UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 001-15957
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)
6430 INDEPENDENCE STREET, WOODLAND HILLS, CALIFORNIA 91367
(Former address)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 74,975,265 shares of
Common Stock, $.001 par value, as of July 31, 2000.
CAPSTONE TURBINE CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements
Balance Sheets as of December 31, 1999 and June 30, 2000..................................... 3
Statements of Operations for the Three-Months Ended June 30, 1999
and June 30, 2000 and for the Six-Months Ended June 30, 1999
and June 30, 2000.......................................................................... 4
Statement of Stockholders' (Deficiency) Equity
for the Six-Months Ended June 30, 2000..................................................... 5
Statements of Cash Flows for the Six-Months Ended June 30, 1999
and June 30, 2000.......................................................................... 6
Notes to Financial Statements................................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview..................................................................................... 10
Three-Months Ended June 30, 2000 Compared to
Three-Months Ended June 30, 1999........................................................... 10
Six-Months Ended June 30, 2000 Compared to
Six-Months Ended June 30, 1999............................................................. 11
Liquidity and Capital Resources.............................................................. 12
Qualitative and Quantitative Disclosures About Market Risk................................... 12
Risk Factors................................................................................. 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 17
Item 2. Changes in Securities and Use of Proceeds.................................................... 17
Item 3. Defaults Upon Senior Securities.............................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 17
Item 5. Other Information............................................................................ 17
Item 6. Exhibits and Reports on Form 8-K............................................................. 17
Signatures ............................................................................................. 18
2
PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CAPSTONE TURBINE CORPORATION
BALANCE SHEETS
December 31, June 30,
1999 2000
------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 6,858,000 $ 99,426,000
Subscription Receivable (Note 6) .......................... 155,564,000
Accounts receivable, net of allowance for
doubtful accounts of $50,000 at December 31, 1999
and $85,000 at June 30, 2000 ............................ 2,425,000 3,482,000
Inventory (Note 5) ........................................ 8,803,000 10,763,000
Prepaid expenses and other current assets ................. 2,217,000 908,000
------------- -------------
Total Current Assets .................................... 20,303,000 270,143,000
------------- -------------
Equipment and Leasehold Improvements:
Machinery, equipment and furniture ........................ 11,824,000 12,799,000
Leasehold improvements .................................... 137,000 137,000
Molds and tooling ......................................... 541,000 678,000
------------- -------------
12,502,000 13,614,000
Less accumulated depreciation and amortization .............. 4,570,000 5,934,000
------------- -------------
Total equipment and leasehold improvements .............. 7,932,000 7,680,000
------------- -------------
Deposits on fixed assets .................................... 3,374,000 4,255,000
Other assets ................................................ 422,000 652,000
Intangible assets, net ...................................... 4,896,000 26,665,000
------------- -------------
Total ................................................. $ 36,927,000 $ 309,395,000
============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Accounts payable .......................................... $ 1,728,000 $ 3,578,000
Accrued liabilities ....................................... 3,017,000 13,982,000
Accrued warranty reserve .................................. 3,168,000 5,572,000
Deferred revenue .......................................... 4,696,000 7,400,000
Current portion of capital lease obligations .............. 1,400,000 1,653,000
------------- -------------
Total current liabilities ............................... 14,009,000 32,185,000
------------- -------------
Non-current Liabilities:
Long-term portion of capital lease obligations ............ 4,499,000 4,802,000
Other long-term liabilities ............................... 37,000
Accrued dividends payable ................................. 6,175,000
------------- -------------
Total non-current liabilities ........................... 10,674,000 4,839,000
------------- -------------
Commitments and Contingencies (Note 8)
Total redeemable preferred stock (Note 6) ................. 156,469,000
------------- -------------
Stockholders' (Deficiency) Equity (Note 6):
Common stock, $.001 par value; 415,000,000 shares
authorized; 2,377,826 and 74,800,305 shares
issued and outstanding at December 31, 1999
and June 30, 2000 respectively .......................... 2,000 74,000
Additional paid in capital ................................ 495,290,000
Accumulated deficit ....................................... (144,227,000) (222,993,000)
------------- -------------
Total stockholders' (deficiency) equity ................. (144,225,000) 272,371,000
------------- -------------
Total ................................................. $ 36,927,000 $ 309,395,000
============= =============
See accompanying notes to financial statements.
3
CAPSTONE TURBINE CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Six
Months Ended Months Ended
June 30, June 30,
------------------------------ -------------------------------
1999 2000 1999 2000
----------- ------------- ------------ -------------
Revenues (Note 3) .......................................... $ 334,000 $ 6,086,000 $ 556,000 $ 9,832,000
Cost of Goods Sold ......................................... 1,347,000 8,256,000 2,580,000 13,380,000
----------- ------------- ------------ -------------
Gross Profit (Loss) ...................................... (1,013,000) (2,170,000) (2,024,000) (3,548,000)
Operating Costs and Expenses:
Research and development ................................. 2,158,000 3,022,000 4,422,000 5,463,000
Selling, general and administrative ...................... 2,568,000 5,677,000 5,070,000 10,061,000
----------- ------------- ------------ -------------
Total operating costs and expenses ..................... 4,726,000 8,699,000 9,492,000 15,524,000
----------- ------------- ------------ -------------
Income (Loss) from Operations .............................. (5,739,000) (10,869,000) (11,516,000) (19,072,000)
Interest Income ............................................ 120,000 1,899,000 217,000 2,622,000
Interest Expense ........................................... (197,000) (200,000) (312,000) (536,000)
Other Income (Expense) ..................................... (9,000) (5,000) 2,000 1,000
----------- ------------- ------------ -------------
Profit (Loss) Before Income Taxes .......................... (5,825,000) (9,175,000) (11,609,000) (16,985,000)
Provision for Income Taxes ................................. 1,000 1,000
----------- ------------- ------------ -------------
Net Income (Loss) .......................................... (5,825,000) (9,175,000) (11,610,000) (16,986,000)
----------- ------------- ------------ -------------
Preferred Stock Dividends, Accretion, and Repurchase ....... (566,000) (419,930,000) (1,120,000) (559,862,000)
----------- ------------- ------------ -------------
Net Loss Attributable to Common Shareholders ............... $(6,391,000) $(429,105,000) $(12,730,000) $(576,848,000)
=========== ============= ============ =============
Weighted Average Common Shares Outstanding ................. 2,287,893 29,973,195 2,235,595 17,011,083
----------- ============= ------------ =============
Net Loss Per Share of Common Stock - Basic and Diluted ..... $ (2.79) $ (14.32) $ (5.69) $ (33.91)
=========== ============= ============ =============
See accompanying notes to financial statements.
4
CAPSTONE TURBINE CORPORATION
STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
Common Stock
------------------------------ Additional
Shares Paid In Accumulated
Outstanding Amount Capital Deficit Total
----------- ------------- ------------- ------------- -------------
Balance, December 31, 1999 ............. 2,377,826 $ 2,000 $ -- $(144,227,000) $(144,225,000)
Common stock warrants granted .......... 8,132,000 8,132,000
Common stock options granted ........... 751,000 751,000
Exercise of common stock options ....... 1,743,275 2,000 374,000 376,000
Exercise of stock warrants ............. 8,912,622 9,000 2,417,000 2,426,000
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 preferred stock .. (1,028,000) (1,028,000)
Beneficial conversion feature
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 51,000 341,296,000 479,645,000 820,992,000
Issuance of common stock ............... 10,454,545 10,000 153,554,000 153,564,000
Net loss ............................... (16,986,000) (16,986,000)
----------- ------------- ------------- ------------- -------------
Balance, June 30, 2000 ................. 74,800,305 $ 74,000 $ 495,290,000 $(222,993,000) $ 272,371,000
=========== ============= ============= ============= =============
See accompanying notes to financial statements.
5
CAPSTONE TURBINE CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six
Months Ended
June 30,
--------------------------------
1999 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $ (11,610,000) $ (16,986,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............................. 1,141,000 2,863,000
Provision for inventory reserve ........................... 407,000
Provision for doubtful accounts ........................... 35,000
Non-employee stock compensation ........................... 9,000 60,000
Employee stock compensation ............................... 26,000 751,000
Changes in operating assets and liabilities:
Accounts receivable ..................................... (687,000) (1,092,000)
Prepaid expenses and other assets ....................... (91,000) 1,079,000
Inventory ............................................... (133,000) (2,367,000)
Accounts payable ........................................ (1,893,000) 1,850,000
Other accrued liabilities ............................... (3,185,000) (713,000)
Accrued warranty reserve ................................ 227,000 2,404,000
Deferred revenue ........................................ 725,000 2,704,000
------------- -------------
Net cash used in operating activities ................. (15,471,000) (9,005,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment and leasehold improvements ........... (652,000) (1,084,000)
Proceeds from sale of equipment ............................... 657,000 1,191,000
Deposits on fixed assets ...................................... 128,000 (881,000)
Intangible assets ............................................. (4,000,000)
------------- -------------
Net cash provided by (used in) investing activities ... 133,000 (4,774,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations ........................ (514,000) (750,000)
Exercise of stock options ..................................... 22,000 376,000
Exercise of common stock warrants ............................. 2,426,000
Exercise of preferred stock warrants .......................... 710,000
Initial public offering costs ................................. (1,286,000)
Net proceeds from issuance of Series F preferred stock ........ 21,817,000
Net proceeds from issuance of Series G preferred stock ........ 120,363,000
Repurchase of preferred stock ................................. (15,492,000)
------------- -------------
Net cash provided by financing activities ............. 21,325,000 106,347,000
------------- -------------
Net Increase in Cash and Cash Equivalents ....................... 5,987,000 92,568,000
Cash and Cash Equivalents, Beginning of Period .................. 4,943,000 6,858,000
------------- -------------
Cash and Cash Equivalents, End of Period ........................ $ 10,930,000 $ 99,426,000
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest .................................................... $ 312,000 $ 390,000
Income taxes ................................................ $ 1,000 $ 1,000
See accompanying notes to financial statements
6
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Business. Capstone Turbine Corporation (the "Company") develops,
manufactures, and markets microturbine generator sets for use in stationary,
vehicular, and other electrical distributed generation applications. The Company
was organized in 1988 and has been commercially producing its microturbine
generator since 1998.
Organization. On June 22, 2000, the Company reincorporated as a Delaware
Corporation. On June 28, 2000, the Company's Registration Statement on Form S-1,
File No. 333-33024, became effective, and the Company entered into an agreement
to sell 10,454,545 shares of common stock in an initial public offering (See
Note 5).
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Regulation S-X
promulgated under the Securities and Exchange Act of 1934. Correspondingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The balance
sheet at December 31, 1999 was derived from audited financial statements
included in the Company's Registration Statement on Form S-1. In the opinion of
management the financial statements include all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of the financial
condition, results of operations and cash flows for such periods. Results of
operations for any interim period are not necessarily indicative of results for
any other interim period or for the full year. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Registration Statement on Form S-1.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Securities and Exchange Commission staff (the "Staff") issued Staff
Accounting Bulletin Number 101 - Revenue Recognition in Financial Statements
("SAB 101") in December 1999. Under the Company's revenue recognition policy,
product revenue is recognized upon shipment of the product to the customer.
There are no rights of return privileges on product sales. Therefore, there was
no impact on the Company's operating results as a result of its adoption of SAB
101.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instrument and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments. It
requires the recognition of all derivatives as either assets or liabilities in
the statement of position and measurement of the instruments at fair value. The
Company is required to adopt SFAS No. 133, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of SFAS No. 133," on January 1, 2001 and is currently evaluating
the impact on the financial statements.
4. SEGMENT REPORTING
The Company has a single operating segment under Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information." The Company's business activities in its operating segment
are the development, manufacture and sale of microturbine generator sets. Set
forth below is a breakdown of the Company's revenues by region:
Three-Months Three-Months Six-Months Six-Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
1999 2000 1999 2000
-------- ---------- -------- ----------
North America .... $272,000 $3,733,000 $469,000 $6,252,000
Asia ............. 62,000 2,236,000 62,000 3,397,000
Europe ........... 117,000 25,000 183,000
-------- ---------- -------- ----------
Total .......... $334,000 $6,086,000 $556,000 $9,832,000
======== ========== ======== ==========
7
5. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
actual cost on the first-in, first-out method) or market value. The amounts
below are net of $3,243,000 and $2,458,000 of obsolescence reserves at December
31, 1999 and June 30, 2000, respectively.
December 31, June 30,
1999 2000
---------- -----------
Raw materials ..................... $7,579,000 $ 8,380,000
Work in process ................... 1,036,000 2,057,000
Finished goods .................... 188,000 326,000
---------- -----------
Total ........................... $8,803,000 $10,763,000
========== ===========
6. CAPITAL STRUCTURE
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 sold in
the offering were sold by the Company. The gross proceeds from the initial
public offering were approximately $167.3 million and the Company estimates it
will incur approximately $13.7 million in costs in connection with the offering.
As the proceeds from the offering were not received until July 5, 2000, the
Company has recorded a subscription receivable, net of underwriters'
commissions, in the amount of $155.6 million as of June 30, 2000.
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 earnings attributable to common
shareholders. The Company also recorded the accrual of preferred stock dividends
under the effective interest method. In February 2000, the Company issued its
Series G preferred stock, which was issued with an $89.6 million beneficial
conversion feature, as the fair value of the common stock into which the
preferred stock was convertible exceeded the carrying value.
As a result of the Company's public offering, the remaining fair value
accretion with respect to its preferred stock of $471.5 million was recorded as
a component of earnings attributable to common shareholders during the
three-month period ended June 30, 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 following
summarizes the Redeemable Preferred Stock as of December 31, 1999:
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) ............ $ 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) ............................... $ 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) .............................. $ 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) ............................... $ 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) .............................. $ 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) ............................ $ 20,903,000
Promissory notes associated
with Series G preferred stock ........................................... $ 10,834,000
------------
Total redeemable preferred stock ...................................... $156,469,000
============
8
The Company accrued $520,000 and $1.0 million in preferred stock
dividends, which were recorded as a component of earnings attributable to common
shareholders during the three-month and six-month periods ended June 30, 2000,
respectively. $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.
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 preferred
stock for $6.68 per share (See Note 8).
8,912,622 shares of common stock were issued from the exercise of common
and preferred stock warrants during the six-month period ended June 30, 2000.
7. STOCK OPTION PLANS
The Company has elected to continue to apply Accounting Principle Board
Opinion ("APB Opinion") No. 25, "Accounting for Stock Issued to Employees," in
its employee stock-based compensation arrangements. Under APB Opinion No. 25,
compensation cost is recognized based on the intrinsic value of the equity
instrument awarded. 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.
During 1999 and the six-months ended June 30, 2000, the Company issued
common stock options at less than the fair value of its common stock.
Accordingly, the Company recorded stock-based compensation expense of $26,000
and $482,000 for the three-month periods ended June 30, 1999 and June 30, 2000,
and $26,000 and $751,000 for the six-month periods ended June 30, 1999 and June
30, 2000, respectively. Stock-based compensation expense for the six-month
period ended June 30, 1999 was included in research and development and selling,
general, and administrative expenses in the amounts of $5,000 and $21,000,
respectively. Stock-based compensation expense for the six-month period ended
June 30, 2000 was included in costs of goods sold, research and development, and
selling, general, and administrative expenses in the amounts of $32,000,
$144,000, and $575,000, respectively. As of June 30, 2000, the Company had $7.3
million in deferred stock compensation related to stock options, which will be
recognized as stock-based compensation expense through 2004 as the amortization
is based on the vesting period.
8. COMMITMENTS AND CONTINGENCIES
In May 2000, the Company entered into a stock repurchase and settlement
agreement with two related shareholders whereby the Company agreed to reacquire
shares of Series E preferred stock and pay a cash settlement. Pursuant to the
agreements, as of June 30, 2000, the Company reacquired 2,319,129 shares at a
per share price of $6.68, which was less than the carrying value on the
reacquisition date. The excess carrying value over the reacquisition price of
$2.2 million was recorded as additional paid-in capital and included as a
component of net earnings attributable to common shareholders during the
three-months ended June 30, 2000. The cash settlement of $700,000 was paid and
the insurance proceeds of $500,000 were collected as of June 30, 2000.
9. RELATED PARTY TRANSACTIONS
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 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. As of June 30, 2000, the Company has
recorded a liability of $10.8 million in addition to a previously recorded
royalty liability of $204,000. The total $11.0 million in royalty liability will
be paid from the proceeds received as part of the Company's initial public
offering. As of June 30, 2000, the Company has recorded as an intangible asset
$26.7 million reflecting the repurchase of the marketing rights, which are being
amortized over the original agreement period of 6 years. The Company recorded
$793,000 and $1.4 million in amortization expense to selling, general, and
administrative expenses for the three-month and six-month periods ended June 30,
2000, respectively, relating to this intangible asset.
9
PART I - FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q and
within Capstone's Registration Statement on Form S-1, File No. 333-33024. 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 "Risk Factors" in
Capstone's Registration Statement on Form S-1, File No. 333-33024 and those
identified at the end of this discussion in this filing. 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 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 and we have focused on
the emerging distributed generation industry that is being driven by fundamental
changes in power requirements. Our strategy to penetrate target markets is based
on business-to-business distribution relationships supported by internal sales
and marketing teams. Toward this goal, we continue to expand our sales and
marketing efforts through new hires and development of support infrastructure.
Our sales efforts remain focused on developing distributor relationships in our
target markets. We are initially focusing on Asia for primarily combined heat
and power applications and North America for resource recovery and hybrid
electric vehicle applications. We have recently targeted our sales efforts to
expand our distributor relationships in the European market.
Our microturbines combine patented air-bearing technology, advanced
combustion technology and sophisticated power electronics to produce an
efficient electricity and heat production system that requires little on-going
maintenance. Our air-bearing technology provides a clean, high-pressure field of
air to lubricate the one moving component of the microturbine rather than using
traditional petroleum products as in conventional bearings. Our microturbines
can operate by remote control and use a broad range of gaseous and liquid fuels,
including previously unusable fuels. Our microturbines can provide scalable
power and this last quarter we succeeded with the first commercial application
designed to allow multiple units to run together. We expect our next model, a
60+ kilowatt system, to be available later this year. We continue to support
significant research and development expenses toward development of this product
and have pre-commercial units under test.
We achieved a number of financial milestones during the second quarter
of 2000. We priced our initial public offering on June 28th, 2000, pursuant to
which we sold 10,454,545 shares at $16 per share, raising over $153.6 million,
net of commissions and expenses. We also completed the acquisition of marketing
rights from a shareholder under a repurchase agreement entered into in 1999. We
also settled an outstanding lawsuit with two shareholders that resulted in the
repurchase of $15.5 million in Series E preferred stock.
As our Company continues to design microturbine-based applications to
satisfy the needs in the growing distributed generation market, we expect our
quarterly performance to fluctuate. 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. We are also a
young company with respect to sales growth and quarter-to-quarter comparisons
between years may not necessarily be meaningful.
THREE-MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE-MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues for the three-months ended June 30, 2000
increased $5.8 million to $6.1 million compared to $334,000 for the three-months
ended June 30, 1999. Unit shipments consisted of our 30 kilowatt
10
product and were for various applications. The increase in revenues is
attributable to our expanding marketing efforts and the developing distributed
generation industry. We intend to maintain our focus on providing power and heat
solutions to customers based on specific, local requirements, which vary
primarily by application and available fuel source.
Gross Profit (Loss). Our gross loss for the three-months ended June 30,
2000 increased $1.2 million to ($2.2) million compared to ($1.0) million for the
three-months ended June 30, 1999. Cost of goods sold includes direct material
costs, assembly and testing, compensation benefits, overhead allocations for
facilities and administration, and warranty reserve charges. Production overhead
is fully charged to cost of goods sold and is expected to decline on a per unit
basis as the fixed costs are allocated over anticipated larger volumes of
production. Costs for replacement parts and systems are charged against our
warranty reserve, which is accrued through charges to costs of goods sold. The
warranty reserve charge increased $1.5 million to $1.7 million for the
three-months ended June 30, 2000 from $202,000 for the three-months ended June
30, 1999 due to an increase in unit shipments. Warranty charges continued to
decline on a per unit basis and we reduced our per unit warranty charge during
the second quarter of fiscal year 2000 based on our actual warranty loss
experience.
Research and Development Expenses. Research and development expenses for
the three-months ended June 30, 2000 increased $864,000, or 40%, to $3.0 million
compared to $2.2 million for the three-months ended June 30, 1999. Research and
development expenses include compensation, engineering department overhead
allocations for administration and facilities, and material costs associated
with development. Research and development expenses related primarily to the
development of our 60+ kilowatt unit and the broadening of our existing product
line for new fuel types and applications. The 60+ kilowatt unit moved from the
design phase into the testing phase. We expect to begin producing commercial
units later this year. In the long-term, we intend to continue to invest
resources for the development of new systems and enhancements and development
expenses may vary if unanticipated expenses are incurred.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses for the three-months ended June 30, 2000 increased $3.1
million, or 121%, to $5.7 million compared to $2.6 million for the three-months
ended June 30, 1999. 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. The Company continues to expand its selling and marketing
efforts through increases in staff headcount and related overhead expenses,
which contributed to most of the increase versus last year during the same
period. We anticipate this trend to continue as we enter into new markets and
develop sales and marketing programs. $482,000 of the increase is attributable
to non-cash, stock-based compensation expense and $793,000 to marketing rights
amortization expense. Both non-cash expenses will increase as full-quarter
expenses are charged in the future. Stock-based compensation expenses will
continue at least through 2004, as the expense is based on the vesting
period of the underlying instruments. Marketing rights amortization expenses
will continue through 2005, as the expense is amortized over the original tenure
of the contract.
Interest and Other Income (Expense). Interest and other income (expense)
for the three-months ended June 30, 2000 increased $1.8 million to $1.7 million
compared to ($86,000) for the three-months ended June 30, 1999. The increase is
primarily attributable to higher interest income from higher average investment
balances due to the funds received from the Series G preferred stock issuance in
February 2000.
SIX-MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX-MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues for the six-months ended June 30, 2000
increased $9.3 million to $9.8 million compared to $556,000 for the six-months
ended June 30, 1999. Unit shipments consisted of our 30 kilowatt product for
various applications. The increase in revenues is attributable to our expanding
marketing efforts. Also, several early customers have now placed repeat orders.
Gross Profit (Loss). Our gross loss for the six-months ended June 30,
2000 increased $1.5 million, or 75%, to ($3.5) million compared to ($2.0)
million for the six-months ended June 30, 1999. Production overhead is fully
charged to cost of goods sold and is expected to decline on a per unit basis as
the fixed costs are allocated over anticipated larger volumes of production.
Costs for replacement parts and systems are charged against our warranty
reserve, which is accrued through charges to costs of goods sold. The warranty
reserve charge increased $2.7 million to $3.1 million for the six-months ended
June 30, 2000 from $374,000 for the six-months ended June 30, 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.
11
Research and Development Expenses. Research and development expenses for
the six-months ended June 30, 2000 increased $1.0 million, or 24%, to $5.5
million compared to $4.4 million for the six-months ended June 30, 2000.
Research and development expenses related primarily to the development of the
60+kilowatt unit and broadening our existing product line for new fuel types and
applications.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses for the six-months ended June 30, 2000 increased $5.0
million, or 98%, to $10.1 million compared to $5.1 million for the six-months
ended June 30, 1999. The primary cause of the increase is additional headcount
and related overhead associated with our growth. $751,000 of the increase is
attributable to non-cash, stock-based compensation expense and $1.4 million to
marketing rights amortization expense. Both non-cash expenses will increase as
full-quarter expenses are charged in the future. Stock-based compensation
expenses will continue at least through 2004, as the expense is based on the
vesting period of the underlying instruments. Marketing rights amortization
expenses will continue through 2005, as the expense is amortized over the
original tenure of the contract.
Interest and Other Income (Expense). Interest and other income (expense)
for the six-months ended June 30, 2000 increased $2.2 million to $2.1 million
compared to ($93,000) for the six-months ended June 30, 1999. The increase is
primarily attributable to higher interest income from higher average investment
balances due to the funds received from the Series G preferred stock issuance in
February 2000.
LIQUIDITY AND CAPITAL RESOURCES
We expect to continue to devote substantial capital resources to the
development of our sales and marketing programs, to expand our production
facilities and staffing, and to expand our research and development activities.
We believe that our cash balances, will be sufficient to meet our anticipated
working capital and capital expenditure requirements through the end of 2001.
Cash flow from operations is likely to remain negative in the foreseeable
future.
Our net cash used by operating activities was ($9.0) million for the
six-months ended June 30, 2000 compared to ($15.5) million for the six-months
ended June 30, 1999. Net cash used in investing activities was ($4.8) million
for the six-months ended June 30, 2000 compared to net cash provided by
investing activities of $133,000 for the six-months ended June 30, 1999.
Investing activities primarily consisted of equipment purchases and the
acquisition of marketing rights.
We have financed our operations and investing activities primarily
through equity issuances. Our net cash provided by financing activities was
$106.3 million for the six-months ended June 30, 2000, compared to $21.3 million
for the six-months ended June 30, 1999. The primary source of cash provided by
financing activities was from the issuance of Series G preferred stock. The cash
provided by financing activities was partially reduced as we reacquired $15.5
million of Series E preferred stock as part of a stock repurchase and settlement
agreement.
We also priced our initial public offering on June 28th, 2000 and
recorded a subscription receivable of $155.6 million, which represents the sale
of 10,454,545 shares at $16 per share, net of underwriters' commissions. The
proceeds were collected on July 5th, 2000 and are invested in U.S. Government
securities.
During the six-months ended June 30, 2000, we sold and leased back under
long-term capital lease obligations $1.2 million in equipment. We also paid
$750,000 under long-term capital lease obligations during the six-months ended
June 30, 2000.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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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
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instrument and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments. It
requires the recognition of all derivatives as either assets or liabilities in
the statement of position and measurement of the instruments at fair value. We
are required to adopt SFAS No. 133, as amended by Financial Accounting Standards
Board Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS No. 133") on January 1,
2001 and we are currently evaluating the impact on the financial statements.
13
RISK FACTORS
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 $17.0 million for the six-months ended June 30, 2000. We anticipate
incurring additional net losses through at least 2001. We have only been
commercially producing the Capstone Microturbine 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.
IF WE ARE UNABLE TO OBTAIN RECUPERATOR CORES FROM SOLAR TURBINE CORPORATION, OUR
SOLE SUPPLIER, OUR ASSEMBLY AND PRODUCTION OF MICROTURBINES MAY SUFFER DELAYS
AND INTERRUPTIONS.
Solar Turbine Corporation is our sole supplier of recuperator cores,
which are heat exchangers that preheat incoming air before it enters the
combustion chamber. Solar is a wholly-owned subsidiary of one of our
competitors, Caterpillar Corporation. At present we are not aware of any other
suppliers, which could produce these cores to our specifications within our time
requirements. We cannot assure you that Solar will be able to furnish us with a
sufficient number of recuperator cores to meet customer demand, that we will be
able to purchase recuperator cores from Solar at commercially acceptable prices
or, if Solar stops making recuperator cores, that we will be able to procure
recuperator cores from another supplier or manufacture them ourselves on a
timely basis and at commercially acceptable prices. Although we have a license
agreement that would permit us to produce the recuperator cores on our own in
the event Solar terminates production, we would not be able to initiate
production without significant delay and interruptions. 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 target availability levels. We recorded a warranty reserve charge of
$3.1 million or 31% of revenue for the six-months ended June 30, 2000. 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.
IF WE DO NOT EFFECTIVELY IMPLEMENT OUR SALES AND MARKETING EXPANSION PROGRAM,
OUR SALES WILL NOT GROW AND OUR PROFITABILITY WILL SUFFER.
We need to increase our internal sales and marketing staff in order to
enhance our sales efforts. We cannot assure you that the expense of such
internal expansion will not exceed the net revenues generated, or that our sales
and marketing team will successfully compete against the more extensive and
well-funded sales and marketing operations of our current and future
competitors. In addition, to grow our sales, we have begun to hire new
management team members to provide more sales and marketing expertise. Since
these management team members will not have a proven track record with us, we
cannot assure you that they will be successful in overseeing their functional
areas. Our inability to recruit, or our loss of, important sales and marketing
personnel, or the inability of new sales personnel to effectively sell and
market our microturbine system could materially adversely affect our business
and results of operations.
14
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.
THE 60+ KILOWATT CAPSTONE MICROTURBINE MAY BE DELAYED, IT MAY BE POORLY SUITED
TO THE MARKET, OR IT MAY ERODE SALES OF OUR 30 KILOWATT UNIT.
The timely and successful launch of our next generation 60+ kilowatt
microturbine is very important to our strategy for further penetrating markets.
Factors that could delay or hinder the successful launch of our 60+ kilowatt
microturbine include:
- research or development problems;
- difficulties in adjusting the current production assembly system
to produce and assemble the 60+ kilowatt unit; or
- an unstable supply or unsatisfactory quality of components from
vendors.
We cannot guarantee you that demand for our 60+ kilowatt unit will exist
and not diminish or cease at the time we are prepared to commercially produce
the 60+ kilowatt unit. It is also possible that production of the 60+ kilowatt
unit could replace or diminish the market for our 30 kilowatt unit.
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 that our management will be able to effectively
manage this growth.
WE MAY NOT EFFECTIVELY EXPAND OUR PRODUCTION CAPABILITIES, WHICH WOULD
NEGATIVELY IMPACT OUR SALES.
We anticipate a significant increase in our business operations, which
will require expansion of our internal and external production capabilities. We
may experience delays or problems in our expected production expansion that
could significantly impact our business. Several factors could delay or prevent
our expected production expansion, including our:
- inability to purchase parts or components in adequate quantities
or sufficient quality;
- failure to increase our assembly and test operations;
- failure to hire and train additional personnel;
- failure to develop and implement manufacturing processes and
equipment;
- inability to find and train proper partner companies in other
countries with whom we can build product distribution,
marketing, or development relationships; and
- inability to acquire new space for additional production
capacity.
15
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. We may experience
delays in production of our Capstone Microturbine if we fail to identify
alternate 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 RELOCATION INTO NEW FACILITIES COULD DISRUPT OUR OPERATIONS, WHICH COULD
NEGATIVELY IMPACT OUR SALES.
We plan to relocate our corporate headquarters, sales, marketing and
distribution centers and manufacturing facility beginning in the third quarter
of 2000. This transition could disrupt our sales efforts and the manufacturing
and distribution of our products, particularly if there are unforeseen delays or
interruptions in our transition process. Any disruption in our ability to sell,
produce or distribute our products could impede our business operations,
resulting in reduced profitability.
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 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 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.
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. Any litigation could be costly, divert management
attention or result in increased costs of doing business.
16
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings:
In May 2000, the Company entered into a stock repurchase and settlement
agreement with two related shareholders whereby the Company agreed to
reacquire shares of Series E preferred stock and pay a cash settlement.
Pursuant to the agreements, as of June 30, 2000, the Company reacquired
2,319,129 shares at a per share price of $6.68. The cash settlement of
$700,000 was paid and the insurance proceeds of $500,000 were collected
as of June 30, 2000.
Item 2. Changes in Securities and Use of Proceeds:
Upon the closing date of the Company's initial public offering, all
76,215,243 shares of preferred stock outstanding (Series A through G)
were converted at various rates into 51,312,037 shares of common stock.
The result of such conversion caused the preferred stockholders to waive
their rights to $6.7 million in accrued preferred stock dividends.
On June 28, 2000 the Commission declared effective the Company's
Registration Statement (Registration Statement No. 333-33024) as filed
with the Commission in connection with the Company's initial public
offering of Common Stock, which was managed by Goldman, Sachs & Co.,
Merrill Lynch & Co., and Morgan Stanley Dean Witter. Pursuant to such
Registration Statement, on July 5, 2000 the Company consummated the
issuance and sale of an aggregate of 10,454,545 shares of its Common
Stock, for a gross aggregate offering price of $167.3 million. The
Company incurred underwriting commissions of approximately $11.7
million. In connection with such offering, the Company expects to incur
total expenses of approximately $2.0 million. As of June 30, 2000,
proceeds, net of underwriters' commissions, were recorded as a
subscription receivable.
Item 3. Defaults Upon Senior Securities.............................. None
Item 4. Submission of Matters to a Vote of Security Holders.......... None
Item 5. Other Information............................................ None
Item 6. Exhibits and Reports on Form 8-K:
Exhibit 27.1 - Financial Data Schedule.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAPSTONE TURBINE CORPORATION
Date: August 4, 2000 By: /s/ Jeffrey Watts
-------------------------------------
Jeffrey Watts,
Senior Vice President Finance and
Administration and
Chief Financial Officer
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