=============================================================================================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K10-K/A
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 30, 1997
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period from __________ to __________
Commission file number 0-6890
MECHANICAL TECHNOLOGY INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1462255
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
968 Albany-Shaker Rd, Latham, New York 12110
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
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, 1997 (based on the last
sale price of $5.125 per share for such stock reported by OTC Bulletin
Board for that date) was approximately $16,154,195.
As of December 12, 1997,January 22, 1998, the registrant had 5,905,6615,905,861 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated into===============================================================================
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information set forth under the caption "Executive Officers" in Item 1 of
the Form 10-K Report Proxy Statement for Part IIIfiled by the registrant with the Commission on December
22, 1997 is incorporated herein by reference.
DIRECTORS
At the Annual Meeting of Shareholders, eight Directors are to be heldelected to
fill the nine available positions, each to hold office until the next Annual
Meeting of Shareholders and until a successor shall be elected and shall
qualify.
Management's nominees for Directors, together with certain information
concerning them, are on March 11, 1998
==============================================================================
PART I
ITEM 1: BUSINESSthe following pages.
Year First
Principal Occupation Became a
Name Age or Employment Director
- -----------------
Mechanical Technology Incorporated and its subsidiaries produce products
and render services 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%------------------------ --- ---------------------------- ----------
Dale W. Church 58 Lawyer, private practice 1997
Edward A. Dohring 64 President, SVG Lithography 1997
Systems, Inc.
Alan P. Goldberg 52 President & Co-Chief 1996
Executive Officer,
First Albany Companies, Inc.
George C. McNamee 51 Chairman of the Company's
revenues from operations were derived from product salesBoard of the 1996
Company and Chairman & Co-Chief
Executive Officer, First Albany
Companies, Inc.
Dr. Martin J. Mastroianni 53 President and Chief Operating 1997
Officer of the Company
E. Dennis O'Connor 58 Director-New Products and 1993
Technology, Masco Corporation and
Registered Patent Attorney
Dr. Walter L. Robb 69 President, Vantage 1997
Management, Inc.
Dr. Beno Sternlicht 69 President, Benjosh Management 1996
Corporation
CERTAIN INFORMATION REGARDING NOMINEES
Mr. Church has practiced law in private practice, government, and corporate
environments for over 30 years with specialties in U.S. and international
government contracting, developing companies, mergers and acquisitions, and
joint ventures. He currently serves as General Counsel to the American
Electronic Association, as a Trustee of the National Security Industrial
Association, and as a director on various private corporations. His previous
experience includes working for the U.S. government's Central Intelligence
Agency and Department of Defense and as corporate counsel to establish
several companies in the Company's
fiscal year ended September 30, 1997; the remaining 24%"Silicon Valley" of revenues were
derived from technology supportCalifornia.
Mr. Dohring has been Vice President of Silicon Valley Group, Inc. ("SVG")
since July 1992 and research and development contracts.
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 assetsPresident of its L.A.B.
divisionSVG Lithography Systems, Inc. unit since
October 1994. From June 1992 to Noonan Machine CompanyOctober 1994, he served as President of Franklin Park, IL. The Company
received $2,600,000 in cashSVG's
Track Systems Division. He joined SVG from Rochester Instrument Systems,
Inc., where he served as President from April 1989 to June 1992. He has also
held management positions with General Signal, CVC Products, Bendix, Bell &
Howell and two notes, totaling $650,000, from Noonan
Machine Company. The net proceeds fromVeeco Instruments.
Mr. Goldberg is the sale were used to pay down all
outstanding debtPresident & Co-Chief Executive Officer and build working capital. The salea Director 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 form a joint
venture 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 $349 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 its interest in the
joint venture could be reduced in certain circumstances in the future. 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. The Company's
investment in the joint venture is included in "Other Assets" at September
30, 1997; the assets contributed by the Company to the joint venture 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.
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, see "Securities Ownership of common 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,Certain
Beneficial Owners" 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 a 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)section entitled "Additional Information", below).
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 two business segments: Test and
Measurement and Technology. (Certain financial information regarding the
Company's business segmentsHe 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. Test and Measurement offers a wide range of technology-
based equipment and systems for improved manufacturing, product testing,
and inspection for industry. Business units in this segment include
Advanced Products Division, Ling Electronics, Inc. and 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-
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, and markets 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, 1997 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 awarded by government agencies or
released to manufacture by commercial customers; however, approximately
$157 thousand of the orders included in the September 30, 1997 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).
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. 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
technology 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
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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 is the belief of the Company that
these expenditures contribute to the growth of the Company's technological
base.
Product Protection
- ------------------
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 segments are subject to intense
competition. In each of its business segments, the 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 operates are: product quality and performance, price, and
timely delivery. The Company believes that its research and development
skills and reputation are competitive advantages.
Employees
- ---------
The total number of employees of the Company and its subsidiaries was 178
as of September 30, 1997, compared to 233 as of the beginning of the
fiscal year.
Executive Officers
- ------------------
The executive officers of the registrant (all of whom serve at the
pleasureChairman of the Board of Directors), their ages,Trustees of the Albany Institute of History
and Art, and a Director of the Center for Economic Growth and the position or
office held by each, are as follows:
Position or Office Name Age
------------------ ---- ---
President, Chief OperatingAlbany
Symphony Orchestra.
Mr. McNamee, Chairman of the Company's Board of Directors, is the Chairman &
Co-Chief Executive Officer Martin J. Mastroianni 53
Andand a Director Vice President, Chief Financial Officer
And Treasurer Cynthia A. Scheuer 36
Vice Presidentof FAC (see "Securities Ownership
of Certain Beneficial Owners" in the section entitled "Additional
Information", below). Mr. McNamee is a member of the Board of Directors of
MapInfo Corporation, The Meta Group, Inc., and General Manager, Denis P. Chaves 57
Advanced Products
Vice PresidentInternet Shopping Network,
Inc. He also serves on the Board of Directors of the New York State Science
and General Manager James Clemens 48
Ling Electronics, Inc.
Vice PresidentTechnology Foundation, and General Manager Douglas McCauley 49
Technology Divisionis Chairman of the Regional Firms Advisory
Committee to the Board of the New York Stock Exchange.
Dr. Mastroianni was appointedelected President and Chief Operating Officer of the
Company in December 1996. Prior to joining the Company, he served most
recently as a Director of Transmission Power Delivery for the Electric Power
Research Institute, (EPRI) where he was employed since 1992. Previously, betweenfrom 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 PresidentMr. O'Connor has, since April 1984, been the Director of New Products and
Chief Financial OfficerTechnology for Masco Corporation, Taylor, Michigan, a diversified
manufacturer of building and Treasurerhome improvement, and other specialty products
for the home and family. The Company understands that Mr. O'Connor
originally became a Director 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 Vice President and was General
Manager of the Company's LAB 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 Manager of Ling
Electronics, Inc., a wholly owned subsidiary of the Company, since April
1997. Mr. Clemens was previously a site manager for Teleflex Control
Systems from December 1994 to March 1997. From September 1992 to November
1994when 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 Manufacturingselected by Masco
Corporation responsible for business conversion from defense to commercial products.
Prior to 1989, he held various management positions with the General
Electric Company.
ITEM 2: PROPERTIES
- ------------------
The Company andas its subsidiaries presently own or lease real estate
principally in New York and California. In management's opinion, these
facilities are generally well 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 in a three-building
complex of approximately 103,000 square feet on 38 acres in Latham, New
York, which is owned by the Company. This complex is divided
approximately equally between 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 portion 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,1999
In addition to the above properties, 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, could relate to compliance with various governmental
regulations and requirements, or could be based on other transactions or
circumstances. The Company does not believe there are any such proceedings
presently pending which could have a material adverse effectdesignee on the Company's financial condition except for the matters described in Note 13Board of Directors pursuant 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).
In February, 1997, an unaffiliated entity, Ling Holdings Group, Inc.
("Plaintiff"), brought suit against the Company. The Plaintiff's claims
arise out of the Company's decision not to sell Plaintiff the stock of the
Company's wholly owned subsidiary, Ling Electronics, Inc. ("LING"), after
expiration of the closing date specified in the stock purchase agreement
and side letters executedagreements entered into in connection with the 1992 transaction (collectively, the "Agreements"). Plaintiff claims that the Agreements
provided an "open-ended" closing that permitted Plaintiff 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.
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.
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
electronic OTC Bulletin Board. Set forth below are the highest and lowest
prices at whichMasco sold 1,730,000 shares of the Company's Common Stock have been traded
during eachto subsidiaries of
the Company's last two fiscal years.
High Low
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
NumberLawrence Insurance Group, Inc., a former majority shareholder of Equity Security Holders
- --------------------------------- Approximate Numberthe
Company. The Lawrence Insurance Group, Inc. subsidiaries agreed to vote
their shares to elect a designee of Record
Title of Class Holders* (as of December 12,1997)
-------------- ---------------------------------
Common Stock, $1.00 Par Value 557
- -----------------------------
*In addition, there are approximately 908 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 ofMasco to the Company's Board of Directors
so long as Masco remained liable under a guarantee it had executed in
connection with the Company's obligations under a line of credit.
Dr. Robb, now a management consultant and will depend, amongPresident of Vantage Management,
Inc., was until December 31, 1992, General Electric Company's("GE") Senior
Vice President for corporate research and development. He directed the GE
Research and Development Center, one of the world's largest and most
diversified industrial laboratories, and served on GE's Corporate Executive
Council. He serves on the Board of Directors of Marquette Electronics, Cree
Research, Celgene, Neopath and X-Ray Optical, Inc. He also serves on the
Advisory Council of the Critical Technology Institute and on the Council of
the National Academy of Engineering.
Dr. Sternlicht, one of the founders of the Company, has been President of
Benjosh Management Corporation, a management firm in New York, New York,
since 1976. He previously served as a Director of the Company from 1961 to
1992. Prior to 1985, he held a number of positions with the Company. At the
time of his departure from the Company, he served as Vice Chairman of the
Board of Directors and Technical Director.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and Executive Officers, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission ("SEC") initial reports of ownership and
reports of changes in ownership of Common Stock and other factors, on earnings, capital requirements,
and the operating and financial conditionequity securities
of the Company. TheOfficers, Directors and greater than ten percent shareholders
are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.
Based on Company records and other information, the Company does not anticipate paying dividends inbelieve
that all SEC filing requirements applicable to its Directors and Officers
with respect to the foreseeable future.Company's fiscal year ended September 30, 1997 were
complied with.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Number Number of
Name of Forms Transactions
---- -------- ------------
Dale Church, Director (1) 1 1
Martin Mastroianni; President, Chief Operating
Officer, Director (1) 1 1
Beno Sternlicht, Director (1) 1 2
(1) Note, such forms were electronically filed with the SEC on a timely
basis, however, the filings were rejected. The filings were then made by
hard copy.
ITEM 6: SELECTED FINANCIAL DATA11: EXECUTIVE COMPENSATION
- --------------------------------
EXECUTIVE COMPENSATION
The following table sets forth summary financial information regarding
Mechanical Technology Incorporatedwith respect to the compensation
for services to the yearsCompany and its subsidiaries during the Company's fiscal
year ended September 30, 1997 (and during the Company's two prior fiscal
years), of each person who served as indicated:
(In thousands, except per share amounts)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Net Sales $ 31,980 $ 31,901 $ 29,748 $ 40,234 $ 41,500
Income from
Continuing Operations 4,520(1) 509(2) 2,922(3) 141 1,162
Net Income (Loss) 4,520 3,748 2,922 (24,378) 1,056
Earnings (Loss) Per
Share:
From Continuing
Operations .80 .13 .82 .04 .33
Net Income (Loss) .80 .96 .82 (6.91) .30
AsChief Executive Officer during such
year, and of September 30:
Total Assets 14,756 14,452 14,483 25,317 42,428
Long-term Obligations 0 3,806 6,222 2,144(4) 11,699
________________________all other persons who served as executive officers of the
Company during such year whose total annual compensation exceeded $100,000.
- ------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
- ------------------------------------------------------------------------------------------------------------------
NAME AND POSITION OF FISCAL SALARY BONUS OTHER RESTRICT- SECURITIES ALL
PRINCIPAL YEAR ANNUAL ED UNDER- OTHER
COMP STOCK LYING COMP
AWARDS OPTIONS
(1) (#)
- ------------------------------------------------------------------------------------------------------------------
R. Wayne Diesel 1997 $200,000 $15,000 - None 35,100 $6,605
CEO (2)
- ------------------------------------------------------------------------------------------------------------------
1996 $200,000 None - None None $8,000
(2)
- ------------------------------------------------------------------------------------------------------------------
1995 $190,764 None - 12,500 None $4,452
(2)
- ------------------------------------------------------------------------------------------------------------------
Martin J. Mastroianni President 1997 $121,154 None - None 150,100 $-
& COO
(3)
- ------------------------------------------------------------------------------------------------------------------
Stephen Sullivan, President, 1997 $62,828 None - None None $16,615
Ling Electronics, Inc. (2)(4)
- ------------------------------------------------------------------------------------------------------------------
1996 $130,310 None - None None $4,840
(2)
- ------------------------------------------------------------------------------------------------------------------
1995 $139,617 None - None None $5,306
(2)
- ------------------------------------------------------------------------------------------------------------------
James Clemens, President, Ling 1997 $57,501 None - None 30,000 $32,123
Electronics, Inc. (5) (2)(6)
- ------------------------------------------------------------------------------------------------------------------
Douglas McCauley, Vice 1997 $115,000 $7,000 - None 15,100 $4,158
President Technology Group (2)
- ------------------------------------------------------------------------------------------------------------------
1996 $110,807 $7,500 - None None None
- ------------------------------------------------------------------------------------------------------------------
1995 $100,152 $5,000 - 625 None $1,669
(2)
- ------------------------------------------------------------------------------------------------------------------
Stephen T. Wilson, Chief 1997 $110,000 $10,000 - None 10,100 $3,594
Financial Officer (2)
- ------------------------------------------------------------------------------------------------------------------
1996 $107,903 $10,000 - None None $2,620
(2)
- ------------------------------------------------------------------------------------------------------------------
1995 $60,846 None - None None $-
- ------------------------------------------------------------------------------------------------------------------
Denis P. Chaves, Vice President, 1997 $120,673 $37,000 - None 25,100 $4,233
LAB and Advanced Products Div (2)
- ------------------------------------------------------------------------------------------------------------------
1996 $99,167 $37,000 - None None $3,966
(2)
- ------------------------------------------------------------------------------------------------------------------
1995 $95,000 $10,000 - 625 None $3,800
(2)
- ------------------------------------------------------------------------------------------------------------------
(1) Includes a $2.012 million gainThis column shows the market value on the saledate of grant of shares of the
L.A.B. DivisionCompany's Common Stock awarded under the Company's Restricted Stock Incentive
Plan. The Plan expired on December 31, 1994. The restrictions on these shares
lapse on a scheduled basis as determined by the Board of Directors at the time
of grant or upon death. The recipient has voting and a $2.5 million extraordinary gain, net of tax, on the extinguishment of
debt. (See Notes 16 and 19dividend rights to the
accompanying Consolidated Financial
Statements)
(2) Includes $750 thousand gainshares from the saledate of ProQuip resulting fromaward. The aggregate holdings/value of shares of
Restricted Stock, as to which the release of escrow funds. (See Note 16 to the accompanying Consolidated
Financial Statements).
(3) Includes ProQuip (sold in November 1994) results through the sale date
and the $6.8 million gainrestrictions have not lapsed, 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.
Consistent with 1996 data, prior years have been restated to reflect the
Defense/Aerospace segment as a discontinued operation. (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: 1997 in Comparison with 1996
- ---------------------------------------------------
On September 30,
1997 (based on a price on that date of $3.47 per share) by the individuals
listed in this table, including the awards shown in this column, are: Mr.
Sullivan, 500 shares/$1,735; Mr. McCauley, 3,500 shares/$12,145. In November
1996, the Board of Directors took action to accelerate the vesting of shares
held by Messrs. Diesel (23,000 shares), McCauley (1,500 shares), and Chaves
(1,500 shares) that were still subject to restrictions under the Plan; as a
result, all restrictions under the Plan have lapsed as to all shares held by
Messrs. Diesel and Chaves, while 4,000 shares held by Mr. McCauley and 500
shares held by Mr. Sullivan remain subject to restrictions under the Plan.
(2) Represents Company matching contributions of $1.00 for each $1.00
contributed by the named individual to the 401(k) Savings Plan up to a maximum
of 4% of base pay.
(3) Dr. Mastroianni replaced Mr. Diesel as President and became Chief Operating
Officer of the Company sold allon December 20, 1996.
(4) Represents payout of the assetsvacation pay in lieu of its L.A.B.
Division to Noonan Machine Companytime off.
(5) Mr. Clemens replaced Mr. Sullivan as president 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 inLing Electronics, Inc.
on March 24, 1997.
(6) Includes a $2,012,000 gain, which was recorded in
the fourth quarter of fiscal year 1997. In addition, $250,000 of the
proceeds associated with one of the notes was recorded as deferred
revenue due to the possible reduction of the $250,000 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 form a joint
venture to further develop the Company's Proton Exchange Membrane Fuel
Cell technology ("Fuel Cell Business"). 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 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 its interest in the joint venture could be reduced in certain
circumstances in the future. 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. The Company's investment in the joint venture is
included in "Other Assets" at September 30, 1997; the assets contributed$30,000 loan by the Company to Mr. Clemens. The loan is
repayable in three equal annual installments of $10,000 plus interest at the
joint venture had previously been included inrate of 6.5%. The Company has agreed to pay Mr. Clemens an annual bonus equal
to the assets ofprincipal plus interest due on the Company's Technology segment. See the supplemental
disclosure regarding Contribution of Net Assetspromissory note, if Mr. Clemens
continues 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
contributedbe employed by the Company on March 24 of 1998, 1999 and 2000,
respectively. The Company also agreed to repay the note in full if Mr.
Clemens dies or becomes permanently disabled prior to the joint venture.
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 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.
Sales for fiscal 1997 totaled $32.0 million compared to $31.9 million for
the prior year, an increase of less than 1% in fiscal 1997 compared to
fiscal 1996.
Selling, general and administrative expenses for fiscal 1997 were 29.2% of
sales, as compared to 30.7% in 1996. Product development and research
costs during fiscal 1997 were 5.4% of sales, compared to 4.0% 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 compared to $956
thousand for fiscal 1996, or a decrease of $376 thousand. The decrease in
operating income is primarily due to continuing declining Technology
segment 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. Stable
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.
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 effectdate of the
final liquidationpayment on the note.
The following table sets forth information concerning the grant of UTEstock
options during the Company's 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
- -------------------------------
Atended September 30, 1997 to each
person who served as Chief Executive Officer during such year, and all other
persons who served as executive officers of the Company's order backlogCompany during such year
whose total annual compensation exceeded $100,000.
OPTION GRANTS IN FISCAL 1997
Potential Realizable
Value
At Assumed Annual
Rates
of
Number of Percentage Stock Price
Shares of Total Exercise Appreciation for
Underlying Options Price Option Term
Name Options Granted to (per share) Expiration 5% ($) 10%($)
- ---- Granted Employees ----------- Date ------- -------
------- --------- ----
R. Wayne Diesel 35,000(1) 9.14% $3.44 6/30/00 $17,305 $36,180
100(2) 0.03% $2.44 12/20/06 $153 $389
Martin J. Mastroianni 30,000(3) 7.83% $2.44 12/20/06 $46,035 $116,662
100(2) 0.03% $2.44 12/20/06 $153 $389
120,000(3) 31.32% $2.50 07/15/07 $188,668 $478,123
James Clemens 15,000(4) 3.92% $3.44 08/27/07 $32,451 $82,237
15,000(5) 3.92% $2.44 03/24/07 $23,018 $58,331
Douglas McCauley 15,000(4) 3.92% $3.44 08/27/07 $32,451 $82,237
100(2) 0.03% $2.44 12/20/06 $153 $389
Stephen T. Wilson 10,000(6) 2.61% $3.44 12/20/99 $3,947 $8,148
100(2) 0.03% $2.44 12/20/06 $153 $389
Denis P. Chaves 25,000(7) 6.53% $3.44 08/27/07 $54,085 $137,062
100(2) 0.03% $2.44 12/20/06 $153 $389
(1) Options may be exercised until June 30, 2000.
(2) Options may be exercised after December 20, 1997 and before December 20,
2007, except in the case of the death, disability or termination of an employee,
in which case options must be exercised sooner.
(3) Dr. Mastroianni was $5.2 million,originally granted qualified options for 150,000
shares; 30,000 of which vested 6,000 per year for each of five years and
120,000 of which vested upon the attainment of certain defined profit targets.
As of July 15, 1997, Dr. Mastroianni's option agreement was amended to provide
that Dr. Mastroianni will receive a decreasetotal of $3.3 million from the prior year-end. This reduction reflects
a decline150,000 qualified stock options
that will vest as follows: a) 30,000 will vest 20% per year commencing as of
December 20, 1996; b) 30,000 will vest at the Ling Division due to orders expected inrate of 33% per year beginning as
of July 15, 1997; c) 90,000 will vest, if certain profit targets are attained,
at the fourth
quarter being shifted to the next fiscalrate of 20,000 per year, for each of three years, commencing as well as the elimination
of backlog for the L.A.B. Division (approximately $.6 million at 1996)
which was soldJuly
15, 1997, and 30,000 as of September 30, 1997.
Inventories, excluding2000.
(4) 25% or 3,750 shares, are exercisable each year beginning on August 27,1998.
(5) Options will vest and may be exercised based upon the effectattainment of certain
defined annual profit targets.
(6) Options may be exercised after December 20, 1997 and prior to December 20,
1999.
(7) 25% or 6,250 shares are exercisable each year beginning on August 27, 1998.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Fiscal Options at
Year Fiscal Year
End (#) End ($)
------------------- -------------------
Shares
Acquired Value
on Realized Exercis- Unexercis Exercis- Unexercis
Name Exercise (#) ($) able -able able -able
- ---- ------------ -------- -------- --------- -------- ---------
R. Wayne Diesel 0 0 35,000 100 $1,050 $103
Martin J. Mastroianni 0 0 16,000 134,100 $15,880 $131,523
James Clemens 0 0 0 30,000 0 $15,900
Douglas McCauley 0 0 0 15,100 0 $553
Stephen T. Wilson 0 0 0 10,100 0 $403
Denis P. Chaves 0 0 0 25,100 0 $853
COMPENSATION COMMITTEE REPORT
COMPENSATION POLICIES FOR OFFICERS. The Company's compensation program for
executive officers and employee Directors currently consists of an annual
salary and bonus payments that are primarily designed to reward performance.
For the fiscal year 1997, the Committee used the following criteria in making
compensation decisions for executive officers:
* Company and individual affiliate financial performance.
* Identification and implementation of strategies and programs
that result in increased revenue, decreased cost or improved
share value.
* Implementation of programs to improve working capital and cash
flow, and to focus the Company's product offerings such that
they compliment the Company's technology resources.
CHIEF EXECUTIVE OFFICER COMPENSATION. Effective July 1, 1997, Mr. Diesel
resigned as Chief Executive Officer and became special assistant to the
chairman of the saleBoard of Directors. The Company does not currently have a
Chief Executive Officer. Mr. Diesel was Chief Executive Officer from
February 1994 to July 1997 and President from February 1994 to December 1996.
He was recruited from outside the Company and had previously held senior
management positions in the insurance and banking industries, and with the
State of New York. The compensation package offered Mr. Diesel took into
consideration his experience and expertise; the size, diversity and needs of
the L.A.B. Division,
decreased by $209 thousand in 1997, an improvement overbusiness; and compensation levels at companies of comparable size and
industry. The compensation package included: (1) a base salary, effective
February 4, 1994; (2) the prior year's
increase in inventories of $627 thousand.
Cash flow from operating activities was $998 thousand in 1997 compared
with $1,400 thousand in 1996potential for cash incentive bonuses based on
performance; and ($558) thousand in 1995. Cash flow from
operating activities was impacted in 1997 and 1996 by positive operating
income and fluctuations in working capital components. Capital
expenditures were $829 thousand for 1997, $549 thousand for 1996 and $667
thousand for 1995. The increased capital expenditures in 1997 were in
accordance with(3) stock grants under the higher level of planned expenditures. Capital
expenditures in 1998 are expected to be about $850 thousand, which
includes expanding engineering and testing capabilities, information
technology upgrades and manufacturing equipment. The Company expects to
finance these expenditures with cash from operations and existing credit
facilities.
Cash and cash equivalents were $1,425 thousand at September 30, 1997
compared to $66 thousand at September 30, 1996, this increase is a result
ofCompany's Restricted Stock
Incentive Plan. For the cash proceeds from the sale of the L.A.B. Division. Working
capital was $6.2 million at September 30, 1997, a $1.1 million increase
over $5.1 million at fiscal year-end 1996.
Atperiod October 1, 1994 through September 30, 1997
there were no borrowings outstandingchanges to his annual compensation. In fiscal 1997, Mr. Diesel
was awarded a bonus of $15,000. The Committee also took action in November
1996 to accelerate the vesting of 23,000 shares held by Mr. Diesel that were
still subject to restrictions under the Restricted Stock Incentive Plan; as a
result, all restrictions under the Plan have lapsed as to all shares held by
Mr. Diesel. In addition, on August 27, 1997, the Committee awarded Mr.
Diesel 35,000 non-qualified options for the Company's common stock. This
award was based upon Mr. Diesel's service to the Company and the Company's
improved financial condition (see "Employment Agreements" in the section
entitled "Certain Relationships and Related Transactions", below).
Effective December 20, 1996, Dr. Martin Mastroianni replaced Mr. Diesel as
President and became Chief Operating Officer of the Company. Dr. Mastroianni
was recruited from outside the Company and held previous management positions
in the energy and the test and measurement industries, including positions
with the Electric Power Research Institute, Vacuum Components, Inc., Tenney
Engineering, Inland Vacuum Industries and Allied Signal. The compensation
package offered to Dr. Mastroianni includes (1) an annual base salary; (2)
the potential for cash incentive bonuses based on performance; and (3) option
grants under the Company's Incentive Stock Option Plan. For the period
December 20, 1996 through September 30, 1997, there were no changes to Dr.
Mastroianni's annual compensation and a cash incentive bonus of $50,000 was
accrued but not paid as of September 30, 1997. Dr. Mastroianni was, however,
awarded qualified options for 30,000 shares, plus an additional 120,000
shares if certain performance targets were met, at an exercise price of $2.44
per share. The award was amended on July 15, 1997, to (1) redefine the
profit targets; (2) reprice the exercise price for the 120,000 shares at
$2.50 per share; and (3) permit vesting of 30,000 of the 120,000 shares based
on the lineCompany's performance in fiscal 1997.
Compensation Committee
Mr. Alan P. Goldberg
Dr. Beno Sternlicht
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee ("Committee") approves all of credit, while at September 30, 1996, there were linethe policies under
which compensation is paid or awarded to the Company's officers and employee
Directors. The Committee, in fiscal 1997, consisted of credit borrowingsMessrs. Goldberg,
Landgraf and Apkarian, until April 16, 1997, and thereafter consisted of $100 thousand. The Company has a lineMr.
Goldberg and Dr. Sternlicht.
Mr. Goldberg is Co-Chief Executive Officer of credit available in the
amount of $4.0 million. This line of credit continues to be
collateralized by a guarantee from a former shareholder, and expires on
October 31, 1998.
During fiscal 1996, First Albany Companies, Inc.
("FAC"). (See "Security Ownership of Certain Beneficial Owners" and "Certain
Relationship and Related Transactions", below).
Mr. Apkarian is a former Chief Executive Officer of the Company. Mr.
Apkarian was Chief Executive Officer of the Company from 1961 until 1991 and
was Chairman of the Board of Directors from 1984 until his resignation from
his position in August 1993. Mr. Apkarian has not served on the Board or the
Compensation Committee since April 1997. Mr. Apkarian did not vote on
matters pertaining to his own compensation.
EMPLOYMENT AGREEMENTS
The Company had purchased
909,091an employment agreement with Mr. Diesel which provided that
Mr. Diesel would receive an annual base salary of $200,000 and was eligible
to receive incentive compensation at the discretion of the Compensation
Committee. This agreement expired in February 1997. Per this agreement, Mr.
Diesel was awarded an initial grant under the Company's Restricted Stock
Incentive Plan of 10,000 shares; in December 1994, the Committee awarded Mr.
Diesel an additional 25,000 shares under such Plan. In addition, on August
27, 1997 the Company awarded Mr. Diesel 35,000 options for shares, pursuant
to the Company's Incentive Stock Option Plan. The agreement also stated that
if Mr. Diesel was removed from the position of President and CEO for reasons
other than cause during his first three years of employment, the Company will
pay him severance payments equivalent to a maximum of one year's base salary
plus insurance benefits. Effective December 20, 1996, Mr. Diesel resigned as
President of the Company. Effective July 1, 1997, Mr. Diesel resigned as
Chief Executive Officer of the Company and became a special assistant to the
Chairman of the Board of the Company. On December 19, 1997, the Company
entered into an agreement with Mr. Diesel regarding termination of his
employment. The agreement provides that Mr. Diesel will receive: a) total
salary payments from the Company of $42,308, b) 401k matching payments of
$4,615.38; c) insurance benefits through December 31, 1997; d) a lump sum
severance payment of $95,615; and e) vesting of the 35,000 non-qualified
stock options awarded to Mr. Diesel on August 27, 1997.
The Company has an agreement with Dr. Mastroianni which provides that Dr.
Mastroianni will receive an annual base salary of $150,000. The agreement
also states that if Dr. Mastroianni is removed from the position of President
for reasons other than cause during his first three years of employment, the
Company will pay him severance payments equivalent to a maximum of one year's
base salary. Per this agreement, Dr. Mastroianni was awarded initial stock
options under the Company's Incentive Stock Option Plan for 30,000 shares
plus up to 120,000 additional shares, based upon achievement of certain
defined profit targets for fiscal 1997. In July 1997, Dr. Mastroianni's
Option Agreement was amended to vest Dr. Mastroianni in an additional 30,000
shares, change the defined profit targets for the remaining 90,000 shares,
and change the exercise price for the full 120,000 shares. (See "Option
Grants in Fiscal Year 1997" in the section entitled "Executive Compensation",
above).
The Company also entered into an agreement with Mr. James Clemens, President
of Ling Electronics, Inc. ("Ling"). The agreement provides that Mr. Clemens'
annual base salary will be $115,000, subject to adjustment by the Committee,
from time to time. In addition, Mr. Clemens is eligible to receive incentive
compensation of 3% of annual pre-tax income of Ling up to $1,000,000, and 2%
of annual pre-tax income of Ling in excess of $1,000,000. The agreement also
grants Mr. Clemens non-qualified stock options for 15,000 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")(see "Executive Compensation - Option Grants in Fiscal
Year 1997", above). In connectionaddition, the Company agreed to advance Mr. Clemens
$30,000 pursuant to a promissory note, payable in three annual installments
of $10,000 plus interest at the rate of 6.5%. The Company agreed to award
Mr. Clemens an annual bonus equivalent to the payments due on the note if Mr.
Clemens is still employed by the Company on March 24, 1998, 1999 and 2000,
respectively. If Mr. Clemens dies or is disabled prior to the due date of
the note, the full amount due on the note will be bonused to Mr. Clemens.
The Company also had an agreement with Mr. Apkarian. This agreement provided
that Mr. Apkarian would continue as an employee and a Director of the Company
at an annual salary of $130,000. The agreement also provided an annual bonus
of $10,000 which he would use to purchase $250,000 of term life insurance.
In addition, the agreement provided for the payment of club dues and the use
of a Company automobile for which Mr. Apkarian paid 50% of the lease
payments. As the result of Mr. Apkarian's retirement on September 30, 1997,
all obligations pursuant to this agreement have terminated, however, the
Company is required to continue to pay 50% of Mr. Apkarian's lease payments
on his automobile until June 1998, at which time the Company will purchase
the automobile and give it to Mr. Apkarian.
DIRECTORS COMPENSATION
Directors who are not officers or employees receive Director's fees of $750
for each Board meeting attended. Directors also are reimbursed for travel
expenses incurred in attending meetings.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of shares of the Company's Common Stock by (i) each
Director and nominee for Director of the Company, (ii) each named executive
officer described in the section of this Amended Annual Report on Form 10-K/A
captioned "Executive Compensation", (iii) all present Directors and Officers
of the Company as a group, and (iv) each person who is known to the
registrant to be the beneficial owner of more than 5% of any class of the
registrant securities as of January 22, 1998.
5,905,861 SHARES OUTSTANDING
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership(1)(2) Class
------------------- --------------------------- ----------
Denis P. Chaves 27,700(3) *
Dale W. Church 50,000(4) *
James R. Clemens 30,000(5) *
R. Wayne Diesel 70,200(6) 1.2%
Edward A. Dohring 15,000(4) *
Alan P. Goldberg 2,165,773(7) 36.7%
Douglas McCauley 15,100(8) *
George C. McNamee 2,245,698(9)(7) 38.0%
Martin J. Mastroianni 170,100(10) 2.9%
E. Dennis O'Connor 40,000 *
Dr. Walter L. Robb 24,500(4) *
Dr. Beno Sternlicht 273,050(4)(11) 4.6%
Stephen Sullivan 1,000(2) *
Stephen T. Wilson 10,100(12) *
All present Directors and
Officers as a group (12 persons) 3,091,423 52.3%
- -------------------------------------
* Percentage is less than 1.0% of the outstanding Common Stock.
(1) To the best of the Company's knowledge, based on information reported by
such Directors and Officers or contained in the Company's shareholder records,
except as otherwise indicated, each of the named persons is presumed to have
sole voting and investment power with respect to all shares shown. None of the
Company's present Directors or Officers other than Messrs. Goldberg and McNamee,
Dr. Mastroianni, Mr. Church and Dr. Sternlicht (see "Security Ownership of
Certain Beneficial Owners", below) beneficially own more than 1% of the
Company's outstanding Common Stock; all present Directors and Officers as a
group beneficially own, in the aggregate, approximately 52.3% of the Company's
outstanding Common Stock.
(2) Includes shares granted under the Company's Restricted Stock Incentive Plan
which are still subject to forfeiture as follows: Mr. McCauley, 3,500 shares;
and Mr. Sullivan, 500 shares. All present Directors and Officers as a group,
3,500 shares.
(3) The individual has the right to acquire 25,000 shares pursuant to an option
granted on August 27, 1997 and 100 shares pursuant to an option granted on
December 20, 1996.
(4) The individual has the right to acquire 10,000 shares pursuant to an option
granted on April 16, 1997.
(5) The individual has the right to acquire 15,000 shares pursuant to an option
granted on August 27, 1997 and 15,000 shares pursuant to an option granted March
24, 1997.
(6) Includes 100 shares held by Mr. Diesel's wife as custodian for their minor
child; Mr. Diesel disclaims beneficial ownership of such shares. The individual
has the right to acquire 35,000 shares pursuant to an option granted August 27,
1997 and 100 shares pursuant to an option granted December 20, 1996.
(7) Includes 2,035,698 shares owned by First Albany Companies Inc.; see
"Security Ownership of Certain Beneficial Owners". However, Messrs. McNamee
and Goldberg disclaim beneficial ownership of such shares.
(8) The individual has the right to acquire 15,000 shares pursuant to options
granted on August 27, 1997 and 100 shares pursuant to options granted on
December 20, 1996.
(9) Includes 10,000 shares owned by Mr. McNamee's wife. Mr. McNamee disclaims
beneficial ownership of those shares.
(10) The individual has the right to acquire up to 150,000 shares pursuant to
stock options granted on December 20, 1996 as amended on July 15, 1997, and 100
shares pursuant to options granted on December 20, 1996.
(11) Includes 26,650 shares owned by Dr. Sternlicht's wife and 10,150 shares
held by Dr. Sternlicht's wife as custodian for their children; Dr. Sternlicht
disclaims beneficial ownership of such shares.
(12) This individual has the right to acquire 10,000 shares pursuant to options
granted on August 27, 1997 and 100 shares pursuant to an option granted on
December 20, 1996.
DIRECTORS COMPENSATION
Directors who are not officers or employees receive Director's fees of $750
for each Board meeting attended. Directors also are reimbursed for travel
expenses incurred in attending meetings.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of January 22, 1998 in respect
of each person known by the Company to be the beneficial owner of more than
5% of its outstanding Common Stock.
Amount of
Beneficial Percent
Name Address Ownership of Class
- --------------- ------------------ ------------ --------
First Albany 30 South Pearl St. 2,035,698(A) 34.5%
Companies, Inc. Albany, N.Y. 12207
(A) Messrs. McNamee and Goldberg may be deemed the beneficial owners of at
least a portion of the shares owned by First Albany Companies, Inc. ("FAC").
However, Messrs. McNamee and Goldberg disclaim such beneficial ownership.
As discussed more fully under "Certain Relationships and Related
Transactions", below, FAC also acquired certain rights to an obligation ("Term Loan")a term loan due from
the sameFCCC (the 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 paymenta note
payable), 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 dated as of
December 27, 1996 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 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 line of credit.
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 27 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, 1998 (the "1998 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 1998 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 1998 Proxy Statement is incorporated herein by reference.note payable.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The informationAt September 30, 1997, First Albany Companies, Inc. ("FAC") owned
approximately 32.3% of the Company's Common Stock.
During fiscal 1997, First Albany Corporation, a wholly owned subsidiary of
FAC, provided financial advisory services in connection with the sale of the
L.A.B. Division, for which will be set forthFirst Albany Corporation was paid a $75,000 fee.
During fiscal 1997, the Company and FAC entered into an agreement dated as of
December 27, 1996, under which the caption "Certain
Information Regarding Nominees"Company issued to FAC 1.0 million shares
of Common Stock in full satisfaction of the section entitled "Electionnote payable to FAC by First
Commercial Credit Corporation ("FCCC"), thereby extinguishing the Company's
indebtedness to FCCC under that certain Note Payable, due December 31, 1996
("Note Payable"); at December 27, 1996, the Note Payable to FCCC had an
outstanding principal balance of Directors",$3.0 million and underaccrued interest of $1.1
million. On December 27, 1996, the captions "Directors Compensation", "Security
Ownershiplast sale price of Certain Beneficial Owners", and "Certain Relationships and
Related Transactions", in the section entitled "Additional Information",
inCompany's Common
Stock, as quoted on the registrant's 1998 Proxy Statement is incorporated herein by
reference.OTC Bulletin Board, was $2.00 per share.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------------------------------------------------------------------------
(a) 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,
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 obligationsobligation
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'sregistrants 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 Thethe 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 Thethe 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
22,1994,22, 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, between the registrant and Chase Manhattan
Bank, N. A. which amends the Amended and Restated
Loan Agreement and waives any existing defaults.(9)
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 21,1995,21, 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)
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) Filed 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) Confidential treatment requested with respect to certain schedules
and exhibits.
(b) One report on Form 8-K was filed during the quarter ending September 30,
1997.
The Company filed a Form 8-K Report, dated September 23, 1997, reporting
under item 5 thereof the Company's execution of a definitive agreement
for the sale of the assets and certain liabilities of its L.A.B. Division
to Noonan Machine Company.
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, 1997January 23, 1998 By: /s/ M. Mastroianni
------------------ ----------------------------------------------------------------------
Martin J. Mastroianni
President and Chief Operating 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 Chairman of the Board of Directors 12/19/9701/23/98
- -------------------------
George C. McNamee
/s/ Martin J. Mastroianni Chief Operating Officer
- ------------------------- (Principal Executive Officer)
Dr. Martin J. Mastroianni and a Director "
/s/ Cynthia A. Scheuer Chief Financial Officer
- ------------------------- (Principal Financial and Accounting
Cynthia A. Scheuer Officer) "
/s/ Dale W. Church Director "
- -------------------------
Dale W. Church
/s/ R.WayneR. 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. O'Connor
/s/ Walter L. Robb Director "
- -------------------------
Dr. Walter L. Robb
/s/ Beno Sternlicht Director "
- -------------------------
Dr. Beno Sternlicht
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, 1997 and 1996 . . . F-3 & F-4
Statements of Income for the Years Ended
September 30, 1997, 1996 and 1995 . . . . . . . . F-5
Statements of Shareholders' Equity for the Years Ended
September 30, 1997, 1996 and 1995 . . . . . . . . F-6
Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995 . . . . . . . .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 audited the consolidated financial statements of Mechanical
Technology Incorporated and Subsidiaries as of September 30, 1997 and
1996, and the related consolidated statements of income, shareholder's
equity and cash flows for each of the three years in the period ended
September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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 includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our 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.
/s/ Coopers & Lybrand L.L.P.
Albany, New York
November 14, 1997
F-2
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
(Dollars in thousands)
1997 1996
ASSETS -------- --------
CURRENT ASSETS
Cash and cash equivalents $ 1,425 $ 66
Accounts receivable, less allowance of
$153 (1997) and $102 (1996) 6,783 7,389
Inventories 3,392 4,111
Note receivable - current 315 -
Prepaid expenses and other current assets 201 190
------- -------
Total Current Assets 12,116 11,756
Property, Plant and Equipment, net 2,272 2,618
Note receivable - noncurrent 335 -
Other 33 78
------- -------
Total Assets $ 14,756 $ 14,452
======= =======
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, 1997 and 1996
(Dollars in thousands)
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY -------- --------
CURRENT LIABILITIES
Current installments on long-term debt $ - $ 604
Income taxes payable 44 16
Accounts payable 1,981 1,979
Accrued liabilities 3,924 4,021
------- -------
Total Current Liabilities 5,949 6,620
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 594 764
------- -------
Total Liabilities 6,543 12,288
------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share,
authorized 15,000,000; issued 5,908,661
(1997) and 4,902,201 (1996) 5,909 4,902
Paid-in capital 13,923 13,423
Deficit (11,569) (16,089)
------- -------
8,263 2,236
Foreign currency translation adjustment (19) (19)
Common stock in treasury, at cost,
3,000 shares (1997 and 1996) (29) (29)
Restricted stock grants (2) (24)
------- -------
Total Shareholders' Equity 8,213 2,164
------- -------
Total Liabilities and Shareholder's Equity $ 14,756 $ 14,452
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, 1997, 1996 and 1995
(Dollars in thousands, except per share)
1997 1996 1995
-------- -------- --------
Product revenue $ 24,222 $ 22,966 $ 18,516
Research & development revenue 7,758 8,935 11,232
------- ------- -------
Total revenue 31,980 31,901 29,748
Product cost of sales 14,487 13,955 12,616
Research & development contract costs 5,813 5,946 8,492
Selling, general and administrative
expenses 9,366 9,781 8,097
Product development and research costs 1,734 1,263 1,425
Impairment loss on long-lived assets - - 1,590
------- ------- -------
Operating income (loss) 580 956 (2,472)
Interest expense (323) (790) (1,081)
Gain on sale of division/subsidiary 2,012 750 6,779
Equity in joint venture loss (330) - -
Other income (expense), net 188 (343) (218)
------- ------- -------
Income from continuing operations before
extraordinary item and income taxes 2,127 573 3,008
Income tax expense 114 64 86
------- ------- -------
Income from continuing operations before
extraordinary item 2,013 509 2,922
Extraordinary Item - gain on extinguishment
of debt, net of taxes ($106) 2,507 - -
------- ------- -------
Income from continuing operations 4,520 509 2,922
Income from discontinued operations - 3,239 -
------- ------- -------
Net income $ 4,520 $ 3,748 $ 2,922
======= ======= =======
Earnings per share:
Continuing operations before
extraordinary item $ .36 $ .13 $ .82
Extraordinary item, gain on
extinguishment of debt .44 - -
------- ------- -------
Continuing operations $ .80 $ .13 $ .82
Discontinued operations - .83 -
------- ------- -------
Net income $ .80 $ .96 $ .82
======= ======= =======
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, 1997, 1996 and 1995
(Dollars in thousands)
1997 1996 1995
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
======= ======= =======
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
======= ======= =======
DEFICIT
Balance, October 1 $(16,089) $(19,837) $(22,759)
Net income 4,520 3,748 2,922
------- ------- -------
Balance, September 30 $(11,569) $(16,089) $(19,837)
======= ======= =======
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance, October 1 $ (19) $ (20) $ (31)
Adjustments - 1 11
------- ------- -------
Balance, September 30 $ (19) $ (19) $ (20)
======= ======= =======
TREASURY STOCK
Balance, October 1 $ (29) $ (29) $ (100)
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)
======= ======= =======
SHAREHOLDERS' EQUITY
September 30 $ 8,213 $ 2,164 $ (3,490)
======= ======= =======
The accompanying notes are an integral part of the consolidated finan-
cial statements.
F-6
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended September 30, 1997, 1996 and 1995
(Dollars in thousands)
1997 1996 1995
OPERATING ACTIVITIES -------- -------- --------
Income from continuing operations $ 4,520 $ 509 $ 2,922
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 - - 1,590
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 330 - -
Accounts receivable reserve 51 (18) 19
Asset valuation reserve 76 - -
Deferred income taxes and other credits (170) (15) (1)
Foreign currency translation - 1 11
Other 31 89 (24)
Changes in operating assets and liabilities net
of effects from discontinued operations:
Accounts receivable 112 (578) 1,611
Inventories 209 (627) (230)
Escrow deposit - 750 (750)
Prepaid expenses and other current assets (19) 271 (19)
Accounts payable 228 (311) 355
Income taxes (78) 3 394
Accrued liabilities (including interest) (360) 1,390 (494)
------- ------- -------
Net cash provided (used) by continuing operations 998 1,400 (558)
Discontinued Operations: ------- ------- -------
Income from discontinued operations - 3,239 -
Adjustments to reconcile income to net cash
provided by discontinued operations:
Changes in net assets/liabilities
of discontinued operations - (2,756) -
------- ------- -------
Net cash provided by discontinued operations - 483 -
------- ------- -------
Net cash provided (used) by operations 998 1,883 (558)
INVESTING ACTIVITIES ------- ------- -------
Purchases of property, plant & equipment (829) (549) (667)
Proceeds from sale of subsidiaries 2,600 750 9,125
------- ------- -------
Net cash provided by investing activities 1,771 201 8,458
FINANCING ACTIVITIES ------- ------- -------
Private placement of common stock, net expenses - 1,900 -
Net payments under line-of-credit (100) (3,308) (592)
Principal payments of long-term debt (1,310) (688) (9,050)
------- ------- -------
Net cash used in financing activities (1,410) (2,096) (9,642)
------- ------- -------
Increase (decrease) in cash and cash equivalents 1,359 (12) (1,742)
Cash and cash equivalents - beginning of year 66 78 1,820
------- ------- -------
Cash and cash equivalents - end of year $ 1,425 $ 66 $ 78
======= ======= =======
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, 1997, 1996 and 1995
(Dollars in thousands)
1997 1996 1995
Supplemental Disclosures -------- -------- --------
- ------------------------
NONCASH INVESTING ACTIVITIES
Contribution of net assets to joint venture
Inventories $ 1 $ - $ -
Property, plant and equipment, net 452 - -
Accounts payable (46) - -
Accrued liabilities (50) - -
------ ------ ------
$ 357 - -
Proceeds from sale of subsidiary ------ ------ ------
Notes receivable $ 650 $ - $ -
------ ------ ------
Net noncash used in investing activities $ 1,007 $ - $ -
------ ------ ------
NONCASH FINANCING ACTIVITIES
Conversion of Note Payable to Common Stock
Note Payable extinguishment $(3,000) $ - $ -
Common stock issued 1,500 - -
Accrued interest - Note Payable (1,213) - -
------ ------ ------
Net noncash used in financing activities $(2,713) $ - $ -
------ ------ ------
Net noncash used in investing/financing activities $(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 investment in the joint venture, plus its share of undistributed
earnings/losses. The investment is included in the financial line "Other
Assets".
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.
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.
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-10
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies (continued)
--------------------
Earnings (Loss) Per Share
- -------------------------
Earnings (loss) per share is computed on the basis of 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: 1997, 5,672,063; 1996, 3,911,952; and 1995, 3,559,789.
Reclassification
- ----------------
Certain 1996 and 1995 amounts have been reclassified to conform with the
1997 presentation.
(2) Long-Term Contracts Receivable
------------------------------
Included in accounts receivable are the following:
(Dollars in thousands) 1997 1996
------ ------
U.S. Government:
Amounts billed and billable $ 920 $ 1,485
Retainage 253 357
------ ------
1,173 1,842
------ ------
Commercial Customers:
Amounts billed 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 completion of the contracts 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 billable and collectible.
F-11
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Inventories
-----------
Inventories consist of the following:
(Dollars in thousands) 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
$400 with an interest rate of
10%, due in monthly installments
through September 30, 2002 400
-------
650
Less: Current portion (315)
-------
$ 335
=======
(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) 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 form a joint
venture 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 its interest in
the joint venture could be reduced in certain circumstances in the future.
EDC made an initial cash contribution of $4.75 million in exchange for the
remaining 50% interest in the joint venture. The Company's investment in
the joint venture is included in "Other Assets" at September 30, 1997; the
assets contributed by the Company to the joint venture 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. The Company recorded the carrying value of the net assets
contributed as its investment in the joint venture in recognition of the
nature of the venture's undertaking. The Company's share of the joint
venture's results of operations of ($439,000), net of amortization of the
excess of the Company's proportionate share of the venture's equity of
$109,000, is recorded under the caption "equity in loss of joint venture."
F-13
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) 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) consists of the following:
(Dollars in thousands) 1997 1996 1995
Continuing operations -------- -------- --------
Federal $ 45 $ 36 $ -
State 69 28 86
Deferred - - -
------- ------- -------
114 64 86
------- ------- -------
Discontinued operations
Federal - - -
State - - -
Deferred - - -
------- ------- -------
- - -
Extraordinary Item ------- ------- -------
Federal 28 - -
State 78 - -
Deferred - - -
------- ------- -------
106 - -
------- ------- -------
$ 220 $ 64 $ 86
======= ======= =======
F-14
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Income Taxes (continued)
------------
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) 1997 1996 1995
-------- -------- --------
Continuing operations
Deferred tax (benefit) expense $ (296) $ (259) $ 1,586
Net operating loss carryforward 972 573 -
Valuation allowance (676) (314) (1,586)
------- ------- -------
- - -
Discontinued operations ------- ------- -------
Deferred tax (benefit) expense - (103) 2,831
Net operating loss carryforward - 1,090 (4,154)
Valuation allowance - (987) 1,323
------- ------- -------
- - -
------- ------- -------
$ - $ - $ -
======= ======= =======
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:
1997 1996 1995
-------- -------- --------
Federal statutory tax rate 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%
Additional tax gain on sale of
subsidiary - 13% -
Change in valuation allowances (32%) (55%) (53%)
Alternative minimum tax 2% 6% -
Other, net (1%) 5% 1%
------- ------- -------
5% 11% 3%
======= ======= =======
F-15
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) 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)
1997 1996
Current deferred tax assets: -------- --------
Bad debt reserve $ 52 $ 31
Inventory valuation 165 230
Inventory capitalization 40 161
Vacation pay 111 111
Warranty and other sale obligations 51 64
Other reserves and accruals 358 37
------- -------
777 634
Valuation allowance (777) (634)
------- -------
Net current deferred tax assets $ - $ -
======= =======
Noncurrent deferred tax assets (liabilities):
Net operating loss $ 1,791 $ 3,625
Property, plant and equipment (251) (324)
Other 288 329
Alternative minimum tax credit 149 -
------- -------
1,977 3,630
Valuation allowance (1,977) (3,630)
Other credits (594) (764)
------- -------
Noncurrent net deferred tax
liabilities and other credits $ (594) $ (764)
======= =======
The valuation allowance at year ended September 30, 1997 is $2,754,000,
and at September 30, 1996 was $4,264,000. During the year ended September
30, 1997, the valuation allowance decreased by $1,510,000.
F-16
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Income Taxes (continued)
------------
At September 30, 1997, the Company has unused Federal net operating loss
carryforwards of approximately $5,266,000. The Federal net operating loss
carryforwards if unused will begin to expire during the year ended
September 30, 2009. The use 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,
the Company has available alternative minimum tax credit carryforward of
approximately $149,000.
During 1997, 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, and for 1995 received net cash refunds for income taxes of
$266,000.
(8) Accrued Liabilities
-------------------
Accrued liabilities consist of the following:
(Dollars in thousands) 1997 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-17
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Indebtedness
------------
Indebtedness consists of the following:
(Dollars in thousands) 1997 1996
-------- --------
Line-of Credit $ - $ 100
Note Payable - 3,000
Term Loan - 1,310
------- -------
- 4,410
Less current portion - 604
------- -------
$ - $ 3,806
======= =======
The Company has a Line of Credit available in the amount of $4,000,000
with interest payable monthly at a rate of prime plus .625% (9.125% at
September 30, 1997). The Line of Credit expires on October 31, 1998 and
is collateralized by a guarantee from a former shareholder.
The weighted average interest rate for the Note Payable and Line of Credit
was 10.75% during 1997 and 13.2% during 1996 and 1995.
Cash payments for interest were $201,000, $477,000 and $695,000 for 1997,
1996 and 1995, respectively.
(10) Shareholders' Equity
--------------------
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 to
$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 at September 30, 1997
and $24,000 at September 30, 1996.
F-18
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 1997, the number of shares available under the
plan increased to 600,000 shares. Under the plan, the Board of Directors
is authorized to award stock options, stock appreciation rights,
restricted stock, and other stock-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.
The fair value of each option granted is estimated on the grant date using
the Black-Scholes Single option model. The dividend yield was 0% for
1997. The expected volatility was 78% in 1997. The expected life of the
options is 5 years. The risk free interest rate ranges from 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
1997. Had compensation cost and fair value been determined pursuant to
Financial Accounting Standard No. 123 ("FAS 123"), "Accounting for Stock-
Based Compensation," net income would decrease from $4,520,000 to
$4,351,000 in 1997. Earnings per share would decrease from $0.80 to $0.76
in 1997. The weighted average fair value of options granted during 1997,
for purposes of FAS 123, is $1.96 per share.
F-19
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:
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
(12) Pension Plans
-------------
The Company maintains a 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 for the
plan was $312,000, $345,000 and $346,000 for 1997, 1996 and 1995,
respectively.
(13) Commitments and Contingencies
-----------------------------
During 1997, a legal action 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 group 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.
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, 1999; $488,000, 2000; $475,000, 2001;
and $559,000, 2002. Rent expense under all leases was $548,000, $542,000
and $564,000 for 1997, 1996 and 1995, respectively.
(14) Related Party Transactions
--------------------------
At September 30, 1997 First Albany Companies, Inc. ("FAC") owned
approximately 32.3% of the Company's Common Stock. (See Note 19)
During fiscal 1997, First Albany Corporation, a wholly owned subsidiary of
FAC, provided financial advisory services in connection with the sale of
the L.A.B. Division, for which First Albany Corporation was paid a $75,000
fee. 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 fee.
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. Billings under the agreement amounted to $65,000 for the 1997
fiscal year and all amounts billed were included in accounts receivable at
September 30, 1997.
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
(15) Discontinued Operations
-----------------------
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
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) 1996 1995
-------- --------
Sales $ 0 $ 0
======= =======
Income from discontinued
operations before income tax $ 3,239 $ 0
Income tax benefit 0 0
------- -------
Net income from discontinued
operations $ 3,239 $ 0
======= =======
There were no assets and liabilities of the Company's discontinued
operations at September 30, 1997 and 1996.
F-23
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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 resulted in a $2,012,000 gain, which was recorded in the fourth
quarter of fiscal year 1997. In addition, $250,000 of the proceeds
associated with one of the notes was recorded as deferred revenue due to
contingencies associated with the realization of this note.
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 in cash from Phase Metrics and ProQuip
forgave a $316,000 intercompany debt due from the Company. The net
proceeds from the sale were used to reduce term debt by $8,000,000 and to
increase working capital by $3,776,000.
The sale resulted in a $6,779,000 gain, which was recorded during the
first quarter of fiscal year 1995. In addition, $750,000 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, a component of the Test & Measurements segment, is included in
the Company's financial statements through November 22, 1994, the date of
its sale, as follows:
(Dollars in thousands) 1995
--------
Sales $ 2,584
=======
Income from continuing operations
before income tax $ 730
Income tax expense 293
-------
Net Income $ 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 $ 27,164
========
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 provisions 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. 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 investment in
Ling.
(18) Information on Business Segments
--------------------------------
The Company's operations comprise two 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.
Test and Measurement - develops and manufactures high-accuracy
inspection systems, shock and vibration testing systems,
and electronic instruments using noncontact measurement techniques.
F-26
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) 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:
(Dollars in thousands)
SALES
--------------------------------
1997 1996 1995
-------- -------- --------
Technology $ 7,878 $ 9,146 $ 11,608
Test and Measurement 24,102 22,755 18,140
------- ------- -------
$ 31,980 $ 31,901 $ 29,748
======= ======= =======
OPERATING INCOME (LOSS)
--------------------------------
1997 1996 1995
-------- -------- --------
Technology $ (959) $ (434) $ (463)
Test and Measurement 1,539 1,390 (2,009)
------- ------- -------
$ 580 $ 956 $ (2,472)
======= ======= =======
DEPRECIATION
1997 1996 1995
-------- -------- --------
Technology $ 344 $ 446 $ 440
Test and Measurement 210 190 203
Corporate 4 4 3
------- ------- -------
$ 558 $ 640 $ 646
======= ======= =======
ASSETS EMPLOYED
1997 1996 1995
-------- -------- --------
Technology $ 3,939 $ 4,527 $ 5,753
Test and Measurement 8,696 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-27
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Information on Business Segments (continued)
--------------------------------
The U.S. Government 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
anticipated 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) 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 and 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 includes 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