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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 25, 1999
/ / Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the period from________________to
_____________________________
Commission File Number 0-6890
_____________________________
MECHANICAL TECHNOLOGY INCORPORATED
(Exact name of registrant as specified in its charter)
New York 14-1462255
_______________________________ ___________________
(State or other jurisdiction of (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
______________
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. Yes X No
___ ___
Class Outstanding at June 25, 1999
_____________________________ ____________________________
Common Stock, $1.00 Par Value 10,822,116 Shares
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MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information
Consolidated Balance Sheets - June 25, 1999
and September 30, 1998 3 - 4
Consolidated Statements of Income -
Three months and nine months ended
June 25, 1999 and June 26, 1998 5
Consolidated Statements of Cash Flows -
Nine months ended June 25, 1999
and June 26, 1998 6
Notes to Consolidated Financial Statements 7 - 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 19
Part II Other Information
Item 1 20
Item 6 20 - 21
Signature 22
PART I FINANCIAL INFORMATION
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 25, 1999 (Unaudited) and
September 30,1998 (Derived from audited financial statements)
(Dollars in thousands)
June 25, Sept 30,
1999 1998
Assets
Current Assets:
Cash and cash equivalents $ 3,188 $ 5,567
Restricted cash 134 -
Trade accounts receivable 3,338 5,058
Allowance for doubtful accounts (84) (99)
_______ _______
Net receivables 3,254 4,959
Accounts receivable-Joint Venture 54 87
Inventories:
Raw materials and components 2,643 2,845
Work in process 1,342 791
Finished goods 86 112
_______ _______
Total inventories 4,071 3,748
Note receivable - current 333 327
Prepaid expenses and other current assets 662 472
Taxes receivable - 8
Net assets of a discontinued operation - 8
Total Current Assets 11,696 15,176
Property, Plant and Equipment, net 6,729 4,467
Note receivable - noncurrent 205 264
Investment in Joint Venture 5,938 1,221
_______ _______
Total Assets $ 24,568 $ 21,128
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 25, 1999 (Unaudited) and
September 30, 1998 (Derived from audited financial statements)
(Dollars in thousands)
June 25, Sept 30,
1999 1998
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 803 $ 2,064
Accrued liabilities 2,025 3,328
Income taxes payable 13 5
Contribution payable - Joint Venture - 4,000
Current installments on long-term debt 285 -
Net liabilities of discontinued operations 504 -
_______ _______
Total Current Liabilities 3,630 9,397
Long-term debt, net of current maturities 5,715 -
Deferred income taxes and other credits 607 607
Total Liabilities 9,952 10,004
Commitments (Note 4)
Shareholders' Equity:
Common stock 10,828 10,775
Paid-in-capital 27,984 16,274
Deficit (24,138) (15,885)
Foreign currency translation adjustment (29) (11)
Treasury stock (29) (29)
_______ _______
Total Shareholders' Equity 14,616 11,124
_______ _______
Total Liabilities and Shareholders' Equity $ 24,568 $ 21,128
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share)
Three months ended Nine months ended
__________________ _________________
June 25, June 26, June 25, June 26,
1999 1998 1999 1998
Revenue $ 2,606 $ 5,767 $ 8,609 $16,016
Cost of sales 1,682 3,003 5,622 9,003
______ ______ ______ ______
Gross profit 924 2,764 2,987 7,013
Selling, general and administrative
expenses 1,137 1,699 3,517 4,607
Product development and
research costs 268 247 800 592
______ ______ ______ ______
Operating (loss)income (481) 818 (1,330) 1,814
Interest expense (74) (8) (101) (18)
Equity in joint venture losses (3,544) (27) (6,859) (27)
Other (expense) income, net (1) 86 33 (35)
______ ______ ______ ______
(Loss)income from continuing
operations before income taxes (4,100) 869 (8,257) 1,734
Income tax expense 37 - 37 -
______ ______ ______ ______
(Loss)income from continuing
operations $(4,137) $ 869 $(8,294) $ 1,734
______ ______ ______ ______
Discontinued Operations (Note 7)
Income (loss) from operations of
discontinued Technology Division,
net of tax benefit 41 - 41 (516)
Loss on disposal of Technology
Division, net of tax benefit - - - (1,769)
______ ______ ______ ______
Income (loss) from discontinued
operations 41 - 41 (2,285)
______ ______ ______ ______
Net (loss)income $(4,096) $ 869 $(8,253) $ (551)
====== ======= ====== ======
Earnings (Loss) per Share (Basic and Diluted):
(Loss)income from continuing
operations $ (.38) $ .10 $ (.76) $ .19
Income (loss) from discontinued
operations - - - (.25)
______ _______ ______ ______
Net(loss)income $ (.38) $ .10 $ (.76) $ (.06)
====== ======= ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine months ended
June 25, June 26,
1999 1998
Operating Activities
Net(loss)income from continuing operations $ (8,294) $ 1,734
Adjustments to reconcile net (loss)income to net
cash used by continuing operations:
Depreciation and amortization 481 224
Equity in joint venture loss 6,859 27
Reserve for bad debts (15) 55
Deferred taxes and other credits - (70)
Stock option compensation 55 -
Changes in operating assets and liabilities:
Accounts receivable 1,720 (769)
Accounts receivable-joint venture 33 (392)
Inventories (323) (532)
Prepaid expenses and other current assets (280) (119)
Accounts payable (1,261) (2)
Income taxes 16 (284)
Accrued liabilities (1,303) (423)
_______ ______
Net cash used by continuing operations (2,312) (551)
Discontinued operations:
Net income (loss) from discontinued
operations 41 (2,285)
Change in net liabilities/assets of
discontinued operations 512 2,537
Net assets transferred from discontinued
operations - (878)
_______ ______
Net cash provided(used) by discontinued operations 553 (626)
_______ ______
Net cash used by operating activities (1,759) (1,177)
_______ ______
Investing Activities
Purchases of property, plant & equipment (2,653) (202)
Contribution payable-joint venture (4,000)
Principal payments from note receivable 53 43
_______ ______
Net cash used by investing activities (6,600) (159)
_______ ______
Financing Activities
Borrowings under IDA financing, less restricted cash 5,866 -
Proceeds from options exercised 132 220
_______ ______
Net cash provided by financing activities 5,998 220
_______ ______
Effect of exchange rate on cash (18) 2
_______ ______
Decrease in cash and cash equivalents (2,379) (1,114)
Cash and cash equivalents - beginning of period 5,567 1,421
_______ ______
Cash and cash equivalents - end of period $ 3,188 $ 307
====== ======
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, 1998.
2. Income Taxes
The Company's effective tax rates for the nine months ended June 25, 1999 and
June 26, 1998 were 1.2% and 0%, respectively.
3. Earnings per Share
The amounts used in computing earnings per share and the effect on income and
the weighted average number of shares of potentially dilutive securities are as
follows:
For the three month period For the nine month period
ended ended
June 25, 1999 June 26, 1998 June 25,1999 June 26,1998
(Dollars in Thousands)
(Loss)income from continuing operations
available to common stockholders $ (4,137) $ 869 $ (8,294) $ 1,734
Weighted average number of
shares:
Weighted average number of shares
used in per share calculation 10,819,135 8,906,151 10,790,277 8,912,995
Effect of dilutive securities:
Stock options - 303,246 - 286,910
___________________________________________________________________________________________________
Weighted average number of
shares used in diluted net
loss per share 10,819,135 9,209,397 10,790,277 9,199,905
___________________________________________________________________________________________________
During the three quarters of fiscal 1999, options to purchase 764,537 shares
of common stock at prices ranging between $1.63 and $22.50 per share were
outstanding but were not included in the computation of Earnings per Share-
assuming dilution because the Company incurred a loss during this period and
inclusion would be anti-dilutive. The options, which expire between December
20, 2006 and June 16, 2009 were outstanding at June 25, 1999.
During the three quarters of fiscal 1998, options to purchase 30,000 shares of
common stock at prices ranging from $5.70 to $6.00 per share were outstanding
but were not included in the computation of Earnings per Share-assuming
dilution because the option exercise prices were greater than the average
market price of the common shares (anti-dilutive). The options, which expire
on October 20, 2007 and April 27, 2008, were outstanding at June 26, 1998.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. 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 thousand of EDC's contribution. In May 1998, EDC contributed an additional
$2 million to Plug Power and the Company purchased another one year option to
match the contribution. The Company paid approximately $191 thousand for the
options, which matured April 24, 1999 ($250 thousand) and June 15, 1999
($2 million).
As of March 25, 1999, the Company and Plug Power exchanged the foregoing
options and certain "research credits" (described below) for 2.25 million
Plug Power membership interests. The Company earned the research credits by
assisting Plug Power in securing the award of certain government grants and
research contracts during the period June 1997 through April 1999.
In August 1998, the Company committed to contribute an additional $5 million
dollars (in cash, accounts receivable and research credits) between August 5,
1998 and March 31, 1999 and recorded a liability representing this obligation.
During the period September 1998 to February 1999, the Company fully funded
this commitment by contributing $4 million cash and converting $.5 million of
accounts receivable and $.5 million of notes receivable.
During April 1999, the Company and EDC amended and restated a prior agreement
granting MTI and EDC the right to purchase membership interests in Plug Power.
The agreement, which was effective as of January 26, 1999, states that, in the
event Plug Power determines that it requires funds at any time through
December 31, 2000, Plug Power has the right to call upon the Company and EDC
to each make capital contributions as follows:
* The Company and EDC will each fund capital calls of up to
$7.5 million in 1999 and $15 million in 2000 ("Capital Commitment").
* In exchange for such capital contributions to Plug Power, the
Company and EDC will receive class A membership interests ("Shares")
from Plug Power at $7.50 per share.
* The Company and EDC will share the Capital Commitment equally.
* Plug Power's Board of Managers will determine when there is need
for such capital contributions.
* The Company and EDC shall have sixty (60) days from the date of
such authorization to tender their payment to Plug Power.
The agreement will terminate on December 31, 2000 or the date of an initial
public offering of shares by Plug Power at a per share price of greater than
$7.50 per share ("Termination Date"). In exchange for the Capital Commitment,
Plug Power has agreed to permit the Company and EDC to make capital
contributions to the extent of their Capital Commitment on the Termination
Date, whether or not such funds have been called, in exchange for Shares at
the fixed price of $7.50 per share.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If Plug Power requests capital contributions pursuant to the Capital
Commitments ("Capital Call"), and either the Company or EDC fail to make such
capital contribution ("Defaulting Member"), then such Defaulting Member shall
forfeit the right to receive the Shares it would have received in the Capital
Call at the fixed price of $7.50 per share ("Defaulted Shares"). Additionally,
to the extent that there are Capital Commitments outstanding, the Defaulting
Member will be required to forfeit the right to receive an additional number of
Shares, at a fixed price of $7.50 per share, equal to two times the Defaulted
Shares ("Additional Defaulted Shares"). The non-Defaulting Member may fund the
Defaulting Member's share of the Capital Call in exchange for Shares at the
fixed price of $7.50 per share.
In June 1999, MTI and Plug Power entered into an agreement for the sale of the
MTI campus and adjacent residence, including all land and buildings, to Plug
Power in exchange for 704,315 Class A membership interests and the assumption
of approximately $6 million in debt by Plug Power. The sale of the MTI
facility and the transfer of the $6 million IDR bonds to Plug Power were
effective as of July 1, 1999 with no gain or loss recognized.
The Company's total contributions to Plug Power (including contributions of
cash, assets, research credits, and a below market lease) for the period
commencing onJune 27, 1997, and ending on June 25, 1999 total $14 million.
The Company's total contributions to Plug Power as of July 1, 1999 total
$14.3 million.
During calendar 1999, Plug Power's equity increased approximately $32.483
million primarily due to investments by investors. Of this amount, $23.368
million was received in cash, $4.990 million in property and services and
$4.125 million represents membership interests issued in connection with the
formation of GE Fuel Cell Systems LLC. As a result, the Company recorded its
proportionate share of the increase in Plug Power's equity ($11.576 million)
as investment in the joint venture and additional paid-in-capital.
The Company has recorded its proportionate share of Plug Power's losses to the
extent of its recorded investment in Plug Power. The carrying value of the
Company's investment is $5.938 million as of June 25, 1999.
The Company will recognize its proportionate share of losses in the future to
the extent of its carrying value and additional future investments.
Plug Power will continue to need substantial investment after December 31,
1999. Plug Power continues to pursue additional sources of capital. There is
no assurance, however, that Plug Power will 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 or dilution of
its interest in Plug Power. If EDC, the Company and other Plug Power members
stop funding Plug Power and no additional sources of capital are found, Plug
Power will not be able to continue as a going concern.
5. Reclassification
Certain fiscal 1998 amounts have been reclassified to conform with the fiscal
1999 presentation.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Comprehensive Income (Loss)
Total comprehensive (loss) income consists of the following:
Three months ended Nine months ended
June 25, June 26, June 25, June 26
(Dollars in thousands) 1999 1998
Net (loss) income $(4,096) $ 869 $(8,253) $ (551)
Other comprehensive (loss) income,
before tax:
Foreign currency translation
adjustments (7) (1) (18) 2
______ ______ ______ ______
Total comprehensive (loss) income $(4,103) $ 868 $(8,271) $ (549)
====== ====== ====== ======
7. Discontinued Operations
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 and 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 the net assets and operating results of the business. In
exchange for the Technology Division's assets, NYFM, Incorporated (a) agreed
to pay the Company a percentage of annual gross sales in excess of $2.5
million for a period of five years; (b) assumed approximately $40 thousand
of liabilities; and (c) established a credit for warranty work of approximately
$35 thousand.
The Company's results for the third quarter of fiscal 1999 include a $41
thousand gain on the sale of the Technology Division calculated as a percentage
of NYFM's first year gross sales in excess of $2.5 million as of March 31, 1999.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Discontinued operations consist of the following:
Three months ended Nine months ended
June 25, June 26, June 25, June 26,
(Dollars in thousands) 1999 1998 1999 1998
Sales $ - $ - $ - $ 532
====== ====== ====== ======
Loss from operations before
income tax $ - $ - $ - $ (516)
Income tax (benefit) - - - -
______ ______ ______ ______
Net loss from discontinued
operations $ - $ - $ - $ (516)
====== ====== ====== ======
Gain (loss) on disposal of Division$ 41 $ - $ 41 $(1,769)
Income tax (benefit) - - - -
______ ______ ______ ______
Gain (loss) on disposal of Division$ 41 $ - $ 41 $(1,769)
====== ====== ====== ======
The assets and liabilities of the Company's discontinued operations are as
follows:
June 25, Sept 30,
1999 1998
Assets $ 457 $ 1,136
Liabilities 961 1,128
Net(liabilities)assets $ (504) $ 8
Assets with a net book value of $907 thousand consisting primarily of land,
building and management information systems were transferred to continuing
operations on October 1, 1997.
8. Debt
The Industrial Development Agency for the Town of Colonie issued $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 leased to Plug Power. The
bond closing was completed December 17, 1998 and proceeds of the IDR Bonds were
deposited with a trustee for the bondholders. The Company has drawn the bond
proceeds to cover qualified project costs. First Albany Companies, Inc. ("FAC"),
which owns 34% of the Company's stock, underwrote the sale of the IDR Bonds. FAC
received no fees for underwriting the IDR Bonds but will be reimbursed for its
out-of-pocket costs.
KeyBank issued a letter of credit for approximately $6 million in connection
with the $6 million IDR Bonds. The KeyBank credit agreements require the
Company to meet certain covenants, including a fixed charge coverage and
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
leverage ratio. Further, if certain performance standards are achieved, the
interest rates on the debt may be reduced.
The debt and the letter of credit obligations were transferred to Plug Power,
LLC in connection with the sale of the MTI facility effective July 1, 1999.
As of June 25, 1999, KeyBank waived certain covenant violations and as of
March 26, 1999, the KeyBank credit agreement was amended to modify certain
covenants to conform with the Company's current performance projections.
9. Cash Flows - Supplemental Information
NonCash investing activities for the nine months ended June 25, 1999 includes a
$11.576 million increase in investment in joint venture and additional paid-in-
capital generated primarily by investments in Plug Power by third parties.
10. Geographic and Segment Information
The Company operates in one business segment, Test and Measurement, which
develops, manufactures, markets and services sensing instruments, computer-
based balancing systems for aircraft engines, vibration test systems and
power conversion products.
The Company evaluates performance based on profit or loss from operations
before income taxes.
The following table details information about the Test and Measurement segment
profit or loss, segment assets and shows the reconciliation of segment data to
the Company's consolidated totals. The Company does not allocate income taxes
or unusual items to segments.
Reconciling
(Dollars in thousands) Test and Item: Consolidated
Three months ended June 25, 1999 Measurement Corporate Totals
Revenues $ 2,606 $ - $ 2,606
Equity in joint venture loss - (3,544) (3,544)
Loss from continuing operations
before tax (689) (3,411) (4,100)
Loss from continuing operations (689) (3,448) (4,137)
Income from discontinued operations - 41 41
Total loss (689) (3,407) (4,096)
Segment assets 7,820 16,748 24,568
Net (liabilities) discontinued
operations - (504) (504)
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciling
(Dollars in thousands) Test and Item: Consolidated
Three months ended June 26, 1998 Measurement Corporate Totals
Revenues $ 5,767 $ - $ 5,767
Income(loss)from continuing
operations before tax 1,038 (169) 869
Income(loss) from continuing
operations 1,038 (169) 869
Total income(loss) 1,038 (169) 869
Segment assets 9,969 3,139 13,108
Net assets discontinued
operations - 649 649
The reconciling items are the amounts of revenues earned and expenses incurred
for corporate operations, which is not included in the segment information.
Reconciling
(Dollars in thousands) Test and Item: Consolidated
Nine months ended June 25, 1999 Measurement Corporate Totals
Revenues $ 8,609 $ - $ 8,609
Equity in joint venture loss - (6,859) (6,859)
(Loss)income from continuing
operations before tax (1,375) (6,882) (8,257)
(Loss)income from continuing
operations (1,375) (6,919) (8,294)
Income from discontinued operations - 41 41
Total (loss)income (1,375) (6,878) (8,253)
Segment assets 7,820 16,748 24,568
Net (liabilities) discontinued
operations - (504) (504)
Reconciling
(Dollars in thousands) Test and Item: Consolidated
Nine months ended June 26, 1998 Measurement Corporate Totals
Revenues $ 16,016 $ - $ 16,016
Equity in joint venture loss - (27) (27)
Income(loss) from continuing
operations before tax 2,297 (563) 1,734
Income(loss)from continuing
operations 2,297 (563) 1,734
Loss on discontinued operations - (2,285) (2,285)
Total income(loss) 2,297 (2,848) (551)
Segment assets 9,969 3,139 13,108
Net assets discontinued
operations - 649 649
The reconciling items are the amounts of revenues earned and expenses incurred
for corporate operations, which is not included in the segment information.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDTED FINANCIAL STATEMENTS
11. Equity
On April 23, 1999, the Company declared a 3 for 2 stock split in the form of a
stock dividend. Holders of the Company's $1.00 par value common stock received
one additional share of $1.00 par value common stock for every two shares of
common stock owned as of April 30, 1999. The financial statements for all
prior periods have been retroactively adjusted to reflect this stock split
for both common stock issued and options outstanding.
12. Subsequent Event
Effective July 1, 1999, the Company closed the sale of the MTI facility,
including a residence located adjacent to the campus, to Plug Power, LLC in
exchange for 704,315 Plug Power Class A membership interests and the
assumption of $6 million in debt by Plug Power.
On July 9, 1999, the Company completed the sale of 801,223 shares of common
stock to current shareholders through a rights offering. The offering raised
approximately $12.82 million before offering costs of approximately $.17 million
for net proceeds of approximately $12.65 million. The Company will use some or
all of the proceeds of the offering for further investment into 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.
In connection with these transactions, the Company's balance sheet will be
impacted as follows:
Effect of
As Reported Transactions Pro-Forma
Current Assets $ 11,696 $ 12,145 $ 23,841
Property, Plant and Equipment, net 6,729 (5,825) 904
Investment in Joint Venture 5,938 330 6,268
Total Assets 24,568 6,650 31,218
Current Liabilities 3,630 (285) 3,345
Long-term debt, net of
current maturities 5,715 (5,715) -
Total Shareholders' Equity 14,616 12,650 27,266
Total Liabilities and
Shareholders' Equity 24,568 6,650 31,218
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 the
net assets (liabilities) and operating results of the business.
Continuing Operations
Sales decreased $3.16 million to $2.61 million for the three months ended
June 25, 1999 as compared to $5.77 million for the three months ended June 26,
1998, a 54.8% decrease. This decrease is the result of continuing weak market
conditions. Sales for the first three quarters of fiscal year 1999 versus the
same period in fiscal year 1998 have decreased $7.4 million to $8.61 million in
1999 from $16.02 million in 1998, a 46.2% decrease. The nine-month changes are
the result of the same conditions as the three-month changes.
Selling, general and administrative expenses decreased $.56 million to
$1.14 million for the three months ended June 25, 1999 as compared to $1.7
million for the three months ended June 26, 1998, a 33% decrease. This decrease
is the result of additional cost reduction efforts in fiscal year 1999 and
decreased commissions as a result of decreased sales. Selling, general and
administrative expenses during the three-quarters of fiscal 1999 of $3.52
million represented a $1.09 million decrease or a 23.7% decrease from $4.61
million incurred during the same period in fiscal 1998. The nine-month changes
are the result of the same conditions as the three-month changes.
Operating income decreased $1.299 million to an operating loss of $(.481)
million for the three months ended June 25, 1999 as compared to $.818 million
for the three months ended June 26, 1998, a 158.8% decrease. This decrease is
the result of decreased sales levels and corresponding decreases in gross
profits due to fixed cost absorption at lower sales levels. Operating losses of
$(1.330) million for the first three quarters of fiscal 1999 represented a
$3.144 million decrease or a 173.3% decrease from the $1.814 million operating
income recorded during the same period last year.
Other
In addition to the matters noted above, for the nine and three months ended
June 25, 1999, the Company recorded a $6.859 million and $3.544 million loss,
respectively, from the recognition of the Company's proportionate share of
losses of the Plug Power joint venture compared to a $27 thousand loss for
comparable periods in fiscal 1998.
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 1999 were reduced by higher
interest expense, principally resulting from increased indebtedness associated
with the Industrial Development Revenue Bonds. The tax rate for the nine months
ended June 25, 1999 and June 26, 1998 was 1.2% and 0%, respectively. This rate
is due to the loss generated by both continuing operations and the investment in
the joint venture and the use of net operating loss carryforwards. However, as
a result of ownership changes in 1996, the availability of pre-1996 net
operating loss carryforwards to offset future taxable income may be
significantly limited pursuant to the Internal Revenue Code.
Financial Condition
Working capital of $8.066 million at June 25, 1999 reflects a $2.287 million
increase from September 30, 1998 as a result of long-term financing.
At June 25, 1999, cash and cash equivalents were $3.19 million versus $5.57
million at September 30, 1998. Net cash used by operating activities for the
first three-quarters of fiscal 1999 amounted to $1.76 million, as compared to
cash used of $1.18 million in the prior year. The capital used during the first
three-quarters of fiscal 1999 was applied principally to fund short term
operating cash flow requirements. Additionally, accounts receivable decreased,
because of reduced sales, to $3.25 million or a 34.4% decrease as of June 25,
1999 as compared to $4.96 million as of September 30, 1998.
MTI also funded $4 million of previously accrued capital contributions to
Plug Power.
The Industrial Development Agency for the Town of Colonie issued $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 leased to Plug
Power. The construction project is substantially completed. The bond closing
was completed December 17, 1998 and proceeds of the IDR Bonds were deposited
with a trustee for the bondholders. The Company has drawn bond proceeds to
cover qualified project costs.
KeyBank issued a letter of credit for approximately $6 million in
connection with the $6 million IDR Bonds. The KeyBank credit agreements require
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 IDR Bonds and KeyBank Letter of
Credit were transferred to Plug Power effective July 1, 1999 in connection with
the sale of the MTI facility and adjacent residence.
Capital spending during the first nine months of fiscal 1999 was $2.65
million, an increase from the comparable period in 1998 where capital spending
totaled $.2 million. Capital spending during fiscal 1999 included the
construction described above. Total additional capital spending during fiscal
1999 is expected to be approximately $.90 million.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company anticipates that it will be able to meet its liquidity needs
during fiscal year 1999 from current cash resources, cash flow generated by
operations, borrowing under its existing line of credit and proceeds from the
Rights Offering completed on July 9, 1999 (see Note 12 to the financial
statements). As of June 25, 1999, KeyBank waived certain covenant violations
and as of March 26, 1999, the KeyBank credit agreement was amended to
modify certain covenants to conform with the Company's current performance
projections.
The Company and EDC have each committed to contribute up to $22.5 million to
Plug Power to fund continuing operations through December 31, 2000. The
Company does not have enough cash on hand to fund its commitment to Plug
Power. If Plug Power calls all or a portion of the $22.5 million, and the
Company agrees to fund the call, the Company may attempt to finance its
capital contribution. However, there is no assurance the Company will find a
lender or investors willing to fund the capital contribution, or that the
Company will be able to borrow or otherwise raise money on terms that are
favorable to the Company. If the capital commitment cannot be financed and
other sources of funding are not found, the Company will not fund its full
capital commitment, and the Company's right to purchase shares of Plug Power
at the fixed price of $7.50 per share will be reduced by three times the
amount of the capital call. If the Company does not satisfy its capital
commitment and EDC does, the Company's interest in Plug Power will suffer
substantial dilution.
Joint Venture
Plug Power, L.L.C. ("Plug Power") will continue to need substantial investment
after December 31, 1999. Plug Power continues to pursue additional sources of
capital. There is no assurance, however, that Plug Power will 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
or dilution of its interest in Plug Power. If EDC, the Company and other Plug
Power members stop funding Plug Power and no additional sources of capital are
found, Plug Power will not be able to continue as a going concern.
Year 2000
General
Mechanical Technology Incorporated's company-wide Year 2000 plan is proceeding
on schedule. The plan is addressing the issue of computer programs and embedded
computer chips being unable to distinguish between the year 1900 and the year
2000 as well as the ability to recognize the leap year date of February 29,
2000. The plan has been divided into six areas: (1) Systems evaluation, (2)
Software evaluation, (3) Third-party suppliers, (4) Facility systems, (5)
Products and (6) Contingency plans. The general phases common to all segments
are: (1) Inventorying Year 2000 items, (2) Assigning priorities to identified
items, (3) Assessing the Year 2000 compliance of items determined to be material
to the Company, (4) Repairing or replacing material items that are determined
not to be Year 2000 compliant, (5) Testing material items and (6) Designing and
implementing contingency and business continuation plans for each organization
and Company location.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Systems Evaluation
All internal systems have been identified, inventoried, prioritized and assessed
for Year 2000 compliance. Systems found to be totally non-compliant are
scheduled for replacement, the remaining systems were found to be in compliance.
Plans are being developed to ensure that staff are available to oversee
restarting certain machines and manually adjusting their dates, if needed.
Software Evaluation
All software material to the Company has been identified, evaluated, and placed
into one of three categories: (1) Found to be in full compliance and certified
as such by vendors, (2) Identified as requiring update, or (3) Identified as
requiring replacement with compliant software. Those in the latter category have
been included in the current budget.
Third-Party Suppliers
This phase of the Year 2000 Plan is in process and will be completed by the end
of fiscal 1999. These third-party suppliers are in the process of implementing
their own plans with an expected completion date of 1999. If any provider is
not successfully compliant, the Company will evaluate selecting alternative
providers at that time.
Facility Systems
The facility systems review is complete. All systems are believed to be Year
2000 compliant including telephone, fire alarm, security, elevator and network
components.
Products
The Company has evaluated both current product offerings and products in the
field to determine their ability to comply with Year 2000 issues. The products
were found to be non-compliant, compliant if modifications are made, fully
compliant or not impacted (that is, the product does not have a computer or
contains an embedded computer but does not use a date function). Those products
identified as non-compliant are products in the field that are not Year 2000
compliant, cannot be modified and must be replaced. Products that can be
modified have upgrades available for sale.
Contingency Plans
This phase is currently being developed. Contingency plans should be in place
by the end of fiscal 1999.
Costs
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the Company's financial position.
The estimated total cost of the Year 2000 project is approximately $120
thousand, which includes software, hardware and cabling upgrade and replacement
costs. This estimate does not include the Company's potential share of Year
2000 costs that may be incurred by our joint venture, in which the Company
participates but is not the operator. The total amount expended on the Plan
through June 25, 1999 was $50 thousand for the upgrade and replacement of
hardware.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of the
Year 2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 Plan is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material customers. The Company believes that, with the implementation and
completion of the Year 2000 Plan as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
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 September 9, 1998, Barbara Lawrence, the Lawrence Group, Inc.
("Lawrence"), and certain other Lawrence-related entities ("Plaintiffs") filed
suit in the United States Bankruptcy Court for the Northern District of New
York against First Albany Corporation ("FAC"), Dale Church, Edward Dohring,
Alan Goldberg, George McNamee, Beno Sternlicht, Marty Mastroianni (former
President and Chief Operating Officer of MTI) and 33 other individuals
("Defendants") who purchased a total of 820,909 shares of MTI stock from the
Plaintiffs. The complaint alleged that Defendants purchased MTI stock from the
Plaintiffs in violation of sections 10b, 20, 20A and rule 10b-5 of the
Securities Exchange Act of 1934. In December 1998, the complaint was amended
to add MTI as a defendant and assert a claim for common law fraud against all
the Defendants including MTI. The case concerns the Defendants' 1998 purchase
of MTI shares from the Plaintiffs at the price of $2.25 per share. Ownership of
the shares was disputed and several of the Plaintiffs were in bankruptcy at the
time of the sale. FAC acted as Placement Agent for the Defendants in the
negotiation and sale of the shares and in proceedings before the Bankruptcy
Court for the Northern District of New York, which approved the sale in
September 1997. Plaintiffs claim that the Defendants failed to disclose
material inside information concerning Plug Power, LLC to the Plaintiffs and
therefore the $2.25 per share 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.
In June 1999, the parties agreed to stay discovery and amend Defendants time to
answer the amended complaint until September 17, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
4.103 Assignment and Assumption Agreement, dated as of
July 1, 1999, by and among Town of Colonie Industrial
Development Agency, the registrant, Plug Power, LLC,
KeyBank National Association and First Albany
Corporation in connection with the sale of the MTI
facility to Plug Power and the assignment and
assumption of rights and obligations in connection
with the Industrial Development Revenue Bonds (Letter
of Credit Secured) Series 1998 A in the original
aggregate amount of $6,000,000.
10.31 Agreement of Sale, effective as of June 23, 1999,
by and between the registrant and Plug Power, LLC
for the sale of the MTI campus and adjacent residence.
27 Financial Data Schedule
PART II OTHER INFORMATION
(b) Two reports on Form 8-K were filed during the third quarter 1999 and one
report was filed subsequent to the quarter ended June 25, 1999.
The Company filed a Form 8-K Report, dated March 29, 1999, reporting
under Item 5 thereof that the Company had cancelled options for 2.25 million
Plug Power shares and certain "research credits" in exchange for 2.25 million
Plug Power Class A membership interests. The "research credits" were granted
to the Company for helping Plug Power secure commitments for government
funding.
The Company filed a Form 8-K Report, dated April 13, 1999, reporting under
Item 5 thereof that its common stock, currently traded on the OTC Electronic
Bulletin Board, will begin trading on the Nasdaq National Market System (NMS)
under the symbol "MKTY" effective April 16, 1999.
The Company filed a Form 8-K Report, dated July 2, 1999, reporting under
Item 5 thereof its intention to release 125,000 shares for the Rights Offering
over-subscription and pre-releasing preliminary third quarter 1999 results.
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
08-06-99 s/George C. McNamee
________ __________________________________
(Date) George C. McNamee
Chairman and Chief Executive Officer
08-06-99 s/Cynthia A. Scheuer
________ __________________________________
(Date) Cynthia A. Scheuer
Vice President/Chief Financial Officer