Soluna Holdings, Inc - Quarter Report: 2001 March (Form 10-Q)

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/X/ Quarterly report pursuant to Section 13 or 15 (d) of the Securities

Exchange Act of 1934

For the quarterly period ended March 31, 2001

/ / 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

(Exact name of registrant as specified in its charter)

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code

(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___

The accompanying notes are an integral part of the consolidated financial statements.

The accompanying notes are an integral part of the consolidated financial statements.

(Dollars in thousands)

The accompanying notes are an integral part of the 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, 2000.

2. Reclassification

Certain fiscal 2000 amounts have been reclassified to conform with the fiscal 2001 presentation.

At March 31, 2001, the principal components of the Company's holdings accounted for under the equity method of accounting are the following:

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.

4. Investments, at equity (Continued)

The following is a roll forward of the Company's accounting for holdings in Plug Power:

There is no difference between the carrying value of the Company's holdings in Plug Power and its interest in the underlying equity at March 31, 2001 or September 30, 2000.

The following is a roll forward of the Company's accounting for holdings in SatCon:

4. Investments, at equity (Continued)

The difference between the carrying value of the Company's holdings in SatCon and its interest in the underlying equity consists of the following:

5. Securities available for sale

Securities available for sale are classified as current assets. Accumulated net unrealized gains (losses) are charged to Other Comprehensive Income.

As of March 31, 2001, securities available for sale consist of Beacon Power common stock and includes the following:

For the six months ended March 31, 2001, unrealized gains were $5.750 million. The deferred tax expense on this income at March 31, 2001 was $2.301 million, resulting in a net unrealized gain of $3.449 million, which is included in Other Comprehensive Income.

On November 17, 2000, the date of the Beacon Power IPO, Beacon Power converted Beacon Preferred Stock to common stock and completed a 2-for-1 stock split immediately prior to the IPO. Immediately after Beacon Power's IPO, the Company owned 2,881,142 shares, approximately 7.5%, of Beacon Power common stock.

In connection with the Company's May 23, 2000 purchase of Beacon Power Class F Preferred Stock, the Company received warrants to purchase shares of common stock, the exercise date, number of shares and exercise price of which would be determined upon either the sale of Beacon Power or the consummation of an underwritten public offering of Beacon Power common stock. When Beacon Power completed its IPO, the warrant terms were set for the purchase of 1,333,333 shares of common stock at an exercise price of $2.25 per share exercisable as of November 17, 2000. The warrants expire on May 23, 2005.

The Company exercised the 1,333,333 warrants on a cash-less basis, on December 20, 2000, and received 985,507 shares of Beacon Power common stock.

6. Debt

As of March 31, 2001, the Company owns 3,866,649 shares, approximately 9.2%, of Beacon Power common stock.

At March 31, 2001, the Company has a $30 million Credit Agreement, as amended, with an outstanding balance of $25.2 million at the Prime Rate (8.0% at March 31, 2001). Additional borrowings are available when the Plug Power stock price is above $20 per share. This liability is classified as short-term.

The Company has pledged 8 million shares of Plug Power common stock as collateral. In addition, the Company entered into a Put and Call with First Albany Companies Inc. ("FAC") to provide independent credit support for repayment of its $25.2 million indebtedness to KeyBank, N.A. ("FAC Credit Enhancement"). The FAC Credit Enhancement provides FAC with the option, if the price of Plug Power stock falls to $4 per share, to either purchase 6.3 million Plug Power shares pledged as collateral on the loan or take an assignment of KeyBank, N.A.'s rights under the Credit Agreement, as amended. The FAC Credit Enhancement may be triggered in the event of a default and was amended on April 27, 2001 (the original expiration date) to extend its expiration date to August 27, 2001. The FAC Credit Enhancement may be renewed by the Company and FAC on a monthly basis upon mutually agreeable terms. If the FAC Credit Enhancement expires, and is not replaced, prior to November 3, 2001, the loan is immediately due and payable. After November 3, 2001, upon expiration of the FAC Credit Enhancement, if Plug Power stock is trading below $20 per share, the loan is immediately due and payable. Mandatory repayments on any outstanding balance in excess of $25.2 million will be required if the Plug Power stock price declines below $16 per share while the FAC Credit Enhancement is in place. After the FAC Credit Enhancement expires, mandatory repayments on any outstanding balance will be required if the Plug Power stock price is below $20 per share. If the FAC Credit Enhancement, which expires on August 27, 2001, is not renewed, the Company may need to sell assets to fund the repayment of the outstanding balance on the credit line. The Company is obligated to make interest-only payments through March 15, 2002, and upon exercise of a term loan option at the end of the line of credit term, to repay the principal in 8 equal quarterly installments beginning March 31, 2002. Interest is payable monthly at either the Prime Rate or if certain performance standards are achieved, based on both the trading volume and market price of Plug Power common stock, at LIBOR based rates.

As of March 31, 2001, the $30 million Credit Agreement, as amended, requires the Company to meet certain covenants, including maintenance of a debt service reserve account (equal to 6 months of interest payments on outstanding debt, amounting to $.950 million at March 31, 2001), a collateral coverage ratio, the FAC Credit Enhancement and a minimum Plug Power share price. The Company was in compliance with these covenants as of March 31, 2001.

On December 27, 2000, the Company entered into two bridge loan agreements with FAC. The first loan was for $945 thousand and was

6. Debt (Continued)

used to pay the purchase price of the original FAC Credit Enhancement. The Company has pledged 200,000 shares of Plug Power common stock as collateral. The second loan is for $5 million, $3 million of which was used to make a December 27, 2000 principal loan repayment to KeyBank, N.A. and the remaining $2 million was available for working capital. The Company pledged 1 million shares of Plug Power common stock as collateral. Both loans bear interest at the Prime Rate (8% at March 31, 2001) and both interest and principal are due on January 3, 2002. Upon mutual agreement of FAC and the Company, the loans may be converted to equity prior to maturity. As of March 31, 2001, the Company has $4.5 million available under the $5 million FAC Bridge loan.

Outstanding debt is as follows:

6. Change in Accounting for Derivative Financial Instruments

Effective October 1, 2000, the Company adopted SFAS No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 established a new model for accounting for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value regardless of purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized periodically in income or shareholders' equity (as a component of comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. Upon adoption of SFAS No. 133, the Company recorded an unrealized gain of $9.986 million. The deferred tax expense on this unrealized gain was $3.876 million, resulting in a net unrealized gain of $6.110 million, reported in the Company's results of operations as a cumulative effect of a change in accounting.

Derivative financial instruments do not have quoted market prices; therefore fair value is based on estimates using valuation techniques.

The Company held the following derivative financial instruments:

The Company operates in two business segments, New Energy and Test and Measurement Instrumentation. The New Energy segment develops new energy technologies and companies. 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, non-recurring 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

12. Geographic and Segment Information (Continued)

segments. 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 evaluating new energy technologies, companies and growth opportunities, the Company's holdings in Plug Power, SatCon and Beacon Power and the results of the Company's equity method accounting for certain holdings. SatCon results are accounted for on a one-quarter lag. The results for Plug Power and SatCon are derived from their unaudited quarterly and audited annual financial statements.

(Dollars in thousands)

12. Geographic and Segment Information (Continued)

The following table presents the details of "Other" segment profit (loss):

13. Related Party Transactions

During fiscal 2001, First Albany Companies Inc. provided a credit enhancement in December 2000 and extended that enhancement in April 2001 for which the Company paid fees of $945 thousand and $200 thousand, respectively.

 

14. Subsequent Events

On April 27, 2001, the Company amended the FAC Credit Enhancement to extend its expiration date from April 27, 2001 to August 27, 2001. The Company paid FAC a fee of $200,000 for this amendment. Further, on April 30, 2001, the Company made principal and interest payments to FAC totaling $1,445 thousand and $117 thousand, respectively, which reduced the Company's obligations on the FAC Bridge Loans to zero.

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.

Sales for the quarter ended March 31, 2001 totaled $1.657 million compared to $1.736 million for the same period in the prior year, a decrease of $.079 million, a 4.6% decrease. This decrease in sales is primarily the result of MTI Instruments' change in sales mix reflecting a reduction in PBS balancing system sales offset by increases in semiconductor and instrument sales. Sales for the first half of fiscal 2001 versus the same period in fiscal 2000 have increased by $.199 million to $3.295 million in 2001 from $3.096 million in 2000, a 6.4% increase. The six-month change is primarily the result of MTI Instruments' increased sales for its new wafer thickness and instruments product lines.

Gross profit decreased to 54.8% of sales in the second quarter of fiscal 2001 from 57.2% of sales for the same period in the prior year. Gross profits decreased in the fiscal 2001 second quarter due to the shift in product mix between PBS balancing systems' and OEM instrument sales. Gross profit as a percentage of sales for the first half of fiscal 2001 versus the same period in fiscal 2000 has increased by 5.6% to 55.5% from 49.9%. The first half change is primarily the result of the sale of Ling in October 1999 (Ling had lower margin sales) and sales of higher margin products in fiscal 2001.

Selling, general and administrative expenses increased $.197 million to $1.625 million for the three months ended March 31, 2001 as compared to $1.428 million for the three months ended March 31, 2000, a 13.8% increase. Selling, general and administrative expenses during the first half of fiscal 2001 of $3.146 million represents a $.928 million or 41.8% increase from $2.218 million incurred during the same period in fiscal 2000. These increases are primarily the result of increased personnel costs related to the operations of the new energy technology segment.

Product development and research costs for the three months ended March 31, 2001 were 73.4% of sales, compared to 15.3% for the same period in the prior year. Development costs increased $.951 million from the three months ended March 31, 2000 to the same period in 2001. Product development and research costs during the first half of fiscal 2001 of $1.217 million represents a $1.080 million or 185.2% increase from $.583 million incurred during the same period in fiscal 2000. These increases reflect the Company's commitment to developing its micro fuel cell initiative and new products at MTI Instruments.

Continuing Operations (Continued)

Operating loss increased $1.233 million to an operating loss of $1.934 million for the three months ended March 31, 2001 as compared

to $.701 million for the three months ended March 31, 2000, a 175.9%

increase. The first half of fiscal 2001 resulted in an operating loss of $2.978 million, an increase of $1.723 million or 137.3% from the $1.255 million operating loss recorded during the same period in fiscal 2000. These increases are the result of increased expenditures for research and product development by both MTI Instruments and the Company's micro fuel cell initiative.

During the first half of fiscal 2001, the Company recorded a $6.110 million unrealized gain, net of tax, from the adoption of SFAS No.133 "Accounting for Derivative Instruments and Hedging Activities," as of October 1, 2000. The Company also recorded a net $.780 million loss on derivative accounting. Changes in derivative fair values are recorded on a quarterly basis.

Results during the three and six months ended March 31, 2001 were reduced by higher interest expense of $.598 million and $1.315 million, respectively, compared to $.493 and $.815 million, respectively, for the same periods last year. These increases result primarily from increased borrowing levels in 2001 associated with working capital requirements.

Fiscal 2000 first half results include a $5.551 million gain on the sale of investments and the prior year results included a $1.262 million gain from the sale of Ling.

In the three and six months ended March 31, 2001, the Company recorded a $4.162 million and $9.034 million loss, net of tax, respectively, from the recognition of the Company's proportionate share of losses in equity investees compared to $3.683 million and $5.798 million loss, net of tax, respectively, for the comparable periods in fiscal 2000.

Equity in investee losses result 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 investee losses. Equity in investee losses for the three months ended March 31, 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.

Continuing Operations (Continued)

Equity in investee losses includes a loss, before taxes, from Plug Power of $5.712 million and $12.694 million, respectively, for the three and six months ended March 31, 2001 compared to $5.484 million and $8.475 million, respectively, for the three and six months ended March 31, 2000. These increases in losses are primarily the result of Plug Power expanding its operations including costs to develop and prototype residential fuel cell units. Equity in investee losses for the three and six months ended March 31, 2001 also includes our proportionate share of losses from SatCon of $.521 million and $.813 million, respectively, compared to $.195 and $.195, respectively, for the three and six months ended March 31, 2000; and embedded difference (the difference between the carrying value of the Company's investment and its interest in the underlying equity) amortization of $.689 million and $1.377 million, respectively, for the three and six months ended March 2001 compared to $.650 and $.650, respectively, for the three and six months ended March 31, 2000. SatCon is accounted for on a one-quarter lag and includes results of SatCon through December 31, 2000. The Company acquired its stock holdings in SatCon during fiscal 2000.

The tax rates for the three and six months ended March 31, 2001 are (39.9%) and (39.8%), respectively, compared to the rates for the three and six months ended March 31, 2000 of (46.0%) and (41.8%), respectively. These tax rates are primarily due to losses generated by operations, gains generated through the sale of holdings and changes in deferred tax liabilities associated with the accounting for holdings in and recognition of the Company's proportionate share of losses from Plug Power and SatCon and its investment in derivatives and marketable securities. Further, as a result of ownership changes in 1996, the availability of net operating loss carryforwards to offset future taxable income will be significantly limited pursuant to the Internal Revenue Code.

Inventory and accounts receivable turnover ratios and their changes for the six months ended March 31 are as follows:

The change in the accounts receivable and inventory turnover ratios are the result of increasing inventory levels to support new product sales and increased receivables aging.

Inventories at March 31, 2001 of $1.678 million reflect inventory levels for MTI Instruments required to support expected increased sales levels in fiscal 2001.

Working capital of $(1.633) million at March 31, 2001 reflects a $22.660 million increase from September 30, 2000. This increase reflects the $5.750 million increase in fair value for the Beacon Power investment, coupled with $8.5 million for additional shares purchased through the cash-less exercise of warrants and the reclassification of $6 million of investments at cost to securities available for sale.

At March 31, 2001, cash and cash equivalents were $2.749 million versus $1.552 million at September 30, 2000. Net cash used by operating activities for the first six months of fiscal 2001 amounted to $4.533 million, as compared to $.719 million in the prior year. Accounts receivable increased due to an increase in sales and the timing of those sales. Accounts receivable totaled $1.586 million as of March 31, 2001 as compared to $.693 million as of September 30, 2000, or a 128.9% increase.

At March 31, 2001, the Company has a $30 million Credit Agreement, as amended with KeyBank, N.A., with an outstanding balance of $25.2 million at Prime (8% at March 31, 2001). Additional borrowings above the $25.2 million balance are available when the Plug Power stock price is above $20 per share. This liability is classified as short-term.

The Company has pledged 8 million shares of Plug Power common stock as collateral for the Credit Agreement, as amended. In addition, the Company entered into a Put and Call with First Albany Companies Inc. ("FAC") to provide independent credit support for repayment of its $25.2 million indebtedness ("FAC Credit Enhancement"). The FAC Credit Enhancement provides FAC with the option, if the price of Plug Power stock falls to $4 per share, to either purchase 6.3 million Plug Power shares pledged as collateral on the loan or take an assignment of KeyBank N.A.'s rights under the Credit Agreement, as amended. The FAC Credit Enhancement may be triggered in the event of a default and was amended on April 27, 2001 (the original expiration date) to extend its expiration date to August 27, 2001. The FAC Credit Enhancement may be renewed by the Company and FAC on a monthly basis upon mutually agreeable terms. If the FAC Credit Enhancement expires, and is not replaced, prior to November 3, 2001, the loan is immediately due and payable. After November 3, 2001, upon expiration of the FAC Credit Enhancement, if Plug Power stock is trading below $20 per share, the loan is immediately due and payable. Mandatory repayments on any outstanding balance in excess of $25.2 million will be required if the Plug Power stock price declines below $16 per share while the FAC Credit Enhancement is in place. After the FAC Credit Enhancement expires, mandatory repayments on any outstanding balance will be required if the Plug Power stock price is below $20 per share.

Financial Condition (Continued)

If the FAC Credit Enhancement, which expires on August 27, 2001, is not renewed, the Company may need to sell assets to fund the repayment of the outstanding balance on the credit line. The Company is obligated to make interest-only payments through March 15, 2002, and upon exercise of a term loan option at the end of the line of credit term, to repay the principal in 8 equal quarterly installments beginning March 31, 2002. Interest is payable monthly at either the Prime Rate or if certain performance standards are achieved, based on both the trading volume and market price of Plug Power common stock, at LIBOR based rates.

As of March 31, 2001, the $30 million Credit Agreement, as amended, requires the Company to meet certain covenants, including maintenance of a debt service reserve account (equal to 6 months of interest payments on outstanding debt, amounting to $.950 million at March 31, 2001), a collateral coverage ratio, the FAC Credit Enhancement and a minimum Plug Power share price. The Company was in compliance with these covenants as of March 31, 2001.

On December 27, 2000, the Company entered into two bridge loan agreements with FAC. The first loan was for $945 thousand and was used to pay the purchase price for the FAC Credit Enhancement. The Company has pledged 200,000 shares of Plug Power common stock as collateral. The second loan is for $5 million, $3 million of which was used to make a December 27, 2000 principal loan repayment to KeyBank, N.A. and the remaining $2 million was available for working capital. The Company pledged 1 million shares of Plug Power common stock as collateral. Both loans bear interest at the Prime Rate (8% at March 31, 2001) and both interest and principal are due on January 3, 2002. Upon mutual agreement of FAC and the Company, loan balances may be converted to equity prior to maturity.

On April 27, 2001, the Company amended the FAC Credit Enhancement to extend its expiration date from April 27, 2001 to August 27, 2001. The Company paid FAC a fee of $200,000 for this amendment. Further, on April 30, 2001, the Company made principal and interest payments to FAC totaling $1,445 thousand and $117 thousand, respectively, which reduced the Company's obligations on the FAC Bridge Loans to zero.

Capital spending during the first six months of fiscal 2001 was $.225 million, an increase from the comparable period in fiscal 2000 where capital spending totaled $.176 million. Capital spending during fiscal 2001 included computers, software, manufacturing and laboratory equipment. Total additional capital spending during fiscal 2001 is expected to be approximately $2.140 million for computers, furniture, computer network equipment, telephone system, facilities fit-up, laboratory and manufacturing equipment.

Financial Condition (Continued)

As of March 31, 2001, the Company recognized a $5.551 million gain on the sale of its holdings. This gain related to the Company's previously announced strategy to raise additional capital through equity offerings and the sale of up to 10% of its assets in order to pay down debt, strengthen its balance sheet and fund its micro fuel cell operations.

As of April 30, 2001, the Company has sold 730,000 shares of Plug Power common stock with proceeds totaling $10.9 million and gains totaling $8.6 million. Taxes on gains will be offset by the Company's net operating loss carryforwards. As of March 31, 2001, the Company estimates its remaining net operating loss carryforwards to be approximately $25 million.

The Company anticipates that it will be able to meet the liquidity needs of its continuing operations, including the repayment of its line of credit in August 2001 if the FAC Credit Enhancement is not extended, for the next year from current cash resources, borrowings under its $5 million bridge loan from FAC, equity financings, and sale of assets. However, there can be no assurance 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.

As of March 31, 2001, the Company owns shares of common stock in the following companies:

(a) As of April 30, 2001, the Company owns 12,974,315 shares.

These securities are currently traded on the Nasdaq National Market; therefore these securities are subject to stock market conditions and in Beacon Power's case, an underwriter's lockup prohibiting the sale of securities until May 17, 2001. When acquired, each of these securities was unregistered. 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 at least one year may be sold immediately after the completion of 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

Financial Condition (Continued)

"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.

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 most recent Form 10-K filed for the year ended December 31, 2000:

Plug Power's cash requirements depend on numerous factors, including, but not limited to, completion of its product development activities, ability to commercialize its fuel cell systems and market acceptance of its systems. Plug Power expects to devote substantial capital resources to continue development programs, establish a manufacturing

infrastructure and develop manufacturing processes. Plug Power believes it will need to raise additional funds to achieve commercialization of its product. However, Plug Power does not know whether it will be able to secure additional funding, or funding on acceptable terms, to pursue its commercialization plans. If additional funds are raised through the issuance of equity securities, the percentage ownership of Plug Power's then current stockholders will be reduced. If adequate funds are not available to satisfy either short or long-term capital requirements, Plug Power may be required to limit operations in a manner inconsistent with its development and commercialization plans, which could affect operations in future periods. Plug Power anticipates incurring substantial additional losses over at least the next several years and believes that its current cash balance will provide sufficient capital to fund operations for at least the next twelve months.

As disclosed in SatCon's Form 10-Q filed for the period ended December 31, 2000:

Since inception, SatCon has financed its operations and met its capital expenditure requirements primarily through the sale of private equity securities, public security offerings, and borrowings on its line of credit and capital equipment leases.

SatCon anticipates that the existing $8.8 million in cash and cash equivalents will be sufficient to fund operations for at least the next twelve months. However, there can be no assurance that SatCon will not require additional financings within this time frame or that any additional financing, if needed, will be available to SatCon on terms acceptable to it, if at all.

Market risk represents the risk of changes in value of a financial instrument, caused by fluctuations in interest rates and equity prices.

At March 31, 2001, the Company had variable rate debt totaling $25.2 million. Interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows. The earnings and cash flow impact for the next year resulting from a one-percentage point increase in interest rates would be approximately $.252 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). The sensitivity analysis presents the hypothetical change in fair value of our new energy holdings held by the Company at March 31, 2001, 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 interests in Plug Power and SatCon are accounted for on the equity method, Beacon Power is accounted for at fair value, and the derivative financial instruments are accounted for at estimated values. The fair market and estimated values, at March 31, 2001, of the Company's interests in these companies and the derivative financial instruments and the effects on fair value are as follows, if the market price on these interests decreased by ten percent:

Statement Concerning Forward Looking Statements (Continued)

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 may be very different from the predictions, expectations, plans and intentions we have shared with our investors. Such forward-looking statements involve known and unknown risks that may cause our actual results to differ materially from those stated and implied by our forward-looking statements. Such risks include, among others, our need to raise additional financing, difficulties in

developing and acquiring new energy companies and technologies, risks related to developing Direct Methanol Fuel Cells, market acceptance of new energy technologies, our dependence on the success of our portfolio companies, our history of losses, the historical volatility of our stock price, the risk we may become an inadvertent investment company, conflicts of interest between us, First Albany Companies Inc. and our portfolio companies 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.

Item 4. Submission of Matters to a Vote of Security Holders

At the Company's Annual Meeting of Shareholders ("Annual Meeting") held on April 24, 2001, the Company's shareholders approved the following:

Incorporation increasing the number of authorized shares of Common Stock from 50,000,000 to 75,000,000:

3. To ratify the appointment of PricewaterhouseCoopers L.L.P as independent auditors for the fiscal year ended September 30, 2001:

(b) No reports on Form 8-K were filed during the quarter ended

March 31, 2001.

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