If the only securities
being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following
box.
o
If any of the securities
being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following
box.
þ
If this Form is filed
to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
o
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering.
o
If this Form is a registration
statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become effective upon filing with
the Commission pursuant to Rule 462(e) under the Securities Act, check the following box.
o
If this Form is a post-effective
amendment to a registration statement filed pursuant to General Instruction I.D. filed to register additional securities or additional
classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box.
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
RISK FACTORS
An investment in
our securities involves a high degree of risk.
Before investing in our securities, y
ou should
carefully consider the following information about these risks, together with the other information contained in this prospectus
and in the documents incorporated by reference into this prospectus, including the specific risk factors discussed under the caption
“Risk Factors” in the applicable prospectus supplement, other information contained in the prospectus supplement or
appearing in, or incorporated by reference in this prospectus. If any of the events anticipated by the risks described below occur,
our business, cash flow, results of operations and financial condition could be adversely affected which could result in a decline
in the market price of our securities, causing you to lose all or part of your investment.
RISKS RELATED TO OUR OPERATIONS
Our business depends in large part on
the growth in demand for portable electronic devices.
Many of our battery products are used to
power various portable electronic devices. Therefore, the demand for our batteries is substantially tied to the market demand
for portable electronic devices. A growth in the demand for portable electronic devices will be essential to the expansion of
our business. Our results of operations may be adversely affected by decreases in the general level of economic activity. Decreases
in consumer spending that may result from the current global economic downturn may weaken demand for items that use our battery
products. A decrease in the demand for portable electronic devices would likely have a material adverse effect on our results
of operations. We are unable to predict the duration and severity of the current disruption in financial markets and the
global adverse economic conditions and the effect such events might have on our business.
Our success depends on the success of
manufacturers of the end applications that use our battery products.
Because our products are designed to be used
in other products, our success depends on whether end application manufacturers will incorporate our batteries in their products.
Although we strive to produce high quality battery products, there is no guarantee that end application manufacturers will accept
our products. Our failure to gain acceptance of our products from these manufacturers could result in a material adverse effect
on our results of operations.
Additionally, even if a manufacturer decides
to use our batteries, the manufacturer may not be able to market and sell its products successfully. The manufacturer’s
inability to market and sell its products successfully could materially and adversely affect our business and prospects because
this manufacturer may not order new products from us. Therefore, our business, financial condition, results of operations and
future success would be materially and adversely affected.
We are and will continue to be subject
to declining average selling prices of consumer electronic devices, which may harm our results of operations.
Portable consumer electronic devices, such
as cellular phones, DVD players, laptop computers and tablets are subject to rapid declines in average selling prices due to rapidly
evolving technologies, industry standards and consumer preferences. Therefore, electronic device manufacturers expect suppliers,
such as our company, to cut their costs and lower the price of their products to lessen the negative impact on the electronic
device manufacturer’s own profit margins. As a result, we have previously reduced the price of some of our battery products
and expect to continue to face market-driven downward pricing pressures in the future. Our results of operations will suffer if
we are unable to offset any declines in the average selling prices of our products by developing new or enhanced products with
higher selling prices or gross profit margins, increasing our sales volumes or reducing our production costs.
Our success is highly dependent on continually
developing new and advanced products, technologies, and processes and failure to do so may cause us to lose our competitiveness
in the battery industry and may cause our profits to decline.
To remain competitive in the battery industry,
it is important to continually develop new and advanced products, technologies, and processes. There is no assurance that competitors’
new products, technologies, and processes will not render our existing products obsolete or non-competitive. Alternately, changes
in legislative, regulatory or industry requirements or in competitive technologies may render certain of our products obsolete
or less attractive. Our competitiveness in the battery market therefore relies upon our ability to enhance our current products,
introduce new products, and develop and implement new technologies and processes. We predominately manufacture and market
Ni-MH batteries, and to a lesser extent, Li-ion and Li-polymer batteries. If our competitors develop alternative products
with more enhanced features than our products, our financial condition and results of operations would be materially and adversely
affected.
The research and development of new products
and technologies is costly and time consuming, and there are no assurances that our research and development of new products will
either be successful or completed within anticipated timeframes, if at all. Our failure to technologically evolve and/or develop
new or enhanced products may cause us to lose competitiveness in the battery market and may cause our profits to decline. In addition,
in order to compete effectively in the battery industry, we must be able to launch new products to meet our customers’ demands
in a timely manner. However, we cannot provide assurance that we will be able to install and certify any equipment needed to produce
new products in a timely manner, or that the transitioning of our manufacturing facility and resources to full production under
any new product programs will not impact production rates or other operational efficiency measures at our manufacturing facility.
In addition, new product introductions and applications are risky, and may suffer from a lack of market acceptance, delay in related
product development and failure of new products to operate properly. Any failure by us successfully to launch new products, or
a failure by our customers to accept such products, could adversely affect our operating results.
We have historically depended on a limited
number of customers for a significant portion of our revenues and this dependence is likely to continue.
We have historically depended on a limited
number of customers for a significant portion of our net sales. Our top five customers accounted for approximately 26.9%, 31.7%
and 37.9% of our net sales for the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, respectively.
One customer, Energizer Battery Manufacturing, Inc., accounted for 11.4%, 14.8% and 19.7% of our net sales for the six months
ended June 30, 2013 and the years ended December 31, 2012 and 2011, respectively. We anticipate that a limited number of customers
will continue to contribute to a significant portion of our net sales in the future. Maintaining the relationships with these
significant customers is vital to the expansion and success of our business, as the loss of a major customer could expose us to
risk of substantial losses. Our sales and revenue could decline and our results of operations could be materially adversely affected
if one or more of these significant customers stops or reduces its purchasing of our products, or if we fail to expand our customer
base for our products.
Significant order cancellations, reductions
or delays by our customers could materially adversely affect our business.
Our sales are typically made pursuant to
individual purchase orders, and we generally do not have long-term supply arrangements with our customers, but instead work with
our customers to develop nonbinding forecasts of future requirements. Based on these forecasts, we make commitments regarding
the level of business that we will seek and accept, the timing of production schedules and the levels and utilization of personnel
and other resources. A variety of conditions, both specific to each customer and generally affecting each customer’s industry,
may cause customers to cancel, reduce or delay orders that were either previously made or anticipated. Generally, customers may
cancel, reduce or delay purchase orders and commitments without penalty, except for payment for services rendered or products
competed and, in certain circumstances, payment for materials purchased and charges associated with such cancellation, reduction
or delay. Significant or numerous order cancellations, reductions or delays by our customers could have a material adverse effect
on our business, financial condition or results of operations.
Substantial defaults by our customers
on accounts receivable or the loss of significant customers could have a material adverse effect on our business.
A substantial portion of our working capital
consists of accounts receivable from customers. One customer represented an aggregate of 7.1% and 16% of our accounts receivable
as of June 30, 2013 and December 31, 2012, respectively. If customers responsible for a significant amount of accounts receivable
were to become insolvent or otherwise unable to pay for products and services, or to make payments in a timely manner, our business,
results of operations or financial condition could be materially adversely affected. An economic or industry downturn could materially
adversely affect the servicing of these accounts receivable, which could result in longer payment cycles, increased collection
costs and defaults in excess of management’s expectations. A significant deterioration in our ability to collect on accounts
receivable could also impact the cost or availability of financing available to us.
A change in our product mix may cause
our results of operations to differ substantially from the anticipated results in any particular period.
Our overall profitability may not meet expectations
if our products, customers or geographic mix are substantially different than anticipated. Our profit margins vary among our battery
and new materials products, our customers and the geographic markets in which we sell our products. Consequently, if our mix of
any of these is substantially different from what is anticipated in any particular period, our profitability could be lower than
anticipated.
Certain disruptions in supply of and changes
in the competitive environment for raw materials integral to our products may adversely affect our profitability.
We use a broad range of materials and supplies,
including metals, chemicals and other electronic components in our products. A significant disruption in the supply of these materials
could decrease production and shipping levels, materially increase our operating costs and materially adversely affect our profit
margins. Shortages of materials or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism
or other interruptions to or difficulties in the employment of labor or transportation in the markets in which we purchase materials,
components and supplies for the production of our products, in each case may adversely affect our ability to maintain production
of our products and sustain profitability. If we were to experience a significant or prolonged shortage of critical components
from any of our suppliers and could not procure the components from other sources, we would be unable to meet our production schedules
for some of our key products and to ship such products to our customers in timely fashion, which would adversely affect our sales,
margins and customer relations.
Our industry is subject to supply shortages
and any delay or inability to obtain product components may have a material adverse effect on our business.
Our industry is subject to supply shortages,
which could limit the amount of supply available of certain required battery components. Any delay or inability to obtain supplies
may have a material adverse effect on our business. During prior periods, there have been shortages of components in the battery
industry and the availability of raw materials has been limited by some of our suppliers. We cannot assure investors that any
future shortages or allocations would not have such an effect on our business. A future shortage can be caused by and result from
many situations and circumstances that are out of our control, and such shortage could limit the amount of supply available of
certain required materials and increase prices affecting our profitability.
Our future operating results may be affected
by fluctuations in costs of raw materials, such as nickel.
Our principal raw material is nickel, which
is available from a limited number of suppliers in China. The price of nickel was volatile during 2011 and 2012 and could be volatile
again. The price of nickel decreased 29% from January 2011 to December 2011 and decreased 12% from January 2012 to December 2012
and decreased 18% from January 2013 to June 2013. The prices of nickel and other raw materials used to make our batteries increase
and decrease due to factors beyond our control, including general economic conditions, domestic and worldwide demand, labor costs
or problems, competition, import duties, tariffs, energy costs, currency exchange rates and those other factors described under
“Certain disruptions in supply of and changes in the competitive environment for raw materials integral to our products
may adversely affect our profitability.” In an environment of increasing prices for nickel and other raw materials, competitive
conditions may impact how much of the price increases we can pass on to our customers and to the extent we are unable to pass
on future price increases in our raw materials to our customers, our financial results could be adversely affected.
Our operations would be materially adversely
affected if third-party carriers were unable to transport our products on a timely basis.
All of our products are shipped through third
party carriers. If a strike or other event prevented or disrupted these carriers from transporting our products, other carriers
may be unavailable or may not have the capacity to deliver our products to our customers. If adequate third party sources to ship
our products are unavailable at any time, our business would be materially adversely affected.
We may not be able to increase our manufacturing
output in order to maintain our competitiveness in the battery industry.
We believe that our ability to provide cost-effective
products represents a significant competitive advantage over our competitors. In order to continue providing such cost-effective
products, we must maximize the efficiency of our production processes and increase our manufacturing output to a level that will
enable us to reduce the unit production cost of our products. Our ability to increase our manufacturing output is subject to certain
significant limitations, including:
|
·
|
Our ability raise capital to acquire additional raw materials and expand our manufacturing facilities;
|
|
·
|
Delays and cost overruns, due to increases in raw material prices and problems with equipment
vendors;
|
|
·
|
Delays or denial of required approvals and certifications by relevant government authorities;
|
|
·
|
Diversion of significant management attention and other resources; and
|
|
·
|
Failure to execute our expansion plan effectively
.
|
If we are not able to increase our manufacturing
output and reduce our unit production costs, we may be unable to maintain our competitive position in the battery industry. Moreover,
even if expand our manufacturing output, we may not be able to generate sufficient customer demand for our products to support
our increased production output.
The market for our products and services
is very competitive and, if we cannot effectively compete, our business will be harmed.
The market for our products and services
is very competitive and subject to rapid technological change. Many of our competitors are larger and have significantly greater
assets, name recognition and financial, personnel and other resources than we have. As a result, our competitors may be in a stronger
position to respond quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes
in customer requirements. We cannot assure that we will be able to maintain or increase our market share against the emergence
of these or other sources of competition. Failure to maintain and enhance our competitive position could materially adversely
affect our business and prospects.
Our business may be adversely affected
by the global economic downturn, in addition to the continuing uncertainties in the financial markets.
The global economy is currently in a pronounced
economic downturn. Global financial markets are continuing to experience disruptions, including severely diminished liquidity
and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty
about economic stability. Given these uncertainties, there is no assurance that there will not be further deterioration in the
global economy, the global financial markets and consumer confidence. If economic conditions deteriorate further, our business
and results of operations could be materially and adversely affected.
Additionally, sales of consumer items such
as portable electronic devices, have slowed and there have been adverse changes in employment levels, job growth, consumer confidence
and interest rates. Our future results of operations may experience substantial fluctuations from period to period as a consequence
of these factors, and such conditions and other factors affecting consumer spending may affect the timing of orders. Thus, any
economic downturns generally would have a material adverse effect on our business, cash flows, financial condition and results
of operations.
Additionally, the inability of our customers
and suppliers to access capital efficiently, or at all, may have other adverse effects on our financial condition. For example,
financial difficulties experienced by our customers or suppliers could result in product delays; increase accounts receivable
defaults; and increase our inventory exposure. The inability of our customers to borrow money to fund purchases of our products
reduces the demand for our products and services and may adversely affect our results from operations and cash flow. These risks
may increase if our customers and suppliers do not adequately manage their business or do not properly disclose their financial
condition to us.
Although we believe we have adequate liquidity
and capital resources to fund our operations internally, in light of current market conditions, our inability to access the capital
markets on favorable terms, or at all, may adversely affect our financial performance. The inability to obtain adequate financing
from debt or capital sources could force us to self-fund strategic initiatives or even forego certain opportunities, which in
turn could potentially harm our performance.
Maintaining and expanding our manufacturing
operations requires significant capital expenditures, and our inability or failure to maintain and expand our operations would
have a material adverse impact on our market share and ability to generate revenue.
We had capital expenditures of approximately
$7.3 million, $13.0 million and $7.7 million in the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011,
respectively. We may incur significant additional capital expenditures as a result of our expansion of our operations into our
new production factory, as well as unanticipated events, regulatory changes and other events that impact our business. If we are
unable or fail to adequately maintain our manufacturing capacity or quality control processes or adequately expand our production
capabilities, we could lose customers and there could be a material adverse impact on our market share and our ability to generate
revenue.
Warranty claims, product liability claims
and product recalls could harm our business, results of operations and financial condition.
Our business inherently exposes us to potential
warranty and product liability claims, in the event that our products fail to perform as expected or such failure of our products
results, or is alleged to result, in bodily injury or property damage (or both). Such claims may arise despite our quality controls,
proper testing and instruction for use of our products, either due to a defect during manufacturing or due to the individual’s
improper use of the product. In addition, if any of our designed products are or are alleged to be defective, then we may be required
to participate in a recall of them.
Existing PRC laws and regulations do not
require us to maintain third party liability insurance to cover product liability claims. Although we have obtained products liability
insurance, if a warranty or product liability claim is brought against us, regardless of merit or eventual outcome, or a recall
of one of our products is required, such claim or recall may result in damage to our reputation, breach of contracts with our
customers, decreased demand for our products, costly litigation, additional product recalls, loss of revenue, and the inability
to commercialize some products. Additionally, our insurance policy imposes a ceiling for maximum coverage and high deductibles
and we may be unable to obtain sufficient amounts from our policy to cover a product liability claim. We may not be able
to obtain any insurance coverage for certain types of product liability claims, as our policy excludes coverage of certain types
of claims. In such cases, we may still incur substantial costs related to a product liability claim, which could adversely
affect our results of operations.
Manufacturing or use of our battery products
may cause accidents, which could result in significant production interruption, delay or claims for substantial damages.
Our batteries, especially lithium batteries,
can pose certain safety risks, including the risk of fire. While we implement stringent safety procedures at all stages of battery
production that minimize such risks, accidents may still occur. Any accident, regardless of where it occurs, may result in significant
production interruption, delays or claims for substantial damages caused by personal injuries or property damages.
Our labor costs have increased and are
likely to continue to increase as a result of changes in Chinese labor laws.
We expect to experience an increase in our
cost of labor due to recent changes in Chinese labor laws which are likely to increase costs further and impose restrictions on
our relationship with our employees. In June 2007, the National People’s Congress of the PRC enacted new labor law legislation
called the Labor Contract Law and more strictly enforced existing labor laws. The law, which became effective on January 1, 2008,
amended and formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of
trade unions. As a result of the law, we have had to increase the salaries of our employees, provide additional benefits to our
employees, and revise certain other of our labor practices. The increase in labor costs has increased our operating costs, which
we have not always been able to pass on to our customers. In addition, under the law, employees who either have worked for us
for 10 years or more or who have had two consecutive fixed-term contracts must be given an “open-ended employment contract”
that, in effect, constitutes a lifetime, permanent contract, which is terminable only in the event the employee materially breaches
our rules and regulations or is in serious dereliction of his or her duties. Such non-cancelable employment contracts have substantially
increased our employment-related risks and limit our ability to downsize our workforce in the event of an economic downturn. No
assurance can be given that we will not in the future be subject to labor strikes or that we will not have to make other payments
to resolve future labor issues caused by the new laws. Furthermore, there can be no assurance that labor laws in the PRC will
not change further or that their interpretation and implementation will vary, which may have a negative effect upon our business
and results of operations.
We cannot guarantee the protection of
our intellectual property rights and if infringement of our intellectual property rights occurs, including counterfeiting of our
products, our reputation and business may be adversely affected.
To protect the reputation of our products,
we have sought to file or register intellectual property, as appropriate, in the PRC where we have our primary business presence.
As of December 31, 2012, we have registered two trademarks as used on our battery products, one in English and the other in its
Chinese equivalent. Our products are currently sold under these trademarks in the PRC, and we plan to expand our products to other
international markets. There is no assurance that there will not be any infringement of our brand name or other registered trademarks
or counterfeiting of our products in the future, in China or elsewhere. Should any such infringement and/or counterfeiting occur,
our reputation and business may be adversely affected. We may also incur significant expenses and substantial amounts of time
and effort to enforce our trademark rights in the future. Such diversion of our resources may adversely affect our existing business
and future expansion plans.
As of June 30, 2013, we held 98 Chinese patents
and had 56 Chinese patent applications pending. Additionally, we have licensed patented technology from Ovonic Battery Company,
Inc. related to the manufacture of Ni-MH batteries. We believe that obtaining patents and enforcing other proprietary protections
for our technologies and products have been and will continue to be very important in enabling us to compete effectively. However,
there can be no assurance that our pending patent applications will issue, or that we will be able to obtain any new patents,
in China or elsewhere, or that our or our licensors’ patents and proprietary rights will not be challenged or circumvented,
or that these patents will provide us with any meaningful competitive advantages. Furthermore, there can be no assurance that
others will not independently develop similar products or will not design around any patents that have been or may be issued to
us or our licensors. Failure to obtain patents in certain foreign countries may materially adversely affect our ability to compete
effectively in those international markets. If a sufficiently broad patent were to be issued from a competing application in China
or elsewhere, it could have a material adverse effect upon our intellectual property position in that particular market.
In addition, our rights to use the licensed
proprietary technologies of our licensors depends on the timely and complete payment for such rights pursuant to license agreements
between the parties; failure to adhere to the terms of these agreements could result in the loss of such rights and could materially
and adversely affect our business.
If our products are alleged to or found
to conflict with patents that have been or may be granted to competitors or others, our reputation and business may be adversely
affected.
Rapid technological developments in the battery
industry and the competitive nature of the battery products market make the patent position of battery manufacturers subject to
numerous uncertainties related to complex legal and factual issues. Consequently, although we either own or hold licenses to certain
patents in the PRC, and are currently processing several additional patent applications in the PRC, it is possible that no patents
will issue from any pending applications or that claims allowed in any existing or future patents issued or licensed to us will
be challenged, invalidated, or circumvented, or that any rights granted thereunder will not provide us adequate protection. As
a result, we may be required to participate in interference or infringement proceedings to determine the priority of certain inventions
or may be required to commence litigation to protect our rights, which could result in substantial costs. Further, other parties
could bring legal actions against us claiming damages and seeking to enjoin manufacturing and marketing of our products for allegedly
conflicting with patents held by them. Any such litigation could result in substantial cost to us and diversion of effort by our
management and technical personnel. If any such actions are successful, in addition to any potential liability for damages, we
could be required to obtain a license in order to continue to manufacture or market the affected products. There can be no assurance
that we would prevail in any such action or that any license required under any such patent would be made available on acceptable
terms, if at all. Failure to obtain needed patents, licenses or proprietary information held by others may have a material adverse
effect on our business. In addition, if we were to become involved in such litigation, it could consume a substantial portion
of our time and resources. Also, with respect to licensed technology, there can be no assurance that the licensor of the technology
will have the resources, financial or otherwise, or desire to defend against any challenges to the rights of such licensor to
its patents.
We rely on trade secret protections through
confidentiality agreements with our employees, customers and other parties; the breach of such agreements could adversely affect
our business and results of operations.
We rely on trade secrets, which we seek to
protect, in part, through confidentiality and non-disclosure agreements with our employees, customers and other parties. There
can be no assurance that these agreements will not be breached, that we would have adequate remedies for any such breach or that
our trade secrets will not otherwise become known to or independently developed by competitors. To the extent that consultants,
key employees or other third parties apply technological information independently developed by them or by others to our proposed
projects, disputes may arise as to the proprietary rights to such information that may not be resolved in our favor. We may be
involved from time to time in litigation to determine the enforceability, scope and validity of our proprietary rights. Any such
litigation could result in substantial cost and diversion of effort by our management and technical personnel.
The failure to manage growth effectively
could have an adverse effect on our employee efficiency, product quality, working capital levels, and results of operations.
Any significant growth in the market for
our products or our entry into new markets may require and expansion of our employee base for managerial, operational, financial,
and other purposes. As of June 30, 2013, we had approximately 3,600 full-time employees. During any growth, we may face problems
related to our operational and financial systems and controls, including quality control and delivery and service capacities.
We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant
added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.
Aside from increased difficulties in the
management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the
purchase of raw materials and supplies, development of new products, and the hiring of additional employees. For effective growth
management, we will be required to continue improving our operations, management, and financial systems and control. Our failure
to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability.
We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards
required by our existing and potential customers.
We are dependent on certain key personnel
and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our success is, to a certain extent, attributable
to the management, sales and marketing, and operational and technical expertise of certain key personnel. Each of the named executive
officers performs key functions in the operation of our business. The loss of a significant number of these employees could have
a material adverse effect upon our business, financial condition, and results of operations.
We are dependent on a technically trained
workforce and an inability to retain or effectively recruit such employees could have a material adverse effect on our business,
financial condition and results of operations.
We must attract, recruit and retain a sizeable
workforce of technically competent employees to develop and manufacture our products and provide service support. Our ability
to implement effectively our business strategy will depend upon, among other factors, the successful recruitment and retention
of additional highly skilled and experienced engineering and other technical and marketing personnel. There is significant competition
for technologically qualified personnel in our business and we may not be successful in recruiting or retaining sufficient qualified
personnel consistent with our operational needs.
Our planned expansion into new and existing
international markets poses additional risks and could fail, which could cost us valuable resources and affect our results of
operations.
We are expanding sales of our products into
new and existing international markets including developing and developed countries, such as Japan, Russia, India, Turkey and
Brazil. These markets are untested for our products and we face risks in expanding the business overseas, which include differences
in regulatory product testing requirements, intellectual property protection (including patents and trademarks), taxation policy,
legal systems and rules, marketing costs, fluctuations in currency exchange rates and changes in political and economic conditions.
Our expansion into the Lithium battery
business is subject to substantial risks, which could result in a material adverse effect on our results of operations.
In September 2008, we completed the construction
and build-out of two production lines for the development and manufacturing of a range of lithium rechargeable batteries and products.
Prior to September 2008, we had very limited experience in the development and production of lithium batteries. While we are expanding
our production capabilities of lithium batteries, we may be unable to manufacture lithium battery products in the time frame and
amounts expected or may be unable to increase our sales of lithium products. The Li-ion battery market is competitive and risky
and we are unsure whether our lithium products will continue to gain market acceptance. We are competing against numerous competitors
with greater financial resources than us, and due to the difficulties of entry into these markets, we may be unsuccessful and
not be able to compete effectively in the lithium battery industry.
Adverse capital and credit market conditions
may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.
The capital and credit markets have been
experiencing extreme volatility and disruption, including, among other things, extreme volatility in securities prices, severely
diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others. Governments
have taken unprecedented actions intended to address extreme market conditions that have included severely restricted credit and
declines in real estate values. In some cases, the markets have exerted downward pressure on availability of liquidity and credit
capacity for certain issuers. While currently these conditions have not impaired our ability to utilize our current credit facilities
and finance our operations, there can be no assurance that there will not be a further deterioration in financial markets and
confidence in major economies such that our ability to access credit markets and finance our operations, including the financing
of the construction of our new recycling facility in Ganzhou and of the machinery for our new lithium battery production facility
in Huizhou, might be impaired. Without sufficient liquidity, we may be forced to curtail our operations and our planned expansion
of our new lithium battery line and construction of our new materials recycling facility. Adverse market conditions may limit
our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to operate and grow our business.
As such, we may be forced to delay raising capital or bear an unattractive cost of capital which could decrease our profitability
and significantly reduce our financial flexibility. The current tightening of credit in financial markets could adversely affect
the ability of our customers to obtain financing for purchases of our products and could result in a decrease in or cancellation
of orders for our products. Our results of operations, financial condition, cash flows and capital position could be materially
adversely affected by disruptions in the financial markets.
Our quarterly results may fluctuate because
of many factors and, as a result, investors should not rely on quarterly operating results as indicative of future results.
Fluctuations in operating results or the
failure of operating results to meet the expectations of public market analysts and investors may negatively impact the value
of our securities. Quarterly operating results may fluctuate in the future due to a variety of factors that could affect revenues
or expenses in any particular quarter. Fluctuations in quarterly operating results could cause the value of our securities to
decline. Investors should not rely on quarter-to-quarter comparisons of results of operations as an indication of future performance.
As a result of the factors listed below, it is possible that in the future periods results of operations may be below the expectations
of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect
our quarterly results include:
|
·
|
Vulnerability of our business to a general economic downturn
in China;
|
|
·
|
Fluctuation and unpredictability of costs related to
the raw materials used to manufacture our products;
|
|
·
|
Seasonality of our business;
|
|
·
|
Changes in the laws of the PRC that affect our operations;
|
|
·
|
Competition from our competitors; and
|
|
·
|
Our ability to obtain necessary government certifications
and/or licenses to conduct our business.
|
Our stock price may be negatively affected
if we become subject to the recent scrutiny, criticism and negative publicity involving U.S. listed Chinese companies.
Recently, U.S. public companies that have
substantially all of their operations in China, particularly companies like us which have completed share exchanges or reverse
merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators
and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial
and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate
governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism
and negative publicity, the publicly traded stock of many U.S.-listed Chinese companies has sharply decreased in value and, in
some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement
actions, and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject
of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources
to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management
from growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely
negatively affected and your investment in our stock could be rendered worthless.
The disclosures in our reports and other
filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC Accordingly,
our public disclosure should be reviewed in light of the fact that no governmental agency that is located in the PRC where substantially
all of our operations are located has conducted any due diligence on our operations or reviewed or cleared any of our disclosures.
We are regulated by the SEC and our reports
and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under
the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended
(the “Exchange Act’). Unlike public reporting companies whose operations are located primarily in the United States,
however, substantially all of our operations are located in China. Because substantially all of our operations and business take
place in China, it may be more difficult for the staff of the SEC to overcome the geographic and cultural obstacles that are present
when reviewing our disclosures. These same obstacles are not present for similar companies whose operations or business take place
entirely or primarily in the United States. Furthermore, our SEC reports and other disclosures and public pronouncements are not
subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings
are not subject to the review of China Securities Regulatory Commission, a PRC regulator that is tasked with oversight of the
capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the
understanding that no local regulator has done any due diligence on our company and with the understanding that none of our SEC
reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local
regulator.
RISKS RELATED TO DOING BUSINESS IN CHINA
Substantially all of our assets are located
in the PRC and substantially all of our revenues are derived from our operations in China, and changes in the political and economic
policies of the PRC.government could have a significant impact upon the business we may be able to conduct in the PRC and accordingly
on the results of our operations and financial condition.
Our business operations may be adversely
affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control
over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by
changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental
regulations, land use rights, property and other matters. Under the current government leadership, the government of the PRC has
been pursuing economic reform policies that encourage private economic activities and greater economic decentralization. There
is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly
alter these policies from time to time without advance notice.
Our operations are subject to PRC laws
and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations thereof,
may have a material and adverse effect on our business.
The PRC’s legal system is a civil law
system based on written statutes. Unlike the common law system prevalent in the United States, decided legal cases have little
value as precedent in China. There are substantial uncertainties regarding the interpretation and application of PRC laws and
regulations, including but not limited to, governmental approvals required for conducting business and investments, laws and regulations
governing the battery industry, national security-related laws and regulations and export/import laws and regulations, as well
as commercial, antitrust, patent, product liability, environmental laws and regulations, consumer protection, and financial and
business taxation laws and regulations.
The Chinese government has been developing
a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing
with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However,
because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation
and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties.
New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
Our principal operating subsidiaries, SZ
Highpower and SZ Springpower are considered foreign invested enterprises under PRC laws, and as a result are required to comply
with PRC laws and regulations, including laws and regulations specifically governing the activities and conduct of foreign invested
enterprises. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses.
If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with
such a violation, including, without limitation:
|
·
|
Revoking our business license, other licenses or authorities;
|
|
·
|
Requiring that we restructure our ownership or operations;
and
|
|
·
|
Requiring that we discontinue any portion or all of our
business.
|
The scope of our business license in China
is limited, and we may not expand or continue our business without government approval and renewal, respectively.
Our principal operating subsidiaries, SZ
Highpower and ICON, are wholly foreign-owned enterprises, commonly known as WFOEs. A WFOE can only conduct business within its
approved business scope, which appears on the business license since its inception. Our license permits us to design, manufacture,
sell and market battery products throughout the PRC. Any amendment to the scope of our business requires further application and
government approval. Prior to expanding our business and engaging in activities that are not covered by our current business licenses,
we are required to apply and receive approval from the relevant PRC government authorities. In order for us to expand business
beyond the scope of our license, we will be required to enter into a negotiation with the authorities for the approval to expand
the scope of our business. PRC authorities, which have discretion over business licenses, may reject our request to expand the
scope of our business licenses to include our planned areas of expansion. We will be prohibited from engaging in any activities
that the PRC authorities do not approve in our expanded business licenses. Companies that operate outside the scope of their
licenses can be subjected to fines, disgorgement of income and ordered to cease operations. Our business and results of operations
may be materially and adversely affected if we are unable to obtain the necessary government approval for expanded business licenses
that cover any areas in which we wish to expand.
We are subject to a variety of environmental
laws and regulations related to our manufacturing operations. Our failure to comply with environmental laws and regulations may
have a material adverse effect on our business and results of operations.
We are subject to various environmental laws
and regulations in China that require us to obtain environmental permits for our battery manufacturing operations. Our current
environmental permit from the Shenzhen Environment Protection Bureau Longgang Sub-bureau (the “Bureau”) covering our
manufacturing operations expires on December 30, 2013. Historically, under a previous permit which expired in September 2007,
we substantially exceeded the approved annual output limit of Ni-MH rechargeable batteries set forth in the permit. Although we
do not currently exceed the approved annual output limits under the new permit, we cannot guarantee that this will continue to
be the case. Additionally, our current permit does not cover one of our existing premises at our manufacturing facility. If we
fail to comply with the provisions of our permit, we could be subject to fines, criminal charges or other sanctions by regulators,
including the suspension or termination of our manufacturing operations.
To the extent we ship our products outside
of the PRC, or to the extent our products are used in products sold outside of the PRC, they may be affected by the following:
The transportation of non-rechargeable and rechargeable lithium batteries is regulated by the International Civil Aviation Organization
(ICAO), and corresponding International Air Transport Association (IATA), Pipeline & Hazardous Materials Safety Administration
(PHMSA), Dangerous Goods Regulations and the International Maritime Dangerous Goods Code (IMDG), and in the P.R.C. by General
Administration of Civil Aviation of China and Maritime Safety Administration of People’s Republic of China. These regulations
are based on the United Nations (UN) Recommendations on the Transport of Dangerous Goods Model Regulations and the UN Manual of
Tests and Criteria. We currently ship our products pursuant to ICAO, IATA and PHMSA hazardous goods regulations. New regulations
that pertain to all lithium battery manufacturers went into effect in 2003 and 2004, and additional regulations went into effect
on October 1, 2009. The regulations require companies to meet certain testing, packaging, labeling and shipping specifications
for safety reasons. We comply with all current PRC and international regulations for the shipment of our products, and will comply
with any new regulations that are imposed. We have established our own testing facilities to ensure that we comply with these
regulations. If we were unable to comply with the new regulations, however, or if regulations are introduced that limit our ability
to transport products to customers in a cost-effective manner, this could have a material adverse effect on our business, financial
condition and results of operations.
We cannot assure that at all times we will
be in compliance with environmental laws and regulations or our environmental permits or that we will not be required to expend
significant funds to comply with, or discharge liabilities arising under, environmental laws, regulations and permits. Additionally,
these regulations may change in a manner that could have a material adverse effect on our business, results of operations and
financial condition. We have made and will continue to make capital and other expenditures to comply with environmental requirements.
Furthermore, our failure to comply with applicable
environmental laws and regulations worldwide could harm our business and results of operations. The manufacturing, assembling
and testing of our products require the use of hazardous materials that are subject to a broad array of environmental, health
and safety laws and regulations. Our failure to comply with any of these applicable laws or regulations could result in:
|
·
|
Regulatory penalties, fines and legal liabilities;
|
|
·
|
Suspension of production;
|
|
·
|
Alteration of our fabrication, assembly and test processes;
and
|
|
·
|
Curtailment of our operations or sales.
|
In addition, our failure to manage the use,
transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs
or future liabilities. Existing and future environmental laws and regulations could also require us to acquire pollution abatement
or remediation equipment, modify our product designs or incur other expenses associated with such laws and regulations. Many new
materials that we are evaluating for use in our operations may be subject to regulation under existing or future environmental
laws and regulations that may restrict our use of one or more of such materials in our manufacturing, assembly and test processes
or products. Any of these restrictions could harm our business and results of operations by increasing our expenses or requiring
us to alter our manufacturing processes.
PRC regulations relating to acquisitions
of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate,
including our ability to pay dividends. Our failure to obtain the prior approval of the China Securities Regulatory Commission,
or the CSRC, for any offering of our securities could have a material adverse effect on our business, operating results, reputation
and trading price of our common stock.
The PRC State Administration of Foreign Exchange,
or “SAFE,” issued a public notice in November 2005, known as Circular 75, concerning the use of offshore holding companies
in mergers and acquisitions in China. The public notice provides that if an offshore company controlled by PRC residents intends
to acquire a PRC company, such acquisition will be subject to registration with the relevant foreign exchange authorities. The
public notice also suggests that registration with the relevant foreign exchange authorities is required for any sale or transfer
by the PRC residents of shares in an offshore holding company that owns an onshore company. The PRC residents must each submit
a registration form to the local SAFE branch with respect to their ownership interests in the offshore company, and must also
file an amendment to such registration if the offshore company experiences material events, such as changes in the share capital,
share transfer, mergers and acquisitions, spin-off transactions or use of assets in China to guarantee offshore obligations. If
any PRC resident stockholder of an offshore holding company fails to make the required SAFE registration and amended registration,
the onshore PRC subsidiaries of that offshore company may be prohibited from distributing their profits and the proceeds from
any reduction in capital, share transfer or liquidation to the offshore entity. In May 2011, the SAFE promulgated new operational
rules, known as Notice 19, for the implementation of Circular 75. Failure to comply with the SAFE registration and amendment requirements
of Circular 75, as applied by SAFE in accordance with Notice 19 could result in liability under P.R.C. laws for evasion of applicable
foreign exchange restrictions. Most of our PRC resident stockholders, as defined in the SAFE notice, have not registered with
the relevant branch of SAFE, as currently required, in connection with their former ownership of equity interests in HKHTC. Because
of uncertainty of how the SAFE notice will be further interpreted and enforced, we cannot be sure how it will affect our business
operations or future plans. For example, our subsidiaries’ ability to conduct foreign exchange activities, such as the remittance
of dividends and foreign currency-denominated borrowings, may be subject to compliance with the SAFE notice by our PRC resident
beneficial holders. Failure by our PRC resident beneficial holders could subject these PRC resident beneficial holders to fines
or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make
distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
On August 8, 2006, the PRC Ministry of Commerce
(“MOFCOM”), joined by the State-owned Assets Supervision and Administration Commission of the State Council, the State
Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission and
SAFE, released a substantially amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises
(the “Revised M&A Regulations”), which took effect on September 8, 2006. These rules significantly revised China’s
regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. These rules
implemented greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming
MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range
of merger, acquisition and investment transactions. Further, the rules established reporting requirements for acquisition of control
by foreigners of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign
control transactions in key industries.
Among other things, the Revised M&A Regulations
include provisions that require that an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled directly
or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such SPV’s
securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures specifying
documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. Highpower’s
PRC counsel, Zhong Lun Law Firm, has advised us that because we completed our onshore-to-offshore restructuring before September
8, 2006, the effective date of the new regulation, it is not necessary for us to submit the application to the CSRC for its approval,
and the listing and trading of our common stock does not require CSRC approval.
If the CSRC or another PRC regulatory agency
subsequently determines that CSRC approval was required for any transaction prior to September 21, 2006 not receiving prior approval,
we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may
impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation
of the proceeds from an offering of securities into the PRC, or take other actions that could have a material adverse effect on
our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common
stock. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt any
offering before settlement and delivery of the securities offered. Consequently, if investors engage in market trading or other
activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not
occur.
Also, if later the CSRC requires that we
obtain its approval for any transaction not receiving prior approval, we may be unable to obtain a waiver of the CSRC approval
requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding
this CSRC approval requirement could have a material adverse effect on the trading price of our common stock.
Furthermore, the Circular on establishing
the Security Review System for Merger and Acquisition of Domestic Enterprise by Foreign Investors was promulgated by the General
Office of the State Council on February 3, 2011 and the Ministry of Commerce issued the corresponding implementation rules on
August 25, 2011. According to these rules, a foreign investor’s acquisitions of Chinese companies in the fields of military,
energy and resources, infrastructure, important agricultural products, infrastructure, transport service, key technology and major
equipment manufacturing, and other restricted fields requires security review by a ministerial panel established and governed
under the direction of the State Council and led by the National Development and Reform Commission and Ministry of Commerce.
Complying with the requirements of the above
rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval
from PRC Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could also affect our ability
to expand our business.
If our land use rights or the land use
rights of our landlord are revoked, we would be forced to relocate operations.
Under Chinese law, land is owned by the state
or rural collective economic organizations. The state issues land use right certificates to land users. Land use rights can be
revoked and the land users forced to vacate at any time when redevelopment of the land is in the public interest. The public interest
rationale is interpreted quite broadly and the process of land appropriation may be less than transparent. We acquired approximately
126,605 square meters of land equity in Huizhou from the Huizhou State-Owned Land Resource in 2007 upon which we constructed our
new manufacturing facility. We also acquired 58,669 square meters of land equity in Ganzhou, Guangdong, China in February 2012
from the Ganzhou Land and Resource Bureau upon which we have started construction of a new facility to house our new materials
business. Besides the land use rights in Huizhou and Ganzhou, we rely on the land use rights of our landlords for other facilities,
and the loss of our own land use rights or our landlords’ land use rights would require us to identify and relocate our
operations, which could have a material adverse effect on our financial condition and results of operations. Any loss of this
land use right would require us to identify and relocate our manufacturing and other facilities, which could have a material adverse
effect on our financial condition and results of operations.
We will not be able to complete an acquisition
of prospective acquisition targets in the PRC unless their financial statements can be reconciled to U.S. generally accepted accounting
principles in a timely manner.
Companies based in the PRC may not have properly
kept financial books and records that may be reconciled with U.S. generally accepted accounting principles. If we attempt to acquire
a significant PRC target company and/or its assets, we would be required to obtain or prepare financial statements of the target
that are prepared in accordance with and reconciled to U.S. generally accepted accounting principles. Federal securities laws
require that a business combination meeting certain financial significance tests require the public acquirer to prepare and file
historical and/or pro forma financial statement disclosure with the SEC. These financial statements must be prepared in accordance
with, or be reconciled to U.S. generally accepted accounting principles and the historical financial statements must be audited
in accordance with the standards of the Public Company Accounting Oversight Board (United States), or PCAOB. If a proposed acquisition
target does not have financial statements that have been prepared in accordance with, or that can be reconciled to, U.S. generally
accepted accounting principles and audited in accordance with the standards of the PCAOB, we will not be able to acquire that
proposed acquisition target. These financial statement requirements may limit the pool of potential acquisition targets with which
we may acquire and hinder our ability to expand our retail operations. Furthermore, if we consummate an acquisition and are unable
to timely file audited financial statements and/or pro forma financial information required by the Exchange Act, such as Item
9.01 of Form 8-K, we will be ineligible to use the SEC’s short-form registration statement on Form S-3 to raise capital,
if we are otherwise eligible to use a Form S-3. If we are ineligible to use a Form S-3, the process of raising capital may be
more expensive and time consuming and the terms of any offering transaction may not be as favorable as they would have been if
we were eligible to use Form S-3.
We face risks related to natural disasters,
terrorist attacks or other events in China that may affect usage of public transportation, which could have a material adverse
effect on our business and results of operations.
Our business could be materially and adversely
affected by natural disasters, terrorist attacks or other events in China. For example, in early 2008, parts of China suffered
a wave of strong snow storms that severely impacted public transportation systems. In May 2008, Sichuan Province in China suffered
a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties. The May
2008 Sichuan earthquake has had a material adverse effect on the general economic conditions in the areas affected by the earthquake. Any
future natural disasters, terrorist attacks or other events in China could cause a reduction in usage of or other severe disruptions
to, public transportation systems and could have a material adverse effect on our business and results of operations.
We face uncertainty from China’s
Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises' Share Transfer (“Circular
698”) that was released in December 2009 with retroactive effect from January 1, 2008.
The Chinese State Administration of Taxation
(SAT) released a circular (Guoshuihan No. 698 – Circular 698) on December 15, 2009 that addresses the transfer of shares
by nonresident companies. Circular 698, which is effective retroactively to January 1, 2008, may have a significant impact
on many companies that use offshore holding companies to invest in China. Circular 698, which provides parties with a short
period of time to comply with its requirements, indirectly taxes foreign companies on gains derived from the indirect sale of
a Chinese company. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling
the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden
is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required
to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the
transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an
abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is
avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s
“substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning
purposes.
The SAT issued Bulletin of the State of Taxation
[2011] No. 24 (Bulletin) on March 28, 2011, in which various issues regarding the tax administration for non-PRC resident enterprises
and clarifications on Circular 698 were addressed. The Bulletin defined some parameters stipulated in Circular 698, which, if
a non-resident enterprise were to fall under, would be subject to the Circular requirements including that (a) “foreign
investor (party with effective control)” applies to all foreign investors who have indirectly transferred a Chinese resident
enterprise and (b) that “effective tax burden” refers to the effective tax imposed on the gains on the share transfer
transaction per se. However, the SAT is expected to issue further clarification and guidance with regard to how to decide “abuse
of form of organization” and “reasonable commercial purpose,” which can be utilized by us to determine if we
comply with Circular 698.
If we fail to comply with the requirements
under Circular 698 and the Bulletin, we may become at risk of being taxed and we may also be required to expend valuable resources
to comply with Circular 698 and the Bulletin or to establish that we should not be taxed, which could have a material adverse
effect on our financial condition and results of operations.
The foreign currency exchange rate between
U.S. Dollars and Renminbi could adversely affect our financial condition.
To the extent that we need to convert U.S.
Dollars into Renminbi for our operational needs, our financial position and the price of our common stock may be adversely affected
should the Renminbi appreciate against the U.S. Dollar at that time. Conversely, if we decide to convert Renminbi into U.S. Dollars
for the operational needs or paying dividends on our common stock, the dollar equivalent of our earnings from our subsidiaries
in China would be reduced should the dollar appreciate against the Renminbi.
Until 1994, the Renminbi experienced a gradual
but significant devaluation against most major currencies, including dollars, and there was a significant devaluation of the Renminbi
on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign
exchange system. Since 1994, the value of the Renminbi relative to the U.S. Dollar has remained stable and has appreciated slightly
against the U.S. Dollar. Countries, including the United States, have argued that the Renminbi is artificially undervalued due
to China’s current monetary policies and have pressured China to allow the Renminbi to float freely in world markets. In
July 2005, the PRC government changed its policy of pegging the value of the Renminbi to the dollar. Under the new policy the
Renminbi is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies. While the
international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure
on the PRC government to adopt an even more flexible currency policy, which could result in further and more significant appreciation
of the Renminbi against the dollar.
Because most of our sales are made in
U.S. Dollars and most of our expenses are paid in RMB, devaluation of the U.S. Dollar could negatively impact our results of operations.
The value of RMB is subject to changes in
China’s governmental policies and to international economic and political developments. In January 1994, the PRC government
implemented a unitary managed floating rate system. Under this system, the People’s Bank of China, or PBOC, began publishing
a daily Base Exchange Rate with reference primarily to the supply and demand of RMB against the U.S. Dollar and other foreign
currencies in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell
rates for RMB within a specified band around the central bank’s daily exchange rate. On July 21, 2005, PBOC announced an
adjustment of the exchange rate of the U.S. Dollar to RMB and modified the system by which the exchange rates are determined,
which has resulted in an appreciation of the RMB against the U.S. Dollar. During the year ended December 31, 2012, the exchange
rate of the RMB to the U.S. Dollar increased approximately 1.1% from the level at the end of December 31, 2011. While the international
reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government
to adopt an even more flexible currency policy, which could result in further fluctuations of the exchange rate of the U.S. Dollar
against the RMB, including future devaluations. Because most of our net sales are made in U.S. Dollars and most of our expenses
are paid in RMB, any future devaluation of the U.S. Dollar against the RMB could negatively impact our results of operations.
Inflation in the PRC could negatively
affect our profitability and growth.
While the PRC economy has experienced rapid
growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid
economic growth can lead to growth in the money supply and rising inflation. According to the National Bureau of Statistics
of China, China’s Average consumer Price Index was 2.7% in 2012. If prices for our products and services rise at a rate
that is insufficient to compensate for the rise in the costs of supplies such as raw materials, it may have an adverse effect
on our profitability.
Furthermore, In order to control inflation
in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state
bank lending. In January 2010, the Chinese government took steps to tighten the availability of credit including ordering banks
to increase the amount of reserves they hold and to reduce or limit their lending. The implementation of such policies may impede
economic growth. In October 2004, the People’s Bank of China, the PRC’s central bank, raised interest rates for the
first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese
economy. In April 2006, the People’s Bank of China raised the interest rate again. Repeated rises in interest rates by the
central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce
demand for our products and services.
Because our funds are held in banks which
do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
Banks and other financial institutions in
the PRC do not provide insurance for funds held on deposit. A significant portion of our assets are in the form of cash deposited
with banks in the PRC, and in the event of a bank failure, we may not have access to our funds on deposit. Depending upon the
amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if
we are not able to access funds to pay suppliers, employees and other creditors, we may be unable to continue in business.
Failure to comply with the United States
Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
As our ultimate holding company is a Delaware
corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies
from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business.
Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery,
pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. We can make no assurance, however, that
our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material
adverse effect on our business, financial condition and results of operations.
If we make equity compensation grants
to persons who are PRC citizens, they may be required to register with the State Administration of Foreign Exchange of the PRC,
or SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt an equity compensation plan for our
directors and employees and other parties under PRC law.
On April 6, 2007, SAFE issued the “Operating
Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan
of An Overseas Listed Company, also known as “Circular 78.” It is not clear whether Circular 78 covers all forms of
equity compensation plans or only those which provide for the granting of stock options. For any plans which are so covered and
are adopted by a non- PRC listed company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register
with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens
to register with SAFE and make the necessary applications and filings if they participated in an overseas listed company’s
covered equity compensation plan prior to April 6, 2007. In 2008, we adopted the Highpower International, Inc. 2008 Omnibus Incentive
Plan (the “Plan”) under which we make option grants and other equity awards to our officers, directors and other eligible
participants under the plan. Circular 78 may require our officers and directors who receive option grants and are PRC citizens
to register with SAFE. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome
and time consuming. If it is determined that the Plan is subject to Circular 78, failure to comply with such provisions may subject
us and participants of the Plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity
compensation to our PRC employees. In that case, our ability to compensate our employees and directors through equity compensation
would be hindered and our business operations may be adversely affected. We have granted options to various employees
and officers located in the PRC, including grants of options to executives and employees in the PRC. We have complied with all
of the relevant regulations imposed upon us related to such grants and assisted our grantees with their compliance with their
individual registration requirements.
We have enjoyed certain preferential tax
concessions and the loss of these preferential tax concessions may cause our tax liabilities to increase and its profitability
to decline.
Our operating subsidiary, SZ Highpower, enjoyed
preferential tax concessions in the PRC, which were only granted to high-technology enterprises operating in the Shenzhen Special
Economic Zone. From 2005 to 2007, SZ Highpower enjoyed a preferential income tax rate of 7.5% due to its status as a new business
and high-tech enterprise status from the Shenzhen level. That status expired on December 31, 2007. In 2008, SZ Highpower received
the National High-technology Enterprise status, and then enjoyed a preferential tax rate of 15%. This status expired on December
31, 2010. In 2011, we renewed our status, which expires on December 31, 2013. Our subsidiary, SZ Springpower, is currently in
the 25% tax bracket. It will be eligible to apply for the hi-tech enterprise status in order to receive a preferential tax rate
of 15% when it reaches profitability, which is expected to occur in 2013. The expiration of the preferential tax treatment will
increase our tax liabilities and reduce our profitability. Additionally, the P.R.C. Enterprise Income Tax Law (the “EIT
Law”) was enacted on March 16, 2007. Under the EIT Law, which became effective on January 1, 2008, China adopted a uniform
tax rate of 25% for all enterprises (including foreign-invested enterprises) and canceled several tax incentives enjoyed by foreign-invested
enterprises. However, for foreign-invested enterprises established before the promulgation of the EIT Law, a five-year transition
period is provided during which the tax rate gradually increased starting in 2008 and will be equal to the new 25% tax rate at
the end of the transition period. We believe that our profitability will be negatively affected in the near future as a result
of the new EIT Law. Any future increase in the enterprise income tax rate applicable to us or other adverse tax treatments could
increase our tax liabilities and reduce net income.
Under the EIT Law, Highpower International
and HKHTC may be classified as “resident enterprises” of China for tax purpose, which may subject Highpower International
and HKHTC to PRC income tax on taxable global income.
Under the PRC Enterprise Income Tax Law (the
“EIT Law”) and its implementing rules, both of which became effective on January 1, 2008, enterprises are classified
as resident enterprises and non-resident enterprises. An enterprise established outside of China with its “de facto management
bodies” located within China is considered a “resident enterprise,” meaning that it can be treated in a manner
similar to a Chinese domestic enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto
management body as a managing body that in practice exercises “substantial and overall management and control over the production
and operations, personnel, accounting, and properties” of the enterprise. Due to the short history of the EIT Law and lack
of applicable legal precedents, it remains unclear how the PRC tax authorities will determine the P.R.C. tax resident treatment
of a foreign company such as Highpower International and HKHTC. Both Highpower International and HKHTC’s members of management
are located in China. If the PRC tax authorities determine that Highpower International or HKHTC is a “resident enterprise”
for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, they may be subject to the enterprise
income tax at a rate of 25% on their worldwide taxable income, including interest income on the proceeds from this offering, as
well as PRC enterprise income tax reporting obligations. Second, the EIT Law provides that dividend paid between “qualified
resident enterprises” is exempted from enterprise income tax. A recent circular issued by the State Administration of Taxation
regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group
enterprises and established outside of China as “resident enterprises” clarified that dividends and other income paid
by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently
at a rate of 10%, when recognized by non-P.R.C. shareholders. It is unclear whether the dividends that Highpower International
or HKHTC receive from SZ Highpower and SZ Springpower will constitute dividends between “qualified resident enterprises”
and would therefore qualify for tax exemption, because the definition of qualified resident enterprises is unclear and the relevant
PRC government authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that
are treated as resident enterprises for PRC enterprise income tax purposes. We are actively monitoring the possibility of “resident
enterprise” treatment for the applicable tax years and are evaluating appropriate organizational changes to avoid this treatment,
to the extent possible. As a result of the EIT Law, our historical operating results will not be indicative of our operating results
for future periods and the value of our common stock may be adversely affected.
Dividends payable by us to our foreign
investors and any gain on the sale of our shares may be subject to taxes under PRC tax laws.
If dividends payable to our shareholders
are treated as income derived from sources within China, then the dividends that shareholders receive from us, and any gain on
the sale or transfer of our shares, may be subject to taxes under PRC tax laws.
Under the EIT Law and its implementing rules,
PRC enterprise income tax at the rate of 10% is applicable to dividends payable by us to our investors that are non-resident enterprises
so long as such non-resident enterprise investors do not have an establishment or place of business in China or, despite the existence
of such establishment of place of business in China, the relevant income is not effectively connected with such establishment
or place of business in China, to the extent that such dividends have their sources within the PRC. Similarly, any gain realized
on the transfer of our shares by such investors is also subject to a 10% PRC income tax if such gain is regarded as income derived
from sources within China and Highpower International is considered as a resident enterprise which is domiciled in China for tax
purpose. Additionally, there is a possibility that the relevant PRC tax authorities may take the view that the Highpower International
and HKHTC are holding SZ Highpower and SZ Springpower, and the capital gain derived by our overseas shareholders or investors
from the share transfer is deemed China-sourced income, in which case such capital gain may be subject to a PRC withholding tax
at the rate of up to 10%. If we are required under the EIT Law to withhold PRC income tax on our dividends payable to our foreign
shareholders or investors who are non-resident enterprises, or if investors are required to pay PRC income tax on the transfer
or our shares under the circumstances mentioned above, the value of investors’ investment in our shares may be materially
and adversely affected.
In January, 2009, the State Administration
of Taxation promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (“Measures”), pursuant to which, the entities which have the direct obligation to make the following payment
to a non-resident enterprise shall be the relevant tax withholders for such non-resident enterprise, and such payment includes:
incomes from equity investment (including dividends and other return on investment), interests, rents, royalties, and incomes
from assignment of property as well as other incomes subject to enterprise income tax received by non-resident enterprises in
China. Further, the Measures provides that in case of equity transfer between two non-resident enterprises which occurs outside
China, the non-resident enterprise which receives the equity transfer payment shall, by itself or engage an agent to, file tax
declaration with the PRC tax authority located at place of the PRC company whose equity has been transferred, and the PRC company
whose equity has been transferred shall assist the tax authorities to collect taxes from the relevant non-resident enterprise.
However, it is unclear whether the Measures refer to the equity transfer by a non-resident enterprise which is a direct or an
indirect shareholder of the said PRC company. Given these Measures, there is a possibility that we may have an obligation to withhold
income tax in respect of the dividends paid to non-resident enterprise investors.
Any recurrence of Severe Acute Respiratory
Syndrome (SARS), Avian Flu, or another widespread public health problem, such as the spread of H1N1 (“Swine”) Flu,
in the PRC could adversely affect our operations.
A renewed outbreak of SARS, Avian Flu or
another widespread public health problem, such as the spread of H1N1 (“Swine”) Flu, in China, where all of our operations
are located and where the substantial portion of our sales occur, could have a negative effect on our operations. Our business
is dependent upon our ability to continue to manufacture battery products. Such an outbreak could have an impact on the Company’s
operations as a result of:
|
·
|
Quarantines
or
closures
of
some
of
our
manufacturing
facilities,
which
would
severely
disrupt
our
operations;
|
|
·
|
The sickness or death of our key officers and employees;
and
|
|
·
|
A general slowdown in the Chinese economy.
|
Any of the foregoing events or other unforeseeable
consequences of public health problems could adversely affect our operations.
A downturn in the economy of the PRC may
slow our growth and profitability.
The growth of the Chinese economy has been
uneven across geographic regions and economic sectors. There can be no assurance that growth of the Chinese economy will be steady
or that any downturn will not have a negative effect on our business, especially if it results in either a decreased use of our
products or in pressure on us to lower our prices.
Because our business is located in the
PRC, we may have difficulty establishing adequate management, legal and financial controls, which are required in order to comply
with U.S. securities laws.
PRC companies have historically not adopted
a western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal
controls and, computer, financial and other control systems. Most of our middle and top management staff are not educated and
trained in the Western system, and we may have difficulty in hiring new employees in the PRC with such training. In addition,
we may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC As a result of these
factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.
Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under
Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal
controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations
and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially
adverse effect on our business.
Investors may experience difficulties
in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws or other foreign laws against us or our management.
Most of our current operations, including
the manufacture and distribution of our products, are conducted in China. Moreover, most of our directors and officers are nationals
and residents of China or Hong Kong. All or substantially all of the assets of these persons are located outside the United States
and in the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside
China upon these persons. In addition, uncertainties exist as to whether the courts of China would recognize or enforce judgments
of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities
laws of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons
predicated upon the securities laws of the United States or any state thereof.
Contract drafting, interpretation and
enforcement in China involve significant uncertainties.
We have entered into numerous contracts governed
by PRC law, many of which are material to our business. As compared with contracts in the United States, contracts governed by
PRC law tend to contain less detail and are not as comprehensive in defining contracting parties’ rights and obligations.
As a result, contracts in China are more vulnerable to disputes and legal challenges. In addition, contract interpretation and
enforcement in China is not as developed as in the United States, and the result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure that we will not be subject to disputes under our material contracts, and if such disputes
arise, we cannot assure that we will prevail.
We could be liable for damages for defects
in our products pursuant to the Tort Liability Law of the PRC.
The Tort Liability Law of the People’s
Republic of China, which was passed during the 12th Session of the Standing Committee of the 11th National People’s Congress
on December 26, 2009, states that manufacturers are liable for damages caused by defects in their products and sellers are liable
for damages attributable to their fault. If the defects are caused by the fault of third parties such as the transporter or storekeeper,
manufacturers and sellers are entitled to claim for compensation from these third parties after paying the compensation amount.
RISKS RELATED TO OUR CAPITAL STRUCTURE
The price of our common stock is volatile
and investors might not be able to resell their securities at or above the price they have paid.
Since our initial public offering and listing
of our common stock in October 2007, the price at which our common stock has traded has been highly volatile, with the lowest
and highest sales price of $0.93 and $9.82, respectively. Investors might not be able to resell the shares of our common stock
other securities at or above the price they paid for them. The stock market has experienced extreme volatility that often has
been unrelated to the performance of its listed companies. Moreover, only a limited number of shares of our common stock are traded
each day, which could increase the volatility of the price of our securities. These market fluctuations might cause our stock
price to fall regardless of our performance. The market price of our securities might fluctuate significantly in response to many
factors, some of which are beyond our control, including the following:
|
·
|
Actual
or
anticipated
fluctuations
in
our
annual
and
quarterly
results
of
operations;
|
|
·
|
Changes
in
securities
analysts’
expectations;
|
|
·
|
Variations
in
our
operating
results,
which
could
cause
us
to
fail
to
meet
analysts’
or
investors’
expectations;
|
|
·
|
Announcements
by
our
competitors
or
us
of
significant
new
products,
contracts,
acquisitions,
strategic
partnerships,
joint
ventures
or
capital
commitments;
|
|
·
|
Conditions
and
trends
in
our
industry;
|
|
·
|
General
market,
economic,
industry
and
political
conditions;
|
|
·
|
Changes
in
market
values
of
comparable
companies;
|
|
·
|
Additions
or
departures
of
key
personnel;
|
|
·
|
Stock
market
price
and
volume
fluctuations
attributable
to
inconsistent
trading
volume
levels;
and
|
|
·
|
Future
sales
of
equity
or
debt
securities,
including
sales
which
dilute
existing
investors.
|
A few principal stockholders have significant
influence over us.
Three of our stockholders beneficially own
or control approximately 47% of our outstanding shares of common stock. If these stockholders were to act as a group, they would
have a significant influence in determining the outcome of any corporate transaction or other matters submitted to our stockholders
for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors,
and other significant corporate actions. Such stockholders may also have the power to prevent or cause a change in control. In
addition, without the consent of these three stockholders, we could be prevented from entering into transactions that could be
beneficial to us. The interests of these three stockholders may differ from the interests of our other securityholders.
Compliance with changing regulation of
corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations and standards
relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations,
have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public
markets and public reporting. For example, on January 30, 2009, the SEC adopted rules requiring companies to provide their
financial statements in interactive data format using the Extensible Business Reporting Language, or XBRL. The Company had
to comply with these rules since June 15, 2011. Our management team has to invest significant management time and financial
resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
If we fail to maintain effective internal
controls over financial reporting, the price of our common stock may be adversely affected.
We are required to establish and maintain
appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls
once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations.
Any failure of these controls could also prevent us from maintaining accurate accounting records and discovering accounting errors
and financial frauds. Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment
of our internal control over financial reporting. The standards that must be met for management to assess the internal control
over financial reporting as effective are complex, and require significant documentation, testing and possible remediation to
meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our
internal control over financial reporting. In addition, the attestation process by our independent registered public accountants
is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an
attestation of our assessment by our independent registered public accountants. If we cannot assess our internal control over
financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation
report on such assessment, investor confidence and share value may be negatively impacted.
In addition, management’s assessment
of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal
controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and
conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment
of our internal controls over financial reporting, or disclosure of our public accounting firm’s attestation to or report
on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of
our common stock.
Compliance with changing regulations of
corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations and standards
relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations,
have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public
markets and public reporting. Our management team will need to invest significant management time and financial resources to comply
with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses
and a diversion of management time and attention from revenue generating activities to compliance activities.
We have adopted the Highpower International,
Inc. 2008 Omnibus Incentive Plan (the “Plan”) under which we may grant securities to compensate employees and other
services providers, which could result in increased share-based compensation expenses and, therefore, reduce net income.
Under current accounting rules, we would
be required to recognize share-based compensation as compensation expense in our statement of operations, based on the fair value
of equity awards on the date of the grant, and recognize the compensation expense over the period in which the recipient is required
to provide service in exchange for the equity award. We made grants of equity awards in 2011 and 2012, and accordingly our results
of operations for the years ended December 31, 2012 and 2011 contain share-based compensation charges. If we grant equity compensation
to attract and retain key personnel, the expenses associated with share-based compensation may adversely affect our net income.
However, if we do not grant equity compensation, we may not be able to attract and retain key personnel or be forced to expend
cash or other compensation instead. Furthermore, the issuance of equity awards would dilute the stockholders’ ownership
interests in our company.
Our certificate of incorporation and bylaws
and Delaware law may have anti-takeover effects that could discourage, delay or prevent a change in control, which may cause our
stock price to decline.
Our certificate of incorporation and bylaws
and Delaware law could make it more difficult for a third party to acquire us, even if closing such a transaction would be beneficial
to our stockholders. We are authorized to issue up to 10,000,000 shares of preferred stock. This preferred stock may be issued
in one or more series, the terms of which may be determined at the time of issuance by our board of directors without further
action by stockholders. The terms of any series of preferred stock may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions.
No preferred stock is currently outstanding. The issuance of any preferred stock could materially adversely affect the rights
of the holders of our common stock, and therefore, reduce the value of our common stock. In particular, specific rights granted
to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to, a third party
and thereby preserve control by the present management.
Provisions of our certificate of incorporation
and bylaws and Delaware law also could have the effect of discouraging potential acquisition proposals or making a tender offer
or delaying or preventing a change in control, including changes a stockholder might consider favorable. Such provisions may also
prevent or frustrate attempts by our stockholders to replace or remove our management. In particular, the certificate of incorporation
and bylaws and Delaware law, as applicable, among other things:
|
·
|
provide the board of directors with the ability to alter
the bylaws without stockholder approval;
|
|
·
|
place limitations on the removal of directors; and
|
|
·
|
provide
that
vacancies
on
the
board
of
directors
may
be
filled
by
a majority
of
directors
in
office,
although
less
than
a quorum.
|
We are also subject to Section 203 of the
Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between a
publicly-held Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who
becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the
date that such stockholder became an interested stockholder.
We do not foresee paying cash dividends
in the foreseeable future and, as a result, our investors’ sole source of gain, if any, will depend on capital appreciation,
if any.
We do not plan to declare or pay any cash
dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding
growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend
income. Capital appreciation, if any, of our securities may be investors’ sole source of gain for the foreseeable future.
Moreover, investors may not be able to resell their securities in our company at or above the price they paid for them.
DESCRIPTION OF DEBT SECURITIES
The following
description, together with the additional information we include in any applicable prospectus supplement, summarizes the material
terms and provisions of the debt securities that may be offered from time to time under this prospectus. While the terms we have
summarized below will generally apply to any future debt securities that may be offered under this prospectus, we will describe
the particular terms of any debt securities that may be offered in more detail in the applicable prospectus supplement. The terms
of any debt securities offered under a prospectus supplement may differ from the terms we describe below.
We
may issue secured or unsecured debt securities offered under this prospectus, which may be senior, subordinated or junior subordinated,
and which may be convertible and which may be issued in one or more series. We will issue any new senior debt securities under
a senior indenture that we will enter into with a trustee named in such senior indenture. We will issue any subordinated debt
securities under a subordinated indenture that we will enter into with a trustee named in such subordinated indenture. We have
filed forms of these documents as exhibits to the registration statement, of which this prospectus is a part. The terms of the
debt securities will include those set forth in the applicable indenture, any related supplemental indenture and any related securities
documents that are made a part of the indenture by the Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”).
You should read the summary below, the applicable prospectus supplement and the provisions of the applicable indenture, any supplemental
indenture and any related security documents, if any, in their entirety before investing in our debt securities. We use the term
“indentures” to refer to both the senior indentures and the subordinated indentures.
The
indentures will be qualified under the Trust Indenture Act We use the term “trustee” to refer to either a trustee
under the senior indenture or a trustee under the subordinated indenture, as applicable.
The
following summaries of material provisions of any senior debt securities, any subordinated debt securities and the related indentures
are subject to, and qualified in their entirety by reference to, all the provisions of the indentures and any supplemental indenture
or related document applicable to a particular series of debt securities. In addition, the material specific financial, legal
and other terms as well as any material U.S. federal income tax consequences particular to securities of each series will be described
in the prospectus supplement relating to the securities of that series. The prospectus supplement may or may not modify the general
terms found in this prospectus and will be filed with the SEC. For a complete description of the terms of a particular series
of debt securities, you should read both this prospectus and the prospectus supplement relating to that particular series, as
well as the complete indentures that contain the terms of the debt securities. See the information under the heading “Where
You Can Find More Information” for information on how to obtain a copy of the appropriate indenture. Except as we may otherwise
indicate, the terms of any senior indenture and any subordinated indenture will be identical.
General
We will describe
in the applicable prospectus supplement the terms relating to a series of debt securities, including:
|
·
|
the
principal amount
being offered, and
if a series, the
total amount authorized
and the total amount
outstanding;
|
|
·
|
any
limit on the amount
that may be issued;
|
|
·
|
whether
or not we will issue
the series of debt
securities in global
form, and, if so,
the terms and who
the depositary will
be;
|
|
·
|
the principal
amount due at maturity,
and whether the
debt securities
will be issued with
any original issue
discount;
|
|
·
|
whether and
under what circumstances,
if any, we will
pay additional amounts
on any debt securities
held by a person
who is not a United
States person for
tax purposes, and
whether we can redeem
the debt securities
if we have to pay
such additional
amounts;
|
|
·
|
the
annual interest
rate, which may
be fixed or variable,
or the method for
determining the
rate and the date
interest will begin
to accrue, the dates
interest will be
payable and the
regular record dates
for interest payment
dates or the method
for determining
such dates;
|
|
·
|
whether
or not the debt
securities will
be secured or unsecured,
and the terms of
any secured debt;
|
|
·
|
the
terms of the subordination
of any series of
subordinated debt;
|
|
·
|
the
place where payments
will be payable;
|
|
·
|
restrictions
on transfer, sale
or other assignment,
if any;
|
|
·
|
our
right, if any, to
defer payment of
interest and the
maximum length of
any such deferral
period;
|
|
·
|
the
date, if any, after
which, the conditions
upon which, and
the price at which,
we may, at our option,
redeem the series
of debt securities
pursuant to any
optional or provisional
redemption provisions
and the terms of
those redemption
provisions;
|
|
·
|
provisions for
a sinking fund,
purchase or other
analogous fund,
if any;
|
|
·
|
the
date, if any, on
which, and the price
at which we are
obligated, pursuant
to any mandatory
sinking fund or
analogous fund provisions
or otherwise, to
redeem, or at the
holder’s option,
to purchase, the
series of debt securities;
|
|
·
|
whether
the indenture will
restrict our ability
and/or the ability
of our subsidiaries
to:
|
|
o
|
incur additional indebtedness;
|
|
o
|
issue additional securities;
|
|
o
|
pay dividends or make distributions
in respect of our capital stock or the capital stock of our subsidiaries;
|
|
o
|
place restrictions on our
subsidiaries’ ability to pay dividends, make distributions or transfer assets;
|
|
o
|
make investments or other
restricted payments;
|
|
o
|
sell or otherwise dispose
of assets;
|
|
o
|
enter into sale-leaseback
transactions;
|
|
o
|
engage in transactions with
stockholders or affiliates;
|
|
o
|
issue or sell stock of our
subsidiaries; or
|
|
o
|
effect a consolidation or
merger;
|
|
·
|
whether
the indenture will
require us to maintain
any interest coverage,
fixed charge, cash
flow-based, asset-based
or other financial
ratios;
|
|
·
|
a
discussion of any
material or special
U.S. federal income
tax considerations
applicable to the
debt securities;
|
|
·
|
information
describing any book-entry
features;
|
|
·
|
the procedures
for any auction
and remarketing,
if any;
|
|
·
|
the denominations
in which we will
issue the series
of debt securities,
if other than denominations
of $1,000 and any
integral multiple
thereof;
|
|
·
|
if other than
U.S. dollars, the
currency in which
the series of debt
securities will
be denominated and
the currency in
which principal,
premium, if any,
and interest will
be paid; and
|
|
·
|
any other specific
terms, preferences,
rights or limitations
of, or restrictions
on, the debt securities,
including any events
of default that
are in addition
to or different
than those described
in this prospectus
or any covenants
provided with respect
to the debt securities
that are in addition
to those described
above, and any terms
which may be required
by us or advisable
under applicable
laws or regulations
or advisable in
connection with
the marketing of
the debt securities.
|
In addition to the
debt securities that may be offered pursuant to this prospectus, we may issue other debt securities in public or private offerings
from time to time. These other debt securities may be issued under other indentures or documentation that are not described in
this prospectus, and those debt securities may contain provisions materially different from the provisions applicable to one or
more issues of debt securities offered pursuant to this prospectus.
Original Issue
Discount
One
or more series of debt securities offered under this prospectus may be sold at a substantial discount below their stated principal
amount, bearing no interest or interest at a rate that at the time of issuance is below market rates. The federal income tax consequences
and special considerations applicable to any series of debt securities generally will be described in the applicable prospectus
supplement.
Senior Debt Securities
Payment
of the principal or, premium, if any, and interest on senior debt securities will rank on a parity with all of our other indebtedness
that is not subordinated.
Subordination
of Subordinated Debt Securities
The
subordinated debt securities will be subordinate and junior in priority of payment to certain of our other indebtedness to the
extent described in a prospectus supplement. The indentures in the forms initially filed as exhibits to the registration statement
of which this prospectus is a part do not limit the amount of indebtedness which we may incur, including senior indebtedness or
subordinated indebtedness, and do not limit us from issuing any other debt, including secured debt or unsecured debt.
Conversion or
Exchange Rights
We
will set forth in the applicable prospectus supplement the terms on which a series of debt securities may be convertible into
or exchangeable for our common stock, our preferred stock or other securities, including the conversion or exchange rate, as applicable,
or how it will be calculated, and the applicable conversion or exchange period. We will include provisions as to whether conversion
or exchange is mandatory, at the option of the holder or at our option. We may include provisions pursuant to which the number
of securities that the holders of the series of debt securities receive upon conversion or exchange would, under the circumstance
described in those provisions, be subject to adjustment, or pursuant to which those holders would, under those circumstances,
receive other property upon conversion or exchange, for example in the event of our merger or consolidation with another entity.
Consolidation,
Merger or Sale
The
indentures in the forms initially filed as exhibits to the registration statement of which this prospectus is a part do not contain
any covenant that restricts our ability to merge or consolidate, or sell, convey, transfer or otherwise dispose of all or substantially
all of our assets. However, any successor of ours or acquirer of such assets must assume all of our obligations under the indentures
and the debt securities.
If
the debt securities are convertible for our other securities, the person with whom we consolidate or merge or to whom we sell
all of our property must make provisions for the conversion of the debt securities into securities which the holders of the debt
securities would have received if they had converted the debt securities before the consolidation, merger or sale.
Events of Default
under the Indentures
Except
as otherwise set forth in an applicable prospectus supplement, the following are events of default under the indentures with respect
to any series of debt securities that we may issue:
|
·
|
if
we
fail
to
pay
interest
when
due
and
payable
and
our
failure
continues
for
30
days
and
the
time
for
payment
has
not
been
extended
or
deferred;
|
|
·
|
if
we
fail
to
pay
the
principal,
or
premium,
if
any,
when
due
and
payable
and
the
time
for
payment
has
not
been
extended
or
delayed;
|
|
·
|
if
we
fail
to
observe
or
perform
any
other
covenant
contained
in
the
debt
securities
or
the
indentures,
other
than
a
covenant
solely
for
the
benefit
of
another
series
of
debt
securities,
and
our
failure
continues
for
90
days
after
we
receive
notice
from
the
trustee
or
holders
of
at
least
25%
in
aggregate
principal
amount
of
the
outstanding
debt
securities
of
the
applicable
series;
and
|
|
·
|
if
specified
events
of
bankruptcy,
insolvency
or
reorganization
occur.
|
If
an event of default with respect to debt securities of any series occurs and is continuing, other than an event of default specified
in the last bullet point above under “— Events of Default Under the Indentures,” the trustee or the holders
of at least 25% in aggregate principal amount of the outstanding debt securities of that series, by notice to us in writing, and
to the trustee if notice is given by such holders, may declare the unpaid principal of, premium, if any, and accrued interest,
if any, due and payable immediately. If an event of default specified in the last bullet point above “— Events of
Default Under the Indentures” occurs with respect to us, the principal amount of and accrued interest, if any, of each series
of debt securities then outstanding shall be due and payable without any notice or other action on the part of the trustee or
any holder.
The
holders of a majority in aggregate principal amount of the outstanding debt securities of an affected series may waive any default
or event of default with respect to the series and its consequences (other than bankruptcy defaults), except there may be no waiver
of defaults or events of default regarding payment of principal, premium, if any, or interest, unless we have cured the default
or event of default in accordance with the applicable indenture.
Subject
to the terms of the indentures, if an event of default under an indenture shall occur and be continuing, the trustee will be under
no obligation to exercise any of its rights or powers under such indenture at the request or direction of any of the holders of
the applicable series of debt securities, unless such holders have offered the trustee indemnity satisfactory to it. The holders
of a majority in principal amount of the outstanding debt securities of any series will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the trustee, or exercising any trust or power conferred on
the trustee, with respect to the debt securities of that series, provided that:
|
·
|
the
direction
so
given
by
the
holder
is
not
in
conflict
with
any
law
or
the
applicable
indenture;
and
|
|
·
|
subject
to
its
duties
under
the
Trust
Indenture
Act,
the
trustee
need
not
take
any
action
that
might
involve
it
in
personal
liability
or
might
be
unduly
prejudicial
to
the
holders
not
involved
in
the
proceeding.
|
A
holder of the debt securities of any series will only have the right to institute a proceeding under the indentures or to appoint
a receiver or trustee, or to seek other remedies if:
|
·
|
the
holder
has
given
written
notice
to
the
trustee
of
a
continuing
event
of
default
with
respect
to
that
series;
|
|
·
|
the
holders
of
at
least
25%
in
aggregate
principal
amount
of
the
outstanding
debt
securities
of
that
series
have
made
written
request
to
the
trustee,
and
such
holders
have
offered
indemnity
satisfactory
to
the
trustee,
to
institute
the
proceeding
as
trustee;
and
|
|
·
|
the
trustee
does
not
institute
the
proceeding,
and
does
not
receive
from
the
holders
of
a
majority
in
aggregate
principal
amount
of
the
outstanding
debt
securities
of
that
series
other
conflicting
directions,
within
90
days
after
the
notice,
request
and
offer.
|
These
limitations do not apply to a suit instituted by a holder of debt securities if we default in the payment of the principal, premium,
if any, or interest on, the debt securities.
We
will periodically file statements with the trustee regarding our compliance with the covenants in the indentures.
Modification
of Indenture; Waiver
We
and the trustee may modify an indenture or enter into or modify any supplemental indenture without the consent of any holders
of the debt securities with respect to specific matters, including:
|
·
|
to
fix
any
ambiguity,
defect
or
inconsistency
in
the
indenture;
|
|
·
|
to
comply
with
the
provisions
described
above
under
“—Consolidation,
Merger
or
Sale;”
|
|
·
|
to
comply
with
any
requirements
of
the
Securities
and
Exchange
Commission
in
connection
with
the
qualification
of
any
indenture
under
the
Trust
Indenture
Act;
|
|
·
|
to
evidence
and
provide
for
the
acceptance
of
appointment
hereunder
by
a
successor
trustee;
|
|
·
|
to
provide
for
uncertificated
debt
securities
and
to
make
any
appropriate
changes
for
such
purpose;
|
|
·
|
to
add
to,
delete
from,
or
revise
the
conditions,
limitations
and
restrictions
on
the
authorized
amount,
terms
or
purposes
of
issuance,
authorization
and
delivery
of
debt
securities
of
any
unissued
series;
|
|
·
|
to
add
to
our
covenants
such
new
covenants,
restrictions,
conditions
or
provisions
for
the
protection
of
the
holders,
to
make
the
occurrence,
or
the
occurrence
and
the
continuance,
of
a
default
in
any
such
additional
covenants,
restrictions,
conditions
or
provisions
an
event
of
default,
or
to
surrender
any
of
our
rights
or
powers
under
the
indenture;
or
|
|
·
|
to
change
anything
that
does
not
materially
adversely
affect
the
legal
rights
of
any
holder
of
debt
securities
of
any
series.
|
In addition, under the
indentures, the rights of holders of a series of debt securities may be changed by us and the trustee with the written consent
of the holders of at least a majority in aggregate principal amount of the outstanding debt securities of each series that is
affected. However, we and the trustee may only make the following changes with the consent of each holder of any outstanding debt
securities affected:
|
·
|
extending
the fixed maturity
of the series of
debt securities;
|
|
·
|
reducing
the principal amount,
reducing the rate
of or extending
the time of payment
of interest, or
reducing any premium
payable upon the
redemption of any
debt securities;
or
|
|
·
|
reducing
the percentage
of debt securities,
the holders of
which are required
to consent to any
supplemental indenture.
|
Discharge
Each indenture provides
that, subject to the terms of the indenture and any limitation otherwise provided in the prospectus supplement applicable to a
particular series of debt securities, we can elect to be discharged from our obligations with respect to one or more series of
debt securities, except for specified obligations, including obligations to:
|
·
|
register the transfer or exchange of debt securities
of the series;
|
|
·
|
replace stolen, lost or mutilated debt securities of
the series;
|
|
·
|
maintain
paying
agents
and
agencies
for
payment,
registration
of
transfer
and
exchange
and
service
of
notices
and
demands;
|
|
·
|
recover
excess
money
held
by
the
trustee;
|
|
·
|
compensate
and
indemnify
the
trustee;
and
|
|
·
|
appoint
any
successor
trustee.
|
In order to exercise
our rights to be discharged, we must deposit with the trustee money or government obligations sufficient to pay all the principal
of, any premium and interest on, the debt securities of the series on the dates payments are due.
“Street Name” and Other Indirect
Holders
Investors who hold securities
in accounts at banks or brokers generally will not be recognized by us as legal holders of debt securities. This manner of holding
securities is called holding in “street name.” Instead, we would recognize only the bank or broker, or the financial
institution that the bank or broker uses to hold its securities. These intermediary banks, brokers and other financial institutions
pass along principal, interest and other payments on the debt securities, either because they agree to do so in their customer
agreements or because they are legally required to do so. If you hold debt securities in “street name,” you should
check with your own institution to find out, among other things:
|
·
|
how
it handles payments
and notices;
|
|
·
|
whether
it imposes fees
or charges;
|
|
·
|
how
it would handle
voting if applicable;
|
|
·
|
whether
and how you can
instruct it to
send you debt securities
registered in your
own name so you
can be a direct
holder as described
below; and
|
|
·
|
if
applicable, how
it would pursue
rights under your
debt securities
if there were a
default or other
event triggering
the need for holders
to act to protect
their interests.
|
Our obligations, as well
as the obligations of the trustee under the indentures and those of any third parties employed by us or the trustee under either
of the indentures, run only to persons who are registered as holders of debt securities issued under the applicable indenture.
As noted above, we do not have obligations to you if you hold in “street name” or other indirect means, either because
you choose to hold debt securities in that manner or because the debt securities are issued in the form of global securities as
described below. For example, once we make payment to the registered holder, we have no further responsibility for the payment
even if that holder is legally required to pass the payment along to you as a “street name” customer but does not
do so.
Form, Exchange and Transfer
We may issue debt securities
of each series only in fully registered form without coupons and, unless we otherwise specify in the applicable prospectus supplement,
in denominations of $1,000 and any integral multiple thereof. The indentures will provide that we may issue debt securities of
a series in temporary or permanent global form and as book-entry securities that will be deposited with, or on behalf of, The
Depository Trust Company or another depositary named by us and identified in a prospectus supplement with respect to that series
(the “Depository”). See “Book-Entry” below for a further description of the terms relating to any book-entry
securities.
At the option of the
holder, subject to the terms of the indentures and the limitations applicable to global securities described below or in the applicable
prospectus supplement, the holder of the debt securities of any series can exchange the debt securities for other debt securities
of the same series, in any authorized denomination and of like tenor and aggregate principal amount.
Subject to the terms
of the indentures and the limitations applicable to global securities set forth below in the applicable prospectus supplement,
holders of the debt securities may present the debt securities for exchange or for registration of transfer, duly endorsed or
with the form of transfer endorsed thereon duly executed if so required by us or the security registrar, at the office of the
security registrar or at the office of any transfer agent designated by us for this purpose. Unless otherwise provided in the
debt securities that the holder presents for transfer or exchange, we will make no service charge for any registration of transfer
or exchange, but we may require payment of any taxes or other governmental charges.
We will name in the applicable
prospectus supplement the security registrar, and any transfer agent in addition to the security registrar, that we initially
designate for any debt securities. We may at any time designate additional transfer agents or rescind the designation of any transfer
agent or approve a change in the office through which any transfer agent acts, except that we will be required to maintain a transfer
agent in each place of payment for the debt securities of each series.
If we elect to redeem
the debt securities of any series, we will not be required to:
|
·
|
issue,
register the transfer
of, or exchange
any debt securities
of any series being
redeemed in part
during a period
beginning at the
opening of business
15 days before
the day of mailing
of a notice of
redemption of any
debt securities
that may be selected
for redemption
and ending at the
close of business
on the day of the
mailing; or
|
|
·
|
register
the transfer of
or exchange any
debt securities
so selected for
redemption, in
whole or in part,
except the unredeemed
portion of any
debt securities
we are redeeming
in part.
|
Book-Entry Securities
The following description
of book-entry securities will apply to any series of debt securities issued in whole or in part in the form of one or more global
securities, except as otherwise described in a related prospectus supplement.
Book-entry securities
of like tenor and having the same date will be represented by one or more global securities deposited with and registered in the
name of a depositary that is a clearing agent registered under the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Beneficial interests in book-entry securities will be limited to institutions that have accounts with the depositary, or
“participants,” or persons that may hold interests through participants.
Ownership of beneficial
interests by participants will only be evidenced by, and the transfer of that ownership interest will only be effected through,
records maintained by the depositary. Ownership of beneficial interests by persons that hold through participants will only be
evidenced by, and the transfer of that ownership interest within such participant will only be effected through, records maintained
by the participants. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such laws may impair the ability to transfer beneficial interests in a global security.
Payment of principal
of and any premium and interest on book-entry securities represented by a global security registered in the name of or held by
a depositary will be made to the depositary, as the registered owner of the global security. Neither we, the trustee nor any agent
of ours or the trustee will have any responsibility or liability for any aspect of the depositary’s records or any participant’s
records relating to or payments made on account of beneficial ownership interests in a global security or for maintaining, supervising
or reviewing any of the depositary’s records or any participant’s records relating to the beneficial ownership interests.
Payments by participants to owners of beneficial interests in a global security held through such participants will be governed
by the depositary’s procedures, as is now the case with securities held for the accounts of customers registered in “street
name,” and will be the sole responsibility of such participants.
A global security representing
a book-entry security is exchangeable for definitive debt securities in registered form, of like tenor and of an equal aggregate
principal amount registered in the name of, or is transferable in whole or in part to, a person other than the depositary for
that global security, only if (i) the depositary notifies us that it is unwilling or unable to continue as depositary for
that global security or the depositary ceases to be a clearing agency registered under the Exchange Act, (ii) there shall
have occurred and be continuing an event of default with respect to the debt securities of that series or (iii) other circumstances
exist that have been specified in the terms of the debt securities of that series. Any global security that is exchangeable pursuant
to the preceding sentence shall be registered in the name or names of such person or persons as the depositary shall instruct
the trustee. It is expected that such instructions may be based upon directions received by the depositary from its participants
with respect to ownership of beneficial interests in such global security.
Except as provided above,
owners of beneficial interests in a global security will not be entitled to receive physical delivery of debt securities in definitive
form and will not be considered the holders thereof for any purpose under the indentures, and no global security shall be exchangeable,
except for a security registered in the name of the depositary. This means each person owning a beneficial interest in such global
security must rely on the procedures of the depositary and, if such person is not a participant, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a holder under the indentures. We understand that under
existing industry practices, if we request any action of holders or an owner of a beneficial interest in such global security
desires to give or take any action that a holder is entitled to give or take under the indentures, the depositary would authorize
the participants holding the relevant beneficial interests to give or take such action, and such participants would authorize
beneficial owners owning through such participant to give or take such action or would otherwise act upon the instructions of
beneficial owners owning through them.
Information Concerning the Trustee
The trustee, other than
during the occurrence and continuance of an event of default under an indenture, undertakes to perform only those duties as are
specifically set forth in the applicable indenture and is under no obligation to exercise any of the powers given it by the indentures
at the request of any holder of debt securities unless it is offered reasonable security and indemnity against the costs, expenses
and liabilities that it might incur. However, upon an event of default under an indenture, the trustee must use the same degree
of care as a prudent person would exercise or use in the conduct of his or her own affairs.
Payment and Paying Agents
Unless we otherwise indicate
in the applicable prospectus supplement, we will make payment of the interest on any debt securities on any interest payment date
to the person in whose name the debt securities, or one or more predecessor securities, are registered at the close of business
on the regular record date for the interest.
We will pay principal
of and any premium and interest on the debt securities of a particular series at the office of the paying agents designated by
us, except that, unless we otherwise indicate in the applicable prospectus supplement, we may make interest payments by check
which we will mail to the holder or by wire transfer to certain holders. Unless we otherwise indicate in a prospectus supplement,
we will designate an office or agency of the trustee in the City of New York as our paying agent for payments with respect to
debt securities of each series. We will name in the applicable prospectus supplement any other paying agents that we initially
designate for the debt securities of a particular series. We will maintain a paying agent in each place of payment for the debt
securities of a particular series.
All money we pay to a
paying agent or the trustee for the payment of the principal of or any premium or interest on any debt securities which remains
unclaimed at the end of two years after such principal, premium or interest has become due and payable will be repaid to us, and
the holder of the debt security thereafter may look only to us for payment thereof.
Governing Law
Except as otherwise specified
in the applicable prospectus supplement, the indentures and the debt securities will be governed by and construed in accordance
with the laws of the State of New York, except to the extent that the Trust Indenture Act is applicable.