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 26, 1999
/ / Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the period from to
Commission File Number 0-6890
MECHANICAL TECHNOLOGY INCORPORATED
(Exact name of registrant as specified in its charter)
New York 14-1462255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
968 Albany-Shaker Rd., Latham, New York 12110
(Address of principal executive offices) (Zip Code)
(518) 785-2211
Registrant's telephone number, including area code
Not Applicable
Former name,former address and former fiscal year,if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Class Outstanding at March 26, 1999
Common Stock, $1.00 Par Value 7,210,145 Shares
===============================================================================
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information
Consolidated Balance Sheets - March 26, 1999
and September 30, 1998 3 - 4
Consolidated Statements of Income -
Three months and six months ended
March 26, 1999 and March 27, 1998 5
Consolidated Statements of Cash Flows -
Six months ended March 26, 1999
and March 27, 1998 6
Notes to Consolidated Financial Statements 7 - 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 18
Part II Other Information
Item 4 19
Item 5 19
Item 6 20
Signature 21
PART I FINANCIAL INFORMATION
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 26, 1999 (Unaudited) and
September 30,1998 (Derived from audited financial statements)
(Dollars in thousands)
March 26, Sept 30,
1999 1998
Assets
Current Assets:
Cash and cash equivalents $ 2,972 $ 5,567
Restricted cash 894 -
Trade accounts receivable 3,787 5,058
Allowance for doubtful accounts (121) (99)
Net receivables 3,666 4,959
Accounts receivable-Joint Venture 96 87
Inventories:
Raw materials and components 2,850 2,845
Work in process 909 791
Finished goods 105 112
Total inventories 3,864 3,748
Note receivable - current 331 327
Prepaid expenses and other current assets 838 472
Taxes receivable - 8
Net assets of a discontinued operation - 8
Total Current Assets 12,661 15,176
Property, Plant and Equipment, net 6,763 4,467
Note receivable - noncurrent 225 264
Investment in Joint Venture 3,800 1,221
Total Assets $ 23,449 $ 21,128
The accompanying notes are an integral part of the consolidated financial
statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 26, 1999 (Unaudited) and
September 30, 1998 (Derived from audited financial statements)
(Dollars in thousands)
March 26, Sept 30,
1999 1998
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 1,237 $ 2,064
Accrued liabilities 2,222 3,328
Income taxes payable - 5
Contribution payable - Joint Venture - 4,000
Current installments on long-term debt 285 -
Net liabilities of discontinued operations 369 -
Total Current Liabilities 4,113 9,397
Long-term debt, net of current maturities 5,715 -
Deferred income taxes and other credits 607 607
Total Liabilities 10,435 10,004
Commitments (Note 4)
Shareholders' Equity:
Common stock 10,822 10,790
Paid-in-capital 22,285 16,259
Deficit (20,042) (15,885)
Foreign currency translation adjustment (22) (11)
Treasury stock (29) (29)
Total Shareholders' Equity 13,014 11,124
Total Liabilities and Shareholders' Equity $ 23,449 $ 21,128
The accompanying notes are an integral part of the consolidated financial
statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share)
Three months ended Six months ended
March 26, March 27, March 26, March 27,
1999 1998 1999 1998
Revenue $ 3,293 $ 6,999 $ 6,003 $10,249
Cost of sales 2,229 3,979 3,940 6,000
Gross profit 1,064 3,020 2,063 4,249
Selling, general and administrative
expenses 1,254 1,585 2,380 2,908
Product development and
research costs 310 197 532 345
Operating (loss)income (500) 1,238 (849) 996
Interest income(expense) 31 (5) (27) (10)
Equity in joint venture losses (2,094) (27) (3,315) (27)
Other income (expense), net 3 (155) 34 (94)
(Loss)income from continuing
operations before income taxes (2,560) 1,051 (4,157) 865
Income tax expense - - - -
(Loss)income from continuing
operations $(2,560) $ 1,051 $(4,157) $ 865
Discontinued Operations (Note 4)
Loss from operations of
discontinued Technology Division,
net of tax benefit - - - (516)
Loss on disposal of Technology
Division, net of tax benefit - (792) - (1,769)
Loss from discontinued operations - (792) - (2,285)
Net (loss)income $(2,560) $ 259 $(4,157) $(1,420)
Earnings per Share:
(Loss)income from continuing
operations $ (.24) $ .12 $ (.39) $ .10
Loss from discontinued operations - (.09) - (.26)
Net(loss)income $ (.24) $ .03 $ (.39) $ (.16)
Earnings per Share-assuming dilution:
(Loss)income from continuing
operations $ (.24) $ .12 $ (.39) $ .09
Loss from discontinued operations - (.09) - (.25)
Net(loss)income $ (.24) $ .03 $ (.39) $ (.16)
The accompanying notes are an integral part of the consolidated financial
statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six months ended
March 26, March 27,
1999 1998
Operating Activities
Net(loss)income from continuing operations $ (4,157) $ 865
Adjustments to reconcile net (loss)income to net
cash provided (used) by continuing operations:
Depreciation and amortization 316 143
Equity in joint venture loss 3,315 27
Reserve for bad debts 22 12
Deferred taxes and other credits - (11)
Stock option compensation 55 -
Changes in operating assets and liabilities:
Accounts receivable 1,271 (1,584)
Accounts receivable-joint venture (9) (228)
Inventories (116) 215
Prepaid expenses and other current assets (418) (11)
Accounts payable (827) (14)
Income taxes 3 (253)
Accrued liabilities (1,106) 3
Net cash used by continuing operations (1,651) (836)
Discontinued operations:
Net loss from discontinued operations - (2,285)
Change in net liabilities/assets of
discontinued operations 377 2,590
Net assets transferred from discontinued
operations - (907)
Net cash provided(used) by discontinued operations 377 (602)
Net cash used by operating activities (1,274) (1,438)
Investing Activities
Purchases of property, plant & equipment (2,560) (115)
Contribution payable-joint venture (4,000) -
Principal payments from note receivable 35 26
Net cash used by investing activities (6,525) (89)
Financing Activities
Net borrowings under line-of-credit - 100
Borrowings under IDA financing, less restricted cash 5,106 -
Proceeds from options exercised 109 3
Net cash provided by financing activities 5,215 103
Effect of exchange rate on cash (11) 3
Decrease in cash and cash equivalents (2,595) (1,421)
Cash and cash equivalents - beginning of period 5,567 1,421
Cash and cash equivalents - end of period $ 2,972 $ 0
The accompanying notes are an integral part of the consolidated financial
statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management the accompanying unaudited consolidated
financial statements contain all adjustments, consisting of only normal,
recurring adjustments, necessary for a fair presentation of results for such
periods. The results for any interim period are not necessarily indicative
of results for the full year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. These consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto for the fiscal year ended September 30, 1998.
2. Income Taxes
The Company's effective tax rate for the six months ended March 26, 1999 and
March 27, 1998 was 0%.
3. Earnings per Share
The amounts used in computing earnings per share and the effect on income and
the weighted average number of shares of potentially dilutive securities are
as follows, after having been retroactively adjusted for the stock split in
the form of a dividend (see Note 11):
<TABLE>
For the three month period For the six month period
ended ended
March 26, 1999 March 27, 1998 March 26,1999 March 27,1998
<S> <C> <C> <C>
(Dollars in Thousands)
(Loss)income available to common $ (2,560) $ 1,051 $ (4,157) $ 865
stockholders
Weighted average number of
shares:
Weighted average number of
shares used in net loss per share 10,794,068 8,859,416 10,782,191 8,858,981
Effect of dilutive securities:
Stock options - 250,424 - 265,629
Weighted average number of
shares used in diluted net
loss per share 10,794,068 9,109,840 10,782,191 9,124,610
</TABLE>
During the first half of fiscal 1999, options to purchase 649,298 shares of
common stock at prices ranging between $2.44 and $8.00 per share were
outstanding but were not included in the computation of Earnings per
Share-assuming dilution because the Company incurred a loss from continuing
operations. Therefore, no potential common shares are included in the
computation (anti-dilutive). The options, which expire between December
20, 2006 and January 8, 2009 were still outstanding at March 26, 1999.
During the first half of fiscal 1998, options to purchase 22,500 shares
of common stock at $5.70 per share were outstanding but were not included
in the computation of Earnings per Share-assuming dilution because the
options' exercise price was greater than the average market price of the
common shares (anti-dilutive). The options, which expire on October 20,
2007, were still outstanding at March 27, 1998.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Investment in Plug Power, L.L.C.
On April 15, 1998, Edison Development Corporation ("EDC") contributed $2.25
million in cash to Plug Power, L.L.C. ("Plug Power"). The Company contributed
a below-market lease for office and manufacturing facilities in Latham, New
York, valued at $2 million and purchased a one year option to match the
remaining $250 thousand of EDC's contribution. In May 1998, EDC contributed
an additional $2 million to Plug Power and the Company purchased another one
year option to match the contribution. The Company paid approximately $191
thousand for the options, which mature April 24, 1999 ($250 thousand) and
June 15, 1999 ($2 million).
As of March 25, 1999, the Company and Plug Power exchanged the options for
2.25 million shares and certain "research credits" (described below) for $2.25
million Plug Power membership interests. The Company earned the research
credits by assisting Plug Power in securing the award of over $50 million in
government grants and research contracts during the period June 1997 through
April 1999. The Company is currently negotiating with EDC and Plug Power to
determine whether the Company is entitled to any further payments in connection
with the research credits. A portion of the "research credits" are still
outstanding. MTI and Plug Power are discussing how these "research credits"
will be treated.
In August, 1998, the Company committed to contribute an additional $5 million
dollars (in cash, accounts receivable and research credits) between August 5,
1998 and March 31, 1999 and recorded a liability representing this obligation.
During the period September 1998 to February 1999, the Company fully funded
this commitment with $4 million cash, $.5 million of accounts receivable and
$.5 million of notes receivable.
During April 1999, the Company and EDC amended and restated a prior agreement
granting MTI and EDC the right to purchase shares. The agreement, which is
effective as of January 26, 1999, states that, in the event Plug Power
determines that it requires funds at any time through December 31, 2000,
Plug Power has the right to call upon the Company and EDC to each make capital
contributions as follows:
*The Company and EDC will each fund capital calls of up to $7.5 million
in 1999 and $15 million in 2000 ("Capital Commitment").
*In exchange for such capital contributions to Plug Power, the Company
and EDC will receive class A membership interests ("Shares") from
Plug Power at $7.50 per share.
*The Company and EDC will share the Capital Commitment equally.
*Plug Power's Board of Managers will determine when there is need for
such capital contributions.
*The Company and EDC shall have sixty (60) days from the date of such
authorization to tender their payment to Plug Power.
The agreement will terminate on December 31, 2000 or the date of an initial
public offering of shares by Plug Power at a per share price of greater than
$7.50 per share ("Termination Date"). In exchange for the Capital Commitment,
Plug Power has agreed to permit the Company and EDC to make capital
contributions to the extent of their Capital Commitment on the Termination
Date, whether or not such funds have been called, in exchange for Shares at
the fixed price of $7.50 per share.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If Plug Power requests capital contributions pursuant to the Capital
Commitments ("Capital Call"), and either the Company or EDC fail to make such
capital contribution ("Defaulting Member"), then such Defaulting Member shall
forfeit the right to receive the Shares it would have received in the Capital
Call at the fixed price of $7.50 per share ("Defaulted Shares").
Additionally, to the extent that there are Capital Commitments outstanding,
the Defaulting Member will be required to forfeit the right to receive an
additional number of Shares, at a fixed price of $7.50 per share, equal to
two times the Defaulted Shares ("Additional Defaulted Shares"). The
non-Defaulting Member may fund the Defaulting Member's share of the Capital
Call in exchange for Shares at the fixed price of $7.50 per share.
In addition, MTI and Plug Power are currently negotiating the sale of the MTI
campus, including all land and buildings, to Plug Power in exchange for Plug
Power Class A membership interests and the assumption of approximately $6
million in debt by Plug Power. No agreement has been reached, but it is hoped
that negotiations will conclude shortly.
The Company's total contributions to Plug Power (including contributions of
cash, assets, research credits, and a below market lease) total $14 million
over the period commencing on June 27, 1997, and ending on March 26, 1999.
In February 1999, Plug Power issued membership interests to new investors
with a recorded value of $13.75 million. Of this amount, $10 million was
received in cash and the balance represents membership interests issued in
connection with GE Fuel Cell Systems LLC. As a result, the Company recorded
its proportionate share of this increase in Plug Power's equity ($5.894
million) as investment in joint venture and additional paid-in-capital.
The Company has recorded its proportionate share of Plug Power's losses to
the extent of its recorded investment in Plug Power. The carrying value of
the Company's investment is $3.8 million as of March 26, 1999.
The Company will recognize its proportionate share of losses in the future
to the extent of its carrying value and additional future investments.
Plug Power, L.L.C. ("Plug Power") will continue to need substantial
investment after December 31, 1999. Plug Power continues to pursue
additional sources of capital. There is no assurance, however, that Plug
Power will find other sources of capital. If other sources of funding
cannot be found, the Company will be faced with contributing and/or lending
additional capital to Plug Power or dilution of its interest in Plug Power.
If EDC, the Company and other Plug Power members stop funding Plug Power
and no additional sources of capital are found, Plug Power will not be able
to continue as a going concern.
5. Reclassification
Certain fiscal 1998 amounts have been reclassified to conform with the
fiscal 1999 presentation.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Comprehensive Income
<TABLE>
Total comprehensive (loss) income consists of the following:
<S> <C> <C>
Three months ended Six months ended
March 26, March 27, March 26, March 27,
(Dollars in thousands) 1999 1998 1999 1998
Net (loss)income $(2,560) $ 259 $(4,157) $ (1,420)
Other comprehensive (loss)income,
before tax:
Foreign currency translation
adjustments (12) 1 (11) 3
Income tax related to items of other
comprehensive income(loss) - - - -
Total comprehensive (loss)income $(2,572) $ 260 $(4,168) $ (1,417)
</TABLE>
7. Discontinued Operations
The sale of the Company's Technology Division, the sole component of the
Technology segment, to NYFM, Incorporated (a wholly owned subsidiary of
Foster-Miller, Inc., a Waltham, Massachusetts-based technology company)
on March 31, 1998 completed management's planned sale of non-core businesses.
Accordingly, the Company no longer includes Technology among its reportable
business segments and now operates in only one segment, Test and Measurement.
The Technology Division is reported as a discontinued operation as of
December 26, 1997, and the consolidated financial statements have been
restated to report separately the net assets and operating results of
the business. In exchange for the Technology Division's assets, NYFM,
Incorporated (a) agreed to pay the Company a percentage of gross sales
in excess of $2.5 million for a period of five years; (b) assumed
approximately $40 thousand of liabilities; and (c) established a credit
for warranty work of approximately $35 thousand.
Discontinued operations consist of the following:
Three months Six months
ended ended
March 27, 1998 March 27, 1998
(Dollars in thousands)
Sales $ - $ 532
Loss from operations before
income tax $ - $ (516)
Income tax (benefit) - -
Net loss from discontinued
operations $ - $ (516)
Loss on disposal of Division $ (792) $ (1,769)
Income tax (benefit) - -
Loss on disposal of Division $ (792) $ (1,769)
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDTED FINANCIAL STATEMENTS
The assets and liabilities of the Company's discontinued operations are as
follows:
March 26, Sept 30,
1999 1998
Assets $ 604 $ 1,136
Liabilities 973 1,128
Net(liabilities)assets $ (369) $ 8
Assets with a net book value of $907 thousand consisting primarily of land,
building and management information systems were transferred to continuing
operations on October 1, 1997.
8. Debt
The Industrial Development Agency for the Town of Colonie issued $6 million in
Industrial Development Revenue ("IDR") Bonds on behalf of the Company to assist
in the construction of a new building for Advanced Products and the Company's
corporate staff and renovation of existing buildings leased to Plug Power.
The construction project is due to be completed in April 1999. The bond closing
was completed December 17, 1998 and proceeds of the IDR Bonds were deposited
with a trustee for the bondholders. The Company may draw the bond proceeds
to cover qualified project costs. First Albany Companies, Inc. ("FAC"), which
owns 34% of the Company's stock, underwrote the sale of the IDR Bonds. FAC
received no fees for underwriting the IDR Bonds but will be reimbursed for its
out-of-pocket costs.
KeyBank issued a letter of credit for approximately $6 million in connection
with the $6 million IDR Bonds. The KeyBank credit agreements require the
Company to meet certain covenants, including a fixed charge coverage and
leverage ratio. Further, if certain performance standards are achieved, the
interest rates on the debt may be reduced.
As of March 26, 1999, the KeyBank credit agreement has been amended to modify
certain covenants to conform with the Company's current performance
projections.
9. Cash Flows - Supplemental Information
NonCash investing activities for the six months ended March 26, 1999 includes
a $5.894 million increase in investment in joint venture and additional
paid-in-capital generated by investments in Plug Power by third parties.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDTED FINANCIAL STATEMENTS
10. Geographic and Segment Information
The Company operates in one business segment, Test and Measurement, which
develops, manufactures, markets and services sensing instruments,
computer-based balancing systems for aircraft engines, vibration test
systems and power conversion products.
The Company evaluates performance based on profit or loss from operations
before income taxes.
The following table details information about the Test and Measurement
segment profit or loss, segment assets and shows the reconciliation of
segment data to the Company's consolidated totals. The Company does not
allocate income taxes or unusual items to segments.
<TABLE>
<S> <C> <C> <C>
Reconciling
(Dollars in thousands) Test and Item: Consolidated
Three months ended March 26, 1999 Measurement Corporate Totals
Revenues $ 3,293 $ - $ 3,293
Equity in joint venture loss - (2,094) (2,094)
Loss from continuing operations
before tax (351) (2,209) (2,560)
Loss from continuing operations (351) (2,209) (2,560)
Total loss (351) (2,209) (2,560)
Segment assets 7,844 15,605 23,449
Net (liabilities) discontinued
operations - (369) (369)
Reconciling
(Dollars in thousands) Test and Item: Consolidated
Three months ended March 27, 1998 Measurement Corporate Totals
Revenues $ 6,999 $ - $ 6,999
Equity in joint venture loss - (27) (27)
Income(loss)from continuing
operations before tax 1,368 (317) 1,051
Income(loss) from continuing
operations 1,368 (317) 1,051
Loss on discontinued operations - (792) (792)
Total income(loss) 1,368 (1,109) 259
Segment assets 9,914 2,680 12,594
Net assets discontinued
operations - 596 596
The reconciling items are the amounts of revenues earned and expenses incurred
for corporate operations, which is not included in the segment information.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDTED FINANCIAL STATEMENTS
Reconciling
(Dollars in thousands) Test and Item: Consolidated
Six months ended March 26, 1999 Measurement Corporate Totals
Revenues $ 6,003 $ - $ 6,003
Equity in joint venture loss - (3,315) (3,315)
(Loss)income from continuing
operations before tax (686) (3,471) (4,157)
(Loss)income from continuing
operations (686) (3,471) (4,157)
Total (loss)income (686) (3,471) (4,157)
Segment assets 7,844 15,605 23,449
Net(liabilities) discontinued
operations - (369) (369)
Reconciling
(Dollars in thousands) Test and Item: Consolidated
Six months ended March 27, 1998 Measurement Corporate Totals
Revenues $ 10,249 $ - $ 10,249
Equity in joint venture loss - (27) (27)
Income(loss) from continuing
operations before tax 1,259 (394) 865
Income(loss)from continuing
operations 1,259 (394) 865
Loss on discontinued operations - (2,285) (2,285)
Total income(loss) 1,259 (2,679) (1,420)
Segment assets 9,914 2,680 12,594
Net assets discontinued
operations - 596 596
The reconciling items are the amounts of revenues earned and expenses incurred
for corporate operations, which is not included in the segment information.
</TABLE>
11. Subsequent Event
On April 23, 1999, the Company declared a 3 for 2 stock split in the form of a
stock dividend. Holders of the Company's $1.00 par value common stock are
entitled to receive one additional share of $1.00 par value common stock for
every two shares of common stock owned as of April 30, 1999. The financial
statements for all prior periods have been retroactively adjusted to reflect
this stock split for both common stock issued and options outstanding.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's earnings during the periods included
in the accompanying consolidated statements of income.
The sale of the Company's Technology Division, the sole component of the
Technology segment, to NYFM, Incorporated (a wholly owned subsidiary of Foster
- -Miller Inc., a Waltham, Massachusetts-based technology company) on March 31,
1998 completed management's planned sale of non-core businesses. Accordingly,
the Company no longer includes Technology among its reportable business
segments and now operates in only one segment, Test & Measurement. The
Technology Division is reported as a discontinued operation as of December 26,
1997 and the consolidated financial statements have been restated to report
separately the net assets (liabilities) and operating results of the business.
Continuing Operations
Sales decreased $3.7 million to $3.3 million for the three months ended
March 26, 1999 as compared to $7.0 million for the three months ended March
27, 1998, a 52.9% decrease. This decrease is the result of current weak market
conditions. Sales for the first half of fiscal year 1999 versus the same
period in fiscal year 1998 have decreased $4.25 million to $6.0 million in 1999
from $10.25 million in 1998, a 41.4% decrease. The six month changes are the
result of the same conditions as the three month changes.
Selling, general and administrative expenses decreased $.33 million to
$1.25 million for the three months ended March 26, 1999 as compared to $1.58
million for the three months ended March 27, 1998, a 20.9% decrease. This
decrease is the result of additional cost reduction efforts in fiscal year
1999 and decreased commissions as a result of decreased sales. Selling,
general and administrative expenses during the first half of fiscal 1999 of
$2.38 million represented a $.53 decrease or a 18.2% decrease from $2.91
million incurred during the same period in fiscal 1998. The six month
changes are the result of the same conditions as the three month changes.
Operating income decreased $1.74 million to an operating loss of $(.5)
million for the three months ended March 26, 1999 as compared to $1.24
million for the three months ended March 27, 1998, a 140.3% decrease. This
decrease is the result of decreased sales levels and corresponding decreases
in gross profits due to fixed cost absorption at lower sales levels. The
first half of fiscal 1999 operating loss of $(.85) million represented a
$1.85 million decrease or a 185% decrease from the $1 million operating
income recorded during the same period last year.
Other
In addition to the matters noted above, for the six and three months ended
March 26, 1999, the Company recorded a $3.315 million and $2.094 million
loss, respectively, from the recognition of the Company's proportionate
share of losses of the Plug Power joint venture compared to a $27 thousand
loss for comparable periods in fiscal 1998.
Results during the first half of fiscal 1999 were reduced by higher
interest expense, principally resulting from increased indebtedness
associated with the Industrial Development Revenue Bonds. The tax rate
for the six
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
months ended March 26, 1999 and March 27, 1998 was 0%. This rate is due to
the loss generated by the investment in the joint venture and the use of net
operating loss carryforwards. However, as a result of ownership changes in
1996, the availability of further net operating loss carryforwards to offset
future taxable income may be significantly limited pursuant to the Internal
Revenue Code.
Financial Condition
Working capital of $8.55 million at March 26, 1999 reflects a $2.77
million increase from September 30, 1998 as a result of long-term financing.
At March 26, 1999, cash and cash equivalents were $2.97 million versus
$5.57 million at September 30, 1998. Net cash used by operating activities
for the first six months of fiscal 1999 amounted to $1.27 million, as
compared to cash used of $1.44 million in the prior year.
The capital used during the first half of fiscal 1999 was applied
principally to fund short term operating cash flow requirements.
Additionally, accounts receivable decreased, because of reduced sales, to
$3.67 million or 26% as of March 26, 1999 as compared to $4.96 million as
of September 30, 1998.
MTI also funded $4 million of previously accrued capital contributions
to Plug Power.
The Industrial Development Agency for the Town of Colonie issued $6
million in Industrial Development Revenue ("IDR") Bonds on behalf of the
Company to assist in the construction of a new building for Advanced
Products and the Company's corporate staff and renovation of existing
buildings leased to Plug Power. The construction project is
substantially completed. The bond closing was completed December 17,
1998 and proceeds of the IDR Bonds were deposited with a trustee for
the bondholders. The Company may draw the bond proceeds to cover
qualified project costs.
KeyBank issued a letter of credit for approximately $6 million in
connection with the $6 million IDR Bonds. The KeyBank credit
agreements require the Company to meet certain covenants, including
a fixed charge coverage and leverage ratio. Further, if certain
performance standards are achieved, the interest rates on the debt
may be reduced.
Capital spending during the first six months of fiscal 1999 was
$2.56 million, an increase from the comparable period in 1998 where
capital spending totaled $.12 million. Capital spending during
fiscal 1999 included the construction described above. Total
additional capital spending during fiscal 1999 is expected to be
approximately $.47 million.
The Company anticipates that it will be able to meet its liquidity
needs during fiscal year 1999 from current cash resources, cash flow
generated by operations and borrowing under its existing line of
credit. As of March 26, 1999, the KeyBank credit agreement has been
amended to modify certain covenants to conform with the Company's
current performance projections.
The Company and EDC have each committed to contribute up to $22.5 million
to Plug Power to fund continuing operations through December 31, 2000.
The Company does not have enough cash on hand to fund its commitment to
Plug Power. If Plug Power calls all or a portion of the $22.5 million,
and the Company agrees to fund, the Company may attempt to finance its
capital contribution. However, there is no assurance the Company will
find a lender or investors willing to fund the capital contribution, or
that the Company will be able to borrow or otherwise raise money on terms
that are favorable to the Company. If the capital commitment cannot be
financed and other sources of funding are not found, the Company will not
fund its full capital commitment, and MTI's right to purchase shares of
Plug Power at the fixed price of $7.50 per share will be reduced by three
times the amount of the capital call. If the Company does not satisfy
its capital commitment and EDC does, the Company's interest in Plug Power
will suffer substantial dilution.
Joint Venture
Plug Power, L.L.C. ("Plug Power") will continue to need substantial
investment after December 31, 1999. Plug Power continues to pursue
additional sources of capital. There is no assurance, however, that
Plug Power will find other sources of capital. If other sources of
funding cannot be found, the Company will be faced with contributing
and/or lending additional capital to Plug Power or dilution of its
interest in Plug Power. If EDC, the Company and other Plug Power members
stop funding Plug Power and no additional sources of capital are found,
Plug Power will not be able to continue as a going concern.
Year 2000
General
Mechanical Technology Incorporated's company-wide Year 2000 plan is
proceeding on schedule. The plan is addressing the issue of computer
programs and embedded computer chips being unable to distinguish between
the year 1900 and the year 2000 as well as the ability to recognize
the leap year date of February 29, 2000. The plan has been divided into
six areas: (1) Systems evaluation, (2) Software evaluation, (3) Third
- -party suppliers, (4) Facility systems, (5) Products and (6) Contingency
plans. The general phases common to all segments are: (1) Inventorying
Year 2000 items, (2) Assigning priorities to identified items, (3)
Assessing the Year 2000 compliance of items determined to be material
to the Company, (4) Repairing or replacing material items that are
determined not to be Year 2000 compliant, (5) Testing material items
and (6) Designing and implementing contingency and business continuation
plans for each organization and Company location.
Systems Evaluation
All internal systems have been identified, inventoried, prioritized and
assessed for Year 2000 compliance. Systems found to be totally non-
compliant are scheduled for replacement, the remaining systems were found
to be in compliance. Plans are being developed to ensure that staff are
available to oversee restarting certain machines and manually adjusting
their dates, if needed.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Software Evaluation
All software material to the Company has been identified, evaluated, and
placed into one of three categories: (1) Found to be in full compliance
and certified as such by vendors, (2) Identified as requiring update, or
(3) Identified as requiring replacement with compliant software. Those in
the latter category have been included in the current budget.
Third-Party Suppliers
This phase of the Year 2000 Plan will be completed by the end of the third
Quarter of fiscal 1999. These third-party suppliers are in the process of
implementing their own plans with an expected completion date of 1999.
If any provider is not successfully compliant, the Company will evaluate
selecting alternative providers at that time.
Facility Systems
The facility systems review is complete. All systems are believed to be
Year 2000 compliant including telephone, fire alarm, security, elevator
and network components.
Products
The Company has evaluated both current product offerings and products in
the field to determine their ability to comply with Year 2000 issues.
The products were found to be non-compliant, compliant if modifications
are made, fully compliant or not impacted (that is, the product does not
have a computer or contains an embedded computer but does not use a date
function). Those products identified as non-compliant are products in the
field that are not Year 2000 compliant, cannot be modified and must be
replaced. Products that can be modified will have upgrades available for
sale during fiscal 1999.
Contingency Plans
This phase is currently being developed. Contingency plans should be in
place by the end of the third Quarter of fiscal 1999.
Costs
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the Company's financial position.
The estimated total cost of the Year 2000 project is approximately $120
thousand, which includes software, hardware and cabling upgrade and
replacement costs. This estimate does not include the Company's potential
share of Year 2000 costs that may be incurred by our joint venture, in which
the Company participates but is not the operator. The total amount expended
on the Plan through March 26, 1999 was $34 thousand for the upgrade and
replacement of hardware.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of
third-party suppliers and customers, the Company is unable to determine
at this time whether the consequences of the Year 2000 failures will have
a material impact on the Company's results of operations, liquidity or
financial condition. The Year 2000 Plan is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 problem and,
in particular, about the Year 2000 compliance and readiness of its material
customers. The Company believes that, with the implementation and completion
of the Year 2000 Plan as scheduled, the possibility of significant interruptions
of normal operations should be reduced.
Statement Concerning Forward Looking Statements
Statements in this Form 10-Q or in documents incorporated herein by
reference that are not statements of historical fact constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, including statements regarding future revenues, expenses and profits.
These forward looking statements are subject to known and unknown risks,
uncertainties or other factors that may cause the actual results of the Company
to be materially different from the historical results or from any results
expressed or implied by the forward looking statements. Such risks and factors
include, but are not limited to, those discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On March 18, 1999, the Company held its Annual Meeting of Shareholders of the
Company. The following members were elected to the Company's Board of
Directors for the terms of office noted:
Nominee Term In Favor Withheld
George C. McNamee 3 year 7,058,811 30,405
E. Dennis O'Connor 3 year 7,058,811 30,405
The results of the voting on the proposal to approve the reappointment of
PricewaterhouseCoopers L.L.P. as the Company's Auditors were as follows:
In Favor Opposed Abstained
7,061,051 25,345 2,820
The results of the voting on the approval and adoption of the Company's 1999
Employee Stock Incentive Plan were as follows:
In Favor Opposed Abstained
5,216,159 67,580 18,327
Item 5. Other Information
In April 1999, Southern California Gas Company, a subsidiary of Sempra Energy,
invested approximately $7.5 million in cash and dedicated internal market
research in Plug Power, in exchange for Class A membership interests and
warrants to purchase Class A membership interests.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule
(b) Two reports on Form 8-K were filed during and two reports were filed
subsequent to the quarter ended March 26, 1999.
The Company filed a Form 8-K Report, dated February 10, 1999, reporting
under Item 5 thereof that Plug Power, LLC, a joint venture between MTI and
Edison Development Company ("EDC") had finalized an agreement to create a
joint venture, GE Fuel Cell Systems, with GE On-Site Power, a subsidiary of
The General Electric Company, to market and distribute Plug Power fuel cell
systems worldwide.
The Company filed a Form 8-K Report, dated February 12, 1999, reporting
under Item 5 thereof that the Company had signed an agreement granting
MTI and DTE each the right to purchase up to 3 million shares of Plug
Power Class A membership interests at $7.50 per share.
The Company filed a Form 8-K Report, dated March 29, 1999, reporting
under Item 5 thereof that the Company had cancelled options for 2.25
million Plug Power shares and certain "research credits" in exchange
for 2.25 million Plug Power Class A membership interests. The "research
credits" were granted to the Company for helping Plug Power secure
commitments for government funding.
The Company filed a Form 8-K Report, dated April 13, 1999, reporting
under Item 5 thereof that its common stock, currently traded on the OTC
Electronic Bulletin Board, will begin trading on the Nasdaq National Market
System (NMS) under the symbol "MKTY" effective April 16, 1999.
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
05-10-99 _____\S\ George McNamee_______________
(Date) George C. McNamee
Chairman and Chief Executive Officer
05-10-99 _______\S\ Cynthia Scheuer_____________
(Date) Cynthia A. Scheuer
Vice President/Chief Financial Officer
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