Capstone Turbine Announces Second-Quarter Results.

Business Editors

CHATSWORTH, Calif.--(BUSINESS WIRE)--July 19, 2001

Capstone Turbine Corporation (Nasdaq:CPST), a leading producer of low-emission microturbine systems, today reported revenue of $13.6 million for the second quarter ended June 30, 2001, compared with revenue of $6.1 million for the second quarter of 2000.

The increase in sales reflects increased penetration of the Company's core markets as well as greater availability of the Company's 60-kilowatt models.

For the second quarter of 2001, Capstone's net loss attributable to common stockholders decreased to $10.3 million, or $0.13 per share on 76,654,902 shares. This compares with a net loss of $429.1 million, or $14.32 per share on 29,973,195 shares, in the second quarter of 2000. The net loss per share in the year ago period was impacted by non-cash charges associated with booking the accretion of the Company's preferred stock to fair market value.

Quarterly Highlights

During the second quarter of 2001, Capstone:

-- Completed the first Capstone 60 microturbine power system with stand-alone
functionality.

-- Signed development agreements with Cummins Incorporated and MGE UPS Systems.


-- Announced that the Governing Board of California's South Coast Air Quality
Management District approved $1.74 million to purchase 30- and 60-kilowatt
microturbines and installation services from Capstone California.

-- Began producing commercial quantities of recuperator cores at its Van Nuys,
Calif. plant.

-- Received notice from Underwriters Laboratories that the Model 330 Capstone
MicroTurbine power system had met its stringent UL1741 utility interactive
requirements.

-- Introduced the foil bearing rotary flow compressor, the first lubricant-free
compressor capable of boosting very low pressure natural gas to a higher
pressure required by the microturbine.

-- Commissioned Capstone MicroTurbines in the first hybrid electric bus in
China, which was unveiled in June.

The Company shipped 421 units in the second quarter of 2001, compared with 211 in the second quarter of 2000 and 307 units in the first quarter of 2001. Sixty-five of the units in the second quarter of 2001 were 60-kilowatt models and the remaining 356 were 30-kilowatt models.

"As we expected, the greater availability of the 60-kilowatt models is helping drive our increased sales," said Dr. Ake Almgren, President and CEO of Capstone Turbine Corporation. "In early June, we completed our first stand-alone 60-kilowatt microturbine power system, which provides true blackout protection.

"We have consistently seen that this mode is the most popular configuration for our 30-kilowatt models, and we expect that sales of the 60-kilowatt model will significantly increase now that it is also available in this mode. We anticipate that multi-pack capability for 60-kilowatt units will be available in the third quarter, which will allow customers with larger loads to combine 60-kilowatt units."

Increasing Market Penetration

The Company continues to see growth in all of its key markets, which include resource recovery, micro-cogeneration, hybrid electric vehicles (HEVs), and the power reliability market, which is primarily its focus in the California market right now. Following are notable developments in the area of sales:

Capstone California

Capstone California, the Company's wholly-owned sales and marketing subsidiary, is making continued progress in the California marketplace. After being established during the first quarter of 2001, the subsidiary accounted for almost 30% of sales in the second quarter, primarily for power reliability and micro-cogeneration applications.

"Capstone California currently has about 100 proposals in the hands of our potential customers, leading us to believe this growth will continue in the third quarter," said Dr. Almgren. "Customer demand in the California market is now predominantly driven by pure economics -- customers reducing their own cost of electricity. In particular, micro-cogeneration solutions have become very attractive."

Resource Recovery

In the resource recovery market, Capstone has begun shipping an offshore version of the microturbine to be used on production platforms.

"Biogas, another category of resource recovery, has also developed very positively and several significant installations have been or are about to be commissioned at landfills and water treatment plants," said Dr. Almgren.

Hybrid Electric Vehicles

During the quarter, the first hybrid electric bus in China was unveiled in the city of Beijing, which is energized by two Capstone 30-kilowatt microturbines. In Italy, Ecopower Technology (EPT) recently presented to the market their first HEV bus using Capstone microturbine technology. In the United Kingdom, the Wrightbus(TM) company, a leading supplier in the public transport vehicle market, is developing a Capstone MicroTurbine-powered HEV bus, initially targeting the British market, which the company expects to begin shipping later this year.

Advanced Vehicle Systems (AVS), one of Capstone's first HEV partners which currently produces a 20-foot HEV bus, has successfully demonstrated its follow-on HEV vehicle. This vehicle, a 30-foot bus, is expected to begin shipping in commercial quantities this year. AVS has also reached an agreement to license their HEV bus to a company located in Taiwan, where shipments are expected to begin next year.

"The HEV market holds great growth potential for Capstone and we continue to make excellent strategic progress," said Dr. Almgren. "We are particularly excited about providing Capstone MicroTurbines for the first HEV bus in China. It goes without saying that China is a potentially huge market for HEVs, and we are working diligently with our partners there to ensure that we capitalize on all of our long-term opportunities."

Distribution Agreements

"We also continue to enhance our channels to market in each of our core markets," said Dr. Almgren. "Having MGE, one of the leading suppliers of power reliability products, validate our microturbine technology in this market is a significant step in our efforts to further penetrate emerging markets.

"Our agreement with Cummins is also extremely important, as they are not only a leading supplier of power generation equipment for the North American market, but also the leading supplier in the Chinese, Indian and Brazilian markets. We will look to leverage our relationship with them to increase our presence in these key markets as quickly as possible. We have already shipped 30- and 60-kilowatt units to Cummins for development purposes and we expect these shipments to grow throughout the remainder of the year."

International Sales

During the second quarter, Capstone continued to expand its international presence with approximately 40% of sales being made to customers outside of North America. In particular, Capstone is beginning to ship a significant number of units into the oilfields of Nigeria, which represents a large opportunity for the Company. Capstone is now making material shipments to Japan, Western Europe, South America and Africa. Two European distribution partners were added during the quarter: Soffimat in France and General Systems Design in Turkey.

"I am also pleased to announce that we have further strengthened our international sales efforts with the addition of Hans Gners as head of business development and sales in Europe and the Middle East," said Dr. Almgren. "Hans joins us after a 25-year career at ASEA Brown Boveri (ABB) Limited where he held various senior management positions in business development of advanced electrical transmission and distribution systems with worldwide responsibility."

Product Development

The Company achieved two significant product development milestones in the second quarter: shipping the first 60-kilowatt model in stand-alone mode, which includes dual mode capability, and introducing the world's first foil bearing rotary flow compressor (RFC).

"The foil bearing RFC enables Capstone to offer a unique solution that eliminates all oil-based lubrication from our 30-kilowatt microturbines," said Dr. Almgren. "Incorporating Capstone's lubricant-free bearing technology into this fuel gas compression solution results in enhanced life and reduced need for maintenance, and provides a significant advantage over competing alternatives."

Capstone's current product development focus is on bringing out additional fuel capabilities for the 60-kilowatt model and cost reducing both the 30- and 60-kilowatt products, which would have a positive impact on the Company's gross margin.

The Company was also recently awarded $3 million by the Department of Energy for research, development and testing of microturbine-powered cooling, heating and power systems for buildings, also referred to as BCHP. These systems will use the waste heat from Capstone's 30- and 60-kilowatt microturbines coupled with absorption chillers for air-conditioning and a desiccant for humidity control.

"This award confirms the expanded opportunities for cogeneration using microturbines, as well as the increased interest in clean, energy-efficient solutions for the United States," said Dr. Almgren.

Production Capabilities

During the second quarter, Capstone substantially enhanced its production capabilities as it began producing commercial quantities of recuperator cores, a key component of microturbines. The first recuperator cores were produced in June, ahead of the Company's initial September timeframe. With the world's first automated recuperator core production process, the Company hopes to achieve a goal of cutting labor time in half and realizing other cost savings that will positively impact its gross margin.

"We are pleased with the performance of the initial recuperator cores that we have produced and we believe that we will continue to have an excellent record with this key component," said Dr. Almgren. "With more than 1,000 Capstone MicroTurbines having been shipped, we have never had a field failure with the recuperator cores."

Governmental Affairs

During the second quarter, Capstone continued its efforts to generate better visibility and support for microturbine technology on the state and federal government levels. Dr. Almgren personally met with President George Bush twice, as well as Energy Secretary Spencer Abraham and California Governor Gray Davis. In addition, U.S. Representative Brad Sherman recently toured the Capstone facility.

"We consider these opportunities invaluable for educating public officials about microturbine technology and its ability to be part of the solution to current and future energy needs in California and the rest of the country," said Dr. Almgren.

Financial Highlights

In the second quarter of 2001, gross margin improved to 4%, compared with a negative 36% gross margin in the same period of 2000. The improvement in gross margin is primarily attributable to factory overhead costs being allocated over larger volumes of production and initial shipments of higher margin 60-kilowatt units. The Company expects the gross margin on the 60-kilowatt units to improve in the third and fourth quarters of 2001 as it begins to use less expensive parts from inventory following the utilization of pre-production parts purchased in low quantities at higher costs.

Research and development expenses decreased to $2.9 million, compared with $3.0 million in the second quarter of 2000. R&D expenses in the second quarter of 2001 were primarily attributable to the development of additional product releases for the Company's 60-kilowatt line of microturbines.

Selling, general and administrative (SG&A) expenses increased to $10.9 million, compared with $5.7 million in the second quarter of 2000. This increase is primarily attributable to the continued expansion of the Company's sales and marketing organization, including the Capstone California subsidiary. SG&A was also impacted by $1.6 million in non-cash expenses associated with stock-based compensation and marketing rights amortization.

During the quarter the Company incurred $800,000 of pre-production costs associated with its recuperator core manufacturing facility which began production in June. Capstone has now begun building recuperator cores for production inventory.

The Company also invested nearly $1.0 million in legal expenses during the quarter related in part to expanding its portfolio of intellectual property. Capstone has increased the number of domestic and international patents it holds to 53, with many more currently being pursued.

The Company continues to be in an exceptionally strong financial position. As of June 30, 2001, Capstone had approximately $200.4 million in cash and cash equivalents, and no long-term debt. The Company used approximately $17 million in cash during the second quarter of 2001, compared with approximately $19 million in the first quarter of 2001. Included in these amounts are capital expenditures totaling $6.5 million in the second quarter and $5.4 million in the first. Capital expenditures included investments in the recuperator core manufacturing facility and equipment totaling approximately $4.4 million in the second quarter and $4.0 million in the first.

Accounts receivable increased to $14.8 million at the end of the second quarter of 2001, reflecting a high level of shipments with 30-day terms in the last month of the quarter. This continues a trend that was also seen in the first quarter of 2001. The Company had no bad debt write-offs during the second quarter and does not anticipate any meaningful write-offs in the third quarter of 2001.

Outlook

Capstone announced that its sales target for the third quarter of 2001 is 600 units. Management believes it currently has visibility on 400 of those units, but cautions that the exact timing of receipt of orders is always uncertain. Additionally, the Company's objective is to exceed 2000 shipments for the full calendar year 2001, of which 500 units are targeted to be 60-kilowatt systems. For 2002, Capstone has set a target of 4,000 units shipped including an increasing percentage of 60-kilowatt systems.

"We believe that there is a lot of business available in our target markets around the world," said Jeff Watts, Chief Financial Officer. "In addition to further developing our existing customer relationships, we are currently focusing on developing very large new customers in our existing sales territories, which typically take a longer time to develop than small customers. However, when they do develop, they potentially represent very large business opportunities for Capstone.

"Inherent in dealing with these large prospects is difficulty in predicting the exact timing for closure of contracts and release of orders. There is no anticipated constraint on our ability to supply this demand given our past investment in assembly and test facilities.

"We also anticipate expanding our sales territories around the world. We will begin to add sales channels in new territories in Europe, Russia and the Middle East with the help of newly hired Hans Gners. We will also begin to expand our presence throughout Asia and South America while working with our partners like Cummins.

"Demand for our 60-kilowatt models appears to be strong and our goal is for these models to comprise 50% of our shipments in 2002. We also continue to focus on hitting our goal of having an increasing percentage of our shipments be subassemblies and components, which garner a higher gross margin. Subassemblies and components are primarily shipped to our partners in the hybrid electric vehicle market, our Japanese partners focusing on the micro-cogeneration market, and other OEMs such as Cummins," said Watts.

Conference Call and Webcast

In conjunction with Capstone Turbine Corporation's second quarter earnings announcement, members of the public are invited to listen to the Company's live quarterly conference call on the Internet on Thursday, July 19, 2001 at 5 p.m. Eastern/2 p.m. Pacific. To hear the call, simply log on at the Company's Web site at www.microturbine.com and go to the Investor Relations Web page.

About Capstone Turbine

Capstone Turbine Corporation (www.microturbine.com; Nasdaq: CPST) -- winner of Financial Times Energy's (www.ftenergy.com) 2000 Global Energy Award for Most Innovative Commercial Technology -- is a leading producer of low-emission microturbine systems. In 1998, Capstone was the first to offer commercial power products utilizing microturbine technology, the result of more than ten years of focused research. Worldwide, more than 1,000 commercial production Capstone MicroTurbine systems serve, among others, the following applications:

-- Hybrid electric vehicles (HEVs): onboard generation

-- Resource recovery: converting oilfield, landfill and sewage

waste gases into electricity

-- Micro-cogeneration: combined heat/power/chilling solutions

-- The 9s market: power quality and reliability

Certain statements contained in this release may be deemed to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, and Capstone Turbine Corporation intends that such forward-looking statements be subject to the safe-harbor created thereby. Such forward-looking statements relate to: 1) Capstone's penetration of its target markets, including its ability to be a part of the solution to California's power supply issues; 2) the emergence of additional markets for microturbines; 3) demand for microturbines and the ability of the Company to ship its 60-kilowatt systems; 4) the Company's development of additional microturbine product releases; 5) the Company's development and initiation of recuperator core manufacturing activities; 6) the impact of production of recuperator cores and the amortization of factory overhead on the Company's gross margin; and 7) component shortages experienced by the Company and the Company's ability to overcome such shortages. Capstone cautions that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements herein. Such factors include, but are not limited to: 1) market acceptance of Capstone's technology and products; 2) the size, timing and shipment of individual orders; 3) the ability of Capstone to successfully execute its production and marketing plans; 4) the Company's ability to develop additional microturbine product releases; 5) the Company's ability to successfully develop its recuperator core manufacturing processes and expand production capacity; 6) being able to secure adequate supplies of acceptable quality components or experiencing higher than anticipated costs; 7) exposure to product liability or other tort claims; 8) the Company's ability to control its warranty exposure; 9) the Company's ability to retain key management and technical personnel; 10) barriers to entry in the marketplace or regulations that may affect the Company's ability to sell its products; 11) the Company's ability to protect its intellectual property or if the Company is found to have infringed upon the intellectual property of others; 12) the Company's ability to operate in a highly competitive market against competitors who have significantly greater resources; and other factors detailed in the Company's filings with the Securities and Exchange Commission. Capstone cautions readers not to place undue reliance on these statements, which speak only as of the date of this release. Capstone undertakes no obligation, and specifically disclaims any obligation, to release any revisions to any forward-looking statements to reflect events or circumstances after the date of this release or to reflect the occurrence of unanticipated events.

Note to Editors: Wrightbus is a registered trademark of Wrightbus Ltd.

                     CAPSTONE TURBINE CORPORATION
                      CONSOLIDATED BALANCE SHEETS


Assets                                    December 31,      June 30,
                                             2000             2001
                                                           (Unaudited)
Current Assets:
  Cash and cash equivalents           $ 236,947,000     $ 200,390,000
  Accounts receivable, net of
   allowance for doubtful accounts
   of $85,000 at December 31, 2000
   and $87,000 at June 30, 2001           3,664,000        14,831,000
  Inventory                              14,123,000        16,454,000
  Prepaid expenses and other
   current assets                         1,689,000         1,160,000
     Total current assets               256,423,000       232,835,000
Equipment and Leasehold Improvements:
  Machinery, equipment and furniture     13,664,000        22,211,000
  Leasehold improvements                  3,055,000         3,184,000
  Molds and tooling                       1,331,000         3,760,000
                                         18,050,000        29,155,000
Less accumulated depreciation
 and amortization                         6,434,000         7,076,000
     Total equipment and leasehold
      improvements                       11,616,000        22,079,000
Deposits on fixed assets                  6,649,000         6,261,000
Other assets                                302,000           252,000
Intangible assets, net                   27,028,000        24,735,000
     Total                            $ 302,018,000     $ 286,162,000

Liabilities and Stockholders' Equity

Current Liabilities:
  Accounts payable                    $   4,728,000     $   6,591,000
  Accrued salaries and wages              1,135,000         1,277,000
  Other accrued liabilities               1,282,000         2,372,000
  Accrued warranty reserve                5,589,000         5,196,000
  Deferred revenue                        4,064,000         3,200,000
  Current portion of capital lease
   obligations                            1,497,000         1,396,000
     Total current liabilities           18,295,000        20,032,000

Non-current Liabilities:
  Long-term portion of capital
   lease obligations                      3,999,000         3,237,000
  Other long-term liabilities               342,000           426,000
     Total non-current liabilities        4,341,000         3,663,000

Commitments and Contingencies                    --                --

Stockholders' Equity:
  Common stock, $.001 par value;
    415,000,000 shares authorized;
    75,771,303 and 76,844,722 shares
    issued and outstanding at
    December 31, 2000 and June 30, 2001,
    respectively                             76,000            77,000
  Additional paid in capital            516,738,000       519,554,000
  Accumulated deficit                  (237,432,000)     (257,164,000)
     Total stockholders' equity         279,382,000       262,467,000
       Total                          $ 302,018,000     $ 286,162,000


                     CAPSTONE TURBINE CORPORATION
                 CONSOLIDATED STATEMENTS OF OPERATIONS
                              (Unaudited)
               (in thousands, except per share amounts)

                                  Three                    Six
                                Months Ended           Months Ended
                                  June 30,               June 30,
                              2000       2001        2000       2001

Revenues                   $  6,086   $ 13,559  $    9,832   $ 22,465
Cost of Goods Sold            8,256     12,982      13,380     21,565
   Gross Profit (Loss)       (2,170)       577      (3,548)       900

Operating Costs and Expenses:
  Research and development    3,022      2,889       5,463      5,659
  Selling, general and
   administrative             5,677     10,893      10,061     20,805
    Total operating
     costs and expenses       8,699     13,782      15,524     26,464
Loss from Operations        (10,869)   (13,205)    (19,072)   (25,564)

Interest Income               1,899      3,082       2,622      6,126
Interest Expense               (200)      (153)       (536)      (320)
Other Income (Expense)           (5)        13           1         27

Loss Before Income Taxes     (9,175)   (10,263)    (16,985)   (19,731)
Provision for Income Taxes                               1          1
Net Loss                     (9,175)   (10,263)    (16,986)   (19,732)

Preferred Stock Dividends,
 Accretion, and Repurchase (419,930)              (559,862)

Net Loss Attributable to
 Common Shareholders      $(429,105)  $(10,263) $ (576,848)  $(19,732)

Weighted Average Common
 Shares Outstanding      29,973,195 76,654,902  17,011,083 76,351,836

Net Loss Per Share of
 Common Stock --
 Basic and Diluted        $  (14.32)  $  (0.13) $   (33.91)  $  (0.26)