Proprietary securities transactions are recorded on trade date, as if they had settled. The related amounts receivable and payable for unsettled securities transactions are recorded net in Receivables from or Payables to others on the statement of financial condition.
Securities owned and sold but not yet purchased consisted of the following as of:
Securities not readily marketable include investment securities (a) for which there is no market on a securities exchange or no independent publicly quoted market, (b) that cannot be publicly offered or sold unless registration has been effected under the Securities Act of 1933, or (c) that cannot be offered or sold because of other arrangements, restrictions or conditions applicable to the securities or to the Company.
The Company holds various investments in its portfolio. Mechanical Technology Incorporated (MTI) and META Group, Inc are the two major holdings.
At December 31, 2000, the Company owned approximately 11,754,000 common shares (33% of the shares outstanding) of MTI. The Company’s investment in MTI is recorded under the equity method and approximated $15,396,000, which included goodwill of approximately $456,000 which is being amortized over 10 years.
MTI was incorporated in 1961 and over the last five years has strengthened its commitment to and involvement in the new energy sector. MTI plans to implement this strategy through the internal development and growth of businesses, the acquisition of majority stock positions in emerging new energy companies, and strategic investments in established new energy businesses.
MTI holds various investments that are recorded under the equity method. The principal components of their investments are Plug Power Inc. and SatCon Technology Corporation. Plug Power Inc. is a U.S. designer and developer of on-site electricity generation systems utilizing proton exchange membrane fuels cells for residential applications, while SatCon Technology Corporation is a designer, developer and maufacturer of high-efficiency, high-reliability and long-lived power and energy management products to serve the distributed power generation and power quality markets.
For the years ended December 31, 2000, 1999 and 1998, the Company’s equity in MTI’s net loss, recorded on a one-quarter delay basis, was ($6,202,000), ($3,629,000) and ($1,488,000), respectively.
The following presents summarized financial information of MTI for the year ended September 30, 2000:
| (In thousands of dollars)
|
|
| Assets | $77,266 |
| Liabilities
| 32,237
|
| Shareholders’ equity
| $45,029
|
| Net Sales
| $5,547
|
| Operating loss | $(3,927) |
| Gain on sale of subsidiary | 1,262 |
| Other expense
| (2,252)
|
| (Loss) from continuing operations before income taxes and equity in investee losses | (4,917) |
| Income tax benefit | 1,927 |
| Equity in investee losses, net of tax benefit
| (15,849)
|
| Loss from continuing operations | (18,839) |
| Income from discontinued operations, net of taxes
| 243
|
| Net loss
| $(18,596)
|
At December 31, 2000, the aggregate market value of the Company’s shares in MTI was $41,138,000. Under the equity method, the market value of MTI’s stock is not included in the calculation of the Company’s investment.
Due to its equity investment in Plug Power Inc., Satcon Technology Corporation, and stock options, MTI stockholders’ equity increased $35.3 million during its fiscal year ending September 30, 2000. Accordingly, the Company has recorded through December 31, 2000 its proportionate share ($11.8 million) of this increase in MTI’s equity as an increase in its investment in MTI. The Company also recorded an increase in additional paid-in-capital of $6.9 million (net of deferred taxes) as a result of these transactions.
On December 27, 2000 the Company entered into a Put and Call Option Agreement (the “Option Agreement”) with Mechanical Technology Incorporated (“MTI”). MTI purchased the option from the Company for $945,000. The Option Agreement was entered into to provide independent credit support for a loan to MTI from Key Bank, N.A. (the “Loan”). The Option Agreement provides that MTI may put 6.3 million shares of the Plug Power Inc. common stock pledged as collateral on the Loan at $4 per share and the Company has the right to either purchase such shares or take an assignment of all of the bank’s rights under the Loan. The Option Agreement expires on April 27, 2001.
In addition, the Company entered into two loan agreements with MTI totaling approximately $6 million. The loans are secured by 1.2 million shares of Plug Power Inc. common stock. The loans bear interest at the prime rate (9.5% at December 27, 2000), and both interest and principal are due January 3, 2002. There was $3.9 million outstanding at December 31, 2000.
In March 2000, MTI announced a 3 for 1 stock split in the form of a stock dividend payable April 12, 2000 to stockholders of record April 3, 2000.
For the three month period ended December 31, 2000, MTI reported an unaudited loss of approximately $0.3 million. The Company’s equity in MTI’s net loss, was a loss of $0.1 million, and will be recorded in the quarter ending March 31, 2001.
At December 31, 2000, the Company owned 134,500 shares of META Group, Inc. The fair market value of this investment was $874,000. During the year ended December 31, 2000 the Company has recorded a realized gain of $2,332,000 and net unrealized losses of $2,800,000. During the year ended December 31, 1999, the Company has recorded net unrealized losses of $2,252,000 with respect to this investment. During the year ended December 31, 1998, the Company recorded a realized gain of $475,000 and net unrealized gains of $2,917,000 with respect to this investment.
NOTE 8. Bank Loans
Short-term bank loans are made under a variety of committed bank lines of credit, which are limited to financing securities eligible for collateralization. The lines totaled $295 million of which approximately $167 million was unused as of December 31, 2000. This includes Company owned securities and certain customer-owned securities purchased on margin, subject to certain regulatory formulas. These loans bear interest at fluctuating rates based primarily on the Federal Funds interest rate. The weighted average interest rates on these loans were 7.0%, 5.5% and 5.3%, at December 31, 2000, 1999 and 1998 respectively. At December 31, 2000, short-term bank loans were collateralized by Company-owned securities of $126,394,000.
A note for $2,933,333 is payable in monthly principal payments of $73,333 plus interest. The interest rate is 1.5% over the 30-day London Interbank Offered Rate (“LIBOR”)(6.5% plus 1.5% on December 31, 2000). A portion of the proceeds from this note was used to pay off a previous note for $1,489,583. This note matures on April 1, 2004.
Future annual principal loan repayment requirements as of December 31, 2000, are as follows:
| (In thousands of dollars)
|
|
| 2001 | $880 |
| 2002 | 880 |
| 2003 | 880 |
| 2004
| 293
|
| Total
| $2,933
|
NOTE 9. Obligations under Capitalized Leases
The following is a schedule of future minimum lease payments under capital leases for office equipment together with the present value of the net minimum lease payments as of December 31, 2000:
| (In thousands of dollars)
|
|
| 2001 | $1,613 |
| 2002 | 930 |
| 2003 | 191 |
| 2004 | 47 |
| 2005
| 6
|
| Total minimum lease payments | 2,787 |
| Less: amount representing interest
| 196
|
| Present value of minimum lease payments
| $2,591
|
NOTE 10. Payables To Others
Amounts payable to others as of:
| (In thousands of dollars) | December 31, | December 31, |
|
| 2000
| 1999
|
| Borrowing under line-of-credit agreements | $14,697 | $15,802 |
| Others
| 2,838
| 3,811
|
| Total
| $17,535
| $19,613
|
NOTE 11. Subordinated Debt
The Company has a subordinated debt of $2,000,000 with interest at 8.75% and $4,000,000 with interest at 9.25%. Interest is paid monthly with the principal amounts due at maturity on December 31, 2002.
Both loan agreements include restrictive financial covenants. One of the more significant covenants requires the Company to maintain a minimum net capital (as defined by Rule 15c3-1 of the Securities and Exchange Commission) equal to three times the required net capital. The amount of required net capital as of December 31, 2000 was $250,000. The amount of net capital as of December 31, 2000 was $37,541,000.
During March 2000, the Lender exercised their options to purchase 139,895 shares of the Company’s common stock and discharged $1,500,000 of subordinated debt owed by the Company.
NOTE 12. Stockholders' Equity
In 2000, the Board of Directors and shareholders approved an amendment to the Company’s Certificate of Incorporation providing for an increase from 10,000,000 to 50,000,000 in the number of authorized shares of Common Stock.
Dividends:
During 2000, the Company declared and paid four quarterly cash dividends totaling $0.20 per share of common stock, and also declared and issued two 5% common stock dividends.
In January 2001, the Board of Directors declared the regular quarterly cash dividend of $ 0.05 per share payable on February 28, 2001, to shareholders of record on February 14, 2001.
Rights Plan:
On March 27, 1998, the Board of Directors adopted a Shareholder Rights Plan. The rights were distributed as a dividend of one right for each share of First Albany Companies Inc. common stock outstanding, with a record date of March 30, 1998. The Shareholder Rights Plan is intended to deter coercive takeover tactics and strengthen the Company’s ability to deal with an unsolicited takeover proposal.
The rights will expire on March 30, 2008. Each right will entitle the holder to buy one one-hundredth of a newly issued share of preferred stock at an exercise price of $56.00. The rights will become exercisable at such time as any person or group acquires more than 15% of the outstanding shares of common stock of the Company (subject to certain exceptions) or within 10 days following the commencement of a tender offer that will result in any person or group owning such percentage of the outstanding voting shares.
Upon any person or group acquiring 15% of the outstanding shares of voting stock, each right will entitle its holders to buy shares of First Albany Companies Inc. common stock (or of the stock of the acquiring company if it is the surviving entity in a business combination) having a market value equal to twice the exercise price of each right. The rights will be redeemable at any time prior to their becoming exercisable.
Treasury Stock:
In October 2000, the Board of Directors authorized a stock repurchase program of up to 1.5 million shares of its outstanding common stock. Under the program, the Company may periodically repurchase shares on the open market at prevailing market prices or in privately negotiated transactions from time to time over the next 18 months. Shares purchased under the program will be held in treasury and used for general corporate purposes. During 2000, the company repurchased approximately 217,000 shares pursuant to this program.
In addition, during 2000, the Company repurchased 925,000 shares of common stock, most of which were from many of its former financial consultants, who were transferred to First Union Securities, Inc. The Company consummated the sale of its Private Client Group to First Union Securities, Inc. on August 4, 2000.
Deferred Compensation and Employee Stock Trust:
The Company has adopted or may hereafter adopt various nonqualified deferred compensation plans (the "Plans") for the benefit of a select group of highly compensated employees who contribute significantly to the continued growth and development and future business success of the Company. Plan participants may elect under the Plans to have the value of their Plans Accounts track the performance of one or more investment benchmarks available under the Plans, including First Albany Companies Common Stock Investment Benchmark, which tracks the performance of First Albany Companies Inc. common stock ("Company Stock"). With respect to the First Albany Companies Common Stock Investment Benchmark, the Company contributes Company Stock to a rabbi trust (the “Trust”) it has established in connection with meeting its related liability under the Plans.
Assets of the Trust have been consolidated with those of the Company. The value of the Company’s stock at the time contributed to the Trust has been classified in stockholders’ equity and generally accounted for in a manner similar to treasury stock.
The deferred compensation arrangement requires the related liability to be settled by delivery of a fixed number of shares of Company Stock. Accordingly, the related liability is classified in equity under deferred compensation and changes in the fair market value of the amount owed to the participant in the Plan is not recognized.
NOTE 13. 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 the financial statement and tax basis of existing assets and liabilities. The effect of tax rate changes on deferred taxes is recognized in the income tax provision in the period that includes the enactment date.
Total income tax provision was allocated as follows:
| (In thousands of dollars) | Year Ended | Year Ended | Year Ended |
| | December 31, | December 31, | December 31, |
|
| 2000
| 1999
| 1998
|
| Income (loss) from continuing operations | $(1,428) | $(3,494) | $186 |
| Income from discontinued operations | 299 | 3,854 | 2,608 |
| Gain on sale of discontinued operations | 16,510 | | |
| Stockholders’ equity
| 4,375
| 2,031
|
|
| Total income taxes
| $19,756
| $2,391
| $2,794
|
The components of income tax expense (benefit) attributable to income from continuing operations are:
| (In thousands of dollars) | Year Ended | Year Ended | Year Ended |
| | December 31, | December 31, | December 31, |
|
| 2000
| 1999
| 1998
|
| Federal | | | |
| Current | $3,865 | $(1,014) | $(530) |
| Deferred | (4,721) | (2,085) | 396 |
| State and local | | | |
| Current | 1,300 | 459 | 192 |
| Deferred
| (1,872)
| (854)
| 128
|
| Total income taxes
| $(1,428)
| $(3,494)
| $186
|
The expected income tax expense using the federal statutory rate differs from income tax expense pertaining to pretax income from continuing operations as a result of the following:
| (In thousands of dollars) | Year Ended | Year Ended | Year Ended |
| | December 31, | December 31, | December 31, |
|
| 2000
| 1999
| 1998
|
| Income taxesat federal statutory rate | $(1,483) | $(2,840) | $683 |
| State and local income taxes, net of federal income taxes | (378) | (138) | 288 |
| Meals and entertainment | 226 | 197 | 135 |
| Tax-exempt interest income, net | (581) | (757) | (970) |
| Life insurance proceeds | (150) | | |
| Other non-deductible interest expense | 745 | | |
| Non deductible expenses, other
| 193
| 44
| 50
|
| Total income taxes
| $(1,428)
| $(3,494)
| $186
|
The temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows:
| (In thousands of dollars) | December 31, | December 31, |
|
| 2000
| 1999
|
| Bad debt reserve | $126 | $132 |
| Securities held for investment | (2,782) | (1,812) |
| Life insurance held for investment | 1,102 | |
| Fixed assets | 4,785 | 1,053 |
| Deferred compensation | 2,446 | 2,381 |
| Accrued liabilities | 316 | |
| Other
| 85
| 82
|
| Total deferred tax assets
| $6,078
| $1,836
|
The Company has not recorded a valuation allowance for deferred tax assets since it has determined that it is more likely than not that deferred tax assets will be fully realized through a combination of future taxable income and income available in carryback years.
NOTE 14. Employee Benefit Plans
The Company maintains a tax deferred profit sharing plan (Internal Revenue Code Section 401(k) Plan) which permits eligible employees to defer a percentage of their compensation. Company contributions to eligible participants may be made at the discretion of the Board of Directors. During the years ended December 31, 2000, 1999 and 1998, the Company contributed $348,000, $224,000 and $297,000 respectively, to this plan.
The Company had also participated in an Employee Stock Bonus Plan (Internal Revenue Code Section 401(a)) which permitted eligible employees to contribute up to 8% of their compensation on an after-tax basis. Prior to December 31, 1999, the Company had made matching contributions equal to a percentage of each employee's contributions. The Company made no contribution to the Stock Bonus Plan in 2000, while contributing $961,000 in 1999 and $864,000 in 1998. Company contributions vest in accordance with the Plan and are tax deferred until withdrawal. Employee and Company contributions were invested solely in the common stock of First Albany Companies Inc. The Company terminated the Stock Bonus Plan effective December 31, 1999. During 2000, the Company received a letter from the Internal Revenue Service determining that the termination of the Stock Bonus Plan does not adversely affect its qualification for federal tax purpose, and distributed substantially all of the assets of the Stock Bonus Plan.
NOTE 15. Incentive Plans
In 1989, stockholders approved adoption of the First Albany Companies Inc. 1989 Stock Incentive Plan (the "1989 Plan"), which authorized the award of options to purchase common stock, common stock appreciation rights or the sale of restricted stock. The Company also terminated the 1982 Plan with the adoption of the 1989 Plan. As of December 31, 1999 and 1998, the 1989 Plan was authorized to issue 2,366,240 and 2,199,673 shares of the Company’s common stock, respectively. The 1989 Plan expired in December 1999. Options previously granted under the 1982 and 1989 Plan remain valid in accordance with the terms of the grant of such options; however, the grant of new options under the 1982 and 1989 Plan ended. Effective March 26, 1999, the Company established the 1999 Long-Term Incentive Plan (the “1999 Plan”). The 1999 Plan provides for the award of options to purchase common stock, common stock appreciation rights, and the sale of restricted common stock. The 1999 Plan authorizes 971,697 shares (adjusted for stock-dividends) of the Company's common stock for issuance to employees of the Company and its subsidiaries and expires December 31, 2009.
Options granted under the 1989 and 1999 Plans have been granted at not less than the fair market value, vest over a maximum of five years, and expire ten years after the grant date. There have been no stock appreciation rights granted under the Plans.
During 2000, 1999 and 1998, 37,810, 135,521, and 39,591, restricted shares, respectively, have been awarded under the Plans at a weighted average grant date fair price of $27.17, $16.92 and $12.77, respectively. The fair market value of the awards will be amortized over the period in which the restrictions are outstanding.
Option transactions for the three year period ended December 31, 2000, under the Plans were as follows:
| | Shares | Weighted Average |
| | Subject | Exercise |
|
| to Option
| Price
|
| Balance at December 31, 1997 | 1,320,451 | $7.43 |
| | | |
| Options granted | 427,843 | 11.09 |
| Options exercised | (99,043) | 7.35 |
| Options terminated
| (52,356)
| 8.56
|
| Balance at December 31, 1998 | 1,596,895 | 7.65 |
| | | |
| Options granted | 460,139 | 10.59 |
| Options exercised | (104,351) | 5.84 |
| Options terminated
| (121,919)
| 8.98
|
| Balance at December 31, 1999 | 1,830,764 | 7.69 |
| | | |
| Options granted | 690,961 | 12.81 |
| Options exercised | (446,512) | 5.12 |
| Options terminated
| (145,682)
| 13.88
|
| Balance at December 31, 2000
| 1,929,531
| $8.96
|
There were 369,945 shares available for grants of options at December 31, 2000.
The following table summarizes information about stock options outstanding under the Plans at December 31, 2000:
| | Outstanding
| Exercisable
|
Exercise
Price | | Average
Life | Average
Exercise | | Average
Exercise |
| Range
| Shares
| (years)
| Price
| Shares
| Price
|
| $2.44 - $2.95 | 216,693 | .78 | $2.62 | 216,693 | $2.62 |
| $4.42 - $6.29 | 232,375 | 2.29 | 4.56 | 232,375 | 4.56 |
| $6.90 - $10.18 | 900,301 | 7.29 | 8.42 | 439,136 | 8.17 |
| $10.62 - $15.12 | 337,208 | 8.08 | 11.16 | 210,462 | 11.20 |
| $16.08 - $20.87
| 242,954
| 9.29
| 17.74
| 91,384
| 16.67
|
|
| 1,929,531
|
| $8.96
| 1,190,050
| $7.73
|
At December 31, 2000, 1,190,050 options with an average exercise price of $7.73 were exercisable; at December 31, 1999, 1,062,668 options with an average exercise price of $6.51 were exercisable; and at December 31, 1998, 774,848 options with an average exercise price of $5.95 were exercisable.
The Company has elected to follow Accounting Principals Board No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) in accounting for the stock option plans. In connection with the sale of the Private Client Group (Note 24), the Company accelerated the vesting in approximately 109,000 options and under APB 25, recognized compensation cost of $1,095,000 and $0 for the years ended December 31, 2000 and 1999, respectively. 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 have decreased from $20.3 million to $19.4 million in 2000, $413 thousand to a loss of $354 thousand in 1999, and $4.3 million to $3.3 million in 1998. Basic earnings per share would decrease from $2.49 to $2.38 in 2000, and $0.05 to ($0.04) in 1999, and $0.55 to $0.41 in 1998. Dilutive earnings per share would decrease from $2.49 to $2.38 in 2000, $.05 to ($0.04) in 1999, and $0.50 to $0.38 in 1998. The initial impact of FASB 123 on pro forma earnings per share may not be representative of the effect on income in future years because options vest over several years and additional option grants may be made each year.
The weighted average fair value of options granted under FAS 123 was $7.75 in 2000, $5.62 in 1999, and $8.12 in 1998. The fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants: dividend yield of 1.71% for 2000, 1.3% for 1999 and 1.5% for 1998; expected volatility of 53.9%, 37.7%, and 66.4%, for 2000, 1999, and 1998, respectively; risk-free interest rates of 5.6% to 6.7%, 5.0% to 5.8% and 5.0%, for 2000, 1999, and 1998, respectively; and expected lives of 6.6, 6.0, and 6.0 years for 2000, 1999, and 1998, respectively.
In November 2000, the Company started an employee Stock Purchase Plan which allows employees to purchase common stock of the Company, at a 15% discount. No shares were purchased pursuant to this plan in 2000.
The Company has various other incentive programs which are offered to eligible employees. These programs consist of cash incentives and deferred bonuses. Amounts awarded vest over periods ranging from three to ten years. Costs are amortized over the vesting period and aggregated $5.3 million in 2000, $5.4 million in 1999, $5.9 million in 1998.
NOTE 16. Commitments and Contingencies
The Company's headquarters, sales offices, and certain office and communication equipment are leased under noncancelable operating leases, certain of which contain escalation clauses and which expire at various times through 2008. Future minimum annual rentals payable are as follows:
| (In thousands of dollars)
|
|
| 2001 | $5,066 |
| 2002 | 5,253 |
| 2003 | 4,922 |
| 2004 | 4,770 |
| 2005 | 3,380 |
| Thereafter
| 6,529
|
| Total
| $29,920
|
Annual rental expense including utilities for the years ended December 31, 2000, 1999 and 1998 approximated $6,516,000, $6,573,000, and $6,366,000 respectively.
In the normal course of business, the Company has been named a defendant or otherwise has possible exposure, in several claims. Certain of these are class actions that seek unspecified damages which could be substantial. Although there can be no assurance as to the eventual outcome of litigation in which the Company has been named as a defendant or otherwise has possible exposure, the Company has provided for those actions most likely to result in adverse dispositions. Although further losses are possible, the opinion of management, based upon the advice of its attorneys and general counsel, is that such litigation will not, in the aggregate, have a material adverse effect on the Company's liquidity or financial position, although it could have a material effect on quarterly or annual operating results in the period in which it is resolved.
As of December 31, 2000, the Company adopted FAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. Under FAS 140, the Company is also required to disclose the market value of collateral received under stock borrow and securities purchased under agreements to resell which it has the ability to sell or pledge.
At December 31, 2000, the approximate market values of collateral received that can be sold or pledged by the Company were:
| Sources of collateral
| |
| (In thousands of dollars) | |
| | |
| Securities purchased under agreement to resell | $60,222 |
| Securities received in securities borrowed, collateralized by cash | 277,092 |
| Securities received in customer margin loans | 8,113 |
At December 31, 2000, the approximate market values of collateral received that were sold or repledged by the Company were:
| Uses of collateral
| |
| (In thousands of dollars) | |
| | |
| Securities loaned, collateralized by cash | $275,130 |
The Company is contingently liable under bank stand-by letter of credit agreements, executed in connection with security clearing activities, totaling $1,700,000 at December 31, 2000. The Company also has guaranteed a note payable for $470,000 that is collateralized by certain assets.
NOTE 17. Net Capital Requirements
The Corporation is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. The Corporation has elected to use the alternative method, permitted by the Rule, which requires that the Corporation maintain a minimum net capital equal to 2 percent of aggregate debit balances arising from customer transactions, as defined. At December 31, 2000, the Corporation had net capital of $37,541,000 which equaled 307.5% of aggregate debit balances and $37,291,000 in excess of required minimum net capital.
NOTE 18. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Company’s customer clearing activities involve the execution, settlement and financing of various customer securities transactions. These activities may expose the Company to off-balance-sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and the Company has to purchase or sell the financial instrument underlying the contract at a loss.
The Company acts as a manager and co-manager in underwriting security transactions. In this capacity, there is risk if the potential customer does not fulfill the obligation to purchase the securities. This risk is mitigated by the fact that the Company deals primarily with institutional investors. In most cases, no one institutional customer subscribes to the majority of the securities being sold, thereby spreading the risk for this type of loss among many established customers. The Company also maintains credit limits for these activities and monitors compliance with applicable limits and industry regulations on a daily basis.
In addition, the Company has sold securities that it does not currently own and is therefore obligated to purchase such securities at a future date. The Company has recorded these obligations in the financial statement at the December 31, 2000 market values of the related securities and will incur a loss if the market value of the securities increases subsequent to December 31, 2000.
The Company’s customer securities activities are transacted on either a cash or margin basis. In margin transactions, the Company extends credit to its customers, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the customers’ accounts. In connection with these activities, the Company executes and clears customer transactions involving the sale of securities not yet purchased, substantially all of which are transacted on a margin basis subject to individual exchange regulations. Such transactions may expose the Company to significant off-balance-sheet risk in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event a customer fails to satisfy its obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer’s obligations. The Company seeks to control the risks associated with its customer activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels daily and, pursuant to such guidelines, requires the customer to deposit additional collateral, or to reduce positions, when necessary.
The Company’s customer financing and securities settlement activities may require the Company to pledge customer securities as collateral in support of various secured financing sources such as bank loans and securities loaned. In the event the counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. The Company controls this risk by monitoring the market value of securities pledged on a daily basis and by requiring adjustments of collateral levels in the event of excess market exposure. In addition, the Company establishes credit limits for such activities and monitors compliance on a daily basis.
NOTE 19. Concentrations of Credit Risk
The Company is engaged in various trading and brokerage activities whose counterparties primarily include broker-dealers, banks, and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the credit worthiness of the counter party or issuer of the instrument. The Company seeks to control credit risk by following an established credit approval process, monitoring credit limits, and requiring collateral where appropriate.
The Company purchases debt securities and may have significant positions in its inventory subject to market and credit risk. In order to control these risks, security positions are monitored on at least a daily basis. Should the Company find it necessary to sell such a security, it may not be able to realize the full carrying value of the security due to the significance of the position sold. The Company reduces its exposure to changes in securities valuation with the use of municipal bond index futures contracts, (See Note 21) and various U.S. Treasury securities.
NOTE 20. Fair Value of Financial Instruments
The financial instruments of the Company are reported on the statement of financial condition at market or fair value or at carrying amounts that approximate fair values, because of the short maturity of the instruments except for its investment in MTI (Note 6) and its subordinated debt. The estimated fair value of subordinated debt at December 31, 2000, approximates its carrying value based on current rates available.
NOTE 21. Derivative Financial Instruments
The Company does not engage in the proprietary trading of derivative securities with the exception of highly liquid index futures contracts and options. These index futures contracts and options are used to hedge securities positions in the Company’s inventory. Gains and losses on these financial instruments are included as revenues from principal transactions.
Trading profits and losses relating to these financial instruments were as follows:
| (In thousands of dollars) | Year Ended | Year Ended | Year Ended |
|
| Dec. 31, 2000
| Dec. 31,1999
| Dec. 31, 1998
|
| Trading profits state and municipal bonds | $4,151 | $(1,110) | $4,730 |
| Index futures hedging
| (785)
| 655
| (2,172)
|
| Net revenues
| $3,366
| $(455)
| $2,558
|
As of December 31, 2000, the contractual or notional amounts related to these financial instruments were as follows:
(In thousands of dollars)
| Average Notional or
Contract Market Value
| Year End Notional or
Contract Market Value
|
| Index futures contracts
| ($5,646)
| ($5,362)
|
As of December 31, 1999, the contractual or notional amounts related to these financial instruments were as follows:
(In thousands of dollars)
| Average Notional or
Contract Market Value
| Year End Notional or
Contract Market Value
|
| Index futures contracts
| ($6,974)
| ($6,165)
|
| | | | |
As of December 31, 1998, the contractual or notional amounts related to these financial instruments were as follows:
(In thousands of dollars)
| Average Notional or
Contract Market Value
| Year End Notional or
Contract Market Value
|
| Index futures contracts
| ($18,253)
| ($8,347)
|
| | | | |
The contractual or notional amounts related to these financial instruments reflect the volume and activity and do not reflect the amounts at risk. The amounts at risk are generally limited to the unrealized market valuation gains on the instruments and will vary based on changes in market value. Futures contracts are executed on an exchange, and cash settlement is made on a daily basis for market movements. Open equity in the futures contracts are recorded as receivables from clearing organizations. The settlement of these transactions is not expected to have a material adverse effect on the financial condition of the Company.
NOTE 22. Segment Analysis
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). SFAS 131 is effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes standards for reporting financial and descriptive information about an enterprise’s operating segments in its annual financial statements and selected segment information in interim financial reports.
The Company’s reportable operating segments are: Institutional (including Investment Banking, Institutional Sales and Trading, First Albany Asset Management Corporation and FA Technology Ventures Corporation), Investments, Equity in Losses of Affiliates and Discontinued Operations. The financial policies of the Company’s segments are the same as those described in the “Summary of Significant Accounting Policies.” The Institutional segment generates revenues from securities transactions (equities and fixed-income securities) with institutional clients along with investment banking activities, which includes managing, co-managing of tax-exempt and corporate securities underwritings and financial advisory services. This segment also includes trading activity in which the Company buys and maintains inventories of fixed-income products and equities securities (as a “market maker”) for sale to other dealers and to institutional clients. The Investment segment includes gains and losses associated with the investment portfolio held at the Company. Discontinued operations is comprised of the Company’s Private Client Group. The Private Client Group had provided securities brokerage services to individual investors. Revenues were generated through customer purchase and sale of various securities: equity, taxable and non-taxable fixed income, mutual funds and various other investment products and services.
Equity in loss of affiliates includes revenue relating to the Company’s investment in Mechanical Technology Incorporated (MTI) which is recorded under the equity method (see Note 7). Pre-tax net loss relating to MTI was ($6,202,000), ($3,629,000) and ($1,488,000) for the years ended December 31, 2000, 1999 and 1998, respectively.
Intersegment revenues and expenses are eliminated between segments. Interest revenues and interest expenses are reviewed primarily on a net basis (Net Interest Revenues) and are shown as such. The Company evaluates the performance of its segments and allocates resources to them based upon long-term margin opportunities, which are consistent with the growth strategy of the Company. Asset information by reportable segments is not reported since the Company does not produce such information internally for the reportable segments. All assets are located in the United States.
Information concerning operations in these segments is as follows:
| For years ended (in thousands of dollars)
| December 31,
2000
| December 31,
1999
| December 31,
1998
| |
| | | | | |
| Revenues (excluding interest income): | | | | |
| | | | | |
| Institutional | $114,577 | $100,204 | $90,739 | |
| Investments | (669) | (1,749) | 3,391 | |
| Continued operations | 113,908 | 98,455 | 94,130 | |
| Discontinued operations
| 61,673
| 92,321
| 85,227
| |
| Total
| $175,581
| $190,776
| $179,357
| |
| | | | | |
| Net Interest Revenues: | | | | |
| | | | | |
| Institutional
| $6,715
| $5,542
| $5,210
| |
| Continued operations | 6,715 | 5,542 | 5,210 | |
| Discontinued operations
| 2,602
| 4,078
| 3,541
| |
| Total
| $9,317
| $9,620
| $8,751
| |
| | | | | |
| Net Revenues: | | | | |
| | | | | |
| Institutional | $121,292 | $105,746 | $95,949 | |
| Investments
| (669)
| (1,749)
| 3,391
| |
| Continued operations | 120,623 | 103,997 | 99,340 | |
| Discontinued operations
| 64,275
| 96,399
| 88,768
| |
| Total
| $184,898
| $200,396
| $188,108
| |
| | | | |
| Pre-Tax Income: | | | |
| | | | |
| Institutional | $2,510 | $(2,976) | $105 |
| Investments | (669) | (1,749) | 3,391 |
| Equity in Losses of affiliates
| (6,202)
| (3,629)
| (1,488)
|
| Continued operations | (4,361) | (8,354) | 2,008 |
| Discontinued operations | 721 | 9,127 | 5,124 |
| Sale of discontinued operations
| 39,309
|
|
|
| Total
| $35,669
| $773
| $7,132
|
NOTE 23. New Accounting Standards
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, “ which defers the effective date of (SFAS No. 133), Accounting for Derivative Instruments and Hedging Activities” to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. The Company will adopt SFAS No. 133 as of January 1, 2001. Upon adoption of SFAS No. 133, the Company will be required to record any unrealized gains or losses on the fair value of its investments in derivatives in its results of operations and will record a cumulative adjustment to reflect the impact of adopting this accounting standard. Adoption of SFAS No. 133 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
NOTE 24. Discontinued Operations
On May 9, 2000, the Company announced that it signed an agreement for the sale of the assets of its Private Client Group, its retail brokerage branch network, to First Union Securities, a subsidiary of First Union Corp. The transaction closed on August 4, 2000. The amount received was approximately $87 million plus certain assets purchased for $6 million less certain liabilities assumed for approximately ($6) million and less the assumption of certain long term deferred compensation plans totaling about ($17) million. In addition, the Company and First Union Securities agreed to jointly enhance the Financial Consultant retention program. The Company's contribution to this plan was approximately ($8) million. Finally, all customer assets and liabilities associated with this business were transferred to First Union Securities.
Included in the condensed consolidated statement of operations under the caption "Gain on Sale of Discontinued Operations Net of Taxes", was an after tax gain from the sale of the Private Client Group of $37.2 million, and a one-time charge of $14.4 million related to the divestiture of the Private Client Group. The one-time charge consisted of a cash charge of $5.5 million and an asset valuation charge of $8.9 million. The cash charge consisted predominately of compensation related charges associated with the completion of the divestiture and the asset valuation charge consisted primarily of the impairment of future lease space and fixed assets, related to the divestiture of the Private Client Group.
In accordance with Accounting Principles Board Opinion No. 30 (APB 30), "Reporting the Results of Operations - Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", the results of the Private Client Group have been reported separately as a discontinued operation for all periods presented.
Components of amounts reflected in condensed consolidated statement of financial condition and condensed consolidated statement of operations are presented in the following tables:
Income Statement Data - Discontinued Operations:
| (In thousands of dollars) | Years Ended |
| | December 31, | December 31, | December 31, |
|
| 2000
| 1999
| 1998
|
| Net revenues | $64,275 | $96,399 | $88,768 |
| Expenses
| 63,554
| 87,272
| 83,644
|
| Income before income taxes | 721 | 9,127 | 5,124 |
| Income tax expense
| 299
| 3,854
| 2,608
|
| Income from discontinued operations, net of taxes
| $422
| $5,273
| $2,516
|
A portion of the company’s net interest income has been allocated to discontinued operations based primarily on the margin borrowings of the Private Client Group clients, net of an allocation of cost of funds relating to these margin borrowings.
SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(In thousands of dollars, except per share data)
Quarters Ended
| 2000 - Calendar Year
| Mar. 31
| June 30
| Sep. 30
| Dec. 31
|
| Total revenues | $50,783 | $44,594 | $48,579 | $49,872 |
| Interest expense
| 17,181
| 19,385
| 21,145
| 15,494
|
| Net revenues | 33,602 | 25,209 | 27,434 | 34,378 |
| Total expenses (excluding interest)
| 31,472
| 26,044
| 28,655
| 32,611
|
| Operating income (loss) | 2,130 | (835) | (1,221) | 1,767 |
| Equity in loss of affiliates
| (597)
| (1,365)
| (1,679)
| (2,562)
|
| Income before income taxes | 1,533 | (2,200) | (2,900) | (795) |
| Income tax expense (benefit)
| 657
| (838)
| (926)
| (321)
|
| Income from continuing operations | 876 | (1,362) | (1,974) | (474) |
| Income from discontinued operations (net of taxes) | 2,187 | 275 | (2,040) | |
| Gain on sale of discontinued operations (net of taxes)
|
|
| 22,799
|
|
| Net income (loss)
| $3,063
| $(1,087)
| $18,785
| $(474)
|
| Net income per commonand common equivalent share: | | | | |
| | | | | |
| Basic: | | | | |
| Continuing operations | $0.11 | $(0.16) | $(0.25) | $(0.06) |
| Discontinued operations | 0.27 | 0.03 | (0.26) | |
| Gain on sale of discontinued operations
|
|
| 2.87
|
|
| Net income (loss)
| $0.38
| $(0.13)
| $2.36
| $(0.06)
|
| Dilutive: | | | | |
| Continuing operation | $0.09 | $(0.16) | $(0.25) | $(0.06) |
| Discontinued operations | 0.22 | 0.03 | (0.26) | |
| Income on sale of discontinued operations
|
|
| 2.87
|
|
| Net income (loss)
| $0.31
| $(0.13)
| $2.36
| $(0.06)
|
All per share figures have been restated for common stock dividends paid. The sum of the quarter earnings per share amount does not always equal the full fiscal year’s amount due to the effect of averaging the number of shares of common stock and common stock equivalents throughout the year.
SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(In thousands of dollars, except per share data)
Quarters Ended
| 1999 - Calendar Year
| Mar. 31
| June 30
| Sep. 30
| Dec. 31
|
| Total revenues | $30,859 | $37,457 | $41,069 | $46,158 |
| Interest expense
| 9,252
| 12,259
| 14,666
| 15,369
|
| Net revenues | 21,607 | 25,198 | 26,403 | 30,789 |
| Total expenses (excluding interest)
| 24,679
| 26,117
| 26,527
| 31,399
|
| Operating income (loss) | (3,072) | (919) | (124) | (610) |
| Equity in loss of affiliates
| (544)
| (872)
| (1,397)
| (816)
|
| Income before income taxes | (3,616) | (1,791) | (1,521) | (1,426) |
| Income tax benefit
| (1,351)
| (741)
| (550)
| (852)
|
| Income from continuing operations | (2,265) | (1,050) | (971) | (574) |
| Income from discontinued operations (net of taxes)
| 1,468
| 1,867
| 541
| 1,397
|
| Net income (loss)
| $(797)
| $817
| $(430)
| $823
|
| | | | | |
| Net income per common and common equivalent share: | | | | |
| | | | | |
| Basic | | | | |
| Continuing operation | $(0.28) | $(0.13) | $(0.12) | $(0.07) |
| Discontinued operations
| 0.18
| 0.23
| 0.07
| 0.17
|
| Net income (loss)
| $(0.10)
| $0.10
| $(0.05)
| $0.10
|
| Dilutive | | | | |
| Continuing operations | $(0.28) | $(0.13) | $(0.12) | $(0.07) |
| Discontinued operations
| 0.18
| 0.23
| 0.07
| 0.17
|
| Net income(loss)
| $(0.10)
| $0.10
| $(0.05)
| $0.10
|
All per share figures have been restated for common stock dividends paid. The sum of the quarter earnings per share amount does not always equal the full fiscal year’s amount due to the effect of averaging the number of shares of common stock and common stock equivalents throughout the year.
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.
Except as set forth below, the information required by this item will be contained under the caption "Election of Directors" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on or about May 22, 2001. Such information is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this item will be contained under the caption "Compensation of Executive Officers" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on or about May 22, 2001. Such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item will be contained under the caption "Stock Ownership of Principal Owners and Management" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on or about May 22, 2001. Such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this item will be contained under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on or about May 22, 2001. Such information is incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
| (a) (1) | The following financial statements are included in Part II, Item 8: |
| | |
| | Report of Independent Accountants |
| | |
| | Financial Statements: |
| | |
| | Consolidated Statements of Income For the Years Ended December 31, 2000, 1999 and 1998 |
| | |
| | Consolidated Statements of Financial Condition as of December 31, 2000 and 1999 |
| | |
| | Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 |
| | |
| | Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 |
| | |
| | Notes to Consolidated Financial Statements |
| | |
| (a) (2) | The following financial statement schedule for the periods 2000, 1999 and 1998 are submitted herewith: |
| | |
| | Schedule II-Valuation and Qualifying Accounts |
| | |
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
| (a) (3) | Exhibits included herein: |
Exhibit
Number Description
| 3.1 | Certificate of Incorporation of First Albany Companies Inc. (filed as Exhibit No. 3.1 to Registration Statement No. 33-1353). |
| 3.1a | Amendment to Certificate of Incorporation of First Albany Companies Inc. (as filed as Exhibit No. (3) (i) to Form 10-Q for the quarter ended June 26, 1998). |
| 3.1b | Amendment to Certificate of Incorporation of First Albany Companies Inc. (Filed as Appendix B to Proxy Statement on Schedule 14A dated May 2, 2000). |
| 3.2 | By laws of First Albany Companies Inc. (filed as Exhibit No. 3.2 to Registration Statement No. 33-1353). |
| 3.2a | By laws of First Albany Companies Inc., as amended (as filed as Exhibit No. 3.2a to Form 10-K for the fiscal year ended September 24, 1993). |
| 3.2b | By laws of First Albany Companies Inc., as amended (as filed as Exhibit No. 3.2b to Form 10-K for the calendar year ended December 31, 1996). |
| 3.2c | By laws of First Albany Companies Inc., as amended (as filed as Exhibit No. 3.2c to Form 10-K for the calendar year ended December 31, 1997). |
| 3.2d | By laws of First Albany Companies Inc., as amended (as filed as Exhibit (3) (ii) to Form 10-Q for the quarter ended June 26, 1998). |
| 4. | Specimen Certificate of Common Stock, par value $.01 per share (filed as Exhibit No. 4 to Registration Statement No. 33-1353). |
| 10.6 | Deferred Profit Sharing Plan of First Albany Corporation effective October 1, 1982, as amended by shareholder vote dated January 19, 1987(filed as Exhibit 10.6 to Form 10-K for the fiscal year ended September 30, 1986). |
| 10.6b | First Albany Corporation Employees’ Retirement and Savings Plan (formerly the Deferred Profit Sharing Plan of First Albany Corporation) amended and effective January 1, 2000, filed as exhibit herewith. |
| 10.12 | First Albany Companies Inc. 1989 Stock Incentive Plan effective February 27, 1989, as approved by shareholder vote dated February 27, 1989(filed as Exhibit 10.12 to Form 10-K for the fiscal year ended September 30, 1989). |
| 10.12a | First Albany Companies Inc. 1989 Stock Incentive Plan, as amended effective May 20, 1999 (filed as Registration Statement 333-78877 dated May 20, 1999). |
| 10.16 | The First Albany Companies Inc. Restricted Stock Plan as adopted by the Company on April 27, 1992(filed as Exhibit 10.16 to Form 10-K for the fiscal year ended September 25, 1992). |
| 10.20 | Subordinated Loan Agreement dated September 16, 1996, between First Albany Companies Inc. and Sharon M. Duker. (Filed as Exhibit 10.20 to Form 10K for calendar year ended December 31, 1996). |
| 10.20a | Subordinated Loan Agreement between First Albany Companies Inc. and Sharon M. Duker as amended effective December 23, 1997 (filed as Exhibit 10.20a to Form 10-K for calendar year ended December 31, 1997). |
| 10.21 | Master Equipment Lease Agreement dated September 25, 1996, between First Albany Companies Inc. and KeyCorp Leasing Ltd. (Filed as Exhibit 10.21 to Form 10K for calendar year ended December 31, 1996). |
| 10.23 | Subordinated Loan Agreement dated December 23, 1997 between First Albany Companies Inc. and Sharon M. Duker (filed as Exhibit 10.23 to Form 10K for calendar year ended December 31, 1997). |
| 10.25 | First Albany Companies Inc. 1999 Long-Term Incentive Plan, effective March 26, 1999 (filed as Appendix A to Proxy Statement on Schedule 14A dated May 20, 1999). |
| 10.26 | Agreements to Sell First Albany Corporation’s Retail Branch Network and Correspondent Clearing Business dated May 8, 2000 between First Albany Companies Inc., First Albany Corporation and First Union Securities, Inc. (Filed as exhibit 10.26 to form 10Q for quarter ended March 31, 2000) |
| 10.27 | First Albany Companies Inc. Deferred Compensation Plan for Key Employees (filed as registration No. 333-37640 (Form S-8) dated May 23, 2000). |
| 10.28 | First Albany Companies Inc. 2000 Employee Stock Purchase Plan (filed as Appendix A to Proxy Statement on Schedule 14A dated May 2, 2000) |
| 10.29 | Put and Call Agreement dated as of December 27, 2000 between the First Albany Companies Inc., Mechanical Technology Incorporated and KeyBank filed as exhibit herewith. |
| 10.30 | Bridge promissory Note in the amount of $5 million , dated as of December 27, 2000 between First Albany Companies Inc. and Mechanical Technology Incorporated , filed as exhibit herewith. |
| 10.31 | Put Promissory Note in the amount of $945,000, dated as of December 27, 2000, between the First Albany Companies Inc. and Mechanical Technology Incorporated, filed as exhibit herewith. |
| 10.32 | Stock Pledge Agreement, dated as of December 27, 2000, by First Albany Companies Inc. and Mechanical Technology Incorporated, pledging 1,000,000 shares of Plug Power Stock in support of the $5 million Bridge Promissory Note, filed as exhibit herewith. |
| 10.33 | Stock Pledge Agreement, dated as of December 27, 2000, by First Albany Companies Inc. and Mechanical Technology Incorporated, pledging 200,000 shares of Plug Power Stock in support of the $945,000 Put Promissory Note, filed as exhibit herewith. |
| 10.34 | Sublease dated January 1999, between First Albany Companies Inc., as Sublandlord and Connectech, LLC d/b/a Telx, as Subtenant for office facilities at 17 State Street, New York, New York filed as exhibit herewith. |
| 10.35 | Sublease dated August 2000, between First Albany Companies Inc. as Sublandlord and First Union Securities, Inc., as Subtenant for office facilities at One Penn Plaza, New York, New York, filed as exhibit herewith. |
| 11 | Computation of per share earnings. |
| 21 | List of Subsidiaries of First Albany Companies Inc. |
| 23 | Consent of PricewaterhouseCoopers L.L.P. |
| (b) | Reports on Form 8-K:
No reports on Form 8-K have been filed by the Registrant during the last quarter of the period covered by this report. |
| (c) | Exhibits:
The exhibits to this report are listed in section (a)(3) of Item 14 above. |
| (d)(2) | Financial Statement Schedules:
The financial statement schedule filed with this report is listed in section (a)(2) of Item 14 above. |
| (d)(1) | Separate Financial Statements of Fifty Percent or Less Owned Persons |
��
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
Item 8
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Mechanical Technology Incorporated
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Mechanical Technology Incorporated and Subsidiaries at September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers L.L.P.
Albany, New York
October 27, 2000,
except for Notes
8, 11, and 17 for
which the date is
December 27, 2000
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and 1999
| | (Dollars in thousands) |
| 2000
| 1999
|
| Assets | | |
| Current Assets: | | |
| Cash and cash equivalents | $1,552 | $5,870 |
| Investments in marketable debt securities | - | 7,876 |
| Accounts receivable, less allowances of $0 in 2000 and $113 in 1999 | 693 | 3,852 |
| Other receivables - related parties | - | 105 |
| Inventories | 1,193 | 3,752 |
| Notes receivable - current | 344 | 329 |
| Deferred income taxes | 979 | - |
| Prepaid expenses and other current assets | 331 | 265 |
Taxes receivable
| -
| 10
|
| | | |
| Total Current Assets | 5,092 | 22,059 |
| | | |
| Restricted cash equivalents (Note 11) | 1,142 | - |
| Property, plant and equipment, net | 529 | 827 |
| Notes receivable - noncurrent, less allowance of $660 in 2000 and $0 in 1999 | 97 | 184 |
| Investments, at equity | 64,356 | 8,710 |
Investments, at cost
| 6,050
| -
|
Total Assets
| $77,266
| $31,780
|
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, 2000 and 1999
| | (Dollars in thousands) |
| 2000
| 1999
|
| Liabilities and Shareholders' Equity | | |
| Current Liabilities: | | |
| Line of credit (Note 11) | $27,000 | $- |
| Accounts payable | 283 | 614 |
| Accrued liabilities | 1,853 | 2,243 |
| Accrued liabilities - related parties | 9 | - |
| Income taxes payable | 9 | - |
Net liabilities of discontinued operations
| 231
| 540
|
| Total Current Liabilities | 29,385 | 3,397 |
| Long-Term Liabilities: | | |
Deferred income taxes and other credits
| 2,852
| 597
|
Total Liabilities
| 32,237
| 3,994
|
| Commitments and Contingencies | | |
| Shareholders' Equity | | |
| Common stock, par value $1 per share, authorized 50,000,000; issued 35,437,285 in 2000 and 34,949,877 in 1999 | 35,437 | 34,947 |
| Paid-in-capital | 54,790 | 19,457 |
Accumulated deficit
| (45,169)
| (26,573)
|
| | 45,058 | 27,831 |
| Accumulated Other Comprehensive Loss: | | |
| Unrealized loss on available for sale securities, net | - | (5) |
Foreign currency translation adjustment
| -
| (11)
|
| Accumulated Other Comprehensive Loss | - | (16) |
| | | |
Common stock in treasury, at cost, 20,250 shares in 2000 and 1999
| (29)
| (29)
|
Total Shareholders' Equity
| 45,029
| 27,786
|
| | | |
Total Liabilities and Shareholders' Equity
| $77,266
| $31,780
|
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share)
| 2000
| 1999
| 1998
|
| Net sales | $5,547 | $12,885 | $21,028 |
Cost of sales
| 2,576
| 8,239
| 12,386
|
| Gross profit | 2,971 | 4,646 | 8,642 |
| Selling, general and administrative expenses | 4,864 | 4,949 | 5,812 |
Product development and research costs
| 2,034
| 1,105
| 831
|
| Operating (loss) income | (3,927) | (1,408) | 1,999 |
| Interest expense | (1,943) | (106) | (102) |
| Gain on sale of subsidiary | 1,262 | - | - |
Other (expense) income, net
| (309)
| 185
| (97)
|
| | | | |
| (Loss) income from continuing operations before income taxes and equity in investee losses | (4,917) | (1,329) | 1,800 |
| Income tax (benefit) expense | (1,927) | 37 | 25 |
Equity in investee losses (net of tax benefit of $10,219 in 2000 and $0 in 1999 and 1998)
| (15,849)
| (9,363)
| (3,806)
|
| Loss from continuing operations | (18,839) | (10,729) | (2,031) |
Income (loss) from discontinued operations (net of taxes of $157 in 2000 and $0 in 1999 and 1998)
| 243
| 41
| (2,285)
|
Net loss
| $(18,596)
| $(10,688)
| $(4,316)
|
| Earnings (loss) per share (Basic and Diluted): | | | |
| Loss from continuing operations | $(.54) | $(.31) | $(.07) |
Income (loss) from discontinued operations
| .01
| -
| (.08)
|
Net loss
| $(.53)
| $(.31)
| $(.15)
|
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 2000, 1999 and 1998
(Dollars in thousands)
COMMON STOCK
| 2000
| 1999
| 1998
|
| Balance, October 1 (1998 balance as previously reported) | $34,947 | $32,325 | $8,864 |
| Three-for-one common stock split effected in the form of a 200% stock dividend effective April 3, 2000 | - | - | 17,728 |
| Issuance of shares - options | 490 | 168 | 351 |
Issuance of shares
| -
| 2,454
| 5,382
|
Balance, September 30
| $35,437
| $34,947
| $32,325
|
| PAID-IN-CAPITAL | | | |
| Balance October 1 (1998 balance as previously reported) | $19,457 | $(5,276) | $10,968 |
| Three-for-one common stock split effected in the form of a 200% stock dividend effective April 3, 2000 | - | - | (17,728) |
| Issuance of shares - options | (3) | 1 | (126) |
| Issuance of shares | - | 10,190 | 1,610 |
| Plug Power investment, net of deferred taxes | 29,252 | 14,487 | - |
| SatCon investment, net of deferred taxes | 872 | - | - |
| Warrants issued, net of deferred taxes | 2,207 | - | - |
| Compensatory stock options, net of deferred taxes | 1,199 | 55 | - |
Stock option exercises recognized differently for financial reporting and tax purposes
| 1,806
| -
| -
|
Balance, September 30
| $54,790
| $19,457
| $(5,276)
|
| DEFICIT | | | |
| Balance, October 1 | $(26,573) | $(15,885) | $(11,569) |
Net loss
| (18,596)
| (10,688)
| (4,316)
|
Balance, September 30
| $(45,169)
| $(26,573)
| $(15,885)
|
| UNREALIZED LOSS ON AVAILABLE FOR SALE SECURITIES, NET | | | |
| Balance, October 1 | $(5) | $- | $- |
Unrealized loss on available for sale securities, net
| 5
| (5)
| -
|
Balance, September 30
| $-
| $(5)
| $-
|
| FOREIGN CURRENCY TRANSLATION ADJUSTMENT | | | |
| Balance, October 1 | $(11) | $(11) | $(19) |
Adjustments
| 11
| -
| 8
|
Balance, September 30
| $-
| $(11)
| $(11)
|
| TREASURY STOCK | | | |
Balance, October 1
| $(29)
| $(29)
| $(29)
|
Balance, September 30
| $(29)
| $(29)
| $(29)
|
| RESTRICTED STOCK GRANTS | | | |
| Balance, October 1 | $- | $- | $(2) |
Grants issued/vested, net
| -
| -
| 2
|
Balance, September 30
| $-
| $-
| $-
|
| SHAREH0LDERS' EQUITY | | | |
September 30
| $45,029
| $27,786
| $11,124
|
| OTHER COMPREHENSIVE (LOSS) INCOME: | | | |
| Net loss | $(18,596) | $(10,688) | $(4,316) |
| Other comprehensive (loss) income: | | | |
| Foreign currency translation adjustment | 11 | - | 8 |
Unrealized loss on available for sale securities
| 5
| (5)
| -
|
Total comprehensive loss
| $(18,580)
| $(10,693)
| $(4,308)
|
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended September 30, 2000, 1999 and 1998
(Dollars in thousands)
OPERATING ACTIVITIES
| 2000
| 1999
| 1998
|
| Loss from continuing operations | $(18,839) | $(10,729) | $(2,031) |
| Adjustments to reconcile net (loss) income to net cash provided (used) by continuing operations: | | | |
| Depreciation and amortization | 264 | 581 | 323 |
| Gain on sale of subsidiaries | (1,262) | - | - |
| Equity in losses of equity investees, gross | 26,068 | 9,363 | 3,806 |
| Allowance for bad debts | 636 | 14 | 5 |
| Loss on sale of fixed assets | 20 | 28 | 9 |
| Deferred income taxes and other credits | (12,152) | (10) | 13 |
| Stock based compensation | 547 | 55 | - |
| Changes in operating assets and liabilities net of effects from discontinued operations: | | | |
| Accounts receivable | 887 | 1,093 | (1,069) |
| Other receivables - related parties | 105 | (18) | - |
| Inventories | (343) | (4) | (362) |
| Prepaid expenses and other current assets | (76) | (174) | (346) |
| Accounts payable | 311 | (1,450) | 788 |
| Income taxes | 19 | (7) | (76) |
| Accrued liabilities - related parties | 9 | - | - |
Accrued liabilities
| (127)
| (1,085)
| (519)
|
Net cash (used) provided by continuing operations
| (3,933)
| (2,343)
| 541
|
| Discontinued Operations: | | | |
| Income(loss) from discontinued operations | 243 | 41 | (2,285) |
| Deferred income taxes and other credits | 157 | - | - |
Changes in net liabilities/assets of discontinued operations
| (309)
| 548
| 2,300
|
Net cash provided by discontinued operations
| 91
| 589
| 15
|
Net cash (used) provided by operations
| (3,842)
| (1,754)
| 556
|
| INVESTING ACTIVITIES | | | |
| Purchases of property, plant & equipment | (286) | (2,738) | (3,166) |
| Purchase of stock in Plug Power | (20,500) | (6,000) | - |
| Purchase of stock in SatCon | (7,070) | - | - |
| Purchase of stock in Beacon Power | (6,050) | - | - |
| Proceeds from sale of subsidiary, net | 23 | - | - |
| Change in restricted cash equivalents, net | (1,142) | - | - |
| Investment in marketable debt securities | (2,000) | (7,881) | - |
| Proceeds from sale of marketable debt securities | 9,881 | - | - |
| Note receivable - other | (660) | - | - |
| Principal payments from note receivable | 72 | 78 | 59 |
Notes receivable Plug Power
| -
| -
| (500)
|
Net cash used by investing activities
| (27,732)
| (16,541)
| (3,607)
|
| FINANCING ACTIVITIES | | | |
| Borrowings under IDA financing, less restricted cash | - | 5,858 | - |
| Proceeds from stock option exercises | 489 | 153 | 225 |
| Proceeds from rights offering | - | 12,820 | 7,178 |
| Costs of rights offering | - | (158) | (186) |
| Debt issue costs | (233) | (75) | (28) |
| Payments under line-of-credit | (5,500) | - | - |
Borrowings under line-of-credit
| 32,500
| -
| -
|
Net cash provided by financing activities
| 27,256
| 18,598
| 7,189
|
Effect of exchange rate on cash
| -
| -
| 8
|
| (Decrease) increase in cash and cash equivalents | (4,318) | 303 | 4,146 |
Cash and cash equivalents - beginning of year
| 5,870
| 5,567
| 1,421
|
Cash and cash equivalents - end of year
| $1,552
| $5,870
| $5,567
|
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For The Years Ended September 30, 2000, 1999 and 1998
(Dollars in thousands)
| 2000
| 1999
| 1998
|
| Non-cash Investing and Financing Activities: | | | |
| | | | |
| Acquired stock of Plug Power in exchange for net assets contributed | $- | $367 | $5,000 |
| | | | |
| Additional investment and paid-in-capital resulting from other investors' investments in Plug Power | 42,310 | 14,487 | - |
| | | | |
| Acquired stock of SatCon Technology Corporation in exchange for net assets of Ling Electronics, Inc. and subsidiaries | 6,738 | - | - |
| | | | |
| Additional investment and paid-in-capital resulting from warrant issuance to SatCon Technology Corporation | 3,678 | - | - |
| | | | |
| Additional investment and paid-in-capital resulting from other investors' investments in SatCon Technology Corporation | 1,418 | - | - |
| | | | |
| Additional paid-in-capital resulting from stock option exercises treated differently for financial reporting and tax purposes | 1,806 | - | - |
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 majority-owned subsidiaries. The equity method of accounting is used for investments in entities over which the Company has significant influence, generally this represents common stock ownership or partnership equity of at least 20% and not more than 50%, or where the Company has the ability to exercise significant influence over operating and financial policies of the investees. All significant intercompany transactions are eliminated in consolidation.
Under the equity method of accounting, the Company recognizes its proportionate share of income or loss of investees. Investee losses are generally recognized only to the extent of investments. Changes in equity of investees, other than income or loss, which change the Company's proportionate interest in the underlying equity of investees, are generally accounted for as changes in investment and additional paid-in-capital. Non-monetary contributions to equity investees are recorded at book value, and if the Company's calculated share of net assets of investees exceeds the book value of non-monetary contributions, the difference is accounted for as a basis difference. Original differences between the Company's carrying amount of an equity investment and its calculated share of net assets of investees is treated as an embedded difference if the Company's carrying amount is higher, or as a basis difference if lower. Embedded differences are amortized into net income (loss) from investees generally over a five-year period while basis differences are generally not amortized due to the research and development nature of investees. Upon an equity investee's initial public offering, basis differences are eliminated in connection with the change in equity. Impairment is measured in accordance with the Company's Asset Impairment Policy.
On October 21, 1999, Ling Electronics, Inc. and Ling Electronics, Ltd. ("Ling") was sold and is therefore not included in the consolidation after that date. Further, the Company acquired an equity interest in SatCon Technology Corporation as of October 21, 1999.
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, investments and line-of-credit, 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:
| Leasehold improvements | 10 years |
| Machinery and equipment | 2 to 10 years |
| Office furniture, equipment and fixtures | 2 to 10 years |
Significant additions or improvements extending assets' useful lives are capitalized; normal maintenance and repair costs are expensed as incurred. The costs of fully depreciated 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 or distributors. Sales of products under long-term contracts are recognized under 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 estimable.
Foreign Currency Translation
Assets and liabilities of the foreign subsidiary are translated at year-end rates of exchange, and revenues and expenses are translated at the average rates of exchange for the year. Gains or losses resulting from the translation of the foreign subsidiary's balance sheet are accumulated in a separate component of shareholders' equity.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid short-term investments with original maturities of less than three months.
Investments in Marketable Securities
Management determines the appropriate classification of its investments in marketable securities at the time of purchase and reevaluates such determinations at each balance sheet date. Marketable securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale along with any investments in mutual funds. Securities available for sale are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a separate component of shareholders' equity. The Company has had no investments that qualify as trading or held to maturity.
The amortized cost of marketable debt securities is adjusted for accretion of discounts to maturity. Such accretion as well as interest are included in interest income. Realized gains and losses are included in "Other (expense) income, net" in the Consolidated Statements of Operations. The cost of securities sold is based on the specific identification method.
The Company's investments in marketable securities are diversified among high-credit quality securities in accordance with the Company's investment policy.
Net Loss per Basic and Diluted Common Share
The Company reports net loss per basic and diluted common share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which establishes standards for computing and presenting loss per share. Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution, if any, which could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the loss of the Company.
Stock Based Compensation
Pursuant to SFAS No. 123 "Accounting for Stock-Based Compensation," the Company has elected to follow the accounting provisions of Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees," for stock-based compensation issued to employees and to adopt the disclosure provisions of SFAS No. 123. The Company will follow the accounting provisions of SFAS No. 123 for stock-based compensation issued to consultants and record a charge to earnings for fair value of options granted.
Advertising
The costs of advertising are expensed as incurred. Advertising expense was approximately $44, $102 and $83 thousand in 2000, 1999 and 1998, respectively.
Asset Impairment
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires companies to record impairments to long-lived assets, certain identifiable intangibles, and related goodwill when events or changing circumstances indicate a probability that the carrying amount of an asset may not be fully recovered. Impairment losses are recognized when expected future cash flows are less than the asset's carrying value.
Concentration of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk consist principally of cash equivalents, investments in marketable securities, trade accounts receivable and unbilled contract costs.
The Company's trade accounts receivable and unbilled contract costs and fees are primarily from sales to commercial customers and U.S. government agencies. The Company does not require collateral and has not historically experienced significant credit losses related to receivables or unbilled contract costs and fees from individual customers or groups of customers in any particular industry or geographic area.
The Company deposits its cash and invests in short-term investments and marketable securities primarily through one regional commercial bank and an investment company.
Credit exposure to any one entity is limited by Company policy.
Research and Development Costs
The Company expenses research and development costs as incurred.
Comprehensive Loss
Comprehensive loss includes net loss, as well as changes in stockholders' equity, other than those resulting from investments by shareholders (i.e., issuance or repurchase of common shares and dividends).
Effect of Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities" to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. The Company will adopt SFAS No. 133 as of October 1, 2000. Upon adoption of SFAS No. 133, the Company will be required to record any unrealized gains or losses on the fair value of its investments in derivatives in its results of operations and will record a cumulative adjustment to reflect the impact of adopting this accounting standard. Adoption of SFAS No. 133 is expected to have a material impact on the Company's consolidated financial position and results of operations but not cash flows. The Company holds warrants to purchase common stock of Beacon Power Corporation and SatCon Technology Corporation. The cumulative adjustment impact, upon adoption, is currently estimated to be a gain of approximately $9.99 million and be reported in the Company's statements of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition". This bulletin, as amended, established guidelines for revenue recognition and is effective for fiscal 2001. The Company does not expect that the adoption of the guidance required by SAB No. 101 will have a material impact on its financial condition or results of operations.
Reclassification and Retroactive Adjustments
Certain 1999 and 1998 amounts have been reclassified to conform to the 2000 presentation. The financial statements for all prior periods have been retroactively adjusted to reflect stock splits for common stock issued and options and warrants outstanding (See Note 12).
2. Investments in Marketable Debt Securities
The following is a summary of the investments in marketable debt securities classified as current assets at September 30:
(Dollars in thousands)
| 2000
| 1999
|
| Available for sale securities: | | |
| Corporate debt securities | | |
Fair value
| $-
| $7,876
|
Amortized cost
| $-
| $7,881
|
Unrealized loss
| $-
| $(5)
|
The difference between the amortized cost of available for sale securities and their fair market value results in unrealized gains and losses, which are recorded as a separate component of stockholders' equity. Gross realized gains and losses on sales of available for sale securities were immaterial in 2000 and 1999.
The estimated fair value of available for sale securities by contractual maturity at September 30 is as follows:
(Dollars in thousands)
| 2000
| 1999
|
| Due in one year or less | $- | $4,916 |
| Due after one year through three years | - | - |
Due after three years
| -
| 2,960
|
| $-
| $7,876
|
Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
3. Long-Term Contracts Receivable
Included in accounts receivable are the following at September 30:
(Dollars in thousands)
| 2000
| 1999
|
| U.S. Government: | $- | $43 |
| Amount billed and billable | | |
Retainage
| -
| -
|
| Commercial Customers: | - | 1,673 |
| Amounts billed and billable | | |
Retainage
| -
| 312
|
| $-
| $2,028
|
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.
4. Inventories
Inventories consist of the following at September 30:
(Dollars in thousands)
| 2000
| 1999
|
| Finished goods | $150 | $73 |
| Work in process | 249 | 916 |
Raw materials, components and assemblies
| 794
| 2,763
|
| $1,193
| $3,752
|
5. Property, Plant and Equipment
Property, plant and equipment consists of the following at September 30:
(Dollars in thousands)
| 2000
| 1999
|
| Leasehold improvements | $72 | $496 |
| Machinery and equipment | 1,417 | 3,686 |
Office furniture and fixtures
| 72
| 621
|
| | 1,561 | 4,803 |
Less accumulated depreciation
| 1,032
| 3,976
|
| $529
| $827
|
Depreciation expense was $169, $489 and $317 thousand for 2000, 1999 and 1998, respectively. Repairs and maintenance expense was $52, $166 and $177 thousand for 2000, 1999 and 1998, respectively.
(6) Notes Receivable
Notes receivable consists of the following at September 30:
(Dollars in thousands)
| 2000
| 1999
|
| Notes receivable with interest at prime (9.5% at September 30, 2000), interest and principal due May 18, 2005 | $660 | $- |
| | | |
| Notes receivable with an interest rate of 10%, interest and principal due September 30, 1998 (A) | 250 | 250 |
| | | |
Notes receivable with an interest rate of 10%, due in monthly installments through September 30, 2002
| 191
| 263
|
| | 1,101 | 513 |
| Less: Current portion | (344) | (329) |
Less: Allowance for bad debt
| (660)
| -
|
| $97
| $184
|
(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. The purchaser has requested that the principal amount of the note be reduced to reflect the resale value of certain assets of the L.A.B. Division, which was sold on September 30, 1997. The Company is enforcing its rights with respect to the note and is currently litigating for the collection of this note.
7. Investments, at Equity
At September 30, 2000, the principal components of investments in equity investees are the following:
| | Calculated | | | |
| | Market Value | | | Description |
Investment
| per Nasdaq
| Ownership
| Shares
| of Business
|
| Plug Power Inc. | $510.5 million | 31.4% | 13,704,315 | A leading U.S. designer and developer of on-site, electricity generation systems utilizing proton exchange membrane fuel cells for residential applications. |
| | | | | |
| SatCon Technology Corporation | $64.4 million | 13.2% | 1,800,000 | Designer, developer and manufacturer of high-efficiency, high-reliability and long-lived power and energy management products to serve the distributed power generation and power quality markets. |
Plug Power Inc.
The following is a roll forward of the Company's investment in Plug Power at September 30:
(Dollars in thousands)
| 2000
| 1999
| 1998
|
| Investment balance, October 1 | $8,710 | $1,221 | $27 |
| Share of Plug Power losses | (23,148) | (9,363) | (3,806) |
| Equity adjustment for share of third-party investments in Plug Power which increased equity | 4,364 | 14,485 | - |
| Capital contribution - cash | 20,500 | 2,000 | - |
| Capital commitment - cash | - | - | 4,000 |
| Capital contribution - notes receivable | - | - | 500 |
| Capital contribution - accounts Receivable | - | - | 500 |
| Company's contribution of campus, at book value | - | 367 | - |
| Company's contribution of below market lease, at book value | - | - | - |
| Company's contribution of research credits, at book value | - | - | - |
Equity adjustment for share of pre-IPO, IPO and over-allotment third-party investments in Plug Power
| 37,946
| -
| -
|
Investment balance, September 30
| $48,372
| $8,710
| $1,221
|
The difference between the carrying value of the Company's investment in Plug Power and its interest in the underlying equity consists of the following at September 30:
(Dollars in thousands)
| 2000
| 1999
|
| Calculated ownership (31.4% in 2000 and 40.65% in 1999) | $48,372 | $12,704 |
Unrecognized basis difference
| -
| (3,994)
|
Carrying value of investment in Plug Power
| $48,372
| $8,710
|
Summarized below is financial information for Plug Power whose fiscal year ends December 31.
| | 9 Months Ended
| Year Ended
|
| (Dollars in thousands) | Sept. 30,
2000 | Sept. 30,
1999 | Dec. 31,
1999 | Dec. 31,
1998 |
|
| Current assets | $112,897 | $12,024 | $177,413 | $5,293 |
| Noncurrent assets | 57,100 | 31,522 | 38,712 | 2,800 |
| Current liabilities | 9,618 | 6,291 | 8,202 | 2,601 |
| Noncurrent liabilities | 6,303 | 6,002 | 6,517 | - |
| Stockholders' equity | 154,076 | 31,253 | 201,407 | 5,493 |
| Gross revenue | 6,898 | 6,702 | 11,000 | 6,541 |
| Gross profit | (3,534) | (3,148) | (4,497) | (2,323) |
| Net loss | (63,929) | (24,867) | (33,469) | (9,616) |
On June 27, 1997, the Company and Edison Development Corp. ("EDC"), a subsidiary of DTE Energy Co., formed a joint venture, Plug Power LLC ("Plug Power") to further develop the Company's Proton Exchange Membrane ("PEM") Fuel Cell technology. In exchange for its contribution of employees, contracts, intellectual property and certain other net assets that had comprised the fuel cell research and development business activity of the Technology segment (the assets of which had a net book value of $357 thousand), the Company received a 50% interest in Plug Power. EDC made an initial cash contribution of $4.75 million in exchange for the remaining 50% interest in Plug Power. The Company's investment in Plug Power is included in the balance sheet caption "Investments, at equity".
On April 15, 1998, EDC contributed $2.25 million in cash to Plug Power. The Company contributed a below-market lease for office and manufacturing facilities in Latham, New York valued at $2 million and purchased a one-year option to match the remaining $250 thousand of EDC's contribution. In May 1998, EDC contributed an additional $2 million to Plug Power and the Company purchased another one-year option to match the contribution. The Company paid approximately $191 thousand for the options, which were scheduled to mature April 24, 1999 ($250 thousand) and June 15, 1999 ($2 million).
As of March 25, 1999, the Company and Plug Power exchanged the foregoing options and certain "research credits" (described below) for $2.25 million Plug Power membership interests. The Company earned the research credits by assisting Plug Power in securing the award of certain government grants and research contracts during the period June 1997 through April 1999.
In August 1998, the Company committed to contribute an additional $5 million (in cash, accounts receivable and research credits) to Plug Power between August 5, 1998 and March 31, 1999 and recorded a liability representing this obligation. During the period from September 1998 to February 1999, the Company fully funded this commitment by contributing $4 million cash and converting $.5 million of accounts receivable and $.5 million of notes receivable.
During April 1999, the Company and EDC amended and restated the Plug Power Mandatory Capital Contribution Agreement. The agreement, which was effective as of January 26, 1999, stated that, in the event Plug Power determined that it required funds at any time through December 31, 2000, Plug Power had the right to call upon the Company and EDC to each make capital contributions as follows:
| • | The Company and EDC would each fund capital calls of up to $7.5 million in 1999 and $15 million in 2000 ("Capital Commitment"). |
| • | In exchange for such capital contributions to Plug Power, the Company and EDC would receive class A membership interests ("Shares") from Plug Power at $7.50 per share. |
| • | The Company and EDC would share the Capital Commitment equally. |
| • | Plug Power's Board of Managers would determine when there is need for such capital contributions. |
| • | The Company and EDC would have sixty (60) days from the date of such authorization to tender their payment to Plug Power. |
The agreement was scheduled to terminate on December 31, 2000 or the date of an initial public offering of shares by Plug Power at a per share price of greater than $7.50 per share ("Termination Date").
In exchange for the Capital Commitment, Plug Power agreed to permit the Company and EDC to make capital contributions to the extent of their Capital Commitment on the Termination Date, whether or not such funds have been called, in exchange for shares at the fixed price of $7.50 per share.
In June 1999, the Company and Plug Power entered into an agreement for the sale of the Company's campus and adjacent residence, including all land and buildings, to Plug Power in exchange for 704,315 Class A membership interests and the assumption of approximately $6 million in debt by Plug Power. The sale of the Company's facility and the transfer of the $6 million IDR bonds to Plug Power were effective as of July 1, 1999 with no gain or loss recognized.
In August 1999, the Company committed to purchase 3 million shares of Plug Power if the public offering price of Plug Power's stock was greater than $7.50 per share. The Plug Power Mandatory Capital Contribution Agreement between the Company and Plug Power, dated as of January 26, 1999 was amended and restated to reflect this commitment.
On September 30, 1999, the Company purchased 266,667 shares of Plug Power at $7.50 per share. This purchase reduced the Company's commitment to purchase Plug Power shares at the time of its public offering from 3,000,000 shares to 2,733,333 shares at a price of $7.50 per share.
On November 1, 1999, the Company purchased 2,733,333 shares of Plug Power at $7.50 per share. This purchase completed the Company's commitment to purchase Plug Power shares at the time of its public offering. Plug Power's public offering was completed at $15 per share.
SatCon Technology Corporation
On October 21, 1999, the Company created a strategic alliance with SatCon Technology Corporation ("SatCon"). SatCon acquired Ling Electronics, Inc. and Ling Electronics, Ltd ("Ling") from the Company and the Company agreed to invest approximately $7 million in SatCon. This investment was funded in two stages during fiscal 2000. In consideration for the acquisition of Ling and the Company's investment, the Company received 1,800,000 shares of SatCon's common stock and warrants to purchase an additional 100,000 shares of SatCon's common stock. SatCon also received warrants to purchase 300,000 shares of the Company's common stock (after the effects of the Company's 3-for-1 stock split).
As a part of the SatCon transaction, the Company issued to SatCon warrants to purchase 108,000 and 192,000 shares of the Company's stock on October 21, 1999 and January 31, 2000, respectively. The warrants are immediately exercisable at $12.56 per share and expire on October 21, 2003 and January 31, 2004, respectively. The estimated fair value of these warrants at the dates issued were $4.94 and $16.38 per share, respectively, using a Black-Scholes option pricing model and assumptions similar to those used for valuing the Company's stock options.
The Company also received warrants to purchase 36,000 and 64,000 shares of SatCon common stock on October 21, 1999 and January 31, 2000, respectively. The warrants are immediately exercisable at $8.80 per share and expire on October 21, 2003 and January 31, 2004, respectively.
The sale resulted in a $1.26 million gain, which was recorded in the first quarter of fiscal year 2000.
The following is a roll forward of the Company's investment in SatCon at September 30:
(Dollars in thousands)
| 2000
|
| Investment balance, October 1 | $- |
| Exchange of Ling for 770,000 shares of SatCon valued at $8.75/share | 6,738 |
| Cash investment for purchase of shares of SatCon (1,030,000) and warrants to purchase shares of SatCon (100,000) | 7,070 |
| Warrants to purchase 300,000 shares of the Company's common stock issued to SatCon - valued using Black-Scholes method | 3,678 |
| Share of SatCon losses on one-quarter lag | (853) |
| Amortization of embedded difference between the Company's basis and calculated ownership of underlying equity | (2,067) |
Equity adjustment for share of third-party investments in SatCon
| 1,418
|
Investment balance, September 30
| $15,984
|
The difference between the carrying value of the Company's investment in SatCon and its interest in the underlying equity consists of the following at September 30:
(Dollars in thousands)
| 2000
|
| Calculated ownership (13.2%) | $4,275 |
Embedded difference
| 11,709
|
Carrying value of investment in SatCon
| $15,984
|
Summarized below is financial information for SatCon. SatCon's fiscal year ends September 30. The investment in SatCon is accounted for on a one-quarter lag.
| | 6 Months Ended |
(Dollars in thousands)
| June 30, 2000
|
| Current assets | $24,935 |
| Noncurrent assets | 18,560 |
| Current liabilities | 5,271 |
| Noncurrent liabilities | 5,773 |
| Stockholders' equity | 32,451 |
| Gross revenue | 12,101 |
| Gross profit | 4,214 |
| Net loss | (4,379) |
(8) Investments, at Cost
Prior to making its investment in Beacon Power Corporation ("Beacon Power"), the Company made a one time $1.2 million bridge loan to Beacon Power in April 2000. This bridge loan was converted to equity as part of a $6 million investment. As part of the bridge financing, the Company received warrants to purchase 12,000 shares of Beacon Power's common stock at $4.20 per share. The Company exercised the warrants on August 24, 2000 and purchased 12,000 shares of Beacon Power common stock for approximately $50 thousand.
On May 23, 2000, the Company invested $6 million in Beacon Power Class F Preferred Stock ("Beacon Preferred Stock"). In connection with the investment, the Company received warrants to purchase shares of common stock, the exercise date, number of shares and exercise price of which would be determined upon either the sale of Beacon Power or the consummation of an underwritten public offering of Beacon Power common stock. On November 17, 2000, Beacon Power completed its initial public offering ("IPO") and the warrant terms were set for the purchase of 1,333,333 shares of common stock at an exercise price of $2.25 per share exercisable as of November 17, 2000. The warrants expire on May 23, 2005.
At September 30, 2000, the Company owned 1,428,571 shares of Beacon Power Preferred Stock and 12,000 shares of common stock or approximately 9.7% of Beacon Power. The market value of the investment in Beacon Power stock was not readily determinable at September 30, 2000.
On November 17, 2000, the date of the Beacon Power IPO, Beacon Power converted Beacon Preferred Stock to common stock and completed a 2-for-1 stock split immediately prior to the IPO. After Beacon Power's IPO, the Company owned 2,881,142 shares, approximately 7.5%, of Beacon Power common stock valued as of the initial public offering at $17.3 million.
The Company exercised the warrants on a cash-less basis, on December 20, 2000, and received 985,507 shares of Beacon Power common stock. After the exercise of the warrants, the Company owned 3,866,949 shares, approximately 10%, of Beacon Power common stock.
Beacon Power develops and manufactures a line of energy storage systems based on advanced flywheel technology. Beacon Power's flywheel energy storage system consists of a rotating, composite rim that spins on magnetic bearings in a vacuum. During power outages or periods of low power quality, the flywheel motor converts to a generator and transfers the stored electricity to the end user. These systems have applications in fiber optic communication networks that require power at remote cabinets and that must maintain telephone and computer communications network services, including the internet, even during a power outage.
9. 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 for the years ended September 30:
(Dollars in thousands)
| 2000
| 1999
| 1998
|
| Continuing operations before equity investee losses | | | |
| Federal | $(457) | $1 | $15 |
| State | 14 | 36 | 10 |
Deferred
| (1,484)
| -
| -
|
| (1,927)
| 37
| 25
|
| Equity investee losses | | | |
| Federal | - | - | - |
| State | - | - | - |
Deferred
| (10,219)
| -
| -
|
| (10,219)
| -
| -
|
Total continuing operations
| (12,146)
| 37
| 25
|
| Discontinued operations | | | |
| Federal | - | - | - |
| State | - | - | - |
Deferred
| 157
| -
| -
|
Total discontinued operations
| 157
| -
| -
|
| $(11,989)
| $37
| $25
|
| Items charged (credited) directly to stockholders' equity: | | | |
| Increase in additional paid-in capital for equity investments, and warrants and options issued - Deferred | 18,825 | 5,794 | - |
| Expenses for employee stock options recognized differently for financial reporting/tax purposes - Federal | (1,806) | (380) | - |
Valuation allowance
| (3,750)
| (5,414)
| -
|
| $13,269
| $-
| $-
|
The significant components of deferred income tax expense (benefit) consists of the following for the years ended September 30:
(Dollars in thousands)
| 2000
| 1999
| 1998
|
| Continuing operations | | | |
| Deferred tax (benefit) expense | $(647) | $(488) | $456 |
| Net operating loss carryforward | (1,981) | (859) | 504 |
Valuation allowance
| 1,144
| 1,347
| (960)
|
| (1,484)
| -
| -
|
| Equity investee losses | | | |
| Deferred tax (benefit) expense | (8,179) | (1,345) | (1,123) |
| Net operating loss carryforward | (2,040) | (2,400) | (399) |
Valuation allowance
| -
| 3,745
| 1,522
|
| (10,219)
| -
| -
|
| Discontinued operations | | | |
| Deferred tax expense (benefit) | 187 | 114 | (508) |
| Net operating loss carryforward | (30) | (97) | (265) |
Valuation allowance
| -
| (17)
| 773
|
| 157
| -
| -
|
| $(11,546)
| $-
| $-
|
The Company's effective income tax rate from continuing operations, including loss from equity investees, differed from the Federal statutory rate for the years ended September 30:
(Dollars in thousands)
| 2000
| 1999
| 1998
|
| Federal statutory tax rate | (34%) | (34%) | (34%) |
| State taxes, net of federal tax effect | (6%) | - | - |
| Change in valuation allowances | 4% | 34% | 28% |
| Research and development credit | (1%) | - | - |
Other, net
| (2%)
| -
| 7%
|
| (39%)
| -%
| 1%
|
Pre-tax loss from continuing operations including pre-tax losses from equity investees was $30,985, $10,692 and $2,006 for the years ended September 30, 2000, 1999 and 1998, respectively.
The deferred tax assets and liabilities consist of the following tax effects relating to temporary differences and carryforwards as of September 30:
(Dollars in thousands)
| 2000
| 1999
|
| Current deferred tax assets: | | |
| Loss provisions for discontinued Operations | $104 | $300 |
| Bad debt reserve | 336 | 112 |
| Inventory valuation | 17 | 173 |
| Inventory capitalization | 14 | 39 |
| Vacation pay | 45 | 63 |
| Warranty and other sale Obligations | 22 | 86 |
| Stock options | 241 | - |
Other reserves and accruals
| 200
| 116
|
| | 979 | 889 |
Valuation allowance
| -
| (889)
|
Net current deferred tax assets
| $979
| $-
|
| Noncurrent deferred tax assets (liabilities): | | |
| Net operating loss | $11,543 | $5,687 |
| Property, plant and equipment | (38) | 122 |
| Investment, in equity investees | (13,835) | (3,322) |
| Other | 223 | 224 |
| Research and development tax credit | 399 | - |
Alternative minimum tax credit
| 150
| 150
|
| Valuation allowance | (1,144) | (2,861) |
Other credits
| (150)
| (597)
|
Noncurrent net deferred tax liabilities and other credits
| $(2,852)
| $(597)
|
The valuation allowance at September 30, 2000 is $1.144 million and at September 30, 1999 was $3.750 million. During the year ended September 30, 2000, the valuation allowance was increased through the statement of operations by $1.144 million and decreased by $3.750 million through paid-in-capital, for a net decrease of $2.606 million.
At September 30, 2000, the Company has unused Federal net operating loss carryforwards of approximately $29.320 million. The Federal net operating loss carryforwards, if unused, will begin to expire during the year ended September 30, 2009. The use of $5.339 million 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, 2000, the Company has approximately $399 thousand of research and development tax credit carryforwards, which begin to expire in 2018, and approximately $150 thousand of alternative minimum tax credit carryforwards, which have no expiration date.
The Company received net (refunds) or made cash payments, net of refunds, for income taxes of $(18), $15 and $42 thousand for 2000, 1999 and 1998, respectively.
10. Accrued Liabilities
Accrued liabilities consist of the following at September 30:
(Dollars in thousands)
| 2000
| 1999
|
| Salaries, wages and related expenses | $383 | $553 |
| Acquisition and disposition costs | 483 | 431 |
| Legal and professional fees | 169 | 169 |
| Warranty and other sale obligations | 54 | 398 |
| Deferred income | 250 | 264 |
| Commissions | 72 | 182 |
| Interest expense | 219 | 7 |
Other
| 223
| 239
|
| $1,853
| $2,243
|
11. Debt
On March 29, 2000, the Company entered into a $50 million Amended and Restated Credit Agreement with KeyBank, N.A. ("the $50 million Credit Agreement"). This agreement superceded all previous credit agreements with KeyBank, N.A. At September 30, 1999, there were no borrowings outstanding on the lines of credit available at that time.
On October 1, 2000, this agreement was previously amended ("the $50 million Credit Agreement, as amended") as follows:
The Company has pledged shares of Plug Power common stock as collateral for the $50 million Credit Agreement, as amended (2,000,000 shares as of September 30, 2000). The Company is obligated to make interest only payments through March 15, 2002, and upon exercise of a term loan option at the end of the line of credit term, to repay the principal in 8 equal quarterly installments beginning March 31, 2002. Interest is payable monthly at either the Prime Rate or if certain performance standards are achieved, based on both the trading volume and market price of Plug Power common stock, at LIBOR based rates. On September 30, 2000, $27 million of debt was outstanding at Prime (9.5%) and is classified as short-term.
On December 27, 2000, this agreement was again amended as follows:
The $50 million Credit Agreement, as amended, was reduced to $30 million ("the $30 million Credit Agreement, as amended"). Concurrent with this amendment, the Bank permanently waived all covenant violations related to the minimum price of Plug Power common stock and the Company made a principal reduction of $3 million, bringing the loan balance to $25.2 million as of the amendment date. Additional borrowings are available when the Plug Power stock price is above $20 per share.
The Company has pledged 8 million shares of Plug Power common stock as collateral. In addition, the Company entered into a Put and Call with First Albany Companies, Inc. ("FAC") to provide independent credit support for repayment of the loan ("FAC Credit Enhancement"). The FAC Credit Enhancement provides FAC with the option, if the price of Plug Power stock falls to $4 per share, to either purchase 6.3 million Plug Power shares pledged as collateral on the loan or take an assignment of KeyBank N.A.'s rights under the Credit Agreement, as amended. The FAC Credit Enhancement may be triggered in the event of a default and expires on April 27, 2001 and may be renewed by the Company and FAC on a monthly basis upon mutually agreeable terms. Upon expiration of the FAC Credit Enhancement, if Plug Power stock is trading below $20 per share the loan is immediately due and payable. Mandatory repayments on any outstanding balance in excess of $25.2 million would be required if the Plug Power stock price declines below $16 per share while the FAC Credit Enhancement is in place. After the FAC Credit Enhancement expires, mandatory repayments on any outstanding balance would be required if the Plug Power stock price is below $20 per share. If the line of credit is due and payable upon expiration of the FAC Credit Enhancement on April 27, 2001, the Company may need to sell assets including certain investments to fund this obligation. The Company is obligated to make interest-only payments through March 15, 2002, and upon exercise of a term loan option at the end of the line of credit term, to repay the principal in 8 equal quarterly installments beginning March 31, 2002. Interest is payable monthly at either the Prime Rate or if certain performance standards are achieved, based on both the trading volume and market price of Plug Power common stock, at LIBOR based rates.
As of December 27, 2000, the $30 million Credit Agreement, as amended, requires the Company to meet certain covenants, including maintenance of a debt service reserve account (equal to 6 months of interest payments on outstanding debt, amounting to $1.142 million at September 30, 2000) and a collateral coverage ratio, the FAC Credit Enhancement and a minimum Plug Power share price. All other covenants in the previous KeyBank credit agreements were eliminated in connection with this financing.
On December 27, 2000, the Company entered into two bridge loan agreements with FAC. The first loan was for $945 thousand and was used to pay the purchase price for the FAC Credit Enhancement. The Company has pledged 200,000 shares of Plug Power common stock as collateral. The second loan is for $5 million, $3 million of which was used to make the principal loan repayment to KeyBank, N.A. and the remaining $2 million will be used for working capital. The Company pledged 1 million shares of Plug Power common stock as collateral. Both loans bear interest at the Prime Rate (9.5% at December 27, 2000) and both interest and principal are due on January 3, 2002. Upon mutual agreement of FAC and the Company, the loans may be converted to equity prior to maturity.
The above agreement supercedes a November 1, 1999 $22.5 million Credit Agreement with KeyBank, N.A. ("the $22.5 million Credit Agreement"). The Company had pledged 13,704,315 shares of Plug Power common stock as collateral for its $22.5 million loan from KeyBank, N.A. ("Loan"). The proceeds of this Loan were used to fund $20.5 million of the Company's Mandatory Capital Commitment to Plug Power. Pursuant to the $22.5 million Credit Agreement, the Company was obligated to make interest- only payments for the first 18 months following the closing of the Loan, and to repay the principal in 6 equal quarterly installments of $3.750 million each, commencing in August 2001. In addition, a one-time commitment fee totaling $247,500 was paid for the Loan, $75,000 of which was paid as of September 30, 1999. Interest was payable monthly at the Prime Rate or if certain performance standards were achieved, at a reduced rate. The performance standards were based on the trading volume and market price of Plug Power common stock. The $22.5 million Credit Agreement terminated on March 29, 2000 when the $50 million Credit Agreement was executed.
At September 30, 1999, the Company had a working capital line of credit available in the amount of $4 million with interest payable monthly at the Prime Rate (8.25% at September 30, 1999) or LIBOR plus 2.5% (7.9% at September 30, 1999). This obligation was collateralized by the assets of the Company, exclusive of its investment in Plug Power. The Company also had a $1 million equipment loan/lease line of credit at an interest rate of LIBOR plus 2.75% (8.15% at September 30, 1999). This obligation was collateralized by equipment purchased under the line of credit. The lines of credit terminated on March 29, 2000 when the $50 million Credit Agreement was executed. No amounts were outstanding under these lines at September 30, 1999.
On December 17, 1998, the Industrial Development Agency for the Town of Colonie issued $6 million in Industrial Development Revenue ("IDR") Bonds on behalf of the Company to assist in the construction of a building for MTI Instruments, Inc. and the Company's corporate staff and renovation of existing buildings leased to Plug Power. The IDR Bond proceeds were deposited with a trustee for the bondholders, and the Company drew bond proceeds to cover qualified project costs. First Albany Companies Inc. ("FAC"), which owns 34% of the Company's stock, underwrote the sale of the IDR Bonds. FAC received no fees for underwriting the IDR Bonds but was reimbursed for its out-of-pocket costs.
KeyBank, N.A. issued a letter of credit ("the credit agreement") for approximately $6 million in connection with the $6 million IDR Bonds. The credit agreement required the Company to meet certain covenants, including a fixed charge coverage and leverage ratio. Further, if certain performance standards were achieved, the interest rates on the debt could be reduced.
The credit agreement also required the Company to grant a first lien on all consolidated assets of the Company, exclusive of its investment in Plug Power, a first mortgage on all land and buildings owned by the Company and a first lien on any equipment purchased by the Company.
The IDR Bond Obligation, letter of credit and unexpended bond proceeds were transferred to Plug Power in connection with the sale of the Company's facility and adjacent residence effective July 1, 1999. As of September 30, 1999, there is no continuing obligation, contingent or direct, with respect to the IDR Bonds or related letter of credit.
The weighted average interest rate on short-term borrowings outstanding was 0% during 2000 and 1999 and 9.02% during 1998.
Cash payments for interest were $1,731, $164 and $97 thousand for 2000, 1999 and 1998, respectively.
12. Shareholders' Equity
Stock Splits
On March 8, 2000, the Company declared a 3-for-1 stock split in the form of a dividend. Holders of the Company's $1.00 par value common stock received two additional shares of $1.00 par value common stock for every one share of common stock owned as of April 3, 2000.
On April 23, 1999, the Company declared a 3-for-2 stock split in the form of a stock dividend. Holders of the Company's $1.00 par value common stock received one additional share of $1.00 par value common stock for every two shares of common stock owned as of April 30, 1999.
Stock Sales
On July 12, 1999, the Company completed the sale of 801,223 shares of common stock to current shareholders through a rights offering. The offering raised approximately $12.820 million before offering costs of approximately $158 thousand for net proceeds of approximately $12.671 million. The Company used some of the proceeds of the offering for investment into Plug Power. In addition, some proceeds were used for acquisitions for the Company's core businesses, efforts to increase market share, working capital, general corporate purposes and other capital expenditures.
On September 30, 1998, the Company completed the sale of 1,196,399 shares of common stock to current shareholders through a rights offering. The offering raised approximately $7.178 million before offering costs of approximately $186 thousand for net proceeds of approximately $6.992 million. The Company used some of the proceeds of the offering for investment in Plug Power. In addition, some proceeds were used for acquisitions for the Company's core businesses, efforts to increase market share, working capital, general corporate purposes and other capital expenditures.
Warrants
The Company issued warrants as part of its strategic alliance with SatCon. The warrants, as adjusted for the April 3, 2000 stock split, provide for the purchase of 108,000 and 192,000 shares of the Company's common stock and were issued on October 21, 1999 and January 31, 2000, respectively. The warrants are immediately exercisable at $12.56 per share and expire on October 21, 2003 and January 31, 2004, respectively.
Changes in Common Shares
Changes in common shares as of September 30 are as follows:
Common Shares
| 2000
| 1999
| 1998
|
| Balance, October 1 (1998 balance as previously reported) | 34,949,877 | 32,321,904 | 8,862,992 |
| Three-for-one common stock split effected in the form of a 200% stock dividend effective April 3, 2000 | - | - | 17,725,984 |
| Issuance of shares for stock option exercises | 487,408 | 224,304 | 349,131 |
| Issuance of shares for stock sale | - | 2,403,669 | 5,383,797 |
Issuance of shares - consultant
| -
| -
| -
|
Balance, September 30
| 35,437,285
| 34,949,877
| 32,321,904
|
Treasury Shares
|
|
|
|
| Balance, October 1 (1998 balance as previously reported) | 20,250 | 13,500 | 4,500 |
| Three-for-one common stock split effected in the form of a 200% stock dividend effective April 3, 2000 | - | - | 9,000 |
Acquisition of shares
| -
| 6,750
| -
|
Balance, September 30
| 20,250
| 20,250
| 13,500
|
12. Earnings per Share
The following is the reconciliation, effected for stock splits in 2000 and 1999, of the numerators and denominators of the basic and diluted per share computations of net loss at September 30:
(Dollars in thousands)
| 2000
| 1999
| 1998
|
Loss from continuing operations attributable to common stockholders
| $(18,839)
| $(10,729)
| $(2,031)
|
| Common shares outstanding, beginning of period | 34,949,877 | 32,321,904 | 8,862,992 |
| Three-for-one common stock split effected in the form of a 200% stock dividend effective April 3, 2000 | - | - | 17,725,984 |
| Weighted average common shares issued during the period | 286,401 | 599,997 | 128,235 |
| Weighted average common shares issued during the period, as calculated for the bonus element effects for rights offerings (a) | - | 1,069,689 | 2,012,805 |
| Weighted average common stock equivalents | - | - | - |
Weighted average shares outstanding - basic and diluted
| 35,236,278
| 33,991,590
| 28,730,016
|
Net loss per weighted average share - basic and diluted
| $(.54)
| $(.31)
| $(.07)
|
(a) The rights offerings on July 12, 1999 and September 30, 1998 offered to all existing shareholders the right to purchase stock at exercise prices that were less than the fair value of the stock at the time of issuance. As a result, basic and diluted Earnings per Share have been adjusted retroactively for the bonus element for all periods presented.
During fiscal 2000, options to purchase 2,703,374 shares of common stock at prices ranging from $0.54 to $21.90 per share were outstanding but were not included in the computation of Earnings per Share-assuming dilution because the Company incurred a loss during this period and inclusion would be antidilutive. The options expire between December 20, 2006, and August 3, 2010. The Company also issued 300,000 warrants to SatCon Technology Corporation at $12.56 per share. These warrants were outstanding at September 30, 2000 but were not included in the computation of Earnings per Share-assuming dilution because the Company incurred a loss during this period and inclusion would be antidilutive. The warrants expire on October 21, 2003 (108,000) and January 31, 2004 (192,000).
During fiscal 1999, options to purchase 2,224,839 shares of common stock at prices ranging between $0.54 and $7.50 per share were outstanding but were not included in the computation of Earnings per Share-assuming dilution because the Company incurred a loss during this period and inclusion would be antidilutive. The options expire between December 20, 2006 and June 16, 2009.
During fiscal 1998, options to purchase 1,822,116 shares of common stock at prices ranging from $0.54 to $1.33 per share were outstanding but were not included in the computation of Earnings per Share-assuming dilution because the Company incurred a loss during this period and inclusion would be anti-dilutive. The options expire between December 20, 2006 and August 31, 2008.
14. Stock Based Compensation
During March 1999, the shareholders approved the 1999 Employee Stock Incentive Plan ("1999 Plan"). The 1999 Plan provides that an initial aggregate number of 1 million shares of common stock may be awarded or issued. The number of shares available under the 1999 Plan has been adjusted for stock splits, and during 2000 and 1999 the number of shares available under the 1999 Plan increased to 4,500,000 and 1,500,000 shares, respectively. Under the 1999 Plan, the Board of Directors is authorized to award stock options to officers, employees and others.
During December 1996, the shareholders approved a stock incentive plan ("1996 Plan"). The 1996 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 1996 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 1996 Plan. The number of shares available under the 1996 Plan have been adjusted for stock splits and rights offerings, and during 2000 and 1999, the number of shares available under the 1996 Plan increased to 3,478,746 and 1,159,582 shares, respectively. Under the 1996 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 four 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 85 percent of the market value of the shares on the date of grant. Unexercised options generally terminate ten years after grant.
The Company has elected to follow Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for employee stock-based compensation and to provide the disclosures required under SFAS No. 123, "Accounting for Stock Based Compensation." APB No. 25 requires no recognition of compensation expense for most of the stock-based compensation arrangements provided by the Company, namely, broad- based employee stock purchase plans and option grants where the exercise price is equal to or not less than 85 percent of the market value at the date of grant. However, APB No. 25 requires recognition of compensation expense for variable award plans over the vesting periods of such plans, based upon the then-current market values of the underlying stock. In contrast, SFAS No. 123 requires recognition of compensation expense for grants of stock, stock options, and other equity instruments, over the vesting periods of such grants, based on the estimated grant-date fair values of those grants.
During fiscal year 2000 and 1999, the Company awarded 60,000 and 45,000 options, respectively, to consultants. Presented below is a summary of compensation expense recorded in "Selling, general and administrative expenses" in the Consolidated Statements of Operations for the years ended September 30:
(Dollars in thousands)
| 2000
| 1999
| 1998
|
| SFAS 123 - Consultants | $505 | $55 | $- |
APB No. 25 - Variable stock options
| 42
| -
| -
|
Total compensation expense
| $547
| $55
| $-
|
Presented below is a summary of the stock option plans' activity for the years ended September 30:
| 2000
| 1999
| 1998
|
| Shares under option at October 1 | 2,224,839 | 1,822,116 | 1,870,200 |
| Granted | 1,081,000 | 697,650 | 893,250 |
| Exercised | (474,808) | (236,847) | (349,134) |
Canceled
| (127,656)
| (58,080)
| (592,200)
|
Shares under option at September 30
| 2,703,375
| 2,224,839
| 1,822,116
|
| Options exercisable at September 30 | 1,500,636 | 1,258,314 | 814,119 |
| Shares available for granting of options | 4,214,582 | 667,926 | 1,067,130 |
The weighted average exercise price is as follows:
| 2000
| 1999
| 1998
|
| Shares under option at October 1 | $1.63 | $.96 | $.65 |
| Granted: | | | |
| Exercise price less than fair market value at grant date | 11.55 | - | - |
| Exercise price equal to fair market value at grant date | 19.87 | 2.87 | 1.28 |
| Exercised | 1.01 | .75 | .64 |
| Canceled | 2.34 | 1.12 | .58 |
| Shares under option at September 30 | 7.85 | 1.63 | .96 |
| Options exercisable at September 30 | 6.42 | 1.86 | .88 |
The following table summarizes information for options outstanding and exercisable at September 30, 2000:
Outstanding Options
| | | Options Exercisable
|
| | | Weighted | | | |
| | | Average | Weighted | | Weighted |
| Exercise | | Remaining | Average | | Average |
| Price | | Contractual | Exercise | | Exercise |
Range
| Number
| Life
| Price
| Number
| Price
|
| $0.54-$0.76 | 437,975 | 6.8 | $0.69 | 310,287 | $0.67 |
| $1.06-$1.56 | 569,325 | 7.7 | $1.32 | 338,700 | $1.32 |
| $1.76-$1.78 | 315,075 | 8.2 | $1.77 | 159,149 | $1.77 |
| $4.17 | 315,000 | 8.5 | $4.17 | 315,000 | $4.17 |
| $6.27-$9.25 | 60,000 | 9.4 | $8.07 | 11,250 | $8.67 |
| $10.65-$14.05 | 379,000 | 9.7 | $11.58 | 43,750 | $10.65 |
| $20.92-$21.92 | 627,000
| 9.5 | $21.40 | 322,500
| $21.15 |
| | 2,703,375
| | | 1,500,636
| |
Option quantities and prices have been adjusted for the three-for-one common stock split effected in the form of a 200% stock dividend effective April 3, 2000.
Pro Forma Fair Value Disclosures
Had compensation expense for the Company's stock options been recognized based on the fair value on the grant date under the methodology prescribed by SFAS No. 123, the Company's net loss and net loss per share for the three years ended September 30, would have been impacted as shown in the following table (in thousands, except per share).
| 2000
| 1999
| 1998
|
| Reported net loss | $(18,596) | $(10,688) | $(4,316) |
| Pro forma net loss | (22,321) | (11,988) | (4,773) |
| Reported diluted net loss per share | (.53) | (.31) | (.15) |
| Pro forma diluted net loss per share | (.63) | (.35) | (.17) |
The fair value of options granted, which is amortized to expense over the option vesting period in determining the pro forma impact, is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
| 2000
| 1999
| 1998
|
| Expected life of option | 5 yrs | 5 yrs | 5 yrs |
| Risk-free interest rate | 6.00-6.55% | 4.37-5.81% | 5.52-5.85% |
| Expected volatility of the Company's stock | 91% | 78% | 102% |
| Expected dividend yield on the Company's stock | 0% | 0% | 0% |
The weighted average fair value of options granted during the years ended September 30, is as follows:
| 2000
| 1999
| 1998
|
| Fair value of each option granted | $12.55 | $1.93 | $1.57 |
| Total number of options granted | 1,081,000 | 697,650 | 893,250 |
| Total fair value of all options Granted | $13,566,550 | $1,346,465 | $1,402,403 |
In accordance with SFAS No. 123, the weighted average fair value of stock options granted is required to be based on a theoretical statistical model using the preceding Black-Scholes assumptions. In actuality, because the Company's stock options are not traded on any exchange, employees can receive no value nor derive any benefit from holding stock options under these plans without an increase in the market price of the Company's stock. Such an increase in stock price would benefit all shareholders commensurately.
(15) Retirement Plan
The Company maintains a voluntary savings and retirement plan (Internal Revenue Code Section 401(k) Plan) covering substantially all employees. The Company plan allows eligible employees to contribute a percentage of their compensation; the Company makes additional voluntary contributions in amounts as determined by management and the Board of Directors. The investment of employee contributions to the plan is self-directed. Effective October 21, 1999, Ling employees no longer participate in the plan due to Ling's sale to SatCon. The cost of the plan was $81, $168 and $152 thousand for 2000, 1999 and 1998, respectively.
14. Commitments and Contingencies
On September 9, 1998, Barbara Lawrence, the Lawrence Group, Inc. ("Lawrence"), and certain other Lawrence-related entities ("Plaintiffs") filed suit in the United States Bankruptcy Court for the Northern District of New York against First Albany Corporation, Mechanical Technology, Dale Church, Edward Dohring, Alan Goldberg, George McNamee, Beno Sternlicht, Marty Mastroianni (former President and Chief Operating Officer of MTI), and 33 other individuals ("Defendants") who purchased a total of 820,909 shares of the Company's stock from the Plaintiffs. The case concerns the Defendants' 1997 purchase of Mechanical Technology shares from the Plaintiffs at the price of $2.25 per share. FAC acted as Placement Agent for the Defendants in the negotiation and sale of the shares and in proceedings before the Bankruptcy Court for the Northern District of New York, which approved the sale in September 1997. Plaintiffs claim that the Defendants failed to disclose material inside information concerning Plug Power, LLC to the Plaintiffs and therefore the $2.25 per share purchase price was unfair. Plaintiffs are seeking damages of $5 million plus punitive damages and costs. In April 1999, Defendants filed a motion to dismiss the amended complaint, which was denied by the Bankruptcy Court. On appeal in October 2000, Plaintiffs' cause of action was dismissed by the United States District Court for the Northern District of New York. In November 2000, Plaintiffs filed an appeal of that dismissal with the United States Court of Appeals for the Second Circuit. That appeal is presently pending.
The Company and its subsidiaries lease certain manufacturing, warehouse and office facilities. The leases generally provide for the Company to pay increases over a base year level for taxes, maintenance, insurance and other costs of the leased properties. The leases contain renewal provisions.
Future minimum rental payments required under noncancelable operating leases are (dollars in thousands): $311 in 2001; $310 in 2002; $305 in 2003; $300 in 2004 and $313 in 2005. Rent expense under all leases was $392, $482 and $403 thousand for 2000, 1999 and 1998, respectively.
Rental income under all sub-leases was $12, $164 and $66 thousand in 2000, 1999 and 1998, respectively.
16. Related Party Transactions
At September 30, 2000, First Albany Companies Inc. ("FAC") owned approximately 34% of the Company's common stock.
Transactions among related parties are as fair to the Company as obtainable from unaffiliated third parties.
In April 2000, the Company entered into a management services agreement with First Albany Corporation, a wholly-owned subsidiary of FAC, to provide certain services on a month to month basis. Under this agreement, FAC bills services to the Company (phone, network, postage, etc.) on a cost reimbursement basis. Billings under these agreements amounted to approximately $30 thousand for 2000. Amounts payable to FAC is included in the financial statement line "Accrued liabilities - related parties".
During fiscal 2000, FAC/Equities, a division of First Albany Corporation, provided financial advisory services in connection with the sale of Ling to SatCon, for which FAC/Equities was paid a fee of approximately $353 thousand.
During fiscal 1999 and 1998, First Albany Corporation provided financial advisory services in connection with the sale of the Technology Division, for which First Albany Corporation was paid fees of $15 and $10 thousand, respectively.
The Company received approximately $5 thousand in interest income from Beacon Power for bridge loan interest.
Amounts receivable from an officer totaled approximately $38 thousand and is included in the financial statement line "Other receivables-related parties" at September 30, 1999. The balance was paid during fiscal 2000.
On June 27, 1997, the Company entered into a management services agreement with Plug Power to provide certain services and facilities for a period of one year. This agreement expired on June 27, 1998. The Company continued to provide services through fiscal 1999, which were billed on a cost reimbursement basis. During 1998, the Company entered into leases for certain of its facilities for manufacturing, laboratory and office space. These leases expired on July 1, 1999 pursuant to the sale of the Company's facility to Plug Power in exchange for 704,315 Plug Power Class A membership interests and the assumption of $6 million in debt by Plug Power. Billings under these agreements amounted to $0, $448 and $661 thousand for 2000, 1999 and 1998, respectively. Amounts receivable from Plug Power under these agreements are included in the financial statement line "Other receivables-related parties."
Prior to becoming Vice President of Corporate Development, Catherine Hill's law firm, Catherine S. Hill, PLLC, served as general counsel to the Company. Billings for 2000 totaled approximately $141 thousand. She also received 30,000 stock options during 2000 with a Black-Scholes value of approximately $446 thousand.
During fiscal 2000, the Company sold furniture and equipment to Plug Power totaling approximately $12 thousand.
The Company made investments in related parties during the fiscal years ended September 30:
(Dollars in thousands)
| 2000
| 1999
| 1998
|
| Plug Power- cash | $20,500 | $6,000 | $- |
| Plug Power- capital commitment in 1998 and funded in 1999 | - | (4,000) | 4,000 |
| Plug Power- notes receivable | - | - | 500 |
| Plug Power- accounts receivable | - | - | 500 |
| Plug Power- campus contribution | - | 367 | - |
| SatCon-cash | 7,070 | - | - |
Beacon Power- cash
| 6,050
| -
| -
|
| $33,620
| $2,367
| $5,000
|
During 2000 and 1999, the Company paid approximately $35 and $59 thousand, respectively to Plug Power in connection with a lease of office and manufacturing space. This lease terminated on November 24, 1999.
On December 27, 2000, the Company entered into a Put and Call with First Albany Companies, Inc. ("FAC") to provide independent credit support for repayment of the loan ("FAC Credit Enhancement"). The FAC Credit Enhancement provides FAC with the option, if the price of Plug Power stock falls to $4 per share, to either purchase 6.3 million Plug Power shares pledged as collateral on the loan or take an assignment of KeyBank N.A.'s rights under the Credit Agreement, as amended. The FAC Credit Enhancement may be triggered in the event of a default and expires on April 27, 2001 and may be renewed by the Company and FAC on a monthly basis upon mutually agreeable terms. Upon expiration of the FAC Credit Enhancement, if Plug Power stock is trading below $20 per share the loan is immediately due and payable.
On December 27, 2000, the Company entered into two bridge loan agreements with FAC. The first loan was for $945 thousand and was used to pay the purchase price for the FAC Credit Enhancement. The Company has pledged 200,000 shares of Plug Power common stock as collateral. The second loan is for $5 million, $3 million of which was used to make the principal loan repayment to KeyBank, N.A. and the remaining $2 million will be used for working capital. The Company pledged 1 million shares of Plug Power common stock as collateral. Both loans bear interest at the Prime Rate (9.5% at December 27, 2000) and both interest
18. Discontinued Operations
and principal are due on January 3, 2002. Upon mutual agreement of FAC and the Company, the loans may be converted to equity prior to maturity.
The sale of the Company's Technology Division, the sole component of the Technology segment, to NYFM, Incorporated (a wholly-owned subsidiary of Foster-Miller, Inc., a Waltham, Massachusetts-based technology company) was completed on March 31, 1998. Accordingly, the Company no longer includes Technology among its reportable business segments. The Technology Division is reported as a discontinued operation as of December 26, 1997, and the consolidated financial statements have been restated to report separately the net assets and operating results of the business. In exchange for the Technology Division's assets, NYFM, Incorporated (a) agreed to pay the Company a percentage of gross sales on an annual basis for a period of five years after the sale as follows: yearly combined gross sales (in excess of $2.5 million) multiplied by .13, .053, .027, for years one, two and three-to-five, respectively; (b) assumed approximately $40 thousand of liabilities; and (c) established a credit for warranty work of approximately $35 thousand. The Company received approximately $0 and $41 thousand as contingent sales proceeds from NYFM, Incorporated in 2000 and 1999, respectively. This amount is included in the financial statement line, "Income (loss) from discontinued operations."
During the fourth quarter of fiscal 2000, the Company reversed $400 thousand ($243 thousand, net of tax) of the previously recorded loss on disposal of the Technology Division. The reversal includes estimated reductions in warranty and accounts receivable reserves.
Discontinued operations consist of the following at September 30:
(Dollars in thousands)
| 2000
| 1999
| 1998
|
Sales
| $-
| $-
| $532
|
| Loss from discontinued operations before income tax | - | - | (516) |
| Income tax (benefit) | - | - | - |
Net loss from discontinued Operations
| $-
| $-
| $(516)
|
| Gain (loss) on disposal of Division | $400 | $41 | $(1,769) |
| Income tax | 157 | - | - |
Gain (loss) on disposal of Division
| $243
| $41
| $(1,769)
|
The assets and liabilities of the Company's discontinued operations are as follows at September 30:
(Dollars in thousands)
| 2000
| 1999
|
| Assets (primarily accounts receivable) | $30 | $220 |
Liabilities (primarily accrued expenses)
| 261
| 760
|
Net liabilities
| $(231)
| $(540)
|
The nature of the net liability for discontinued operations as of September 30, 2000 and the expected period of liquidation are as follows (Dollars in thousands):
Nature of (Liabilities)/Assets
| Amount
| Expected Period of Liquidation
|
| Accounts receivable | $30 | Fiscal 2001 |
| Warranty | (163) | Fiscal 2001 |
| Severance | (60) | Fiscal 2001 |
| Personnel and wind-down costs | (38)
| Fiscal 2001 |
| | $(231)
| |
(19) Sale of Division/Subsidiary
On October 21, 1999, the Company created a strategic alliance with SatCon Technology Corporation ("SatCon"). SatCon acquired Ling Electronics, Inc. and Ling Electronics, Ltd. ("Ling") from the Company and the Company agreed to invest approximately $7 million in SatCon. This investment was funded in two stages during fiscal 2000. In consideration for the acquisition of Ling and the Company's investment, the Company received 1,800,000 shares of SatCon's common stock and warrants to purchase an additional 100,000 shares of SatCon's common stock. SatCon also received warrants to purchase 300,000 shares of the Company's common stock (after the effects of the Company's 3-for-1 stock split).
As a part of the SatCon transaction, the Company issued to SatCon warrants to purchase 108,000 and 192,000 shares of the Company's stock on October 21, 1999 and January 31, 2000, respectively. The warrants are immediately exercisable at $12.56 per share and expire on October 21, 2003 and January 31, 2004, respectively. The estimated fair value of these warrants at the dates issued were $4.94 and $16.38 per share, respectively, using a Black-Scholes option pricing model and assumptions similar to those used for valuing the Company's stock options.
The Company also received warrants to purchase 36,000 and 64,000 shares of SatCon common stock on October 21, 1999 and January 31, 2000, respectively. The warrants are immediately exercisable at $8.80 per share and expire on October 21, 2003 and January 31, 2004, respectively.
The sale resulted in a $1.262 million gain, which was recorded in the first quarter of fiscal year 2000.
20. Geographic and Segment Information
The Company sells its products on a worldwide basis with its principal markets listed in the table below where information on export sales is summarized by geographic area for the Company as a whole for the years ended September 30:
| (Dollars in thousands) | | | |
Geographic Area
| 2000
| 1999
| 1998
|
| United States | $4,362 | $9,576 | $17,022 |
| Europe | 185 | 1,180 | 1,072 |
| Japan | 397 | 787 | 1,534 |
| Pacific Rim | 387 | 760 | 834 |
| China | 88 | 278 | 302 |
| Canada | 20 | 153 | 228 |
Rest of World
| 108
| 151
| 36
|
Total Sales
| $5,547
| $12,885
| $21,028
|
The Company operates in two business segments, New Energy and Test and Measurement Instrumentation. The New Energy segment develops new energy technologies and companies. The Test and Measurement Instrumentation segment develops, manufactures, markets and services sensing instruments and computer-based balancing systems for aircraft engines; and prior to the sale of Ling in October 1999, vibration test systems and power conversion products.
The accounting policies of the New Energy and Test and Measurement Instrumentation segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes, accounting changes, non-recurring items, and interest income and expense. Inter-segment sales are not significant.
In the Test and Measurement Instrumentation Segment, in 2000, one customer accounted for $1.16 million or 20.9% of sales and one customer accounted for $620 thousand or 11.2% of sales; no customers accounted for more than 10% of sales in 1999; and in 1998 one customer accounted for $2.83 million or 13.5% of sales and one customer accounted for $2.41 million or 11.5% of sales.
Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other" column includes corporate related items and items like income taxes or unusual items, which are not allocated to reportable segments. In addition, segments' noncash items include any depreciation and amortization in reported profit or loss. The New Energy segment figures include the Company's activities related to evaluating new energy technologies, investment and growth opportunities, and the Company's investments in Plug Power, SatCon and Beacon Power and the results of the Company's equity method of accounting for certain investments. SatCon's results are accounted for on a one-quarter lag. The results for Plug Power and SatCon are derived from their unaudited quarterly and audited annual financial statements.
(20) Geographic and Segment Information (Continued)
(Dollars in thousands)
Sept. 30, 2000
| New Energy
| Test and Measurement Instrumentation
| Other
| Consolidated Totals
|
| Revenues | $- | $5,547 | $- | $5,547 |
| Segment profit (loss) | (17,071) | (2,431) | 906 | (18,596) |
| Equity in investee losses, net of tax | (15,849) | - | - | (15,849) |
| Total assets | 70,438 | 2,286 | 4,542 | 77,266 |
| Investments, at equity | 64,356 | - | - | 64,356 |
| Investments, at cost | 6,050 | - | - | 6,050 |
| Capital expenditures | 9 | 137 | 140 | 286 |
| Depreciation and amortization | 3 | 130 | 131 | 264 |
| | | | | |
Sept. 30, 1999
|
|
|
|
|
| Revenues | $- | $12,885 | $- | $12,885 |
| Segment profit (loss) | (9,363) | (1,404) | 79 | (10,688) |
| Equity in investee losses, net of tax | (9,363) | - | - | (9,363) |
| Total assets | 8,710 | 8,185 | 14,885 | 31,780 |
| Investments, at equity | 8,710 | - | - | 8,710 |
| Capital expenditures | - | 183 | 2,555 | 2,738 |
| Depreciation and amortization | - | 202 | 379 | 581 |
| | | | | |
Sept. 30, 1998
|
|
|
|
|
| Revenues | $- | $21,028 | $- | $21,028 |
| Segment profit (loss) | (3,806) | 2,155 | (2,665) | (4,316) |
| Equity in investee losses, net of tax | (3,806) | - | - | (3,806) |
| Total assets | 1,221 | 9,424 | 10,483 | 21,128 |
| Investments, at equity | 1,221 | - | - | 1,221 |
| Capital expenditures | - | 202 | 2,964 | 3,166 |
| Depreciation and amortization | - | 205 | 118 | 323 |
The following table presents the details of "Other" segment profit (loss) for the years ended September 30:
(Dollars in thousands)
| 2000
| 1999
| 1998
|
| Corporate and other expenses (income): | | | |
| Depreciation and amortization | $131 | $379 | $118 |
| Interest expense | 1,943 | 106 | 102 |
| Interest income | (463) | (335) | (65) |
| Income tax (benefit) expense | (1,927) | 37 | 25 |
| Other expense (income), net | 915 | (225) | 200 |
| (Income) loss from discontinued operations, net | (243) | (41) | 2,285 |
Gain on sale of division
| (1,262)
| -
| -
|
Total (income) expense
| $(906)
| $(79)
| $2,665
|
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
PERIODS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999
AND DECEMBER 31, 1998.
| COL. A
| COL. B
| COL. C
| COL. D
| COL. E
|
| | | Additions | | |
| | Balance at | Charged to | | Balance |
| | Beginning | Costs and | | at End of |
| Description
| of Period
| Expenses
| Deductions
| Period
|
| Allowance for doubtful accounts-deducted from receivables from customers: | | | | |
| Calendar Year 2000 | $315,000 | $188,000 | $203,000 | $300,000 | |
| Calendar Year 1999 | $305,000 | $10,000 | $0 | $315,000 | |
| Calendar Year 1998 | $340,000 | $133,000 | $168,000 | $305,000 | |
| | | | | | | | | |
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.
FIRST ALBANY COMPANIES INC.
| | By: /s/ GEORGE C. McNAMEE
| |
| | George C. McNamee, | |
| | Chairman and Co-Chief Executive Officer
| |
| | Date: March 28, 2001 | |
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 in the capacities and on the dates indicated.
| Signature | Title | Date |
| | | |
| /s/ GEORGE C. McNAMEE
| Chairman and Co-Chief Executive Officer | March 28, 2001 |
| George C. McNamee | | |
| | | |
| /s/ ALAN P. GOLDBERG
| President and Co-Chief Executive Officer | March 28, 2001 |
| Alan P. Goldberg | | |
| | | |
| /s/ STEVEN R. JENKINS
| Chief Financial Officer | March 28, 2001 |
| Steven R. Jenkins | (Principal Accounting Officer) | |
| | | |
| /s/ HUGH A. JOHNSON, JR.
| Senior Vice President and Director | March 28, 2001 |
| Hugh A. Johnson, Jr. | | |
| | | |
| /s/ PETER BARTON
| Director | March 28, 2001 |
| Peter Barton | | |
| | | |
| /s/ J. ANTHONY BOECKH
| Director | March 28, 2001 |
| J. Anthony Boeckh | | |
| | | |
| /s/ WALTER M. FIEDEROWICZ
| Director | March 28, 2001 |
| Walter M. Fiederowicz | | |
| | | |
| /s/ DANIEL V. McNAMEE III
| Director | March 28, 2001 |
| Daniel V. McNamee III | | |
| | | |
| /s/ CHARLES L. SCHWAGER
| Director | March 28, 2001 |
| Charles L. Schwager | | |
| | | |
| /s/ BENAREE P. WILEY
| Director | March 28, 2001 |
| Benaree P. Wiley | | |
