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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.D.C. 20549
FORM 10-Q
/X / Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2002March 31, 2003
/ / Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the period from to
Commission File Number 0-6890
MECHANICAL TECHNOLOGY INCORPORATED
(Exact name of registrant as specified in its charter)
New York | 14-1462255 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
431 New Karner Road, Albany, New York 12205
(Address of principal executive offices) (Zip Code)
(518)(518) 533-2200
(Registrant's telephone number, including area codecode)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class | Outstanding at |
Common stock, $1.00 Par Value |
|
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Part | Page No. |
Item 1. Financial Statements Financial Statements of Mechanical Technology Incorporated | |
Consolidated Balance Sheets - | 3-4 |
Consolidated Statements of Operations - Three | 5 |
Consolidated Statements of Shareholders' Equity - | 6 |
Consolidated Statements of Cash Flows - | 7 |
Notes to Interim Consolidated Financial Statements (Unaudited) |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 36 |
Item 4. Controls and Procedures | 36 |
Part | |
Item |
|
Item | 37 |
Item 3. Defaults Upon Senior Securities | 37 |
Item 4. Submission of Matters to a Vote of Security Holders | 37 |
Item 5. Other Information | 37 |
Item 6. Exhibits and Reports on Form 8-K |
|
Signatures |
|
Certifications | 39 - 40 |
2
PART II. FINANCIAL INFORMATION
Item 1. Financial Statements
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 2002 March 31, 2003 (Unaudited)
and December 31, 2001 (Unaudited) and
September 30, 2001 (Derived from audited financial statements)2002 (Audited)
(Dollars in thousands)
Sept. 30,2002 | Dec. 31, 2001 | Sept. 30, 2001 | |
Assets | |||
Current Assets: | |||
Cash and cash equivalents | $4,652 | $4,127 | $ 9,807 |
Restricted cash equivalents | 1,001 | 14 | 78 |
Securities available for sale | 2,073 | 5,734 | 6,704 |
Accounts receivable | 1,003 | 902 | 586 |
Inventories | 1,360 | 1,510 | 1,674 |
Notes receivable | - | 25 | 250 |
Deferred income taxes | - | 2,315 | 2,052 |
Prepaid expenses and other current assets | 2,169 | 1,042 | 1,108 |
Total Current Assets | 12,258 | 15,669 | 22,259 |
Derivative assets | 11 | 194 | 220 |
Property, plant and equipment, net | 1,553 | 1,548 | 1,581 |
Holdings, at equity | 22,828 | 38,937 | 47,197 |
Total Assets | $36,650 | $56,348 | $71,257 |
Mar. 31, | Dec. 31, | |
2003 | 2002 | |
Assets | ||
Current Assets: | ||
Cash and cash equivalents | $ 8,169 | $ 7,320 |
Securities available for sale | 38,788 | 37,332 |
Accounts receivable | 1,339 | 1,445 |
Inventories | 1,344 | 1,378 |
Prepaid expenses and other current assets | 818 | 668 |
Total Current Assets | 50,458 | 48,143 |
Long Term Assets: | ||
Derivative assets | - | 6 |
Property, plant and equipment, net | 1,570 | 1,558 |
Deferred income taxes | 2,896 | 2,677 |
Notes receivable-noncurrent, less allowance of $660 | - | - |
Total Assets | $54,924 | $52,384 |
The accompanying notes are an integral part of the consolidated financial statements.
3
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 2002 March 31, 2003 (Unaudited)
and December 31, 2001 (Unaudited) and
September 30, 2001 (Derived from audited financial statements)2002 (Audited)
(Dollars in thousands, except share data)
Mar. 31, | Dec. 31, | ||||
Sept. 30, 2002 | Dec. 31,2001 | Sept. 30, 2001 | 2003 | 2002 | |
Liabilities and Shareholders' Equity | |||||
Current Liabilities: | |||||
Line of credit | $ 1,000 | $ 1,000 | $ 5,000 | ||
Accounts payable | 406 | 643 | 807 | $ 733 | $ 761 |
Accrued liabilities | 1,613 | 1,632 | 1,945 | 1,787 | 1,543 |
Accrued liabilities - related parties | 220 | 101 | 3 | 55 | 190 |
Income taxes payable | 206 | 28 | 25 | 64 | 92 |
Contingent obligation to common stock warrant holders | - | - | 288 | ||
Net liabilities of discontinued operations | - | 356 | 358 | ||
Deferred income taxes | 9,988 | 8,876 | |||
Total Current Liabilities | 3,445 | 3,760 | 8,426 | 12,627 | 11,462 |
Long-Term Liabilities: | |||||
Deferred income taxes and other credits | 173 | 4,406 | 8,453 | ||
Other credits | 24 | ||||
Total Liabilities | 3,618 | 8,166 | 16,879 | 12,651 | 11,486 |
Commitments and Contingencies | |||||
Minority interests | 242 | 574 | 331 | 35 | 150 |
Shareholders' Equity: | |||||
Common stock, par value $1 per share, authorized 75,000,000; issued 35,547,510 in September 2002 and 35,505,010 in December and September 2001 |
35,547 |
35,505 |
35,505 | ||
Common stock, par value $1 per share, authorized 75,000,000; issued 35,659,385 in March 2003 and 35,648,135 in December 2002 |
35,659 |
35,648 | |||
Paid-in-capital | 67,560 | 67,045 | 65,103 | 67,502 | 67,479 |
Accumulated deficit | (70,288) | (54,913) | (41,328) | (61,937) | (61,874) |
32,819 | 47,637 | 59,280 | 41,224 | 41,253 | |
Accumulated Other Comprehensive Loss: | |||||
Unrealized loss on available for sale securities, net of tax | - | - | (5,204) | ||
Common stock in treasury, at cost, 20,250 shares | (29) | (29) | (29) | ||
Accumulated Other Comprehensive Income: | |||||
Unrealized gain on securities available for sale, net of taxes | 14,677 | 13,170 | |||
Restricted stock grant | (28) | (40) | |||
Common stock in treasury, at cost, 8,020,250 shares | (13,635) | (13,635) | |||
Total Shareholders' Equity | 32,790 | 47,608 | 54,047 | 42,238 | 40,748 |
Total Liabilities and Shareholders' Equity | $ 36,650 | $ 56,348 | $ 71,257 | $ 54,924 | $ 52,384 |
The accompanying notes are an integral part of the consolidated financial statements.
4
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)
Three months ended | Nine months ended | |||
Sept. 30, 2002 | Sept. 30, 2001 | Sept. 30, 2002 | Sept. 30, 2001 | |
Revenue: | ||||
Product revenue | $ 1,018 | $ 1,743 | $ 3,203 | $ 5,660 |
Funded research and development | 489 | - | 1,046 | - |
Total revenue | 1,507 | 1,743 | 4,249 | 5,660 |
Operating costs and expenses: | ||||
Cost of product revenue | 453 | 663 | 1,703 | 2,435 |
Research and product development expenses: | ||||
Funded research and product development expenses | 761 | - | 1,778 | - |
Unfunded research and product development expenses | 1,095 | 1,124 | 3,213 | 3,238 |
Total research and product development expenses | 1,856 | 1,124 | 4,991 | 3,238 |
Selling, general and administrative expenses | 1,239 | 1,601 | 3,897 | 4,638 |
Operating loss | (2,041) | (1,645) | (6,342) | (4,651) |
Interest expense | (12) | (192) | (36) | (1,253) |
Loss on derivatives | (5) | (459) | (183) | (537) |
Gain on derivatives, Company stock | - | 922 | - | 922 |
Gain (loss) on sale of holdings | 881 | (2,171) | 5,491 | 28,838 |
Impairment losses (Note 8) | (945) | - | (8,127) | - |
Other (expense) income, net | (29) | 1,057 | (16) | (54) |
(Loss) income from continuing operations before income taxes, equity in holdings' losses and minority interest |
(2,151) |
(2,488) |
(9,213) |
23,265 |
Income tax benefit (expense) | 163 | 1,917 | 2,024 | (8,506) |
Equity in holdings' losses, net of tax | (2,654) | (4,206) | (8,894) | (12,200) |
Minority interest in losses of consolidated subsidiary | 100 | 123 | 329 | 123 |
(Loss) income from continuing operations | (4,542) | (4,654) | (15,754) | 2,682 |
Income from discontinued operations, net of tax | 379 | - | 379 | - |
(Loss) income before cumulative effects of change in accounting principle | (4,163) | (4,654) | (15,375) | 2,682 |
Cumulative effect of accounting change for derivative financial instruments for Company's own stock, net of tax |
- |
- |
- |
1,468 |
Net (loss) income | $(4,163) | $ (4,654) | $(15,375) | $ 4,150 |
(Loss) Earnings Per Share (Basic): | ||||
(Loss) income from continuing operations | $(.13) | $(.13) | $(.44) | $.08 |
Income from discontinued operations | .01 | - | .01 | - |
Cumulative effect of accounting change for derivative financial instruments for Company's own stock |
- |
- |
- |
.04 |
(Loss) earnings per share | $(.12) | $(.13) | $(.43) | $.12 |
(Loss) Earnings Per Share (Diluted): | ||||
(Loss) income from continuing operations | $(.13) | $(.13) | $(.44) | $.07 |
Income from discontinued operations | .01 | - | .01 | - |
Cumulative effect of accounting change for derivative financial instruments for Company's own stock |
- |
- |
- |
.04 |
(Loss) earnings per share | $(.12) | $(.13) | $(.43) | $.11 |
Three months ended | ||
Mar. 31, | Mar. 31, | |
2003 | 2002 | |
Revenue: | ||
Product revenue | $ 1,283 | $ 590 |
Funded research and development | 522 | 172 |
Total revenue | 1,805 | 762 |
Operating costs and expenses: | ||
Cost of product revenue | 555 | 412 |
Research and product development expenses: | ||
Funded research and product development | 820 | 345 |
Unfunded research and product development | 951 | 1,023 |
Total research and product development expenses | 1,771 | 1,368 |
Selling, general and administrative expenses | 1,420 | 1,635 |
Operating loss | (1,941) | (2,653) |
Interest expense | (3) | (12) |
Loss on derivatives | (6) | (167) |
Gain on sale of holdings, net | - | 2,241 |
Gain on sale of securities available for sale, net | 1,720 | - |
Impairment losses (Note 6) | - | (5,282) |
Other (expense) income, net | (38) | 9 |
Loss from operations before income taxes, equity in holdings' losses and minority interests | (268) | (5,864) |
Income tax benefit | 89 | 2,353 |
Equity in holdings' losses, net of tax | - | (1,866) |
Minority interests in losses of consolidated subsidiary | 116 | 121 |
Net loss | $ (63) | $ (5,256) |
Loss per Share (Basic and Diluted): | ||
Loss per share | $ (0.00) | $ (0.15) |
The accompanying notes are an integral part of the consolidated financial statements.
5
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
Nine months ended COMMON STOCK Sept. 30, 2002 Sept. 30, 2001 Balance, January 1 $ 35,505 $ 35,443 Issuance of shares - options 42 62 Balance, September 30 $ 35,547 $ 35,505 PAID-IN-CAPITAL Balance, January 1 $ 67,045 $ 55,147 Issuance of shares - options (2) 4 MTI MicroFuel Cell investment (7) 1,163 Plug Power holding, net of taxes 636 8,329 SatCon holding, net of taxes (150) 2,460 Compensatory stock options 38 38 Stock option exercises recognized differently for financial reporting and tax purposes - 169 Reclassification of common stock warrants from equity to liability, net of tax - (2,207) Balance, September 30 $ 67,560 $ 65,103 ACCUMULATED DEFICIT Balance, January 1 $(54,913) $(45,478) Net (loss) income (15,375) 4,150 Balance, September 30 $(70,288) $(41,328) ACCUMULATED OTHER COMPREHENSIVE LOSS: UNREALIZED LOSS ON AVAILABLE FOR SALE SECURITIES, NET OF TAXES Balance, January 1 $ - $ 14,470 Change in unrealized loss on available for sale securities, net of taxes - (19,674) Balance, September 30 $ - $ (5,204) TREASURY STOCK Balance, January 1 $ (29) $ (29) Balance, September 30 $ (29) $ (29) SHAREHOLDERS' EQUITY Balance, September 30 $ 32,790 $ 54,047 TOTAL COMPREHENSIVE (LOSS) INCOME: Net (loss) income $(15,375) $ 4,150 Other comprehensive loss: Change in unrealized loss on available for sale securities, net of tax - (19,674) Total comprehensive loss $(15,375) $(15,524)
Three months ended | ||
Mar. 31, | Mar. 31, | |
2003 | 2002 | |
COMMON STOCK | ||
Balance, beginning | $ 35,648 | $ 35,505 |
Issuance of shares - options | 11 | 24 |
Balance, ending | $ 35,659 | $ 35,529 |
PAID-IN-CAPITAL | ||
Balance, beginning | $ 67,479 | $ 67,045 |
Issuance of shares - options | 9 | (6) |
MTI MicroFuel Cell investment | 2 | - |
Plug Power holding, net of taxes | - | 83 |
SatCon holding, net of taxes | - | (86) |
Compensatory options | 11 | 13 |
Stock option exercises recognized differently for financial reporting and tax purposes |
1 | 25 |
Balance, ending | $ 67,502 | $ 67,074 |
ACCUMULATED DEFICIT | ||
Balance, beginning | $(61,874) | $(54,913) |
Net loss | (63) | (5,256) |
Balance, ending | $(61,937) | $(60,169) |
ACCUMULATED OTHER COMPREHENSIVE INCOME: | ||
UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE, | ||
NET OF TAXES | ||
Balance, beginning | $ 13,170 | $ - |
Change in unrealized gain on securities available for sale, net of taxes | 1,507 | - |
Balance, ending | $ 14,677 | $ - |
RESTRICTED STOCK GRANT | ||
Balance, beginning | $ (40) | $ - |
Grants vested | 12 | - |
Balance, ending | $ (28) | $ - |
TREASURY STOCK | ||
Balance, beginning | $(13,635) | $ (29) |
Balance, ending | $(13,635) | $ (29) |
SHAREHOLDERS' EQUITY | ||
Balance, ending | $ 42,238 | $ 42,405 |
TOTAL COMPREHENSIVE INCOME (LOSS): | ||
Net loss | $ (63) | $ (5,256) |
Other comprehensive income: | ||
Change in unrealized gain on securities available for sale, net of taxes | 1,507 | - |
Total comprehensive income (loss) | $ 1,444 | $ (5,256) |
The accompanying notes are an integral part of the consolidated financial statements.
6
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)thousands)
Nine months ended | ||
Sept. 30, 2002 | Sept. 30, 2001 | |
Operating Activities | ||
Net (loss) income excluding discontinued operations | $(15,754) | $ 4,150 |
Adjustments to reconcile net (loss) income excluding discontinued | ||
operations to net cash used by continuing operations: | ||
Cumulative effect of accounting change for derivative financial instruments for Company's own stock, gross | - | (2,468) |
Loss on derivatives | 183 | 537 |
Gain on derivatives, Company stock | - | (922) |
Stock dividend income | - | (827) |
Capitalized interest | - | 107 |
Impairment losses | 8,127 | - |
Minority interest | (329) | (123) |
Depreciation and amortization | 407 | 1,641 |
Gain on sale of holdings | (5,491) | (28,838) |
Equity in losses of equity holdings (gross) | 8,872 | 18,832 |
Allowance for bad debts | - | (250) |
Loss on disposal of fixed assets | 16 | 4 |
Deferred income taxes and other credits | (1,918) | 2,399 |
Stock option compensation | 38 | 38 |
Changes in operating assets and liabilities: | ||
Accounts receivable | (101) | 347 |
Inventories | 150 | (264) |
Prepaid expenses and other current assets | (1,170) | (208) |
Accounts payable | (236) | 249 |
Income taxes | 178 | 16 |
Accrued liabilities - related parties | 119 | (3) |
Accrued liabilities | (19) | 94 |
Net cash used by continuing operations | (6,928) | (5,489) |
Discontinued Operations: | ||
Income from discontinued operations, net of tax | 379 | - |
Change in net liabilities/assets | (356) | 127 |
Net cash provided by discontinued operations | 23 | 127 |
Net cash used by operating activities | (6,905) | (5,362) |
Investing Activities | ||
Purchases of property, plant and equipment | (385) | (1,284) |
Proceeds from sale of holdings | 8,747 | 37,842 |
Net change in restricted cash equivalents | (987) | 989 |
Principal payments from notes receivable | 25 | 169 |
Net cash provided by investing activities | 7,400 | 37,716 |
Financing Activities | ||
Net proceeds from subsidiary stock issuance | - | 867 |
Net payments under bank line-of-credit | - | (20,200) |
Net payments under related party debt | - | (4,052) |
Financing costs | - | (200) |
Treasury stock purchase by subsidiary | (10) | - |
Proceeds from stock option exercises | 40 | 66 |
Net cash provided (used) by financing activities | 30 | (23,519) |
Increase in cash and cash equivalents | 525 | 8,835 |
Cash and cash equivalents - beginning of period | 4,127 | 972 |
Cash and cash equivalents - end of period | $ 4,652 | $ 9,807 |
Three months ended | ||
Mar. 31, 2003 | Mar. 31, 2002 | |
Operating Activities | ||
Net loss | $ (63) | $ (5,256) |
Adjustments to reconcile net loss to | ||
net cash used by operations: | ||
Loss on derivatives | 6 | 167 |
Impairment losses | - | 5,282 |
Minority interests in losses of consolidated subsidiary | (116) | (121) |
Depreciation and amortization | 138 | 129 |
Gain on sale of holdings, net | - | (2,241) |
Gain on sale of securities available for sale, net | (1,720) | - |
Equity in holdings' losses, gross | - | 3,115 |
Loss on disposal of fixed assets | - | 5 |
Deferred income taxes and other credits | (111) | (3,591) |
Stock based compensation | 23 | 13 |
Changes in operating assets and liabilities: | ||
Accounts receivable | 106 | 297 |
Inventories | 34 | (95) |
Prepaid expenses and other current assets | (147) | (264) |
Accounts payable | (28) | (213) |
Income taxes | (28) | 3 |
Accrued liabilities - related parties | (135) | 32 |
Accrued liabilities | 244 | 190 |
Net cash used by operations | (1,797) | (2,548) |
Investing Activities | ||
Purchases of property, plant and equipment | (150) | (70) |
Proceeds from sale of holdings | - | 3,582 |
Proceeds from sale of securities available for sale | 2,776 | - |
Principal payments from notes receivable | - | 25 |
Net cash provided by investing activities | 2,626 | 3,537 |
Financing Activities | ||
Proceeds from stock option exercises | 20 | 18 |
Net cash provided by financing activities | 20 | 18 |
Increase in cash and cash equivalents | 849 | 1,007 |
Cash and cash equivalents - beginning of period | 7,320 | 4,127 |
Cash and cash equivalents - end of period | $ 8,169 | $ 5,134 |
The accompanying notes are an integral part of the consolidated financial statements.
7
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In the opinion of management the accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and contain all adjustments, consisting of only normal, recurring adjustments, necessary for a fair presentation of results for such periods. The results for any interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended September 30, 2001.
Change in Accounting for SatCon Technology Holding
The Company's holdings in SatCon were accounted for on a one-quarter lag under the equity method of accounting from January 1, 2002 through July 1, 2002. On July 1, 2002, the Company determined that it no longer has the ability to exercise significant influence over the operating and financial policies of SatCon as a result of waiving the Company's right to nominate and recommend directors to SatCon's board and our reduction of ownership in SatCon and, therefore, has accounted for its investment in SatCon since July 1, 2002 using the fair value method as set forth in SFAS No. 115, "Accounting for Certain Debt and Equity Securities." The Company is no longer required to record its share of any losses from SatCon and the investment is carried at fair value and designated as available for sale and any unrealized holding gains or losses are to be included in stockholders' equity as a component of accumulated other comprehensive income (loss).
As of September 30, 2002, the fair market value of SatCon's common stock was $1.34 per share. The Company's cost basis in its investment in SatCon's common stock was $2.02 per share. As of September 30, 2002, the Company believes the decline in market value represents an other than temporary decline and the Company recorded an impairment loss of $.668 million in its statement of operations.
Additionally, the Company has warrants to purchase 100,000 shares of SatCon's common stock at an exercise price of $7.84 per share with expiration dates in October 2003 and January 2004. The Company accounts for these warrants in accordance with SFAS No. 133 and, therefore, records the warrants at their fair value and records any change in value in its statement of operations. As of September 30, 2002, the warrants to purchase SatCon common stock had a fair value of $11 thousand and are included in derivative assets on the accompanying balance sheet.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Change in Year-End
On February 13, 2002, the Company changed its fiscal year-end from September 30 to December 31, effective with the calendar year beginning January 1, 2002. A three-month transition period from October 1, 2001 through December 31, 2001 (the "Transition Period") precedes the start of the 2002 fiscal year. "2001" refers to fiscal periods in the year ended September 30, 2001 and the Transition Period refers to the three months ended December 31, 2001. This new fiscal year makes the Company's annual and quarterly reporting periods consistent with those used by Plug Power Inc. ("Plug Power") and permits the Company to continue to account for its holdings in Plug Power on a timely basis.2002.
Revenue Recognition
The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition."Revenue Recognition. Product revenue is recognized when there is persuasive evidence of an arrangement, delivery of the product to the customer or distributor has occurred, at which time title generally is passed to the customer or distributor, and the Company has determined that collection of a fixed fee is probable, all of which occur upon shipment of the product. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the installation. The Company provides for a warranty reserve at the time the product revenue is recognized.
The Company performs funded research and development for government agencies and companies under cost reimbursement contracts, which generally require
the Company to absorb up to 50% of the total costs incurred. Cost reimbursement contracts provide for the reimbursement of allowable costs. Such contracts require the Company to deliver research and tangible developments in fuel cell technology, and system design and prototype fuel cell systems for test and evaluation by the government agency. Revenues are generally recognized in proportion to the reimbursable costs incurred.
When government agencies are providing funding they do not expect the government to be the only significant end user of the resulting products. These contracts do not require delivery of products that meet defined performance specifications, but are best efforts arrangements to achieve overall research and development objectives. Included in accounts receivable are billed and unbilled work-in-progress on cost reimbursed government contracts. Total estimated cost to complete a contract in excess of the awarded contract amounts are charged to operations during the period such costs are estimated.
While the Company's accounting for these contract costs are subject to audit by the sponsoring agency,entity, in the opinion of management, no material adjustments are expected as a result of such audits. Cost of product revenue includes material, labor and overhead. Costs incurred in connection with funded research and development arrangements are included in funded research and product development expenses.
8
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Deferred revenue consists of payments received from customers in advance of services performed, products shipped or installation completed.
Derivative Warranty
The Company records a warranty reserve at the time product revenue is recorded based on a historical rate. The reserve is reviewed during the year and is adjusted, if appropriate, to reflect new product offerings or changes in experience. Actual warranty claims are tracked by product.
Stock Based Compensation
At March 31, 2003, the Company has two stock-based employee compensation plans, which are described more fully in Note 15 of the financial statements and notes thereto for the year ended December 31, 2002. SFAS No. 123,Accounting Company Stock
for Stock-Based Compensation, requires the measurement of the fair value of stock options or warrants granted to employees to be included in the statement of operations or, alternatively, disclosed in the notes to consolidated financial statements. The Company accounts for derivatives potentially settledstock-based compensation of employees under the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations and has elected the disclosure-only alternative under SFAS No. 123. The Company records the fair market value of stock options and warrants granted to non-employees in the Company's own stockexchange for services in accordance with Emerging Issues Task Force Issue EITF 00-19, "Accounting(EITF) No. 96-18,Accounting for Derivative FinancialEquity Instruments IndexedThat Are Issued to and Potentially SettledOther Than Employees for Acquiring, or in a Company's Own Stock."Conjunction with Selling, Goods or Services, in the Consolidated Statement of Operations. The Standard requires freestanding contracts that are settled in a company's own stock, including common stock warrants,Company does not intend to be designated as an equity instrument, asset or a liability. Underadopt the transition provisions of EITF 00-19, a contract designatedSFAS No. 148,Accounting for Stock-Based Compensation- Transition and Disclosure.
The following table illustrates the effect on net loss and earnings per share as an asset or a liability must be carried at fair value, with any changes in fair value recorded in the results of operations. A contract designated as
an equity instrument must be included within equity, and no fair value adjustments are required. In accordance with EITF 00-19,if the Company determined that outstanding warrants as of June 30, 2001 to purchase 300,000 shares of the Company's Common Stock issued to
SatCon Technology Corporation should be designated as a liability. Effective June 30,2001,had applied the fair value recognition provisions of all such warrants were reclassified from equity to liabilities with subsequent changes in the fair value included in the results of operations.
The classification of these warrants is reassessed periodically. As a result of the amendment to the SatCon warrant agreements on December 28, 2001, requiring the Company to settle the warrants, when
exercised, in common stock, the warrants were reclassified from liability to equity and further changes in the fair value of the warrants are no longer reported in results of operations.
Accounting for Goodwill and Other Intangible AssetsStock-Based Compensation, to stock-based employee compensation.
Effective January 1, 2002, the Company adopted the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets." This Statement affects the Company's treatment of goodwill and other intangible assets. The Statement requires that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the Statement's criteria. Intangible assets with finite useful lives will continue to be amortized over those periods. Amortization of goodwill and intangible assets with indeterminable lives will cease.
As a result of the adoption of the Statement, the Company will no longer amortize the goodwill associated with its equity holdings in SatCon. Subsequent to the adoption of SFAS No. 142, effective July 1, 2002, the Company no longer uses the equity method of accounting for its investment in SatCon (See Note 1).
9
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, | Three months ended | |||
except per share data) | Mar. 31, | Mar. 31, | ||
2003 | 2002 | |||
Net loss, as reported | $ (63) | $ (5,256) | ||
Add: Total stock-based employee | ||||
compensation expense already recorded in | ||||
financial statements, net of related tax | ||||
Effects | 7 | 8 | ||
Deduct: Total stock-based employee | ||||
compensation expense determined under fair | ||||
value based method for all awards, net of | ||||
related tax effects | (371) | (371) | ||
Pro forma net loss | $ (427) | $(5,619) | ||
Loss per share: | ||||
Basic and diluted - as reported | $ (0.00) | $ (0.15) | ||
Basic and diluted - pro forma | $ (0.02) | $ (0.16) |
Income Taxes
The Company recorded expense related toaccounts for taxes in accordance with Financial Accounting
Standard No. 109,Accounting for Income Taxes, which requires the amortization of goodwill associated with its holdings in SatCon of $0 and $689 thousand and $0 and $2,066 thousand, respectively, during the three and nine months ended September 30, 2002 and September 30, 2001, respectively. The Company has no intangible assets.use
The Pro Forma effects of the Company adoptingasset and liability method of accounting for income taxes. Under the provisions of SFAS No. 142 would be as follows:
(Dollars in thousands, except per share data) | Three months ended Sept. 30, 2002 | Three months ended Sept. 30, 2001 | Nine months ended Sept. 30, 2002 | Nine months ended Sept. 30, 2001 |
Reported net (loss) income | $(4,163) | $(4,654) | $(15,375) | $ 4,150 |
Add back goodwill amortization, net of taxes | - | 414 | - | 1,206 |
Adjusted net (loss) income | $(4,163) | $(4,240) | $(15,375) | $ 5,356 |
Basic (Loss) Income Per Share: | ||||
Reported net (loss) income | $ (0.12) | $ (0.13) | $ ( 0.43) | $ 0.12 |
Goodwill amortization | - | 0.01 | - | 0.03 |
Adjusted (loss) income per share | $ (0.12) | $ (0.12) | $( 0.43) | $ 0.15 |
Diluted (Loss) Income Per Share: | ||||
Reported net (loss) income | $ (0.12) | $ (0.13) | $ (0.43) | $ 0.11 |
Goodwill amortization | - | 0.01 | - | 0.03 |
Adjusted (loss) income per share | $ (0.12) | $ (0.12) | $ (0.43) | $ 0.14 |
Accounting for Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accountingasset and liability method, deferred income taxes are recognized for the Impairment or Disposaltax consequences of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting"temporary differences" by applying enacted statutory tax rates applicable for the Impairmentfuture years to differences between financial statement and tax bases of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB No. 30. This Statement addresses financial accounting and reporting for the impairment or disposal of long-livedexisting assets and was adopted asliabilities. Under FAS No. 109, the effect of January 1, 2002. This Statement specifies how impairment will be measured and how impaired
assets will be classifiedtax rate changes on deferred taxes is recognized in the financial statements.income tax provision in the period that includes the enactment date. The Company's adoption of this Statement did not have a material impact onprovision for taxes is reduced by investment and other tax credits in the Company's financial statements.
years such credits become available.
Certain 2001 amounts have been reclassified to conform to the 2002 presentation.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mar. 31, | Mar. 31, | ||||||
(Dollars in thousands) | Sept. 30, 2002 | Dec. 31, 2001 | Sept.30, 2001 | (Dollars in thousands) | 2003 | 2002 | |
U.S. and State Government: | U.S. and State Government: | ||||||
Amount billed and billable | $ 486 | $ 191 | $ - | ||||
Amount billable | Amount billable | $ 298 | $ 300 | ||||
Amount billed | Amount billed | - | 42 | ||||
Retainage | 11 | - | - | Retainage | 35 | 25 | |
$ 497 | $ 191 | $ - | $ 333 | $ 367 |
The balances billed but not paid by customers pursuant to retainage provisions in contracts are due upon completion of the contracts and acceptance by the customer. Based on the Company's experience, most retainage amounts are expected to be collected within the ensuing year.
Inventories consist of the following at:
(Dollars in thousands) | Sept. 30, 2002 | Dec. 31, 2001 | Sept.30, 2001 |
Finished goods | $ 313 | $ 342 | $ 272 |
Work in process | 437 | 479 | 693 |
Raw materials, components and assemblies | 610 | 689 | 709 |
$1,360 | $1,510 | $1,674 |
The principal components of the Company's holdings, at equity consist of the following:
Holding |
Recorded Book Value ($ in millions) | Quoted Market Price per Nasdaq | Calculated Market Value per Nasdaq ($ in millions) |
Ownership |
Shares |
September 30, 2002 | |||||
Plug Power Inc. | $22.828 | $ 4.79 | $ 53.142 | 21.81% | 11,094,315 |
December 31, 2001 | |||||
Plug Power Inc. | $32.177 | $ 8.74 | $104.830 | 23.83% | 11,994,315 |
SatCon Technology Corporation | 6.760 | $ 5.20 | 6.760 | 7.86% | 1,300,000 |
Total | $38.937 | $111.590 | |||
September 30, 2001 | |||||
Plug Power Inc. | $36.027 | $ 9.62 | $115.385 | 23.9% | 11,994,315 |
SatCon Technology Corporation | 11.170 | $ 4.86 | 6.318 | 8.05% | 1,300,000 |
Total | $47.197 | $121.703 |
10
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Summarized below is financial information for Plug Power and SatCon, as derived from published financial reports. Plug Power's fiscal year ends December 31 and SatCon's fiscal year ends September 30. The Company's holdings in SatCon were accounted for on a one-quarter lag until July 1, 2002 when the accounting for the SatCon holding was changed to fair value from the equity method (See Note 1).
(Dollars in thousands) |
SatCon | Plug Power | ||||
Balance Sheet | As of June 29, 2002(1) | As of Sept. 30, 2001(2) | As of June 30, 2001(1) | As of Sept. 30, 2002(1) | As of Dec. 31, 2001(2) | As of Sept. 30, 2001(1) |
Current assets | $25,046 | $42,466 | $44,802 | $ 75,394 | $100,565 | $111,212 |
Non-current assets | 20,792 | 26,310 | 24,621 | 44,253 | 50,809 | 53,607 |
Current liabilities | 11,445 | 12,842 | 9,302 | 8,974 | 10,199 | 7,737 |
Non-current liabilities | 932 | 1,423 | 1,723 | 6,018 | 6,172 | 6,534 |
Stockholders' equity | 33,461 | 54,511 | 58,398 | 104,655 | 135,003 | 150,548 |
(Dollars in thousands) |
SatCon | Plug Power __________________________ | ||
Three Months Ended | Three Months Ended | |||
Results of Operations | June 29, 2002(1) | June 30, 2001(1) | Sept. 30, 2002(1) | Sept. 30, 2001(1) |
Gross revenues | $ 11,754 | $ 10,640 | $ 2,994 | $ 920 |
Gross profit (loss) | 1,994 | 2,337 | (149) | (1,489) |
Net loss before cumulative effect of changes in accounting principles |
(4,996) |
(3,538) |
(10,674) |
(18,708) |
Cumulative effect of changes in accounting principles |
- |
(1,087) |
- |
- |
Net loss | (4,996) | (4,625) | (10,674) | (18,708) |
Nine Months Ended | Nine Months Ended | |||
Results of Operations | June 29, 2002(1) | June 30, 2001(1) | Sept. 30, 2002(1) | Sept. 30, 2001(1) |
Gross revenues | $ 30,395 | $ 31,670 | $ 8,442 | $ 3,237 |
Gross profit (loss) | 3,552 | 6,788 | 716 | (3,342) |
Net loss before cumulative effect of changes in accounting principles |
(15,389) |
(12,899) |
(34,499) |
(56,042) |
Cumulative effect of changes in accounting principles | - | (2,109) | - | - |
Net loss | (15,389) | (15,008) | (34,499) | (56,042) |
(1) derived from unaudited financial information
(2) derived from audited financial statements
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plug Power Inc.
The following is a roll forwardInventories consist of the Company's accounting for holdings in Plug Power:
(Dollars in thousands) | Nine months ended Sept. 30, 2002 | Three months ended Dec. 31, 2001 | Twelve months ended Sept. 30, 2001 |
Holdings balance, beginning of period | $32,177 | $ 36,027 | $ 48,372 |
Share of Plug Power losses, gross | (7,762) | (4,069) | (22,101) |
Sale of shares | (2,223) | - | (4,708) |
Equity adjustment for share of third-party investments in Plug Power which increased equity | 636 | 219 | 14,464 |
Holdings balance, end of period | $22,828 | $ 32,177 | $ 36,027 |
There is no difference between the carrying value of the Company's holdings in Plug Power and its interest in the underlying equity at September 30, 2002, December 31, 2001 or September 30, 2001.
SatCon Technology Corporation
The following is a roll forward of the Company's accounting for holdings in SatCon:at:
(Dollars in thousands) | Nine months ended Sept. 30, 2002 | Three months ended Dec. 31, 2001 | Twelve months ended Sept. 30, 2001 |
Holdings balance, beginning of period | $ 6,760 | $11,170 | $ 15,984 |
Share of SatCon losses on one-quarter lag, gross (A) | (1,110) | (727) | (1,938) |
Sale of shares | (832) | - | (4,296) |
Amortization of embedded difference between the Company's basis and calculated |
- |
(688) |
(2,755) |
Impairment loss (Note 8) | (2,475) | (5,790) | - |
Equity adjustment for other equity activity (A) | (150) | 2,795 | 4,175 |
Transfer assets to available for sale securities on July 1, 2002 | (2,193) | - | - |
Holdings balance, end of period | $ - | $ 6,760 | $11,170 |
The difference between the carrying value of the Company's holdings in SatCon and its interest in the underlying equity (on a one-quarter lag basis) during the periods the Company applied the equity method of accounting consists of the following:
Dec. 31, | Sept.30, | ||
(Dollars in thousands) | 2001 | 2001 | |
Calculated ownership | $ 4,285 | $ 4,704 | |
Embedded difference (goodwill) (Note 2) | 2,475 | 6,466 | |
Carrying value of investment in SatCon at equity | $ 6,760 | $11,170 |
(A) The Company's holdings in SatCon were accounted for on a one-quarter lag (through SatCon's quarter ended June 29, 2002) until accounting for the holding was changed on July 1, 2002 to fair value from the equity method (See Note 1).
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mar. 31, | Dec. 31, | |||
(Dollars in thousands) | 2003 | 2002 | ||
Finished goods | $ 310 | $ 313 | ||
Work in process | 298 | 253 | ||
Raw materials, components and assemblies | 736 | 812 | ||
$1,344 | $1,378 |
Securities available for sale are classified as current assets. Changes inassets and accumulated net unrealized gains (losses) are charged to Other Comprehensive Income (Loss).
The principal components of the Company's securities available for sale consist of the following:
Security | Recorded Book Value ($ in millions) | Quoted Market Price Per Nasdaq | Calculated Market Value per Nasdaq ($ in millions) |
Ownership |
Shares |
September 30, 2002 | |||||
SatCon | $ 1.323 | $ 1.34 | $ 1.323 | 5.9% | 987,500 |
Beacon Power | .750 | $ 0.17 | .750 | 10.3% | 4,410,797 |
Total | $ 2.073 | $ 2.073 | |||
December 31, 2001 | |||||
Beacon Power | $ 5.734 | $ 1.30 | $ 5.734 | 10.3% | 4,410,797 |
September 30, 2001 | |||||
Beacon Power | $ 6.704 | $ 1.52 | $ 6.704 | 10.3% | 4,410,797 |
Securities available for sale consist of Beacon Power(Dollars in thousands, except stock price and SatCon Technology common stock (as of July 1, 2002). share data)
Quoted | ||||||
Market | ||||||
Book | Unrealized | Recorded | Price | |||
Security | Basis | Gain (Loss) | Fair Value | Per NASDAQ | Ownership | Shares |
March 31, 2003 | ||||||
Plug Power | $13,456 | $24,865 | $38,321 | $ 5.06 | 15.10% | 7,573,227 |
SatCon | 869 | (402) | 467 | 0.72 | 3.80% | 648,600 |
Total | $14,325 | $24,463 | $38,788 | |||
December 31, 2002 | ||||||
Plug Power | $14,344 | $21,905 | $36,249 | $ 4.49 | 15.83% | 8,073,227 |
SatCon | 1,037 | 46 | 1,083 | 1.40 | 4.58% | 773,600 |
Total | $15,381 | $21,951 | $37,332 |
The book basis roll forward of BeaconPlug Power and SatCon Technology common stocksecurities is as follows:
BeaconPlug Power Corporation
(Dollars in thousands) | Sept. 30, 2002 | Dec.31, 2001 | Sept.30, 2001 |
Capital contributions during 2000 - cash | $ 6,050 | $ 6,050 | $ 6,050 |
Cash-less warrant exercise during 2001 | 8,500 | 8,500 | 8,500 |
Stock received as pro rata distribution from SatCon during 2001 | 827 | 827 | 827 |
Impairment loss during the Transition Period ended December 31, 2001 | (9,643) | (9,643) | - |
Impairment loss during 2002 (Note 8) | (4,984) | - | - |
Securities book basis | 750 | 5,734 | 15,377 |
Fair value adjustment | - | - | (8,673) |
Securities at market value | $ 750 | $ 5,734 | $ 6,704 |
SatCon Technology Corporation
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) | Mar. 31, | Dec. 31, |
2003 | 2002 | |
Securities available for sale, beginning of period | $14,344 | $ - |
Transfer asset from holdings, at equity on December 20, 2002 | - | 14,416 |
Sale of shares | (888) | (72) |
Securities book basis | 13,456 | 14,344 |
Unrealized gain on marketable securities | 24,865 | 21,905 |
Securities available for sale, end of period | $38,321 | $36,249 |
11
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SatCon
(Dollars in thousands) | Mar. 31, | Dec. 31, |
2003 | 2002 | |
Securities available for sale, beginning of period | $ 1,037 | $ - |
Transfer asset from holdings, at equity on July 1, 2002 | - | 2,193 |
Sale of shares | (168) | (488) |
Impairment loss (Note 6) | - | (668) |
Securities book basis | 869 | 1,037 |
Unrealized (loss) gain on marketable securities | (402) | 46 |
Securities available for sale, end of period | $ 467 | $ 1,083 |
The Company regularly reviews its holdings and securities available for sale to determine if any declines in value of those holdings are other than temporary. The Company assesses whether declines in the value of its holdings and securities in publicly traded companies, measured by comparison of the current market price of the securities to the carrying value of the Company's holdings and securities, are considered to be other than temporary based on factors that include (1) the length of time carrying value exceeds fair market value, (2) the Company's assessment of the financial condition and the near term prospects of the companies, and (3) the Company's intent with respect to the holdings and securities.
The slowing economy has had a negative impact on the equity value of companies in the new energy sector. In light of these circumstances
and based on the results of the reviews described above, the Company recorded other than temporary impairment charges with respect to its holdings in publicly traded companies. The pre-taxPre-tax impairment losses were recorded as follows:
For the three months ended | For the nine months ended | |||
(Dollars in thousands) | Sept. 30, 2002 | Sept. 30, 2001 | Sept. 30, 2002 | Sept. 30, 2001 |
Holdings, at equity (SatCon), (Note 6) | $ 57 | $ - | $2,475 | $ - |
Securities available for sale (Beacon), (Note 7) | 220 | - | 4,984 | - |
Securities available for sale (SatCon), (Note 7) | 668 | - | 668 | - |
$945 | $ - | $8,127 | $ - |
Three months ended | ||||
(Dollars in thousands) | Mar. 31, 2003 | Mar. 31, 2002 | ||
Holdings, at equity (SatCon) | $ - | $(1,798) | ||
Securities available for sale (Beacon) | - | (3,484) | ||
$ - | $(5,282) |
The Company's effective income tax rates forrate from operations, including equity in holdings' losses differed from the three and nine months ended September 30, 2002 and 2001 wereFederal statutory rate as follows:
For the three months ended Sept. 30, 2002Sept. 30, 2001 | For the nine months ended Sept. 30, 2002Sept. 30, 2001 | |||
Tax rate | (3.68)% | (39.94)% | (11.31)% | 41.65% |
Three months ended | ||||
Mar. 31, 2003 | Mar. 31, 2002 | |||
Federal statutory tax rate | (34.00)% | (34.00)% | ||
State taxes, net of federal tax | ||||
Effect | (.58) | (6.00) | ||
Other, net | 1.37 | (.11) | ||
Tax rate | (33.21)% | (40.11)% |
12
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Income tax (benefit) expense consists of the following:
(Dollars in thousands) | For the three months ended Sept. 30, 2002Sept. 30, 2001 | For the nine months ended Sept. 30, 2002Sept. 30, 2001 | ||
Continuing operations before equity in holdings' losses | ||||
Federal | $ - | $ (81) | $ (475) | $ 459 |
State | (164) | 6 | 391 | 18 |
Deferred | 1 | (1,842) | (1,940) | 8,029 |
(163) | (1,917) | (2,024) | 8,506 | |
Equity in holdings' losses | ||||
Federal | - | - | - | - |
State | - | - | - | - |
Deferred | - | (1,259) | 22 | (6,632) |
- | (1,259) | 22 | (6,632) | |
Total continuing operations | (163) | (3,176) | (2,002) | 1,874 |
Change in accounting principle | ||||
Federal | - | - | - | - |
State | - | - | - | - |
Deferred | - | - | - | 1,000 |
Total change in accounting principle | - | - | - | 1,000 |
Discontinued operations | ||||
Federal | - | - | - | - |
State | - | - | - | - |
Deferred | - | - | - | - |
Total discontinued operations | - | - | - | - |
Total | $ (163) | $(3,176) | $(2,002) | $2,874 |
Items charged (credited) directly to stockholders' equity: | ||||
Increase in additional paid- in capital for equity holdings, warrants and options issued - Deferred |
$ - |
$ 5,920 |
$ - |
$ 7,193 |
Increase in unrealized loss on available for sale securities - Deferred |
- | (8,321) |
- |
(13,116) |
Expenses for employee stock options recognized differently for financial reporting/tax purposes - Federal |
- |
- |
- |
(169) |
Decrease in additional paid- in-capital for change in accounting for derivative financial instruments for Company's own stock |
- |
- |
- |
(1,471) |
$ - | $(2,401) | $ - | $ (7,563) |
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended | ||||
(Dollars in thousands) | Mar. 31, | Mar. 31, | ||
2003 | 2002 | |||
Operations before equity in holdings' losses | ||||
Federal | $ - | $ - | ||
State | 22 | (11) | ||
Deferred | (111) | (2,342) | ||
(89) | (2,353) | |||
Equity in holdings' losses | ||||
Federal | - | - | ||
State | - | - | ||
Deferred | - | (1,249) | ||
- | (1,249) | |||
Total operations | $ (89) | $(3,602) | ||
Items charged (credited) directly to stockholders' equity: | ||||
Increase in additional paid- in capital for equity holdings and warrants and options issued - Deferred |
$ - |
$ (2) | ||
Increase in unrealized gain on available for sale securities - Deferred |
1,005 | - | ||
Expenses for employee stock options recognized differently for financial reporting/tax purposes - Federal |
(1) |
(25) | ||
$ 1,004 | $ (27) |
The deferred tax assets and liabilities consist of the following tax effects relating to temporary differences and carryforwards:
(Dollars in thousands) |
(Dollars in thousands) | Sept. 30, 2002 | Dec. 31, 2001 | Sept. 30, 2001 | (Dollars in thousands) | Mar. 31, | Dec. 31, | |||
Current deferred tax assets: | ||||||||||
Loss provisions for discontinued operations | $ - | $ 142 | $ 143 | |||||||
2003 | 2002 | |||||||||
Current deferred tax (liabilities) assets: | Current deferred tax (liabilities) assets: | |||||||||
Bad debt reserve | Bad debt reserve | 264 | 277 | 277 | Bad debt reserve | $ 264 | $ 264 | |||
Inventory valuation | Inventory valuation | 55 | 27 | 27 | Inventory valuation | 12 | 12 | |||
Inventory capitalization | Inventory capitalization | 12 | 12 | Inventory capitalization | 19 | 19 | ||||
Securities available for sale | Securities available for sale | 5,599 | 1,344 | 956 | Securities available for sale | (10,786) | (9,659) | |||
Vacation pay | Vacation pay | 101 | 94 | 78 | Vacation pay | 94 | 94 | |||
Warranty and other sale obligations | Warranty and other sale obligations | 40 | 33 | 29 | Warranty and other sale obligations | 26 | 22 | |||
Stock options | Stock options | 252 | 237 | 232 | Stock options | 261 | 256 | |||
Contingent liability warrant holders | - | 115 | ||||||||
Other reserves and accruals | Other reserves and accruals | 103 | 149 | 183 | Other reserves and accruals | 122 | 116 | |||
6,426 | 2,315 | 2,052 | ||||||||
Valuation allowance | (6,426) | - | - | |||||||
Net current deferred tax assets | $ - | $ 2,315 | $ 2,052 | |||||||
Net current deferred tax liabilities | Net current deferred tax liabilities | $ (9,988) | $(8,876) | |||||||
Noncurrent deferred tax assets (liabilities): | ||||||||||
Net operating loss | $ 4,970 | $ 3,117 | $ 2,360 | $ 4,007 | $ 3,790 | |||||
Property, plant and equipment | (82) | (82) | (123) | |||||||
Holdings, at equity | (4,888) | (7,314) | (10,618) | |||||||
Derivatives | (4) | (78) | (88) | - | (2) | |||||
Other | 239 | 201 | 201 | 239 | ||||||
Research and development tax credit | 459 | 459 | 459 | |||||||
Alternative minimum tax credit | 150 | 609 | 609 | 150 | 150 | |||||
844 | (3,088) | (7,159) | 4,732 | 4,513 | ||||||
Valuation allowance | (844) | (1,144) | (1,144) | (1,836) | ||||||
Other credits | (173) | (174) | (150) | |||||||
Noncurrent net deferred tax liabilities and other credits | $ (173) | $(4,406) | $(8,453) | |||||||
Net noncurrent deferred tax assets | $ 2,896 | $ 2,677 |
13
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The valuation allowance at September 30,March 31, 2003 and December 31, 2002 is $7.270 million and at September 30, 2001 was $1.144$1.836 million. During the quarter ended September 30, 2002, theThe valuation allowance was increased throughreflects the statement of operations by $2.459 million and decreased by $.015 million through paid-in-capital, for a net increase of $2.444 million. Year to date in 2002, the valuation allowance was increased through the statement of operations by $6.280 million and decreased by $.154 million through paid-in-capital, for a net increase of $6.126 million. The Company determinedestimate that based on the "start up" nature of its micro fuel cell operations, which continues to generate losses, and the reduced built-in gain associated with its Plug Power holdings, it was more likely than not that the ultimate recognition of deferred tax assets would notcertain net operating losses may be realized.unavailable to offset future taxable income.
As of September 30, 2002,March 31, 2003, the Company had a $10 million Credit Agreement with KeyBank, N.A. dated as of August 10, 2001 ("the $10 million Credit Agreement"). As of September 30, 2002,March 31, 2003, the Company had $1 millionno outstanding debt and no availability under this line of credit.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2002,credit because the market value of Plug Power common stock fell below $7was $5.06 per share, to $4.79 per share, therefore no credit is currently availablewhich reduced the availability under this line of credit. In accordance with the $10 million Credit Agreement, the Company deposited $1 million into its debt service fundfacility to cover the outstanding debt balance.zero.
The amounts used in computing earnings per share ("EPS") and the effect on income and the weighted average number of shares of potentially dilutive securities are as follows:
For the three months ended | For the nine months Ended | Three months ended | ||||||
(Dollars in thousands) | Sept. 30, 2002 | Sept. 30, 2001 | Sept. 30, 2002 | Sept. 30, 2001 | ||||
(Loss) income from continuing operations | $(4,542) | $(4,654) | $(15,754) | $2,682 | ||||
(Dollars in thousands, except | Mar. 31, | |||||||
per share data) | 2003 | 2002 | ||||||
Loss from operations | $ (63) | $(5,256) | ||||||
Basic EPS: | ||||||||
Common shares outstanding, beginning of period | 35,527,260 | 35,484,760 | 35,484,760 | 35,422,335 | 27,627,885 | 35,484,760 | ||
Unvested restricted common shares | (50,000) | - | ||||||
Weighted average common shares issued during the period | - | - | 29,582 | 44,886 | 9,250 | 24,350 | ||
Weighted average shares outstanding | 35,527,260 | 35,484,760 | 35,514,342 | 35,467,221 | 27,587,135 | 35,509,110 | ||
(Loss) income per weighted average share | $ (0.13) | $ (0.44) | $ 0.08 | |||||
Loss per weighted average share | $ (0.00) | $ (0.15) | ||||||
Diluted EPS: | ||||||||
Common shares outstanding, beginning of period | 35,527,260 | 35,484,760 | 35,484,760 | 35,422,335 | 27,627,885 | 35,484,760 | ||
Weighted average common shares issued during the period | - | - | 29,582 | 44,886 | 9,250 | 24,350 | ||
Weighted average number of options | - | 1,360,341 | - | |||||
Weighted average number of warrants | - | - | - | |||||
Weighted average shares outstanding | 35,527,260 | 35,484,760 | 35,514,342 | 36,827,562 | 27,637,135 | 35,509,110 | ||
(Loss) income per weighted average share | $ (0.13) | $ (0.44) | $ 0.07 | |||||
Loss per weighted average share | $ (0.00) | $ (0.15) |
14
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three and nine months ended September 30, 2002,March 31, 2003, options to purchase 3,399,0253,317,275 shares of common stock at prices ranging from $.54 to $21.92 per share and warrants to purchase 300,000 shares of common stock at $12.56 per share were outstanding but were not included in the computations of EPS-assuming dilution because the Company incurred losses during these periods and inclusion would be anti-dilutive. Additionally, under SFAS No. 128,Earnings per Share, 50,000 shares of non-vested restricted common stock, which vests solely upon continued service, were excluded from the computation of basic earnings per share.
For the three months ended September 30, 2001,March 31, 2002, options to purchase 3,182,9003,175,050 shares of common stock at prices ranging from $.54 to $21.92 per share and warrants to purchase 300,000 shares of common stock at $12.56 per share were outstanding but were not included in the computations of EPS-assuming dilution because the Company incurred losses during these periods and inclusion would be antidilutive.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSanti-dilutive.
Equity in holdings' losses, net of tax, for holdings accounted for under the equity method is as follows:
For the three months ended | For the nine months ended | |||
(Dollars in thousands) | Sept. 30, 2002 | Sept. 30, 2001 | Sept. 30, 2002 | Sept. 30, 2001 |
Plug Power | $(2,327) | $(3,452) | $(7,807) | $ (9,818) |
SatCona | (327) | (754) | (1,087) | (2,382) |
$(2,654) | $(4,206) | $(8,894) | $(12,200) | |
aIncludes goodwill amortization as follows (See Note 2): | $ - | $ 689 | $ - | $ 2,066 |
Three months ended | ||
(Dollars in thousands) | Mar. 31, | Mar. 31, |
2003 | 2002 | |
Plug Power | $ - | $(1,612) |
SatCon | - | (254) |
$ - | $(1,866) |
The Company sold shares of the following holdings and recognized gains and proceeds as follows:
For the three months ended | For the nine months ended | |||||
(Dollars in thousands, except shares) | Sept. 30, 2002 | Sept. 30, 2001 | Sept. 30, 2002 | Sept. 30, 2001 | ||
Plug Power | ||||||
Shares sold | 300,000 | - | 900,000 | 1,710,000 | ||
Proceeds | $ 1,631 | - | $ 7,707 | $35,717 | ||
Gain on sales | $ 952 | - | $ 5,485 | $31,009 | ||
SatCon | ||||||
Shares sold | 100,000 | 500,000 | 312,500 | 500,000 | ||
Proceeds | $ 130 | $ 2,125 | $ 1,040 | $ 2,125 | ||
(Loss) gain on sales | $ (71) | $(2,171) | $ 6 | $(2,171) | ||
Total net gain (loss) on sales | $ 881 | $(2,171) | $ 5,491 | $28,838 |
Three months ended | ||
Mar. 31, | Mar. 31, | |
(Dollars in thousands, except shares) | 2003 | 2002 |
Plug Power | ||
Shares sold | - | 300,000 |
Proceeds | $ - | $ 2,902 |
Gain on sales | $ - | $ 2,097 |
SatCon | ||
Shares sold | - | 112,500 |
Proceeds | $ - | $ 680 |
Gain on sales | $ - | $ 144 |
Total net gain on sales | $ - | $ 2,241 |
15
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company sold shares of the following securities and recognized gains (losses) and proceeds as follows:
Three months ended | ||
Mar. 31, | Mar. 31, | |
(Dollars in thousands, except shares) | 2003 | 2002 |
Plug Power | ||
Shares sold | 500,000 | - |
Proceeds | $ 2,661 | $ - |
Gain on sales | $ 1,773 | $ - |
SatCon | ||
Shares sold | 125,000 | - |
Proceeds | $ 115 | $ - |
Loss on sales | $ (53) | $ - |
Total net gain on sales | $ 1,720 | $ - |
Three months ended | ||||
Mar. 31, | Mar. 31, | |||
(Dollars in thousands) | Nine months ended Sept. 30, | 2003 | 2002 | |
2002 | 2001 | |||
Non-cash Investing and Financing Activities: | ||||
Additional holdings and paid-in-capital resulting from other investors' investments in Plug Power Inc. | $ 636 | $13,882 | ||
Additional holdings and paid-in-capital resulting from other investors' activity in Plug Power Inc. | $ - | $ 139 | ||
Change in holdings and paid-in-capital resulting from other equity activity in SatCon Technology Corporation | (150) | 4,099 | - | (143) |
Additional paid-in-capital resulting from stock option exercises treated differently for financial reporting and tax purposes |
- |
169 | 1 | 25 |
Contingent obligation to common stock warrant holders | - | 1,210 | ||
Additional investment and paid-in-capital resulting from other investors' capital transactions in MTI MicroFuel Cells Inc. | (7) | 1,163 | ||
Change in investment and paid-in-capital resulting from Other investors' activity in MTI MicroFuel Cells Inc. stock | 2 | - | ||
Prepaid material in exchange for investment in subsidiary | - | 750 | 3 | - |
The Company operates in two business segments, New Energy and Test and Measurement Instrumentation. The New Energy segment develops new energy technologies and companies and is currently
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
focused on commercializing direct methanol micro fuel cells. The
Test and Measurement Instrumentation segment develops,designs, manufactures, markets and services sensinghigh-performance test and measurement instruments and systems and computer-based balancing systems for aircraft engines.
The Company evaluates performance based on profit or loss from operations before income taxes, accounting changes, unusual items management does not deem relevant to segment performance, and interest income and expense. Inter-segment sales are not significant.
Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other" column
includes corporate related items and items like income taxes or unusual items, which are not allocated to reportable segments. The
16
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
"Reconciling Items" column includes minority interestinterests in a consolidated subsidiary and income tax allocation to equity in holdings' losses. In addition, segments' noncash items include any depreciation and amortization in reported profit or loss. The New Energy segment figures include the Company's activities related to evaluating new energy technologies, companies and growth opportunities, micro fuel cell
operations, the Company's holdings in Plug Power, SatCon and Beacon Power and the results of the Company's equity method of accounting for certain holdings. As of July 1, 2002, SatCon holdings are accounted for based on fair value. SatCon results were accounted for on a one-quarter lag except for sale of stock which was affected as of the date of sale. The results for Plug Power and SatCon arewere derived from their published quarterly and annual financial statements.
The Company's holdings in SatCon were accounted for on a one-quarter lag (through SatCon's quarter ended June 29, 2002) until accounting for the holding was changed on July 1, 2002 to fair value from the equity method. The sale of SatCon stock was affected as of the date
(Dollars in thousands) Three months ended Sept. 30, 2002 |
New Energy | Test and MeasurementInstrumentation | Other | ReconcilingItems | ConsolidatedTotals |
Product revenue | $ - | $1,018 | $ - | $ - | $ 1,018 |
Funded research and development revenue | 489 | - | - | - | 489 |
Research and product development expenses | 1,627 | 229 | - | - | 1,856 |
Selling, general and administrative expenses | 410 | 442 | 387 | - | 1,239 |
Equity in holdings' losses | (2,654) | - | - | - | (2,654) |
Impairment losses | (945) | - | - | - | (945) |
Segment (loss) profit | (4,185) | (30) | (48) | 100 | (4,163) |
Total assets | 27,066 | 2,095 | 7,489 | - | 36,650 |
Holdings, at equity | 22,828 | - | - | - | 22,828 |
Securities available for sale | 2,073 | - | - | - | 2,073 |
Capital expenditures | 143 | 4 | 12 | - | 159 |
Depreciation and amortization | 55 | 36 | 50 | - | 141 |
of sale. The accounting for the Company's holdings in Plug Power was changed on December 20, 2002 to fair value from the equity method.
(Dollars in thousands) | Test and | ||||
Measurement | Reconciling | Consolidated | |||
Three months ended March 31, 2003 | New Energy | Instrumentation | Other | Items | Totals |
Product revenue | $ - | $1,283 | $ - | $ - | $ 1,283 |
Funded research and development revenue | 522 | - | - | - | 522 |
Research and product development expenses | 1,543 | 228 | - | - | 1,771 |
Selling, general and administrative expenses | 632 | 406 | 382 | - | 1,420 |
Segment profit (loss) from operations before income taxes, equity in holdings' losses and minority interests |
16 |
50 |
(334) |
- |
(268) |
Segment profit (loss) | 16 | 50 | (245) | 116 | (63) |
Total assets | 40,195 | 2,509 | 12,220 | - | 54,924 |
Securities available for sale | 38,788 | - | - | - | 38,788 |
Capital expenditures | 101 | 5 | 44 | - | 150 |
Depreciation and amortization | 65 | 30 | 55 | - | 150 |
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Three months ended Sept. 30, 2001 |
New Energy | Test and MeasurementInstrumentation | Other | ReconcilingItems | ConsolidatedTotals |
Product revenue | $ - | $ 1,743 | $ - | $ - | $ 1,743 |
Funded research and development revenue | - | - | - | - | - |
Research and product development expenses | 779 | 345 | - | - | 1,124 |
Selling, general and administrative expenses | 1,046 | 477 | 78 | - | 1,601 |
Equity in holdings' losses | (5,465) | - | - | 1,259 | (4,206) |
Segment (loss) profit | (9,924) | 196 | 4,951 | 123 | (4,654) |
Total assets | 56,305 | 2,596 | 12,356 | - | 71,257 |
Holdings, at equity | 47,197 | - | - | - | 47,197 |
Securities available for sale | 6,704 | - | - | - | 6,704 |
Capital expenditures | 222 | 2 | 230 | - | 454 |
Depreciation and amortization | 28 | 42 | 44 | - | 114 |
(Dollars in thousands) Nine months ended Sept. 30, 2002 |
New Energy | Test and MeasurementInstrumentation | Other | ReconcilingItems | ConsolidatedTotals |
Product revenue | $ - | $ 3,203 | $ - | $ - | $ 3,203 |
Funded research and development revenue | 1,046 | - | - | - | 1,046 |
Research and product development expenses | 4,239 | 752 | - | - | 4,991 |
Selling, general and administrative expenses | 1,554 | 1,361 | 982 | - | 3,897 |
Equity in holdings' losses | (8,872) | - | - | (22) | (8,894) |
Impairment losses | (8,127) | - | - | - | (8,127) |
Segment (loss) profit | (16,520) | (700) | 1,516 | 329 | (15,375) |
Total assets | 27,066 | 2,095 | 7,489 | - | 36,650 |
Holdings, at equity | 22,828 | - | - | - | 22,828 |
Securities available for sale | 2,073 | - | - | - | 2,073 |
Capital expenditures | 283 | 10 | 92 | - | 385 |
Depreciation and amortization | 153 | 108 | 146 | - | 407 |
(Dollars in thousands) Nine months ended Sept. 30, 2001 |
New Energy | Test and MeasurementInstrumentation | Other | ReconcilingItems | ConsolidatedTotals |
Product revenue | $ - | $ 5,660 | $ - | $ - | $ 5,660 |
Funded research and development revenue | - | - | - | - | - |
Research and product development expenses | 2,221 | 1,017 | - | - | 3,238 |
Selling, general and administrative expenses | 2,382 | 1,432 | 824 | - | 4,638 |
Equity in holdings' losses | (18,832) | - | - | 6,632 | (12,200) |
Segment profit (loss) | 7,303 | 590 | (3,866) | 123 | 4,150 |
Total assets | 56,305 | 2,596 | 12,356 | - | 71,257 |
Holdings, at equity | 47,197 | - | - | - | 47,197 |
Securities available for sale | 6,704 | - | - | - | 6,704 |
Capital expenditures | 684 | 30 | 570 | - | 1,284 |
Depreciation and amortization | 53 | 127 | 1,461 | - | 1,641 |
17
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands) | Test and | ||||
Measurement | Reconciling | Consolidated | |||
Three months ended March 31, 2002 | New Energy | Instrumentation | Other | Items | Totals |
Product revenue | $ - | $ 590 | $ - | $ - | $ 590 |
Funded research and development revenue | 172 | - | - | - | 172 |
Research and product development expenses | 1,102 | 266 | - | - | 1,368 |
Selling, general and administrative expenses | 783 | 501 | 351 | - | 1,635 |
Equity in holdings' losses | (3,115) | - | - | 1,249 | (1,866) |
Impairment losses | (5,282) | - | - | - | (5,282) |
Segment loss from operations before income taxes, equity in holdings' losses and minority interests |
(5,004) |
(670) |
(190) |
- |
(5,864) |
Segment (loss) profit | (8,119) | (670) | 3,412 | 121 | (5,256) |
Total assets | 36,681 | 2,255 | 9,902 | - | 48,838 |
Holdings, at equity | 32,679 | - | - | - | 32,679 |
Securities available for sale | 2,250 | - | - | - | 2,250 |
Capital expenditures | 30 | - | 40 | - | 70 |
Depreciation and amortization | 46 | 36 | 47 | - | 129 |
The following table presents the details of "Other" segment (loss) profit:
Three months ended | Nine months ended | Three months ended | ||||||
(Dollars in thousands) | Sept. 30, 2002 | Sept. 30, 2001 | Sept. 30, 2002 | Sept. 30, 2001 | Mar. 31, | |||
2003 | 2002 | |||||||
Corporate and Other Income (Expenses): | ||||||||
Depreciation and amortization | $ (50) | $ (44) | $ (146) | $(1,461) | $ (55) | $ (47) | ||
Interest expense | (12) | (192) | (36) | (1,253) | (3) | (12) | ||
Interest income | 25 | 214 | 75 | 346 | 13 | 26 | ||
Income from discontinued operations, | ||||||||
net of tax | 379 | - | 379 | - | ||||
Change in accounting principle, net of tax | - | 1,468 | - | 1,468 | ||||
Income tax benefit (expense) | 163 | 3,176 | 2,002 | (1,874) | ||||
Other (expense) income, net | (553) | 329 | (758) | (1,092) | ||||
Income tax benefit | 89 | 3,602 | ||||||
Other expense, net | (289) | (157) | ||||||
Total (expense) income | $ (48) | $4,951 | $ 1,516 | $(3,866) | $ (245) | $3,412 |
During the nine months ended September 30, 2002, First Albany Companies Inc. ("FAC") sold 662,705 shares of the Company's common stock in the public markets. FAC now owns 11,091,040 shares, approximately 31.22% of the Company's common stock.
In July 2001, MTI MicroFuel Cells Inc. ("MTI Micro"), a subsidiary of the Company, entered into a Joint Venture Agreement with E.I. DuPont de Nemours and Company ("Dupont"), a minority shareholder in MTI Micro, to undertake a research and development program funded by the Advanced Technology Program of the National Institute of Standards and Technology ("NIST"). As the program administrator, MTI Micro submits all bills from Dupont to NIST for payment.
In connection with NIST billings, as of September 30, 2002,March 31, 2003, the Company has a liability to Dupont (a minority shareholder in MTI Micro) for approximately $220$55 thousand. This liability is included in the financial statement line "Accrued liabilities - related parties."
Sales of Holdings
From October 1 through November 12, 2002, the Company sold Plug Power and SatCon common stock as follows:
(Dollars in thousands) Company Number of Shares Sold Net Proceeds from Sales Plug Power 203,000 $1,002 SatCon 213,900 262 $1,264
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NYSERDA Award
On April 25, 2002, the Company announced that its subsidiary, MTI Micro, received an award of $500,000 from the New York State Energy Research and Development Authority (NYSERDA). The award, matched by a similar commitment from MTI Micro, will help fund a year-long research program to advance the development and commercialization of direct methanol micro fuel cell technology.
The NYSERDA award will also augment and support a $9.3 million research and development program that is a joint effort of MTI Micro and DuPont. In August 2001, the two companies received an award of $4.6 million for the program from the Advanced Technology Program (ATP) of NIST.
New Chairman and Chief Executive Officer
On October 22, 2002, the Company announced that Dale W. Church was named Chairman and Chief Executive Officer of the Company, succeeding George C. McNamee who resigned his chairmanship and board seat. Further, William P. Acker will no longer serve as President of the Company in order to devote his time entirely as CEO and President of MTI Micro, the rapidly growing micro fuel cell subsidiary.
U.S. Air Force Contract
On October 31, 2002, MTI Instruments, a subsidiary of the Company, announced the award of a multi-year U.S. Air Force requirements contract to provide up to 53 PBS-4100 systems, 12 upgrade kits and 42 amplifiers. As part of the contract fulfillment to date, MTI Instruments has received orders for 14 PBS-4100 systems and related accessories totaling $800,000.
Beacon Power Dividend Distribution
On September 25, 2002, Beacon Power Corporation declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of Beacon common stock. Each Right will entitle shareholders to buy one one-hundredth of a share of a new series of preferred stock at an exercise price of $22.50.
The Rights will be exercisable only if a person or group acquires 15% (30% in the case of Perseus Capital, L.L.C.) or more of Beacon's common stock or announces a tender offer the consummation of which would result in ownership by a person or group of 15% or more of the common stock.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When the Rights first become exercisable, the Company will be entitled to buy from Beacon Power one one-hundredth of a share of a new series of Series A Junior Participating Preferred Stock at a purchase price of $22.50 or, at the option of the holder, a number of shares of Beacon common stock having an aggregate market value equal to twice the exercise price. If Beacon Power is involved in a merger or other business combination, or sells 50% or more of its assets or earning power, at any time after the Rights become exercisable, the Rights will be modified so as to entitle a holder to buy a number of shares of common stock or the acquiring company having a market value of twice the exercise price of each Right.Until ten days after the acquisition by a person or group of beneficial ownership of 15% (30% for Perseus) or more of Beacon Power's common stock, the Rights are redeemable for $0.01 per Right at the option of Beacon Power's Board of Directors.The dividend distribution of the Rights was scheduled for October 7, 2002, payable to shareholders of record on that date. The Rights will expire approximately ten years later on September 30, 2012. The Rights distribution is not taxable to shareholders.
Based on the description of the transaction above, the Company will receive Rights to purchase the equivalent of 44,108 shares of Series A Junior Participating Preferred Stock at $22.50 per share.
In AugustJune 2001, the FASBFinancial Accounting Standards Board ("FASB") issued SFASStatement of Financial Accounting Standards ("SFAS") No. 143, "AccountingAccounting for Asset Retirement Obligations.Obligation." SFAS No. 143 requires entities to record the fair Effect of Recent Accounting Pronouncements value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred ifincurred. When the liability is initially recorded, an entity capitalizes a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part ofcost by increasing the carrying amount of the long-lived asset. Over time, the liability is accreted to its present value each period and the
18
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not believe the adoption of this Statement willdid not have a material impact on its consolidated financial statements.
OnIn July 30, 2002, the FASB issued SFAS No. 146, "AccountingAccounting for Costs Associated with Exit or Disposal Activities." This Statement requires companies to recognizeActivities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities when they are incurred rather than at the date ofand nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a commitment to an exit or disposal plan. The provisions of this Statement areRestructuring). This statement is effective for exist orexit and disposal activities that are initiated after December 31, 2002. The adoption of this Statement did not have a material impact on its consolidated financial statements.
In November 2002, with early application encouraged.FASB issued FASB Interpretation No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
The CompanyIndirect Guarantees of Indebtedness of Others,an interpretation of
FASB Statement No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45 clarifies the requirements
of SFAS No. 5,Accounting for Contingencies, relating to the
guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 covers guarantee contracts that have any of the following four characteristics: (a) contracts that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, a liability, or an equity security of the guaranteed party (e.g., financial and market
value guarantees), (b) contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an obligating agreement (performance guarantees), (c) indemnification agreements that contingently require the indemnifying party (guarantor) to make
payments to the indemnified party (guaranteed party) based on changes in an underlying that is related to an asset, a liability, or an equity security of the indemnified party, such as an adverse judgment in a lawsuit or the imposition of additional taxes due to either a change in the process of reviewing the provisionstax law or an adverse interpretation of the new standardtax law, and (d) indirect guarantees of the indebtedness of others. FIN 45 specifically excludes certain guarantee contracts from its scope. Additionally, certain guarantees are not subject to determine its potential impact.FIN 45's provisions for initial recognition and measurement but
19
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
are subject to its disclosure requirements. The initial recognition and measurement provisions are effective for guarantees issued or modified after December 31, 2002. The adoption of the Standard had no impact on the Company's consolidated financial statements and the Company began making required disclosures in its consolidated financial statements beginning December 31, 2002. The Company has made appropriate disclosures regarding warranties and future guarantees issued or modified will be recognized in the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148,Accounting for Stock Based Compensation-Transition and Disclosure, an amendment to FASB Statement No. 123. This Statement amends SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, SFAS No. 148 amends APB Opinion No. 28,Interim Financial
Reporting, to require disclosure about those effects in interim financial reporting. For entities that voluntarily change to the fair
value based method of accounting for stock-based employee compensation, the transition provisions are effective for fiscal
years ending after December 15, 2002. For all other companies, the disclosure provisions and the amendment to APB No. 28 are effective for interim periods beginning after December 15, 2002. The Company does not intend to adopt the transition provisions of the Statement and began making all required disclosures as of December 31, 2002.
In January 2003, FASB issued FASB Interpretation No. 46,Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of the Standard, effective January 1, 2003, had no impact on the Company's
consolidated financial statements and related disclosures.
20
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Investment Company Act
Our equity holdings and securities available for sale may constitute investment securities under the Investment Company Act. In general, a company may be deemed to be an investment company if it owns investment securities with a value exceeding 40% of its total assets, subject to certain exclusions and exemptions. Investment companies
are subject to registration under, and compliance with, the Investment Company Act unless a particular exemption or safe harbor provision applies. If we werethe Company was to be deemed an investment company, wethe Company would become subject to the requirements of the Investment Company Act. As a consequence, wethe Company would be prohibited from engaging in certain businesses or issuing certain securities, certain of our contracts might be voidable, and wethe Company might be subject to civil and criminal penalties for noncompliance.
Until fiscal 2001, the Company qualified for a safe harbor exemption under the Investment Company Act based upon the level of ownership of
shares of Plug Power and influence over its management or policies.
However, since wethe Company sold some of ourits shares of Plug Power during fiscal 2001, this safe harbor exemption is no longer available.
On December 3, 2001, wethe Company made an application to the Securities and Exchange Commission ("SEC") requesting that they either declare that we arethe Company is not an investment company because we areit is primarily engaged in
another business or exempt usit from the provisions of the Investment Company Act for a period of time. This application is pending. If
our the Company's application is not granted, wethe Company will have to find another safe harbor or exemption that weit can qualify for, which may include a one-year safe harbor granted by the Investment Company Act, or become an investment company
subject to the regulations of the Investment Company Act.
If we were deemed to be an investment company and could not find another safe harbor or exemption and failed to register as an investment company, the SEC could require us to sell our interests in
Plug Power SatCon and Beacon,SatCon, until the value of our holdings is reduced
reduced below 40% of total assets. This could result in sales of our
holdings in quantities of shares at depressed prices and we may never realize anticipated benefits from, or may incur losses on, these sales.
Further, we may be unable to sell some holdings due to contractual or legal restrictions or the inability to locate a suitable buyer. Moreover, we may incur tax liabilities when selling assets.
21
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Litigation
On September 9, 1998, Barbara Lawrence, the Lawrence Group, Inc.
("Lawrence"), and certain other Lawrence-related entities ("Plaintiffs") initially filed suit in the Bankruptcy Court and the United States BankruptcyDistrict Court for the Northern District of New York which were subsequently consolidated in the District Court, against First Albany Corporation, Mechanical Technology, Dale Church, Edward Dohring, Alan Goldberg,
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
George McNamee, Beno Sternlicht, Marty Mastroianni (former President and Chief Operating Officer of the Company), and 33 other individuals ("Defendants") who purchased a total of 820,909 shares of the Company's stock from the Plaintiffs. The case concerns the Defendants' 1997 purchase of Mechanical Technology shares from the Plaintiffs at the price of $2.25 per share.share ($0.75 per share post split). FAC acted as Placement
Agent for the Defendants in the negotiation and sale of the shares and in proceedings before the Bankruptcy Court for the Northern District of New York, which approved the sale in September 1997.
Plaintiffs claim that the Defendants failed to disclose material inside information concerning Plug Power, LLC to the Plaintiffs and therefore the $2.25 per share ($0.75 per share post split) purchase price was unfair. Plaintiffs are seeking damages of $5 million plus punitive damages and costs. In April 1999, Defendants filed a motion to dismiss the amended complaint, which was denied by the Bankruptcy Court. On appeal in October 2000, Plaintiffs' cause of action was dismissed by the United States District Court for the Northern District of New York. In November 2000, Plaintiffs filed an appeal of that dismissal with the United States Court of Appeals for the Second Circuit. In June 2002, the Second Circuit Court of Appeals reversed the District Court decision and remanded the case for further consideration. A motion to reconsider the decisionconsideration of the Plaintiff's claims as motions to modify the Bankruptcy Court of Appeals hassale order. The Plaintiff's claims have now been filed and is pending.referred back to Bankruptcy Court for such consideration. The
Company believes the claims have no merit and
intends to defend them vigorously.The Company cannot predict the
outcometheoutcome of the claims nor reasonably estimate a range of possible loss given the current status of the litigation. Accordingly, no amounts have been reserved for this matter.
Leases
The Company and its subsidiaries lease certain manufacturing, laboratory and office facilities. The leases generally provide for the Company to pay either increases over a base year level for taxes, maintenance, insurance and other costs of the leased properties or the Company's allocated share of insurance, taxes, maintenance and other costs of leased properties. The leases contain renewal provisions.
22
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSISNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Future minimum rental payments required under noncancelable operating leases are (dollars in thousands): $418 remaining in 2003; $607 in 2004, $547 in 2005, $429 in 2006, $316 in 2007 and $605 thereafter.
Warranties
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSA reconciliation of changes in product warranty liabilities is as follows:
Three months ended | ||
Mar. 31, | Mar. 31, | |
(Dollars in thousands) | 2003 | 2002 |
Balance, beginning of period | $53 | $81 |
Accruals for warranties issued | 13 | 6 |
Accruals related to pre-existing warranties | ||
(including changes in estimates) | - | - |
Settlements made (in cash or in kind) | (1) | (7) |
Balance, end of period | $65 | $80 |
Licenses
The followingCompany licenses, on a non-exclusive basis, certain DMFC technology from Los Alamos National Laboratory. Under this agreement, the Company is management's discussionrequired to pay future minimum annual license fees of (dollars in thousands): $200 in 2004 and analysis$250 in 2005. Once products are being sold, royalties will be based on 2% of the first $50 million of net sales, 1% on net sales in excess of $50 million but less than $100 million and .5% on net sales in excess of $100 million. License payments made in any year can be applied against royalties due and total annual fees in any year shall not exceed $1 million.
Employment Agreements
The Company has employment agreements with certain employees that
provide severance payments and accelerated vesting of certain significant factors, which have affectedoptions upon termination of employment under certain circumstances, as
defined. As of March 31, 2003, the Company's earnings duringpotential minimum
obligation to these employees was approximately $971 thousand.
Sales of Securities Available for Sale
From April 1 through May 14, 2003, the periods included in the accompanying, consolidated statementsCompany sold securities available for sale as follows:
(Dollars in thousands, except share data) | ||
Number of | Net Proceeds | |
Company | Shares Sold | From Sales |
Plug Power | 212,647 | $1,057 |
SatCon | 67,500 | 47 |
$1,104 |
23
Item 2. Management's Discussion and Analysis of income.Financial Condition and Results of Operations
Overview
The Company is primarily engaged in the development and commercialization of direct methanol micro fuel cells ("DMFCs") through its subsidiary MTI MicroFuel Cells Inc. ("MTI Micro")and in the designdevelopment and manufacturingsales of precision instrumentationinstruments through its subsidiary MTI Instruments, Inc. ("MTI Instruments"). Mechanical TechnologyThe Company also co-founded and retains a significantan interest in Plug Power Inc. ("Plug Power") (NASDAQ: PLUG), a leading manufacturer of fuel cells. Mechanical TechnologyThe Company also has an interest in SatCon Technology Corporation ("SatCon") (NASDAQ: SATC), which develops power electronics and energy management products, and Beacon Power Corporation (NASDAQ: BCON), which develops flywheel energy storage systems.products.
MTI Micro is developing directcommercializing its micro fuel cell power systems as future power sources for portable electronics in commercial and military markets, with an initial product planned for 2004.
A micro fuel cell is a portable power source for electronic devices that creates useable electrical energy through a chemical reaction with a catalyst. MTI Micro's proprietary micro fuel cell power systems use methanol, fuel cellsa common alcohol with a high energy density, which allows its systems to be lightweight and provide power for longer periods of time between refueling. MTI Micro's systems can be instantly refueled without the goal of commercializationneed for a power outlet or a lengthy recharge and do not contain the heavy toxic metals found in 2004. many batteries.
MTI Micro has built a strategic partnership with DuPont, significant intellectual propertynumber of system prototypes that demonstrate size reductions, performance improvements, the ability to operate in any orientation, operation at a range of voltages and, most recently, the use of 100 percent methanol fuel - eliminating the need to carry water in the micro fuel cell industry, an experienced leadership team comprised of seasoned business executives and successful entrepreneurs, and an industry leading team of researchers and scientists.cartridge, thereby achieving greater energy density.
MTI Instruments specializes in the design, manufacture and servicesale of non-contact precisionhigh-performance test and measurement equipment.instruments and systems. MTI Instruments' three product groups provide a rangeprovide: electronic, computerized general gaging instruments for position, displacement and vibration applications; semiconductor products for wafer characterization of instrumentation devices for science, engineeringsemi-insulating and manufacturing: semiconductor systems, jet enginesemiconducting wafers; and portable balancing systems and non-contact sensing instruments. Most recently, MTI Instruments has focused development efforts on measurement systems primarily for the semiconductor industry and is working on advancing wafer metrology systems to develop more multi-purpose devices.aircraft engines. MTI Instruments' largest customers include industry leaders in the computer, electronic, semiconductor, automotive, aerospace, aircraft and bioengineering fields.
From inception through September 30, 2002,March 31, 2003, the Company has incurred net losses of $70.3$61.9 million and expects to incur losses as it continues micro fuel cell product development and commercialization programs. The Company expects that losses will fluctuate from quarteryear to quarteryear and that such fluctuations may be substantial as a result of, among other factors, the number of prototypes produced, gains on sales of holdings and the operating results of MTI Instruments.
Instruments and MTI Micro.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Significant Judgments and Estimates
The Company's discussion and analysis of its financial condition and results of its operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses and related disclosure of assets and liabilities.during the reporting periods. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, inventories, holdings and income taxes. The Company bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
conditions.
The CompanyManagement believes that the following are the Company's most critical accounting policies affect its more significant judgmentsaffected by the estimates and estimates usedassumptions the Company must make in the preparation of its consolidated financial statements.statements and related disclosures:
Revenue Recognition.The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition."Revenue Recognition. Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer or distributor has occurred, at which time title generally is passed to the customer or distributor, and we havethe Company has determined that collection of thea fixed fee is probable. Title to the product generally passesprobable, all of which occur upon shipment of the product, as the products are shipped FOB shipping point. We provide for a warranty reserve at the timeproduct. If the product requires installation to be performed by the Company, all revenue related to the product is recognized. We performdeferred and recognized upon the completion of the installation.
The Company performs funded research and development and product development for government agencies and companies under cost reimbursement contracts.contracts, which generally require the Company to absorb up to 50% of the total costs incurred. Cost reimbursement contracts provide for the reimbursement of allowable costs. Revenue from reimbursement contracts isRevenues are generally recognized as services are performed. In these contracts, we receive periodic progress payments and retain the rightsin proportion to the intellectual property developed in gove rnment contracts. All payments madereimbursable costs incurred. When government agencies are providing funding they do not expect the government to be the Company for work performed on contracts with agenciesonly significant end user of the U.S. governmentresulting products. These contracts do not require delivery of products that meet defined performance specifications, but are subjectbest efforts arrangements to audit and adjustment by the Department of Commerce. Adjustments are recognized in the period made. Any losses incurred in performing fundedachieve overall research and development projectsobjectives. Included in accounts receivable are recognized as funded researchbilled and development expenses as incurred.unbilled work-in-progress on cost reimbursed contracts.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates (Continued)25
Inventory.The Company writes down its inventory for estimated obsolescence orunmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Holdings.TheImpairment of Holdings and Securities Available for Sale.The Company holds minority interests in companies having operations or technology in areas within its strategic focus, all of which are publicly traded and have highly volatile share prices. The Company records a holdingan impairment charge when it believes a holding or security available for sale has experienced a decline in value that is other than temporary. If the Company determines that the decline in value is temporary, unrealized losses, net of income taxes, would be reported as a separate component of shareholders' equity.
Future adverse changes in market conditions or poor operating results of underlying holdings or securities available for sale could result in significant losses and an inability to recover the carrying value of the holdings,asset, thereby possibly requiring an impairment charge in the future.
Income Taxes. As part of the process of preparing our consolidated financial statements, we arethe Company is required to estimate ourits income taxes in each of the jurisdictions in which we operate.it operates. This process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Included in this assessment is the determination of net operating loss carryforwards. These differences result in a net deferred tax asset. WeThe Company must assess the likelihood that ourits deferred tax assets will be recovered from future taxable income and, to the extent that we believethe Company believes that recovery is not likely, welikely; it must establish a valuation allowance.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance due to uncertainties related to our ability to utilize certain net deferred tax assets, primarily consisting of built-in-losses on holdings and net operating losses and credits which may bebeing carried forward, before they expire.forward. The valuation allowance is based on estimates of the recoverability of certain net operating losses. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations. The Company has recorded a full$1.836 million valuation allowance against its net deferred tax assets of $7.270$4.732 million as of September 30, 2002,March 31, 2003, due to uncertainties related to its ability to utilize certain of these assets. The valuation allowance is based on estimates of taxable income and the period over which its deferred asset s will be recoverable.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS26
Results of Operations
Change in Accounting for SatCon Technology Holding.Three Months Ended March 31, 2003 Compared to March 31, 2002
The Company's holdings in SatCon were accounted for on a one-quarter lag under the equity methodfollowing is management's discussion and analysis of accounting from January 1, 2002 through July 1, 2002. On July 1, 2002, the Company determined that it no longer has the ability to exercisecertain significant influence over the operating and financial policies of SatCon as a result of waivingfactors, which have affected the Company's right to nominate and recommend directors to SatCon's board and our reductionresults of ownership in SatCon and, therefore, has accountedoperations for its investment in SatCon since July 1, 2002 using the fair value method as set forth in SFAS No. 115, "Accounting for Certain Debt and Equity Securities." The Company is no longer required to record its share of any losses from SatCon and the investment is carried at fair value and designated as available for sale and any unrealized holding gains or losses are to be included in stockholders' equity as a component of accumulated other comprehensive income (loss).
Change in Year-End.On February 13, 2002, the Company changed its fiscal year-end from September 30 to Decemberthree-months ended March 31, effective with the calendar year beginning January 1, 2002. A three-month transition period from October 1, 2001 through December 31, 2001 (the "Transition Period") precedes the start of the 2002 fiscal year. "2001" refers to fiscal periods in the year ended September 30, 2001 and the Transition Period refers2003 compared to the three monthsthree-months ended DecemberMarch 31, 2001. This new fiscal year makes the Company's annual and quarterly reporting periods consistent with those used by Plug Power Inc. and permits the Company to continue to account for its holdings in Plug Power on a timely basis.2002.
Product Revenue. Product revenue at MTI Instrumentsin the Test and Measurement Segment for the three months ended September 30, 2002March 31, 2003 totaled $1.018$1.283 million compared to $1.743$.590 million for the same period in the prior year, a decreasean increase of $.725$.693 million, or 41.6%117.5%. This decreaseincrease is primarily the result of decreasedincreased sales to OEMAviation and PBSGeneral Gaging customers of $.606$.469 and $.137$.127 million, respectively, partially offset byand other product line net increases of $.018$.097 million. The OEM reduction reflects the downturn in the OEM markets served by MTI Instruments.
Sales for the first nine months of 2002 versus the same period in 2001 have decreased by $2.457 million to $3.203 million in 2002 from $5.660 million in 2001, a 43.4% decrease. The nine month decrease is the result of decreased sales to OEM customers of $2.427 million, semiconductor customers of $.097 million and other net decreases in other product lines of $.042 million offset by increases to Fotonic Sensor customers of $.109 million.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Continued)
Funded Research and Development Revenue. Funded research and development revenue was $.489 millionin the New Energy Segment for the three months ended September 30, 2002. Funded research and development revenueMarch 31, 2003 totaled $.522 million compared to $.172 million for the first nine monthssame period in the prior year, an increase of 2002 totaled $1.046 million.$.350 million, or 203.5%. These amounts
reflect billings and amounts to be billed under government contracts for the research and development of micro fuel cells for use in portable electronics. This increase is the direct result of the NIST and NYSERDA contracts being fully underway compared to the prior year where the NIST contract was just starting.
Cost of Product Revenue.Cost of product revenue in Test and Measurement for the three months ended September 30, 2002 decreasedMarch 31, 2003 increased by $.210$.143 million or 31.7%34.7% from $.663$.412 million for the same period in the prior year to $.453$.555 million. The decreaseincrease was primarily due to decreasedincreased sales.
Gross profit from product revenue decreased to 55.5%as a percentage of product revenue increased to 56.7% for the three months ended September 30, 2002March 31, 2003 from 62% of product revenue for the same period30.2% in the prior year.
Gross profits decreased The gross profit percentage increased for the three months ended September 30, 2002March 31, 2003 due to highera change in the product mix at MTI Instruments and a reduction in overhead absorption resulting from decreased sales levels in 2002.
Gross profit from product revenue decreased by 10.2%as compared to 46.8% from 57.0% for the first nine months of 2002 versus the same period in 2001. The nine month change is the result of higher2002 where overhead absorption resulting from decreasedwas higher on lower overall sales levels.
Funded Research and Product Development Expenses.Funded research and product development expenses were $.761in New Energy increased by $.475 million or 137.7% to $.820 million for the three months ended September 30, 2002. Funded research and development expensesMarch 31, 2003 from $.345 million for the first nine months of 2002 totaled $1.778 million.same period in the prior year. The increased costs are attributable to funded research and productincreased development expenses from government programs.costs related to MTI Micro moving toward commercialization.
Unfunded Research and Product Development Expenses. Unfunded research and product development expenses decreased by $.029$.072 million or 2.6%7.0% to
$1.095.951 million for the three months ended September 30, 2002March 31, 2003 from $1.124$1.023 million for the same period in the prior year. This decrease reflects a $.116$.038 million reduction in product development costs at MTI Instrumentsfor Test and Measurement due to reduced spending on development. The development projects reachingof MTI Instrument's newest product, the product introduction phase Microtrak II, was completed
27
and introduced during the third quarter of 2002. This decrease also includes a $.087$.034 million increase for MTI Micro.
Unfunded research and development expenses for the first nine months of 2002 versus the same perioddecrease at New Energy as more costs are allocated to funded programs in 2001 has remained stable at $3.213 million2003 than in 2002 and $3.238 million in 2001.2002.
Selling, General and Administrative Expenses.Selling, general and administrative expenses decreased $.362$.215 million to $1.239$1.420 million for the three months ended September 30, 2002March 31, 2003 as compared to $1.601
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Continued)
$1.635 million for the same period in the prior year, a 22.6%13.1% decrease.
Selling, general and administrative expenses for the first nine months of 2002 totaled $3.897 million representing a 16% decrease from $4.638 million during the same period in 2001. This decrease is primarily the result of reduced expense for incentive compensation, since future incentives are expecteda reduction in staffing levels at MTI Instruments and an increase in recovery of costs related to be in the form of stock options.
government contracts at MTI Micro.
Operating Loss.Operating loss increased $.396decreased $.712 million to an operating loss of $2.041$1.941 million for the three months ended
September 30, 2002March 31, 2003 as compared to $1.645$2.653 million for the same period in the prior year, a 24.1% increase.26.8% decrease. This decrease in loss increase results primarily from decreasesincreases in gross profits from product revenues, reduced staffing levels at MTI Instruments.
The first nine months of 2002 resulted in an operating loss of $6.342 million,Instruments and an increase of $1.691 million over the $4.651 million operating loss for the same period in 2001. This loss increase results primarily from decreases in gross profitsfunded research and development revenue at MTI Instruments.Micro.
Derivative (Losses) Gains.TheLoss on Derivatives.The Company recorded gains of $0 million and $.922 million on derivative accounting for Company's own stock for the three months ended September 30, 2002 and 2001, respectively. The Company also recorded net losses of $.005 million$6 thousand and $.459 million$167 thousand on derivative accounting for the three months ended September 30,March 31, 2003 and 2002, and 2001, respectively. Changes in derivative fair values, calculated using the Black-Scholes pricing model, are recorded on a quarterly basis.
The first nine months of 2002 and 2001 included gains on derivative accounting for Company's own stock of $0 million and $.922 million, respectively, and net losses on derivative accounting of $.183 million and $.537 million, respectively.
Gain (Loss) on Sale of Holdings.ResultsHoldings, Net.Results in the prior year for the three months ended September 30,March 31, 2002 include a $.881$2.241 million gain on the sale of holdings compared toholdings. The average selling price per share of Plug Power and SatCon was $9.67 and $6.04, respectively, in 2002.
Gain on Sale of Securities Available for Sale, Net.Results for the same period in the prior year which includedthree months ended March 31, 2003 include a $2.171 million loss.
The first nine months of 2002 includes a $5.491$1.720 million gain on the sale of holdings compared to the same periodsecurities available for sale. The average selling price per share of Plug Power and SatCon was $5.26 and $1.28, respectively, in the prior year which included a gain of $28.838 million.2003.
Impairment Losses.ForLosses.Impairment losses were not recorded during the three months ended September 30,March 31, 2003. For the three months ended March 31, 2002, the Company recorded a $.945$5.282 million charge for impairment losses for other than temporary decline in the value of certain available-for-sale securities ($.8883.484 million) and equity method investments ($.0571.798 million). For the nine months ended September 30, 2002, impairment
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Continued)
charges totaled $8.127 million, $2.475 million related to equity method investments and $5.652 million for availability-for-sale securities.
Interest Expense.Results during the three and nine months ended September 30,March 31, 2003 and 2002 were affected by interest expense of $.012 million$3 and $.036 million, respectively, compared to $.192 million and $1.253
million, respectively, for the same periods in the prior year.$12 thousand, respectively. The decrease in expense results from decreases in the amount of debt outstanding and prime interest rate.
Equity in Holdings' Losses, Net of Tax.In the three and nine months ended September 30,March 31, 2002, the Company recorded a $2.654 million and
$8.894$1.866 million loss, net of tax, respectively, from the recognition of the Company's proportionate share of losses in equity holdings compared to $4.206 million and $12.200 million, respectively, net of tax, for the comparable periods in the prior year.
holdings. Equity in
28
holdings' losses results from the Company's minority ownership in certain companies, which are accounted for under the equity method
of accounting. Under the equity method of accounting,
the Company's proportionate share of each company's operating losses and amortization of the Company's net excess investment over its equity in each company's net assets is included in equity in
holdings' losses. As a result of adopting SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002, the Company no longer amortized the goodwill associated with its equity holdings in SatCon. Equity in holdings' losses for the three and nine months ended September 30,March 31, 2002 and 2001 includes the results from the Company's minority ownership in Plug Power and SatCon. Effective July 1, 2002, the Company accounts for its investmentCompany's holdings in SatCon and as of December 20, 2002, the Company's holdings in Plug Power are accounted for using the fair value method as set forth in SFAS No. 115, "AccountingAccounting for Certain Debt and Equity Securities."Securities. The Company is no longer required to record its share of any losses from SatCon or Plug Power and the investment isholdings are carried at fair value, and designated as available for sale, and any unrealized holding gains and losses are to be included in stockholders' equity as a component of accumulated other comprehensive income (loss). The Company expects Plug Power to continue to invest in development of their products and services, and to recognize operating losses, which will result in future charges recorded by the Company to reflect its proportionate share of such losses.
Equity in holdings' losses includes a loss, before taxes, from Plug Power of $2.327$2.691 million and $7.762 million, respectively, for the three and nine months ended September 30, 2002 compared to $4.477 million and $15.119 million, respectively, for the three and nine
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Continued)
months ended September 30, 2001. The decrease is a combination of Plug Power's reduction in net losses for 2002 compared to 2001 combined with the Company's decrease in ownership of Plug Power since 2001.March 31, 2002. Equity in holdings' losses, before taxes, for the three and nine months ended September 30,March 31, 2002 also includes our proportionate
share of losses from SatCon of $.327 million and $1.110 million, respectively, compared to $.302 million and $1.647 million, respectively, for the three and nine months ended September 30, 2001;
and embedded difference (the difference between the carrying value of the Company's holdings and its interest in the underlying equity) amortization of $0 and $0, respectively, for the three and nine months ended September 30, 2002 compared to $.689 million and $2.066 million, respectively, for the three and nine months ended September 30, 2001.$.424 million. SatCon was accounted for on a one-quarter lag until the accounting was changed to fair value from the equity method on July 1, 2002. Plug Power was accounted for under the equity method until the accounting was changed on December 20, 2002 and includes results of SatCon through June 29, 2002.
Cumulative Effect of Change in Accounting Principle.On June 30, 2001, the Company began accounting for warrants to purchase the Company's common stock designated as a liability in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," and, therefore, recorded a cumulative unrealized gain, net of tax, of $1.468 million.fair value.
Income Tax (Benefit) Expense.TheBenefit.The income tax ratesbenefit rate for the three and nine months ended September 30, 2002 are (3.68)% and (11.31)%March 31, 2003 is 33.21% compared to the ratesrate for the three and nine months ended September 30, 2001March 31, 2002 of (39.94)% and 41.65%40.11%. These tax rates are primarily due to losses generated by operations, offset by a full valuation reserve recorded against net deferred tax assets as of September 30, 2002.operations. The valuation allowance at September 30,March 31, 2003 and December 31, 2002 is $7.270 million and at September 30, 2001 was $1.144 million. During the quarter ended
September 30, 2002, the valuation allowance was increased through the statement of operations by $2.459 million and decreased by $.015 million through paid-in-capital, for a net increase of $2.444 million. Year to date in 2002, the valuation allowance was increased through the statement of operations by $6.280 million and decreased by $.154 million through paid-in-capital, for a net increase of $6.126$1.836 million. The Company determined that based on the "start up" nature of its micro fuel cell operations, which continues to generate losses, and the reduced built-in gain associated with its Plug Power holdings, it was more likely than not that the ultimate recognition of certain deferred tax assets would not be realized.
Further, as a result of ownership changes in 1996, the availability of $1.467 million of net operating loss carryforwards to offset future taxable income will be limited pursuant to the Internal Revenue Code.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIESLiquidity and Capital Resources
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
InventoryThe Company has incurred significant losses as it continues micro fuel cell product development and accounts receivable (from product revenue) turnover ratioscommercialization programs. The Company expects that losses will fluctuate from year to year and their changes forthat such fluctuations may be substantial as a result of, among other factors, the ninenumber of prototypes produced, gains on sales of holdings and the operating results of MTI Instruments and MTI Micro. As of March 31, 2003, the Company had an accumulated deficit of $61.937 million. During the three months ended September 30 are as
follows:
2002 | 2001 | Change | |
Inventory | 0.85 | 1.41 | (0.56) |
Accounts receivable (for product revenues) | 5.88 | 5.10 | .78 |
The changeMarch 31, 2003, the Company incurred a loss of $63 thousand and used cash in the inventory turnover ratio is the result of sales reduction and inventory levels for new semi-conductor products.
The changeoperating activities totaling $1.797 million. This cash use in the accounts receivable turnover ratio is the result of the timing of sales.
Inventories at September 30, 2002 of $1.360 million reflect inventory levels for MTI Instruments required to support expected sales levels in 2002.
Working capital of $8.813 million at September 30, 2002 reflects a $3.096 million decrease from $11.909 million at December 31, 2001. This decrease reflects $6.905 million net cash used in operating
activities offset2003 was funded by $8.747 million in proceeds from sale of holdings a $4.984 million decrease in fair value of Beacon Power holdings and a $2.315 million decrease in deferred income tax assets.
At September 30, 2002, cash and cash equivalents were $4.652 million versus $4.127 million at December 31, 2001. Net cash used by operating activities for the nine months ended September 30, 2002 amounted to $6.905 million, as compared to $5.362 million in the prior year. Accounts receivable increased due to the timing of sales during the quarter. Accounts receivable totaled $1.003 million as of September 30, 2002 as compared to $.902 million as of December 31, 2001, or an 11.2% increase.
As of September 30, 2002, the Company had a $10 million Credit Agreement with KeyBank, N.A. dated as of August 10, 2001 ("the $10 million Credit Agreement"). As of September 30, 2002, the Company had $1 million outstanding under this line of credit. If the market value of Plug Power common stock falls below $8 per share the facility is reduced to $5 million and if the value falls below $7 per share the facility is reduced to zero.
As of September 30, 2002, the market value of Plug Power common stock was $4.79 per share, therefore no credit is currently available under this line of credit. In accordance with the $10 million Credit Agreement, the Company deposited $1 million into its debt service fund to cover the outstanding debt balance.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition (Continued)
The $10 million Credit Agreement requires the Company to meet certain covenants, including maintenance of a debt service reserve account
(equal to 3 months of interest payments on outstanding debt), minimum
Plug Power share price and pledge additional collateral and maintain
an additional collateral value, if required, based on the Plug Power share price falling below $10 per share. Additional collateral
consisting of 500,000 shares of SatCon common stock was pledged in August 2001, when the market value of Plug Power common stock fell
below $10 per share.totaling $2.776 million. The Company was in compliance with these covenantsexpects to continue to incur losses as of September 30, 2002.it develops and
Capital spending during the first nine months of fiscal 2002 was $.385 million, a decrease29
commercializes micro fuel cells and it expects to continue funding its operations from the comparable period in 2001 where capital spending totaled $1.284 million. Capital spending during fiscal 2002 included furniture, computers, software and laboratory equipment. Total additional capital spending during fiscal 2002 is
expected tosales of holdings unless other sources of funding can be approximately $.206 million for computers, furniture, facilities fit-up, laboratory and manufacturing equipment.
The Company leases equipment, office and laboratory space under operating leases. Future minimum rental payments, as of September 30, 2002, under the operating leases with non-cancelable terms are as follows:
(Dollars in Year Ending December 31, thousands) | |
2002 | $ 114 |
2003 | 457 |
2004 | 451 |
2005 | 463 |
2006 | 389 |
Thereafter | 921 |
Total operating lease commitments | $2,795 |
The Company anticipates barring unforeseen circumstances, that it will be able to meet the liquidity needs of its continuing operations for the
next year from current cash resources, government contract revenues,cash flow generated by operations, sale of assets (securities available for sale) and equity financings, and sale of assets.if deemed appropriate. However, there can be no assurance as to the future stock prices or performance of Plug Power, SatCon or Beacon, or that the Company will not require additional financing within this time frame or that any additional financing will be available to the Company on terms acceptable to the Company, if at all. Cash used in operations is expected to total approximately $10.8 million for 2003. Further, cash used for capital expenditures is expected to total approximately $2.3 million in 2003. Based on current cash flow and revenue projections, and assuming current market values, the sale of available for sale securities and current cash and cash equivalents should be adequate to fund operations for another two to three years. The Company will also seek to provide additional resources through equity offerings and ad ditional government revenues.
Proceeds from the sale of assets are subject to fluctuations in the market value of Plug Power and SatCon as well as limitations on the ability to sell shares arising under securities laws and other agreements detailed below.
On December 17, 2001 the Company entered into a plan under
Rule 10b5-1 (the "Plan") pursuant to which the Company will sell shares of Plug Power. The Plan provides for the sale of, and the Company intends to sell, up to 1.2 million shares of Plug Power
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition (Continued)
during calendar 2002 and up to 2 million shares of Plug Power during calendar 2003. As of September 30, 2002, 900,000 shares of Plug Power have been sold pursuant to the Plan. Under the terms of the Plan, the Company may terminate the Plan at any time.
On April 25, 2002, the Company announced that its subsidiary, MTI Micro, received an award of $500,000 from the New York State Energy Research and Development Authority (NYSERDA). The award, matched by a similar commitment from MTI Micro, will help fund a yearlong research
program to advance the development and commercialization of direct
methanol micro fuel cell technology.
The NYSERDA award will augment and support the $9.3 million research and development program that is a joint effort of MTI Micro and DuPont. The Company's share of the Advanced Technology Program
("ATP") awarded by the National Institute of Standards and Technology ("NIST") is $3.3 million. The Company began incurring costs under this program during December 2001. The award is to carry out a three-year, $9.3 million cost-shared program to research and develop a micro fuel cell for use in portable electronics.
Proceeds from the sale of assets are subject to fluctuations in the market value of Plug Power, SatCon and Beacon as well as securities laws and other agreements detailed below.
From October 1 through November 12, 2002, the Company sold Plug Power and SatCon common stock as follows:
(Dollars in thousands) Company | Number of Shares Sold | Net Proceeds from Sales |
Plug Power | 203,000 | $1,002 |
SatCon | 213,900 | 262 |
$1,264 |
The future sale of holdings in Plug Power SatCon and Beacon PowerSatCon will generate taxable income or loss which is different from book income or loss due to the tax bases in these assets being significantly different from their book bases and the available
net federal operating loss carryforwards available to offset income.
bases. Book and tax bases as of September 30, 2002March 31, 2003 are as follows:
Holdings Shares Held Average Book Basis Average Tax Basis Plug Power 11,094,315 $2.06 $0.96 SatCon 987,500 1.34 7.06 Beacon Power 4,410,797 .17 2.06
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average Average Holdings Shares Held Book Cost Basis Tax Basis Plug Power 7,573,227 $1.78 $0.96 SatCon 648,600 1.34 7.06Financial Condition (Continued)
As of September 30, 2002,March 31, 2003, the Company has holdings in Plug Power SatCon and Beacon Power securities. Plug Power and SatCon aresecurities. Each of these securities is currently traded on the Nasdaq National Market (NASDAQ: PLUG and SATC) and Beacon Power is traded on the Nasdaq Small Cap Market (NASDAQ: BCON). These securities are therefore subject to stock market conditions. When acquired, each of these securities was unregistered.
On June 11, 2002, Beacon Power was delisted from the Nasdaq National Market System ("NMS") because it was consistently trading at less than $1.00 per share.
On July 18, 2002, Beacon announced it had received approval from the Nasdaq Small Cap Market for the quotation of its shares. Beacon may become eligible to request a transfer back to the NMS if by March 10, 2003 it meets the closing bid price test by maintaining a $1 closing bid price for 30 consecutive trading days, and has maintained compliance with all other continued listing requirements on that market. If it does not achieve these tests, then
thereafter, it may be listed on the NMS only if it meets all the normal criteria for initial inclusion in the NMS. Beacon can continue the quotation of its shares on the Small Cap Market until March 10, 2003. If it fails to meet the closing bid price test of $1.00 per share for at least ten consecutive trading days by March 10, 2003, then Beacon will no longer qualify to be quoted on the Small Cap Market, and would need to apply to be quoted on the Over the Counter Bulletin Board.
In February 2000, SatCon registered the securities acquired by the Company on a Form S-3. The stock in Plug Power and Beacon Power are
is considered "restricted securities" as defined in Rule 144 and may be sold in the future without registration under the Securities Act
subject to compliance with the provisions of Rule 144. Generally,
30
restricted securities that have been owned for a period of at least one year may be sold immediately after an IPO, subject to the volume limitations of Rule 144. However, because of our ownership position, and our appointment of directors to both Plug Power's and Beacon Power's Board of Directors, we are considered an "affiliate" of those
companiesPlug Power and therefore are subject to the volume limitation of Rule 144, even if we have held the securities for two years or more.
The Rule 144 limitations, as currently in effect, limit our sales of either Plug Power or Beacon Power stock within any three-month period
to a number of shares that does not exceed the greater of 1% of the
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Condition (Continued)
then outstanding shares of common stock of the company, or the average weekly trading volume of the common stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to certain restrictions.
As disclosedWorking capital was $37.83 million at March 31, 2003, a $1.15 million increase from $36.68 million at December 31, 2002. This increase is primarily the result of $1.5 million of fair value adjustments for securities available for sale and a $.8 million increase in Plug Power's Form 10-Q filed for the period ended September 30, 2002, Plug Power's cash requirements depend on numerous factors, including completion of its product development activities, ability to commercialize its fuel cell systems, market acceptance of its systems and other factors. Plug Power expects to devote
substantial capital resources to continue its development programs directed at commercializing its fuel cell systems for worldwide use, hire and train its production staff, develop and expand its manufacturing capacity and production activities and expand its
research and development activities. Plug Power expects to pursue the expansion of its operations through internal growth and strategic
acquisitions and expects that such activities will be funded from existing cash and cash equivalents, issuance of additional equity or debt securities or additional borrowings subject to market and other conditions. The failure to raise the funds necessary to finance its
future cash requirements or consummate future acquisitions could adversely affect its ability to pursue its strategy and could negatively affect its operations in future periods. Plug Power
anticipates incurring substantial additional losses over at least the next several years and believes that its current cash, cash
equivalents and marketable securities balances will provide sufficient capital to fund operations for at least the next twelve months.
Plug Power has financed its operations through September 30, 2002, primarily resulting from the sale of equity, which has providedsecurities available for sale during the period offset by a $1.1 million increase in current deferred tax liabilities.
At March 31, 2003, the Company's order backlog was $.547 million, compared to $.446 million at December 31, 2002.
Inventory and accounts receivable (from product revenues) turnover ratios and their changes for the three months ended March 31 are as follows:
2003 | 2002 | Change | |
Inventory | .40 | .26 | .14 |
Accounts receivable (for product revenues) | 1.86 | 1.53 | .33 |
The changes in the inventory and accounts receivable turnover ratios are the result of increases in sales over the comparable prior year period.
Inventories at March 31, 2003 of $1.3 million reflect inventory levels for MTI Instruments required to support expected second quarter sales. Additionally, accounts receivable decreased by $.106 million in 2003 primarily due to lower monthly sales volume in March 2003 compared to December 2002.
Cash flow used by operating activities for the three months ended March 31, 2003 was $1.8 million compared with $2.5 million in the prior year.
Capital expenditures during the first three months of 2003 were $.150 million, an increase from the comparable period in 2002 where spending totaled $.070 million. Capital expenditures in 2003 included furniture, computer equipment, facilities fit-up, software, and manufacturing and laboratory equipment. Remaining capital expenditures
31
in 2003 are expected to approximate $2.1 million, consisting of expenditures for facility expansion, computer, manufacturing and laboratory equipment. The Company expects to finance these expenditures with cash from operations and other sources.
Future minimum rental, license and royalty payments to LANL, as of March 31, 2003, under agreements with non-cancelable terms are as follows:
Licenses/ | |||
Operating | Royalties | ||
Leases | (A) | Total | |
(Dollars in thousands) | |||
2003 | $ 418 | $ - | $ 418 |
2004 | 607 | 200 | 807 |
2005 | 547 | 250 | 797 |
2006 | 429 | - | 429 |
2007 | 316 | - | 316 |
Thereafter | 605 | - | 605 |
Total commitments | $2,922 | $ 450 | $3,372 |
(A) Once products are sold under this agreement, royalties will be based on 2% of the first $50 million of net sales, 1% on net sales in theexcess of $50 million but less than $100 million and .5% on net sales in excess of $100 million. License payments made in any year can be applied against royalties due and total annual fees in any year shall not exceed $1 million.
amount of $292.8 million. As of September 30, 2002, Plug Power had unrestricted cashCash and cash equivalents and marketable securities totaling $66.0were $8.2 million and working capital of $66.4 million. As a result of Plug Power's purchase of real estate in 1999, it has escrowed an additional $5.3at March 31, 2003 compared to $7.3 million in restricted cash to collateralize the debt assumed on the purchase. Since inception, net cash used in operating activities has been $179.6 million and cash used in investing activities has been $66.6 million, including our investments in marketable securities in the amount of $25.8 million.at December 31, 2002.
Market Risk
Market risk represents the riskAs of changes in value of a financial instrument caused by fluctuations in interest rates and equity prices.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Risk (Continued)
At September 30, 2002,March 31, 2003, the Company had variable ratea $10 million Credit Agreement with KeyBank, N.A. dated as of August 10, 2001 ("the $10 million Credit Agreement"). The Company has no debt totaling $1 million. Interest rate changes generally do not affectoutstanding and no availability under this line of credit since the fair
March 31, 2003 market value of Plug Power common stock was $5.06. Under the debt but do impact future earningsterms of the $10 million Credit Agreement, the Company has the ability to borrow under the facility if the market value of Plug Power common stock rises above $7 per share.
The $10 million Credit Agreement expires July 31, 2003 and cash
flows. The earnings and cash flow impact for the next year resulting fromCompany plans to pursue a one-percentage point increase in interest rates would be approximately $10 thousand, holding other variables (debt level) constant.
new working capital line of credit during 2003. The Company has performed a sensitivity analysis on its holdingspledged two million shares of Plug Power common stock as collateral for the $10 million Credit Agreement. Additional collateral consisting of 500,000 shares of SatCon and Beaconcommon stock was pledged in August 2001, when the market value of Plug Power common stock fell below $10 per share. At the Company's request, KeyBank released the SatCon stock on April 19, 2003.
The $10 million Credit Agreement requires the Company to meet certain covenants, including maintenance of a debt service reserve account
32
(equal to 3 months of interest payments on outstanding debt), minimum Plug Power share price and pledge additional collateral and maintain an additional collateral value, if required, based on the Plug Power share price falling below $10 per share. The Company was in compliance with these covenants as of March 31, 2003.
In 2003, the Company recognized a $1.720 million net gain on the sale of its securities available for sale. This gain related to the Company's previously announced strategy to raise additional capital through equity offerings and the sale of its assets in order to fund its micro fuel cell operations.
As of March 31, 2003, the Company has sold .500 million shares of Plug Power common stock with proceeds totaling $2.661 million and gains totaling $1.773 million and .125 million shares of SatCon common stock with proceeds totaling $.115 million and losses totaling $53 thousand. Taxes on the net gains will be offset by the Company's operating losses. As of March 31, 2003, the Company estimates its remaining net operating loss carryforwards to be approximately $10.2 million.
From April 1 through May 14, 2003, the Company sold available for sale securities as follows:
(Dollars in thousands, except share data) | ||
Number of | Net Proceeds | |
Company | Shares Sold | from Sales |
Plug Power | 212,647 | $1,057 |
SatCon | 67,500 | 47 |
$1,104 |
The Company and its derivative financial instruments (warrantspartners have begun the second year of a $4.6 million Advanced Technology Program ("ATP") of the National Institute of Standards and Technology ("NIST"). The award is to purchase SatCon common stock).carry out a two-and-a-half-year, $9.3 million cost-shared program to research and develop a micro fuel cell for use in portable electronics. The
The sensitivity analysis presents the hypothetical change in fair value of our holdings held byprogram began October 1, 2001 and, during 2003, the Company at September 30, 2002, which are sensitiveexpects to changesreceive approximately $1.6 million in interest rates. Market risk is estimated as the potential change in fair value resulting from an immediate hypothetical one-percentage point parallel shift in the yield curve. The fair values of the Company's holdings in marketable securities have been based on quoted market prices and its derivative financial instruments based on estimates using valuation techniques.NIST grant revenues.
The Company's holdings in Plug Power and SatCon (through July 1, 2002) are accounted for on the equity method, holdings in SatCon (effective July 1, 2002) and Beacon Power are accounted for at fair value, and derivative financial instruments are accounted for at estimated values. The fair market and estimated values, at September
30, 2002, of the Company's holdings in these companies and
derivatives and the calculated impact of a market price decrease of ten percent, is as follows:
(Dollars in millions) Holdings/Derivatives | Estimated Fair Market Value | 10% Market Decrease |
Plug Power | $53.142 | $5.314 |
SatCon | 1.323 | .132 |
Beacon Power | .750 | .075 |
Derivatives | .011 | .001 |
New Accounting Pronouncements
In AugustJune 2001, the FASBFinancial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Statement ("SFAS") No. 143,Accounting for Asset Retirement Obligation. SFAS No. 143 "Accounting for Asset Retirement Obligations." SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred ifincurred. When the liability is initially recorded, an entity capitalizes a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part ofcost by increasing the carrying amount of the long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or
33
incurs a gain or loss upon settlement.SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New Accounting Pronouncements (Continued)
Company does not believe the adoption of this Statement will have a material impact on its consolidated financial statements.
OnIn July 30, 2002, the FASB issued SFAS No. 146, "AccountingAccounting for Costs Associated with Exit or Disposal Activities." This Statement requires companies to recognizeActivities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities when they are incurred rather than at the date ofand nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a commitment to an exit or disposal plan. The provisions of this Statement areRestructuring). This statement is effective for exist orexit and disposal activities that are initiated after December 31, 2002. The Company does not believe the adoption of this Statement will have a material impact on its consolidated financial statements.
In November 2002, with early application encouraged.the FASB issued FASB Interpretation No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 ("FIN 45"). FIN 45 clarifies the requirements of SFAS No. 5,Accounting for Contingencies, relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 covers guarantee contracts that have any of the following four characteristics: (a) contracts that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, a liability, or an equity security of the guaranteed party (e.g., financial and market value guarantees), (b) contracts that contingently require the guarantor to make payments to the guaranteed party based on another ent ity's failure to perform under an obligating agreement (performance guarantees), (c) indemnification agreements that contingently require the indemnifying party (guarantor) to make payments to the indemnified party (guaranteed party) based on changes in an underlying that is related to an asset, a liability, or an equity security of the indemnified party, such as an adverse judgment in a lawsuit or the imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law, and (d) indirect guarantees of the indebtedness of others. FIN 45 specifically excludes certain guarantee contracts from its scope. Additionally, certain guarantees are not subject to FIN 45's provisions for initial recognition and measurement but are subject to its disclosure requirements. The initial recognition and measurement provisions are effective for guarantees issued or modified after December 31, 2002. The Company began making required disclosures in its consolidated financ ial statements beginning December 31, 2002. The Company has made appropriate disclosures regarding warranties and future quarters issued or modified will be recognized in the Company's consolidated financial statements.
34
In December 2002, the FASB issued SFAS No. 148,Accounting for Stock Based Compensation-Transition and Disclosure, an amendment to FASB Statement No. 123. This Statement amends SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, SFAS No. 148 amends APB Opinion No. 28,Interim Financial
Reporting, to require disclosure about those effects in interim financial reporting. For entities that voluntarily change to the fair value based method of accounting for stock-based employee compensation, the transition provisions are effective for fiscal years ending after December 15, 2002. For all other companies, the disclosure provisions and the amendment to APB No. 28 are effective for interim periods beginning after December 15, 2002. The Company does not intend to adopt the transition provisions of the Statement and began making required disclosures in its consolidated financial statements beginning December 31, 2002.
In January 2003, the FASB issued FASB Interpretation No. 46,Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company is incurrently evalua ting the processimpact of reviewing the provisions of the new standard to determineFIN 46 on its potentialconsolidated financial statements and related disclosures but does not expect that there will be any material impact.
Statement Concerning Forward Looking Statements
This Quarterly Report on Form 10-Q contains and incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934.1934, as amended. You can identify forward-looking statements through our use of the words
"expect, "expect," "anticipate," "believe," "should," "could," "may," "will," and other similar words, whether in the negative or the affirmative. Statements containing these, or similar words, are our predictions, expectations, plans and intentions of what
35
may occur in the future.
All statements that are not historical fact should be deemed to be
forward-looking statements. Webelieve it is important to
communicate our future expectations to our investors; however, our
actual results could differentdiffer materially from the predictions, expectations, plans and intentions we have shared with our investors in such forward-looking statements. Such risks include, among others, 1) our continuing need to raise additional financing; 2) the risks
inherent in the development of direct methanol micro fuel cells (DMFCs), including, among others, the risk that a) we are not successfuldifficulties in developing the technology, b) we do not develop the technology in timeand acquiring new technologies; 3) risks related to take advantagedeveloping DMFC's; 4) market acceptance of the market opportunity, c) DMFCs are not accepted by consumers, or fail to satisfy critical product requirements necessary to market a product, or d) we fail to develop necessary third-party relationships, or we fail to do so on terms or in a timeframe that is favorable to the Company, or those
third-parties fail to timely deliver the technology, supplies, components or channel development activities necessary to support a
DMFC product; 3)DMFC's; 5) our dependence on the success of our portfolio companies particularly in light of recent market conditions; 4) infringement of intellectual property rights and licenses of the Company or others; 5) our inability to keep up with our competition,
companies; 6) our history of losses; 7) the historical volatility of our stock price; 6)8) the risk we may become an inadvertent investment Company; 7) conflicts of interest between us, First Albany Companies Inc. and our portfolio companies; 8)company; 9) and general market conditions.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statement Concerning Forward Looking Statements (Continued)
Readers should not rely on our forward-looking statements. These and other risks are set forth in greater detail in the "Risk Factors" section of our Annual Report on Form 10-K, which is incorporated herein by reference. WeExcept as may be required by applicable law, we do not undertake or intend to update any information in any forward-looking statements after the date of our Annual Report on Form 10-K, which is incorporated herein by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign exchange rates or weak economic conditions in foreign markets. Since our sales are currently priced in U.S. dollars and are translated to local currency amounts, a strengthening of the dollar could make our products less competitive in foreign markets. Interest income is sensitive to changes in the general level of U.S. interest rates, particularly since our investments are in short-term instruments. Based on the nature and current levels of our investments, however, we make.have concluded that there is no material market risk exposure.
Item 4. Controls and Procedures
(a)Evaluation of disclosure controls and procedures.Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934)as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner.
(b)Changes in internal controls.There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.
36
PART IIII. OTHER INFORMATION
Item 1:1. Legal Proceedings
At any point in time, the Company and its subsidiaries may be involved in various lawsuits or other legal proceedings; these could arise from the sale of products or services or from other matters relating to its regular business activities, compliance with various governmental regulations and requirements, or other transactions or circumstances. The Company does not believe there are any such proceedings presently pending, which could have a material adverse effect on the Company's financial condition except for the matters described in Note17Note16 of the Notes to Interim Consolidated Financial Statements.
Item 2. Changes in Securities and Use of Proceeds
On September 9, 1998, Barbara Lawrence, the Lawrence Group, Inc.Not applicable.
("Lawrence"), and certain other Lawrence-related entities ("Plaintiffs") filed suit in the United States Bankruptcy Court for the Northern DistrictItem 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of New York against First Albany Corporation, Mechanical Technology, Dale Church, Edward Dohring, Alan Goldberg, George McNamee, Beno Sternlicht, Marty Mastroianni (former President and Chief Operating OfficerMatters to a Vote of MTI), and 33 other individuals ("Defendants") who purchased a total of 820,909 shares of the Company's stock from the Plaintiffs. The case concerns the Defendants' 1997 purchase of Mechanical Technology shares from the Plaintiffs at the price of $2.25 per share. FAC acted as Placement Agent for the Defendants in the negotiation and sale of the shares and in proceedings before the Bankruptcy Court for the NorthernSecurity Holders
District of New York, which approved the sale in September 1997. Plaintiffs claim that the Defendants failed to disclose material inside information concerning Plug Power, LLC to the Plaintiffs and therefore the $2.25 per share purchase price was unfair. Plaintiffs are seeking damages of $5 million plus punitive damages and costs. In April 1999, Defendants filed a motion to dismiss the amended complaint, which was denied by the Bankruptcy Court. On appeal in October 2000, Plaintiffs' cause of action was dismissed by the United States District Court for the Northern District of New York. In November 2000, Plaintiffs filed an appeal of that dismissal with the United States Court of Appeals for the Second Circuit. In June 2002, the Second Circuit Court of Appeals reversed the District Court decision and remanded the case for further consideration. A motion to reconsider the decision of the Court of Appeals has been filed and is pending. The Company believes the claims have no merit andNot applicable.
intends to defend them vigorously.The Company cannot predict theItem 5. Other Information
outcome of the claims nor reasonably estimate a range of possible loss given the current status of the litigation.
PART II OTHER INFORMATION
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits | |
Exhibit No. | Description |
99.17.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
99.17.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 2002. One report on Form 8-K was filed during the quarter ending DecemberMarch 31, 2002 regarding the announcement of Dale Church's appointment as Chairman and CEO of the Company, George C. McNamee's stepping down from the chairmanship and Board and that William Acker will no longer serve as President of the Company but will devote his energies to the Company's micro fuel cell subsidiary.2003.
37
SIGNATURESIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Mechanical Technology Incorporated
(Date) | s/Dale W. Church____ Dale W. Church Chief Executive Officer |
(Date) | s/Cynthia A. ScheuerCynthia A. Scheuer Vice President and Chief Financial Officer |
38
CERTIFICATIONS
I, Dale W. Church, certify that:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
May 15, 2003/S/ DALE W. CHURCH
Dale W. Church
Chief Executive Officer
39
I, Cynthia A. Scheuer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mechanical Technology Incorporated;
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
May 15, 2003/S/ CYNTHIA A. SCHEUER Dale W. Church
Cynthia A. Scheuer
Chief Financial Officer
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