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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, 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, 2004March 31, 2005
or
/ / Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 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) 533-2200
(Registrant's telephone number, including area code)
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. Yesx No¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes¨x Nox¨
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 |
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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Part I. FINANCIAL INFORMATION | Page No. |
Item 1. Financial Statements Financial Statements of Mechanical Technology Incorporated and Subsidiaries | |
Condensed Consolidated Balance Sheets - | 3-4 |
Condensed Consolidated Statements of Operations - Three | 5 |
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income - | 6 |
Condensed Consolidated Statements of Cash Flows - | 7 |
Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. Controls and Procedures |
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Part II. OTHER INFORMATION | |
Item 1. Legal Proceedings |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. Defaults Upon Senior Securities |
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Item 4. Submission of Matters to a Vote of Security Holders |
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Item 5. Other Information |
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Item 6. Exhibits |
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Signatures |
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2004March 31, 2005 (Unaudited) and December 31, 20032004
(Dollars in thousands)
Sept. 30, | Dec. 31, | Mar. 31, | Dec. 31, | |
2004 | 2003 | 2005 | 2004 | |
Assets | ||||
Current Assets: | ||||
Cash and cash equivalents | $17,159 | $12,380 | $18,418 | $22,545 |
Securities available for sale | 19,186 | 44,031 | 19,095 | 17,678 |
Accounts receivable | 1,192 | 962 | ||
Inventories, net | 1,099 | 1,300 | ||
Accounts receivable, less allowances of $58 in 2005 and 2004 | 1,531 | 1,772 | ||
Other receivables - related parties | - | 3 | ||
Inventories | 1,118 | 1,136 | ||
Prepaid expenses and other current assets | 619 | 514 | 852 | 504 |
Total Current Assets | 39,255 | 59,187 | 41,014 | 43,638 |
Long Term Assets: | ||||
Securities available for sale - restricted | 17,307 | - | 17,820 | 16,497 |
Property, plant and equipment, net | 2,556 | 1,999 | 2,780 | 2,884 |
Deferred income taxes | 3,426 | 4,652 | 3,507 | 3,811 |
Notes receivable-noncurrent, less allowance of $660 as of December 31, 2003 | - | - | ||
Total Assets | $62,544 | $65,838 | $65,121 | $66,830 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2004March 31, 2005 (Unaudited) and December 31, 20032004
(Dollars in thousands, except share data)
Sept. 30, | Dec. 31, | Mar. 31, | Dec. 31, | |
2004 | 2003 | 2005 | 2004 | |
Liabilities and Shareholders' Equity | ||||
Current Liabilities: | ||||
Accounts payable | $ 579 | $ 692 | $ 640 | $ 13 |
Accrued liabilities | 2,398 | 1,528 | 3,001 | 3,287 |
Accrued liabilities - related parties | 53 | 48 | 9 | - |
Income taxes payable | 12 | 12 | 32 | 40 |
Deferred income taxes | 5,865 | 14,481 | 5,042 | 5,486 |
Total Current Liabilities | 8,907 | 16,761 | 8,724 | 8,826 |
Long-Term Liabilities: | ||||
Derivative liability | 4,163 | - | 4,359 | 1,125 |
Other credits | 24 | 24 | 24 | 24 |
Total Liabilities | 13,094 | 16,785 | 13,107 | 9,975 |
Commitments and Contingencies | ||||
Minority interests | 1,706 | 787 | 836 | 1,271 |
Shareholders' Equity: | ||||
Common stock, par value $1 per share, authorized 75,000,000; issued | 37,283 | 35,776 | ||
Common stock, par value $1 per share, authorized 75,000,000; issued | 38,651 | 38,651 | ||
Paid-in-capital | 75,819 | 68,708 | 82,772 | 82,769 |
Accumulated deficit | (67,431) | (62,433) | (72,678) | (66,624) |
45,671 | 42,051 | |||
Accumulated Other Comprehensive Income: | ||||
Unrealized gain on securities available for sale, net of taxes | 15,827 | 19,944 | 16,187 | 14,542 |
Common stock in treasury, at cost, 8,040,736 shares at September 30, 2004 and 8,035,974 shares at December 31, 2003 | (13,754) | (13,729) | ||
Common stock in treasury, at cost, 8,040,736 shares at March 31, 2005 and December 31, 2004 | (13,754) | (13,754) | ||
Total Shareholders' Equity | 47,744 | 48,266 | 51,178 | 55,584 |
Total Liabilities and Shareholders' Equity | $ 62,544 | $ 65,838 | $ 65,121 | $ 66,830 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)
Three months ended | Nine months ended | Three months ended | ||||||
Sept. 30, | Sept. 30, | Mar. 31, | Mar. 31, | |||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | |||
Revenues: | ||||||||
Product revenue | $ 1,642 | $ 1,598 | $ 4,452 | $ 4,304 | $ 1,403 | $ 1,579 | ||
Funded research and development revenue | 175 | 310 | 754 | 1,422 | 324 | 388 | ||
Total revenues | 1,817 | 1,908 | 5,206 | 5,726 | 1,727 | 1,967 | ||
Operating costs and expenses: | ||||||||
Cost of product revenue | 686 | 755 | 1,956 | 1,868 | 602 | 647 | ||
Research and product development expenses: | ||||||||
Funded research and product development | 881 | 879 | 2,576 | 2,502 | 1,055 | 1,154 | ||
Unfunded research and product development | 2,352 | 1,317 | 6,331 | 3,548 | 1,605 | 1,514 | ||
Total research and product development expenses | 3,233 | 2,196 | 8,907 | 6,050 | 2,660 | 2,668 | ||
Selling, general and administrative expenses | 1,526 | 1,854 | 4,890 | 4,559 | 3,034 | 1,307 | ||
Operating loss | (3,628) | (2,897) | (10,547) | (6,751) | (4,569) | (2,655) | ||
Interest expense | - | - | (7) | |||||
(Loss) gain on derivatives | (2,635) | 2 | (2,424) | (4) | ||||
Loss on derivatives | (3,234) | (1,281) | ||||||
Gain on sale of securities available for sale, net | - | 4,123 | 3,129 | 7,483 | - | 3,129 | ||
Impairment losses | - | - | (418) | |||||
Other income (expenses), net | 41 | (75) | 60 | (114) | 100 | (13) | ||
(Loss) income from continuing operations before | ||||||||
income taxes and minority interests | (6,222) | 1,153 | (9,782) | 189 | ||||
Income tax benefit (expense) | 2,473 | (425) | 3,854 | (74) | ||||
Loss before income taxes and minority interests | (7,703) | (820) | ||||||
Income tax benefit | 1,209 | 316 | ||||||
Minority interests in losses of consolidated subsidiary | 356 | 195 | 930 | 346 | 440 | 262 | ||
(Loss) income from continuing operations | (3,393) | 923 | (4,998) | 461 | ||||
Income from discontinued operations, net of tax | - | - | 13 | |||||
Net (loss) income | $ (3,393) | $ 923 | $ (4,998) | $ 474 | ||||
(Loss) Income per Share (Basic and Diluted): | ||||||||
(Loss) income per share from continuing operations | $ (0.12) | $ 0.03 | $ (0.17) | $ 0.02 | ||||
Income per share from discontinued operations | - | - | ||||||
(Loss) income per share | $ (0.12) | $ 0.03 | $ (0.17) | $ 0.02 | ||||
Net loss | $ (6,054) | $ (242) | ||||||
Loss per Share (Basic and Diluted): | ||||||||
Loss per share | $ (0.20) | $ (0.01) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
Nine months ended | Three months ended | |||
Sept. 30, | Mar. 31, | Mar. 31, | ||
2004 | 2003 | 2005 | 2004 | |
COMMON STOCK | ||||
Balance, beginning | $ 35,776 | $ 35,648 | $ 38,651 | $ 35,776 |
Issuance of shares - options | 88 | 11 | - | 51 |
Issuance of shares - private placement | 1,419 | - | - | 1,419 |
Balance, ending | $ 37,283 | $ 35,659 | $ 38,651 | $ 37,246 |
PAID-IN-CAPITAL | ||||
Balance, beginning | $ 68,708 | $ 67,479 | $ 82,769 | $ 68,708 |
Issuance of shares - options | 115 | 9 | - | 78 |
MTI MicroFuel Cell investment | 344 | 191 | 46 | - |
Private placement, net of expenses | 5,827 | - | (45) | 5,909 |
Compensatory options | - | 32 | - | - |
Derivative tax asset | 695 | - | ||
Stock option exercises recognized differently for financial | ||||
reporting and tax purposes | 130 | 1 | ||
Stock option exercises recognized differently for financial reporting and tax purposes | 2 | 75 | ||
Balance, ending | $ 75,819 | $ 67,712 | $ 82,772 | $ 74,770 |
ACCUMULATED DEFICIT | ||||
Balance, beginning | $(62,433) | $(61,874) | $(66,624) | $(62,433) |
Net (loss) income | (4,998) | 474 | ||
Net loss | (6,054) | (242) | ||
Balance, ending | $(67,431) | $(61,400) | $(72,678) | $(62,675) |
ACCUMULATED OTHER COMPREHENSIVE INCOME: | ||||
UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE, | ||||
NET OF TAXES | ||||
UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE, NET OF TAXES | ||||
Balance, beginning | $ 19,944 | $ 13,170 | $ 14,542 | $ 19,944 |
Less reclassification adjustment for gains included in net income | (1,248) | (3,262) | - | (1,248) |
Change in unrealized (loss) gain on securities available for sale, net of taxes | (2,869) | 2,311 | ||
Balance, ending | $ 15,827 | $ 12,219 | ||
RESTRICTED STOCK GRANT | ||||
Balance, beginning | $ - | $ (40) | ||
Grants vested | - | 37 | ||
Change in unrealized gain on securities available for sale, net of taxes | 1,645 | 1,606 | ||
Balance, ending | $ - | $ (3) | $ 16,187 | $ 20,302 |
TREASURY STOCK | ||||
Balance, beginning | $(13,729) | $(13,635) | $(13,754) | $(13,729) |
Stock acquisition | (25) | - | - | (25) |
Balance, ending | $(13,754) | $(13,635) | $(13,754) | $(13,754) |
SHAREHOLDERS' EQUITY | ||||
Balance, ending | $ 47,744 | $ 40,552 | $ 51,178 | $ 55,889 |
TOTAL COMPREHENSIVE LOSS: | ||||
Net (loss) income | $ (4,998) | $ 474 | ||
Other comprehensive loss: | ||||
Change in unrealized loss on securities available for sale, net of taxes | (4,117) | (951) | ||
Total comprehensive loss | $ (9,115) | $ (477) | ||
TOTAL COMPREHENSIVE (LOSS) INCOME: | ||||
Net loss | $ (6,054) | $ (242) | ||
Other comprehensive (loss) income: | ||||
Change in unrealized gain on securities available for sale, net of taxes | 1,645 | 358 | ||
Total comprehensive (loss) income | $ (4,409) | $ 116 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine months ended | Three months ended | |||
Sept. 30, 2004 | Sept. 30, 2003 | Mar. 31, 2005 | Mar. 31, 2004 | |
Operating Activities | ||||
Net (loss) income excluding discontinued operations | $ (4,998) | $ 461 | ||
Adjustments to reconcile net (loss) income to net cash used by operations: | ||||
Net loss | $ (6,054) | $ (242) | ||
Adjustments to reconcile net loss to net cash used by operations: | ||||
Loss on derivatives | 2,424 | 4 | 3,234 | 1,281 |
Impairment losses | - | 418 | ||
Minority interests in losses of consolidated subsidiary | (930) | (346) | (440) | (262) |
Loss on retirement of subsidiary treasury stock | - | 5 | ||
Minority interest portion of stock based compensation | 5 | - | ||
Depreciation and amortization | 657 | 430 | 303 | 191 |
Gain on sale of securities available for sale, net | (3,129) | (7,483) | - | (3,129) |
Loss on disposal of fixed assets | 34 | 3 | 3 | 5 |
Deferred income taxes and other credits | (3,820) | 104 | ||
Deferred income taxes | (1,234) | (243) | ||
Stock based compensation | - | 69 | 46 | - |
Changes in operating assets and liabilities net of effects from discontinued operations: | ||||
Changes in operating assets and liabilities: | ||||
Accounts receivable | (230) | 306 | 241 | (520) |
Inventories, net | 201 | 99 | ||
Other receivables - related parties | 3 | (22) | ||
Inventories | 18 | 23 | ||
Prepaid expenses and other current assets | (105) | (912) | (348) | (286) |
Accounts payable | (112) | (84) | 628 | 504 |
Income taxes payable | - | (82) | (8) | (5) |
Accrued liabilities - related parties | 5 | (86) | 9 | 29 |
Accrued liabilities | 870 | 245 | (286) | 94 |
Net cash used by operating activities excluding discontinued operations | (9,133) | (6,849) | ||
Discontinued operations: | ||||
Income from discontinued operations | - | 13 | ||
Deferred income taxes | - | 8 | ||
Net cash provided by discontinued operations | - | 21 | ||
Net cash used by operating activities | (9,133) | (6,828) | (3,880) | (2,582) |
Investing Activities | ||||
Purchases of property, plant and equipment | (1,248) | (843) | (202) | (397) |
Proceeds from sale of securities available for sale | 3,804 | 11,654 | - | 3,804 |
Net cash provided by investing activities | 2,556 | 10,811 | ||
Net cash (used) provided by investing activities | (202) | 3,407 | ||
Financing Activities | �� | |||
Gross proceeds from private placement | 10,000 | - | - | 10,000 |
Costs of private placement | (1,015) | - | (45) | (933) |
Purchase of common stock for treasury | (25) | - | - | (25) |
Proceeds from stock option exercises | 203 | 20 | - | 129 |
Proceeds from subsidiary stock issuances | 2,193 | 1,001 | ||
Net cash provided by financing activities | 11,356 | 1,021 | ||
Increase in cash and cash equivalents | 4,779 | 5,004 | ||
Net cash (used) provided by financing activities | (45) | 9,171 | ||
(Decrease) increase in cash and cash equivalents | (4,127) | 9,996 | ||
Cash and cash equivalents - beginning of period | 12,380 | 7,320 | 22,545 | 12,380 |
Cash and cash equivalents - end of period | $ 17,159 | $ 12,324 | $ 18,418 | $ 22,376 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") and contain all adjustments, consisting of only normal, recurring adjustments, necessary for a fair presentation of results for such periods. The results of operations for the interim periods presented are not necessarily indicative of results for the full year.
Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K and 10-K/A filed for the fiscal year ended December 31, 2003.2004, as amended.
The information presented in the accompanying condensed consolidated balance sheet as of December 31, 20032004 has been derived from the Company's December 31, 20032004 audited consolidated financial statements. All other information has been derived from the Company's unaudited condensed consolidated financial statements for the periods as of and ending September 30, 2004ended March 31, 2005 and 2003.
2004.
Revenue Recognition
Mechanical Technology Incorporated ("the Company" or "MTI")The Company applies the guidance within SEC Staff Accounting Bulletin ("SAB") No. 104,Revenue Recognition,which superceded SAB No. 101,Revenue Recognition in Financial Statements("SAB 104")in the evaluation of its contracts to determine when to properly recognize revenue. Under SAB No. 104, revenue is recognized when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery has occurred or services have been rendered, the sales price is determinable, and collectibility is reasonably assured.
Product Revenue.ProductRevenue
Product revenue is recognized when there is persuasive evidence of an arrangement, the collection of a fixed fee is fixedprobable 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, all of which generally 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. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied.
The Company defers recognition of its initial micro fuel cell product-related revenue at the time of delivery and recognizes revenue as the continued warranty obligations expire. The costs associated with the product and warranty obligations are expensed as they are incurred. The Company's initial shipment of its micro fuel cell product is a customer specific arrangement that includes fuel cell systems and continued warranty support. While contract terms require payment upon delivery of the fuel cell system and are not contingent on the achievement of specific milestones or other substantive performance, the continuing obligation to warranty the product results in the Company deferring recognition of product-related revenue and recognizing product-related revenue when the warranty obligations expire. The warranty on the product is for a period of fifteen months. When micro fuel cell product-related revenue qualifies for revenue recognition it will be recorded in the Consolidated Statements of Operations in the line titled "Other income (expenses), net."
As the Company gains commercial experience, including field experience relative to warranty based on the sales of its initial products, in future periods, the Company may recognize product-related revenue upon delivery of the product or may continue to defer recognition, based on application of appropriate guidance within SAB No. 104, or changes in the manner contractual agreements are structured, including agreements with distribution partners.
8
MTI Instruments, Inc. ("MTI Instruments"), a wholly-owned subsidiary of the Company, currently has distributor agreements in place for (1) the domestic sale of its semiconductor products and (2) the international sale of general instrument and semiconductor products in certain global regions. Such agreements grant a distributor the right of first refusal to act as distributor for such products in the distributor's territory. In return, the distributor agrees to not market other products which are considered by MTI Instruments to be in direct competition with MTI Instruments' products. The distributor is allowed to purchase MTI Instruments' equipment at a price which is discounted off the published domestic/international list prices. Such list prices can be adjusted by MTI Instruments during the term of the distributor agreement, but MTI Instruments must provide advance notice at least 90 days before the price adjustment goes into effect. Generally , payment terms with the distributor are standard net 30 days; however, on occasion, extended payment terms have been granted. Title to the product passes to the distributor upon delivery to the independent carrier (standard FOB factory), and the distributor is responsible for any required training and/or service with the end-user. The sale (and subsequent payment) between MTI Instruments and the distributor is not contingent upon the successful resale of the product by the distributor. Distributor sales are covered by MTI Instruments' standard one-year warranty and there are no special return policies for distributors.
Some of MTI Instruments' direct sales, particularly sales of semi-automatic and fully-automated semiconductor metrology equipment, involve on-site customer acceptance and/or training. In those instances, revenue recognition does not take place at time of shipment. Instead, MTI Instruments recognizes the sale after the unit is installed and/or training is performed and an on-site acceptance is given by the customer. Agreed-upon acceptance terms and conditions, if any, are negotiated at time of purchase.
Funded Research and Development Revenue.TheRevenue
The Company performs funded research and development for government agencies and commercial companies under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as the services are performed. In each type of contract, the Company generally receives periodic progress payments or payments upon reaching interim milestones. When the current estimates of total contract revenue for commercial development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and development projects are recognized as research and development expense as incurred. As of Sep tember 30, 2004, the Company has accrued approximately $114 thousand for anticipated contract losses on commercial contracts. When government agencies are providing funding theythe y 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 contracts. Billings in excess of contract revenues earned are recorded as deferred revenue. While the Company's accounting for government contract costs is subject to audit by the sponsoring entity, in the opinion of management, no material adjustments are expected as a result of such audits. Adjustments are recognized in the period made.
8The Company has fixed-price contracts with the following entities: Harris Corporation ("Harris"), Cabot Superior Micro Powders ("CSMP"), the U.S. Marines and the U.S. Army. These contracts will each result in the following funding amounts upon completion of research tasks (CSMP and the U.S. Marines) or prototypes (Harris and the U.S. Army) of $200,000, $69,907, $250,000 and $249,831, respectively.
The Company has two cost-shared contracts with the following entities: the New York State Energy Research and Development Authority ("NYSERDA"); and the Department of Energy ("DOE"). These contracts require that the Company's subsidiary MTI MicroFuel Cells Inc. ("MTI Micro") conduct research and deliver direct methanol micro fuel cell ("DMFC") prototypes pursuant to predefined work plans and schedules. The contracts with NYSERDA and DOE result in the following total multi-year contract expenditures by MTI Micro:
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)9
$2,702,080 and $6,144,094, and result in total multi-year funding of $1,249,736 and $3,000,000, respectively.
MTI Micro retains ownership of the intellectual property ("IP") generated under each of its federal government contracts and under contracts with Harris and CSMP. Each federal government agency retains a government use license and march- in rights if MTI Micro fails to commercialize technology generated under the contract. In addition, under the NYSERDA contract, MTI Micro has the right to elect to retain any invention made under the NYSERDA contract within six months of invention. NYSERDA also retains rights to a government use license for New York State and its political subdivisions for any inventions made under the contract. In addition, MTI Micro agreed to pay NYSERDA a royalty of 1.5% of the sales price of any product sold incorporating IP developed pursuant to the NYSERDA contract if the product is manufactured by a New York State manufacturer. This royalty increases to 5% if the manufacturer is not deemed to be a New York State manufacturer. In any event, the royalty is subject to a cap equal to two times the total contract funds paid by NYSERDA to MTI Micro as reduced to reflect any New York State jobs created by MTI Micro.
Cost of Product Revenue
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.
Deferred revenue consists of payments received and amounts due from customers in advance of services performed, products shipped customer acceptance or installation completed.
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.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Stock Based Compensation
The Company has two stock-based employee compensation plans and its majority-owned subsidiary, MTI Micro, has one stock-based employee compensation plan, which are described more fully in Note 13, Stock Based Compensation, of the consolidated financial statements for the year ended December 31, 2003.2004. Statement of Financial Accounting Standards ("SFAS") No. 123,Accounting for Stock-Based Compensation, requires the measurement of the fair value of stock options or warrants granted to employees to be included in the consolidated financial statements of operations or, alternatively, disclosed in the notes to consolidated financial statements. The Company accounts for stock-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. 123.123. The Company records the fair market value of stock options and warrants granted to non-employees in exchange for services in accordance with Emerging Issues Task Force ("EITF") Issue No. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, in the condensed consolidated statements of operations. The Company has adopted the disclosure provisions but does not intend to adopt the transition provisions of SFAS No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure.
The following table illustrates the effect on net (loss) incomeloss and (loss) incomeloss per share as if the Company had applied the fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation, to stock-based employee compensation.
10
(Dollars in thousands, except per share data) | Three months ended | Nine months ended | ||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |
2004 | 2003 | 2004 | 2003 | |
Net (loss) income, as reported | $(3,393) | $ 923 | $(4,998) | $ 474 |
Add: Total stock-based employee | ||||
compensation expense already recorded in | ||||
financial statements, net of related tax effects | - | 14 | - | 42 |
Deduct: Total stock-based employee | ||||
compensation expense determined under fair | ||||
value based method for all awards, net of | ||||
related tax effects | (936) | (262) | (1,109) | (916) |
Pro forma net (loss) income | $(4,329) | $ 675 | $(6,107) | $ (400) |
(Loss) income per share: | ||||
Basic and diluted - as reported | $ (0.12) | $ 0.03 | $ (0.17) | $ 0.02 |
Basic and diluted - pro forma | $ (0.15) | $ 0.02 | $ (0.21) | $ (0.01) |
9
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data) | Three months ended | |||
Mar. 31, | Mar. 31, | |||
2005 | 2004 | |||
Net loss, as reported | $(6,054) | $ (242) | ||
Add: Total stock-based employee compensation | ||||
expense already recorded in financial | ||||
statements, net of related tax effects | 44 | - | ||
Deduct: Total stock-based employee | ||||
compensation expense determined under fair | ||||
value based method for all awards, net of | ||||
related tax effects | (452) | (215) | ||
Pro forma net loss | $(6,462) | $ (457) | ||
Loss per share: | ||||
Basic and diluted - as reported | $ (0.20) | $ (0.01) | ||
Basic and diluted - pro forma | $ (0.21) | $ (0.02) |
Accounting for Derivative Instruments
On October 1, 2000, theThe Company adoptedaccounts for derivative instruments and embedded derivative instruments in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities,as amended by SFAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities,which establishes a new model for accounting for derivatives and hedging activities. These standards required the Companyrequire an entity to recognize all derivative instrumentsderivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. Fair value is estimated using the Black Scholes Option-Pricing Model.
In September 2000, the EITF issued The Company also follows EITF Issue No. 00-19,Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company's Own Stock, which requires freestanding contracts that are settled in a company's own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under the provisions of EITF Issue No. 00-19 , a contract designated 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.
The Company held or has outstanding the following derivative financial instruments:
Sept. 30, | Sept. 30, | Dec. 31, | ||
2004 | 2003 | 2003 | Expiration | |
Derivatives issued: | ||||
Warrants, exercisable beginning February 5, 2005, to purchase the | ||||
Company's common stock issued to Chicago Investment Group, L.L.C. | ||||
at a purchase price of $10.572 per share | 28,377 | - | - | February 5, 2006 |
First Investment Right, exercisable beginning April 25, 2004, to | ||||
purchase the Company's common stock issued to Fletcher | ||||
International, Ltd. at a purchase price of $6.34 per share(1) | 1,261,830 | - | - | December 31, 2004 |
Second Investment Right, exercisable beginning immediately after | ||||
the full exercise of the First Investment Right, to purchase the | ||||
Company's common stock issued to Fletcher International, Ltd. at | ||||
a purchase price of $6.34 per share through December 31, 2006(1) | 3,154,575 | - | - | December 31, 2006 |
Plug Power Investment Right, exercisable at any time from June 1, 2005 | ||||
through December 31, 2006 after the full exercise of the First | ||||
Investment Right, to purchase a number of the Company's shares of | ||||
Plug Power common stock (to the extent of the number of shares | ||||
remaining in escrow pursuant to the agreement) equal to | ||||
$10,000,000 divided by the prevailing price per share of Plug Power | ||||
common stock(1) | (2) | - | - | December 31, 2006 |
Warrants, immediately exercisable, to purchase the Company's | ||||
common stock issued to SatCon at a purchase price of $12.56 per share | - | 108,000 | - | October 21, 2003 |
Warrants, immediately exercisable, to purchase the Company's | ||||
common stock issued to SatCon at a purchase price of $12.56 per share | - | 192,000 | 192,000 | January 31, 2004 |
Derivatives held: | ||||
Warrants, immediately exercisable, to purchase SatCon common | ||||
stock at a purchase price of $7.84 per share | - | 36,000 | - | October 21, 2003 |
Warrants, immediately exercisable, to purchase SatCon common | ||||
stock at a purchase price of $7.84 per share | - | 64,000 | 64,000 | January 31, 2004 |
Mar. 31, | Mar. 31, | Dec. 31, | ||
2005 | 2004 | 2004 | Expiration | |
Derivatives issued: | ||||
Warrants, exercisable beginning February 5, 2005, to purchase the | ||||
Company's common stock issued to Chicago Investment Group, L.L.C. | ||||
at a purchase price of $10.572 per share | 28,377 | 28,377 | 28,377 | February 5, 2006 |
First Investment Right, exercisable beginning April 25, 2004, to | ||||
purchase the Company's common stock issued to Fletcher | ||||
International, Ltd. at a purchase price of $6.34 per share(1) | - | 1,135,074 | - | December 31, 2004 |
Second Investment Right, exercisable beginning December 22, 2004, | ||||
to purchase the Company's common stock issued to Fletcher | ||||
International, Ltd. at a purchase price of $6.023 per share through | ||||
December 31, 2006(1) (3) | 3,320,604 | 2,553,916 | 3,154,575 | December 31, 2006 |
Plug Power Investment Right, exercisable at any time from June 1, 2005 | ||||
through December 31, 2006, to purchase a number of the Company's | ||||
shares of Plug Power common stock (to the extent of the number of | ||||
shares remaining in escrow pursuant to the agreement) equal to | ||||
$10,000,000 divided by the prevailing price per share of Plug Power | ||||
common stock(1) | (2) | - | - | December 31, 2006 |
11
(1) - The Company and Fletcher International, Ltd. entered into an amended private placement agreement on May 4, 2004 (see Note 8 - Shareholders' Equity).2004.
(2)- The-The exercise price for the Plug Power Investment Right is $10,000,000 less the positive difference between $18,000,000 and the product of the sum of 1,418,842 and the quantity of2,680,671 shares purchased in the exercise of the first $8 million additional investment right (1,261,830 shares) multiplied by the prevailing price per share of our common stock on the date Fletcher elects to exercise such right, all divided by the quotient obtained by dividing 10,000,000 by the prevailing price of Plug Power common stock on the date Fletcher elects to exercise such right (see Note 8- Shareholders' Equity).right.
(3)-The Company incurred a registration penalty during March 2005 which resulted in a reduction in the exercise price for the Second Investment Right from $6.34 to $6.023 per share.
10
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Income Taxes
The Company accounts for taxes in accordance with SFAS No. 109,Accounting for Income Taxes, which requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable for future years to differences between financial statement and tax bases of existing assets and liabilities. Under SFAS No. 109, the effect of tax rate changes on deferred taxes is
recognized in the income tax provision in the period that includes the enactment date. The provision for taxes is reduced by investment and other tax credits in the years such credits become available. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
Reclassification
Certain 2003 amounts have been reclassified to conform to the 2004 presentation. The reclassifications have no effect on total revenues, total expenses, net (loss) income or shareholders' equity as previously reported.
The reclassifications impact our condensed consolidated statements of operations in the following way:
The reclassifications impact our condensed consolidated statements of shareholders' equity in the following way:
Included in accounts receivable are the following at:
Sept. 30, | Dec. 31, | Mar. 31, | Dec. 31, | |
(Dollars in thousands) | 2004 | 2003 | 2005 | 2004 |
U.S. and State Government: | ||||
Amount billed | $ 255 | $ 280 | $ 632 | $ 844 |
Amount billable | 242 | 272 | 305 | 301 |
Retainage | 70 | 65 | 22 | 11 |
Total U.S. and State Government | $ 567 | $ 617 | 959 | 1,156 |
Commercial: | $ 625 | $ 345 | ||
Commercial amounts billed | 630 | 674 | ||
Sub Total | 1,589 | 1,830 | ||
Allowance for bad debts | (58) | (58) | ||
Total | $1,192 | $ 962 | $1,531 | $1,772 |
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.
11
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Inventories consist of the following at:
Sept. 30, | Dec. 31, | |||
(Dollars in thousands) | 2004 | 2003 | ||
Finished goods | $ 345 | $ 300 | ||
Work in process | 88 | 316 | ||
Raw materials, components and assemblies, net | 666 | 684 | ||
$1,099 | $1,300 |
Mar. 31, | Dec. 31, | |||
(Dollars in thousands) | 2005 | 2004 | ||
Finished goods | $ 343 | $ 318 | ||
Work in process | 121 | 100 | ||
Raw materials, components and assemblies, net | 654 | 718 | ||
$1,118 | $1,136 |
Notes receivable consist of the following at:
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(A)On August 13, 2003, the Company converted its existing note receivable to a redeemable subordinated debenture. The debenture accrues interest at the rate of 12% per annum. Repayments are scheduled to begin December 1, 2004 in accordance with the debenture agreement.12
During the quarter ended September 30, 2004, the Company wrote this note receivable off against its allowance for bad debts.
Securities available for sale are classified as both current assets and long-term restricted assets and accumulated net unrealized gains are reported in Other Comprehensive Income. In connection with the Company's private
placement consummated on January 29, 2004 and the amendment of the private placement agreement on May 4, 2004, the Company has escrowed 2.7 million shares of Plug Power common stock (see Note 8 - Shareholders' Equity).
The principal components of the Company's securities available for sale consist of the following at:
(Dollars in thousands, except stock price and share data)
Quoted | Quoted | |||||||||||
Market | Market | |||||||||||
Book | Unrealized | Recorded | Price | Book | Unrealized | Recorded | Price | |||||
Security | Basis | Gain | Fair Value | Per NASDAQ | Ownership | Shares | Basis | Gain | Fair Value | Per NASDAQ | Ownership | Shares |
September 30, 2004 | ||||||||||||
March 31, 2005 | ||||||||||||
Plug Power: | ||||||||||||
Current | $ 5,319 | $13,867 | $19,186 | $ 6.41 | 4.09% | 2,993,227 | $ 5,141 | $13,954 | $19,095 | $ 6.60 | 3.97% | 2,893,227 |
Restricted(1) | 4,797 | 12,510 | 17,307 | $ 6.41 | 3.69% | 2,700,000 | 4,797 | 13,023 | 17,820 | $ 6.60 | 3.70% | 2,700,000 |
Total | $10,116 | $26,377 | $36,493 | 7.78% | 5,693,227 | $ 9,938 | $26,977 | $36,915 | 7.67% | 5,593,227 | ||
December 31, 2003 | ||||||||||||
Plug Power | $10,791 | $33,240 | $44,031 | $ 7.25 | 8.36% | 6,073,227 | ||||||
December 31, 2004 | ||||||||||||
Plug Power: | ||||||||||||
Current | $ 5,141 | $12,537 | $17,678 | $6.11 | 3.95% | 2,893,227 | ||||||
Restricted(1) | 4,797 | 11,700 | 16,497 | $6.11 | 3.69% | 2,700,000 | ||||||
$ 9,938 | $24,237 | $34,175 | 7.64% | 5,593,227 |
(1)
12
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The book basis roll forward of Plug Power securities is as follows:
Plug Power - Current
(Dollars in thousands) | Sept. 30, | Dec. 31, | Mar. 31, | Dec. 31, |
2004 | 2003 | 2005 | 2004 | |
Securities available for sale, beginning of period | $10,791 | $14,344 | $ 5,141 | $10,791 |
Sale of shares | (675) | (3,553) | - | (853) |
Transfer 3,000,000 shares to restricted on 1/29/04 | (5,330) | - | - | (5,330) |
Transfer 300,000 shares from restricted on 5/6/04 | 533 | - | - | 533 |
Securities book basis | 5,319 | 10,791 | 5,141 | 5,141 |
Unrealized gain on securities available for sale | 13,867 | 33,240 | 13,954 | 12,537 |
Securities available for sale, end of period | $19,186 | $44,031 | $19,095 | $17,678 |
Plug Power - Restricted
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(Dollars in thousands) | Mar. 31, | Dec. 31, |
2005 | 2004 | |
Securities available for sale, beginning of period | $ 4,797 | $ - |
Transfer 3,000,000 shares from current on 1/29/04 | - | 5,330 |
Transfer 300,000 shares to current on 5/6/04 | - | (533) |
Securities book basis | 4,797 | 4,797 |
Unrealized gain on securities available for sale | 13,023 | 11,700 |
Securities available for sale - restricted, end of period | $17,820 | $16,497 |
13
Accumulated unrealized gains related to securities available for sale are as follows:
Sept. 30, | Dec. 31, | Mar. 31, | Dec. 31, | |
(Dollars in thousands) | 2004 | 2003 | 2005 | 2004 |
Accumulated unrealized gains | $ 26,377 | $ 33,240 | $ 26,977 | $24,237 |
Accumulated deferred tax expense | ||||
on unrealized gains | (10,550) | (13,296) | ||
Accumulated deferred tax expense on unrealized gains | (10,790) | (9,695) | ||
Accumulated net unrealized gains | $ 15,827 | $ 19,944 | $ 16,187 | $14,542 |
The Company's effective income tax benefit (expense) rate from operations differed from the Federal statutory rate as follows:
Three months ended | Nine months ended | Three months ended | ||||||
Sept. 30, | Sept. 30, | Sept. 30, | Mar. 31, | |||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | |||
Federal statutory tax rate | 34.00% | (34.00)% | 34.00% | (34.00)% | 34.00% | |||
State taxes, net of federal tax effect | 6.00 | (1.76) | 5.58 | 3.43 | 5.79 | 4.15 | ||
Other expense, net | (.25) | ( 1.10) | (.18) | ( 8.48) | ||||
Adjustment for projected annual effective tax rate | (24.06) | - | ||||||
Other benefit, net | (.03) | .39 | ||||||
Tax rate | 39.75% | (36.86)% | 39.40% | (39.05)% | 15.70% | 38.54% |
13
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Income tax benefit (expense) consists of the following:
Three months ended | Nine months ended | |||
(Dollars in thousands) | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, |
2004 | 2003 | 2004 | 2003 | |
Operations before minority interest | ||||
Federal | $ - | $ - | $ 96 | $ - |
State | - | 74 | (62) | 30 |
Deferred | 2,473 | (499) | 3,820 | (104) |
Total continuing operations | $2,473 | $ (425) | $3,854 | $ (74) |
Discontinued operations | ||||
Federal | - | - | - | - |
State | - | - | - | - |
Deferred | - | - | - | ( 8) |
Total discontinued operations | - | - | - | ( 8) |
Total | $2,473 | $ (425) | $3,854 | $ (82) |
Items credited directly to shareholders' equity: | ||||
Increase in unrealized gain on securities available for sale - Deferred | $2,437 | $ 40 | $2,745 | $ 634 |
Expenses for employee stock options recognized differently for financial reporting/tax purposes - Federal |
2 |
- |
130 |
1 |
Derivative tax asset - Deferred | - | - | 695 | - |
$ 2,439 | $ 40 | $ 3,570 | $ 635 |
Deferred tax assets and (liabilities) consist of the following tax effects relating to temporary differences and carryforwards:
(Dollars in thousands) | Sept. 30, | Dec. 31, | ||
2004 | 2003 | |||
Current deferred tax assets (liabilities): | ||||
Bad debt reserve | $ - | $ 264 | ||
Inventory valuation | 14 | 3 | ||
Inventory capitalization | 20 | 20 | ||
Securities available for sale | (6,431) | (15,289) | ||
Vacation pay | 170 | 181 | ||
Warranty and other sale obligations | 17 | 11 | ||
Stock options | 269 | 269 | ||
Other reserves and accruals | 76 | 60 | ||
Net current deferred tax liabilities | $(5,865) | $(14,481) | ||
Non-current deferred tax assets (liabilities): | ||||
Net operating loss | $ 8,979 | $ 5,785 | ||
Property, plant and equipment | (145) | (145) | ||
Securities available for sale - restricted | (5,989) | - | ||
Derivatives | 1,665 | - | ||
Other | 239 | 239 | ||
Research and development tax credit | 459 | 459 | ||
Alternative minimum tax credit | 54 | 150 | ||
5,262 | 6,488 | |||
Valuation allowance | (1,836) | (1,836) | ||
Net non-current deferred tax assets | $ 3,426 | $ 4,652 | ||
Other Credits | $ (24) | $ (24) |
14
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended | ||||
(Dollars in thousands) | Mar. 31, | Mar. 31, | ||
2005 | 2004 | |||
Operations before minority interest | ||||
Federal | $ - | $ 96 | ||
State | (25) | (23) | ||
Deferred | 1,234 | 243 | ||
Total | $1,209 | $ 316 | ||
Income tax benefit (expense) allocated directly to shareholders' equity: | ||||
Change in unrealized (gain) loss on available for sale securities - Deferred tax (expense) benefit | $(1,096) | $(238) | ||
Expenses for employee stock options recognized differently for financial reporting/tax purposes - Federal tax benefit |
2 |
75 | ||
$(1,094) | $(163) |
The valuation allowance at September 30, 2004March 31, 2005 and December 31, 20032004 was $1.836 million. It is anticipated that a full valuation allowance will be required by the end of 2005. The provision for this quarter has been adjusted to reflect the projected annual effective rate including the anticipated impact of a full valuation allowance. The valuation allowance reflects the estimate that it was more likely than not that certain net operating losses may be unavailable to offset future taxable income.
14
Common Shares
Changes in common shares issued are as follows:
Nine | ||
Months Ended | Year Ended | |
Sept. 30, | Dec. 31, | |
2004 | 2003 | |
Balance, beginning | 35,776,510 | 35,648,135 |
Issuance of shares for stock option exercises | 87,300 | 128,375 |
Issuance of shares for private placement | 1,418,842 | - |
Balance, ending | 37,282,652 | 35,776,510 |
Three | ||
Months Ended | Year Ended | |
Mar. 31, | Dec. 31, | |
2005 | 2004 | |
Balance, beginning | 38,650,949 | 35,776,510 |
Issuance of shares for stock option exercises | - | 193,768 |
Issuance of shares for private placement | - | 2,680,671 |
Balance, ending | 38,650,949 | 38,650,949 |
Treasury Stock
Changes in treasury stock shares are as follows:
Nine | Three | |||
Months Ended | Year Ended | Months Ended | Year Ended | |
Sept. 30, | Dec. 31, | Mar. 31, | Dec. 31, | |
2004 | 2003 | 2005 | 2004 | |
Balance, beginning | 8,035,974 | 8,020,250 | 8,040,736 | 8,035,974 |
Shares acquired for cash | 4,762 | 15,724 | - | 4,762 |
Balance, ending | 8,040,736 | 8,035,974 | 8,040,736 |
Warrants Issued
On February 5, 2004, the Company issued to Chicago Investment Group, L.L.C. a warrant to purchase 28,377 shares of the Company's common stock at an exercise price of $10.572 per share. The estimated fair value of this warrant at the date issued was $1.39 per share, using a Black Scholes Option-Pricing Model and assumptions similar to those used for valuing the Company's stock options. The warrant may not be exercised untilis exercisable beginning February 5, 2005 and expires on February 5, 2006.
Reservation of Shares
The Company has reserved common shares for future issuance as of September 30, 2004March 31, 2005 as follows:
Stock options outstanding |
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Stock options available for issuance |
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Additional Investment Rights as required by amended private placement agreement |
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Registration penalty shares under private placement agreement | 66,413 |
Warrants outstanding | 28,377 |
Number of common shares reserved |
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15
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Completion of Option Exchange
On December 22, 2003, the Company announced the completion of the first phase of its stock option exchange offer. A total of 757,000 options with an average exercise price of approximately $19 were tendered by
employees and then cancelled by the Company in exchange for the future issuance of options at a one-for-two ratio. New options totaling 341,000 were issued in the final phase of the exchange offer on June 23, 2004 at an exercise price of $6.17 per share to employees and directors who were employed by the Company or served as directors of the Company from December 22, 2003, the acceptance date, through June 23, 2004.
Private Placement
OnThe Company entered into a financing transaction with Fletcher International, Ltd. ("Fletcher"), on January 29, 2004 and amended the Company issued toterms of such transaction on May 4, 2004. To date Fletcher International, Ltd., or Fletcher, in a private placement (1) 1,418,842has purchased 2,680,671 shares of our common stock for an aggregate purchase price of $10 million, or $7.048 per share, and (2) rightspursuant to purchase up to an additional $26 million of our common stock and in certain instances up to 3,000,000 shares of Plug Power Inc. (NASDAQ:PLUG) common stock owned by us, which rights are referred to herein assuch financing transaction. In addition, Fletcher has the additional investment rights.
On May 4, 2004, the Company amended its agreement with Fletcher. This agreement, as amended, ("the 2004 Private Placement") includes a change in the exercise price for the rights to purchase additional shares of MTI common stock to a fixed price $6.34 per share from, in the original agreement, $7.048 per share until December 31, 2005 and the lesser of $7.048 per share or a variable price in 2006. The change to a fixed price substantially reduces the potential for shareholder dilution if shares had been purchased at a variable price in 2006. The price remains subject to adjustment upon the occurrence of certain limited events. The 2004 Private Placement, also includes: (1) an increase in the rights to purchase additional shares of MTI common stock to $28 million from $26 million, (2) a reduction in Fletcher's right to purchase Plug Poweran additional $20 million of the Company's common stock, escrowed by the Company to a maximum of 2,700,000 shares from a maximum of 3,000,000 shares, (3) an extension of the exercise period for the righ t to purchase Plug Power common stock toon one or more purchases between June 1, 2005 and December 31, 2006occasions, at a price of $6.023
15
(adjusted from a one-time purchase in June of 2005, (4) an extension of MTI's ability to withdraw Plug Power common stock from escrow through December 31, 2006 instead of through June 30, 2005, and (5) an extension of the exercise period for the right to invest the first $8 million in MTI's common stock to$6.34) per share at any time prior to December 31, 2004 from any time prior2006. Fletcher also has the right to ninety business days afterreceive Company shares without payment upon the effective dateoccurrence of MTI's registration statement.
On May 20, 2004, the Company's registration statementcertain events, including but not limited to, failing to register for resale with the SEC became effective for 1,418,842shares purchased by Fletcher on the time table agreed to, a restatement of the Company's financial statements, change of control of the Company and issuance of securities at a price below Fletcher's purchase price. We have filed registration statements covering all of the shares purchased by Fletcher to date and in the event of any additional purchases we are similarly obligated to file one or more registration statements covering the resale of such shares. TheFletcher also has the right to purchase up to 2,700,000 shares of Plug Power common stock owned by us, potentially at a discount to the market price of such shares at the time of purchase.
We filed a registration statement permits Fletcher to re-sellon January 6, 2005 covering the resale of 1,261,829 shares of our common stock purchased by Fletcher on December 22, 2005. The Company failed to meet its contractual obligation with Fletcher to have such registration statement declared effective by March 22, 2005 and therefore under the terms of the Fletcher agreement we were required to issue additional shares of common stock to Fletcher and the exercise
price for the Fletcher additional investment rights has been reduced to $6.023 per share. We are required to issue a number of shares of common stock that will result in Fletcher having effectively made its December 2004 investment at a price per share that is lower than the actual price paid. We refer to this reduced exercise price as the "deemed exercise price." More specifically, for each month during which we fail to satisfy the registration requirement, the deemed exercise price is reduced by $0.317 per share. As a consequence, on April 20, 2005 we issued 66,413 shares of common stock to Fletcher without any additional payment required by Fletcher, representing a deemed exercise price for Fletcher's December 2004 investment of $6.023 per share. In addition, since we are required to file a registration statement covering the resale of any such additional shares issued to them.Fletcher, we amended the registration statement initially filed in January 2005 to include the additional 66,413 sha res of common stock. That registration statement, covering the resale of 1,328,242 shares of common stock, was declared effective by the SEC on April 21, 2005.
Additional Investment Rights
The additional investment rights provide Fletcher with the right, but not the obligation, to purchase up to an additional $8 million of our common stock at any time prior to December 31, 2004, at a price per share equal to $6.34. In addition, in the event Fletcher exercises in full such $8 million investment right, Fletcher shall have
the right, but not the obligation, to purchase, in a single purchase or multiple purchases, up to an additional $20 million of our common stock at any time prior to December 31, 2006 at a price per share equal to $6.34,$6.023 (adjusted from $6.34), which date and price may be extended and adjusted, respectively, in the event that we have not satisfied our contractual obligations with respect to the registration for resale of common stock issued or issuable to Fletcher.
The table below illustrates the number of shares Fletcher would receive upon exercise of its $20 million additional investment right at a price per share equal to $6.34$6.023 (adjusted from $6.34) (such exercise price is subject to adjustment as described below under "Adjustment Provisions"). Note thatFurther, the Company's 2004 Private Placement
16
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
private placement agreement with Fletcher provides that the maximum number of shares we could potentially issue to Fletcher is 8,330,411 shares.
Shares Issuable in Purchase Price Exchange for $20 MTI Stock Million Investment $6.34 3,154,575 Purchase Price MTI Stock Shares Issuable in Exchange for $20 Million Investment $6.023 3,320,604
Plug Power Shares
In connection with the 2004 Private Placement agreement, theThe Company has reduced theplaced 2,700,000 shares of Plug Power common stock in escrow that are available for purchase by Fletcher in certain instances. Fletcher may, on one or multiple occasions, from June 1, 2005 to December 31, 2006, exercise its right to purchase from us a number of shares of Plug Power it has deposited into escrowcommon stock totaling $10,000,000 divided by the prevailing price (as defined below) per share of Plug Power common stock, but only to 2,700,000the extent of the number of shares a reduction of 300,000 shares.remaining in escrow. Commencing immediately after the SEC declaresdeclared effective on May 20, 2004 the registration statement relating to shares of our common stock thatowned by Fletcher, owns (or may acquire), we continue to have the right to have 250,000 of such shares released from escrow to us, on a monthly basis, in the event that on any day during such month, the prevailing price of our common stock exceeds $6.343 (which price may have been adjusted to reflect stock splits, recombinations, stock
dividends or the like). If Fletcher does not exercise its right to purchase the first additional $8 million of our common stock, all of such Plug Power shares will be released from escrow to us. If, however, Fletcher does exercise such right, then at any time, on one or multiple occasions, from June 1, 2005 to December 31, 2006, Fletcher may exercise its right to purchase from us a number of shares of Plug Power common stock totaling $10,000,000 divided by the prevailing price per share of Plug Power common stock, but only to the extent of the number of shares remaining in escrow.
16
The exercise price for the Plug Power investment right is $10,000,000 less the positive difference between $18,000,000 and the product of the sum of 1,418,842 and the quantity of2,680,671 shares purchased in the exercise of the first $8 million of additional investment rights multiplied by the prevailing price per share of our common stock on the date Fletcher elects to exercise such right, all divided by the quotient obtained by dividing 10,000,000 by the prevailing price of Plug Power common stock on the date Fletcher elects to exercise such right. As used herein, a prevailing price is the average of the daily volume-weighted average price per share of common stock during the sixty-business-day period ending three days prior to the date Fletcher elects to exercise such right, provided however that the price may not exceed the average of thedaily volume-weighted average prices for any ten business days within such sixty-business-day per iod.sixty-business day period. Each of the above referenced per shareexercise prices for the additional investment rights wasis subject to adjustment as described below under"AdjustmentAdjus tment Provisions."
As a result of this exercise price calculation, we may be required to sell shares of Plug Power at a discount to prices we would otherwise obtain in sales at market prices. The table below illustrates such potential discounts
based on assumed decreases in our stock price from $6.00$5.00 (which, for the purposes of this illustration, serves as an approximation of the price of our common stock as of March 11, 2004, the date we filed Amendment No. 1 to our Registration Statement on Form S-3 (SEC File No. 333-112464))stock), and an assumed price of Plug Power common stock at the time of exercise. Note that Fletcher's right to purchase Plug Power shares is conditioned on the exercising of Fletcher's first $8 million of additional investment rights.
Assumed | Effective | Percentage | |||
MTI | Plug | Exercise | Discount | Plug Shares | Proceeds to |
Price | Price | Price | to Market | Purchased | MTI |
$6.00 | $7.00 | $5.66 | 19% | 1,428,571 | $8,084,031 |
$4.50 | $7.00 | $2.84 | 59% | 1,428,571 | $4,063,023 |
$3.00 | $7.00 | $0.03 | 99% | 1,428,571 | $ 42,016 |
$1.50 | $7.00 | $ - | 100% | 1,428,571 | $ - |
| Assumed | Effective | Percentage | ||
MTI | Plug | Exercise | Discount | Plug Shares | Proceeds to |
Price | Price | Price | to Market | Purchased | MTI |
$5.00 | $7.00 | $3.78 | 46% | 1,428,571 | $5,399,998 |
$4.50 | $7.00 | $2.84 | 59% | 1,428,571 | $4,063,023 |
$3.00 | $7.00 | $0.03 | 99% | 1,428,571 | $ 42,016 |
$1.50 | $7.00 | $ - | 100% | 1,428,571 | $ - |
17
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Adjustment Provisions
The 2004 Private Placement agreementprivate placement with Fletcher also provides that the Company may be required to issue additional shares to Fletcher, reduce the exercise prices described above for the additional investment rights and/or extend the investment term upon the occurrence of certain events (each as more fully described below) including:
Restatement
In the event we restate any portion of our financial statements prior to January 29, 2005, or prior to the first anniversary of the closing of any additional investment, as the casemay be, the exercise price for the additional investment rights willmay be adjusted to equal the prevailingaverage price (as defined) of our common stock sixty days after we restate our financial statements.statements if the average price of the Company's common stock sixty days after a restatement is five percent lower than the average price three days before the restatement (a "Qualifying Restatement"). In addition, with respect to any investments made prior to the time of the restatement, Fletcher willwould receive additional shares of common stock such that all such investments will have been effectively made at such adjusted exercise price.
17
The following table illustrates the number of additional shares of common stock Fletcher would receive without any additional payment on its part in the event that the average price of the Company's common stock sixty days after a restatement (as defined) is $5.00 per share and $4.00 per share.
Number of Shares | Qualifying | ||
Investments | Issued at the time of the | Restatement | Additional Shares |
To Date | Original Investment | Price | to be Issued |
$18,000,000 | 2,680,671 | $5.00 | 919,329 |
$18,000,000 | 2,680,671 | $4.00 | 1,819,329 |
In response to comments received from the SEC staff of the Division of Corporation Finance, the Company previously amended its current Annual Report on Form 10-K for the year ended December 31, 2004 and its prior
Annual Reports on Form 10-K for the years ended December 31, 2003 and December 31, 2002 to supplement the Company's financial statements with additional financial statements of SatCon Technology Corporation and Plug Power, which were all previously publicly available, and to include certain summary financial information for both companies in the relevant notes to the Company's financial statements. In the Company's opinion, the above do not constitute restatements for purposes of its agreement with Fletcher.
Change in Control
In the event of a change of control of our company prior to sixty days after the expiration of the additional investment term, we may have to issue additional shares of our common stock to Fletcher and the additional investment rights (including the right to purchase the Plug Power shares) may be accelerated. If the consideration per sharepaid to our shareholders in the change of control transaction is less than twice the amount of the price per share paid by Fletcher for any of its investments pursuant to the agreement with Fletcher orof the certificate of additional investment rights, then we must issue to Fletcher a number of shares of our common stock such that all of its investments will have been effectively made at a price per share equal to such per sharechange of control consideration multiplied by 0.5. In addition, if our shareholders have not approved the transaction with Fl etcher prior to a change of control of our company, Fletchermay make a net basis settlement with respect to its additional investment rights. The mechanics of a net basis settlement are described below under "
18
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dilutive Issuances
If, on or prior to December 31, 2004 we issue any equity securities at a price below $7.048 as it relates to the initial $10 million investment and $6.34 as it relates to all additional investments, then we must issue to Fletcher a number of additional shares to reflect the number of shares it would have acquired if its purchase price was such lower price and adjust the exercise price for the additional investment rights to such lower price. In addition, if after December 31, 2004 and ending December 31, 2006, we issue any equity securities at a price below $7.048 as it relates to the initial $10 million investment and $6.34 as it relates to any additional investments which have been made, the exercise price for the additional investment rights shall be adjusted to provide Fletcher "weighted average" anti-dilution protection and we must issue to Fletcher a number of additional shares such that all prior investments will have been effectively made at such adjusted exercise price.
Registration Obligations
In the event we fail to satisfy our contractual obligations to register for resale shares of common stock issued or issuable to Fletcher, then we must issue to Fletcher a number of additional shares to reflect the number of shares it would have acquired if its purchase price was based on the actual exercise price reduced by five percent for each month in which we fail to satisfy our obligations and adjust the exercise price for the additional investment rights to such lower price. In addition, such failure will result in an extension of the investment term for each day we fail to satisfy our registration obligations. These registration obligations include, among other things, maintaining the effectiveness of registration statements.
As described above, we failed to satisfy the registration requirement for the 1,261,829 shares of common stock purchased by Fletcher on December 22, 2004 until April 21, 2005.
18
Other
The 2004 Private Placement agreementprivate placement also provides Fletcher certain other rights including, but not limited to, indemnification rights with respect to (1) breaches of representations, warranties and covenants contained in the agreements with Fletcher, and (2) misstatements in or omissions from the prospectus and the registration statement relating to shares of our common stock that Fletcher owns or may acquire.
Placement and Amendment Fees
In connection with the 2004 Private Placement, in February 2004 the Company paid placement fees, recorded in equity against the proceeds of the private placement, of $600 thousand to Chicago Investment Group, L.L.C. and issued a warrant to purchase 28,377 shares of the Company's common stock at an exercise price of $10.572 per share. The warrant may not be exercised until February 5, 2005 and expires on February 5, 2006. In connection with the amendment of the private placement, the Company paid advisory fees of $300 thousand to Citigroup Global Markets Inc.
19
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following is the reconciliation of the numerators and denominators of the basic and diluted (loss) incomeloss per share computations:
Three months ended | ||||
Mar. 31, | Mar. 31, | |||
(Dollars in thousands, except shares and per share data) | 2005 | 2004 | ||
Loss | $ (6,054) | $ (242) | ||
Basic and Diluted Loss per Share: | ||||
Common shares outstanding, beginning of period | 30,610,213 | 27,740,536 | ||
Weighted average common shares issued during the period | - | 1,008,756 | ||
Weighted average common shares reacquired during the period | - | (157) | ||
Weighted average shares outstanding, end of period | 30,610,213 | 28,749,135 | ||
Loss per weighted average share | $ (0.20) | $ (0.01) |
Three months ended | Nine months ended | |||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |
(Dollars in thousands, except per share data) | 2004 | 2003 | 2004 | 2003 |
(Loss) income from continuing operations | $ (3,393) | $ 923 | $(4,998) | $ 461 |
Basic (Loss) Income per Share: | ||||
Common shares outstanding, beginning of period | 29,240,791 | 27,639,260 | 27,740,536 | 27,627,885 |
Unvested restricted common shares | - | (50,000) | - | (50,000) |
Weighted average common shares issued during the period | 1,125 | - | 1,335,297 | 10,646 |
Weighted average common shares reacquired during the period | - | - | (3,233) | - |
Weighted average shares outstanding, end of period | 29,241,916 | 27,589,260 | 29,072,600 | 27,588,531 |
(Loss) income per weighted average share | $(0.12) | $ 0.03 | $(0.17) | $ 0.02 |
Diluted (Loss) Income per Share: | ||||
Common shares outstanding, beginning of period | 29,240,791 | 27,639,260 | 27,740,536 | 27,627,885 |
Weighted average common shares issued during the period | 1,125 | - | 1,335,297 | 10,646 |
Weighted average number of shares reacquired during the period | - | - | (3,233) | - |
Weighted average number of options | - | 1,039,181 | - | 739,579 |
Weighted average number of warrants | - | - | - | - |
Weighted average shares outstanding | 29,241,916 | 28,678,441 | 29,072,600 | 28,378,110 |
(Loss) income per weighted average share | $ (0.12) | $ 0.03 | $(0.17) | $ 0.02 |
For the three and nine months ended September 30, 2004,March 31, 2005, options to purchase 3,793,5313,754,250 shares of common stock at exercise prices ranging from $0.54 to $20.92 per share, additional investment rights to purchase approximately 4,416,4053,320,604 shares ($28,000,00020 million divided by $6.34$6.023 per share) of common stock with an exercise price of $6.34$6.023 per share and warrants to purchase 28,377 shares of common stock with an exercise price of $10.572 per share were outstanding but were not included in the computations of Loss per Share-assuming dilution because the Company incurred losses during this period and inclusion would be anti-dilutive.
For the three and nine months ended September 30, 2003,March 31, 2004, options to purchase 2,825,650 shares of common stock at exercise prices ranging from $0.54 to $20.92 per share, additional investment rights to purchase approximately 3,688,990 shares ($26,000,000 divided by $7.048 per share) of common stock with an exercise price of $7.048 per share and warrants to purchase 300,00028,377 shares of common stock with an exercise price of $12.56$10.572 per share were outstanding but were not included in the computations of EPS-assumingLoss per Share-assuming dilution because the Company incurred losses during this period and inclusion would be anti-dilutive. Additionally, under SFAS No. 128,Earnings per Share, 50,000 shares of non-vested restricted common stock, which vest solely upon continued service, were excluded from the computation of basic earnings per share.
The Company sold shares of the following securities and recognized gains and proceeds as follows:
Three months ended | Nine months ended | |||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |
(Dollars in thousands, except shares) | 2004 | 2003 | 2004 | 2003 |
Plug Power | ||||
Shares sold | - | 1,000,000 | 380,000 | 2,000,000 |
Proceeds | $ - | $ 5,024 | $ 3,804 | $10,251 |
Gain on sales | $ - | $ 3,247 | $ 3,129 | $ 6,698 |
SatCon | ||||
Shares sold | - | 581,100 | - | 773,600 |
Proceeds | $ - | $ 1,237 | $ - | $ 1,403 |
Gain on sales | $ - | $ 876 | $ - | $ 785 |
Total net gain on sales | $ - | $ 4,123 | $ 3,129 | $ 7,483 |
Three months ended | ||||
Mar. 31, | Mar. 31, | |||
(Dollars in thousands, except shares) | 2005 | 2004 | ||
Plug Power | ||||
Shares sold | - | 380,000 | ||
Proceeds | $ - | $ 3,804 | ||
Gain on sales | $ - | $ 3,129 |
20
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)19
Nine months ended | Three months ended | |||
Sept. 30, | Mar. 31, | |||
(Dollars in thousands) | 2004 | 2003 | 2005 | 2004 |
Non-cash Operating, Investing and Financing Activities: | ||||
Additional paid-in-capital resulting from stock option exercises treated differently for financial reporting and tax purposes | $ 130 | $ 1 | $ 2 | $ 75 |
Change in investment and paid-in-capital resulting from other investors' activity in MTI MicroFuel Cells Inc. stock | 344 | 191 | 46 | - |
Derivative tax asset | 695 | - | ||
Prepaid material in exchange for investment in subsidiary | - | 3 |
The Company operates in two business segments, New Energy and Test and Measurement Instrumentation. The New Energy segment is focused on commercializing direct methanol micro fuel cells ("DMFCs").DMFCs. The Test and Measurement Instrumentation segment designs, manufactures, markets and services computer-based balancing systems for aircraft engines, high-performance test and measurement instruments and systems, and wafer characterization tools for the semiconductor industry. The Company's principal operations are located in North America.
The accounting policies of the New Energy and Test and Measurement Instrumentation segments are the same as those described in the summary of significant accounting policies in the Company's consolidated financial statements (See Note 1) for the year ended December 31, 2003.2004. The Company evaluates performance based on profit or loss from operations before income taxes, accounting changes, 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 "Reconciling Items" column includes minority interests in
a consolidated subsidiary. In addition, segments' noncash items include any depreciation and amortization in reported profit or loss. The New Energy segment figures include the Company's micro fuel cell operations, equity securities of Plug Power, and SatCon, gains (losses) on the sale of these securities, (losses) gains related to the embedded derivative for the purchase of Plug Power common stock and warrants to purchase SatCon common stock.
(Dollars in thousands) | Test and | Condensed | |||
Measurement | Reconciling | Consolidated | |||
Three months ended March 31, 2005 | New Energy | Instrumentation | Other | Items | Totals |
Product revenue | $ - | $1,403 | $ - | $ - | $ 1,403 |
Funded research and development revenue | 324 | - | - | - | 324 |
Research and product development expenses | 2,391 | 269 | - | - | 2,660 |
Selling, general and administrative expenses | 1,375 | 479 | 1,180 | - | 3,034 |
Loss on derivatives | (3,234) | - | - | - | (3,234) |
Segment loss from operations before income taxes and minority interests | (7,336) | (49) | (318) | - | (7,703) |
Segment (loss) profit | (7,336) | (49) | 891 | 440 | (6,054) |
Total assets | 46,746 | 2,204 | 16,171 | - | 65,121 |
Securities available for sale | 19,095 | - | - | - | 19,095 |
Securities available for sale - restricted | 17,820 | - | - | - | 17,820 |
Derivative liability | 4,359 | - | - | - | 4,359 |
Capital expenditures | 134 | 22 | 46 | - | 202 |
Depreciation and amortization | 138 | 15 | 150 | - | 303 |
20
21
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands) | Test and | Condensed | |||
Measurement | Reconciling | Consolidated | |||
Three months ended September 30, 2004 | New Energy | Instrumentation | Other | Items | Totals |
Product revenue | $ - | $1,642 | $ - | $ - | $ 1,642 |
Funded research and development revenue | 175 | - | - | - | 175 |
Research and product development expenses | 2,970 | 263 | - | - | 3,233 |
Selling, general and administrative expenses | 312 | 433 | 781 | - | 1,526 |
Loss on derivatives | (2,635) | - | - | - | (2,635) |
Segment (loss) profit from continuing operations before income taxes and minority interests |
(5,994) |
187 |
(415) |
- |
(6,222) |
Segment (loss) profit | (5,994) | 187 | 2,058 | 356 | (3,393) |
Total assets | 53,843 | 1,870 | 6,831 | - | 62,544 |
Securities available for sale | 19,186 | - | - | - | 19,186 |
Securities available for sale - restricted | 17,307 | - | - | - | 17,307 |
Derivative liability | 4,163 | - | - | - | 4,163 |
Capital expenditures | 154 | 23 | 240 | - | 417 |
Depreciation and amortization | 116 | 17 | 110 | - | 243 |
Three months ended September 30, 2003 | |||||
Product revenue | $ - | $ 1,598 | $ - | $ - | $ 1,598 |
Funded research and development revenue | 310 | - | - | - | 310 |
Research and product development expenses | 1,910 | 286 | - | - | 2,196 |
Selling, general and administrative expenses | 806 | 423 | 625 | - | 1,854 |
Gain on derivatives | 2 | - | - | - | 2 |
Gain on sale of securities available for sale, net | 4,123 | - | - | - | 4,123 |
Segment profit (loss) from continuing operations before income taxes and minority interests |
1,647 |
90 |
(584) |
- |
1,153 |
Segment profit (loss) | 1,647 | 90 | (1,009) | 195 | 923 |
Total assets | 40,584 | 2,211 | 10,280 | - | 53,075 |
Securities available for sale | 31,156 | - | - | - | 31,156 |
Capital expenditures | 210 | 24 | 102 | - | 336 |
Depreciation and amortization | 73 | 25 | 60 | - | 158 |
22
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands) | Test and | Condensed | |||
Measurement | Reconciling | Consolidated | |||
Three months ended March 31, 2004 | New Energy | Instrumentation | Other | Items | Totals |
Product revenue | $ - | $ 1,579 | $ - | $ - | $ 1,579 |
Funded research and development revenue | 388 | - | - | - | 388 |
Research and product development expenses | 2,401 | 267 | - | - | 2,668 |
Selling, general and administrative expenses | 313 | 391 | 603 | - | 1,307 |
Loss on derivatives | (1,281) | - | - | - | (1,281) |
Gain on sale of securities available for sale, net | 3,129 | - | - | - | 3,129 |
Segment (loss) profit from continuing operations before income taxes and minority interests |
(766) |
201 |
(255) |
- |
(820) |
Segment (loss) profit | (766) | 201 | 61 | 262 | (242) |
Total assets | 50,422 | 2,546 | 19,141 | - | 72,109 |
Securities available for sale | 20,792 | - | - | - | 20,792 |
Securities available for sale - restricted | 23,160 | - | - | - | 23,160 |
Capital expenditures | 188 | 10 | 199 | - | 397 |
Depreciation and amortization | 94 | 16 | 81 | - | 191 |
(Dollars in thousands) | Test and | Condensed | |||
Measurement | Reconciling | Consolidated | |||
Nine months ended September 30, 2004 | New Energy | Instrumentation | Other | Items | Totals |
Product revenue | $ - | $4,452 | $ - | $ - | $ 4,452 |
Funded research and development revenue | 754 | - | - | - | 754 |
Research and product development expenses | 8,049 | 858 | - | - | 8,907 |
Selling, general and administrative expenses | 1,048 | 1,265 | 2,577 | - | 4,890 |
Loss on derivatives | (2,424) | - | - | - | (2,424) |
Gain on sale of securities available for sale, net | 3,129 | - | - | - | 3,129 |
Segment (loss) profit from continuing operations before income taxes and minority interests |
(8,441) |
149 |
(1,490) |
- |
(9,782) |
Segment (loss) profit | (8,441) | 149 | 2,364 | 930 | (4,998) |
Total assets | 53,843 | 1,870 | 6,831 | - | 62,544 |
Securities available for sale | 19,186 | - | - | - | 19,186 |
Securities available for sale - restricted | 17,307 | - | - | - | 17,307 |
Derivative liability | 4,163 | - | - | - | 4,163 |
Capital expenditures | 662 | 59 | 527 | - | 1,248 |
Depreciation and amortization | 318 | 50 | 289 | - | 657 |
Nine months ended September 30, 2003 | |||||
Product revenue | $ - | $ 4,304 | $ - | $ - | $ 4,304 |
Funded research and development revenue | 1,422 | - | - | - | 1,422 |
Research and product development expenses | 5,218 | 832 | - | - | 6,050 |
Selling, general and administrative expenses | 1,817 | 1,219 | 1,523 | - | 4,559 |
Loss on derivatives | (4) | - | - | - | (4) |
Gain on sale of securities available for sale, net | 7,483 | - | - | - | 7,483 |
Impairment losses | (418) | - | - | - | (418) |
Segment profit (loss) from continuing operations before income taxes and minority interests |
1,281 |
250 |
(1,342) |
- |
189 |
Segment profit (loss) | 1,281 | 250 | (1,403) | 346 | 474 |
Total assets | 40,584 | 2,211 | 10,280 | - | 53,075 |
Securities available for sale | 31,156 | - | - | - | 31,156 |
Capital expenditures | 371 | 32 | 440 | - | 843 |
Depreciation and amortization | 205 | 82 | 143 | - | 430 |
The following table presents the details of "Other" segment profit (loss):profit:
Three months ended | Nine months ended | |||
(Dollars in thousands) | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, |
2004 | 2003 | 2004 | 2003 | |
Corporate and Other Income (Expense): | ||||
Depreciation and amortization | $ (110) | $ (60) | $ (289) | $ (143) |
Interest expense | - | - | - | (7) |
Interest income | 4 | 50 | 27 | 96 |
Income tax benefit (expense) | 2,473 | (425) | 3,854 | (74) |
Income from discontinued operations, net | - | - | - | 13 |
Other expense, net | (309) | (574) | (1,228) | (1,288) |
Total corporate and other income (expense) | $2,058 | $(1,009) | $ 2,364 | $(1,403) |
23
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended | ||||
(Dollars in thousands) | Mar. 31, | Mar. 31, | ||
2005 | 2004 | |||
Corporate and Other Income (Expense): | ||||
Depreciation and amortization | $ (150) | $ (81) | ||
Interest income | 54 | 16 | ||
Income tax benefit | 1,209 | 316 | ||
Other expense, net | (222) | (190) | ||
Total corporate and other income | $ 891 | $ 61 |
In connection with the National Institute of Standards and Technology ("NIST") contract billings and supplier accounts payable, as of September 30, 2004 and December 31, 2003, theThe Company has a liability topurchases materials from E.I. du Pont de Nemours and Company ("Dupont"DuPont") (a minority, a shareholder in MTI Micro)Micro, such purchases totaled $45 thousand and $123 thousand for approximately $53the three months ended March 31, 2005 and $482004, respectively. The Company has a liability to DuPont for materials purchases totaling $9 thousand respectively.as of March 31, 2005 and a net receivable totaling $2 thousand as of December 31, 2004. This liability is included in the financial statement line"Accrued "Accrued liabilities - related parties."
On March 29, 2004, The net receivable is included in the Company acquired 4,762 shares of its common stock from its CEO, Dale Church, in connection with a revised tax liability of Mr. Church resulting from the vesting of restricted stock in October 2003. The Company had previously acquired 15,724 shares in connection with the payment of Mr. Church's original tax liability as reported on October 28, 2003.
financial statement line "Other receivables - related parties."
None.In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151,Inventory Costs-an amendment of ARB No. 43, Chapter 4("FAS 151"), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires idle facility expenses, freight, handling costs and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is in the process of evaluating the impact of this standard on its consolidated financial statements.
21
In December 2004, the FASB issued SFAS No. 123 (Revised 2004)Share-Based Payment ("SFAS No. 123R"). SFAS No. 123R addresses all forms of share-based payment ("SBP") awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R will require the Company to expense SBP awards with compensation cost for SBP transactions measured at fair value. The FASB originally stated a preference for a lattice model because it believed that a lattice model more fully captures the unique characteristics of employee stock options in the estimate of fair value, as compared to the Black-Scholes model which the Company currently uses for its footnote disclosure. The FASB decided to remove its explicit preference for a lattice model and not require a single valuation methodology. SFAS No. 123R requires the Company to adopt the new accounting provisions beginning in its first quarter of 2006. The Com pany has not yet determined the impact of applying the various provisions of SFAS No. 123R. The unvested value of share awards to be amortized into the operating statement is approximately $5.7 million as of December 31, 2004.
In December 2004, the FASB issued SFAS No. 153,Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for non-monetary asset exchanges beginning in our second quarter of fiscal 2006. The Company is in the process of evaluating the impact of this standard on its consolidated financial statements.
Lawrence
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 District Court for the Northern District of New York which were subsequently consolidated in the District Court, against First Albany Corporation ("FAC"), Mechanical Technology Incorporated, Dale Church, Edward Dohring, Beno Sternlicht, Alan Goldberg and George McNamee (former Directors of the Company), Marty Mastroianni (former President and Chief Operating Officer of the Company), and 33 other individuals ("Defendants") who purchased a total of 820,909 (2,462,727 shares post split) shares of the Company's common 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 ($0.75 per share post split). FAC acted as Placement Agent for the Defendants in the negotiati on 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 of the Plaintiff's claims as motions to modify the Bankruptcy Court sale order. The Plaintiff's claims have now been referred back to Bankruptcy Court for such consideration. In September 2003, the Bankruptcy Court issued an order permitting Plaintiffs to conduct limited discovery concerning how First Albany formed an opinion about the Company's stock up until the date the Stock Purchase Agreement was executed. Discovery has commenced.
The Company believes the claims have no merit and intends to defend them vigorously.The Company cannot predict theoutcome 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.
Ling Electronics, Inc.
On July 8, 2003, Donald R. Gililland, Sharon Gililland, Vernon Dunham and Jean Dunham, owners of 4890 E. La
Palma Avenue, Anaheim, CA 92870 ("Plaintiffs"), the former location of Ling Electronics, Inc. ("Ling"), filed22
24
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
suit in the Superior Court of California for Orange County against SatCon Power Systems, Inc., a subsidiary of SatCon Technology Corporation ("SatCon"), and Mechanical Technology. In September 2003, SatCon and the Company filed a joint answer to the complaint. In September 2004, the Company and SatCon each retained independent counsel. The matter is scheduled for trial in January 2005.
The complaint alleges breach of the lease and, among other things, Ling's failure to maintain and repair the premises. Ling was a subsidiary of the Company until it was sold to SatCon Technology Corporation in 1999. The Plaintiffs allege that the correction and repair of the various breaches by SatCon and the Company of their obligations under the lease will exceed $400,000. The building was leased from 1983 through lease expiration in 2003. The Company remained as a guarantor on the lease after the sale of Ling to SatCon.
The Company believes the claims have no merit and intends to defend them vigorously. The Company cannot predict the outcome 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 four manufacturing, laboratory and office facilities. The leases generally provide for the Company to pay either an increase 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.
Future minimum rental payments required under non-cancelable operating leases are (dollars in thousands): $139$519 remaining in 2004; $566 in 2005, $4462005; $532 in 2006, $318$327 in 2007, $316 in 2008, $289 in 2009, and $289$0 thereafter.
Warranties
A reconciliation of changes in product warranty liabilities is as follows:
Nine months ended | Year ended | Three months ended | Year ended | |
Sept. 30, | Dec. 31, | Mar. 31, | Dec. 31, | |
(Dollars in thousands) | 2004 | 2003 | 2005 | 2004 |
Balance, January 1 | $28 | $ 54 | $38 | $ 28 |
Accruals for warranties issued | 22 | 55 | 7 | 38 |
Accruals related to pre-existing warranties (including changes in estimates) | - | (66) | - | (16) |
Settlements made (in cash or in kind) | (9) | (15) | (5) | (12) |
Balance, end of period | $41 | $ 28 | $40 | $ 38 |
Licenses
The Company licenses, on a non-exclusive basis, certain DMFC technology from Los Alamos National Laboratory ("LANL"). Under this agreement, the Company is required to pay future minimum annual license fees of (dollars in thousands): $200 in 2004 and $250 thousand yearly through 2019. 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 options upon termination of employment under certain circumstances, as defined in the applicable agreements. As of September 30, 2004,March 31, 2005, the Company's potential minimum obligation to these employees was approximately $1.061$.946 million.
25
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Guaranty of Subsidiary Funding
In connection with the Strategic Alliance Agreement between MTI MicroFuel Cells Inc. ("MTI Micro") and The Gillette Company ("Gillette"), the Company guaranteed additional investments in its subsidiary, MTI Micro, of up to $20 million before September 19, 2005, if other sources of funding are not available. Immediately prior to the Gillette transaction closing in September 2003, the Company invested $11 million ($7.4 million in cash and $3.6 million through the conversion of a loan receivable to equity) of its $20 million commitment in MTI Micro common stock. In October 2003, Jeong Kim, an MTI Micro board member, invested $1 million in MTI Micro common stock and on April 7, 2004, the Company invested $15 million into MTI Micro fulfilling its guaranty obligation.
Investment Company Act
The Company's securities available for sale constitute investment securities under the Investment Company Act of 1940 (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 the Company were to be deemed an investment company, the Company would become subject to the requirements of the Investment Company Act. As a consequence, the Company would be prohibited from engaging in certain businesses or issuing certain securities, certain of the Company's contracts might be voidable, and the Company might be subject to civil and criminal penalties for noncompliance.
23
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 the Company sold some of its shares of Plug Power during fiscal 2001, this safe harbor exemption may not be available.
On December 3, 2001, the Company made an application to the SEC requesting that it either declare that the Company is not an investment company because it is primarily engaged in another business or exempt it from the provisions of the Investment Company Act for a period of time. The Company amended this application on October 20, 2003. This application is pending. If the Company's application is not granted, the Company will have to find another safe harbor or exemption that it 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 the Company was 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 the Company to sell its interest in Plug Power until the value of its securities available for sale are reduced below 40% of total assets. This could result in sales of securities in quantities of shares at depressed prices and the Company may never realize anticipated benefits from, or may incur losses on, these sales. Also, in connection with the Strategic Alliance Agreement with Gillette, the Company has agreed to indemnify Gillette against any losses arising out of or related to the
Company's noncompliance with the Investment Company Act or any regulations thereunder.
Further, the Company may be unable to sell some securities due to contractual or legal restrictions or the inability to locate a suitable buyer. Moreover, the Company may incur tax liabilities when selling assets.
Contract Losses
During 2004, MTI Micro entered into a fixed price-cost type completion contract with the U.S. Army. The contract which totals $250 thousand permits monthly cost progress payments and calls for the delivery of five DMFC power system units. These prototypes require substantial engineering to meet the performance requirements of the customer. At the end of 2004, MTI Micro forecasted that the contract would be completed during 2005 and accrued $ 540 thousand for the then anticipated cost needed to be incurred to complete the project. The expected overrun has increased to $1.036 million and the accrued contract overrun remains at $540 thousand as of March 31, 2005. Although MTI Micro believes that it will complete this contract to the satisfaction of the customer, it is possible that MTI Micro will not be successful. Through monthly reports, MTI Micro updates the customer on accomplishments, technical issues, financial status, forecast to complete and anticipated solutions.
Additionally, other contracts have forecasted costs in excess of contract values as of March 31, 2005 and December 31, 2004. As of the end of 2004, MTI Micro accrued $17 thousand for the anticipated cost overruns for the projects and the accrued contract overrun remains at $17 thousand as of March 31, 2005.
MTI Micro was formed on March 26, 2001. TheAs of March 31, 2005, the Company owns approximately 89% of theMTI Micro's outstanding capital stock of MTI Micro as of September 30, 2004.common stock.
26
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On April 7, 2004, MTI Micro sold 3,218,885 and 215,000 shares of MTI Micro common stock to the Company and a group of private investors, respectively, at a price of $4.66 per share for approximately $15 million and $1 million
respectively. As a result of the Company's investment, it has fully satisfied its remaining investment guaranty under the Gillette Agreement. Further, on May 20, 2004, MTI Micro sold 215,000 shares of MTI Micro common stock to a private investor at a price of $4.66 per share for approximately $1 million.
One component ofThe increase in the Company's paid-in-capital increase in 2004related to MTI MicroFuel Cell investment of $46 thousand for the period ended March 31, 2005, represents a $344 thousand increase forthe changes in the Company's equity investment in MTI Micro, which resulted from third-party stock transactions in MTI Micro.
Sale of Securities Available for Sale
From October 1 through November 5, 2004, the Company sold available for sale securities as follows:
(Dollars in thousands)
Company | Number of Shares Sold | Proceeds from Sales |
Plug Power | 100,000 | $675 |
Contracts
On October 20, 2004, the Company announced that its subsidiary, MTI Micro, received two contracts to demonstrate energy density advantages and to quantify potential logistical advantages of its direct methanol micro fuel cells ("DMFCs") and fuel refill systems for the United States Armed Forces. The first award, which will be administered by the Army Research, Development and Engineering Command ("RDECOM") as part of its evaluation of new technologies for field-readiness, will total approximately $250,000 over the next ten months.
The second award, a Phase I Small Business Innovative Research ("SBIR") contract from Marine Corp System Command, will provide $70,000 over the next six months to support efforts to analyze and report on current regulations and requirements necessary to field DMFCs and fuel refill systems. An optional three month period could raise the total value of the contract to $100,000.
On August 18, 2004, MTI Micro, entered into an amendment to the multi-year strategic alliance agreement with The Gillette Company ("Gillette") whereby MTI Micro, Gillette and Gillette's Duracell business unit will exclusively develop and commercialize a low-power direct methanol micro fuel cell power system and a compatible fuel refill system to power future mass market, high volume, portable consumer devices. The amendment to the agreement clarified the allocation of deliverables in milestones 3 and 4; added an additional milestone; and changed the due dates for MTI Micro'sand Gillette'sdeliverables. MTI Micro also granted a non-exclusive license to Gillette to any improvements by MTI Micro to intellectual property developed by Gillette.
24
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Item 2 contains forward-looking statements that involve risks and uncertainties, which may cause the Company's actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. See "Statement Concerning Forward-Looking Statements" on page 36.32.
Overview
The Company is primarily engaged in the development and commercialization of DMFCsMobionTM cord-free advanced portable power systems, through its majority-owned subsidiary MTI MicroMicroFuel Cells Inc. ("MTI Micro"), and in the design, manufacture, and sale of high-performance test and measurement instruments and systems through its wholly-owned subsidiary MTI Instruments. The CompanyInstruments, Inc. ("MTI Instruments"). MTI also co-founded and retains ana minority interest in Plug Power (NASDAQ:Inc. ("Plug Power") (Nasdaq: PLUG), a designer and developer of on-site energy systems based on proton exchange membrane fuel cells.
MTI Micro designs and develops DMFCsMobionTMfuel cell systems for portable power applications. A micro fuel cell is a portable power source that converts chemical energy into useable electrical energy. MTI Micro is developing a micro fuel cell
that uses methanol, a common alcohol, as its fuel. The Company believes DMFCdirect methanol fuel cell ("DMFC") systems could potentially have an energy density of five to ten times that of Lithium-Ion "(Li-Ion")Li-Ion batteries. The advantage of DMFC systems isCompany believes that, when commercialized, theyDMFC systems should be able to power a wireless electronic device for longer periods of time than Li-Ion batteries betweenwithout recharging/refueling. In addition, DMFCsMobionTMfuel cell systems may be instantly refueled withouteliminating the need for a power outlet or a lengthy recharge.
MTI Micro's fuel cell technology platform can be customized to provide portable power for a number of applications depending on the power level, required run time and size requirements. MTI Micro plans to launch itsMicro's initial product is a power source for Intermec Technologies Corporation ("Intermec")hand held RFID tag readers, byreaders. The first MobionTMfuel cell systems were delivered at the end of 2004. 2004 in low volumes to a single consumer.
MTI Micro has also developed prototype DMFC systems for military customers, including the RF Communications Division of Harris Corporation ("Harris"), a supplier of military communication devices. Pursuant to the Harris agreements, MTI Micro delivered prototypes during the first and second quarters of 2003 and the second quarter of 2004.
MTI Instruments has three product groups: aviation, general gaging and semiconductor. These product groups provide: portable balancing systems for aircraft engines; electronic, computerized general gaging instruments for position, displacement and vibration applications; and semiconductor products for wafer characterization of semi-insulating and semi-conducting wafers.wafers and vibration analysis systems for aircraft engines. MTI Instruments' strategy is to continue to enhance and expand its product offerings with the goal of increasing market share and profitability. MTI Instruments' largest customers include the U.S. Air Force and industry leaders in the computer, electronic, semiconductor, automotive, aerospace, aircraft and bioengineering fields.
MTI Instruments' Engine Balancingengine balancing and Vibration Analysisvibration analysis system primarily serves the aviation industry, both in the commercial and military sectors. These systems perform a number of vibration analysis and engine balancing functions typically for large turbofan engines on the flight-line and in test cells. In addition, our Engine BalancingMTI Instruments' engine balancing and Vibration Analysisvibration analysis system has recently been used for the first time in an industrial turbo machinery application.
The General InstrumentsMTI Instruments' general gaging product line employs three sensing technologies - capacitance, fiber optics and laser triangulation - to measure displacement, position, thickness, vibration and other dimensional measurement applications. The advantages of each technology are generally related to the requirements of specific applications, which typically transcend the capabilities of conventional measuring techniques. The most successful applications have been in data storage, OEMs, semiconductors and the automotive industry. End-users cover a broad range of industrial markets, as well as research labs, universities and the government agencies.
MTI Instruments' semiconductor tools compete in the wafer metrology segment of the semiconductor equipment market. Product models include manual units, semi-automated units and fully automated systems whichthat measure thickness, total thickness variation, bow, warp, site and global flatness. These metrology and inspection tools
25
cover a broad range of applications both on the front-end and back-end of the manufacturing process. End-users of these tools include both wafer manufacturers (foundries) and device (chip) manufacturers.
28
From inception through September 30, 2004,March 31, 2005, the Company has incurred net losses of $67.4$72.7 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 year to year and that such fluctuations may be substantial as a result of, among other factors, gains on sales of securities available for sale and the operating results of MTI Instruments and MTI Micro.
Critical Accounting Policies and Significant Judgments and Estimates
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note 1 to the condensedCompany's 2004 annual consolidated financial statements includes a summary of the Company's most significant accounting policies. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosuresdisclosure of assets and liabilities. On an on-going basis, the Company evaluates its estimates and judgments, including those related to revenue recognition, inventories, securities available for sale, derivative instrumentsincome taxes and income taxes. The Companyderivatives. Management bases its estimates on historical experience and on various other assumptionsfactors that are believed to be reasonable under the circumstances, the results of which formfor m 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.
The following Our critical accounting policies have been newly identified or modified since December 31, 2003:estimates were discussed with our Audit Committee.
Derivative Instruments
The Company has held or issued certain derivative instrumentsDiscussion and embedded derivative instruments and records these derivatives and embedded derivative instruments separated from the host contract in accordance with StatementAnalysis of Financial Accounting Standards ("SFAS") No. 133,Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities.These standards require the Company to recognize all derivative instruments as either assets or liabilities on the statementResults of financial position and measure these instruments at fair value. Fair value is estimated using the Black Scholes Option-Pricing Model.
Revenue Recognition
The Company applies the guidance within SEC Staff Accounting Bulletin No. 104,Revenue Recognition in Financial Statements("SAB 104")in the evaluation of its contracts to determine when to properly recognize revenue. Under SAB 104 revenue is recognized when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery has occurred or services have been rendered, the sales price is determinable, and collectibility is reasonably assured.
Product Revenue.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, all of which generally 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. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied.
Funded Research and Development Revenue.The Company performs funded research and development for government agencies and commercial companies under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as the services are performed. In each type of contract, the Company receives periodic progress payments or payments upon reaching interim milestones. When the current estimates of total contract revenue for commercial development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in
29
performing funded research and development projects are recognized as research and development expense as incurred. As of September 30, 2004, the Company has accrued approximately $114 thousand for anticipated contract losses on commercial contracts. 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 contracts. While the Company's accounting for government contract costs is subject to audit by the sponsoring entity, in the opinion of management, no material adjustments are expected as a result of such audits. Adjustments are recognized in the period made.
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.
Deferred revenue consists of payments received and amounts due from customers in advance of services performed, products shipped, customer acceptance or installation completed.Operations
Results of Operations
Three and Nine Months for the Quarter Ended September 30, 2004March 31, 2005 Compared to the Three and Nine Months Ended September 30, 2003March 31, 2004
The following is management's discussion and analysis of certain significant factors, which have affected the Company's results of operations for the three and nine months ended September 30, 2004March 31, 2005 compared to the three and nine months ended September 30, 2003.March 31, 2004.
Product Revenue. ProductRevenue.Product revenue in the Test and Measurement Instrumentation segment for the three months ended September 30, 2004 increased2005 decreased in comparison to the same period last yearin 2004 by $.044$.176 million, or 2.8%11.1%, to $1.642$1.403 million. The three-month increaseThis decrease is primarily the result of increases in semiconductor product sales of $.354 million, which includes the shipment of an AutoScan and a 300 SA wafer metrology tool. This increase has been partially offset by decreases in sales to semiconductor customers of $.142 million and aviation customers of $.266$.135 million reflecting a decline in shipments under the existing Air Force retrofit and maintenance contract and other decreases of $.044 million in general gaging product sales.
Product revenue for the first nine months of 2004 increased in comparison to the same period last year by $.148 million or 3.4% to $4.452 million. The nine-month increase is primarily the result of a $.706 million increase in semiconductor product sales, which includes shipments of the first two AutoScans and two 300 SA wafer metrology tools. This increase has been partially offset by decreases in sales to aviation customers of $.465 million, reflecting a decline in shipments under two existing Air Force contracts and other decreasesincreases in sales to general gaging customers of $.093$.101 million. The decrease in semiconductor sales reflects the shipment of one manual gage during the first quarter of 2005 as compared to five manual gages and one semi-automated unit for the same period in 2004. The decrease in sales to aviation customers includes a $.182 million decrease related to the timing of shipments under the Retrofit Air Force contract due to decreased activityfewer portable balancing systems, change amplifiers and accessory kits being sent by the U.S. Air Force for upgrade in 2005 than in 2004. A total of 22 units were upgraded in 2005 compared to 30 in 2004. This reduction in upgrade business was partially offset by the shipment of five new acces sory kits under a priority contract from original equipment manufacturer customers.the U.S. Air Force for $.059 million. The increase in general instrument sales is primarily due to a $.095 million increase in capacitance product sales to a distributor.
Information regarding government contracts included in product revenue is as follows:
(Dollars in thousands, except contract values)
Revenues | Revenues | Contract Life to | Total Contract | ||
Nine months ended | Nine months ended | Date Revenues as of | Orders | ||
Contract | Expiration | Sept. 30, 2004 | Sept. 30, 2003 | Sept. 30, 2004 | Received to Date |
$8.8 million | |||||
Retrofit and | |||||
Maintenance | |||||
of PBS 4100's | 06/20/2008 | $ 1,363 | $ 1,530 | $ 3,104 | $ 3,310 |
$3.1 million | |||||
PBS units and | |||||
Accessory Kits | 09/30/2004* | $ 111 | $ 211 | $ 1,132 | $ 2,469 |
Revenues | Revenues | Revenues | Total Contract | ||
Three months | Three months | Contract to | Orders Received | ||
Ended | Ended | Date | to Date | ||
Contract | Expiration | Mar. 31, 2005 | Mar. 31, 2004 | Mar. 31, 2005 | Mar. 31, 2005 |
$8.8 million Retrofit | |||||
and Maintenance of | |||||
PBS 4100's | 06/20/2008 | $ 521 | $ 703 | $ 4,179 | $ 4,298 |
$3.1 million PBS | |||||
Units and Accessory Kits | 09/30/2004 | $ - | $ 111 | $ 2,469 | $ 2,469 |
* Although this contract expired, all open delivery orders under the contract are active.
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Funded Research and Development Revenue. FundedRevenue.Funded research and development revenue in the New Energy segment for the three months ended September 30, 20042005 decreased in comparison to the same period last yearin 2004 by $.135$.064 million to $.175$.324 million, a 43.5%16.5% decrease. The three-month decrease is primarily the result of the National Institute of Standards and Technology ("NIST") and New York State Energy Research and Development Authority ("NYSERDA") government contracts contributing $.273contract's completion in 2004 when it contributed $.388 million morein revenue. This revenue decline was offset in 2005 by $.151 million in revenues in 2003 compared to 2004 due tofrom the completion ofDOE contract, $.112 million from the NYSERDA contract, in$.025 million from the fourth quarter of 2003Marines and $.036 million from the wind down of theCSMP NIST contract during the third quarter of 2004. This decrease was partially offset by $.138 million in revenues under new contracts with the US Army Research Laboratory ("ARL") for the delivery of micro fuel cell units and Cabot Superior Micropowders ("CSMP") and the U.S. Department of Energy ("DOE") for the advancement of the consumer DMFC platform.
Funded research and development revenue for the first nine months of 2004 decreased in comparison to the same period last year by $.668 million to $.754 million, a 47.0% decrease. The nine-month decrease is the result of the NIST and NYSERDA government contracts contributing $.805 million more revenues in 2003 compared to 2004 due to the completion of the NYSERDA contract in the fourth quarter of 2003 and the wind down of the NIST contract during the third quarter of 2004. Harris revenues of $.175 million were also recorded in 2003. These decreases were partially offset by $.312 million in revenues under new contracts with ARL, CSMP and DOE.subcontract.
Information regarding government contracts included in funded research and development revenue is as follows:
(Dollars in thousands, except contract values)
Revenues | Revenues | Contract Life to | ||
Nine months ended | Nine months ended | Date Revenues as of | ||
Contract | Expiration | Sept. 30, 2004 | Sept. 30, 2003 | Sept. 30, 2004 |
$3.0 million DOE | 07/31/07 | $ 44 | $ - | $ 44 |
$350 thousand NYSERDA | 08/31/05 | $ - | $ - | $ - |
$200 thousand NIST ** | 06/30/05 | $ 72 | $ - | $ 72 |
$200 thousand ARL | 12/31/04 | $ - | $ 200 | |
$4.6 million NIST * | 09/30/04 | $ 438 | $ 1,038 | $ 3,334 |
$200 thousand NYSERDA | 01/31/04 | $ - | $ - | $ 200 |
$500 thousand NYSERDA | 09/30/03 | $ - | $ 204 | $ 500 |
Revenues | Revenues | Contract | ||
Three months | Three months | Revenues | ||
Ended | Ended | to Date as of | ||
Contract | Expiration | Mar. 31, 2005 | Mar. 31, 2004 | Mar. 31, 2005 |
$3.0 million DOE | 07/31/07 | $ 151 | $ - | $ 329 |
$249.8 thousand Army(4) | 09/30/05 | $ - | $ - | $ - |
$1.250 million NYSERDA(1) | 06/30/06 | $ 112 | $ - | $ 917 |
$69.9 thousand Marine | 06/30/05 | $ 25 | $ - | $ 25 |
$200 thousand NIST(2) | 06/30/05 | $ 36 | $ - | $ 146 |
$250 thousand Harris(4) | 03/31/05 | $ - | $ - | $ - |
$200 thousand ARL | 12/31/04 | $ - | $ - | $ 200 |
$4.6 million NIST(3) | 09/30/04 | $ - | $ 388 | $ 3,342 |
* This
(1)Total contract value is $1.250 million consisting of four Phases: Phase I for $500 thousand was from 3/12/02 thru 9/30/03; Phase II for $200 thousand was from 10/28/03 with a joint venture with Dupont. Dupont's sharecompletion date of the contract revenue is $1.3 million.10/31/04; Phase III for $348 thousand commenced 8/23/04 and expires on 8/31/05; and Phase IV for $202 thousand which commenced on 12/14/04 and expires on 6/30/06. Phases I and II have been completed.
**(2) This contract is a subcontract with CSMP under NIST.
(3)This contract was a joint venture with DuPont. DuPont's share of the contract revenue is $1.3 million.
(4)Revenue under these contracts has been deferred subject to customer acceptance.
Cost of Product Revenue.Cost of product revenue in the Test and Measurement Instrumentation segment for the three months ended September 30, 20042005 decreased in comparison to the same period last yearin 2004 by $.069$.045 million, or 9.1%7%, to $.686$.602 million. The decrease was primarilydirectly due tothe lower sales volume for 2005 and its product mix, which during 2004 includes the shipment of an AutoScan which had a reduced carrying value due to the soft2005 included lower semiconductor market over the last two years.
Gross profit as a percentage of product revenue increased to 58.2% for the three months ended September 30, 2004 from 52.8%and aviation sales and increases in the prior year. The gross profit percentage increased primarily as a result of the sales volume and product mix, which during 2004 includes a higher share of semiconductor productgeneral gaging sales.
Cost of product revenue in the Test and Measurement Instrumentation segment for the nine months ended September 30, 2004 increased in comparison to the same period last year by $.088 million or 4.7% to $1.956 million. The increase was primarily due to a higher sales volume.
Gross profit as a percentage of product revenue decreased to 56.1%57.1% for the nine months ended September 30, 20042005 from 56.6%59% in the prior year. The gross profit percentage decreaseddecrease was primarily due to a one point decrease in PBS product margins as a result of a slight increase in overhead coststhe mix of the type of Air Force units upgraded under the Retrofit Air Force contract. Additionally, capacitance product margins declined due to a declinerise in directly applied manufacturing labor stemming from the current year'scapacitance product mix.
31sales to a distributor at discounted prices pursuant to a distribution agreement.
Funded Research and Product Development Expenses.Funded research and product development expenses in the New Energy segment increaseddecreased by $.002$.099 million or 0.2%8.6% to $.881$1.055 million for the three months ended September 30, 20042005 in comparison to the same period last year.
Funded research and product development expenses in the New Energy segment increased by $.074 million or 3.0% to $2.576 million for the nine months ended September 30, 2004 in comparison to the same period last year.2004. The
increased decreased costs arewere attributable to the development of prototypeschange in contracts under development. In 2005 MTI Micro is working on contracts for Harris and costs incurred under new contracts with ARL forDOE, NYSERDA, the delivery of micro fuel cell unitsU.S. Marines, the U.S. Army and CSMP and DOE for the advancement of the consumer DMFC platform. These costswhile in 2004 they were partially offset by decreased development costs related to the completion of the second NYSERDA contract during 2003 and reduced costs related toworking on the NIST contract as it was winding down during the third quarter of 2004.
contract.
Unfunded Research and Product Development Expenses.Expense. Unfunded research and product development expenses increased by $1.035$.091 million or 78.6%6% to $2.352$1.605 million for the three months ended September 30, 20042005 in comparison to the same period last year.in 2004. This increase reflects a $1.058 million increase in the New Energy segment internal development costs directed at commercializing micro fuel cells, including costs for the development of our micro fuel cell system for Intermec and development costs in connection with Gillette and potential commercial products. This increase was offset by a $.023 million decrease in product development costs in the Test and Measurement Instrumentation segment related to a staff reduction.
Unfunded research and product development expenses increased by $2.783 million or 78.4% to $6.331 million for the nine months ended September 30, 2004 in comparison to the same period last year. This increase reflects a $2.757$.089 million increase in the New Energy segment reflecting increased internal development costs directed at commercializing micro fuel cells, including costs for the development of our micro
fuel cell system for Intermec and
development costs in connection with Gillette and potential commercial products. Unfunded
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research and product development costs include the cost of micro fuel cell products warranty activity related to the shipments of its initial fuel cell units at low volume production. This increase also includes a $.026
$.002 million increase in product development costsexpenses in the Test and Measurement Instrumentation segment related to improvements for the continued development of the PBS-3300Microtrak II product and MTI-2100. The PBS-3300 is a smaller test cell system used for small turbines and props and the MTI-2100 is the newest version of the fiber-optic based vibration sensor.high temperature capacitance probe.
Selling, General and Administrative Expenses.Selling, general and administrative expenses decreased $.328increased by $1.727 million, or 132.1% to $1.526$3.034 million for the three months ended September 30, 20042005 in comparison to the same period last year, a 17.7% decrease.in 2004. This decreasechange is primarily the result of decreasedan increase of $.100 million in licensing fees related to the LANL license, $.558 million in consulting and other professional fees including approximately $.290 million of approximately $.301costs related to Sarbanes-Oxley compliance and the SEC review of the Company's filings, increased salaries and employee benefits of $.698 million related to an increase in the number of employees working in the micro fuel cell business transactions that occurred during 2003 and other net expense decreases of $.027 million.
Selling, general and administrative expenses increased $.331 million to $4.890 million for the nine months ended September 30, 2004as business development efforts increase as well as an increase in comparison to the same period last year, a 7.3% increase. This increase is primarily the result of a net increase of $.154 million in professional fees which includes $.300 million in advisory fees and approximately $.155 million in costscorporate support employees related to the amendmentSarbanes-Oxley compliance, increased public relations costs of the Company's private placement transaction$.060 million, increased depreciation expense of $.114 million due to an increase in 2004 offset by $.301capital expenditures and a $.173 million relateddecrease in liquidations to business transactions that occurred during 2003research and other net expense increases of $.177 million relateddevelopment costs due to costs associated with commercializing micro fuel cells.reduction in contract activity.
Operating Loss.Operating loss for the three months ended September 30, 20042005 in comparison to the same period last year increased by $.731$1.914 million to $3.628$4.569 million, a 25.2%72.1% increase. This increase in operating loss results primarily from increases in researchselling, general and product development costs andadministration expenses, decreases in funded research and development revenue in the New Energy segment partially offset by increases in gross profits from product revenues in the Test and Measurement Instrumentation segment and decreases in selling, general and administrative expenses.
Operating loss for the nine months ended September 30, 2004 in comparison to the same period last year increased by $3.796 million to $10.547 million, a 56.2% increase. This increase in operating loss results primarily from increases in research and product development costs, selling, general and administration expenses and decreases in funded research and development revenue in the New Energy segment partially offset by increases in gross profits from product revenues in the Test and Measurement Instrumentation segment.
Other Income (Expenses), Net. Other income increased by $.113 million, or 869.2% to $.100 million for 2005 in comparison to the same period in 2004. This change is primarily the result of increased interest income.
Revenue from sales of micro fuel cell products was $0 million for the three months ended March 31, 2005 and March 31, 2004. We defer recognition of initial micro fuel cell product-related revenue at the time of delivery and recognize this revenue as other income as the continued warranty obligations expire. The costs associated with the product and warranty obligations are expensed as they are incurred.
Our initial sales of low volume production Mobion™products in December 2004 were a customer specific arrangement that includes fuel cell systems and continued warranty support. While contract terms require payment upon delivery of the System and are not contingent on the achievement of specific milestones or other substantive performance, the continuing obligation to warranty results in the Company deferring recognition of product-related revenue and recognizing product-related revenue as other income when the warranty obligations expire. The warranty on the product is for a period of fifteen months.
During the fourth quarter of 2004, we received a purchase order for 50 Systems and delivered 25 Systems during December 2004. The product-related revenue associated with these 25 Systems is subject to warranty obligations and has been deferred. For the three months ended March 31, 2005 and 2004, we had no System sales.
Gain on Sale of Securities Available for Sale, Net.Results for the three and nine months ended September 30, 2004 included a $0 and $3.129 million gain on the sale of securities available for sale, respectively, compared to a $4.123
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and $7.483 million gain on the sale of securities availablesale. Results for sale, respectively, for the same period in 2003.2005 included no such gains. The average selling price per share of Plug Power common stock was $9.93 for the nine months ended September 30, 2004. The average selling price per share of Plug Power and SatCon common stock was $4.96 and $2.07,
respectively, for the three months ended September 30, 2003, and $5.07 and $1.75, respectively, for the nine months ended September 30, 2003.March 31, 2004.
(Loss) GainLoss on Derivatives.The Company recorded a losslosses of $2.635$3.234 million and a gain of $.002$1.281 million on derivative accounting for the three months ended September 30,2005 and 2004, and 2003, respectively. Losses of $2.424 million and $.004 million were recorded for the nine months ended September 30, 2004 and 2003, respectively. The 2004 loss relatesThese losses relate to the embedded derivative for the purchase of Plug Power common stock, which is part of the 2004 private placement transaction whileand the gain (loss) in 2003 related to warrants forexpiration of the purchase of SatCon common stock held by the Company.warrants. Changes in derivative fair valuesvalue for the embedded derivative and the SatCon warrants areis calculated using the Black Scholes Option-Pricing Model.
Impairment Losses.For the three and nine months ended September 30, 2003, the Company recorded a $0 and $.418 million charge for impairment losses for other than temporary declines in the value of certain securities available for sale.
Income Tax Benefit (Expense).TheBenefitThe income tax benefit ratesrate for the three2005 was 15.70% and nine months ended September 30,for 2004 were 39.75% and 39.40% compared to the tax expense rates for the three and nine months ended September 30, 2003 of (36.86)% and (39.05)%was 38.54%. TheseThe tax benefit rates are primarily due to losses generated by operations. It is anticipated that a full valuation allowance will be required by the end of 2005. The provision for this quarter has been adjusted to reflect the projected annual effective rate including the anticipated impact of a full valuation allowance. The valuation allowance at September 30, 2004March 31, 2005 and December 31, 20032004 was $1.836 million. The Company determined that it was more likely than not that the ultimate recognition of certain deferred tax assets would not be realized.
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Further, as a result of ownership changes in 1996, the availability of $1.014$.561 million of net operating loss carryforwardscarry-forwards to offset future taxable income will be limited pursuant to the Internal Revenue Code.
Liquidity and Capital Resources
The Company has incurred significant losses as it continues to fund MTI Micro's DMFC product development
and commercialization programs. The Company expects that losses will fluctuate from year to year and that such fluctuations may be substantial as a result of, among other factors, gains on sales of securities available for sale, the operating results of MTI Instruments and MTI Micro, the availability of equity financing including the
additional investment rights issued in connection with the 2004 Private Placementprivate placement and the ability to attract
government funding resources to offset research and development costs. As of September 30, 2004,March 31, 2005, the Company had an accumulated deficit of $67.431$72.678 million. During the ninethree months ended September 30, 2004,March 31, 2005, the Company recognizedCompany's results of operations resulted in a net loss of $4.998$6.054 million and used cash in operating activities totaling $9.133 $3.880
million. This cash use in 20042005 was funded primarily by proceeds from the salecash and cash equivalents on hand as of securities available for sale which totaled $3.804 million, net proceedsDecember 31, 2004 of $8.985 million from the 2004 Private Placement transaction and proceeds from subsidiary stock issuances of $2.193$22.545 million. The Company expects to continue to incur losses as it developsseeks to develop and commercializes DMFCscommercialize MobionTMfuel cell systems and it expects to continue funding its operations from current cash and cash equivalents, the sales of securities available for sale, proceeds, if any, from the exercise of additional investment rights issued in connection with the 2004 Private Placementprivate placement or other equity financings and government program funding in each case unless other sources of funding can be foun d.
During the remainder of 2004, thefunding. The Company expects to spend approximately $3.0$12.5 million on research and development of DMFCsMobionTM fuel cells and $.200$1.2 million in research and development on MTI Instruments' products.products in 2005.
The Company anticipates that it will be able to meet the liquidity needs of its operations for the next year from current cash resources, sale of securities available for sale and, to the extent available, equity financings. However, there
There can be no assurance that the Company will not require additional financing within this time frameduring 2005 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 $14.3$16.5 million for 2004.2005. Further, cash used for capital expenditures is expected to total approximately $3.2$1.5 million in 2004. Capital expenditures for 20042005 and will consist of expenditurespurchases for facility expansion, furniture, computer equipment, software and manufacturing and laboratory equipment. The Company believes it will have adequate resources to fund operations and capital expenditures for 2004 and 2005through the fourth quarter of 2006 based on current cash and cash equivalents, current cash flow and revenue projections and the pote ntialpotential sale of unrestricted securities available for sale at current market values. Proceeds from the sale of
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unrestricted securities available for sale are subject to fluctuations in the market value of Plug Power as well as limitations on the ability to sell shares arising from the escrow of 2,700,000 shares in connection with Fletcher'sthe Fletcher right to purchase Plug
Power common stock between June 1, 2005 and December 31, 2006, subject to the terms of the agreement with Fletcher. The Company may also seek to provide additional resources through an equity offering. Additional
government revenues and Fletcher's potential exercise of additional investment rights totaling up to an additional $28$20 million could also provide additional resources. The Company anticipates that it will have to raise additional equity capital to fund its long-term business plan, regardless of whether Fletcher exercises any or all of its additional investment rights.
Future sales of Plug Power securities will generate taxable income or loss, which is different from book income or loss, due to the tax basisbases in these assets being significantly different from their book basis.bases. Book and tax basisbases as of September 30, 2004March 31, 2005 are as follows:
Average Average Security Shares Held Book Cost Basis Tax Basis Plug Power - unrestricted 2,993,227 $1.78 $0.96 Plug Power - restricted 2,700,000 $1.78 $0.96 Average Average Security Shares Held Book Cost Basis Tax Basis Plug Power- unrestricted 2,893,227 $1.78 $0.96 Plug Power- restricted(A) 2,700,000 $1.78 $0.96
As of September 30, 2004, the Company owned 5,693,227 common shares of Plug Power.
As of March 31, 2005, the Company owned 5,593,227 shares of Plug Power common stock. In connection with Fletcher,the 2004 private placement the Company has placed 2,700,000 of its Plug Power shares in escrow and Fletcher may havehas the right, beginning June 1, 2005 and ending December 31, 2006, to purchase those shares, potentially at a discount. Plug Power stock is currently traded on the Nasdaq National Market and is therefore subject to stock market
conditions. When acquired, these securities were unregistered. Plug Power securities are considered "restricted
securities" as defined in Rule 144 and may not be sold in the future without registration under the Securities Act, of 1933 subject tounless in compliance with the provisions of Rule 144.an available exemption there from.
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Working capital was $30.348$32.290 million at September 30, 2004March 31, 2005, a $12.078$2.522 million decrease from $42.426$34.812 million at December 31, 2003.2004. This decrease is primarily the result of an increase to current assets for the proceeds from the private placementuse of cash in operations offset by decreases to current assets related toincreases in the restrictionmarket value of 2,700,000 shares of Plug Power under the escrow agreement pursuant to the Company's amended private placement and the associated decrease to current deferred tax liabilitiessecurities available for the tax impact of the reclassification of these securities from current to long-term assets.sale.
At September 30, 2004,March 31, 2005, the Company's order backlog was $2.098$.448 million, compared to $.447$.480 million at December 31, 2003.2004.
Inventory and accounts receivable (from product revenues) turnover ratios and their changes for the ninethree months ended September 30March 31 are as follows:
2004 | 2003 | Change | 2005 | 2004 | Change | |
Inventory | 1.80 | 1.70 | .10 | 1.90 | 1.70 | .20 |
Accounts receivable (for product revenues) | 6.65 | 6.53 | .12 | |||
Accounts receivable (from product revenues) | 2.03 | 2.30 | (.27) |
The changeschange in the inventory andturnover ratio is the result of lower inventories in 2005 compared to 2004. The decrease in the accounts receivable turnover ratios areratio is the result of lower sales volume in the volume and timingfirst quarter of sales. The Test and Measurement Instrumentation segment had higher year to date sales and higher cost of sales during 2004 as2005 compared to 2003.
2004.
Cash flow used by operating activities for the nine months ended September 30, 2004 was $9.133 million compared with $6.828$3.880 million for the same periodthree months ended March 31, 2005 compared with $2.582 million in the prior year.2004. This cash use increase of $2.305$1.298 million primarily reflects increases in cash expenditures to fund New Energy segment research and development,operations' growth, partially offset by balance sheet changes, which reflect the timing of cash payments and receipts.
Capital expenditures were $.202 million during the first ninethree months of 2004 were $1.2482005, a decrease of $.195 million an increase of $.405 million from the same period of the prior year. Capital expenditures in 20042005 included furniture, computer equipment, facilities fit-up,demonstration equipment, software, and manufacturing and laboratory equipment. RemainingThere were no outstanding commitments for capital expenditures in 2004 are expected to approximate $1.9 million, consistingas of expenditures for computer equipment, software, software implementation and
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manufacturing and laboratory equipment.March 31, 2005. The Company expects to finance these expenditures with current cash and cash equivalents, the sale of unrestricted securities available for sale, equity financing and other sources, as appropriate.appropriate and to the extent available.
On January 29, 2004,Pursuant to additional investment rights, Fletcher has the Company consummatedright, but not the obligation, to purchase, in a private placementsingle purchase or multiple purchases, up to Fletcher International, Ltd. of $10an additional $20 million of itsour common stock at any time prior to December 31, 2006 at a price per share equal to $6.023 (as adjusted from $6.34), which date and price may be extended and adjusted, respectively, in certain additional investment rights. This private placement was amended on May 4, 2004, as more fully described in Note 8 -Shareholders' Equity.
As of September 30, 2004, the Company sold 380,000circumstances, and up to 2,700,000 shares of Plug Power common stock owned by us in certain circumstances.
The Company may sell shares of Plug Power common stock in connection with proceeds totaling $3.804 million and net gains totaling $3.129 million. This gain related to the Company'sits previously announced strategy to raise additional capital through the sale of its assets and equity offeringsPlug Power stock in order to fund its micro fuel cell operations. Taxes on the net gains are expected to be offset by the Company's net operating losses. As of September 30, 2004,March 31, 2005, the Company estimates its remaining net operating loss carryforwardscarry forwards to be approximately $22.4$29.107 million.
From October 1 through November 5, 2004, 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 | 100,000 | $675 |
Cash and cash equivalents were $17.159 million at September 30, 2004 compared to $12.380 million at December 31, 2003.
The launch of MTI Micro's first product for Intermec scheduled for the end of 2004 will have negative gross margins and therefore will be shipped in low volumes. The shipment of the Intermec product will meet key objectives for MTI Micro, including: the development of a product platform which has potential applications in other vertical markets critical to MTI Micro's technology development- the military market; creation of codes and standards; valuable field experience and user feedback; and advancement of product development, design and manufacturing methods.
Contractual Obligations
Contractual obligations as of September 30, 2004, under agreements with non-cancelable terms are as follows:
Payments Due by Period | |||||
Less Than | 1-3 | 3-5 | More than | ||
Total | 1 Year | Years | Years | 5 Years | |
Contractual obligations: | |||||
Operating leases | $2,193 | $ 644 | $ 865 | $ 631 | $ 53 |
Purchase obligations | 2,316 | 2,259 | 56 | 1 | - |
License obligations(A), (B) | 3,950 | 450 | 500 | 500 | 2,500 |
Other long-term liabilities recorded | |||||
on the balance sheet | 24 | - | 24 | - | - |
Total | $8,483 | $3,353 | $1,445 | $1,132 | $2,553 |
(A) Once products are sold under the LANL license agreement, 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.
(B) Under the Strategic Alliance Agreement (the "Agreement"), as amended, with Gillette, if MTI Micro sells fuel refills in the target market after its exclusivity obligations have expired, then MTI Micro will be required to pay Gillette royalties as defined in the Agreement. Portions of the Agreement are subject to confidential treatment as filed with the SEC.
New Accounting Pronouncements
None.In November 2004, the FASB issued SFAS No. 151,Inventory Costs-an amendment of ARB No. 43, Chapter 4("FAS 151"), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires idle facility expenses, freight, handling costs and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is in the process of evaluating the impact of this standard on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004)Share-Based Payment ("SFAS No. 123R"). SFAS No. 123R addresses all forms of share-based payment ("SBP") awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R will require the Company to expense SBP awards with compensation cost for SBP transactions measured at fair value. The FASB originally stated a preference for a lattice model because it believed that a lattice model more fully captures the unique characteristics of employee stock options in the estimate of fair value, as compared to the
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Black-Scholes model which the Company currently uses for its footnote disclosure. The FASB decided to
remove its explicit preference for a lattice model and not require a single valuation methodology. SFAS No. 123R requires the Company to adopt the new accounting provisions beginning in its first quarter of 2006. The Company has not yet determined the impact of applying the various provisions of SFAS No. 123R. The unvested value to be amortized into the operating statement is approximately $5.7 million as of December 31, 2004.
In December 2004, the FASB issued SFAS No. 153,Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for non-monetary asset exchanges beginning in our second quarter of fiscal 2006. The Company is in the process of evaluating the impact of this standard on its consolidated financial statements.
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Additional Information Concerning Risks
In connection with the 2004 Private Placement, as amended,private placement, we may have to (1) sell shares of our common stock at prices which result in substantial dilution to our shareholders, and (2) issue additional shares of our common stock to Fletcher at prices that may be substantially below market value at the time of issuance without any payment required by Fletcher, which would cause our shareholders to suffer additional dilution.
TheAfter giving effect to the 1,261,829 shares of common stock we issued to Fletcher on December 22, 2004 (as well as all shares issued or to be potentially issued to Fletcher in connection with our failure to satisfy the registration requirement as discussed under "Financing Arrangements- Private Placement providesPlacement"), the 2004 private placement provided Fletcher additional investment rights to purchase: (1) $8 million of our common stock at a price equalpurchase up to $6.34 per share (subject to adjustment) and (2) in the event that Fletcher purchases the full $8 million, an additional $20 million of our common stock at a price equal to $6.34 per share (subject to adjustment). This price has been reduced to $6.023 per share due to our failure to satisfy the registration requirement, and may be further reduced due to, among other things, continuing failure to satisfy such registration requirement. Any exercise of the additional investment rights could result in sales of our common stock at prices that are below the market price for our common stock at the time the investment right is exercised and could result in substantial dilution to our shareholders.
Our agreement with Fletcher also provides that Fletcher will receive additional shares of our common stock with respect to shares it already owns, and the exercise price and term relating to unexercised additional investment rights will be adjusted to the benefit of Fletcher, each upon the occurrence of certain events or circumstances, some of which are beyond our control, including:
-issuances of our equity securities at a price below $7.048 per share (which is the price Fletcher paid in connection with its initial $10 million investment) or issuances of our equity securities at a price below $6.34 per share (which iswas the original exercise price Fletcher will pay in connection with its exercise of itsrelating to the additional investment rights totaling $28 million)rights);
- our failure to satisfy certain requirements relating to registering the resale of shares issued or issuable to Fletcher pursuant to the securities laws;
- a change in control of our company;Company; and
-a restatement of our financial results.
In addition,in any event, 8,330,411 shares is the maximum number of shares of our common stock we may be required to issue to Fletcher, which amount includes the 1,418,842 shares issued on January 29, 2004.2004, the 1,261,829 shares issued on December 22, 2004 and the 66,413 registration penalty shares issued on April 20, 2005.
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In connection with the 2004 Private Placement, as amended,private placement, we may havewill be responsible for having the resale of shares purchased by Fletcher registered with the SEC within defined time periods and subject to sellpenalties if the shares of Plug Power common stock at a price beloware not registered with the market value of such shares, which sales would reduce the value of our assets.SEC within those defined time periods.
Pursuant to our amended agreement with Fletcher, we are obligated, within ten business days after the closing of the purchase of any additional shares by Fletcher pursuant to rights issued in connection with the 2004 Private
Placement, to file a registration statement with the SEC covering the resale of all such shares. We are also obligated to cause each of those registration statements, including the Registration Statement of which this
prospectus is included, to be declared effective not more than sixty (60) days after the closing of the purchase of such shares, or if the registration statement is reviewed by the SEC, not more than ninety (90) days after the closing of the purchase of such shares. If we fail to file the registration statements or become effective as set forth above, we must issue to Fletcher a number of additional shares to reflect the number of shares it would have deposited 2,700,000 shares of Plug Power common stockacquired if its purchase price was based on the actual exercise price reduced by five percent for each month in escrowwhich we fail to satisfy our potential obligation to sell such shares to Fletcher. The number of shares Fletcher may purchaseobligations and adjust the exercise price for thosethe additional investment rights to such lower price. In addition, such failure will result in an extension of the investment term for each day we fail to satisfy our registration obligations. The Company initially filed this Registration Statement on January 6, 2005 which was within ten business days after the closing of the purchase of additional shares is subjectby Fletcher on D ecember 22, 2004. The 90-day deadline for this Registration Statement to fluctuation based onbe declared effective was March 22, 2005. We failed to meet the market priceMarch 22, 2005 deadline and therefore were required to issue 66,413 additional shares of our common stock to Fletcher without any payment required on its part and the market price of Plug Power stock. Accordingly, Fletcher may, in certain instances, purchase shares of Plug Power common stock either at a price below the fair market value of such shares, thereby reducing the value of our assets, or even if based on the market price of Plug Power shares, at a price at which we would not desire to sell such shares.
Under new regulations required by the Sarbanes-Oxley Act of 2002, an adverse opinion on internal controls over financial reporting could be issued by our auditors, and this could have a negative impact on our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we establish and maintain an adequate internal control structure and procedures for financial reporting and assess on an on-going basis the design and operating effectiveness of our internal control structure and procedures for financial reporting. Our auditors are required to audit both the design and operating effectiveness of our internal controls over financial reporting, and management's assessment of the design and the effectiveness of those controls. Although we are not aware of any material weaknesses at this time, this is the first time that we have undergone a comprehensive internal assessment and external audit of our internal controls over financial reporting. Therefore, it is possible that material weaknesses could be found. If we are unable to remediate those weaknesses before the conclusion of the external audit, the auditors couldwill be required to issue an adverse opinion on our internal controls over f inancial reporting.
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Because opinions on internal controls over financial reporting have not been required in the past, it is uncertain what impact an adverse opinion would have upon our stock price.
additional shares for each month that we continue to fail to satisfy such requirement.
Statement Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q and the documents we have filed with the Securities and Exchange Commission that are incorporated by reference into this Form 10-Q contain and incorporate forward-looking
statements that involve risks and uncertainties within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Any statements contained, or incorporated by reference, in this Form 10-Q that are not statements of historical fact may be forward-looking statements. When we use the words "anticipates," "plans," "expects," "believes," "should," "could," "may," "will" and similar expressions, we are identifying forward-looking statements. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. These factors include, among others:
− risks related to developing MobionTMdirect methanol micro fuel cells or DMFCs, and whether we will ever successfully develop commercially viable DMFCs;
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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 FormForms 10-K and Form 10-K/A, which are incorporated herein by reference and under the caption "Additional Information Concerning Risks Related to the 2004 Private Placement Transaction, as AmendedRisks"" in this quarterly report on Form 10-Q. Except as may be required by applicable law, we do not undertake or intend to update any forward-looking statements after the date of our Annual Report on FormForms 10-K and Form 10-K/A, which are incorporated herein by reference.
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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 cash equivalents. Based on the nature and current levels of our cash equivalents, however, we have concluded that there is no material market risk exposure.
As a result of holding securities available for sale, the Company is exposed to fluctuations in market value. The Company recognizes changes in market value through the balance sheet, however if an other than temporary market decline were to occur, it could have a material impact on the Company's operating results.
The Company's issued derivatives consist of warrants and rights to purchase shares of the Company's common stock and Plug Power common stock owned by the Company. The fair value of the embedded derivative for the right to purchase Plug Power common stock is recorded in the financial statement line titled "Derivative liability." This derivative is valued quarterly using the Black Scholes Option-Pricing Model. The Company's held derivatives consist of warrants to purchase SatCon common stock. The fair value of the warrants to purchase SatCon common stock is based on estimates using the Black Scholes Option-Pricing Model. The Company recognizes changes in fair value through the operating statement line titled "(Loss) gain on derivatives." The Company does not use derivative financial instruments for speculative or trading purposes.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, includingcertifications of the Company's Chief Executive Officer and Chief Financial Officer conducted an evaluationattached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q include, in paragraph 4 of such certifications, information concerning the Company's disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 4A for a more complete understanding of the matters covered by such certifications.
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, under the supervision of and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report of the effectiveness of the Company's disclosurereport. Disclosure controls and procedures (as definedinclude, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
33
accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure in accordance with Exchange Act Rule 13a-15(e) and Rule 15d-15(e)).
Based on thatthis evaluation, and due to the existence of a material weakness in our internal control over financial reporting as of March 31, 2005, the Chief Executive Officer and Chief Financial Officer concluded that, theas of March 31, 2005, our disclosure controls and procedures were effective in ensuringnot adequate to ensure that all material information required to be disclosed in the reportsby the Company in reports that it files andor submits under the Securities and Exchange Act of 1934 has been made known to them on a timely basis and that such information has been properlyis recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. This material weakness resulted from the inadequate function of internal control related to management's review of the Company's accounting for income taxes and related disclosures. No other material weaknesses were identified.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of our financial statements would not be prevented or detected. As of March 31, 2005, we did not maintain effective control over the calculation of the tax provision in accordance with generally accepted accounting principles. Specifically, our processes, procedures and controls related to the preparation and review of the quarterly tax provision were not adequate to ensure that the deferred tax provision was prepared in accordance with generally accepted accounting principles. This control deficiency resulted in quarter-end adjustments, which were brought to the Company's attention by its independent auditors in connection with the review of the Company's first quarter financial statements, to correct the income tax benefit recognized in the first quarter of 2005 and the related deferred income tax accounts. Further, this control deficiency could result in a misstatement of the tax provision and deferred tax balances that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Therefore, we have concluded that this control deficiency constitutes a material weakness.
Because of this material weakness, management has concluded that the Company did not maintain effective internal control over financial reporting as required.of March 31, 2005 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework.
Remediation Steps to Address the Material Weakness
The Company is in the process of remediating the identified material weakness in the Company's internal control over financial reporting. The Company is implementing new controls to ensure that the above-mentioned error in the calculation of the tax provision does not recur. This will include the selection of an outside service provider to review the tax provision, or through enlisting additional tax expertise within the company, or through the implementation of a checklist of items to be considered during the preparation and review of the tax provision.
(b) Changes in Internal ControlsControl Over Financial Reporting
There have not been no significantany changes in the Company's internal controlscontrol over financial reporting, except for the item noted above, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the most recentCompany's fiscal quarter ended March 31, 2005 that have materially affected, or are reasonablyreasonable likely to materially affect, the Company's internal controlscontrol over financial reporting.
Sarbanes-Oxley Section 404 Compliance
Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") will require the Company to include an internal control report from management in its Annual Report on Form 10-K for the year ended December 31, 2004 and in subsequent Annual Reports thereafter. The internal control report must include the following: (1) a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of the Company's internal control over financial reporting, (3) management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, including a statement as to whether or not internal control over financial reporting is effective, and (4) a statement that the Company's independent auditors have issued an attestation report on management's assessment of internal control over financial repo rting.
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Management acknowledges its responsibility for establishing and maintaining internal controls over financial reporting and seeks to continually improve those controls. In addition, in order to achieve compliance with Section 404 of the Act within the required timeframe, the Company has been conducting a process to document and evaluate its internal controls over financial reporting since 2003.
In this regard, the Company has dedicated internal resources and adopted a detailed work plan to: (i) assess and document the adequacy of internal control over financial reporting; (ii) take steps to improve control processes where required; (iii) validate through testing that controls are functioning as documented; and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. The Company believes its process for documenting, evaluating and monitoring its internal control over financial reporting is consistent with the objectives of Section 404 of the Act. Furthermore, the Company expects that the assessment and validation process will be significantly complete before December 31, 2004, thereby enabling the Company to conclude on the adequacy of the design and function of its internal controls over financial reporting.
During the third quarter of 2004, the Company commenced testing and gap analysis of its internal controls over financial reporting. The Company's documentation and testing to date have identified certain gaps in the documentation, design and effectiveness of internal controls over financial reporting that the Company has taken action to remediate. Although the Company expects to have completed, before year-end 2004, remediation of all gaps of which it is currently aware, the testing and gap analysis is ongoing. Therefore, it is possible that additional conditions requiring remediation could be found before the testing and gap analysis is concluded. As a result, given the risks inherent in the design and operation of internal controls over financial reporting, the Company can provide no assurance as to its or its independent auditor's conclusions at December 31, 2004 with respect to the effectiveness of its internal controls over financial reporting.
It should be noted that any system of internal controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the internal control system are met. In addition, the design of any internal control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of internal control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.At any point in time, the Company and its subsidiaries may be involved in various lawsuits or other legal proceedings. Such lawsuits 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.
Ling Electronics, Inc.
On March 5, 2005, the Company entered into a settlement agreement for the outstanding claim brought against it by Donald R. Gililland, Sharon Gililland, Vernon Dunham and Jean Dunham, related to a facility lease. The claim was settled for $240 thousand to be paid by SatCon and $35 thousand to be paid by the Company. This settlement released the Company from any future obligations. The Company had accrued costs to settle this claim and the settlement of this claim was accounted for in the results of operations for the year ended December 31, 2004. The settlement was paid in March 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.Recent Sales of Unregistered Securities
On December 22, 2004, Fletcher exercised its right to purchase an additional 1,261,829 shares of the Company's common stock. On January 6, 2005, the Company filed a resale registration statement on Form S-3 for the 1,261,829 shares of the Company's common stock issued to Fletcher. This resale registration statement was converted to Form S-1 and on April 20, 2005, we issued 66,413 shares of our common stock to Fletcher. Our agreement with Fletcher requires that we issue such shares without any payment required on the part of Fletcher due to our failure to have the January 6, 2005 registration statement declared effective by March 22, 2005 with respect to the 1,261,829 shares of our common stock sold to Fletcher. The registration statement was amended to include the 66,413 additional shares and was declared effective by the SEC on April 21, 2005, covering the resale of all 1,328,242 shares issued to Fletcher in December 2004 and April 2005. Each of these Fletcher private placements was exempt f rom registration under the Securities Act pursuant to Section 4(2) thereof since each was a sale not involving a public offering. The purchaser in such transactions represented to us that it was an accredited investor, acquiring the securities for investment and not distribution. No underwriters were involved in the foregoing transactions.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibit No. | Description |
31.1 | Rule 13a-14(a)/15d-14(a) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Steven N. Fischer |
31.2 | Rule 13a-14(a)/15d-14(a) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Cynthia A. Scheuer |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Steven N. Fischer |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Cynthia A. Scheuer |
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SIGNATURES
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/Steven N. Fischer Steven N. Fischer Chief Executive Officer |
(Date) | /s/Cynthia A. Scheuer Cynthia A. Scheuer Vice President and Chief Financial Officer |
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