UNITED STATES
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2003
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________ .
Commission file number: 001-15957
CAPSTONE TURBINE CORPORATION
| 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 [X] No [ ]
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 [X] No [ ]
The number of outstanding shares of the registrant’s common stock as of September 30, 2003 was 83,080,102.
1
CAPSTONE TURBINE CORPORATION
INDEX
| Page | ||||||||||
| Number | ||||||||||
PART I — FINANCIAL INFORMATION |
||||||||||
| Item 1. | Consolidated Financial Statements (Unaudited) |
|||||||||
Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 |
3 | |||||||||
Consolidated Statements of Operations for the Three Months and Nine Months Ended
September 30, 2003 and September 30, 2002 |
4 | |||||||||
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and September 30, 2002 |
5 | |||||||||
Notes to Consolidated Financial Statements |
6 | |||||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11 | ||||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
14 | ||||||||
| Item 4. | Controls and Procedures |
14 | ||||||||
PART II — OTHER INFORMATION |
||||||||||
| Item 1. | Legal Proceedings |
15 | ||||||||
| Item 5. | Other Information – Business Risks |
15 | ||||||||
| Item 6. | Exhibits and Reports on Form 8-K |
16 | ||||||||
| Signatures | 17 | |||||||||
2
PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CAPSTONE TURBINE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, | December 31, | |||||||||||
| 2003 | 2002 | |||||||||||
Assets |
||||||||||||
Current Assets: |
||||||||||||
Cash and cash equivalents |
$ | 119,949,000 | $ | 140,310,000 | ||||||||
Accounts receivable, net of allowance for doubtful accounts and sales returns of $578,000 at
September 30, 2003 and $194,000 at December 31, 2002 |
2,749,000 | 4,893,000 | ||||||||||
Inventory |
10,596,000 | 9,124,000 | ||||||||||
Prepaid expenses and other current assets |
2,092,000 | 2,331,000 | ||||||||||
Total current assets |
135,386,000 | 156,658,000 | ||||||||||
Equipment and Leasehold Improvements: |
||||||||||||
Machinery, equipment, and furniture |
22,996,000 | 22,996,000 | ||||||||||
Leasehold improvements |
8,497,000 | 8,480,000 | ||||||||||
Molds and tooling |
4,316,000 | 4,350,000 | ||||||||||
| 35,809,000 | 35,826,000 | |||||||||||
Less accumulated depreciation and amortization |
18,476,000 | 15,346,000 | ||||||||||
Total equipment and leasehold improvements, net |
17,333,000 | 20,480,000 | ||||||||||
Non-Current Portion of Inventory |
3,787,000 | 6,784,000 | ||||||||||
Intangible Asset, net |
1,828,000 | 2,029,000 | ||||||||||
Other Assets |
492,000 | 1,240,000 | ||||||||||
Total |
$ | 158,826,000 | $ | 187,191,000 | ||||||||
Liabilities and Stockholders’ Equity |
||||||||||||
Current Liabilities: |
||||||||||||
Accounts payable |
$ | 1,726,000 | $ | 4,321,000 | ||||||||
Accrued salaries and wages |
1,420,000 | 2,088,000 | ||||||||||
Other accrued liabilities |
1,314,000 | 1,132,000 | ||||||||||
Accrued warranty reserve |
6,196,000 | 6,913,000 | ||||||||||
Deferred revenue |
1,817,000 | 734,000 | ||||||||||
Current portion of capital lease obligations |
1,158,000 | 1,522,000 | ||||||||||
Total current liabilities |
13,631,000 | 16,710,000 | ||||||||||
Long-Term Portion of Capital Lease Obligations |
251,000 | 974,000 | ||||||||||
Other Long-Term Liabilities |
1,232,000 | 1,325,000 | ||||||||||
Commitments and Contingencies |
— | — | ||||||||||
Stockholders’ Equity: |
||||||||||||
Common stock, $.001 par value; 415,000,000 shares authorized; 83,631,310 shares issued
and 83,080,102 shares outstanding at September 30, 2003; 81,635,035 shares issued
and 81,437,822 shares outstanding at December 31, 2002 |
84,000 | 82,000 | ||||||||||
Additional paid-in capital |
529,389,000 | 526,952,000 | ||||||||||
Accumulated deficit |
(384,671,000 | ) | (358,646,000 | ) | ||||||||
Less: Deferred stock compensation |
(577,000 | ) | — | |||||||||
Less: Treasury stock, at cost; 551,208 shares at September 30, 2003;
197,213 shares at December 31, 2002 |
(513,000 | ) | (206,000 | ) | ||||||||
Total stockholders’ equity |
143,712,000 | 168,182,000 | ||||||||||
Total |
$ | 158,826,000 | $ | 187,191,000 | ||||||||
See accompanying notes to consolidated financial statements.
3
CAPSTONE TURBINE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three | Nine | |||||||||||||||||
| Months Ended | Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Revenues |
$ | 2,347,000 | $ | 3,887,000 | $ | 9,261,000 | $ | 15,886,000 | ||||||||||
Cost of Goods Sold |
4,551,000 | 6,301,000 | 16,246,000 | 25,481,000 | ||||||||||||||
Gross Loss |
(2,204,000 | ) | (2,414,000 | ) | (6,985,000 | ) | (9,595,000 | ) | ||||||||||
Operating Expenses: |
||||||||||||||||||
Research and development |
2,402,000 | 1,880,000 | 5,858,000 | 4,938,000 | ||||||||||||||
Selling, general and administrative |
4,643,000 | 7,057,000 | 14,140,000 | 25,067,000 | ||||||||||||||
Impairment loss on marketing rights |
— | — | — | 15,999,000 | ||||||||||||||
Total operating expenses |
7,045,000 | 8,937,000 | 19,998,000 | 46,004,000 | ||||||||||||||
Loss from Operations |
(9,249,000 | ) | (11,351,000 | ) | (26,983,000 | ) | (55,599,000 | ) | ||||||||||
Interest Income |
309,000 | 687,000 | 1,148,000 | 2,266,000 | ||||||||||||||
Interest Expense |
(52,000 | ) | (97,000 | ) | (189,000 | ) | (316,000 | ) | ||||||||||
Other Income |
— | 3,000 | 1,000 | 28,000 | ||||||||||||||
Loss Before Income Taxes |
(8,992,000 | ) | (10,758,000 | ) | (26,023,000 | ) | (53,621,000 | ) | ||||||||||
Provision for Income Taxes |
— | — | 2,000 | 2,000 | ||||||||||||||
Net Loss |
$ | (8,992,000 | ) | $ | (10,758,000 | ) | $ | (26,025,000 | ) | $ | (53,623,000 | ) | ||||||
Weighted Average Common Shares Outstanding |
81,788,427 | 77,526,602 | 81,477,606 | 77,455,926 | ||||||||||||||
Net Loss Per Share of Common Stock – Basic and Diluted |
$ | (0.11 | ) | $ | (0.14 | ) | $ | (0.32 | ) | $ | (0.69 | ) | ||||||
See accompanying notes to consolidated financial statements.
4
CAPSTONE TURBINE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net loss |
$ | (26,025,000 | ) | $ | (53,623,000 | ) | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
4,790,000 | 8,065,000 | ||||||||||
Impairment loss on marketing rights |
— | 15,999,000 | ||||||||||
Non-cash reversal of administrative expenses |
(1,099,000 | ) | — | |||||||||
Provision for doubtful accounts and sales returns |
555,000 | 169,000 | ||||||||||
Inventory write-down |
63,000 | 3,002,000 | ||||||||||
Provision for warranty expenses |
2,011,000 | 2,364,000 | ||||||||||
Loss on disposal of equipment |
217,000 | 86,000 | ||||||||||
Non-employee stock compensation |
28,000 | — | ||||||||||
Employee and director stock compensation |
537,000 | 780,000 | ||||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
1,589,000 | 2,028,000 | ||||||||||
Inventory |
1,462,000 | 1,883,000 | ||||||||||
Prepaid expenses and other current assets |
239,000 | (1,220,000 | ) | |||||||||
Other assets |
— | (267,000 | ) | |||||||||
Accounts payable |
(1,496,000 | ) | (110,000 | ) | ||||||||
Accrued salaries and wages and deferred compensation |
(704,000 | ) | 319,000 | |||||||||
Other accrued liabilities |
124,000 | (55,000 | ) | |||||||||
Accrued warranty reserve |
(2,728,000 | ) | (2,239,000 | ) | ||||||||
Deferred revenue |
1,083,000 | (838,000 | ) | |||||||||
Net cash used in operating activities |
(19,354,000 | ) | (23,657,000 | ) | ||||||||
Cash Flows from Investing Activities: |
||||||||||||
Acquisition of and deposits on fixed assets |
(950,000 | ) | (2,116,000 | ) | ||||||||
Proceeds from disposal of fixed assets |
26,000 | — | ||||||||||
Net cash used in investing activities |
(924,000 | ) | (2,116,000 | ) | ||||||||
Cash Flows from Financing Activities: |
||||||||||||
Repayment of capital lease obligations |
(1,073,000 | ) | (976,000 | ) | ||||||||
Exercise of stock options and employee stock purchases |
1,297,000 | 214,000 | ||||||||||
Acquisition of treasury stock |
(307,000 | ) | — | |||||||||
Net cash used in financing activities |
(83,000 | ) | (762,000 | ) | ||||||||
Net Decrease in Cash and Cash Equivalents |
(20,361,000 | ) | (26,535,000 | ) | ||||||||
Cash and Cash Equivalents, Beginning of Period |
140,310,000 | 170,868,000 | ||||||||||
Cash and Cash Equivalents, End of Period |
$ | 119,949,000 | $ | 144,333,000 | ||||||||
Supplemental Disclosures of Cash Flow Information: |
||||||||||||
Cash paid during the period for: |
||||||||||||
Interest |
$ | 189,000 | $ | 316,000 | ||||||||
Income taxes |
$ | 2,000 | $ | 2,000 | ||||||||
See accompanying notes to consolidated financial statements.
5
CAPSTONE TURBINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Organization
Capstone Turbine Corporation (the “Company”) develops, manufactures and sells microturbine generator sets for use in combined heat and power generation, resource recovery, hybrid electric vehicles and other power, heat and cooling applications in the markets for distributed power generation around the world. 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 December 31, 2002 was derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. 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 December 31, 2002.
Certain reclassifications have been made in some prior year balances to match the current year’s presentation.
3. New Accounting Pronouncements
In May 2003, Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity”, was issued. The standard establishes how an issuer classifies and measures certain freestanding financial instruments with characteristics of liabilities and equity and requires that such instruments be classified as liabilities. The standard is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In April 2003, SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, was issued. The standard amends and clarifies financial reporting for derivative instruments and for hedging activities accounted for under SFAS No. 133 and is effective for contracts entered into or modified, and for hedges designated, after June 30, 2003. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In January 2003, the Emerging Issues Task Force (“EITF”) released EITF 00-21: “Accounting for Revenue Arrangements with Multiple Deliverables.” EITF 00-21 clarifies the timing and recognition of revenue from certain transactions that include the delivery and performance of multiple products or services. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Alternatively, entities may elect to report the change in accounting as a cumulative-effect adjustment in accordance with Accounting Principles Board Opinion 20, “Accounting Changes.” If so elected, disclosure should be made in periods subsequent to the date of initial application of this consensus of the amount of the recognized revenue that was previously included in the cumulative-effect adjustments. The adoption of EITF 00-21 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
6
CAPSTONE TURBINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
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:
| September 30, | December 31, | ||||||||
| 2003 | 2002 | ||||||||
Raw materials |
$ | 10,930,000 | $ | 12,623,000 | |||||
Work in process |
1,991,000 | 1,831,000 | |||||||
Finished goods |
1,462,000 | 1,454,000 | |||||||
Total |
14,383,000 | 15,908,000 | |||||||
Less non-current portion |
3,787,000 | 6,784,000 | |||||||
Current portion |
$ | 10,596,000 | $ | 9,124,000 | |||||
The non-current portion of inventory represents that portion of the inventory in excess of amounts expected to be sold or used in the next twelve months.
5. Intangible Asset
The intangible asset represents the license granted to the Company to use a former supplier’s intellectual property for the design and manufacture of licensed product for use in microturbines. Additional information is as follows:
| September 30, | December 31, | ||||||||
| 2003 | 2002 | ||||||||
Gross carrying amount |
$ | 3,663,000 | $ | 3,663,000 | |||||
Less accumulated amortization and impairment loss |
1,835,000 | 1,634,000 | |||||||
Net |
$ | 1,828,000 | $ | 2,029,000 | |||||
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 September 30, 2003 was $67,000 and $201,000, respectively, compared with $94,000 and $281,000 for the same periods last year. This intangible asset is scheduled to be fully amortized by 2010 with corresponding amortization estimated to be $66,000, $267,000, $267,000, $267,000, $267,000 and $694,000, for the remainder of 2003, calendar years 2004, 2005, 2006, 2007, and thereafter, respectively.
6. Stock-Based Compensation
The following table is presented in accordance with SFAS No. 148 and 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:
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| In Thousands (except per share amounts) | 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net loss, as reported |
$ | ( 8,992 | ) | $ | (10,758 | ) | $ | (26,025 | ) | $ | (53,623 | ) | |||||
Add: Stock-based employee and director compensation
included in reported net loss |
134 | 253 | 537 | 780 | |||||||||||||
Deduct: Total stock-based employee and director
compensation expense determined under fair value
based method |
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