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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 001-15952
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CAPSTONE TURBINE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4180883
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
21211 NORDHOFF STREET, CHATSWORTH, CALIFORNIA 91311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
818-734-5300
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
The number of shares outstanding of the registrant's common stock as of
March 31, 2001 was 76,314,943.
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CAPSTONE TURBINE CORPORATION
INDEX
PAGE
NUMBER
------
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 2000 and
March 31, 2001............................................ 1
Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and March 31, 2001................... 2
Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 2000 and March 31, 2001...... 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and March 31, 2001................... 4
Notes to Financial Statements............................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations Overview........................ 7
Three Months Ended March 31, 2001 Compared to Three Months
Ended March 31, 2000...................................... 7
Liquidity and Capital Resources............................. 8
Item 3. Qualitative and Quantitative Disclosures About Market
Risk...................................................... 9
Business Risks.............................................. 10
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 19
Item 2. Changes in Securities and Use of Proceeds................... 19
Item 3. Defaults Upon Senior Securities............................. 19
Item 4. Submission of Matters to a Vote of Security Holders......... 19
Item 5. Other Information........................................... 19
Item 6. Exhibits and Reports on Form 8-K............................ 19
Signatures............................................................ 21
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAPSTONE TURBINE CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
DECEMBER 31, MARCH 31,
2000 2001
------------- -------------
Current Assets:
Cash and cash equivalents................................. $ 236,947,000 $ 217,718,000
Accounts receivable, net of allowance for doubtful
accounts of $85,000 at December 31, 2000 and $87,000 at
March 31, 2001......................................... 3,664,000 6,753,000
Inventory................................................. 14,123,000 15,570,000
Prepaid expenses and other current assets................. 1,689,000 1,192,000
------------- -------------
Total current assets.............................. 256,423,000 241,233,000
------------- -------------
Equipment and Leasehold Improvements:
Machinery, equipment and furniture........................ 13,664,000 13,879,000
Leasehold improvements.................................... 3,055,000 3,064,000
Molds and tooling......................................... 1,331,000 1,547,000
------------- -------------
18,050,000 18,490,000
Less accumulated depreciation and amortization.............. 6,434,000 6,703,000
------------- -------------
Total equipment and leasehold improvements........ 11,616,000 11,787,000
------------- -------------
Deposits on fixed assets.................................... 6,649,000 11,015,000
Other assets................................................ 302,000 334,000
Intangible assets, net...................................... 27,028,000 26,162,000
------------- -------------
Total............................................. $ 302,018,000 $ 290,531,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 4,728,000 $ 4,486,000
Accrued salaries and wages................................ 1,135,000 1,094,000
Other accrued liabilities................................. 1,282,000 1,310,000
Accrued warranty reserve.................................. 5,589,000 5,148,000
Deferred revenue.......................................... 4,064,000 2,208,000
Current portion of capital lease obligations.............. 1,497,000 1,464,000
------------- -------------
Total current liabilities......................... 18,295,000 15,710,000
------------- -------------
Non-current Liabilities:
Long-term portion of capital lease obligations............ 3,999,000 3,618,000
Other long-term liabilities............................... 342,000 375,000
------------- -------------
Total non-current liabilities..................... 4,341,000 3,993,000
------------- -------------
Commitments and Contingencies............................... -- --
Stockholders' Equity:
Common stock, $.001 par value; 415,000,000 shares
authorized; 75,771,303 and 76,314,943 shares issued and
outstanding at December 31, 2000 and March 31, 2001,
respectively........................................... 76,000 76,000
Additional paid in capital................................ 516,738,000 517,653,000
Accumulated deficit....................................... (237,432,000) (246,901,000)
------------- -------------
Total stockholders' equity........................ 279,382,000 270,828,000
------------- -------------
Total............................................. $ 302,018,000 $ 290,531,000
============= =============
See accompanying notes to financial statements.
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CAPSTONE TURBINE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 2001
------------- ------------
Revenues.................................................... $ 3,746,000 $ 8,906,000
Cost of Goods Sold.......................................... 5,124,000 8,583,000
------------- ------------
Gross (Loss) Profit......................................... (1,378,000) 323,000
Operating Costs and Expenses:
Research and development.................................. 2,441,000 2,770,000
Selling, general and administrative....................... 4,384,000 9,844,000
------------- ------------
Total operating costs and expenses................ 6,825,000 12,614,000
------------- ------------
Loss from operations........................................ (8,203,000) (12,291,000)
Interest Income............................................. 723,000 3,044,000
Interest Expense............................................ (336,000) (167,000)
Other Income (Expense)...................................... 6,000 (54,000)
------------- ------------
Loss Before Income Taxes.................................... (7,810,000) (9,468,000)
Provision for Income Taxes.................................. 1,000 1,000
------------- ------------
Net Loss.................................................... (7,811,000) (9,469,000)
------------- ------------
Preferred Stock Dividends and Accretions.................... (139,932,000)
------------- ------------
Net Loss Attributable to Common Shareholders................ $(147,743,000) $ (9,469,000)
============= ============
Weighted Average Common Shares Outstanding.................. 4,048,970 76,048,770
============= ============
Net Loss Per Share of Common Stock -- Basic and Diluted..... $ (36.49) $ (0.12)
============= ============
See accompanying notes to financial statements.
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CAPSTONE TURBINE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 2001
(UNAUDITED)
COMMON STOCK
--------------------- ADDITIONAL
SHARES PAID IN ACCUMULATED
OUTSTANDING AMOUNT CAPITAL DEFICIT TOTAL
----------- ------- ------------ ------------- -------------
BALANCE, DECEMBER 31,
1999..................... 2,377,826 $ 2,000 -- $(144,227,000) $(144,225,000)
Common stock warrants
granted.................. 8,132,000 8,132,000
Stock based compensation... 269,000 269,000
Exercise of stock options
and warrants............. 2,873,409 3,000 1,079,000 1,082,000
Accretion of preferred
stock.................... (9,480,000) (40,377,000) (49,857,000)
Dividends accrued for
preferred stock.......... (508,000) (508,000)
Beneficial conversion
feature for Series G
Preferred stock.......... (89,567,000) (89,567,000)
Net loss................... (7,811,000) (7,811,000)
---------- ------- ------------ ------------- -------------
BALANCE, MARCH 31, 2000.... 5,251,235 $ 5,000 $ -- $(282,490,000) $(282,485,000)
========== ======= ============ ============= =============
BALANCE, DECEMBER 31,
2000..................... 75,771,303 $76,000 $516,738,000 $(237,432,000) $ 279,382,000
Stock based compensation... 485,000 485,000
Exercise of stock
options.................. 543,640 540,000 540,000
Stock issuance costs....... (110,000) (110,000)
Net loss................... (9,469,000) (9,469,000)
---------- ------- ------------ ------------- -------------
BALANCE, MARCH 31, 2001.... 76,314,943 $76,000 $517,653,000 $(246,901,000) $ 270,828,000
========== ======= ============ ============= =============
See accompanying notes to financial statements.
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CAPSTONE TURBINE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (7,811,000) $ (9,469,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,250,000 2,224,000
Provision for doubtful accounts........................ 30,000
Loss on disposal of equipment.......................... 68,000
Non-employee stock compensation........................ 60,000 10,000
Employee stock compensation............................ 269,000 475,000
Changes in operating assets and liabilities:
Accounts receivable.................................. 128,000 (3,119,000)
Inventory............................................ (2,409,000) (1,447,000)
Prepaid expenses and other current assets............ 933,000 465,000
Accounts payable..................................... (22,000) (242,000)
Accrued salaries and wages........................... (112,000) (41,000)
Other accrued liabilities............................ (27,000) 61,000
Accrued warranty reserve............................. 1,017,000 (441,000)
Deferred revenue..................................... 4,736,000 (1,856,000)
------------ ------------
Net cash used in operating activities............. (1,988,000) (13,282,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment and leasehold improvements....... (328,000) (1,075,000)
Proceeds from sale of equipment........................... 791,000
Deposits on fixed assets.................................. (29,000) (4,366,000)
Intangible assets......................................... (4,000,000) (557,000)
------------ ------------
Net cash used in investing activities............. (3,566,000) (5,998,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations.................... (368,000) (379,000)
Exercise of stock options and warrants.................... 1,082,000 540,000
Stock issuance costs...................................... (110,000)
Net proceeds from issuance of Series G preferred stock.... 120,363,000
------------ ------------
Net cash provided by financing activities......... 121,077,000 51,000
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents...... 115,523,000 (19,229,000)
Cash and Cash Equivalents, Beginning of Period............ 6,858,000 236,947,000
------------ ------------
Cash and Cash Equivalents, End of Period.................. $122,381,000 $217,718,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 190,000 $ 167,000
Income taxes........................................... $ 1,000 $ 1,000
See accompanying notes to financial statements.
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CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION
Business. Capstone Turbine Corporation (the "Company") develops,
manufactures, and markets microturbine generator sets for use in stationary,
vehicular, and other electrical distributed generation applications. The Company
was organized in 1988 and has been commercially producing its microturbine
generator since 1998. The Company has incurred significant operating losses
since its inception. Management anticipates incurring additional losses until
the Company can produce sufficient revenues to cover costs. To date, the Company
has funded its activities primarily through private and public equity offerings.
Organization. In February 2001, the Company formed a wholly owned
subsidiary, Capstone California Corporation, to provide direct sales of products
to the California market.
Basis of Consolidation. The consolidated financial statements include the
accounts of the parent company and its wholly owned subsidiary, after
elimination of inter-company transactions.
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Regulation S-X
promulgated under the Securities and Exchange Act of 1934. They do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The balance sheet at December 31,
2000 was derived from audited financial statements included in the Company's
Annual Report on Form 10-K. In the opinion of management the interim financial
statements include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial condition, results of
operations and cash flows for such periods. Results of operations for any
interim period are not necessarily indicative of results for any other interim
period or for the full year. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
New Accounting Pronouncement -- SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, is effective for all fiscal years beginning
after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. The Company adopted SFAS
133 effective January 1, 2001. The adoption of SFAS 133 did not have a
significant impact on the financial position, results of operations, or cash
flows of the Company.
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CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. SEGMENT REPORTING
The Company is considered to be a single operating segment in conformity
with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The business activities of said operating segment are the
development, manufacture and sale of turbine generator sets. Following is the
geographic revenue information:
THREE-MONTHS THREE-MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2000 2001
--------------- ---------------
North America................................. $2,519,000 $5,407,000
Asia.......................................... 1,161,000 2,697,000
Europe........................................ 66,000 447,000
South America................................. -- 204,000
Africa........................................ -- 151,000
---------- ----------
Total............................... $3,746,000 $8,906,000
========== ==========
5. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
actual cost on the first-in, first-out method) or market.
DECEMBER 31, MARCH 31,
2000 2001
------------ -----------
Raw materials..................................... $10,133,000 $13,966,000
Work in process................................... 3,354,000 1,538,000
Finished goods.................................... 636,000 66,000
----------- -----------
Total................................... $14,123,000 $15,570,000
=========== ===========
6. STOCK BASED COMPENSATION
During 1999 and 2000, the Company issued common stock options at less than
the fair value of its common stock. Accordingly, the Company recorded
stock-based compensation expense of $269,000 and $475,000 for the three-month
periods ended March 31, 2000 and 2001, respectively. Stock-based compensation
expense for the three-month period ended March 31, 2000 was included in cost of
goods sold, research and development and selling, general, and administrative
expenses in the amounts of $11,000, $61,000 and $197,000, respectively.
Stock-based compensation expense for the three-month period ended March 31, 2001
was included in cost of goods sold, research and development, and selling,
general, and administrative expenses in the amounts of $17,000, $85,000, and
$373,000, respectively. As of March 31, 2001, the Company had $5.5 million in
deferred stock compensation related to stock options, which will be recognized
as stock-based compensation expense through 2004, as the amortization is based
on the vesting period.
7. COMMITMENTS AND CONTINGENCIES
In August 2000, the Company entered into a Transition Agreement and Amended
and Restated License Agreement with a supplier, requiring a total of $9.1
million in upfront payments. Under the terms of the Agreements, the Company
acquired fixed assets and manufacturing technology, which provide the Company
with the ability to manufacture components previously purchased from the
supplier. During the three-month period ending March 31, 2001, the Company
completed its upfront payments under the Agreements. The Company is required to
pay a per unit royalty fee over a seventeen-year period.
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes included in this Form 10-Q and within Capstone's Annual
Report on Form 10-K. When used in the following discussion, the words
"believes", "anticipates", "intends", "expects" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties, which could cause actual results to differ
materially from those projected. These risks include those identified under
"Business Risks" in this Form 10-Q. Readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the date hereof.
We are under no obligation to update any of the forward-looking statements after
the filing of this Form 10-Q to conform such statements to actual results or to
changes in our expectations.
OVERVIEW
Capstone develops, manufactures and markets microturbine technology for use
in stationary, combined heat and power generation, resource recovery, hybrid
electric vehicle, and other power and heat applications in the multi-billion
dollar market for distributed power generation. Our microturbines provide power
at the site of consumption and to hybrid electric vehicles that combine a
primary source battery with an auxiliary power source, such as a microturbine,
to enhance performance. We believe the simple and flexible design of our
microturbines will enable our distributors and end users to develop an
increasingly broad range of applications to fit their particular power needs.
Capstone expects its microturbines to provide the commercial power generation
industry with clean, multifunctional, and scalable distributed power sources.
We began commercial sales of our units in 1998, targeting the emerging
distributed generation industry that is being driven by fundamental changes in
power requirements. We are currently focusing on growth of our sales and
marketing efforts, development of new products, acquisition of intellectual
property rights and manufacturing facility expansion, which will result in
higher operating expenses. We intend to achieve long-run profitability through
production efficiencies and economies of scale. During the three-month period
ending March 31, 2001, we formed a wholly owned subsidiary, Capstone California
Corporation, in response to the current energy situation in California; we
completed our upfront payments to acquire intellectual property from a former
supplier; we continued our effort to manufacture recuperator cores by the third
quarter of 2001 at a new facility by acquiring more equipment and adding
leasehold improvements; and we continued working to develop new, higher
profit-margin products.
We sell complete microturbine units, subassemblies and components. Our
microturbines can be fueled by various sources including natural gas, propane,
sour gas, kerosene and diesel. We will continue investing significant resources
to develop new products and enhancements, including enhancements that enable
greater kilowatt power production, additional fuel capabilities and additional
distributed power generation solutions such as co-generation applications.
We continue to generate operating losses and we expect to continue to
sustain operating losses through at least fiscal year 2002. Our sales cycles
vary by application and geographic region, and in many cases require long lead
times between identifying customer needs and providing commercially available
solutions. As a result of anticipated increases in our operating expenses
resulting from our expansion and the difficulty in forecasting revenue levels,
we expect our quarterly performance to fluctuate. We are also a young company
with respect to sales growth, and therefore period-to-period comparisons between
years may not necessarily be meaningful.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Revenues. Revenues for the three months ended March 31, 2001 increased $5.2
million to $8.9 million compared to $3.7 million for the three months ended
March 31, 2000. The increase in revenues is attributable to greater sales to a
larger customer base, which has resulted from expanding our marketing efforts.
Revenues for the three months ending March 31, 2001 were derived from unit sales
of our 30-kilowatt and 60-kilowatt
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products. Revenues for the three months ending March 31, 2000 were derived
primarily from unit sales of only our 30-kilowatt products. These units were
used for various commercial applications and operated using different fuel
types. During the three months ended March 31, 2001, we shipped 307 units, an
increase of 181 units over the 126 units we shipped in the three months ended
March 31, 2000.
Gross Profit. Cost of goods sold includes direct material costs, assembly
and testing, compensation and benefits, overhead allocations for facilities and
administration, and warranty reserve charges. Our gross profit for the three
months ended March 31, 2001 decreased $1.7 million to $323,000 compared to a
gross loss of ($1.4) million for the three months ended March 31, 2000. Gross
loss as a percentage of revenue declined as production overhead costs were
allocated over larger volumes of production. Costs for replacement parts and
systems are charged against our warranty reserve, which is accrued through
charges to costs of goods sold. The warranty reserve charge decreased $778,000
to $594,000 for the three months ended March 31, 2001 from $1.4 million for the
three months ended March 31, 2000 as warranty charges per unit for our
30-kilowatt products have declined based on our actual warranty loss experience.
Research and Development Expenses. Research and development expenses
include compensation, the engineering department overhead allocations for
administration and facilities, and material costs associated with development.
Research and development expenses were primarily for expanding the functionality
of our 60-kilowatt family of products and for next generation products. Research
and development expenses for the three-months ended March 31, 2001 increased
$329,000, or 13%, to $2.8 million compared to $2.4 million for the three-months
ended March 31, 2000.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses include compensation and related expenses in support of
our general corporate functions, which include human resources, finance and
accounting, information systems and legal services. Selling, general, and
administrative expenses for the three months ended March 31, 2001 increased $5.4
million, or 125%, to $9.8 million compared to $4.4 million for the three months
ended March 31, 2000. The primary cause of the increase was $2.1 million in
pre-production costs associated with the Company's core manufacturing. The
Company continues to expand its selling and marketing efforts through increases
in staff headcount and related overhead expenses, and we anticipate this trend
to continue as we enter into new markets and develop sales and marketing
programs. $186,000 of the increase was attributable to non-cash, stock-based
compensation expense and $803,000 to marketing rights amortization expense
relating to the repurchase of marketing rights from Fletcher Challenge Limited.
Stock-based compensation expense will continue at least through 2004, as the
expense is based on the vesting period of the underlying instruments. Marketing
rights amortization expense will continue through 2005, as the expense is being
amortized over the original term of the contract.
Interest Income. Interest income for the three months ended March 31, 2001
increased $2.3 million to $3.0 million compared to $723,000 for the three months
ended March 31, 2000. The increase is primarily attributable to higher average
investment balances due to the funds received from the Series G preferred stock
issuance in February 2000, our initial public offering in July 2000 and our
secondary public offering in November 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements depend on many factors, including our product
development activities, our product expansion and our commercialization efforts.
We expect to continue to devote substantial capital resources to continue the
development of our sales and marketing programs, to hire and train production
staff and to expand our research and development activities. We believe that our
current cash balances are sufficient to fund operations at least through 2002.
We have financed our operations and investing activities primarily through
private and public equity offerings. Our primary cash requirements have been to
fund research and development, capital expenditures and production costs.
Through our private equity financings we raised approximately $263.1 million and
through our public financings we raised approximately $173.2 million in net
proceeds.
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Our net cash used by operating activities was $13.3 million for the three
months ended March 31, 2001 compared to $2.0 million for the three months ended
March 31, 2000. Net cash used in investing activities was $6.0 million for the
three months ended March 31, 2001 compared to net cash used by investing
activities of $3.6 million for the three months ended March 31, 2000. Investing
activities in 2001 primarily consisted of equipment and tooling purchases,
intangible purchases and leasehold improvements associated with our recuperator
core manufacturing and facility.
Our net cash provided by financing activities was $51,000 for the three
months ended March 31, 2001 compared to $121.1 million for the three months
ended March 31, 2000. The decrease in cash provided by financing activities was
primarily due to the Series G preferred stock closing in February 2000. We have
financed our operations and investing activities primarily through private and
public equity issuances. The primary source of our cash and cash equivalents as
of March 31, 2001 were provided by financing activities from the issuance of
Series G preferred stock, the issuance of common stock in our initial public
offering and the issuance of common stock in our secondary offering, all during
2000.
We have invested proceeds from the issuances of securities to provide
liquidity for operations and for capital preservation. In addition, we use
capital lease commitments to sell and leaseback various fixed assets. Pursuant
to existing leasing arrangements, as of March 31, 2001, we had $4.6 million
outstanding under a lease with Transamerica, $286,000 outstanding to Finova and
$9,000 outstanding to other leasing institutions.
During the first quarter of 2001, the Company completed its acquisition of
intangible assets for intellectual property from Solar Turbines in conjunction
with the development of recuperator core technology. The Company is using this
technology to produce its own recuperator cores.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently use derivative financial instruments that expose us to
market risk. Information required by this item is included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Foreign Currency
We currently develop products in the United States and market our products
in North America, Asia, Europe and Africa. As a result, factors such as changes
in foreign currency exchange rates or weak economic conditions in foreign
markets could affect our financial results. As all of our sales and supplies are
currently made in U.S. Dollars, we do not utilize foreign exchange contracts to
reduce our exposure to foreign currency fluctuations. In the future, as our
customers and vendor bases expand, we anticipate that we will enter into
transactions that are denominated in foreign currencies.
Interest
We have no long-term debt outstanding and do not use any derivative
instruments.
Inflation
We do not believe that inflation has had a material effect on our financial
position or results of operations. However, we cannot predict the future effects
of inflation, including interest rate fluctuations and market fluctuations.
Impact of Recently Issued Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The Company adopted
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SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not have a
significant impact on the financial position, results of operations, or cash
flows of the Company.
BUSINESS RISKS
This Form 10-Q and other public statements and announcements made by
Capstone and its representatives from time to time contain or may contain
forward-looking statements (as such term is defined in Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Exchange Act of 1934, as amended (the "Exchange Act") pertaining to, among other
things, Capstone's future results of operations, research and development
activities, including the development of our 60-kilowatt unit and our
125-kilowatt unit, sales expectations, sources for parts, federal, state and
local regulations, and general business, industry and economic conditions
applicable to Capstone. These statements are based largely on Capstone's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. Factors
that can cause actual results to differ materially include, but are not limited
to, those discussed below. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
following factors should be considered in addition to the other information
contained herein in evaluating Capstone and its business. We are under no
obligation to update any of the forward-looking statements after the filing of
this Form 10-Q to conform such statements to actual results or to changes in our
expectations.
WE HAVE A LIMITED OPERATING HISTORY CHARACTERIZED BY NET LOSSES, WE ANTICIPATE
CONTINUED LOSSES THROUGH AT LEAST 2002 AND WE MAY NEVER BECOME PROFITABLE.
Since our inception in 1988, we have reported net losses for each year. Our
net losses were $30.6 million in 1997, $33.1 million in 1998, $29.5 million in
1999, $31.4 million in 2000 and $9.5 million for the three months ended March
31, 2001. We anticipate incurring additional net losses through at least 2002.
Since inception through December 31, 2000, we have recorded cumulative losses of
approximately $157.4 million. We have only been commercially producing Capstone
MicroTurbines since December 1998 and have made only limited sales to date.
Also, because we are in the early stages of selling our products, we have
relatively few customers. Even if we do achieve profitability, we may be unable
to increase our sales and sustain or increase our profitability in the future.
A MASS MARKET FOR MICROTURBINES MAY NEVER DEVELOP OR MAY TAKE LONGER TO DEVELOP
THAN WE ANTICIPATE, WHICH WOULD ADVERSELY IMPACT OUR REVENUES AND PROFITABILITY.
Our products represent an emerging market, and we do not know whether our
targeted customers will accept our technology or will purchase our products in
sufficient quantities to grow our business. If a mass market fails to develop or
develops more slowly than we anticipate, we may be unable to recover the losses
we have incurred to develop our products, we may be unable to meet our
operational expenses and we may be unable to achieve profitability. The
development of a mass market for our systems may be impacted by many factors
which are out of our control, including:
- the cost competitiveness of our microturbines;
- the future costs and availability of fuels used by our microturbines;
- consumer reluctance to try a new product;
- consumer perceptions of our microturbines' safety;
- regulatory requirements; and
- the emergence of newer, more competitive technologies and products.
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IF WE ARE UNABLE TO MANUFACTURE RECUPERATOR CORES INTERNALLY, OUR ASSEMBLY AND
PRODUCTION OF MICROTURBINES MAY SUFFER DELAYS AND INTERRUPTIONS.
Solar Turbines Incorporated has been our sole supplier of recuperator
cores, which are heat exchangers that preheat incoming air before it enters the
combustion chamber and are an essential component of our microturbines. Solar is
a wholly owned subsidiary of Caterpillar Inc. At present, we are not aware of
any other suppliers that could produce these cores to our specifications within
our time requirements. In September 2000, we exercised contractual rights to
begin using Solar's intellectual property to manufacture recuperator cores
ourselves and we estimate that the transition from purchasing recuperator cores
from Solar to manufacture them ourselves will take approximately twelve months
to complete. However, since we have never before manufactured recuperator cores,
the transition period may be longer. We cannot assure you that this transition
will be without disruption. Any delays or disruptions in this transition process
may result in interruptions of assembly and shipment of our products. Also, we
cannot assure you that Solar will honor the license agreement, that a court
would enforce it, or that we will be able to meet our obligations under it. If
we had to develop and produce our own recuperator cores without using Solar's
intellectual property, we estimate it could take up to three years to begin
production.
WE MAY NOT BE ABLE TO CONTROL OUR WARRANTY EXPOSURE AND OUR WARRANTY RESERVE MAY
NOT BE SUFFICIENT TO MEET OUR WARRANTY EXPENSE, WHICH COULD IMPAIR OUR FINANCIAL
CONDITION.
We sell our products with warranties. However, these warranties vary from
product to product with respect to the time period covered and the extent of the
warranty protection. Malfunctions of our product could expose us to significant
warranty expenses. Because we are in the early stages of production and few of
our products have completed a full warranty term, we cannot be certain that we
have adequately determined our warranty exposure. Moreover, as we develop new
configurations for our microturbines or as our customers place existing
configurations in commercial use for long periods of time, we expect to
experience product malfunctions that cause our products to fall substantially
below our 98% availability target level. While our microturbines have often
achieved this availability target when using high-pressure natural gas, we are
still working to achieve this availability target across all of our units and
for all fuel sources. While management believes that the recorded warranty
reserve is reasonable, there can be no assurance that the reserve will be
sufficient to cover our warranty expenses in the future. Although we attempt to
reduce our risk of warranty claims through warranty disclaimers, we cannot
assure you that our efforts will effectively limit our liability. Any
significant incurrence of warranty expense could have a material adverse effect
on our financial condition.
WE MAY NOT BE ABLE TO RETAIN KEY MANAGEMENT AND THE LOSS OF KEY MANAGEMENT COULD
PREVENT EFFECTIVE IMPLEMENTATION OF OUR EXPANSION PLAN.
Our success depends in significant part upon the continued service of key
management personnel, such as Dr. Ake Almgren, our Chief Executive Officer, Mr.
Jeffrey Watts, our Chief Financial Officer and Mr. William Treece, our Senior
Vice President of Strategic Technology Development. Currently, the competition
for qualified personnel is intense and we cannot assure you that we can retain
our existing management team. The loss of Dr. Almgren, Mr. Watts, Mr. Treece or
any other key management personnel could materially adversely affect our
operations.
WE MAY NOT BE ABLE TO HIRE AND RETAIN THE TECHNICAL PERSONNEL NECESSARY TO BUILD
OUR PRODUCTS, WHICH COULD DELAY PRODUCT DEVELOPMENT AND LOWER PRODUCTION.
We have historically experienced, and expect to continue to experience,
delays in filling technical positions. Competition is intense for qualified
technical personnel, and in particular skilled engineers. As a result, we may
not be able to hire and retain engineering personnel that we need. Our failure
to do so could delay product development cycles, affect the quality of our
products, reduce the number of microturbines we can produce and/or otherwise
negatively affect our business.
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IF WE DO NOT EFFECTIVELY IMPLEMENT OUR SALES AND MARKETING EXPANSION PROGRAM,
OUR SALES WILL NOT GROW AND OUR PROFITABILITY WILL SUFFER.
We need to increase our internal sales and marketing staff in order to
enhance our sales efforts. We cannot assure you that the expense of such
internal expansion will not exceed the net revenues generated, or that our sales
and marketing team will successfully compete against the more extensive and
well-funded sales and marketing operations of our current and future
competitors. In addition, to grow our sales, we have begun to hire new
management team members to provide more sales and marketing expertise. Since
these management team members will not have a proven track record with us, we
cannot assure you that they will be successful in overseeing their functional
areas. Our inability to recruit, or our loss of, important sales and marketing
personnel, or the inability of new sales personnel to effectively sell and
market our microturbine system could materially adversely affect our business
and results of operations.
THE CALIFORNIA ENERGY SITUATION MAY CHANGE AND NEGATIVELY IMPACT OUR SALES.
Problems associated with deregulation of the electric industry in
California have resulted in intermittent service interruptions and significantly
higher costs in some areas of the state. To alleviate these problems, emergency
procedures have been implemented in California to provide for expedited review
and approval of the construction and operation of new power plants in California
on favorable terms. Additional competition from these power plants or other
power sources that may take advantage of favorable legislation as well as
unforeseen changes in the California market could diminish the demand for our
products. In response to the California energy situation, we have established a
wholly owned subsidiary, Capstone California, to directly service the California
market and expand our customer base. We cannot assure you that significant sales
will arise from the formation of this subsidiary for this potential market.
WE MAY NOT BE ABLE TO ESTABLISH STRATEGIC MARKETING RELATIONSHIPS, IN WHICH CASE
OUR SALES WOULD NOT INCREASE AS EXPECTED.
We are in the early stages of developing our distribution network. In order
to expand our customer base, we believe that we must enter into strategic
marketing alliances or similar collaborative relationships, in which we ally
ourselves with companies that have particular expertise in or more extensive
access to desirable markets. Providing volume price discounts and other
allowances along with significant costs incurred in customizing our products may
reduce the potential profitability of these relationships. We may not be able to
identify appropriate distributors on a timely basis, and we cannot assure you
that the distributors with which we partner will focus adequate resources on
selling our products or will be successful in selling them. In addition, we
cannot assure you that we will be able to negotiate collaborative relationships
on favorable terms or at all. The lack of success of our collaborators in
marketing our products may adversely affect our financial condition and results
of operations.
WE HAVE LIMITED EXPERIENCE IN INTERNATIONAL SALES AND MAY NOT SUCCEED IN GROWING
OUR INTERNATIONAL SALES.
We have limited experience in international sales and will depend on our
international marketing partners for these sales. Most of our marketing
partnerships are recently created and, accordingly, may not achieve the results
that we expect. If a dispute arises between us and any of our partners, we may
not achieve our desired sales results and we may be delayed or completely fail
to penetrate some international markets, and our revenue and operations could be
materially adversely affected. Any inability to obtain foreign regulatory
approvals or quality standard certifications on a timely basis could negatively
impact our business and results of operations. Also, as we seek to expand into
the international markets, customers may have difficulty or be unable to
integrate our products into their existing systems. As a result, our products
may require redesign. In addition, we may be subject to a variety of other risks
associated with international business, including:
- delays in establishing international distribution channels;
- difficulties in collecting international accounts receivables;
- difficulties in complying with foreign regulatory and commercial
requirements;
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- increased costs associated with maintaining international marketing
efforts;
- compliance with U.S. Department of Commerce export controls;
- increases in duty rates;
- the introduction of non-tariff trade barriers;
- fluctuations in currency exchange rates;
- political and economic instability; and
- difficulties in enforcement of intellectual property rights.
THE 60-KILOWATT CAPSTONE MICROTURBINE MAY NOT REACH THE LEVEL OF SALES THAT WE
ANTICIPATE OR IT MAY ERODE SALES OF OUR 30-KILOWATT UNIT.
The successful launch of our next generation 60-kilowatt microturbine, the
Capstone 60, is very important to our market penetration strategy. Factors that
could hinder the successful launch of our Capstone 60 microturbine include
potential engineering, production or performance problems, including problems in
developing the ability to operate on multiple fuels or in multiple modes of
operation and an unstable supply or unsatisfactory quality of components from
vendors. We cannot guarantee you that demand for our 60-kilowatt unit will
develop or that if it does develop, that it will not diminish over time. It is
also possible that production of the 60-kilowatt unit could replace or diminish
the sales of our 30-kilowatt unit. If so, our results of operations would be
adversely affected.
WE MAY BE UNABLE TO FUND OUR FUTURE OPERATING REQUIREMENTS, WHICH COULD FORCE US
TO CURTAIL OUR OPERATIONS.
We are a capital-intensive company and may need additional financing to
fund our operations. In 2000, our net cash used in operations was $23.8 million
and our net cash used in investing activities totaled $26.9 million. As of March
31, 2001, we had approximately $217.6 million in cash and cash equivalents on
hand. Our future capital requirements will depend on many factors, including our
ability to successfully market and sell our products. To the extent that the
funds we now have on hand are insufficient to fund our future operating
requirements, we will need to raise additional funds, through further public or
private equity or debt financings. These financings may not be available or, if
available, may be on terms that are not favorable to us and could result in
further dilution to our stockholders. Downturns in worldwide capital markets may
also impede our ability to raise additional capital on favorable terms or at
all. If adequate capital were not available to us, we would likely be required
to significantly curtail or possibly even cease our operations.
WE MAY NOT BE ABLE TO EFFECTIVELY PREDICT OR REACT TO RAPID TECHNOLOGICAL
CHANGES THAT COULD RENDER OUR PRODUCTS OBSOLETE.
The market for our products is characterized by rapidly changing
technologies, extensive research and new product introductions. We believe that
our future success will depend in large part upon our ability to enhance our
existing products and to develop, introduce and market new products. As a
result, we expect to continue to make a significant investment in product
development. We have in the past experienced setbacks in the development of our
products and our anticipated roll out of our products has accordingly been
delayed. If we are unable to develop and introduce new products or enhancements
to our existing products that satisfy customer needs and address technological
changes in target markets in a timely manner, our products will become
noncompetitive or obsolete.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR GROWTH OR IMPROVE OUR MANAGEMENT
INFORMATION SYSTEMS, WHICH WOULD IMPAIR OUR PROFITABILITY.
If we are successful in executing our business plan, we will experience
growth in our business that could place a significant strain on our management
and other resources. Our ability to manage our growth will require us to
continue to improve our operational, financial and management information
systems, to
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implement new systems and to motivate and effectively manage our employees. We
cannot assure you that our management will be able to effectively manage this
growth.
WE MAY NOT EFFECTIVELY EXPAND OUR PRODUCTION CAPABILITIES, WHICH WOULD
NEGATIVELY IMPACT OUR SALES.
We anticipate a significant increase in our business operations, which will
require expansion of our internal and external production capabilities. We may
experience delays or problems in our expected production expansion that could
significantly impact our business. Several factors could delay or prevent our
expected production expansion, including our:
- inability to purchase parts or components in adequate quantities or
sufficient quality;
- failure to increase our assembly and test operations;
- failure to hire and train additional personnel;
- failure to develop and implement manufacturing processes and equipment;
- inability to find and train proper partner companies in other countries
with whom we can build product
- distribution, marketing, or development relationships;
- inability to manufacture recuperator cores on schedule, in quantities or
with the quality that we require; and
- inability to acquire new space for additional production capacity.
WE MAY NOT ACHIEVE PRODUCTION COST REDUCTIONS NECESSARY TO COMPETITIVELY PRICE
OUR PRODUCT, WHICH WOULD IMPAIR OUR SALES.
We believe that we will need to reduce the unit production cost of our
products over time to maintain our ability to offer competitively priced
products. Our ability to achieve cost reductions will depend on our ability to
develop low cost design enhancements that lower costs, to obtain necessary
tooling and favorable vendor contracts, as well as to increase sales volumes so
we can achieve economies of scale. We cannot assure you that we will be able to
achieve any production cost reductions.
OUR SUPPLIERS AND MANUFACTURERS MAY NOT SUPPLY US WITH A SUFFICIENT AMOUNT OF
COMPONENTS OR COMPONENTS OF ADEQUATE QUALITY, AND WE MAY NOT BE ABLE TO PRODUCE
OUR PRODUCT.
Although we generally attempt to use standard parts and components for our
products, some of our components are currently available only from a single
source or from limited sources. Also, we cannot guarantee that any of the parts
or components that we purchase will be of adequate quality or that the prices we
pay for these parts or components will not increase. For example, there is
currently an industry-wide shortage of several electronic components, some of
which we use in our products. We may experience delays in production of our
Capstone MicroTurbine if we fail to identify alternative vendors, or any parts
supply is interrupted or reduced or there is a significant increase in
production costs, each of which could materially adversely affect our business
and operations.
OUR PRODUCTS INVOLVE A LENGTHY SALES CYCLE AND WE MAY NOT ANTICIPATE SALES
LEVELS APPROPRIATELY, WHICH COULD IMPAIR OUR PROFITABILITY.
The sale of our products typically involves a significant commitment of
capital by customers, with the attendant delays frequently associated with large
capital expenditures. We are targeting, in part, customers in the utility
industry, which generally commit to a larger number of products when ordering
and which have a lengthy process for approving capital expenditures. We have
also targeted the hybrid electric vehicle market, which requires a significant
amount of lead-time due to the implementation costs incurred. For these and
other reasons, the sales cycle associated with our products is typically lengthy
and subject to a number of significant risks over which we have little or no
control. We expect to plan our production and inventory levels based on internal
forecasts of customer demand, which is highly unpredictable and can fluctuate
substantially.
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If sales in any period fall significantly below anticipated levels, our
financial condition and results of operations could suffer. In addition, our
operating expenses are based on anticipated sales levels, and a high percentage
of our expenses are generally fixed in the short term. As a result of these
factors, a small Fluctuation in timing of sales can cause operating results to
vary from period to period.
WE FACE POTENTIALLY SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS, WHICH COULD
IMPACT OUR STOCK PRICE.
A number of factors could affect our operating results and thereby impact
our stock price, including:
- the timing of the introduction or enhancement of products by us or our
competitors;
- our reliance on a small number of customers;
- the size, timing and shipment of individual orders;
- market acceptance of new products;
- potential delays in production as a result of the commencement of our
manufacturing of recuperator cores;
- customers delaying orders of our products because of the anticipated
release of new products by us;
- changes in our operating expenses, the mix of products sold, or product
pricing;
- the ability of our suppliers to deliver quality parts when we need them;
- development of our direct and indirect sales channels;
- loss of key personnel;
- political unrest or changes in the trade policies, tariffs or other
regulations of countries in which we do business that could lower demand
for our products; and
- changes in market prices for natural resources that could lower the
desirability of our products.
Because we are in the early stages of selling our products, with relatively
few customers, we expect our order flow to continue to be uneven from period to
period. Because a significant portion of our expenses are fixed, a small
variation in the timing of recognition of revenue can cause significant
variations in operating results from quarter to quarter.
POTENTIAL INTELLECTUAL PROPERTY, SHAREHOLDER OR OTHER LITIGATION MAY ADVERSELY
IMPACT OUR BUSINESS.
Because of the nature of our business, we may face litigation relating to
intellectual property matters, labor matters, product liability and shareholder
disputes. Our intellectual property is one of our principal assets. A negative
outcome in a litigation relating to our intellectual property could have a
material adverse effect on our business and operating results. An adverse
judgment could negatively impact the price of our common stock and our ability
to obtain future financing on favorable terms or at all. Any litigation could be
costly, divert management attention or result in increased costs of doing
business.
OUR COMPETITORS, WHO HAVE SIGNIFICANTLY GREATER RESOURCES THAN WE HAVE, MAY BE
ABLE TO ADAPT MORE QUICKLY TO NEW OR EMERGING TECHNOLOGIES OR TO DEVOTE GREATER
RESOURCES TO THE PROMOTION AND SALE OF THEIR PRODUCTS, AND WE MAY BE UNABLE TO
COMPETE EFFECTIVELY.
Our competitors include several well-established companies that have
substantially greater resources than we have and that benefit from larger
economies of scale and worldwide presence. Honeywell (AlliedSignal), NREC
(Ingersoll-Rand Company), and Elliot/General Electric Company are domestically
based competitors of Capstone who we believe have microturbines in various
stages of development. NREC (Ingersoll-Rand Company) has announced that it
expects to begin to commercially ship microturbine units in 2001. In addition to
these domestic microturbine competitors, AB Volvo and ABB Ltd. have a joint
venture in Europe, called Turbec, to develop a microturbine. A number of other
major automotive and industrial companies have in-house microturbine development
efforts, including Ishikawajima-Harima Heavy Industries, Mitsubishi
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Heavy Industries, Ltd. and Turbo Genset Inc. We believe that all of these
companies will eventually have products that will compete with our
microturbines. Some of our competitors are currently developing and testing
microturbines which they expect to produce greater amounts of power than
Capstone MicroTurbines, ranging from 75 kilowatts up to 350 kilowatts, and which
may have longer useful lives than Capstone MicroTurbines. Capstone MicroTurbines
also compete with other existing technologies, including the electric utility
grid, reciprocating engines, fuel cells, and solar and wind powered systems.
Many of the competitors producing these technologies also have greater resources
than we have. For instance, reciprocating engines are produced by, among others,
Caterpillar Inc., Interstate companies and Cummins Inc. We cannot assure you
that the market for distributed power generation products will not ultimately be
dominated by technologies other than ours.
Because of greater resources, some of our competitors may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and sale of their
products than we can. We believe that developing and maintaining a competitive
advantage will require continued investment by us in product development,
manufacturing capability and sales and marketing. We cannot assure you that we
will have sufficient resources to make the necessary investments to do so. In
addition, current and potential competitors have established or may in the
future establish collaborative relationships among themselves or with third
parties, including third parties with whom we have strategic relationships.
Accordingly, new competitors or alliances may emerge and rapidly acquire
significant market share.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET AND MAY NOT BE ABLE TO COMPETE
EFFECTIVELY DUE TO FACTORS AFFECTING THE MARKET FOR OUR PRODUCTS.
The market for our products is highly competitive and is changing rapidly.
We believe that the primary competitive factors affecting the market for our
products include:
- operating efficiency;
- reliability;
- product quality and performance;
- life cycle costs;
- development of new products and features;
- quality and experience of sales, marketing and service organizations;
- availability and price of fuel;
- product price;
- emissions levels;
- name recognition; and
- quality of distribution channels.
Several of these factors are outside our control. We cannot assure you that
we will be able to compete successfully in the future with respect to these or
any other competitive factors.
UTILITY COMPANIES COULD PLACE BARRIERS TO OUR ENTRY INTO THE MARKETPLACE AND WE
MAY NOT BE ABLE TO EFFECTIVELY SELL OUR PRODUCT.
Utility companies commonly charge fees to industrial customers for
disconnecting from the grid, for using less electricity, or for having the
capacity to use power from the grid for back-up purposes. These types of fees
could increase the cost to our potential customers of using our systems and
could make our systems less desirable, thereby harming our revenue and
profitability.
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WE DEPEND ON OUR INTELLECTUAL PROPERTY TO MAKE OUR PRODUCTS COMPETITIVE AND IF
WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR BUSINESS WILL SUFFER.
We rely on a combination of patent, trade secret, copyright and trademark
law, and nondisclosure agreements to establish and protect our intellectual
property rights in our products. At March 31, 2001, we possessed 39 United
States patents and two international patents and additional patents pending. In
particular, we believe that our patents and patents pending for our air-bearing
systems, digital power controller and our combustion systems are key to our
business. We believe that, due to the rapid pace of technological innovation in
turbine products, our ability to establish and maintain a position among the
technology leaders in the industry depends on both our patents and other
intellectual property and the skills of our development personnel. We cannot
assure you that any patent, trademark, copyright or license owned or held by us
will not be invalidated, circumvented or challenged, that the rights granted
thereunder will provide competitive advantages to us or that any of our future
patent applications will be issued with the scope of the claims asserted by us,
if at all. Further, we cannot assure you that third parties or competitors will
not develop technologies that are similar or superior to our technology,
including our air bearing technology, duplicate our technology or design around
our patents. Also, another party may be able to reverse engineer our technology
and discover our intellectual property and trade secrets. We may be subject to
or may initiate proceedings in the U.S. Patent and Trademark Office, which can
require significant financial and management resources. In addition, the laws of
foreign countries in which our products are or may be developed, manufactured or
sold may not protect our products and intellectual property rights to the same
extent as the laws of the United States. Our inability to protect our
intellectual property adequately could have a material adverse effect on our
financial condition or results of operations.
IF WE ARE FOUND TO INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WE
MAY NOT BE ABLE TO PRODUCE OUR PRODUCTS OR MAY HAVE TO ENTER INTO COSTLY LICENSE
AGREEMENTS.
Third parties may claim infringement by us with respect to past, current or
future proprietary rights. In particular, Honeywell (AlliedSignal), Sundstrand
Corporation and Solar Turbines Incorporated have patents in areas related to our
business and core technologies. Any infringement claim, whether meritorious or
not, could be time-consuming, result in costly litigation or arbitration and
diversion of technical and management personnel or require us to develop
non-infringing technology or to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us, or at all, and could significantly harm our business and
operating results. Litigation may also be necessary in the future to enforce our
patent or other intellectual property rights, to protect our trade secrets and
to determine the validity and scope of proprietary rights of others. For
example, in 1997, we were involved in a dispute with Honeywell (AlliedSignal)
regarding various disputed intellectual property rights. We entered into a
settlement agreement regarding these issues. These types of disputes could
result in substantial costs and diversion of resources and could materially
adversely affect our financial condition and results of operations.
WE OPERATE IN A HIGHLY REGULATED BUSINESS ENVIRONMENT AND CHANGES IN REGULATION
COULD IMPOSE COSTS ON US OR MAKE OUR PRODUCTS LESS ECONOMICAL.
Our products are subject to federal, state, local and foreign laws and
regulations, governing, among other things, emissions to air as well as laws
relating to occupational health and safety. Regulatory agencies may impose
special requirements for implementation and operation of our products (e.g.
connection with the electric grid) or may significantly impact or even eliminate
some of our target markets. We may incur material costs or liabilities in
complying with government regulations. In addition, potentially significant
expenditures could be required in order to comply with evolving environmental
and health and safety laws, regulations and requirements that may be adopted or
imposed in the future. Furthermore, our potential utility customers must comply
with numerous laws and regulations. The deregulation of the utility industry may
also create challenges for our marketing efforts. For example, as part of
electric utility deregulation, federal, state and local governmental authorities
may impose transitional charges or exit fees, which would make it less
economical for some potential customers to switch to our products. Further, our
ability to penetrate the Japanese market will depend on our receipt of approvals
and changes to regulatory requirements surrounding
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power generation by Japan's Ministry of International Trade and Industry, or
MITI. We can provide no assurances that we will be able to obtain these
approvals and changes in a timely manner, or at all.
THE MARKET PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE AND MAY DECLINE
REGARDLESS OF OUR OPERATING PERFORMANCE.
The market price of our common stock is highly volatile. Factors that could
cause fluctuation in our stock price may include, among other things:
- actual or anticipated variations in quarterly operating results;
- changes in financial estimates by securities analysts;
- conditions or trends in our industry;
- changes in the market valuations of other technology companies;
- the listing for trading of options on our common stock;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, divestitures, joint ventures or other strategic
initiatives;
- capital commitments;
- additions or departures of key personnel; and
- sales of common stock.
Many of these factors are beyond our control. These factors may cause the
market price of our common stock to decline, regardless of our operating
performance.
BECAUSE A SMALL NUMBER OF STOCKHOLDERS OWN A SIGNIFICANT PERCENTAGE OF OUR
COMMON STOCK, THEY MAY CONTROL ALL MAJOR CORPORATE DECISIONS AND OUR OTHER
STOCKHOLDERS MAY NOT BE ABLE TO INFLUENCE THESE CORPORATE DECISIONS.
Our nine executive officers and directors beneficially own approximately
14% of our outstanding common stock. In addition, three other investors
beneficially own approximately 19% of our outstanding capital stock. If these
parties act together, they can significantly influence the election of all
directors and the approval of actions requiring the approval of a majority of
our stockholders. The interests of our management or these investors could
conflict with the interests of our other stockholders.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 5, 2000, we completed the initial public offering of our common
stock. The shares of common stock sold in the offering were registered under the
Securities Act on a Registration Statement on Form S-1/A (No. 333-33024). The
Securities and Exchange Commission declared the Registration Statement effective
on June 28,2000.
In our initial public offering, we sold an aggregate of 10,454,545 shares
our common stock for net proceeds of approximately $153.6 million. Since our
initial public offering, we have used from the general corporate funds, which
includes proceeds from a previous offering of the Series G preferred stock,
approximately $13.5 million to purchase tooling and manufacturing equipment,
$11.0 million to repurchase marketing rights and $28.1 million to fund operating
activities, including sales and marketing and research and development. As of
March 31, 2001, remaining net proceeds from the offering were primarily held in
cash equivalents and short-term investments. With the exception of marketing
rights acquired from Fletcher Challenge Limited none of the net proceeds of the
offering were paid, directly or indirectly, to any director or officer of
Capstone or any of their associates, or to persons owning ten percent or more of
any class of our equity securities, or any affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Index to Exhibits.
The following exhibits are incorporated by reference into this Form 10-Q:
EXHIBIT
NUMBER DESCRIPTION
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3.1(1) Second Amended and Restated Certificate of Incorporation of
Capstone Turbine.
3.2(1) Amended and Restated Bylaws of Capstone Turbine.
4.1(1) Specimen stock certificate.
10.1(1) Lease between Capstone Turbine and Northpark Industrial
Leahy Division LLC, dated December 1, 1999, for leased
premises at 21211 Nordhoff Street, Chatsworth, California.
10.2(1) 1993 Incentive Stock Option Plan.
10.3(1) Employee Stock Purchase Plan.
10.4(1) 2000 Equity Incentive Plan.
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.5(2) Transition Agreement, dated August 2, 2000, by and between
Capstone Turbine and Solar Turbines Incorporated.
10.6(2) Amended and Restated License Agreement, dated August 2,
2000, by and between Solar Turbines Incorporated and
Capstone Turbine.
- ---------------
(1) Incorporated by reference to Capstone Turbine's Registration Statement on
Form S-1 (File No. 333-33024).
(2) Incorporated by reference to Capstone Turbine's Current Report on Form 8-K
filed on October 16, 2000.
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAPSTONE TURBINE CORPORATION
Date: April 30, 2001 By: /s/ JEFFREY WATTS
------------------------------------
Jeffrey Watts,
Senior Vice President Finance and
Administration and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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