UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2004
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 001-15957
CAPSTONE TURBINE CORPORATION
|
Delaware
(State or other jurisdiction of incorporation or organization) |
95-4180883
(I.R.S. Employer Identification No.) |
21211 Nordhoff Street, Chatsworth, California 91311
(Address of principal executive offices and zip code)
818-734-5300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes þ No o
The number of outstanding shares of the registrant’s common stock as of February 7, 2005 was 84,805,605.
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CAPSTONE TURBINE CORPORATION
INDEX
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| Item 5. | 15 | |||||||
| Item 6. | 17 | |||||||
| Signatures |
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18 | ||||||
| EXHIBIT 10.1 | ||||||||
| EXHIBIT 10.2 | ||||||||
| EXHIBIT 10.3 | ||||||||
| EXHIBIT 31.1 | ||||||||
| EXHIBIT 31.2 | ||||||||
| EXHIBIT 32 | ||||||||
2
PART I — FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
CAPSTONE TURBINE CORPORATION
See accompanying notes to consolidated financial statements.
3
CAPSTONE TURBINE CORPORATION
See accompanying notes to consolidated financial statements.
4
CAPSTONE TURBINE CORPORATION
See accompanying notes to consolidated financial statements.
5
CAPSTONE TURBINE CORPORATION
1. Business and Organization
Capstone Turbine Corporation (the “Company”) develops, manufactures and sells microturbine
generator sets for use in on-site combined heat and power generation, resource recovery,
and other power, heat and cooling applications in the markets for distributed power
generation around the world. Additionally, the products can be used for hybrid electric vehicles.
The Company was organized in 1988 and has been commercially producing its microturbine generators
since 1998.
The Company has incurred significant operating losses since its inception. Management
anticipates incurring additional losses until the Company can produce sufficient revenues to cover
costs and expenses. To date, the Company has funded its activities primarily through private and
public equity offerings.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (“generally accepted
accounting principles”) for interim financial information and with the instructions to Form 10-Q
and Regulation S-X promulgated under the Securities Exchange Act of 1934. They do not include all
of the information and footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at March 31, 2004 was derived from audited financial
statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004.
In the opinion of management, the interim financial statements include all adjustments (consisting
of normal recurring adjustments) necessary for a fair presentation of the financial condition,
results of operations and cash flows for such periods. Results of operations for any interim period
are not necessarily indicative of results for any other interim period or for the full year. These
financial statements should be read in conjunction with the financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the
year ended March 31, 2004. This form 10-Q refers to the
year ended March 31, 2004 and the year ending March 31,
2005 as Fiscal 2004 and Fiscal 2005, respectively.
3. Customer Concentrations and Accounts Receivable
Two customers accounted for approximately 40% of revenues for the third quarter ended December
31, 2004. Two customers accounted for approximately 39% of revenues for the same
quarter last year. One customer accounted for approximately 13% of revenues for the nine months
ended December 31, 2004. Two customers accounted for approximately 23% of revenues for the same
period last year. Each of those customers individually accounted for 10% or more of revenues.
While the Company has individual customers who, in any period, may represent a significant portion
of the Company’s business, overall, the Company is not dependent on any single customer or
particular group of customers.
As of December 31, 2004 the Company has no individual customers or groups of customers who
represented a significant portion of accounts receivable.
4. Inventory
Inventory is stated at the lower of standard cost (which approximates actual cost on the
first-in, first-out method) or market and consists of the following:
The non-current portion of inventory represents that portion of the inventory in excess of
amounts expected to be sold or used within the next twelve months.
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CAPSTONE TURBINE CORPORATION
5. Intangible Asset
The Company’s sole intangible asset is a manufacturing license as follows:
This intangible asset, which was acquired in 2000, is being amortized over its estimated
useful life of ten years. Related amortization expense for the three-month and nine-month periods
ended December 31, 2004 was $67,000 and $201,000, respectively, compared with $67,000 and $201,000
for the same periods last year. The manufacturing license is scheduled to be fully amortized by
fiscal year 2011 with corresponding amortization estimated to be
$67,000 for the remainder of Fiscal 2005, $267,000 for each of the fiscal years 2006, 2007, 2008
and 2009, and an aggregate amount of $358,000 for all fiscal years thereafter.
6. Stock-Based Compensation
The Company accounts for employee stock option plans under the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB No. 25”) and related interpretations. The Company accounts for equity instruments
issued to other than employees using the fair value method prescribed by Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and
Emerging Issues Task Force (“EITF”) 96-18 “Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, Or Service”. The
following table illustrates the effect on net loss and net loss per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 to employee stock option grants:
During the years ended December 31, 1999 and 2000, the Company granted options with exercise
prices less than the fair value of its common stock. The compensation cost recorded for these
options was fully amortized as of June 30, 2004. In addition, in Fiscal 2004, the Company issued
shares of restricted common stock at less than the fair value of its common stock. Accordingly, the
Company recorded stock-based compensation expense based on the vesting of these issuances as
follows:
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CAPSTONE TURBINE CORPORATION
As of December 31, 2004, the Company had $393,000 in deferred stock compensation related to
restricted stock, which will be amortized through fiscal year 2008.
7. Accrued Warranty Reserve
The Company provides for the estimated costs of warranties at the time revenue is recognized.
The specific terms and conditions of those warranties vary depending upon the product sold, place
of sale and the length of extended warranties sold. The Company’s product warranties generally
start from the delivery date and continue for one year. Factors that affect the Company’s warranty
obligation include product failure rates and costs of repair or replacement in correcting product
failures. The Company also accrues the estimated costs to address reliability repairs on products
no longer in warranty when, in the Company’s judgment, and in accordance with a specific plan
developed by the Company, it is prudent to provide such repairs. The Company assesses the adequacy
of recorded warranty liabilities and makes adjustments quarterly, if necessary.
Changes in accrued warranty reserve during the nine months ended December 31, 2004 are as
follows:
8. Commitments and Contingencies
As of December 31, 2004, the Company had firm commitments to purchase inventories of
approximately $10,691,000.
The Company leases offices and manufacturing facilities under various non-cancelable operating
leases expiring at various times through fiscal year 2011. All of the leases require the Company
to pay maintenance, insurance and property taxes. The lease agreements provide for rent escalation
over the lease term. Rent expense is recognized on a straight-line basis over the term of the
lease. The difference between rent expense recorded and the amount paid is credited or charged to
“deferred rent” which is included in Other Long-Term Liabilities. Deferred rent amounted to
$650,000 and $636,000 as of December 31, 2004 and March 31, 2004, respectively. Also included in
Other Long-Term Liabilities was an accrual of $270,000 and $339,000 as of December 31, 2004 and
March 31, 2004, respectively, for the expected loss on sub-lease of an office. The reduction in
the accrual was due to the lease payments made net of sub-lease income, offset by an increase in
the expected loss on the lease of $102,000.
In December 2001, a purported shareholder class action lawsuit was filed against the Company,
two of its officers, and the underwriters of the Company’s initial public offering. The suit
purports to be a class action filed on behalf of purchasers of the Company’s common stock during
the period from June 28, 2000 to December 6, 2000. An amended complaint was filed on April 19,
2002. No date has been set for the Company to respond to the complaint. Plaintiffs allege that the
underwriter defendants agreed to allocate stock in the Company’s June 28, 2000 initial public
offering and November 16, 2000 secondary offering to certain investors in exchange for excessive
and undisclosed commissions and agreements by those investors to make additional purchases of stock
in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectuses for these two
public offerings were false and misleading in violation of the securities laws because they did not
disclose these arrangements. A committee of the Company’s Board of Directors conditionally approved
a proposed partial settlement with the plaintiffs in this matter. The settlement would provide,
among other things, a release of the Company and of the individual defendants for the conduct
alleged in the action to be wrongful in the amended complaint. The Company would agree to
undertake other responsibilities under the partial settlement, including agreeing to assign away,
not assert, or release certain potential claims the Company may have against its underwriters. Any
direct financial impact of the proposed settlement is expected to be borne by the Company’s
insurers. The committee agreed to the settlement which is subject to a hearing on fairness and
approval by the Court.
The Company is a defendant in an arbitration related to a breach of contract, brought by a
party that conducted business with the Company, claiming damages in excess of $10 million. The
Company intends to vigorously defend against this action. As with any legal dispute, the ultimate
outcome of this action is uncertain.
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CAPSTONE TURBINE CORPORATION
9. Related Party Transactions
Mr. Eliot Protsch is the Chairman of the Company’s Board of Directors. Mr. Protsch is Senior
Executive Vice-President and Chief Financial Officer of Alliant Energy Corporation. He previously
was President of Interstate Power and Light Company, a subsidiary of Alliant Energy Corporation.
Alliant Energy Resources, Inc., a subsidiary of Alliant Energy Corporation, is a distributor for
the Company. There were no sales to Alliant Energy Resources, Inc. for the three months ended
December 31, 2004 and 2003. There were no sales for the nine months ended December 31, 2004 and
$25,000 for the nine months ended December 31, 2003.
In October 2002, the Company entered into a strategic alliance with United Technologies
Corporation (“UTC”), holder of less than 5% of the Company’s common stock, through its UTC Power
Division. Sales to UTC’s affiliated companies were approximately $169,000 and $51,000 for the
three months ended December 31, 2004 and 2003, respectively. Sales for the nine months ended
December 31, 2004 and 2003 were, $1,023,000 and $396,000, respectively. In December 2003, the
Company engaged United Technologies Research Center (“UTRC”) to be a subcontractor of the Company
in relation to one of the United States Department of Energy (“DOE”) awards. UTRC is the research
and development branch of UTC. There were no billings to the Company under this subcontract
agreement for the three months ended December 31, 2004 and 2003. For the nine months ended
December 31, 2004, there were approximately $100,000 in billings compared to none for the same
period a year ago. In June 2004, the Company engaged United Technologies Power, LLC (“UTC Power”)
to be a subcontractor of the Company in relation to one of the DOE awards. There have been no
payments to UTC Power or billings to the DOE under this contract to date.
10. Net Loss Per Common Share
Basic loss per share of common stock is computed using the weighted-average number of common
shares outstanding for the period. For purposes of computing basic loss per share and diluted loss
per share, shares of restricted common stock which are contingently returnable (i.e., subject to
repurchase if the purchaser’s status as an employee or consultant terminates) are not considered
outstanding until they are vested. Diluted loss per share is also computed without consideration to
potentially dilutive instruments because the Company incurred losses which would make them
antidilutive. There were outstanding stock options at December 31, 2004 and 2003 to purchase
8,914,000 and 8,590,000 shares, respectively. As of December 31, 2004, 333,000 shares of restricted
common stock are contingently returnable.
11. Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 151 “Inventory Costs, an
amendment of APB No. 43, Chapter 4”
(“SFAS No. 151”). SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage) and requires that those items be
recognized as current period charges regardless of whether they meet the criterion of “so
abnormal”. In addition, the Statement requires that allocation of fixed production overheads to
the cost of conversion be based on the normal capacity of the production facilities. SFAS No. 151
requires adoption by the Company by fiscal year 2007; earlier application is permitted. The
Company has not determined the impact that the statement will have on its financial
statements.
In December 2004, Statement of Financial Accounting Standards No. 123R “Share-Based Payment –
an amendment of FASB Statements No. 123 and 95” (“SFAS No. 123R”), was issued. SFAS No. 123R
addresses the accounting for share-based payment transactions with employees and other third
parties eliminating the ability to account for share-based compensation transactions using APB
Opinion No. 25, “Accounting for Stock Issued to Employees”, and requires that such transactions be
accounted for using a fair-value-based method. SFAS No. 123R requires adoption by the Company in
the second quarter of fiscal year 2006, and its application could have a material impact on the
amount of earnings the Company reports in fiscal year 2006. The Company has not yet determined the
impact that SFAS No. 123R will have on its financial statements.
In December 2004, Statement of Financial Accounting Standards No. 153, “Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS No. 153”) was issued. SFAS No. 153
addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets, and replaces it with
an exception for exchanges that do not have commercial substance. SFAS No. 153 requires adoption by the Company by fiscal year 2007; earlier application is
permitted. The Company does not have nonmonetary transactions as addressed in the Statement and
believes that when adopted, SFAS No. 153 will not have a significant impact on its financial
statements.
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial
Statements and Notes included in this Quarterly Report and within the Company’s Annual Report on
Form 10-K for the year ended March 31, 2004. When used in this Quarterly Report, and in the
following discussion, the words “believes”, “anticipates”, “intends”, “expects” and similar
expressions are intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ materially from those
projected. These risks include those identified under “Business Risks” in Item 5 of Part II of
this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date hereof.
Critical Accounting Policies and Estimates
The preparation of the Company’s financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
Management believes the most complex and sensitive judgments, because of their significance to the
consolidated financial statements, result primarily from the need to make estimates about the
effects of matters that are inherently uncertain. Actual results could differ from management’s
estimates. We believe the critical accounting policies listed below affect our more significant
accounting judgments and estimates used in the preparation of the consolidated financial
statements. These policies are described in greater detail in our Annual Report on Form 10-K for
Fiscal 2004.
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 151 “Inventory Costs, an
amendment of APB No. 43, Chapter 4”
(“SFAS No. 151”). SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage) and requires that those items be
recognized as current period charges regardless of whether they meet the criterion of “so
abnormal”. In addition, the Statement requires that allocation of fixed production overheads to
the cost of conversion be based on the normal capacity of the production facilities. SFAS No. 151
requires adoption by the Company by fiscal year 2007; earlier application is permitted. The
Company has not determined the impact that the statement will have on its financial
statements.
In December 2004, Statement of Financial Accounting Standards No. 123R “Share-Based Payment –
an amendment of FASB Statements No. 123 and 95” (“SFAS No. 123R”), was issued. SFAS No. 123R
addresses the accounting for share-based payment transactions with employees and other third
parties eliminating the ability to account for share-based compensation transactions using APB
Opinion No. 25, “Accounting for Stock Issued to Employees”, and requires that such transactions be
accounted for using a fair-value-based method. SFAS No. 123R requires adoption by the Company in
the second quarter of fiscal year 2006, and its application could have a material impact on the
amount of earnings the Company reports in fiscal year 2006. The Company has not yet determined the
impact that SFAS No. 123R will have on its financial statements.
In December 2004, Statement of Financial Accounting Standards No. 153, “Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS No. 153”) was issued. SFAS No. 153
addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets, and replaces it with
an exception for exchanges that do not have commercial substance. SFAS No. 153 requires adoption
by the Company by fiscal year 2007; earlier application is permitted. The Company does not have
nonmonetary transactions as addressed in the Statement and believes that when adopted, SFAS No. 153
will not have a significant impact on its financial statements.
Overview
We develop, manufacture and market microturbines for use in stationary distributed power
generation applications such as combined heat and power (“CHP”), combined cooling heat and power
(“CCHP”), resource recovery, power quality and reliability and in non-stationary applications such
as hybrid electric vehicles. Our microturbines provide power at the site of consumption and to
10
hybrid electric vehicles that combine a primary source battery with an auxiliary power source, such
as a microturbine, to enhance performance. We expect our microturbines to provide both the
commercial power generation industry and hybrid electric vehicles with clean, multifunctional, and scalable distributed power sources. The microturbines are
sold primarily through our distributors. In fiscal year 2005 (“Fiscal 2005”), we began efforts to
develop direct sales opportunities for our products, parts and services. Our independent
Authorized Service Companies (“ASCs”) provide installation and service. Successful implementation
of the microturbine relies on the quality of the microturbine, the ability of the distributors to
sell into appropriate applications, and quality installations and support by ASCs.
The market for our products is highly competitive and is changing rapidly. Our microturbines
compete with existing technologies, such as the utility grid and reciprocating engines, and may
also compete with emerging distributed generation technologies, including solar power, wind powered
systems, fuel cells and other microturbines. Additionally, many of our distributed generation
competitors are well-established firms that derive advantages from production economies of scale
and have a worldwide presence and greater resources, which they can devote to product development
or promotion.
We began commercial sales of our Model C30 products in 1998. In September 2000, we shipped the
first commercial unit of our Model C60 microturbine. To date, we have sold more than 3,000
commercial units. At the end of fiscal year 2004 (“Fiscal 2004”), we adopted a new strategic plan
for Fiscal 2005 and the fiscal years ending March 31, 2006 and 2007. We expect that our existing
product platforms, the Model C30 and Model C60, will be our major product lines during our
three-year strategic planning period.
The key areas of our three-year strategic plan commencing in Fiscal 2005 and our progress in
each area appear below. Each key area is used by management as a performance indicator of progress
toward achieving the goals of the strategic plan and to evaluate and manage the Company’s business.
11
12
Results of Operations
Three Months Ended December 31, 2004 and 2003
Revenues.
Revenues for the third quarter of Fiscal 2005, which ended December 31, 2004,
increased $1.4 million to $4.7 million from $3.3 million during the same period last year.
Shipments during the current period were 4.5 megawatts compared with 2.4 megawatts in the prior
period reflecting higher demand in the current period. Revenues from accessories, parts and
service for the quarter of $1.2 million increased by $0.1 million from $1.1 million for the same
period last year.
Two customers accounted for approximately 40% of revenues for the third quarter of Fiscal
2005. Two customers accounted for approximately 39% of revenues for the same period last year.
Gross Loss.
We had a gross loss of $1.7 million for the third quarter of Fiscal 2005, which
was $1.4 million better than the $3.1 million gross loss for the same period last year. The lower gross loss
in the current period is the result of three primary differences. First, the higher sales in the
current period yielded higher contribution margin. Second, in the current period, a net decrease
of $1.6 million was reflected as a result of a warranty accrual adjustment recorded in the prior
year. And third, the warranty costs reduction and higher sales contribution benefit were partially
offset by inventory write-offs in the third quarter. The net warranty cost reduction resulted largely from
the Company recording $1.7 million in charges last year to increase the warranty reserve for
preexisting warranties and warranty accommodation. Further, the current
period charge for warranties for product sold in this period was
$1.0 million higher than the prior year.
The increase is the net result of warranty provisions on a greater number of products sold this
year, largely offset by a reduction in the average cost of warranties per unit. This increase was largely offset by a
reduction in the reserve for preexisting warranties.
We expect to continue to incur gross losses until we are able to increase our contribution
margins through higher sales volumes and per unit margins and lower warranty and direct materials
costs and lower our manufacturing costs through efforts such as outsourcing non-core functions.
Research and Development Expenses (“R&D”).
R&D expenses for the third quarter of Fiscal 2005
decreased $0.2 million to $2.8 million from $3.0 million for the same period last year. R&D
expenses are reported net of benefits from cost sharing programs such as the DOE funding. There
were $0.2 million in benefits this quarter compared to no such benefits for the same period a year
ago.
Selling, General, and Administrative (“SG&A”) Expenses.
SG&A expenses for the third quarter of
Fiscal 2005 decreased $0.1 million to $5.6 million from $5.7 million for the same period last year.
Interest Income.
Interest income for the third quarter of Fiscal 2005 increased by $0.1
million to $0.4 million from $0.3 million for the same period last year. The increase in interest
income resulted from slightly higher interest rates in the current period. We expect decreasing
cash balances from our use of funds to continue to diminish our interest income.
13
Nine Months Ended December 31, 2004 and 2003
Revenues.
Revenues for the nine months ended December 31, 2004 increased $1.9 million to $11.6
million from $9.7 million for the same period last year, reflecting increased demand for our
products in the current year. Shipments during the nine-month
period were 11.3 megawatts compared with 8.9 megawatts during the same period last year. Revenues
from accessories, parts and service for the nine months ended December 31, 2004 decreased by $0.5
million from $3.2 million to $2.7 million for the same period last year because of larger purchases made by
one distributor in the 2004 period. We expect sales in Fiscal 2005 to exceed sales for Fiscal 2004.
One customer accounted for approximately 13% of revenues for the nine months ended December
31, 2004. Two customers accounted for approximately 23% of revenues for the same period a year ago.
Each of these customers individually accounted for 10% or more of revenues.
Gross Loss.
We had a gross loss of $5.6 million for the nine months ended December 31, 2004,
compared with $7.9 million for the same period last year. The change in gross loss was largely
attributable to a $2.5 million warranty accrual adjustment made
in the prior year. The warranty accrual adjustment in the prior year
was made to increase the warranty reserve for preexisting warranties
and warranty accommodations. Gross loss
also was reduced by $0.3 million this year and by the same amount last year as a result of using
previously written-down recuperator cores.
R&D Expenses.
R&D expenses for the nine months ended December 31, 2004, increased $1.2 million
to $9.1 million from $7.9 million for the same period last year. R&D expenses are reported net of
benefits from cost sharing programs. These benefits were $0.3 million for the nine months ended
December 31, 2004, compared with $0.2 million for the same period last year. The benefits from cost
sharing programs vary from period-to-period depending on the phases of the programs. The increase
in spending is primarily the result of higher personnel costs associated with product robustness
and enhancement efforts.
SG&A Expenses.
SG&A expenses for the nine months ended December 31, 2004 increased $1.0
million to $16.0 million from $15.0 million for the same period last year. Overall spending was
higher in Fiscal 2005 in areas such as Sarbanes-Oxley compliance, recruitment, consulting and staffing of
our quality department. We expect to incur the higher level of SG&A costs, as reflected in the current year that will
continue to be driven by Sarbanes-Oxley requirements and support of our quality department.
Interest Income.
Interest income for the nine months ended December 31, 2004 decreased $0.1
million to $0.9 million from $1.0 million for the same period last year. The decrease was primarily
attributable to the lower cash balances and lower average interest rates during the current period.
We expect decreasing cash balances from our use of funds to continue to diminish our interest
income.
Other Income.
Other income was $0.4 million for the first nine months of Fiscal 2005, compared
to none for the same period last year. The increase resulted from a legal settlement.
Liquidity and Capital Resources
Our cash requirements depend on many factors, including the execution of our strategic plan.
We expect to continue to devote substantial capital resources to running our business and executing
the strategic changes summarized above. We believe that our current cash balance is sufficient to
fund operating losses and our currently projected commitments until we become cash flow positive.
We have invested our cash in an institutional fund that invests in high quality short-term
money market instruments to provide liquidity for operations and for capital preservation.
Overall cash usage for Fiscal 2005 was $5.8 million higher than the same period a year ago.
On a cash basis, excluding changes in operating assets and liabilities, Fiscal 2005 operating loss was $3.7 million higher than
last year. This increased cash usage has largely been the result of our focus on reliability and
product robustness which has resulted in increased personnel, recruiting and related costs.
Additionally, changes in operating assets and liabilities used $2.1 million more cash this year than for the same period
last year. The largest contributor to this increased usage of cash has been inventories. A year
ago, inventory reductions yielded working capital benefits. This year, inventories have increased
from purchases made in anticipation of expected future demands, and this has used cash.
Except for scheduled payments made during Fiscal 2005, there have been no material changes in
the Company’s remaining commitments under non-cancelable operating leases and capital leases as
disclosed in the Company’s Annual Report on Form 10-K
14
for fiscal year 2004. The Company may incur costs
in early fiscal year 2006 to reconfigure and/or expand production
facilities. However, these potential changes, are not fully
developed, and an estimate of the costs cannot be provided at this time.
Since 1999, the Company has worked with the DOE on the “Advanced Microturbine System” concept
behind the C200 product and has received funding for some of the associated development efforts.
While the Model C200 is still in beta testing, the scope of work under this contract has been
substantially completed and there is approximately $0.9 million remaining in earned and unfunded
billings. We expect to collect these amounts and record the
associated amounts as reductions to engineering costs
when the funding is confirmed. Further, we have applied for additional funding from the DOE to
support continuing developments under the Advanced Microturbine System project.
We anticipate that our total cash usage for Fiscal 2005 will be higher than the $30.2 million used
in Fiscal 2004. Previously, we expected a slight increase in usage versus the prior year. We now
expect the current year usage to be greater, in part because the timing of this year’s sales is
expected to result in more accounts receivable at the end of Fiscal 2005. These accounts
receivable should result in cash collections in the next fiscal year. Over the next two years, we
expect cash usages to decline significantly as we transition to cash flow positive.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
No material changes have occurred in the quantitative and qualitative market risk disclosure
of the Company as presented in its Annual Report on Form 10-K for the year ended March 31, 2004.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management
team, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures as of the end of the quarter ended December 31, 2004. Based
on that evaluation, our management, including our CEO and CFO, have concluded that our disclosure
controls and procedures were effective, as of December 31, 2004, to provide reasonable assurance
that information required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during
the quarter ended December 31, 2004, that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
However, the Company is currently undergoing a comprehensive effort
to comply with Section 404 of the Sarbanes-Oxley Act of 2002.
Compliance is required as of our year-end of March 31, 2005.
This effort includes documenting, evaluating the design and testing
the effectiveness of our internal controls. During this process, we
expect to make improvements in the design and operation of our
internal controls, including further formalization of policies and
procedures, improved segregation of duties and additional monitoring
controls.
PART II — OTHER INFORMATION
Item 5.
Other Information
Business Risks
This document contains certain forward-looking statements (as such term is defined in Section
27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) pertaining to, among other things,
our future results of operations, R&D activities, sales and cash flow expectations, our ability to
develop markets for our products, sources for parts, federal, state and local regulations, and
general business, industry and economic conditions applicable to us. These statements are based
largely on our current expectations, estimates and forecasts and are subject to a number of risks
and uncertainties. Actual results could differ materially from these forward-looking statements.
Factors that can cause actual results to differ materially include, but are not limited to, those
discussed below. Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The following factors should be considered in
addition to the other information contained herein in evaluating Capstone and its business. We
assume no obligation to update any of the forward-looking statements after the filing of this Form
10-Q to conform such statements to actual results or to changes in our expectations except as
required by law.
15
Investors should carefully consider the risks described below before making an investment
decision. In addition, these risks are not the only ones facing our Company. Additional risks of
which we may not be aware or that we currently believe are immaterial may also impair our business operations or our stock price. Our business could be harmed by any of
these risks. The trading price of our common stock has and could continue to vary as a result of
any of these risks, and investors may lose all or part of their investment. These factors are
described in greater detail in our Annual Report on Form 10-K for the year ended March 31, 2004.
16
Item 6.
Exhibits
Index to Exhibits.
The following exhibits are filed with, or incorporated by reference into, this Quarterly Report on Form 10-Q:
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAPSTONE TURBINE CORPORATION
18
December 31,
March 31,
2004
2004
$
75,693,000
$
102,380,000
1,980,000
4,170,000
10,674,000
7,893,000
905,000
1,099,000
89,252,000
115,542,000
19,119,000
20,877,000
8,534,000
8,499,000
4,503,000
4,363,000
32,156,000
33,739,000
19,860,000
18,718,000
12,296,000
15,021,000
3,260,000
3,936,000
1,493,000
1,694,000
352,000
352,000
$
106,653,000
$
136,545,000
$
4,144,000
$
2,790,000
1,072,000
1,664,000
1,805,000
2,043,000
10,613,000
11,695,000
1,392,000
1,166,000
19,000
582,000
19,045,000
19,940,000
69,000
13,000
989,000
1,149,000
—
—
—
—
85,000
85,000
530,842,000
530,394,000
(443,471,000
)
(414,020,000
)
(393,000
)
(503,000
)
(513,000
)
(513,000
)
86,550,000
115,443,000
$
106,653,000
$
136,545,000
Table of Contents
Three
Nine
Months Ended
Months Ended
December 31,
December 31,
2004
2003
2004
2003
$
4,683,000
$
3,251,000
$
11,563,000
$
9,730,000
6,427,000
6,359,000
17,142,000
17,649,000
(1,744,000
)
(3,108,000
)
(5,579,000
)
(7,919,000
)
2,793,000
3,034,000
9,126,000
7,886,000
5,612,000
5,688,000
16,013,000
15,007,000
8,405,000
8,722,000
25,139,000
22,893,000
(10,149,000
)
(11,830,000
)
(30,718,000
)
(30,812,000
)
378,000
302,000
937,000
1,011,000
(2,000
)
(38,000
)
(37,000
)
(154,000
)
3,000
(1,000
)
369,000
(2,000
)
(9,770,000
)
(11,567,000
)
(29,449,000
)
(29,957,000
)
—
—
2,000
—
$
(9,770,000
)
$
(11,567,000
)
$
(29,451,000
)
$
(29,957,000
)
84,411,962
82,705,535
84,336,840
81,908,416
$
(0.12
)
$
(0.14
)
$
(0.35
)
$
(0.37
)
Table of Contents
Nine Months Ended
December 31,
2004
2003
$
(29,451,000
)
$
(29,957,000
)
3,586,000
4,747,000
41,000
280,000
207,000
56,000
957,000
3,454,000
30,000
243,000
102,000
74,000
114,000
462,000
38,000
—
2,149,000
1,062,000
(2,312,000
)
2,545,000
194,000
(378,000
)
1,354,000
126,000
(690,000
)
227,000
(300,000
)
705,000
(2,039,000
)
(3,386,000
)
226,000
(176,000
)
(25,794,000
)
(19,916,000
)
(605,000
)
(1,111,000
)
1,000
26,000
(604,000
)
(1,085,000
)
(593,000
)
(1,162,000
)
304,000
1,390,000
—
(92,000
)
(289,000
)
136,000
(26,687,000
)
(20,865,000
)
102,380,000
132,584,000
$
75,693,000
$
111,719,000
$
37,000
$
154,000
$
2,000
$
—
Table of Contents
December 31,
March 31,
2004
2004
$
9,787,000
$
7,899,000
3,214,000
2,570,000
933,000
1,360,000
13,934,000
11,829,000
3,260,000
3,936,000
$
10,674,000
$
7,893,000
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
$
3,663,000
(1,969,000
)
1,694,000
(201,000
)
$
1,493,000
Three Months Ended
Nine Months Ended
In Thousands (except per share amounts)
December 31,
December 31,
2004
2003
2004
2003
$
(9,770
)
$
(11,567
)
$
(29,451
)
$
(29,957
)
37
135
114
462
(915
)
(1,270
)
(2,864
)
(4,175
)
$
(10,648
)
$
(12,702
)
$
(32,201
)
$
(33,670
)
$
(0.12
)
$
(0.14
)
$
(0.35
)
$
(0.37
)
$
(0.13
)
$
(0.15
)
$
(0.38
)
$
(0.41
)
Three Months Ended
Nine Months Ended
December 31,
December 31,
2004
2003
2004
2003
$
—
$
14,000
$
—
$
44,000
—
53,000
3,000
167,000
37,000
68,000
111,000
251,000
$
37,000
$
135,000
$
114,000
$
462,000
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
$
11,695,000
2,578,000
(2,039,000
)
(1,621,000
)
$
10,613,000
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Table of Contents
•
Impairment of long-lived assets, including intangible assets;
•
Inventory write-downs and classification of inventory;
•
Estimates of warranty obligations;
•
Sales returns and allowances;
•
Allowance for doubtful accounts;
•
Deferred tax assets; and
•
Loss contingencies.
Table of Contents
1.
Focus on Vertical Markets
– Within the distributed generation markets that we
serve, we focus on vertical markets that we identify as having the greatest near-term
potential. In each of the markets that we serve — CHP, CCHP, resource recovery, power
reliability and remote power — we identify specific targeted vertical market segments.
Within each of these markets, we identify the critical factors to penetrating these
markets and have built our plans around those factors.
During the third quarter of
Fiscal 2005, we received net orders for 1.4 megawatts and
shipped 4.5 megawatts of product. As of December 31, 2004, we had 8.2 megawatts in
backlog. We anticipate shipping the majority of this backlog in the remainder of this
fiscal year. All of our actual product shipments in the third quarter of Fiscal 2005
were to target markets; 52% for use in CHP applications, 8% for use in resource recovery
applications and 23% for use in CCHP applications. On a year-to-date basis through the
first nine months of Fiscal 2005, we received 13.0 megawatts of orders. The
majority, 72%, of the orders received this year, are in our targeted markets.
2.
Sales and Distribution Channel
– The previous sales strategy of selling large
volumes of product through distributors did not meet our expectations, and some
distributors refocused their efforts on opportunities other than microturbines. As a
result, several end users began working directly with us. Our strategic plan calls for
building our direct sales channel for select vertical markets to augment sales channel
efforts in the Americas. We expect that our distributors will continue to provide a
majority of our business. We are continuing to develop and strengthen key distributors,
while moving other distributors into dealer or manufacturer’s representative-type
arrangements. This has required the termination of some existing agreements to the
extent permitted by the applicable contracts and entering into new agreements.
Additionally, we have been adding new distributors and representatives who are
experienced in our target markets. We believe that this combined approach can leverage
the best of what our distributors and Capstone have to bring to our customers and will
make us more responsive to customers’ needs.
Since March 31, 2004, we have terminated or served notice of termination or
non-renewal on many of our distributors worldwide. Despite this significant change, about
55% of our product revenues in the third quarter of Fiscal 2005 and 75% year-to-date were
generated by our distributors. We expect to access direct sales opportunities in
the market both through our own sales force and sales representative relationships. We
are also in the process of negotiating with several potential new distributors and
dealers in key focused markets and, in the third quarter, signed our first new dealer
agreement.
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3.
Geographies
– The Americas have been, and we expect will continue to be, our
largest market. Within the United States, our focus is on California and the Northeast.
Japan is our second largest market based on installed units, but we expect that growth
in Japan will be moderate. We have several capable distributors in Japan and we will
continue to rely on their ability to develop the market, obtain sales and service the installed base. During
the next three years, we believe that Europe will offer significant opportunities. In
particular, we expect the resource recovery market to expand based on a number of
European Union directives regarding environmental projects. We have begun expanding our
distribution in Europe in order to capture those opportunities and have established a
direct European sales presence. Africa, the Middle East and Asia represent opportunities
that we will pursue on a project-by-project basis where they complement our strategic
direction.
By geography, our sales year to date have come 67% from the Americas, 16% from
Europe and 17% from Asia. While we see increasing demand in many geographic areas, we
believe the rate of increase will be largest in Europe.
4.
Service
– We have begun executing our strategy to serve customers directly, as
well as through qualified distributors and ASCs, all of whom will perform their service
work using technicians specifically trained by Capstone. We are expanding our direct
service presence in California and have established a service office in the Northeast.
To better serve our customers, we have in-country parts distribution in Japan
and are working to enhance our parts distribution by establishing distribution
warehouses in the Northeastern United States and in Europe.
In the third quarter, we entered into our first direct service agreements in support
of our strategy. While these were not financially significant agreements, they represent
a milestone to demonstrating execution of our strategy.
5.
Product Robustness and Life Cycle Maintenance Costs
– Customers expect high
performance and competitive total cost of ownership. To address those needs, we must
continually ensure a high level of performance. Performance is affected not only by the
microturbine, but also by the proper application design and installation, and the
quality of ongoing service.
In the first quarter of Fiscal 2005, we accomplished our predicted
mean-time-between-failures target for products that we are manufacturing currently. Also,
we installed our first prototype real time monitoring and diagnostic feature in a system
and began to evaluate its performance. Since then, we continue our efforts to enhance
the robustness of our products. We expect this work to be ongoing at a high level of
commitment through this fiscal year. This level of commitment has caused us to expand our
spending for engineering and quality staffing.
As part of our product robustness initiative, we developed our quality organization
and have instituted more design, supply chain and manufacturing processes. As a result,
both the quality organization and the enhanced processes have added to our base operating
costs.
To further enhance the performance of units currently installed and those to be
installed, we are expanding the training and certifications available to our service
providers. We believe this additional education will result in improved applications,
installations and operations of our units.
6.
New Product Development
– Our new product development is targeted specifically to
meet the needs of our selected vertical markets. We are deferring other product
development activities which are not directly linked to our three-year strategy. Our
product development efforts will be centered on enhancing the features of the C30 and
C60 products.
While our primary development focus continues to be on enhancing the C30 and C60
products, our most recent significant new product platform development activity has been
the C200 microturbine — a 200-kilowatt, higher efficiency product. Since 2000, we have
been working with the DOE under a Cooperative Agreement on the “Advanced Microturbine
System” concept behind the C200 product and have received from the DOE a portion of the
associated development costs. Four beta units are now being tested and are performing
well. The commercial launch for this product is dependent upon the successful completion
of beta and qualification testing and market demand.
7.
Cost and Core Competencies
– Improving overall product cost is an important
element of the strategic plan. The planning process identified opportunities for
improvement through focusing on core competencies. We believe that we can achieve
overall cost improvements by outsourcing areas not consistent with our core
competencies. We have
Table of Contents
identified design, assembly, test and installation support as
areas where we have capabilities to add value. In conjunction with these changes, we
have also identified a number of supply chain driven component cost reduction actions.
While we are actively engaged in identifying opportunities for outsourcing and
developing strategic suppliers, we have recently experienced some cost increases. In
particular, we have been impacted by increasing costs for commodity materials, such as
metals. To help offset these costs, we recently announced a price increase effective
February 1, 2005 that is expected to average approximately 7% across all product lines.
We are in the process of rationalizing our supply base. We believe there is an
opportunity to “pool” our spending in commodity groups such as sheet metal, electronics,
electro-mechanical and casting/machining which can lead to lower costs and an improved
supply base. Our outsourcing activities may increase spending in the short-term for
transitional costs, but we expect that these costs will be more than offset by reduced
material costs in the future.
As a result of our anticipated sales demand and changes made to our manufacturing
processes over the last year, we believe we will need to reconfigure and/or expand our
production facilities. While we have not yet fully developed these plans, we expect
that, early in fiscal year 2006, we will incur additional costs (which are not currently
quantifiable) for changes to our production facilities.
Table of Contents
Table of Contents
Table of Contents
•
Our operating history is characterized by net losses, and we anticipate further losses
and may never become profitable;
•
A sustainable market for microturbines may never develop or may take longer to develop
than we anticipate, which would adversely affect our revenues and profitability;
•
We operate in a highly competitive market among competitors who have significantly
greater resources than we have and we may not be able to compete effectively;
•
If we do not effectively implement our sales, marketing and service plans, our sales
will not grow and our profitability will suffer;
•
We may not be able to retain or develop distributors, dealers, sales representatives or
ASCs in our targeted markets, in which case our sales would not increase as expected;
•
As we become more involved in direct sales and service, we may become exposed to
additional business risks, including the risk of entering into contracts which ultimately
prove to be unprofitable;
•
We operate in a highly regulated business environment and changes in regulation could
impose costs on us or make our products less economical, thereby affecting demand for our
microturbines;
•
Utility companies or governmental entities could place barriers to our entry into the
marketplace, and as a result, we may not be able to effectively sell our product;
•
Product quality expectations may not be met causing slower market acceptance, higher
warranty cost exposure and/or production constraints;
•
We depend upon the development of new products and enhancements of existing products;
•
Operational restructuring or other business operating changes may result in asset
impairment or other unanticipated charges or in the ability to recover value from
previously impaired assets or to address issues without incurring anticipated obligations;
•
We may not achieve production cost reductions necessary to competitively price our
product, which would impair our sales;
•
Our suppliers 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;
•
Some of the components of our products have risks of significant cost variability,
either because they contain a high portion of commodity materials or are available only
from a limited number of suppliers who can readily influence our costs. These risks could
impact the costs we pay for components of our products.
•
Our products involve a lengthy sales cycle and we may not anticipate sales levels
appropriately, which could impair our potential profitability;
•
Potential intellectual property, shareholder or other litigation as well as current
litigation may adversely impact our business;
•
We may be unable to fund our future operating requirements, which could force us to
curtail our operations;
Table of Contents
•
We may not be able to effectively manage our growth, expand our production capabilities
or improve our operational, financial and management information systems, which would
impair our sales and profitability;
•
Our success depends in significant part upon the continued service of management and key
employees;
•
Failure to comply with internal controls evaluation and attestation requirements could
cause regulatory scrutiny or penalties as well as a drop in our stock price;
•
Our business is especially subject to the risk of earthquake; and
•
We face potentially significant fluctuations in operating results and the market price
of our common stock is highly volatile and may change regardless of our operating
performance.
Exhibit
Number
Description
3.1
(2)
3.2
(3)
4.1
(2)
10.1
(1)
10.2
(1)
10.3
(1)
31.1
(1)
31.2
(1)
32
(1)
(1)
Filed herewith.
(2)
Incorporated by reference to Capstone Turbine’s Registration Statement on Form S-1 (File No.
333-33024).
(3)
Incorporated by reference to Capstone Turbine’s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2003 (File No. 001-15957).
Table of Contents
Date: February 9, 2005
By:
/s/ KAREN CLARK
Karen Clark
Senior Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 10.1
AMENDMENT TO THE
CAPSTONE TURBINE CORPORATION
AMENDED AND RESTATED 2000 EQUITY INCENTIVE PLAN
THIS AMENDMENT to the Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan (the “Plan”) is made by Capstone Turbine Corporation (the “Company”) on this ___day of February, 2005.
RECITALS:
WHEREAS, the Company established the Plan as an equity incentive plan and, pursuant to authorization of the Company’s shareholders, completely amended and restated the Plan effective September 10, 2004; and
WHEREAS, the Company has undertaken a review of its compensation arrangements and, upon advice of counsel, desires to conform the terms of the Plan with regard to a change in control of the Company with the other severance and compensation arrangements maintained by the Company;
NOW, THEREFORE, pursuant to authorization of the Company’s board of directors, the Plan is hereby amended as follows effective January 31, 2005:
| 1. | Section 2(a) of the Plan is restated as follows: |
(a) “ Acquisition ” means, unless specified otherwise in an Agreement,
(i) the successful acquisition by a person or related group of persons, (other than the Company or a person that directly or indirectly controls, is controlled by or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities pursuant to a transaction or series of related transactions which the Board does not at any time recommend the Company’s stockholders to accept or approve;
(ii) the first date within any period of 12 consecutive months or less on which there is effected a change in the composition of the Board such that a majority of the Board ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been members of the Company’s Board continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board;
(iii) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated;
(iv) the sale, transfer or other disposition of all or substantially all of the assets of the Company in complete liquidation or dissolution of the Company;
(v) any reverse merger in which the Company is the surviving entity but in which securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such merger; or
(vi) the issuance by the Company to a single person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by or is under common control with, the Company) of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities (determined after such issuance) in a single transaction or a series of related transactions.
| 2. | Section 2(e) is restated as follows: |
(e) “ Cause ” means the commission of any act of fraud, embezzlement, theft or dishonesty by a Holder, any unauthorized use or disclosure by a Holder of confidential information or trade secrets of the Company (or any parent or subsidiary thereof), or any other intentional misconduct by a Holder adversely affecting the business or affairs of the Company (or any parent or subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Company (or any parent or subsidiary) may consider as grounds for the dismissal or discharge of any Holder.
| 3. | Section 15(e) is restated as follows: |
(e) In the event the Company undergoes an Acquisition and any surviving corporation or entity or acquiring corporation or entity, or affiliate of such corporation or entity, does assume any Options, Stock Purchase Rights or Restricted Stock outstanding under the Plan (or substitutes similar stock awards, including an award to acquire the same consideration paid to the stockholders in the transaction described in this subsection 15(e), for those outstanding under the Plan), then, with respect to each stock award held by participants in the Plan then performing services as Employees or Directors, the vesting of each such stock award (and, if applicable, the time during which such stock award may be exercised) shall be accelerated and such stock award shall immediately become fully vested and exercisable, if any of the following events occurs within 12 months after the effective date of the Acquisition:
(i) the Employee status or Director status, as applicable, of the participant holding such stock award is terminated by the Company without Cause; or
(ii) the Employee holding such stock award terminates his or her Employee status following (A) a change in position with the Company or any reduction in his or her level of responsibility; (B) any reduction in his or her level of compensation (including base salary, fringe benefits, participation in any plans and target bonuses under any corporate-performance based bonus or incentive programs); or (C) a relocation of the place of employment of the Employee by more than 50 miles; provided and only if such change, reduction or relocation is effected without such individual’s consent.
2
IN WITNESS WHEREOF, the undersigned officer of the Company has executed this First Amendment to the Plan pursuant to authorization from the Company on the date first written above.
| CAPSTONE TURBINE CORPORATION | ||||
|
|
||||
|
|
By: | |||
|
|
||||
|
|
Its: | |||
|
|
||||
3
Exhibit 10.2
AMENDMENT TO THE
CAPSTONE TURBINE CORPORATION
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AMENDMENT to the Agreement for the purchase of stock between Capstone Turbine Corporation (the “Company”) and John Tucker (“Purchaser”), dated August 4, 2003, is made on this ___day of February, 2005.
RECITALS:
WHEREAS, the Company granted to Purchaser on August 4, 2003 an award of its common stock subject to the terms and restrictions stated in the Agreement, including terms for the payment of a purchase for such common stock; and
WHEREAS, the Company and Purchaser desire to clarify and correct the terms that are stated in the Agreement for vesting of the restricted stock shares subject thereto in the event of a change in control of the Company;
NOW, THEREFORE, the Agreement is hereby amended by restating Section 4 in the manner set forth below, as authorized by the board of directors of the Company to be effective January 31, 2005:
4. VESTING.
The Shares shall vest and be released from the Company’s Repurchase Option (as hereinafter defined) in accordance with the following provisions:
(a) 25% of the Shares (rounded down to the next whole number of shares) shall vest one year after the “Vesting Commencement Date” (as defined below), and 1/48th of the Shares (rounded down to the next whole number of shares) shall vest each month thereafter on the date corresponding to the Vesting Commencement Date, so that all of the Shares shall be vested on the 48th month anniversary of the Vesting Commencement Date, subject to, with respect to each vesting date, Purchaser continuing to be either an Employee or a Consultant of the Company on such vesting date.
(b) Vesting under this Section shall cease in the event that Purchaser ceases to be either an Employee or a Consultant; provided, however, that if Purchaser is terminated by the Company other than for Cause (as such term is defined in the Company’s Amended and Restated 2000 Equity Incentive Plan) prior to the one-year anniversary of the Vesting Commencement Date, 1/48 th of the Shares (rounded down to the next whole number of shares) shall be deemed to have vested on the one-month anniversary of the Vesting Commencement Date and on each monthly anniversary thereafter until the date of such termination. At such times, the repurchase provisions of Section 5 hereof shall apply to all Shares that are Unvested Shares as of the date of such termination.
(c) The Vesting Commencement Date shall be August 1, 2003.
(d) Notwithstanding anything herein to the contrary, in the event of an “Acquisition” of the Company, as defined in the Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan, the vesting of the Shares shall be governed by the terms of such plan relating to an Acquisition.
IN WITNESS WHEREOF, the undersigned officer of the Company has executed this Amendment pursuant to authorization from the Company and the Purchaser has set his hand hereto on the date first written above.
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Exhibit 10.3
CAPSTONE TURBINE CORPORATION
CHANGE OF CONTROL SEVERANCE PLAN
Amended and Restated January 31, 2005
Capstone Turbine Company (the “Company”) established the Capstone Turbine Corporation Change in Control Severance Plan (the “Plan”) effective April 24, 2002 for the purpose of retaining its key executives by assuring them of adequate severance pay in the event of a change in the control of the Company. As authorized by its board of directors, the Company desires to amend the Plan, effective January 31, 2005, to conform the Plan’s definition of “change of control” with its other compensation programs and to ensure that the Plan is in compliance with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”).
ELIGIBILITY
Eligibility in the Plan is limited to the executive officers or employees of the Company who are designated to participate in the Plan by the Company’s board of directors (the “Board”) from time to time. Each officer or employee who is so designated as eligible to participate in the Plan is referred to hereinafter as an “Executive.” Executives may be added or deleted based on Board approval; provided that, only such Board approvals which have been received prior to the consummation of the applicable Change of Control shall be effective as to the addition or deletion of Executives.
SEVERANCE BENEFITS
In the event that an Executive is Involuntarily Terminated within 12 months of a Change of Control (as such terms are defined herein), such Executive shall be entitled to receive from the Company an amount equal to such Executive’s annual base salary plus the cash incentive compensation paid for the year in which the effective date for the Change in Control occurs (such amount, the “Salary”). The Salary shall be paid in one lump sum on the date such Executive was Involuntarily Terminated (the “Termination Date”). Pursuant to COBRA, the Company shall continue such Executive Officer’s health care coverage as under the Company’s medical and dental plans. The Company will pay for such coverage until 12 months after the Termination Date. Thereafter, such Executive shall be eligible to continue such coverage at his or her own expense for the remainder of his or her applicable COBRA continuation period. As used herein, the term “Involuntarily Terminated” shall mean the termination of an Executive’s service by reason of:
1. involuntary dismissal or discharge by the Company for reasons other than Misconduct (as defined below), or
2. voluntary resignation following (A) a change in position with the Company or a reduction in his or her level of responsibility, (B) any reduction in his or her level of compensation (including base salary, fringe benefits, participation in any plans and target bonuses under any corporate-performance based bonus or incentive programs) or (C) a relocation
of such individual’s place of employment by more than 50 miles, provided and only if such change, reduction or relocation is effected without the individual’s consent.
As used herein, “Misconduct” shall mean the commission of any act of fraud, embezzlement, theft or dishonesty by such individual, any unauthorized use or disclosure by such individual of confidential information or trade secrets of the Company (or any parent or subsidiary thereof), or any other intentional misconduct by such individual adversely affecting the business or affairs of the Company (or any parent or subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Company (or any parent or subsidiary) may consider as grounds for the dismissal or discharge of any Executive.
CHANGE OF CONTROL
For the purposes of this severance plan, the term “Change in Control” means any of the following:
1. the successful acquisition by a person or related group of persons, (other than the Company or a person that directly or indirectly controls, is controlled by or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities pursuant to a transaction or series of related transactions which the Board does not at any time recommend the Company’s stockholders to accept or approve;
2. the first date within any period of 12 consecutive months or less on which there is effected a change in the composition of the Company’s Board such that a majority of the Board ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (i) have been members of the Company’s Board continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board;
3. a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated;
4. the sale, transfer or other disposition of all or substantially all of the assets of the Company in complete liquidation or dissolution of the Company;
5. any reverse merger in which the Company is the surviving entity but in which securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such merger; or
6. the issuance by the Company to a single person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by or is under
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common control with, the Company) of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities (determined after such issuance) in a single transaction or a series of related transactions.
SUMMARY OF PLAN INFORMATION
The information in this section is intended to answer general questions regarding the operation of the Plan.
Except for those responsibilities specifically reserved to the Board herein, the Plan is administered by the “Administrator.” The Administrator is the committee of officers or Board members designated from time to time by the Company to administer the Plan. In the absence of such designation, the Company shall be the Administrator. The Administrator may delegate any of its duties or authorities to any person or entity. The Administrator has absolute discretion to make all decisions under the Plan, including making determinations about eligibility for and the amounts of benefits payable under the Plan and interpreting all Plan provisions. All decisions of the Administrator are final, binding and conclusive. If a Change in Control occurs, as determined by the Administrator in its discretion, the Administrator shall consist of a committee of the individuals who were the chief executive officer of the Company, the chief financial officer of the Company and the senior human resources officer of the Company immediately prior to the Change in Control.
How to Make a Claim for Benefits
If severance benefits are not automatically paid upon a payment event, an Executive may file a request for benefits in writing with the “Administrator” (as defined in this section). Failure to timely submit an application for benefits in writing, as specified in Section 5, will result in a loss of Plan benefits. You may not assign your benefits. Any attempted assignment is void.
If an individual’s claim for Benefits is denied, the Administrator will furnish written notice of denial to the individual (“Claimant”) within 90 days of the date the claim is received, unless special circumstances require an extension of time for processing the claim. This extension will not exceed 90 days, and the Claimant must receive written notice stating the grounds for the extension and the length of the extension within the initial 90-day review period. If the Administrator does not provide written notice, the Claimant may deem the claim denied and seek review according to the appeals procedures set forth below.
1. The notice of denial to the Claimant shall state:
| (a) | The specific reasons for the denial; | |||
| (b) | Specific references to pertinent provisions of the Plan on which the denial was based; | |||
| (c) | A description of any additional material or information needed for the Claimant to perfect his or her claim and an explanation of why the material or information is needed; | |||
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| (d) | A statement that the Claimant may request a review upon written application to the Administrator, review pertinent Plan documents, and submit issues and comments in writing and that any appeal that the Claimant wishes to make of the adverse determination must be in writing to the Administrator within 60 days after the Claimant receives notice of denial of benefits; and | |||
| (e) | The name and address of the Administrator to which the Claimant may forward an appeal. The notice may state that failure to appeal the action to the Administrator in writing within the 60-day period will render the determination final, binding and conclusive. | |||
2. If the Claimant appeals to the Administrator, the Claimant or his or her authorized representative may submit in writing whatever issues and comments he or she believes to be pertinent. The Administrator shall reexamine all facts related to the appeal and make a final determination of whether the denial of benefits is justified under the circumstances. The Administrator shall advise the Claimant in writing of:
| (a) | The Administrator’s decision on appeal. | |||
| (b) | The specific reasons for the decision. | |||
| (c) | The specific provisions of the Plan on which the decision is based. | |||
Notice of the Administrator’s decision shall be given within 60 days of the Claimant’s written request for review, unless additional time is required due to special circumstances. In no event shall the Administrator render a decision on an appeal later than 120 days after receiving a request for a review.
Plan Amendment or Termination
The Company may terminate or amend the Plan in its sole discretion at any time prior to a Change in Control by a written amendment that is authorized by the Company. However, once a Change in Control occurs, or upon the execution of a letter of intent or definitive agreement for the Company to engage in a transaction that will result in a Change in Control, (i) no amendment or termination will be effective with respect to an Executive unless he or she receives 30 days written notice of such amendment and consents thereto in writing after consultation with legal counsel, (ii) the identity of the Administrator may not be changed by an amendment without the express written consent of a majority of individuals who are or will become eligible to receive benefits hereunder as a result of the Change in Control.
The Company’s authorization of an amendment must be evidenced by one of the following: (1) a resolution of the board of directors; (2) execution of the amendment by the Company’s chief executive officer, president or secretary; or (3) ratification of the amendment by either a resolution of the board of directors or written confirmation of ratification by the chief executive officer, president or secretary. Notice of any amendment must be provided to or made available to the
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Administrator. Oral amendments and modifications of this Plan are not effective. All amendments and modifications must be in writing and signed as provided above to be effective.
Additional Information
Benefits are paid out of the general assets of the Company. The Company may, in its discretion establish a “grantor trust” to fund the payment of Benefits. Otherwise, this Plan does not give an Executive any rights to any particular assets of the Company. Cash amounts paid under a severance plan are generally considered taxable income to the recipient.
ERISA Rights
Participant in the Plan are entitled to certain rights and protections under ERISA. ERISA provides that all Plan participants shall be entitled to:
| • | Examine, without charge, at the Plan Administrator’s office and at other specified locations, all Plan documents, including insurance contracts, and copies of all documents filed by the Plan with the U.S. Department of Labor, such as detailed annual reports and plan descriptions. | |||
| • | Obtain copies of all Plan documents and other Plan information upon written request to the Plan Administrator. The Plan Administrator may make a reasonable charge for the copies. | |||
| • | Receive a summary of the Plan’s annual financial report. The Plan Administrator is required by law to furnish each participant with a copy of this summary annual report. | |||
In addition to creating rights for Plan participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit Plan. The people who operate your Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries. No one, including the Company or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit under this Plan or from exercising your rights under ERISA. If a claim for a Benefit is denied in whole or in part, you must receive a written explanation of the reason for the denial. You have the right to have the Plan Administrator review and reconsider your claim.
Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan and do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Administrator.
If you have a claim for benefits that is denied or ignored, in whole or in part, and you have exhausted all administrative remedies provided herein and ERISA, you may file suit in a federal court. If it should happen that Plan fiduciaries misuse the Plan’s money or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor or you may file suit in a federal court. The court will decide who should pay court costs and fees. If you
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lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous.
If you have any questions about your Plan, you should contact the Plan Administrator. If you have
any questions about this statement or about your rights under ERISA, you should contact the nearest
Area Office of the U.S. Labor-Management Services Administration, Department of Labor.
Summary of Plan Information
Capstone Turbine Corporation Change in Control Severance Plan
Capstone Turbine Corporation
21211 Nordhoff Street
Chatsworth, CA 91311
The cost of the Plan is paid entirely by the Company.
The Company’s Employer Identification No.: 95-4180883
Plan Number: 510
Plan Year: January 1 to December 31
Administrator of the Change in Control Severance Plan
c/o Sharon Faltemier
Capstone Turbine Corporation
21211 Nordhoff Street
Chatsworth, CA 91311
(818) 734-5300
Agent for Service of Legal Process on the Plan: Chief executive officer of the Company or the Plan Administrator.
IN WITNESS WHEREOF, Capstone Turbine Corporation, acting through the undersigned authorized representative, has executed this Plan on the ___day of February, 2005, to be effective as of January 31 2005.
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EXHIBIT A
Eligible Employees
As provided in the Capstone Turbine Corporation Change in Control Severance Plan (“Plan”), the board of directors of Capstone Turbine Corporation has designated the following individuals to be eligible for participation and identified as “Executives;” as defined in the Plan. This designation supercedes and replaces all prior designations made under the Plan, and is effective___, 2004.
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Exbibit 31.1
CERTIFICATION
I, John Tucker, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended December 31,
2004 of Capstone Turbine Corporation (the “Company”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the Company as of, and for, the periods presented
in this report;
4.
The Company’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for the Company and have:
(a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Quarterly Report is being prepared;
(b)
Evaluated the effectiveness of the Company’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c)
Disclosed in this report any change in the Company’s internal control
over financial reporting that occurred during the Company’s most recent fiscal
quarter that
has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting; and
5.
The Company’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the Company’s auditors and the
audit committee of the Company’s board of directors:
(a)
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely
to adversely affect the Company’s ability to record, process, summarize and report
financial information; and
(b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company’s internal control over
financial reporting.
By:
/s/ JOHN TUCKER
John Tucker
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Karen Clark, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended December 31,
2004 of Capstone Turbine Corporation (the “Company”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the Company as of, and for, the periods presented
in this report;
4.
The Company’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for the Company and have:
(a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Quarterly Report is being prepared;
(b)
Evaluated the effectiveness of the Company’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c)
Disclosed in this report any change in the Company’s internal control
over financial reporting that occurred during the Company’s most recent fiscal
quarter that
has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting; and
5.
The Company’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the Company’s auditors and the
audit committee of the Company’s board of directors:
(a)
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely
to adversely affect the Company’s ability to record, process, summarize and report
financial information; and
(b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company’s internal control over
financial reporting.
By:
/s/ KAREN CLARK
Karen Clark
Chief Financial Officer
Exhibit 32
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
In connection with the Quarterly Report of Capstone Turbine Corporation (the “Company”) on Form
10-Q for the quarterly period ended December 31, 2004, as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), John Tucker, Chief Executive Officer of the Company,
and Karen Clark, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United
States Code), that the Report complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of the Company.
PURSUANT TO
RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
By:
/s/ JOHN TUCKER
John Tucker
President and Chief Executive Officer
By:
/s/ KAREN CLARK
Karen Clark
Chief Financial Officer