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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-15957
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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 the
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or in any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of common stock held by
non-affiliates of the registrant as of December 29, 2000 was $2,121.6 million
based upon the composite closing price of the registrant's common stock on the
Nasdaq National Market System on that date.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 76,009,984 shares of
common stock, $.001 par value, were outstanding as of March 23, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Proxy Statement for Annual Meeting of Stockholders to be held May
9, 2001.
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CAPSTONE TURBINE CORPORATION
FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Facilities.................................................. 23
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 24
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 25
Item 6. Selected Financial Data..................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 27
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 31
Item 8. Financial Statements and Supplementary Data................. 32
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial
Disclosure.................................................. 47
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 47
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 47
Item 13. Certain Relationships and Related Transactions.............. 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 48
Signatures............................................................ 50
i
PART I
ITEM 1. BUSINESS.
OVERVIEW
Capstone develops, designs, assembles and sells Capstone MicroTurbines for
worldwide applications in the multibillion dollar markets for on-site power
production, also known as distributed power generation, and hybrid electric
vehicles that combine the primary source battery with an auxiliary power source,
such as a microturbine, to enhance performance. We are the first company to
offer a proven, commercially available power source using microturbine
technology. Our 30-kilowatt and 60-kilowatt products are state-of-the-art
systems designed to produce electricity for commercial and small industrial
users. Our microturbines combine patented air-bearing technology, advanced
combustion technology and sophisticated power electronics to form efficient and
reliable electricity and heat production systems. Also, our advanced technology
allows our microturbines to operate by remote control. Our 30-kilowatt product
can use a broad range of gaseous and liquid fuels in an environmentally friendly
manner, and we intend to develop corresponding additional configurations for our
60-kilowatt product.
We are a leading worldwide developer and supplier of microturbine
technology. As of December 31, 2000, we had shipped 1,004 commercial units, of
which three were shipped during 1998, 211 were shipped during 1999 and 790
during 2000. As of December 31, 2000, our backlog for units scheduled for
delivery within one year was 806, which based on a standard unit price without
accessories is worth approximately $23.6 million.
We believe stationary applications for our microturbines, both independent
of or connected to the electric utility grid, are extremely broad. The primary
stationary markets that we are targeting include:
- resource recovery -- using natural gas that is otherwise burned or
released directly into the atmosphere to produce power;
- micro-cogeneration/combined heat and power -- using both electricity and
heat, for example, for space heating, air conditioning and chilling
water, to maximize use of available energy;
- back-up and standby power/peak shaving, including power quality and
reliability -- providing a reliable back-up power supply for increasingly
electricity-dependent enterprises and self-generation during hours when
electricity prices spike and meeting power quality supply reliability
requirements for users with particularly low tolerances for power source
interruption; and
- developing regions and other stationary power applications -- providing
power in areas with limited access to transmission and distribution
lines.
We also have applied our technology to hybrid electric vehicles such as
buses, industrial use and other vehicles. Capstone MicroTurbine subassemblies
are currently used in buses operating in Christchurch, New Zealand and U.S.
cities such as Los Angeles, Atlanta, Chattanooga and Tempe. In 2000, we signed
an agreement with Hyundai Motor Corporation to demonstrate the feasibility of
integrating our microturbine technology into Hyundai sport utility vehicles and
buses.
Since our microturbine systems and subassemblies can be used as a power
source within larger energy "solutions" for our customers, we envision our
distributors and end users developing more applications over time. Our marketing
strategy includes partnering with major companies with strong connections to
local markets and, when appropriate, to sell directly to the end user.
OUR PRODUCTS
Capstone MicroTurbines are compact, environmentally friendly generators of
electricity and heat. They operate on the same principle as a jet engine but can
use a variety of commercially available fuels, such as natural gas, diesel,
kerosene and propane, as well as previously unusable or underutilized fuels. For
example, our 30-kilowatt product can operate on low British thermal unit gas,
which is gas with low energy content, and can also operate on gas with a high
amount of sulfur, known in the industry as sour gas. The small size and
1
relatively lightweight modular design of our microturbines allows for easy
transportation and installation with minimal site preparation.
Our microturbines incorporate four major design features:
- patented air-bearing technology;
- air cooling;
- digital power electronics; and
- advanced combustion technology.
The air-bearing system allows our microturbines' single moving component to
produce power without the need for typical petroleum-based lubrication.
Air-bearings use a high-pressure field of air rather than petroleum lubricants,
which reduces maintenance attributable to oil changes and lubricating bearings
and improves reliability. Air-bearings also eliminate product malfunctions
caused by the extreme build-up of heat on metal parts when conventional
lubricants fail or run out from failure to lubricate. Air cooling eliminates the
need to install or maintain cooling systems. The digital power controller
manages critical functions and monitors over 200 features of the microturbine.
For instance, the digital power controller controls the microturbine's speed,
temperature and fuel flow and communicates with external computers and modems.
All control functions are performed digitally, as opposed to using analog
electronics. The digital power controller optimizes performance, resulting in
lower emissions, higher reliability and consistent efficiency over a variable
power demand range.
Our Model 330 and the Capstone 60-kilowatt units are approximately the size
of a large refrigerator. Our Model 330 generates approximately 30 kilowatts of
electrical power, which is enough power to power a convenience store, and
approximately 300,000 kilojoules per hour of heat, enough energy to heat 20
gallons of water per minute with a 20-degree Fahrenheit heat rise. We have the
ability to vary and modify our microturbines to accommodate a variety of
applications and needs.
Our strategy is to develop products that can operate:
- connected to the electric utility grid;
- on a stand-alone basis; or
- in dual mode, where the microturbine operates connected to the grid or,
when the grid is unavailable, the microturbine automatically disconnects
itself from the grid and operates on a stand-alone basis.
In September 2000, we shipped the first commercial unit of our 60-kilowatt
family of microturbine systems, a unit using high-pressure natural gas to
generate power in stand-alone mode. We intend to develop 60-kilowatt units in
all twenty-four of the configurations in which our 30-kilowatt units are
available.
Our family of products is currently available in the following
configurations:
PRODUCT CONFIGURATIONS
MODEL 330 CAPSTONE 60
------------------------------ ------------------------------
GRID STAND- DUAL GRID STAND- DUAL
FUEL: CONNECT ALONE MODE CONNECT ALONE MODE
----- -------- -------- -------- -------- -------- --------
low pressure natural gas........... X X X X
high pressure natural gas.......... X X X X
low BTU gas........................ X X X
sour gas........................... X X X
gaseous propane.................... X X X
compressed natural gas............. X X X
diesel............................. X X X
kerosene........................... X X X
We offer various accessories for our products including rotary gas
compressors with digital controls, batteries with digital controls for
stand-alone or dual-mode operations, packaging options, and miscellaneous
2
parts such as frames, exhaust ducting and installation hardware, if required. We
also sell microturbine components and subassemblies.
DETAILED MICROTURBINE DESCRIPTION
The Model 330 Capstone MicroTurbine is a reliable, compact, low emission,
power generation system, which generates approximately 30 kilowatts of electric
power as a stand-alone power source or in conjunction with traditional power
sources. Our Capstone 60 family generates approximately 60 kilowatts of electric
power. As an alternative power source, our microturbines may replace or
efficiently supplement existing sources of electric power.
The Capstone MicroTurbine consists of a turbogenerator and digital power
controller combined with ancillary systems such as a fuel system.
[System Overview Graphic]
The turbogenerator includes a mechanical combustor system and a single
moving component rotating on our patented air-bearings at up to 96,000
revolutions per minute. The combustor system operates on a variety of fuels and
at full power achieves nitrogen oxides emissions levels in the exhaust of less
than nine parts per million per volume of nitrogen oxides and unburned
hydrocarbons for natural gas and less than 25 parts per million per volume for
diesel, significantly less than the 1,000 to 3,000 parts per million emission
standard of a reciprocating diesel fuel generator set. As a result of our
patented air-bearings, microturbines do not require lubrication and do not
utilize liquid cooling, keeping maintenance costs throughout the microturbine's
estimated 40,000-hour life extremely low.
The digital power controller is a state-of-the-art, air cooled, insulated
gate bipolar transistor based inverter with advanced digital signal processor
based microelectronics. The advantages of digital electronics over analog
electronics include accuracy, flexibility, and repeatability. In addition, we
are taking advantage of the example set by the computer industry: digital data
processing results in higher reliability with increasingly lower cost. The
digital power controller controls and manages the microturbine using proprietary
software and advanced algorithms. The digital power controller:
- starts the turbogenerator and controls its load;
- manages the speed, fuel flow, and exhaust temperature of the
microturbine;
- converts the variable frequency up to a maximum of 1,600 hertz, and
variable voltage power produced by the generator into a usable output of
either 50/60 hertz AC or optional DC; and
- provides digital communications to externally maintain and control the
equipment.
In addition, the digital power controller's application software provides
an advantage to end-users by allowing them to remotely operate and manage the
microturbine. Unlike the technology of other power sources that require manual
monitoring and maintenance, the microturbine allows end users to remotely and
3
efficiently monitor performance, fuel input, power generation and time of
operation using our proprietary communications software, which can interface
with standard personal computers using our application software. This remote
capability provides end users with power generation flexibility and cost
savings.
The Model 330 was initially designed to operate connected to an electric
utility grid and uses a high pressure, natural gas fuel source. We can easily
vary and modify the basic microturbine to accommodate a variety of applications
and needs. We have operated with different fuels including a variety of
carbon-based fuels such as propane, sour gas, kerosene and diesel. The combustor
system remains the same for all fuels, except for the fuel injectors, which
currently vary between liquid and gaseous fuels. The Capstone MicroTurbine's
multi-fuel capability provides significant competitive advantages with respect
to the markets in which we may operate. We offer other accessories including
rotary gas compressors with digital controls, batteries with digital controls
for stand-alone or grid connected operations, packaging options, and
miscellaneous parts such as frames and exhaust ducting and installation hardware
where required.
TYPICAL OPERATION OF A MICROTURBINE
Air is drawn into the air inlet by the compressor impeller. The compressor
impeller increases the pressure of the air and ejects it into the recuperator.
The recuperator is a heat exchanger that heats the air as it passes through it
to approximately 1,000 degrees Fahrenheit. Preheating the air substantially
lessens the amount of fuel needed, thus increasing the efficiency of the unit.
The preheated air leaves the recuperator and enters the combustion chamber where
it is mixed with the fuel and burned. The fuel is controlled and delivered to
the combustion chamber for ignition and combustion by injectors and the
combustor system. The mixture of combusted gas enters the turbine where it is
then expanded. As the mixture expands, it causes the turbine to rotate. The
turbine is directly coupled to the compressor and generator shaft, and as the
turbine rotates, the compressor and generator rotate at a speed of up to 96,000
revolutions per minute, and generate electricity. The combusted gas mixture
leaves the turbine in the form of exhaust at a temperature of up to
approximately 1,200 degrees Fahrenheit and flows through the recuperator where
it heats the cooler air brought into the compressor through the impeller. As the
combusted gas mixture mixes with that cooler air, the exhaust cools to a
temperature of approximately 600 degrees Fahrenheit and is discharged through
the exhaust pipe. In order to improve the energy efficiency further, we are
testing higher operating temperatures.
TURBOGENERATOR AIR FLOWS
[CAPSTONE'S MICROTURBINE GENERATOR]
There is only one moving component in the entire turbogenerator, which
consists of the rotating generator shaft, the compressor impeller, and the
turbine rotor. This rotating component is supported by a combination of radial
air bearings and one double acting axial air bearing. Air bearings avoid the
need for oil lubrication
4
resulting in low maintenance requirements and high reliability. The entire
system is air-cooled, which avoids liquid cooling, thereby resulting in low
maintenance requirements.
We have achieved Underwriters' Laboratories certification for our initial
Model 330 product and will continue to qualify our products under Underwriters'
Laboratories approval. We are currently working to achieve ISO 9001
certification. The International Organization for Standardization provides a
methodology by which manufacturers can obtain quality certification.
APPLICATIONS
STATIONARY POWER APPLICATIONS
Worldwide stationary power generation applications vary from huge central
stationary generating facilities, above 1,000 megawatts, down to back-up uses
below 10 kilowatts. Historically, power generation in most developed countries
such as the United States has been part of a regulated system. A number of
developments related primarily to the deregulation of the industry as well as
significant technology advances have broadened the range of power supply choices
to customers. We believe our microturbines will be used in a variety of
innovative electric power applications requiring less than 2 megawatts and more
immediately in those requiring less than 300 kilowatts. Capstone has identified
several markets with characteristics that we believe would value our inherently
flexible, distributed electricity generating system. Stationary power
applications for our microturbines include:
- resource recovery;
- micro-cogeneration/combined heat and power;
- back-up and standby power/peak shaving, including power quality and
reliability; and
- developing regions and other stationary power applications.
Each of these markets will adopt our products at different rates depending
upon several factors. We believe the resource recovery market generally and the
combined heat and power market in Japan have properties that are conducive to
the rapid acceptance of our microturbines. However, the combined heat and power
market in North America as well as the back-up and standby power and peak
shaving markets will take longer to penetrate due to changing competitive
conditions and the deregulating electric utility environment.
Resource Recovery
On a worldwide basis, there are thousands of locations where the production
of fossil fuels and other extraction and production processes creates fuel
byproducts, which traditionally have been released or burned into the
atmosphere. Our Model 330 microturbine can burn these waste gases with minimal
emissions thereby avoiding the imposition of penalties incurred for pollution,
while simultaneously producing electricity for use in the oil fields themselves.
Our Model 330 has demonstrated effectiveness in this application and outperforms
conventional combustion engines in a number of circumstances, including when the
gas contains a high amount of sulfur. We intend to test our 60-kilowatt unit to
confirm its functionality under the severe conditions involved in resource
recovery operations. We have sold a substantial portion of our systems into the
resource recovery market to be used at oil and gas exploration and production
sites. We have also identified gas released from landfills and gas produced from
sludge digestion as well as seam gas from coal deposits as markets for our
product.
Micro-Cogeneration/Combined Heat and Power
Micro-cogeneration, or combined heat and power, is an extensive market that
seeks to use both the heat energy and electric energy produced in the generation
process. Using the heat and electricity created from a single combustion process
increases the efficiency of the system from approximately 30% to 70% or more.
The increased operating efficiency reduces overall emissions and, through
displacement of other separate systems, reduces variable production costs. The
most prominent uses of heat energy include space heating and air conditioning,
heating and cooling water, as well as drying and other applications.
5
There are substantial existing markets for combined heat and power
applications in Western Europe, Japan, and other parts of Asia, in addition to
an emerging market in North America. Many governments have encouraged more
efficient use of the power generation process to reduce pollution and the cost
of locally produced goods. Japan, which has some of the highest electric power
costs in the world, has been particularly active in exploring innovative ways to
improve the efficiency of generating electricity. To access this market, we have
entered into agreements with distributors, which have engineered combined heat
and power packages that utilize the hot exhaust air of the microturbine for
heating water.
We believe that Capstone MicroTurbines provide an economic solution in
markets similar to Japan for delivering clean power when and where it is needed
without requiring a large capital investment. Capstone MicroTurbines and/or
subassemblies incorporated into a more comprehensive energy package should allow
us to penetrate these large and growing markets. In particular, we believe our
microturbine's ability to accept a wide range of fuel options will enhance our
market position and accelerate acceptance in these locations.
Back-up and Standby Power/Peak Shaving
With the trends of continuing deregulation in the electric utility industry
and increased reliance on sensitive digital electronics in day-to-day life,
industrialized societies are increasingly demanding high quality, high
reliability power. End customers with greater freedom of choice are
investigating alternative power sources to protect their business operations and
equipment from costly interruptions. Recent brownouts and blackouts have
demonstrated the need to ensure high reliability. Along with deregulation has
come the initiation of competition in electricity generation and substantially
increased electricity price volatility. Spot electricity prices in the mid-west
United States reached $8,000 per megawatt-hour in 1998, $5,000 per megawatt-hour
during the summer of 1999, and $2,000 per megawatt-hour during the summer of
2000. We believe an increasing number of power marketers, energy service
providers and end users will use alternative power sources to protect against
temporary price spikes by "peak shaving" or self-generating when the price
charged by the local utility company gets too high. These load management
applications give the user a unilateral opportunity to reduce energy costs.
Our 60-kilowatt microturbine, which we expect to be the primary product in
these markets, will provide users great flexibility. The Capstone MicroTurbine
system architecture allows any user to determine its interface with the local
electric grid with minimal disruption. In applications where emissions, weight
or vibration are important considerations, the microturbine also has a
competitive advantage due to its low emissions and flexibility in siting. In
addition, microturbines can be managed and monitored remotely, thereby reducing
on-site maintenance costs.
Utilities also can take advantage of Capstone MicroTurbines to avoid costly
transmission and distribution system expansion or upgrades in uncertain growth
or "weak" areas in the electric utility grid. These companies can place our
microturbines where the electrical power is needed. The microturbines can supply
power in conjunction with the power provided by the utility's standard
generation and transmission equipment. In the alternative the utility can use
the microturbines to provide power during times when demand for power is at its
highest, potentially reducing the need for expensive expansions to the central
power plant. Rural electric cooperatives and electric utilities may use our
microturbines as a stand-alone system to provide temporary or back-up power for
specific applications or to provide primary power for remote needs.
Power Quality and Reliability. An important and rapidly growing sector
within the back-up and standby power/peak shaving market is power quality and
reliability. Due to the potentially catastrophic consequences of even momentary
system failure, certain power users, such as high technology and information
systems companies, require particularly high levels of reliability in their
power service. Our microturbines can follow levels of demand and have low
emissions, which we believe permits them to be configured in multiple unit
arrays and used in combination to provide a highly reliable electricity
generating system. We believe that customers with particularly low tolerances
for power service interruptions, such as high technology and information systems
companies, represent a significant and growing potential market for our
microturbine products.
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Developing Regions and Other Stationary Power Applications
Many people in less developed countries do not have access to electric
power. The ability of our microturbines to use a location's fuel of choice, for
example kerosene, diesel or propane, will allow countries to use their available
fuel source infrastructure more efficiently. We also have designed our
microturbine to be a competitive, reliable primary power source alternative
compared to diesel generators and other technologies that currently provide
power to remote areas or areas with unreliable central generation. The Capstone
MicroTurbine is the only commercially available microturbine that has
demonstrated the ability to operate on a stand-alone basis, an attractive
feature in locations lacking significant transmission infrastructure. This is
due to our microturbines' "load following" characteristic, meaning that our
microturbines are able to match power output to the served facility's need for
power. In addition, while emissions have not been a large market issue in these
developing regions, we believe any increases in environmental concerns or
stricter emissions requirements would benefit us in the long run. Furthermore,
remote commercial and industrial applications, including offshore oil and gas
platform power, pipeline cathodic protection, and resort and rural are a
electrification, can use our microturbine effectively.
HYBRID ELECTRIC VEHICLE POWER MARKET
We are actively pursuing the hybrid electric bus and industrial and other
passenger and commercial electric vehicle markets for our microturbines and
microturbine subassemblies. Hybrid electric vehicular applications of our
microturbine are competitive due to low emissions and low cost per mile of
operation. Using vehicles that recharge batteries at night reduces the cost of
electricity consumed and helps to load balance the grid.
We believe that the hybrid electric vehicle market segment represents a
significant opportunity and will expand as governments and consumers demand
cost-efficient, reliable and environmentally friendly mobile electric power,
particularly in urban areas. Transit authorities have already demonstrated
hybrid electric buses as a viable alternative to pure electric buses and to
diesel buses, which emit relatively high levels of emissions.
Instead of working purely on a battery or other energy storage device,
hybrid electric vehicles combine the primary source battery with an auxiliary
power source, such as a Capstone MicroTurbine, to enhance performance. The
hybrid electric vehicles use electricity from the battery and the Capstone
MicroTurbine recharges the battery on an as-needed basis while in operation.
These vehicles have many of the positive attributes of pure electric vehicles
but provide the added benefits of longer operating periods and longer ranges
than pure electric vehicles using current technology.
Our microturbines have been used for over two years in vehicle
applications. Our system has been designed into four different manufacturers'
general production hybrid electric vehicle platforms, which were put into
service in the United States beginning in 1997. The Capstone MicroTurbine in one
such hybrid electric vehicle application has logged more than 30,000 miles of
operation in a municipal bus without significant maintenance while providing a
cost-efficient, low emission alternative to higher cost, pure electric vehicles
and higher emissions reciprocating engines. The two significant advantages of
the microturbine as compared to the internal combustion engine are very low
emissions and very low maintenance.
Hybrid electric vehicles using the microturbine can recharge their
batteries using power from the electric utility grid at night when demand for
electricity is lowest, and use power generated by the microturbine during the
day when demand for grid power is highest. Electric utilities can therefore
benefit from the implementation of Capstone MicroTurbine-equipped hybrid
electric vehicles as a means of balancing intra-day demand for electricity. We
are pursuing a strategy of partnering with electric utilities to promote hybrid
electric buses.
MICROTURBINE BENEFITS
Multi-Fuel Capability
The Capstone MicroTurbine design provides flexibility for use with a
variety of possible fuels, including both gaseous and liquid fuels. This
multi-fuel capability increases the number of applications and geographic
locations in which our microturbines may be used. The Model 330 is currently
capable of being configured for
7
low pressure natural gas, high pressure natural gas, low British thermal unit
gas like methane, high sulfur content (sour) gas, gaseous propane and compressed
natural gas, as well as liquid fuels such as diesel and kerosene. Our
60-kilowatt product currently uses low pressure and high-pressure natural gas,
and we are developing corresponding additional fuel configurations for the
60-kilowatt model.
Cost Competitive
We believe our microturbines are cost competitive in their target markets.
In the exploration and production markets, environmental penalties incurred for
flaring or venting gas can be avoided by using our microturbines. Our low
maintenance microturbines can burn wellhead gas directly off the casing head,
avoiding any intermediary sulfur scrubbing devices, while competing devices
require extra maintenance and additional intermediary devices to do the same. In
the landfill gas digestion market, the microturbine can burn low British thermal
unit and sour gas while requiring minimal maintenance relative to competing
technologies, like reciprocating engines. In the coal seam gas market, our
microturbines require substantially less maintenance than reciprocating engines.
The ability of the microturbine to operate on a stand-alone basis allows for
less capital expenditures compared to the electric utility grid, which requires
up-front capital expenditures for additional distribution and transmission
lines. In combined heat and power applications, the microturbine's efficiency is
approximately 60-70% compared to approximately 30% efficiency when used only to
generate electricity in typical technology. In the hybrid electric vehicle
market, the microturbine results in lower cost per mile, lower emissions, and
load balancing of the grid for the utility.
Because the applications for the our microturbines are extremely broad and
the number of features which can influence capital cost is also large, estimates
of energy generation costs per kilowatt hour vary substantially depending on
assumptions. When used in resource recovery applications, our microturbine
operates with gas not otherwise useable as fuel. In some cases, consuming this
gas avoids environmental penalties. Assuming the units are grouped in operating
groups of four and run approximately 90% of the year, we estimate the generation
cost per kilowatt-hour at slightly less than $0.031 per kilowatt-hour. In
combined heat and power applications where gas costs are approximately $6.00 per
million British thermal units, we estimate the generation cost per kilowatt-hour
at approximately $0.081 per kilowatt-hour. The generation costs are highly
sensitive to the price of the fuel. Other applications including standby and
peak sharing depend greatly on the specific set of circumstances confronting a
potential end-user. Additionally, we believe that our 60-kilowatt units will
exhibit better operating characteristics and lower electrical generation costs
than our 30-kilowatt units.
Environmentally Friendly
In stationary power generation configurations, our digital power controlled
combustion system produces less than nine parts per million per volume of
emissions of nitrogen oxides and unburned hydrocarbons at full power when
burning natural gas or propane, and less than 25 parts per million per volume
when using diesel fuel. We believe that these emission levels are less than the
emissions of any fossil fuel combustor without catalytic combustion or other
emissions reduction equipment. Due to our patented air-bearing technology, our
microturbines require no petroleum-based lubricants, avoiding potential ground
contamination caused by petroleum-based lubricants used by conventional
reciprocating engines, turbines and other similar technologies. Also, because
our system is air cooled, we avoid the use of toxic liquid coolants, such as
glycol.
Availability and Reliability
Our microturbines provide both high availability and reliability when
compared to other power generation alternatives. We designed the microturbine
for a target availability of 98%. Our microturbines have often achieved this
availability target when using high-pressure natural gas, and we are working to
achieve this availability target across all of our units and for other fuel
sources.
8
Minimal Maintenance
Our patented air-bearing system, digital power controller and air-cooled
design significantly reduce the maintenance cost of our microturbines. The air
bearings eliminate the need for lubrication, avoiding the need to change oil and
individually lubricate ball bearings or other similar devices. The digital power
controller's ability to continuously and remotely monitor our microturbine
performance avoids regularly scheduled diagnostic maintenance costs. The
air-cooled design eliminates all of the maintenance related to liquid cooling
systems utilized with conventional power electronics technology and generator
cooling. Currently, the only scheduled maintenance for the Model 330 is periodic
cleaning or changing of the intake air filter and fuel filters every 8,000 hours
of operation and thermocouple, igniter and fuel injector replacement every
12,000 hours of operation. We expect scheduled maintenance for our 60-kilowatt
unit to be similar.
Remote Monitoring and Operating
The digital power controller allows users to efficiently monitor our
microturbines' performance, fuel input, power generation and time of operation
in the field from off-site locations by telephonic hook-up. In addition, the
operator can remotely turn the microturbine on and off, control the fuel flow
and vary the power output.
Flexible Configuration
Our Model 330 microturbines can be customized to serve a wide variety of
operating requirements. It can be connected to the electric utility grid or
operate on a stand-alone or dual mode basis. It can use a variety of fuel
sources and can be readily integrated into combined heating and power
applications. The microturbine can be sold either as a ready-to-use unit, or in
component and subassembly form for repackaging to the ultimate end user. The
microturbine can be operated as a single unit, or several units can be installed
together and operated in parallel as one unit. We expect to develop our
60-kilowatt family of microturbines to be available for use in all of these
configurations.
Scalable Power System
Our microturbines are designed to allow multiple units to run together to
meet each customer's specific needs. This feature enables users to meet more
precisely their growing demand requirements and thereby manage their capital
costs more efficiently.
Relative Ease of Transportation and Installation
Our microturbines are easy to transport, install and relocate. Their small
size allows great flexibility in siting. Our stationary systems in enclosures
are approximately six feet tall and weigh between 900 and 1,500 pounds,
depending upon model and optional equipment. Relative to competing technologies,
our microturbines are designed to minimize installation costs by simplifying and
standardizing installation procedures. Our microturbines require a fuel source
hook-up, a hook-up for the power generated, and proper venting or utilization of
exhaust. Larger multi-pack microturbine configurations may require concrete pads
to support the additional weight, but the hook-ups are similar.
Protection Relay Functionality
Our microturbines have protective relay functions built into the digital
power controller such that in grid-connect or dual mode, the microturbine will
not send power out over the electric utility grid if the utility is not
supplying voltage over its grid. This feature minimizes the potential damage to
the local electric grid and one of incumbent utilities' major concerns regarding
the interconnection of distributed generation technologies. This was recognized
by the state of New York in approving our microturbines to be connected to New
York network grids.
9
SALES, MARKETING AND DISTRIBUTION
We are focused on selling microturbines in the worldwide stationary and
hybrid electric vehicular markets. We anticipate that our microturbines will be
used in a variety of electric power applications requiring less than 2 megawatts
and more immediately in applications requiring less than 300 kilowatts. Specific
early applications include combined heat and power, resource recovery, remote
and onsite power generation and hybrid electric vehicles. Focusing on these
target markets should help us build significant sales volume and reduce our unit
production costs. The list price of our Model 330 is $29,000, or approximately
$967/kilowatt, and $49,000 for the Capstone 60, or approximately $817/kilowatt.
We believe the most effective way to penetrate our target markets is
through business-to-business distribution strategies and, when appropriate,
direct distribution. Distributors can incorporate subassemblies and components
into uniquely designed packages for distribution, such as in Japan where our
distributors incorporate our systems into combined heat and power applications.
Elsewhere, distribution agreements are tailored to the particular strengths of
partners in various local country markets. In some target markets, we will
distribute our uniquely designed product solutions to major corporations, which
will use the products directly.
In California, we have established a wholly-owned subsidiary to directly
market energy solutions. The subsidiary was established in response to the
increasing number of inquiries presented as a result of current power issues
within the state. Similar to our distributor arrangements, this entity will work
in the local market to incorporate power solutions based on our microturbine
technology.
Our approach for distribution within the hybrid electric vehicles market
has been to identify early adopters who can demonstrate the feasibility of the
microturbine technology. Our microturbine systems are currently in production
platforms used by four different manufacturers for hybrid electric vehicles. We
initially developed sales relationships with smaller bus companies, and having
demonstrated the performance of our technology, we are now establishing
relationships with larger regional bus companies. We have also entered into a
joint development agreement with Hyundai Motor Company to demonstrate the
feasibility of integrating our microturbine technology into Hyundai sports
utility vehicles and buses.
DISTRIBUTION AGREEMENTS
We intend to continue to enter into distribution arrangements with
knowledgeable distributors in our various target markets. Our general strategy
will be to enter into nonexclusive distribution agreements with interested and
qualified third parties who will use our microturbine and/or subassemblies in
their products and energy solutions. We intend to become a supplier of critical
components to the distributed energy solution industry as a whole. As part of
this strategy and to increase the speed of adoption of our products, we have
established relationships with over 40 distributors worldwide.
North America
Our focus in North America continues with our efforts to sell into the
exploration and production segment of the resource recovery market. We are
developing strategic distribution partners in other distributed generation
markets, which we believe will begin to generate significant sales in the next
three to five years.
In 1999, we sold 152 units in the North American market, which generated
approximately $4.8 million in revenue. In 2000, we sold 485 units and various
parts in the North American market, which generated approximately $13.9 million
in revenue.
Asia
Our sales and marketing strategy in Asia is to first enter the Japanese
market by developing significant corporate distribution partnerships within
Japan, which will subsequently enable us to quickly enter other selected markets
along the Pacific Rim.
Our primary market focus in Japan is combined heat and power applications.
Within Japan, there is great demand for economic energy solutions seeking to
lower both the existing high cost of electricity and meet the
10
'greenhouse gas emissions guidelines of the Kyoto accords. Our local partners
recognize the quickest and most practical way to accomplish this is through
combined heat and power applications, which raise efficiencies from
approximately 30% for pure electrical generation to approximately 60 - 70% or
more in combined heat and power applications. Each of our partners is seeking to
design applications using our microturbines and/or subassemblies and components
for their particular target combined heat and power market.
In 1999, we sold 50 units in the Asian market, which generated
approximately $1.6 million in revenue. In 2000, we sold 274 units and various
parts in Asia, which generated approximately $8.3 million in revenue.
Europe
We intend to broaden our distribution alliances in Europe in 2001. Capstone
is developing a sales and service infrastructure in Europe focused on serving
the local needs of customers in each country. We believe it is critical to find
partners speaking the country language, and with the right local technical and
commercial capabilities to assure that Capstone microturbines are properly
applied, installed and supported. As of December 31, 2000, Capstone had
agreements with three distribution partners covering the UK, Germany, the
Netherlands and Scandinavia. Negotiations are in process to cover France, Italy,
Greece and Turkey. Market focus is on combined heat and power applications
(hotels, nursing homes, offices, greenhouses, laundry, recreation facilities),
oil and gas production, and biogas (landfill and water treatment facilities).
In 1999, we sold nine units in Europe, which generated approximately
$275,000 in revenue. In 2000, we sold 31 units and various parts in Europe,
which generated approximately $977,000 in revenue.
CUSTOMERS
In 2000, the Company had sales to the Interstate companies, based in
Minnesota, of $5,069,000 and sales to Williams Distributed Power Services, based
in Oklahoma, of $2,374,000, which represented approximately 22% and 10%,
respectively, of the Company's revenues for the year. Both of these customers
are distributors servicing our North American market.
COMPETITION
The market for our products is highly competitive and is changing rapidly
with the interplay of a number of factors. Our microturbines compete with
existing technologies such as the utility grid and reciprocating engines, and
may also compete with emerging distributed generation technologies, including
solar power, wind powered systems, fuel cells and other microturbines. As many
of our distributed generation competitors are well-established firms, they
derive advantages from production economies of scale, a worldwide presence and
greater resources, which they can devote to product development or promotion.
Generally, power purchased from the electric utility grid is less costly
than power produced by distributed generation technologies, such as fuel cells
or microturbines. Utilities may also charge fees to attach to their power grid.
However, we compete with the power grid in instances in which the costs of
connecting to the grid from remote locations are high, reliability and power
quality are of critical importance, or in situations where peak shaving could be
economically advantageous due to highly variable electricity prices. Because the
Capstone MicroTurbine provides a reliable source of power and can operate on
multiple fuel sources, we believe it offers a level of flexibility and
reliability not currently offered by other current technologies such as
reciprocating engines.
Our competitors producing reciprocating engines have products and markets
that are well developed and technologies that have been proven for some time. A
reciprocating engine is similar in design to internal combustion engines used in
automobiles. Reciprocating engines are popular for back-up power applications
but are not typically intended for primary use due to high levels of emissions,
noise and low reliability. These technologies are currently produced by, among
others, Caterpillar Inc., Interstate companies and Kohler.
Our microturbine may also compete with other distributed generation
technologies, including solar power and wind powered systems. Solar powered and
wind powered systems produce no emissions. The main
11
drawbacks to solar powered and wind powered systems are their dependence on
weather conditions and their high capital costs.
Although the market for fuel cells is still developing, a number of
companies are focused on the residential and vehicular fuel cell markets,
including Plug Power, Avista Labs, H Power and Ballard Power Systems. Another
developer of fuel cell technology, United Technologies Corporation, is focused
on developing fuel cell solutions for large stationary power plants. Fuel cells
have lower levels of nitrogen oxides atmospheric emissions than our
microturbines. We believe that none of these fuel cell technologies will compete
directly with our microturbines in the short run. However, over the
medium-to-long term, fuel cell technologies that compete directly with our
products may be introduced.
We may also compete with several well-established companies developing
microturbines. We believe a number of major automotive and industrial companies
have in-house microturbine development efforts, including Honeywell
(AlliedSignal), Elliott Power Systems, NREC (Ingersoll-Rand), Toyota Motor
Corporation, Mitsubishi Heavy Industries, Ltd., AB Volvo/ABB Ltd. (Turbec) and
Williams International. DTE Energy Co., Pratt & Whitney Canada Corp. and Turbo
Genset Inc. recently formed a joint venture for developing a microturbine. We
expect all of these companies to enter into commercial production of
microturbines in the future.
We believe that our microturbine currently compares favorably to our
competitors' products. For example, competing microturbines lack our Model 330
functionality in several important areas, including the ability to automatically
switch from operating with the utility power grid to stand-alone operation, the
ability to operate multiple units together in tandem when in stand-alone mode,
the ability to match power output to the served facility's need for power, the
ability to operate on gas with low energy content (less than 500 British thermal
units per cubic foot), and the ability to operate on sour gas. All of this
functionality is currently available with the Model 330 and we expect it also to
be available with our 60-kilowatt family of microturbines, except for the
capability to operate on sour gas, about which we are uncertain. Additionally,
our nitrogen oxides atmospheric emissions are less than 9 parts per million,
which is significantly lower than our primary competitor's specification of 50
parts per million. Low nitrogen oxides emissions are important because federal
environmental regulations limit nitrogen oxides emissions by electric utilities
in order to reduce acid rain and for other purposes. Competing microturbines may
currently cost less than our model, but we anticipate that our product will,
with higher production volume and higher kilowatt output products, become more
cost competitive. As competitors improve the functionality of their products, we
expect competition to become more intense.
SOURCING AND MANUFACTURING
Our microturbines are designed to achieve high volume, low-cost production
objectives and offers significant manufacturing advantages through the use of
commodity materials and conventional manufacturing processes. Our manufacturing
designs use conventional technology, which has been proven in high volume
automotive and turbocharger production for many years. The microturbines are
designed for simple assembly and testing and to facilitate automated production
techniques using less-skilled labor.
Our strategy of out-sourcing the manufacturing and assembly of our
nonproprietary product components to a proven vendor base allows for attractive
pricing, quick ramp-up and the use of just-in-time inventory management
techniques. We believe that we can realize both purchase economies from existing
vendors and economies of scale related to our product development costs as unit
volume increases. We manufacture the air-bearings and combustion system
components at our facilities in Chatsworth, California. We also assemble the
units at that location. We have primary and secondary sources for all of our
components other than the recuperator.
To date, Solar Turbines Incorporated, a wholly owned subsidiary of
Caterpillar Inc., has been our sole supplier of recuperator cores. At present,
we are not aware of any other supplier that could produce these cores according
to our specifications and within our time requirements. In 2000, we exercised an
option to license Solar's technology, which allows us to manufacture cores
ourselves. We are required to make payments to Solar pursuant to the license at
varying rates. Our transition to becoming our own supplier of recuperator cores
12
is expected to be completed by the third quarter of 2001. However, since we have
never before manufactured recuperator cores, the transition period may be
longer. We will produce our recuperator cores in a separate facility, located in
nearby Van Nuys, California. Recuperator cores in inventory, together with those
available from Solar, are expected to meet our requirements, until we are able
to produce them internally. After that time, we expect to rely on recuperator
cores from our new production facility.
Senior management has recognized the importance of quality control by
appointing a vice president of quality control to oversee the implementation of
a rigorous quality control program, which includes the use of outside
consultants. One hundred percent of all systems go through assembly test
procedures before a system is shipped. In addition, key subassemblies such as
the digital power controller undergo up to 15 hours of burn-in. All center
section subassemblies undergo complete spin test checks where they are spun up
to over 96,000 revolutions per minute to ensure perfect balance and operation.
When a microturbine is completely assembled, it is tested in one of our two
fully automated test cells.
Our recuperator and assembly facilities are currently designed to
accommodate the production of approximately 20,000 units per year.
RESEARCH AND DEVELOPMENT
Our research and development activities have enabled us to become one of
the first companies to develop a commercially available microturbine that
operates in parallel with the grid. We are the first company to successfully
demonstrate a commercially available microturbine that operates on a stand-alone
basis. We believe that our more than ten years and over 300 man-years of
research and development activities provide us with a significant advantage
relative to our competitors. In fiscal years 1998, 1999 and 2000, we spent
approximately $19.0, $9.1 and $11.3 million, respectively, on our research and
development efforts.
We have successfully integrated turbo-engineering and control and power
electronics. This is a direct result of the turbo-engineering research and
development and the electronics research and development occurring in the same
location. This has allowed us to immediately discover and solve integration
issues in-house without relying on outsourced research and development. We
believe that our continued in-house research and development, incorporating
turbo-engineering and control with power electronics, will provide us with a
competitive advantage relative to competitors that outsource research and
development of components that are critical to a viable microturbine.
We intend to broaden our product line by developing additional microturbine
products. In 2000, we shipped the first commercial model of our 60-kilowatt
family of products. We are currently developing additional models of our
60-kilowatt microturbine system for expected commercial shipments in the next
several calendar quarters. We intend to develop a family of microturbines with
power output up to approximately 125+ kilowatts. We expect to leverage our
scaleable design architecture by developing microturbines and digital power
controllers to provide a superior performance-price ratio while simultaneously
improving our profitability.
We also intend to continue our research and development efforts to enhance
our current products by increasing performance and efficiency, and adding
features and functionality to our microturbines. Research and development
activities have also focused on development of related products and
applications, including gas compressors that enhance the microturbines'
multi-fuel capability and integration with energy storage devices like battery
packs for stand-alone applications.
In 2000, we were awarded a $10 million grant from the United States
Department of Energy to develop an Advanced Microturbine System. The $10 million
grant, to be distributed over a five-year period, is the maximum amount
available under the Department of Energy's Advanced Microturbine Systems
Program. The program is estimated to cost $23.0 million over the five years,
which would require the Company to provide approximately $13.0 million of our
own research and development expenditures. We intend to leverage, in part, the
technology we develop using this grant in the development of our 125+ kilowatt
microturbines, subject to any rights held pursuant to the grant by the
Department of Energy with respect to the technology.
13
Additionally, we are reviewing projects that will incorporate our
microturbine technology as part of a hybrid energy source solution combining our
microturbine with a traditional fuel cell. As part of this effort, we shipped
our initial microturbine to FuelCell Energy as part of this strategic program.
INTELLECTUAL PROPERTY RIGHTS AND PATENTS
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. As of December 31, 2000, we had 35 issued
United States patents and two international patents and several U.S. and
international patent applications on file primarily covering our air-bearing
systems, combustor systems and digital control systems. Many of our patents
pending in part also relate to one of these important systems. The protection of
our intellectual property rights in these components is critical to our
technology. In particular, we believe that each of our patents and patents
pending are key to our business. Our patents are due to expire from 2010 to
2019.
We believe that a policy of actively protecting intellectual property is an
important component of our strategy of being the technology leader in
microturbine system technology and will provide us with a long-term competitive
advantage. In addition, we implement very tight security procedures at our plant
and facilities and have confidentiality agreements with each of our vendors,
employees and visitors to our facilities.
COMPANY HISTORY AND PRODUCT DEVELOPMENT
We were organized in 1988. On June 22, 2000 we reincorporated as a Delaware
corporation. In April 1993, Benjamin M. Rosen, then Chairman of Compaq Computer
Corporation, and his brother, Dr. Harold A. Rosen, former Vice President of
Hughes Aircraft Company, became interested in our Company for vehicular
applications. Since then, the Rosens, together with the Sevin Rosen Funds and
Canaan Partners, were joined by other investors including Rho Management,
Fletcher Challenge Limited (a New Zealand corporation), Vulcan Ventures, Inc.
(an affiliate of Paul Allen), Cascade Investments (an affiliate of Bill Gates),
Southern Union Company, Mitsubishi Corporation, Takuma Co. Ltd., Sumitomo
Corporation, Meidensha Corporation, Active Power Inc., Hydro-Quebec, Kyushya
Electric EDPC and Star Ventures of Munich, Germany.
We have spent more than ten years and 300 man-years of research and
development to create a reliable, efficient generating system with broad fuel
capabilities and power applications. Some of our important milestones and
noticeable accomplishments include:
DATE MILESTONE
---- ---------
1988............... Capstone was organized to develop small single shaft gas
turbines for heat and electricity generation applications in
vehicles
1993............... Ben Rosen, chairman of Compaq, and brother Harold Rosen,
vice president of Hughes Aircraft, invested in Capstone
which resulted in a focus on microturbines for vehicle
applications
1994............... Expanded development of microturbines for stationary
distributed generation applications
1995............... Shipped first prototype microturbine to customers
1996............... Developed second generation microturbine and began field
testing
1997............... First installation of a Capstone MicroTurbine subassembly
set in a hybrid electric bus
First microturbine subassembly operated with compressed
natural gas in a hybrid electric vehicle
Began development of the digital power controller
1998............... Shipped first commercial product, the Model 330
1999............... Achieved the ability to operate in stand-alone and dual mode
and to burn sour gas
Had approximately $7 million in revenue with 211 systems
shipped and over 150 employees
2000............... Completed development of software which allowed for
scalability
Shipped first commercial model of our 60+ kilowatt family of
products
Approximately $23 million in revenue with 790 systems
shipped and over 220 employees
14
EMPLOYEES
At December 31, 2000 we employed 223 regular and contract employees. No
employees are covered by any collective bargaining arrangements. We believe that
our relationships with our employees are good.
BUSINESS RISKS
This document contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the 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 HAVE A LIMITED OPERATING HISTORY CHARACTERIZED BY NET LOSSES, WE ANTICIPATE
CONTINUED LOSSES THROUGH AT LEAST 2001 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 and $31.4 million in 2000. We anticipate incurring additional net losses
through at least 2001. Since inception through December 31, 2000, we have
recorded cumulative losses of approximately $147.9 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.
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
15
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. We
estimate that the transition from purchasing recuperator cores from Solar to
manufacturing 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. We recorded a warranty reserve charge of $4.6 million or
20% of revenue for the year ended December 31, 2000 and $2.6 million or 39% of
revenue for the year ended December 31, 1999. While management believes that the
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.
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
16
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;
- 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;
17
- 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
December 31, 2000, we had approximately $236.9 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 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.
18
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. 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
19
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 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
20
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.
21
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 December 31, 2000, we possessed 35 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
22
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 eleven executive officers and directors beneficially own approximately
17% of our outstanding common stock. In addition, three other investors
beneficially own approximately 22% 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.
ITEM 2. FACILITIES.
Our principal corporate offices, administrative, sales and marketing,
research and development and support facilities consist of approximately 98,000
square feet of office space, warehouse space and assembly and test space at
21211 Nordhoff Street in Chatsworth, California. Our lease for those premises
expires in 2010. We lease an additional property at 6025 Yolanda Avenue in
Tarzana, California, which consists of approximately 12,000 square feet. This
property currently serves as our microturbine testing facility. This lease will
expire on July 31, 2001. We also recently entered into a lease for an
approximately 79,000 square foot facility at 16700 Stagg Street in nearby Van
Nuys, California, which we intend to use as a manufacturing facility for our
recuperator cores. This lease will expire in 2010. See Footnote 7, Commitments
and Contingencies, in the Company's financial statements.
ITEM 3. LEGAL PROCEEDINGS.
On February 11, 1998, we filed a complaint against Michael Irvine, a former
employee, alleging trade secret misappropriation, breach of contract and other
related causes of action in the Superior Court for the County of Orange,
California. The former employee filed a cross-complaint alleging wrongful
termination, breach of contract, and other related causes of action. The relief
requested in the cross complaint included declaratory relief as well as lost
earnings and incidental, general, special, and punitive damages, but none of
23
these amounts were specified in the cross-complaint. We settled our claims
against the former employee, receiving a permanent injunction that prevents that
former employee from disclosing or using any confidential information. With
respect to the cross-complaint, we prevailed on summary judgment in February
1999. The former employee has since filed a notice of appeal and the parties
have filed briefs on the issue. We intend to vigorously defend these claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of our stockholders during the
fourth quarter of fiscal year 2000.
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Price Range of Common Stock
Our common stock has traded on the Nasdaq National Market under the symbol
"CPST" since our initial public offering on June 29, 2000. The following table
sets forth, for the periods indicated, the high and low sales prices per share
of our common stock as reported on the Nasdaq National Market.
HIGH LOW
------- -------
FISCAL YEAR 2000:
Second Quarter (beginning June 29, 2000)................. $51.750 $27.375
Third Quarter............................................ 98.500 37.500
Fourth Quarter........................................... 69.750 17.750
As of March 23, 2001, the last reported sale price of our common stock on
the Nasdaq National Market was $29.94 per share. As of March 23, 2000, there
were 609 stockholders of record of our common stock. This does not include the
number of persons whose stock is in nominee or "street name" accounts through
brokers.
Dividend Policy
We currently intend to retain any earnings for use in our business and,
therefore, we do not anticipate paying any cash dividends in the foreseeable
future. We have never declared or paid any cash dividends on our capital stock.
In the future, the decision to pay any cash dividends will depend upon our
results of operations, financial condition and capital expenditure plans, as
well as such other factors as our Board of Directors, in its sole discretion,
may consider relevant.
Recent Sales of Unregistered Securities
During the three fiscal years ended December 31, 2000, 1999 and 1998, we
issued and sold the following unregistered securities, all of which were deemed
to be exempt from registration under the Securities Act in reliance upon Section
4(2) of the Securities Act or Regulation D promulgated thereunder as
transactions by an issuer not involving any public offering:
- As a result of Capstone's initial public offering, on July 5, 2000 we
issued a total of 51,312,037 shares of our common stock upon the
automatic conversion of all shares of Capstone's preferred stock. As a
result of a three-for-five reverse stock split on May 26, 2000, series A,
B, C, D, E, F and G preferred stock were convertible at a factor of .60,
.70, .77, .90, .95, .60 and .60, respectively into shares of common
stock.
- On February 24, 2000, we issued 35,683,979 shares of series G preferred
stock for $4.00 per share to accredited investors in connection with a
private financing. Capstone received proceeds, net of origination costs,
of approximately $131.1 million. Of the shares of series G preferred
stock issued, 1,250,000 shares were issued to an existing stockholder for
no cash consideration and 58,979 shares were issued to holders of
promissory notes for accrued interest.
Use of Proceeds from Registered Securities
On July 5, 2000, we completed the initial public offering of our common
stock. This offering was managed by Goldman, Sachs & Co., Merrill Lynch, Pierce
Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated. 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.
25
In our initial public offering, we sold an aggregate of 10,454,545 shares
our common stock, for a gross aggregate offering price of $167.3 million. We
incurred underwriting commissions of approximately $11.7 million and other
expenses of approximately $2.0 million resulting in net proceeds of
approximately $153.6 million. The net proceeds of our initial public offering
have been used to fund operating losses, the repurchase of marketing rights from
Fletcher Challenge Limited, capital expenditures and for general corporate
purposes. As of December 31, 2000, remaining net proceeds from the offering were
primarily held in cash equivalents and short-term investments for use to fund
operating losses, for capital expenditures and general corporate purposes. With
the exception of marketing rights acquired from Fletcher Challenge Limited for
$11,000,000, 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.
26
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data shown below for, and as of the end of, each of
the years in the five-year period ended December 31, 2000 have been derived from
the audited financial statements of Capstone. The historical results are not
necessarily indicative of the operating results to be expected in the future.
The selected financial data should be read in conjunction with "Business Risks",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes included
elsewhere in this Form 10-K filing for the statement of operations for the years
ended December 31, 1998, 1999 and 2000 and for the balance sheet data at
December 31, 1999 and 2000.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS:
Total revenues...................... $ 1,462 $ 1,623 $ 84 $ 6,694 $ 23,163
Cost of goods sold.................. 2,179 8,147 5,335 15,629 27,815
-------- -------- -------- -------- --------
Gross loss..................... (717) (6,524) (5,251) (8,935) (4,652)
Operating costs and expenses:
Research and development.......... 8,599 13,281 19,019 9,151 11,319
Selling, general and
administrative................. 3,585 10,946 10,257 11,191 24,067
-------- -------- -------- -------- --------
Loss from operations.............. (12,901) (30,751) (34,527) (29,277) (40,038)
Net loss....................... $(12,595) $(30,553) $(33,073) $(29,530) $(31,424)
======== ======== ======== ======== ========
Net loss per share of common
stock -- basic and diluted... $ (4.87) $ (8.97) $ (18.82) $ (17.76) $ (12.82)
======== ======== ======== ======== ========
AS OF DECEMBER 31,
---------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- --------- --------
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 1,464 $ 44,563 $ 4,943 $ 6,858 $236,947
Working capital.................... 1,773 41,431 6,919 6,294 238,128
Total assets....................... 6,820 56,989 25,770 36,927 302,018
Capital lease obligations.......... 846 1,885 4,449 5,899 5,496
Long-term debt..................... -- -- -- -- --
Redeemable preferred stock......... 25,975 99,720 101,624 156,469 --
Stockholders'
(deficiency)/equity.............. (24,176) (56,057) (91,151) (144,225) 279,382
-------- -------- -------- --------- --------
Total liabilities and
stockholders' equity... $ 6,820 $ 56,989 $ 25,770 $ 36,927 $302,018
======== ======== ======== ========= ========
ITEM 7. 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 related notes included in Item 8 of this 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 Item 1 of this
Form 10-K. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof.
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
27
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. Specifically, in 2000, we
consolidated our administrative and production operations into one building, we
acquired intellectual property from a former supplier and started our effort to
manufacture recuperator cores at a new facility, we entered into new supplier
contracts to reduce overall unit costs and we continued 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.
Since inception through December 31, 2000, we generated cumulative
operating losses of approximately $147.9 million 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.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues. Revenues in 2000 increased $16.5 million to $23.2 million,
compared to $6.7 million for 1999. The increase in revenues is attributable to
greater sales to a larger customer base, which has resulted from expanding our
marketing efforts. Revenues for 2000 and 1999 were derived almost entirely from
unit sales of our 30-kilowatt products. These units were used for various
commercial applications and operated using different fuel types. During 2000, we
shipped 790 units, an increase of 579 units over the 211 units we shipped in
1999. Our backlog of orders at December 31, 2000 was 806 units, as compared to
310 units at December 31, 1999.
Gross Loss. 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 loss decreased $4.3
million, or 48%, to $4.7 million in 2000 from a gross loss of $8.9 million for
1999. 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 cost of goods sold. The warranty reserve charge increased
$1.9 million to $4.6 million in 2000 from $2.6 million for 1999 due to an
increase in unit shipments. Warranty charges continued to decline on a per unit
basis, as we reduced our per unit warranty charge 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 for expanding the functionality of our
30-kilowatt family of products and development of the 60-kilowatt family of
products and for next generation products. Research and development expenses in
2000 increased $2.2 million, or 24%, to $11.3 million, compared to $9.1 million
for 1999.
28
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 in 2000 increased $12.9 million, or 115%, to $24.1
million, compared to $11.2 million for 1999. The primary cause of the increase
was 68 new employees and general overhead associated with our growth. $1.4
million of the increase was attributable to non-cash, stock-based compensation
expense and $3.9 million 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 increased $9.1 million to $9.6 million in
2000, compared to $452,000 for 1999. The increase is primarily attributable to
the higher average investment balances due to the funds received from our Series
G preferred stock issuance in February 2000, our initial public offering in July
2000 and our secondary public offering in November 2000.
Income Tax Provision. At December 31, 2000, we had federal and state net
operating loss carryforwards of approximately $135.9 million and $114.1 million,
respectively, which may be utilized to reduce future taxable income, subject to
limitations. Under the Tax Reform Act of 1996, the amounts of and benefit from
net operating losses are subject to an annual limitation due to the ownership
change limitations. We have provided a valuation allowance for 100% of our net
deferred tax asset of $63.5 million at December 31, 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues in 1999 increased $6.6 million to $6.7 million from
$84,000 for 1998. Commercial sales began in December 1998, and 1999 was the
first complete fiscal year that commercial units were available. During 1999, we
shipped 211 units on customer orders totaling 521 units. Our backlog of orders
at December 31, 1999 was 310 units.
Gross Loss. In 1999, our gross loss increased $3.6 million, or 70%, to $8.9
million for 1999 from a loss of $5.3 million for 1998. The warranty reserve
charge increased $2.3 million to $2.6 million for 1999 from $261,000 for 1998
primarily due to the increase in units shipped from three in 1998 to 211 in
1999. As of December 31, 1999, a warranty reserve of approximately $3.2 million
had been accrued. The increases in warranty reserve charges were partially
offset by decreased inventory writedowns. The increase in the warranty charge of
$2.3 million represents approximately 65% of the total increase in gross loss
from 1998 to 1999. The remaining increase in gross loss was primarily the result
of substantially more unit shipments with a negative margin in 1999 versus 1998.
(The negative margin resulted from fixed costs spread over a small number of
units during early stage production.) Warranty charges decreased as a percentage
of both revenues and direct material costs. In 1998, we recognized a charge of
$4.2 million to writedown inventory to its estimated net realizable value. There
was no similar charge in 1999. Additionally, the provision for inventory
obsolescence increased $439,000, or 64%, to $1.1 million in 1999 from $681,000
in 1998.
Research and Development. Research and development expenses decreased $9.9
million, or 52%, to $9.1 million for 1999 from $19.0 million for 1998. With the
beginning of commercial production in 1999, a substantial portion of overhead
allocable to research and development decreased along with other general
research and development expenses associated with hardware and design.
Selling, General and Administrative. Selling, general and administrative
expenses increased $934,000, or 9%, to $11.2 million for 1999 from $10.3 million
for 1998. This increase resulted primarily from higher compensation and overhead
expenses associated with our general growth, including the development of our
sales and marketing division. At December 31, 1999, we had 156 full-time
employees, up from 115 at December 31, 1998. The growth in employees was
primarily in operations, which added 26 people, and selling, general and
administrative, which added 13 people.
29
Interest Income. Interest income decreased $1.0 million, or 69%, to
$452,000 for 1999 from $1.4 million for 1998. This decrease was due to lower
interest earned on lower average investment balances available during 1999.
Income Tax Provision. At December 31, 1999, we had federal and state net
operating loss carryforwards of approximately $105.7 million and $88.2 million,
respectively, which may be utilized to reduce future federal taxable income
through the year 2019, subject to limitations. Under the Tax Reform Act of 1996,
the amounts of and benefit from net operating losses are subject to an annual
limitation due to the ownership change limitations. We have provided a valuation
allowance for 100% of our net deferred tax asset of $51.0 million at December
31, 1999.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table presents unaudited quarterly financial information for
the twelve quarters ended December 31, 2000. This information was prepared in
accordance with generally accepted accounting principles, and, in the opinion of
management, contains all adjustments necessary for a fair presentation of such
quarterly information when read in conjunction with the financial statements
included elsewhere herein. As we increase commercial production, our operating
results for any prior quarters may not necessarily indicate the results for any
future periods.
1999 2000
-------------------------------------- ---------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------- ------- -------- -------- -------
Total revenues................. $ 222 $ 334 $ 759 $ 5,379 $ 3,746 $ 6,086 $ 6,197 $ 7,134
Cost of goods sold............. 1,233 1,347 1,990 11,059 5,124 8,256 7,278 7,157
------- ------- ------- -------- ------- -------- -------- -------
Gross loss................... (1,011) (1,013) (1,231) (5,680) (1,378) (2,170) (1,081) (23)
Operating costs and expenses:
Research and development..... 2,264 2,158 2,259 2,470 2,441 3,022 2,953 2,903
Selling, general and
administrative............. 2,502 2,568 2,748 3,373 4,384 5,677 7,203 6,803
------- ------- ------- -------- ------- -------- -------- -------
Loss from operations......... (5,777) (5,739) (6,238) (11,523) (8,203) (10,869) (11,237) (9,729)
Net loss..................... $(5,785) $(5,825) $(6,253) $(11,667) $(7,811) $ (9,175) $ (8,081) $(6,357)
======= ======= ======= ======== ======= ======== ======== =======
The increase in sales, and respective cost of goods sold, in 1999 and 2000
resulted from our increased efforts to bring our commercial units to market.
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements depend on many factors, including our product
development activities, our production expansion and our commercialization
efforts. We expect 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. Since
our inception, 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.
Our net cash used by operating activities was ($23.8) million in 2000
compared to ($24.5) million for 1999. Net cash used in investing activities was
($26.9) million in 2000 compared to net cash used by investing activities of
($5.2) million for 1999. Investing activities in 2000 primarily consisted of
equipment purchases, leasehold improvements associated with our new facility,
deposits on assets to be used in recuperator core production and the acquisition
of marketing rights. Our net cash provided by financing activities was $280.8
million in 2000, compared to $31.6 million for 1999. The primary source of cash
provided by financing activities was 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. The cash provided by
financing activities
30
was partially reduced as we reacquired $15.5 million of series E preferred stock
as part of a stock repurchase and settlement agreement.
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 December 31, 2000, we had $5.1 million
outstanding under a lease with Transamerica, $388,000 outstanding to Finova and
$11,000 outstanding to other leasing institutions.
During 2000, we completed the acquisition of marketing rights from a
related party, Fletcher Challenge. The total value of such rights aggregated
$28.0 million and is being amortized over the life of the original marketing
agreement of six years. We reacquired the marketing rights to allow us to fully
control the distribution of our products. We also acquired $2.9 million in
intangible assets for intellectual property from Solar Turbines in conjunction
with the development of recuperator core technology. We anticipate using this
technology to produce our own recuperator cores.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We do not currently use derivative financial instruments for speculative
purposes 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" and in Note 2 of Notes to Financial Statements.
Foreign Currency
We currently develop products in the United States and market our products
in North America, Europe and Asia. 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. We also have no foreign
currency translations in our reported financial statements. 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 during the past three years. 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 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.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CAPSTONE TURBINE CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ 33
Financial Statements as of December 31, 1999 and 2000 and
for the Years Ended December 31, 1998, 1999 and 2000:
Balance Sheets............................................ 34
Statements of Operations.................................. 35
Statement of Stockholders' (Deficiency) Equity............ 36
Statements of Cash Flows.................................. 37
Notes to Financial Statements............................. 38
32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Capstone Turbine Corporation:
We have audited the accompanying balance sheets of Capstone Turbine
Corporation (the "Company") as of December 31, 1999 and 2000, and the related
statements of operations, stockholders' (deficiency) equity, and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Capstone Turbine Corporation as of December
31, 1999 and 2000, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 2, 2001
33
CAPSTONE TURBINE CORPORATION
BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------------
1999 2000
------------- -------------
Current Assets:
Cash and cash equivalents................................. $ 6,858,000 $ 236,947,000
Accounts receivable, net of allowance for doubtful
accounts of $50,000 in 1999 and
$85,000 in 2000......................................... 2,425,000 3,664,000
Inventory................................................. 8,803,000 14,123,000
Prepaid expenses and other current assets................. 2,217,000 1,689,000
------------- -------------
Total current assets................................ 20,303,000 256,423,000
------------- -------------
Equipment and Leasehold Improvements:
Machinery, equipment, and furniture....................... 11,824,000 13,664,000
Leasehold improvements.................................... 137,000 3,055,000
Molds and tooling......................................... 541,000 1,331,000
------------- -------------
12,502,000 18,050,000
Less accumulated depreciation and amortization............ 4,570,000 6,434,000
------------- -------------
Total equipment and leasehold improvements.......... 7,932,000 11,616,000
------------- -------------
Deposits on Fixed Assets.................................... 3,374,000 6,649,000
Other Assets................................................ 422,000 302,000
Intangible Assets, Net...................................... 4,896,000 27,028,000
------------- -------------
Total............................................... $ 36,927,000 $ 302,018,000
============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Accounts payable.......................................... $ 1,728,000 $ 4,728,000
Accrued salaries and wages................................ 677,000 1,135,000
Other accrued liabilities................................. 2,340,000 1,282,000
Accrued warranty reserve.................................. 3,168,000 5,589,000
Deferred revenue.......................................... 4,696,000 4,064,000
Current portion of capital lease obligations.............. 1,400,000 1,497,000
------------- -------------
Total current liabilities........................... 14,009,000 18,295,000
------------- -------------
Long-Term Portion of Capital Lease Obligations.............. 4,499,000 3,999,000
------------- -------------
Other long-term liabilities................................. 342,000
------------- -------------
Accrued Dividends Payable................................... 6,175,000 --
------------- -------------
Commitments and Contingencies............................... -- --
Redeemable Preferred Stock, 80,000,000 Shares Authorized:
Series A preferred stock, $.001 par value; 6,570,000
shares issued and outstanding (involuntary liquidation
preference of $6,570,000, net of unamortized accretion
of origination fees of $37,000) at December 31, 1999... 15,183,000 --
Series B preferred stock, $.001 par value; 3,333,334
shares issued and outstanding (involuntary liquidation
preference of $5,000,000, net of unamortized accretion
of origination fees of $34,000) at December 31, 1999... 8,928,000 --
Series C preferred stock, $.001 par value; 7,655,018
shares issued and outstanding (involuntary liquidation
preference of $15,310,000, net of unamortized accretion
of origination fees of $266,000) at December 31,
1999................................................... 23,324,000 --
Series D preferred stock, $.001 par value; 3,125,000
shares issued and outstanding (involuntary liquidation
preference of $12,500,000, net of unamortized accretion
of origination fees of $14,000) at December 31, 1999... 14,313,000 --
Series E preferred stock, $.001 par value; 10,664,111
shares issued and outstanding (involuntary liquidation
preference of $63,985,000, net of unamortized accretion
of origination fees of $995,000) at December 31,
1999................................................... 62,984,000 --
Series F preferred stock, $.001 par value; 11,129,246
shares issued and outstanding (involuntary liquidation
preference of $22,258,000, net of unamortized accretion
of origination fees of $2,697,000) at December 31,
1999................................................... 20,903,000 --
Promissory notes associated with Series G preferred stock... 10,834,000 --
------------- -------------
Total redeemable preferred stock.................... 156,469,000 --
------------- -------------
Stockholders' (Deficiency) Equity:
Common stock, $.001 par value; 415,000,000 shares
authorized; 2,377,826, and 75,771,303 shares issued and
outstanding at December 31, 1999 and 2000............... 2,000 76,000
Additional paid-in capital................................ -- 516,738,000
Accumulated deficit....................................... (144,227,000) (237,432,000)
------------- -------------
Total stockholders' (deficiency) equity............. (144,225,000) 279,382,000
------------- -------------
Total............................................... $ 36,927,000 $ 302,018,000
============= =============
See accompanying notes to financial statements.
34
CAPSTONE TURBINE CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1999 2000
------------ ------------ -------------
Revenues:
Product revenue............................... $ 76,000 $ 6,694,000 $ 23,163,000
Contract revenue.............................. 8,000 -- --
------------ ------------ -------------
Total revenues........................ 84,000 6,694,000 23,163,000
Cost of Goods Sold.............................. 5,335,000 15,629,000 27,815,000
------------ ------------ -------------
Gross Loss...................................... (5,251,000) (8,935,000) (4,652,000)
Operating Costs and Expenses:
Research and development...................... 19,019,000 9,151,000 11,319,000
Selling, general, and administrative.......... 10,257,000 11,191,000 24,067,000
------------ ------------ -------------
Total operating costs and expenses.... 29,276,000 20,342,000 35,386,000
Interest Income................................. 1,437,000 452,000 9,589,000
Interest Expense................................ (309,000) (721,000) (915,000)
Other (Expense)/Income.......................... 327,000 17,000 (59,000)
------------ ------------ -------------
Loss Before Income Taxes........................ (33,072,000) (29,529,000) (31,423,000)
Provision for Income Taxes...................... 1,000 1,000 1,000
------------ ------------ -------------
Net Loss........................................ (33,073,000) (29,530,000) (31,424,000)
------------ ------------ -------------
Preferred Stock Dividends and Accretion......... (2,096,000) (26,700,000) (559,862,000)
------------ ------------ -------------
Net Loss Attributable to Common Stockholders.... $(35,169,000) $(56,230,000) $(591,286,000)
============ ============ =============
Net Loss Per Share of Common Stock -- Basic and
Diluted....................................... $ (17.76) $ (24.53) $ (12.82)
============ ============ =============
Weighted Average Common Shares Outstanding...... 1,980,478 2,292,242 46,107,074
============ ============ =============
See accompanying notes to financial statements.
35
CAPSTONE TURBINE CORPORATION
STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
COMMON STOCK
--------------------- ADDITIONAL
SHARES PAID-IN ACCUMULATED
OUTSTANDING AMOUNT CAPITAL DEFICIT TOTAL
----------- ------- ------------ ------------- -------------
BALANCE, JANUARY 1, 1998............................. 1,834,654 2,000 -- (56,059,000) (56,057,000)
Exchange of common stock........................... (182,639) (70,000) (70,000)
Exercise of stock options.......................... 519,250 145,000 145,000
Accretion of preferred stock....................... (75,000) (295,000) (370,000)
Dividends accrued for Series A preferred stock..... (329,000) (329,000)
Dividends accrued for Series B preferred stock..... (157,000) (157,000)
Dividends accrued for Series C preferred stock..... (333,000) (333,000)
Dividends accrued for Series D preferred stock..... (231,000) (231,000)
Dividends accrued for Series E preferred stock..... (676,000) (676,000)
Net loss........................................... (33,073,000) (33,073,000)
---------- ------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 1998........................... 2,171,265 2,000 -- (91,153,000) (91,151,000)
Common stock warrants granted...................... 2,969,000 2,969,000
Common stock options granted....................... 135,000 135,000
Exercise of stock options and warrants............. 206,561 53,000 53,000
Accretion of preferred stock....................... (3,157,000) (21,637,000) (24,794,000)
Dividends accrued for Series A preferred stock..... (363,000) (363,000)
Dividends accrued for Series B preferred stock..... (174,000) (174,000)
Dividends accrued for Series C preferred stock..... (368,000) (368,000)
Dividends accrued for Series D preferred stock..... (255,000) (255,000)
Dividends accrued for Series E preferred stock..... (747,000) (747,000)
Net loss........................................... (29,530,000) (29,530,000)
---------- ------- ------------ ------------- -------------
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
Common stock options granted....................... 1,744,000 1,744,000
Exercise of stock options and warrants............. 10,912,609 12,000 3,653,000 3,665,000
Repurchase of preferred stock...................... 2,209,000 454,000 2,663,000
Accretion of preferred stock....................... (13,883,000) (457,593,000) (471,476,000)
Dividends accrued for Series A preferred stock..... (196,000) (196,000)
Dividends accrued for Series B preferred stock..... (94,000) (94,000)
Dividends accrued for Series C preferred stock..... (198,000) (198,000)
Dividends accrued for Series D preferred stock..... (137,000) (137,000)
Dividends accrued for Series E preferred stock..... (403,000) (403,000)
Beneficial conversion feature for Series G
preferred stock.................................. (89,567,000) (89,567,000)
Dividends waived on preferred stock................ 440,000 6,309,000 6,749,000
Conversion of preferred stock...................... 51,312,037 51,000 341,296,000 479,644,000 820,991,000
Issuance of common stock........................... 11,168,831 11,000 173,147,000 173,158,000
Net loss........................................... (31,424,000) (31,424,000)
---------- ------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 2000........................... 75,771,303 $76,000 $516,738,000 $(237,432,000) $ 279,382,000
========== ======= ============ ============= =============
See accompanying notes to financial statements.
36
CAPSTONE TURBINE CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1999 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(33,073,000) $(29,530,000) $(31,424,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 1,660,000 2,356,000 7,126,000
Provision for inventory reserve............... 681,000 1,120,000 407,000
Inventory writedown to net realizable value... 4,225,000
Loss on sale of equipment........................ 30,000 239,000 95,000
Non-employee stock compensation.................. 1,050,000 80,000 60,000
Employee stock compensation...................... 131,000 1,744,000
Changes in operating assets and liabilities:
Accounts receivable........................... 51,000 (2,329,000) (1,239,000)
Inventory..................................... (9,318,000) (1,220,000) (5,727,000)
Prepaid expenses and other assets............. 360,000 (1,328,000) 648,000
Accounts payable.............................. (3,856,000) 497,000 2,999,000
Accrued salaries and wages.................... 106,000 157,000 458,000
Other accrued liabilities..................... 1,930,000 (1,617,000) (716,000)
Accrued warranty reserve...................... (55,000) 2,295,000 2,421,000
Deferred revenue.............................. (30,000) 4,696,000 (632,000)
------------ ------------ ------------
Net cash used in operating activities.... (36,239,000) (24,453,000) (23,780,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment and leasehold
improvements.................................. (4,016,000) (2,449,000) (6,766,000)
Proceeds from sale of equipment.................. 3,140,000 2,338,000 1,221,000
Deposits on fixed assets......................... (2,133,000) (78,000) (3,275,000)
Intangible assets................................ (5,000,000) (18,106,000)
------------ ------------ ------------
Net cash used in investing activities.... (3,009,000) (5,189,000) (26,926,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations........... (517,000) (1,119,000) (1,608,000)
Exercise of stock options and warrants........... 145,000 53,000 4,375,000
Net proceeds from issuance of Series F preferred
stock......................................... 21,789,000
Proceeds from promissory notes associated with
Series G preferred stock...................... 10,834,000
Net proceeds from issuance of Series G preferred
stock......................................... 120,362,000
Repurchase of preferred stock.................... (15,492,000)
Net proceeds from issuance of common stock....... 173,158,000
------------ ------------ ------------
Net cash (used in) provided by financing
activities............................. (372,000) 31,557,000 280,795,000
------------ ------------ ------------
Net (Decrease) Increase in Cash and Cash
Equivalents...................................... (39,620,000) 1,915,000 230,089,000
Cash and Cash Equivalents, Beginning of Year....... 44,563,000 4,943,000 6,858,000
------------ ------------ ------------
Cash and Cash Equivalents, End of Year............. $ 4,943,000 $ 6,858,000 $236,947,000
============ ============ ============
Supplemental Disclosures of Cash Flow Information--
Cash paid during the year for:
Interest...................................... $ 309,000 $ 630,000 $ 770,000
Income taxes.................................. $ 1,000 $ 1,000 $ 1,000
See accompanying notes to financial statements.
37
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY
Capstone Turbine Corporation (the "Company") was formed to develop,
manufacture, and market 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 microturbines 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents -- The Company considers only those investments that are
highly liquid, readily convertible to cash and mature within three months from
the date of purchase as cash equivalents.
Depreciation and Amortization -- Depreciation and amortization are provided
for using the straight-line method over the estimated useful lives of the
related assets, ranging from three to ten years. Leasehold improvements are
amortized over the period of the lease or the estimated useful lives of the
assets, whichever is shorter. Amortization of assets under capital leases and
intangible assets are included with depreciation and amortization expense.
Depreciation and amortization expense was $1,660,000, $2,356,000 and $7,126,000
for the years ended December 31, 1998, 1999 and 2000, respectively.
Long-Lived Assets -- The Company reviews the recoverability of long-lived
assets whenever events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable. If the expected future cash flows
from the use of such assets (undiscounted and without interest charges) are less
than the carrying value, the Company's policy is to record a write-down, which
is determined based on the difference between the carrying value of the assets
and their estimated fair value.
Product and Contract Revenues -- The Company's policy is to recognize
product revenue upon shipment of the product to the customer. There are no
rights of return privileges on product sales.
Warranty Policy -- Estimated future warranty obligations are provided for
by charges to operations in the period in which the related revenue is
recognized. The warranty reserve is based upon historical and projected product
failure rates, estimated costs to repair or replace a unit and the number of
units covered under the warranty period.
Deferred Revenue -- Deferred revenue consists of customer deposits.
Deferred revenue will be recognized upon shipment of the product to the
customer.
Accounting for Stock-Based Compensation -- Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
requires expanded disclosures of stock-based compensation arrangements with
employees and encourages (but does not require) compensation cost to be measured
based on the fair value of the equity instrument awarded. Under SFAS No. 123,
the fair value of stock-based awards to employees is calculated through the use
of option pricing models even though such models were developed to estimate the
fair value of freely tradable and fully transferable options, without vesting
restrictions, which significantly differ from the Company's stock option awards.
Companies are permitted, however, to continue to apply Accounting Principle
Board Opinion ("APB Opinion") No. 25, "Accounting for Stock Issued to
Employees," which recognizes compensation cost based on the intrinsic value of
the equity instrument awarded. The Company has elected to continue to apply APB
Opinion No. 25 in its employee stock-based compensation arrangements (see Note
6). Expense for common stock options granted to non-employees is recorded based
upon the fair value of the equity instrument awarded calculated through the use
of an option-pricing model.
38
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Risk Concentrations -- Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of cash equivalents
and accounts receivable. The Company places its cash equivalents with high
credit quality institutions.
The Company had sales to a single customer of $1,858,000 that represented
approximately 28% of the Company's revenues for the year ended December 31,
1999. The Company had accounts receivable from two customers of approximately
$613,000 and $277,000, respectively, that represented approximately 25% and 11%,
respectively of total accounts receivable at December 31, 1999.
The Company had sales to two customers of $5,069,000 and $2,374,000 that
represented approximately 22% and 10%, respectively, of the Company's revenues
for the year ended December 31, 2000. The Company had accounts receivable from
two customers of approximately $809,000 and $715,000 that represented
approximately 22% and 20%, respectively, of total accounts receivable at
December 31, 2000.
Estimates and Assumptions -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Net Loss Per Common Share -- Basic loss per common share is computed using
the weighted-average number of common shares outstanding for the period. The
weighted-average number of common shares outstanding, was 1,980,478, 2,292,242
and 46,107,074 in 1998, 1999 and 2000, respectively. The impact of common stock
options, outstanding preferred stock, warrants for preferred stock, and warrants
for common stock have not been included for purposes of the computation of
diluted earnings per share as their inclusion would have had an antidilutive
effect on the per-share amounts for the periods presented; therefore, diluted
loss per share is equal to basic loss per share. Antidilutive common stock
options and warrants were 3,417,664, 14,303,142 and 1,984,874 in 1998, 1999 and
2000, respectively.
Supplemental Cash Flow Information -- During 1998, 1999 and 2000, the
Company financed machinery purchases of $3,162,000, $2,467,000 and $1,290,000,
respectively, through capital lease obligations.
During 1998, 1999 and 2000, the Company issued approximately $1,534,000,
$76,000 and $60,000, respectively, of preferred stock for services rendered by
several vendors. The expense was recorded at the fair value of services
received.
During 1999, the Company granted 12,000 common stock options to a
consultant. The fair value of these options was determined to be $37,000. The
expense will be recognized over the vesting period.
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:
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1999 2000
------- ---------- -----------
North America................................... $84,000 $4,811,000 $13,913,000
Asia............................................ -- 1,608,000 8,273,000
Europe.......................................... -- 275,000 977,000
------- ---------- -----------
Total Revenues.................................. $84,000 $6,694,000 $23,163,000
======= ========== ===========
39
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
3. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
actual cost on the first-in, first-out method) or market. The amounts below are
net of $3,243,000 and $1,546,000 of obsolescence reserves at December 31, 1999
and 2000, respectively.
DECEMBER 31,
-------------------------
1999 2000
---------- -----------
Raw materials...................................... $7,579,000 $10,133,000
Work in process.................................... 1,036,000 3,354,000
Finished goods..................................... 188,000 636,000
---------- -----------
$8,803,000 $14,123,000
========== ===========
4. INCOME TAXES
Significant components of the Company's deferred income tax assets
(liabilities) and related valuation allowance at December 31, 1999 and 2000 are
as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1999 2000
------------ ------------
Current deferred income tax assets:
Inventory..................................... $ 1,389,000 $ 662,000
Warranty reserve.............................. 1,356,000 2,384,000
Other......................................... 1,033,000 2,810,000
Current deferred income tax liabilities:
State taxes................................... (3,968,000) (4,838,000)
Other......................................... (549,000) (1,863,000)
------------ ------------
Net current deferred income tax asset
(liability)................................... (739,000) (845,000)
------------ ------------
Long-term deferred assets:
Net operating loss carryforwards.............. 43,656,000 56,274,000
Tax credit carryforwards...................... 8,117,000 8,093,000
------------ ------------
Net long-term deferred income tax asset......... 51,773,000 64,367,000
Valuation allowance............................. (51,034,000) (63,522,000)
------------ ------------
Total deferred income tax asset................. $ -- $ --
============ ============
Due to the uncertainty surrounding the realization of the benefits of its
favorable tax attributes in future income tax returns, the Company has placed a
valuation allowance against its deferred income tax assets.
40
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company's net operating loss ("NOL") and tax credit carryforwards for
federal and state income tax purposes at December 31, 2000 are as follows:
EXPIRATION
PERIOD
------------
Federal NOL..................................... $135,857,000 2008 to 2020
State NOL....................................... 114,058,000 2001 to 2005
Federal tax credit carryforwards................ 4,770,000 2008 to 2015
State tax credit carryforwards.................. 3,322,000 2008 to 2015
The net operating losses and tax credits can be carried forward to offset
future taxable income, if any. Utilization of the net operating losses and tax
credits are subject to a $57.6 million annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions.
A reconciliation of income tax benefit to the federal statutory rate
follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000
------------ ------------ ------------
Federal income tax at the statutory
rate................................... $(11,245,000) $(10,040,000) $(10,680,000)
State taxes, net of federal benefit...... (2,017,000) (2,610,000) (2,800,000)
Other.................................... (3,277,000) 190,000 992,000
Valuation allowance...................... 16,539,000 12,460,000 12,488,000
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
5. CAPITAL STRUCTURE
On May 26, 2000, a three-for-five reverse split of the Company's
outstanding common stock became effective. All share and per share amounts in
the accompanying financial statements have been retroactively restated to
reflect this stock split.
In 1999, the Company received $10,834,000 in exchange for promissory notes
associated with the Series G preferred stock from various stockholders. These
notes represent promissory notes to the respective stockholders and bear
interest from the deposit date until stock issuance at 5.54%. Interest expense
associated with these notes was $90,000 and $145,000 for the years ended
December 31, 1999 and 2000, respectively, all of which was payable on the stock
issuance date.
On February 24, 2000, the Company closed the Series G preferred stock
issuance for $4.00 per share in a private placement. Proceeds, net of
origination fees, to the Company approximated $131.1 million, of which $10.8
million was received in 1999. 35,683,979 shares of Series G were issued, which
included 1,250,000 shares issued to an existing stockholder for no cash
consideration (see Note 9) and 58,979 shares issued to holders of promissory
notes for accrued interest. The Series G preferred stock was issued with a
beneficial conversion feature as the fair value of the common stock into which
the preferred stock was convertible exceeded the carrying value. The beneficial
conversion feature was determined to be approximately $89.6 million. This amount
was accounted for as a charge to accumulated deficit and an in-substance
dividend to the preferred stockholders in February 2000 and accordingly
increased the loss applicable to common stockholders. The Company issued 739,577
common stock warrants at a per share exercise price of $0.67 to an investment
banker for services rendered in conjunction with the Series G preferred stock
offering. The fair value of these warrants of $7.6 million was recorded as
origination fees at the time of the Series G issuance.
As part of a stock repurchase and settlement agreement entered into by the
Company in May 2000, the Company reacquired 2,319,129 shares of Series E
preferred stock for $6.68 per share, which was less than the carrying value on
the reacquisition date. The excess carrying value over the reacquisition price
of $2.2 million
41
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
was recorded as additional paid-in capital and included as a component of net
loss attributable to common stockholders during the fiscal year ended December
31, 2000.
On June 28, 2000, the Company entered into an agreement to sell
approximately 10.5 million shares of common stock at an offering price of $16.00
per share through an initial public stock offering. All of the shares issued in
the public offering were sold by the Company. The gross proceeds from the
initial public offering were $167.3 million and the Company incurred $13.7
million in costs in connection with the offering.
Prior to the public offering, the Company had several series of preferred
stock outstanding. It therefore accreted the difference between the redemption
value of each series of preferred stock and the net proceeds received in each
preferred stock offering under the effective interest method from the respective
stock issuance date of each series to the respective redemption date. The
accretion was recorded as a component of net loss attributable to common
stockholders. The Company also recorded the accrual of preferred stock dividends
under the effective interest method.
As a result of the Company's public offering, the total remaining fair
value accretion with respect to its preferred stock of $471.5 million was
recorded as a component of net loss attributable to common stockholders during
the fiscal year ended December 31, 2000. All outstanding shares of the Company's
preferred stock converted into approximately 51.3 million shares of common stock
as a result of the public offering. Of the $821.0 million carrying value of the
preferred stock, $479.6 million was recorded as an increase to accumulated
deficit and $341.3 million was recorded as an increase to additional paid-in
capital, amounts equal to previously recorded accretion charges.
The Company accrued $1.0 million in preferred stock dividends, which were
recorded as a component of net loss attributable to common stockholders during
the fiscal year ended December 31, 2000. $6.7 million in accrued preferred stock
dividends were waived as a result of the automatic conversion of preferred stock
into common stock and were also reversed, which resulted in an increase to
accumulated deficit of $6.3 million and an increase to additional paid-in
capital of $440,000, amounts equal to previously recorded dividend accrual
charges.
On November 16, 2000, the Company entered into an agreement to sell
approximately 5.0 million shares of common stock at an offering price of $30.00
per share through a secondary public stock offering. Of the 5.0 million shares
sold, the Company sold 714,286 shares and existing shareholders sold 4,285,714
shares. The gross proceeds to the Company from the secondary public stock
offering were $21.4 million and the Company incurred approximately $1.8 million
in costs in connection with the offering.
On December 31, 2000, the Company issued 57,294 shares of common stock in
conjunction with its Employee Stock Purchase Plan (see Note 6) and 478 shares of
common stock to employees in consideration for services performed. During the
fiscal year ended December 31, 2000, 9,962,509 shares of common stock were
issued from the exercise of common and preferred stock warrants.
In 1999, the Company granted 8,692,230 common stock warrants at a weighted
average exercise price of $0.36. 8,396,624 warrants at an exercise price of
$0.33 were issued to Series F preferred stock stockholders. The fair value on
the date of grant was approximately $2,645,000, which was recorded as additional
paid-in capital. 90,000 common stock warrants at an exercise price of $0.50 were
granted to two stockholders relating to the Series G financing. The fair value
on the date of grant was approximately $263,000, which was recorded as
additional paid-in capital. 40,606 common stock warrants at an exercise price of
$5.00 were granted to a lessor. The fair value on the date of grant was
approximately $61,000, which was recorded as a prepaid asset and additional
paid-in capital (see Note 9). The prepaid asset is being amortized as rent
expense over the related lease term. The Company also granted 165,000 warrants
at an exercise price of $0.50 to two stockholders relating to the Series G
financing. The fair value of $483,000 was recorded as a liability at December
31, 1999. Upon issuance in January 2000 the fair value was recorded as
additional paid-in capital. The fair values of the common stock warrants were
determined using the Black-Scholes model.
42
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During 1998, prior to the 3-for-5 reverse stock split, the Company issued
170,000 shares of Series A, 53,407 shares of Series B and 80,992 shares of
Series E preferred stock to various common stockholders in a one-for-one
exchange for common stock.
As of December 31, 2000 there were no warrants outstanding for the
Company's stock.
6. STOCK OPTION PLANS
In June 2000, the Company adopted the 2000 Equity Incentive Plan, as a
successor plan to the 1993 Incentive Stock Plan. The 2000 Plan provides for
awards of up to 3,300,000 shares of common stock, plus 493,709 shares previously
authorized and remaining available under the 1993 Plan.
In June 2000, the Company adopted the 2000 Employee Stock Purchase Plan
(the "Purchase Plan"), which provides for the granting of Purchase Rights to
purchase common stock to regular full and part-time employees or officers of the
Company and its subsidiaries. Under the Purchase Plan, shares of common stock
will be issued upon exercise of the Purchase Rights. Under the Purchase Plan, an
aggregate of 900,000 shares may be issued pursuant to the exercise of Purchase
Rights. The maximum amount that an employee can contribute during a Purchase
Right Period is $25,000 or 15% of the employee's regular compensation. Under the
Purchase Plan, the exercise price of a Purchase Right will be the lesser of 85%
of the fair market value of such shares on the first day of the Purchase Right
Period or the last day of the Purchase Right Period. For this purpose, the fair
market value of the stock is its closing price as reported on the Nasdaq Stock
Market on the day in question.
Prior to 1999, the Company issued common stock options at exercise prices
equal to, or greater than, the fair value of its common stock. Accordingly, no
stock-based compensation was recorded for those periods.
During 1999 and 2000, the Company issued common stock options at less than
the fair value of its common stock. Accordingly, the Company recorded employee
stock-based compensation expense of $131,000 and $1,744,000 for the years ended
December 31, 1999 and 2000, respectively. Stock-based compensation expense for
the year ended December 31, 1999 was included in cost of goods sold, research
and development and selling, general, and administrative expenses in the amounts
of $2,000, $24,000 and $105,000, respectively. Stock-based compensation expense
for year ended December 31, 2000 was included in cost of goods sold, research
and development, and selling, general, and administrative expenses in the
amounts of $64,000, $305,000, and $1,375,000, respectively. As of December 31,
2000, the Company had $6.2 million in deferred stock compensation related to
stock options, which will be recognized as stock-based compensation expense
through 2004.
43
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Information relating to the outstanding stock options is as follows:
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Outstanding at January 1, 1998...................... 1,866,720 $0.43
Granted........................................... 1,604,100 1.32
Exercised......................................... (519,250) 0.28
Canceled.......................................... (292,694) 0.55
--------- -----
Outstanding at December 31, 1998.................... 2,658,876 0.98
Granted........................................... 2,952,720 0.37
Exercised......................................... (133,348) 0.30
Canceled.......................................... (387,911) 1.02
--------- -----
Outstanding at December 31, 1999.................... 5,090,337 0.63
Granted........................................... 1,515,600 8.39
Exercised......................................... (892,328) 0.51
Canceled.......................................... (47,512) 3.41
--------- -----
Outstanding at December 31, 2000.................... 5,666,097 $2.61
========= =====
Additional information regarding options outstanding at December 31, 2000,
is as follows:
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
-------------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED WEIGHTED
NUMBER OF SHARES REMAINING AVERAGE EXERCISABLE AT AVERAGE
OUTSTANDING AT CONTRACTUAL LIFE EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES DECEMBER 31, 2000 (IN YEARS) PRICE 2000 PRICE
--------------- ------------------ ---------------- -------- -------------- --------
Less than $1.00........... 3,990,987 7.9 $ 0.55 1,868,795 $ 0.65
$1.01 to $10.00........... 1,361,910 9.0 $ 4.33 112,329 $ 2.50
Greater than $10.00....... 313,200 9.1 $21.46 3,750 $16.00
--------- ---------
5,666,097 8.2 $ 2.61 1,984,874 $ 0.79
========= =========
As of December 31, 2000, 3,480,509 shares were available for future grant.
If the Company recognized employee stock option-related compensation
expense in accordance with SFAS No. 123 and used the minimum value method for
1998 and 1999 and the Black-Scholes method for 2000 for determining the fair
value of options granted, the net loss attributable to common stockholders and
net loss per share -- basic and diluted would have been $35,370,000 and $17.86,
respectively, for the year ended December 31, 1998, $56,739,000 and $24.75,
respectively, for the year ended December 31, 1999 and $594,940,000 and $12.90,
respectively, for the year ended December 31, 2000.
In computing the impact of SFAS No. 123, the weighted-average fair value of
$0.37, $0.45 and $9.12 for 1998, 1999 and 2000 stock option grants,
respectively, was estimated at the dates of grant using the minimum value model
with the following assumptions for 1998, 1999 and 2000: risk-free interest rate
of approximately 5.3, 5.4 and 6.2 percent, respectively, and no assumed dividend
yield. The weighted average expected life of the options was 6, 4, and 4 years
for 1998, 1999 and 2000, respectively. The volatility used for 2000 was 95%.
For purposes of determining the SFAS No. 123 pro forma compensation
expense, the weighted-average fair value of the options is amortized over the
vesting period.
44
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
At December 31, 1999 and 2000, respectively, the Company had equipment
under capital leases with a cost of $7,703,000 and $8,208,000 and accumulated
amortization of $2,276,000 and $3,440,000, respectively. The lease terms range
from three to five years. The deferred gain on sale-leaseback capital lease
obligations was $122,000 and $109,000 as of December 31, 1999 and 2000,
respectively, which is being recognized as an offset to amortization expense
over the useful life of the asset. The related assets collateralize the capital
lease obligations.
The Company leases office, manufacturing and warehouse space under various
non-cancelable operating leases. Rent expense related to these leases amounted
to approximately $819,000, $954,000 and $1,191,000 for the years ended December
31, 1998, 1999 and 2000, respectively.
At December 31, 2000, the Company's commitments under non-cancelable
operating and capital leases were as follows:
2000
-------------------------
OPERATING CAPITAL
YEAR ENDING DECEMBER 31 LEASES LEASES
----------------------- ----------- ----------
2001............................................... $ 1,249,000 $2,143,000
2002............................................... 1,282,000 1,849,000
2003............................................... 1,324,000 1,821,000
2004............................................... 1,363,000 946,000
2005............................................... 1,396,000 --
Thereafter......................................... 7,029,000 --
----------- ----------
Total minimum lease payments............. $13,643,000 6,759,000
=========== ----------
Less amount representing interest.................. 1,263,000
----------
Net present value................................ 5,496,000
Less current portion............................... 1,497,000
----------
Long-term portion.................................. $3,999,000
==========
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 payments. $6.1 million was paid as of December 31, 2000 and the
balance is owed based on various milestones through April 2001. Under the terms
of the Agreements, the Company will acquire fixed assets and manufacturing
technology, which will provide the Company with the ability to manufacture
components previously purchased from the supplier. The Agreements require the
Company to pay a per-unit royalty fee over a seventeen-year period. As a result
of these agreements, the Company and supplier mutually terminated any
obligations under their prior agreements.
The Company also has at December 31, 1999 and 2000, $3,374,000 and
$6,649,000, respectively, of deposits with several companies for machinery and
tooling for future production in the normal course of business, respectively.
In 2000, the Company was awarded a $10 million grant from the United States
Department of Energy to develop an Advanced Microturbine System. The $10 million
grant is to be distributed over a five-year period. The program is estimated to
cost $23.0 million over the five years, which would require the Company to
provide approximately $13.0 million of its own research and development
expenditures.
The Company is involved in various legal proceedings, claims, and
litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such legal proceedings, claims, and litigation will
not have a material adverse affect the Company's financial statements.
45
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution 401(k) profit-sharing plan in
which all employees are eligible to participate. Employees may contribute up to
15 percent of their eligible compensation. Employees are fully vested in their
contributions to the plan. The plan also provides for both Company matching and
discretionary contributions, which are to be determined by the Board of
Directors. No Company contributions have been made to the plan since its
inception.
9. RELATED PARTY TRANSACTIONS
During 1998, the Company was reimbursed $39,000 by a related company for
the use of the Company's office facility as well as for other expenses.
In 1999 and 2000, the Company entered into non-exclusive marketing
agreements with various distributors. These agreements included product purchase
and equity investment commitments in Series G preferred stock on behalf of the
distributors. Sales to these distributors were $1.0 million and $2.0 million in
1999 and 2000, respectively, and deferred revenue amounted to approximately $4.2
million and $2.3 million as of December 31, 1999 and 2000, respectively.
Promissory notes related to Series G preferred stock from these distributors
amounted to $6.2 million as of December 31, 1999.
In 1999, the Company reacquired contractual marketing rights for certain
territories from a shareholder. As part of the agreement, the Company paid $5.0
million in 1999 and $4.0 million in January 2000. In February 2000, the Company
issued 1,250,000 shares of Series G preferred stock with a fair value of $8.3
million as part of the consideration paid to reacquire the marketing rights.
Because the stock issuance was part of the consideration, it was recorded at its
fair value in accordance with SFAS 123. In addition, the agreement for the
repurchase of the marketing rights provided for the acceleration of future
royalty payments in the event of an initial public offering. In July 2000, the
Company paid $11.0 million in royalty payments, consisting of $204,000 in a
previously recorded royalty liability and $10.8 million in an accelerated
royalty liability. As of December 31, 2000, the Company has recorded as an
intangible asset $24.0 million reflecting the $28.0 million repurchase of
marketing rights, net of accumulated amortization of $4.0 million. The marketing
rights are being amortized over the original agreement period of 6 years and the
Company recorded $104,000 and $3.9 million of amortization expense in selling,
general, and administrative expenses for the for the fiscal years ended December
31, 1999 and 2000, respectively.
During 2000, the Company loaned an aggregate of $300,000 to two of its
senior vice presidents. The loans are secured by deeds of trusts and bear
interest at 6.80%. As of December 31, 2000, $300,000 of the principal amounts of
the loans were outstanding, of which $150,000 is due within one year.
During 1999, the Company granted a lessor 40,606 common stock warrants. The
fair value on the date of grant was approximately $61,000, which was recorded as
additional paid-in capital.
* * * * * *
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Capstone had no changes in independent auditors during the fiscal years
ended December 31, 1999 and 2000.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item 10 is incorporated by reference from
Capstone's definitive proxy statement for its 2001 annual meeting of
stockholders, scheduled to be held on May 9, 2001.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 is incorporated by reference from
Capstone's definitive proxy statement for its 2001 annual meeting of
stockholders, scheduled to be held on May 9, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 12 is incorporated by reference from
Capstone's definitive proxy statement for its 2001 annual meeting of
stockholders, scheduled to be held on May 9, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 is incorporated by reference from
Capstone's definitive proxy statement for its 2001 annual meeting of
stockholders, scheduled to be held on May 9, 2001.
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)1. Index to Financial Statements.
PAGE
CAPSTONE TURBINE CORPORATION REFERENCE
---------------------------- ---------
Report of Deloitte & Touche LLP........................... 33
Balance Sheets as of December 31, 2000 and December 31,
1999................................................... 34
Statements of Operations for fiscal years ended December
31, 2000, December 31, 1999 and December 31, 1998...... 35
Statements of Stockholders' (Deficiency) Equity for fiscal
years ended December 31, 2000, December 31, 1999 and
December 31, 1998...................................... 36
Statements of Cash Flows for fiscal years ended December
31, 2000, December 31, 1999 and December 31, 1998...... 37
Notes to Financial Statements............................. 38
(a)2. Financial Statement Schedules.
PAGE
REFERENCE
---------
Report of Deloitte & Touche LLP........................... 51
Schedule II -- Valuation and Qualifying Accounts.......... 52
All other schedules have been omitted since they are either not required or
the information is provided in this Annual Report, including in the financial
statements included herewith.
48
(a)3. Index to Exhibits.
The following exhibits are filed with, or incorporated by reference into,
this Annual Report on Form 10-K:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1(2) Second Amended and Restated Certificate of Incorporation of
Capstone Turbine.
3.2(2) Amended and Restated Bylaws of Capstone Turbine.
4.1(2) Specimen stock certificate.
9.1(2) Investor Rights Agreement.
9.2(2) Amendment No. 1 to Investors Rights Agreement.
9.3(3) Amendment No. 2 to Investors Rights Agreement.
9.4(3) Amendment No. 3 to Investors Rights Agreement.
10.1(2) 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(2) 1993 Incentive Stock Option Plan.
10.3(2) Employee Stock Purchase Plan.
10.4(2) 2000 Equity Incentive Plan.
10.5(4) Transition Agreement, dated August 2, 2000, by and between
Capstone Turbine and Solar Turbines Incorporated.
10.6(4) Amended and Restated License Agreement, dated August 2,
2000, by and between Solar Turbines Incorporated and
Capstone Turbine.
16.1(2) Letter from Ernst & Young regarding change in independent
auditors.
21.1(1) List of Subsidiaries of Registrant.
23.1(1) Consent of Deloitte & Touche LLP.
24.1(1) Power of Attorney (included in the signature page of this
Form 10-K).
- ---------------
(1) Filed herewith.
(2) Incorporated by reference to Capstone Turbine's Registration Statement on
Form S-1 (File No. 333-33024).
(3) Incorporated by reference to Capstone Turbine's Registration Statement on
Form S-1 (File No. 333-48524).
(4) Incorporated by reference to Capstone Turbine's Current Report on Form 8-K
filed on October 16, 2000.
(b) Reports on Form 8-K.
Capstone Turbine filed a Current Report on Form 8-K on October 16, 2000.
49
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on the
30th day of March, 2001.
CAPSTONE TURBINE CORPORATION
By: /s/ JEFFREY WATTS
------------------------------------
Jeffrey Watts
Senior Vice President,
Chief Financial Officer and
Secretary
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Capstone Turbine Corporation, hereby severally constitute Ake
Almgren and Jeffrey Watts, and each of them singly, our true and lawful
attorneys with full power to them, and each of them singly, to sign for us and
in our names in the capacities indicated below, the Form 10-K filed herewith and
any and all amendments to said Form 10-K, and generally to do all such things in
our names and in our capacities as officers and directors to enable Capstone
Turbine Corporation to comply with the provisions of the Securities Exchange Act
of 1934, and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 30th day of March, 2001 by the following
persons on behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ DR. AKE ALMGREN Chief Executive Officer and Director
- -------------------------------------------------------- (Principal Executive Officer)
Dr. Ake Almgren
/s/ JEFFREY WATTS Chief Financial Officer
- -------------------------------------------------------- (Principal Financial and Accounting Officer)
Jeffrey Watts
/s/ RICHARD AUBE Director
- --------------------------------------------------------
Richard Aube
/s/ JOHN JAGGERS Director
- --------------------------------------------------------
John Jaggers
/s/ JEAN-RENE MARCOUX Director
- --------------------------------------------------------
Jean-Rene Marcoux
/s/ BENJAMIN M. ROSEN Director
- --------------------------------------------------------
Benjamin M. Rosen
/s/ ERIC YOUNG Director
- --------------------------------------------------------
Eric Young
50
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Capstone Turbine Corporation:
We have audited the financial statements of Capstone Turbine Corporation as
of December 31, 1999 and 2000, and for each of the three years in the period
ended December 31, 2000, and have issued our report thereon dated February 2,
2001; included elsewhere in this Annual Report on Form 10-K. Our audits also
included the financial statement schedule of Capstone Turbine Corporation listed
in Item 14. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
LOS ANGELES, CALIFORNIA
FEBRUARY 2, 2001
51
SCHEDULE II
CAPSTONE TURBINE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
THREE-YEAR PERIOD ENDED DECEMBER 31, 2000
BALANCE AT ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO FROM AT END
OF YEAR OPERATIONS RESERVE OF YEAR
---------- ---------- ---------- ----------
Allowance for doubtful accounts year
ended:
December 31, 1998....................... $ 10,000 $ 3,000 $ 10,000 $ 3,000
December 31, 1999....................... 3,000 50,000 3,000 50,000
December 31, 2000....................... 50,000 35,000 -- 85,000
Reserve for inventory obsolescence year
ended:
December 31, 1998....................... 4,050,000 681,000 2,194,000 2,537,000
December 31, 1999....................... 2,537,000 1,120,000 414,000 3,243,000
December 31, 2000....................... 3,243,000 407,000 2,104,000 1,546,000
Warranty reserve year ended:
December 31, 1998....................... 928,000 261,000 316,000 873,000
December 31, 1999....................... 873,000 2,643,000 348,000 3,168,000
December 31, 2000....................... 3,168,000 4,569,000 2,148,000 5,589,000
52
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1(2) Second Amended and Restated Certificate of Incorporation of
Capstone Turbine.
3.2(2) Amended and Restated Bylaws of Capstone Turbine.
4.1(2) Specimen stock certificate.
9.1(2) Investor Rights Agreement.
9.2(2) Amendment No. 1 to Investors Rights Agreement.
9.3(3) Amendment No. 2 to Investors Rights Agreement.
9.4(3) Amendment No. 3 to Investors Rights Agreement.
10.1(2) 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(2) 1993 Incentive Stock Option Plan.
10.3(2) Employee Stock Purchase Plan.
10.4(2) 2000 Equity Incentive Plan.
10.5(4) Transition Agreement, dated August 2, 2000, by and between
Capstone Turbine and Solar Turbines Incorporated.
10.6(4) Amended and Restated License Agreement, dated August 2,
2000, by and between Solar Turbines Incorporated and
Capstone Turbine.
16.1(2) Letter from Ernst & Young LLP regarding change in
independent auditors.
21.1(1) List of Subsidiaries of Registrant.
23.1(1) Consent of Deloitte & Touche LLP.
24.1(1) Power of Attorney (included in the signature page of this
Form 10-K).
- ---------------
(1) Filed herewith.
(2) Incorporated by reference to Capstone Turbine's Registration Statement on
Form S-1 (File No. 333-33024).
(3) Incorporated by reference to Capstone Turbine's Registration Statement on
Form S-1 (File No. 333-48524).
(4) Incorporated by reference to Capstone Turbine's Current Report on Form 8-K
filed on October 16, 2000.