Capstone Green Energy Corp (CGRN) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Capstone Turbine Corporation third quarter conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the program, please press star, then zero, on your touchtone telephone. As a reminder, ladies and gentlemen, this conference call is being recorded. If you should disconnect and wish to rejoin the conference, you may do so by dialing 877-817-7175.

I would now like to introduce your host for today's conference call, Miss of FRB Weber Shandwick. Ma'am, you may begin.

Good afternoon, and thank you for joining Capstone Turbine to discuss its results for the third quarter of 2002. By now, you should all have received a copy of the press release, which was issued this afternoon. If not, please call my office at 310-407-6555, and we'll get a copy to you.

On today's call are Dr. Ike Almgren, President and Chief Executive Officer, and Karen Clark, Chief Financial Officer of Capstone Turbine.

Capstone will be holding a one-hour conference call today, the format of which will be management's review for the quarter, followed by Q&A.

Please bear with me for one moment while I read through the Safe Harbor Statement.

During the course of the conference call, management may make projections or other forward-looking statements regarding the events or future financial performance of the company, within the meaning of the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which may cause Capstone's actual results to be materially different from future results expressed or implied in such statements. Capstone undertakes no obligation to release any revisions to any forward-looking statements.

For a more detailed discussion of factors that affect Capstone's operating results, we refer you to the company's filings with the Securities and Exchange Commission.

At this time I will turn the call over to Dr. Ike Almgren. Ike?

Thank you, . Good afternoon and thank you for joining us. We have a lot to talk about on our call today. I'm going to begin with a quick overview of our company's results for the third quarter.

Then I'll give you an overview of our current market conditions. Further, I'll talk about a significant success we have had with our strategic initiative and about our recently announced program.

Then I'll turn the call over to Karen to review our third quarter results. After that, I'll take you through an update on our operating initiatives.

So let's begin with an overview of our third quarter results.

For the quarter, revenues were $3.9 million as compared with 3.3 million in the same period a year ago. The loss for the current quarter were $10.8 million or 14 cents per share. For Q3 a year ago, we reported debt loss was $12.5 million or 16 cents per share.

On a year-to-date basis, were $15.9 million and the reported loss was $53.6 million or 69 cents per share.

This includes 23 cents per share for the and excess inventory write-downs taken in the second quarter. Excluding these charges, the year-to-date loss will be 46 cents per share.

Last year for the first nine months, the company had saved $25.8 million, a net loss of $32.2 million and a loss per share of 42 cents.

Currently market conditions are challenging. Overall the market is very tight with capital spending and you're seeing this impact companies across the board. Further, in some areas, wholesale electricity prices have dropped compared to 2002 . This type of and payback period for some projects. Adding to our challenges is that for many of our potential customers, the are still perceived as a new technology.

While we have identified many of our opportunities, converting these opportunities to orders is a challenge.

While the current market has its challenges, we are encouraged by some of the development we see happening in the government support for this generation. In California, the Public Utility Commission decided to put operating on biogas on a higher intense in 11.

The famouse national energy bill, whcih is in coference includes a proposal for 10 percent tax cut in for systems.

In Europe, a large initiative with CHP is underway for a decision in the E.U. Parliament.

Initiatives such as these can improve the market for MicroTurbine .

We are seeing new support for this in other areas as well. The national accounts and alliance, which includes the American Foundation, the American Gas Association and the Department of Energy, is developing installations for CHP and to and promote energy efficient energy solutions for commercial customers.

Of the five , is providing MicroTurbines for two of them.

These are all indications that a better understanding and acceptance of the MicroTurbine is developing around the world.

One other key initiative this year has been to build strategic partners. We are very pleased that United Corporation, and Capstone have announced long-term strategic alliance. offers a broad range of high technology products, systems and services to the building system industry.

corporation is a leading manufacturer of heating, ventilation, air conditioning and systems.

I want to spend a few minutes on some of the details of this alliance. First of all, it's a 10-year agreement. The overall program involves the integration, marketing, sales and service of combined heat and power -- CHP solutions -- targeted for commercial building. The agreement provides for the combination of our MicroTurbine products with their .

By engineering the products to work together, we can provide customers seamless, energy efficient solutions for their cooling needs. Further, by making our work in concert with the comfort network, system monitoring services provided by can be extended to our MicroTurbines, whether they are deployed in combination with , or used solely for generating electricity. This provides an enhanced level of service to customers.

will be an authorized sales and service channel for customers in North America and most of Europe. They will be the exclusive distributor for the combined Capstone MicroTurbines with the . And to be a non-exclusive distributor Capstone MicroTurbines.

can provide a significant backbone to our sales and service channels.

As part of the alliance agreement, purchased 4.9 percent of Capstone for one dollar per share. The company issues new stock to facilitate this transaction.

are very pleased have completed such a significant alliance agreement in the few months since deciding to focus on this initiative. And we are continuing to pursue other strategic alliances.

Moving on -- our board has announced its decision to initiate a stock repurchase program. We it's the best of our cash resources, and given the valuation of our stock, we believe having a stock repurchase program is in the best interest of our shareholders. The program will be to repurchase up to $10 million of stock at times and prices deemed appropriate.

With that, I'll turn the call over to Karen to the quarter in more detail. Karen?

Thank you, Ike.

Shipments in the third quarter were 2.3 megawatts. Compared to the third quarter of last year, our megawatt ships were 10 percent higher this period. Just under half of the megawatts shipped this quarter came from 60 kilowatt products whereas a year ago, the 60 kilowatt products counted for over a third of the megawatt ships.

On a year-to-date basis, the Company has shipped 15.3 megawatt products with just over 60 percent from 30 kilowatt units. For the first nine months of last year, the Company shipped 27 megawatts with nearly 80 percent coming from 30 kilowatt units.

Remember that in the first half of last year, the Company was receiving the benefits of demand propelled by the United States Western energy crisis. Geographically, 70 percent of revenues were generated in North America and over 20 percent in Asia. This is fairly consistent with the geographic source of the sales in the third quarter of last year.

Product shipments in the quarter resulted in $2.6 million of revenue or $100,000 more than the same period a year ago. In the quarter, the Company had $1.3 million of sales from accessories, parts and service whereas a year ago accessories, parts and service sales were $800,000.

In the quarter, the Company refurbished more than 50 units that were in distributors' inventory. We are aware that roughly 30 of these units were placed into service in the quarter or shortly thereafter. Overall in the third quarter, there were no individually significant customers whereas last year, 12 percent or just over $400,000 of the Company's total sales in the period came from one customer.

On a year-to-date basis, revenues were $12 million from product sales and $3.9 million from accessories, parts and service sales. In the same period last year, product revenues were $23.3 million or nearly twice this year's levels and accessories, parts and service revenues were $2.5 million or about 60 percent of this year's levels.

This year one of the Company's Japanese partners accounts for about 14 percent of the year-to-date sales. And the European utilities to whom we sold a significant volume of product in the first quarter is responsible for 13 percent of our year-to-date sales. Last year on a year-to-date basis, one customer accounted for 15 percent of the Company's $25.8 million in total sales.

Moving up to margins. In the current period, margins showed a loss of $2.4 million as compared with the loss of $2.1 million last year. The most significant driver of the change in margins between periods came from absorbing costs as a result of building with inventories in last year's third quarter. Whereas this year finished goods inventories were reduced during the quarter. Compared to margins in the second quarter of this year, after adjusting for the $1.8 million excess inventory reserve taken in that period, this quarter's margins were nearly the same. The averaged impact of the lowered sales volume this quarter was offset by improved margins from a better mix of product that included a higher portion of and more profitability configured as well as, among other things, a higher -- higher margin accessory, parts and service sales than in the prior period.

On a year-to-date basis, the reported gross loss was $9.6 million as compared with a gross loss of $1.2 million a year ago. This $8.4-million spread is due to several factors: The lower sales level in the current; the $1.8 million excess inventory reserve taken last quarter; the overhead from the addition of the manufacturing facility; higher charges this year, resulting in large part from engineering changes; and higher premium net warranty charges this year, which are based on our better understanding of actually warranty costs.

Research and development, or R&D costs, were $1.9 million in the quarter, as compared with $2.5 million in the third quarter of last year. R&D expenses are reported net of contract offset. Contract offsets, which include reimbursement from sources such as Department of Energy were $1.5 million this quarter as compared with $1 million a year ago. Excluding the impact of the offsets, R&D costs were $100,000 higher in the third quarter of last year. We had told you we expected engineering costs to be higher in the third quarter than in the first two quarters of the year, but the actual results are only marginally higher than the last quarter's spending. We made planned progress without spending as anticipated, and we're able to record project milestone billings for of milestones not anticipated in the period.

On a year-to-date basis, R&D costs were $4.9 million as compared with $8.2 million for the same period last year. These numbers are again net of contract offsets, and those offsets were $4.1 million and $1.5 million respectively.

The underlying spending for R&D has decreased only about $600,000 between years. Selling, general and administrative expenses decreased to $7.1 million compared with $9.2 million in the third quarter of 2001; $1.3 million of this lower expense was due to lower amortization expense as a result of writing off the marketing asset last quarter, and the remaining $800,000 reduction was due to lower spending.

On a year-to-date basis, excluding marketing impairment loss recorded in the second quarter this year, SG&A is down 16 percent from $30 million last year to $25.1 million this year.

Last quarter we told you we expected operating costs for the full year, excluding the marketing impairment, to be roughly 10 percent below last year's level. We now expect to the year's operating costs again, excluding marketing impairment, to be roughly 20 percent below last year's level.

Other income and expense decreased to $600,000 this quarter from $1.4 million in the third quarter last year. This reflects lower cash balances and lower interest rates in the current period. On a year-to-date basis, 2002 other income and expense was $2 million, or $5.2 million lower than a year ago. Again, this is the result of the lower interest rates and lower cash balances.

Moving on now to our balance sheet. Our accounts receivable balance was $5.8 million at the end of the quarter, down $2.2 million from the balance at both the end of last quarter, and the end of 2001. The change in the receivables balance since last quarter primarily reflects the change in the sales level.

Inventory levels were relatively unchanged from the second quarter with current inventory in the 16.2 million versus 16.9 million at the end of last quarter. Overall, inventories are down from $22 million at the end of last year.

As of the end of the period, we had $144.3 million in cash and cash equivalents. We used $10.8 million in cash in the quarter, up from 9.2 million in the prior, but down nearly 50 percent from the $18.7 million in cash used during the third quarter of last year.

Our operating cash flow, with the use of $9.7 million whereas last quarter we used $8.1 million for operations. Working capital used $2 million more cash this quarter. Last quarter saw the benefit of inventory reductions whereas there were not similar reductions this quarter.

Cash used for asset purchased was again well controlled at $800,000. On a year-to-date basis, total capital spending has been $2.1 million only 13 percent of the $15.7 million used for the first nine months of last year.

Overall, total cash usage has been $26.5 million year to date, just under half of the $55.3 million used in the same period a year ago.

Last quarter, we told you to expect cash usage for the year to be around $40 million plus or minus, depending on changes in working capital. We are still holding our guidance in this range, excluding cash changes associated with equity transactions.

I'll now turn the call back to Ike for his operation's update.

Thank you Karen. While today's market conditions are challenging, we are continuing to build up on days for tomorrow. We continue to work on our three focus areas, development of the market, reducing total cost, and improving quality.

As we expand the key things we needed to do to penetrate the market was clear all along that cooling applications represent an even bigger market potential than hot water and steam based applications. However, it was also clear we would need to team up with a partner, aimed directly at the building, cooling, heating and power market, the market. This was part of what drove us to look at, to look to you to see as a strategic partner. That we have many capable distributors around the world, due to Corporation, if the leading manufacturer heating ventilation, air conditioning for . They had customers and service operations throughout the world. By combining our with that , we had an opportunity to provide a better solution to commercial building customers.

Commercial buildings are only one part of this story, as they represent a very significant market.

We are not expecting immediate results from this lines for you to see, because they need to lay the foundation work in their organization, with their customers. They have to educate their channels, become trained as service providers and the like.

We are expecting that we will be starting on these activities in the very near term. As we told you before, our products have a relatively long cycle -- six months or more for these type of projects. So, we expect it will take time to see an impact on orders from this alliance. However, we believe this alliance with UTC is an important step in the right direction.

You'll recall that last quarter on told you about the Capstone onSITE, our new article that shows successful implementations of MicroTurbines. They describe how Capstone MicroTurbines are creating benefit for customers. We onSITE articles showing the benefits for MicroTurbines for numbers of applications. We believe these experiences of real customers will provide beneficial insight for companies and communities considering installing MicroTurbines for similar applications.

The onSITE articles are available on our website, and I encourage you to take a look at them.

In the area of developments -- during the third quarter, the first three sections of the interconnection standard. This standard provides a platform for developing a more uniformed approach to interconnection. We have been actively participating in and encouraging this development. While this standard, in itself, does not eliminate the challenges and costs of interconnection, it is a very important step in the right direction.

or focus action items. At the previous conference call, I mentioned we had completed the first phase of a dedicated effort to have from Capstone visit our installed MicroTurbines. The program has now been completed in Europe, and is largely complete in North America and Japan.

We have obtained valuable information about how our MicroTurbines are being installed and used. Along the way, we've provided end users with current software versions and other benefits we believe can help enhance the performance of their units.

Our task now is to use the information we learned from these to provide better training, information and support for our distributors and their users.

To update on some of our performance statistics, we now have 2.8 million hours of accumulated operating time at customer sites. The longest running unit has now reached 32,000 hours, and there are five units with more than 20,000 hours operating.

With that update on our key initiatives, I'd like to turn to some of our operating and engineering developments. You'll recall that last quarter we told you about the significant progress we made in demonstrating our abilities for use in high volumes. As we developed our skills and knowledge in , we have found ways to achieve high performance levels from previously not to be usable. As a result, we believe in time we will be able to use more than half a million dollars worth of previously .

We expect to begin realizing this benefit in the first half of next year. We are pleased that the ingenuity and persistence of our people in the manufacturing operations have taken us to this level.

And now pleased to note that we are making solid progress is our advanced MicroTurbine systems development. We have successfully run the system at full temperatures, which is another typical milestone. This is a major project for the Company and to date, our design is performing well and the program is on schedule.

We are continuing towards the next steps, including adding , which is based on a new design. The first commercial release expected as a result of the Advanced Microturbine system is the , which is scheduled to be introduced in 2004.

During the quarter, the Company shipped a 60 kilowatt simple cycle machine for the fuel cell energy program. This program combines our microturbine with our 250 kilowatt molten carbon fuel cell stack. The electric efficiency of the combined system is expected to be in the same range as a large combined cycle gas turbine.

In light of the market conditions and because of the late and time frame for realizing the market potential for market , the Company's recently undertook a reduction in force. Shrinking the work force by about six percent. We are continuing to invest in our sales and marketing and customer service .

Let's turn now to what our expectations are for the rest of this year. We believe Capstone's will continue to on opportunities for the fourth quarter. As we have said before, our on a basis as this creates variability to be . Because of the uncertainty in the market right now and our limited we are no longer providing guidance and expectations for the fourth quarter or the full year.

Finally, as you may have read in our press release, I have announced my intention to retire from Capstone. At our recent Board meeting with the we discussed my plan to retire and the need to find a successor to lead the business to the next level. In order to initiate a search for a successor without creating rumors and other problems, it was concluded the most straightforward way is to announce it publicly.

As I said, with confirmation of the alliance with UTC in addition to our leading position in the market, our strong technology and our , total cost improvement and reduction of total I think Capstone has a solid foundation to build on.

to be the appropriate time to seek a successor. We don't know how long it will take to find someone, however, I'm very supportive of the Board taking the time it needs to find the right person to lead the Company forward and to make a smooth transition.

The Board has asked and I have agreed to continue my efforts to expand our strategic relationships such as the one we just with UTC. Given the time that will require away from the Company, the Board has decided to seek an individual who can work with me in the near term. I expect to work closely with this interim person to ensure our critical priorities are driven forward. As part of the transition, the Board has selected Eliot Protsch as the new chairman. It is a very good choice. Eliot's from Alliance Energy and knows the thoroughly and has hands on experience with Capstone microturbines and other new energy technologies.

I am proud and pleased to have the opportunity to lead Capstone from being a small private company with a good idea for a product, through the launch of the first commercial market turbine, the , and then positioning the Company for future growth. Capstone is today by far the leading microturbine company. The strategic alliance with from that position. While there are many challenges ahead for Capstone, I firmly believe in energy in general, and the potential for Capstone microturbines in particular. With that, we will close our formal remarks and take your questions.

Thank you ladies and gentlemen. If you have a question at this time, please press the one key on your touchtone telephone, and we also ask that you limit yourself to one question each; however, please feel free to re-queue yourself for any follow-up questions you may have. One moment for our first question.

Our first question comes from from .

Thank you. Good afternoon. Can you just give us some background in terms of why there is such a shortfall in the level of shipments relative to what had given from the guidance for your first of shipments three months ago?

Steve, please could you repeat the question Steve?

Yeah, I mean, there was a major shortfall in your shipments from what you were discussing in the last conference call, even at the first , you know, standpoint, which I thought were shipments that were pretty well assured at that point, and I was wondering if you could give us some background in terms of what were the sources of the shortfall in the shipping levels.

Yes, basically, the third quarter, in its nature, July, August, September, it is kind of back loaded, in that respect by--the main reason for the shortfall is . Some may the product, some for long time, others for a short time. The other effect we had is that some of the sales through our distributor channels, in particular in Japan, they used, , what they have in the inventory, .

I'm sorry Ike. How does that work with the Japanese distributors? I mean, I'm not sure what they are ...

No, we--we have--as they have orders there --the Japanese distributors from the start, they ordered--it was part of the agreement that they should order certain quantities, and they have done, and so they have units in inventory, they have a lot of units, but when they get the sales order from their customers, they--if they have that particular configuration in the inventory, they use that.

Okay, and so the --so in effect, they had to in effect, use that inventory up before they could order new, and the market there was slow as well?

Yes.

Okay, thank you.

Thank you.

Thank you. Our next question comes from from Wedbush Morgan Securities.

Hi, happy Halloween, everybody.

Hi Gary, thank you.

I wanted to ask about the venture, and you said that they had purchased the shares; have they completed that purchase to date?

Yes, that has been done.

Then can I follow up with a question about, do they have any initial commitments, or order commitments in the agreement?

Yes. They have a proprietary business plan, and targets for this business. In addition, the agreement commits them to a minimum resource levels and a nominal space level.

You said nominal, not necessarily, so easily achievable, is that what you mean by nominal?

I think you interpretation's correct.

OK. I will get back in the queue. Thank you.

Thank you. Our next question comes from from Bank of America Securities.

Thank you. Sort of a two-part question, one, just to close the loop on the sale, could you share with us how many actual shares they purchased at $1 per share.

And the second part, unrelated to that is, as you look into '03 right now, and given the fact that visibility is low, can you share with us some parameters to think about with regards to, you know, what kind of volumes we should be thinking about?

OK, well I'll take the first part of your question and then let Ike take the second part. The shares sold to was about 3.9 million shares.

OK.

And the second part of your question, what 2003 survives the recovery of the general does not have an effect on and we to guess as expect in our own action that we have targeted the same at levels roughly similar to those and , but with our goals driven by straight economics, more of them intensive.

Ike, I missed that, is that flattish with '02 volume with Capstone, or how should I think about it?

I'm sorry, can you say again, was that slant it was what?

Yes, can you compare the two the volume, you know, this year, how should I think about next year, just relatively speaking, given market conditions and all that. Should we look at flattish volumes, '03 versus '02?

No , what we said, we think everything is more is go with in line with wins and , which all this flat compared to 2002.

And the, just to clarify, we're talking, what are we saying about win, can you just quantify that?

On the win and , what we can see grows on a 90 basis in the range of 20 to 40 percent.

Thank you.

Thank you. Our next question comes from from Second Line Capital.

When you look out many years, you know, three to five years, that do you think the potential is for the United Technologies business, and also maybe look at it another way, what percentage of your total market do you think is covered by United Technologies, exclusive distribution relationship?

It's, this is difficult question to quantify in absolute numbers. I mean, I rarely like to make a statement that we expect, we expect the impact to have, be substantial and the potential list of , this is a long-term, you know, long-term agreement with the stronger safe channel into the in the world.

But can you speak to, there's been no penetration to the market yet, can you speak to what that addressable market is that you're hoping to penetrate.

It is one of these markets that I'd prefer not to talk in these numbers. I mean, it's a huge market. In order to penetrate it correctly, we have to have solutions. And that's what we will work on -- combining the with the MicroTurbines.

We are in the early stage of this and there are plans -- they are proprietary. So, I mean, I can't, at this stage, disclose more.

OK. Thank you.

Our next question comes from David Smith from Salomon Smith Barney.

Good afternoon.

Two real quick questions. First, can you talk about production being down year-over-year? I would have thought with lower production -- or with the lower production levels that margins would have suffered a little more -- gross margins, specifically. But, you did mention that it was a better sales mix. Can you just talk about specifically how much production levels were down year-over-year? And then secondly, if you can maybe give us insight into the number you had shipped in the quarter?

OK. Let me start with your second one. The units shipped in the quarter -- there were 79. 51 of those were at systems, and 28 of them were systems.

And then, looking -- your other question was about year-on-year -- how the margins were impacted by lower overhead absorption. A year ago, the company was building a significant amount of inventory, and you'll recall, that's really -- finished this inventory that we've been working off. And that absorption level was favorable to the company to the tune of roughly $600,000 a year ago. And this year, as I mentioned, we reduced the inventory levels, and so fixed costs previously hung up on the balance sheet fell through in the period. So, it gives you a sense of the magnitude of the .

OK. But wouldn't there have been some upside to the sales mix in the excess spare parts that you had mentioned?

Yes. The sales mix that I was having was really relative to Q2 of this year, not to Q3 of last year.

Do you want me to still ...

Yeah. Will you give us those comparisons if they're available?

Q2 of this year to Q3 of this year, or Q3 this year to Q3 last year -- which are you asking for?

Q3 over Q3.

I'm sorry. OK. Q3 over Q3. Hang on just one second. On a per unit basis, I -- yup, there we go. Year-over-year, Q3 to Q3, on the 30s -- we had it relatively unchanged. And on the 60s year-over-year, we have a much better mix this year -- more highly configured products. And therefore, the margins on those products are significantly higher than the prior year. We've not disclosed what are margins are per configuration, but suffice it to say, they're significantly better this year.

OK.

And parts and service margins were, again, up rather significantly versus a year ago -- roughly twice the margin contribution.

Well, I guess the difficulty that I've got, then, is that I would have thought that gross margin in the quarter would have been better. You know, I understand the production issue, but was the production issue that significant to the overall benefit from those points?

It is a significant element in the year on year. When you look at Q3 to the Q3 period, there are a number of things that go back and forth. But the impact of the inventory change is by far the single largest item.

Right. OK. Thanks.

Thank you. Our next question is a followup from from JMP Securities.

Yes, thank you. Just a couple of questions that I can ask. First of all, in terms of a share buyback. It sounds like you received about $4 million from UTC. Why when the Company is cash, would you spend $6 million of your own cash to repurchase the shares at this point?

The cash -- the stock repurchase program is an up to $10 million program. That is the maximum amount authorized by our Board. It does not commit the Company to spend all of those funds. And so the Board will continue to assess from time to time how much of that it intends to actually move to repurchase.

But you haven't changed at all -- before I heard any of your forecast on cash flow in 2003 from your I assume?

No, there's nothing in our comments that has changed anything as to our Q3.

OK. And Karen, I think you said that you have about a half a million dollar inventory of old recuperators that will be used in 2003?

Correct.

Right. And so, can you give us some feeling in terms of -- I assume that's direct written down value. Do you have some feel for what those values would be when they're shipped? Or that they'll be handled from an accounting standpoint?

Sure. What will happen is because those were reserved in 2001 they currently sit on our books at a zero value. When they are used in our production processes, they will go out the door at zero cost. And therefore, we will have an unusually high gross margin during those periods and of course will be required to disclose to you that benefit when it occurs.

And which quarters do you expect those to be shipped? clark: We believe we will start seeing this happen in the first half of next year.

OK. Thank you.

You're welcome.

Thank you. Our next question comes from from Adams Harkness.

Thank you. Ike, quick question for you. We've seen the advertising the microturbine out in a variety of trade magazines. Are they getting any traction with that product? And two, did they have any comments on the new relationship with United Technologies and do you think it will impact that ongoing relationship? Thanks.

Yes, on the first part of the question, we have -- they have approach. They've been out there since they have a number of these . They, as well as we, will have hoped they could have close more of them, but I think the market conditions are a little different from them. Regarding the new relation with , we have had any comments from them.

Great, thank you.

You're welcome.

Thank you, our next question is a follow up from from Wedbush Morgan Securities.

Regarding the share repurchase, and you did mention that it's authorized, have you repurchased any shares since you made the announcement?

No, we were precluded from entering the market until after this call, and the market has an opportunity to digest the information from today.

Okay. When did you start the discussions with , and what brought you two together at this stage of the Company's development?

Yes, we started several months ago, and then I think it became--from both sides. I mean, I think they had looked into the market, and found things that we could do were attractive. We had looked into the market and found things they could do attractive, and then we gradually built from there.

So it was a mutual attraction, you could say?

Yes, a mutual attraction, and also I would like to point out that the roll out in the power was a significant event, where they really take energy.

Okay, final question I have is on the reduction in force. Was it across the board in the Company, or did it target specific, say operations or engineering? You mentioned you're still building on the sales and marketing side. Could you give us a sampling of what the reduction of force entailed?

I think you basically answered the question yourself. I mean, we focused on the areas you mentioned to reduce, and then at the same time, building in the areas of sales, marketing and customer service.

Okay, thank you.

Thank you, Once again, ladies and gentlemen, if you have a question at this time, please press the one key on your touchtone telephone.

Are there any more questions?

Our next question is a follow up from David Smith from Salomon Smith Barney.

Hi, just one more follow up on . Is there any technology transfer in that relationship? My understanding is that they were developing a--I think a 400 kilowatt microturbine. Is there any sharing that's going to occur there?

No, there is no technology transfer in this agreement. What we have agreed to is to join to study if there are things we could do jointly in the 3 to 500 range.

Does have a recuperatory core that they're using today?

I'd say it does not--I don't think so, but I don't know.

Is there any opportunity with your licensing agreement with ?

Not directly, I mean not--our is what we call or annual design, and it's very much an integrated part of the Capstone design, so to take that concept into another end, it requires significant development. See, it's not--you can't re-characterize it as a commodity product you can apply to any other turbine. It's a dedicated design.

One other thing I need so ask, Ike. I came across, the other day, I think October 29th, the Department of General Services in California put out a bid for either microturbines, gas turbines, or solar panels, or maybe fuel cell serve was included in that as well, but that said, is that the type of program that this relationship would build, would bid upon, or would it be something directed more at commercial customers rather than government entities.

No, , this product did, so this request were those came out recently. I think these are very, very good programs. In this particular case, they look for, I think it's five to seven megawatts of power. At this good program, we're pressing to look into that if that program will be simple perhaps to bid on.

OK, great. Thanks.

Thank you. Our next question comes from from Salomon Smith Barney.

Yes, first I think that the buyback is a very fine idea and I think you should do it considering you have almost $2 in cash, the company's being in line at a net minus basis for everything. I think it's a worth use of some of the monies.

On a question basis, in regards to this deal, are they going to be marketing the product as an electric generation product as well as a heating/cooling product?

They will market the product as a co-branded product. Their focus, that core business is or particular , but they'd like to see this as being supplement to the main driver for and make their product offering more attractive for the customers, more complete solutions.

Is this, I heard somebody mentioned, but I didn't really catch it, is this an exclusive deal that you can't market with anybody else or not?

To be precise about it, it's, it's exclusive in that respect, but the combination of the microturbine and .

In other aspects, it's not an exclusive arrangement.

Are you going to be marketing it with them? Are your people going to be, let's see, making sales calls with them together to explain the product, or are you going to be training their sales force to do so?

We are presently discussing that the main, the main approach to the market is of course to base it on their sales channels, in particular the carry-safe . As in the backup and support we'll do from us as well as power.

But does that mean you're going to be training their sales force in this?

Yes, definitely when it comes to the microturbin aspect of it.

OK. Thank you.

OK, you're welcome.

Thank you. Our next question comes from from .

Will the relationship with provide the potential customer with more attractive financing options than what you are currently able to offer that customer?

I can't give you a precise, but in general terms and just on the carrier is such a big entity, so I think it's a fair assumption they order today can offer more attractive financing than a smaller company like Capstone can.

OK. And another question Ike, relating to some of your marketing new business initiatives with gas utilities out there, such as and . Could you give us an update on how those programs are going, and secondly, whether or not any distribution agreements have been signed with those entities.

In short, we are building relationships with the gas companies. I think it's a fair to characterize the state of that is another state, what they do at included gas and . They're doing pilot projects which are customer sites to demonstrate the capabilities of MicroTurbines -- in particular, in CHP and applications.

I mentioned earlier this national accounts program, which is driven very much by the American Gas Association -- but this is an early stage. I think they show extremely positive what can be done. And all of us involved in these programs, of course, like to see that to go to the next phase, where it becomes more and used in more areas.

And, have any distribution agreements been signed yet?

is underway in all these cases. And in areas like Europe and Holland, we work with through our distributor . Same thing in Japan -- we work closely with , but it's through our distributors. It's already established.

OK. All right. Thank you.

You're welcome.

Thank you. Our next question comes from Banc of America Securities.

Thanks, guys.

A couple of quick follow-ups. One on the cost side, Karen. Can you give us a sense -- as far as R&D and G&A expense levels go, is the third quarter level something we should think about as a run rate as we look into '03?

On an overall basis, as we look into the fourth quarter of the year, I think that you'll see these areas increasing somewhat. Again, our R&D programs are continuing to expand as we make progress. And we don't have the same percent of -- or the same netting down effect. While we do have still some significant dollars coming in, we're gonna wind up with more going to our bottom line. So, that will be one of the factors driving the fourth quarter being higher.

And for the fourth quarter so far, through the month of October, have you folks shipped any units yet?

Yes, but we don't disclose how many.

OK. Thank you.

Thank you. Our next question is a follow-up from from Morgan Securities.

OK. One final question on the markets -- the foreign markets that you've typically talked about. If the alliance works out, it seems to me like you're gonna be more weighted than ever in the CHP, BCHP market. Is there any -- can you reduce expenses further by cutting back some of the efforts in those other areas that seem to be longer-stage development areas? Just your thoughts on that.

Yes. As we -- we walk the talk when we say that our focus is on CHP. And to that -- I think we're moving up in that, and historically can be in the range of 50 percent of what we do. And I think given that focus is -- you say we get more bang for the buck with our resources. I'd like point out that some basic designs of the MicroTurbine is it can be used for many applications. The difference here CHP is that we do more effort in marketing we do -- additional efforts to make the complete solution more attractive, and that's the key behind the focus.

Thank you.

Thank you. Our final question is a follow up from from Salomon Smith Barney.

You had spoken briefly about the advance program; could you just elaborate for a moment, what really is the difference between that product and the current product?

Yes, the--in all our efforts to drive total historic costs down, we believe the quickest way to do that, or the most significant way to do that is to increase the size of the units. With more kilowatts, it's easier to reduce the dollar per , so that's one of the major purposes. The other one, which probably has an even more significant impact on the total operating cost is the efficiency of the turbine, and that--the Advance has very ambitious with the we expect to be well over 30 percent efficiency. So the main driver for all of this is to have a more competitive product with a lower cost and a lower operating cost.

Is that the--it's the 200 size?

The 200 size, yes. And we are--if you could take a derivative from the advance market programs, which target even higher efficiencies, that we had optimized for the commercial product something which we can bring to the market reasonably fast, and then optimize the cost for it.

Was that going to apply to the smaller size units coming as well, or is it strictly going to be targeting making larger and larger output units?

No, I mean, we have limited resources. We try to focus them--we have our basic platform was the 30 machine, we made that with full functionality, it will stand alone. We added fuel options and all that, then we managed to move that to the next step, which was the 60 machine, and in order to get the gain, we used the same , we could optimize and maximize the investment in facility. And what we are using, our resource of engineering, is to add the functionality to the 60. The 60, they will--it had better margins, and we now had to expand the functionality for it, and then we are--the next step is the 200, and with that we expect to have a pretty good family, and I think at this point, to then discuss what we will do after that, is too early. I think we should keep our engineer efforts focused.

So the main thrust of this basically is to put out a product that's going to lower the cost per , is that right?

Absolutely, and that's the focus.

Okay.

And in addition to that, lower the operating cost by higher efficiency.

Okay.

Okay, thank you.

Thank you. This does conclude the Q&A question session. At this time, I would like to turn the program back to management for any closing remarks.

Yes, thank you very much for joining us today. I know it's a special evening, so thank you for taking that extra time, and good night.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program, you may now disconnect. Good day.