Tesla 2011 Annual Report Download - page 53

Table of Contents
amount of $28.3 million. At this time, we do not plan to hold reservation payments separately or in an escrow or trust fund or pay any interest on
reservation payments except to the extent applicable state laws require us to do so. We generally use these funds for working capital and other
general corporate purposes.
California laws, and potentially the laws of other states, restrict the ability of licensed auto dealers to advertise or take deposits for vehicles
before the vehicles are available to the dealer from the manufacturer. In November 2007, we became aware that the New Motor Vehicle Board
of the California Department of Transportation has considered whether our reservation policies and advertising comply with the California
Vehicle Code. To date, we have not received any communications on this topic from the New Motor Vehicle Board or the Department of Motor
Vehicles (DMV), which has the power to enforce these laws. There can be no assurance that the DMV will not take the position that our vehicle
reservation or advertising practices violate the law. We expect that if the DMV determines that we may have violated the law, it would initially
discuss its concerns with us and request voluntary compliance. If we are ultimately found to be in violation of California law, we might be
precluded from taking reservation payments, and the DMV could take other actions against us, including levying fines and requiring us to refund
reservation payments. Resolution of any inquiry may also involve restructuring certain aspects of the reservation program. In addition, California
is currently the only jurisdiction in which we have licenses to both manufacture and sell our vehicles so any limitation imposed on our operations
in California may be particularly damaging to our business. The DMV also has the power to suspend licenses to manufacture and sell vehicles in
California, following a hearing on the merits, which it has typically exercised in cases of significant or repeat violations and/or a refusal to
comply with DMV directions.
Certain states may have specific laws which apply to reservation payments accepted by dealers, or manufacturers selling directly to
consumers, or both. For example, the state of Washington requires that reservation payments or other payments received from residents in the
state of Washington must be placed in a segregated account until delivery of the vehicle, which account must be unencumbered by any liens
from creditors of the dealer and may not be used by the dealer. Consequently, we established a segregated account for reservation payments in
the state of Washington in January 2010. There can be no assurance that other state or foreign jurisdictions will not require similar segregation of
reservation payments received from customers. Our inability to access these funds for working capital purposes could harm our liquidity.
Furthermore, while we have performed an analysis of the principal laws in the European Union relating to our distribution model and
believe we comply with such laws, we have not performed a complete analysis in all foreign jurisdictions in which we may sell
vehicles. Accordingly, there may be laws in jurisdictions we have not yet entered or laws we are unaware of in jurisdictions we have entered that
may restrict our vehicle reservation practices or other business practices. Even for those jurisdictions we have analyzed, the laws in this area can
be complex, difficult to interpret and may change over time. If our vehicle reservation or advertising practices or other business practices were
found to violate the laws of a jurisdiction, we may face exposure under those laws and our business and prospects would be adversely
affected. For example, if we are required to return reservation payment amounts, we may need to raise additional funds to make such
payments. There can be no assurance that such funding would be available on a timely basis on commercially reasonable terms, if at all. If a
court were to find that our reservation agreement or advertising does not comply with state laws, we may face exposure under those laws which
may include exposure under consumer protection statutes such as those that deal with unfair competition and false advertising. Moreover,
reductions in our cash as a result of redemptions or an inability to take reservation payments could also make it more difficult for us to obtain
additional financing. The prospect of reductions in cash, even if unrealized, may also make it more difficult to obtain financing.
Our plan to expand our network of Tesla stores will require significant cash investments and management resources and may not meet
our expectations with respect to additional sales of our electric vehicles. In addition, we may not be able to open stores in certain states.
Our plan to expand our network of Tesla stores will require significant cash investments and management resources and may not meet our
expectations with respect to additional sales of our electric vehicles. This planned global expansion of Tesla stores may not have the desired
effect of increasing sales and expanding our
52