| CAPSTONE TURBINE CORP Item 1A Risk Factors |
| This document contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) pertaining to, among other things, our future results of operations, profits and losses, R&D activities, sales expectations, our ability to develop markets for our products, sources for parts, federal, state and local regulations, general business, industry and economic conditions applicable to us, the reliability of our products and their need for maintenance, our ability to be cost-competitive and to outperform competition, customer satisfaction, the value of using our products, our ability to achieve economies of scale, market advantage, return on investment and functionality of products, including the potential use for emergency elevator power |
| These statements are based largely on our current expectations, estimates and forecasts and are subject to a number of risks and uncertainties |
| Actual results could differ materially from those anticipated by these forward-looking statements |
| Factors that can cause actual results to differ materially include, but are not limited to, those discussed below |
| Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof |
| The following factors should be considered in addition to the other information contained herein in evaluating Capstone and its business |
| We assume no obligation to update any of the forward-looking statements after the filing of this Form 10-K to conform such statements to actual results or to changes in our expectations, except as may be required by law |
| 16 ______________________________________________________________________ The following are certain risk factors that could affect our business, financial condition, results of operations, and cash flows |
| These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10 K because these factors could cause the actual results and conditions to differ materially from those projected in forward-looking statements |
| Before you invest in our publicly traded securities, you should know that making such an investment involves some risks, including the risks described below |
| In addition, these risks are not the only ones facing our Company |
| Additional risks of which we may not be aware or that we currently believe are immaterial may also impair our business operations or our stock price If any of the risks actually occur, our business, financial condition or results of operations could be negatively affected |
| In that case, the trading price of our common stock could decline, and you may lose all or part of your investment |
| In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this report on Form 10 K, our quarterly reports on Form 10 Q and other documents filed by us from time to time |
| Our operating history is characterized by net losses |
| We anticipate further losses and we may never become profitable |
| Since inception, we have incurred annual operating losses |
| We expect this trend to continue until such time that we can sell a sufficient number of units and achieve a cost structure to become profitable |
| Our business is such that we have relatively few customers and limited repeat business |
| We may not have adequate cash resources to reach the point of profitability, and we may never become profitable |
| Even if we do achieve profitability, we may be unable to increase our sales and sustain or increase our profitability in the future |
| A sustainable market for microturbines may never develop or may take longer to develop than we anticipate, which would adversely affect our revenue and profitability |
| Our products represent an emerging market, and we do not know whether our targeted customers will accept our technology or will purchase our products in sufficient quantities to allow our business to grow |
| To succeed, demand for our products must increase significantly in existing markets, and there must be strong demand for products that we introduce in the future |
| If a sustainable market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we have incurred to develop our products, we may have further impairment of assets, and we may be unable to meet our operational expenses |
| The development of a sustainable market for our systems may be hindered by many factors, including some that are out of our control |
| Examples include: · consumer reluctance to try a new product; · regulatory requirements; · the cost competitiveness of our microturbines; · costs associated with the installation and commissioning of our microturbines; · maintenance and repair costs associated with our microturbines; · the future costs and availability of fuels used by our microturbines; · economic downturns and reduction in capital spending; · consumer perceptions of our microturbines’ safety and quality; · the emergence of newer, more competitive technologies and products; and · decrease in domestic and international incentives |
| 17 ______________________________________________________________________ We operate in a highly competitive market among competitors who have significantly greater resources than we have and we may not be able to compete effectively |
| Capstone MicroTurbines compete with several technologies, including reciprocating engines, fuel cells and solar power |
| Competing technologies may receive certain benefits, like governmental subsidies or promotion, or be able to offer consumer rebates or other incentives that we cannot receive or offer to the same extent |
| This could enhance our competitors’ abilities to fund research, penetrate markets or increase sales |
| Our competitors include several well-known companies with histories of providing power solutions |
| They have substantially greater resources than we have and have established worldwide presence |
| Because of greater resources, some of our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, to devote greater resources to the promotion and sale of their products than we can or they may introduce governmental regulations and policies to create competitive advantage vis-à-vis our products |
| We believe that developing and maintaining a competitive advantage will require continued investment by us in product development and quality, as well as attention to product performance, our product prices, our conformance to industry standards, manufacturing capability and sales and marketing |
| In addition, current and potential competitors have established or may in the future establish collaborative relationships among themselves or with third parties, including third parties with whom we have business relationships |
| Accordingly, new competitors or alliances may emerge and rapidly acquire significant market share |
| Overall, the market for our products is highly competitive and is changing rapidly |
| We believe that the primary competitive factors affecting the market for our products, including some that are outside of our control, include: · name recognition, historical performance and market power of our competitors; · product quality and performance; · operating efficiency; · product price; · availability, price and compatibility of fuel; · development of new products and features; and · emissions levels |
| There is no assurance that we will be able to successfully compete against either current or potential competitors or that competition will not have a material adverse effect on our business, operating results and financial condition |
| If we do not effectively implement our sales, marketing and service plans, our sales will not grow and our profitability will suffer |
| Our sales and marketing efforts may not achieve intended results and therefore may not generate the net revenue we anticipate |
| As a result of our strategic plan, we have decided to focus our resources on selected vertical markets, such as cogeneration (CHP and CCHP), resource recovery and secure power |
| We may change our focus to other markets or applications in the future |
| If we are not able to successfully address markets for our products, we may not be able to grow our business, compete effectively or achieve profitability |
| We do not have extensive experience in providing direct sales and service and may not be 18 ______________________________________________________________________ successful in executing this strategy |
| In addition, we may lose existing distributors or service providers or we may have more difficulty attracting new distributors and service providers as a result of this strategy |
| Further we may incur new types of obligations, such as extended service obligations, that could result in costs that exceed the related revenue |
| We may encounter new transaction types through providing direct sales and service and these transactions may require changes to our historic business practices |
| For example, an arrangement with a third party leasing company may require us to provide a residual value guarantee, which is not consistent with our past operating practice |
| Also, as we expand in international markets, customers may have difficulty or be unable to integrate our products into their existing systems or may have difficulty complying with foreign regulatory and commercial requirements |
| Any redesign of the product may delay sales or cause quality issues |
| In addition, we may be subject to a variety of other risks associated with international business, including import/export restrictions, fluctuations in currency exchange rates and global political and economic instability |
| Approval of the New York City Department of Buildings’ MEA application for listing our product on the MEA Index may not result in an increase in sales |
| Our sales efforts may not achieve our intended targets with regards to the New York market and therefore may not generate the net revenue we anticipate |
| As a result of our strategic plan, we have decided to focus resources on the New York market to support the sales that may result from the approval of the New York City Department of Buildings’ MEA application for listing our product on the MEA Index |
| Though we received our MEA approval from the New York City Department of Buildings MEA Division and the New York Fire Department on May 24, 2006, certain applications of our products will require further approval and there can be no assurance that our focus on, or our near-term plans for, the New York market will be successful |
| Approval of Capstone-branded products for listing on the General Service Administration (“GSA”) Schedule does not ensure that we will supply products to the federal government and may not result in an increase in sales |
| We have publicly announced that our products have been approved by the GSA The GSA approval provides the opportunity for federal end-user customers to negotiate and acquire products and services from commercial suppliers |
| Although our products received such approval, there is no assurance that we will achieve our intended targets with regards to the sale of our products to the federal government, and, therefore, we may not generate the net revenue we anticipate |
| We do not have a definitive agreement with Broad USA, Inc |
| to develop jointly fully integrated cogeneration (CCHP) systems, and this strategic relationship is subject to negotiation and execution of a definitive agreement and may not result in an increase in sales |
| We have publicly announced that we have negotiated and signed a Memorandum of Understanding (“MOU”) with Broad USA, Inc |
| to jointly develop fully integrated cogeneration (CCHP) systems |
| The basis of the agreement will synchronize the two companies to follow our “cookie-cutter” concept for market standardization of on-site power and CHP solutions |
| Although we have a signed MOU, we do not have a definitive agreement with Broad USA, Inc, and no assurance can be given that we will reach such an agreement |
| If we enter into such an agreement, our sales efforts may not achieve intended targets with regards to the anticipated strategic relationship with Broad USA, Inc |
| 19 ______________________________________________________________________ We may not be able to retain or develop distributors or dealers in our targeted markets, in which case our sales would not increase as expected |
| In order to serve certain of our targeted markets, we believe that we must ally ourselves with companies that have particular expertise or better access to those markets |
| We believe that retaining or developing strong distributors or dealers in these targeted markets can improve the rate of adoption as well as reduce the direct financial burden of introducing a new technology and creating a new market |
| Because of distributors’ and dealers’ relationships in their respective markets, the loss of a distributor or dealer could adversely impact the ability to penetrate our target market |
| We offer our distributors and dealers a stated discount from list price for the products they purchase |
| In the future, to attract and retain distributors and dealers, we may provide volume price discounts or otherwise incur significant costs that may reduce the potential profitability of these relationships |
| We may not be able to retain or develop appropriate distributors or dealers on a timely basis, and we cannot provide assurance that the distributors or dealers will focus adequate resources on selling our products or will be successful in selling them |
| In addition, some of the relationships may require that we grant exclusive distribution rights in defined territories |
| These exclusive distribution arrangements could result in our being unable to enter into other arrangements at a time when the distributor or dealer with whom we form a relationship is not successful in selling our products or has reduced its commitment to market our products |
| We cannot provide assurance you that we will be able to negotiate collaborative relationships on favorable terms or at all |
| The inability of the Company to have appropriate distribution in our target markets may adversely affect our financial condition and results of operations |
| Our largest customer may not achieve its forecasted sales growth, and we have given it notice of certain breaches of contract that have not been cured and could result in termination of our agreement with this customer |
| Sales to UTC Power, LLC (“UTCP”), an affiliate of UTC, accounted for approximately 17prca and 15prca of our net revenue for the years ended March 31, 2006 and 2005 |
| Our OEM agreement with UTCP permits UTCP to package the Capstone MicroTurbine products with chillers and heat exchange equipment manufactured by UTCP and to sell and service the integrated CCHP units |
| UTCP’s performance as it relates to engineering, installation and provision of after-market service could have a significant impact on our reputation and products |
| On September 11, 2005, we gave notice to UTCP, pursuant to our OEM agreement, of certain breaches of the OEM agreement by UTCP, including failure to meet sales targets for the year |
| We could elect to terminate the OEM agreement if UTCP fails to cure the breaches |
| While we believe that UTCP has not yet cured some key breaches of the agreement, we have continued to work with UTCP and have encouraged UTCP to resolve the underlying causes of the breaches |
| Meanwhile, we are continuing to do business with UTCP under the OEM agreement, and we have not terminated the agreement |
| If this relationship is terminated, we will honor sales orders committed to prior to the date of termination in accordance with the OEM agreement; however, our near-term sales, cash flow and profitability could be adversely affected |
| Furthermore, while this relationship is important to us, UTCP has not and may not achieve its forecasted sales growth, which could affect our ability to meet our sales, cash flow and profitability targets |
| We may not be able to develop sufficiently trained applications engineering, installation and service support to serve our targeted markets |
| Our ability to identify and develop business relationships with companies who can provide quality, cost-effective application engineering, installations and service can significantly affect our success |
| The application engineering and proper installation of our microturbines, as well as proper maintenance and service, are critical to the performance of the units |
| Additionally, we need to reduce the total installed cost 20 ______________________________________________________________________ of our microturbines to enhance market opportunities |
| Our inability to improve the quality of applications, installation and service while reducing associated costs could affect the marketability of our products |
| Changes in our product components may require us to replace parts held at distributors and ASCs |
| We have entered into agreements with some of our distributors and ASCs that require that if we render parts obsolete in inventories they own and hold in support of their obligations to serve fielded microturbines, then we are required to replace the affected stock at no cost to the distributors or ASCs |
| While we have never incurred costs or obligations for these types of replacements, it is possible that future changes in our product technology could result and yield costs that have a material adverse effect on our results of operations or financial position |
| We operate in a highly regulated business environment, and changes in regulation could impose significant costs on us or make our products less economical, thereby affecting demand for our microturbines |
| Our products are subject to federal, state, local and foreign laws and regulations, governing, among other things, emissions to air and occupational health and safety |
| Regulatory agencies may impose special requirements for implementation and operation of our products (eg, connection with the electric grid) or may significantly affect or even eliminate some of our target markets |
| We may incur material costs or liabilities in complying with government regulations |
| In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations and requirements that may be adopted or imposed in the future |
| For example, our current products do not comply with the 2007 proposed emission standards of the California Air Resources Board |
| Furthermore, our potential utility customers must comply with numerous laws and regulations |
| The deregulation of the utility industry may also create challenges for our marketing efforts |
| For example, as part of electric utility deregulation, federal, state and local governmental authorities may impose transitional charges or exit fees, which would make it less economical for some potential customers to switch to our products |
| We can provide no assurances that we will be able to obtain these approvals and changes in a timely manner, or at all |
| The market for electricity and generation products is heavily influenced by federal and state government regulations and policies |
| The deregulation and restructuring of the electric industry in the United States and elsewhere may aid the desirability of alternative power sources |
| Problems associated with such deregulation and restructuring may cause rule changes that may reduce or eliminate advantages of such deregulation and restructuring |
| We cannot determine how the deregulation and the restructuring of the electric utility industry will ultimately affect the market for our microturbines |
| Changes in regulatory standards or policies could reduce the level of investment in the research and development of alternative power sources, including microturbines |
| Any reduction or termination of such programs can increase the cost to our potential customers, making our systems less desirable, and thereby adversely affect our revenue and potential profitability |
| Utility companies or governmental entities could place barriers to our entry into the marketplace and we may not be able to effectively sell our product |
| Utility companies or governmental entities could place barriers on the installation of our product or the interconnection of the product with the electric grid |
| Further, they may charge additional fees to customers who install on-site generation, or for having the capacity to use power from the grid for back-up or standby purposes |
| These types of restrictions, fees or charges could hamper the ability to install or effectively use our product or increase the cost to our potential customers for using our systems |
| This could make our systems less desirable, thereby adversely affecting our revenue and profitability potential |
| In addition, utility rate reductions can make our products less competitive which would have a material 21 ______________________________________________________________________ adverse effect on our operations |
| The cost of electric power generation is ultimately tied to the cost of natural gas |
| However, changes to electric utility tariffs often require lengthy regulatory approval and include a mix of fuel types as well as customer categories |
| Potential customers may perceive the resulting swings in gas and electric pricing as an increased risk of investing in on-site generation |
| Product quality expectations may not be met causing slower market acceptance or warranty cost exposure |
| As we continue to improve the quality and lower the total costs of ownership of our products, we may require engineering changes |
| Such improvement initiatives may render existing inventories obsolete or excessive |
| Despite our continuous quality improvement initiatives, we may not meet customer expectations |
| Any significant quality issues with our products could have a material adverse effect on our rate of product adoption, results of operations and financial position |
| Moreover, as we develop new configurations for our microturbines or as our customers place existing configurations in commercial use, our products may perform below expectations |
| Any significant performance below expectations could adversely affect our operating results and financial position and affect the marketability of our products |
| We sell our products with warranties |
| While management believes that the provision for estimated product warranty expenses is reasonable, there can be no assurance that the provision will be sufficient to cover our warranty expenses in the future |
| Although we attempt to reduce our risk of warranty claims through warranty disclaimers, we cannot ensure that our efforts will effectively limit our liability |
| Any significant incurrence of warranty expense in excess of estimates could have a material adverse effect on our operating results and financial position |
| Further, we have at times undertaken programs to enhance the performance of units previously sold |
| These enhancements have at times been provided at no cost or below our cost |
| While we believe we have no obligations to offer such programs, we may choose to do so again in the future and such actions could result in significant costs |
| We depend upon the development of new products and enhancements of existing products |
| Our operating results may depend on our ability to develop and introduce new products, or enhance existing products and to reduce the costs to produce our products |
| The success of our products is dependent on several factors, including proper product definition, product cost, timely completion and introduction of the products, differentiation of products from those of our competitors, meeting changing customer requirements, emerging industry standards and market acceptance of these products |
| The development of new, technologically advanced products and enhancements is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends |
| There can be no assurance that we will successfully identify new product opportunities, develop and bring new or enhanced products to market in a timely manner, successfully lower costs and achieve market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive |
| Operational restructuring may result in asset impairment or other unanticipated charges |
| As a result of our strategic plan, we have identified opportunities to outsource to third party suppliers certain functions which we currently perform |
| We believe outsourcing can reduce product costs, improve product quality or increase operating efficiency |
| These actions may not yield the expected results, and outsourcing may result in delay or lower quality products |
| Transitioning to outsourcing may cause certain affected employees to leave the Company before the outsourcing is complete |
| This could result in a lack of the experienced in-house talent necessary to successfully implement the outsourcing |
| Further, depending on the nature of operations outsourced and the structure of agreements we reach with suppliers to perform these functions, we may experience impairment in the value of manufacturing assets related to the outsourced functions or other unanticipated charges, which could have a material adverse effect on our operating results |
| 22 ______________________________________________________________________ We may not achieve production cost reductions necessary to competitively price our product, which would impair our sales |
| We believe that we will need to reduce the unit production cost of our products over time to maintain our ability to offer competitively priced products |
| Our ability to achieve cost reductions will depend on our ability to develop low cost design enhancements, to obtain necessary tooling and favorable supplier contracts and to increase sales volumes so we can achieve economies of scale |
| We cannot provide assurance that we will be able to achieve any such production cost reductions |
| Our failure to achieve such cost reductions could have a material adverse effect on our business and results of operations |
| Commodity market factors impact our costs and availability of materials |
| Our products contain a number of commodity materials, from metals, which includes steel, special high temperature alloys, copper, nickel and molybdenum, to computer components |
| The availability of these commodities could impact our ability to acquire the materials necessary to meet our requirements |
| The cost of metals has historically fluctuated |
| The pricing could impact the costs to manufacture our product |
| If we are not able to acquire commodity materials at prices and on terms satisfactory to us or at all, our operating results may be materially adversely affected |
| Our suppliers may not supply us with a sufficient amount of components or components of adequate quality, and we may not be able to produce our product |
| Although we generally attempt to use standard parts and components for our products, some of our components are currently available only from a single source or limited sources |
| We may experience delays in production if we fail to identify alternative suppliers, or if any parts supply is interrupted, each of which could materially adversely affect our business and operations |
| In order to reduce manufacturing lead times and ensure adequate component supply, we enter into agreements with certain suppliers that allow them to procure inventories based upon criteria defined by us |
| If we fail to anticipate customer demand properly, an oversupply of parts could result in excess or obsolete inventories, which could adversely affect our business |
| Our inability to meet volume commitments with suppliers could affect the availability or pricing of our parts and components |
| A reduction or interruption in supply, a significant increase in price of one or more components or a decrease in demand of products could materially adversely affect our business and operations and could materially damage our customer relationships |
| Financial problems of suppliers on whom we rely could limit our supply or increase our costs |
| Also, we cannot guarantee that any of the parts or components that we purchase will be of adequate quality or that the prices we pay for the parts or components will not increase |
| Inadequate quality of products from suppliers could interrupt our ability to supply quality products to our customers in a timely manner |
| Additionally, defects in materials or products supplied by our suppliers that are not identified before our products are placed in service by our customers could result in higher warranty costs and damage to our reputation |
| We also outsource approximately 2prca of our components internationally and expect to increase international outsourcing of components |
| As a result of outsourcing internationally, we may be subject to delays in delivery due to the timing or regulations associated with the import/export process, delays in transportation or regional instability |
| Our products involve a lengthy sales cycle and we may not anticipate sales levels appropriately, which could impair our potential profitability |
| The sale of our products typically involves a significant commitment of capital by customers, with the attendant delays frequently associated with large capital expenditures |
| For these and other reasons, the sales cycle associated with our products is typically lengthy and subject to a number of significant risks over which we have little or no control |
| We expect to plan our production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially |
| If sales in any period fall significantly below anticipated levels, our financial condition and results of operations could 23 ______________________________________________________________________ suffer |
| If demand in any period increases well above anticipated levels, we may have difficulties in responding, incur greater costs to respond, or be unable to fulfill the demand in sufficient time to retain the order, which would negatively impact our operations |
| In addition, our operating expenses are based on anticipated sales levels, and a high percentage of our expenses are generally fixed in the short term |
| As a result of these factors, a small fluctuation in timing of sales can cause operating results to vary from period to period |
| Potential intellectual property, shareholder or other litigation may adversely impact our business |
| We may face litigation relating to intellectual property matters, labor matters, product liability, or other matters |
| An adverse judgment could negatively impact our financial position and results of operations, the price of our common stock and our ability to obtain future financing on favorable terms or at all |
| Any litigation could be costly, divert management attention or result in increased costs of doing business |
| We may be unable to fund our future operating requirements, which could force us to curtail our operations |
| To the extent that the funds we now have on hand are insufficient to fund our future operating requirements, we would need to raise additional funds, through further public or private equity or debt financings depending upon prevailing market conditions |
| These financings may not be available or, if available, may be on terms that are not favorable to us and could result in dilution to our stockholders and reduction of the price of our stock |
| Downturns in worldwide capital markets could also impede our ability to raise additional capital on favorable terms or at all |
| If adequate capital were not available to us, we would likely be required to significantly curtail or possibly even cease our operations |
| We may not be able to effectively manage our growth, expand our production capabilities or improve our operational, financial and management information systems, which would impair our sales and profitability |
| If we are successful in executing our business plan, we will experience growth in our business that could place a significant strain on our business operations, management and other resources |
| Our ability to manage our growth will require us to expand our production capabilities, continue to improve our operational, financial and management information systems, and to motivate and effectively manage our employees |
| We cannot provide assurance that our systems, procedures and controls or financial resources will be adequate, or that our management will keep pace with this growth |
| We cannot provide assurance that our management will be able to manage this growth effectively |
| Our success depends in significant part upon the continuing service of management and key employees |
| Our success depends in significant part upon the continuing service of our executive officers, senior management and sales and technical personnel |
| The failure of our personnel to execute our strategy, or our failure to retain management and personnel, could have a material adverse effect on our business |
| Our success will be dependent on our continued ability to attract, retain and motivate highly skilled employees |
| Loss of these people or our inability to replace them with similarly skilled and trained individuals or new processes in a timely manner could adversely impact our internal control mechanisms |
| 24 ______________________________________________________________________ We cannot be certain of the future effectiveness of our internal controls over financial reporting or the impact thereof on our operations or the market price of our common stock |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in this Annual Report on Form 10-K our assessment of the effectiveness of our internal controls over financial reporting |
| Furthermore, our independent registered public accounting firm is required to audit our assessment of the effectiveness of our internal controls over financial reporting and separately report on whether it believes we maintain, in all material respects, effective internal controls over financial reporting |
| We identified three material weaknesses in our system of internal controls as of March 31, 2005 |
| Since March 31, 2005, we have adequately addressed the three material weaknesses |
| We cannot provide assurance that our system of internal controls will be effective in the future as our operations and control environment change |
| If we cannot adequately maintain the effectiveness of our internal controls over financial reporting, our financial reporting may be inaccurate |
| If reporting errors actually occur, we could be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission |
| These results could adversely affect our financial results or the market price of our common stock |
| Our operations are vulnerable to interruption by fire, earthquake and other events beyond our control |
| Our operations are vulnerable to interruption by fire, earthquake and other events beyond our control |
| Our executive offices and manufacturing facilities are located in Southern California |
| Because the Southern California area is located in an earthquake-sensitive area, we are particularly susceptible to the risk of damage to, or total destruction of, our facilities in Southern California and the surrounding transportation infrastructure, which could affect our ability to make and transport our products |
| While the Company maintains personal property and business interruption coverage, it does not maintain earthquake coverage for personal property or resulting business interruption |
| If an earthquake, fire or other natural disaster occurs at or near our facilities, our business, financial condition and operating results could be materially adversely affected |
| The market price of our common stock has been and may continue to be highly volatile and an investment in our common stock could suffer a decline in value |
| An investment in our common stock is risky, and shareholders could suffer significant losses and wide fluctuations in the market value of their investment |
| The market price of our common stock is highly volatile and is likely to continue to be volatile |
| As a result of the factors discussed below, our operating results for a particular quarter are difficult to predict |
| Given the continued uncertainty surrounding many variables that may affect the industry in which we operate, our ability to foresee results for future periods is limited |
| This variability could affect our operating results and thereby adversely affect our stock price |
| Many factors that contribute to this volatility are beyond our control and may cause the market price of our common stock to change, regardless of our operating performance |
| Factors that could cause fluctuation in our stock price may include, among other things: · actual or anticipated variations in quarterly operating results; · market sentiment toward alternate energy stocks in general or toward Capstone; · changes in financial estimates or recommendations by securities analysts; · conditions or trends in our industry or the overall economy; · loss of one or more of our significant customers; · errors, omissions or failures by third parties in meeting commitments to the Company; 25 ______________________________________________________________________ · changes in the market valuations or earnings of our competitors or other technology companies; · the trading of options on our common stock; · announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives; · announcements of significant market events, such as power outages, regulatory changes or technology changes; · changes in the estimation of the future size and growth rate of our market; · future equity financings; · the failure to achieve our near-term plans for the federal government despite receiving listing on the General Service Administration Schedule; · the failure to achieve our near-term plans for the New York market despite receiving the New York MEA approval; · failure to enter into a definitive agreement with Broad USA, Inc |
| ; · litigation or disputes with customers or business partners; · capital commitments; · additions or departures of key personnel; · sales or purchases of the Company’s common stock; · the trading volume of our common stock; · developments relating to litigation or governmental investigations; and · decrease in oil and electricity prices |
| In addition, the stock market in general, and the Nasdaq National Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected |
| The market prices of securities of technology companies and companies servicing the technology industries have been particularly volatile |
| These broad market and industry factors may cause a material decline in the market price of our common stock, regardless of our operating performance |
| In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company |
| This type of litigation, if instituted against us and regardless of whether we prevail on the underlying claim, could result in substantial costs and a diversion of management’s attention and resources, which could materially harm our financial condition and results of operations |
| Provisions in our certificate of incorporation, bylaws and our stockholder rights plan, as well as Delaware law, may discourage, delay or prevent a merger or acquisition at a premium price |
| Provisions of our second amended and restated certificate of incorporation, amended and restated bylaws and our stockholder rights plan, as well as provisions of the General Corporation Law of the State of Delaware, could discourage, delay or prevent unsolicited proposals to merge with or acquire us, even though such proposals may be at a premium price or otherwise beneficial to you |
| These provisions include our board’s authorization to issue shares of preferred stock, on terms the board determines in its 26 ______________________________________________________________________ discretion, without stockholder approval, and provisions of Delaware law that restrict many business combinations |
| We are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware, which could prevent us from engaging in a business combination with a 15prca or greater stockholder for a period of three years from the date it acquired such status unless appropriate board or stockholder approvals are obtained |
| Our board of directors has adopted a stockholder rights plan, pursuant to which one preferred stock purchase right has been issued for each share of our common stock authorized and outstanding at the close of business on July 18, 2005 |
| The rights plan is intended to protect our stockholders in the event of an unfair or coercive offer to acquire the Company |
| However, the existence of the rights plan may discourage, delay or prevent a merger or acquisition of the Company that is not supported by the board of directors |