| MAXWELL TECHNOLOGIES INC Item 1A Risk Factors An investment in our common stock involves a high degree of risk |
| Our business, financial condition and results of operations could be seriously harmed if potentially adverse developments, some of which are described below, materialize and cannot be resolved successfully |
| In any such case, the market price of our common stock could decline and you may lose all or part of your investment in our common stock |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties, including those not presently known to us or that we currently deem immaterial, may also result in decreased revenues, increased expenses or other adverse impacts that could result in a decline in the price of our common stock |
| You should also refer to the other information set forth in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes |
| We have a history of losses and we may not achieve or maintain profitability in the future, which may decrease the market value of our common stock |
| We have incurred net losses in our last seven fiscal years |
| We cannot assure you that we will become profitable in the foreseeable future, if ever |
| Even if we do achieve profitability, we may experience significant fluctuations in our revenues and we may incur net losses from period to period as a result of a number of factors, including but not limited to the following: • the amounts invested in developing, manufacturing and marketing our products in any period as compared with the volume of sales of those products in the same period; • increasing number of competitors and resulting price competition; • fluctuations in demand for our products by our OEM customers; • the prices at which we sell our products and services compared with the prices of our competitors and our product costs; • the timing of our product introductions may lag behind those of our competitors; • inability to manufacture our products at a cost level that supports adequate gross margins; • negative impacts resulting from acquisitions we have made or may make; and • future changes in financial accounting standards or practices |
| In addition, we incur significant costs developing and marketing products based on new technologies and, in order to increase our market share, we have sold, and may in the future sell, our products at profit margins below those we ultimately expect to achieve |
| We have in the past, and may in the future, make a strategic decision to accept certain orders to sell products to a limited number of customers at prices below our manufacturing costs |
| The impact of the foregoing may cause our operating results to be below the expectations of public market analysts and investors, which may result in a decrease in the market value of our common stock |
| A small number of customers account for a significant portion of our revenues |
| We expect that a small number of customers will continue to account for a large portion of our revenues for the foreseeable future |
| If our relationships with our large customers were disrupted, we could lose a significant portion of our anticipated revenues |
| Factors that could influence our relationships with our customers include: • our ability to sell our products at prices that are competitive with competing suppliers; • our ability to maintain features and quality standards for our products sufficient to meet the expectations of our customers; and • our ability to produce and deliver a sufficient quantity of our products in a timely manner to meet our customers’ requirements |
| 17 ______________________________________________________________________ [60]Table of Contents Our large cell ultracapacitors designed for transportation and industrial applications may not gain widespread commercial acceptance, which would adversely impact our growth opportunities, and our overall business prospects |
| We have designed our large cell ultracapacitor products primarily for use in transportation and industrial applications |
| Currently, most of the major automotive companies are testing and developing alternative power sources to augment the current 12-volt electrical system or support the power requirements of hybrid drive systems |
| We believe our ultracapacitors provide an innovative alternative power solution for both of these applications, and we are currently collaborating technically with several automotive suppliers and auto companies regarding designing our ultracapacitors into their future products |
| However, the historic per unit cost of ultracapacitors has prevented ultracapacitors from gaining widespread commercial acceptance |
| In addition, there are other competing technologies such as advanced batteries, compressed gas and hydrolytic fluids as well as competing ultracapacitors |
| We believe that the long-term success of our ultracapacitor products will be determined by our ability to reduce the price of our products and outperform competing technologies, resulting in our ultracapacitors being widely designed into the next generation of hybrid drive systems and the first generation of up-rated 12 and 42-volt electrical systems |
| If our ultracapacitor products fail to achieve widespread commercial acceptance in the next generation of automotive systems, our future revenues and growth opportunities will be adversely impacted and our overall business prospects will be significantly impaired |
| We may be unable to produce our large cell ultracapacitors in commercial quantities or reduce the cost of production enough to be commercially viable for widespread application, which would adversely impact our revenues and growth opportunities, and our overall business prospects |
| If we are not able to produce large quantities of our large cell ultracapacitor products in the near future at a significantly lower per unit cost, our large cell ultracapacitors may not be a commercially viable alternative to competing energy storage and power delivery solutions |
| Although we have been selling BOOSTCAP^® large cell ultracapacitors designed for transportation and industrial applications, we have only produced these products in limited quantities and at relatively high prices compared with traditional energy storage and power delivery devices |
| We are currently investing significant resources in improving our ultracapacitor cell and multi-cell module designs for higher performance and lower cost, and in automating and scaling up our manufacturing capacity to enable us to produce ultracapacitors in quantities sufficient to meet the needs of our potential customers |
| If we are unable to continue reducing our cost of production and establishing the capability to produce large quantities of ultracapacitors at a reduced cost, we may not be able to generate commercial acceptance of, and sufficient revenue from, these products to recover our significant investment in the development and manufacturing scale-up, and our overall business prospects will be significantly impaired |
| It may also be difficult for us to solve management, technological, engineering and other problems, which may arise in connection with scaling up our manufacturing processes |
| These problems may include production volumes and yields, quality assurance, adequate and timely supply of materials and components and shortages of qualified management and other personnel |
| In addition, we may elect to have some of our products manufactured by third parties |
| If we outsource the manufacture of our products, we will face risks with respect to quality assurance, cost and the absence of close engineering support |
| We may not be able to develop and market our products successfully, and thus may not be able to achieve or maintain profitability in the future |
| If we are unable to develop and market our products successfully, we may not achieve or maintain profitability |
| In recent years, we have introduced many of our products into commercial markets and, upon such introductions, we also must demonstrate our capabilities as a reliable supplier of these products |
| Some of our products are alternatives to established products or provide capabilities that do not presently exist in the marketplace |
| Our products are sold in highly competitive and rapidly changing markets |
| Our products’ success is significantly affected by their cost, technology standards, performance and reliability and end-user preferences |
| The success of our products also depends on a number of factors, including our ability to: • maintain an engineering and marketing staff sufficiently skilled to identify and design new products; 18 ______________________________________________________________________ [61]Table of Contents • identify and develop attractive markets for our new products and technologies and accurately anticipate demand; • develop appropriate sales and distribution channels; • develop and manufacture new products that we can sell at competitive prices, with adequate margins; • deliver products that meet our customers’ requirements for quality and reliability; • increase our manufacturing capacity and improve manufacturing efficiency to meet our customer demands while maintaining quality; • successfully respond to technological changes by improving our existing products and technologies; • demonstrate that our products have technological and/or economic advantages over competing products; • successfully respond to competitors that are more experienced, have significantly greater resources and have a larger base of customers; and • secure required raw materials at the prices necessary to manufacture and deliver competitive products |
| If we are unable to secure qualified and adequate sources for our materials, components and sub-assemblies, we may not be able to make our products at competitive costs and we may have difficulty meeting customer demand, which could damage our relationships with our customers |
| Our ability to manufacture products depends in part on our ability to secure qualified and adequate sources of materials, components and sub-assemblies at prices that enable us to make our products at competitive costs |
| Some of our suppliers are currently the sole source of one or more items that we need to manufacture our products |
| Although we seek to reduce our dependence on sole and limited source suppliers, the partial or complete loss of these sources could have at least a temporary adverse effect on our business and results of operations and damage customer relationships |
| Upon occasion, we have experienced difficulty in obtaining timely delivery of supplies from outside suppliers, which has delayed deliveries to our customers |
| There can be no assurance that such supply problems will not recur |
| Our product lines may be subject to increased competition, and this may limit our ability to maintain our gross margins |
| If our competitors develop and commercialize products faster than we do, or commercialize products that are superior to or lower cost than our products, our commercial opportunities may be reduced or eliminated |
| Market acceptance of our products will depend on competitive factors, many of which are beyond our control |
| Competition in our markets is intense and has been accentuated by the rapid pace of technological development |
| Our competitors include large fully-integrated electronics companies |
| We may not be able to develop, fund or invest in one or more of our product lines to the same degree or as quickly as our competitors do |
| Many of our competitors have substantially greater research and development capabilities and financial, manufacturing, technological, marketing and sales resources than we do, as well as more experience in research and development, product testing, manufacturing, marketing and sales |
| These organizations also compete with us to: • attract parties for collaborations or joint ventures; • license proprietary technology that is competitive with our technology; and • attract and hire scientific, engineering and marketing talent |
| Our competitors may succeed in developing and commercializing products earlier than we do |
| Our competitors may also develop products or technologies that are superior to or lower cost than ours, and render our product candidates or technology obsolete or non-competitive |
| If we cannot successfully compete with new or existing products, our sales and revenue would suffer and we may not ever become profitable |
| 19 ______________________________________________________________________ [62]Table of Contents If our OEM customers fail to purchase our components or to sell sufficient quantities of their products incorporating our components, or if our OEM customers’ sales timing and volume fluctuates, it could prevent us from achieving our sales and market share goals |
| Sales to a relatively small number of OEM customers, as opposed to direct retail sales to end customers, make up a large portion of our revenues |
| For example, one customer, ABB Ltd, accounted for approximately 23prca of our revenues in 2005 |
| Our ability to make sales to OEM customers depends on our ability to compete on price, delivery and quality |
| The timing and volume of these sales depend upon the sales levels and shipping schedules for the products of our OEM customers |
| Thus, even if we develop a successful component, our sales will not increase unless the product into which our component is incorporated is successful |
| If our OEM customers fail to sell a sufficient quantity of products incorporating our components, or if the OEM customers’ sales timing and volume fluctuate, it could prevent us from achieving our sales targets and negatively impact our market share |
| Our OEM customers typically require a long development and engineering process before incorporating our products into their systems and products |
| This period of time is in addition to the time we spend on basic research and product development |
| As a result, we are vulnerable to changes in technology or end user preferences |
| Our opportunity to sell our products to our OEM customers typically occurs at infrequent intervals, depending on when the OEM customer designs a new product or enhances an existing one |
| If we are not aware of an OEM’s product development schedule, or if we cannot provide components or technologies when they develop their products, we may miss a sales opportunity that may not reappear for some time |
| We may face product liability or warranty claims, either directly or indirectly through our customers, and we have limited experience with some of our products as to our potential liability |
| Any product defects could, in turn, lead to defects in our customers’ products that incorporate our products |
| Defects in our products could give rise to warranty claims against us or to liability for damages |
| Such defects could also lead to liability for consequential damages |
| Defects in our products could, moreover, impair the market’s acceptance of our products |
| We have limited experience with some of our products in evaluating the potential liability that could be created by claims under our warranties |
| If the claims made under such warranties exceed our warranty reserves, our results of operations and financial condition could be materially adversely affected |
| Additionally, warranty periods in some foreign countries are mandated by law |
| Unfavorable economic conditions in the US and abroad may adversely affect our OEM customers and prevent us from achieving sales growth |
| Many of our new products are components designed to be integrated into new products and systems to be introduced to the marketplace by our OEM customers |
| For example, unfavorable economic conditions in 2003 and 2004 resulted in reduced capital spending on US electric utility infrastructure and delayed the introduction of certain new products by our OEM customers |
| A recurrence of such unfavorable economic conditions may adversely affect our ability to market and sell our new products in the future |
| A prolonged economic downturn could materially harm our business |
| Any negative trends in the general economy, including trends resulting from actual or threatened military action by the United States and threats of terrorist attacks in the United States and abroad, could cause a decrease in capital spending in many of the markets we serve |
| In particular, a downward cycle affecting the technology, automotive and industrial, and military and aerospace markets would likely result in a reduction in demand for our products |
| In addition, if our customers’ own markets and financial performance decline, we may not be able to collect outstanding amounts due to us |
| Any such circumstances could harm our consolidated financial position, results of operations and cash flows |
| 20 ______________________________________________________________________ [63]Table of Contents If we are unable to protect our intellectual property adequately, such as in the Peoples Republic of China (PRC), we could lose our competitive advantage in the industry segments in which we do business |
| Our success depends in part on establishing and protecting our intellectual property rights |
| If we are unable to protect our intellectual property adequately, we could lose our competitive advantage in the industry segments in which we do business |
| Although we protect our intellectual property rights through patents, trademarks, copyrights, trade secrets and other measures, these steps may not prevent infringement, misappropriation or other misuse by third parties |
| We have taken steps to protect our intellectual property rights under the laws of certain foreign countries, but our efforts may not be effective to the extent that foreign laws are not as protective as the laws of the US For example, we have licensed the rights to manufacture and market our patented ultracapacitor technology in the PRC to a company located in the PRC Patent and other intellectual property rights receive substantially less protections in the PRC than is available in the United States |
| In addition, we face the possibility that third parties may “reverse engineer” our products to discover how they work and introduce competing products, or that third parties might independently develop products and intellectual property similar to ours |
| We have increased our emphasis on protecting our technologies and products through patents |
| Our success depends on maintaining our patents, adding to them where appropriate, and developing products and applications without infringing the patent and proprietary rights of others |
| The following risks, among others, are involved in protecting our patents: • our patents may be circumvented or challenged and held unenforceable or invalid; • our pending or future patent applications may not be issued in a timely manner and may not provide the protections we seek; and • others may claim rights in the patented and other proprietary technology that we own or license |
| If our patents are invalidated or if it is determined that we, or the licensor of the patent, do not hold sole rights to the patent, we could lose our competitive advantage in the industry segments in which we do business |
| Competing research and patent activity in our product areas is substantial |
| Conflicting patent and other proprietary rights claims may result in disputes or litigation |
| Although we do not believe that our products or proprietary rights infringe third parties’ rights, infringement claims could be asserted against us in the future |
| Also, we may not be able to stop a third party product from infringing our proprietary rights without litigation |
| If we are forced to bring such claims or are subject to such claims by others, we could face time-consuming, costly litigation that may result in product shipment delays, damage payments or injunctions that could prevent us from making, using or selling infringing products |
| In addition, such litigation could increase our operating expenses and adversely impact our operating results |
| We may also be required to enter into royalty or licensing agreements on unfavorable terms as part of a judgment or settlement, which could negatively impact the amount of revenue derived from our products or proprietary rights |
| Our reputation and ability to enter into alliances or other strategic arrangements may affect our success |
| Since we anticipate licensing our technology to others, our reputation may be affected by the performance of the companies to which we license our technology |
| Our licenses may grant exclusivity with respect to certain uses or geographic areas |
| For example, we granted an exclusive license to YEC to manufacture and sell our BOOSTCAP^® products in China, and to sell to other mutually agreed customers elsewhere in Asia |
| As a result, we will be wholly dependent on the success of the licensee for success with respect to any exclusive use or geographical area |
| As with YEC, we anticipate that future alliances may be with foreign partners or entities |
| As a result, such future alliances may be subject to the political climate and economies of the foreign countries where such partners reside and operate |
| We cannot be certain that our alliance partners or other partners will provide us with the support we anticipate, that such alliances or other relationships will be successful in developing our technology for use with their intended products, or that any alliances or other relationships will be successful in manufacturing and marketing their 21 ______________________________________________________________________ [64]Table of Contents products |
| Any of our international operations will also be subject to certain external business risks such as exchange rate fluctuations, political instability or significant weakening of a local economy in which a foreign entity with which we have an affiliation operates or is located |
| Certain provisions of alliance agreements that are for our benefit may be subject to restrictions in foreign laws that limit our ability to enforce such contractual provisions |
| If these alliances are not successful our business and prospects could be negatively affected |
| We face risks associated with marketing, distribution and sale of our products internationally and, if we are unable to manage these risks effectively, it could impair our ability to increase sales |
| We derive a significant portion of our revenues from sales to customers located outside the US We expect our international sales to continue to represent a significant and increasing portion of our future revenues |
| As a result, our business will continue to be subject to certain risks, such as foreign government regulations, export controls, changes in tax laws, tax treaties, tariffs, freight rates and timely and accurate financial reporting from our international subsidiary |
| Additionally, as a result of our extensive international operations and significant revenue generated outside the US, the dollar amount of our current and future revenues, expenses and debt may be materially affected by fluctuations in foreign currency exchange rates |
| If we are unable to manage these risks effectively, it could impair our ability to increase international sales |
| Similarly, assets or liabilities of our consolidated foreign subsidiary that are not denominated in its functional currency are subject to effects of currency fluctuations, which may affect our reported earnings |
| We have substantial operations in Switzerland |
| Having substantial international operations increases the difficulty of managing our financial reporting and internal controls and procedures |
| In addition, to the extent we are unable to respond effectively to political, economic and other conditions in the countries where we operate and do business, our results of operations and financial condition could be materially adversely affected |
| Moreover, changes in the mix of income from our foreign subsidiaries, expiration of tax holidays and changes in tax laws and regulations could increase our tax expense |
| An ongoing contract audit by the Defense Department could result in charges to our earnings and have a negative effect on our cash position and we could be subject to additional future audits |
| The Defense Department’s auditing agency is auditing a contract entered into in 1995 and completed in 1999 by a company we purchased |
| We have requested a release of liability from the prime contractor, but there is no assurance that such a release will be obtained and that we will not incur some liability |
| If we are unable to retain key personnel, we could lose our technological and competitive advantage in some product areas and business segments |
| Since many of our products employ emerging technologies, our success depends upon the continued service of our key technical and senior management personnel |
| Some of our scientists and engineers are the key developers of our products and technologies and are recognized as leaders in their area of expertise |
| The loss of such personnel could threaten our technological and competitive advantage in some product areas and product lines |
| Our performance also depends on our ability to identify, hire, train, retain and motivate qualified personnel, especially key executives, operations staff and highly skilled engineers |
| The industries in which we compete are characterized by a high level of employee mobility and aggressive recruiting of skilled personnel in a highly competitive employment market |
| All of our employees are “at will” and thus may terminate their employment with us at any time |
| 22 ______________________________________________________________________ [65]Table of Contents Our ability to increase market share and sales depends on our ability to hire, train and retain qualified marketing and sales personnel |
| Because many of our products are new, we have limited experience marketing and selling them |
| To sell our products, our marketing and sales personnel must demonstrate the advantages of our products over competing products, and we must be able to demonstrate the value of new technology in order to sell new products to existing and new customers |
| The highly technical nature of the products we offer requires that we attract and retain qualified marketing and sales personnel, and we may have difficulty doing that in a highly competitive employment market |
| Also, as part of our sales and marketing strategy, we enter into arrangements with distributors and sales representatives to sell our products, and it is possible that our arrangements with outside distributors and sales representatives may not be successful |
| Our business and operations would suffer in the event of system failures |
| Despite the implementation of security measures, redundancy and backup, our internal information technology networking systems are vulnerable to damages from computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures |
| Additionally, from time to time, we install new or upgraded business management systems |
| To the extent such systems fail or are not properly implemented, we may experience material disruption to our business, including our ability to report operating results on a timely basis |
| Changes in accounting rules for stock-based compensation may adversely affect our operating results, our stock price and our competitiveness in the employee marketplace |
| We have a history of using employee stock options and other stock-based compensation to hire, motivate and retain our workforce |
| In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nodtta 123R, “Share-Based Payment,” which has required us, starting in the first quarter of fiscal year 2006, to measure compensation costs for all stock-based compensation (including stock options and our employee stock purchase plan) at fair value and to recognize these costs as expenses in our statements of operations |
| The recognition of these expenses in our statements of operations will result in lower earnings per share, which could negatively impact our future stock price |
| In addition, if we reduce our stock-based compensation to minimize the recognition of these expenses, our ability to recruit, motivate and retain employees may be impaired, which could put us at a competitive disadvantage in the employee marketplace |
| Compliance with changing regulations of corporate governance and public disclosure may result in additional expenses |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, have created significant additional expenses for public companies |
| We are committed to maintaining high standards of corporate governance and public disclosure |
| As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, significantly increased general and administrative expenses and diversion of management time to such compliance activities |
| Our recent efforts to comply with section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations have required significant effort and resources, and resulted in significant cost to us |
| These efforts and expense are increased because of our substantial international operations |
| Anti-takeover provisions in our certificate of incorporation and bylaws could prevent certain transactions and could make a takeover more difficult |
| Some provisions in our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if such change in control would be beneficial to our stockholders |
| We have a classified board of directors, which means that our directors are divided into three classes that are elected to 23 ______________________________________________________________________ [66]Table of Contents three-year terms on a staggered basis |
| Since the three year terms of each class overlap the terms of the other classes of directors, the entire board of directors cannot be replaced in any one year |
| Furthermore, our certificate of incorporation contains a “fair price provision” which may require a potential acquirer to obtain the consent of our board to any business combination involving us |
| We have adopted a program under which our stockholders have rights to purchase our stock directly from us at a below-market price if a company or person attempts to buy us without negotiating with the board |
| This program is intended to encourage a buyer to negotiate with us, but may have the effect of discouraging offers from possible buyers |
| The provisions of our certificate of incorporation and bylaws could delay, deter or prevent a merger, tender offer, or other business combination or change in control involving us that stockholders might consider to be in their best interests |
| This includes offers or attempted takeovers that could result in our stockholders receiving a premium over the market price for their shares of our common stock |
| Our common stock experiences limited trading volume and our stock price has been volatile |
| Our common stock is traded on the NASDAQ National Market |
| The trading volume of our common stock each day is relatively low |
| This means that sales or purchases of relatively small blocks of stock can have a significant impact on the price at which our stock is traded |
| We believe that factors such as quarterly fluctuations in financial results, announcements of new technologies impacting our products, announcements by competitors or changes in securities analysts’ recommendations could cause the price of our stock to fluctuate substantially |
| These fluctuations, as well as general economic conditions such as recessions or higher interest rates, may adversely affect the market price of our common stock |
| We may experience difficulty manufacturing our products, which would prevent us from achieving increased sales and market share |
| We may experience difficulty in manufacturing our products in increased quantities, outsourcing the manufacturing of our products and improving our manufacturing processes |
| If we are unable to manufacture our products in increased quantities, or if we are unable to outsource the manufacturing of our products or improve our manufacturing processes, we may be unable to increase sales and market share for our products and could also lose existing customers |
| We have limited experience in manufacturing our products in high volume and, therefore, it may be difficult for us to achieve the following results: • increase the quantity of the new products we manufacture while maintaining quality, especially those products that contain new technologies; • reduce our manufacturing costs to a level needed to produce adequate profit margins and avoid losses on committed sales agreements currently priced at below our product costs; and • design and procure additional automated manufacturing equipment |
| It may also be difficult for us to solve management, technological, engineering and other problems, which may arise in connection with our manufacturing processes |
| These problems may include production volumes and yields, quality assurance, adequate and timely supply of high quality materials and components and shortages of qualified management and other personnel |
| If the investors in our December 2005 financing convert their notes or exercise their warrants, it will have a dilutive effect upon our stockholders |
| In December 2005 we issued notes and warrants to an institutional investor |
| Pursuant to the terms of the notes, the holders of such notes may convert the notes into shares of common stock at any time prior to their 24 ______________________________________________________________________ [67]Table of Contents maturity at the Conversion Price, subject to adjustment upon specified events, including a price-based weighted average anti-dilution provision, and further subject to adjustment for stock splits, combinations or similar events specified in the notes |
| Subject to certain conditions, we can automatically convert the notes into common stock of the Company at the Conversion Price |
| Unless our shares of common stock trade at or above a weighted-average price of 115prca of the then effective Conversion Price, we will be obligated to repay equal portions of the principal amount outstanding under the notes on a quarterly basis beginning two (2) years after the date of original issuance, provided that any holder may defer the receipt of any such payment for a period of up to two (2) years |
| As part of the transaction, we also issued to such investors warrants to purchase up to an additional 394cmam737 shares of our common stock at the Conversion Price, subject to anti-dilution provisions similar to the provisions set forth in the notes, and further subject to adjustment for stock splits, combinations or similar events |
| The warrants are exercisable immediately after the closing date of the private placement and expire five (5) years from the date of issuance |
| If the investor converts the notes or exercises the warrants, we will issue shares of our common stock and such issuances will be dilutive to our stockholders |
| Because the Conversion Price may be adjusted from time to time in accordance with the provisions of the notes and the warrants, the number of shares that could actually be issued may be greater than the amount described above |
| In addition, if such institutional investors or our other stockholders sell substantial amounts of our common stock in the public market during a short period of time, our stock price may decline significantly |
| Lastly, we have an obligation to file a registration on Form S-3 to cover the resale of the shares underlying the notes and warrants |
| We are subject to financial penalties for failure to file the registration statement and have it declared effective by the SEC We substantially increased our outstanding indebtedness with the issuance of certain subordinated convertible notes and we may not be able to pay our debt and other obligations |
| In December 2005 we issued notes in the aggregate principal amount of dlra25 million in a private placement to an institutional investor |
| The notes accrue interest at a per annum rate equal to the Federal Funds Rate (as defined in the notes) plus 1dtta125prca, subject to adjustment, with accrued interest payable quarterly |
| By issuing the notes we increased our indebtedness substantially |
| In addition, the holders of the notes have imposed certain restrictive covenants, including limits on our future indebtedness and limits on our ability to incur future liens and make certain restricted payments |
| Upon a change of control (as defined in the notes), the holders of the notes will have certain redemption rights |
| An event of default would occur under the notes for a number of reasons, including our failure to pay when due any principal, interest or late charges on the notes, certain defaults on our indebtedness, certain events of bankruptcy and our breach or failure to perform certain representations and obligations under the notes |
| Upon the occurrence of an event of default, our obligations under the notes may become due and payable in accordance with the terms thereof |
| All shares associated with the subordinated convertible debt and stock warrants are required to be registered by March 20, 2006 |
| A penalty of dlra12cmam500 per day will accrue if the shares are not registered by the deadline |
| As a result, the issuance of the notes may or will: • make it more difficult for us to obtain any necessary financing in the future for working capital, capital expenditures or other purposes; • make it more difficult for us to be acquired; • require us to dedicate a substantial portion of our cash flow from operations and other capital resources to debt service; • limit our flexibility in planning for, or reacting to, changes in our business; and • make us more vulnerable in the event of a downturn in our business or industry conditions |
| If we are unable to satisfy our payment obligations under the notes or otherwise are obliged to repay the notes prior to the due date, we could default on such notes, in which case our available cash could be depleted, perhaps seriously, and our ability to fund operations could be materially harmed |
| 25 ______________________________________________________________________ [68]Table of Contents Our credit agreements contain various restrictions and covenants that limit management’s discretion in the operation of our business and could limit our ability to grow and compete |
| The credit agreements governing our bank credit facilities contain various provisions that limit our ability to: • incur additional debt; • make loans, pay dividends and make other distributions; • create certain liens on, or sell, our assets; • merge or consolidate with another corporation or entity, or enter into other transactions outside the ordinary course of business; and • make certain changes in our capital structure |
| These provisions restrict management’s ability to operate our business in accordance with management’s discretion and could limit our ability to grow and compete |
| Our credit agreements also require us to maintain our compliance with certain financial covenants and ratios |
| If we fail to comply with any of such financial covenants or ratios, or otherwise default under our credit agreements, the lenders under such agreements could: • accelerate and declare all amounts borrowed to be immediately due and payable, together with accrued and unpaid interest; • terminate their commitments, if any, to make further extensions of credit to us and/or attempt to secure collateral |
| In the event that amounts due under our credit agreements are declared immediately payable, we may not have, or be able to obtain, sufficient funds to make such accelerated payments |
| We may not be able to obtain sufficient capital to meet potential customer demand or corporate needs, which could require us to change our business strategy and result in decreased profitability and a loss of customers |
| We believe that in the future we will need a substantial amount of additional capital for a number of purposes, including the following: • to meet potential production volumes for our product lines, particularly our ultracapacitors, which require high-speed automated production lines to achieve targeted customer volume and price requirements; • to expand our manufacturing capabilities and develop viable out-source partners and other production alternatives; • to fund our continuing expansion into commercial markets and compete effectively in those markets; • to develop new technology and cost effective solutions in our business; and • to acquire new or complementary businesses, product lines and technologies |
| In December 2005, we raised approximately dlra23dtta7 million (net of offering expenses) through a private placement of convertible debentures and warrants to purchase shares of our common stock |
| In July 2005, we raised approximately dlra5dtta4 million (net of offering expenses) through the sale of our common stock pursuant to a shelf registration statement on Form S-3 |
| However there can be no assurance that additional financing will be available to us on acceptable terms or at all |
| If adequate funds are not available when needed, we may be required to change or delay our planned growth, which could result in decreased revenues, profits and a loss of customers |
| The issuance of additional shares will result in dilution of our current stockholders |
| Further, if additional 26 ______________________________________________________________________ [69]Table of Contents financing is accomplished by the issuance of debt, the service cost, or interest, will reduce net income or increase net losses and may also require the issuance of additional warrants to purchase shares of common stock |
| The issuance of shares of our common stock could result in the loss of our ability to use our net operating losses |
| As of December 31, 2005, we had approximately dlra140dtta4 million of federal tax and state tax net operating loss carryforwards |
| Realization of any benefit from our tax net operating losses is dependent on: 1) our ability to generate future taxable income and 2) the absence of certain future “ownership changes” of our common stock |
| An “ownership change,” as defined in the applicable federal income tax rules, would place significant limitations, on an annual basis, on the use of such net operating losses to offset any future taxable income we may generate |
| Such limitations, in conjunction with the net operating loss expiration provisions, could effectively eliminate our ability to use a substantial portion of our net operating losses to offset any future taxable income |
| The issuance of shares of our commons stock could cause an “ownership change |
| ” Such transactions include the issuance of shares of common stock upon future conversion or exercise of outstanding options, warrants and convertible preferred stock |