DRAFT 8/05/98
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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 June 26, 1998
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from _______________ to ______________
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Commission File Number 0-6890
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MECHANICAL TECHNOLOGY INCORPORATED
(Exact name of registrant as specified in its charter)
New York 14-1462255
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
968 Albany-Shaker Rd., Latham, New York 12110
- --------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
(518) 785-2211
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Registrant's telephone number, including area code
Not Applicable
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(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Class Outstanding at June 26, 1998
- ----------------------------- ----------------------------
Common Stock, $1.00 Par Value 5,981,896 Shares
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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page No.
------------
Part I Financial Information
- ----------------------------
Consolidated Balance Sheets - June 26, 1998
and September 30, 1997 (Restated) 3 - 4
Consolidated Statements of Income -
Three months and nine months ended
June 26, 1998 and June 27, 1997 (Restated) 5
Consolidated Statements of Cash Flows -
Nine months ended June 26, 1998
and June 27, 1997 (Restated) 6 - 7
Notes to Consolidated Financial Statements 8 - 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 17
Part II Other Information
- -------------------------
Item 1 18
Item 4 18
Item 6 19
Signature 20
PART I FINANCIAL INFORMATION
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 26, 1998 (Unaudited) and September 30, 1997
(Derived from audited financial statements, as restated)
(Dollars in thousands)
Sept 30,
June 26, 1997
1998 (Restated)
Assets --------- ---------
Current Assets:
Cash and cash equivalents $ 307 $ 1,421
Trade accounts 5,737 4,576
Allowance for doubtful accounts (149) (94)
------- -------
Net receivables 5,588 4,482
Inventories:
Raw materials and components 2,658 2,214
Work in process 1,074 967
Finished goods 186 205
------- -------
Total inventories 3,918 3,386
Note receivable - current 325 315
Prepaid expenses and other current assets 217 102
Taxes receivable 211 -
Net assets of a discontinued operation 649 3,186
------- -------
Total Current Assets 11,215 12,892
Property, Plant and Equipment, net 1,611 749
Note receivable - noncurrent 282 335
Other assets - 27
------- -------
Total Assets $ 13,108 $ 14,003
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 26, 1998 (Unaudited) and September 30, 1997
(Derived from audited financial statements, as restated)
(Dollars in thousands)
Sept 30,
June 26, 1997
1998 (Restated)
--------- ----------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 1,387 $ 1,389
Accrued liabilities 2,838 3,276
Income taxes payable - 73
Payroll liabilities 473 458
------- -------
Total Current Liabilities 4,698 5,196
Deferred income taxes and other credits 524 594
------- -------
Total Liabilities 5,222 5,790
Commitments
Shareholders' Equity:
Common stock 5,985 5,909
Paid-in-capital 14,067 13,923
Deficit (12,120) (11,569)
Foreign currency translation adjustment (17) (19)
Treasury stock (29) (29)
Restricted stock grants - (2)
------- -------
Total Shareholders' Equity 7,886 8,213
------- -------
Total Liabilities and Shareholders' Equity $ 13,108 $ 14,003
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share)
Three months ended Nine months ended
June 27, June 27,
June 26, 1997 June 26, 1997
1998 (Restated) 1998 (Restated)
-------- -------- -------- --------
Revenue $ 5,767 $ 5,621 $ 16,016 $ 18,215
Cost of sales 3,003 3,224 9,003 10,970
Selling, general and administrative
expenses 1,676 2,094 4,607 5,140
Product development and
research costs 247 272 592 770
------- ------- ------- -------
Operating income 841 31 1,814 1,335
Interest expense (8) (60) (18) (285)
Equity in joint venture losses - - (27) -
Other (expense) income, net 36 61 (35) 111
------- ------- ------- -------
Income from continuing operations
before extraordinary item and
income taxes 869 32 1,734 1,161
Income tax (benefit) expense - (39) - 96
Income from continuing operations ------- ------- ------- -------
before extraordinary item 869 71 1,734 1,065
Extraordinary item - gain on
extinguishment of debt, net
of taxes ($106) - - - 2,507
------- ------- ------- -------
Income from continuing operations 869 71 1,734 3,572
Discontinued Operations (Note 4)
Income/(loss) from operations of
discontinued Technology Division,
net of tax benefit - 271 (516) (198)
Loss on disposal of Technology
Division, net of tax benefit - - (1,769) -
------- ------- ------- -------
Income/(loss) from discontinued
operations - 271 (2,285) (198)
------- ------- ------- -------
Net income (loss) $ 869 $ 342 $ (551) $ 3,374
======= ======= ======= =======
Earnings per Share:
Income before extraordinary item $ .15 $ .01 $ .29 $ .19
Extraordinary item - - - .45
Income(loss)on discontinued operations - .05 (.38) (.03)
------- ------- ------- -------
Net income (loss) $ .15 $ .06 $ (.09) $ .61
======= ======= ======= =======
Earnings per Share-assuming dilution:
Income before extraordinary item $ .14 $ .01 $ .28 $ .19
Extraordinary item - - - .45
Income (loss) on discontinued operations - .05 (.37) (.03)
------- ------- ------- -------
Net income (loss) $ .14 $ .06 $ (.09) $ .61
======= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine months ended
June 27,
June 26, 1997
1998 (Restated)
Operating Activities ------- -------
Net income from continuing operations $ 1,734 $ 3,572
Adjustments to reconcile net income to net
cash provided (used) by continuing operations:
Gain on extinguishment of debt - (2,507)
Depreciation and amortization 224 181
Equity in joint venture loss 27 -
Reserve for bad debts 55 (13)
Other - 19
Deferred taxes and other credits (70) -
Changes in operating assets and liabilities:
Accounts receivable (1,161) 710
Inventories (532) 156
Prepaid expenses and other current assets (119) 18
Accounts payable (2) (847)
Income taxes (284) (247)
Payroll Liabilities 15 (148)
Accrued liabilities (438) (929)
------- -------
Net cash used by continuing operations (551) (35)
------- -------
Discontinued operations:
Net loss from discontinued operations (2,285) (198)
Change in net assets/liabilities of
discontinued operations 2,537 (599)
Net assets transferred from discontinued operations (878) -
------- -------
Net cash used by discontinued operations (626) (797)
------- -------
Net cash used by operating activities (1,177) (832)
Investing Activities ------- -------
Purchases of property, plant & equipment (202) (322)
Principal payments from note receivable 43 -
------- -------
Net cash used by investing activities (159) (322)
Financing Activities ------- -------
Net borrowings under line-of-credit - 1,649
Principal payments of long-term debt - (454)
Other - 7
Proceeds from options exercised 220 -
------- -------
Net cash provided by financing activities 220 1,202
------- -------
Effect of exchange rate on cash 2 4
------- -------
(Decrease) increase in cash and cash equivalents (1,114) 52
Cash and cash equivalents - beginning of period 1,421 62
------- -------
Cash and cash equivalents - end of period $ 307 $ 114
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine months ended
June 27,
June 26, 1997
Supplemental Disclosure 1998 (Restated)
- ----------------------- ------- -------
NonCash Investing Activities
Contribution of net assets to joint venture
Inventories $ - $ 1
Property, plant & equipment, net - 444
Accounts Payable - (46)
Accrued Liabilities - (50)
------- -------
Net noncash used in investing activities $ - $ 349
======= =======
NonCash Financing Activities
Conversion of Note Payable to common stock
Note payable extinguishment $ - $ (3,000)
Common stock issued - 1,500
Accrued interest- Note Payable - (1,213)
------- -------
Net noncash used in financing activities $ - $ (2,713)
======= =======
Net noncash used in investing/financing activities $ - $ (2,364)
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management the accompanying unaudited consolidated
financial statements contain all adjustments, consisting of only normal,
recurring adjustments, necessary for a fair presentation of results for such
periods. The results for any interim period are not necessarily indicative of
results for the full year. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
for the fiscal year ended September 30, 1997.
2. Income Taxes
The Company's effective tax rate for the nine months ended June 26,1998 and June
27, 1997 was 0% and 5.4%, respectively. The June 26, 1998 rate reflects the use
of net operating losses and a full valuation allowance against the deferred tax
assets generated by the losses on discontinued operations.
3. Earnings per Share
The reconciliation of the numerators and denominators of Earnings per Share and
Earnings per Share-assuming dilution are as follows:
For the three month period For the three month period
ended June 26, 1998 ended June 27, 1997
----------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Income before --------- ----------- --------- --------- ----------- ---------
extraordinary item $ 869,000 $ 71,000
Earnings per Share:
- ------------------
Income available to
common stockholders $ 869,000 5,937,434 $ .15 $ 71,000 5,900,408 $ .01
Effect of Dilutive ======= =======
Securities:
- ----------
Stock Options - 202,164 - 7,089
Earnings per Share- --------- --------- --------- ---------
assuming dilution:
- -----------------
Income available to
common stockholders
plus assumed
conversion $ 869,000 6,139,598 $ .14 $ 71,000 5,907,497 $ .01
========= ========= ======= ========= ========= =======
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine month period For the nine month period
ended June 26, 1998 ended June 27, 1997
----------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Income before --------- ----------- --------- --------- ----------- ---------
extraordinary item $1,734,000 $1,065,000
Earnings per Share:
- ------------------
Income available to
common stockholders $1,734,000 5,941,997 $ .29 $1,065,000 5,577,386 $ .19
Effect of Dilutive ======= =======
Securities:
- ----------
Stock Options - 191,273 - -
Earnings per Share- --------- --------- --------- ---------
assuming dilution:
- -----------------
Income available to
common stockholders
plus assumed
conversion $1,734,000 6,133,270 $ .28 $1,065,000 5,577,386 $ .19
========== ========= ======= ========= ========= =======
During the first three quarters of fiscal 1998,options to purchase 20,000 shares
of common stock at prices ranging from $5.70 to $6per share were outstanding but
were not included in the computation of Earnings per Share-assuming dilution
because the options' exercise price was greater than the average market price of
the common shares. The options, which expire between October 20, 2007 and April
27, 2008, were still outstanding at June 26, 1998.
During the first three quarters of fiscal 1997, options to purchase 188,100
shares of common stock at a price of $2.44 per share were outstanding but were
not included in the computation of Earnings per Share-assuming dilution because
the exercise price was greater than the average market price of the common
shares. Therefore, no potential common shares are included in the computation.
The options, which expire between December 20, 2006 and March 14, 2007, were
still outstanding at June 27, 1997.
4. Discontinued Operations - Restatement
All remaining assets of the Company's Technology Division, the sole component of
the Technology segment, were sold to NYFM, Incorporated (a wholly-owned
subsidiary of Foster Miller, Inc., a Waltham, Massachusetts-based technology
company) on March 31, 1998. In exchange for the Technology Division's assets,
NYFM, Incorporated a) agreed to pay the Company a percentage of gross sales in
excess of $2.5 million for a period of five years; b) assumed approximately
$40,000 of liabilities; and c) established a credit for warranty work of
approximately $35,000. Accordingly, the Company no longer includes Technology
among its reportable business segments and now operates in only one segment,Test
& Measurement. The Technology Division is reported as a discontinued operation
as of December 26, 1997, and the consolidated financial statements have been
reclassified to report separately the net assets and operating results of the
business. The Company's prior year financial statements have been restated to
conform to this treatment.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Discontinued operations consist of the following:
Three months ended Nine months ended
------------------ ------------------
June 26, June 27, June 26, June 27,
(Dollars in thousands) 1998 1997 1998 1997
-------- -------- -------- --------
Sales $ - $ 2,444 $ 532 $ 6,486
======= ======= ======= =======
Income (loss) from operations
Before income tax $ - $ 286 $ (516) $ (208)
Income tax (benefit) - 15 - (10)
------- ------- ------- -------
Net income (loss) from discontinued
operations $ - $ 271 $ (516) $ (198)
======= ======= ======= =======
Loss on disposal of Division $ - $ (1,769)
Income tax (benefit) - -
------- -------
Loss on disposal of Division $ - $ (1,769)
======= =======
The assets and liabilities of the Company's discontinued operations are as
follows:
June 26, Sept 30,
1998 1997
-------- --------
Assets held for sale $ 1,806 $ 3,968
Liabilities $ 1,157 $ 782
------- -------
Net Assets $ 649 $ 3,186
======= =======
Assets with a net book value of $878,000 consisting primarily of land, building
and management information systems were transferred to continuing operations on
October 1, 1997.
5. Reclassification
Certain fiscal 1997 amounts have been reclassified to conform with the fiscal
1998 presentation.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Comprehensive Income
Total comprehensive income for the three and nine months ended June 26, 1998 and
June 27, 1997 consists of:
Three months ended Nine months ended
------------------ -----------------
Restated Restated
June 26, June 27, June 26, June 27,
(Dollars in thousands) 1998 1997 1998 1997
- --------------------------------- -------- -------- -------- --------
Net income(loss) $ 869 $ 342 $ (551)$ 3,374
Other comprehensive income(loss),
before tax:
Foreign currency translation
adjustments (1) 1 2 4
Income tax related to items of other
comprehensive income(loss) - - - -
------- ------- ------- -------
Total comprehensive income(loss) $ 868 $ 343 $ (549)$ 3,378
======= ======= ======= =======
7. Investment in Plug Power, L.L.C.
On April 15, 1998, Edison Development Corporation ("EDC") contributed $2.25
million in cash to Plug Power, L.L.C. ("Plug Power"). The Company contributed a
below-market lease for office and manufacturing facilities in Latham, New York,
valued at $2 million and purchased a one year option to match the remaining
$250,000 of EDC's contribution. In May 1998, EDC contributed an additional $2
million to Plug Power and the Company purchased a one year option to match the
contribution. The Company paid approximately $191,000 for the options, which
mature in April 1999 ($250,000) and May 1999 ($2 million).
On July 31, 1998, Plug Power asked the Company and EDC to each commit to
contribute an additional $5 million dollars (in cash and research credits)
between August 5, 1998 and March 31, 1999. Such contributions, if made, will
increase the Company's total contributions to Plug Power(including contributions
of cash, assets, research credits, and a below market lease) to $11.75 million
over the period commencing on June 27, 1997, and ending on March 31, 1999. In
addition, unless the Company exercises its options to match EDC's previous
contributions of $250,000 in April 1999, and $2 million in May 1999,such options
will lapse. The Company, EDC and Plug Power are currently negotiating whether,
when and how, such additional contributions will be made. If EDC and/or the
Company do not contribute or lend additional funds to Plug Power, and no
additional sources of funding can be found,Plug Power will be unable to continue
as a going concern.
The Company, EDC and Plug Power intend to determine the form, timing and pricing
of additional contributions or loans to Plug Power,if any, for the period August
1, 1998 through March 31, 1999, not later than September 15, 1998. On August 5,
1998, EDC and the Company made short term loans to Plug Power of $500,000 each.
If the Company, EDC and Plug Power have not agreed upon the terms and timing of
additional contributions to Plug Power, if any, as of September 15, 1998, such
loans will be payable upon demand.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has recorded its proportionate share of Plug Power's losses only to
the extent of its recorded investment in Plug Power, such investment is zero as
of June 26, 1998.
To the extent the Company makes investments in Plug Power,it will also recognize
its proportionate share of losses to the extent of these investments.
8. Commitments
The Industrial Development Agency for the Town of Colonie has agreed to issue $6
million in Industrial Development Revenue ("IDR") Bonds on behalf of the Company
to assist in the construction of a new building for Advanced Products and the
Company's corporate staff and renovation of existing buildings to be leased to
Plug Power, L.L.C. The construction project is due to be completed in December
1998. First Albany Companies, Inc. ("FAC"), the Company's controlling
shareholder, will underwrite the sale of the IDR Bonds. Proceeds of the IDR
Bonds will be deposited with a trustee for the bondholders. The Company may draw
the bond proceeds to cover qualified project costs. The bond closing is expected
to be completed on or about August 30, 1998. FAC will receive no fees for
underwriting the IDR Bonds but will be reimbursed for its out-of-pocket costs.
9. Subsequent Events
Debt
- ----
On July 15, 1998, the Company received a commitment from KeyBank National
Association ("KeyBank") to lend the Company $4 million in a working capital line
of credit at an interest rate of LIBOR plus 250 basis points, and a $1 million
equipment loan/lease line of credit at an interest rate of LIBOR plus 275 basis
points, both of which expire January 31, 2000. Additionally, KeyBank has agreed
to issue a $6 million direct pay letter of credit to enhance the $6 million IDR
Bonds to be issued on the Company's behalf on or about August 30, 1998. The loan
commitment requires the Company to meet certain covenants, including a fixed
charge coverage and leverage ratio. Further, if certain performance standards
are achieved, the interest rates on the debt may be reduced. The commitment
letter also require the Company to grant a first lien on all consolidated assets
of the Company exclusive of Plug Power, L.L.C., a first mortgage on all land and
buildings owned by the Company and a first lien on any equipment purchased bythe
Company.
Rights Offering
- ---------------
On July 22, 1998, the Company filed a Registration Statement for the sale of
additional common stock to current shareholders through the issuance of non-
transferable rights. The offering will raise up to approximately $6 million. The
Company will use some or all of the proceeds of the offering for investment in
and/or loans to Plug Power. In addition, some proceeds may be used for
acquisitions for the Company's core businesses,efforts to increase market share,
working capital, general corporate purposes and other capital expenditures.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors, which have affected the Company's earnings during the periods included
in the accompanying consolidated statements of income.
The sale of the Company's Technology Division, the sole component of the
Technology segment, to NYFM, Incorporated (a wholly owned subsidiary of Foster-
Miller, Inc., a Waltham, Massachusetts-based technology company) on March 31,
1998 completed management's planned sale of non-core businesses. Accordingly,the
Company no longer includes Technology among its reportable business segments and
now operates in only one segment, Test & Measurement. The Technology Division is
reported as a discontinued operation as of December 26, 1997, and the
consolidated financial statements have been restated to report separately thenet
assets and operating results of the business. Net assets of the discontinued
operation were $649 thousand and $3,186 thousand at June 26, 1998 and September
30, 1997, respectively and the loss on discontinued operations included a loss
from operations of $516 thousand and a loss on disposal of $1,769 thousand for
the nine month period ended June 26, 1998. The loss on disposal includes a
provision for estimated operating results prior to disposal. The Company's prior
year financial statements have been restated to conform to this treatment.
Continuing Operations
- ---------------------
Sales increased $146 thousand to $5,767 thousand for the three months ended
June 26, 1998 as compared to $5,621 thousand for the three months ended June 27,
1997, a 2.6% increase. This change is the result of an approximate $1 million
increase in sales for Advanced Products, which more than offset the sales
reduction resulting from the September 30, 1997 sale of the L.A.B. Division. The
L.A.B. Division reported sales of $889 thousand and operating income of $106
thousand for the three months ended June 27, 1997. Operating income increased
$810 thousand to $841 thousand for the three months ended June 26, 1998 as
compared to $31 thousand for the three months ended June 27, 1997, a 2,612.9%
increase. The increase is the result of increased sales levels for Advanced
Products and improved margins as a result of cost control measures.
Sales for the first three quarters of fiscal year 1998 versus the same period
in fiscal year 1997 have decreased $2.2million to $16million in 1998 from $18.2
million in 1997, a 12% decrease. This decrease is attributable to the reduction
of sales resulting from the sale of the L.A.B. Division on September 30, 1997,
which reported sales of $2,617 thousand and operating income of $309thousand for
the first three quarters of fiscal 1997. The first three quarters of fiscal 1998
operating income of $1,814 thousand represented a $479 thousand increase or a
35.9% increase from the $1,335thousand operating income recorded during the same
period last year. The increase is the result of increased sales levels for
Advanced Products and improved margins as a result of cost control measures.
Other
- -----
In addition to the matters noted above, during the first three quarters of
fiscal 1997, the Company recorded a $2.5 million extraordinary gain, net of
taxes, on the extinguishment of debt.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results during the first three quarters of fiscal 1998 and fiscal 1997 were
enhanced by lower interest expense, principally resulting from reduced
indebtedness. Moreover, the Company benefited from reduced income tax expense
due to the use of net operating loss carryforwards. However, as a result of
ownership changes, the availability of further net operating loss carryforwards
to offset future taxable income will be significantly limited pursuant to the
Internal Revenue Code. The tax rate for the nine months ended June 26, 1998 and
June 27, 1997 was 0% and 5.4%, respectively. The June 26, 1998 rate reflects the
use of net operating losses and a full valuation allowance against the deferred
tax assets generated by the losses on discontinued operations.
Financial Condition
- -------------------
The Company's working capital of $6.52 million at June 26, 1998 reflects a
$1.18 million decline from September 30, 1997.
At June 26, 1998, cash and cash equivalents were $307 thousand versus $1.42
million at September 30, 1997. Net cash used by operating activities for the
first nine months of fiscal 1998 amounted to $1.18 million, as compared to cash
used of $828 thousand in the prior year.
The capital used during the first three quarters of fiscal 1998 was
applied principally to fund short term operating cash flow requirements and
pay estimated taxes. Additionally, accounts receivable increased to $5.59
million or 24.7% as of June 26, 1998 as compared to $4.48 million as of
September 30, 1997.
Capital spending during the first nine months of fiscal 1998 was $202
thousand, a decrease from the comparable period in 1997 during which capital
spending totaled $322 thousand. Capital spending during the fourth quarter of
fiscal 1998 and the first quarter of fiscal 1999 will reflect the construction
of a new building for Advanced Products and Corporate staff and renovations to
an existing building to be leased to Plug Power, L.L.C. Total capital
spending for this project is expected to be approximately $6 million.
The reduction in net assets of discontinued operations of $2,537 thousand
includes the transfer of $878 thousand of assets to continuing operations
(principally land, building and management information systems) as well as the
accrual for the loss on disposal of the Technology Division. Such accrual
included a provision for estimated operating results prior to disposal and an
estimate of the loss on disposal and winddown of the Technology Division, which
totaled $1,769 thousand. The sale of the Technology Division was completed as of
March 31, 1998.
During fiscal 1996, First Albany Companies, Inc. ("FAC") purchased 909,091
shares of the Company's common stock from the New York State Superintendent of
Insurance as the court-ordered liquidator of United Community Insurance Company
("UCIC"). In connection with this purchase, FAC had also acquired certain rights
to an obligation ("Term Loan") due from the same finance company ("FCCC")to whom
the Company was obligated under the Note Payable.FCCC was in default of its Term
Loan to UCIC. FAC, as the owner of the rights to the Term Loan, filed suit-
seeking payment. Collateral for the FCCC Term Loan included the Company's Note
Payable to FCCC. FAC exercised its rights to the collateral securing the Term
Loan,including the right to obtain payment on the Note Payable directly from the
Company.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On December 27, 1996, the Company and FAC entered into an agreement under
which the Company issued to FAC 1.0 million shares of common stock in full
satisfaction of the Note Payable of $3.0 million and accrued interest of $1.2
million. Accordingly, the Company realized a gain on the extinguishment of debt
totaling $2.5 million, net of approximately $100 thousand of transaction related
expenses and net of taxes of $106 thousand.
The Company anticipates that it will be able to meet the liquidity needs of
its continuing operations during fiscal year 1998 from cash flow generated by
operations, borrowing under its existing line of credit and, if consummated, the
newly committed line of credit from KeyBank N.A.
Debt
- ----
On July 15, 1998, the Company received a commitment from KeyBank National
Association ("KeyBank") to lend the Company $4 million in a working capital line
of credit at an interest rate of LIBOR plus 250 basis points, and a $1 million
equipment loan/lease line of credit at an interest rate of LIBOR plus 275 basis
points, both of which expire January 31, 2000. Additionally, KeyBank has agreed
to issue a $6 million direct pay letter of credit to enhance the $6 million IDR
Bonds to be issued on the Company's behalf on or about August 30, 1998. The loan
commitment requires the Company to meet certain covenants, including a fixed
charge coverage and leverage ratio. Further, if certain performance standards
are achieved, the interest rates on the debt may be reduced. The commitment
letter also requires the Company to grant a first lien onall consolidated assets
of the Company exclusive of Plug Power, L.L.C., a first mortgage on all land and
buildings owned by the Company and a first lien on any equipment purchased bythe
Company.
The Industrial Development Agency for the Town of Colonie has agreed to issue
$6 million in Industrial Development Revenue Bonds ("IDR") on behalf of the
Company to assist in the construction of a new building for Advanced Productsand
the Company's corporate staff and renovation of existing buildings to be leased
to Plug Power, L.L.C. The construction project is due to be completed as of
December 1998. First Albany Companies, Inc. ("FAC"), which owns 34% of the
Company's stock, will underwrite the sale of the IDR Bonds. Proceeds of the IDR
Bonds will be deposited with a trustee for the bondholders. The Company may draw
the bond proceeds to cover qualified project costs. The bond closing is expected
to be completed on or about August 30, 1998. FAC will receive no fees for
underwriting the IDR Bonds but will be reimbursed for its out of pocket costs.
Equity
- ------
On July 22, 1998, the Company filed a Registration Statement for the sale of
additional common stock to current shareholders through the issuance of non-
transferable rights.The anticipated proceeds of up to approximately $6 million
will be used for investment in and/or loans to Plug Power, L.L.C., acquisitions
for the Company's core businesses and other general corporate business purposes.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Joint Venture
- -------------
On July 31, 1998, Plug Power, L.L.C. asked the Company to commit to
contribute $5 million (in cash and research credits) to Plug Power, L.L.C. to
fund continuing operations for the period August 1, 1998 through March 31, 1999.
The Company, EDC and Plug Power, L.L.C. are currently negotiating whether, when
and how, such additional contributions will be made. On August 5, 1998, EDC and
the Company each made short-term loans of $500,000 to Plug Power, L.L.C. If the
Company, EDC and Plug Power, L.L.C. have not agreed upon the terms and timing of
additional contributions to Plug Power, L.L.C. as of September 15, 1998, these
loans will be payable on demand. In addition, Plug Power, L.L.C. will continue
to need substantial investment for the foreseeable future. Plug Power, L.L.C.
continues to pursue strategic partners and additional sources of capital. Plug
Power, L.L.C. is currently negotiating with several strategic partners and has
signed a preliminary Memorandum of Understanding with one strategic partner.
There is no assurance, however, that Plug Power, L.L.C. will successfully
conclude any transactions with strategic partners or find other sources of
capital. If other sources of funding cannot be found, the Company will be faced
with contributing and/or lending additional capital to Plug Power, L.L.C. or
dilution of its interest in Plug Power, L.L.C. If EDC and the Company stop
funding Plug Power, L.L.C. and no additional sources of capital are found, Plug
Power, L.L.C. will not be able to continue as a going concern.
Year 2000
- ---------
The Company relies on both internal systems and systems of other parties in
regard to its business, accounting and operational software. As the millennium
approaches, the Company is working toward becoming year 2000 compliant. Many of
the Company's internal systems and products that have integrated software are
already year 2000 compliant. The Company currently has plans that if successful
will have all internal systems and all of our products year2000 complaint during
fiscal 1999.
The Company has contacted its outside software providers regarding their
products compliance with year 2000 issues and has developed specific plans to
address any non-compliant products. These providers are in the process of
implementing these plans with an expected completion date of 1999. If any
provider is not successful, the Company will evaluate selecting alternative
providers at that time.
The incremental costs of assuring that the Company's products and purchased
software and products are year 2000 complaint are estimated to be approximately
$120,000. Most of these costs are attributable to software/hardware upgrades.
The Company presently believes that with modifications to existing software or
conversion to new software, year 2000 problems can be effectively mitigated.
However, if such modifications and conversions are not made,or are not completed
timely, or if other issues that have not been anticipated arise, year 2000
problems could have a material impact on the operations of the Company.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statement Concerning Forward Looking Statements
- -----------------------------------------------
Statements in this Form 10-Q or in documents incorporated herein by
reference that are not statements of historical fact constitute "forward-looking
statements"within the meaning of the Private Securities Litigation Reform Act of
1995, including statements regarding future revenues, expenses and profits.
These forward looking statements are subject to known and unknown risks,
uncertainties or other factors that may cause the actual results of the Company
to be materially different from the historical results or from any results
expressed or implied by the forward looking statements. Such risks and factors
include, but are not limited to, those discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
PART II OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
On January 30, 1998, Stephen Sullivan, former President of Ling Electronics,
Inc., a wholly-owned subsidiary of the Company, filed suit in Superior Court of
the State of California against Ling Electronics, Inc., alleging age
discrimination and wrongful termination claims against the Company arising from
the termination of Mr.Sullivan's employment by Ling, seeking unspecified relief.
The Company is currently in settlement negotiations with Mr. Sullivan.
In May 1998,the Company paid $138,580.30 in satisfaction of all of the Company's
obligations for past or future EPA response costs and any costs incurred by the
PRP's with respect to the site as its share of the Settlement of the
Environmental Protection Agency's executed consent decree with the Company and
other named potentially responsible parties in connection with a alleged release
of hazardous materials into the environment at a site in Malta, New York.
In February, 1997, an unaffiliated entity, Ling Holdings Group, Inc.
("Plaintiff"), brought suit against the Company. The Plaintiff's claims
arise out of the Company's decision not to sell Plaintiff the stock of the
Company's wholly owned subsidiary, Ling Electronics, Inc. ("LING"), after
expiration of the closing date specified in the stock purchase agreement
and side letters executed in connection with the transaction
(collectively, the "Agreements"). Plaintiff claims that the Agreements
provided an "open-ended" closing that permitted Plaintiff to purchase LING
when Plaintiff raised sufficient funds to do so. Plaintiff further claims
breach of express and implied contractual obligations, fraud,
misrepresentation, and other torts in connection with the Company's
refusal to consummate the sale after the agreed upon closing date.
Plaintiff further alleged that the Company wrongfully confiscated $50,000
of Plaintiff's escrowed funds in breach of the escrow agreement between
Plaintiff, the Company, and the Adirondack Trust Company ("Escrow Agent").
Escrow Agent commenced an interpleader action regarding the escrowed funds
in September, 1997.
The Company believes that its determination not to sell LING to Plaintiff
was in compliance with the terms of the Agreements. The Company further
believes that it became the rightful owner of funds escrowed with the
Escrow Agent, when Plaintiff failed to have sufficient funds available to
close the purchase of LING on the closing date specified in the
Agreements. The Company has filed claims against Plaintiff for negligent
misrepresentation, asserting that Plaintiff misled the Company concerning
its ability to raise the funds required to purchase LING.
The Ling Holdings Group, Inc. lawsuit trial date has been postponed until
September 21, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On April 15, 1998, the Company held its Annual Meeting of Shareholders of the
Company. The following members were elected to the Company's Board of Directors
for the terms of office noted:
Nominee Term In Favor Withheld
- ------- ---- -------- --------
Dale W. Church 2 year 4,417,446 3,581
Edward A. Dohring 2 year 4,418,621 2,406
Alan P. Goldberg 3 year 4,419,071 1,956
George C. McNamee 1 year 4,418,971 2,056
E. Dennis O'Connor 1 year 4,418,971 2,056
Dr. Walter L. Robb 3 year 4,418,871 2,156
Dr. Beno Sternlicht 3 year 4,418,850 2,177
The results of the voting on the proposal to approve the reappointment of
Coopers & Lybrand, L.L.P. as the Company's Auditors were as follows:
In Favor Opposed Abstained
-------- ------- ---------
4,417,627 1,300 2,100
The results of the voting on the approval of the Amendment and Restatement of
the Company's Certificate of Incorporation and the Restatement of the Company's
By-Laws were as follows:
In Favor Opposed Abstained
--------- ------- ---------
Amendment and Restatement of
the Company's Certificate
of Incorporation 3,739,428 25,403 6,215
Restatement of the Company's
By-Laws 3,739,189 25,493 6,364
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
10.28 Agreement between Mechanical Technology, Inc. and Malone &
Tate Builders, Inc. for Building One Construction
10.29 Mechanical Technology, Incorporated/Plug Power, L.L.C.
Lease for Building III
27 Financial Data Schedule
(b) One report on Form 8-K was filed during the quarter ended June 26, 1998.
The Company filed a Form 8-K Report, dated April 8, 1998, reporting under
Item 5 thereof the resignation of Martin J. Mastroianni as an officer and
director of the Company, Ling Electronics, Inc. and Plug Power, L.L.C. and
subsidiaries thereof.
SIGNATURE
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
08-06-98 /s/ G.C. McNamee
- ---------- ----------------------------------
(Date) George C. McNamee
Chief Executive Officer
08-06-98 /s/ C.A. Scheuer
- ---------- ----------------------------------
(Date) Cynthia A. Scheuer
Vice President/Chief Financial Officer