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| <NonNumbericText> <div style="font-family:Times New Roman;font-size:10pt;"><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-weight:bold;"></font><font style="font-family:inherit;font-size:10pt;font-style:italic;font-weight:bold;">TRANSACTIONS WITH CYPRESS SEMICONDUCTOR CORPORATION ("CYPRESS")</font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The Company was formerly a subsidiary of Cypress. After completion of the Company’s initial public offering (“IPO”) in November 2005, Cypress held, in the aggregate, approximately 52.0 million shares of the Company’s class B common stock, representing all of the then-outstanding class B common stock. On May 4, 2007 and August 18, 2008, Cypress completed the sale of 7.5 million shares and 2.5 million shares, respectively, of the Company’s class B common stock in offerings pursuant to Rule 144 of the Securities Act. Such shares were converted to 10.0 million shares of the Company’s class A common stock upon sale. The Company was a majority-owned subsidiary of Cypress through September 29, 2008. After the close of trading on the New York Stock Exchange (“NYSE”) on September 29, 2008, Cypress distributed to its shareholders all of its remaining shares of the Company’s class B common stock, in the form of a pro rata dividend to the holders of record as of September 17, 2008 of Cypress common stock. As a result, the Company discontinued being a subsidiary of Cypress.</font></div><div style="line-height:120%;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Two of the seven members of the Company’s Board of Directors have a relationship with Cypress. Mr. T.J. Rodgers, Chairman of SunPower’s Board of Directors, is also the co-founder, board member, President and Chief Executive Officer of Cypress. On November 9, 2010, Mr. T.J. Rodgers notified the Company of his decision to retire from the Board following the completion of his current term at the Company's 2011 Annual Meeting of Stockholders. In addition, Mr. W. Steve Albrecht currently serves on the boards of both Cypress and SunPower.</font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-weight:bold;">Administrative Services Provided by Cypress</font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Cypress seconded employees and consultants to the Company for different time periods through 2008 for which the Company paid their fully-burdened compensation. In addition, Cypress personnel rendered services to the Company to assist with administrative functions, such as employee benefits and other Cypress corporate services and infrastructure, for which the Company paid for a portion of the Cypress employees’ fully-burdened compensation. In the case of the Philippines subsidiary, which entered into a services agreement for such secondments and other consulting services in January 2005, the Company paid the fully burdened compensation plus 10%. The amounts that the Company recorded as general and administrative expenses in the accompanying Consolidated Statements of Operations for these services was approximately $3.5 million in fiscal 2008.</font></div><div style="line-height:120%;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font><font style="font-family:inherit;font-size:10pt;font-weight:bold;">Leased Facility in the Philippines</font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In 2003, the Company and Cypress reached an understanding that the Company would build out and occupy a building owned by Cypress for its first solar cell manufacturing facility (“FAB1”) in the Philippines. The Company entered into a lease agreement for FAB1 and a sublease for the land under which the Company paid Cypress at a rate equal to the cost to Cypress for FAB1 (including taxes, insurance, repairs and improvements). Under the lease agreement, the Company had the right to purchase FAB1 and assume the lease for the land from Cypress at any time at Cypress’s original purchase price of approximately $8.0 million, plus interest computed on a variable index starting on the date of purchase by Cypress until the sale to the Company, unless such purchase option was exercised after a change of control of the Company, in which case the purchase price would be at a market rate, as reasonably determined by Cypress. In May 2008, the Company exercised its right to purchase FAB1 from Cypress and assumed the lease for the land from an unaffiliated third party for a total purchase price of $9.5 million. The lease for the land expires in May 2048 and is renewable for an additional 25 years. Rent expense paid to Cypress for FAB1 was $0.1 million in fiscal 2008. In addition, the Company paid Cypress $0.6 million and $0.2 million in fiscal 2010 and 2009, respectively, for certain electronic equipment located at its manufacturing facilities.</font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-weight:bold;">Leased Headquarters Facility in San Jose, California</font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In May 2006, the Company entered into a lease agreement for its approximately 44,000 square foot headquarters, which is located in a building owned by Cypress in San Jose, California, for $6.0 million over the five-year term of the lease expiring in April 2011. In October 2008, the Company amended the lease agreement, increasing the rentable square footage and the total lease obligations to approximately 60,000 and $7.6 million, respectively, over the five-year term of the lease. The Company paid Cypress $3.2 million, $1.6 million and $1.6 million in fiscal 2010, 2009 and 2008, respectively, to rent the building as well as other related services on the premises under a transition services agreement entered into at the time of Cypress's distribution of the Company's class B common stock. The Company will not be renewing its lease with Cypress and will be moving to new offices leased from an unaffiliated third party in May 2011.</font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-weight:bold;">Employee Matters Agreement</font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In October 2005, the Company entered into an employee matters agreement with Cypress to allocate assets, liabilities and responsibilities relating to its current and former U.S. and international employees and its participation in the employee benefits plans that Cypress sponsored and maintained. In July 2008, the Company transferred all accounts in the Cypress 401(k) Plan held by the Company’s employees to its SunPower 401(k) Savings Plan. In September 2008, all of the Company’s eligible employees began participating in SunPower’s own health and welfare plans and no longer participate in the Cypress health and welfare plans. In connection with Cypress’ spin-off of its shares of the Company’s class B common stock in September 2008, the Company and Cypress agreed to terminate the employee matters agreement.</font></div><div style="line-height:120%;text-align:left;text-indent:36px;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-weight:bold;">Indemnification and Insurance Matters Agreement</font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The Company has indemnified Cypress and its affiliates, agents, successors and assigns from all liabilities arising from environmental conditions: existing on, under, about or in the vicinity of any of the Company’s facilities, or arising out of operations occurring at any of the Company’s facilities, including its California facilities, whether prior to or after Cypress’s spin-off of the Company’s class B common stock held by Cypress; existing on, under, about or in the vicinity of the Philippines facility which the Company occupies, or arising out of operations occurring at such facility, whether prior to or after the separation, to the extent that those liabilities were caused by the Company; arising out of hazardous materials found on, under or about any landfill, waste, storage, transfer or recycling site and resulting from hazardous materials stored, treated, recycled, disposed or otherwise handled by any of the Company’s operations or the Company’s California and Philippines facilities prior to the separation; and arising out of the construction activity conducted by or on behalf of the Company at Cypress’s Texas facility.</font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The indemnification and insurance matters agreement also contains provisions governing the Company’s insurance coverage, which was under the Cypress insurance policies. As of September 29, 2008, the Company obtained its own separate policies for the coverage previously provided under the indemnification and insurance matters agreement.</font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-weight:bold;">Tax Sharing Agreement</font></div><div style="line-height:120%;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">On October 6, 2005, while a subsidiary of Cypress, the Company entered into a tax sharing agreement with Cypress providing for each party's obligations concerning various tax liabilities. The tax sharing agreement is structured such that Cypress would pay all federal, state, local and foreign taxes that are calculated on a consolidated or combined basis while the Company was a member of Cypress’s consolidated or combined group for federal, state, local and foreign tax purposes. The Company’s portion of tax liabilities or benefits was determined based upon its separate return tax liability as defined under the tax sharing agreement. These tax liabilities or benefits were based on a pro forma calculation as if the Company were filing a separate income tax return in each jurisdiction, rather than on a combined or consolidated basis, subject to adjustments as set forth in the tax sharing agreement.</font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">On June 6, 2006, the Company ceased to be a member of Cypress’s consolidated group for federal income tax purposes and certain state income tax purposes. On September 29, 2008, the Company ceased to be a member of Cypress’s combined group for all state income tax purposes. To the extent that the Company becomes entitled to utilize the Company’s separate tax returns portions of any tax credit or loss carryforwards existing as of such date, the Company will distribute to Cypress the tax effect, estimated to be 40% for federal and state income tax purposes, of the amount of such tax loss carryforwards so utilized, and the amount of any credit carryforwards so utilized. The Company will distribute these amounts to Cypress in cash or in the Company’s shares, at Cypress’s option. As of January 2, 2011, the Company has a potential liability of approximately </font><font style="font-family:inherit;font-size:10pt;color:#000000;text-decoration:none;">$2.2 million</font><font style="font-family:inherit;font-size:10pt;"> that may be due under this arrangement. These amounts do not reflect potential adjustments for the effect of the restatement of the Company’s consolidated financial statements in fiscal 2009 and 2008. In fiscal 2010 and 2009, the Company paid </font><font style="font-family:inherit;font-size:10pt;color:#000000;text-decoration:none;">$0.7 million</font><font style="font-family:inherit;font-size:10pt;"> and </font><font style="font-family:inherit;font-size:10pt;color:#000000;text-decoration:none;">$16.5 million</font><font style="font-family:inherit;font-size:10pt;">, respectively, in cash to Cypress, of which zero and </font><font style="font-family:inherit;font-size:10pt;color:#000000;text-decoration:none;">$15.1 million</font><font style="font-family:inherit;font-size:10pt;">, respectively, represents the federal component and </font><font style="font-family:inherit;font-size:10pt;color:#000000;text-decoration:none;">$0.7 million</font><font style="font-family:inherit;font-size:10pt;"> and </font><font style="font-family:inherit;font-size:10pt;color:#000000;text-decoration:none;">$1.4 million</font><font style="font-family:inherit;font-size:10pt;">, respectively, represents the state component. </font></div><div style="line-height:120%;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The Company will continue to be jointly and severally liable for any tax liability during all periods in which it is deemed to be a member of the Cypress consolidated or combined group. Accordingly, although the tax sharing agreement allocates tax liabilities between Cypress and all its consolidated subsidiaries, for any period in which the Company was included in Cypress’s consolidated or combined group, the Company could be liable in the event that any federal or state tax liability was incurred, but not discharged, by any other member of the group.</font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The Company will continue to be jointly and severally liable to Cypress until the statute of limitations runs or all appeal options are exercised for all years where the Company joined in the filing of tax returns with Cypress. If Cypress experiences adjustments to their tax liability pursuant to tax examinations, the Company may incur an incremental liability.</font></div><div style="line-height:120%;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The Company would also be liable to Cypress for taxes that might arise from the distribution, or "spin-off," by Cypress of the Company's class B common stock to Cypress's stockholders on September 29, 2008. In connection with Cypress’s spin-off of the Company’s class B common stock, the Company and Cypress, on August 12, 2008, entered into an amendment to its tax sharing agreement (“Amended Tax Sharing Agreement”) to address certain transactions that may affect the tax treatment of the spin-off and certain other matters.</font></div><div style="line-height:120%;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Subject to certain caveats, Cypress obtained a ruling from the Internal Revenue Service (“IRS”) to the effect that the distribution by Cypress of the Company’s class B common stock to Cypress's stockholders qualified as a tax-free distribution under Section 355 of the Internal Revenue Code (“Code”). Despite such ruling, the distribution may nonetheless be taxable to Cypress under Section 355(e) of the Code if 50% or more of the voting power or value of the Company's stock was or is later acquired as part of a plan or series of related transactions that included the distribution of the Company’s stock. The Amended Tax Sharing Agreement requires the Company to indemnify Cypress for any liability incurred as a result of issuances or dispositions of the Company’s stock after the distribution, other than liability attributable to certain dispositions of the Company’s stock by Cypress, that cause Cypress’s distribution of shares of the Company’s stock to its stockholders to be taxable to Cypress under Section 355(e) of the Code.</font></div><div style="line-height:120%;text-align:left;text-indent:36px;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In addition, under the Amended Tax Sharing Agreement, the Company is required to provide notice to Cypress of certain transactions that could give rise to the Company’s indemnification obligation relating to taxes resulting from the application of Section 355(e) of the Code or similar provisions of other applicable law to the spin-off as a result of one or more acquisitions, as described in the agreement. The Company is not required to indemnify Cypress for any taxes which would result solely from issuances and dispositions of the Company’s stock prior to the spin-off and any acquisition of the Company’s stock by Cypress after the spin-off.</font></div><div style="line-height:120%;text-align:left;text-indent:36px;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Under the Amended Tax Sharing Agreement, the Company also agreed that, until October 29, 2010, it would not effect a conversion of any or all of its class B common stock to class A common stock or any similar recapitalization transaction or series of related transactions (a “Recapitalization”). In addition, the Company agreed that until October 29, 2010, it would not enter into or facilitate any other transaction resulting in an acquisition, as described in the agreement, of its stock without first obtaining the written consent of Cypress. As further detailed in the agreement, the Company is not required to obtain Cypress's consent unless such transactions would involve the acquisition for purposes of Section 355(e) of the Code after August 4, 2008 of more than 25% of its outstanding shares of common stock. In addition, the requirement to obtain Cypress's consent does not apply to certain qualifying acquisitions of the Company's stock, as defined in the Amended Tax Sharing Agreement.</font></div><div style="line-height:120%;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The Company also agreed that it will not (i) effect a Recapitalization during the 36 month period following the spin-off without first obtaining a tax opinion from a nationally recognized tax counsel, in form and in substance reasonably satisfactory to Cypress, to the effect that such Recapitalization (either alone or when taken together with any other transaction or transactions) will not cause the spin-off to become taxable under Section 355(e), or (ii) seek any private ruling, including any supplemental private ruling, from the IRS with regard to the spin-off, or any transaction having any bearing on the tax treatment of the spin-off, without the prior written consent of Cypress. </font></div><div style="line-height:120%;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">In January 2010, Cypress was notified by the IRS that it intends to examine Cypress’s corporate income tax filings for the tax years ended in 2006, 2007 and 2008. SunPower was included as part of Cypress’s federal consolidated group in 2006 and part of 2007. </font></div><div style="line-height:120%;text-align:left;text-indent:36px;"><font style="font-family:inherit;font-size:10pt;"> </font></div><div style="line-height:120%;text-align:left;text-indent:36px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Cypress has not notified the Company of any agreed notices of proposed adjustments to the tax liabilities. However, the IRS has not completed its examination and there can be no assurance that there will be no material adjustments upon completion of their review. Additionally, while years prior to fiscal 2006 for Cypress's U.S. corporate tax return are not open for assessment, the IRS can adjust net operating loss and research and development carryovers that were generated in prior years and carried forward to fiscal 2006 and subsequent years. If the IRS sustains tax assessments against Cypress SunPower may be obligated to indemnify Cypress under the terms of the Amended Tax Sharing Agreement.</font></div><div style="line-height:120%;"><font style="font-family:inherit;font-size:10pt;"> </font></div></div> </NonNumbericText> |
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