______________________________________________________________________________ ______________________________________________________________________________ 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 March 28, 1997 / / Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the period from to __________________________________ Commission File Number 0-6890 __________________________________ MECHANICAL TECHNOLOGY INCORPORATED (Exact name of registrant as specified in its charter) New York 14-1462255 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 968 Albany-Shaker Road, Latham, New York 12110 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) (518) 785-2211 ------------------ (Registrant's telephone number, including area code) Not Applicable ------------------ (Former name,former address and former fiscal year,if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- CLASS OUTSTANDING AT MARCH 28, 1997 _____________________________ _____________________________ Common Stock, $1.00 Par Value 5,899,201 Shares ______________________________________________________________________________ ______________________________________________________________________________
MECHANICAL TECHNOLOGY INCORPORATED INDEX Page No. -------- Part I Financial Information Consolidated Balance Sheets - March 28, 1997 and September 30, 1996 3 - 4 Consolidated Statements of Income - Three months and six months ended March 28, 1997 and March 29, 1996 5 Consolidated Statements of Cash Flows - Six months ended March 28, 1997 and March 29, 1996 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 10 Part II Other Information 11 Item 1. Legal Proceedings Item 2. Exhibits and Reports on Form 8-K Signature 12 2
PART I FINANCIAL INFORMATION MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of March 28, 1997 (Unaudited) and September 30, 1996 (Derived from audited financial statements) (Dollars in thousands) March 28, Sept. 30, 1997 1996 ASSETS --------- --------- Current Assets: Cash and cash equivalents $ 105 $ 66 Trade accounts 7,402 7,491 Allowance for doubtful accounts (90) (102) ------- ------- Net receivables 7,312 7,389 Inventories: Raw materials and components 2,649 2,231 Work in process 1,075 1,727 Finished goods 151 153 ------- ------- Total inventories 3,875 4,111 Prepaid expenses & other current assets 196 190 ------- ------- Total Current Assets 11,488 11,756 ------- ------- Property, Plant and Equipment: Cost 20,023 19,498 Accumulated depreciation (17,104) (16,880) ------- ------- Net Property, Plant and Equipment 2,919 2,618 ------- ------- Other Assets 64 78 ------- ------- TOTAL ASSETS $ 14,471 $ 14,452 ======= ======= The accompanying notes are an integral part of the consolidated financial statements. 3
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) As of March 28, 1997 (Unaudited) and September 30, 1996 (Derived from audited financial statements) (Dollars in thousands) March 28, Sept.30, 1997 1996 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Line-of-credit $ 1,600 $ - Current installments on long-term debt 604 604 Income taxes payable 98 16 Accounts payable 1,564 1,979 Accrued liabilities 2,399 3,350 Payroll and other taxes withheld and accrued 344 671 ------- ------- Total Current Liabilities 6,609 6,620 Line-of-credit, net of current portion - 100 Note Payable - 3,000 Long-term debt, net of current maturities 403 706 Accrued interest - Note Payable - 1,098 Deferred income taxes and other credits 739 764 ------- ------- Total Liabilities 7,751 12,288 ------- ------- Shareholders' Equity: Common stock 5,902 4,902 Paid-in capital 13,923 13,423 Deficit (13,057) (16,089) Foreign currency translation adjustment (16) (19) Treasury stock (29) (29) Restricted stock grants (3) (24) ------- ------- Total Shareholders' Equity 6,720 2,164 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,471 $ 14,452 ======= ======= The accompanying notes are an integral part of the consolidated financial statements. 4
MECHANICAL TECHNOLOGY INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share) Three months ended Six months ended ------------------ ------------------ March 28, March 29, March 28, March 29, 1997 1996 1997 1996 -------- -------- -------- -------- Product revenue $ 6,358 $ 4,939 $ 12,654 $ 10,336 Research & development revenue 2,156 2,925 3,982 4,929 ------- ------- ------- ------- Total revenue 8,514 7,864 16,636 15,265 Product cost of sales 3,853 2,992 7,759 6,341 Research & development contract costs 1,601 1,805 2,924 3,214 Selling, general and administrative expenses 2,278 2,363 4,298 4,261 Product development and research costs 556 443 846 634 ------- ------- ------- ------- Operating income 226 261 809 815 Interest expense (64) (160) (225) (423) Gain on sale of subsidiary, ProQuip - 750 - 750 Other income (expense), net 15 (98) 51 (142) ------- ------- ------- ------- Income before extraordinary item and income taxes 177 753 635 1,000 Income tax expense 75 9 110 16 ------- ------- ------- ------- Income before extraordinary item 102 744 525 984 Gain on extinguishment of debt, net of taxes ($106) - - 2,507 - ------- ------- ------- ------- Net income $ 102 $ 744 $ 3,032 $ 984 ======= ======= ======= ======= Earnings per share: Income before extraordinary item $ .02 $ .21 $ .10 $ .28 Gain on extinguishment of debt .00 .00 .46 .00 ------- ------- ------- ------- Net Income $ .02 $ .21 $ .56 $ .28 ======= ======= ======= ======= The accompanying notes are an integral part of the consolidated financial statements. 5
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Six months ended ------------------- March 28, March 29, 1997 1996 OPERATING ACTIVITIES -------- -------- Net income $ 3,032 $ 984 Adjustments to reconcile net income to net cash provided (used) : Gain on extinguishment of debt (2,507) - Depreciation and amortization 290 351 Gain on sale of subsidiary - (750) Accounts receivable reserve (12) (50) Asset valuation reserve - 134 Foreign currency translation 3 (5) Other (5) - Changes in operating assets and liabilities: Accounts receivable 89 608 Inventories 236 (420) Escrow deposit - 750 Prepaid expenses and other current assets (6) 268 Accounts payable (415) (548) Income taxes (24) (15) Accrued liabilities (1,263) 299 ------- ------- Net cash (used) provided by operations $ (582) $ 1,606 ------- ------- INVESTING ACTIVITIES Purchases of property, plant & equipment $ (576) $ (325) Proceeds from sale of subsidiary, ProQuip, net of cash balance and expenses - 750 ------- ------- Net cash (used) provided in investing activities $ (576) $ 425 FINANCING ACTIVITIES ------- ------- Net borrowings (payments) under line-of-credit agreement $ 1,500 $ (1,608) Principal payments of long-term debt (303) (386) ------- ------- Net cash provided (used) in financing activities $ 1,197 $ (1,994) ------- ------- Increase in cash and cash equivalents $ 39 $ 37 Cash and cash equivalents - beginning of period 66 78 ------- ------- Cash and cash equivalents - end of period $ 105 $ 115 ======= ======= Supplemental Disclosure NON CASH FINANCING ACTIVITIES Conversion of Note Payable to common stock Note Payable extinguishment $ (3,000) $ - Common stock issued 1,500 - Accrued interest - Note Payable (1,213) - ------- ------- Net noncash used in financing activities $ (2,713) $ - ======= ======= The accompanying notes are an integral part of the consolidated financial statements. 6
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The management of the Company believes the accompanying unaudited consolidated financial statements contain all adjustments (consisting primarily of normal recurring accruals) necessary to fairly present the financial position as of March 28, 1997 and results of operations and changes in financial position for the six months then ended. 2. The results of operations for the six-month period ended March 28, 1997 are not necessarily indicative of the results to be expected for the full year. 3. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K Report for the fiscal year ended September 30, 1996. 7
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On December 27, 1996, the Company and First Albany Companies, Inc. ("FAC") entered into an agreement under which the Company issued to FAC 1.0 million shares of common stock in full satisfaction of the Note Payable of $3.0 million and accrued interest of $1.2 million. As a result, the Company in the first quarter of fiscal 1997 realized a gain on the extinguishment of debt totaling $2.6 million, net of approximately $100 thousand of transaction related expenses. (see "FINANCIAL CONDITION" below.) During the first quarter of fiscal 1997 the Company announced it had discontinued efforts to sell its wholly owned subsidiary, Ling Electronics Inc. ("Ling"), of Anaheim, California. A definitive agreement had been negotiated and executed under which the amount to be paid in cash at closing approximated Ling's book value; however the buyer failed to obtain funding prior to the expiration date of the agreement. 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 RESULTS OF OPERATIONS - --------------------- (Dollars in thousands) SALES ----- Three months ended Six months ended -------------------- ------------------ BUSINESS SEGMENT: 3/28/97 3/29/96 Change 3/28/97 3/29/96 Change - ----------------- -------- -------- -------- -------- -------- -------- Test & Measurement $ 6,328 $ 4,929 $ 1,399 $ 12,594 $ 10,326 $ 2,268 Technology 2,186 2,935 (749) 4,042 4,939 (897) ------ ------ ------ ------- ------- ------ TOTAL $ 8,514 $ 7,864 $ 650 $ 16,636 $ 15,265 $ 1,371 ====== ====== ====== ======= ======= ====== OPERATING INCOME (LOSS) ----------------------- Three months ended Six months ended -------------------- ------------------ BUSINESS SEGMENT: 3/28/97 3/29/96 Change 3/28/97 3/29/96 Change - ----------------- -------- -------- -------- -------- -------- -------- Test & Measurement $ 535 $ 154 $ 381 $ 1,302 $ 590 $ 712 Technology (309) 107 (416) (493) 225 (718) ------ ------ ------ ------ ------ ------ TOTAL $ 226 $ 261 $ (35) $ 809 $ 815 $ (6) ====== ====== ====== ====== ====== ====== Sales for the first six months of fiscal year 1997 versus the same period of fiscal year 1996 have increased approximately $1.4 million or 9.0% while operating income was essentially unchanged. The effect each business segment had on this change is outlined in the above table and discussed below. TEST AND MEASUREMENT - -------------------- The Test and Measurement segment reported a 22% increase in sales and a 120.7% rise in operating income during the first six months of fiscal 1997 compared to the same period last year. 8
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sales for the first half of fiscal year 1997 totaled $12.6 million compared to $10.3 million for the comparable period in the prior year. All divisions within this segment reported higher levels of shipments in the first six months of fiscal 1997 as compared to the same period in the prior year. Operating income for the first half of fiscal 1997 totaled $1.3 million, an increase of $712 thousand over the $590 thousand operating income for the same period in 1996; improved operating income resulted primarily from the higher level of sales partially offset by higher product development cost. All divisions were profitable during the first six months with Ling Electronics Inc.("Ling") recording the most significant improvement from the prior year. However, it is unlikely this level of improvement at Ling will be sustained for the remainder of the fiscal year which may result in lower segment growth in the second half of fiscal 1997. TECHNOLOGY - ---------- The Technology segment experienced a 18.2% decrease in sales and a significant decline in operating income compared to the corresponding six-month period last year. The decline in sales was substantially due to delays in performing the work on a large contract. This segment incurred an operating loss of $493 thousand compared to income of $225 thousand for the first six months of the previous year. Current year results were negatively impacted by contract overruns of approximately $580 thousand. As the Technology segment continues to focus on fewer business areas and concentrates on new products such as low-cost power generation with particular emphasis on fuel cell technologies, the segment is competing for and more dependent on a few large government-funded R&D contracts for the bulk of its business. However, fiscal constraints at all levels of government have reduced the level of funding available for these programs, and securing additional such contracts has become more difficult and competitive; no improvement in this situation is anticipated in the foreseeable future. The Company is actively pursuing other sources of funding, such as joint ventures with partners in the utility industry; however, there is no assurance the Company will be successful in securing such funding. Additional funding sources are deemed critical to support and sustain ongoing efforts to commercialize these technologies and the failure to obtain funding from the government or other sources could have a material adverse effect on the Company's financial condition. Technology segment results in the remaining quarters of fiscal 1997 will rely on success in procuring and fulfilling orders within the fiscal year. The future growth and profitability of the segment will be highly dependent on its success in procuring and performing substantial work on such orders and securing funding to continue efforts to commercialize its fuel cell technology. OTHER - ----- In addition to the matters noted above, the Company recorded a $2.5 million extraordinary gain, net of taxes, on the extinguishment of debt during the first quarter of fiscal 1997. Results during the first six months of fiscal 1997 were further enhanced by lower interest expense, principally resulting from reduced indebtedness. Moreover, in the first six months, the Company benefited from reduced income tax expense due to the use of net operating loss carryforwards. However, as a result of recent ownership changes, the availability of any further net operating loss carryforwards to offset future taxable income will be significantly limited pursuant to the Internal Revenue Code. 9
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION - ------------------- Working capital of $4.9 million at March 28, 1997 reflects a $257 thousand decline from September 30, 1996. At March 28, 1997 cash and cash equivalents were $105 thousand versus $66 thousand at September 30, 1996. Net cash used by operations for the first six months of fiscal 1997 amounted to $582 thousand, as compared to cash provided of $1.6 million in the same period last year. The capital used during the first half of fiscal 1997 was used principally to reduce accrued liabilities and accounts payable and to acquire capital equip- ment. Substantially all of the funds provided were from line of credit borrowings. Line of credit borrowings at March 28, 1997 were $1.6 million, while at September 30, 1996 there were line of credit borrowings of $100 thousand. Capital spending during the first six months of fiscal 1997 was $576 thousand, a significant increase from the comparable period in 1996, where capital spending totaled $325 thousand. The increased capital investments are in accordance with the higher level of planned expenditures for fiscal 1997. During fiscal 1996, First Albany Companies, Inc. ("FAC") had purchased 909,091 shares of the Company's common stock from the New York State Superintendent of Insurance as the court-ordered liquidator of United Community Insurance Company ("UCIC"). In connection with this purchase, FAC had also acquired certain rights to an obligation ("Term Loan") due from the same finance company ("FCCC") to whom the Company was obligated under the Note Payable. FCCC was in default of its Term Loan to UCIC. FAC, as the owner of the rights to the Term Loan, filed suit seeking payment and obtained a summary judgment. Collateral for the FCCC Term Loan included the Company's Note Payable to FCCC. FAC exercised its rights to the collateral securing the Term Loan, including the right to obtain payment on the Note Payable directly from the Company. On December 27, 1996, the Company and FAC entered into an agreement under which the Company issued to FAC 1.0 million shares of common stock in full satisfaction of the Note Payable of $3.0 million and accrued interest of $1.2 million. Accordingly, the Company realized a gain on the extinguishment of debt totaling $2.6 million, net of approximately $100 thousand of transaction related expenses. The Company anticipates that it will be able to meet the liquidity needs of its continuing operations from cash flow generated by those operations and borrowing under its existing line of credit, including sufficient cash flow to make all payments due on its term loan indebtedness during 1997. 10
PART II OTHER INFORMATION Item 1. Legal Proceedings - ------------------------- Lawrence Group, Inc. - -------------------- As previously reported (see Form 10-Q Report for quarter ended June 28, 1996), Lawrence Group, Inc.("LGI"), the owner of approximately 14% of the Company's outstanding Common Stock, filed a legal action against the Company and First Albany Companies, Inc. ("FAC") in May 1996 challenging certain actions taken by the Company's Board of Directors in connection with its approval, under Section 912 of the New York Business Corporation Law, of the purchase by FAC of 909,091 shares of the Company's Common Stock (which represented about 25% of the shares of such stock then outstanding). Claims under federal securities laws asserted by LGI in that litigation were previously dismissed; in April 1997, the Company's motion seeking dismissal of the remaining claims asserted by LGI (based on alleged violation of state law) was granted, and the case has been dismissed. Ling Holdings Group, Inc. - ------------------------- In February 1997, Ling Holdings Group, Inc. filed suit in the Orange County (California) Superior Court against the Company, its Ling Electronics, Inc. ("Ling") subsidiary, the Company's Chief Executive Officer (R. Wayne Diesel), and unnamed other persons. The Complaint alleges, among other things, that the various Defendants breached their obligations to Plaintiff in connection with the termination of a Stock Purchase Agreement that had been entered into in 1996 for the proposed sale of Ling by the Company, asserts claims against the Defendants on a variety of theories (e.g., breach of contract, fraud, conversion, etc.), and seeks a number of different remedies for the alleged injuries suffered by Plaintiff (including monetary damages, specific performance of the Stock Purchase Agreement, imposition of a constructive trust, an accounting of lost profits, etc.). The Company believes the claims asserted in the Complaint are without merit, and intends to vigorously defend the matter. Due to the preliminary nature of the proceedings in this case, final decisions have not yet been made regarding all actions the Company will take in response to the Complaint; however, as an initial matter the Company has filed a motion to dismiss a number of the counts of the multiple-count Complaint. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits Exhibit No. Description ----------- ----------- 10.17 Agreement, dated March 14, 1997, between the registrant and Mr. James Clemens, Vice President and General Manager of Ling Electronic, Inc., regarding his employment 27 Financial Data Schedule (b) No Reports on Form 8-K were filed by the Company during the quarter ending March 28, 1997. 11
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 5-12-97 /s/ R. WAYNE DIESEL - -------- ----------------------------------- (Date) R. Wayne Diesel Chief Executive Officer 5-12-97 /s/ STEPHEN T. WILSON - -------- ----------------------------------- (Date) Stephen T. Wilson Chief Financial Officer 12