Capstone Green Energy Corp (CGRN) 2002 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to your Capstone Turbine fourth 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 disconnect and need to rejoin, please dial 1-800-982-3472.

As a reminder ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Jill Fukuhara of FRB Weber Shandwick.

Good afternoon and thank you for joining Capstone Turbine to discuss its results for the fourth quarter and year-end 2002.

By now you should 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 Emily Liggett, Interim Chief Executive Officer, and Karen Clark, Chief Financial Officer of Capstone Turbine.

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 revision 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'll turn the call over to Karen Clark. Karen?

Thank you, Jill. Good afternoon, everyone.

As Jill mentioned, I'm here today with Emily Liggett. Emily joined us in November as our interim Chief Operating Officer following the announcement by Ake Almgren that he intended to retire as our President and CEO.

We continue to search for a new CEO, but Emily has been named interim CEO as Ake has finished his primary responsibilities and moved to a special advisor to Capstone.

I think you'll see from our discussion today that Emily has been quite busy. She will talk with you about the work we've done, the focus it has led us to, and the actions we are taking. Then, I'll discuss the financial results for 2002, and update you on changes in our board. There will be time for questions at the end.

I'll now turn the call over to Emily.

Thanks, Karen.

I'd like to start by saying how delighted I am to be here. Despite the current climate in the energy industry, I find power technology and distributive generation a very interesting market at an important stage of their development.

While we want to spend most of our time today discussing Capstone, I think it's worthwhile to take a quick look at the bigger distributive generation market before discussing some of the specific actions that we've taken here at Capstone.

When I joined Capstone, I needed to understand some fundamental questions about the company and its prospects. Is distributive generation a market that will grow and prosper over time? If yes, are MicroTurbines a meaningful solution in distributive generation? And is Capstone a company that can deliver on the promise of MicroTurbines?

Research and analysis have led us to answer yes on each account. I think the basic in distributive generation are generally well understood, such as aging grids and the not-in-my-backyard reaction to centralized power plants, which are causing demand for smaller, cleaner, on-site generation.

So, given this support for distributive generation, is there a role for MicroTurbines? Absolutely. MicroTurbines offer on-site generation that provides for a relatively low-hassle, low-maintenance, low-emissions, small-footprint solution, with attractive life-cycle costs and an ability to handle a variety of fuel types. The technology is maturing and becoming more competitive.

So, now that we've answered those questions, we get to Capstone. Capstone is clearly the leader in MicroTurbine technology with very strong intellectual property and early mover advantages. The three million operating hour milestone achieved last quarter is testament to that leadership and knowledge base.

Capstone is also the only MicroTurbine supplier that has received certification for the new California emissions standard.

So, despite the current difficult economic climate in which we find ourselves, I believe in the future of distributive generation, MicroTurbines, and in Capstone's long-term potential as it matures into a commercially viable business.

With this as a backdrop, how does Capstone become well-positioned as a distributive generation solution? And, most importantly, what does it take for Capstone to become profitable? While we haven't completed our work, its become evident that a part of the answer lies in much greater focus in a few high leverage areas. Three of these areas are vertical markets, lower maintenance costs, and targeted new product development. So let's talk about each of these three area.

First on specific vertical markets. In the last three months we've done much to better understand our markets. We've examined numerous, well-defined customer and their distinct needs. We are committed to developing the complete solution for these vertical markets and finding ways to improve our value proposition. We are also identifying those markets that we believe have the greatest, near term potential for accelerated adoption of MicroTurbines. Among the most attractive markets are those where we already have channel partners who are strong allies in providing complete solutions to end users. So we are starting with these. We realize that we do not need to provide the entire solution ourselves but we do need to make sure that it exists for our customers. As an example, we're continuing to build our working relationship with United Technologies, UTC, to bring differentiated complete solutions into markets. Our channel partners in Japan have a successful history of building product and solutions for select vertical markets. For a while, this focusing will mean more attention to the targeted markets and less on others. However, we believe that working with channel partners to improve tailored solutions for specific end user markets is imperative to building their rate of adoption of Capstone MicroTurbines.

So that addresses our market focus. So let's turn our attention now to our maintenance costs.

To fuel the rate of adoption, we know that we must continue to raise the bar on our product performance, particularly by reducing overall maintenance costs and insuring the market leading position of our liquid fuel systems. A distinguishing design feature of our products has always been low maintenance attributes. We believe that further leveraging this advantage could have a step change impact on our market acceptance. We realize that new main stream customers expect higher performance than early adopters do and we must meet or beat those expectations. As a result, we have set very aggressive goals for ourselves in 2003 to improve our maintenance costs and improve the competitiveness of our total cost of ownership.

As to liquid systems. We believe that today we offer the most functional liquid fuel MicroTurbines. By enhancing this competitive advantage, we intend to accelerate the development of the Japanese markets where liquid system solutions are preferred because of the lower price and broader availability of the fuel. While improving maintenance costs and enhancing our liquid systems, our actions we chose to further our competitive position in our target markets, we believe these changes will benefit many of the other markets in which are products are used.

So we've covered markets, we've covered maintenance costs. Now on to the third high leverage area, new product development.

While we are devoting a substantial effort to improving maintenance costs and enhancing liquid systems, as I said, we are also focused on key, new product development projects that support our targeted vertical markets. In particular, we're driving hard to meet our schedule and development goals for the C200 product, including its higher efficiency and its lower, first cost per kilowatt. We plan to introduce this product in 2004. Because of prioritizing, the improved maintenance costs and liquid systems and focusing on our product development work, we are deferring from other development projects. We are choosing to put our efforts first into what we believe are the highest leverage activities. Our belief that we need to bring more focus into our activities

Our belief that we need to bring more focus into our activities came hard from our deepening understanding of how our products are applied and users need in terms of a complete solution. As you have previously been told, Capstone continues to gather important data on the products we have shipped, applications and installation.

This effort has given us more information as visibility into our product attractiveness and adoption rates.

Much of the data we have today was gathered as part of the company's field program in the last half of 2002. Our personnel visited distributors and installation sites around the world, seeking to learn where our products are being used and how they're performing. As a result of this work, we have greatly enhanced our database of Capstone Installation. We have accumulated data on installation and operating histories as well as information on the frequency and cost of scheduled and unscheduled maintenance. This effort to collect and evaluate information on our product use and performance is ongoing.

What we have learned to date has been instrumental in defining and focusing our improvement goals.

Understanding installation has helped us focus beyond shipments to distributors to look more clearly at installations at our end users. And that's a very important point, to go between shipments to distributors to installations at end users. This is key to better understand our vertical markets, applications, customer needs and the Capstone value proposition. Every year the number of newly installed units has been greater than in the prior year. We believe that this continuous and steady installation growth year-over-year is more indicative of our rate of adoption than simply looking at quarterly or annual shipments.

This trends provided us with information on our product's historical rate of adoption in the market.

Another result of this field program is that we know now that we have more micro turbines in our channels that are not in the sales cycle than we previously realized. We currently believe there are approximately 1,00 units at our channel partners, which have not been installed, of which up to 700 are available for sale. Based on what we have learned, we believe sales in 2002 were impacted by about 200 units that were shipped from channel partner inventory.

For 2003, we believe our channel partners will sell a significant portion of the inventories they now hold and we are committed to working with them in this process.

These facts, combined with the current economic environment, leads us to expect Capstone sales in 2003 will be flat to down compared to 2002. However, we expect the number of units installed this year to again grow from the number installed in 2002.

We've also taken a multi-year look at our business and what it will take to achieve profitability with our current cash. We have multiple scenarios to reach cash flow positive and are still working on various options.

So with all this information, we knew we had to take action to further reduce our cost structure, resize the business and lower our cash usage rate. We needed to size the organization to support today's needs and future plans.

We have taken important actions to address this. We have reduced our work force by 22 percent since the third quarter of 2002. These reductions were made at all levels of the organization. To help us build speed, better communication, and increase flexibility, we have eliminated layers of management. Beyond addressing staffing, we have identified additional opportunities to reduce our cash cost structure. Some of these changes may drive higher costs in the short term, but should pay back very quickly.

We are still refining our plans for 2003, and are looking for further ways to both lower current costs and position ourselves well for the future.

In summary, while our business plans are not complete, the need to prioritize has become clear. Our approach to the market is to better understand what end-users want, and to work with channel partners to develop and deliver total solutions tailored to targeted markets. We are improving maintenance costs, and enhancing our systems. We are focusing on key new product development, such as the with its more favorable efficiency and cost advantages. We are focusing our resources and being diligent that our cash spending is in support of those priorities. We are choosing to do fewer things and do them well. We are picking our targets and moving one by one to enhance our value proposition to the market. We believe these actions are necessary to increase the adoption rate and build the platform for future growth.

Before I ask Karen to review the financials with you, I want to say a few words about the employees at Capstone. Their focus, effort and commitment are key to our success. Capstone has very dedicated people, passionate about what it takes to build a successful company for the long-term and willing to drive the changes needed.

So, now I'll turn the call over to Karen.

Thank you, Emily.

Let's review the 2002 financial results. I'll start with an overview, and then get into more details.

For the quarter, revenues were $3.6 million, as compared with $10.1 in the same period a year ago. The loss for the quarter was $20.7 million, or 26 cents per share.

The fourth quarter results reflect two significant expenses. First, we recorded a charge of five million dollars, representing six cents per share, for the partial impairment of the manufacturing facility. This resulted from lower production expectations than were previously forecast. Second, we adjusted our warranty reserve balance by $3.6 million, or five cents per share. This amount is in excess of what we had been accruing on a per-unit basis in recent quarters.

Excluding these charges, the loss for the quarter was $12.1 million, or 15 cents per share. In the fourth quarter of 2001, the recorded net loss was $14.6 million, or 19 cents per share.

On a full-year basis, sales in 2002 were $19.5 million, and the recorded loss was $74.4 million, or 95 cents per share. The loss included 20 cents per share for the marketing rights impairment charge taken in the second quarter, and 11 cents per share for the facility impairment, and additional warranty charges taken in the fourth quarter.

Excluding these charges, results for the year would have shown a loss of $49.8 million, or 64 cents per share. By comparison, in 2001, sales were $36 million, and the net loss was $46.9, or 61 cents per share.

Now, let's get into the details by starting with shipments. Shipments were 3.4 megawatts in the fourth quarter of 2002, compared with 11.1 megawatts in the same period of 2001. During the fourth quarter of last year, 55 percent of our sales were to two customers, whereas in the fourth quarter of 2002, there was one significant customer accounting for 22 percent of sales.

Geographically, our mix of sales this quarter was roughly three quarters from North America, and the remainder from the rest of the world. This was about the same mix seen in the fourth quarter of 2001. Product shipments in the quarter resulted in $2.6 million of revenues or roughly 30 percent of the 8.8 million of product revenue in the same period a year ago. In the quarter, we also had revenue from the sales of parts, accessories and service of $1 million.

This compared with $1.3 million in the prior year. On a full year basis, we shipped 18.7 megawatts, as compared with 38.1 megawatts in 2001. Full year 2002 product revenues were $14.5 million, or about 45 percent of the $32.2 million in product revenues in the preceding year. Parts, accessories and service sales increased $1.2 million between year from $3.8 million in 2001, to 5 million in 2002. Of the 2002 sales, 22 percent came from two major customers, whereas in 2001 two large customers accounted for 25 percent of sales.

Margins in the fourth quarter showed a loss of $12.4 million, as compared with $2.4 million for this same period in the prior year. The two fourth quarter 2002 adjustment that we discussed earlier accounted for most of this difference between years. On a full year basis, the reported growth loss was $22 million, as compared with a gross loss of 3.6 million in 2001. This $18.4 million spread was due to several factors. 8.6 million of it was from the two fourth quarter 2002 adjustments. 1.8 million came from excess inventory reserves taken in the second quarter of 2002. Also contributing were lower sales in the current year, the overhead from a full year of core operating costs in 2002, versus a partial year in 2001, higher scrap charges this year and higher per unit warranty charges in 2002.

Research and development, or R&D costs, decreased to $2 million in the period, as compared with $2.5 million in the fourth quarter of 2001. R&D expenses are reported net of contract offsets. These offsets were $1.5 million this quarter, as compared with $700,000 a year ago. On a full year basis, R&D costs were $7 million, as compared with $10.7 million in 2001. These numbers are net of third party funding of $5.6 million and 2.1 million respectively. So the underlying spending for R&D decreased $200,000 between years.

Selling, general and administrative expenses decreased to $6.8 million, compared with 10.8 million in the fourth quarter of 2001. The decrease cost between periods are due to two items. First, lower spending in 2002 and, second, $1.3 million due to lower amortization expense in the current year resulting from having fully impaired the marketing rights asset earlier in 2002. On a full year basis, SG&A was $31.8 million, compared with 40.8 million in 2001. While the company's decreased spending accounted for most of the decrease, $2.7 million was attributable to the lower amortization.

At the beginning of 2002, we told you we expected our operating costs for the year to be roughly equal to those incurred in 2001. During the year we initiated cost control measures.

Excluding the marketing rights impairment charge, operating costs for the full year were 38.8 million, decreasing nearly 25 percent from $51.4 million in 2001.

Other income and expense decreased to $500,000 this quarter from $1 million in the fourth quarter last year, which reflected lower cash balances and lower interest rates in the current period.

On a full-year basis, 2002 other income and expense was $5.8 million lower than a year ago, again, as a result of lower interest rates and lower cash balances.

Moving to our balance sheet, our accounts receivable balance was $4.9 million at the end of the year, down from $8 million at the end of 2001. The change in the receivable balance reflects the lower sales level in 2002 and higher engineering cost reimbursement receivables at the end of the current period.

Inventory levels at the end of 2001 were $22 million. At the end of 2002, the company had net inventory of $15.9 million. While the inventory is expected to be used over time, only a portion of it is expected to be used to meet anticipated sales in 2003.

The remainder is expected to be used in future periods; therefore, $9.1 million was classified as current inventory and the remaining $6.8 million was classified as long-term. As of December 31st, 2002, we had $140.3 million in cash and cash equivalents. We used $4 million in cash in the fourth quarter down from $10.8 million in the third quarter and $10.8 million during the fourth quarter of 2001. For the full year 2002, we used 30.6 million in cash, less than half the $66.1 million used in 2001.

Our operating activities used $7.1 million in cash in the fourth quarter whereas the prior quarter we used $9.7 million for operations and in the fourth quarter of 2001, we used $9.2 million.

That completes our 2002 financial review.

Now I'd like to say a few words about changes that have recently occurred on our Board. Consistent with stepping out of his role as CEO, Ake Almgren has resigned from our Board. Ake has a continuing role assisting the company as a special advisor. Joining our Board is . had a 38-year career at GM, where he last served as the President of General Motors, Europe. brings broad business management skills and particular expertise in lean manufacturing, product development, and quality assurance. We welcome to the Board and thank Ake for his years of dedicated service and many contributions to Capstone.

With that, I will hand the call back to Emily for some closing comments.

Thank you Karen. In summary, I'd like to step back and put in perspective what we've communicated today.

We've outlined several of the challenges Capstone faces and our actions to address those challenges. Even in light of these difficulties, we want to be clear that we see a substantial market for distributive generation and a path to that market for our product. We see distinctive value that only the Capstone markets micro turbine brings to this market. We believe we understand where we are, and what we need to do.

Many very substantial companies around the globe share in the vision of distributive generation. Several of these companies are our partners and are moving forward with continued confidence in us to deliver on that vision.

At Capstone, we're committed, excited and determined to remain the leader in MicroTurbines and to build a successful business.

We will now address any questions that you may have.

Ladies and gentlemen, if you have a question at this time, please press the one key on your touchtone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key. If you are on speakerphone, please lift the handset before asking your question.

Our first question comes from Harold from Salomon Smith Barney. Please proceed.

Hi, Emily. How are you guys doing?

Fine, thanks.

I have a couple of questions for you. First, could you give us some better detail on how the UTX adventure is going at this point?

Sure, we can. We are very pleased with the partnership with UTC. It's going better than we anticipated at this point, having just announced it last quarter. All the U.S. offices are up and running in terms of being trained on our products and how to service them. Does that answer your question?

Well, not -- can you give me something with a little meat on it? How many different places around the country are they selling it? How many regional locations are they selling it through? How much product have they sold already? Or, how much product do they have out for the bid that are related to this type of stuff?

OK. Well ...

And how many types of projects are they offering it in? You know, something a little more meaningful. At this point, you know, I've been here for years. I've been waiting to see something. I believe in this thing tremendously. But, we need -- the company needs to show us what's going on, not just telling us that we're going forward. We need something with a little more articulation of facts. How's that?

All right. Well, let me try to give you as many facts as I can. UTC purchased six units in the third quarter, and just one unit last quarter. But, our normal cycle for any business partners is about nine months before you see real commercial products come to closure, so you need demonstration products first.

They have four regional offices in the U.S.; these are the ones we've talked about that have been trained.

OK.

We're beginning to see leads in the pipeline.

OK. So, these four offices are -- all the sales people and technical people have been by you and they've been trained and they're up and running and they're offering the product with their other offerings for building systems, so forth and so on?

Yes, there are. Their regional offices are in San Francisco, Chicago, Southern California and New England.

OK.

And the ones that seem to be seeing the most opportunities at the moment are those in New England and Southern California.

Do you anticipate any further depth of product offerings as far as -- I mean, that's -- 44 offices in the United States is not what you'd call very heavy participation. I understand that this is starting up, but I was wondering if they gave you any feedback on how they feel it's going.

Well, our indications so far have been that they feel very positive about it; I think more positive than they expected. They've had a very successful installation at their research center. They're very pleased with how that -- those microturbines are performing.

OK.

They see much more opportunities for our C60 machine than they expected too. They are very eager to see our C200 machine but they see a lot more advantages a lot sooner of its C60. I'm putting together what we would call it, you know, a three pack or a four pack, so that they can get three C60 or four C60 together.

Right. I've got to see some actual installation see operations. I understand what you're saying and I think that that's reasonable. Now, unfortunately, people don't understand enough of what it's about and I think the education process needs to be expanded from you guys in some form. I don't know exactly how. I think you need to spend some more time on that. I think that the education process is paramount to getting more sales. If people would understand and to see how this stuff works and what it does, I think they would be a lot more prone to consider purchase.

Yes.

The way it is explained in general does not portray or convey the proper information. That's what I've seen.

OK.

And I'd like to tell you that because I'm a major shareholder and losing 90 percent of my investment and I'm still in here. So, I mean, it must -- either I'm crazy or I believe in you and I'm hoping that you guys are going to follow this through to success.

Well we plan to. We plan to.

But I think that it's necessary to do things somewhat differently than they've been done until now . . .

Yes.

And in that regard my question to you directly is, why do -- are you continued to be called interim CEO. If you're good, then they should give you the job. If not, what is it that they're looking for?

Well that's a different question than UTC but . . .

That's right.

I have personal reasons that I am only an interim CEO and I am not a candidate, nor have I ever been a candidate to be the permanent CEO.

Oh.

But I'm happy to do all I can to do what we can for the next one to come in.

Our next question comes from Gary Holdsworth from Wedbush Morgan Securities.

Folks, I wanted to get a little bit behind the 700 units you mentioned in your press release. Now just going back a little bit of history. You sold about 1,000 units in -- or shipped about 1,000 units in 2001 and about 480 in 2002 or 1500 some odd units. You're saying that approximately 700 of those never got to end customers. Is that what you're saying?

Well there have been -- we have shipped more than we've installed for several years . . .

OK.

And there's a certain number of shipments that fit in distributors inventories because they're waiting for the project to be completed or the prep work to be done. So there is a normal amount of what we call committed inventory in the channels. They know what project that that's going to. What we didn't appreciate was how many distributors had made volume commitments and volume purchases and did not have a place for those microturbines to go. So that's why we're saying there are 1,000 in the channels approximately and approximately 300 of those are committed. They know what projects they're going to. About 700 are not committed.

OK. Now . . .

But those 700 have built up over several years. That didn't just all happen in 2000 or 2001.

All right. So it's interesting now that we're -- I mean a couple -- like a year ago we heard about it, you know, a couple or 200 or 300 in the channel though that, and especially in Japan, that, you know, were out there uncommitted and it seems like, you know, it's a surprise to see a large number like 700 at this stage of the game.

Yes, and it was a surprise to us too. I think last, the second quarter last year, we thought it was about 400 units.

OK.

And so as we went out and physically visited our distributors, we learned it was larger than that.

All right. The second question I have is relating to the margin on the units that were shipped in the fourth quarter, because you know, even if you look at the cost of revenues excluding all the charges around 7,400,000 roughly, again round numbers, that's a much, you know, higher cost of revenue versus the third quarter, which had about the same level of sales, a little bit higher, but about the same level.

Could you explain what's going on there?

The biggest thing going on in there Gary is that warranty reserve that we discussed, that obviously does not relate just to the sales occurring in this quarter, but as Emily said, we've done a lot of work to really understand more about our fleet. And we talked about this before, that as we get better understanding about our fleet and its performance we have to adjust the warranty reserve balance and that relates to the feel-good units, not just the units we sold in the quarter.

Right, so by your raising the warranty reserve, I just want to understand, you know, what, what we should take away from that. That the units in the field are performing well, but they're not performing perhaps as well as initially expect, or they're having more, I mean, you mentioned you know, more maintenance than probably they would expect out as being the main contributor there. I'm just understanding why the warranty reserve's going up.

That's essentially it Gary.

OK.

Yes, another thing, obviously going on in the margin is the important that we talked about. That, because it related to the recuperate core manufacturing facility, which is the manufacturing asset, it's showing us in the cost of goods sold section, and that's $5 million.

OK, and I guess my final question is after you've done this extensive review, especially looking at your cost structure, how do you feel today about self-manufacturing, and would it ever, you consider taking that elsewhere, lower cost areas of the country or the world, or is that just too much, adding too much complexity to an already somewhat complex piece of equipment?

I think there are opportunities in time to go there. We need to get to a point where we have enough volume to make ourselves a good customer for a vendor, and also have the stability of our product and processes. So once we've gotten through that stage of the game and get to where we think our volumes are attractive enough to bring us cost reduction, it absolutely is something we need to take a look at.

All right. Thank you.

Thank you Gary. Good talking to you.

Again ladies and gentlemen, if you have question at this time, please press the one key on your touch-tone telephone.

Our next question comes from from Wachovia Securities.

Oh hi. I have two questions. The first is can you identify who your two largest customers are?

I'm sorry. We won't make that information public.

OK, and secondly, I've seen a lot of activity in the area of development of the series hybrid automobile where Capstone is providing the basically the generator for recharging the batteries, and I just wonder where you see some place down the road how that portion of the business will compare to the distributed power part from in terms of levels of volume or continuing business.

Well, I think -- this is Emily -- I think your question is about stationary applications versus hydro-electric vehicle applications?

Yes. Correct.

Because we are seeing continued interest in ATV. Historically, it's been five to 10 percent of our business.

OK.

But, at this point, it's been mostly demonstration-type projects, as opposed to high-volume commercial.

Do you have any feel for where this might go, say, five -- well, five to eight years down the road when we would expect to see more of these vehicles coming into production once reliability has been established? Is that too far out to project?

Well, it's forward-looking, for sure. And it is far out, also.

OK.

But, we are working on our long-term plan.

OK.

And we're certainly including the ATV part of the business.

OK. But, at this point, you're about five to 10 percent of the business is in the automotive portion?

Right. It's actually more trucks and buses than automotive ...

Oh, OK. OK.

... for larger vehicles.

OK. Very good. Thank you very much.

Um-hmm.

Our next question comes from John Quealy from Adams Harkness.

Hi, good afternoon.

Just a quick couple of questions here. In terms of reducing maintenance costs, could you give us a couple of examples on what specifically you're planning to implement to reduce time and expense for maintenance?

Sure. I can think -- there's lots of examples, but let me think of a couple. Once we mentioned was in our liquid fuel product, and certainly, you know, liquid fuel pump -- you know, you can pay more and have them last longer, or pay less and they don't last as long. So, you can chose between costs or maintenance costs in terms of how often you replace those pumps.

Another area is in our power electronics, because, again, there's trade-offs in how you design your power electronics and how often they need to be replaced.

We're also looking at different ways to stock replacement parts and spare parts, and working with our service providers to make those more available.

OK. Great. And in terms of new product development, you said you were deferring some projects. What, particularly, are you folks pushing out in terms of your development dollars in the near-term?

Well, we are -- have deferred some of the additional fuel capabilities for our C60 model. Our C30 product today has a very wide range of fuel that can be used in it. Our C60 is not as -- as many, so the medium BTU C60 has not yet been introduced. Our liquid fuel C60, a propane C60 -- those have not been introduced.

So, customers who want those sorts of fuel flexibilities will need to continue to buy our C30.

OK. Great. Thanks a lot.

Um-hmm.

Our next question comes from David Anderson from Palo Alto Investors.

Good afternoon.

Karen, last quarter, I think you guys talked about the board approving some share repurchases up to a certain dollar amount. Just looking at the outstanding shares here, that doesn't look like that's happened. As a matter of fact, share count's gone the other direction. Can you discuss any plans for cash use there and share repurchases?

We did repurchase about 200,000 shares during the last period. You're right; it wasn't a lot, especially when you consider in the fourth quarter is when the additional shares were issued to UTC. Keep in mind we have a limited numberof days during the period we can't participate in the market. We've been out for quite a while now while we've been in a blackout period but we do intend to continue the program. The board is so very supportive of it.

OK. Any talk of the level ultimately over some period of time. You know, level of dollar commitment given where you've brought your cash burn down. You've got $140 million there and if your burn is, you know, in the $5 million a quarter range right now, then it seems you've got some capital that could be a potential return to shareholders to repurchase.

I hear what you're saying. That is a balance that our board is evaluating on an ongoing basis. We are not going to publicly state what our speed is and going through our allocated amount of funds but we have said there's up to $10 million available to execute this program.

OK. Thank you.

Thank you.

Our next question comes from from .

Hi, Emily. Wanted to follow-up just a little bit on -- ultimate question is, who you see as the best customers for let's say just the next couple of years for the microturbines? Could you maybe address the environmental customers versus maybe back-up power customers, heat recapture clients, et cetera? Can you maybe give me a ranking of 1, 2, 3, who's you think -- who are the best potential customers, including auto in there? Buses?

OK. You know, certainly, you know, if you're pining on the and, you know, how things work out today, pre fuel markets are very attractive. So things like , you know, landfills, waste water treatment plants. Things that have, you know, resource recovery kinds of opportunities. Combined heat and power, the CHP market is still about half of our business and when you combine that with some of the UTC offerings with Carrier with or looking at hot water, using that direct exhaust in different ways, you really make the economics quite attractive. So building owners, like commercial -- these are not ranked. I know you asked for that but I'd have to think more carefully to put them in rank orders but these are all in that top category. Building orders like owners, like commercial and industrial businesses and, from a geographic standpoint, certainly North America and Japan. Specifically in North America, you know, California and the northeast like, New York, New Jersey, have very attractive economics at the moment. We see ATV the hybroelectric vehicles that you mentioned, still in the 5 to 10 percent range in the short term.

What about government work? Any additional potential for grants from the government for development?

OK. So this is more on the product development side, rather than sales?

Yes.

Yes. OK. Because we are work -- we do work with some government grants. We have been working with the Department of Energy on the advanced microturbines program and our product has been partially funded by some of this -- the Department of Energy. So we look . . .

Any potential for any national defense sales?

No. As far as I know, we haven't done anything specifically. I mean there may be some small orders but nothing significant. We don't have a clear view for additional funding for the DOE. We look for programs that they have that make sense for where we're trying to take the business, so besides the uncertainty in general about government funding, we also don't know in the direction they're going how well that fits with where we're going. Beyond this program, the advanced microturbine system.

Do you see any interest or inquiries in backup power market?

Sure. Absolutely. We have people calling about that backup power.

Do you think any of that in the next couple of years has the potential to translate into any sales?

Well, I think at the moment it's much more demonstration . We haven't seen a high volume adoption. We still see it as a good long-term potential though.

OK, that's enough, thank you.

Our next question comes from from Second Line Capital Management.

Yeah a few followups. First of all, looking at the thousand units in the channel, and I guess, 300 committed, 700 not committed. How much of that 700, if that's the way to look at it, do you consider excess, or do you consider it all excess.

Well, depending on how you look at it, our channel partners only, so I don't know how they consider it. We are working with them to understand what status it's in. We know occasionally, for instance they might use some spare parts off of a piece of equipment, so we don't know for sure that they all could ship out the door tomorrow, but we want to work with them to see how many are saleable and what they'd like to do with them.

How many units do we think will ship this year and to what extent do you think that channel will be reduced in '03?

Well, at the moment our guidance is around flat or less than last year total, so that will come from a combination of our channel inventories and our own sales, shipments from the factory.

Right, but, are sales going to impacted this year because there's so much out there in the channel, the channel partners hopefully are going to be liquidating part of that channel.

Right, we are estimating about half and half, about half of the installations this year will come from our distributor inventory, and about half will be new shipments from our factory.

And I'm sorry, will that total 400? 200 from each?

We haven't made a number for you, we only said that it will be flat or down from last year.

OK and...

And our sales will be.

But is that, in your mind get the channel into a rational form, or the channel will still be excessively stuffed?

I think they could still have some left for 2004. But we think it will take a good chunk out of it.

OK.

What we have said is that installations grow every year. So if you just look at the installations, it's a good story, there's more every year than there was the year before. Very steady growth. If you just look at the shipments from the factory, though, you could draw some unusual conclusions.

Alright. In terms of cash burn what can you say about the first quarter and '03 in terms of range of cash burns.

We are not providing guidance for that at this time. As you can see, throughout the course of 2002 the company really just continued after its work to reduce cash burn and had pretty nice results by year end. We're not only continuing the types of efforts we had from last year but trying to step those up, but there are always timing issues and changing in working capital and the like that can impact on a quarter to quarter basis.

Can you say, given the revenue outlook for the first quarter what the first quarter cash burn'll look like? Some kind of range?

We're not going to provide that guidance today.

Alright. Emily, I don't know, obviously you've backed up and done some work on this and you talked about being a viable market, and a prior question we talked about some specific market opportunities. Can you quantify this at all as to how big you think the distributor generation market is for Microturbines over the next five years or something like that, or how big some of these selected markets are and your hope?

Well I think I am probably safer in giving some market data that we've gotten from other people in terms of other market study. In a long term has been estimated at gigawats. So big, very big.

And percentages that would be Microturbines'? Any ideas? The penetration ?

Those are hard to say. This is such an emerging technology. We're such a small player today, that's the good news, but that also means it's quite difficult to make these projections.

OK.

Our intention is to have a very compelling value proposition. We think we're picking the right partners, we think we have great technologies, we've got a couple bumps in the road that we're going over at the moment, but we feel like we have a clear path. But it is going to take some time.

OK, I'm not going to pound you on the head, but you talk about a clear path but you're not in a position to articulate that clear path for us at this point.

That's true. With the numbers, you're right. We're obviously giving you a clear path in terms of the actions that we're taking.

OK, in terms of the CEO search, how is that being done, where are we in the process, what's the timeframe for that?

Well, there is an executive search firm that was retained last November. And they have been actively interviewing candidates. The board also has been involved in interviewing candidates.

And when do you hope to have a CEO in place?

Those are hard to predict. We...

Have we made any offers to candidates yet?

No. Not that I know of.

OK, but is this a process that certainly must be on the front burner to some extent... Do we want to have it completed in the next three months? Do we want to have it completed this quarter?

That project really is in the hands of our board and they are working on it with all due pace. One of the advantages we have is that Emily is here to assist the company in the interim, so they do have the opportunity to spend the time it takes to find the right candidate.

Thank you, our next question comes from Gary Holdsworth from Wedbush Morgan Securities.

Just a quick followup question. You mentioned the inventory in the channel. Is there any... how many finished units and finished goods do you have currently.

Just a second, Gary.

It's a small number Gary, we can look to get the number but it's small. We've pretty much been making to order for the last year.

Alright, then, unrelated question. The recent spike in natural gas do to the economics of Microturbines? Any thoughts on that?

About gas -- well it affects the for sure. So if you are doing an economic evaluation only in your installation, it makes it a more difficult sale as electricity, you know, prices go down and natural gas prices go up. That's another reason why our multiple fuel capability is important and the sales we're making to free fuels.

So, in essence, not only, you know, are you facing a difficult capital equipment market, but you're also facing some, you know, negative impact as well for '03, depending on how long the high gas prices endure?

Well and it's very regional. You know, there are different in different areas around the world.

But, you're right, we have to look at and, again, those are for the sales that are based on economics only. It depends on how they value the environmental impact and some of the other features that a microturbine offers.

OK. Thanks.

I'm showing no further questions at this time. Please go ahead with any further remarks.

OK. We thank you for joining us today.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude the program and you may now disconnect.