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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 30, 2002
/ / Transition report pursuant to Section 13 or 15 (d) of the Securities
For the period from to
Commission File Number 0-6890
MECHANICAL TECHNOLOGY INCORPORATED
(Exact name of registrant as specified in its charter)
New York
14-1462255
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
431 New Karner Road, Albany, New York 12205
(Address of principal executive offices) (Zip Code)
(
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 August 9, 2002
Common stock, $1.00 Par Value
35,527,260 Shares
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Part I - Financial Information
Page No.
Consolidated Balance Sheets - June 30, 2002, December 31, 2001 and September 30, 2001
3-4
Consolidated Statements of Operations - Three and six months ended June 30, 2002 and 2001
5
Consolidated Statements of Shareholders' Equity - Six months ended June 30, 2002 and 2001
6
Consolidated Statements of Cash Flows - Six months ended June 30, 2002 and 2001
7
Notes to Consolidated Financial Statements
8-24
Management's Discussion and Analysis of Financial Condition and Results of Operations
25-40
Part II Other Information
Item 1 - Legal Proceedings
41
Item 6 - Exhibits and Reports on Form 8-K
42
Signatures
43
PART I FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2002 and December 31, 2001 (Unaudited) and
September 30, 2001 (Derived from audited financial statements)
(Dollars in thousands)
June 30, 2002
Dec. 31,
2001
Sept. 30,
Assets
Current Assets:
Cash and cash equivalents
$6,177
$4,127
$ 9,807
Restricted cash equivalents
13
14
78
Securities available for sale
970
5,734
6,704
Accounts receivable
1,369
902
586
Inventories
1,347
1,510
1,674
Notes receivable
-
25
250
Deferred income taxes
2,315
2,052
Prepaid expenses and other current assets
1,742
1,042
1,108
Total Current Assets
11,618
15,669
22,259
Derivative asset
16
194
220
Property, plant and equipment, net
1,534
1,548
1,581
Holdings, at equity
28,375
38,937
47,197
Total Assets
$41,543
$56,348
$71,257
The accompanying notes are an integral part of the consolidated financial statements.
(Dollars in thousands, except share data)
June 30,
2002
Dec. 31, 2001
Liabilities and Shareholders' Equity
Current Liabilities:
Line of credit
$ 1,000
$ 5,000
Accounts payable
579
643
807
Accrued liabilities
1,611
1,632
1,945
Accrued liabilities - related parties
131
101
3
Income taxes payable
437
28
Contingent obligation to common stock
warrant holders
288
Net liabilities of discontinued
operations
356
358
Total Current Liabilities
4,114
3,760
8,426
Long-Term Liabilities:
Deferred income taxes and other credits
173
4,406
8,453
Total Liabilities
4,287
8,166
16,879
Commitments and Contingencies
Minority interests
345
574
331
Shareholders' Equity:
Common stock, par value $1 per share,
authorized 75,000,000; issued
35,547,510 in June 2002 and 35,505,010
in December and September 2001
35,547
35,505
Paid-in-capital
67,518
67,045
65,103
Accumulated deficit
(66,125
(54,913)
(41,328
36,940
47,637
59,280
Accumulated Other Comprehensive Loss:
Unrealized loss on available for sale
securities, net of tax
(5,204)
Common stock in treasury, at cost,
20,250 shares
(29)
Total Shareholders' Equity
36,911
47,608
54,047
Total Liabilities and Shareholders'
Equity
$ 41,543
$ 56,348
$ 71,257
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)
Three months ended
Six months ended
Revenue:
Product revenue
$ 1,595
$ 2,260
$ 2,185
$ 3,917
Funded research and development
385
557
Total revenue
1,980
2,260
2,742
3,917
Operating costs and expenses:
Cost of product revenue
838
1,023
1,250
1,772
Research and product development expenses:
Funded research and product development expenses
672
1,017
Unfunded research and product development expenses
1,095
897
2,118
2,114
Total research and product development expenses
1,767
3,135
Selling, general and administrative expenses
1,412
2,658
3,037
Operating loss
(1,648)
(1,072)
(4,301)
(3,006)
Interest expense
(12)
(463)
(24)
(1,061)
Loss on derivatives
(11)
(27)
(178)
(78)
Gain on sale of holdings
2,369
25,458
4,610
31,009
Impairment losses (Note 7)
(1,900)
(7,182)
Other income (expense), net
4
(478)
(1,111
(Loss) income from operations before income taxes,
equity in holdings' losses, cumulative effect of
change in accounting principle and minority
interests
(1,198)
23,418
(7,062)
25,753
Income tax (expense) benefit
(492)
(9,492)
1,861
(10,423)
Equity in holdings' losses, net of tax
(4,374)
(3,832)
(6,240)
(7,994)
Minority interest in losses of consolidated
subsidiary
108
229
(Loss) income before cumulative effect of change in
accounting principle
(5,956)
10,094
(11,212)
7,336
Cumulative effect of accounting change for
derivative financial instruments for
Company's own stock, net of tax
1,468
Net (loss) income
$(5,956)
$ 11,562
$(11,212)
$ 8,804
(Loss) Earnings Per Share (Basic):
(Loss) income before cumulative effect of changes
in accounting principle
$(.17)
$.28
$(.32)
$.21
Company's own stock
.04
(Loss) earnings per share
$.32
$.25
(Loss) Earnings Per Share (Diluted):
(Loss) income before cumulated effect of changes in
$.27
$.20
derivative financial instruments for Company's own
stock
$.31
$.24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
COMMON STOCK
Balance, January 1
$ 35,505
$ 35,443
Issuance of shares - options
62
Balance, June 30
$ 35,547
PAID-IN-CAPITAL
$ 67,045
$ 55,147
(2)
Plug Power holding, net of taxes
578
606
SatCon holding, net of taxes
(128)
1,303
Compensatory stock options
Stock option exercises recognized differently for
financial reporting and tax purposes
169
Reclassification of common stock warrants from equity
to liability, net of tax
(2,207)
$ 67,518
$ 55,047
ACCUMULATED DEFICIT
$(54,913)
$(45,478)
8,804
$(66,125)
$(36,674)
ACCUMULATED OTHER COMPREHENSIVE LOSS:
UNREALIZED LOSS ON AVAILABLE FOR SALE SECURITIES, NET OF TAXES
$ -
$ 14,470
Change in unrealized loss on available for sale
securities, net of taxes
(7,192
$ 7,278
TREASURY STOCK
$ (29)
SHAREHOLDERS' EQUITY
$ 36,911
$ 61,127
TOTAL COMPREHENSIVE (LOSS) INCOME:
Other comprehensive loss:
Change in unrealized loss on available for
sale securities, net of tax
(7,192)
Total comprehensive (loss) income
$ 1,612
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands
Operating Activities
Adjustments to reconcile net (loss) income to net cash used
by operations:
Cumulative effect of accounting change for derivative
financial instruments for Company's own stock, gross
(2,468)
178
Impairment losses
7,182
Minority interest
(229)
Depreciation and amortization
266
1,527
(4,610)
(31,009)
Equity in losses of equity holdings (gross)
6,218
13,367
Loss on disposal of fixed assets
1
(1,918)
5,499
Stock option compensation
Changes in operating assets and liabilities:
(467)
(999)
163
(343)
(729)
(171)
(64)
122
Income taxes
409
434
30
(6)
(21)
624
Net cash used by operations
(4,776
(4,515)
Discontinued Operations:
Change in net liabilities/assets
127
Net cash provided by discontinued operations
Net cash used by operating activities
(4,776)
(4,388
Investing Activities
Purchases of property, plant and equipment
(226)
(830)
Proceeds from sale of holdings
6,986
35,717
Net change in restricted cash equivalents
200
Principal payments from notes receivable
Net cash provided by investing activities
6,786
35,256
Financing Activities
Net payments under bank line-of-credit
(10,000)
Net payments under related party debt
(4,052)
Financing costs
(200)
Proceeds from stock option exercises
40
66
Net cash provided (used) by financing activities
(14,186)
Increase in cash and cash equivalents
2,050
16,682
Cash and cash equivalents - beginning of period
4,127
972
Cash and cash equivalents - end of period
$ 6,177
$ 17,654
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management the accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and contain all adjustments, consisting of only normal, recurring adjustments, necessary for a fair presentation of results for such periods. The results for any interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended September 30, 2001.
Change in Year-End
On February 13, 2002, the Company changed its fiscal year-end from September 30 to December 31, effective with the calendar year beginning January 1, 2002. A three-month transition period from October 1, 2001 through December 31, 2001 (the "Transition Period") precedes the start of the 2002 fiscal year. "2001" refers to fiscal periods in the year ended September 30 and the Transition Period refers to the three months ended December 31, 2001. This new fiscal year makes the Company's annual and quarterly reporting periods consistent with those used by Plug Power Inc. ("Plug Power") and permits the Company to continue to account for its holdings in Plug Power on a timely basis.
Revenue Recognition
The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." Product revenue is recognized when there is persuasive evidence of an arrangement, delivery of the product to the customer or distributor has occurred, at which time title generally is passed to the customer or distributor, and the Company has determined that collection of a fixed fee is probable, all of which occur upon shipment of the product. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the installation. The Company provides for a warranty reserve at the time the product revenue is recognized.
The Company performs funded research and development for government agencies under cost reimbursement contracts, which generally require
the Company to absorb up to 50% of the total costs incurred. Cost reimbursement contracts provide for the reimbursement of allowable costs. Such contracts require the Company to deliver research and tangible developments in fuel cell technology, and system design and prototype fuel cell systems for test and evaluation by the government agency. Revenues are recognized in proportion to the costs incurred.
Included in accounts receivable are billed and unbilled work-in-progress on cost reimbursed government contracts. Total estimated cost to complete a contract in excess of the awarded contract amounts are charged to operations during the period such costs are estimated. While the Company's accounting for these contract costs are subject to audit by the sponsoring agency, in the opinion of management, no material adjustments are expected as a result of such audits. Cost of product revenue includes material, labor and overhead. Costs incurred in connection with funded research and development arrangements are included in funded research and product development expenses.
Derivative Accounting, Company Stock
The Company accounts for derivatives potentially settled in the Company's own stock in accordance with Emerging Issues Task Force Issue EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." The Standard requires freestanding contracts that are settled in a company's own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value, with any changes in fair value recorded in the results of operations. A contract designated as
an equity instrument must be included within equity, and no fair value adjustments are required. In accordance with EITF 00-19, the Company determined that outstanding warrants as of June 30, 2001 to purchase 300,000 shares of the Company's Common Stock issued to
SatCon Technology Corporation should be designated as a liability. Effective June 30, 2001, the fair value of all such warrants were reclassified from equity to liabilities with subsequent changes in the fair value included in the results of operations.
The classification of these warrants is reassessed periodically. As a result of the amendment to the SatCon warrant agreements on December 28, 2001, requiring the Company to settle the warrants, when
exercised, in common stock, the warrants were reclassified from liability to equity and further changes in the fair value of the warrants are no longer reported in results of operations.
Accounting for Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets." This Statement affects the Company's treatment of goodwill and other intangible assets. The Statement requires that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the Statement's criteria. Intangible assets with finite useful lives will continue to be amortized over those periods. Amortization of goodwill and intangible assets with indeterminable lives will cease.
As a result of the adoption of the Statement, the Company will no longer amortize the goodwill associated with its equity holdings in SatCon. The Company will continue to regularly evaluate its holdings in SatCon to determine if any declines in value of holdings are other than temporary and record impairment losses, when appropriate (see Note 7). As of June 30, 2002, there is no goodwill associated with our investment in SatCon.
The Company recorded expense related to the amortization of goodwill associated with its holdings in SatCon of $0 and $1,377 thousand, during the six months ended June 30, 2002 and June 30, 2001, respectively. The Company has no intangible assets.
The Pro Forma effects of the Company adopting the provisions of SFAS No. 142 would be as follows:
(Dollars in thousands, except
per share data)
Three months
ended
June 30, 2001
Six months
Reported net (loss) income
$11,562
Add back goodwill amortization, net
of taxes
410
816
Adjusted net (loss) income
$11,972
$ 9,620
Basic (Loss) Income Per Share:
$ (0.17)
$ 0.32
$ ( 0.32)
$ 0.25
Goodwill amortization
0.01
0.02
Adjusted (loss) income per share
$ 0.33
$ 0.27
Diluted (Loss) Income Per Share:
$ 0.31
$ (0.32)
$ 0.24
$ 0.26
Accounting for Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB No. 30. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and was adopted as of January 1, 2002. This Statement specifies how impairment will be measured and how impaired
assets will be classified in the financial statements. The Company's adoption of this Statement did not have a material impact on the Company's financial statements.
Certain 2001 amounts have been reclassified to conform to the 2002 presentation.
Inventories consist of the following at:
Sept.30,
Finished goods
$ 336
$ 342
$ 272
Work in process
395
479
693
Raw materials, components and assemblies
616
689
709
$1,347
$1,510
$1,674
The principal components of the Company's holdings, at equity consist of the following:
Holding
Recorded
Book Value
($ in millions)
Quoted
Market Price
per Nasdaq
Calculated
Market Value
Ownership
Shares
Plug Power Inc.
$25.776
$ 7.91
$ 90.129
22.44%
11,394,315
SatCon Technology
Corporation
2.599
$ 1.60
1.740
6.58%
1,087,500
Total
$28.375
$ 91.869
December 31, 2001
$32.177
$ 8.74
$104.830
23.83%
11,994,315
6.760
$ 5.20
7.86%
1,300,000
$38.937
$111.590
September 30, 2001
$36.027
$ 9.62
$115.385
23.9%
SatCon Technology Corporation
11.170
$ 4.86
6.318
8.05%
$47.197
$121.703
Summarized below is financial information for Plug Power and SatCon, as derived from published financial reports. Plug Power's fiscal year ends December 31 and SatCon's fiscal year ends September 30. Our holdings in SatCon are accounted for on a one-quarter lag.
SatCon
_______________________________________
Plug Power
________________________________________
Balance Sheet
As of
Mar. 30,
2002(1)
2001(2)
2001(1)
Current
assets
$29,608
$42,466
$44,802
$ 83,589
$100,565
$111,212
Non-current
22,549
26,310
24,621
46,832
50,809
53,607
liabilities
11,586
12,842
9,302
9,456
10,199
7,737
1,050
1,423
1,723
6,070
6,172
6,534
Stockholders'
equity
39,521
54,511
58,398
114,895
135,003
150,548
Three Months Ended
Results of
Operations
Mar. 31,
Gross revenues
$ 10,300
$ 11,536
$ 2,544
$ 1,289
Gross profit (loss)
871
2,482
(348)
(909)
Net loss
(4,997)
(6,371)
(12,229)
(18,320)
Six Months Ended
$ 18,640
$ 21,030
$ 5,448
$ 2,316
1,558
4,451
865
(1,853)
Net loss before cumulative
effect of changes in
accounting principles
(10,392)
(9,359)
(23,825)
(37,334)
Cumulative effect of changes
in accounting principles
(1,022)
(10,381)
(1)
SatCon's July 31, 2002 press release on third quarter results and accomplishments for the three months ended June 29, 2002 included the following information:
(Dollars in
thousands)
June 29,
Current assets
$25,046
Non-current assets
20,792
Current liabilities
11,445
Non-current liabilities
932
Stockholders' equity
33,461
3 Months Ended
$11,754
Gross profit
1,994
(4,996)
The following is a roll forward of the Company's accounting for holdings in Plug Power:
Twelve months ended
Sept.30, 2001
Holdings balance, beginning of period
$32,177
$ 36,027
$ 48,372
Share of Plug Power losses, gross
(5,435)
(4,069)
(22,101)
Sale of shares
(1,544)
(4,708)
Equity adjustment for share of third-party
investments in Plug Power which increased equity
219
14,464
Holdings balance, end of period
$25,776
$ 32,177
There is no difference between the carrying value of the Company's holdings in Plug Power and its interest in the underlying equity at June 30, 2002, December 31, 2001 or September 30, 2001.
The Company sold shares of Plug Power and recognized gains and proceeds as follows:
(Dollars in thousands, except shares)
June 30, 2002 June 30, 2001
Shares sold
300,000
1,217,500
600,000
1,710,000
Proceeds
$3,174
$28,658
$6,076
$35,717
Gain on sales
$2,435
$25,458
$4,532
$31,009
The following is a roll forward of the Company's accounting for holdings in SatCon:
$6,760
$11,170
$ 15,984
Share of SatCon losses on one-quarter lag,
gross
(783)
(727)
(1,938)
(832)
(4,296)
Amortization of embedded difference between
the Company's basis and calculated ownership of underlying equity, one-quarter lag (Note 2)
(688)
(2,755)
Impairment loss (Note 7)
(2,418)
(5,790)
Equity adjustment for other equity activity
(128
2,795
4,175
$2,599
$ 6,760
The difference between the carrying value of the Company's holdings in SatCon and its interest in the underlying equity (on a one-quarter lag basis) consists of the following:
Calculated ownership
$ 4,285
$ 4,704
Embedded difference (goodwill) (Note 2)
2,475
6,466
Carrying value of investment in SatCon
The Company sold shares of SatCon and recognized gains and proceeds as follows:
100,000
212,500
$230
$910
(Loss) gain on sales
$(66)
$ 78
Securities available for sale are classified as current assets. Changes in net unrealized gains (losses) are charged to Other Comprehensive Income.
Securities available for sale consist of Beacon Power common stock. The book basis roll forward of Beacon Power common stock is as follows:
Dec.31,
Capital contributions during 2000 - cash
$ 6,050
Cash-less warrant exercise during 2001
8,500
Stock received as pro rata distribution from
SatCon during 2001
827
Impairment loss during the Transition Period
ended December 31, 2001
(9,643)
Impairment loss during 2002 (see Note 7)
(4,764
Securities book basis
15,377
Fair value adjustment
(8,673
Securities at market value
$ 970
$ 5,734
$ 6,704
The Company's ownership of Beacon Power common stock is as follows:
Dec.31, 2001
4,410,797
Percentage
10.3%
The Company regularly reviews its holdings and securities available for sale to determine if any declines in value of those holdings are other than temporary. The Company assesses whether declines in the value of its holdings and securities in publicly traded companies, measured by comparison of the current market price of the securities to the carrying value of the Company's holdings and securities, are considered to be other than temporary based on factors that include (1) the length of time carrying value exceeds fair market value, (2) the Company's assessment of the financial condition and the near term prospects of the companies, and (3) the Company's intent with respect to the holdings and securities.
The slowing economy has had a negative impact on the equity value of companies in the new energy sector. In light of these circumstances and based on the results of the reviews described above, the Company recorded other than temporary impairment charges with respect to its holdings in publicly traded companies. The pre-tax impairment losses were recorded as follows:
Holdings, at equity (SatCon), (see Note 5)
$ 620
$2,418
Securities available for sale (Beacon), (see Note 6)
1,280
4,764
$1,900
$7,182
The Company's effective tax rates for the three months ended June 30, 2002 and 2001 were as follows:
For the three months
For the six months
Tax rate
40.96%
40.53%
(13.85%)
40.73%
Income tax (benefit) expense consists of the following:
Operations before equity in
holdings' losses
Federal
$ (475)
$ 540
State
565
555
12
Deferred
402
8,946
(1,941
9,871
492
9,492
(1,861
10,423
Equity in holdings' losses
1,271
(2,613)
22
(5,373
Total operations
1,763
6,879
(1,839)
5,050
Change in accounting principle
1,000
Total change in accounting
Principle
$ 1,763
$7,879
$(1,839)
$6,050
Items charged (credited)
directly to stockholders'
equity:
Increase in additional paid-
in Capital for equity
holdings, and warrants and
options issued - Deferred
$ (2)
$ 417
$ 1,273
Decrease (increase) in
unrealized loss on available
for sale securities -
2,552
(4,794)
Expenses for employee stock
options recognized
differently for financial
reporting/tax purposes -
(25)
(85)
(169)
Decrease in additional paid-
in-capital for change in
accounting for derivative
financial instruments for
(1,471)
$ (27)
$1,413
$(5,161)
The deferred tax assets and liabilities consist of the following tax effects relating to temporary differences and carryforwards:
Current deferred tax assets:
Loss provisions for discontinued operations
$ 142
$ 143
Bad debt reserve
277
Inventory valuation
52
27
Inventory capitalization
3,250
1,344
956
Vacation pay
114
94
Warranty and other sale obligations
34
33
29
Stock options
247
237
232
Contingent liability warrant holders
115
Other reserves and accruals
149
183
4,236
Valuation allowance
(4,236
Net current deferred tax assets
$ 2,315
$ 2,052
Net operating loss
$ 3,749
$ 3,117
$ 2,360
Property, plant and equipment
(82)
(3,919)
(7,314)
(10,618)
Derivatives
(88)
Other
239
201
Research and development tax credit
459
Alternative minimum tax credit
150
609
590
(3,088)
(7,159)
(590)
(1,144)
Other credits
(173
(174
(150)
Noncurrent net deferred tax liabilities
and other credits
$ (173)
$(4,406)
$(8,453)
The valuation allowance at June 30, 2002 is $4.826 million and at June 30, 2001 was $1.144 million. During the quarter ended June 30, 2002, the valuation allowance was increased through the statement of operations by $3.821 million and decreased by $.139 million through paid-in-capital, for a net increase of $3.682 million. The Company determined that based on the "start up" nature of its micro fuel cell operations, which continues to generate losses, and the reduced built-in gain associated with its Plug Power holdings, the ultimate recognition of deferred tax assets was not assured.
As of June 30, 2002, the Company had a $10 million Credit Agreement with KeyBank, N.A. dated as of August 10, 2001 ("the $10 million Credit Agreement"). As of June 30, 2002, the Company had $1 million outstanding under this line of credit.
As of June 30, 2002, the market value of Plug Power common stock was $7.91 per share which means the amount available on the line of credit was $5 million of which $1 million was outstanding, leaving $4 million available under the facility.
Subsequent to June 30, 2002, the market value of Plug Power common stock fell below $7 per share, therefore no credit is currently available under this line of credit. In accordance with the $10 million Credit Agreement, the Company deposited $1 million into its
debt service fund to cover the outstanding debt balance.
The amounts used in computing earnings per share ("EPS") and the effect on income and the weighted average number of shares of potentially dilutive securities are as follows:
Loss
$8,804
Basic EPS:
Common shares outstanding,
beginning of period
35,509,110
35,455,335
35,484,760
35,422,335
Weighted average common shares
issued during the period
15,900
12,238
23,016
35,971
Weighted average shares outstanding
35,525,010
35,467,573
35,507,776
35,458,306
Loss per weighted average share
Diluted EPS:
Weighted average number of options
1,516,624
1,404,667
Weighted average number of warrants
Weighted average number of shares
used in fully diluted income
(loss) per share
36,984,197
36,862,973
average share
For the three and six months ended June 30, 2002, options to purchase 3,356,525 shares of common stock at prices ranging from $.54 to $21.92 per share and warrants to purchase 300,000 shares of common stock at $12.56 per share were outstanding but were not included in the computations of EPS-assuming dilution because the Company incurred losses during these periods and inclusion would be anti-dilutive.
The Company's holdings' losses, net of tax, accounted for under the equity method is as follows:
$(3,868)
$(2,931)
$(5,480)
$(6,366)
SatCona
(506)
(901
(760
(1,628
$(4,374)
$(3,832)
$(6,240)
$(7,994)
a
follows:
$ 688
$ 1,377
Non-cash Investing and Financing Activities:
Additional holdings and paid-in-capital resulting from other investors' investments in Plug Power Inc.
$ 578
$1,010
Change in holdings and paid-in-capital resulting from other equity activity in SatCon Technology Corporation
2,172
Additional paid-in-capital resulting from stock option exercises treated differently for financial reporting and tax purposes
Contingent obligation to common stock warrant holders
1,210
Capitalization of interest on FAC loans
107
The Company operates in two business segments, New Energy and Test and Measurement Instrumentation. The New Energy segment is currently focused on commercializing direct methanol micro fuel cells. The Test and Measurement Instrumentation segment develops, manufactures, markets and services sensing instruments and computer-based balancing systems for aircraft engines.
The Company evaluates performance based on profit or loss from operations before income taxes, accounting changes, unusual items and interest income and expense. Inter-segment sales are not significant.
Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other" column
includes corporate related items and items like income taxes or unusual items, which are not allocated to reportable segments. The
"Reconciling Items" column includes minority interest in consolidated subsidiary and income tax allocation to equity in holdings' losses. In addition, segments' noncash items include any depreciation and amortization in reported profit or loss. The New Energy segment figures include the Company's activities related to micro fuel cell
operations, the Company's holdings in Plug Power, SatCon and Beacon Power and the results of the Company's equity method of accounting for certain holdings. SatCon results are accounted for on a one-quarter
lag except for sale of stock which is affected as of the date of sale. The results for Plug Power and SatCon are derived from their published quarterly and annual financial statements.
Three months ended June 30, 2002
New Energy
Test and Measurement Instrumentation
Reconciling Items
Consolidated Totals
$1,595
Funded research and
development revenue
Research and product
development expenses
257
Selling, general and
administrative expenses
361
418
244
(3,103)
(1,271)
Segment (loss) profit
(4,216)
(1,848)
Total assets
31,357
2,488
7,698
41,543
Capital expenditures
110
156
36
49
137
Three months ended June 30, 2001
568
329
608
496
308
(6,445)
2,613
Segment profit (loss)
20,261
350
(9,049)
11,562
74,851
3,801
16,345
94,997
42,159
26,679
326
10
303
639
581
637
Six months ended June 30, 2002
2,612
523
1,144
919
595
(6,218)
(22)
(12,335)
(670)
1,564
140
80
226
98
72
96
Six months ended June 30, 2001
1,442
1,336
955
746
(13,367)
5,373
17,227
394
(8,817)
462
340
830
85
1,417
The following table presents the details of "Other" segment (loss) profit:
Corporate and Other Income (Expenses):
$ (49)
$ (581)
$ (96)
$(1,417)
Interest income
24
111
50
132
(1,763)
(7,879)
1,839
(6,050)
Other expense, net
(48
(237
(205)
(421
Total (expense) income
$(1,848)
$(9,049)
$ 1,564
$(8,817)
During the six months ended June 30, 2002, First Albany Companies Inc. ("FAC") sold 662,705 shares of the Company's common stock in the public markets. FAC now owns 11,091,040 shares, approximately 31.22% of the Company's common stock.
In July 2001, MTI MicroFuel Cells Inc. ("MTI Micro"), a subsidiary of the Company, entered into a Joint Venture Agreement with E.I. DuPont de Nemours and Company ("Dupont"), a minority shareholder in MTI Micro, to undertake a research and development program funded by the Advanced Technology Program of the National Institute of Standards and Technology ("NIST"). As the program administrator, MTI Micro submits all bills from Dupont to NIST for payment.
In connection with NIST billings, as of June 30, 2002, the Company has a liability to Dupont for approximately $131 thousand. This liability is included in the financial statement line "Accrued liabilities - related parties."
Sales of Holdings
From July 1 through August 9, 2002, the Company sold Plug Power and SatCon common stock as follows:
Company
Number of
Shares Sold
Net Proceeds
from Sales
45,000
$262
18,000
23
$285
NYSERDA Award
On April 25, 2002, the Company announced that its subsidiary, MTI MicroFuel Cells, Inc., received an award of $500,000 from the New York State Energy Research and Development Authority (NYSERDA). The award, matched by a similar commitment from MTI Micro, will help fund a year-long research program to advance the development and commercialization of direct methanol micro fuel cell technology.
The NYSERDA award will also augment and support a $9.3 million research and development program that is a joint effort of MTI Micro and DuPont. In August 2001, the two companies received an award of $4.6 million for the program from the Advanced Technology Program (ATP) of NIST.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not believe the adoption of this Statement will have a material impact on its financial statements.
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this Statement are effective for exist or disposal activities that are initiated after December 31, 2002, with early application encouraged.
The Company is in the process of reviewing the provisions of the new standard to determine its potential impact.
Our equity holdings and securities available for sale may constitute investment securities under the Investment Company Act. In general, a company may be deemed to be an investment company if it owns investment securities with a value exceeding 40% of its total assets, subject to certain exclusions and exemptions. Investment companies
are subject to registration under, and compliance with, the Investment Company Act unless a particular exemption or safe harbor provision applies. If we were to be deemed an investment company, we would become subject to the requirements of the Investment Company Act. As a consequence, we would be prohibited from engaging in certain businesses or issuing certain securities, certain of our contracts might be voidable, and we might be subject to civil and criminal penalties for noncompliance.
Until fiscal 2001, the Company qualified for a safe harbor exemption under the Investment Company Act based upon the level of ownership of shares of Plug Power and influence over its management or policies.
However, since we sold some of our shares of Plug Power during fiscal 2001, this safe harbor exemption is no longer available.
On December 3, 2001, we made an application to the Securities and Exchange Commission ("SEC") requesting that they either declare that we are not an investment company because we are primarily engaged in another business or exempt us from the provisions of the Investment Company Act for a period of time. This application is pending. If our application is not granted, we will have to find another safe harbor or exemption that we can qualify for or become an investment company subject to the regulations of the Investment Company Act.
If we were deemed to be an investment company and could not find another safe harbor or exemption and failed to register as an investment company, the SEC could require us to sell our interests in
Plug Power, SatCon and Beacon, until the value of our holdings is
reduced below 40% of total assets. This could result in sales of our
holdings in quantities of shares at depressed prices and we may never realize anticipated benefits from, or may incur losses on, these sales.
Further, we may be unable to sell some holdings due to contractual or legal restrictions or the inability to locate a suitable buyer. Moreover, we may incur tax liabilities when selling assets.
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, Mechanical Technology, Dale Church, Edward Dohring, Alan Goldberg, George McNamee, Beno Sternlicht, Marty Mastroianni (former President and Chief Operating Officer of the Company), and 33 other individuals ("Defendants") who purchased a total of 820,909 shares of the Company's stock from the Plaintiffs. The case concerns the Defendants' 1997 purchase of Mechanical Technology shares from the Plaintiffs at the price of $2.25 per share. 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 by the Bankruptcy Court. On appeal in October 2000, Plaintiffs' cause of action was dismissed by the United States District Court for the Northern District of New York. In November 2000, Plaintiffs filed an appeal of that dismissal with the United States Court of Appeals for the Second Circuit. In June 2002, the Second Circuit Court of Appeals reversed the District Court decision and remanded the case for further consideration. A motion to reconsider the decision of the Court of Appeals has been filed and is pending.
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 Company is primarily engaged in the development of direct methanol micro fuel cells through its subsidiary MTI MicroFuel Cells, Inc. ("MTI Micro")and in the design and manufacturing of precision instrumentation through its subsidiary MTI Instruments. Mechanical Technology also co-founded and retains a significant interest in Plug Power Inc. (NASDAQ: PLUG), a leading manufacturer of fuel cells. Mechanical Technology also has an interest in SatCon Technology Corporation (NASDAQ: SATC), which develops power electronics and energy management products, and Beacon Power Corporation (NASDAQ: BCON), which develops flywheel energy storage systems.
MTI Micro is developing direct methanol fuel cells with the goal of commercialization in 2004. MTI Micro has a strategic partnership with DuPont, significant intellectual property in the micro fuel cell industry, a world-class leadership team comprised of seasoned business executives and successful entrepreneurs, and an industry leading team of researchers and scientists.
MTI Instruments specializes in the design, manufacture and service of non-contact precision test and measurement equipment. MTI Instruments' three product groups provide a range of instrumentation devices for science, engineering and manufacturing: semiconductor systems, jet engine balancing systems and non-contact sensing instruments. Most recently, MTI Instruments has focused development efforts on measurement systems primarily for the semiconductor industry and is working on advancing waver metrology systems to develop more multi-purpose devices. MTI Instruments' largest customers include industry leaders in the computer, electronic, semiconductor, automotive, aerospace, aircraft and bioengineering fields.
From inception through June 30, 2002, the Company has incurred net losses of $66.1 million and expects to incur losses as it continues micro fuel cell product development and commercialization programs. The Company expects that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial as a result of, among other factors, the number of prototypes produced, gains on sales of holdings and the operating results of MTI Instruments.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of
Critical Accounting Policies and Estimates (Continued)
America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets,
conditions.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Revenue Recognition. The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition." Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and we have determined that collection of the fee is probable. Title to the product generally passes upon shipment of the product, as the products are shipped FOB shipping point. We provide for a warranty reserve at the time the product revenue is recognized. We perform funded research and development and product development for government agencies under cost reimbursement contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs. Revenue from reimbursement contracts is recognized as services are performed. In these contracts, we receive periodic progress payments and retain the rights to the intellectual property developed in government contracts. All payments made to the Company for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Department of Commerce. Adjustments are recognized in the period made. Any losses incurred in performing funded research and development projects are recognized as funded research and development expenses as incurred.
Inventory. The Company writes down its inventory for estimated obsolescence or
Holdings. The Company holds minority interests in companies having operations or technology in areas within its strategic focus, all of which are publicly traded and have highly volatile share prices. The Company records a holding impairment charge when it believes a holding has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying holdings could result in significant losses and an inability to recover the carrying value of the holdings, thereby possibly requiring an impairment charge in the future.
Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimation of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Included in this assessment is the determination of net operating loss carryforwards. These differences result in a net deferred tax asset. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent that we believe that recovery is not likely, we must establish a valuation allowance.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We recorded a valuation allowance due to uncertainties related to our ability to utilize certain net deferred tax assets, primarily consisting of built-in-losses on holdings and net operating losses and credits which may be carried forward, before they expire. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation allowance, which could materially impact our financial position and results of operations. The Company has recorded a full valuation allowance against its deferred tax assets of $4.826 million as of June 30, 2002, due to uncertainties related to its ability to utilize these assets. The valuation allowance is based on estimates of taxable income and the period over which its deferred assets wil l be recoverable.
Results of Operations
Change in Year-End. On February 13, 2002, the Company changed its fiscal year-end from September 30 to December 31, effective with the calendar year beginning January 1, 2002. A three-month transition period from October 1, 2001 through December 31, 2001 (the "Transition Period") precedes the start of the 2002 fiscal year. "2001" refers to fiscal periods in the year ended September 30 and the Transition Period refers to the three months ended December 31, 2001. This new fiscal year makes the Company's annual and quarterly
reporting periods consistent with those used by Plug Power Inc. and permits the Company to continue to account for its holdings in Plug Power on a timely basis.
Product Revenue.
Sales for the first six months of 2002 versus the same period in 2001 have decreased by $1.732 million to $2.185 million in 2002 from $3.917 million in 2001, a 44.2% decrease. The six month
decrease is the result of decreased sales to OEM customers of $1.821 million and semiconductor customers of $.102 million offset by increases to PBS customers of $.154 million and other net increases in other product lines of $.037 million.
Funded Research and Development Revenue. Funded research and development revenue was $.385 million for the three months ended June 30, 2002. Funded research and development revenue for the first six months of 2002 totaled $.557 million. These amounts reflect billings and amounts to be billed under government contracts for the research and development of micro fuel cells for use in portable electronics.
Cost of Product Revenue.
Gross profits decreased for the three months ended June 30, 2002 due to higher overhead absorption resulting from decreased sales levels in 2002.
Results of Operations (Continued)
Gross profit from product revenue decreased by 12% to 42.8% from 54.8% for the first six months of 2002 versus the same period in 2001. The six month change is the result of higher overhead absorption resulting from decreased sales levels.
Funded Research and Product Development Expenses.
Unfunded Research and Product Development Expenses.
$1.095 million for the three months ended June 30, 2002 from $.897 million for the same period in the prior year. This increase reflects a $.072 million reduction in product development costs at MTI Instruments due to reduced spending on development projects reaching the product introduction phase and a $.270 million increase for MTI Micro.
Unfunded research and development expenses for the first six months of 2002 versus the same period in 2001 has remained stable at $2.118 million in 2002 and $2.114 million in 2001.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses for the first six months of 2002 totaled $2.658 million representing a 12.5% decrease from $3.037 million during the same period in 2001. This decrease is primarily the result of reduced expense for incentive compensation, since future incentives are expected to be in the form of stock options.
Operating Loss. Operating loss increased $.576 million to an operating loss of $1.648 million for the three months ended
June 30, 2002 as compared to $1.072 million for the same period in the prior year, a 53.7% increase. This loss increase results primarily from decreases in gross profits at MTI Instruments.
The first six months of 2002 resulted in an operating loss of $4.301 million, an increase of $1.295 million over the $3.006 million operating loss for the same period in 2001. This loss increase results primarily from decreases in gross profits at MTI Instruments.
Gain on Sale of Holdings. Results for the three months ended June 30, 2002 include a $2.369 million gain on the sale of holdings compared to the same period in the prior year which included a $25.458 gain.
The first six months of 2002 includes a $4.610 million gain on the sale of holdings compared to the same period in the prior year which included a gain of $31.009 million.
Derivative Losses. The Company recorded net losses of $.011 million and $.027 million on derivative accounting for the three months ended June 30, 2002 and 2001, respectively. Changes in derivative fair values, calculated using the Black-Scholes pricing model, are recorded on a quarterly basis.
The first six months of 2002 and 2001 included net losses on derivative accounting of $.178 million and $.078 million, respectively.
Impairment Losses. For the three months ended June 30, 2002, the Company recorded a $1.9 million charge for impairment losses for other than temporary decline in the value of certain available-for-sale securities ($1.280 million) and equity method investments ($.620 million). For the six months ended June 30, 2002, impairment charges totaled $7.182 million, $2.418 million related to equity method investments and $4.764 million for availability-for-sale securities.
Interest Expense. Results during the three and six months ended June 30, 2002 were affected by interest expense of $.012 million and $.024 million, respectively, compared to $.463 million and $1.061 million, respectively, for the same periods in the prior year. The decrease in expense results from decreases in the amount of debt outstanding and prime interest rate since last year.
Equity in Holdings' Losses, Net of Tax. In the three and six months ended June 30, 2002, the Company recorded a $4.374 million and
$6.240 million loss, net of tax, respectively, from the recognition of the Company's proportionate share of losses in equity holdings compared to $3.832 million and $7.994 million, respectively, net of tax, for the comparable periods in the prior year.
Equity in holdings' losses results from the Company's minority ownership in certain companies, which are accounted for under the equity method of accounting. Under the equity method of accounting,
the Company's proportionate share of each company's operating losses and amortization of the Company's net excess investment over its equity in each company's net assets is included in equity in
holdings' losses. As a result of adopting SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002, the Company will no longer amortize the goodwill associated with its equity holdings in SatCon. Equity in holdings' losses for the three and six months ended June 30, 2002 and 2001 includes the results from the Company's minority ownership in Plug Power and SatCon. The Company expects these companies to continue to invest in development of their products and services, and to recognize operating losses, which will result in future charges recorded by the Company to reflect its proportionate share of such losses.
Equity in holdings' losses includes a loss, before taxes, from Plug Power of $2.744 million and $5.435 million, respectively, for the three and six months ended June 30, 2002 compared to $4.930 million and $10.642 million, respectively, for the three and six months ended June 30, 2001. The decrease is a combination of Plug Power's reduction in net losses for 2002 compared to 2001 and the result of the Company's decrease in ownership of Plug Power since 2001. Equity
in holdings' losses, before taxes, for the three and six months ended June 30, 2002 also includes our proportionate share of losses from SatCon of $.359 million and $.783 million, respectively, compared to $.825 million and $1.346 million, respectively, for the three and six months ended June 30, 2001; and embedded difference (the difference between the carrying value of the Company's holdings and its interest in the underlying equity) amortization of $0 and $0, respectively, for the three and six months ended June 30, 2002 compared to $.688 million and $1.377 million, respectively, for the three and six months ended June 30, 2001. SatCon is accounted for on a one-quarter lag and includes results of SatCon through March 30, 2002.
Income Tax (Benefit) Expense. The tax rates for the three and six months ended June 30, 2002 are 40.96% and (13.85%) compared to the rates for the three and six months ended June 30, 2001 of 40.53% and 40.73%. These tax rates are primarily due to losses generated by operations, offset by a full valuation reserve recorded against net deferred tax assets as of June 30, 2002. The valuation allowance at June 30, 2002 is $4.826 million and at June 30, 2001 was $1.144 million. During the quarter ended June 30, 2002, the valuation allowance was increased through the statement of operations by $3.821 million and decreased by $.139 million through paid-in-capital, for a net increase of $3.682 million. The Company determined that based on the "start up" nature of its micro fuel cell operations, which continues to generate losses, and the reduced built-in gain associated with its Plug Power holdings, the ultimate recognition of deferred tax assets was not assured.
Further, as a result of ownership changes in 1996, the availability of net operating loss carryforwards to offset future taxable income will be limited pursuant to the Internal Revenue Code.
Financial Condition
Inventory and accounts receivable turnover ratios and their changes for the six months ended June 30 are as follows:
Change
Inventory
0.82
1.02
(0.20)
4.29
3.54
.75
The change in the inventory turnover ratio is the result of sales reduction and inventory levels for new semi-conductor products.
The change in the accounts receivable turnover ratio is the result of the timing of sales.
Inventories at June 30, 2002 of $1.347 million reflect inventory levels for MTI Instruments required to support expected sales levels in 2002.
Working capital of $7.504 million at June 30, 2002 reflects a $4.405 million decrease from $11.909 million at December 31, 2001. This decrease reflects $4.776 million net cash used in operating
activities offset by $6.986 million in proceeds from sale of holdings, a $4.764 million decrease in the fair value of Beacon Power holdings and a $2.315 million decrease in deferred income tax assets.
At June 30, 2002, cash and cash equivalents were $6.177 million versus $4.127 million at December 31, 2001. Net cash used by operating activities for the six months ended June 30, 2002 amounted to $4.776 million, as compared to $4.388 million in the prior year. Accounts receivable increased due to the timing of sales during the
quarter. Accounts receivable totaled $1.369 million as of June 30, 2002 as compared to $.902 million as of December 31, 2001, or a 51.8% increase.
As of June 30, 2002, the Company had a $10 million Credit Agreement with KeyBank, N.A. dated as of August 10, 2001 ("the $10 million Credit Agreement"). As of June 30, 2002, the Company had $1 million outstanding under this line of credit. If the market value of Plug Power common stock falls below $8 per share the facility is reduced to $5 million and if the value falls below $7 per share the facility is reduced to zero.
Financial Condition (Continued)
As of June 30, 2002, the market value of Plug Power common stock was $7.91 per share which means the amount available on the line of
credit was $5 million of which $1 million was outstanding, leaving $4 million available under the facility.
Subsequent to June 30, 2002, the market value of Plug Power common stock fell below $7 per share, therefore no credit is currently available under this line of credit. In accordance with the $10 million Credit Agreement, the Company deposited $1 million into its debt service fund to cover the outstanding debt balance.
The $10 million Credit Agreement requires the Company to meet certain covenants, including maintenance of a debt service reserve account
(equal to 3 months of interest payments on outstanding debt), minimum Plug Power share price and pledge additional collateral and maintain
an additional collateral value, if required, based on the Plug Power share price falling below $10 per share. Additional collateral
consisting of 500,000 shares of SatCon common stock was pledged in August 2001, when the market value of Plug Power common stock fell below $10 per share. The Company was in compliance with these covenants as of June 30, 2002.
Capital spending during the first six months of fiscal 2002 was $.226 million, a decrease from the comparable period in 2001 where capital spending totaled $.830 million. Capital spending during fiscal 2002 included furniture, computers, software and laboratory equipment. Total additional capital spending during fiscal 2002 is expected to be approximately $1.3 million for computers, furniture, facilities
fit-up, laboratory and manufacturing equipment.
The Company leases equipment, office and laboratory space under operating leases. Future minimum rental payments, as of June 30, 2002, under the operating leases with non-cancelable terms are as follows:
Year Ending December 31, thousands)
$ 229
2003
457
2004
451
2005
463
2006
389
Thereafter
921
Total operating lease commitments
$2,910
The Company anticipates, barring unforeseen circumstances, that it will be able to meet the liquidity needs of its operations for the
next year from current cash resources, government contract revenues, equity financings, sale of assets and borrowings under its $10 million Credit Agreement. However, there can be no assurance as to
the future stock prices or performance of Plug Power, SatCon or Beacon, or that the Company will not require additional financing within this time frame or that any additional financing will be available to the Company on terms acceptable to the Company, if at all.
On December 17, 2001 the Company entered into a plan under
Rule 10b5-1 (the "Plan") pursuant to which the Company will sell shares of Plug Power. The Plan provides for the sale of, and the Company intends to sell, up to 1.2 million shares of Plug Power during calendar 2002. As of June 30, 2002, 600,000 shares of Plug Power have been sold pursuant to the Plan. Under the terms of the Plan, the Company may terminate the Plan at any time.
On April 25, 2002, the Company announced that its subsidiary, MTI Micro, received an award of $500,000 from the New York State Energy Research and Development Authority (NYSERDA). The award, matched by a similar commitment from MTI Micro, will help fund a yearlong research program to advance the development and commercialization of direct methanol micro fuel cell technology.
The NYSERDA award will augment and support the $9.3 million research and development program that is a joint effort of MTI Micro and DuPont. The Company's share of the Advanced Technology Program ("ATP") awarded by the National Institute of Standards and Technology ("NIST") is $3.3 million. The Company began incurring costs under this program during December 2001. The award is to carry out a three-year, $9.3 million cost-shared program to research and develop a micro fuel cell for use in portable electronics.
Proceeds from the sale of assets are subject to fluctuations in the market value of Plug Power, SatCon and Beacon as well as securities laws and other agreements detailed below.
The future sale of holdings in Plug Power, SatCon and Beacon Power will generate taxable income or loss which is different from book income or loss due to the tax bases in these assets being significantly different from their book bases and the available
net federal operating loss carryforwards available to offset income.
Book and tax bases as of June 30, 2002 are as follows:
Holdings
Shares Held
Average
Book Basis
Tax Basis
$2.26
$0.96
2.39
7.06
Beacon Power
.22
2.06
As of June 30, 2002, the Company has holdings in Plug Power, SatCon and Beacon Power securities. Plug Power and SatCon are currently traded on the Nasdaq National Market (NASDAQ: PLUG and SATC) and Beacon Power is traded on the Nasdaq Small Cap Market (NASDAQ: BCON). These securities are therefore subject to market conditions. When acquired, each of these securities was unregistered.
On March 20, 2002, Beacon Power filed a Form 8-K with the SEC stating that Beacon Power had received notification from Nasdaq that, because the closing price of its common stock had been below $1.00 for 30 consecutive days, it would be delisted from the Nasdaq National Market System on June 11, 2002 unless it closed at $1.00 per share or more for a minimum of l0 consecutive trading days before then.
On July 18, 2002, Beacon announced it had received approval from the Nasdaq Small Cap Market for the quotation of its shares. Beacon's stock will be eligible to request a transfer of the quotation back to the National Market System ("NMS") if it maintains a closing bid price of $1.00 for 30 consecutive trading days before September 9, 2002 and complies with other NMS maintenance requirements. After September 9, 2002, it may become eligible to request transfer back to the Nasdaq
NMS if by March 10, 2003 it meets the above closing bid price test and has maintained compliance with all other continued listing requirements on that market. If it does not achieve these tests, then
thereafter, it may be listed on the NMS only if it meets all the normal criteria for initial inclusion in the NMS. Beacon can continue the quotation of its shares on the Small Cap Market if it achieves a
closing bid price of $1.00 for at least ten consecutive trading days before September 9, 2002. If it fails to do so and yet meets one of the core maintenance criteria for the Small Cap Market on September 9, then it still will remain eligible to be quoted on the Small Cap
Market for an additional 180-calendar day grace period thereafter (expiring on March 10, 2003). Beacon expects to meet such maintenance criteria. If it fails to meet the closing bid price test by March 10, 2003, then Beacon will no longer qualify to be quoted on the Small Cap Market, and would need to apply to be quoted on the Over the Counter Bulletin Board.
In February 2000, SatCon registered the securities acquired by the Company on a Form S-3. The stock in Plug Power and Beacon Power are
considered "restricted securities" as defined in Rule 144 and may be sold in the future without registration under the Securities Act
subject to compliance with the provisions of Rule 144. Generally, restricted securities that have been owned for a period of at least one year may be sold immediately after an IPO, subject to the volume limitations of Rule 144. However, because of our ownership position and our appointment of directors to both Plug Power's and Beacon Power's Board of Directors, we are considered an "affiliate" of those
companies and therefore are subject to the volume limitation of Rule 144, even if we have held the securities for two years or more.
The Rule 144 limitations, as currently in effect, limit our sales of either Plug Power or Beacon Power stock within any three-month period
to a number of shares that does not exceed the greater of 1% of the then outstanding shares of common stock of the company, or the average weekly trading volume of the common stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to certain restrictions.
As disclosed in Plug Power's Form 10-Q filed for the period ended June 30, 2002, Plug Power's cash requirements depend on numerous factors, including completion of its product development activities, ability to commercialize its fuel cell systems, market acceptance of its systems and other factors. Plug Power expects to devote substantial capital resources to continue its development programs directed at commercializing its fuel cell systems for worldwide use, hire and train its production staff, develop and expand its manufacturing capacity and production activities and expand its
research and development activities. Plug Power expects to pursue the expansion of its operations through internal growth and strategic
acquisitions and expects that such activities will be funded from existing cash and cash equivalents, issuance of additional equity or debt securities or additional borrowings subject to market and other conditions. The failure to raise the funds necessary to finance its
future cash requirements or consummate future acquisitions could adversely affect its ability to pursue its strategy and could negatively affect its operations in future periods. Plug Power
anticipates incurring substantial additional losses over at least the next several years and believes that its current cash, cash
equivalents and marketable securities balances will provide sufficient capital to fund operations for at least the next twelve months.
Plug Power has financed its operations through June 30, 2002, primarily from the sale of equity, which has provided cash in the
amount of $292.8 million. As of June 30, 2002, Plug Power had unrestricted cash and cash equivalents and marketable securities totaling $75.8 million and working capital of $74.1 million. As a result of Plug Power's purchase of real estate, it has escrowed an additional $5.3 million in cash to collateralize the debt assumed on the purchase. Since inception, net cash used in operating activities has been $170.4 million and cash used in investing activities has been $73.2 million including our investments in marketable securities in the amount of $33.0 million.
As disclosed in SatCon's Form 10-Q filed for the period ended June 29, 2002:
Since inception, SatCon has financed its operations and met its capital expenditure requirements primarily through the sale of private equity securities, public security offerings, borrowings on a line of credit and capital equipment leases.
SatCon anticipates that, barring unforeseen circumstances, the existing cash, cash equivalents and marketable securities available at June 29, 2002 will be sufficient to fund operations through September 30, 2002. However, in the event that SatCon is unable to realize cost-saving measures that are underway, its expenses are higher than anticipated or its revenues or collections are lower or slower than anticipated, SatCon may need additional cash prior to September 30, 2002. SatCon may also need additional future funds in order to fund unanticipated operating losses, to grow, to develop new or enhance existing products and services, to respond to competitive pressures or to acquire complementary businesses, products or technologies. Sources of additional funding could include obtaining a credit facility or the issuance of debt or equity securities. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of SatCon's stockholders will be red uced and SatCon's stockholders may experience additional dilution. The terms of additional funding may also limit SatCon's operating and financial flexibility. There can be no assurance that additional financing of any kind will be available to SatCon on terms acceptable to SatCon, or at all. If adequate funds are not available or are not available on acceptable terms, SatCon
would be required to scale back its operations.
Failure to obtain future funding when needed or on acceptable terms would materially, adversely affect SatCon's financial position and results of operations.
In late July 2002 SatCon received a letter of commitment from the Silicon Valley Bank for a $5 million revolving line of credit. This commitment provided that the line of credit will be secured by most of the assets of SatCon and is formula based with a 75% draw against eligible receivables as defined in the agreement, and requires SatCon to raise $4 million of subordinated debt or equity by December 1, 2002. On August 2, 2002 SatCon accepted the terms of the commitment and is working with the bank on the documentation and the other conditions to close the loan before the expiration of the commitment. However, there can be no assurance that SatCon will close the loan or, if the loan closes, that SatCon will be able to raise the $4 million of equity or subordinated debt as specified by December 1, 2002 to continue the loan. Further, if SatCon's cash at June 29, 2002 is insufficient to fund operations through September 30, 2002, and SatCon does not close the proposed loan with the Silicon Valley Bank or , if the loan is closed SatCon is unable to raise the $4 million of equity or subordinated debt by December 1, 2002, SatCon will need to consider other options. Some of the options include selling assets or businesses, restructuring SatCon so that it is able to operate using only its cash flow or securing some other form of financing. There can be no assurance, however, that SatCon would be successful in executing any of these options. If SatCon is not successful, it will likely have a material adverse effect on SatCon's financial position and results of operation.
Market Risk
Market risk represents the risk of changes in value of a financial instrument caused by fluctuations in interest rates and equity prices.
At June 30, 2002, the Company had variable rate debt totaling $1 million. Interest rate changes generally do not affect the fair
market value of the debt 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 $.010 million, holding other variables (debt level) constant.
The Company has performed a sensitivity analysis on its holdings of Plug Power, SatCon and Beacon Power common stock and its derivative financial instruments (warrants to purchase SatCon common stock).
Market Risk (Continued)
The sensitivity analysis presents the hypothetical change in fair value of our holdings held by the Company at June 30, 2002, 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 holdings in marketable securities have been based on quoted market prices and its derivative financial instruments based on estimates using valuation techniques.
The Company's holdings in Plug Power and SatCon are accounted for on the equity method, holdings in Beacon Power are accounted for at fair value, and derivative financial instruments are accounted for at estimated values. The fair market and estimated values, at June
30, 2002, of the Company's holdings in these companies and
derivatives and the calculated impact of a market price decrease of ten percent, is as follows:
(Dollars
in millions)
Holdings/Derivatives
Estimated Fair
10% Market
Decrease
$90.129
$9.013
.174
.970
.097
.016
.002
New Accounting Pronouncements
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." Statement No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Statement No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not believe this Statement will have a material impact on its financial statements.
Statement Concerning Forward Looking Statements
This Form 10-Q contains and incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. You can identify forward-looking statements through our use of the words
"expect," "anticipate," "believe," "should," "could," "may," "will," and other similar words, whether in the negative or the affirmative. Statements containing these, or similar words, are our predictions, expectations, plans and intentions of what may occur in the future.
All statements that are not historical fact should be deemed to be
forward-looking statements. We believe it is important to
communicate our future expectations to our investors; however, our
actual results could different materially from the predictions, expectations, plans and intentions we have shared with our investors in such forward-looking statements. Such risks include, among others, 1) our continuing need to raise additional financing; 2) the risks inherent in the development of direct methanol micro fuel cells (DMFCs), including, among others, the risk that a) we are not successful in developing the technology, b) we do not develop the technology in time to take advantage of the market opportunity, c) DMFCs are not accepted by consumers, or fail to satisfy critical product requirements necessary to market a product, or d) we fail to develop necessary third-party relationships, or we fail to do so on terms or in a timeframe that is favorable to the Company, or those third-parties fail to timely deliver the technology, supplies, components or channel development activities necessary to support a
DMFC product; 3) our dependence on the success of our
portfolio companies particularly in light of recent market conditions; 4) infringement of intellectual property rights and licenses of the Company or others; 5) our inability to keep up with our competition, 6) our history of losses; 7) the historical volatility of our stock price; 6) the risk we may become an inadvertent investment Company; 7) conflicts of interest between us, First Albany Companies Inc. and our portfolio companies; 8) and general market conditions.
These and other risks are set forth in greater detail in the "Risk Factors" section of our Annual Report on Form 10-K, which is incorporated herein by reference. We do not intend to update any information in any forward-looking statements we make.
PART II OTHER INFORMATION
Item 1: Legal Proceedings
At any point in time, the Company and its subsidiaries may be involved in various lawsuits or other legal proceedings; these could arise from the sale of products or services or from other matters relating to its regular business activities, compliance with various governmental regulations and requirements, or other transactions or circumstances. The Company does not believe there are any such proceedings presently pending, which could have a material adverse effect on the Company's financial condition except for the matters described in Note 17 of the Notes to Consolidated Financial Statements.
("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, Mechanical Technology, 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 the Company's stock from the Plaintiffs. The case concerns the Defendants' 1997 purchase of Mechanical Technology shares from the Plaintiffs at the price of $2.25 per share. FAC acted as Placement Agent for the Defendants in the negotiation and sale of the shares and in proceedings before the Bankruptcy Court for the 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 by the Bankruptcy Court. On appeal in October 2000, Plaintiffs' cause of action was dismissed by the United States District Court for the Northern District of New York. In November 2000, Plaintiffs filed an appeal of that dismissal with the United States Court of Appeals for the Second Circuit. In June 2002, the Second Circuit Court of Appeals reversed the District Court decision and remanded the case for further consideration. A motion to reconsider the decision of the Court of Appeals has been filed and is pending.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
Description
99.17.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.17.2
(b) No reports on Form 8-K were filed during the quarter ended June 30, 2002.
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
08/14/02
(Date)
s/William P. Acker
s/Cynthia A. Scheuer