<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 2000
REGISTRATION STATEMENT NO. 333-33024
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CAPSTONE TURBINE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 3629 95-4180883
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
6430 INDEPENDENCE
WOODLAND HILLS, CALIFORNIA 91367
(818) 716-2929
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
DR. AKE ALMGREN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAPSTONE TURBINE CORPORATION
6430 INDEPENDENCE
WOODLAND HILLS, CALIFORNIA 91367
(818) 716-2929
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
BRIAN CARTWRIGHT ROBERT E. BUCKHOLZ, JR.
LATHAM & WATKINS SULLIVAN & CROMWELL
633 WEST 5TH STREET, SUITE 4000 125 BROAD STREET
LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10004
(213) 485-1234 (212) 558-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES
IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED.
<TABLE>
<S> <C> <C>
[CAPSTONE LOGO] SUBJECT TO COMPLETION. DATED JUNE 12, 2000.
9,090,909 Shares
CAPSTONE TURBINE CORPORATION
Common Stock
</TABLE>
----------------------
This is an initial public offering of shares of common stock of Capstone
Turbine Corporation. All of the 9,090,909 shares of common stock are being sold
by Capstone.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $10.00 and $12.00. Application has been made for quotation
of the common stock on the Nasdaq National Market under the symbol "CPST".
See "Risk Factors" beginning on page 6 to read about factors you should
consider before buying shares of the common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Capstone...................... $ $
</TABLE>
To the extent that the underwriters sell more than 9,090,909 shares of
common stock, the underwriters have the option to purchase up to an additional
1,363,636 shares from Capstone at the initial public offering price less the
underwriting discount.
----------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
----------------------
Prospectus dated , 2000.
<PAGE> 3
<TABLE>
<S> <C>
RESOURCE RECOVERY
DENVER, CO.
</TABLE>
<TABLE>
<S> <C>
BACKUP POWER
WOODLAND HILLS, CA
</TABLE>
<TABLE>
<S> <C>
HYBRID ELECTRIC BUS
TEMPE, AZ
</TABLE>
<PAGE> 4
PROSPECTUS SUMMARY
The following summarizes information in other sections of our prospectus,
including our financial statements, the notes to those financial statements and
the other financial information appearing elsewhere in this prospectus. You
should read the entire prospectus carefully.
CAPSTONE TURBINE CORPORATION
CAPSTONE
We develop, design, assemble and sell Capstone(TM)MicroTurbines. Capstone
MicroTurbines are marketable worldwide in the multibillion dollar market for
distributed power generation. Capstone 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 are the first company to sell a proven, commercially available
power source using microturbine technology. The Capstone MicroTurbine combines
sophisticated design, engineering and technology to produce a reliable and
flexible generator of electricity and heat for commercial and industrial
applications and is a result of over ten years of research and development. 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.
PRODUCT
The Capstone MicroTurbine is a compact, environmentally friendly generator
of electricity and heat. Our state-of-the-art microturbines combine patented
air-bearing technology, advanced combustion technology and sophisticated power
electronics to produce an efficient and reliable 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 are easily transportable and designed to allow multiple
units to run together to meet an end user's specific electrical and heat
requirements.
We also have applied our technology to hybrid electric vehicles such as
buses and industrial use vehicles. Buses using Capstone MicroTurbines have
demonstrated greater range, less maintenance and lower cost than other low
emission buses. Our microturbines have been in commercial use in buses since
July 1999 and are currently being used in buses operating in Los Angeles,
Atlanta, Nashville and Tempe.
We currently sell a system which produces approximately 30 kilowatts of
electricity. We expect our next model, a 60+ kilowatt system, to be available by
the third quarter of 2000. Our 30 kilowatt unit provides power sufficient to
operate a typical convenience store. A typical fast food restaurant requires
approximately 90 kilowatts of power and could be powered by three of our 30
kilowatt units.
TARGET MARKETS
The fundamental need for power, along with global deregulation of the
electric power industry, an increasing need for better power quality and
reliability and significant advances in power technology, are creating many new
opportunities for Capstone MicroTurbine systems.
STATIONARY
We believe the stationary applications for our microturbines are extremely
broad, either on a stand-alone basis or connected to the electric utility grid,
because of our microturbines' ability to adapt to fuels, load variations, and
various climates while operating in an environmentally friendly manner. We have
initially targeted markets which we believe will identify and employ our product
1
<PAGE> 5
attributes quickly. As levels of acceptance and volumes increase, we expect to
enter larger, more diverse markets. Our initial target markets include:
- Resource Recovery
Oil and gas production creates fuel byproducts that traditionally have
been released or burned into the atmosphere. Capstone MicroTurbines can
burn these otherwise wasted gases, including gas with high sulfur
content, with minimal emissions and produce on-site electricity for these
activities. Our microturbines can also burn gas released from landfills
and gas produced from sludge digestion.
- Combined Heat and Power
Using both the heat and electricity from the combustion of fuel improves
the overall efficiency of the generation process and can provide a
comprehensive solution to a customer's energy needs. Uses for the heat
include space heating, air conditioning and heating and cooling water. We
have identified the Japanese market as the most receptive for these
applications in the near term.
- Backup and Standby/Peak Shaving
Many commercial and small industrial customers in developed countries
could reduce their electricity costs and/or improve their quality and
reliability of electric power supply by installing a Capstone
MicroTurbine to meet some or all of their needs as a backup power source.
Utilities could install Capstone MicroTurbines at the end of the electric
utility grid to avoid building costly power lines. In addition, end users
also can use our microturbines to avoid temporary spikes in power prices
by producing their own power during periods when power demand and power
costs are high, known in the industry as peak shaving.
- Developing Regions
Much of the world's population does not have access to electric power.
Our microturbine can be a primary, stand-alone power source which burns
the gas or liquid fuel of choice.
HYBRID ELECTRIC VEHICLES
We believe that the hybrid electric vehicle market currently represents a
significant opportunity and will expand as governments and consumers demand
cost-efficient, reliable and environmentally friendly vehicles, particularly in
urban areas.
OUR STRATEGY
Our objective is to maintain our position as a leading worldwide developer
and supplier of microturbine technology for the stationary power generation and
hybrid electric vehicle markets. Key elements of our strategy include the
following:
- We believe the most effective way to penetrate our target markets is with
a business-to-business distribution strategy. We are forging alliances
with key distribution partners worldwide.
- We are currently developing a 60+ kilowatt microturbine system for
expected commercial shipments in the third quarter of 2000. We intend to
develop a family of microturbines with power outputs of up to 125+
kilowatts. We also intend to continue our research and development
efforts to enhance our current products.
2
<PAGE> 6
- We believe that a policy of actively protecting our patents and other
intellectual property is an important component of our strategy to remain
the leader in microturbine technology and will provide us a long-term
competitive advantage.
- We expect our unit production costs and prices to decline substantially
as volumes increase. Our strategy is to use low cost materials and to
outsource all non-proprietary hardware and electronics to achieve high
volume, low cost production targets. We are pursuing a "tier one" supply
strategy whereby vendors are responsible for the supply of complete
subassemblies made up of parts purchased from other vendors. We will
retain manufacturing control over our proprietary air-bearing and
combustion components.
OUR EXISTING SHAREHOLDER BASE AND STRONG MANAGEMENT TEAM
Prior to this offering, we have raised over $260 million of private equity.
Through our investor base we have access to extensive knowledge and experience
in the electric utility and gas utility industries and to engineering expertise
in developing various applications throughout the world.
Led by Dr. Ake Almgren, we have a strong management team in place with
significant industry experience covering all principal functional areas.
3
<PAGE> 7
THE OFFERING
Shares offered by us...................... 9,090,909 shares
Common stock to be outstanding after this
offering.................................. 73,262,712 shares
Use of proceeds........................... We plan to use the proceeds for
purchasing tooling and
manufacturing equipment, expanding
sales and marketing activities,
continuing product development,
payment to Fletcher Challenge
Limited as part of a buyback of
marketing rights, and for general
corporate purposes, including
research and product development,
manufacturing and market
development, capital expenditures
and potential acquisitions. See
"Use of Proceeds".
Proposed Nasdaq National Market symbol.... CPST
The number of shares of our common stock that will be outstanding after
this offering:
- includes 9,539,881 shares outstanding as of May 31, 2000, plus 51,309,769
shares of common stock to be issued upon the conversion of preferred
stock into common stock, plus 3,322,153 shares to be issued for warrants
exercised on a cashless basis at the time of this offering at a weighted
average exercise price of $0.76 per share and assuming an offering price
of $11.00 per share, plus 9,090,909 shares of common stock to be issued
in this offering; and
- excludes up to 1,363,636 shares of common stock issuable upon exercise of
the overallotment option granted to the underwriters and up to 9,330,808
shares of common stock either underlying options granted or available for
issue under our stock option plans and 900,000 shares reserved for
issuance under our employee stock purchase plans.
Unless otherwise indicated, all information in this prospectus:
- assumes the underwriters option to purchase additional shares in the
offering will not be exercised; and
- gives effect to the conversion of all outstanding shares of preferred
stock into shares of common stock.
----------------------
We were incorporated in California in 1988. We intend to reincorporate in
Delaware prior to the completion of this offering. Our principal executive
offices are located at 6430 Independence, Woodland Hills, California 91367. Our
telephone number at that location is (818) 716-2929. Our internet address is
www.capstoneturbine.com. This internet address is provided for informational
purposes only and is not intended to be useable as a hyperlink. The information
at this internet address is not a part of this prospectus.
The name Capstone and the Turbine Blade logo are trademarks that belong to
us. This prospectus also contains the names of other entities which are the
property of their respective owners.
4
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, ---------------------
----------------------------------------------------- MARCH 31, MARCH 31,
1995 1996 1997 1998 1999 1999 2000*
-------- -------- -------- -------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Total revenues.................. $ 920 $ 1,462 $ 1,623 $ 84 $ 6,694 $ 222 $ 3,746
Cost of goods sold.............. 199 2,179 8,147 5,335 15,629 1,233 5,124
-------- -------- -------- -------- --------- -------- ---------
Gross profit (loss)........... 721 (717) (6,524) (5,251) (8,935) (1,011) (1,378)
Operating costs and expenses:
Research and development...... 4,796 8,599 13,281 19,019 9,151 2,264 2,441
Selling, general and
administrative.............. 1,878 3,585 10,946 10,257 11,191 2,502 4,384
-------- -------- -------- -------- --------- -------- ---------
Income (loss) from
operations.................. (5,953) (12,901) (30,751) (34,527) (29,277) (5,777) (8,203)
Net income (loss)........... $ (5,957) $(12,595) $(30,553) $(33,073) $ (29,530) $ (5,785) $ (7,811)
======== ======== ======== ======== ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
QUARTER END
YEAR END DECEMBER 31, ---------------------
----------------------------------------------------- MARCH 31, MARCH 31,
1995 1996 1997 1998 1999 1999 2000*
-------- -------- -------- -------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 525 $ 1,464 $ 44,563 $ 4,943 $ 6,858 $ 8,539 $ 122,381
Working capital................. 255 1,773 41,431 6,919 6,294 14,120 117,400
Total assets.................... 1,351 6,820 56,989 25,770 36,927 29,535 165,765
Capital lease obligations....... -- 846 1,885 4,449 5,899 4,542 6,458
Long term debt.................. -- -- -- -- -- -- --
Redeemable preferred stock...... 11,242 25,975 99,720 101,624 156,469 115,129 416,407
Stockholders'
(deficiency)/equity........... (11,371) (24,176) (56,057) (91,151) (144,225) (96,104) (282,485)
Total liabilities and
stockholders' equity.......... $ 1,351 $ 6,820 $ 56,989 $ 25,770 $ 36,927 $ 29,535 $ 165,765
</TABLE>
---------------
* As restated -- See Note 13 to the financial statements.
5
<PAGE> 9
RISK FACTORS
You should carefully consider the following risks and all other information
in this prospectus before deciding to invest in our common stock.
RISKS RELATING TO OUR 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 $7.8 million for the first quarter ended March 31, 2000. We anticipate
incurring additional net losses through at least 2001. Since inception through
March 31, 2000, we have recorded cumulative losses of $124.2 million. 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.
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 microturbine;
- 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 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.
6
<PAGE> 10
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 $1.4 million or
37% of revenue for the quarter ended March 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 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.
7
<PAGE> 11
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.
IF JAPANESE COMPETITORS DEVELOP ALTERNATIVE TECHNOLOGY OR CEASE TO PURCHASE OUR
PRODUCTS, OUR SALES MAY DECLINE
We believe that the greatest competitive threat we face in the long term
will most likely arise from Japanese competitors, many of which have unique
design capabilities for advanced combined heat and power units. Over time, these
competitors may include our current Japanese partners. Our Japanese partners may
pursue alternative technologies or develop alternative products in addition to
or in lieu of our products either on their own or in collaboration with others.
They may develop products or components better suited for integration with their
own systems than our products. They possess an advantage in marketing to
potential purchasers or distributors in the Pacific Rim, a prime market for
various applications of the Capstone MicroTurbine. If we are not able to achieve
our expected penetration and growth in Japan and Asia, our sales, operations and
business may be materially adversely affected.
WE DO NOT HAVE EXPERIENCE IN INTERNATIONAL SALES AND MAY NOT SUCCEED IN GROWING
OUR INTERNATIONAL SALES
We do not have 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;
- fluctuations in currency exchange rates;
8
<PAGE> 12
- political and economic instability; and
- difficulties in enforcement of intellectual property rights.
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 which 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 BE UNABLE TO FUND OUR FUTURE OPERATING REQUIREMENTS, WHICH COULD FORCE US
TO CURTAIL OUR OPERATIONS
We are a capital intensive company and will need additional financing to
fund our operations. We averaged approximately $2.1 million per month of cash
outflows in 1999, and we expect these expenses to continue at present levels or
increase in the future. As of March 31, 2000, we had approximately $122.4
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 generated by this offering 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 shareholders.
Downturns in worldwide capital markets may also impede our ability to raise
additional capital on favorable terms or at all. If adequate capital is 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 that our management will be able to effectively
manage this growth.
9
<PAGE> 13
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.
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 low cost design
enhancements, obtaining necessary tooling and favorable vendor contracts, as
well as increasing 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. 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 CASH FLOW
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
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<PAGE> 14
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.
WE FACE POTENTIAL SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS, WHICH COULD
IMPACT STOCK PRICES
A number of factors could affect our operating results and thereby impact
our stock prices, 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;
- 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. Any litigation could be costly, divert management attention or result
in increased costs of doing business. As an example, two related shareholders
asserted various fraud or misrepresentation claims against us and some of our
present and former officers and directors arising out of representations which
the shareholders alleged that we made in connection with our 1997 offering of
Series E Preferred Stock. On May 3, 2000, we entered into a confidential
settlement agreement with these shareholders pursuant to which we paid a
$700,000 cash settlement. In addition pursuant to an agreement dated May 4,
2000, we have repurchased 92.8% of their stock or 2,319,129 shares of Series E
Preferred Stock at a price per share of $6.68. The remaining 180,871 shares were
purchased by other parties at a price per share of $6.68. Although we intend to
vigorously defend any future lawsuits, we cannot assure you that we would
ultimately be successful. 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.
WE MAY BE EXPOSED TO PRODUCT LIABILITY OR OTHER TORT CLAIMS IF OUR PRODUCTS
FAIL, WHICH COULD SUBJECT US TO LIABILITY AND ADVERSELY IMPACT OUR RESULTS OF
OPERATIONS
Potential customers will rely upon our products for critical energy needs.
A malfunction or the inadequate design of our products could result in product
liability or other tort claims. Our
11
<PAGE> 15
microturbines run at high speeds and high temperatures and use flammable fuels
that are inherently dangerous substances. Accidents involving our products could
lead to personal injury or physical damage. Although we attempt to reduce the
risk of these types of losses through liability limitation clauses in our
agreements, we cannot assure you that our efforts will effectively limit our
liability. Any liability for damages resulting from malfunctions could be
substantial and could materially adversely affect our business and results of
operations. In addition, a well-publicized actual or perceived problem could
adversely affect the market's perception of our products. This could result in a
decline in demand for our products, which would materially adversely affect our
financial condition and results of operations.
RISKS RELATING TO OUR INDUSTRY
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 (Allied Signal), NREC
(Ingersoll Rand), and Elliot/General Electric are domestically based competitors
of Capstone who we believe have microturbines in various stages of development.
We believe Honeywell (AlliedSignal) began to ship production microturbine units
in March of 2000. In addition to these domestic microturbine competitors,
Volvo-ABB have a joint venture in Europe to develop a microturbine. A number of
other major automotive and industrial companies have in-house microturbine
development efforts, including Toyota, Mitsubishi Heavy Industries, Turbo Genset
and Williams International. We believe that all of these companies will
eventually have products which will compete with our family of microturbines.
Some of our competitors are currently developing and testing microturbines which
they expect to produce greater amounts of power than the Capstone MicroTurbine,
ranging from 75 kilowatts up to 350 kilowatts, and which may have longer useful
lives than the Capstone MicroTurbine. Our Capstone MicroTurbine also competes
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 in part by Caterpillar,
Detroit Diesel and Cummins. 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;
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<PAGE> 16
- 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;
- 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.
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 May 31, 2000, we possessed 27 United States
patents and two international patents and 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
and Solar Turbine Corporation 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
13
<PAGE> 17
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, to
determine the validity and scope of proprietary rights of others. For example,
in 1997, we were involved in a dispute with Honeywell (Allied Signal) 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.
RISKS RELATING TO THIS OFFERING
A LARGE NUMBER OF SHARES OF OUR COMMON STOCK WILL BECOME AVAILABLE FOR SALE IN
THE FUTURE, WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
The market price of our common stock could decline as a result of sales of
a large number of shares in the market after this offering or the perception
that these sales could occur. These factors also could make it more difficult
for us to raise funds through future offerings of our common stock.
There will be 73,262,712 shares of common stock outstanding immediately
after this offering. Of these shares, the shares sold by us in this offering
will be freely transferable without restriction or further registration under
the Securities Act of 1933, except for any shares purchased by our affiliates,
sales of which will be limited by Rule 144 under Securities Act. Holders of
restricted shares generally will be entitled to sell these shares in the public
market without registration either under Rule 144 or any other applicable
exemption under the Securities Act. The holders of 52,171,147 shares of common
stock have agreed not to sell those securities for 180 days after the date of
this prospectus without the prior written consent of Goldman, Sachs & Co.
Goldman Sachs may, however, in its sole discretion, release all or any portion
of the securities subject to those lock-up agreements.
Immediately after this offering the holders of approximately 55.1 million
shares of common stock, all of which must comply with the lock-up agreements
described above, have registration rights. If they exercise those rights, shares
covered by a registration statement can be sold in the public market. We also
intend to register shares of common stock that we have issued or may issue under
our benefit plans or pursuant to option agreements. After that registration
statement is effective, shares issued upon exercise of stock options to persons
other than affiliates will be eligible for resale in the public market without
restriction, which could adversely affect our stock price. Absent registration,
those shares could nevertheless be sold, subject to limitations on the manner of
sale. Sales by affiliates could also occur, subject to limitations, under Rule
144 of the Securities Act.
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<PAGE> 18
THERE IS NO ESTABLISHED TRADING MARKET FOR OUR COMMON STOCK, AND THE MARKET
PRICE OF OUR COMMON STOCK MAY BE HIGHLY VOLATILE OR MAY DECLINE REGARDLESS OF
OUR OPERATING PERFORMANCE
There has not been a public market for our common stock. We cannot predict
the extent to which a trading market will develop or how liquid that market
might become. If you purchase shares of common stock in this offering, you will
pay a price that was not established in the public trading markets. The initial
public offering price will be determined by negotiations between the
underwriters and us. You may not be able to resell your shares at or above the
initial public offering price and may suffer a loss on your investment.
The market price of our common stock is likely to be highly volatile.
Factors that could cause fluctuation in the 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;
- 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 SHAREHOLDERS OWN A SIGNIFICANT PERCENTAGE OUR COMMON
STOCK, THEY MAY CONTROL ALL MAJOR CORPORATE DECISIONS AND OUR OTHER SHAREHOLDERS
MAY NOT BE ABLE TO INFLUENCE THESE CORPORATE DECISIONS
Following this offering, our nine executive officers and directors will
beneficially own approximately 32% of our outstanding common stock. In addition,
three other investors will beneficially own approximately 19% of our outstanding
capital stock after this offering. If these parties act together, they can elect
all directors and approve actions requiring the approval of a majority of our
shareholders. The interests of our management or these investors could conflict
with the interests of our other shareholders.
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<PAGE> 19
FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary", "Risk
Factors", "Use of Proceeds", "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Business" and elsewhere in this
prospectus that are forward-looking statements. You can identify these
statements by forward-looking words such as "may", "will", "expect",
"anticipate", "believe", "estimate" and "continue" or similar words.
Forward-looking statements may also use difference phrases. Forward-looking
statements address, among other things:
- our future expectations;
- projections of our future results of operations or of our financial
condition; and
- other "forward looking" information.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or which we do not fully control that could cause actual
results to differ materially from those expressed or implied by our
forward-looking statements, including:
- changes in general economic and business conditions and in the technology
industry in particular;
- changes in our business strategies;
- product development delays;
- future levels of government funding; and
- other factors discussed under "Risk Factors" and elsewhere.
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<PAGE> 20
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of 9,090,909 shares
of our common stock in this offering will be $91.0 million, at an assumed
initial public offering price of $11.00 per share, after deducting the estimated
underwriting discounts and commissions and our estimated offering expenses. We
estimate that our total net proceeds of $91.0 million will be used as follows:
- approximately $22.0 million will be used for purchasing tooling and
manufacturing equipment;
- approximately $18.0 million will be used for expanding sales and
marketing activities;
- approximately $30.0 million will be used for continuing product
development efforts;
- approximately $11.0 million will be paid to Fletcher Challenge Limited as
part of a buyback of marketing rights;
- approximately $10.0 million will be used for general corporate purposes,
which may include working capital, funds for operations, research and
product development, market development, capital expenditures and
potential acquisitions.
Pending their use, we will invest these proceeds in short-term
government-backed securities. We do not currently have any planned material
acquisitions. Although we currently intend to use the proceeds as set forth
above, management has broad discretion to vary the uses as it deems fit.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We
currently intend to retain our future earnings, if any, to finance the expansion
of our business and do not expect to pay any dividends.
Payment of future cash dividends, if any, will be at the discretion of our
board of directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs and
plans for expansion.
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<PAGE> 21
CAPITALIZATION
The following table sets forth our actual, pro forma, and pro forma as
adjusted total capitalization at March 31, 2000.
Our pro forma capitalization gives effect to:
- the conversion of all outstanding shares of preferred stock at various
conversion rates into 53,242,830 shares of common stock upon the
consummation of this offering; and
- the waiver of accrued preferred stock dividends.
Our pro forma, as adjusted capitalization gives effect to:
- the issuance and sale of the 9,090,909 shares of common stock offered by
us in this offering; and
- the application of the estimated net proceeds from the sale of our common
stock payable to us based on an initial public offering price of $11.00
per share and after deducting underwriting fees and estimated offering
expenses.
<TABLE>
<CAPTION>
MARCH 31, 2000*
---------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(in thousands, unaudited)
<S> <C> <C> <C>
Current liabilities......................................... $ 18,702 $ 18,702 $ 18,702
Capitalized lease obligations............................... 6,458 6,458 6,458
Long-term debt.............................................. 0 0 0
Accrued preferred stock dividends........................... 6,683 0 0
Redeemable preferred stock,................................. 416,407 0 0
Stockholders' (deficiency)/equity:
Common stock.............................................. 5 58 67
Additional paid-in capital................................ 0 423,037 514,028
Accumulated deficit....................................... (282,490) (282,490) (282,490)
----------- ----------- -----------
Total stockholders' (deficiency)/equity................. (282,485) 140,605 231,605
----------- ----------- -----------
Total capitalization.................................. $ 165,765 $ 165,765 $ 256,765
=========== =========== ===========
Shares of common stock outstanding.......................... 5,251,235 58,494,065 67,584,974
Shares of preferred stock outstanding....................... 78,175,694 0 0
</TABLE>
*As restated - See Note 13 to the financial statements.
---------------
Our pro forma capitalization and pro forma, as adjusted capitalization set forth
above exclude:
- 1,357,148 shares issuable upon exercise of stock options issued, outstanding
and exercisable as of March 31, 2000, plus an additional 4,073,297 shares
issuable upon exercise of stock options issued and outstanding, plus an
additional 4,865,453 shares reserved for issuance in connection with future
stock options and other incentive plans;
- 7,201,437 shares of common stock issuable upon exercise of outstanding common
stock warrants at a weighted average exercise price of $0.36; and
- 865,128 shares of common stock issuable upon exercise and conversion of
outstanding preferred stock warrants at a weighted average exercise price of
$2.58.
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<PAGE> 22
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was $123.9
million, or $2.12 per share. Our pro forma net tangible book value per share is
determined by subtracting the total amount of our liabilities from the total
amount of our tangible assets and dividing the remainder by the number of shares
of our common stock outstanding immediately prior to this offering. The pro
forma net tangible book value per share after this offering will be $3.02.
Therefore, purchasers of shares of common stock in this offering will realize
immediate dilution of $7.98 per share. The following table illustrates this
dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Net tangible book value per share before this offering.... $2.12
Increase per share attributable to this offering.......... $0.90
Pro forma tangible book value per share after this
offering.................................................. $ 3.02
Dilution per share to new investors......................... $ 7.98
</TABLE>
The following pro forma table presents, as of March 31, 2000 and utilizing
an initial public offering price of $11.00 per share, for our existing
shareholders and our new investors:
- the number of shares of our common stock purchased from us;
- the total cash consideration paid; and
- the average price per share paid by the existing holders of common stock
immediately prior to this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders......................... 58,494,065 86.5% $269,040,000 72.9% $ 4.60
New investors................................. 9,090,909 13.5 100,000,000 27.1 11.00
---------- ----- ------------ ----- ------
Total....................................... 67,584,974 100.0% $369,040,000 100.0% $ 5.46
========== ===== ============ ===== ======
</TABLE>
The table excludes:
- up to 1,363,636 shares of common stock that may be issued by us pursuant
to the underwriters' overallotment option;
- 1,357,148 shares of common stock issuable upon exercise of stock options
that are currently issued, outstanding and exercisable at a weighted
average exercise price of $0.80 per share as of March 31, 2000;
- 4,073,297 shares of common stock issuable upon exercise of stock options
that are currently issued and outstanding at a weighted average exercise
price of $1.05 per share at March 31, 2000;
- 3,965,453 shares of common stock available for future grant under our
existing and proposed stock option plans as of March 31, 2000;
- 900,000 shares of common stock reserved for purchase after this offering
under our employee stock purchase plan;
- 7,201,437 shares of common stock issuable upon exercise of outstanding
common stock warrants at a weighted average exercise price of $0.36; and
- 865,128 shares of common stock issuable upon exercise and conversion of
outstanding preferred stock warrants at a weighted average exercise price
of $2.58.
To the extent these shares are issued, there will be further dilution to
new investors. See "Management" and the notes to our financial statements
included elsewhere in this prospectus.
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<PAGE> 23
SELECTED HISTORICAL 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, 1999, have been derived
from the audited financial statements of Capstone. The income statement data for
the years ended December 31, 1998 and 1999 and the balance sheet data at
December 31, 1998 and 1999 have been derived from financial statements that have
been audited by Deloitte & Touche LLP, independent auditors. The income
statement data for the years ended December 31, 1995, 1996, and 1997 and the
balance sheet data at December 31, 1995, 1996 and 1997 have been derived from
financial statements that have been audited by other independent auditors. The
selected financial data as of and for the quarters ended March 31, 1999 and 2000
are derived from unaudited financial statements which appear elsewhere in this
prospectus. In the opinion of management, the unaudited financial statements
have been prepared on a basis consistent with our audited financial statements
and include all adjustments, which are only normal recurring adjustments,
necessary for a fair presentation of the financial position and the results of
operations for the unaudited periods. 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 "Risk Factors", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes included elsewhere in
this prospectus for the statement of operations for the years ended December 31,
1997, 1998, 1999 and the quarters ended March 31, 1999 and 2000 and for the
balance sheet data at December 31, 1998 and 1999.
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000*
------- -------- -------- -------- -------- ------- -------
(in thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Total revenues......................................... $ 920 $ 1,462 $ 1,623 $ 84 $ 6,694 $ 222 $ 3,746
Cost of goods sold..................................... 199 2,179 8,147 5,335 15,629 1,233 5,124
------- -------- -------- -------- -------- ------- -------
Gross profit (loss)................................... 721 (717) (6,524) (5,251) (8,935) (1,011) (1,378)
Operating costs and expenses:
Research and development.............................. 4,796 8,599 13,281 19,019 9,151 2,264 2,441
Selling, general and administrative................... 1,878 3,585 10,946 10,257 11,191 2,502 4,384
------- -------- -------- -------- -------- ------- -------
Income (loss) from operations......................... (5,953) (12,901) (30,751) (34,527) (29,277) (5,777) (8,203)
Net income (loss)................................... $(5,957) $(12,595) $(30,553) $(33,073) $(29,530) $(5,785) $(7,811)
======= ======== ======== ======== ======== ======= =======
Net income (loss) per share of common stock -- basic
and diluted....................................... $ (4.87) $ (8.97) $ (18.82) $ (17.76) $ (24.53) $ (2.91) $(36.49)
======= ======== ======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER END
ACTUAL YEAR END DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000*
-------- -------- -------- -------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 525 $ 1,464 $ 44,563 $ 4,943 $ 6,858 $ 8,539 $ 122,381
Working capital.................................... 255 1,773 41,431 6,919 6,294 14,120 117,400
Total assets....................................... 1,351 6,820 56,989 25,770 36,927 29,535 165,765
Capital lease obligations.......................... -- 846 1,885 4,449 5,899 4,542 6,458
Long-term debt..................................... -- -- -- -- -- -- --
Redeemable preferred stock......................... 11,242 25,975 99,720 101,624 156,469 115,129 416,407
Stockholders' (deficiency)/equity.................. (11,371) (24,176) (56,057) (91,151) (144,225) (96,104) (282,485)
-------- -------- -------- -------- --------- -------- ---------
Total liabilities and stockholders' equity......... $ 1,351 $ 6,820 $ 56,989 $ 25,770 $ 36,927 $ 29,535 $ 165,765
======== ======== ======== ======== ========= ======== =========
</TABLE>
---------------
* As restated -- See Note 13 to the financial statements.
20
<PAGE> 24
The following pro forma balance sheet data reflects the conversion of
preferred stock and the waiver of accrued preferred stock dividends. The pro
forma, as adjusted, balance sheet data at March 31, 2000 reflects our receipt of
the estimated net proceeds from the sale of 9,090,909 million shares of common
stock in this offering (at an assumed initial public offering price of $11.00
per share), less underwriting fees, estimated expenses and the application of
the estimated net proceeds.
<TABLE>
<CAPTION>
QUARTER END MARCH 31, 2000*
-----------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(in thousands and unaudited)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 122,381 $ 122,381 $ 202,381
Working capital............................................. 117,400 117,400 197,400
Total assets................................................ 165,765 165,765 256,765
Capital lease obligations................................... 6,458 6,458 6,458
Long-term debt.............................................. -- -- --
Accrued preferred stock dividends........................... 6,683 -- --
Redeemable preferred stock.................................. 416,407 -- --
Stockholders' (deficiency)/equity........................... (282,485) 140,605 231,605
----------- ----------- -----------
Total liabilities and stockholders' equity.................. $ 165,765 $ 165,765 $ 256,765
=========== =========== ===========
Shares of common stock outstanding.......................... 5,251,235 58,494,065 67,584,974
Shares of preferred stock outstanding....................... 78,175,694 0 0
</TABLE>
---------------
* As restated -- See Note 13 to the financial statements.
The pro forma balance sheet data and the pro forma, as adjusted balance sheet
data, at March 31, 2000, exclude:
- 1,357,148 shares issuable upon exercise of stock options issued, outstanding
and exercisable as of March 31, 2000, plus an additional 4,073,297 shares
issuable upon exercise of stock options issued and outstanding, plus an
additional 4,865,453 shares reserved for issuance in connection with future
stock options and other incentive plans;
- 7,201,437 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $0.36; and
- 865,128 shares of common stock issuable upon exercise and conversion of
outstanding preferred stock warrants at a weighted average exercise price of
$2.58.
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Capstone is the first company to produce commercially available distributed
power generation systems using microturbine technology. Our products are derived
from over 300 man-years of research and development, supported by over $260
million in private-equity investment. Since inception through March 31, 2000, we
generated cumulative operating losses of approximately $124.2 million and we
expect to continue to sustain operating losses through fiscal year 2001.
From our founding in 1988 through 1998, we focused primarily on research
and development, culminating with the commercial release of our Model 330. With
commercial sales beginning in December 1998 and increasing to over 200 units in
1999, our focus has shifted beyond research and development to commercial
production. We are developing, manufacturing and marketing microturbine
technology for use in stationary distributed power generation, combined heat and
power generation, resource recovery, hybrid electric vehicle and other power and
heat applications. In order to achieve our goals we will expand our sales and
marketing activities by hiring additional sales staff and entering into new
distribution agreements. We intend to achieve long-run profitability through
production efficiencies and economies of scale. Specifically, we are
consolidating our administrative and production operations into one building, we
are entering into new supplier contracts to reduce overall unit costs, and we
are developing new higher profit margin products.
Since the commercial release of the Capstone MicroTurbine, demand has
continued to grow and we anticipate that it will accelerate as successful
results from customers and new applications are recognized in the distributed
generation market. To accommodate increased demand, we are increasing the scale
of our operations, including hiring additional personnel, which will result in
higher operating expenses. We believe increasing the scale of our operations
will enable us to realize accelerated revenue growth. As a result of our
expansion, the anticipated increase in our operating expenses and the difficulty
in forecasting revenue levels, we expect to continue to experience fluctuations
in our results of operations. See "Risk Factors".
We currently sell complete microturbine units, subassemblies and components
that can be fueled in part by 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. Our new products should
achieve increased manufacturing efficiencies by utilizing our existing
technology to allow us to command higher unit prices while keeping costs
relatively low.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
Revenues
Revenues for the quarters ended March 31, 2000 and 1999 were derived from
unit sales for commercial applications. All of our sales are based on our
standard 30 kilowatt unit, which is a modular unit that is manufactured in order
to accommodate the customer specific application and fuel type. Many of our
sales are made to large, well-positioned energy service providers that
distribute our products individually or in conjunction with their own power
solutions. Revenues increased $3.5 million to $3.7 million for the quarter ended
March 31, 2000 from $222,000 for the quarter ended March 31, 1999. Unit
shipments increased by 119 to 126 units for the quarter ended March 31, 2000
from 7 units for the quarter ended March 31, 1999. Our backlog of orders at
March 31, 2000 was 601 units, which we expect, compared to our historical
results, to significantly contribute to our future operating results. Over 97%
of our backlog is non-cancelable, and all of it is for delivery within one year.
We believe we will be able to accommodate these orders and future orders on a
timely basis.
22
<PAGE> 26
Gross Profit (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 increased $367,000,
or 36%, to ($1.4) million for the quarter ended March 31, 2000 from a loss of
($1.0) million for the quarter ended March 31, 1999. Costs for replacement of
systems under warranty are charged against our warranty reserve, which is
accrued through charges to costs of goods sold. The warranty reserve charge
increased $1.2 million to $1.4 million for the quarter ended March 31, 2000 from
$173,000 for the quarter ended March 31, 1999 due to the increase in unit
shipments. Warranty charges on a per unit basis decreased as we reduced our
warranty charge based on our actual warranty loss experience. With respect to
unit costs, we anticipate component costs to decline as we attain better
economies of scale for purchased components and greater production efficiencies
from a larger manufacturing facility.
Research and Development
Research and development expenses includes compensation, the engineering
department overhead allocations for administration and facilities, and material
costs associated with development. In addition to research and development
expenses on existing products, we have expenses associated with the next
generation production units and associated components. Research and development
expenses increased $177,000, or 8%, to $2.4 million for the quarter ended March
31, 2000 from $2.3 million for the quarter ended March 31, 1999. The primary
cause of the increase is attributable to work performed on new products.
Selling, General and Administrative
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.
Sales, general and administrative expenses increased $1.9 million, or 75%, to
$4.4 million in 2000 from $2.5 million for the 1999 quarter. The increase was
primarily attributable to higher overhead associated with supporting the growth
in the company and higher expenses associated with expanding our sales and
marketing efforts. In support of our growth, we anticipate certain one-time
costs of approximately $2.0 million associated with consolidating facilities in
the second and third quarters of fiscal year 2000. These costs include moving
expenses, general leasehold improvements, new computer equipment, and production
equipment. The consolidation to the new facility will decrease aggregate monthly
rents by $6,000.
Interest and Other Income (Expense)
Interest and other income (expense) consists primarily of interest income
earned on our cash and cash equivalents and interest charges in connection with
our capital leases. Interest and other income (expense) increased $400,000 to
$393,000 for the quarter ended March 31, 2000 from ($7,000) for the quarter
ended March 31, 1999. The increase was primarily attributable to the higher
interest income earned on larger average investment balances, partially offset
by higher interest expense on larger outstanding capital lease balances.
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 of 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.
23
<PAGE> 27
Gross Profit (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 $2.4 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 $2.4
million represents approximately 67% 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 percent of
both revenues and direct material costs and we expect the warranty charges to
decrease in 2000 as actual warranty costs merit a reduction. In 1998, the
Company 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. We intend to continue to invest resources
for the development of new systems and enhancements, including higher power
microturbines, expanded operating features, multi-fuel capabilities, and related
software. We expect to spend approximately $11.0 million on research and
development in fiscal year 2000, which will be an increase of approximately $1.9
million or approximately 21% from $9.1 million in 1999. These research and
development expenses will relate primarily to final development of the 60+
kilowatt unit. Research and development expenses may vary from this projection
if unanticipated expenses are incurred.
Selling, General and Administrative
Sales, 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 sales, general and administrative which added 13 people.
Interest and Other Income (Expense)
Interest and other income (expense) decreased $1.7 million, or 117%, to
($252,000) for 1999 from $1.5 million for 1998. This decrease was due to lower
interest earned on lower average investment balances available during 1999. In
addition, higher outstanding capital lease balances resulted in higher interest
expense charges.
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.
24
<PAGE> 28
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Revenues in 1998 and 1997 were derived from unit sales and contract
revenues. Unit sales were primarily pre-commercial units delivered to customers
for testing applications and integration into their own systems, while contract
revenues were derived from reimbursements for government sponsored programs
associated with engineering research and development. Sales decreased $1.5
million, or 95%, to $84,000 for 1998 from $1.6 million for 1997. Revenues in
1997 consisted of 40 units sold for new pre-commercial testing applications.
Once we had a sufficient number of these pre-commercial units running, we
reduced new shipments to monitor and improve the performance of those units. As
a result, we only shipped three units in the first eleven months of 1998.
Following the completion of our testing, we began selling commercial units in
December 1998.
Gross Profit (Loss)
In 1998, gross loss decreased $1.3 million, or 20%, to ($5.3) million for
1998 from ($6.5) million for 1997. The warranty reserve charge decreased
$898,000 to $261,000 for 1998 from $1.2 million for 1997 primarily due to the
decrease in units shipped from 40 in 1997 to three in 1998. Additionally, the
provision for inventory obsolescence decreased $3.2 million, or 83% to $681,000
in 1998 from $3.9 million in 1997. During 1998, we recognized a charge of $4.2
million to writedown inventory to its net realizable value. The writedown was
due to a significant increase in the cost of a component part during 1998 which
resulted in inventory cost exceeding the estimated net realizable value. The
related vendor contract has since been renegotiated and no similar writedown is
anticipated.
Research and Development
Research and development expense increased $5.7 million, or 43%, to $19.0
million for 1998 from $13.3 million for 1997. The increase in 1998 resulted
primarily from expanded research and development efforts to initiate commercial
development. In addition, lower hardware expenses were offset by higher
engineering compensation costs.
Selling, General and Administrative
Sales, general and administrative expenses decreased $689,000, or 6%, to
$10.3 million for 1998 from $10.9 million for 1997. This decrease is primarily a
result of higher shared cost expenses allocated to the engineering and
production cost centers rather than to general and administrative cost centers.
Shared costs expenses are allocated based on cost center personnel counts. The
decrease was partially offset by higher compensation and facility expenses.
Interest and Other Income (Expense)
Interest and other income (expense) increased $1.3 million to $1.5 million
for 1998 from $199,000 for 1997. This increase resulted primarily from $564,000
in higher interest income from higher average investment balances due to the
timing of funds received in an equity issuance.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table presents unaudited quarterly financial information for
the nine quarters ended March 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
25
<PAGE> 29
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.
<TABLE>
<CAPTION>
1998 1999 2000*
-------------------------------------- -------------------------------------- -------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------- ------- ------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues............... $ 30 $ 8 $ -- $ 46 $ 222 $ 334 $ 759 $ 5,379 $ 3,746
Costs of goods sold.......... 60 36 104 5,135 1,233 1,347 1,990 11,059 5,124
------- ------- ------- -------- ------- ------- ------- -------- -------
Gross profit (loss)........ (30) (28) (104) (5,089) (1,011) (1,013) (1,231) (5,680) (1,378)
Operating costs and expenses:
Research and development... 4,089 3,872 6,523 4,535 2,264 2,158 2,259 2,470 2,441
Selling, general and 2,209 2,173 3,291 2,584 2,502 2,568 2,748 3,373 4,384
administrative...........
------- ------- ------- -------- ------- ------- ------- -------- -------
Income (loss) from (6,328) (6,073) (9,918) (12,208) (5,777) (5,739) (6,238) (11,523) (8,203)
operations...............
Net income (loss).......... $(5,726) $(5,640) $(9,609) $(12,098) $(5,785) $(5,825) $(6,253) $(11,667) $(7,811)
======= ======= ======= ======== ======= ======= ======= ======== =======
</TABLE>
* As restated -- See Note 13 to the financial statements.
The increase in cost of goods sold in the fourth quarter of 1998 is
primarily the result of a $4.2 million charge to writedown inventory to its net
realizable value. The increase in sales, and respective cost of goods sold, in
the third and fourth quarters of 1999 resulted from our increased sales 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 intend to incur
approximately $2.0 million of expenditures in connection with relocating to our
new facility and making tenant improvements. We believe that our current cash
balances and the net proceeds from this offering will provide us with sufficient
capital to fund operations at least through 2001.
We have financed our operations primarily through private equity offerings.
We raised $125.6 million through December 31, 1999 and an additional $137.5
million in February 2000. Our primary cash requirements have been to fund
research and development, capital expenditures and production costs. Net cash
used in operating activities was $24.5 million, $36.2 million, and $25.7 million
for 1999, 1998 and 1997 and $2.0 million for the first quarter of 2000. Proceeds
from the issuances of preferred and common stock are currently held in
government securities to provide liquidity for operations. In addition, we use
capital lease commitments to sell and leaseback various fixed assets.
We have a commitment letter in place with Transamerica Business Credit
Corporation in which Transamerica extends to us a lease line of up to $10.0
million to lease equipment, including manufacturing equipment, machine tools,
furniture and computer related equipment. We also have a leasing arrangement
with Finova Capital whereby we utilized a $2.0 million equipment lease line.
Pursuant to these arrangements, as of December 31, 1999, we have $4.9 million
outstanding under our lease line with Transamerica, $1.0 million outstanding to
Finova and $22,000 outstanding to other leasing institutions. As of March 31,
2000, we have $5.6 million outstanding under our lease line with Transamerica,
$823,000 outstanding to Finova and $19,000 outstanding to other leasing
institutions.
At December 1999, we had commitments of $132.0 million with Solar Turbines
under a long-term purchase agreement for components and subassembly units which
expires August 2007.
26
<PAGE> 30
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.
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.
27
<PAGE> 31
BUSINESS
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. The
Capstone MicroTurbine is a state-of-the-art system that produces approximately
30 kilowatts of electricity for commercial and small industrial users. Our
microturbine combines patented air-bearing technology, advanced combustion
technology and sophisticated power electronics to produce an efficient and
reliable electricity and heat production system that requires little on-going
maintenance. Also, because of our advanced technology, our microturbines can
operate by remote control and can use a broad range of gaseous and liquid fuels
in an environmentally friendly manner.
We are a leading worldwide developer and supplier of microturbine
technology. As of March 31, 2000 we had shipped 338 commercial units on 939
orders, creating a backlog of 601 units. Over 97% of our backlog is
non-cancelable, and all of it is for delivery within one year. We expect our
backlog of orders to be significant to our future operating results, and we
believe we will be able to accommodate the orders and future orders.
Additionally, we have arrangements with customers located in the United States
and Japan which require them to purchase in aggregate up to 2,450 units over
three years. For some of these units, the customer must make a nonrefundable
prepayment of the total cost of a unit required to be purchased or be liable for
full payment of the unit. For the remaining units, firm purchase orders must be
made every month and require a non-refundable 30% downpayment. We expect our
next model, a 60+ kilowatt system, to be commercially available by the third
quarter of 2000.
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 intend to target include:
- resource recovery -- using natural gas that is otherwise burned or
released directly into the atmosphere to produce power;
- 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;
- standby/backup power -- providing a reliable backup power supply for
increasingly electricity-dependent enterprises; and
- peak shaving -- self-generation during hours when electricity prices
spike.
We also have applied our technology to hybrid electric vehicles such as
buses and industrial use vehicles. Capstone MicroTurbine subassemblies are
currently used in buses operating in Los Angeles, Atlanta, Nashville and Tempe,
and in tunnel carts and garbage trucks currently being deployed in Japan.
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 corporations with strong connections to
local markets. Where appropriate, primarily in resource recovery applications,
we intend to sell directly to the end user.
OUR PRODUCT
The Capstone MicroTurbine is a compact, environmentally friendly generator
of electricity and heat. It operates 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, the Capstone MicroTurbine can operate on low Btu gas, which is gas
28
<PAGE> 32
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 relative
lightweight modular design of the Capstone MicroTurbine allows for easy
transportation and installation with minimal site preparation.
The Capstone MicroTurbine incorporates three major design features:
- patented air-bearing technology;
- digital power electronics; and
- advanced combustion technology.
The air-bearing system allows the Capstone MicroTurbine's 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. 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.
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 heat rise. We
have the ability to vary and modify our basic microturbine model to accommodate
a variety of applications and needs. The Capstone Microturbine 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.
We offer various 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, exhaust
ducting and installation hardware, if required. We also sell microturbine
components and subassemblies.
Our microturbine systems have accumulated over 300,000 hours of operation
under varying climates and operating conditions. Our product has a target
availability of 98%, that is, the unit will be available to operate 98% of any
given year. 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.
We expect our next microturbine system, a 60+ kilowatt unit, to be
available for commercial sales in the third quarter of 2000.
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PRODUCT DEVELOPMENT
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:
<TABLE>
<CAPTION>
DATE MILESTONE
---- ---------
<S> <C>
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 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
</TABLE>
TARGET MARKETS
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 has broadened the range of power supply choices
to customers. We believe our microturbine 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 the Capstone MicroTurbine include:
- resource recovery;
- combined heat and power;
- backup and standby power and peak shaving; and
- other stationary power sources
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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 backup 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.
The Capstone 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. The unit
outperforms conventional combustion engines in a number of circumstances,
including when the gas contains a high amount of sulfur.
During 2000, we expect a substantial portion of our units sold 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 near term target
markets for our product. As of March 31, 2000 Detroit Diesel has ordered 108
microturbines, of which we have shipped 50 units, for use in seam gas recovery
from coal deposits.
Combined Heat and Power
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 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.
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 various distributors including Takuma, which has
engineered a combined heat and power package that utilizes the hot exhaust air
of the microturbine for heating water.
We believe that the Capstone MicroTurbine provides an economic solution in
markets similar to Japan for delivering clean power when and where it is needed
without requiring a large capital investment. The Capstone MicroTurbine 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. 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.
Backup 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
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interruptions. Recent brown-outs and black-outs 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 midwest United States reached
$8,000 per megawatt-hour in 1998 and $5,000 per megawatt-hour during the summer
of 1999. 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 Capstone 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 backup power for
specific applications or to provide primary power for remote needs.
Developing Regions and Other Stationary Power Applications
Many people in less developed countries do not have access to electric
power. The fuels of choice in these countries generally tend to be liquid fuels
like kerosene, diesel and propane. The Capstone MicroTurbine's multi-fuel
capability should be a significant benefit and competitive advantage in these
regions. 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. Remote commercial and industrial applications,
including offshore oil and gas platform power, pipeline cathodic protection, as
well as resort and rural area electrification, can use our microturbine
effectively. The Capstone MicroTurbine is the only commercially available
microturbine that has demonstrated the ability to operate on a stand-alone
basis, a feature that is attractive in locations lacking significant
transmission infrastructure. 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.
Hybrid Electric Vehicle Power Market
We are actively pursuing the hybrid electric bus and industrial electric
vehicle market and have supplied microturbine subassemblies for hybrid electric
vehicles. Hybrid electric vehicular applications of our microturbine are
competitive due to low emissions and low cost per mile of operation. Using
vehicles which 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.
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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.
The Capstone MicroTurbine has been tested 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 in 1999. The Capstone MicroTurbine in one such hybrid
electric vehicle application has logged more than 23,000 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. As of March 31, 2000, we had shipped 52
microturbines for vehicular use on 97 orders. 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
will pursue a strategy of partnering with electric utilities in promoting hybrid
electric buses.
MICROTURBINE BENEFITS
MULTI-FUEL CAPABILITY
The Capstone MicroTurbine operates on a broad range of both gaseous and
liquid fuels. Current compatible gas fuels include, low pressure natural gas,
high pressure natural gas, low btu gas like methane, high sulfur content (sour)
gas and compressed natural gas. Currently compatible liquid fuels include
diesel, kerosene and propane. Multi-fuel capability increases the number of
applications and geographic locations in which the Capstone MicroTurbine may be
used.
COST COMPETITIVE
The Capstone MicroTurbine is cost competitive in its target markets. In the
exploration and production markets environmental penalties incurred for flaring
gas can be avoided by using our microturbine. Our low maintenance microturbine
can burn wellhead gas directly off the wellhead avoiding any intermediary
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 btu 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 Capstone MicroTurbine 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, the Capstone
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
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and run approximately 90% of the year, we estimate the generation cost per
kilowatt hour at slightly less than $.04 per kilowatt hour. In combined heat and
power applications where gas costs are approximately $3 per million British
thermal units, we estimate the generation cost per kilowatt hour at
approximately $.08 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. We believe that the 60+ kilowatt unit will exhibit better operating
characteristics and lower electrical generation costs as volumes increase.
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, the
Capstone Microturbine requires no lubricants of any kind, 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
The Capstone MicroTurbine provides both high availability and reliability
when compared to other power generation alternatives. We designed the
microturbine for a target availability of 98%. The microturbine has 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. We expect the availability of our 60+ kilowatt model to be
similar to that of the existing 30 kilowatt model.
MINIMAL MAINTENANCE
Our patented air-bearing system, digital power controller and air cooled
design significantly reduce the maintenance cost of the Capstone MicroTurbine.
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 is periodic
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.
REMOTE MONITORING AND OPERATING
The digital power controller allows users to efficiently monitor the
Capstone MicroTurbine's 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
The Capstone MicroTurbine 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.
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SCALEABLE POWER SYSTEM
The Capstone MicroTurbine is 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 microturbine is easy to transport, install and relocate, and its small
size allows great flexibility in siting. The system is approximately six feet
tall and weighs approximately 900 pounds. Relative to competing technologies,
the Capstone MicroTurbines are designed to minimize installation costs by
simplifying and standardizing installation procedures. Our microturbine requires
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
The Capstone MicroTurbine has 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.
BUSINESS STRATEGY
Our goal is to maintain our position as a leading worldwide developer and
supplier of microturbine technology for the distributed generation market both
in stationary and hybrid electric vehicular applications. The following are key
elements of our strategy to achieve this objective:
FOCUS ON NEAR TERM MARKET OPPORTUNITIES
We have targeted resource recovery, combined heat and power in Japan and
hybrid electric vehicles as markets which can quickly adopt our unique product
offerings. We have established strategic relationships with direct users and/or
distribution partners in each of these markets.
In the resource recovery market, the Capstone MicroTurbine is a key
component of the Williams Energy Conversion Unit (ECU(TM)), a total power
generation, management and storage package. At a Williams ECU test installation
in an oilfield near Denver, two Capstone MicroTurbine power generators convert
untreated wellhead waste gas into clean, useable power. The power is transferred
to a Powercell PowerBlock(TM) system which stores, conditions and delivers the
power to the pump-jacks.
For example, in the combined heat and power market, we have entered into a
strategic marketing alliance with Active Power Corporation of Tokyo that will
allow Active Power to provide a much cleaner, lower-maintenance alternative to
older technology power generators in a variety of applications ranging from
small shops to residential buildings to construction sites.
In the hybrid electric vehicle market, we have supplied subassemblies and
other components for hybrid electric buses to various customers, including bus
manufacturers and electric utilities, as well as for industrial hybrid electric
uses, such as garbage trucks and tunnel service locomotives.
DEVELOP LONG TERM MARKET OPPORTUNITIES
We expect the North American market for both combined heat and power and
standby and backup/peak shaving to develop more slowly than our near term market
opportunities. We are establishing distribution alliances to penetrate these
markets as they develop. For example, we
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recently entered into an agreement with Williams Distributed Power Services,
Inc. with the goal of penetrating the combined heat and power and backup and
standby power markets in North America. This agreement allows Williams to
combine the Capstone MicroTurbine systems with other equipment, tools or
services for power generation supply or storage, sold or leased by Williams.
This will enable Williams to offer customers in the United States and other
international markets a suite of products and specialized power supply packages
incorporating the Capstone MicroTurbine. We believe the Capstone MicroTurbine is
an important addition to Williams' portfolio of practical and leading edge
technologies and will enable Williams to offer a wide range of services to a
diversified customer base.
ENHANCE DISTRIBUTION ALLIANCES
We believe the most effective way to penetrate our target markets is with a
business-to-business distribution strategy. We are forging alliances with key
distribution partners worldwide. Some of our key distribution partners are
Williams Distributed Power Services Inc., PanCanadian Petroleum Ltd., Mitsubishi
Corporation, Takuma Co., Meidensha Corporation, Sumitomo Corporation and Alliant
Energy Corp. Capstone has developed alliances with, among others, Advanced
Vehicular Systems and DesignLine to develop the hybrid electric bus market.
BROADEN AND ENHANCE OUR PRODUCT LINE
We intend to broaden our product line by developing additional microturbine
products. We are currently developing a 60+ kilowatt microturbine system for
expected commercial shipments in the third quarter of 2000. 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.
AGGRESSIVELY PROTECT OUR PROPRIETARY INTELLECTUAL PROPERTY
We seek to identify and to protect aggressively our key intellectual
property, primarily through the use of patents. 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.
ACHIEVE PRODUCTION EFFICIENCIES
Our efforts to be a low cost provider begin with the design process, where
our microturbine products are designed to facilitate high volume, low-cost
production targets. We manufacture only proprietary microturbine components,
including our air-bearing systems and combustion system components. Our
operating strategy is to outsource all non-proprietary hardware and electronics,
and we continue to establish a limited number of high volume supplier alliances
with companies that can quickly scale up to significant quantities. We are
pursuing a "tier one" supply strategy whereby we contract with a few suppliers
who are responsible for integrating various subassemblies.
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
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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 current list price of our
Model 330 is $27,000, which translates into approximately $900/kilowatt. As we
achieve greater cost competitiveness which we believe is under $600/kilowatt, we
plan to enter into mainstream markets, such as peak shaving, backup/standby
power and base load power generation.
We believe the most effective way to penetrate these target markets is a
business-to-business distribution strategy. The four distribution agreements
that we have entered into with Japanese entities are typical of this approach.
These agreements allow our local country partners to distribute complete
Capstone MicroTurbine systems in Japan. They can also incorporate subassemblies
and components into uniquely designed combined heat and power units and packages
for distribution within Japan and the rest of the world, excluding the United
States. Capstone has the right to distribute these uniquely designed packages
exclusively in the United States and nonexclusively in the rest of the world
excluding Japan.
Elsewhere, this general type of distribution agreement will be 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.
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. We initially developed sales relationships with smaller
bus companies, such as Advanced Vehicular Systems, DesignLine and E-Bus. Having
demonstrated the performance of our technology, we have established
relationships with larger regional bus companies, like Eldorado National.
Eldorado National is now delivering hybrid electrical buses to the Los Angeles
Department of Water & Power for use in the Los Angeles basin.
Early adopters in the industrial hybrid electrical vehicle market are
currently implementing the technology into the marketplace. Capstone Micro
Turbine subassemblies are currently used in tunnel service locomotives being
deployed by Tomoi and in garbage trucks being deployed by Mitsuit Fuji in Japan.
NORTH AMERICA
Our near-term focus in North America is to continue 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. Our current strategic partners include electric utilities
like Hydro Quebec, gas utilities like New Jersey Resources and Southern Union
Company, propane companies such as Suburban Propane as well as energy service
providers such as Alliant Energy and Williams Companies and distributors of
reciprocating engines such as Detroit Diesel.
Current resource recovery customers/partners include, Pan Canadian
Petroleum and the Williams Companies. We currently have entered into
distribution agreements with both of these companies to distribute Capstone
MicroTurbine systems. Pan Canadian distributes our products in Canada. The
Williams Companies is an energy solution provider selling into a variety of
markets. The Capstone MicroTurbine is a key component of the Williams ECU(TM), a
total power generation, management and storage package. At a Williams ECU test
installation in an oilfield near Denver, two Capstone MicroTurbine power
generators are currently converting and treating wellhead waste gas into clean,
useable power.
In 1999 we sold 151 units in the North American market which generated
approximately $4.8 million in revenue.
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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 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.
We currently have substantially similar distribution agreements with
Mitsubishi Corporation, Kanamoto/Active Power, Sumitomo Corporation jointly with
Meidensha Corporation, and Takuma Co. Ltd. All of these agreements permit the
Japanese partner to distribute complete Capstone MicroTurbine units within Japan
or to incorporate Capstone MicroTurbine subassemblies and components into
individually designed combined heat and power packages for distribution both
within Japan and to the rest of the world excluding the U.S. We have exclusive
distribution rights for these individually designed units in the United States
and have non-exclusive distribution rights in the rest of the world, excluding
Japan. All of these agreements required the Japanese partner to purchase on a
prepaid basis 100 Capstone Model 330 MicroTurbine systems for delivery within 12
months from the signing of the agreement. We expect all 400 units to be
delivered on or before December 31, 2000.
In 1999 we sold 51 units in the Asian market which generated approximately
$1.6 million in revenue.
EUROPE
We currently have agreements in Europe with British Gas to investigate the
U.K. and Ireland markets, and with GAS Energietechnik to investigate the German
market primarily for combined heat and power applications. We intend to broaden
our distribution alliances in Europe in 2000 and 2001. In 1999 we sold nine
units in Europe which generated approximately $275,000 in revenue.
HYBRID ELECTRIC VEHICLES MARKET
The hybrid electric vehicles market segment represents a significant
opportunity for the Capstone MicroTurbine. This microturbine system was put into
production platforms used by four different manufacturers for hybrid electric
vehicles placed into service in 1999. The Capstone MicroTurbine, in one such
hybrid electric vehicle application, has logged more than 23,000 miles of
operation in a municipal bus without significant maintenance. Electric utilities
can benefit from the implementation of Capstone MicroTurbine-equipped hybrid
electric vehicles as a means of balancing intra-day demand for electricity. We
intend to pursue a strategy of partnering with electric utilities in promoting
hybrid electric buses.
DISTRIBUTION AGREEMENTS
As stated above, we intend to continue to enter into distribution
arrangements with knowledgeable distributors in the various target markets. We
do not expect to market directly to end users, except in the resource recovery
market. Our general strategy will be to enter into nonexclusive distribution
agreements with interested and qualified third parties who will use our Capstone
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.
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As part of this strategy and to increase the speed of adoption of our
products, we have entered into five distribution agreements, one with the
Williams Companies and four with various Japanese entities. The Japanese
distribution agreements are substantially similar and provide that these
distributors will promote, market, sell, distribute and service our complete
microturbine units or some subassemblies, or both generally in connection with
stationary applications. Typically, these agreements have a term of
approximately three years and allow the distributors to distribute complete
Capstone MicroTurbine systems in Japan. They can also incorporate subassemblies
and components into uniquely designed combined heat and power units and packages
for distribution within Japan and the rest of the world, excluding the United
States. Capstone has the right to distribute these uniquely designed packages
exclusively in the United States and nonexclusively in the rest of the world,
excluding Japan.
Under these agreements, each distributor prepaid for 100 complete
microturbine systems. We have granted to the distributor the right to use some
of our intellectual property, including our trademarks. In addition to
promoting, selling and distributing our products, the distributor must provide
specific services to end users including on-going maintenance and prompt
warranty services in accordance with the warranty then in effect. Also, each
employee of a distributor who is to provide services to end users must attend
our service certification seminars and receive our services certification.
We entered into a supply agreement with Williams Distributed Power
Services, Inc. in June 1999 whereby Williams agreed to purchase 1,989 Capstone
MicroTurbine Systems over three years depending upon annual forecasts. Williams
may resell or enter into sale-leaseback arrangements with its customers and may
integrate our product into Williams' products or services. Williams acquired the
exclusive right to sell to its affiliated entities. If at any time we commence
negotiations with another party for exclusive distribution rights in a
territory, Williams will also have the right to negotiate with us to distribute
our products in that territory. Williams may not distribute any microturbine
generating less than 250 kilowatts of electricity other than the Capstone
MicroTurbines during the agreement's three year term.
SOURCING AND MANUFACTURING
The Capstone MicroTurbine is 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 of primarily all but our
air-bearing systems and components of the combustion system 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 Woodland Hills, California. We
also assemble the units at that location. We have primary and secondary sources
for all of our components other than the recuperator.
Solar Turbine Corporation, a wholly owned subsidiary of Caterpillar
Corporation, is our sole supplier of recuperator cores. At present we are not
aware of any other suppliers who could produce these cores according to our
specifications and within our time requirements. Accordingly, our dependence
upon Solar is substantial. We have entered into a license agreement with Solar
that would permit us to produce the recuperator cores at our option at any time.
The license agreement allows our use of Solar's intellectual property to produce
the recuperator core. We are required to make payments to Solar pursuant to the
license at varying rates. If we had to develop and produce
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our own recuperator cores without using Solar's intellectual property, we
estimate it could take up to three years to be in production. See "Risk
Factors -- We may not be able to obtain recuperator cores from Solar Turbine
Corporation, our sole supplier, and our assembly and production of microturbines
may suffer delays and interruptions".
Senior management has recognized the importance of quality control by
appointing a vice president of quality to oversee the implementation of a
rigorous quality control program, which includes the use of outside consultants.
Before a system is shipped, 100% of all systems go through assembly test
procedures lasting over one hour. 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.
Currently, we have the capability to produce approximately 10,000 units per
year at our facilities. During the second quarter of 2000, we plan to move to a
new assembly and test location in the neighboring town of Chatsworth, California
where we expect to be able to produce approximately 20,000 units per year.
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 May 31, 2000, we had 27 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.
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 provides us with a significant advantage
relative to our competitors.
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.
CUSTOMERS
In 1999, sales to Williams, worth $1.9 million, accounted for 28% of our
sales revenue. We had accounts receivable due from Williams and Advanced
Vehicular Systems of approximately $275,000 and $277,000, respectively, and each
represented approximately 11% of total accounts receivable at the end of 1999.
Additionally, in 1999 and 2000, we entered into agreements whereby each of our
Japanese distributors, Mitsubishi, Takuma, Active Power, and Meidensha-Sumitomo
is required to prepay for 100 microturbine units. These prepaid orders account
for approximately 25% of our contractual purchase commitments. Further, in June
of 1999 we entered into a supply agreement with
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Williams in which Williams agreed to purchase a maximum of 1,989 Capstone
MicroTurbine systems over three years, depending upon annual forecasts.
COMPETITION
The market for our products is highly competitive and is changing rapidly
with the interplay of a number of factors. The Capstone MicroTurbine competes
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 that produce 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 in part by Caterpillar, Detroit Diesel and Cummins.
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 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, 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 in part Honeywell
(AlliedSignal), Elliott/General Electric, NREC (Ingersoll Rand), Toyota,
Mitsubishi Heavy Industries, Volvo/ABB, Turbo Genset and Williams International.
DTE Energy Co., Pratt & Whitney Canada Corp. and The Turbo Genset Co. recently
formed a joint venture for developing a miniturbine. Although we believe these
companies have established microturbine development programs, we also believe we
are the only company, other than Honeywell (Allied Signal), currently producing
commercial units. We have shipped over 396 commercial units in the last 16
months. We expect our first mover advantage to allow us to quickly develop the
market for Capstone MicroTurbines, however 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 the
MicroTurbine's functionality in several important areas,
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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
heat 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 Capstone MicroTurbine. Additionally, our nitrogen oxides atmospheric
emissions are less than 9 parts per million, which is significantly lower than
our primary competitor's specification of 25 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.
In the long-term we believe that the greatest competitive threat will arise
from Japanese competitors, many of which have unique design capabilities and
have greater resources than us. Our Japanese partners may be able to produce
microturbines or develop alternative technologies, either on their own or in
collaboration with others, including our competitors. They may develop products
or components better suited to integration with their systems than our products.
Our Japanese partners and/or competitors possess a natural advantage in
marketing to potential purchasers or distributors in the Pacific Rim, a prime
market for various applications of the Capstone MicroTurbine.
COMPANY BACKGROUND
We were organized in 1988. In April 1993, Benjamin M. Rosen, 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 Corporation,
Hydro-Quebec, Kyushya Electric EDPC and Star Ventures of Munich, Germany. Prior
to this offering, we had raised over $260 million from our investors.
DETAILED MICROTURBINE DESCRIPTION
The current 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. We are developing a microturbine which will generate 60+
kilowatts of power. As an alternative power source, our microturbines may
replace or efficiently supplement existing sources of electric power.
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The Capstone MicroTurbine consists of a turbogenerator and digital power
controller combined with ancilliary systems such as a fuel system as shown
below:
System Overview Graphic
The turbogenerator includes a mechanical combustor system and a single
moving part 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 micro-electronics. 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 option 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
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
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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.
TURBOGENERATOR AIR FLOWS
[CAPSTONE'S MICROTURBINE GENERATOR]
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 up to approximately 30 kilowatts of
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 500 degrees
fahrenheit and is discharged through the exhaust pipe. In order to improve the
energy efficiency further, we are testing higher operating temperatures.
There is only one moving component in the entire turbogenerator, which
consists of the rotating generator shaft, the compressor wheel, and the turbine
rotor. This rotating component is supported by three radial air bearings and one
double acting air bearing. Air bearings avoid the need for oil lubrication
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
product and will continue to qualify our products under Underwriters'
Laboratories approval. We plan to achieve ISO 9001 certification in the future.
The International Organization for Standardization provides a methodology by
which manufacturers can obtain quality certification.
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EMPLOYEES
At May 31, 2000 we employed 187 regular employees. No employees are covered
by any collective bargaining arrangements. We believe that our relationships
with our employees are good.
FACILITIES
Currently, our principal administrative, sales and marketing, research and
development and support facilities consist of an aggregate of approximately
89,000 square feet of office space, warehouse space and assembly and test space
in and around Woodland Hills, California. We occupy these spaces under nine
separate leases. However, we plan on relocating our corporate headquarters and
the majority of our operations to 21211 Nordhoff Street in Chatsworth during the
year 2000. We entered into a lease for that premise that expires on December 31,
2009 or ten years following our possession of the property and the expiration of
an early possession period of 60 days exclusive of extensions. The square
footage for our new property is approximately 98,370 square feet and our payment
under that lease will be $30,000 per month for the first six months, and will
rise to $60,000 on the seventh month with incremental increases thereafter. As a
result of our decision to relocate, we will have allowed eight of our nine
leases to expire at the end of their extended terms, and we will permit these
eight leases to expire at different times during the period from May 1, 2000 to
September 1, 2000. Management is attempting to sublet certain of these leases
prior to the termination date. We have renewed one lease for our property at
6025 Yolanda Avenue in Tarzana which consists of 12,120 square feet. This
property will serve as our microturbine testing facility. This lease will expire
on July 31, 2001 and our payment under this lease is $9,084 a month.
LEGAL PROCEEDINGS
On May 3, 2000, Capstone entered into a confidential settlement agreement
with two related shareholders, Craig Drill Capital, L.P. and Craig Drill Capital
Limited, each of whom asserted fraud and misrepresentation claims arising out of
their purchase of our Series E Preferred Stock. Pursuant to the agreement,
Capstone paid a cash settlement of $700,000. Of the cash settlement, $500,000
was paid by our insurance carrier and $200,000 was paid directly by us. In
addition pursuant to an agreement dated May 4, 2000, Capstone repurchased
approximately 92.8% of the shareholders' stock or 2,319,129 shares of Series E
Preferred Stock at $6.68 per share. An additional 180,871 shares of Series E
Preferred Stock were purchased from these shareholders by other parties at a
price per share of $6.68 on May 30, 2000.
On February 11, 1998, we filed a complaint against Michael Irvine, a former
employee, alleging trade secret misappropriation, breached 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 actions. 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
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.
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MANAGEMENT
DIRECTOR, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our executive officers, directors and key employees, their positions and
their ages as of March 31, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ake Almgren............................... 53 President, Chief Executive Officer and Director
Jeffrey Watts............................. 49 SVP Finance & Administration, CFO, Secretary
William Treece............................ 59 SVP, Strategic Technology Development
Paul Chancellor........................... 46 Senior Vice President, Engineering
Gabriel Tashjian.......................... 34 Senior Vice President, Sales
Mark Kuntz................................ 37 Vice President, Marketing
Joel Wacknov.............................. 30 Vice President, Power Electronics Group
Daniel Callahan........................... 52 Vice President, Quality
Lloyd Kirchner............................ 36 Vice President, Supply Management
Paul Berner............................... 39 Director of Operations
Richard Aube.............................. 31 Director
John Jaggers.............................. 49 Director
Jean-Rene Marcoux......................... 55 Director
Benjamin M. Rosen......................... 67 Director
Peter Steele.............................. 41 Director
Eric Young................................ 43 Director
</TABLE>
AKE ALMGREN Dr. Almgren joined us in July 1998 as President and Chief
Executive Officer after a 26 year career at ASEA Brown Boveri Limited, a
worldwide power solutions company. While there, Dr. Almgren held the position of
Business Area Manager for Distribution Transformers worldwide where he managed
the operation of 36 plants in 28 countries. He has also been President of ABB
Power T&D Company, President of ABB Power Distribution, and President of ABB
Power Systems during his tenure at ABB. In addition, Dr. Almgren has also been
President of Autoliv, an automotive restraint company. Dr. Almgren holds a Ph.D.
in Engineering from Linkopings Tekniska Hogskola in Sweden and a Masters of
Mechanical Engineering from the Royal Institute of Technology in Stockholm,
Sweden. He is a citizen of Sweden and has worked and lived in the United States
during the last nine years.
JEFFREY WATTS Mr. Watts has been our Chief Financial Officer since 1995 and
also serves as our Senior Vice President of Finance and Administration and
Secretary. Mr. Watts has over 20 years experience in financial management and
strategic planning for companies including IBM Corporation, Deloitte & Touche
LLP, a professional services firm, and McKinsey & Company, Inc. Prior to joining
us, he was Senior Vice President and Chief Financial Officer of P-Com, Inc., a
telecommunications equipment supplier, where he led it through various private
financings, an initial public offering and its first secondary offering. He
holds a BA degree in Economics from the University of California Berkeley and an
MBA from the University of Chicago.
WILLIAM TREECE Mr. Treece joined us in 1997 as our Vice President of
Engineering and in 1998 became our Senior Vice President of Engineering. Prior
to joining us, Mr. Treece had a 24 year career with Sundstrand Aerospace, a
large aerospace company, where he held a number of positions including Director
of Engineering, Director of Operations, and Director of Commercial programs.
During his career, Mr. Treece has worked on all aspects of turbine development,
manufacturing and marketing. He holds a BS in Mechanical Engineering from
Indiana Institute of Technology and has done graduate work in engineering and
business at the University of Southern California and San Diego State
University.
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PAUL CHANCELLOR Mr. Chancellor joined us in 2000 as Senior Vice President
of Engineering. From July, 1996 until the time he joined Capstone, Mr.
Chancellor served as Vice President of Support Services for ABB, Power
Generation Inc., whose key products are gas and steam turbine generators. In
this capacity he led a group that included supply management, information
systems, quality, and document management through its formation period. Prior to
this, from January 1995 through July of 1996, Mr. Chancellor was Vice President
of Engineering for Power Generation Inc. where he led a group of 80 people and
was responsible for over $10 million in engineering time and $150 million in
purchased materials and equipment, annually. Mr. Chancellor earned his BS in
Mechanical Engineering and his MSME at Auburn University, as well as a diploma
from the Von Karman Institute in Brussels, Belgium.
GABRIEL TASHJIAN Mr. Tashjian joined us in March of 2000 as Senior Vice
President of Sales. From 1988 to March, 2000 Mr. Tashjian worked in sales and
operations for General Electric in a number of its divisions including GE Power
Systems and GE Energy Services. Most recently, Mr. Tashjian served as Manager,
Commercial Operations for GE Energy Services. Mr. Tashjian's career with General
Electric has included extensive international experience, including his term as
Sales Director for Central and Eastern Europe, from October 1995 to March of
1998, where he led the sales, marketing and business development activities in
23 central and eastern European countries. Mr. Tashjian received his BS in
Electrical Engineering from the University of Southern California.
MARK KUNTZ Mr. Kuntz joined us in 2000 as Vice President of Marketing.
Prior to joining Capstone, Mr. Kuntz served as Vice President and General
Manager of Unicom Distributed Energy, a holding company for the utility
Commonwealth Edison, where he was responsible for bringing that company's
turbogenerator power system to market and for developing new business
opportunities in distributed generation. Before his position at Unicom, Mr.
Kuntz was Director of National Accounts for Lennox Industries, where he provided
sales, marketing and customer service, as well as distribution and technical
support to retail, restaurant and institutional customers. Mr. Kuntz received a
BS in Mechanical Engineering from Cal Poly, San Luis Obispo, and a MBA from
Southern Methodist University.
JOEL WACKNOV Mr. Wacknov joined us in 1996 as an electrical engineer and
was subsequently promoted to Vice President in 1999. He previously worked with
AeroVironment, an electrical control company. Mr. Wacknov holds a BSEE from UCLA
and a MSEE from the University of Wisconsin.
DANIEL CALLAHAN Mr. Callahan joined us in 2000 as Vice President of
Quality. Prior to his start with Capstone, Mr. Callahan spent over 16 years in
quality control for a number of companies, including over ten years with Hewlett
Packard and its related companies. From 1994 until 2000, Mr. Callahan was
Quality and Reliability Manager, Optoelectronics Division, for LumiLeds
Lighting, which was recently spun off from Hewlett Packard as part of Agilent
Technologies. In this capacity, Mr. Callahan achieved annual budget reductions
from $6 million to $900,000 over a three year period, implemented an electronic
documentation system for a worldwide network, and implemented industry quality
control standards, including ISO 9000, TQM and TQC. Mr. Callahan received a BS
in Systems Engineering from the United States Naval Academy and a MS in Physics
from the U.S. Naval Postgraduate School.
LLOYD KIRCHNER Mr. Kirchner joined us in 1997 as mechanical systems
engineer and was subsequently promoted to Vice President of Supply Management in
1999. Previously he was with Amoco Power Resources Corporation, an integrated
oil company, for over ten years. Mr. Kirchner holds a BSME from Rice University
and an MBA from the University of Chicago.
PAUL BERNER Mr. Berner joined us in 1995 as a design engineer. He has held
a variety of engineering and operations assignments since then. He was formerly
with Sundstrand Aerospace, a large aerospace company, in a variety of
engineering and operations assignments. Mr. Berner holds a BS in Mechanical
Engineering from San Diego State University.
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RICHARD AUBE Mr. Aube became our director in 2000. Mr. Aube is currently a
Managing Director of The Beacon Group, LLC, a private investment and strategic
advisory firm based in New York. Mr. Aube joined The Beacon Group in 1993,
focusing on the firm's investment activities in the energy sector. Prior to
joining The Beacon Group, Mr. Aube was an investment banker in the Natural
Resources Group at Morgan Stanley & Co, Incorporated. Mr. Aube is a director of
Generac Portable Products and Proton Energy Systems, a company which designs,
develops and manufactures proton exchange membrane technology.
JOHN JAGGERS Mr. Jaggers has been our director since 1993. Mr. Jaggers is
also a general partner and the Chief Financial Officer of Sevin Rosen Funds, a
group of venture capital funds. Mr. Jaggers joined Sevin Rosen, a current
stockholder, in 1988, focusing on software and information services. Prior to
joining Sevin Rosen, Mr. Jaggers spent eight years in the venture capital and
corporate financing activities of Rotan Mosle Inc., where he specialized in new
technologies and small, rapidly growing companies. Mr. Jaggers received his
Bachelors and Masters degrees in Electrical Engineering from Rice University. He
received his MBA from Harvard University.
JEAN-RENE MARCOUX Mr. Marcoux became our director in 2000. Mr. Marcoux
first joined Hydro-Quebec in 1969 and for over ten years occupied several
positions in IREQ, its research institute. Mr. Marcoux returned in 1997 to serve
as President and Chief Executive Officer of Hydro-Quebec CapiTech and General
Manager Technology Marketing and Affiliates for Hydro-Quebec, the fourth largest
utility in the world. Prior to that, he held positions related to business
development with GEC-Althom and ABB.
BENJAMIN M. ROSEN Mr. Rosen has been our director since 1993. Mr. Rosen is
Chairman of the Board of Directors of Compaq Computer Corporation, a personal
computer manufacturer, and is also a co-founder of Sevin Rosen Funds, a venture
capital firm managing a several hundred million dollar portfolio. Mr. Rosen is
also a member of the Board of Directors of Ask Jeeves. Mr. Rosen is vice-
chairman of the Board of Trustees of the California Institute of Technology, a
member of the Board of Managers of Memorial Sloan-Kettering Cancer Center, and a
member of the Board of Overseers of Columbia Business School. Mr. Rosen received
a BS degree in Electrical Engineering from Caltech, an MS in Electrical
Engineering from Stanford University and an MBA from Columbia University.
PETER STEELE Mr. Steele is the Director of International New Ventures
within Fletcher Challenge Energy. In this capacity Mr. Steele is responsible for
leading the companies international growth ambitions. In his 18 years of
experience with Fletcher Challenge Energy, a New Zealand based energy,
construction and pulp and paper company, Mr. Steele has managed operations in
several Asian countries including: Indonesia, Thailand, Philippines, China and
most recently held the position of Chief Operating Officer for Fletcher
Challenge Energy Brunei. Mr. Steele is a professional engineer and resides in
Auckland, New Zealand.
ERIC YOUNG Mr. Young has been our director since 1993. Mr. Young is a
cofounder of Canaan Partners, a venture capital investment firm, and has served
as a general partner since its inception in 1987. From 1979 to 1987 Mr. Young
held various management positions with General Electric Co. and G.E. Venture
Capital, a venture capital investment firm and subsidiary of General Electric.
Mr. Young is also a director of several private entities. Mr. Young holds an MBA
from Northwestern University and a BS in Mechanical Engineering from Cornell
University.
BOARD COMPOSITION
Effective upon the closing of this offering, the number of our directors
will be fixed at seven. At each annual meeting of stockholders, directors will
be elected for one-year terms.
BOARD COMMITTEES
Effective upon the closing of this offering, we will have an Audit
Committee and a Compensation Committee. The members of the Audit Committee will
be made up of Messrs. Aube, Steele and
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Young. The Audit Committee will be responsible for recommending to the board of
directors the engagement of our outside auditors and reviewing our accounting
controls and the results and scope of audits and other services provided by our
auditors. The Compensation Committee will be made up of Messrs. Jaggers and
Rosen. The Compensation Committee will be responsible for reviewing and
recommending to the board of directors the amount and type of non-stock
compensation to be paid to senior management and establishing and reviewing
general policies relating to compensation and benefits of employees.
DIRECTOR COMPENSATION
Directors who are employees and non-employee directors receive no
compensation for their services as directors. However, they are reimbursed for
the expenses they incur in attending the board or committee meetings.
All directors are eligible to participate in our 2000 stock option plans.
Non-employee directors are eligible to participate in our 2000 equity incentive
plan, which provides that our non-employee directors will be granted initial
options to purchase 21,600 shares of common stock on the date our stock begins
public trading, or on their initial election to the board of directors if after
the date our stock begins public trading. The 2000 plan further provides for
subsequent formula grants to our non-employee directors of options to purchase
21,600 shares of common stock on the date of the first annual meeting of our
stockholders that occurs in the third year after the non-employee director's
initial grant and at which the non-employee director is reelected to our board
of directors. These initial and subsequent options granted to our non-employee
directors are subject to vesting, in three equal installments over three years,
based upon continuing service as a director. Employee directors are eligible to
participate in our 2000 employee stock purchase plan as long as they meet
eligibility requirements, including not owning, immediately after an option is
granted, 5% or more of the voting power of all classes of stock. Our 1993 stock
incentive plan does not provide for grants of stock options to directors.
ACCELERATED VESTING
The board has adopted an accelerated vesting schedule with respect to
options granted to Dr. Almgren, our chief executive officer, and Mr. Watts, our
chief financial officer, such that these executive officers' options immediately
vest upon an acquisition of Capstone or an acquisition of 50% of the voting
power or economic interest of Capstone.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation that will be in effect at the time of this
offering limits the liability of directors to the maximum extent permitted by
Delaware law. Delaware law provides that directors of a corporation will not be
personally liable for monetary damages for breach of their fiduciary duties as
directors, except liability for any of the following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our bylaws that will be in effect at the time of this offering will provide
that we shall indemnify our directors and executive officers and may indemnify
our other officers and employees and other agents to the fullest extent
permitted by law. We believe that indemnification under our bylaws covers
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<PAGE> 53
at least negligence and gross negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the bylaws would permit indemnification.
We will enter into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, including attorneys' fees, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by us arising out of such person's services as our director or executive
officer, any of our subsidiaries or any other company or enterprise to which the
person provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us as described
above, we have been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid in the year
ended December 31, 1999, to the following executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------
NUMBER
OF SECURITIES
ANNUAL COMPENSATION UNDERLYING
-------------------- OPTIONS ALL OTHER
NAME YEAR SALARY($) BONUS($) GRANTED(#) COMPENSATION
---- ---- --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Ake Almgren..................................... 1999 $200,000 $100,000 1,245,000 --
President and Chief Executive Officer 1998 106,154 125,000 780,000 --
Jeffrey Watts................................... 1999 $153,462 $ -- 285,300 --
Senior Vice President Finance & 1998 145,000 -- -- --
Administration, CFO, Secretary 1997 136,222 -- -- --
William Treece.................................. 1999 $146,338 $ -- 120,000 --
Senior Vice President, Engineering 1998 145,000 -- -- --
1997 94,135 -- 90,000 --
</TABLE>
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
during 1999 to our executive officers listed in the Summary Compensation Table.
During 1999, we granted options to purchase an aggregate of 2,952,720 shares of
common stock to employees. The exercise price per share for these options was
less than the fair market value of the common stock as of the grant date.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE MARKET EXPIRATION GRANT DATE
NAME GRANTED(1) FISCAL YEAR PRICE PRICE DATE PRESENT VALUE(2)
---- ---------- ------------- -------- ------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Ake Almgren..................... 1,245,000 42% $0.33 $0.57 5/1/2009 $371,010
Jeffrey Watts................... 285,300 10% $0.33 $0.57 5/1/2009 $ 85,019
William Treece.................. 120,000 4% $0.33 $0.57 5/1/2009 $ 35,760
</TABLE>
---------------
(1) All options were granted under our stock option plan and have a ten-year
term. Of the options shown in this table, 100% vest 05/01/2003. Vested
options become immediately exercisable upon a sale of the company or an
initial public offering.
(2) The grant date present value was calculated using a minimum value option
valuation model, using the assumptions set forth in note 6 to the notes of
our financial statements.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options to purchase common stock held as of December 31, 1999 by
our executive officers listed in the Summary Compensation Table. There was no
public trading market for our common stock as of December 31, 1999. Accordingly,
the values of the unexercised in-the-money options have been calculated on the
basis of $6.00 per share, the deemed fair market value of our common stock at
the end of fiscal year 1999, less the applicable exercise price multiplied by
the number of shares that may be acquired on exercise.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 31, 1999(#) DECEMBER 31, 1999($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ake Almgren.......... -- -- 457,813 1,567,187 2,410,108 8,544,892
Jeffrey Watts........ -- -- 189,272 260,878 1,080,992 1,478,596
William Treece....... -- -- 52,500 157,500 262,500 867,500
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
OPTIONS/SARS BASED
ON PUBLIC OFFERING
PRICE($)
---------------------------
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
<S> <C> <C>
Ake Almgren.......... 4,699,174 16,380,826
Jeffrey Watts........ 2,027,351 2,782,987
William Treece....... 525,000 1,655,000
</TABLE>
STOCK OPTION PLANS
1993 INCENTIVE STOCK PLAN
We have a 1993 incentive stock option plan that allows some of our
employees and consultants the ability to acquire an ownership interest in our
company. Under this plan, we have reserved for issuance 7,800,000 shares of
common stock. The 1993 plan allows us to grant:
- incentive stock options;
- nonstatutory stock options; and
- stock purchase rights.
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<PAGE> 55
Options and stock purchase rights may be granted to employees and
consultants, while incentive stock options may be granted only to employees. As
of May 31, 2000, options to purchase 7,368,671 shares had been granted under
this plan, of which options for 5,599,479 shares remained outstanding. The 1993
plan will continue to be in effect with respect to outstanding options granted
under that plan until they are either exercised or expire in accordance with
their respective terms. Capstone plans to grant no further new options under the
1993 plan after the closing of the offering, although to the extent options
previously granted under the 1993 plan are subsequently forfeited or expire
unexercised or otherwise become available, they may be reissued under the 2000
equity incentive plan. In addition, any shares that are authorized but not
issued under the 1993 plan as of the closing of this offering will become
available for issuance under the 2000 plan.
The exercise price of common stock underlying an option may be greater,
less than or equal to fair market value. The exercise price of an incentive
stock option granted to an employee who owns:
- 10% or less of the voting power of all classes of stock, may not be less
than 100% of the fair market value of the underlying shares of common
stock on the date of the grant; and
- more than 10% of the voting power of all classes of stock, may not be
less than 110% of the fair market value of the underlying shares of
common stock on the date of the grant.
The exercise price of common stock underlying a nonstatutory stock option
granted to an employee or consultant who owns:
- 10% or less of the voting power of all classes of stock, may not be less
than 85% of the fair market value of the underlying shares of common
stock on the date of the grant; and
- more than 10% of the voting power of all classes of stock, may not be
less than 110% of the fair market value of the underlying shares of
common stock on the date of the grant.
In the case of a stock purchase right, the per share exercise price of the
common stock underlying the right granted to a person who owns:
- 10% or less of the voting power of all classes of stock, may not be less
than 85% of the fair market value of the underlying shares of common
stock on the date of the grant; and
- more than 10% of the voting power of all classes of stock, may not be
less than 100% of the fair market value of the underlying shares of
common stock on the date of the grant.
The maximum term of an option is 10 years from the date of the grant,
though the option agreement may set forth a shorter term. The term is five years
for an option granted to an employee who, at the time of the grant, owns stock
representing more than 10% of the voting power of all classes of stock. Options
are typically subject to vesting schedules, which do not exceed five years.
Options may be exercised for specified periods, generally 30 days, after the
termination of the optionee's employment or other service relationship with us,
and are generally non-transferable. The term of a nonstatutory stock option may
be extended under some circumstances for a period of six months upon the death
of the optionee. If the board determines to grant a stock purchase right, a
stock purchase agreement or stock bonus agreement must be executed no later than
six months from the date of the grant. In some instances, we have a repurchase
option upon the purchaser's voluntary or involuntary termination. The repurchase
price is the fair market value for such shares on the date the right of
repurchase is triggered.
Upon the exercise of options or the grant of purchase right, the board
determines the method of payment, and may consist of:
- cash;
- check;
- promissory note or other deferred payment arrangement;
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<PAGE> 56
- delivery of shares of common stock that have a fair market value on the
date of surrender equal to the aggregate exercise price; or
- any combination of methods above or other method to the extent permitted
by sections 408 or 409 of the California General Corporation Law.
The 1993 plan may be administered by the board of directors or a committee
appointed by the board. Subject to the provisions of the plan, the board may
select the individuals eligible to receive awards, determine or modify the terms
and conditions of the awards granted, determine fair market value and exercise
price within specific parameters, waive vesting provisions, and generally
administer and interpret the plan.
Upon specified events, including a stock split, reverse stock split, stock
dividend, combination or reclassification, we will adjust proportionately:
- the number of shares of common stock covered by each outstanding option
or purchase right;
- the number of shares of common stock that have been authorized under the
plan but as to which no options or purchase rights have been granted or
which have been returned to the plan or repurchased upon a holder's
termination or otherwise; and
- the price per share of common stock covered by each outstanding option or
purchase right.
In the event of our dissolution or liquidation, all options and purchase
rights not previously exercised will terminate immediately prior to the
consummation of that action. In the event of certain transactions, we and the
other parties to the transactions may agree to treat all the outstanding awards
in a different manner. These transactions include a merger or consolidation in
which we are not the survivor or in which shares of our stock are converted into
cash, securities or other property; the sale of all or substantially all of our
assets; a liquidation or dissolution that we initiate; and a transaction in
which any person becomes the beneficial owner, directly or indirectly, of 30% or
more of our outstanding capital stock on a fully diluted and as-converted basis.
2000 EQUITY INCENTIVE PLAN
Our 2000 equity incentive plan was adopted by our board of directors on
, 2000 and approved by our stockholders on , 2000 as
a successor plan to our 1993 incentive stock plan. The 2000 plan provides for
awards up to 3,300,000 shares of common stock, plus the number of shares
previously authorized and remaining available under the 1993 plan as of the
closing of this offering, plus any shares covered by options granted under the
1993 plan that are forfeited or expire unexercised after the closing of this
offering.
The 2000 plan is substantially the same as the 1993 plan, except that it
contemplates the issuance of stock after completion of this offering. The 2000
plan provides for the discretionary grant of awards to employees, consultants
and members of the board of directors. These awards can be incentive stock
options (as defined in Section 422 of the Internal Revenue Code), nonstatutory
stock options (that is, options that do not meet the definition of incentive
stock options), stock purchase rights and stock bonus rights. The 2000 plan
provides that our non-employee directors will be granted initial options to
purchase 21,600 shares of common stock on the date our stock begins public
trading, or on their initial election to the board of directors, if later.
The 2000 plan also provides for subsequent grants to our non-employee
directors of options to purchase 21,600 shares of common stock on the date of
the annual stockholders meeting in the third year after the director's initial
grant, if the director is reelected to our board . All of these options granted
to non-employee directors are subject to vesting, in three equal installments
over three years, based upon continuing service as a director. These options
will have an exercise price equal to the fair market value of the common stock
on the grant date, and a term of 10 years, subject to earlier expiration in
connection with termination of service.
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<PAGE> 57
Our board of directors or a committee of board members may administer the
2000 plan. Starting with the date our stock begins public trading, the 2000 plan
will be administered by a committee composed of two or more independent
directors. The administrator determines the terms of the options or other awards
granted, including when they vest or may be exercised, the exercise price, the
number of shares subject to each option or other award (but not to exceed
3,000,000 per year per participant), and the forms of payment permitted upon
exercise. The board of directors may amend, suspend or terminate the 2000 plan,
except that no action may affect any share of common stock previously issued and
sold or any option previously granted under the 2000 plan without the holder's
consent. In addition, shareholder approval is generally required for the board
of directors to increase the number of shares that may be issued under the 2000
plan. However, no shareholder approval is required in case of a merger,
recapitalization, spin-off, stock split, dissolution, disposition of
substantially all of our assets, or other transaction or event involving a
change in our capital structure. In these cases, the board also has discretion
to adjust the exercise price of any option or stock purchase right, as well to
adjust the number and kind of shares for which options or stock purchase rights
may be granted or which are subject to outstanding options, stock purchase
rights or restricted stock.
For any participant who owns stock possessing more than 10% of the voting
power of all classes of our outstanding capital stock, the per share exercise
price of a stock option must equal at least 110% of the fair market value of a
share of common stock on the grant date. However, the maximum term of a stock
option granted to such a participant differs depending upon the type of option:
If it is an incentive stock option the term must not exceed five years, but if
it is a nonstatutory stock option the term may not exceed 10 years. For all
other participants, the term of all other options granted under the 2000 plan
may not exceed 10 years, and the per share exercise price must equal
- at least 100% of the fair market value of a share of common stock on
the grant date, if the option is an incentive stock option, or
- at least 85% of the fair market value of a share on the grant date if
the option is a nonstatutory stock option. However, pursuant to a
merger or other corporate transaction, options may be granted with an
exercise price different from those set forth above.
Options and other awards granted under the 2000 plan generally are subject
to vesting conditions relating to continued service to the company. Vesting
conditions customarily provide that the award becomes exercisable over time in
stages corresponding to length of service as an employee, director or
consultant. Options and other awards generally are not transferable by the
optionee. Options granted under the 2000 plan generally must be exercised within
three months after the end of the optionee's status as an employee, director or
consultant, or within one year in case of disability or death. If an optionee's
status as an employee, director or consultant is terminated for cause, the
option terminates immediately.
The 2000 plan provides for the grant of stock purchase rights and stock
bonus rights. Stock purchase rights permit the grantee to enter into an
agreement with us to purchase restricted stock, subject to vesting conditions
relating to continued service. Unless the plan administrator determines
otherwise, the restricted stock purchase agreement will give us the option to
repurchase the restricted shares upon the voluntary or involuntary termination
of the purchaser's employment or consulting relationship with our company for
any reason, including death or disability. We intend that the restricted stock
purchase agreement will provide that this repurchase right would apply only to
the shares covered by the unvested portion of the purchaser's stock purchase
right. The purchase price for shares repurchased pursuant to a restricted stock
purchase agreement, and the rate at which the repurchase right lapses will be
determined by the administrator and set forth in the restricted stock purchase
agreement. We intend that the restricted stock purchase agreement provide that
the purchase price for such repurchased shares would be the original price paid
by the purchaser.
If we merge with another corporation, the administrator may, but is not
required, to accelerate the vesting of each outstanding option and other award.
In a merger, the surviving corporation may
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<PAGE> 58
assume any outstanding options or other awards or may substitute similar stock
awards, without accelerating the vesting of outstanding awards. If the surviving
corporation does not assume or substitute for outstanding options and other
awards, then:
- (1) for participants whose service has not been terminated prior to the
merger, awards will become fully vested and exercisable and all
restrictions on those awards will lapse at least 10 days before the
merger closes, and
- (2) for other participants, outstanding awards will terminate if not
exercised before the merger closes.
If the surviving corporation does assume or substitute for outstanding awards,
then a participant's awards will become immediately fully vested and exercisable
if, within nine months after the merger one of the following occurs:
- (1) the surviving corporation terminates the participant's employee or
director status without cause, or
- (2) an employee terminates employment either because his principal work
location moves more than 50 miles from his existing work location or
because there is a material reduction in his responsibilities.
General Federal Tax Consequences. In general under current federal laws,
participants in the 2000 plan who receive nonstatutory stock options, restricted
stock, deferred stock, and stock payments are taxable upon receipt of common
stock or cash with respect to those awards or grants. Subject to limitations
under section 162(m) of the Internal Revenue Code, discussed further below, we
will be entitled to a corporate income tax deduction for the amounts taxable to
those recipients. If a recipient of incentive stock options exercises those
options and then holds those options and option stock for certain minimum
holding periods, he generally has no taxable income on the receipt of common
stock, and we are not entitled to a deduction. Participants in the 2000 plan
will be provided with detailed information regarding the tax consequences
relating to the various types of awards and grants under the plan.
Section 162(m) Limitation. In general, under section 162(m) of the Internal
Revenue Code, income tax deductions of publicly held corporations may be limited
to the extent total compensation for certain executive officers in any one year
exceeds $1,000,000 (less any excess parachute payments as defined in section
280G of the Internal Revenue Code). For purposes of this general rule, total
compensation includes base salary, annual bonus, stock option exercises and
non-qualified benefits paid. However, under section 162(m), the deduction limit
does not apply to certain performance-based compensation established by an
independent compensation committee which is adequately disclosed to, and
approved by, stockholders. In particular, stock options will satisfy the
performance-based compensation exception if the awards are made by a qualifying
compensation committee, the plan sets the maximum number of shares any person
can be granted within a specified period, and the compensation is based solely
on an increase in the stock price after the grant date (that is, the option
exercise price is at least equal to the fair market value of the stock subject
to the award on the grant date). Rights or awards other than options will not
qualify as performance-based compensation for these purposes unless the rights
or awards are granted or vest upon preestablished objective performance goals
whose material terms are disclosed to and approved by the stockholders. Under a
transition rule for compensation plans of corporations which, like Capstone, are
privately held and which become publicly held in an initial public offering, the
2000 plan will not be subject to section 162(m) until the earlier of (1) the
material modification of the 2000 plan; (2) the issuance of all employer stock
and other compensation that has been allocated under the 2000 plan; or (3) the
first meeting of stockholders at which directors are to be elected that occurs
after December 31, 2003.
Based on current law, we have attempted to structure the 2000 plan so that
after December 31, 2003, subject to obtaining shareholder approval for the 2000
plan, the remuneration attributable to
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stock options which meet the other requirements of section 162(m) will not be
subject to the $1,000,000 limitation. We have not, however, requested a ruling
from the IRS or an opinion of counsel regarding this issue.
EMPLOYEE STOCK PURCHASE PLAN
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 employee stock purchase plan was adopted by our board of directors
on , 2000 and approved by our stockholders on , 2000. A
total of 900,000 shares of common stock may be sold under the purchase plan. As
of the date of this prospectus, no shares have been issued under the purchase
plan. The purchase plan is administered by a committee composed of not less than
two members of the board of directors who are "non-employee directors" within
the meaning of Rule 16b-3 adopted by the SEC under Section 16(b) of the
Securities Exchange Act.
The purchase plan, which is intended to qualify under section 423 of the
Internal Revenue Code, contains consecutive offer periods that are generally six
months in duration. The offer periods start on January 1 and July 1 and end on
the last day of June and December, except for the first offer period, which will
commence on the date immediately preceding the first date on which a share of
common stock is traded on an exchange or quoted on Nasdaq or a successor
quotation system and end on December 31, 2000. Employees are eligible to
participate if they are customarily employed by us or any participating
subsidiary for more than 20 hours per week and more than five months per year.
However, no employee may be granted a right to purchase stock under the purchase
plan (1) to the extent that, immediately after the grant of the right to
purchase stock, the employee would own, or be treated as owning, stock
possessing 5% or more of the total combined voting power or value of all classes
of our capital stock, or (2) to the extent that his or her rights to purchase
stock under all of our employee stock purchase plans accrues at a rate which
exceeds $25,000 worth of stock for each calendar year.
The purchase plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's base compensation. Base
compensation is defined as the participant's total base compensation which he or
she receives on each payday as compensation for services to our company,
excluding overtime payments, sales commissions, incentive compensation, bonuses,
expense reimbursements, fringe benefits and other special payments. The maximum
number of shares a participant may purchase with respect to a single offer
period is 2,500 shares. Amounts deducted and accumulated by the participant are
used to purchase shares of common stock at the end of each offer period. The
price of stock purchased under the purchase plan is 85% of the lesser of the
fair market value of the common stock (1) the first day of the offer period or
(2) the last day of the offer period. Participants may end their participation
at any time other than the final 15 days of an offer period, and they will be
paid their payroll deductions to date. Purchase of stock by participants in the
purchase plan occurs automatically on the last day of each offer period.
Participation ends automatically upon termination of employment with us, and the
employee's payroll deductions to date will be refunded to the employee. However,
if employment is terminated by the employee's death, a refund of the employee's
payroll deductions to date requires a written request from the executor of the
employee's will or the administrator of the employee's estate before the next
date on which an offer period ends; otherwise the purchase of stock using the
employee's payroll deductions will occur on the last day of the offer period.
Rights to purchase stock granted under the purchase plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the purchase plan. The purchase
plan provides that, upon certain specified events, such as a merger
recapitalization, spin-off, stock split, dissolution, disposition of
substantially all of our assets, or other similar corporate transaction or
event, the board has discretion to adjust the exercise price of any option as
well as the number and kind of shares for which options may be granted or which
are subject to outstanding options. Our board of directors has the authority to
amend or terminate the
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<PAGE> 60
purchase plan; however, shareholder approval is required to amend the purchase
plan either to change the number of shares of stock that may be sold pursuant to
the purchase plan (except upon certain specified events involving a change in
capital structure, such as those listed in the preceding sentence), or to alter
the requirements for eligibility to participate in the purchase plan, or in any
manner that would cause the plan to no longer be an "employee stock purchase
plan" within the meaning of Section 423(b) of the Internal Revenue Code. The
purchase plan will terminate on December 31, 2010, unless terminated earlier in
accordance with its provisions.
EMPLOYMENT AGREEMENTS
We have entered into a letter agreement with Ake Almgren, our President and
Chief Executive Officer. During his employment Dr. Almgren will receive a base
salary plus a bonus of up to $100,000 based on the achievement of annual
objectives and stock options under Capstone Turbine Corporation's Stock Option
Plan, originally granted in the amount of 780,000 shares vesting over four
years. Upon termination of his employment, Dr. Almgren will receive an amount
equaling the monthly rate of the base salary for the six months following
termination. For 1999, Dr. Almgren's base salary was $200,000.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 16, 1995, we entered into a Preferred Stock Purchase Agreement for
Series B Preferred Stock pursuant to which Fletcher Challenge Distributed
Generation, Inc. purchased 3,333,334 shares of Series B Preferred. In connection
with the Series B preferred financing, we and Fletcher Challenge Power Marketing
Limited, a New Zealand corporation and an affiliate of Fletcher Challenge,
entered into a Marketing and Licensing Agreement dated May 16, 1995. This
agreement provided that Fletcher Challenge Power Marketing have the exclusive
marketing rights for seven years from the date in which Capstone met a specified
technological milestone. This milestone was met in 1999 and the original
agreement term, therefore, would have expired in 2006. The marketing rights
related to sales of our products throughout the world exclusive of the United
States, Canada, Mexico, Europe and Africa. We have subsequently reacquired these
marketing and licensing rights under the terms of the Marketing Rights Buyback
Agreement, dated as of July 14, 1999, entered into by us, Awatea Holdings
Limited, Fletcher Challenge and Fletcher Challenge Power Marketing. Among other
things, the Buyback Agreement provides for our repurchase of Fletcher
Challenge's Power Marketing marketing rights and future royalties on shipments
in the specified territory. As part of the repurchase agreement we elected to
make an upfront payment of $9 million, resulting in a royalty obligation of 4%,
up to a maximum of $11.0 million. The future royalty payments will accelerate at
a qualifying public offering and, accordingly, we will pay the royalty maximum
of $11 million from the proceeds of this offering because we have not paid any
royalty payments to date. As further provided in the repurchase agreement, on
February 24, 2000 we also issued 1,250,000 shares of Series G preferred with a
liquidation preference of $4.00 per share for no additional consideration to
Awatea. Peter Steele is a director designee of Fletcher Challenge to our board.
Sales made to Fletcher Challenge and an affiliate were $247,000 in 1999.
On January 17, 1997, we issued 3,125,000 shares of our Series D Preferred
to various investors, some of whom were our officers, directors or 5%
shareholders. On August 22, 1997 we issued 5,865,814 shares of our Series E
Preferred Stock to various investors. An additional 4,587,331 shares of Series E
Preferred Stock were issued on November 19, 1997. On May 31, 1999, we issued
11,095,496 shares of Series F Preferred Stock, in addition to warrants to
acquire 6,250,004 shares of common stock, to various investors, some of whom
were our directors or 5% shareholders. On February 24, 2000, we issued
35,683,979 shares of Series G preferred stock to various investors some of whom
were our officers, directors or 5% shareholders.
We have sold several of our products to Fletcher Challenge Energy, Canada
and Fletcher Challenge Power Marketing, New Zealand for aggregate proceeds of
approximately $357,000. Fletcher Challenge Power Marketing, New Zealand
purchased one microturbine in 1995 and three units in 1996 for proceeds of
approximately $110,000. In 1999 we sold six units to Fletcher Challenge Power
Marketing, New Zealand for resale to Japanese customers for approximately
$178,000. Fletcher Challenge Energy Canada purchased two microturbines in 1999
for aggregate proceeds of approximately $69,000, the same price other customers
paid.
During 1997 and 1998, Fletcher Challenge reimbursed us $137,000 and
$39,000, respectively, for the use of our office facilities as well as for other
expenses. As of December 31, 1998, we had a $17,000 receivable for these
expenses.
During 1997, we purchased from Rosen Motors, of which our present and
former directors Benjamin Rosen and Dr. Harold Rosen, respectively, were
principal officers, equipment and improvements in the amount of $590,000 and
assumed several leases.
The following members of our Board of Directors represent venture capital
firms that have invested in us. Richard Aube is a managing director of the
Beacon Group, LLC, a private investment and strategic advisory firm based in New
York. John Jaggers is a general partner and the Chief Financial Officer of Sevin
Rosen Funds, a group of venture capital firms that manages a several hundred
million dollar portfolio. Benjamin Rosen is a co-founder of Sevin Rosen Funds.
Eric Young is a
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<PAGE> 62
co-founder of Canaan Partners, a venture capital investment firm and has served
as a general partner. Jean-Rene Marcoux is President and Chief Executive Officer
of Hydro-Quebec CapiTech, the investment arm of Hydro-Quebec. Each of these
firms represented on the Board of Directors has invested in us. For a breakdown
of shareholding, please see "Principal Shareholders," following this section.
Additionally, under the Amended and Restated Stockholders Agreement, parties to
that agreement have agreed to vote their shares to elect representatives of each
of these groups, among others, to the Board.
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<PAGE> 63
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock by:
- all persons known by us to own beneficially 5% or more of the common
stock;
- each of our directors;
- the executive officers listed in the Summary Compensation Table; and
- all directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder on this table
is c/o Capstone Turbine Corporation, 6430 Independence, Woodland Hills, CA
91367. A person has beneficial ownership of shares if he has the power to vote
or dispose of the shares. This power can be exclusive or shared, direct or
indirect. In addition, a person is considered by SEC rules to beneficially own
shares underlying options that are presently exercisable or will become
exercisable within 60 days. The shares listed in this table below under "Number
of Shares Underlying Options" include shares issuable upon the exercise of
options that are presently exercisable or will become exercisable within 60 days
of May 31, 2000.
As of May 31, 2000, there were 65,905,872 shares of our common stock
outstanding, after giving effect to the conversion of all shares of preferred
stock into common stock, the cashless exercise of all outstanding warrants
assuming a public offering price of $11.00 per share, and including options
granted and exercisable within 60 days of May 31, 2000. To calculate a
shareholder's percentage of beneficial ownership, we must include in the
numerator and denominator those shares underlying options that the shareholder
is considered to beneficially own. Shares underlying options held by other
shareholders, however, are disregarded in this calculation. Therefore, the
denominator used in calculating beneficial ownership among our shareholders may
differ.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PRIOR TO OFFERING
-----------------------------------------------
NUMBER OF SHARES BENEFICIALLY
NUMBER OF SHARES OWNED AFTER OFFERING
OUTSTANDING UNDERLYING --------------------
NAME OF BENEFICIAL OWNER SHARES OPTIONS TOTAL PERCENT NUMBER PERCENT
------------------------ ----------- ---------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Awatea (Fletcher
Challenge)(1)................. 8,077,565 8,077,565 12.26% 8,077,565 10.77%
Peter Steele(2)................. 8,077,565 8,077,565 12.26% 8,077,565 10.77%
Rho Management Trust I(3)....... 6,193,985 6,193,985 9.40% 6,193,985 8.26%
Southern Union Company(4)....... 4,167,916 4,167,916 6.32% 4,167,916 5.56%
Sevin Rosen Funds(5)............ 4,111,316 4,111,316 6.24% 4,111,316 5.48%
John Jaggers(6)................. 4,111,316 4,111,316 6.24% 4,111,316 5.48%
Beacon Group Energy Investment
Fund II(7).................... 3,750,000 3,750,000 5.69% 3,750,000 5.00%
Richard Aube(8)................. 3,750,000 3,750,000 5.69% 3,750,000 5.00%
Vulcan Ventures, Inc.(9)........ 3,539,997 3,539,997 5.37% 3,539,997 4.72%
Paul G. Allen(10)............... 3,539,992 3,539,997 5.37% 3,539,997 4.72%
Benjamin M. Rosen(11)........... 3,492,621 3,492,621 5.30% 3,492,621 4.66%
Eric Young(12).................. 2,414,721 2,414,721 3.66% 2,414,721 3.22%
Jean-Rene Marcoux(13)........... 1,200,000 1,200,000 1.82% 1,200,000 1.60%
Dr. Ake Almgren(14)............. 120,000 633,125 753,125 1.14% 753,125 1.00%
Jeffrey Watts(15)............... 200,570 108,213 308,783 0.47% 308,783 0.41%
William Treece(16).............. 58,125 42,500 100,625 0.15% 100,625 0.13%
All directors and executive
officers as a group (9
persons)...................... 23,424,918 783,838 24,208,756 36.73% 24,208,756 32.28%
</TABLE>
---------------
(1) Includes 7,328,996 shares issuable upon conversion of preferred stock,
604,243 shares issuable upon exercise of common stock warrants, and 144,326
shares issuable upon exercise and conversion of preferred stock warrants.
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<PAGE> 64
(2) Director designee for Awatea (Fletcher Challenge). Mr. Steele disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(3) Includes 4,712,850 shares issuable upon conversion of preferred stock,
1,348,591 shares issuable upon exercise of common stock warrants, and
132,544 shares issuable upon exercise and conversion of preferred stock
warrants. Capstone has been informed that Rho Management Company, Inc., a
New York corporation, which acts as investment advisor to Rho Management
Trust I, may be deemed to be the beneficial owner of shares registered in
the name of the Trust. Joshua Ruch may be deemed to control Rho Management
Company, and thereby to have voting and investment control over the shares
registered in the name of the Trust.
(4) Includes 1,875,000 shares of common stock and 2,292,916 shares issuable
upon conversion of preferred stock.
(5) Includes 34,979 shares of common stock, 3,753,238 shares issuable upon
conversion of preferred stock, 248,163 shares issuable upon exercise of
common stock warrants and 74,936 shares issuable upon exercise and
conversion of preferred stock warrants all held by various venture capital
partnerships managed by Sevin Rosen Funds.
(6) Director designee and general partner of various affiliated venture capital
partnerships managed by Sevin Rosen Funds. Mr. Jaggers disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(7) Consists of 3,750,000 shares issuable upon conversion of preferred stock.
(8) Director designee for Beacon Group Energy Investment Fund II, LP. Mr. Aube
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(9) Includes 229,096 shares of common stock and 3,310,901 shares issuable upon
conversion of preferred stock. Vulcan Ventures, Inc. has informed Capstone
that Paul G. Allen is the beneficial owner of these shares.
(10) Includes 229,096 shares of common stock and 3,310,901 shares issuable upon
conversion of preferred stock held as of record by Vulcan Ventures, Inc.
(11) Director. Includes 194,261 shares in common stock and 3,298,360 shares
issuable upon conversion of preferred stock.
(12) Director designee of the Canaan Partnership Funds. Includes 162,118 shares
of common stock, 2,212,416 shares issuable upon conversion of preferred
stock, and 40,187 shares issuable upon exercise and conversion of preferred
stock warrants. Mr. Young disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein.
(13) Director designee for Hydro-Quebec. Consists of 1,200,000 shares issuable
upon conversion of preferred stock. Mr. Marcoux disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(14) President, CEO and Director. Consists of 120,000 shares of common stock and
633,125 shares of common stock issuable upon exercise of options
exercisable within 60 days of May 31, 2000.
(15) SVP Finance & Administration, CFO and Secretary. Consists of 190,350 shares
of common stock and 108,213 shares of common stock issuable upon exercise
of options exercisable within 60 days of May 31, 2000.
(16) SVP Engineering. Consists of 58,125 shares of common stock and 42,500
shares of Common Stock issuable upon exercise of options exercisable within
60 days of May 31, 2000.
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<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
The Company, is authorized to issue up to 135,000,000 shares of common
stock, $0.001 par value per share, and 80,000,000 shares of preferred stock,
$0.001 par value.
COMMON STOCK
As of May 31, 2000, our outstanding common stock consisted of 64,171,799
shares of common stock, after giving effect to the exercise of outstanding
warrants, and the conversion of all shares of preferred stock into common stock
upon the closing of this offering, held by 337 shareholders of record. Holders
of common stock are entitled to one vote for each share held of record on all
matters on which shareholders may vote, and do not have cumulative voting rights
in the election of directors. Holders of common stock are entitled to receive,
as, when and if declared by the board of directors from time to time, such
dividends and other distributions in cash, stock or property from our assets or
funds legally available for such purposes subject to any dividend preferences
that may be attributable to our outstanding preferred stock.
No preemptive, conversion, redemption or sinking fund provisions apply to
the common stock. All outstanding shares of common stock are fully paid and
non-assessable. In the event of our liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in the assets available
for distribution.
PREFERRED STOCK
Upon the closing of this offering, we will have no outstanding shares of
preferred stock. Our board of directors, without further action by the
shareholders, is authorized to issue an aggregate of 80,000,000 shares of
preferred stock. We have no plans to issue a new series of preferred stock. Our
board of directors may issue preferred stock with dividend rates, redemption
prices, preferences on liquidation or dissolution, conversion rights, voting
rights and any other preferences, which rights and preferences could adversely
affect the voting power of the holders of common stock. Issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions or other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or could discourage or delay a
third party from acquiring control.
WARRANTS
At May 31, 2000, we had outstanding common and preferred stock warrants
exercisable for 3,450,257 shares of common stock to investors and 119,167 shares
of common stock to equipment lessors. These warrants expire on dates ranging
from the consummation of this offering to December, 2003. The exercise price and
number of shares of stock issuable upon the exercise of each of the warrants may
be adjusted upon the occurrence of certain events, including stock splits, stock
dividends, reorganizations, or merger. In addition, some of the warrants and
shares of stock issuable upon exercise of those warrants have registration
rights.
REGISTRATION RIGHTS
After the consummation of this offering, the holders of approximately
9,090,909 million shares of common stock will be entitled to registration rights
with respect to the registrable securities. These rights are provided under the
terms of the registrable securities and agreements between us and the holders of
those securities. These agreements and the registrable securities provide demand
registrations rights. In addition, pursuant to these agreements, the holders of
the securities are entitled to require us to include their registrable
securities in registration statements we file under the Securities Act of 1933.
Registration of shares of common stock pursuant to the exercise of registration
rights under the Securities Act would result in those shares becoming freely
tradable without restriction under the Securities Act immediately upon the
effectiveness of such registration.
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<PAGE> 66
RIGHTS AGREEMENT
We have in place two rights agreements by and among us and several of our
shareholders which grant the shareholders rights to include their shares in a
registration statement filed by us. The underwriter participating may limit the
number of shares offered by the shareholders. Among other things, the rights
agreements provide that in connection with some issuances of securities each
holder who is a party to the rights agreement may purchase an amount of such
securities and on substantially the same terms and conditions as the issuance as
determined by a formula intended to ensure that those holders can maintain their
proportional interest in us on a fully diluted basis.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS WHICH MAY HAVE AN
ANTI-TAKEOVER EFFECT
A number of provisions of our Certificate of Incorporation and By-laws
which will be effective upon completion of this offering concern matters of
corporate governance and the rights of shareholders. These provisions, as well
as the ability of our board of directors to issue shares of preferred stock
and/or to set the voting rights, preferences and other terms, may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by our board of directors, including takeovers which shareholders may
deem to be in their best interests. If takeover attempts are discouraged,
temporary fluctuations in the market price of our common stock, which may result
from actual or rumored takeover attempts, may be inhibited. These provisions,
and the ability of our board of directors to issue preferred stock without
further shareholder action, also could delay or frustrate the removal of
incumbent directors or the assumption of control by shareholders, even if the
removal or assumption would be beneficial to our shareholders. These provisions
also could discourage or make more difficult a merger, tender offer or proxy
contest, even if favorable to the interests of shareholders, and could depress
the market price of our common stock. Our board of directors believes that these
provisions are appropriate to protect out interests and of our shareholders. Our
board of directors has no present plans to adopt any further measures or devices
which may be deemed to have an "anti-takeover effect."
TRADING ON THE NASDAQ NATIONAL MARKET SYSTEM
We have applied to have our common stock approved for quotation on the
Nasdaq under the symbol "CPST".
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be ChaseMellon
Shareholder Services.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market following
the offering could adversely affect the market price of the common stock and
adversely affect our ability to raise capital at a time and on terms favorable
to us.
Of the 73,262,712 shares to be outstanding after the offering, the
9,090,909 shares of common stock offered by us pursuant to this offering and
approximately 41,717,228 additional shares of common stock will be freely
tradeable without restriction in the public market unless such shares are held
by "affiliates," as that term is defined in Rule 144(a) under the Securities
Act. For purposes of Rule 144, an "affiliate" of an issuer is a person that,
directly or indirectly through one or more intermediaries, controls, or is
controlled by or is under common control with, such issuer. The remaining shares
of common stock to be outstanding after the offering are "restricted securities"
under the Securities Act and may be sold in the public market upon the
expiration of specified holding periods under Rule 144, subject to the volume,
manner of sale and other limitations of Rule 144.
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<PAGE> 67
In addition, as of May 31, 2000, there were outstanding common and
preferred stock warrants exercisable for 3,569,424 shares of common stock, and
options issued and outstanding to purchase 5,599,479 shares of common stock. An
additional 3,731,329 shares were reserved for issuance under our option plans.
We intend to register the shares of common stock issued or reserved for issuance
under our option plans or separate option agreements as soon as practicable
following the date of this prospectus.
Holders of approximately 55.1 million shares of common stock are entitled
to registration rights with respect to such shares for resale under the
Securities Act. If such holders, by exercising their registration rights, cause
a large number of shares to be registered and sold in the public market, these
sales could have an adverse effect on the market price for the common stock.
LOCK-UP ARRANGEMENTS
Our executive officers and directors and certain other shareholders have
agreed not to sell or otherwise dispose of any shares of common stock for a
period of 180 days after the date of this prospectus without the prior written
consent of Goldman, Sachs & Co. We have agreed not to sell or otherwise dispose
of any shares of our common stock for a period of 180 days after the date of
this prospectus. See "Underwriting".
VALIDITY OF COMMON STOCK
The validity of the shares of common stock offered hereby will be passed
upon for us by Latham & Watkins, Los Angeles, California and for the
underwriters by Sullivan & Cromwell, New York, New York.
EXPERTS
Deloitte & Touche LLP, independent auditors, have audited our financial
statement and financial statement schedule at December 31, 1998 and 1999, and
for each of the two years in the period ended December 31, 1999, as set forth in
their reports. We have included our financial statements and financial statement
schedules in the prospectus and elsewhere in the registration statement in
reliance on Deloitte & Touche LLP's reports, given on their authority as experts
in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited our financial
statements and financial statement schedule at December 31, 1997, and for the
year ended December 31, 1997, as set forth in their report (which contain an
explanatory paragraph describing conditions that raise substantial doubt about
our ability to continue as a going concern as described in Note 1 to those
financial statements). We have included our financial statements and financial
statement schedules in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
CHANGE OF AUDITORS
In August 1998, the Board of Directors elected to change our independent
auditors, from Ernst & Young, LLP, to Deloitte & Touche LLP. In connection with
Ernst & Young LLP's audit of the financial statements for the years ended
December 31, 1995, 1996 and 1997, and in connection with the subsequent period
up to August 1998, there were no disagreements with Ernst & Young LLP on any
matters of accounting principles or practices, financial statements disclosure
or auditing scope or procedures, nor any reportable events. Ernst & Young LLP's
report on our financial statements for the years ended December 31, 1995, 1996
and 1997 contained no adverse opinion or disclaimer of opinion and was not
modified or qualified as to uncertainty, audit scope or accounting principles
except for a going concern emphasis paragraph for each of the three years. The
decision to change auditors was approved by our board of directors. We have
provided Ernst & Young LLP with a copy of the disclosure contained in this
section of the prospectus.
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<PAGE> 68
UNDERWRITING
Capstone and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to conditions, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and Morgan Stanley & Co. Incorporated are the representatives of
the underwriters.
<TABLE>
<CAPTION>
Number of Shares
Underwriters ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Merrill Lynch, Pierce, Fenner & Smith ......................
Incorporated
Morgan Stanley & Co. Incorporated ..........................
---------
Total........................................... 9,090,909
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,363,636 shares from Capstone to cover such sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Capstone. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Capstone
----------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................. $ $
Total................................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial offering price. If all the shares are not sold at the initial offering
price, the representatives may change the offering price and the other selling
terms.
Capstone, its directors, officers and persons owning its common stock have
agreed with the underwriters not to dispose of or hedge any of their common
stock or securities convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus, except with the prior written
consent of the representatives. This agreement does not apply to gifts or
transfers to affiliates or transactions under any existing employee benefit
plans. See "Shares Eligible for Future Sale" for a discussion of various
transfer restrictions.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Capstone and the
representatives. Among the facts to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be our historical performance, estimates of the business
potential and earnings prospects of Capstone, an assessment of our management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
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<PAGE> 69
At Capstone's request, the underwriters have reserved up to 909,090 shares
of the common stock offered hereby for sale, at the initial public offering
price, to employees, customers and other friends of Capstone through a directed
share program. The number of shares available for sale to the general public
will be reduced to the extent these persons purchase the reserved shares. We
cannot assure you that any of the reserved shares will be so purchased. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same basis as other shares offered hereby.
Capstone will apply to have the common stock included for quotation on the
Nasdaq National Market under the symbol of "CPST".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
A prospectus in electronic format may be made available on the Web sites
maintained by one or more underwriters or securities dealers. The
representatives of the underwriters may agree to allocate a number of shares to
underwriters for sale to their online brokerage account holders. Internet
distribution will be allocated by the representatives to underwriters that may
make Internet distributions on the same basis as other allocations. In addition,
shares may be sold by the underwriters to securities dealers who resell shares
to online brokerage account holders.
The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares offered.
Capstone estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$2,000,000.
Capstone has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
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<PAGE> 70
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including the exhibits and schedules thereto) under the
Securities Act and the rules and regulations thereunder, for the registration of
the common stock offered hereby. This prospectus is part of the registration
statement. This prospectus does not contain all the information included in the
registration statement because we have omitted parts of the registration
statement as permitted by the Securities and Exchange Commission's rules and
regulations. For further information about us and our common stock, you should
refer to the registration statement. Statements contained in this prospectus as
to any contract, agreement or other document referred to are not necessarily
complete. Where the contract or other document is an exhibit to the registration
statement, each statement is qualified by the provisions of that exhibit.
You can inspect and copy all or any portion of the registration statements
or any reports, statements or other information we file at the public reference
facility maintained by the Securities and Exchange Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the Securities
and Exchange Commission at 1-800-SEC-0330 for further information about the
operation of the public reference rooms. Copies of all or any portion of the
registration statement can be obtained from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the registration statement is publicly
available through the Securities and Exchange Commission's site on the
Internet's World Wide Web, located at http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You can also
request copies of these documents, for a copying fee, by writing to the
Securities and Exchange Commission. We intend to furnish to our stockholders
annual reports containing audited financial statements for each fiscal year.
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<PAGE> 71
CAPSTONE TURBINE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP....... F-2
Independent Auditors' Report of Ernst & Young LLP........... F-3
Financial Statements as of December 31, 1998 and 1999 and
March 31, 2000 (Unaudited) and for the Years Ended
December 31, 1997, 1998 and 1999 and the Three Months
Ended March 31, 1999 (Unaudited) and 2000 (Unaudited):
Balance Sheets............................................ F-4
Statements of Operations.................................. F-5
Statement of Stockholders' Deficiency..................... F-6
Statements of Cash Flows.................................. F-7
Notes to Financial Statements............................. F-8
</TABLE>
F-1
<PAGE> 72
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, 1998 and 1999, and the related statements of
operations, stockholders' deficiency, and cash flows for the years then ended.
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, 1998 and 1999, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 20, 2000 (May 26, 2000 for paragraph 1 of Note 13)
F-2
<PAGE> 73
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Capstone Turbine Corporation
We have audited the accompanying statement of operations, stockholders' equity,
and cash flows for the year ended December 31, 1997. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Capstone Turbine Corporation's operations
and cash flows for the year ended December 31, 1997, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Capstone Turbine Corporation will continue as a going concern. As more fully
described in Note 1, the Company has incurred significant operating losses and
continues to need to raise additional funding. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
Woodland Hills, California
April 3, 1998, except for paragraph 1
of Note 13, as to which
the date is May 26, 2000
F-3
<PAGE> 74
CAPSTONE TURBINE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 2000
---------------------------- MARCH 31, PRO FORMA
1998 1999 2000 (UNAUDITED)
------------ ------------- ------------- -------------
(UNAUDITED) (NOTE 12)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 2)......................... $ 4,943,000 $ 6,858,000 $ 122,381,000
Accounts receivable, net of allowance for doubtful accounts
of $3,000 in 1998 and $50,000 in 1999.................... 79,000 2,425,000 2,297,000
Accounts receivable from related parties (Note 10)......... 17,000
Inventory (Note 3)......................................... 8,703,000 8,803,000 11,212,000
Prepaid expenses and other current assets.................. 808,000 2,217,000 1,784,000
------------ ------------- ------------- -------------
Total current assets..................................... 14,550,000 20,303,000 137,674,000
------------ ------------- ------------- -------------
Equipment and Leasehold Improvements (Notes 2 and 7):
Machinery, equipment, and furniture........................ 8,938,000 11,824,000 12,128,000
Leasehold improvements..................................... 182,000 137,000 137,000
Molds and tooling.......................................... 397,000 541,000 607,000
------------ ------------- ------------- -------------
9,517,000 12,502,000 12,872,000
Less accumulated depreciation and amortization............. 2,706,000 4,570,000 5,287,000
------------ ------------- ------------- -------------
Total equipment and leasehold improvements............... 6,811,000 7,932,000 7,585,000
------------ ------------- ------------- -------------
Deposits on Fixed Assets (Note 7)........................... 4,340,000 3,374,000 3,403,000
Other Assets................................................ 69,000 422,000 441,000
Intangible Assets, Net (Note 10)............................ 4,896,000 16,662,000
------------ ------------- ------------- -------------
Total.................................................... $ 25,770,000 $ 36,927,000 $ 165,765,000
============ ============= ============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Accounts payable........................................... $ 1,230,000 $ 1,728,000 $ 1,706,000
Accrued salaries and wages................................. 520,000 677,000 565,000
Other accrued liabilities.................................. 3,957,000 2,340,000 2,813,000
Accrued warranty reserve................................... 873,000 3,168,000 4,186,000
Deferred revenue (Notes 2 and 10).......................... 4,696,000 9,432,000
Current portion of capital lease obligations (Note 7)...... 1,051,000 1,400,000 1,572,000
------------ ------------- ------------- -------------
Total current liabilities................................ 7,631,000 14,009,000 20,274,000
------------ ------------- ------------- -------------
Long-Term Portion of Capital Lease Obligations (Note 7)..... 3,398,000 4,499,000 4,886,000
------------ ------------- ------------- -------------
Accrued Dividends Payable (Note 5).......................... 4,268,000 6,175,000 6,683,000 --
------------ ------------- ------------- -------------
Commitments and Contingencies (Note 7)
Redeemable Preferred Stock, 80,000,000 Shares Authorized
(Notes 5 and 11):
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 $49,000, $37,000 and $34,000) at
December 31, 1998 and 1999 and March 31, 2000,
respectively............................................. 6,521,000 15,183,000 23,466,000 --
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 $44,000, $34,000 and $32,000) at
December 31, 1998 and 1999 and March 31, 2000,
respectively............................................. 4,956,000 8,928,000 13,300,000 --
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 $341,000, $266,000 and $247,000)
at December 31, 1998 and 1999 and March 31, 2000,
respectively............................................. 14,969,000 23,324,000 33,665,000 --
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 $18,000, $14,000 and $13,000) at
December 31, 1998 and 1999, and March 31, 2000,
respectively............................................. 12,482,000 14,313,000 19,542,000 --
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 $1,283,000, $995,000 and $924,000)
at December 31, 1998 and 1999 and March 31, 2000,
respectively............................................. 62,696,000 62,984,000 79,809,000 --
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 and $2,520,000) at
December 31, 1999 and March 31, 2000..................... -- 20,903,000 25,305,000 --
Series G preferred stock, $.001 par value; 35,698,985
shares issued and outstanding (involuntary liquidation
preference of $142,796,000, net of unamortized accretion
of origination fees of $15,197,000) at March 31, 2000.... -- -- 221,320,000 --
Promissory notes associated with Series G preferred
stock.................................................... -- 10,834,000 -- --
------------ ------------- ------------- -------------
Total redeemable preferred stock......................... 101,624,000 156,469,000 416,407,000 --
------------ ------------- ------------- -------------
Stockholders' (Deficiency) Equity (Notes 5, 6, and 11):
Common stock, $.001 par value; 135,000,000 shares
authorized; 2,171,266, 2,377,826, 5,251,235, and
58,494,065 shares issued and outstanding at December 31,
1998, 1999, March 31, 2000, and March 31, 2000 pro forma
respectively............................................. 2,000 2,000 5,000 58,000
Additional paid-in capital................................. -- -- -- 423,037,000
Accumulated deficit........................................ (91,153,000) (144,227,000) (282,490,000) (282,490,000)
------------ ------------- ------------- -------------
Total stockholders' (deficiency) equity.................. (91,151,000) (144,225,000) (282,485,000) 140,605,000
------------ ------------- ------------- -------------
Total.................................................... $ 25,770,000 $ 36,927,000 $ 165,765,000 165,765,000
============ ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 75
CAPSTONE TURBINE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, QUARTERS ENDED MARCH 31,
------------------------------------------ ---------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Notes 2 and 10):
Product revenue...................... $ 1,510,000 $ 76,000 $ 6,694,000 $ 222,000 $ 3,746,000
Contract revenue..................... 113,000 8,000 -- -- --
------------ ------------ ------------ ----------- -------------
Total revenues..................... 1,623,000 84,000 6,694,000 222,000 3,746,000
Cost of Goods Sold (Note 3)............ 8,147,000 5,335,000 15,629,000 1,233,000 5,124,000
------------ ------------ ------------ ----------- -------------
Gross Profit (Loss).................... (6,524,000) (5,251,000) (8,935,000) (1,011,000) (1,378,000)
Operating Costs and Expenses:
Research and development............. 13,281,000 19,019,000 9,151,000 2,264,000 2,441,000
Selling, general, and
administrative..................... 10,946,000 10,257,000 11,191,000 2,502,000 4,384,000
------------ ------------ ------------ ----------- -------------
Total operating costs and
expenses......................... 24,227,000 29,276,000 20,342,000 4,766,000 6,825,000
Interest Income........................ 873,000 1,437,000 452,000 97,000 723,000
Interest Expense....................... (168,000) (309,000) (721,000) (115,000) (336,000)
Other (Expense)/Income................. (506,000) 327,000 17,000 11,000 6,000
------------ ------------ ------------ ----------- -------------
Profit (Loss) Before Income Taxes...... (30,552,000) (33,072,000) (29,529,000) (5,784,000) (7,810,000)
Provision for Income Taxes (Note 4).... 1,000 1,000 1,000 1,000 1,000
------------ ------------ ------------ ----------- -------------
Net Income (Loss)...................... (30,553,000) (33,073,000) (29,530,000) (5,785,000) (7,811,000)
Preferred Stock Dividends and
Accretion............................ (1,419,000) (2,096,000) (26,700,000) (554,000) (139,932,000)
------------ ------------ ------------ ----------- -------------
Net Loss Attributable to Common
Stockholders......................... $(31,972,000) $(35,169,000) $(56,230,000) $(6,339,000) $(147,743,000)
============ ============ ============ =========== =============
Weighted Average Common Shares
Outstanding.......................... 1,699,196 1,980,478 2,292,242 2,177,088 4,048,970
============ ============ ============ =========== =============
Net Loss Per Share of Common Stock --
Basic and Diluted.................... $ (18.82) $ (17.76) $ (24.53) $ (2.91) $ (36.49)
============ ============ ============ =========== =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 76
CAPSTONE TURBINE CORPORATION
STATEMENT OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL
SHARES PAID-IN ACCUMULATED
OUTSTANDING AMOUNT CAPITAL DEFICIT TOTAL
----------- ------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 as previously
reported..................................... 2,588,732 $3,000 $ $ (24,179,000) $ (24,176,000)
Three-for-five common stock split.............. (1,035,493) (1,000) 1,000 --
---------- ------- ------------ ------------- -------------
Balance, January 1, 1997, As Adjusted.......... 1,553,239 2,000 1,000 (24,179,000) (24,176,000)
Issuance of common stock..................... 44,339 41,000 41,000
Exercise of stock options and warrants....... 237,076 50,000 50,000
Accretion of preferred stock................. (92,000) (114,000) (206,000)
Dividends accrued for Series A preferred
stock...................................... (297,000) (297,000)
Dividends accrued for Series B preferred
stock...................................... (143,000) (143,000)
Dividends accrued for Series C preferred
stock...................................... (302,000) (302,000)
Dividends accrued for Series D preferred
stock...................................... (209,000) (209,000)
Dividends accrued for Series E preferred
stock...................................... (262,000) (262,000)
Net loss..................................... (30,553,000) (30,553,000)
---------- ------- ------------ ------------- -------------
Balance, December 31, 1997..................... 1,834,654 2,000 -- (56,059,000) (56,057,000)
Exchange of common stock (Note 5)............ (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 (Note 5)....... 2,969,000 2,969,000
Common stock options granted (Note 6)........ 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................. 269,000 269,000
Exercise of stock options and warrants....... 2,873,409 3,000 1,079,000 1,082,000
Accretion of preferred stock................. (9,480,000) (40,377,000) (49,857,000)
Dividends accrued for Series A preferred
stock...................................... (97,000) (97,000)
Dividends accrued for Series B preferred
stock...................................... (46,000) (46,000)
Dividends accrued for Series C preferred
stock...................................... (98,000) (98,000)
Dividends accrued for Series D preferred
stock...................................... (68,000) (68,000)
Dividends accrued for Series E preferred
stock...................................... (199,000) (199,000)
Beneficial conversion feature for Series G
preferred stock (Note 11).................. (89,567,000) (89,567,000)
Net loss..................................... (7,811,000) (7,811,000)
---------- ------- ------------ ------------- -------------
Balance, March 31, 2000 Unaudited.............. 5,251,235 $5,000 $ -- $(282,490,000) $(282,485,000)
========== ======= ============ ============= =============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 77
CAPSTONE TURBINE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, QUARTERS ENDED MARCH 31,
------------------------------------------ --------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................. $(30,553,000) $(33,073,000) $(29,530,000) $(5,785,000) $ (7,811,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 944,000 1,660,000 2,356,000 573,000 1,250,000
Provision for inventory reserve......... 3,918,000 681,000 1,120,000
Inventory writedown to net realizable
value................................. 4,225,000
Loss on sale of equipment............... 150,000 30,000 239,000
Non-employee stock compensation......... 41,000 1,050,000 80,000 60,000
Employee stock compensation............. 131,000 269,000
Changes in operating assets and
liabilities:
Accounts receivable................... 233,000 51,000 (2,329,000) (108,000) 128,000
Prepaid expenses and other assets..... (864,000) 360,000 (1,328,000) (145,000) 933,000
Inventory............................. (5,638,000) (9,318,000) (1,220,000) (181,000) (2,409,000)
Accounts payable...................... 3,952,000 (3,856,000) 497,000 (447,000) (22,000)
Accrued salaries and wages............ 206,000 106,000 157,000 (520,000) (112,000)
Other accrued liabilities............. 2,178,000 1,930,000 (1,617,000) (2,644,000) (27,000)
Accrued warranty reserve.............. 424,000 (55,000) 2,295,000 113,000 1,017,000
Deferred revenue...................... (707,000) (30,000) 4,696,000 255,000 4,736,000
------------ ------------ ------------ ----------- ------------
Net cash used in operating
activities........................ (25,716,000) (36,239,000) (24,453,000) (8,889,000) (1,988,000)
------------ ------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment and leasehold
improvements............................ (3,524,000) (4,016,000) (2,449,000) (458,000) (328,000)
Proceeds from sale of equipment........... 1,183,000 3,140,000 2,338,000 317,000 791,000
Deposits on fixed assets.................. (2,207,000) (2,133,000) (78,000) 181,000 (29,000)
Intangible assets......................... (5,000,000) (4,000,000)
------------ ------------ ------------ ----------- ------------
Net cash (used in) provided by
investing activities.............. (4,548,000) (3,009,000) (5,189,000) 40,000 (3,566,000)
------------ ------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations.... (226,000) (517,000) (1,119,000) (254,000) (368,000)
Exercise of stock options................. 50,000 145,000 41,000 5,000 311,000
Exercise of warrants...................... 12,000 0 771,000
Net proceeds from issuance of Series D
preferred stock......................... 12,475,000
Net proceeds from issuance of Series E
preferred stock......................... 61,064,000
Net proceeds from promissory notes
associated with Series F preferred
stock................................... 12,694,000
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......................... 120,363,000
------------ ------------ ------------ ----------- ------------
Net cash provided by (used in)
financing activities.............. 73,363,000 (372,000) 31,557,000 12,445,000 121,077,000
------------ ------------ ------------ ----------- ------------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 43,099,000 (39,620,000) 1,915,000 3,596,000 115,523,000
Cash and Cash Equivalents, Beginning of
Year...................................... 1,464,000 44,563,000 4,943,000 4,943,000 6,858,000
------------ ------------ ------------ ----------- ------------
Cash and Cash Equivalents, End of Year...... $ 44,563,000 $ 4,943,000 $ 6,858,000 $ 8,539,000 $122,381,000
============ ============ ============ =========== ============
Supplemental Disclosures of Cash Flow
Information --
Cash paid during the year for:
Interest................................ $ 168,000 $ 309,000 $ 630,000 $ 115,000 $ 190,000
Income taxes............................ $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 78
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY
Capstone Turbine Corporation (the "Company") was formed to develop,
manufacture, and market turbine generator sets for use in stationary, vehicular,
and other electrical distributed generation applications. The Company was
organized in 1988, but has only been commercially producing the turbine
generator sets since 1998. Because the Company is in the early stages of selling
the products with relatively few customers, the Company has had uneven order
flow from period to period.
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. There can be no assurance that the Company
will achieve or sustain profitability or positive cash flow from its operations.
To date, the Company has funded its activities primarily through private
equity offerings. The Company received proceeds, net of origination fees, of
approximately $128,098,000 through the issuance of Series G preferred stock in a
private placement which closed on February 24, 2000. The Company expects to
obtain additional funding through private or public equity offerings until such
time as it achieves positive cash flow from operations; however, there can be no
assurance that such financing will be available on terms satisfactory to the
Company or that positive operating cash flows will be achieved.
UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS -- The condensed financial
statements as of March 31, 2000 and for the quarters ended March 31, 1999 and
2000 are unaudited. In the opinion of management, the unaudited financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position and the
result of operations as of such date and for such periods. Results of interim
periods are not necessarily indicative of the result to be expected for the
entire fiscal year.
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
using the straight-line method over estimated useful lives of the related
assets, ranging from three to five years. Leasehold improvements are amortized
over the period of the lease or the estimated useful life of the asset,
whichever is shorter. Amortization of assets under capital leases is included
with depreciation and amortization expense. Depreciation and amortization
expense was $944,000, $1,660,000 and $2,356,000 for the years ended December 31,
1997, 1998 and 1999, 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 -- Product revenue is recognized upon
shipment of the product to the customer as the shipping terms are Ex Works
Capstone. There are no rights of return
F-8
<PAGE> 79
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
privileges on product sales. Contract revenue derived from research and
development projects is recognized as revenues upon the completion of specified
milestones.
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," was effective for the Company beginning January 1, 1996. SFAS No.
123 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.
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.
Two customers account for 31% and 22% of the Company's revenues for the
year ended December 31, 1997. The Company had no other customers which represent
10% or more of its sales. 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 has net accounts receivable from two
customers of approximately $275,000 and $277,000, respectively, that each
represented approximately 11% of total accounts receivable at December 31, 1999.
There is a sole source of recuperator cores, a key component, used in the
Company's products. The Company is not aware of any other suppliers who would
produce these cores to the Company's specifications and time requirements.
Although the Company has a license agreement which would permit the production
of the cores in-house in the event the vendor terminates production, the Company
would not be able to assume production without significant delays and
interruptions.
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. Diluted
loss per common share reflects the potential dilution that could occur if
securities were exercised or converted into common stock. The weighted-average
number of common shares outstanding, was 1,699,196,
F-9
<PAGE> 80
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1,980,478 and 2,292,242 in 1997, 1998 and 1999, 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 2,625,508, 3,417,664 and 14,303,142 in
1997, 1998 and 1999, respectively.
SUPPLEMENTAL CASH FLOW INFORMATION -- During 1997, 1998 and 1999, the
Company financed machinery purchases of $1,230,000, $3,162,000 and $2,467,000,
respectively, through capital lease obligations.
During 1997, the Company issued 3,125,000 and 10,453,145 shares of Series D
and E preferred stock, respectively. During 1998, the Company issued 170,000,
53,407 and 209,966 additional shares of Series A, C and E preferred stock,
respectively. During 1999, the Company issued 1,000 additional shares of Series
E preferred stock and 11,129,246 shares of Series F preferred stock.
During 1998 and 1999, the Company issued approximately $1,534,000 and
$76,000, respectively, of preferred stock for services rendered by several
vendors, of which approximately $1,050,000 and $76,000 was expensed during 1998
and 1999, respectively, and approximately $484,000 was accrued at December 31,
1997. 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 of
which $4,000 was recorded as expense in 1999. The remaining $33,000 will be
recognized over the vesting period.
RECLASSIFICATIONS -- Certain reclassifications were made to the 1997 and
1998 financial statements in order to conform to the 1999 presentation.
SEGMENT REPORTING -- The Company is considered to be a single operating
segment in conformity with Statement of Financial Accounting Standards 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:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ------- ----------
<S> <C> <C> <C>
North America......................................... $1,623,000 $84,000 $4,811,000
Asia.................................................. -- -- 1,608,000
Europe................................................ -- -- 275,000
---------- ------- ----------
Total Revenues........................................ $1,623,000 $84,000 $6,694,000
========== ======= ==========
</TABLE>
NEW ACCOUNTING PRONOUNCEMENT -- 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.
F-10
<PAGE> 81
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $2,537,000, $3,243,000 and $3,243,000 of obsolescence reserves at
December 31, 1998 and 1999 and March 31, 2000, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1998 1999 2000
---------- ---------- -----------
<S> <C> <C> <C>
Raw materials............................ $7,954,000 $7,579,000 $ 9,864,000
Work in process.......................... 749,000 1,036,000 1,131,000
Finished goods........................... 188,000 217,000
---------- ---------- -----------
$8,703,000 $8,803,000 $11,212,000
========== ========== ===========
</TABLE>
4. INCOME TAXES
Significant components of the Company's deferred income tax assets
(liabilities) and related valuation allowance at December 31, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Current deferred income tax assets:
Inventory................................................. $ 2,820,000 $ 1,389,000
Warranty reserve.......................................... 374,000 1,356,000
Other..................................................... 1,623,000 1,033,000
Current deferred income tax liabilities:
State taxes............................................... (2,733,000) (3,968,000)
Other..................................................... (265,000) (549,000)
------------ ------------
Net current deferred income tax asset (liability)........... 1,819,000 (739,000)
------------ ------------
Long-term deferred assets:
Net operating loss carryforwards.......................... 32,704,000 43,656,000
Tax credit carryforwards.................................. 4,051,000 8,117,000
------------ ------------
Net long-term deferred income tax asset..................... 36,755,000 51,773,000
Valuation allowance......................................... (38,574,000) (51,034,000)
------------ ------------
Total deferred income tax asset............................. $ -- $ --
============ ============
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future income tax returns, the Company has
placed a valuation allowance against its otherwise recognizable deferred income
tax assets.
F-11
<PAGE> 82
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company's net operating loss and tax credit carryforwards for federal
and state income tax purposes at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
EXPIRATION
PERIOD
------------
<S> <C> <C>
Federal NOL................................................ $105,742,000 2008 to 2019
State NOL.................................................. 88,178,000 2000 to 2004
Federal tax credit carryforwards........................... 4,750,000 2008 to 2014
State tax credit carryforwards............................. 3,367,000 2008 to 2014
</TABLE>
The net operating losses and federal and state 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 an 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax at the statutory
rate............................. $(10,388,000) $(11,245,000) $(10,040,000)
State taxes, net of federal
benefit.......................... (2,121,000) (2,017,000) (2,610,000)
Other.............................. (1,411,000) (3,277,000) 190,000
Valuation allowance................ 13,920,000 16,539,000 12,460,000
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
</TABLE>
5. CAPITAL STRUCTURE
The preferred stock is convertible into common stock at each holder's
option at any time after issuance. In the event of a public offering of the
Company's equity securities in the amount of $30 million or greater and at a
price no less than $13.33 per share (see Note 13), as adjusted, or an
affirmative vote of the stockholders of each class of stock, all preferred stock
will automatically be converted into common stock.
Preferred stock, in most circumstances, is convertible to common stock on a
one-for-one basis. The conversion rates may change in the event of a stock
split, combination or, if any additional shares are issued at less than an
earlier preferred stock series original issue price. If additional shares are
issued at a price less than earlier issuances, the conversion rate is increased
for those series by a factor based upon the original number of shares, the new
shares issued and the total amount of consideration received by the Company for
the new shares. As a result of the Series F preferred stock issuance on May 31,
1999, Series B, C, D, and E preferred stock are now convertible at a factor of
1.17, 1.28, 1.50 and 1.59, respectively. The voting rights of the Series A,
Series B, Series C, Series D, Series E and Series F preferred stock are equal to
the number of shares of common stock into which such shares may be converted.
Preferred stock must be redeemed by the Company if it receives written
certification on or before August 30, 2002 that no less than 75 percent of the
preferred stockholders have elected in favor of redemption. The Series A, Series
B, Series C, Series D, Series E and Series F preferred stock redemption price is
equal to the greater of $1.00, $1.50, $2.00, $4.00, $6.00 and $2.00 per share,
respectively, or the fair market value per share at the redemption date. In the
event that the preferred
F-12
<PAGE> 83
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
stockholders elect in favor of redemption, the preferred stock will be redeemed
in two equal installments on or about January 1, 2003 and January 1, 2004.
The Company is accreting the difference between the redemption value and
the net proceeds received in each preferred stock offering under the effective
interest method from the stock issuance date to the redemption dates. During
1999, the fair value of Series A, B, C, D and F exceeded the stated value which
resulted in additional accretion of $8,650,000, $3,962,000, $8,280,000,
$1,827,000 and $1,342,000, respectively.
Each share of Series A, B, C, D, E and F preferred stock entitles the
holder to receive dividends at an annual rate of $.10, $.15, $.20, $.40, $.60
and $.20 per share, respectively, at the discretion and declaration of the Board
of Directors. Dividends are payable in cash unless conversion to common stock
occurs prior to payment. Upon conversion, unpaid dividends shall be deemed
waived by the holders of all preferred stock. Until April 1, 1998, July 30,
2000, July 30, 2001, December 31, 2001, August 30, 2002, and February 26, 2004,
the rights to dividends upon the issued and outstanding shares of Series A, B,
C, D, E and F preferred stock, respectively, is non-cumulative, unless and until
such dividends have been declared by the Board of Directors. After April 1,
1998, July 30, 2000, July 30, 2001, December 31, 2001, August 30, 2002, and
February 26, 2004, the rights to dividends at a minimum of the respective rates
from that date become cumulative regardless of formal declaration from the Board
of Directors for Series A, B, C, D, E and F, respectively.
The Company records the preferred stock dividend accrual under the
effective interest method. The actual cash liability was $493,000 and $1,150,000
at December 31, 1998 and 1999, respectively. No dividends have been declared or
paid as of December 31, 1999.
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 for the year ended December 31, 1999 all
of which is payable on the stock issuance date.
During 1998, 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.
In the event of liquidation, dissolution, or winding up the Company, the
preferred stockholders, on a pro rata basis, shall be entitled to receive assets
available for distribution, prior to any distribution to common stockholders.
F-13
<PAGE> 84
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Company's common and preferred stock
warrants outstanding as of December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------------------------------------------- --------------------------------------------
NUMBER OF NUMBER OF
COMMON COMMON
SHARES EXERCISE SHARES EXERCISE
ISSUABLE PRICE EXPIRATION DATE ISSUABLE PRICE EXPIRATION DATE
--------- -------- --------------------- --------- -------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock warrants............ 73,213 $0.17 July 31, 1999 8,396,624 $0.33 February 26, 2006
=======
90,000 0.50 August 30, 2006
40,606 5.00 October 31, 2006
---------
8,527,230
=========
</TABLE>
<TABLE>
<CAPTION>
1998 1999
-------------------------------------------- --------------------------------------------
NUMBER OF NUMBER OF
PREFERRED PREFERRED
SHARES EXERCISE SHARES EXERCISE
ISSUABLE PRICE EXPIRATION DATE ISSUABLE PRICE EXPIRATION DATE
--------- -------- --------------------- --------- -------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock warrants:
Series A....................... 92,000 $1.00 December 5, 2003 92,000 $1.00 December 5, 2003
Series C....................... 30,303 $3.30 July 31, 2001 30,303 $3.30 July 31, 2001
Series C....................... 1,020,322 $2.00 February 28, 2003 1,020,322 $2.00 February 28, 2003
--------- ---------
1,142,625 1,142,625
========= =========
</TABLE>
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 10). 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. These common stock warrants expire on August 31, 2006. The fair value
of the common stock warrants were determined using the Black-Scholes model.
6. STOCK OPTION PLANS
The Company has an Incentive Stock Option Plan, which provides for the
granting of options for the purchase of up to 7,800,000 shares of the Company's
common stock. Under terms of the plan, options may be granted to employees,
non-employee directors and consultants. Options principally vest over periods up
to four years from the date of grant and generally expire ten years from such
grant.
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, the Company issued common stock options at less than the fair
value of its common stock. Accordingly, the Company recorded stock-based
compensation of $131,000 to
F-14
<PAGE> 85
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
expense in 1999. This 1999 expense was included in cost of goods sold, research
and development and selling, general and administrative expenses in the amount
of $2,000, $24,000 and $105,000, respectively. At December 31, 1999, the Company
had $977,000 in deferred stock compensation related to such options which will
be recognized as stock-based compensation expense through 2003.
Information relating to the outstanding stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1997......................... 1,765,523 0.27
Granted.............................................. 480,900 0.93
Exercised............................................ (237,076) 0.22
Canceled............................................. (142,627) 0.35
---------
Outstanding at December 31, 1997....................... 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
=========
</TABLE>
Additional information regarding options outstanding at December 31, 1999,
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
---------------------------------- EXERCISABLE
NUMBER OF WEIGHTED- ------------
SHARES AVERAGE EXERCISABLE
OUTSTANDING AT REMAINING AT
DECEMBER 31, CONTRACTUAL LIFE DECEMBER 31,
EXERCISE PRICES 1999 (IN YEARS) 1999
--------------- -------------- ---------------- ------------
<S> <C> <C> <C>
$0.17.................................. 28,782 4.7 28,782
0.25.................................. 159,002 5.8 155,443
0.33.................................. 3,085,601 9.1 575,434
0.50.................................. 63,900 9.8
0.67.................................. 85,200 7.3 55,294
1.00.................................. 1,371,212 8.2 717,904
2.50.................................. 296,640 8.8 79,737
--------- ---------
5,090,337 8.7 1,612,594
========= =========
</TABLE>
As of December 31, 1999, 1,612,594 shares were exercisable and 1,648,597
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
determining the fair value of options granted after December 31, 1994, its net
loss attributable to common stockholders and net loss per share -- basic and
diluted would have been $32,026,000 and $18.85, respectively, for the year ended
F-15
<PAGE> 86
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, $35,370,000 and $17.86, respectively, for the year ended
December 31, 1998 and $56,739,000 and $24.75, respectively, for the year ended
December 31, 1999.
In computing the impact of SFAS No. 123, the weighted-average fair value of
$.27, $.37 and $.45 for 1997, 1998 and 1999 stock option grants, respectively,
was estimated at the dates of grant using the minimum value model with the
following assumptions for 1997, 1998 and 1999: risk-free interest rate of
approximately 6.0, 5.3 and 5.4 percent, and no assumed dividend yield. The
weighted average expected life of the options was 6, 6, and 4 years for 1997,
1998 and 1999, respectively.
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.
7. COMMITMENTS AND CONTINGENCIES
At December 31, 1998 and 1999, respectively, the Company had equipment
under capital leases with a cost of $5,235,000 and $7,703,000 and accumulated
amortization of $969,000 and $2,276,000, respectively. The lease terms range
from three to five years. The deferred gain on sale-leaseback capital lease
obligations was $167,000 and $122,000 as of December 31, 1998 and 1999,
respectively, which is being recognized as an offset to amortization expense
over the useful life of the asset. The capital lease obligations are
collateralized by the related assets.
The Company leases office, manufacturing and warehouse space under various
non-cancelable operating leases. Rent expense related to these leases amounted
to approximately $347,000, $819,000 and $954,000 for the years ended December
31, 1997, 1998 and 1999, respectively.
At December 31, 1999, the Company's commitments under noncancelable
operating and capital leases were as follows:
<TABLE>
<CAPTION>
1999
------------------------
YEAR ENDING OPERATING CAPITAL
DECEMBER 31: LEASES LEASES
------------ ---------- ----------
<S> <C> <C>
2000.................................................. $ 755,000 $2,098,000
2001.................................................. 723,000 1,880,000
2002.................................................. 756,000 1,477,000
2003.................................................. 772,000 1,445,000
2004.................................................. 794,000 595,000
Thereafter............................................ 4,578,000 --
---------- ----------
Total minimum lease payments....................... $8,378,000 7,495,000
----------
Less amount representing interest....................... 1,596,000
----------
Net present value....................................... 5,899,000
Less current portion.................................... 1,400,000
----------
Long-term portion....................................... $4,499,000
==========
</TABLE>
At December 31, 1998 and 1999, the Company has approximately $134 million
and $132 million, respectively, of commitments under a long-term purchase
agreement for components and subassembly units which expires on August 25, 2007.
Purchases under this agreement were $4.2 million, $8.5 million and $684,000 for
the years ended December 31, 1997, 1998 and 1999, respectively. There are no
required minimum yearly purchases under this agreement. The Company also has
$4,340,000 and $3,374,000 of deposits with several companies for machinery and
tooling for
F-16
<PAGE> 87
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
future production in the normal course of business, respectively. The Company is
committed to purchase approximately $2 million of the components and subassembly
units in 2000.
The Company has a $1 million standby letter of credit which serves as a
guarantee for one of the purchase commitments. This letter of credit expires on
March 31, 2000.
A stockholder of the Company alleges damages as a result of alleged
representations made by the Company and some of the Company's present and former
officers in connection with the Series E Preferred Stock offering in 1997. As of
March 20, 2000, it was not possible to determine what effect, if any, the
ultimate resolution of this case would have on the Company's financial
statements. (See Note 13).
The Company is involved in various other 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.
8. EQUIPMENT LEASE LINE
During 1997, the Company entered into an equipment lease line agreement
with a leasing institution that provides for sale-leaseback transactions up to a
cumulative maximum of $20,000,000. The equipment lease line was renewed during
1999 for one year and provides for sale-leaseback transactions up to a maximum
of $10,000,000. Under this revised agreement, $4,394,000 was available for
future financing transactions at December 31, 1999.
9. 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.
10. RELATED PARTY TRANSACTIONS
During 1997, an affiliated company ceased operations. The Company purchased
equipment and improvements in the amount of $590,000 from the affiliated
company. Additionally, the Company assumed leases for certain facilities
previously occupied by the affiliated company.
During 1997 and 1998, the Company was reimbursed $137,000 and $39,000,
respectively, by a related company, for the use of the Company's office facility
as well as for other expenses, and had a $17,000 receivable from that Company
for these expenses as of December 31, 1998.
In 1999, the Company entered into non-exclusive marketing agreements with
two distributors. These agreements include product purchase and equity
investment commitments in Series G preferred stock on behalf of the
distributors. Sales to these distributors were $1 million in 1999 and deferred
revenue amounted to approximately $4.2 million as of December 31, 1999.
Promissory notes related to Series G preferred stock from these distributors
amounted to $6.2 million as of December 31, 1999.
In conjunction with the Series B preferred stock issuance in 1995 a
shareholder acquired the exclusive marketing rights for certain territories. In
1999, the Company reacquired these marketing rights. As part of the agreement
the Company paid $5 million toward a variable upfront payment to determine
future royalty rates, which was capitalized as an intangible asset and is being
amortized over 6 years. Accumulated amortization was $104,000 as of December 31,
1999. In January 2000,
F-17
<PAGE> 88
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the Company paid an additional $4 million toward the variable upfront payment
which resulted in a future royalty rate of 4% to a maximum of $11.0 million. The
future royalty rate maximum payment is accelerated in the event of a qualifying
public offering. The agreement stipulates additional stock consideration of $5
million which is contingent upon future stock issuances. The criteria for
payment of the stock consideration were not met as of December 31, 1999. On
February 24, 2000, the Company issued 1,250,000 shares of the Series G preferred
stock with a liquidation preference of $4.00 per share for no further
consideration in fulfillment of the stock issuance obligation (See Note 11).
This stock consideration is in addition to the upfront payments and does not
affect the future royalty payments. The stock consideration, including the
beneficial conversion feature, was recorded as an intangible asset and is being
amortized over the six year period of the agreement. Sales made to this
stockholder and an affiliate were $247,000 in 1999.
The Company has existing warrants with a lessor to purchase 30,303 shares
of Series C preferred stock at a per share price equal to $3.30 per share which
were issued in 1996.
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. Additional shares may be purchased by the lessor
upon the Company obtaining additional financing under the Equipment lease line
agreement. The lessor can exercise the warrants for no consideration and receive
in exchange the number of common stock shares which represent the difference
between the fair market value on the date exercised and the exercise price.
Certain vendors of the Company are also stockholders to which payments of
$1,417,000, $4,587,000 and $3,370,000 were made during 1997, 1998 and 1999,
respectively. The accounts payable to stockholders was $290,000 and $189,000 as
of December 31, 1998 and 1999, respectively. Capital lease obligations to
stockholders were $4,423,000 and $5,633,000 as of December 31, 1998 and 1999,
respectively.
11. SERIES G PREFERRED STOCK ISSUANCE
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 $128.1 million. 35,683,979 shares
of Series G were issued which includes 1,250,000 shares issued to an existing
stockholder for no consideration (see Note 10) 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 is convertible exceeds the carrying value.
The beneficial conversion feature was determined to be approximately $89.6
million. This amount will be accounted for as an increase in and a charge to
additional paid-in capital and an insubstance dividend to the preferred
stockholders in the first quarter of 2000 and accordingly will increase the loss
applicable to common stockholders.
The Company is committed to issue 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 will be recorded as origination fees at the time of issuance.
F-18
<PAGE> 89
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. PRO FORMA INFORMATION
PRO FORMA BALANCE SHEET INFORMATION (UNAUDITED) -- The Board of Directors
authorized the Company to file a registration statement with the Securities and
Exchange Commission permitting the Company to sell shares of common stock in an
initial public offering ("IPO"). If the IPO is consummated, all shares of Series
A, Series B, Series C, Series D, Series E, Series F and Series G preferred stock
will automatically convert into shares of common stock at the conversion rates
as discussed in Note 13. The unaudited pro forma balance sheet information
reflects the conversion of the preferred stock and the waiver of accrued
preferred stock dividends.
PRO FORMA NET LOSS PER SHARE (UNAUDITED) -- The following table sets forth,
the computation of the unaudited pro forma basic and diluted loss per share for
the year ended December 31, 1999 and the quarter ended March 31, 2000, assuming
the conversion of the preferred stock, outstanding at each respective date, into
shares of the Company's common stock effective upon the closing of the Company's
IPO as if the conversion occurred at the date of issuance.
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31, 1999 MARCH 31, 2000
----------------- --------------
<S> <C> <C>
Numerator --
Net loss available to common stockholders......... $(29,530,000) $(7,811,000)
Denominator:
Weighted average common shares outstanding........ 2,292,242 4,048,970
Conversion of Series A preferred stock............ 3,942,000 3,942,000
Conversion of Series B preferred stock............ 2,346,867 2,346,867
Conversion of Series C preferred stock............ 5,900,958 5,900,958
Conversion of Series D preferred stock............ 2,808,988 2,808,988
Conversion of Series E preferred stock............ 10,147,169 10,147,169
Conversion of Series F preferred stock............ 6,677,548 6,677,548
Conversion of Series G preferred stock............ 21,419,391
------------ -----------
Shares used in pro forma calculation................ 34,115,772 57,291,891
------------ -----------
Pro forma basic and diluted loss per share.......... $ (0.87) $ (.14)
============ ===========
</TABLE>
13. SUBSEQUENT EVENTS
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. As a result of the stock split, Series A, B, C, D, E, F and G
preferred stock are now convertible at a factor of .60, .70, .77, .90, .95, .60
and .60, respectively into common stock.
UNAUDITED
In February, 2000, 739,577 common stock warrants at a fair value of
$7,649,000 were issued to an investment banking firm for consideration relating
to the Series G preferred stock issuance.
During the quarter ended March 31, 2000, the Company issued stock options
at less than the fair value of its common stock. Accordingly, the Company
recorded stock-based compensation of $198,000 to expenses for the quarter ended
March 31, 2000. The Company recorded stock-based compensation relating to the
options granted in 1999 of $71,000 to expenses for the quarter ended March 31,
2000. Stock-based compensation expense was included in cost of goods sold,
research and development and selling, general and administrative expenses in the
amount of $11,000, $61,000
F-19
<PAGE> 90
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and $197,000, respectively. As of March 31, 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.
In May 2000, the Company entered into a stock repurchase agreement and a
settlement agreement with two related stockholders whereby the Company agreed to
reacquire shares of Series E preferred stock and pay a cash settlement. Pursuant
to the agreements, the Company reacquired 2,319,129 shares at a per share price
of $6.68, which is less than the carrying value on the reacquisition date. The
excess carrying value over the reacquisition price will be recorded as
additional paid-in capital and included as a component of net earnings available
to common stockholders during the quarter ending June 30, 2000. The total cash
settlement is $700,000, of which $500,000 is covered by insurance. The Company
has recorded a liability for the loss associated with this agreement.
In May 2000, an amendment to three stockholder rights agreements reduced
the minimum per share price for the automatic conversion of the Company's
preferred stock in the event of a initial public offering to no less than $8.00
per share, as adjusted, on a post-reverse split basis.
RESTATEMENT
Subsequent to the issuance of the Company's financial statements for the quarter
ended March 31, 2000, management determined that the fair value of the 1,250,000
shares of Series G preferred stock issued in connection with the repurchase of
marketing rights, as discussed in Note 10, should be reflected in its entirety
of $8,250,000 as an intangible asset. The Company had previously reflected only
the $5,000,000, $4 per share, Series G issuance price as an intangible asset and
treated the difference between the issuance price and the fair value as a
beneficial conversion feature.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE QUARTER
ENDED MARCH 31, 2000
-----------------------------
AS PREVIOUSLY AS
REPORTED RESTATED
------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Intangible assets......................................... $ 13,463,000 $ 16,662,000
Accumulated deficit....................................... (285,689,000) (282,490,000)
Total stockholders' deficiency............................ (285,684,000) (282,485,000)
Pro forma accumulated deficit............................. (285,689,000) (282,490,000)
STATEMENT OF OPERATIONS DATA:
Selling, general and administrative expenses.............. 4,333,000 4,384,000
Net loss.................................................. (7,760,000) (7,811,000)
Preferred stock dividends and accretion................... (143,182,000) (139,932,000)
Net loss attributable to common stockholders.............. (150,942,000) (147,743,000)
Net loss per share of common stock -- basic and diluted... (37.28) (36.49)
</TABLE>
* * * * * *
--------------------
F-20
<PAGE> 91
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
[COLLAGE OF PHOTOS: TURBINE BLADE, CAPSTONE TURBINE PRODUCT CASING, OIL RIG,
BUS, CLOUDS, BRANCH WITH WET LEAVES, SCHEMATIC ENGINEERING DIAGRAM]
<PAGE> 92
----------------------------------------------------------
----------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its dates.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................... 1
Risk Factors............................ 6
Forward-Looking Statements.............. 16
Use of Proceeds......................... 17
Dividend Policy......................... 17
Capitalization.......................... 18
Dilution................................ 19
Selected Historical Financial Data...... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 22
Business................................ 28
Management.............................. 46
Certain Relationships and Related
Transactions.......................... 58
Principal Shareholders.................. 60
Description of Capital Stock............ 62
Shares Eligible for Future Sale......... 63
Validity of Common Stock................ 64
Experts................................. 64
Change of Auditors...................... 64
Underwriting............................ 65
Where You Can Find More Information..... 67
Index to Financial Statements........... F-1
</TABLE>
----------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
9,090,909 Shares
CAPSTONE TURBINE CORPORATION
Common Stock
[CAPSTONE LOGO]
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
Representatives of the Underwriters
----------------------------------------------------------
----------------------------------------------------------
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with the offering (excluding underwriting discounts and commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- ----------
<S> <C>
SEC Registration Fee........................................ $ 30,360
NASD Filing Fee............................................. 12,000
Nasdaq National Market Listing Fee..........................
Accounting Fees and Expenses................................
Legal Fees and Expenses.....................................
Printing Expenses...........................................
Blue Sky Qualification Fees and Expenses....................
Transfer Agent's Fee........................................
Miscellaneous...............................................
----------
Total....................................................... $2,000,000
==========
</TABLE>
The amounts set forth above, except for the Securities and Exchange Commission
and National Association of Securities Dealers, Inc. fees, are in each case
estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Our certificate of incorporation and our bylaws provide for
indemnification of our directors, officers, employees and other agents to the
extent permitted by the Delaware General Corporation Law. We have also entered
into agreements with our directors and executive officers that require Capstone
among other things to indemnify them against certain liabilities that may arise
by reason of their status or service as directors and officers liability
insurance, which provides coverage against certain liabilities including
liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Issuances of Shares of Preferred Stock and Preferred Stock Warrants
On January 17, 1997, Capstone issued and sold 3,125,000 shares of its
Series D Preferred Stock to eighteen accredited investors for an aggregate
purchase price equal to $12,500,000. This issuance was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as a sale by an issuer not
involving a public offering.
On August 22, 1997 and November 21, 1997, Capstone issued and sold
5,865,814 and 4,587,331 shares of its Series E Preferred Stock, respectively to
seventy-four accredited investors for an aggregate purchase price equal to
$63,979,000. This issuance was deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act or Regulation D
promulgated thereunder as a sale by an issuer not involving a public offering.
On May 31, 1999 11,095,496 shares of Series F preferred stock, in the
aggregate amount of $22,190,992, were issued to sixty-six accredited investors.
This issuance was deemed to be exempt from registration under the Securities Act
in reliance on Section 4(2) of the Securities Act or Regulation D promulgated
thereunder as a sale by an issuer not involving a public offering.
II-1
<PAGE> 94
On February 24, 2000 Capstone issued and sold 35,683,979 shares of its
Series G Preferred Stock to 140 accredited investors for an aggregate purchase
price equal to $137,500,000. This issuance was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as a sale by an issuer not
involving a public offering.
(b) Issuances of Common Stock and Common Stock Warrants
Between September 14, 1988 and March 31, 2000, Capstone issued 5,251,235
shares of its common stock, of which 2,303,584 shares were issued upon exercise
of warrants and 1,704,102 shares were issued upon exercise of stock options.
Capstone has remaining issued and unexercised warrants exercisable for 8,066,525
shares of its common stock. This amount includes warrants exercisable for 90,000
shares of common stock to two accredited investors as well as warrants
exercisable for 739,577 shares of common stock granted to an investment banker
in connection with the Series G offering. Certain warrants were issued in
connection with the Bridge Notes convertible into Series F Preferred Stock to
sixty-one accredited investors. The issuance was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as a sale by an issuer not
involving a public offering.
(c) Issuances of Options to Employees, Directors and Consultants.
Between September 14, 1988 and March 31, 2000, Capstone issued options
exercisable for 7,134,547 shares (net of cancellations) of its common stock
pursuant to Capstone's 1993 Incentive Stock Option Plan to approximately 120
individuals. Of this amount as of March 31, 2000, 1,704,102 options had been
exercised, 1,357,148 options are issued and exercisable, and 4,073,297 options
are issued and require further vesting before they are exercisable. Of the
issued shares of the Series C Preferred Stock, 35,000 shares were issued
pursuant to employment agreements and 18,407 shares were issued for consulting
services rendered. Of the shares of Series E Preferred Stock issued, 45,500
shares were issued through stock option agreements and 164,340 shares were
issued for services rendered and through other arrangements. These grants were
deemed to be exempt from registration under the Securities Act in reliance on
Rule 701 promulgated under Section 3(b) of the Securities Act as a transaction
to compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each of the foregoing
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the instruments representing such securities
issued in such transaction.
II-2
<PAGE> 95
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1# Articles of Incorporation of Capstone Turbine.
3.2# Form of Amended and Restated Certificate of Incorporation of
Capstone Turbine.
3.3# Form of Second Amended and Restated Certificate of
Incorporation of Capstone Turbine.
3.4# Bylaws of Capstone Turbine.
3.5# Amended and Restated Bylaws of Capstone Turbine.
4.1* Specimen certificate for shares of common stock, $.001 par
value, of Capstone Turbine.
5.1* Opinion of Latham & Watkins as to the legality of the
securities being offered.
9.1# Investor Rights Agreement
10.1+ Solar Alliance and License Agreements
10.2# Lease between registrant and Northpark Industrial -- Leahy
Division LLC, dated December 1, 1999, for leased premises at
21211 Nordhoff Street, Chatsworth, California.
10.3# 1993 Incentive Stock Option Plan
10.4# Employee Stock Purchase Plan.
10.5# 2000 Equity Incentive Plan.
16.1# Letter from Ernst & Young LLP regarding change in
independent auditors
23.1** Consent of Deloitte & Touche LLP
23.2** Consent of Ernst & Young LLP
23.3* Consent of Latham & Watkins (included in exhibit 5.1)
24.1# Powers of Attorney (included on signature page).
27.1# Financial Data Schedule.
</TABLE>
---------------
* To be filed by amendment
** Filed herewith
+ Filed herewith; portions of this exhibit have been omitted pursuant to a
request for confidential treatment
# Previously filed
(b) Financial Statement Schedules
<TABLE>
<S> <C>
(1) Independent Auditors' Report of Deloitte & Touche LLP... S-1
(2) Independent Auditors' Report of Ernst & Young LLP....... S-2
(3) Schedule II -- Valuation and Qualifying Accounts........ S-3
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit
II-3
<PAGE> 96
to a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Woodland Hills, State of California, on June 12, 2000.
Capstone Turbine Corporation
By: /s/ JEFFREY WATTS
------------------------------------
Jeffrey Watts
Secretary and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President, Chief Executive June 12, 2000
----------------------------------------------------- Officer and Director
Ake Almgren (Principal Executive Officer)
/s/ JEFFREY WATTS Chief Financial Officer June 12, 2000
----------------------------------------------------- (Principal Financial Officer and
Jeffrey Watts Principal Accounting Officer)
* Director June 12, 2000
-----------------------------------------------------
Richard Aube
* Director June 12, 2000
-----------------------------------------------------
John Jaggers
* Director June 12, 2000
-----------------------------------------------------
Jean-Rene Marcoux
* Director June 12, 2000
-----------------------------------------------------
Benjamin M. Rosen
* Director June 12, 2000
-----------------------------------------------------
Peter Steele
* Director June 12, 2000
-----------------------------------------------------
Eric Young
*By: /s/ JEFFREY WATTS
--------------------------------------------
Jeffrey Watts
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 98
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Capstone Turbine Corporation:
We have audited the financial statements of Capstone Turbine Corporation as of
and for the years ended December 31, 1998 and 1999, and have issued our report
thereon dated March 20, 2000 (May 26, 2000 for paragraph 1 of Note 13); such
report is included elsewhere in this Registration Statement. Our audits also
included the financial statement schedule listed in Item 16(b). The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits. In our opinion, such financial statement schedule for the
years ended December 31, 1998 and 1999, 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
March 20, 2000 (May 26, 2000 for paragraph 1 of Note 13)
S-1
<PAGE> 99
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the statement of operations, stockholders' equity, and cash
flows of Capstone Turbine Corporation for the year ended December 31, 1997, and
have issued our report thereon dated April 3, 1998, except for paragraph 1 of
Note 13, as to which the date is May 26, 2000 (included elsewhere in this
Registration Statement). Our audit also included the financial statement
schedule for the year ended December 31, 1997 listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule for the year ended December 31,
1997 referred to above, 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/ ERNST & YOUNG LLP
Woodland Hills, California
April 3, 1998, except for paragraph 1
of Note 13, as to which
the date is May 26, 2000.
S-2
<PAGE> 100
SCHEDULE II
CAPSTONE TURBINE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
THREE YEAR PERIOD ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO FROM AT END
OF YEAR OPERATIONS RESERVES OF YEAR
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts year
ended:
December 31, 1997...................... $ -- $ 10,000 $ -- $ 10,000
December 31, 1998...................... 10,000 3,000 10,000 3,000
December 31, 1999...................... 3,000 50,000 3,000 50,000
Reserve for inventory obsolescence year
ended:
December 31, 1997...................... 180,000 3,918,000 48,000 4,050,000
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
Warranty reserve year ended:
December 31, 1997...................... 504,000 1,159,000 735,000 928,000
December 31, 1998...................... 928,000 261,000 316,000 873,000
December 31, 1999...................... 873,000 2,643,000 348,000 3,168,000
</TABLE>
S-3
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1# Articles of Incorporation of Capstone Turbine.
3.2# Form of Amended and Restated Certificate of Incorporation of
Capstone Turbine.
3.3# Form of Second Amended and Restated Certificate of
Incorporation of Capstone Turbine.
3.4# Bylaws of Capstone Turbine.
3.5# Amended and Restated Bylaws of Capstone Turbine.
4.1* Specimen certificate for shares of common stock, $.001 par
value, of Capstone Turbine.
5.1* Opinion of Latham & Watkins as to the legality of the
securities being offered.
9.1# Investor Rights Agreement
10.1+ Solar Alliance and License Agreements
10.2# Lease between registrant and Northpark Industrial -- Leahy
Division LLC, dated December 1, 1999, for leased premises at
21211 Nordhoff Street, Chatsworth, California.
10.3# 1993 Incentive Stock Option Plan
10.4# Employee Stock Purchase Plan.
10.5# 2000 Equity Incentive Plan.
16.1# Letter from Ernst & Young LLP regarding change in
independent auditors
23.1** Consent of Deloitte & Touche LLP
23.2** Consent of Ernst & Young LLP
23.3* Consent of Latham & Watkins (included in exhibit 5.1)
24.1# Powers of Attorney (included on signature page).
27.1# Financial Data Schedule.
</TABLE>
---------------
* To be filed by amendment
** Filed herewith
+ Filed herewith; portions of this exhibit have been omitted pursuant to a
request for confidential treatment
# Previously filed
