========================================================================================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to SectionANNUAL REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities
Exchange Act ofOF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 19971998
or
/ / Transition Report Pursuant to SectionTRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) of the
Securities Exchange Act ofOF 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)
Registrant's telephone number, including area code: (518)785-2211
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act
$1.00 Par Value Common Stock
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [ ]
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 aggregate market value of the registrant's Common Stock held by
nonaffiliates of the registrant on December 12, 199711, 1998 (based on the last
sale price of $5.125$8.50 per share for such stock reported by OTC Bulletin
Board for that date) was approximately $16,154,195.$32,296,183.
As of December 12, 1997,11, 1998, the registrant had 5,905,6617,179,770 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated into Form 10-K Report
Proxy Statement for Part III
Annual Meeting of Shareholders
to be held on March 11, 1998
==============================================================================18, 1999
PART I
ITEM 1: BUSINESS
- -----------------
Mechanical Technology IncorporatedDuring the last two and a half years, MTI has undergone significant
change. In May 1996, First Albany Companies, Inc. ("FAC") acquired a
substantial interest in MTI and led a series of financial and strategic
transactions that have significantly changed MTI's operations and fiscal
well-being. In July 1996, MTI received an infusion of capital through a
private placement of its subsidiaries produce productsCommon Stock. In December 1996, MTI and render servicesFAC
succeeded in two business segments:
* Test and Measurement
* Technology
The major markets for these products and services are the electronics,
aerospace, capital goods, and defense industries. 76%restructuring a significant outstanding debt of the Company's
revenuesCompany
by swapping the debt for Common Stock. This allowed the Company to
receive an unqualified opinion in 1996 from operations were derived from product sales inits Independent Auditors,
Coopers & Lybrand L.L.P., for the Company's
fiscal year ended September 30, 1997;first time since 1992. On June 27,
1997, the remaining 24%Company transferred a portion of revenues were
derived from technology supportthe Technology Division to
Plug Power, L.L.C. ("Plug Power") to form a joint venture between the
Company and Edison Development Corp. ("EDC"), a subsidiary of DTE
Energy, Corp. Plug Power has focused exclusively on the research and
development contracts.of an economically viable Proton Exchange Membrane ("PEM")
fuel cell. On September 30, 1997, the Company sold all of the assets of
its L.A.B. Division to Noonan Machine Company of Franklin Park,
Illinois. The proceeds from this sale were used to pay down outstanding
debt and build working capital. On March 31, 1998, the Company sold the
remainder of its Technology Division to a subsidiary of Foster-Miller,
Inc., a Waltham, Massachusetts-based technology company. These
divestitures have enabled the Company to continue to invest in fuel cell
technology through Plug Power and to better focus on its profitable test
and measurement business. In June, 1998, the Company raised
approximately $7.2 million in a rights offering and committed to invest
approximately $5 million of the proceeds in Plug Power, now an industry
leader in development of fuel cells in the United States.
Today, MTI is a very different Company, substantially streamlined in
focus, but with many challenges remaining. MTI is a manufacturer of
advanced test and measurements products that combine precision sensing
capabilities with proprietary software and systems to serve a variety of
applications for commercial and military customers. The Company has two
principal business units: the Advanced Products Division ("Advanced
Products"), which produces sensing instruments and computer-based
balancing systems, and Ling Electronics, Inc. ("Ling"), a developer and
manufacturer of vibration test systems and power conversion products.
MTI is also a fifty percent owner of Plug Power, which hopes to be the
first commercial manufacturer of PEM fuel cells for residential and
other applications.
Advanced Products has two general product families: non-contact sensing
instrumentation and computer-based balancing systems. The non-contact
sensing instrumentation products utilize fiber optic, laser and
capacitance technology to perform high precision position measurements
for product design and quality control inspection requirements,
primarily in the semiconductor and computer disk drive industries. Some
of these products bear the trademarks FOTONIC and ACCUMEASURE, which are
recognized in the industry worldwide. Advanced Products's computer-
based aircraft engine balancing systems include an on-wing jet engine
balancing system used by both commercial and military aircraft fleet
maintenance personnel. This product provides trim balancing and
vibration analysis in the field or in test cells.
Ling, of Anaheim, California, designs, manufactures, and markets
electro-dynamic vibration test systems, high-intensity-sound
transducers, power conversion equipment and power amplifiers used to
perform reliability testing and stress screening during product
development and quality control. This mode of testing is used by
industry and the military to reveal design and manufacturing flaws in a
broad range of precision products, from satellite parts to computer
components. Recent Ling products for power and frequency conversion and
"clean power" applications include systems capable of output up to 432
kVA.
The Company believes that the test and measurement industry will undergo
substantial consolidation in the near future. The challenges facing MTI
today are similar to those facing other smaller companies in industries
where consolidation is a part of the landscape. The Company believes
that consolidation may become a competitive necessity and that Advanced
Products and Ling are well-positioned to combine with complementary,
synergistic businesses to enhance and expand product offerings and
increase profitability and market position. Accordingly, the Company is
actively exploring strategic acquisitions and alliances for these
business units.
Plug Power, the Company's fuel cell joint venture, is developing a
proton exchange membrane fuel cell for residential and automotive
applications. In June 1998, Plug Power introduced the world's first
fuel cell powered home. In September 1998, Plug Power announced a
preliminary agreement with GE Power Systems to market and distribute
Plug Power's residential fuel cell units worldwide. Plug Power
continues to need substantial investment to continue its research and
development of the fuel cell and is aggressively pursuing additional
funding sources.
Mechanical Technology Incorporated was incorporated in New York in 1961.
Unless the context otherwise requires, the "registrant", "Company",
"Mechanical Technology", and "MTI" refers to Mechanical Technology
Incorporated and its subsidiaries. The Company's principal executive
offices are located at 968 Albany-Shaker Road, Latham, New York 12110 and
its telephone number is (518) 785-2211.
Significant Developments in the Business
- ----------------------------------------
On September 30, 1997, the Company sold all of the assets of its L.A.B.
division to Noonan Machine Company of Franklin Park, IL. The Company
received $2,600,000 in cash and two notes, totaling $650,000, from Noonan
Machine Company. The net proceeds from the sale were used to pay down all
outstanding debt and build working capital. The sale of L.A.B. resulted
in a $2,012,000 gain, which was recorded in the fourth quarter of fiscal
year 1997.
On June 27, 1997, the Company and Edison Development Corp. ("EDC"), a
subsidiary of DTE Energy Co. entered into final agreements to formformed a joint venture, Plug Power, L.L.C.
("Plug Power"), to further develop the Company's Proton Exchange Membrane
Fuel Cell technology. In exchange for its contribution of employees, contracts and
intellectual property and certain other net assets that had comprised the
fuel cell research and development business activity of the Technology
segment (which assets had a net book value of $349$357 thousand), the Company
received a 50% interest in the joint venture; the Company is not obligated to make
any future contributions to the joint venture, but itsPlug Power. The Company's interest in the
joint venture couldPlug
Power may be reduced in certain circumstances in the future.circumstances. EDC made an initial cash
contribution of $4.75 million in exchange for the remaining 50% interest
in the joint venture. EDC is required to contribute
an additional $4.25 million in certain circumstances.Plug Power. The Company's investment in the joint venturePlug Power is included in "Other Assets" at September
30, 1997;the
balance sheet caption "Investment in Joint Venture"; the assets
contributed by the Company to the joint venturePlug Power had previously been included in
the assets of the Company's Technology segment. See the supplemental
disclosure regarding Contribution of Net Assets to Joint Venture in the
Consolidated Statements of Cash Flows (included in the financial statements set forth above in this Form 10-K
Report and incorporated herein by reference) for additional information regarding
the assets contributed by the Company to Plug Power.
On April 15, 1998, EDC contributed $2.25 million in cash to 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 joint venture.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 that contribution.
The Company paid approximately $191 thousand for the options, which mature
in April 1999 ($250 thousand) and May 1999 ($2 million). If the Company
does not exercise its options, they will lapse.
In August 1998, the Company committed to contribute an additional $5
million dollars (in cash, accounts receivable and research credits) to
Plug Power between August 5, 1998 and March 31, 1999 and recorded a
liability representing this obligation. Such contributions will
increase the Company's total contributions to Plug Power (including
contributions of cash, assets, research credits and a below market
lease) to $11.75 million over the period commencing on June 27, 1997 and
ending on March 31, 1999.
On August 5, 1998, the Company made a short term loan to Plug Power of
$500 thousand, which was subsequently contributed to capital on
September 23, 1998. The Company also converted $500 thousand of its
accounts receivable from Plug Power to capital on September 23, 1998.
At September 30, 1998, the remaining obligation to provide additional
funds to Plug Power was $4 million. The Company has recorded its
proportionate share of Plug Power's losses to the extent of its recorded
investment in Plug Power (including the foregoing obligation to
contribute an additional $4 million through March 31, 1999).
On September 30, 1998, the Company completed the sale of 1,196,399 shares
of common stock to current shareholders through a rights offering. The
offering raised approximately $7,178 thousand before offering costs of
approximately $186 thousand for net proceeds of approximately $6,992
thousand. The Company will use some or all of the proceeds of the
offering for investment in and/or loans to Plug Power. In addition, some
proceeds may be used for acquisitions for the Company's core businesses,
efforts to increase market share, working capital, general corporate
purposes and other capital expenditures.
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. Net assets of the
discontinued operation were $8 thousand and $3,186 thousand at September
30, 1998 and 1997, respectively and the loss on discontinued operations
in 1998 included a loss from operations of $516 thousand and a loss on
disposal of $1,769 thousand. The loss on disposal includes a provision
for estimated operating results prior to disposal. The Company's prior
year financial statements have been restated to conform to this
treatment. See Note 15 to the accompanying Consolidated Financial
Statements.
On September 30, 1997, the Company sold all of the assets of its L.A.B.
division to Noonan Machine Company of Franklin Park, IL. The Company
received $2,600 thousand in cash and two notes, totaling $650 thousand,
from Noonan Machine Company. The purchaser has requested that the
principal amount of the note be reduced to reflect the resale value of
certain assets of L.A.B. The Company is enforcing its rights with respect
to the note. The net proceeds from the sale were used to pay down all
outstanding debt and build working capital. The sale of L.A.B. resulted
in a $2,012 thousand gain, which was recorded in the fourth quarter of
fiscal year 1997.
On December 27, 1996, the Company and First Albany Companies, Inc. ("FAC")
entered into a Settlement Agreement and Release whereby the Company issued
FAC 1.0 million shares of common stockCommon Stock in full satisfaction of its
obligations pursuant to the Claim Participation Agreement dated December
21, 1993 and amended December 14, 1994, among United Telecontrol
Electronics, Inc. ("UTE"), the Company and First Commercial Credit
Corporation, in the principal amount of $3.0 million plus 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 $2.5 million,
net of approximately $100 thousand of transaction related expenses and net
of taxes of $106 thousand.
The Company's wholly owned subsidiary, UTE of Asbury Park, New Jersey,
filed afor voluntary bankruptcy under Chapter 11 of the Federal Bankruptcy
Code in April 1994. During October 1994, UTE commenced an orderly
liquidation and final court approval occurred during the third quarter of
fiscal 1996. Accordingly, the Company no longer includes Defense/Aerospace
amongst its reportable business segments and UTE has been classified as a
"discontinued operation" in the Company's Financial Statements. (See Note
15 to the accompanying Consolidated Financial Statements).
During November 1994, the Company sold all of the outstanding capital
stock of its subsidiary, ProQuip Inc. ("ProQuip") of Santa Clara, CA for
approximately $13.3 million. The sale resulted in a gain of approximately
$6.8 million in fiscal 1995 and $750 thousand, as a result of the release
of escrow funds, in fiscal 1996. (See Note 16 to the accompanying
Consolidated Financial Statements).
ProQuip's financial results are
included as part of the Company's Test and Measurement segment for prior
fiscal year periods covered by this Form 10-K until November 22, 1994
(the date of its sale).
Business Segments
- -----------------
The Company currently conducts business in twoone business segments:segment: Test and
Measurement and Technology. (Certain financial information regarding the
Company's business segments is included in Note 18 to the accompanying
Consolidated Financial Statements and is incorporated herein by
reference.) In the Test and Measurement segment, the Company primarily
produces products for sale, while in the Technology segment the Company
primarily performs technology support and research and development under
contract. The Company believes its technology support and research and
development activities provide a competitive advantage to the product
segments through the performance of related research which, for the most
part, is funded by outside parties.
Test and Measurement
The Company derived 75% of its revenues from the Test and Measurement
segment in 1997.Measurement. Test and Measurement offers a wide range of technology-
basedtechnology-based
equipment and systems for improved manufacturing, product testing, and
inspection for industry. Business units in this segment include the
Advanced Products Division, Ling Electronics, Inc. and the L.A.B. Division
(sold on September 30, 1997).
ProQuip Inc. was also included in this
segment prior to its sale on November 22, 1994.
The Advanced Products Division designs, manufactures and markets high-
performancehigh-performance test
and measurement instruments and systems. These products are categorized
in two general product families: non-contact sensing instrumentation and
computer-based balancing systems. The Division's largest customers
include industry leaders in the computer, electronic, semiconductor,
automotive, aerospace, aircraft and bioengineering fields.
The non-contact sensing instrumentation products utilize fiber optic,
laser and capacitance technology to perform high precision position
measurements for product design and quality control inspection
requirements, primarily in the semiconductor and computer disk drive
industries. Product trademarks such as the Fotonic Sensor and Accumeasure
are recognized worldwide.
The Division's computer-based aircraft engine balancing systems include an
on-wing jet engine balancing system used by both commercial and military
aircraft fleet maintenance personnel. This product provides trim
balancing and vibration analysis in the field or in test cells.
Ling Electronics, Inc., of Anaheim, California, designs, manufactures, and
markets electro-dynamic vibration test systems, high-intensity-sound
transducers, power conversion equipment and power amplifiers used to
perform reliability testing and stress screening during product
development and quality control. This mode of testing is used by industry
and the military to reveal design and manufacturing flaws in a broad range
of precision products, from satellite parts to computer components. Recent
Ling products for power and frequency conversion and "clean power"
applications include systems capable of output up to 432 kVA.
The L.A.B. Division, which was sold on September 30, 1997, designs,
manufactures,designed,
manufactured and marketsmarketed mechanically-driven and hydraulically-driven
test systems for package and product reliability testing. Among other
uses, this equipment simulates the conditions a product will encounter
during transportation and distribution including shock, compression,
vibration and impact. This type of testing is widely conducted by
businesses involved in product design, packaging and distribution.
The business units in the Test and Measurement segment have numerous
customers and are not dependent upon a single or a few customers.
Technology
The Company derived 25% of its revenues from the Technology segment in
1997. The Technology segment engages in technology commercialization /
product development, provides technical support to the Company's other
Divisions, has initiated several strategic/teaming relationships with
other companies, and performs contract research, development,
engineering, and technical services for government and commercial
customers.
The Technology segment develops advanced components, such as magnetic
and foil bearings, builds custom process automation equipment, and
provides high-efficiency turbines, spare parts, and service for the
business previously included in the Company's currently inactive
subsidiary, Turbonetics Energy, Inc. Major markets include the U.S.
military and process industrial concerns that plan to generate power
from surplus steam.
The Technology segment also provides hardware and software for machinery
monitoring and develops advanced sensor technology for precision
imaging, control, and measurement. One product, TempSense 10i, employs
fiber-optics to measure the temperature of electric power transmission
lines, a limiting factor in the ability of utilities to increase output
over existing lines. Major markets include electric utilities and the
Department of Energy.
The Technology segment, either directly or as a subcontractor, received
approximately 67% of its 1997 revenues (versus 73% in 1996) from various
agencies of the U.S. Government; approximately 65% of the segment's
revenues were derived from two agencies, the Departments of Defense and
Energy. Contracts with the U.S. Government are subject to termination by
the Government, at any time, either for convenience or for other causes as
determined by the contracts. The Technology segment has had no government
contracts terminated which, when terminated, resulted in a material
adverse effect on the Company.
Backlog
- -------
The backlog of orders believed to be firm as of September 30, 1997is
$2,071,000 for 1998 and 1996 is as follows:
1997 1996
-------- --------
(In thousands)
Technology $ 1,359 $ 1,572
Test and Measurement 3,861 6,970
------ ------
Total $ 5,220 $ 8,542
====== ======
All amounts shown above have been$3,861,000 for 1997. The backlog relates to
contracts awarded by government agencies or released to manufacture by commercial customers; however, approximately
$157customers.
Approximately $110 thousand of the orders included in the September 30,
19971998 backlog may not be filled during the Company's current fiscal year (as compared to
approximately $40 thousand not expected to be so filled at the end of the
prior year).year.
Marketing and Sales
- -------------------
The Company sells its products and services through a combination of a
direct sales force, manufacturer's representatives, distributors and
commission salesmen.salespeople. Each business unit is responsible for its own
sales organization. Typically, the Company's product businesses employ
regional manufacturer's representatives on an exclusive geographic basis
to form a nationwide or worldwide distribution organization; the business
unit is responsible for marketing and sales management and provides the
representatives with sales and technical expertise on an "as-required"
basis. To a great extent, the marketing and sales of the Company's larger
products and systems consist of a joint effort by the business unit's
senior management, its direct sales force and manufacturer's
representatives to sophisticated customers. The manufacturer's
representatives are compensated on a commission basis.
The Company's technology support and research and development services are
sold on a direct basis. Reputation and personal contacts within the
specialized technical areas are critical to the identification and receipt
of support contracts. The Company believes it has an excellent reputation
within the technical areas in which it operates.
Research and Development
- ------------------------
The Company conducts considerable research and development. The following
table summarizes company- and customer-sponsored expenditures on
technologydevelopment to support
research and development, and product development for
the last three years:
1997 1996 1995
-------- -------- --------
(In thousands)
Company-Sponsored $ 1,734 $ 1,263 $ 1,425
Customer-Sponsored 5,813 5,946 8,492
------- ------- -------
Total $ 7,547 $ 7,209 $ 9,917
======= ======= =======
While the amount estimated above as customer-sponsored research activities
is often not directly related to the development of new products or the
improvement of
existing products it isand develop new products. (See the beliefaccompanying
Consolidated Statements of the Company that
these expenditures contribute to the growth of the Company's technological
base.
Product Protection
- ------------------Operations). The Company holds numerous patents and
rights in various fields of technology. However, these patents, either individually or collectively,
are not believed to be material to the success of any of the Company's
business segments. The technology of the Company is
generally an advancement of the "state of the art", and the Company
expects to maintain a competitive position by continuing such advances
rather than relying on patents. Licenses to other companies to use
Company-developed technology have been granted. Licenses that have been granted or agreed to be granted
have been, and are expected to be of
benefit to the Company, though royalty income received in recent years has
not been material in amount and is not expected to be material in the
foreseeable future.
Competition
- -----------
The Company and each of its business segmentsunits are subject to intense
competition. In each of its business segments, theThe Company faces competition from at least several
companies, many of which are larger than MTI and have greater financial
resources. While the business units in the Company's Test and Measurement
segment each have a major share of their respective markets, the Company
does not consider any of them to be dominant within its industry.
The Company's Technology segment has a
negligible share of its respective market and competes with dozens (and
perhaps hundreds) of competing providers of similar products and services,
many of whom have greater financial and technical resources.
The primary competitive considerations in the business segments in which
the Company operatestest and measurement segment
are: product quality and performance, price and timely delivery. The
Company believes that its research andproduct development skills and reputation are
competitive advantages.
Employees
- ---------
The total number of employees of the Company and its subsidiaries was 178123
as of September 30, 1997,1998, compared to 233178 as of the beginning of the
fiscal year.
Executive Officers
- ------------------
The executive officers of the registrant (all of whom serve at the
pleasure of the Board of Directors), their ages, and the position or
office held by each, are as follows:
Position or Office Name Age
------------------ ---- ---
President, Chief OperatingExecutive Officer, Martin J. Mastroianni 53
AndGeorge C. McNamee 52
and a Director
Vice President and Chief Financial Officer
And Treasurer Cynthia A. Scheuer 3637
Financial Officer
Vice President and General Manager, Denis P. Chaves 5758
Advanced Products
Vice President and General ManagerChief Executive Officer James R. Clemens 4849
Ling Electronics, Inc.
Vice President and General Manager Douglas McCauley 49
Technology Division
Dr. Mastroianni was appointed President andMr. McNamee has been Chief OperatingExecutive Officer of the Company in Decembersince April
1998 and a director since 1996. Prior to joining the Company, he served most
recently as Director, Transmission Power Delivery for the Electric Power
Research Institute (EPRI) where he was employed since 1992. Previously,
between 1973 to 1992, he held senior management positions in the
technology driven test and measurement industries with Vacuum Components,
Inc., Tenney Engineering, Inland Vacuum Industries, Halocarbon Products,
Inc., and Allied Signal Corporation.
Ms. Scheuer was appointed Vice President and Chief Financial Officer and
Treasurer of
the Company in November 1997. Prior to joining the Company, she was a
senior business assurance manager at Coopers & Lybrand L.L.P. where she
was employed since 1983.
Mr. Chaves has been Vice President and General Manager of the Company's
Advanced Products Division since 1987 and was Vice President and was General
Manager of the Company's LABL.A.B. Division from January 1994 until it was
sold in September, 1997. Previously, he served as Manager of Corporate
Marketing for the Company from 1981 to 1987.
Mr. Clemens has been Vice President and General ManagerChief Executive Officer of Ling
Electronics, Inc., a wholly owned subsidiary of the Company, since April
1997.1998. Mr. Clemens was previously Vice President and General Manager of
Ling from April 1997 to April 1998. From December 1994 to March 1997, he
was a site manager for Teleflex Control
Systems from December 1994 to March 1997.Control. From September 1992 to November
1994, he was President and Chief Operating Officer of MTI's former
subsidiary United Telecontrol Electronics.
Mr. McCauley has been Vice President and General Manager of the Technology
Division since August 1994. He was previously Director of Business
Development from January 1989 to September 1991 and from October 1993 to
August 1994. From October 1991 to October 1993 he had been Vice President
of Corporate Development for Chamberlain Manufacturing Corporation,
responsible for business conversion from defense to commercial products.
Prior to 1989, he held various management positions with the General
Electric Company.Electronics, Inc.
ITEM 2: PROPERTIES
- ------------------
The Company owns and its subsidiaries presently own or lease real estate
principallyleases property in New York and California. In
management's opinion, thesethe facilities are generally well maintainedwell-maintained and are
adequate to meet the Company's current and anticipated future needs.
Owned Properties
The Company's corporate headquarters and certain of its research and
development and manufacturing facilities are located inon a three-building
complex of approximately 103,000 square feet on 38 acres36 acre site in Latham,
New York, whichYork. The site includes three separate buildings that contain a total of
approximately 116,000 square feet. In October 1998, the Company completed
construction of a new manufacturing and office facility for Advanced Products
and corporate headquarters. The former Advanced Products facility has been
renovated and is owned bybeing rented to Plug Power, as part of the Company. This complexCompany's capital
contribution to Plug Power. See "Significant Developments in the Business".
The lease expires on September 30, 2008. The third building is dividedbeing rented
to Plug Power and NYFM, Incorporated. Both Plug Power's and NYFM
Incorporated's leases expire on March 31, 1999.
Ling Electronics', Inc. leases approximately equally between85,000 square feet of office and
laboratory-manufacturing areas.
Corporate staff, the Technology segment, and the Advanced Products
Division (part of the Test and Measurement segment) are located at the
Latham facility.
Leased Properties
The Company and its subsidiaries lease the following facilities in which
its various business units conduct operations; generally, these are stand-
alone low-rise buildings containing primarily manufacturing space with
some portionin Anaheim, California. The lease will expire in June of
each used for office space.
Approximate Lease
Location Square feet Segment Used By Expires
-------- ----------- --------------- -------
Anaheim, CA 85,000 Test and Measurement June,1998
Malta, NY 18,000 Technology December,19992003.
In addition to the above properties,property, the Company and its subsidiaries lease
several small offices for field engineering and/or marketing personnel at
various locations in the United States and United Kingdom.
ITEM 3: LEGAL PROCEEDINGS
- --------------------------
At any point in time, the Company and its subsidiaries may be involved in
various lawsuits or other legal proceedings; these could arise from the
sale of products or services or from other matters relating to its regular
business activities, couldmay relate to compliance with various governmental
regulations and requirements, or couldmay be based on other transactions or
circumstances. The Company does not believe there are any such proceedings
presently pending whichthat could have a material adverse effect on the
Company's financial condition except for the matters described in Note 13
to the accompanying Consolidated Financial Statements (which description
is incorporated herein by reference),and the matters discussed below (as
to which matters the Company considers the likelihood of a material
adverse outcome remote).
InOn or about February 6, 1997, an unaffiliated entity, Ling Holdings Group, Inc. ("Plaintiff"Holdings"), brought suit
commenced an action against the Company. The Plaintiff's claims
arise outCompany and its former chief executive
officer, R. Wayne Diesel, in the Superior Court, Orange County,
California, entitled Ling Holdings Group, Inc. v. Mechanical Technology
Inc. et al, No. 775074. In that action, Holdings alleged nine causes of
action against the Company for breach of contract and tort. All of the
Company's decision notclaims related to sell Plaintiffa Stock Purchase Agreement between Holdings and the
stockCompany. In the action, Holdings sought specific performance of the Company's wholly owned subsidiary,Stock
Purchase Agreement (i.e., the sale of two subsidiaries of the Company,
Ling Electronics, Inc. ("LING")and Ling Electronics Limited), as well as
compensatory and punitive damages. The Company asserted counterclaims.
In August 1998, all but five of Holdings' causes of action were dismissed
with prejudice. The remaining causes of action were dismissed with
prejudice in an oral statement of decision by the court after expirationa trial,
which began on September 21 and concluded September 30, 1998. The
Company's counterclaims were dismissed, as well. The judgment, based upon
the court's September 30 statement of decision, was entered November 17,
1998. Holdings will have 60 days from the mailing of notice of entry of
the closing date specified in the stock purchase agreement
and side letters executed in connection with the transaction
(collectively, the "Agreements"). Plaintiff claims that the Agreements
provided an "open-ended" closing that permitted Plaintiffjudgment to purchase LING
when Plaintiff raised sufficient funds to do so. Plaintiff further claims
breach of express and implied contractual obligations, fraud,
misrepresentation, and other torts in connection with the Company's
refusal to consummate the sale after the agreed upon closing date.
Plaintiff further alleged that the Company wrongfully confiscated $50,000
of Plaintiff's escrowed funds in breach of the escrow agreement between
Plaintiff, the Company, and the Adirondack Trust Company ("Escrow Agent").
Escrow Agent commenced an interpleader action regarding the escrowed funds
in September, 1997.
The Company believes that its determination not to sell LING to Plaintiff
was in compliance with the terms of the Agreements. The Company further
believes that it became the rightful owner of funds escrowed with the
Escrow Agent, when Plaintiff failed to have sufficient funds available to
close the purchase of LING on the closing date specified in the
Agreements. The Company has filed claims against Plaintiff for negligent
misrepresentation, asserting that Plaintiff misled the Company concerning
its ability to raise the funds required to purchase LING.
In September, 1997, the Environmental Protection Agency ("EPA") executed a
consent decree with the Company, and other named potentially responsible
parties ("PRPs"), approving a settlement between the Company and the PRPs
("Settlement"), in connection with an alleged release of hazardous
materials into the environment, at a site in Malta, New York (the "Site").
The Settlement provided that the Company will pay $138,580.30 as its share
of the Settlement, in satisfaction of all of the Company's obligations for
past or future EPA response costs and any costs incurred by the PRPs with
respect to the Site. In addition, in the unlikely event that unexpected
future Site costs arise for which the Company has any responsibility, the
Company's liability for such costs will be limited to 2.25% of such costs.
The Settlement remains subject to final governmental and court approval.
There is no assurance the Company will be successful in connection with
the above-referenced matters or that the Settlement will receive final
approval, however, the Company considers the likelihood of a material
adverse outcome to be remote and does not currently anticipate that any
expense or liability it may incur as a result of these matters in the
future will be material to the Company's financial condition.appeal.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
There were no matters submitted to a vote of the registrant's security
holders during the fourth quarter of fiscal 1997.1998.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- ----------------------------------------------------------
Price Range of Common Stock
- ---------------------------
Since August 1994, the Company's Common Stock has been traded on the over-
the-counter market and is listed under the symbol MKTY on NASD's
electronicthe OTC Bulletin
Board. Set forth below are the highest and lowest prices at which shares
of the Company's Common Stock have been traded during each of the
Company's last two fiscal years.
High Low
Fiscal Year 1998
First Quarter 6-3/4 3-3/4
Second Quarter 8-1/8 3-1/2
Third Quarter 8-1/8 5-11/16
Fourth Quarter 9-3/8 6
Fiscal Year 1997 ------ ------
First Quarter 2-7/8 1-1/2
Second Quarter 2-3/4 1-7/8
Third Quarter 3-1/2 1-7/8
Fourth Quarter 4-1/3 2-1/4
Fiscal Year 1996
First Quarter 1-1/8 3/8
Second Quarter 3-1/2 5/16
Third Quarter 3-1/4 1-1/2
Fourth Quarter 2-7/8 1-3/4
Number of Equity Security Holders
- --------------------------------- Approximate Number of Record
Title of Class Holders* (asAs of December 12,1997)
-------------- ---------------------------------11, 1998, the Company had approximately 538 holders of its
$1.00 par value Common Stock, $1.00 Par Value 557
- -----------------------------
*InStock. In addition, there are approximately 9081,356
beneficial owners holding stock in "street" name.
Dividends
- ---------
The Company has never paid cash dividends on its Common Stock.
The payment of dividends is within the discretion of the Company's Board
of Directors and will depend, among other factors, on earnings, capital
requirements, and the operating and financial condition of the Company.
The Company has never paid and does not anticipate paying dividends in the
foreseeable future.
ITEM 6: SELECTED FINANCIAL DATA
- --------------------------------
The following table sets forth summary financial information regarding
Mechanical Technology Incorporated for the years ended September 30, as
indicated:
Statement of Earnings Data (In thousands, except per share amounts)data)
Restated Restated Restated Restated
1998 1997 1996 1995 1994
1993
-------- -------- -------- -------- --------
Net Sales $ 31,98021,028 $ 31,90124,102 $ 29,74822,755 $ 40,23418,140 $ 41,50029,721
Gain on sale of
subsidiary/division or
building - 2,012 750 6,779 1,856
(Loss) Income from
Continuing Operations
4,520(1) 509(2) 2,922(3) 141 1,162
NetBefore Extraordinary
Item and Income Taxes (2,006) 2,701 673 3,352 816
(Loss) 4,520 3,748 2,922 (24,378) 1,056
Earnings (Loss) Per
Share:
FromIncome from
Continuing Operations
.80 .13 .82 .04 .33before Extraordinary Item (2,031) 2,558 598 3,256 201
Extraordinary Item -
Gain on Extinguish-
ment of Debt, net of
taxes($106) - 2,507 - - -
(Loss) Income from
Continuing Operations (2,031) 5,065 598 3,256 201
(Loss) Income from
Discontinued
Operations, Net
of Taxes (2,285)(1) (545) 3,150 (334) (24,579)(2)
Net(Loss)Income $ (4,316) $ 4,520 $ 3,748 $ 2,922 $(24,378)
Diluted Earnings
Per Share (3)
(Loss) .80 .96 .82Income from
Continuing Operations
before Extraordinary
Item $ (0.35) $ 0.45 $ 0.15 $ 0.91 $ 0.05
Extraordinary Item - 0.44 - - -
(Loss)Income from
Discontinued
Operations (0.38) (0.09) 0.81 (0.09) 6.96
Net (Loss)Income $ (0.73) $ 0.80 $ 0.96 $ 0.82 $ (6.91)
.30
As of September 30:Weighted Average Shares
Outstanding and
Equivalents 5,937,158 5,672,045 3,911,952 3,559,789 3,529,881
Balance Sheet Data:
Working Capital
(Deficit) $ 5,779 $ 7,696 $ 7,086 $ 2,712 $ (6,219)
Total Assets 14,756 14,452 14,483 25,317 42,428
Long-term Obligations21,128 14,003 13,481 13,444 23,971
Total Long-Term
Debt 0 3,806 6,222 2,144(4) 11,699
________________________0 5,508 6,960 11,182
Total Shareholders'
Equity (Deficit) 11,124 8,213 2,164 (3,490) (6,418)
_______________________
(1) Includes a $2.012 million gain onnet charge of $1,769 related to the salediscontinuance of the
L.A.B. Division andCompany's Technology Division.
(2) Includes a $2.5 million extraordinary gain, net charge of tax, on the extinguishment of
debt. (See Notes 16 and 19$15,415 related to the accompanying Consolidated Financial
Statements)
(2) Includes $750 thousand gain fromdiscontinuance of the
sale of ProQuip resulting from
the release of escrow funds. (See Note 16Company's United Telecontrol Electronics, Inc. subsidiary.
(3) Earnings per share have been restated to the accompanying Consolidated
Financial Statements).
(3) Includes ProQuip (sold in November 1994) results through the sale date
and the $6.8 million gain on its sale. All prior periods include the
results of ProQuip. (See Note 16 to the accompanying Consolidated
Financial Statements).
(4) Does not include approximately $8.0 million classified as a current
liability and paid in the first quarter of fiscal year 1995 from the net
proceeds received from the sale of ProQuip in November 1994.
Consistentcomply with 1996 data, priorSFAS No. 128,
"Earnings Per Share."
Prior years have been restated to reflect the Technology and
Defense/Aerospace segmentsegments as a discontinued operation.operations. (See Note 15 to
the accompanying Consolidated Financial Statements).
There were no cash dividends on common stock declared for any of the
periods presented.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ----------------------------------------------------------
Results of Operations: 19971998 in Comparison with 1996
- ---------------------------------------------------1997
The following three paragraphs summarize significant organizational
changes, which impact the comparison of 1998 and 1997 results of
operations.
On June 27, 1997, the Company and Edison Development Corp. ("EDC"), a
subsidiary of DTE Energy Co. formed a joint venture, Plug Power L.L.C.
("Plug Power") to further develop the Company's Proton Exchange Membrane
Fuel Cell technology. In exchange for its contribution of employees,
contracts, intellectual property and certain other assets that had
comprised the fuel cell research and development business activity of the
Technology segment (which assets had a net book value of $357 thousand),
the Company received a 50% interest in Plug Power. The Company's interest
in Plug Power may be reduced in certain circumstances. EDC made an
initial cash contribution of $4.75 million in exchange for the remaining
50% interest in Plug Power. The Company's investment in Plug Power is
included in the balance sheet caption "Investment in Joint Venture"; the
assets contributed by the Company to Plug Power had previously been
included in the assets of the Company's Technology segment. See the
supplemental disclosure regarding Contribution of Net Assets to Joint
Venture in the Consolidated Statements of Cash Flows for additional
information regarding the assets contributed by the Company to Plug Power.
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. Net assets of the discontinued
operation were $8 thousand and $3,186 thousand at September 30, 1998 and
1997, respectively and the loss on discontinued operations included a loss
from operations of $516 thousand and a loss on disposal of $1,769 thousand
at September 30, 1998. The loss on disposal includes a provision for
estimated operating results prior to disposal. The Company's prior year
financial statements have been restated to conform to this treatment.
On September 30, 1997, the Company sold all of the assets of its L.A.B.
Division to Noonan Machine Company of Franklin Park, IL. The Company
received $2,600,000$2,600 thousand in cash and two notes, totaling $650,000,$650 thousand,
from Noonan Machine Company. The purchaser has requested that the
principal amount of the note be reduced to reflect the resale value of
certain assets of L.A.B. The Company is enforcing its rights with respect
to the note. The net proceeds from the sale were used to pay down all
outstanding debt and build working capital. The sale of L.A.B. resulted
in a $2,012,000$2,012 thousand gain, which was recorded in the fourth quarter of
fiscal year 1997. In addition, $250,000$250 thousand of the proceeds associated
with one of the notes was recorded as deferred revenue due to the
possible reduction of the $250,000$250 thousand note receivable, in the event of
a sale of certain fixed assets, in accordance with the terms of the
note.
The following is management's discussion and analysis of certain
significant factors, which have affected the Company's results of
operations for 1998 compared to 1997. This discussion relates only to the
Company's continuing operations.
Sales for fiscal 1998 totaled $21.0 million compared to $24.1 million for
the prior year, a decrease of $3.1 million or 12.8%. This decrease is
attributable to the reduction of sales resulting from the sale of the
L.A.B. Division on September 30, 1997, which reported sales of
$3.3 million and operating income of $500 thousand at September 30, 1997.
Advanced Products reported a sales increase of 26.2% and Ling reported a
sales decrease of 11.3% in the year ended September 30, 1998.
Selling, general and administrative expenses for fiscal 1998 were 27.6% of
sales, as compared to 29.1% in 1997. Product development and research
costs during fiscal 1998 were 4% of sales, compared to 4.2% for 1997.
Lower levels of general/administrative expenses for fiscal 1998 resulted
primarily from cost reduction efforts during fiscal 1998 as well as the
elimination of costs for L.A.B. of $600 thousand.
Operating income of $2 million at September 30, 1998 represented a $400
thousand or 24% increase from the $1.6 million operating income recorded
during the same period last year. The increase is the result of
increased sales levels for Advanced Products and improved margins as a
result of cost control measures. Excluding the L.A.B. division results
in 1997, operating income increased $900 thousand.
In addition to the matters noted above, during the fourth quarter of
fiscal 1998, the Company recorded a $3.8 million loss from the recognition
of the Company's proportionate share of losses of the Plug Power joint
venture compared to a $300 thousand loss in 1997. During the fourth
quarter of fiscal 1997, the Company recorded a $2.0 million gain on the
sale of the L.A.B. Division. Further, 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 fiscal 1998 were enhanced by lower interest expense,
principally resulting from reduced indebtedness. Moreover, the Company
benefited from reduced income tax expense due to the loss generated by
discontinued operations and the use of net operating loss carryforwards.
However, as a result of recent ownership changes, the availability of
further net operating loss carryforwards to offset future taxable income
will be significantly limited pursuant to the Internal Revenue Code.
Results of Operations: 1997 in Comparison with 1996
The following three paragraphs summarize significant organizational
changes, which impact the comparison of 1997 and 1996 results of
operations.
On September 30, 1997, the Company sold all of the assets of its L.A.B.
Division to Noonan Machine Company of Franklin Park, IL. The Company
received $2,600 thousand in cash and two notes, totaling $650 thousand,
from Noonan Machine Company. The purchaser has requested that the
principal amount of the note be reduced to reflect the resale value of
certain assets of L.A.B. The Company is enforcing its rights with respect
to the note. The net proceeds from the sale were used to pay down all
outstanding debt and build working capital. The sale of L.A.B. resulted
in a $2,012 thousand gain, which was recorded in the fourth quarter of
fiscal year 1997. In addition, $250 thousand of the proceeds associated
with one of the notes was recorded as deferred revenue due to the
possible reduction of the $250 thousand note receivable, in the event of
a sale of certain fixed assets, in accordance with the terms of the
note.
On June 27, 1997, the Company and Edison Development Corp. ("EDC"), a
subsidiary of DTE Energy Co. entered into final agreements to formformed a joint venture, Plug Power L.L.C.
("Plug Power") to further develop the Company's Proton Exchange Membrane
Fuel Cell technology ("Fuel Cell Business").technology. In exchange for its contribution of employees,
contracts, intellectual property and certain other assets that had
comprised the fuel cell research and development business activity of the
Technology segment (which assets had a net book value of $349$357 thousand),
the Company received a 50% interest in the joint venture;
the Company is not obligated to make any future contributions to the joint
venture, but itsPlug Power. The Company's interest
in the joint venture couldPlug Power may be reduced in certain circumstances in the future.circumstances. EDC made an initial
cash contribution of $4.75 million in exchange for the remaining 50%
interest in the joint
venture. EDC is required to contribute an additional $4.25 million in
certain circumstances.Plug Power. The Company's investment in the joint venturePlug Power is
included in "Other Assets" at September 30, 1997;the balance sheet caption "Investment in Joint Venture"; the
assets contributed by the Company to the joint venturePlug Power had previously been
included in the assets of the Company's Technology segment. See the
supplemental disclosure regarding Contribution of Net Assets to Joint
Venture in the Consolidated Statements of Cash Flows (included in the financial
statements set forth above in this Form 10-K Report and incorporated
herein by reference) for additional
information regarding the assets contributed by the Company to the joint venture.Plug Power.
On December 27, 1996, the Company and First Albany Companies, Inc. ("FAC")
entered into a Settlement Agreement and Release whereby the Company issued
FAC 1.0 million shares of common stockCommon Stock in full satisfaction of its
obligations pursuant to the certain Claim Participation Agreement dated
December 21, 1993 and amended December 14, 1994, among United Telecontrol
Electronics, Inc. ("UTE"), the Company and First Commercial Credit
Corporation, in the principal amount of $3.0 million plus 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 $2.5 million,
net of approximately $100 thousand of transaction related expenses and net
of taxes of $106 thousand. (See "Liquidity and Capital Resources",
below.)
The following is management's discussion and analysis of certain
significant factors, which have affected the Company's results of
operations for 1997 compared to 1996. This discussion relates only to the
Company's continuing operation, which included the Fuel Cell Business
prior to its contribution to the joint venture in July 1997.operations.
Sales for fiscal 1997 totaled $32.0$24.1 million compared to $31.9$22.8 million for
the prior year, an increase of less than 1%5.9% in fiscal 1997 compared to fiscal
1996. L.A.B and Advanced Products reported sales increases of 7.8% and
19.4%, respectively and Ling reported a sales decrease of 0.2%.
Selling, general and administrative expenses for fiscal 1997 were 29.2%29.1% of
sales, as compared to 30.7%31.1% in 1996. Product development and research
costs during fiscal 1997 were 5.4%4.2% of sales, compared to 4.0%3.0% for 1996.
Lower levels of general/administrative expenses for fiscal 1997 resulted
primarily from cost reduction efforts during fiscal 1997 as well as
certain expenses having been incurred during 1996 in connection with the
now-discontinued efforts to sell Ling.
Company 1997 operating income totaled $580 thousand$1.6 million compared to $956
thousand$1.1
million for fiscal 1996, or a decreasean increase of $376$500 thousand. The decreaseincrease
in operating income is primarily due to continuing declining Technology
segmentgrowth of revenues.
The Test and Measurement segment reported fiscal 1997 sales of $24.1
million compared to $22.8 million in the prior period or a 5.9% increase.
L.A.B and Advanced Products reported sales increases of 7.8% and 19.4%,
respectively and the Ling Division reported a sales decrease of 0.2%.
Operating income for fiscal 1997 amounted to $1.5 million, an increase of
$.1 million over the $1.4 million operating income in 1996. StableIncreased operating income was achieved in spite of higher product
development costs. All divisions reported improvements, however, Ling
continues to experience an operating loss.
The Technology segment recorded a $1.3 million or 13.9% decline in sales
to $7.9 million for fiscal 1997 as compared to $9.1 million in fiscal
1996. The operating loss for 1997 was $959 thousand, a significant
increase in losses from the $434 thousand operating loss in 1996. The
lower level of sales resulted from the continuing reduction of government
spending. Current year results were negatively impacted by contract
overruns of approximately $900 thousand.
The Technology segment continues to be dependent on 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. For the third year in a row, the Technology segment
has a historically low level of backlog, and any improvement in the
segment's results in fiscal 1998 will depend on success in procuring and
fulfilling orders within the fiscal year. The future growth and
profitability of the segment will depend on its success in identifying and
exploiting new markets for its products and services. In light of these
circumstances, and with the transfer of the fuel cell research and
development business activity of the Technology segment to the joint
venture with EDC (discussed above), the Company continues to evaluate its
strategic options with respect to the remaining business activities that
comprise this segment.
In addition to the matters noted above, during the fourth quarter of
fiscal 1997, the Company recorded a $2.0 million gain on the sale of the
L.A.B. Division and a $330 thousand loss from the recognition of the
Company's proportionate share of the loss of the Plug Power joint venture.
Sales for the L.A.B. Division were $3.3 million in 1997 and $3.1 million
in 1996. Further, the Company recorded a $2.5 million extraordinary gain,
net of taxes, on the extinguishment of debt during the first quarter of
fiscal 1997. Fiscal 1996 results included a $750 thousand gain from the
sale of its former subsidiary ProQuip, as a result of the removal of
contingencies, and income from discontinued operations of $3.2 million.contingencies.
Results during fiscal 1997 were further enhanced by lower interest
expense, principally resulting from reduced indebtedness. Moreover, the
Company has 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 further net operating loss carryforwards to
offset future taxable income will be significantly limited pursuant to the
Internal Revenue Code.
Results of Operations: 1996 in Comparison with 1995
- ---------------------------------------------------
As described in Note 15 to the accompanying Consolidated Financial
Statements, the Company's United Telecontrol Electronics, Inc. ("UTE")
subsidiary filed for voluntary bankruptcy under Chapter 11 of the Federal
Bankruptcy Code in April 1994 and commenced an orderly liquidation in
October 1994. In June 1996 the Bankruptcy Court confirmed UTE's plan of
liquidation under which the Company was released from all remaining
liabilities related to UTE's bankruptcy. Accordingly, UTE's results and
the impact of the liquidation on the Company's results have been
classified as "discontinued operations" in the Consolidated Financial
Statements.
The Company recorded the effect of the final liquidation of UTE during
fiscal year 1996. Final adjustments to the Company's financial statements
as a result of the UTE bankruptcy are reflected in income from
discontinued operations. For 1996, income from discontinued operations of
$3.2 million was recorded as a result the Company's release from all
remaining liabilities. No income (loss) from discontinued operations was
recorded for fiscal year 1995, and a $24.5 million net loss was recorded
in 1994 for discontinued operations, including $15.4 million to write down
all assets to net realizable value and establish a reserve for estimated
future termination and liquidation cost.
In November 1994, the Company sold its ProQuip Inc. ("ProQuip") subsidiary
for approximately $13.3 million, of which $750 thousand was placed in
escrow for fifteen months to provide a fund for indemnity payments. As of
February 22, 1996 (the escrow expiration date), no claim had been filed,
nor was the Company aware of any circumstances which might give rise to
future claims. Accordingly, the Company recognized the remaining $750
thousand gain from the sale during the second quarter of fiscal 1996.
Prior year information contains ProQuip results through its sale date
(November 22, 1994) and the $6.8 million gain on its sale. (See Note 16 to
the accompanying Consolidated Financial Statements).
The following is management's discussion and analysis of certain
significant factors, which have affected the Company's results of
operations for 1996 compared to 1995. This discussion relates only to the
Company's continuing operations, which included ProQuip in fiscal year
1995 prior to its sale in November 1994.
Sales for fiscal year 1996 totaled $31.9 million compared to $29.7 million
for the prior year. Prior year sales include $2.6 million from the
Company's former subsidiary, ProQuip; excluding ProQuip, sales increased
$4.7 million or 17.4% in fiscal 1996 compared to fiscal 1995.
Selling, general and administrative expenses for fiscal 1996 were 30.7% of
sales, as compared to 27.2% in 1995 (28.6% excluding ProQuip). Product
development and research costs during fiscal 1996 were 4.0% of sales,
compared to 4.8% for 1995 (4.5% excluding ProQuip). Higher levels of
general/administrative expenses for fiscal 1996 resulted primarily from
increased divisional profit sharing accruals, expenses incurred in
connection with the now-discontinued efforts to sell Ling, and expenses
attributable to several legal matters.
Company 1996 operating income totaled $956 thousand compared to a $2.5
million operating loss for fiscal 1995, or an improvement of $3.4 million.
The significant improvement in operating income is primarily due to
results in the Test and Measurement segment.
The Test and Measurement segment reported fiscal 1996 sales of $22.8
million compared to $18.1 million in the prior period or a 25.4% increase.
Prior year sales include $2.6 million from ProQuip; excluding ProQuip,
sales increased 46.3%. All divisions within this segment reported higher
levels of orders and shipments in fiscal 1996 as compared to 1995.
Operating income for fiscal 1996 amounted to $1.4 million, an increase of
$3.4 million over the $2.0 million operating loss in 1995. The prior
year's results included a $1.6 million impairment loss on the Company's
investment in Ling, which was partially offset by operating income from
ProQuip of $607 thousand before the date of its sale. All divisions
reported significant improvements, primarily from the higher level of
sales, however Ling continued to experience an operating loss.
The Technology segment recorded a $2.5 million or 21.2% decline in sales
to $9.1 million for fiscal 1996 as compared to $11.6 million in fiscal
1995. The operating loss for 1996 was $434 thousand, a slight improvement
over the $463 thousand operating loss in 1995. The lower level of sales
resulted from completion of a major program in the Power and Energy
business area. Margins improved which resulted from a higher yielding
sales mix, however this benefit was substantially offset by higher levels
of product development and other expenses.
The Technology segment continues to be dependent on 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. For the second year in a row, the Technology segment
has an historically low level of backlog, and any improvement in the
segment's results in fiscal 1997 will depend on success in procuring and
fulfilling orders within the fiscal year. The future growth and
profitability of the segment will depend on its success in identifying and
exploiting new markets for its products and services.
In addition to the matters noted above, the Company's results for fiscal
1996 were further enhanced by decreased interest expense, due to reduced
indebtedness and a lower prime rate, and by recognition of a $750 thousand
contingency gain on the sale of ProQuip. Moreover, the Company continues
to benefit from net operating loss carryforwards and therefore has no
federal income tax provision (exclusive of minimum taxes).
Liquidity and Capital Resources
- -------------------------------
At September 30, 19971998, the Company's order backlog was $5.2$2.1 million, a
decrease of $3.3$1.8 million from the prior year-end. This reduction reflects
a decline at the Ling Division due to orders expected in the fourth quarter of 1998 being
shifted to the next fiscal year as well asyear.
Inventories increased by $362 thousand in 1998 to support increased sales
levels at Advanced Products. Additionally, accounts receivable increased
by $477 thousand in 1998 due to the eliminationtiming of backlog forsales at the L.A.B. Division (approximately $.6 million at 1996)
which was sold as of September 30, 1997.
Inventories, excluding the effectend of the
sale of the L.A.B. Division,
decreased by $209fiscal year.
Cash flow from continuing operations was $513 thousand in 1998 compared
with $1,089 thousand in 1997 an improvement over the prior year's
increase in inventories of $627 thousand.
Cash flow from operating activities was $998and ($49) thousand in 1997 compared
with $1,400 thousand in 1996 and ($558) thousand in 1995.1996. Cash flow from
operating activities was impacted in 19971998 and 19961997 by positive operating
income and fluctuations in working capital components.
Working capital was $5.8 million at September 30, 1998, a $1.9 million
decrease from $7.7 million at fiscal year-end 1997. Capital used during
fiscal 1998 was principally to fund short term operating cash flow
requirements and pay construction costs.
Capital expenditures were $829$3,166 thousand for 1998, $377 thousand for 1997
$549and $170 thousand for 1996 and $667
thousand for 1995.1996. The increased capital expenditures in 19971998
were in accordance with the higher level of planned expenditures.expenditures and the
construction of a new facility for Advanced Products and corporate
headquarters and renovations to an existing building leased to Plug Power.
Capital expenditures in 19981999 are expected to be about $850 thousand,$4.4 million, which
includes expanding engineeringconsists of additional expenditures associated with the construction of
the new facility, computer software and testing capabilities, information
technology upgradeshardware costs and manufacturing
equipment. The Company expects to finance these expenditures with cash
from operations and existing credit facilities. As of September 30, 1998,
the Company was committed to construction costs of approximately $2,856
thousand.
Cash and cash equivalents were $1,425$5,567 thousand at September 30, 1998
compared to $1,421 thousand at September 30, 1997, compared to $66 thousand at September 30, 1996, this increase is
a resultattributable to $6,992 thousand of thenet cash proceeds from the sale of
the L.A.B. Division. Working
capital was $6.2 million atcommon shares to existing shareholders through a rights offering, which
closed on September 30, 1997, a $1.1 million increase
over $5.1 million at fiscal year-end 1996.1998 net of payments associated with the Company's
construction project.
At September 30, 1998 and 1997, there were no borrowings outstanding on
the linelines of credit, while at September 30, 1996, there were line of credit borrowings
of $100 thousand.credit. The Company has a working capital line of credit
available in the amount of $4.0 million. This$4 million and a $1 million equipment line of
credit. These lines of credit expire on January 31, 2000.
The reduction in net assets of discontinued operations of $3,178 thousand
includes the transfer of $878 thousand of assets to continuing operations
(principally land, building and management information systems) as well as
the accrual for the loss on disposal of the Technology Division. Such
accrual included a provision for estimated operating results prior to
disposal and an estimate of the loss on disposal and winddown of the
Technology Division, which totaled $1,769 thousand. The sale of the
Technology Division was completed as of March 31, 1998.
On July 31, 1998, Plug Power asked the Company to commit to contribute $5
million (in cash, other assets and research credits) to Plug Power to fund
continuing operations for the period August 1, 1998 through March 31,
1999. The Company has committed to the $5 million contribution request,
which will be funded by the proceeds from the rights offering. On August
5, 1998, EDC and the Company each made short-term loans of $500 thousand
to Plug Power, which were subsequently contributed to capital on September
23, 1998. On September 23, 1998, the Company also contributed $500
thousand of accounts receivable from Plug Power to equity. A liability
for $4 million was recorded as of September 30, 1998 to reflect the
Company's additional obligation to fund Plug Power during 1999. In
addition, Plug Power will continue to need substantial investment for the
foreseeable future. Plug Power continues to pursue strategic partners and
additional sources of capital. Plug Power is currently negotiating with
several strategic partners and has signed a preliminary Memorandum of
Understanding with General Electric Power Systems. There is no assurance,
however, that Plug Power will successfully conclude any transactions with
strategic partners or find other sources of capital. If other sources of
funding cannot be collateralized byfound, 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 and the Company stop funding Plug Power
and no additional sources of capital are found, Plug Power will not be
able to continue as a guarantee from a former shareholder, and expires on
October 31, 1998.going concern.
During fiscal 1996, First Albany Companies, Inc. ("FAC") had purchased
909,091 shares of the Company's common stockCommon 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 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 stockCommon Stock in full satisfaction of the Note
Payable of $3.0$3 million and accrued interest of $1.2 million. Accordingly,
the Company realized a gain on the extinguishment of debt totaling $2.5
million, net of approximately $100 thousand of transaction related
expenses and net of taxes of $106 thousand.
The Company benefited in fiscal 1997 from the sale of the L.A.B. Division
on September 30, 1997, with cash proceeds of $2.6 million and two notes
receivable for a total of $650 thousand. The cash proceeds were used to
pay off the remaining balance on the Company's term loan to Chase
Manhattan Bank and to provide for general working capital needs.
The Company anticipates that it will be able to meet the liquidity needs
of its continuing operations from cash flow generated by operations and
borrowing under its existing linelines of credit.
Debt
The Industrial Development Agency for the Town of Colonie has agreed to
issue $6 million in Industrial Development Revenue Bonds ("IDR") 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 as of April 1999. First Albany Companies, Inc. ("FAC"),
which owns 34% of the Company's stock, will underwrite the sale of the IDR
Bonds. Proceeds of the IDR Bonds will be deposited with a trustee for the
bondholders. The Company may draw the bond proceeds to cover qualified
project costs. The bond closing is expected to be completed on or about
December 17, 1998. FAC will receive no fees for underwriting the IDR
Bonds but will be reimbursed for its out of pocket costs.
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
At September 30, 1998, all internal systems have been identified,
inventoried, prioritized and assessed for Year 2000 compliance. Systems
found to be totally non-compliant were replaced, 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.
Software Evaluation
At September 30, 1998, 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 2nd
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 which 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 2nd 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
joint ventures, in which the company participates but is not the
operator. The total amount expended on the Plan through September 30,
1998 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 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.
Statements in this Form 10-K 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".
ITEM 8: FINANCIAL STATEMENTS
- -----------------------------
The financial statements filed herewith are set forth on the Index to
Consolidated Financial Statements on Page F-1 of the separate financial
section which follows page 2733 of this report and are incorporated herein
by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information set forth under the caption "Executive Officers" in Item 1
of this Form 10-K Report, and the information which will be set forth in
the section entitled "Election of Directors", and under the captions
"Security Ownership of Certain Beneficial Owners" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the section
entitled "Additional Information", in the definitive Proxy Statement to be
filed by the registrant, pursuant to Regulation 14A, for its Annual
Meeting of Shareholders to be held on February 23, 1998March 18, 1999 (the "1998"1999 Proxy
Statement"), is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
- --------------------------------
The information which will be set forth under the captions "Executive
Compensation", "Compensation Committee Report", "Compensation Committee
Interlocks and Insider Participation", "Employment Agreements", and
"Directors Compensation", in the section entitled "Additional Information"
in the registrant's 19981999 Proxy Statement, is incorporated herein by
reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- -------------------------------------------------------------
The information which will be set forth under the captions "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" in the section entitled "Additional Information" in the
registrant's 19981999 Proxy Statement, is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information which will be set forth under the caption "Certain
Information Regarding Nominees" in the section entitled "Election of
Directors", and under the captions "Directors Compensation", "Security
Ownership of Certain Beneficial Owners", and "Certain Relationships and
Related Transactions", in the section entitled "Additional Information",
in the registrant's 19981999 Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES,SCHEDULE AND REPORTS ON
FORM 8-K
- -----------------------------------------------------------------
(a) (1) The financial statements filed herewith are set forth on the
Index to Consolidated Financial Statements on page F-1 of the separate
financial section which accompanies this Report, which is incorporated
herein by reference.
The following exhibits are filed as part of this Report:
Exhibit
Number Description
------- -----------
2.1 Purchase Agreement, dated as of November 23,
1994, among the Registrant, ProQuip Inc. and
Phase Metrics.(7)
3.1 Certificate of Incorporation of the registrant,
as amended.(1)
3.2 By-Laws of the registrant, as amended.
4.1 Certificate of Amendment of the Certificate
of Incorporation of the registrant, filed
on March 6, 1986 (setting forth the provisions
of the Certificate of Incorporation,as amended,
relating to the authorized shares of the
registrant's Common Stock) - included in
the copy of the registrant's Certificate of
Incorporation, as amended, filed as Exhibit 3.1
hereto.
4.20 Loan Agreement, dated as of June 1, 1987,
between the registrant and Chase Lincoln
First Bank, N.A. ("Chase Lincoln"), relating to
a $20,000,000 term loan to finance the registrant's
acquisition of United Telecontrol Electronics, Inc.
(the "UTE Loan Agreement").(1)
4.21 First Amendment to Loan Agreement, dated as
of September 30, 1988, amending certain
provisions of the UTE Loan Agreement.(1)
4.22 Second Amendment to Loan Agreement, dated as of
February 21, 1990, amending certain provisions
of the UTE Loan Agreement.(1)
4.24 Third Amendment to Loan Agreement, dated as
of January 1, 1991, amending certain
provisions of the UTE Loan Agreement.(2)
4.25 Form of Note, in the amount of $9,181,700, executed
by the registrant on January 1, 1991 to evidence its
indebtedness under the UTE Loan Agreement.(2)
4.26 Form of Note, in the amount of $2,000,000,
executed by the registrant on January 1, 1991
to evidence its indebtedness under the UTE
Loan Agreement.(2)
4.27 Form of Note, in the amount of $1,000,000,
executed by the registrant on January 1, 1991
to evidence its indebtedness under the UTE
Loan Agreement.(2)
4.28 Mortgage, dated January 31, 1991, executed
by the registrant in favor of Chase Lincoln
and securing the registrant's obligation to
Chase Lincoln, including those under the
UTE and ProQuip Loan Agreements.(2)
4.30 Loan Agreement, dated as of September 30, 1988,1998
between the registrant and Chase Lincoln relating
to an $8,000,000 term loan to finance the
registrant's acquisition of ProQuip, Inc. (the
"ProQuip Loan Agreement").(1)
4.31 Negative Pledge Agreement, dated as of
September 30, 1988, executed by the registrant
in favor of Chase Lincoln in connection with
the ProQuip Loan Agreement.(1)
4.32 Security Agreement, dated as of September 30, 1988,
executed by the registrant in favor of Chase
Lincoln and securing the registrant's obligations
to Chase Lincoln, including those under the UTE
and ProQuip Loan Agreements (the "Chase Lincoln
Security Agreement").(1)
4.33 First Amendment to Loan Agreement, dated as
of February 21, 1990, amending certain provisions
of the ProQuip Loan Agreement.(1)
4.34 Form of Note, in the amount of $3,375,817.80,
executed by the registrant on February 21, 1990
to evidence its indebtedness under the ProQuip
Loan Agreement.(1)
4.35 Amendment Number One to Security Agreement,
executed by the registrant on February 21, 1990,
amending the Chase Lincoln Security Agreement.(1)
4.36 Mortgage, dated February 21, 1990, executed
by the registrant in favor of Chase Lincoln
and securing the registrant's obligations
to Chase Lincoln, including those under the
UTE and ProQuip Loan Agreements.(1)
4.37 Second Amendment to Loan Agreement, dated
as of January 1, 1991, amending certain
provisions of the ProQuip Loan Agreement.(2)
4.38 Mortgage Modification and Allocation Agreement,
dated January 1, 1991, executed by the registrant
and Chase Lincoln.(2)
4.40 Form of Payment Guaranty, dated as of
September 1, 1988 [as of September 30, 1988,
in the case of ProQuip, Inc.], executed by the
subsidiaries of the registrant in favor of Chase
Lincoln and guaranteeing payment of the
registrant's obligations to Chase Lincoln,
including those under the UTE and ProQuip Loan
Agreements.(1)
4.41 Form of Negative Pledge Agreement, dated as
of September 30, 1988, executed by the
subsidiaries of the registrant in favor of
Chase Lincoln in connection with the
ProQuip Loan Agreement.(1)
4.42 Form of Security Agreement, dated as of
September 30, 1988, executed by the
subsidiaries of the registrant in favor of
Chase Lincoln and securing the registrant's
obligations to Chase Lincoln, including those
under the UTE and ProQuip Loan Agreements.(1)
4.43 Acknowledgment, Confirmation and Further
Agreement, made as of February 21, 1990,
executed by the subsidiaries of the registrant
in favor of Chase Lincoln with respect to the
registrant's obligations under the UTE and
ProQuip Loan Agreements.(1)
4.50 Debt Restructure Agreement, made as of
February 21, 1990, between the registrant,
Chase Lincoln, and Manufacturers Hanover Trust
Company ("Manufacturers Hanover"), providing for
a restructuring of the registrant's indebtedness
to Chase Lincoln under the UTE and ProQuip Loan
Agreements and of the registrant's outstanding
indebtedness to Manufacturers Hanover (the
"MHTCo. Existing Debt"), among other things.(1)
4.55 Second Amendment to Debt Restructure Agreement,
made as of January 1, 1991, between the registrant,
Chase Lincoln, and Manufacturers Hanover, amending
certain provisions of the Debt Restructure
Agreement.(2)
4.56 Second Debt Restructure Agreement, as of
July 22, 1992, between the registrant,
Chase Lincoln First Bank, N. A. ("CLFB"),
and Chemical Bank ("Chemical"), as successor in
interest to Manufacturers Hanover Trust Company,
providing for a restructuring of the registrant's
indebtedness to CLFB under the UTE and ProQuip
Loan Agreements and of the registrant's outstanding
indebtedness to Chemical, among other things.(3)
4.63 Promissory Note, in the amount of $4,000,000
and dated July 22, 1992, executed by the registrant
to evidence its indebtedness to Chemical from
time to time with respect to a line of credit
in such amount (The Chemical Line of Credit).(3)
4.64 Form of Payment Guaranty, dated as of July
24, 1992, executed by Masco Corporation in
favor of Chemical and guaranteeing payment
of the registrant's obligations to Chemical
under the Chemical Line of Credit.(3)
4.65 Promissory Note, in the amount of
$4,000,000 and dated October 31, 1994,
extending the maturity date of the
Promissory note dated July 22, 1992,
executed by the registrant to evidence its
indebtedness to Chemical under The Chemical
Line of Credit.(8)
4.66 Promissory Note, in the amount of $4,000,000
and dated October 31, 1995, extending the
maturity date of the Promissory note dated
October 31, 1994, executed by the registrant to
evidence its indebtedness to Chemical under The
Chemical Line of Credit.(9)
4.67 Form of Payment Guaranty, dated October 31,
1995 executed by Masco Corporation in favor of
Chemical and guaranteeing payment of the
registrant's obligations to Chemical under the
Chemical Line of Credit.(9)
4.80 Amended and Restated Loan Agreement, dated
as of July 22, 1992, between the registrant
and Chase Lincoln First Bank, N.A., which
amends, restates, combines, and supersedes
in full the UTE and the ProQuip loan
agreements.(3)
4.81 Form of Note, in the amount of $5,000,000,
executed by the registrant on July 24, 1992
to evidence its indebtedness to CLFB under
the July 22, 1992 Loan Agreement.(3)
4.82 Form of Note, in the amount of $7,984,770,
executed by the registrant on July 24, 1992
to evidence its indebtedness to CLFB under
the July 22, 1992 Loan Agreement.(3)
4.83 Additional Mortgage Note, dated July 24,
1992, executed by the registrant in favor
of CLFB and securing the registrant's
obligation to CLFB under the Loan Agreement.(3)
4.84 Additional Mortgage and Security Agreement,
dated as of July 22, 1992, executed by the
registrant in favor of CLFB and securing
the registrant's obligations to CLFB.(3)
4.85 Mortgage Consolidation, Spreader, Modification
Extension and Security Agreement, dated July
22, 1992, executed by the registrant and
CLFB.(3)
4.86 Confirmation of Guaranties and Security
Agreements, dated July 22, 1992, executed
by subsidiaries of the registrant in favor
of CLFB with respect to the registrant's
obligations to CLFB.(3)
4.87 Consent and waiver, dated December 21, 1993,
from CLFB to the registrant with respect to the
Amended and Restated Loan Agreement.(5)
4.88 Amendment One to Amended and Restated Loan
Agreement, dated as of August 1, 1994, between
the registrant and Chase Manhattan Bank, N. A.
which amends the Amended and Restated Loan
Agreement to defer the payment due on June 30,
1994.(6)
4.89 Amendment Two to Amended and Restated Loan
Agreement with waiver, dated as of November
22,1994, between the registrant and Chase
Manhattan Bank, N. A. which amends the Amended
and Restated Loan Agreement and waives any
existing defaults.(8)
4.90 Additional Mortgage and Security Consolidation
Agreement, dated as of October 6, 1995 executed
by the registrant in favor of Chase Manhattan
Bank, N.A. and securing the registrant's
obligations to Chase Manhattan Bank, N.A.(9)
4.91 Form of Note, in the amount of $340,000,executed
by the registrant on October 6, 1995 to evidence
its indebtedness to Chase Manhattan Bank, N.A.
under the July 22, 1992 Loan Agreement.(9)
4.92 Amendment Three to Amended and Restated Loan
Agreement with waiver, dated as of November
30, 1995,30,1995, between the registrant and Chase
Manhattan Bank, N. A. which amends the Amended
and Restated Loan Agreement and waives any
existing defaults.(9)
4.93 Credit Agreement dated as of September 22, 1998
among Mechanical Technology Incorporated and
KeyBank National Association ("KeyBank").
4.94 Security Agreement, dated as of September 22,
1998, executed by the registrant in favor of
KeyBank and securing the registrant's
obligations to KeyBank.
4.95 Security Agreement, dated as of September 22,
1998, executed by Ling Electronics, Inc. (a
wholly-owned subsidiary of the registrant) in
favor of KeyBank and securing the registrant's
obligations to KeyBank.
4.96 Guaranty of Payment and Performance, dated as of
September 22, 1998, executed by Ling Electronics,
Inc. (a wholly-owned subsidiary of the
registrant) in favor of KeyBank and guaranteeing
payment of the registrant's obligations to
KeyBank.
10.1 Mechanical Technology Incorporated Restricted
Stock Incentive Plan-filed as Exhibit 28.1 to
the registrant's Form S-8 Registration
Statement No. 33-26326 and incorporated herein
by reference.
10.3 MTI Employee 1982 Stock Option Plan.(1)
10.4 Agreement, dated December 21, 1993, between
UTE, First Commercial Credit Corporation
("FCCC") and the registrant, relating to an
advance against certain receivables.(5)
10.6 Agreement, dated June 2, 1993, between the
registrant and Mr. Harry Apkarian, Director,
regarding his employment.(5)
10.7 Agreement, dated February 22, 1994, between
the registrant and Mr. R. Wayne Diesel,
President and Chief Executive Officer,
regarding his employment.(8)
10.8 Agreement, dated December 14, 1994, between
FCCC and the registrant, modifying the Agreement
dated December 21, 1993 relating to an
advance against certain receivables.(8)
10.9 Agreement, dated May 30, 1995, between FCCC
and the registrant, extending the maturity of
the Agreement dated December 14, 1994 relating
to an advance against certain receivables.(9)
10.10 Agreement, dated June 28, 1995, between FCCC
and the registrant, extending the maturity of
the Agreement dated December 14, 1994 relating
to an advance against certain receivables.(9)
10.11 Agreement, dated September 21,1995, between FCCC
and the registrant, extending the maturity of
the Agreement dated December 14,1994 relating to
an advance against certain receivables.(9)
10.12 Agreement, dated October 25, 1995, between FCCC
and the registrant, extending the maturity of
the Agreement dated December 14, 1994 relating
to an advance against certain receivables.(9)
10.13 Agreement, dated December 27, 1995, between
FCCC and the registrant, extending the maturity
of the Agreement dated December 14, 1994
relating to an advance against certain
receivables.(9)
10.14 Mechanical Technology Incorporated Stock
Incentive Plan - included as Appendix A to the
registrant's Proxy Statement, filed pursuant to
Regulation 14A, for its December 20, 1996
Special Meeting of Shareholders and
incorporated herein by reference. (10)
10.15 Agreement, dated December 6, 1996, between
the registrant and Mr. Martin J. Mastroianni,
President and Chief Operating Officer,
regarding his employment. (10)
10.16 Settlement Agreement and Release, dated as of
December 27, 1996, between First Albany
Companies Inc. and the registrant, with respect
to the registrant's indebtedness and
obligations under the Agreement dated December
14, 1994 between FCCC and the registrant
relating to an advance against certain receivables. (10)
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. (11)
10.18 Limited Liability Company Agreement of Plug
Power, L.L.C., dated June 27, 1997, between
Edison Development Corporation and Mechanical
Technology, Incorporated. (12)(13)
10.19 Contribution Agreement, dated June 27, 1997,
between Mechanical Technology, Incorporated and
Plug Power, L.L.C. (12)(13)
10.20 Asset Purchase Agreement, dated as of September
22, 1997, between Mechanical Technology,
Incorporated and Noonan Machine Company. (12)
10.21 Asset Purchase Agreement between MTI and NYFM,
Incorporated, dated as of March 31, 1998. (14)
10.22 Option Agreement-Contribution Match between Plug
Power, L.L.C. and MTI, dated as of April 24,
1998. (14)
10.23 Option Agreement-Contribution Match between Plug
Power, L.L.C. and MTI, dated as of June 15,
1998. (14)
10.24 Contribution Agreement between Edison
Development Corporation and MTI, dated as of
June 10, 1998. (14)
10.25 Form of Notice of Guaranteed Delivery for
Subscription Certificate. (14)
10.26 Form of American Stock Transfer & Trust Co.
Agency Agreement. (14)
10.27 Form of Instructions for Subscription
Certificate. (14)
10.28 Agreement between Mechanical Technology, Inc.
and Malone & Tate Builders, Inc. for Building 1
Construction. (15)
10.29 Mechanical Technology, Incorporated/Plug Power,
L.L.C. Lease for Building III. (15)
21 Subsidiaries of the registrant.
27 Financial Data Schedule
______________________
Certain exhibits were previously filed (as indicated below) and are
incorporated herein by reference. All other exhibits for which no
other filing information is given are filed herewith:
(1) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report, as amended, for its fiscal year ended
September 30, 1989.
(2) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-Q Report for its fiscal quarter ended December
29, 1990.
(3) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-Q Report for its fiscal quarter ended June 27,
1992.
(4) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report for its fiscal year ended September 30,
1991.
(5) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report for its fiscal year ended September 30,
1993.
(6) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-Q Report for its fiscal quarter ended July 2,
1994.
(7) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 8-K Report dated November 23, 1994.
(8) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report for its fiscal year ended September 30,
1994.
(9) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report for its fiscal year ended September 30,
1995.
(10) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report for its fiscal year ended September
30, 1996.
(11) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 8-K Report dated May 12, 1997.
(12) ConfidentialFiled as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report for the fiscal year ended September
30,1997.
(13) Refiled herewith after confidential treatment requestedrequest with
respect to certain schedules and exhibits.
(b)exhibits was denied by the
Commission. Confidential treatment with respect to certain
schedules and exhibits was granted.
(14) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form S-2 dated August 18, 1998.
(15) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Report on Form 10-Q for the period ended June 26,
1998.
(a) (2) Schedule. The following consolidated financial statement
schedule for each of the three years in the period ended September 30,
1998 is included pursuant to Item 14(d):
Report of Independent Accountants on Financial Statements
Schedule
Schedule II--Valuation and Qualifying Accounts
(a) (3) One report on Form 8-K was filed during the quarter ending
September 30, 1997.1998.
The Company filed a Form 8-K Report, dated September 23, 1997,10, 1998,
reporting under item 5 thereof the Company's executionPlug Power LLC's (a joint venture
between MTI and DTE) its preliminary approval from its Board of
Managers concerning its understanding with GE Power Systems, to
brand, market and distribute Plug Power's residential fuel cells
through a definitive agreement for the sale of the assets and certain
liabilities of its L.A.B. Division to Noonan Machine Company.
joint venture marketing subsidiary.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: December 19, 199716, 1998 By: /s/ M. Mastroianni
------------------ -------------------------------
Martin J. Mastroianni
President andG.C. McNamee
George C. McNamee
Chief OperatingExecutive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ------
/s/ George C. McNamee Chief Executive Officer and
George C. McNamee Chairman of the Board of Directors 12/19/97
- -------------------------
George C. McNamee
/s/ Martin J. Mastroianni Chief Operating Officer
- ------------------------- (Principal Executive Officer)
Dr. Martin J. Mastroianni and a Director "16/98
/s/ Cynthia A. Scheuer Chief Financial Officer
- -------------------------Cynthia A. Scheuer (Principal Financial and Accounting
Cynthia A. Scheuer
Officer) "
/s/ Dale W. Church Director "
- -------------------------
Dale W. Church
/s/ R.Wayne Diesel Director "
- -------------------------
R. Wayne Diesel
/s/ Edward A. Dohring Director "
- -------------------------
Edward A. Dohring
/s/ Alan P. Goldberg Director "
- -------------------------
Alan P. Goldberg
/s/ E. Dennis O'Connor Director "
- -------------------------
E. Dennis.Dennis O'Connor
/s/ Walter L. Robb Director "
- -------------------------
Dr. Walter L. Robb
/s/ Beno Sternlicht Director "
- -------------------------
Dr. Beno Sternlicht
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders
of Mechanical Technology Incorporated
Our audits of the consolidated financial statements referred to in our
report dated November 6, 1998 appearing on page F-2 of this Form 10-K of
Mechanical Technology Incorporated also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers L.L.P.
Albany, New York
November 6, 1998
SCHEDULE II
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
Additions
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Deductions period
Allowance for
doubtful accounts
Year ended
September 30:
1998 $ 94 $ 95 $ - $ 90 $ 99
1997 73 49 - 28 94
1996 58 26 - 11 73
Valuation allowance
for deferred tax assets
Year ended
September 30:
1998 $ 2,754 $ 1,335 $ - $ - $ 4,089
1997 4,264 - - 1,510 2,754
1996 5,565 - - 1,301 4,264
Includes accounts written off as uncollectible, recoveries and the effect
of currency exchange rates.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------
Page
------
Report of Independent Accountants. . . . . . . . . . . F-2
Consolidated Financial Statements:
Balance Sheets as of September 30, 19971998 and 1996 .1997 . . F-3 & F-4
Statements of IncomeOperations for the Years Ended
September 30, 1998, 1997 1996 and 19951996 . . . . . . . . F-5
Statements of Shareholders' Equity for the Years Ended
September 30, 1998, 1997 1996 and 19951996 . . . . . . . . F-6
Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 1996 and 19951996 . . . . . . . .F-7 - F-8
Notes to Consolidated Financial Statements . . . . . . F-9 - F-29
Separate financial statements of the registrant alone are omitted because
the registrant is primarily an operating company and all subsidiaries
included in the consolidated financial statements being filed, in the
aggregate, do not have minority equity interest and/or indebtedness to any
person other than the registrant or its consolidated subsidiaries in
amounts which together exceed 5% of the total assets as shown by the most
recent year-end consolidated balance sheet.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Mechanical Technology Incorporated
We have auditedIn our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and retained earnings and of
cash flows present fairly, in all material respects, the financial
statementsposition of Mechanical Technology Incorporated and Subsidiaries as ofat
September 30, 1998 and 1997, and 1996,the results of their operations and the related consolidated statements of income, shareholder's
equity andtheir
cash flows for each of the three years in the period ended September 30,
1997.1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management. Ourmanagement;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards. Those standards which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includesstatements, assessing the accounting
principles used and significant estimates made by management, as well asand
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In ourthe opinion the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Mechanical Technology Incorporated and Subsidiaries as of September 30,
1997 and 1996, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended September 30,
1997, in conformity with generally accepted accounting principles.expressed above.
/s/ Coopers & LybrandPricewaterhouseCoopers L.L.P.
Albany, New York
November 14, 1997
F-26, 1998
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 19971998 and 19961997
(Dollars in thousands)
Restated
1998 1997
1996------- --------
ASSETS -------- --------
CURRENT ASSETS
Cash and cash equivalents $ 1,4255,567 $ 661,421
Accounts receivable, less allowance of
$153$99 (1998) and $94 (1997) and $102 (1996) 6,783 7,3894,959 4,482
Accounts receivable - Joint Venture 87 -
Inventories 3,392 4,1113,748 3,386
Taxes receivable 8
Note receivable - current 327 315 -
Prepaid expenses and other current assets 201 190472 102
Net assets of a discontinued operation 8 3,186
------- ---------------
Total Current Assets 12,116 11,75615,176 12,892
Property, Plant and Equipment, net 2,272 2,6184,467 749
Note receivable - noncurrent 264 335
-
Other 33 78Investment in Joint Venture 1,221 27
------- ---------------
Total Assets $21,128 $ 14,756 $ 14,45214,003
======= ===============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, 19971998 and 19961997
(Dollars in thousands)
Restated
1998 1997
1996------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------- --------
CURRENT LIABILITIES
Current installments on long-term debt $ - $ 604
Income taxes payable 44 16$ 5 $ 73
Accounts payable 1,981 1,9792,064 1,389
Accrued liabilities 3,924 4,021
------- -------3,328 3,734
Contribution payable-Joint Venture 4,000 -
Total Current Liabilities 5,949 6,6209,397 5,196
LONG-TERM LIABILITIES
Line-of-Credit - 100
Note Payable - 3,000
Long-term debt, net of current maturities - 706
Accrued Interest - Note Payable - 1,098
Deferred income taxes and other credits 607 594
764
------- ---------------
Total Liabilities 6,543 12,288$10,004 $ 5,790
------- ---------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share,
authorized 15,000,000; issued
7,182,645 (1998) and 5,908,661 (1997) and 4,902,201 (1996)7,183 5,909 4,902
Paid-in capital 19,866 13,923
13,423
Deficit (15,885) (11,569)
(16,089)
------- ---------------
11,164 8,263 2,236
Foreign currency translation adjustment (19)(11) (19)
Common stock in treasury, at cost,
3,000 shares (1997(1998 and 1996)1997) (29) (29)
Restricted stock grants - (2)
(24)
------- ---------------
Total Shareholders' Equity 11,124 8,213
2,164
------- ---------------
Total Liabilities and Shareholder's Equity $21,128 $ 14,756 $ 14,45214,003
======= ===============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
For the Years Ended September 30, 1998, 1997 1996 and 19951996
(Dollars in thousands, except per share)
Restated Restated
1998 1997 1996
1995------- -------- --------
--------
Product revenueNet sales $21,028 $ 24,22224,102 $ 22,966 $ 18,516
Research & development revenue 7,758 8,935 11,232
------- ------- -------
Total revenue 31,980 31,901 29,748
Product cost22,755
Cost of sales 14,487 13,955 12,616
Research & development contract costs 5,813 5,946 8,49212,386 14,474 13,925
------- -------- --------
Gross profit 8,642 9,628 8,830
Selling, general and
administrative expenses 9,366 9,781 8,0975,812 7,015 7,071
Product development
and research costs 1,734 1,263 1,425
Impairment loss on long-lived assets - - 1,590831 1,020 690
------- ------- --------------- --------
Operating income (loss) 580 956 (2,472)1,999 1,593 1,069
Interest expense (102) (323) (790) (1,081)
Gain on sale of division/subsidiarydivision
/subsidiary - 2,012 750 6,779
Equity in joint venture loss (3,806) (330) -
-
Other (expense)income, (expense), net 188 (343) (218)(97) (251) (356)
------- ------- -------
-------- --------
(Loss)Income from continuing
operations before extraordinary
item and income taxes 2,127 573 3,008(2,006) 2,701 673
Income tax expense 114 64 8625 143 75
------- ------- -------
-------- --------
(Loss)Income from continuing
operations before extraordinary
item 2,013 509 2,922(2,031) 2,558 598
Extraordinary Item -Item- gain on
extinguishment of debt, net
of taxes ($106) - 2,507 -
-
------- ------- -------
-------- --------
(Loss)Income from continuing
operations 4,520 509 2,922
(2,031) 5,065 598
(Loss)Income from discontinued
operations - 3,239 -(2,285) (545) 3,150
------- ------- -------
Net -------- --------
Net(loss)income $(4,316) $ 4,520 $ 3,748
$ 2,922
======= ======= =============== ========
Earnings per share:
Continuing operationsshare (Basic and Diluted):
(Loss)income before extraordinary
item $ .36(.35) $ .13.45 $ .82.15
Extraordinary item, gain on
extinguishment of debtItem - .44 -
(Loss)income on discontinued operations (.38) (.09) -
------- ------- -------
Continuing operations-------- --------
Net (Loss)income $ (.73) $ .80 $ .13 $ .82
Discontinued operations - .83 -
------- ------- -------
Net income $ .80 $ .96 $ .82.15
======= ======= =============== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 1998, 1997 1996 and 19951996
(Dollars in thousands)
Restated Restated
1998 1997 1996 1995
COMMON STOCK
-------- -------- --------
COMMON STOCK
Balance, October 1 $ 4,902 $ 3,569 $ 3,546
Issuance of shares 1,007 1,333 23
------- ------- -------
Balance, September 30 $ 5,909 $ 4,902 $ 3,569
======= ======= =======Issuance of shares - options 78 - -
Issuance of Shares 1,196 1,007 1,333
-------- -------- --------
Balance, September 30 $ 7,183 $ 5,909 $ 4,902
======== ======== ========
PAID-IN-CAPITAL
Balance, October 1 $ 13,423 $ 12,856 $ 12,944
Issuance of shares 500 567 -
Restricted stock grants - - (88)
------- ------- -------
Balance, September 30 $ 13,923 $ 13,423 $ 12,856
======= ======= =======Issuance of shares - options 147 - -
Issuance of shares 5,796 500 567
-------- -------- --------
Balance, September 30 $ 19,866 $ 13,923 $ 13,423
======== ======== ========
DEFICIT
Balance, October 1 $(11,569) $(16,089) $(19,837)
$(22,759)
Net Net(loss)income (4,316) 4,520 3,748
2,922
------- ------- --------------- -------- --------
Balance, September 30 $(15,885) $(11,569) $(16,089)
$(19,837)
======= ======= =============== ======== ========
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance, October 1 $ (19) $ (19) $ (20)
$ (31)
Adjustments 8 - 1
11
------- ------- --------------- -------- --------
Balance, September 30 $ (11) $ (19) $ (19)
$ (20)
======= ======= =============== ======== ========
TREASURY STOCK
Balance, October 1 $ (29) $ (29) $ (100)(29)
Restricted stock grants - - 71
------- ------- --------
-------- -------- --------
Balance, September 30 $ (29) $ (29) $ (29)
======= ======= =============== ======== ========
RESTRICTED STOCK GRANTS
Balance, October 1 $ (24) $ (29) $ (18)
Grants issued/vested,net 22 5 (11)
------- ------- -------
Balance, September 30 $ (2) $ (24) $ (29)
======= ======= =======Grants issued/vested,net 2 22 5
-------- -------- --------
Balance, September 30 $ - $ (2) $ (24)
======== ======== ========
SHAREHOLDERS' EQUITY
September 30 $ 11,124 $ 8,213 $ 2,164 $ (3,490)
======= ======= =======(2,164)
======== ======== ========
The accompanying notes are an integral part of the consolidated finan-
cialfinancial
statements.
F-6
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended September 30, 1998, 1997 1996 and 19951996
(Dollars in thousands)
Restated Restated
1998 1997 1996
1995------- -------- --------
OPERATING ACTIVITIES
-------- -------- --------
(Loss)Income from continuing
operations $(2,031) $ 4,5205,065 $ 509 $ 2,922598
Adjustments to reconcile net income
to net cash provided (used) by
continuing operations:
Depreciation and amortization 587 686 837
Impairment loss on long-lived assets - - 1,590323 243 233
Gain on extinguishment of debt,
net of taxes - (2,507) - -
Gain on sale of subsidiaries - (2,012) (750) (6,779)
Equity in joint venture loss 3,806 330 - -
Accounts receivable reserve 51 (18) 19
Asset valuation reserve 765 21 15
Loss on sale of fixed assets 9 - -
Deferred income taxes and other credits 13 (170) (15)
(1)
Foreign currency translationOther - 1 11
Other 31 89 (24)29
Changes in operating assets and liabilities net
of effects from discontinued operations:
Accounts receivable 112 (578) 1,611(1,069) (44) (1,635)
Inventories 209 (627) (230)(362) 228 (664)
Escrow deposit - - 750 (750)
Prepaid expenses and other current
assets (19) 271 (19)(374) (18) 240
Accounts payable 228 (311) 355788 (87) 97
Income taxes (78) 3 394(76) (49) 4
Accrued liabilities (including interest) (360) 1,390 (494)(519) 58 1,049
------- ------- --------------- --------
Net cash provided (used) by
continuing operations 998 1,400 (558)513 1,089 (49)
------- -------- --------
Discontinued Operations:
------- ------- -------
(Loss)/Income from discontinued
operations - 3,239 -(2,285) (574) 3,150
Adjustments to reconcile income to net cash
provided (used) by discontinued operations:
Changes in net assets/liabilities
of discontinued operations 3,178 31 (1,598)
Net assets transferred from
discontinued operations (878) - (2,756) -
------- ------- -------
Net cash provided by discontinued operations - 483 -
------- ------- --------------- --------
Net cash provided (used) by discontinued
operations 998 1,883 (558)15 (543) 1,552
------- -------- --------
Net cash provided by operations 528 546 1,503
------- -------- --------
INVESTING ACTIVITIES ------- ------- -------
Purchases of property, plant &
equipment (829) (549) (667)(3,166) (377) (170)
Proceeds from sale of subsidiaries - 2,600 750
9,125Principal payments from note receivable 59 - -
Note receivable Plug Power (500) - -
------- ------- --------------- --------
Net cash (used)provided by investing
activities 1,771 201 8,458(3,607) 2,223 580
------- -------- --------
FINANCING ACTIVITIES ------- ------- -------
Private placement of common stock,
net expenses - - 1,900
Proceeds from options exercised 225 - -
Proceeds from rights offering 7,178 - -
Costs of rights offering (186) - -
Net payments(payments) under line-of-credit
and note agreement - (100) (3,308)
(592)
Principal payments ofon long-term debt - (1,310) (688)
(9,050)
------- ------- --------------- --------
Net cash used inprovided(used)by financing
activities 7,217 (1,410) (2,096)
(9,642)
------- ------- --------------- --------
Effect of exchange rate changes on
cash flows 8 - 1
Increase (decrease) in cash and
cash equivalents 4,146 1,359 (12) (1,742)
Cash and cash equivalents -
beginning of year 66 78 1,8201,421 62 74
------- ------- --------------- --------
Cash and cash equivalents -
end of year $ 1,4255,567 $ 661,421 $ 7862
======= ======= =============== ========
The accompanying notes are an integral part of the consolidated financial
statements. F-7
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For The Years Ended September 30, 1998, 1997 1996 and 19951996
(Dollars in thousands)
Restated Restated
1998 1997 1996
1995------- -------- --------
Supplemental Disclosures -------- -------- --------
- ------------------------
NONCASH INVESTING ACTIVITIES
Contribution of net assets to
joint venture
InventoriesAccounts receivable $ 1500 $ - $ -
Note receivable 500 - -
Inventories - 1 -
Property, plant and equipment, net - 452 - -
Accounts payable - (46) - -
Accrued liabilities - (50) -
Contribution payable -
------ ------ ------Joint Venture 4,000 - -
------- -------- --------
$ 5,000 $ 357 $ -
-------- -------- --------
Proceeds from sale of subsidiary
------ ------ ------
Notes receivable $ - $ 650 $ -
$ -
------ ------ ------------- -------- --------
Net noncash usedprovided(used) in
investing activities $ 5,000 $ 1,007 $ -
$ -
------ ------ ------------- -------- --------
NONCASH FINANCING ACTIVITIES
Conversion of Note Payable to
Common Stock
Note Payable extinguishment $(3,000) $ - $ (3,000) $ -
Common stock issued - 1,500 - -
Accrued interest - Note Payable - (1,213) -
-
------ ------ ------------- -------- --------
Net noncash used in financing
activities $(2,713) $ - $ (2,713) $ -
------ ------ ------------- -------- --------
Net noncash used provided(used)in
investing/financing activities $(1,706)$ 5,000 $ (1,706) $ -
$ -
====== ====== ============= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies
-------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and
accounts have been eliminated. The Company has a 50% interest in a joint
venture. The consolidated financial statements include the Company's
original investmentinvestments in the joint venture (including obligations to invest), plus
its share of undistributed earnings/losses. The investment is included in
the financial line "Other
Assets""Investment in Joint Venture".
Use of Estimates
- ----------------
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Financial Instruments
- ---------------------
The fair value of the Company's financial instruments including cash and
cash equivalents, line-of-credit, note payable and long-term debt,
approximates carrying value. Fair values were estimated based on quoted
market prices, where available, or on current rates offered to the Company
for debt with similar terms and maturities.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant, and Equipment
- ------------------------------
Property, plant and equipment are stated at cost and depreciated using
primarily the straight-line method over their estimated useful lives
ranging from 3 to 40 years. Significant additions or improvements
extending assets' useful lives are capitalized; normal maintenance and
repair costs are expensed as incurred. The cost of fully depreciated
F-9
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies (continued)
-------------------
assets remaining in use are included in the respective asset and
accumulated depreciation accounts. When items are sold or retired,
related gains or losses are included in net income.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies (continued)
Income Taxes
- ------------
The Company accounts for taxes in accordance with Financial Accounting
Standard No. 109, "Accounting for Income Taxes," which requires the use of
the asset and liability method of accounting for income taxes. Under the
asset and liability method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable for future years to differences between financial
statement and tax bases of existing assets and liabilities. Under FAS No.
109, the effect of tax rate changes on deferred taxes is recognized in the
income tax provision in the period that includes the enactment date. The
provision for taxes is reduced by investment and other tax credits in the
years such credits become available.
Revenue Recognition
- -------------------
Sales of products are recognized when products are shipped to customers.
Sales of products under long-term contracts are recognized under the
percentage-of-completion method. Sales of contract research and
development services are also recognized on the
percentage-of-completion method. Percentage-of-completion is based on the
ratio of incurred costs to current estimated total costs at completion.
Total contract losses are charged to operations during the period such
losses are estimated.estimable.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of the foreign subsidiary are translated at year-
end rates of exchange, and revenues and expenses are translated at the
average rates of exchange for the year. Gains or losses resulting from the
translation of the foreign subsidiary's balance sheet are accumulated in a
separate component of shareholders' equity.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist of cash and highly liquid short-term
investments with maturities of less than three months.
F-10Earnings (Loss) Per Share
Effective October 1, 1997, the Company adopted Financial Accounting
Standard No. 128, "Earnings per Share." In accordance with this Standard,
net income(loss) per share is computed using the weighted average number
of common shares outstanding during each year. Diluted net income(loss)
per share includes the effects of all potentially dilutive securities.
Earnings per share amounts for all periods presented have been computed in
accordance with this Standard.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies (continued)
--------------------
Earnings (Loss) Per Share
- -------------------------
Earnings (loss) per share is computed onAdvertising
The costs of advertising are expensed as incurred. Advertising expense
was approximately $83, $92 and $82 thousand in 1998, 1997, and 1996,
respectively.
Asset Impairment
The Company adopted SFAS No. 121, "Accounting For The Impairment of Long-
Lived Assets and for Long-Lived Assets To Be Disposed Of." This statement
requires companies to record impairments to long-lived assets, certain
identifiable intangibles, and related goodwill when events or changing
circumstances indicate a probability that the basiscarrying amount of an asset
may not be fully recovered. Impairment losses are recognized when
expected future cash flows are less than the weighted average
number of shares outstanding plus the common stock equivalents which would
arise from the exercise of stock options, unless such common stock
equivalents would be anti-dilutive. Weighted average outstanding shares
are:asset's carrying value.
Reclassification and Restatement
Certain 1997 5,672,063;and 1996 3,911,952; and 1995, 3,559,789.
Reclassification
- ----------------
Certain 1996 and 1995 amounts have been reclassified to conform with the
1998 presentation. The financial statements for 1997 presentation.and 1996 have also
been restated to reflect the discontinuance of the Company's Technology
Division (See Note 15).
(2) Long-Term Contracts Receivable
------------------------------
Included in accounts receivable areInventories
Inventories consist of the following:
(Dollars in thousands) 1998 1997
1996
------ ------
U.S. Government:
Amounts billed-------- --------
Finished goods $ 112 $ 205
Work in process 791 967
Raw materials, components and billableassemblies 2,845 2,214
-------- --------
$ 9203,748 $ 1,485
Retainage 253 357
------ ------
1,173 1,842
------ ------
Commercial Customers:
Amounts billed3,386
======== ========
(3) Property, Plant and billable 1,032 294
Retainage 165 269
------ ------
1,197 563
------ ------
$ 2,370 $ 2,405
====== ======
The balances billed but not paid by customers pursuant to retainage
provisions in contracts are due upon completionEquipment
Property, plant and equipment consists of the contractsfollowing:
(Dollars in thousands) 1998 1997
-------- --------
Land and acceptance by the customer. Based on the Company's experience, most
retainage amounts are expected to be collected within the ensuing year.
In addition, the Company periodically incurs costs in excess of funded
contract limits. Such costs are incurred in the expectation of future
authorization by the contract sponsor. Management believes these costs,
classified as inventory, will become billableimprovements $ 125 $ -
Buildings and collectible.
F-11improvements 6,111 -
Leasehold improvements 517 568
Machinery and equipment 4,285 3,092
Office furniture and fixtures 866 579
-------- --------
11,904 4,239
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Inventories
-----------
Inventories consistProperty, Plant and Equipment (continued)
(Dollars in thousands) 1998 1997
-------- --------
Less accumulated depreciation 7,437 3,490
-------- --------
$ 4,467 $ 749
======== ========
At the beginning of 1998, assets with a net book value of $878 thousand
consisting primarily of land, building and management information systems
were transferred from discontinued operations to continuing operations.
Construction in progress, included in buildings and improvements, was
approximately $1,371 thousand in 1998.
At the end of 1998, the Company was committed to approximately $2,856
thousand of future expenditures for new equipment and facilities.
Depreciation expense was $317, $216 and $194 thousand for 1998, 1997
and 1996, respectively. Repairs and maintenance expense was $177, $175
and $182 thousand for 1998, 1997 and 1996, respectively.
The cost and accumulated depreciation of buildings and improvements
leased to Plug Power was:
(Dollars in thousands) 1998 1997 1996
-------- -------- --------
Cost $ 1,547 $ 21 $ -
Accumulated depreciation (660) (17) -
-------- -------- --------
$ 887 $ 4 $ -
======== ======== ========
(4) Notes Receivable
Notes receivable consists of the following:
(Dollars in thousands) 1998 1997
1996
-------- --------
Finished goods $ 205 $ 153
Work in process 973 1,727
Raw materials, components
and assemblies 2,214 2,231
------- -------
$ 3,392 $ 4,111
======= =======
(4) Property, Plant and Equipment
-----------------------------
Property, plant and equipment consist of the following:
(Dollars in thousands) 1997 1996
-------- --------
Land and improvements $ 125 $ 125
Buildings and improvements 3,520 3,513
Leasehold improvements 642 752
Machinery and equipment 12,316 13,625
Office furniture and fixtures 1,462 1,483
------- -------
18,065 19,498
Less accumulated depreciation 15,793 16,880
------- -------
$ 2,272 $ 2,618
======= =======
Depreciation expense was $558,000, $640,000 and $646,000 for 1997, 1996
and 1995, respectively. Repairs and maintenance expense was $452,000,
$502,000 and $362,000 for 1997, 1996 and 1995, respectively.
F-12
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Notes Receivable
----------------
Notes receivable at September 30, 1997 consists of:
(Dollars in thousands) 1997 --------
$250 with an interest rate of
10%, interest and principal due
September 30, 1998 (A) $ 250 $ 250
$400 with an interest rate of
10%, due in monthly installments
through September 30, 2002 341 400
--------------- --------
591 650
Less: Current portion (327) (315)
--------------- --------
$ 264 $ 335
=============== ========
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Notes Receivable (continued)
(A) The principal amount of this note may be reduced in accordance with
the terms of the note in the event of a sale of the fixed assets. (6)The
purchaser has requested that the principal amount of the note be reduced
to reflect the resale value of certain assets of L.A.B. The Company is
enforcing its rights with respect to the note and is currently negotiating
the collection of this note.
(5) Investment in Joint Venture
---------------------------
On June 27, 1997, the Company and Edison Development Corp. ("EDC"), a
subsidiary of DTE Energy Co. entered into final agreements to formformed a joint venture, Plug Power, L.L.C.
("Plug Power"), to further develop the Company's Proton Exchange Membrane
Fuel Cell technology. In exchange for its contribution of contracts and
intellectual property and certain other net assets that had comprised the
fuel cell research and development business activity of the Technology
segment (which assets had a net book value of $357 thousand), the Company
received a 50% interest in the joint venture; the Company is not obligated
to make any future contributions to the joint venture, but itsPlug Power. The Company's interest in the joint venture couldPlug
Power may be reduced in certain circumstances in the future.circumstances. EDC made an initial cash
contribution of $4.75 million in exchange for the remaining 50% interest
in the joint venture.Plug Power. The Company's investment in the joint venturePlug Power is included in "Other Assets" at September 30, 1997;the
balance sheet caption "Investment in Joint Venture"; the assets
contributed by the Company to the joint venturePlug Power had previously been included in
the assets of the Company's Technology segment. See the supplemental
disclosure regarding Contribution of Net Assets to Joint Venture in the
Consolidated Statements of Cash Flows for additional information regarding
the assets contributed by the Company to the joint
venture.Plug Power. The Company recorded
the carrying value of the net assets contributed as its initial investment
in the joint venturePlug Power in recognition of the nature of the venture's undertaking.
On April 15, 1998, EDC contributed $2.25 million in cash to Plug Power.
The Company's shareCompany 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 joint
venture's results of operations ofCompany purchased another one-year option to match that contribution.
The Company paid approximately $191 thousand for the options, which mature
in April 1999 ($439,000), net of amortization of250 thousand) and May 1999 ($2 million). If the excess ofCompany
does not exercise its options, they will lapse.
In August, 1998, the Company committed to contribute an additional $5
million dollars (in cash, accounts receivable and research credits) to
Plug Power between August 5, 1998 and March 31, 1999 and recorded a
liability representing this obligation. Such contributions will
increase the Company's proportionate sharetotal contributions to Plug Power (including
contributions of cash, assets, research credits, and a below market
lease) to $11.75 million over the venture's equity of
$109,000, is recorded under the caption "equity in loss of joint venture."
F-13period commencing on June 27, 1997,
and ending on March 31, 1999.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7)(5) Investment in Joint Venture (continued)
On August 5, 1998, the Company made a short term loan to Plug Power of
$500 thousand, which was subsequently contributed to capital on
September 23, 1998. The Company also converted $500 thousand of its
accounts receivable from Plug Power to capital on September 23, 1998.
At September 30, 1998, the remaining obligation to provide additional
funds to Plug Power was $4 million.
The Company has recorded its proportionate share of Plug Power's losses
to the extent of its recorded investment in Plug Power (including the
foregoing obligation to contribute an additional $4 million through
March 31, 1999).
At September 30, 1998, the difference between the carrying value of the
Company's investment in Plug Power and its interest in the underlying
equity consists of the following:
(Dollars in thousands)
Calculated 50% ownership $ 2,431
Unrecognized negative goodwill (2,086)
Value of below market lease contribution (2,000)
Calculated 50% of equity value under option (1,125)
Contribution liability 4,000
-------
Carrying value of Investment in Joint Venture $ 1,221
=======
(6) Income Taxes
------------
Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates.
Income tax expense (benefit) for the years ended September 30, consists of
the following:
(Dollars in thousands) 1998 1997 1996 1995
Continuing operations
-------- -------- --------
Continuing operations
Federal $ 4515 $ 3662 $ -44
State 69 28 8610 81 31
Deferred - - -
------- ------- -------
114 64 86
------- ------- --------------- -------- --------
25 143 75
-------- -------- --------
Discontinued operations
Federal - - -(17) (8)
State - - -(12) (3)
Deferred - - -
------- ------- --------------- -------- --------
- - -
Extraordinary Item ------- ------- -------
Federal 28 - -
State 78 - -
Deferred - - -
------- ------- -------
106 - -
------- ------- -------
$ 220 $ 64 $ 86
======= ======= =======
F-14(29) (11)
======== ======== ========
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7)(6) Income Taxes (continued)
------------(Dollars in thousands) 1998 1997 1996
-------- -------- --------
Extraordinary Item
Federal - 28 -
State - 78 -
Deferred - - -
-------- -------- --------
- 106 -
-------- -------- --------
$ 25 $ 220 $ 64
======== ======== ========
The significant components of deferred income tax expense (benefit) for
the years ended September 30, 1997, 1996 and 1995 are as follows:
(Dollars in thousands) 1998 1997 1996 1995
-------- -------- --------
Continuing operations
Deferred tax (benefit) expense $ (296)(667) $ (259)(356) $ 1,586(310)
Net operating loss carryforward 972 573 -105 1,223 635
Valuation allowance (676) (314) (1,586)
------- ------- -------562 (867) (325)
-------- -------- --------
- - -
-------- -------- --------
Discontinued operations ------- ------- -------
Deferred tax (benefit) expense - (103) 2,831(508) 60 ( 52)
Net operating loss carryforward - 1,090 (4,154)(265) (251) 1,028
Valuation allowance - (987) 1,323
------- ------- -------773 191 (976)
-------- -------- --------
- - -
------- ------- --------------- -------- --------
$ - $ - $ -
======= ======= =============== ======== ========
Extraordinary item
Deferred tax (benefit) expense - (28) (103) 2,831-
Net operating loss carryforward - 862 1,090 (4,154)-
Valuation allowance - (834) (987) 1,323
------- ------- --------
-------- -------- --------
- - -
------- ------- --------------- -------- --------
$ - $ - $ -
======= ======= =============== ======== ========
The Company's effective income tax rate from continuing operations
differed from the Federal statutory rate as follows:
1998 1997 1996 1995
-------- -------- --------
Federal statutory tax rate 34%(34%) 34% 34%
State taxes, net of
federal tax effect - 2% 3% 2%
Amortization of goodwill - - 1%
Meals and entertainment - 5% - Impairment loss on long-lived
assets - - 18%1%
Additional tax gain on sale of
subsidiary - 13% - 11%
Change in valuation allowances 28% (32%) (55%) (53%(48%)
Alternative minimum tax - 2% 6% -7%
Other, net 7% (1%) 5%3%
-------- -------- --------
1%
------- ------- ------- 5% 11%
3%
======= ======= =======
F-15======== ======== ========
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7)(6) Income Taxes (continued)
------------
The deferred tax assets and liabilities as of September 30, 1997 and 1996 consist of the
following tax effects relating to temporary differences and carryforwards:
(Dollars in thousands)
1998 1997
1996-------- --------
Current deferred tax assets:
-------- --------Loss provisions for Discontinued
Operations $ 337 $ -
Bad debt reserve $96 52 $ 31
Inventory valuation 161 165 230
Inventory capitalization 20 40 161
Vacation pay 11166 111
Warranty and other sale obligations 25 51 64
Other reserves and accruals 151 358
37
------- --------------- --------
856 777 634
Valuation allowance (856) (777)
(634)
------- --------------- --------
Net current deferred tax assets $ - $ -
======= =============== ========
Noncurrent deferred tax assets (liabilities):
Net operating loss $ 1,7911,951 $ 3,6251,791
Property, plant and equipment (9) (251)
(324)Investment in Joint Venture 954 -
Other 187 288 329
Alternative minimum tax credit 150 149
-
------- --------------- --------
3,233 1,977 3,630
Valuation allowance (3,233) (1,977) (3,630)
Other credits (607) (594)
(764)
------- --------------- --------
Noncurrent net deferred tax
liabilities and other credits $ (607) $ (594)
$ (764)
======= =============== ========
The valuation allowance at year ended September 30, 19971998 is $2,754,000,$4,089
thousand and at September 30, 19961997 was $4,264,000.$2,754 thousand. During the year
ended September 30, 1997,1998, the valuation allowance decreasedincreased by $1,510,000.
F-16
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Income Taxes (continued)
------------$1,335
thousand.
At September 30, 1997,1998, the Company has unused Federal net operating loss
carryforwards of approximately $5,266,000.$5,738 thousand. The Federal net operating
loss carryforwards if unused will begin to expire during the year ended
September 30, 2009. The use of $5,339 thousand of these carryforwards is
limited on an annual basis, pursuant to the Internal Revenue Code, due to
certain changes in ownership and equity transactions. For the year ended
September 30, 1997,1998, the Company has available alternative minimum tax
credit carryforward of approximately $149,000.
During 1997, the$150 thousand.
The Company made cash payments for income taxes of $361,000,
for 1996 made cash payments, net of cash refunds, for income taxes of $61,000,$42,
$361 and $61 thousand for 1995 received net cash refunds for income taxes of
$266,000.
(8) Accrued Liabilities
-------------------
Accrued liabilities consist of the following:
(Dollars in thousands)1998, 1997 and 1996, -------- --------
Salaries, wages and related expenses $ 1,073 $ 1,230
Acquisition and disposition costs 665 371
Legal and professional fees 445 197
Warranty and other sale obligations 370 460
Contingent liabilities 350 367
Accrued severance 300 -
Deferred income - L.A.B. sale 250 -
Commissions 230 331
Interest expense 103 96
Customer advances against contracts - 696
Other 138 273
------- -------
$ 3,924 $ 4,021
======= =======
F-17respectively.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Indebtedness
------------
Indebtedness consists(7) Accrued Liabilities
Accrued liabilities consist of the following:
(Dollars in thousands) 1998 1997 1996
-------- --------
Line-of CreditSalaries, wages and related expenses $ -999 $ 100
Note Payable - 3,000
Term Loan - 1,310
------- -------
- 4,410
Less current portion - 604
------- -------924
Acquisition and disposition costs 410 665
Legal and professional fees 305 445
Warranty and other sale obligations 607 329
Contingent liabilities 150 350
Accrued severance 143 300
Deferred income 267 250
Commissions 213 230
Interest expense 8 103
Other 226 138
-------- --------
$ -3,328 $ 3,806
======= =======3,734
======== ========
(8) Debt
The Company has a Lineworking capital line of Creditcredit available in the amount
of $4,000,000$4 million with interest payable monthly at a rate of prime plus .625% (9.125%(8.5% at
September 30, 1997)1998) or LIBOR plus 2.5% (7.875% at September 30, 1998), and
a $1 million equipment loan/lease line of credit at an interest rate of
LIBOR plus 2.75% (8.125% at September 30, 1998). The Linelines of Credit expirescredit
expire on OctoberJanuary 31, 2000. No amounts were outstanding under these lines
at September 30, 1998 and 1997.
The Industrial Development Agency for the Town of Colonie has agreed to
issue $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 collateralizeddue
to be completed in April 1999. First Albany Companies Inc. ("FAC"), which
owns 34% of the Company's stock, will underwrite the sale of the IDR
Bonds. Proceeds of the IDR Bonds will be deposited with a trustee for the
bondholders. The Company may draw the bond proceeds to cover qualified
project costs. The bond closing is expected to be completed on or about
December 17, 1998. FAC will receive no fees for underwriting the IDR
Bonds but will be reimbursed for its out-of-pocket costs.
Additionally, KeyBank has agreed to issue a $6 million direct pay letter
of credit to enhance the $6 million IDR Bonds to be issued on the
Company's behalf on or about December 17, 1998. 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.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Debt (continued)
The credit agreement also requires the Company to grant a first lien on
all consolidated assets of the Company, exclusive of its investment in
Plug Power, a first mortgage on all land and buildings owned by the
Company and a guarantee from a former shareholder.first lien on any equipment purchased by the Company.
The weighted average interest rate for the Note Payable and Line of Credit
draws during 1998 was 9.02%, 10.75% during 1997 and 13.2% during 1996 and 1995.1996.
Cash payments for interest were $201,000, $477,000$97, $201 and $695,000$477 thousand for 1998, 1997
and 1996, and 1995, respectively.
(10)(9) Shareholders' Equity
--------------------On September 30, 1998, the Company completed the sale of 1,196,399 shares
of common stock to current shareholders through a rights offering. The
offering raised approximately $7,178 thousand before offering costs of
approximately $186 thousand for net proceeds of approximately $6,992
thousand. The Company will use some or all of the proceeds of the
offering for investment in and/or loans to Plug Power. In addition, some
proceeds may be used for acquisitions for the Company's core businesses,
efforts to increase market share, working capital, general corporate
purposes and other capital expenditures.
The Company had a Restricted Stock Incentive Plan, which awarded
restricted Common Stock of the Company to officers and other key
employees. The Plan expired on December 31, 1994 and no further awards may
be granted. In fiscal year 1995, 32,500 shares were granted, amounting tovalued at
$14,375 based on the market value of the stock at the date of grant. For
accounting purposes, the value of the grants represents compensation,
which has been deferred and is being amortized over the 5-year and 10-year
vesting periods. The shares granted during 1995 were recorded as a
component of Shareholders' Equity. The value of the grants, net of
accumulated amortization and write-offs, was $2,000$0 at September 30, 19971998 and
$24,000$2 thousand at September 30, 1996.
F-181997.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Shareholders' Equity (continued)
Changes in common shares for 1998, 1997 and 1996 are as follows:
Common Shares 1998 1997 1996
- ------------- -------- -------- --------
Balance, October 1 5,908,661 4,902,201 3,568,868
Issuance of shares for
stock option exercises 77,585 - -
Issuance of shares for
stock sale 1,196,399 1,000,000 1,333,333
Issuance of shares -
consultant - 6,460 -
-------- -------- --------
Balance, September 30 7,182,645 5,908,661 4,902,201
======== ======== ========
Treasury Shares
Balance, October 1 and
September 30 3,000 3,000 3,000
======== ======== ========
(10) 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:
(Dollars in Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
(Loss) income before extraordinary
item and available to common
stockholders $ (2,031) $ 2,558 $ 598
Weighted average number of
shares:
Weighted average number of
shares used in net (loss)/
income per share 5,937,158 5,662,827 3,911,952
Effect of dilutive securities:
Stock options - 9,218 -
- -------------------------------------------------------------------------------
Weighted average number of
shares used in diluted net
(loss)/income per share 5,937,158 5,672,045 3,911,952
- -------------------------------------------------------------------------------
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Earnings per Share (continued)
During fiscal 1998, options to purchase 404,915 shares of common stock at
prices ranging from $2.44 to $6 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.
The options, which expire between December 20, 2006 and August 31, 2008,
were still outstanding at September 30, 1998. During fiscal 1997,
options to purchase 195,000 shares of common stock at a price of $3.44
per share were outstanding but were not included in the computation of
Earnings per Share-assuming dilution because the exercise price was
greater than the average market price of the common shares. Therefore,
no potential common shares are included in the computation. The
options, which expire August 27, 2007 were still outstanding at
September 30, 1997.
(11) Stock Option Plan
-----------------
During December 1996, the shareholders approved a new stock incentive
plan. The plan provides that an initial aggregate number of 500,000 shares
of common stock may be awarded or issued. The number of shares available
under the plan may be increased by 10% of any increase in the number of
outstanding shares of common stock for reasons other than shares issued
under this plan. During 1998 and 1997, the number of shares available
under the plan increased to 719,640 and 600,000 shares.shares respectively.
Under the plan, the Board of Directors is authorized to award stock
options, stock appreciation rights, restricted stock, and other stock-basedstock-
based incentives to officers, employees and others. Options are generally
exercisable in from one to five cumulative annual amounts beginning 12
months after the date of grant. Certain options granted may be
exercisable immediately. Option exercise prices are not less than the
market value of the shares on the date of grant. Unexercised options
generally terminate ten years after grant.
TheFor the purpose of applying Financial Accounting Standard No. 123 ("FAS
123"), "Accounting for Stock-Based Compensation", the fair value of each
option granted is estimated on the grant date using the Black-Scholes
Single optionOption model. The dividend yield was 0% for 1997.1998 and 1997,
respectively. The expected volatility was 102% in 1998 and 78% and in
1997. The expected life of the options is 5 years. The risk free interest
rate ranges from 5.52% to 5.85% in 1998 and 6.12% to 6.67% in 1997. The
Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for stock options.
Accordingly, no compensation cost has been recognized in 1998 or 1997.
Had compensation cost and fair value been determined pursuant to Financial Accounting Standard No.FAS 123,
("FAS 123"), "Accounting for Stock-
Based Compensation,"net loss would increase from $(4,316) to $(4,773) thousand in 1998 and net
income would decrease from $4,520,000$4,520 to $4,351,000$4,351 thousand in 1997. EarningsBasic and
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Stock Option Plan (continued)
diluted loss per share would increase from $(.73) to $(.80) in 1998 and
basic and diluted earnings per share would decrease from $0.80 to $0.76 in
1997. The weighted average fair value of options granted during 1998 and
1997 for purposes of FAS 123, is $4.70 and $1.96 per share.
F-19share, respectively.
Activity with respect to the plan is as follows:
1998 1997
-------- --------
Shares under option
at October 1 415,600 -
Options granted 198,500 423,100
Options exercised (77,585) -
Options canceled (131,600) (7,500)
-------- --------
Shares under option
at September 30 404,915 415,600
======== ========
Options exercisable
at September 30 180,915 76,800
Shares available for
granting of options 237,140 184,400
The weighted average exercise price is as follows:
1998 1997
-------- --------
Shares under option
at October 1 $ 2.93 $ -
Options granted 5.75 2.91
Options exercised 2.87 -
Options canceled 2.61 2.44
Shares under option at
September 30 4.37 2.91
Options exercisable at
September 30 3.96 2.93
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Stock Option Plan (continued)
-----------------
Activity with respect to the plan is as follows:
1997
----------------------
Weighted
Average
Exercise
Number Price
----------------------
Shares under option, October 1, 1996 - -
Options granted 423,100 $ 2.91
Options exercised - -
Options canceled (7,500) 2.44
------- -----
Shares under option, September 30 1997 415,600 2.91
Options exercisable, September 30, 1997 76,800 2.93
------- -----
Shares available for granting of options,
September 30, 1997 184,400
=======
The following is a summary of the status of options outstanding at
September 30, 1997:1998:
Outstanding Options Exercisable Options
- ----------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Contractual Exercise Exercise
Range Number Life Price Number Price
$2.44 180,600 9.2 $2.44 1,800 $2.44
$2.50 40,000 9.5 $2.50 40,000 $2.50
$3.44 195,000 9.9 $3.44 35,000 $3.44
F-20
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS$2.44-$3.44 212,415 8.8 $3.16 110,915 $3.03
$4.09-$6.00 192,500 9.7 $5.84 70,000 $6.00
(12) Pension Plans
-------------Retirement Plan
The Company maintains a voluntary savings and retirement plan (Internal
Revenue Code Section 401(k) Plan) covering substantially all employees.
The Company plan allows eligible employees to contribute a percentage of
their compensation; the Company makes additional contributions in amounts
as determined by management and the Board of Directors. The expense forinvestment of
employee contributions to the plan is self-directed. The cost of the plan
was $312,000, $345,000$83, $179 and $346,000$187 thousand for 1998, 1997 1996 and 1995,1996, respectively.
(13) Commitments and Contingencies
-----------------------------
During 1997,October 1998, a legal action brought by a group of investors
against the Company related to a stock purchase agreement and side letter
agreements for the sale of the stock of the Company's wholly owned
subsidiary, Ling Electronics, Inc. ("Ling"), was commenced by a groupdetermined in favor of
investors. Management is vigorously defending
the action and believes the likelihood of a loss in the action is not
probable. The final outcome of this action is not presently determinable
and, therefore, no provision for any liability that may result has been
recorded in the Company's financial statements.Company.
In February 1995, Ling, made a voluntary disclosure to the United States
Department of Commerce regarding unlicensed exports of certain products
shipped in the first four months of fiscal 1995. Ling has fully cooperated
with the Office of Export Enforcement, which has not taken any action to
date. Possible administrative sanctions include: no action; a warning
letter; denial of export privileges; and/or imposition of civil penalties.
Foreign sales represent a significant portion of Ling's total revenue. The
final outcome of this matter is not presently determinable and, therefore
no provision for any liability that may result has been recorded in the
Company's financial statements.
F-21
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Commitments and Contingencies (continued)
-----------------------------
Future minimum rental payments required under noncancelable operating
leases are $479,000, 1998; $467,000,(dollars in thousands): $386 in 1999; $488,000,$424 in 2000; $475,000,$433 in
2001; $438 in 2002; and $559,000, 2002.$342 in 2003. Rent expense under all leases was
$548,000, $542,000$403, $446 and $564,000$433 thousand for 1998, 1997 and 1996, respectively.
Future minimum rental income under non-cancelable operating sub-leases are
(dollars in thousands): $165 in 1999; $160 in 2000; $141 in 2001; $150 in
2002; and 1995,$105 in 2003.
Rental income under all sub-leases was $66, $19 and $10 thousand in 1998,
1997 and 1996, respectively.
The Company leases certain of its Latham, New York facilities to its 50
percent owned joint venture, Plug Power, L.L.C. Effective October 1,
1998, the Company has leased one building to Plug Power at below market
rent as part of its April 1998 capital contribution to Plug Power. The
lease is for ten years with an option to extend the lease for an
additional 5 years at 70 percent of the current fair market rent. Future
minimum rental income receivable under non-cancelable leases as of
September 30, 1998 are as follows:
(Dollars in thousands)
Fiscal Year Amount
- ----------- ----------
1999 $ 212
2000 212
2001 212
2002 212
2003 212
----------
$ 1,061
==========
(14) Related Party Transactions
--------------------------
At September 30, 19971998 First Albany Companies, Inc. ("FAC") owned
approximately 32.3%34% of the Company's Common Stock.Stock (See Note 19)18).
During fiscal 1998 and 1997, First Albany Corporation, a wholly owned
subsidiary of FAC, provided financial advisory services in connection with
the sale of the Technology Division in 1998 and the L.A.B. Division in
1997, for which First Albany Corporation was paid a $75,000
fee.fees of $10 and $75
thousand, respectively. During fiscal 1996, First Albany Corporation,
acted as placement agent in connection with a private placement of 1.3
million shares of the Company's Common Stock, pursuant to which the
Company raised approximately $1.9 million of additional capital (net of
expenses), for which First Albany Corporation was paid a $40,000$40 thousand fee.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Related Party Transactions (continued)
On June 27, 1997, the Company entered into a management services agreement
with the Plug Power joint venture to provide certain services and facilities for a period of
one year. The agreement may be renewed
annually.Services billed by the Company are for cost reimbursement only.
Billings under the agreementthese agreements amounted to $65,000$661 and $65 thousand for the1998
and 1997, fiscal year and all amounts billed wererespectively. Amounts receivable from Plug Power under these
agreements are included in the balance sheet caption "Accounts receivable
- - Joint Venture". During 1998, the Company entered into leases for
manufacturing, laboratory and office space which expire at various dates
through September 30, 2008.
On August 5, 1998, the Company made a short term loan to Plug Power of
$500 thousand, which was subsequently contributed to capital on September
23, 1998. The Company also converted $500 thousand of its accounts
receivable atfrom Plug Power to capital on September 23, 1998. At September
30, 1997.1998, the remaining obligation to provide additional funds to Plug
Power was $4 million.
During 1996, and 1995, the Company made several rental payments for laboratory space
to an officer/director of the Lawrence Insurance Group Inc. ("LIG") and
purchased various insurance coverage from LIG or companies owned directly
or indirectly by LIG totaling $453,000 and
$493,000, respectively.
F-22
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS$453 thousand. At September 30, 1996,
several subsidiaries of LIG collectively owned approximately 16.8% of the
Company's common stock.
(15) 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 &
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.
The Company's United Telecontrol Electronics, Inc. ("UTE") subsidiary, the
sole component of the Defense/Aerospace segment, filed for voluntary
bankruptcy under Chapter 11 of the Federal Bankruptcy Code in April 1994.
During October 1994, UTE commenced an orderly liquidation and final court
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Discontinued Operations (continued)
approval occurred during the third quarter of fiscal 1996. Accordingly,
the Company no longer includes Defense/Aerospace among its reportable
business segments, and since 1994 UTE has been reported as a discontinued
operation, and accordingly the consolidated financial statements have been
reclassified to report separately the net liabilities and operating
results of the business. The Company recorded the effect of the final
liquidation of UTE during fiscal year 1996. Final adjustments to the
Company's financial statements as a result of the UTE bankruptcy are
reflected in income from discontinued operations.
Discontinued operations consist of the following:
(Dollars in thousands) 1998 1997 1996
1995-------- -------- --------
Sales $ 0532 $ 0
======= =======
Income7,878 $ 9,146
======== ======== ========
(Loss)income from discontinued
operations before income tax $ 3,239 $ 0(516) (574) 3,139
Income tax benefit 0 0
------- -------(benefit) - (29) (11)
-------- -------- --------
Net (loss)income from discontinued
operations $ 3,239(516) $ 0
======= =======
There were no(545) $ 3,150
======== ======== ========
Loss on disposal of Division $ (1,769) - -
Income tax (benefit) - - -
-------- -------- --------
Loss on disposal of Division $ (1,769) $ - $ -
======== ======== ========
The assets and liabilities of the Company's discontinued operations are as
follows at September 30:
(Dollars in thousands) 1998 1997
-------- --------
Assets (primarily accounts receivable
at September 30, 19971998) $ 1,136 $ 3,968
Liabilities (primarily accrued expenses
at September 30, 1998) 1,128 782
-------- --------
Net Assets $ 8 $ 3,186
======== ========
Assets with a net book value of $878 thousand consisting primarily of
land, building and 1996.
F-23
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSmanagement information systems were transferred to
continuing operations on October 1, 1997.
(16) Sale of Division/Subsidiary
---------------------------
L.A.B. Division
- ---------------
On September 30, 1997, the Company sold all of the assets of its L.A.B.
Division to Noonan Machine Company of Franklin Park, IL. The Company
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Sale of Division/Subsidiary (continued)
received $2,600,000$2,600 thousand in cash and two notes, totaling $650,000,$650 thousand,
from Noonan Machine Company. The purchaser has requested that the
principal amount of the note be reduced to reflect the resale value of
certain assets of L.A.B. The Company is enforcing its rights with respect
to the note. The net proceeds from the sale were used to pay down all
outstanding debt and build working capital.
The sale resulted in a $2,012,000$2,012 thousand gain, which was recorded in the
fourth quarter of fiscal year 1997. In addition, $250,000$250 thousand of the
proceeds associated with one of the notes was recorded as deferred revenue
due to contingencies associated with the realization of this note. This
note is still outstanding as of September 30, 1998.
ProQuip, Inc.
- -------------
On November 22, 1994, the Company sold all of the outstanding capital
stock of its ProQuip Inc. subsidiary to Phase Metrics of San Diego, CA.
The Company received $13,250,000$13,250 thousand in cash from Phase Metrics and
ProQuip forgave a $316,000$316 thousand intercompany debt due from the Company.
The net proceeds from the sale were used to reduce term debt by $8,000,000$8,000
thousand and to increase working capital by $3,776,000.$3,776 thousand.
The sale resulted in a $6,779,000$6,779 thousand gain, which was recorded during the
first quarter of fiscal year 1995. In addition, $750,000$750 thousand of the net
proceeds was escrowed to provide a fund for any indemnity payments that
the Company may be obligated to pay Phase Metrics. As of February 22, 1996
(the escrow expiration date), no claim had been filed, nor was the Company
aware of any circumstances which might give rise to future claims.
Accordingly, the Company recognized the remaining $750 thousand gain from
the sale during the second quarter of fiscal 1996.
F-24
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Sale of Subsidiaries (continued)
--------------------
ProQuip,(17) Geographic and Segment Information
The Company sells its products on a component of the Test & Measurements segment, is includedworldwide basis with its principal
markets listed in the Company's financial statements through November 22, 1994,table below where information on export sales is
summarized by geographic area for the date of
its sale,Company as follows:a whole:
(Dollars in thousands)
1995Geographic Area 1998 1997 1996
- --------------- -------- -------- --------
United States $ 17,022 $ 17,290 $ 15,050
Europe 1,072 1,223 2,909
Japan 1,534 1,243 1,321
Pacific Rim 834 1,901 1,286
China 302 1,900 1,307
Canada 228 178 341
Rest of World 36 367 541
-------- -------- --------
Total Sales $ 2,584
=======
Income from continuing operations
before income tax21,028 $ 730
Income tax expense 293
-------
Net Income24,102 $ 437
=======
The following unaudited condensed pro forma income statement from
continuing operations for the year ended September 30, 1995 reflects the
effects of the sale of ProQuip, assuming the sale had occurred October 1,
1994. The pro forma adjusted results include a reduction of interest on
term debt, assuming a payment of $8,000,000 was made; a reduction of
interest on the line of credit, assuming the excess net proceeds after the
term debt pay down are used to reduce or pay down any outstanding line of
credit balance; and interest income earned on excess cash after the pay
down of the term debt and line of credit.
(Dollars in thousands) 1995
Pro Forma
---------
Sales $ 27,16422,755
======== Operating loss $ (3,194)
--------
Interest expense 914
Other (expense) income, net (226)
--------
Loss from continuing operations
before income tax (4,334)
Income tax benefit (142)
--------
Loss from continuing operations $ (4,192)
======== F-25========
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) Impairment Loss on Long-Lived Assets
------------------------------------
During 1995, the Company elected to adopt the provisionsGeographic and Segment Information (continued)
One customer accounted for 11.5% of Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of". Accordingly, the realizability of
goodwill associated with the Company's investment in Ling Electronics,
Inc. (Ling), a wholly owned subsidiary, was analyzed for impairment due to
its history of operating and cash flow losses.sales during fiscal 1998.
The Company determined that
the goodwill would not likely be recoverable based on the estimated future
cash flows at Ling. As a result, a $1,590,000 impairment loss was
recognized to reduce the carrying value of the Company's investmentoperates in Ling.
(18) Information on Business Segments
--------------------------------
The Company's operations comprise twoone business segments.
Technology - provides contract research and development, design and
prototype manufacturing services in mechanical engineering, machinery
dynamics and diagnostics, tribology, electrical engineering,
measurement science, and energy technology.segment, Test and Measurement, -which
develops, manufactures, markets and manufactures high-accuracy
inspectionservices sensing instruments,
computer-based balancing systems shock andfor aircraft engines, vibration testingtest
systems and electronic instruments using noncontact measurement techniques.
F-26power conversion products.
The accounting policies of the Test and Measurement segment are the same
as those described in the summary of significant accounting policies. 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. In addition, segments
noncash items include any depreciation and amortization in reported profit
or loss.
Reconciling
(Dollars in thousands) Test and Item: Consolidated
1998 Measurement Corporate Totals
- ---- ----------- ----------- ------------
Revenues $ 21,028 $ - $ 21,028
Interest revenue - 65 65
Interest expense - 102 102
Depreciation and
amortization 205 118 323
Equity in joint venture loss - (3,806) (3,806)
Income (loss) from
continuing operations
before tax 2,155 (4,161) (2,006)
Income (loss) from
continuing operations 2,155 (4,186) (2,031)
Loss on discontinued
operations - (2,285) (2,285)
Total income (loss) 2,155 (6,471) (4,316)
Segment assets 9,424 11,696 21,120
Net assets discontinued
operations - 8 8
Expenditures for segment
assets 202 2,964 3,166
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18)(17) Geographic and Segment Information on Business Segments (continued)
--------------------------------
The information below includes the results of ProQuip, Inc. which was sold
in November 1994 (See Note 16).
A summary of financial data for these business segments at September 30,
1997, 1996, 1995, and for the fiscal years then ended follows:Reconciling
(Dollars in thousands) SALES
--------------------------------
1997 1996 1995
-------- -------- --------
Technology $ 7,878 $ 9,146 $ 11,608
Test and Item: Consolidated
1997 Measurement Corporate Totals
- ---- ----------- ----------- ------------
Revenues $ 24,102 $ - $ 24,102
Interest revenue - - -
Interest expense - 323 323
Depreciation and
amortization 206 37 243
Equity in joint venture loss - (330) (330)
Gain on sale of
division - 2,012 2,012
Income from continuing
operations before
extraordinary item
and tax 2,414 287 2,701
Income from continuing
operations before
extraordinary item 2,411 147 2,558
Extraordinary item, net
of tax - 2,507 2,507
Loss on discontinued
operations - (545) (545)
Total income 2,411 2,109 4,520
Segment assets 8,696 2,121 10,817
Net assets discontinued
operations - 3,186 3,186
Expenditures for segment
assets 375 2 377
1996
- ----
Revenues $ 22,755 18,140
------- ------- -------
$ 31,980- $ 31,901 $ 29,748
======= ======= =======
OPERATING INCOME (LOSS)
--------------------------------
1997 1996 1995
-------- -------- --------
Technology $ (959) $ (434) $ (463)
Test22,755
Interest revenue - - -
Interest expense - 790 790
Depreciation and
Measurement 1,539 1,390 (2,009)
------- ------- -------
$ 580 $ 956 $ (2,472)
======= ======= =======
DEPRECIATION
1997 1996 1995
-------- -------- --------
Technology $ 344 $ 446 $ 440
Test and Measurement 210 190amortization 203 Corporate 4 4 3
------- ------- -------
$ 558 $ 640 $ 646
======= ======= =======
ASSETS EMPLOYED
1997 1996 1995
-------- -------- --------
Technology $ 3,939 $ 4,527 $ 5,753
Test and Measurement 8,69630 233
Gain on sale of
division - 750 750
Income (loss) from continuing
operations before tax 2,006 (1,333) 673
Income (loss) from
continuing operations 2,004 (1,406) 598
Income from discontinued
operations - 3,150 3,150
Total income 2,004 1,744 3,748
Segment assets 9,577 7,492
Corporate 2,121 348 1,238
------- ------- -------
$ 14,756 $ 14,452 $ 14,483
======= ======= =======
CAPITAL EXPENDITURES
1997 1996 1995
-------- -------- --------
Technology $ 452 $ 285 $ 227
Test and Measurement 375 258 437
Corporate 2 6 3
------- ------- -------
$ 829 $ 549 $ 667
======= ======= =======
F-279,925
Net assets discontinued
operations - 3,556 3,556
Expenditures for segment assets 169 1 170
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18)(17) Geographic and Segment Information on Business Segments (continued)
--------------------------------
The U.S. Governmentreconciling items are the amounts of revenues earned and expenses
incurred for corporate operations, which is the largest customer of the Technology segment and
accounted for 16%, 21% and 30% of consolidated revenues in 1997, 1996 and
1995, respectively. The largest single government agency customer of the
Technology segment accounted for 8%, 14% and 23% of the Company's
consolidated revenues in 1997, 1996 and 1995, respectively. The largest
customer of the Test & Measurement segment accounted for 5%, 2%, and 7%
of consolidated revenues in 1997, 1996, and 1995, respectively.
The Technology segment continues to be dependent on 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
anticipatednot included in the foreseeable future. For the second year in a row , the
Technology segment
has a historically low level of backlog, and any
improvement in the segment's results in fiscal 1998 will depend on
success in procuring and fulfilling orders within the fiscal year. The
future growth and profitability of the segment will depend on its success
in identifying and exploiting new markets for its products and services.
(19)information.
(18) Extraordinary Item- Extinguishment of Debt
------------------------------------------
During fiscal 1996, FAC 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 also acquired certain rights to an
obligation ("Term Loan") due from the same finance company ("FCCC") to
whom the Company was obligated under a Note Payable, due December 31,
1996 (See Notes 9 andNote 14).
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. Collateral for the
FCCC Term Loan includesincluded the Company's Note Payable to FCCC. FAC has exercised
its rights to the collateral securing the Term Loan, including the right
to obtain payment on the Note Payable directly from the Company. The
Company and FAC entered into an agreement dated as of December 27, 1996
under which the Company issued to FAC 1.0 million shares of Common
Stock in full satisfaction of the Note Payable and accrued interest.
F-28
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19) Extraordinary Item- Extinguishment of Debt (continued)
------------------------------------------
Accordingly, the Note payable of $3.0 million and accrued interest of
$1.1 million were reclassified as long term in the accompanying September
30, 1996 balance sheet.
If FCCC were to seek collection of the Note Payable plus accrued interest
from the Company, the Company, based on the opinion of counsel, believes
that the outcome of any such action pursued by FCCC against the Company
would not have a material adverse impact on the Company's financial
position or results of operation.
F-29(19) Comprehensive Income
Total comprehensive income for the years ended September 30 consists of:
(Dollars in Thousands) 1998 1997 1996
-------- -------- --------
Net (loss)income $ (4,316) $ 4,520 $ 3,748
Other comprehensive income(loss),
before tax:
Foreign currency translation
adjustments 8 - 1
Income tax related to items of
other comprehensive
income(loss) - - -
-------- -------- --------
Total comprehensive income(loss) $ (4,308) $ 4,520 $ 3,749
======== ======== ========