 10-Q			As Previously Reported in Quarterly Report on Form 10-Q
Cost of systems revenue	$	209,223		$	209,137		$	352,487		$	352,350
Cost of components revenue	80,688				80,584			157,930			157,752
Operating income	44,819				45,009			59,514			59,829
Interest expense	(6,097		)		(1,411	)		(12,394	)		(2,875	)
Other, net	(3,570		)		(3,570	)		(2,855	)		(3,827	)
Income before income taxes and equity in earnings of unconsolidated investees	37,441				42,317			50,701			59,563
Income tax provision	7,614				15,039			9,419			20,072
Income before equity in earnings of unconsolidated investees	29,827				27,278			41,282			39,491
Net income	31,157				28,608			43,156			41,365

As a result of the Company’s adoption of FSP APB 14-1, the Company’s Condensed Consolidated Statement of Cash Flows for the six months ended June 29, 2008 has been adjusted as follows:

(In thousands)	As Adjusted in this Quarterly Report on Form 10-Q			As Previously Reported in Quarterly Report on Form 10-Q
Cash flows from operating activities:
Net income	$	43,156		$	41,365
Depreciation		22,053			21,971
Non-cash interest expense		8,679			—
Amortization of debt issuance costs		1,074			972
Deferred income taxes and other tax liabilities		10,080			20,734
Net cash used in operating activities		(39,372	)		(39,372	)

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Index

Earnings Per Share

On December 29, 2008, the Company adopted FSP Emerging Issues Task Force Issue (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”), which clarifies that all outstanding unvested share-based payment awards that contain rights to nonforteitable dividends participate in undistributed earnings with common shareholders. In fiscal 2007, the Company granted restricted stock awards with the same dividend rights as its other stockholders, therefore, unvested restricted stock awards are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied (see Note 15). The new guidance was applied retroactively to the Company’s historical results of operations, and as a result, the Company’s Condensed Consolidated Statements of Operations for the three and six months ended June 29, 2008 have been adjusted as follows:

(In thousands, except per share data)	Three Months Ended				Six Months Ended
	As Adjusted in this Quarterly Report on Form 10-Q		As Previously Reported in Quarterly Report on Form 10-Q		As Adjusted in this Quarterly Report on Form 10-Q		As Previously Reported in Quarterly Report on Form 10-Q
Net income	$	31,157	$	28,608	$	43,156	$	41,365
Net income per share of class A and class B common stock:
Basic	$	0.39	$	0.36	$	0.54	$	0.52
Diluted	$	0.37	$	0.34	$	0.51	$	0.49
Weighted-average shares:
Basic		79,412		79,412		79,188		79,188
Diluted		83,365		84,036		83,182		83,848

Disclosures about Derivative Instruments and Hedging Activities

On December 29, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133” (“SFAS No. 161”), which had no financial impact on the Company’s condensed consolidated financial statements and only required additional financial statement disclosures as set forth in Note 13. SFAS No. 161 specifically requires entities to provide enhanced disclosures addressing the following: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.

Fair Value of Assets and Liabilities

In February 2008, the FASB issued FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP SFAS No. 157-2”), which delayed the effective date of SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2009. Therefore, in the first quarter of fiscal 2009, the Company adopted SFAS No. 157 for nonfinancial assets and nonfinancial liabilities. The adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities that are not measured and recorded at fair value on a recurring basis did not have a significant impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued three Staff Positions: (i) SFAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP SFAS No. 157-4”), (ii) SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP SFAS No. 115-2 and FSP SFAS No. 124-2”), and (iii) SFAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP SFAS No. 107-1 and APB 28-1”), which were adopted by the Company in the second quarter of fiscal 2009. FSP SFAS No. 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS No. 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If the Company were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and the Company may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP SFAS No. 115-2 and FSP SFAS No. 124-2 provide additional guidance on presenting impairment losses on securities to bring consistency to the timing of impairment recognition, and provide clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. FSP SFAS No. 107-1 and APB 28-1 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP SFAS No. 107-1 and APB 28-1 also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. The adoption of these Staff Positions had no financial impact on the Company’s condensed consolidated financial statements and only required additional financial statement disclosures (see Notes 2, 5 and 7).

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Index

Business Combinations

In April 2009, the FASB issued FSP SFAS No. 141(R)-1 which amends the provisions in SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”), for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. FSP SFAS No. 141(R)-1 eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in SFAS No. 141(R) and instead carries forward most of the provisions in SFAS No. 141, "Business Combinations" ("SFAS No. 141"), for acquired contingencies. FSP SFAS No. 141(R)-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company’s adoption of FSP SFAS No. 141(R)-1 in the first quarter of fiscal 2009 did not have a material effect on its condensed consolidated financial statements. As a result of the adoption of SFAS No. 141(R), the Company reflected an asset for in-process research and development of $1.0 million in connection with the acquisition of Tilt Solar LLC (“Tilt Solar”) during the second quarter of fiscal 2009 which would have been expensed under previous guidance (see Note 4).

Subsequent Events

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS No. 165"), which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The Company evaluated subsequent events through the date the Quarterly Report on Form 10-Q was issued on July 31, 2009. The Company’s adoption of SFAS No. 165 in the second quarter of fiscal 2009 did not have a material effect on its condensed consolidated financial statements and only required additional financial statement disclosures.

Recent Accounting Pronouncements Not Yet Adopted

With the exception of those discussed below, there have been no recent accounting pronouncements not yet adopted that are of significance, or potential significance, to the Company.

In June 2009, the FASB ratified EITF Issue No. 09-1, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance” (“EITF 09-1”), which clarifies that share lending arrangements that are executed in connection with convertible debt offerings or other financings should be considered debt issuance costs. At the date of issuance, share lending arrangements entered into on the Company’s class A common stock are required to be measured at fair value and recognized as debt issuance costs in its condensed consolidated financial statements. In connection with the issuance of the 1.25% debentures and 0.75% debentures, the Company loaned approximately 2.9 million shares of its class A common stock to Lehman Brothers International (Europe) Limited (“LBIE”) and approximately 1.8 million shares of its class A common stock to Credit Suisse International (“CSI”) under share lending arrangements. EITF 09-1 will result in significantly higher non-cash amortization of the debt issuance costs and a loss resulting from Lehman Brothers Holding Inc. (“Lehman”) filing a petition for protection under Chapter 11 of the U.S. bankruptcy code on September 15, 2008, and LBIE commencing administration proceedings (analogous to bankruptcy) in the United Kingdom. EITF 09-1 is effective for fiscal years beginning after December 15, 2009, and retrospective application is required for all periods presented. The Company is currently evaluating the impact of the adoption of EITF 09-1 on its condensed consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”). SFAS No. 167 was issued to amend FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46(R)”), to eliminate the exemption for qualifying special purpose entities, provide a new approach for determining which entity should consolidate a variable interest entity, and require an enterprise to regularly perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009. Earlier application is prohibited. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 167 on its condensed consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS No. 168”), to establish the codification as the source of authoritative accounting principles in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”). All guidance contained in the codification carries an equal level of authority. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and will not have an effect on the Company’s condensed consolidated financial statements.

Fiscal Years

The Company reports on a fiscal-year basis and ends its quarters on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. Fiscal year 2009 consists of 53 weeks while fiscal year 2008 consists of 52 weeks. The second quarter of fiscal 2009 ended on June 28, 2009 and the second quarter of fiscal 2008 ended on June 29, 2008.

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Basis of Presentation

The accompanying condensed consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and include the accounts of the Company and all of its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements as adjusted for the retrospective application of FSP APB 14-1 discussed above. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2008.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("United States" or "U.S.") 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, goodwill, other intangible assets and other long-term assets, asset impairments, valuation of auction rate securities, investments in joint ventures, certain accrued liabilities including accrued warranty reserves, valuation of debt without the conversion feature, and income taxes and tax valuation allowances. Actual results could materially differ from those estimates.

In the three months ended June 28, 2009, the Company identified certain adjustments related to fiscal 2008, primarily due to systems costs and inventory that resulted in recording additional out of period costs of approximately $2.1 million. The effect of these items is not material to estimated pre-tax or net income for the current year.

In the opinion of management, the accompanying condensed consolidated interim financial statements contain all adjustments, consisting only of normal recurring adjustments, which the Company believes are necessary for a fair statement of the Company’s financial position as of June 28, 2009 and its results of operations for the three and six months ended June 28, 2009 and June 29, 2008 and its cash flows for the six months ended June 28, 2009 and June 29, 2008. These condensed consolidated interim financial statements are not necessarily indicative of the results to be expected for the entire year.

Note 2. BALANCE SHEET COMPONENTS

(In thousands)	June 28, 2009			December 28, 2008
Accounts receivable, net:
Accounts receivable, gross	$	223,326		$	196,316
Less: Allowance for doubtful accounts		(2,648	)		(1,863	)
Less: Allowance for sales returns		(1,034	)		(231	)
	$	219,644		$	194,222

Inventories:
Raw materials(1)	$	51,558		$	130,082
Work-in-process		5,865			15,505
Finished goods(2)		205,470			105,955
	$	262,893		$	251,542
(1) In addition to polysilicon and other raw materials for solar cell manufacturing, raw materials include installation materials for systems projects.
(2) The balance of finished goods as of December 28, 2008 increased by $0.2 million for the change in amortization of capitalized non-cash interest expense capitalized in inventory as a result of the Company’s adoption of FSP APB 14-1 (see Note 1).

Prepaid expenses and other current assets:
VAT receivables, current portion	$	28,026		$	26,489
Deferred tax assets, current portion		5,658			5,658
Debt issuance costs, current portion		2,825			2,150
Foreign currency forward exchange contracts		1,378			11,443
Deferred project costs		34,106			1,459
Other receivables(3)		34,977			36,749
Other prepaid expenses		15,290			14,306
	$	122,260		$	98,254
(3) Includes tolling agreements with suppliers in which the Company provides polysilicon required for silicon ingot manufacturing and procures the manufactured silicon ingots from the suppliers (see Note 9).

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(In thousands)		June 28, 2009		December 28, 2008
Other long-term assets:
VAT receivables, net of current portion	$	6,935	$	6,692
Debt issuance costs, net of current portion		5,339		2,527
Investments in joint ventures		33,366		29,007
Note receivable(4)		10,000		10,000
Other		30,186		28,525
	$	85,826	$	76,751
(4) In June 2008, the Company loaned $10.0 million to a third-party private company pursuant to a three-year interest-bearing note receivable that is convertible into equity at the Company’s option.

Accrued liabilities:
VAT payables	$	13,883	$	18,934
Income taxes payable		—		13,402
Deferred tax liability		5,658		5,658
Foreign currency forward exchange contracts		28,477		45,791
Warranty reserves		30,400		23,872
Employee compensation and employee benefits		14,139		19,018
Deferred revenue		5,908		5,159
Other		31,559		25,215
	$	130,024	$	157,049

Note 3. PROPERTY, PLANT AND EQUIPMENT

(In thousands)	June 28, 2009			December 28, 2008(1)
Property, plant and equipment, net:
Land and buildings	$	17,166		$	13,912
Manufacturing equipment		451,717			387,860
Computer equipment		37,734			26,957
Furniture and fixtures		4,406			4,327
Leasehold improvements		160,257			148,190
Construction-in-process		152,426			149,657
		823,706			730,903
Less: Accumulated depreciation		(140,695	)		(101,656	)
	$	683,011		$	629,247

(1)	Property, plant and equipment, net increased $16.6 million for non-cash interest expense associated with the 1.25% debentures and 0.75% debentures that was capitalized and added to the cost of qualified assets as a result of the Company’s adoption of FSP APB 14-1 (see Note 1).

Certain manufacturing equipment associated with solar cell manufacturing lines located at one of the Company’s facilities in the Philippines are collateralized in favor of a customer by way of a chattel mortgage, a first ranking mortgage and a security interest in the property. The Company provided security for advance payments received from a customer in fiscal 2008 totaling $40.0 million in the form of collateralized manufacturing equipment with a net book value of $39.4 million and $43.1 million as of June 28, 2009 and December 28, 2008, respectively (see Note 7).

The Company evaluates its long-lived assets, including property, plant and equipment and other intangible assets with finite lives (see Note 4), 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.

Ongoing weak global credit market conditions have had a negative impact on the Company’s earnings during the first half of fiscal 2009. From time to time, the Company may temporarily remove certain long-lived assets from service based on projections of reduced capacity needs. The Company believes the current adverse change in its business climate resulting in lower forecasted revenue for fiscal 2009 is temporary in nature and does not indicate that the fair values of its long-lived assets have fallen below their carrying values as of June 28, 2009.

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Note 4. BUSINESS COMBINATION, GOODWILL AND OTHER INTANGIBLE ASSETS

Acquisition of Tilt Solar

On April 14, 2009, the Company completed the acquisition of Tilt Solar which was not material to the Company’s financial position or results of operations.

Goodwill

The following table presents the changes in the carrying amount of goodwill under the Company's reportable business segments:

(In thousands)	Systems		Components		Total
As of December 28, 2008	$	181,801	$	14,919	$	196,720
Goodwill acquired		581		—		581
Translation adjustment		—		392		392
As of June 28, 2009	$	182,382	$	15,311	$	197,693

The balance of goodwill within the Systems Segment increased $0.6 million as of June 28, 2009 due to the Company’s acquisition of Tilt Solar, which represents the excess of the purchase price over the fair value of the underlying net tangible and other intangible assets of Tilt Solar. The Company records a translation adjustment for the revaluation of its Euro and Australian dollar functional currency subsidiaries’ goodwill and other intangible assets into U.S. dollar. For the three months ended June 28, 2009, the translation adjustment increased the balance of goodwill within the Components Segment by $0.4 million.

In accordance with SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets” (“SFAS No. 142”), goodwill is tested for impairment at least annually, or more frequently if certain indicators are present. The Company conducts its annual impairment test of goodwill as of the Sunday closest to the end of the third fiscal quarter of each year. Impairment of goodwill is tested at the Company’s reporting unit level which is at the segment level by comparing each segment’s carrying amount, including goodwill, to the fair value of that segment. To determine fair value, the Company has historically utilized a market multiples comparative approach. In performing its analysis, the Company has utilized information with assumptions and projections it considers reasonable and supportable. If the carrying amount of the reporting unit exceeds its implied fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. Based on its last impairment test as of September 28, 2008, the Company determined there was no impairment.

Under SFAS No. 142, goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Ongoing weak global credit market conditions have had a negative impact on the Company’s earnings and the profitability of its Systems Segment during the first half of fiscal 2009. Management evaluated all the facts and circumstances, including the duration and severity of the decline in its revenue and market capitalization and the reasons for it, to assess whether an impairment indicator exists that would require impairment testing of its reporting units. Management concluded that no impairment indicator existed as of June 28, 2009, because the decline in revenue is deemed to be temporary in nature and management does not believe that there is a significant adverse change in the long-term business prospects for its Systems Segment.

Other Intangible Assets

The following tables present details of the Company's acquired other intangible assets:

(In thousands)	Gross		Accumulated Amortization			Net
As of June 28, 2009
Patents and purchased technology	$	51,398	$	(36,668	)	$	14,730
Purchased in-process research and development		1,000		—			1,000
Tradenames		2,566		(1,934	)		632
Customer relationships and other		28,303		(11,576	)		16,727
	$	83,267	$	(50,178	)	$	33,089

As of December 28, 2008
Patents and purchased technology	$	51,398	$	(31,322	)	$	20,076
Tradenames		2,501		(1,685	)		816
Customer relationships and other		27,456		(8,858	)		18,598
	$	81,355	$	(41,865	)	$	39,490

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In connection with the acquisition of Tilt Solar, the Company recorded $1.5 million of other intangible assets in the second quarter of fiscal 2009. All of the Company’s acquired other intangible assets, excluding goodwill, are subject to amortization. Amortization expense for other intangible assets totaled $4.1 million and $8.2 million for the three and six months ended June 28, 2009, respectively, and $4.0 million and $8.4 million for the three and six months ended June 29, 2008, respectively. As of June 28, 2009, the estimated future amortization expense related to other intangible assets is as follows (in thousands):

2009 (remaining six months)	$	8,288
2010	15,308
2011	5,274
2012	4,114
Thereafter	105
	$	33,089

Note 5. INVESTMENTS

SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1") and the lowest priority to unobservable inputs ("Level 3"). Level 2 measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1.

Assets Measured at Fair Value on a Recurring Basis

The following tables present information about the Company’s available-for-sale securities accounted for under SFAS No. 115, “Accounting for Investment in Certain Debt and Equity Securities” (“SFAS No. 115”), that are measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value in accordance with the provisions of SFAS No. 157. Information about the Company’s foreign currency derivatives measured at fair value on a recurring basis is disclosed in Note 13. The Company does not have any nonfinancial assets or nonfinancial liabilities that are recognized or disclosed at fair value in its condensed consolidated financial statements on a recurring basis.

	June 28, 2009
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	496,130	$	—	$	796	$	496,926
Bank notes		19,825		—		—		19,825
Corporate securities		—		—		18,482		18,482
Total available-for-sale securities	$	515,955	$	—	$	19,278	$	535,233

	December 28, 2008
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	227,190	$	—	$	7,185	$	234,375
Bank notes		49,610		—		—		49,610
Corporate securities		—		9,994		23,577		33,571
Total available-for-sale securities	$	276,800	$	9,994	$	30,762	$	317,556

Available-for-sale securities utilizing Level 3 inputs to determine fair value are comprised of investments in money market funds totaling $0.8 million and $7.2 million as of June 28, 2009 and December 28, 2008, respectively, and auction rate securities totaling $18.5 million and $23.6 million as of June 28, 2009 and December 28, 2008, respectively.

Money Market Funds

Investments in money market funds utilizing Level 3 inputs consist of the Company’s investments in the Reserve Primary Fund and the Reserve International Liquidity Fund (collectively referred to as the "Reserve Funds"). The net asset value per share for the Reserve Funds fell below $1.00 because the funds had investments in Lehman, which filed for bankruptcy on September 15, 2008. As a result of this event, the Reserve Funds wrote down their investments in Lehman to zero and also announced that the funds would be closed and distributed to holders. The Company has estimated its loss on the Reserve Funds to be approximately $2.2 million based upon information publicly disclosed by the Reserve Funds relative to its holdings and remaining obligations. The Company recorded impairment charges of zero and $1.2 million in the three and six months ended June 28, 2009, respectively, and $1.0 million during the second half of fiscal 2008, in “Other, net” in its Condensed Consolidated Statements of Operations, thereby establishing a new cost basis for each fund. The Company’s other money market fund instruments are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices for identical instruments in active markets.

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Auction Rate Securities

Auction rate securities in which the Company invested are primarily student loans, the majority of which are triple-A rated and substantially guaranteed by the U.S. government under the Federal Family Education Loan Program (“FFELP”). Historically, these securities have provided liquidity through a Dutch auction at pre-determined intervals every 7 to 49 days. At the end of each reset period, investors can continue to hold the securities or sell the securities at par through an auction process. The “stated” or “contractual” maturities for these securities generally are between 20 to 30 years. Beginning in February 2008, the auction rate securities market experienced a significant increase in the number of failed auctions, resulting from a lack of liquidity, which occurs when sell orders exceed buy orders, and does not necessarily signify a default by the issuer.

All auction rate securities held by the Company have failed to clear at auctions in subsequent periods. For failed auctions, the Company continues to earn interest on these investments at the contractual rate. Prior to 2008, failed auctions rarely occurred, however, such failures could continue to occur in the future. In the event the Company needs to access funds invested in such auction rate securities, 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 held are classified as “Long-term investments” in the Condensed Consolidated Balance Sheets, because they are not expected to be used to fund current operations and such classification is consistent with the stated contractual maturities of the securities.

The Company determined that use of a valuation model was the best available technique for measuring the fair value of its auction rate securities. The Company used an income approach valuation model to estimate the price that would be received to sell its securities in an orderly transaction between market participants ("exit price") as of the balance sheet dates. The exit price was derived as the weighted average present value of expected cash flows over various periods of illiquidity, using a risk adjusted discount rate that was based on the credit risk and liquidity risk of the securities. While the valuation model was based on both Level 2 (credit quality and interest rates) and Level 3 inputs, the Company determined that the Level 3 inputs were the most significant to the overall fair value measurement, particularly the estimates of risk adjusted discount rates and ranges of expected periods of illiquidity. The valuation model also reflected the Company's intention to hold its auction rate securities until they can be liquidated in a market that facilitates orderly transactions. The following key assumptions were used in the valuation model:

5 years to liquidity;

continued receipt of contractual interest which provides a premium spread for failed auctions; and

discount rates ranging from 4.4% to 9.47%, which incorporates a spread for both credit and liquidity risk.

Based on these assumptions, the Company estimated that the auction rate securities with a stated par value of $21.1 million at June 28, 2009 would be valued at approximately 88% of their stated par value, or $18.5 million, representing a decline in value of approximately $2.6 million. At December 28, 2008, the Company estimated that auction rate securities with a stated par value of $26.1 million would be valued at approximately 91% of their stated par value, or $23.6 million, representing a decline in value of approximately $2.5 million. Due to one auction rate security’s downgrade from a triple-A rating to a Baa1 rating, the length of time that has passed since the auctions failed and the ongoing uncertainties regarding future access to liquidity, the Company has determined the impairment is other-than-temporary and recorded impairment losses of $0.5 million and $0.6 million in the three and six months ended June 28, 2009, respectively, and $2.5 million in the fourth quarter of fiscal 2008, in “Other, net” in its Condensed Consolidated Statements of Operations. The following table provides a summary of changes in fair value of the Company’s available-for-sale securities utilizing Level 3 inputs for the six months ended June 28, 2009:

(In thousands)	Money Market Funds			Auction Rate Securities
Balance at December 28, 2008	$	7,185		$	23,577
Sales and distributions (1)		(5,151	)		(4,526	)
Impairment loss recorded in “Other, net”		(1,238	)		(569	)
Balance at June 28, 2009	$	796		$	18,482

(1)	The Company sold an auction rate security with a carrying value of $4.5 million for $4.6 million to a third-party outside of the auction process and received distributions of $5.2 million from the Reserve Funds.

The following table provides a summary of changes in fair value of the Company’s available-for-sale securities which utilized Level 3 inputs for the six months ended June 29, 2008:

(In thousands)	Auction Rate Securities
Balance at December 31, 2007	$	—
Transfers from Level 2 to Level 3		29,050
Purchases		10,000
Sales		(13,000	)
Unrealized loss included in other comprehensive income		(964	)
Balance at June 29, 2008	$	25,086

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The following table summarizes unrealized gains and losses by major security type designated as available-for-sale:

	June 28, 2009								December 28, 2008
			Unrealized								Unrealized
(In thousands)	Cost		Gross Gains		Gross Losses		Fair Value		Cost		Gross Gains		Gross Losses			Fair Value
Money market funds	$	496,926	$	—	$	—	$	496,926	$	234,375	$	—	$	—		$	234,375
Bank notes		19,825		—		—		19,825		49,610		—		—			49,610
Corporate securities		18,482		—		—		18,482		33,579		2		(10	)		33,571
Total available-for-sale securities	$	535,233	$	—	$	—	$	535,233	$	317,564	$	2	$	(10	)	$	317,556

The classification of available-for-sale securities and cash deposits is as follows:

	June 28, 2009						December 28, 2008
(In thousands)	Available- For-Sale		Cash Deposits		Total		Available- For-Sale		Cash Deposits		Total
Cash and cash equivalents	$	384,226	$	72,609	$	456,835	$	101,523	$	100,808	$	202,331
Short-term restricted cash(1)		28,303		—		28,303		13,240		—		13,240
Short-term investments		796		—		796		17,179		—		17,179
Long-term restricted cash(1)		103,426		85,809		189,235		162,037		—		162,037
Long-term investments		18,482		—		18,482		23,577		—		23,577
	$	535,233	$	158,418	$	693,651	$	317,556	$	100,808	$	418,364

(1)	The Company provided security in the form of cash collateralized bank standby letters of credit for advance payments received from customers.

The contractual maturities of available-for-sale securities is as follows:

(In thousands)	June 28, 2009		December 28, 2008
Due in less than one year	$	516,751	$	186,540
Due from one to two years (1)		—		3,206
Due from two to twenty years		18,482		127,810
	$	535,233	$	317,556

(1) The Company classifies all available-for-sale securities that are intended to be available for use in current operations as short term investments.

Assets Measured at Fair Value on a Non-Recurring Basis

The Company holds minority investments comprised of common and preferred stock in certain non-public companies. The Company monitors these minority investments for impairment and records reductions in the carrying values when necessary. Circumstances that indicate an other-than-temporary decline include valuation ascribed to the issuing company in subsequent financing rounds, decreases in quoted market price and declines in operations of the issuer. As of June 28, 2009 and December 28, 2008, the Company had $33.4 million and $29.0 million, respectively, in investments accounted for under APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (the “equity method”), and $3.1 million in investments accounted for under the cost method (see Note 10). During the fourth quarter of fiscal 2008, the Company recorded an other-than-temporary impairment charge of $1.9 million on its non-publicly traded investment accounted for using the cost method, due to the deterioration of the credit market and economic environment.

The following table provides a summary of changes in fair value of the Company’s minority investments in certain non-public companies, all of which utilize Level 3 inputs under the fair value hierarchy:

	Common and Preferred Stock
(In thousands)	June 28, 2009			June 29, 2008
Balance at the beginning of the period	$	32,066		$	5,304
Purchases		—			12,625
Payments		(19	)		—
Equity in earnings of unconsolidated investees		4,378			1,874
Balance at the end of the period	$	36,425		$	19,803

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Note 6. ADVANCES TO SUPPLIERS

The Company has entered into agreements with various polysilicon, ingot, wafer, solar cell and solar panel vendors that 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 9). Under certain agreements, the Company is required to make prepayments to the vendors over the terms of the arrangements. In the first half of fiscal 2009, the Company paid advances totaling $5.6 million in accordance with the terms of existing supply agreements. As of June 28, 2009 and December 28, 2008, advances to suppliers totaled $141.1 million and $162.6 million, respectively, the current portion of which is $28.0 million and $43.2 million, respectively.

The Company’s future prepayment obligations related to these agreements as of June 28, 2009 are as follows (in thousands):

2009 (remaining six months)	$	92,546
2010	161,414
2011	121,564
2012	72,694
	$	448,218

Note 7. ADVANCES FROM CUSTOMERS

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 products occur.

In August 2007, the Company entered into an agreement with a third-party to supply polysilicon. Under the polysilicon agreement, the Company received advances of $40.0 million in each of fiscal 2008 and 2007 from this third party. Commencing in fiscal 2010 and continuing through 2019, these advance payments are to be applied as a credit against the third party’s polysilicon purchases from the Company. Such polysilicon is expected to be used by the third party to manufacture ingots, and potentially wafers, which are to be sold to the Company under an ingot supply agreement. As of June 28, 2009, the outstanding advance was $80.0 million of which $4.0 million had been classified in short-term customer advances and $76.0 million in long-term customer advances in the accompanying Condensed Consolidated Balance Sheets, based on projected product shipment dates. As of December 28, 2008, the outstanding advance of $80.0 million was classified in long-term customer advances. The Company provided security for advances of $40.0 million received in fiscal 2008 in the form of collateralized manufacturing equipment with a net book value of $39.4 million and $43.1 million as of June 28, 2009 and December 28, 2008, respectively (see Note 3).

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 30.0 million Euros (approximately $35.5 million based on the exchange rate as of January 1, 2006) 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 was recognized over product deliveries at a specified rate on a per-unit-of-product-delivered basis through the second quarter of fiscal 2009. As of June 28, 2009, the remaining outstanding advance was 10.3 million Euros (approximately $14.5 million based on the exchange rate as of June 28, 2009) of which $8.4 million and $6.1 million had been classified in short-term and long-term customer advances, respectively. As of December 28, 2008, the remaining outstanding advance was 12.5 million Euros (approximately $17.5 million based on the exchange rate as of December 28, 2008) of which $8.4 million and $9.1 million had been classified in short-term and 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 other agreements with customers who have made advance payments for solar products. These advances will be applied as shipments of product occur. As of June 28, 2009 and December 28, 2008, such customers had made advances of $7.7 million and $12.9 million, respectively.

The estimated utilization of advances from customers and the related interest of $0.7 million thereto are (in thousands):

2009 (remaining six months)	$	10,295
2010		20,314
2011		8,282
2012		8,000
2013		8,000
Thereafter		48,000
	$	102,891

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Note 8. RESTRUCTURING COSTS

The Company records restructuring costs in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). In response to deteriorating economic conditions, the Company reduced its global workforce of regular employees by approximately 80 positions in the first half of fiscal 2009 in order to reduce its annual operating expenses. The restructuring actions included charges of $0.5 million and $1.7 million in the three and six months ended June 28, 2009, respectively, for severance, benefits and related costs.

A summary of total restructuring activity for the three and six months ended June 28, 2009 is as follows:

	Workforce Reduction Accrual
(In thousands)	Three Months Ended			Six Months Ended
Balance at the beginning of the period	$	156		$	—
Restructuring charges		497			1,682
Cash payments		(540	)		(1,569	)
Balance at the end of the period	$	113		$	113

Restructuring accruals totaled $0.1 million as of June 28, 2009 and are recorded in “Accrued liabilities” in the Condensed Consolidated Balance Sheet and represent estimated future cash outlays primarily related to severance expected to be paid within the third quarter of fiscal 2009.

A summary of the charges in the Condensed Consolidated Statements of Operations resulting from workforce reductions during the three and six months ended June 28, 2009 is as follows:

(In thousands)	Three Months Ended		Six Months Ended
Cost of systems revenue	$	80	$	259
Cost of components revenue		21		49
Research and development		53		130
Sales, general and administrative		343		1,244
Total restructuring charges	$	497	$	1,682

Note 9. 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. 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 has various lease arrangements, including for 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, Australia, Canada, Germany, Italy, Spain and South Korea, all of which are leased from unaffiliated third-parties. Future minimum obligations under all non-cancelable operating leases as of June 28, 2009 are as follows (in thousands):

2009 (remaining six months)	$	2,828
2010		5,063
2011		3,735
2012		2,843
2013		2,761
Thereafter		14,630
	$	31,860

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 disclosed purchase commitments arising from these agreements are firm, non-cancelable and unconditional commitments.

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The Company also has agreements with several suppliers, including joint ventures, for the procurement of polysilicon, ingots, wafers, solar cells and solar panels which specify future quantities and pricing of products to be supplied by the vendors for periods up to 12 years and provide for certain consequences, such as forfeiture of advanced deposits and liquidated damages relating to previous purchases, in the event that the Company terminates the arrangements (see Note 6).

As of June 28, 2009, total obligations related to non-cancelable purchase orders totaled approximately $82.9 million and long-term supply agreements totaled approximately $4,040.3 million. Future purchase obligations under non-cancelable purchase orders and long-term supply agreements as of June 28, 2009 are as follows (in thousands):

2009 (remaining six months)	$	283,425
2010		585,909
2011		584,502
2012		360,028
2013		278,338
Thereafter		2,031,026
	$	4,123,228

Total future purchase commitments of $4,123.2 million as of June 28, 2009 include tolling agreements with suppliers in which the Company provides polysilicon required for silicon ingot manufacturing and procures the manufactured silicon ingots from the supplier. Annual future purchase commitments in the table above are calculated using the gross price paid by the Company for silicon ingots and are not reduced by the price paid by suppliers for polysilicon. Total future purchase commitments as of June 28, 2009 would be reduced by $598.7 million to $3,524.5 million had the Company’s obligations under such tolling agreements been disclosed using net cash outflows.

Product Warranties

The Company generally warrants or guarantees the performance of the solar panels that it manufactures at certain levels of power output for 25 years. In addition, the Company passes through to customers long-term warranties from the original equipment manufacturers (“OEMs”) of certain system components. Warranties of 25 years from solar panels suppliers are standard in the solar industry, while inverters typically carry warranty periods ranging from 5 to 10 years. In addition, the Company generally warrants its workmanship on installed systems for a period of 1, 2, 5 or 10 years. The Company maintains reserves to cover potential liability that could result from these warranties. 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 various factors including, historical warranty claims, results of accelerated lab testing, field monitoring, vendor reliability estimates, and data on industry averages for similar products. Historically, warranty costs have been within management’s expectations.

Provisions for warranty reserves charged to cost of revenue were $5.3 million and $9.0 million during the three and six months ended June 28, 2009, respectively, and $4.9 million and $9.8 million for the three and six months ended June 29, 2008, respectively. Activity within accrued warranty for the three and six months ended June 28, 2009 and June 29, 2008 is summarized as follows:

	Three Months Ended						Six Months Ended
(In thousands)	June 28, 2009			June 29, 2008			June 28, 2009			June 29, 2008
Balance at the beginning of the period	$	30,566		$	19,517		$	28,062		$	17,194
Accruals for warranties issued during the period		5,316			4,941			8,993			9,840
Settlements made during the period		(1,774	)		(1,937	)		(2,947	)		(4,513	)
Balance at the end of the period	$	34,108		$	22,521		$	34,108		$	22,521

The accrued warranty balance at June 28, 2009 and December 28, 2008 includes $3.7 million and $4.2 million, respectively, of accrued costs primarily related to servicing the Company’s obligations under long-term maintenance contracts entered into under the Systems Segment and such balances are included in “Other long-term liabilities” in the Condensed Consolidated Balance Sheets.

Uncertain Tax Positions

Total liabilities associated with uncertain tax positions under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, and Related Implementation Issues” (“FIN 48”), were $12.9 million and $12.8 million as of June 28, 2009 and December 28, 2008, respectively, and are included in "Other long-term liabilities" in the Company’s Condensed Consolidated Balance Sheets as they are not expected to be paid within the next twelve months. Due to the complexity and uncertainty associated with its tax positions, the Company cannot make a reasonably reliable estimate of the period in which cash settlement will be made for its liabilities associated with uncertain tax positions in other long-term liabilities.

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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 its financial position, liquidity or results of operations.

Note 10. JOINT VENTURES

Woongjin Energy Co., Ltd (“Woongjin Energy”)

The Company and Woongjin Holdings Co., Ltd. (“Woongjin”), a provider of environmental products located in Korea, formed Woongjin Energy in fiscal 2006, a joint venture to manufacture monocrystalline silicon ingots. The Company and Woongjin have funded the joint venture through capital investments. In January 2008, the Company invested an additional $5.4 million in the joint venture. Until Woongjin Energy engages in an IPO, Woongjin Energy will refrain from declaring or making any distributions, including dividends, unless its debt-to-equity ratio immediately following such distribution would not be greater than 200%. The Company supplies polysilicon, services and technical support required for silicon ingot manufacturing to the joint venture, and the Company procures the manufactured silicon ingots from the joint venture under a five-year agreement. Payments to Woongjin Energy for manufacturing silicon ingots totaled $42.5 million and $74.8 million during the three and six months ended June 28, 2009, respectively, and $9.2 million and $15.0 million during the three and six months ended June 29, 2008, respectively. As of June 28, 2009 and December 28, 2008, $13.6 million and $22.5 million, respectively, remained due and payable to Woongjin Energy.

As of June 28, 2009 and December 28, 2008, the Company had a $28.5 million and $24.0 million, respectively, investment in the joint venture in its Condensed Consolidated Balance Sheets which represented a 40% equity investment. The Company periodically evaluates the qualitative and quantitative attributes of its relationship with Woongjin Energy to determine whether the Company is the primary beneficiary of the joint venture and needs to consolidate Woongjin Energy’s results into the Company’s financial statements in accordance with FIN 46(R). The Company has concluded it is not the primary beneficiary of the joint venture because Woongjin Energy supplies only a portion of the Company’s future estimated total ingot requirement through 2012 and the existing supply agreement is shorter than the estimated economic life of the joint venture. In addition, the Company believes that Woongjin is the primary beneficiary of the joint venture because Woongjin guarantees the initial $33.0 million loan for Woongjin Energy and exercises significant control over Woongjin Energy’s board of directors, management, and daily operations.

The Company accounts for its investment in Woongjin Energy using the equity method of accounting in which the investment is classified as “Other long-term assets” in the Condensed Consolidated Balance Sheets and the Company’s share of Woongjin Energy’s income totaling $3.2 million and $4.5 million for the three and six months ended June 28, 2009, respectively, and $1.3 million and $1.9 million for the three and six months ended June 29, 2008, respectively, is included in “Equity in earnings of unconsolidated investees” in the Condensed Consolidated Statements of Operations. The amount of equity earnings increased year-over-year due to: (i) increases in production since Woongjin Energy began manufacturing in the third quarter of fiscal 2007 and (ii) the Company’s equity investment increased from 27.4% as of June 29, 2008 to 40% as of June 28, 2009. Neither party has contractual obligations to provide any additional funding to the joint venture. The Company’s maximum exposure to loss as a result of its involvement with Woongjin Energy is limited to its carrying value.

The Company conducted other related-party transactions with Woongjin Energy during fiscal 2008. The Company recognized zero and $0.6 million in components revenue during the three and six months ended June 29, 2008, respectively, related to the sale of solar panels to Woongjin Energy. As of June 28, 2009 and December 28, 2008, zero and $0.8 million, respectively, remained due and receivable from Woongjin Energy related to the sale of solar panels.

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Summarized financial information adjusted to conform to U.S. GAAP for Woongjin Energy, as it qualifies as a “significant investee” of the Company as defined in SEC Regulation S-X Rule 1-02(bb) during the six months ended June 28, 2009, is as follows:

(In thousands)	Six Months Ended
Revenue	$	43,701
Gross margin		25,993
Operating income		23,817
Net income		12,339

First Philec Solar Corporation (“First Philec Solar”)

The Company and First Philippine Electric Corporation (“First Philec”) formed First Philec Solar in fiscal 2007, a joint venture to provide wafer slicing services of silicon ingots to the Company. The Company and First Philec have funded the joint venture through capital investments. In fiscal 2008, the Company invested an additional $4.2 million in the joint venture. The Company supplies to the joint venture silicon ingots and technology required for slicing silicon, and the Company procures the silicon wafers from the joint venture under a five-year wafering supply and sales agreement. This joint venture is located in the Philippines and became operational in the second quarter of fiscal 2008. In the three and six months ended June 28, 2009, the Company paid $9.0 million and $15.8 million, respectively, to First Philec Solar for wafer slicing services of silicon ingots. As of June 28, 2009 and December 28, 2008, $3.3 million and $1.9 million, respectively, remained due and payable to First Philec Solar.

As of June 28, 2009 and December 28, 2008, the Company had a $4.9 million and $5.0 million, respectively, investment in the joint venture in its Condensed Consolidated Balance Sheets which represented a 19% equity investment. The Company periodically evaluates the qualitative and quantitative attributes of its relationship with First Philec Solar to determine whether the Company is the primary beneficiary of the joint venture and needs to consolidate First Philec Solar’s results into the Company’s financial statements in accordance with FIN 46(R). The Company has concluded it is not the primary beneficiary of the joint venture because the existing five-year agreement discussed above is considered a short period compared against the estimated economic life of the joint venture. In addition, the Company believes that First Philec is the primary beneficiary of the joint venture because First Philec exercises significant control over First Philec Solar’s board of directors, management, and daily operations.

The Company accounts for this investment using the equity method of accounting since the Company is able to exercise significant influence over First Philec Solar due to its board positions. The Company’s investment is classified as “Other long-term assets” in the Condensed Consolidated Balance Sheets and the Company’s share of First Philec Solar’s losses totaling $0.1 million in each of the three and six months ended June 28, 2009 is included in “Equity in earnings of unconsolidated investees” in the Condensed Consolidated Statement of Operations. The Company’s maximum exposure to loss as a result of its involvement with First Philec Solar is limited to its carrying value.

Note 11. DEBT AND CREDIT SOURCES

Line of Credit

On July 13, 2007, the Company entered into a credit agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) and has entered into amendments to the credit agreement from time to time. As of June 28, 2009, the credit agreement provides for a $50.0 million revolving credit line, with a $50.0 million letter of credit subfeature, and a separate $150.0 million collateralized letter of credit facility. The Company may borrow up to $50.0 million and request that Wells Fargo issue up to $50.0 million in letters of credit under the letter of credit subfeature through March 27, 2010. Letters of credit issued under the subfeature reduce the Company’s borrowing capacity under the revolving credit line. Additionally, the Company may request that Wells Fargo issue up to $150.0 million in letters of credit under the collateralized letter of credit facility through March 27, 2014. As detailed in the agreement, the Company pays interest of LIBOR plus 2% on outstanding borrowings under the revolving credit line, and a fee of 2% and 0.2% to 0.4% depending on maturity for outstanding letters of credit under the letter of credit subfeature and collateralized letter of credit facility, respectively. At any time, the Company can prepay outstanding loans without penalty. All borrowings under the revolving credit line must be repaid by March 27, 2010, and all letters of credit issued under the letter of credit subfeature expire on or before March 27, 2010 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 collateralized letter of credit facility expire no later than March 27, 2014.

In connection with the credit agreement, the Company entered into a security agreement with Wells Fargo, granting a security interest in a securities account and a deposit account to secure its obligations in connection with any letters of credit that might be issued under the collateralized letter of credit facility. SunPower North America, LLC and SunPower Corporation, Systems (“SP Systems”), both wholly-owned subsidiaries of the Company, also entered into an associated continuing guaranty with Wells Fargo. In addition, SP Systems pledged 60% of its equity interest in SunPower Systems SARL to Wells Fargo in the second quarter of fiscal 2009 to collateralize up to $50.0 million of the Company’s obligations under the revolving credit line. The terms of the credit agreement include certain conditions to borrowings, representations and covenants, and events of default customary for financing

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transactions of this type. Covenants contained in the credit agreement include, but are not limited to, restrictions on the incurrence of additional indebtedness, pledging of assets, payment of dividends or distribution on its common stock, and purchases of property, plant and equipment and financial covenants with respect to certain liquidity, net worth and profitability metrics. If the Company fails to comply with the financial and other restrictive covenants contained in the credit agreement resulting in an event of default, all debt to Wells Fargo could become immediately due and payable and the Company’s other debt may become due and payable in the event there are cross-default provisions in the agreements governing such debt.

As of June 28, 2009 and December 28, 2008, no amounts were outstanding on the revolving credit line and letters of credit totaling $49.1 million and $29.9 million, respectively, were issued by Wells Fargo under the letter of credit subfeature. In addition, letters of credit totaling $93.1 million and $76.5 million were issued by Wells Fargo under the collateralized letter of credit facility as of June 28, 2009 and December 28, 2008, respectively. As of June 28, 2009 and December 28, 2008, cash available to be borrowed under the revolving credit line was $0.9 million and $20.1 million, respectively, and includes letter of credit capacities available to be issued by Wells Fargo under the letter of credit subfeature. Letters of credit available under the collateralized letter of credit facility at June 28, 2009 and December 28, 2008 totaled $56.9 million and $73.5 million, respectively.

Term Loan with Union Bank, N.A. (“Union Bank”)

On April 17, 2009, the Company entered into a loan agreement with Union Bank under which the Company borrowed $30.0 million for a term of three years at an interest rate of LIBOR plus 2%, or approximately 2.3% at June 28, 2009. The loan is to be repaid in eight equal quarterly installments of principal plus interest commencing June 30, 2010. Unless and until the Company has granted to Union Bank a security interest in cash collateral not less than 105% of the outstanding principal amount of the loan, the Company must maintain a depository account with Union Bank holding a predetermined amount of funds. During the first year of the loan, such account is required to hold at all times a balance equal to the aggregate sum of $10.0 million plus interest due and payable during the following 12 months, calculated monthly on a rolling basis. During the second and third years of the loan, such account is required to hold at all times a balance equal to the aggregate payments due and payable with respect to principal and interest during the following 12 months, calculated monthly on a rolling basis. In connection with the loan agreement, the Company entered into a security agreement with Union Bank, which will grant a security interest in the deposit account in favor of Union Bank on April 1, 2010 if, prior to then, all of the Company’s 0.75% debentures have not been converted or exchanged in a manner satisfactory to Union Bank. SunPower North America, LLC and SP Systems, both wholly-owned subsidiaries of the Company, have each guaranteed $30.0 million in principal plus interest of the Company’s obligations under the loan agreement. The agreements governing the term loan with Union Bank include certain representations, covenants, and events of default customary for financing transactions of this type.

Debt Facility Agreement with the Malaysian Government

On December 18, 2008, the Company entered into a facility agreement with the Malaysian Government. In connection with the facility agreement, the Company executed a debenture and deed of assignment in favor of the Malaysian Government, granting a security interest in a deposit account and all assets of SunPower Malaysia Manufacturing Sdn. Bhd., a wholly-owned subsidiary of the Company, to secure its obligations under the facility agreement.

Under the terms of the facility agreement, the Company may borrow up to Malaysian Ringgit 1.0 billion (approximately $283.1 million based on the exchange rate as of June 28, 2009) to finance the construction of its third solar cell manufacturing facility in Malaysia. The loans within the facility agreement are divided into two tranches that may be drawn through June 2010. Principal is to be repaid in six quarterly payments starting in July 2015, and a non-weighted average interest rate of approximately 4.4% per annum accrues and is payable starting in July 2015. The Company has the ability to prepay outstanding loans without premium or penalty and all borrowings must be repaid by October 30, 2016. The terms of the facility agreement include certain conditions to borrowings, representations and covenants, and events of default customary for financing transactions of this type. As of June 28, 2009 and December 28, 2008, the Company had borrowed Malaysian Ringgit 375.0 million (approximately $106.2 million based on the exchange rate as of June 28, 2009) and Malaysian Ringgit 190.0 million (approximately $54.6 million based on the exchange rate as of December 28, 2008), respectively, under the facility agreement.

4.75%, 1.25% and 0.75% Convertible Debentures

The following table summarizes the Company’s outstanding convertible debt:

	June 28, 2009						December 28, 2008
(In thousands)	Carrying Value		Face Value		Fair Value(1)		Carrying Value		Face Value		Fair Value(1)
4.75% debentures	$	230,000	$	230,000	$	264,617	$	—	$	—	$	—
1.25% debentures		162,339		198,608		155,731		156,350		198,608		143,991
0.75% debentures		140,501		151,883		137,454		200,823		225,000		166,747
	$	532,840	$	580,491	$	557,802	$	357,173	$	423,608	$	310,738

(1)	The fair value of the convertible debt was determined based on quoted market prices as reported by an independent pricing source.

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In May 2009, the Company issued $230.0 million in principal amount of its 4.75% senior convertible debentures and received net proceeds of $225.0 million, before payment of the offering expenses and the cost of the convertible debenture hedge transactions described below. Interest on the 4.75% debentures is payable on April 15 and October 15 of each year, beginning on October 15, 2009. Holders of the 4.75% debentures are able to exercise their right to convert the debentures at any time into shares of the Company’s class A common stock at a conversion price equal to $26.40 per $1,000 principal amount. The applicable conversion rate may adjust in certain circumstances, including upon a fundamental change, as defined in the indenture governing the 4.75% debentures. If not earlier converted, the 4.75% debentures mature on April 15, 2014. Holders may also require the Company to repurchase all or a portion of their 4.75% debentures upon a fundamental change at a cash repurchase price equal to 100% of the principal amount plus accrued and unpaid interest. In the event of certain events of default, such as the Company’s failure to make certain payments or perform or observe certain obligations thereunder, Wells Fargo, the trustee, or holders of a specified amount of then-outstanding 4.75% debentures will have the right to declare all amounts then outstanding due and payable.

In February 2007, the Company issued $200.0 million in principal amount of its 1.25% senior convertible debentures and received net proceeds of $194.0 million. Interest on the 1.25% debentures is payable on February 15 and August 15 of each year, which commenced August 15, 2007. The 1.25% debentures mature on February 15, 2027. Holders may require the Company to repurchase all or a portion of their 1.25% 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, as defined in the indenture governing the 1.25% debentures. In addition, the Company may redeem some or all of the 1.25% debentures on or after February 15, 2012. The 1.25% debentures are 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 the Company’s class A common stock. The initial effective conversion price of the 1.25% debentures is approximately $56.75 per share and is 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 and received net proceeds of $220.1 million. Interest on the 0.75% debentures is payable on February 1 and August 1 of each year, which commenced February 1, 2008. The 0.75% debentures mature on August 1, 2027. Holders may require the Company to repurchase all or a portion of their 0.75% 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, as defined in the indenture governing the 0.75% debentures. In addition, the Company may redeem some or all of the 0.75% debentures on or after August 1, 2010. The 0.75% debentures will be classified as short-term debt in the Company’s Condensed Consolidated Balance Sheet beginning on August 1, 2009. The 0.75% debentures are 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, class A common stock or a combination of cash and class A common stock, at the Company’s election. The initial effective conversion price of the 0.75% debentures is approximately $82.24 per share and is subject to customary adjustments in certain circumstances.

The 4.75% debentures, 1.25% debentures and 0.75% debentures are senior, unsecured obligations of the Company, ranking equally with all existing and future senior unsecured indebtedness of the Company. The 4.75% debentures, 1.25% debentures and 0.75% debentures are effectively subordinated to the Company’s 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 4.75% debentures, 1.25% debentures and 0.75% debentures do not contain any sinking fund requirements.

If the closing price of the Company’s class A common stock equaled or exceeded 125% of the initial effective conversion price governing the 1.25% debentures and/or 0.75% debentures for 20 out of 30 consecutive trading days in the last month of the fiscal quarter then holders of the 1.25% debentures and/or 0.75% debentures have the right to convert the debentures any day in the following fiscal quarter. For the quarter ended September 28, 2008, the closing price of the Company’s class A common stock equaled or exceeded 125% of the $56.75 per share initial effective conversion price governing the 1.25% debentures for 20 out of 30 consecutive trading days ending on September 28, 2008, thus holders of the 1.25% debentures were able to exercise their right to convert the debentures any day during the fourth quarter in fiscal 2008. As of December 28, 2008, the Company received notices for the conversion of approximately $1.4 million of the 1.25% debentures which the Company settled for approximately $1.2 million in cash and 1,000 shares of class A common stock.

Because the closing price of the Company’s class A common stock on at least 20 of the last 30 trading days during the fiscal quarters ending June 28, 2009, March 29, 2009 and December 28, 2008 did not equal or exceed $70.94, or 125% of the applicable conversion price for its 1.25% debentures, and $102.80, or 125% of the applicable conversion price for its 0.75% debentures, holders of the 1.25% debentures and 0.75% debentures are unable to exercise their right to convert the debentures, based on the market price conversion trigger, any day in the first, second and third quarters of fiscal 2009. Accordingly, the Company classified the 1.25% debentures and 0.75% debentures as long-term debt in its Condensed Consolidated Balance Sheets as of June 28, 2009 and December 28, 2008. This test is repeated each fiscal quarter, therefore, if the market price conversion trigger is satisfied in a subsequent quarter, the debentures may again be re-classified as short-term debt.

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The 1.25% debentures and 0.75% debentures are subject to the provisions of FSP APB 14-1, adopted by the Company on December 29, 2008, since the debentures must be settled at least partly in cash upon conversion. The 4.75% debentures are not subject to the provisions of FSP APB 14-1 since they are only convertible into the Company’s class A common stock. The Company estimated that the effective interest rate for similar debt without the conversion feature was 9.25% and 8.125% on the 1.25% debentures and 0.75% debentures, respectively. The principal amount of the outstanding debentures, the unamortized discount and the net carrying value as of June 28, 2009 was $350.5 million, $47.7 million and $302.8 million, respectively, and as of December 28, 2008 was $423.6 million, $66.4 million and $357.2 million, respectively. In the second quarter of fiscal 2009, the Company repurchased a portion of its 0.75% debentures with a principal amount, unamortized discount and net carrying value of $73.1 million, $5.9 million and $67.2 million, respectively, for approximately $67.9 million. The Company recognized $5.9 million and $10.9 million in non-cash interest expense during the three and six months ended June 28, 2009, respectively, related to the adoption of FSP APB 14-1, as compared to $4.3 million and $8.7 million during the three and six months ended June 29, 2008, respectively (see Note 1). As of June 28, 2009, the remaining weighted average period over which the unamortized discount will be recognized is as follows (in thousands):

2009 (remaining six months)	$	11,405
2010	19,661
2011	14,687
2012	1,898
	$	47,651

Call Spread Overlay (“CSO”)

Concurrent with the issuance of the 4.75% debentures, the Company entered into certain convertible debenture hedge transactions (the “Purchased Options”) with affiliates of certain of the 4.75% debenture underwriters. The Purchased Options allow the Company to purchase up to approximately 8.7 million shares of the Company’s class A common stock and are intended to reduce the potential dilution upon conversion of the 4.75% debentures in the event that the market price per share of the Company’s class A common stock at the time of exercise is greater than the conversion price of the 4.75% debentures. The Purchased Options will be settled on a net share basis. Each convertible debenture hedge transaction is a separate transaction, entered into by the Company with each option counter-party, and is not part of the terms of the 4.75% debentures. The Company paid aggregate consideration of $97.3 million for the Purchased Options on May 4, 2009. The exercise price of the Purchased Options is $26.40 per share of the Company’s class A common stock, subject to adjustment for customary anti-dilution and other events.

Under EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock” (“EITF 07-5”), the Purchased Options are deemed to be a mark-to-market derivative during the period in which the over-allotment option in favor of the 4.75% debenture underwriters is unexercised. The Company entered into the debenture underwriting agreement on April 28, 2009 and the 4.75% debenture underwriters exercised the over-allotment option in full on April 29, 2009. During the one-day period that the underwriters’ over-allotment option was outstanding, the Company’s class A common stock price increased substantially, resulting in a non-cash non-taxable gain on Purchased Options of $21.2 million in each of the three and six months ended June 28, 2009 in its Condensed Consolidated Statements of Operations.

The Company also entered into certain warrant transactions whereby the Company agreed to sell to affiliates of certain of the 4.75% debenture underwriters warrants (the “warrants”) to acquire up to approximately 8.7 million shares of the Company’s class A common stock. The warrants expire in 2014. If the market price per share of the Company’s class A common stock exceeds the exercise price of the warrants, the warrants will have a dilutive effect on the Company’s earnings per share. Each warrant transaction is a separate transaction, entered into by the Company with each option counter-party, and is not part of the terms of the 4.75% debentures. Holders of the 4.75% debentures do not have any rights with respect to the warrants. The warrants were sold for aggregate cash consideration of approximately $71.0 million on May 4, 2009. The exercise price of the warrants is $38.50 per share of the Company’s class A common stock, subject to adjustment for customary anti-dilution and other events.

The Purchased Options and sale of warrants described above represent a CSO with respect to the 4.75% debentures. Assuming full performance by the counter-parties, the transactions effectively increase the conversion price of the 4.75% debentures from $26.40 to $38.50. The Company’s net cost of the Purchased Options and sale of warrants for the CSO was $26.3 million.

Note 12. COMPREHENSIVE INCOME

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income includes unrealized gains and losses on the Company’s available-for-sale investments, foreign currency derivatives designated as cash flow hedges and translation adjustments. The components of comprehensive income were as follows:

	Three Months Ended					Six Months Ended
(In thousands)	June 28, 2009			June 29, 2008		June 28, 2009			June 29, 2008
Net income	$	24,171		$	31,157	$	19,385		$	43,156
Other comprehensive income:
Translation adjustment		2,550			1,924		(14,057	)		12,329
Unrealized gain (loss) on investments, net of tax		—			469		8			(1,002	)
Unrealized gain (loss) on derivatives, net of tax		(18,968	)		5,051		3,565			3,595