========================================================================== 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 December 31, 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.) 325 Washington Avenue Extension, Albany, New York 12205-5505 (Address of principal executive offices) (Zip Code) (518) 218-2500 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 December 31, 1999 Common Stock, $1.00 Par Value 11,717,508 Shares ===============================================================================
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES INDEX Page No. Part I Financial Information Consolidated Balance Sheets - December 31, 1999 and September 30, 1999 3 - 4 Consolidated Statements of Operations - 5 Three months ended December 31, 1999 and December 25, 1998 Consolidated Statements of Cash Flows - Three months ended December 31, 1999 and December 25, 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 21 Signature 22
PART I FINANCIAL INFORMATION MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 1999 (Unaudited) and September 30,1999 (Derived from audited financial statements) (Dollars in thousands) Dec.31, Sept.30, 1999 1999 Assets Current Assets: Cash and cash equivalents $ 5,646 $ 5,870 Investments in marketable debt securities 4,830 7,876 Restricted cash and investments 2,350 - Accounts receivable, less allowance of $0 and $113 669 3,852 Other receivables - related parties 306 105 Inventories: Raw materials and components 752 2,763 Work in process 229 916 Finished goods 45 73 _______ _______ Total inventories 1,026 3,752 Note receivable - current 331 329 Prepaid expenses and other current assets 352 265 Taxes receivable - 10 _______ _______ Total Current Assets 15,510 22,059 Property, Plant and Equipment, net 500 827 Note receivable - noncurrent 163 184 Investment in Plug Power 64,166 8,710 Investment in SatCon 14,341 - _______ _______ Total Assets $ 94,680 $ 31,780 ======= ======= The accompanying notes are an integral part of the consolidated financial statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 1999 (Unaudited) and September 30, 1999 (Derived from audited financial statements) (Dollars in thousands) Dec.31, Sept 30, 1999 1999 Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 182 $ 614 Accrued liabilities 1,681 2,243 Contribution payable - SatCon 4,500 - Income taxes payable 6 - Net liabilities of discontinued operations 544 540 _______ _______ Total Current Liabilities 6,913 3,397 Long-term debt, net of current maturities 22,500 - Deferred income taxes and other credits 11,164 597 _______ _______ Total Liabilities 40,577 3,994 Commitments (Note 4) Shareholders' Equity: Common stock 11,724 11,649 Paid-in-capital 70,754 42,755 Accumulated Deficit (28,346) (26,573) _______ _______ 54,132 27,831 Accumulated Other Comprehensive Loss: Unrealized loss on available for sale securities,net - (5) Foreign currency translation adjustment - (11) _______ _______ Accumulated Other Comprehensive Loss - (16) Treasury stock (29) (29) _______ _______ Total Shareholders' Equity 54,103 27,786 _______ _______ Total Liabilities and Shareholders' Equity $ 94,680 $31,780 ======= ====== The accompanying notes are an integral part of the consolidated financial statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands, except per share) Three months ended Dec.31, Dec.25, 1999 1998 Revenue $ 1,357 $ 2,710 Cost of sales 804 1,711 ______ ______ Gross profit 553 999 Selling, general and administrative expenses 790 1,126 Product development and research costs 317 222 ______ ______ Operating loss (554) (349) Interest expense (322) (58) Gain on sale of division/subsidiary 1,262 - Equity in Plug Power losses (2,991) (1,221) Other (expense) income, net 98 31 ______ ______ Loss before income taxes (2,507) (1,597) Income tax (benefit)expense (734) - ______ _______ Net loss $(1,773) $ (1,597) ====== ======= Net Loss per Share (Basic and Diluted): $ (.15) $ (.14) ====== ======= 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) Three months ended Dec.31, Dec.25, 1999 1998 Operating Activities Net loss from continuing operations $ (1,773) $(1,597) Adjustments to reconcile net (loss)income to net cash provided (used) by continuing operations: Depreciation and amortization 57 125 Gain on sale of division/subsidiary (1,262) - Equity in Plug Power loss 2,991 1,221 Reserve for bad debts (24) 9 Loss on sale of fixed assets 14 - Deferred income taxes and other credits (740) - Changes in operating assets and liabilities: Accounts receivable 911 1,246 Other receivables - related parties (201) (5) Inventories (176) 28 Prepaid expenses and other current assets (51) (225) Accounts payable 210 (837) Income taxes 16 6 Accrued liabilities 87 (1,156) _______ ______ Net cash provided(used) by continuing operations 59 (1,185) _______ ______ Discontinued operations: Change in net liabilities/assets of discontinued operations 4 303 _______ ______ Net cash provided by discontinued operations 4 303 _______ ______ Net cash provided(used) by operating activities 63 (882) _______ ______ Investing Activities Purchases of property, plant & equipment (118) (1,587) Investment in Plug Power (20,500) (2,500) Investment in SatCon (2,570) - Proceeds from sale of subsidiary, net 23 - Establish restricted cash account (2,650) - Proceeds from sale of marketable debt securities 4,965 - Investment in marketable debt securities (2,000) - Principal payments from note receivable 19 18 _______ ______ Net cash used by investing activities (22,831) (4,069) _______ ______ Financing Activities Proceeds from long term debt 22,500 - Debt issue costs (205) - Borrowings under IDA financing, less restricted cash - 4,824 Proceeds from stock options exercised 249 - _______ ______ Net cash provided by financing activities 22,544 4,824 _______ ______ Effect of exchange rate on cash - 1 _______ ______ Decrease in cash and cash equivalents (224) (126)
Cash and cash equivalents - beginning of period 5,870 5,567 _______ ______ Cash and cash equivalents - end of period $ 5,646 $ 5,441 ====== ====== 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, 1999. 2. Reclassification Certain fiscal 1999 amounts have been reclassified to conform with the fiscal 2000 presentation. 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. 3. Investment in Plug Power On November 1, 1999, the Company purchased 2,733,333 shares of Plug Power at $7.50 per share with proceeds from a $22.5 million Credit Agreement (see Note 5). This purchase completed the Company's commitment to purchase Plug Power shares at the time of its public offering. Plug Power's public offering was completed at $15 per share. The Company's total contributions to Plug Power (including contributions of cash, assets, research credits, below market lease and real estate) now totals $41.2 million. Immediately after the Plug Power IPO, the Company owned 13,704,315 shares or 31.9% of Plug Power. During fiscal 2000, Plug Power's shareholders' equity increased $178.755 million primarily due to cash investments by individuals and corporate investors, including the Company, and the public offering. As a result, the Company recorded its proportionate share of the increase in Plug Power's equity ($37.946 million) as investment in Plug Power and additional paid-in-capital (net of associated deferred taxes of $11.307 million). The carrying value of the Company's investment in Plug Power is $64.166 million as of December 31, 1999. At December 31, 1999, the market value of the Company's investment in Plug Power was approximately $387.147 million, as quoted on the NASDAQ National Market. The Company will recognize its proportionate share of losses in the future to the extent of its carrying value and additional future investments.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Investment in Plug Power (continued) Summarized below is financial information for Plug Power. Plug Power's fiscal year ends December 31. 3 months ended Dec.31, Dec.31, 1999 1998 (Dollars in thousands) Current assets $ 183,014 $ 5,293 Non-current assets 33,112 2,800 Current liabilities 9,002 2,601 Noncurrent liabilities 5,717 - Stockholders' equity 201,407 5,493 Gross revenue 4,298 1,545 Negative gross profit (1,349) (494) Net loss (8,602) (2,524) 4. Sale of Ling Electronics/Investment in SatCon On October 21, 1999, the Company created a strategic alliance with SatCon Technology Corporation (SatCon). SatCon acquired Ling Electronics, Inc. and Ling Electronics, Ltd. from the Company and the Company invested approximately $7 million in SatCon. In consideration for the acquisition of Ling Electronics and the Company's investment, the Company received 1,800,000 shares of SatCon's common stock and warrants to purchase an additional 100,000 shares of SatCon's common stock. The Company funded $2.57 million of its investment on October 21, 1999 and $4.5 million on January 31, 2000 in accordance with the stock purchase agreement. The Company's commitment to fund $4.5 million was recorded and is included in the financial statement line "Contribution Payable-SatCon" as of December 31, 1999. SatCon also received warrants to purchase 100,000 shares of the Company's common stock. The sale of Ling resulted in a $1.262 million gain. As a part of the SatCon transaction, the Company issued warrants to purchase 36,000 and 64,000 shares of the Company's stock on October 21, 1999 and January 31, 2000, respectively. The warrants are immediately exercisable at $37.66 per share and expire on October 21, 2003 and January 31, 2004, respectively. The estimated fair value of these warrants at the dates issued were $14.81 and $49.14 per share, respectively, using a Black Scholes option pricing model and assumptions similar to those used for valuing the Company's stock options. The Company also received warrants to purchase 36,000 and 64,000 shares of SatCon common stock on October 21, 1999 and January 31, 2000, respectively. The warrants are immediately exercisable at $8.80 per share and expire on October 21, 2003 and January 31, 2004, respectively. The Company accounts for its investment in SatCon on the equity method. The consolidated financial statements include the Company's investments in SatCon (including obligations to invest) plus its share of earnings/losses (on a one- quarter lag). The investment is included in the financial statement line "Investment in SatCon."
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Sale of Ling Electronics/Investment in SatCon (continued) The carrying value of the Company's investment in SatCon is $14.341 million as of December 31, 1999 including an accrual of $4.5 million which will fund the Company's commitment to purchase 659,200 shares. The Company funded this commitment on January 31, 2000. At December 31, 1999, the quoted market value of the Company's investment in SatCon, including accrued shares, was approximately $15.019 million as quoted on the NASDAQ National Market. In addition, David Eisenhaure, President and Chief Executive Officer of SatCon Technology Corporation, will become a member of the Board of Directors of the Company and Alan Goldberg, a director of the Company and co-Chief Executive Officer of First Albany Companies Inc. will become a member of SatCon's Board of Directors. SatCon has also agreed to appoint an additional member to its Board of Directors based on the recommendations of the Company. SatCon Technology Corporation manufactures and sells power and energy management products for telecommunications, silicon wafer manufacturing, factory automation, aircraft, satellites and automotive applications. SatCon has four operating divisions: Film Microelectronics, Inc. designs and manufactures microelectronic circuits and interconnect products. Magmotor manufactures motors and magnetic suspension systems. Beacon Power manufactures flywheel energy storage devices and the Technology Center are responsible for new technology and product development. 5. Debt On November 1, 1999, the Company entered into a $22.5 million Credit Agreement with KeyBank, N.A. ("the $22.5 million Credit Agreement"), the Company has pledged 13,704,315 shares of Plug Power Common Stock as collateral for its $22,500,000 loan from KeyBank, N.A. ("Loan"). The proceeds of this loan were used to fund $20.5 million of the Company's Mandatory Capital Commitment to Plug Power. Pursuant to the $22.5 million Credit Agreement, the Company is obligated to make interest only payments for the first 18 months following the closing of the Loan, and to repay the principal in 6 equal quarterly installments of $3.750 million each, commencing in August 2001. In addition, a one time commitment fee totaling $247,500 is payable for the Loan, $75,000 of which was paid as of September 30, 1999. Interest is payable monthly at the Prime Rate (8.50% on December 31, 1999) or if certain performance standards are achieved, at a reduced rate. The performance standards are based on the trading volume and price of Plug Power stock. The $22.5 million Credit Agreement requires the Company to meet certain covenants, including maintenance of a collateral account which at all times has a minimum market value of $600 thousand and a beginning balance on November 1, 1999 of $2.65 million, and maintenance of a collateral coverage ratio. All other covenants in the original KeyBank lines of credit were eliminated in connection with this financing. The Company's $4 million working capital line of credit and $1 million equipment loan/lease line of credit have been extended and will expire on March 31, 2000.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Shareholders' Equity Changes in shareholders' equity for the three-months ended December 31, 1999 is as follows: Dec.31 (Dollars in Thousands) 1999 COMMON STOCK Balance, October 1 $ 11,649 Issuance of shares - options 75 _______ Balance, December 31, 1999 $ 11,724 ======= PAID-IN CAPITAL Balance, October 1 $ 42,755 Issuance of shares - options 175 Plug Power investment, net of deferred taxes of $11,307 26,639 MTI warrants issued 533 Compensatory stock options 652 _______ Balance, December 31, 1999 $ 70,754 ======= ACCUMULATED DEFICIT Balance, October 1 $(26,573) Net (loss) (1,773) _______ Balance, December 31, 1999 $(28,346) ======= UNREALIZED LOSS ON AVAILABLE FOR SALE SECURITIES, NET Balance, October 1 $ (5) Adjustment 5 _______ Balance, December 31, 1999 $ - ======= FOREIGN CURRENCY TRANSLATION ADJUSTMENT Balance, October 1 $ (11) Adjustment 11 _______ Balance, December 31, 1999 $ - ======= TREASURY STOCK Balance, October 1 $ (29) _______ Balance, December 31, 1999 $ (29) ======= SHAREHOLDERS' EQUITY December 31, 1999 $ 54,103 =======
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Income Taxes The Company's effective tax rates for the three months ended December 31, 1999 and December 25, 1998 were (29.3%) and 0%, respectively. Income tax (benefit) expense consists of the following: For the three month period ended Dec.31, 1999 Dec.25, 1998 (Dollars in Thousands) Federal $ 3 $ - State 3 - Deferred (740) - ___________ ___________ $ (734) $ - =========== =========== The valuation allowance at December 31, 1999 has been reduced to zero from $3.750 million at September 30, 1999. This $3.750 million decrease in the valuation allowance results from the establishment of deferred tax liabilities associated with the Company's Investment in Plug Power. These deferred tax liabilities are primarily due to the difference between the book and tax treatments of the Plug Power investment and losses. 8. 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 ended Dec.31, 1999 Dec.25, 1998 (Dollars in Thousands) Loss from continuing operations available to common stockholders $ (1,773) $ (1,597) Weighted average number of shares: Weighted average number of shares used in net loss per share, 11,671,644 11,122,696 including the bonus element effects for the rights offering Effect of dilutive securities: Stock options - - ____________________________________________________________________________ Weighted average number of shares Used in diluted net loss per share 11,671,644 11,122,696 ____________________________________________________________________________ During the first quarter of fiscal 2000, options to purchase 655,687 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 November 1, 2009 were outstanding at December 31, 1999.
During the first quarter of fiscal 1999, options to purchase 680,010 shares of common stock at prices ranging from $1.63 to $5.29 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, 1999 and December 22, 2008 were outstanding at December 25, 1998.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Comprehensive (Loss)Income Total comprehensive (loss) income consists of the following: Three months ended Dec.31, Dec.25, (Dollars in thousands) 1999 1998 Net loss $(1,773) $(1,597) Other comprehensive income, before tax: Foreign currency translation adjustments 11 1 ______ ______ Total comprehensive loss $(1,762) $(1,596) ====== ====== 10. Cash Flows - Supplemental Information Three months ended Dec.31, Dec.25, (Dollars in thousands) 1999 1998 NONCASH INVESTING ACTIVITIES Proceeds from sale of subsidiary Invested in SatCon $ 6,737 $ - Contribution payable to SatCon 4,500 - Warrants issued to SatCon (533) - ______ ______ Net noncash investing activities $10,704 $ - ______ ______ NONCASH FINANCING ACTIVITIES Additional paid-in capital - Other investors $26,639 $ - ______ ______ Net noncash financing activities $26,639 $ - ______ ______ Net noncash provided by investing and financing activities $37,343 $ - ====== ====== Noncash financing activities for the three months ended December 31, 1999 include an increase in investment in Plug Power and additional paid-in-capital generated primarily by investments in Plug Power by third parties. 11. Geographic and Segment Information The Company operates in two business segments, Alternative Energy Technology and Test and Measurement. The Alternative Energy Technology segment incubates alternative energy technology. The Test and Measurement segment develops, manufactures, markets and services sensing instruments and computer-based balancing systems for aircraft engines.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Geographic and Segment Information (continued) The Company evaluates performance based on profit or loss from operations before income taxes, accounting changes, non-recurring items and interest income and expense. 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. In addition, segments noncash items include any depreciation and amortization in reported profit or loss. Amounts in the Alternative Energy Technology segment represent the Company's interest in Plug Power. The Company's investment in SatCon is currently reported in the Other category. In future periods, the Company will include its proportionate share of the results of operations of other similar investments (on a one-quarter lag). The information is derived from Plug Power's unaudited financial statements. <TABLE> (Dollars in thousands) <CAPTION> Three Months Ended Alternative Energy Test and Reconciling Consolidated Dec.31, 1999 Technology Measurement Other Items Totals <S> <C> <C> <C> <C> <C> Revenues $ 4,298 $ 1,357 $ - $ (4,298) $ 1,357 Segment profit/ (loss) (8,602) (440) 1,658 5,611 (1,773) Equity in Plug Power loss - - - (2,991) (2,991) Total assets 216,126 1,946 28,568 (151,960) 94,680 Investment in Plug Power - - - 64,166 64,166 Investment in SatCon - - - 14,341 14,341 Capital expenditures 2,512 26 92 (2,512) 118 Depreciation and amortization 363 26 31 (363) 57 </TABLE>
<TABLE> <CAPTION> Three Months Ended Alternative Energy Test and Reconciling Consolidated Dec.25, 1998 Technology Measurement Other Items Totals <S> <C> <C> <C> <C> <C> Revenues $ 1,545 $ 2,710 $ - $ (1,545) $ 2,710 Segment profit/ (loss) (2,524) (335) (41) 1,303 (1,597) Equity in Plug Power loss - - - (1,221) (1,221) Total assets 8,093 7,779 13,553 (8,093) 21,332 Investment in Plug Power - - - - - Capital expenditures 710 11 1,576 (710) 1,587 Depreciation and amortization 176 46 79 (176) 125 </TABLE>
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Geographic and Segment Information (continued) The following table presents the details of "Other" segment profit (loss). (Dollars in thousands) Three months ended Dec.31, Dec.25, 1999 1998 Corporate and Other Expenses/(Income): Depreciation and amortization $ 31 $ 79 Interest expense 322 58 Interest income (161) (47) Income tax (benefit) (734) - Other (income)expense, net 146 (49) Gain on sale of division (1,262) - _____________________ Total (income) expense $(1,658) $ 41 The reconciling items are the amounts of revenues earned and expenses incurred for corporate operations, which is not included in the segment information. 12. Related Party Transactions During fiscal 2000, First Albany Corporation provided financial advisory services in connection with the sale of Ling Electronics for which they were paid fees of $.353 million.
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. Continuing Operations Sales decreased $1.353 million to $1.357 million for the three months ended December 31, 1999 as compared to $2.710 million for the three months ended December 25, 1998, a 50% decrease. This decrease is the result of the sale of Ling on October 21, 1999 and a $.444 million increase in Advanced Products sales. Ling sales were $.140 million for the quarter in 2000 and $1.94 million for the 1999 quarter. The sale of Ling resulted in a $1.262 million gain, which was recorded in the first quarter of fiscal 2000. Selling, general and administrative expenses decreased $.336 million to $.790 million for the three months ended December 31, 1999 as compared to $1.126 million for the three months ended December 25, 1998, a 30% decrease. This decrease is primarily the result of the sale of Ling in October 1999. Operating loss increased $.205 million to an operating loss of $(.554) million for the three months ended December 31, 1999 as compared to $(.349) million for the three months ended December 25, 1998, a 58.7% increase. This is primarily the result of increased Ling operating losses prior to its sale in October 1999, and a $.095 million increase in expenditures for product development. Other In addition to the matters noted above, for the three months ended December 31, 1999, the Company recorded a $2.991 million loss from the recognition of the Company's proportionate share of losses of Plug Power compared to a $1.221 million loss for the comparable period in fiscal 1999. Results during the first quarter of fiscal 2000 were reduced by higher interest expense of $.322 million for the three months ended December 31, 1999 compared to $.058 million for the comparable period in fiscal 1999, principally resulting from increased indebtedness associated with the $22.5 million Credit Agreement used to fund additional investments in Plug Power. The tax rates for the three months ended December 31, 1999 and December 25, 1998 were (29.3%) and 0%, respectively. The December 31, 1999 tax rate is due to the loss generated by operations offset by deferred tax liabilities associated with the accounting for the investment in and recognition of the Company's proportionate share of losses from Plug Power.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition Working capital of $8.597 million at December 31, 1999 reflects a $10.065 million decrease from September 30, 1999. This decrease reflects the $2.570 million investment in SatCon and the $4.5 million contribution payable to SatCon as well as the impact of the sale of Ling in October 1999. At December 31, 1999, cash and cash equivalents were $5.646 million versus $5.870 million at September 30, 1999. Net cash provided by operating activities for the first quarter of fiscal 2000 amounted to $.063 million, as compared to cash used of $1.185 million in the prior year. Accounts receivable decreased due to the collection of receivables generated late in the fourth quarter of fiscal 1999 and the sale of Ling in October 1999. Accounts receivable totaled $.669 million or an 82.6% decrease as of December 31, 1999 as compared to $3.852 million as of September 30, 1999. On November 1, 1999, the Company entered into a $22.5 million Credit Agreement with KeyBank, N.A. ("the $22.5 million Credit Agreement"). The proceeds of this loan were used to fund $20.5 million of the Company's Mandatory Capital Commitment to Plug Power. Pursuant to the Mandatory Capital Commitment, the Company purchased 266,667 shares of Plug Power for $2 million on September 30, 1999 and 2,733,333 shares of Plug Power for $20.5 million in November 1999. The Company is obligated to make monthly interest only payments for the first 18 months following the closing of the Loan, and to repay the principal in 6 equal quarterly installments of $3.750 million each, commencing August 2001. The $22.5 million Credit Agreement requires the Company to meet certain covenants, including maintenance of a collateral account which at all times has a minimum market value of $600 thousand and a beginning balance on November 1, 1999 of $2.65 million, and maintenance of a collateral coverage ratio. All other covenants in the original KeyBank lines of credit were eliminated in connection with this financing. The $22.5 million Credit Agreement is collateralized by 100% of the Company's equity interest in Plug Power. Capital spending during the first three months of fiscal 2000 was $.118 million, a decrease from the comparable period in 1999 where capital spending totaled $1.587 million. Capital spending during fiscal 2000 included the fit- up for the Company's new facility. Total additional capital spending during fiscal 2000 is expected to be approximately $.280 million for computer and manufacturing equipment. The Company anticipates that it will be able to meet the liquidity needs of its continuing operations and its investment commitment to SatCon from current cash resources, cash flow generated by operations and borrowing under its existing lines of credit.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Market Risk Market risk represents the risk of changes in value of a financial instrument, caused by fluctuations in interest rates and equity prices. The Company's exposure to interest rate risk relates primarily to its investment in marketable debt securities. The investments are at variable rates, which generally reflect market conditions. The Company manages its investments to increase return on investment and only invests in instruments with high credit quality. At December 31, 1999, the Company had variable rate debt totaling $22.500 million. Interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows. The earnings and cash flow impact for the next year resulting from a one-percentage point increase in interest rates would be approximately $.225 million, holding other variables (debt level) constant. The Company has performed a sensitivity analysis on its marketable debt securities and its investments in Plug Power and SatCon common stock. The sensitivity analysis presents the hypothetical change in fair value of those financial instruments held by the Company at December 31, 1999 which are sensitive to changes in interest rates. Market risk is estimated as the potential change in fair value resulting from an immediate hypothetical one- percentage point parallel shift in the yield curve. The fair values of the Company's investments in marketable securities have been based on quoted market prices. As the carrying amounts on short-term investments maturing in less than 180 days approximate the fair value, these are not included in the sensitivity analysis. The fair value of marketable securities over 180 days is $4.830 million. A one-percentage point change in the interest rates would change the fair value of investments over 180 days by $339 thousand. The Company also has investments in Plug Power and SatCon, which are accounted for on the equity method. The fair market values, at December 31, 1999, of the investments are $387.147 million for Plug Power and $15.019 million for SatCon, including accrued shares. If the market price on these investments decreased by ten percent, the fair value of the stocks would decrease by $38.7 and $1.5 million for Plug Power and SatCon, respectively. Year 2000 The Company's Year 2000 plan is complete. The plan addresses 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 non-compliant were replaced and compliant systems were assessed to determine what, if any, maintenance is required to keep them compliant. Plans have been developed to ensure that staff is available to oversee restarting certain machines and manually adjusting their dates. Software Evaluation All software material to the Company has been identified, evaluated, and is now in compliance and certified as such by vendors or new software has been installed. Third-Party Suppliers Third-party suppliers have been identified and reviewed to determine whether their products and supplies are Year 2000 compliant. Any provider identified as non-compliant has been or will be replaced with an alternative provider if they cannot serve our needs. Facility Systems All facility systems are believed to be Year 2000 compliant including telephone, fire alarm, security 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 fall into three categories, non-compliant, compliant if modifications are made and 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). All products currently sold by the Company are fully Year 2000 compliant. The Company has produced and made available for sale, upgrades to products requiring modifications to be Year 2000 compliant. Those products identified as non-compliant are products that have been in the field for a number of years and must be replaced by customers. Contingency Plans In the event the Company's Year 2000 plan is ineffective or unanticipated problems arise, the Company has developed contingency plans which are now in place. The plans include use of hard copy data and alternate suppliers. Costs The total cost associated with required modifications to become Year 2000 compliant was not material to the Company's financial position. The estimated total cost of the Year 2000 project was approximately $120 thousand, which included 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 Plug Power or SatCon, in which the Company participates but is not the operator. The total amount expended on the Plan through December 31, 1999 was $124 thousand for the upgrade and replacement of hardware. No additional expenditures are expected.
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. To date the Company has experienced no Year 2000 failures. Statement Concerning Forward Looking Statements Statements in this Form 10-Q or in documents incorporated herein by reference that are not historical facts or information constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, the information set forth herein. Such forward looking statements involve known and unknown risks, uncertainties or other factors which may cause the actual results, levels of activity, performance or achievement of Company or industry results to be materially different from any future results, levels of activity, performance or achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the ability of the Company to implement its business strategy; the Company's access to financing; the Company's ability to successfully identify new business opportunities; the Company's ability to attract and retain employees; changes in the industry; competition; the effect of regulatory and legal proceedings and other factors discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations". As a result of the foregoing and other factors, no assurance can be given as to the future results and achievements of the Company. Neither the Company nor any other person assumes responsibility for the accuracy and completeness of these statements.
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. In October 1999, Defendants answered the amended Complaint. On January 25, 2000, a complaint was filed by DCT, Inc. against Plug Power, The Detroit Edison Company and Edison Development Corporation in the Wayne County, Michigan Circuit Court. The complaint alleges, among other things, that Plug Power, The Detroit Edison Company and Edison Development Corporation misappropriated from DCT business and technical trade secrets, ideas, know-how and strategies relating to fuel cell systems and breached certain contractual obligations owed to DCT. Plug Power believes that the allegations made against it are without merit and intends to vigorously contest the litigation, but the ultimate outcome of any litigation is of course uncertain.
PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 10.41 Mechanical Technology Incorporated Stock Purchase Warrant dated January 31, 2000. 10.42 SatCon Technology Corporation Stock Purchase Warrant dated January 31, 2000. 27 Financial Data Schedule (b) Three reports on Form 8-K were filed during the quarter ended December 31, 1999 and one report was filed subsequent to the quarter ended December 31, 1999. The Company filed a Form 8-K Report, dated October 4, 1999, reporting under item 5 thereof that Plug Power filed an amendment to its registration statement with the Securities and Exchange Commission stating that shares of Plug Power would be offered at an estimated price range of $13 to $15 per share. On September 30, 1999, the Company purchased 266,667 shares of Plug Power at $7.50 per share thereby reducing the Company's commitment to purchase shares at the public offering from 3 million to 2,733,333 shares. The Company filed a Form 8-K Report, dated October 22, 1999, reporting under item 5 thereof the creation of a strategic alliance with SatCon Technology Corporation. SatCon acquired Ling Electronics, Inc. and Ling Electronics, Ltd. from the Company and the Company will invest approximately $7,000,000 in SatCon. In consideration for the acquisition of Ling Electronics and the Company's investment, the Company will receive 1,800,000 shares of SatCon's common stock and warrants to purchase an additional 100,000 shares of SatCon's common stock. The Company immediately funded $2,570,000 of its investment in SatCon and will make the remaining investment by the end of January 2000. SatCon will also receive warrants to purchase 100,000 shares of the Company's common stock. The Company filed a Form 8-K Report, dated November 16, 1999, reporting under item 5 thereof that on November 8, 1999 Plug Power received correspondence from counsel to DCT, Inc., alleging, among other things, that the Company misappropriated from DCT, Inc. business and technical trade secrets, ideas, know-how and strategies relating to fuel cell systems, and that certain contractual obligations owed to DCT, Inc. were breached. The Company filed a Form 8-K Report, dated January 31, 2000, reporting under item 5 thereof that on January 25, 2000, a complaint was filed by DCT, Inc. against Plug Power, Inc., The Detroit Edison Company and Edison Development Corporation in the Wayne County, Michigan Circuit Court. The complaint alleges, among other things, that Plug Power, The Detroit Edison Company and Edison Development Corporation misappropriated from DCT business and technical trade secrets, ideas, know-how and strategies relating to fuel cell systems and breached certain contractual obligations owed to DCT.
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 02-11-2000 s/George C. McNamee __________ ____________________________________ (Date) George C. McNamee Chairman and Chief Executive Officer 02-11-2000 s/Cynthia A. Scheuer __________ ____________________________________ (Date) Cynthia A. Scheuer Vice President/Chief Financial Officer