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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from __________ to __________
Commission file number 0-6890
MECHANICAL TECHNOLOGY INCORPORATED
(Exact name of registrant as specified in its charter)
New York 14-1462255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
325 Washington Avenue Extension, Albany, New York 12205
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518)218-2500
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act
$1.00 Par Value Common Stock
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
_____ _____
The aggregate market value of the registrant's Common Stock held by
nonaffiliates of the registrant on December 20, 1999 (based on the last
sale price of $21.50 per share for such stock reported by NASDAQ for that
date) was approximately $137,542,000.
As of December 20, 1999, the registrant had 11,698,571 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated into Form 10-K Report
Proxy Statement for Part III
Annual Meeting of Shareholders
to be held on March 16, 2000
PART I
ITEM 1: BUSINESS
MTI manufactures and sells precision diagnostic and measurement
instruments and incubates alternative energy technology. Given MTI's
recent success with Plug Power, Inc. and its early development efforts
with Proton Exchange Membrane ("PEM") fuel cells, gas and steam powered
turbines and the Sterling Engines, MTI is in a unique position to be a
leader in the evolution of alternative energy technology. MTI's
alternate energy strategy includes: acquisition of companies that have
synergies with MTI's core competencies; acquisition of majority stock
positions in established alternative energy companies; and internal
development and growth of alternative energy businesses.
Over the last several years MTI sold off non-core businesses and
restructured its balance sheet. Today MTI is a very different company,
substantially streamlined in focus, but with challenges remaining. MTI
is a manufacturer of advanced diagnostic, test and measurement products
that combine precision sensing capabilities with proprietary software
and systems to serve a variety of applications for commercial and
military customers. The Company has two principal business units: the
Advanced Products Division ("Advanced Products"), which produces
diagnostic and sensing instruments and computer-based balancing systems;
and Ling Electronics, Inc. ("Ling"), a developer and manufacturer of
vibration test systems and power conversion products, which was sold on
October 21, 1999, as part of a strategic alliance with SatCon Technology
Corporation.
In the coming year, Advanced Products will focus on improving existing
products and developing additional products for diagnostic and testing
equipment. The non-contact sensing instrumentation products utilize
fiber optic, laser and capacitance technology to perform high precision
position measurements for product design and quality control inspection
requirements, primarily in the semiconductor and computer disk drive
industries. Advanced Products' computer-based aircraft engine balancing
systems include an on-wing jet engine balancing system used by both
commercial and military aircraft fleet maintenance personnel. This
product provides trim balancing and vibration analysis in the field or
in test cells.
MTI is uniquely positioned to be the moving force behind the evolution
of alternative energy technology. As a pioneer in the alternative
energy field, MTI has demonstrated its ability, first in the research
and development of gas and steam turbines; then through its development
efforts in connection with the Sterling Engines; and most recently in
its research and development of PEM fuel cell technology. MTI has
successfully turned its PEM fuel cell research into a public company
dedicated to bringing a safe, reliable and cost-effective fuel cell to
market. Plug Power, Inc., which was initially a joint venture of MTI
and Detroit Edison, believes that it will soon have residential fuel
cells in the market place. MTI helped develop the strategic
partnerships, capital investment, and growth strategy of Plug Power,
Inc. It is MTI's forward strategy to use its resources and experiences
to repeat this success with other alternative energy companies.
Mechanical Technology Incorporated was incorporated in New York in 1961.
Unless the context otherwise requires, the "registrant", "Company",
"Mechanical Technology" and "MTI" refers to Mechanical Technology
Incorporated and its subsidiaries. The Company's principal executive
offices are located at 325 Washington Avenue Extension, Albany, New York
12205 and its telephone number is (518) 218-2500.
Significant Developments in the Business
On June 27, 1997, the Company and Edison Development Corp. ("EDC"), a
subsidiary of DTE Energy Co. formed a joint venture, Plug Power, L.L.C.
("Plug Power"), to further develop the Company's Proton Exchange Membrane
("PEM") Fuel Cell technology. In exchange for its contribution of
contracts and intellectual property and certain other net assets that had
comprised the fuel cell research and development business activity of the
Technology segment (which assets had a net book value of $357 thousand),
the Company received a 50% interest in 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 "Investment in Plug Power"; the assets
contributed by the Company to Plug Power had previously been included in
the assets of the Company's Technology segment. See the supplemental
disclosure regarding Contribution of Net Assets to Plug Power in the
Consolidated Statements of Cash Flows for additional information regarding
the assets contributed by the Company to Plug Power.
Plug Power has focused exclusively on the research, development and
manufacture of an economically viable PEM fuel cell. During 1999, the
Company invested $6 million cash in Plug Power and sold the MTI campus
to Plug Power in exchange for shares of Plug Power and Plug Power's
assumption of $6 million of debt.
On October 29, 1999 Plug Power Inc. made an initial public offering
("IPO") of its common stock on the NASDAQ National Market under the
symbol "PLUG." The initial public offering price for the 6 million
shares issued was $15 per share. Additionally, the underwriters of the
IPO exercised their 900,000 share over allotment at the IPO price.
Since Plug Power was formed in 1997 the Company, EDC and other investors
have contributed substantial amounts of cash and other assets to Plug
Power. Contributions to Plug Power by the Company totaled $20.7 million
as of September 30, 1999. Immediately prior to the Plug Power IPO, the
Company purchased an additional 2,733,333 shares of Plug Power at $7.50
per share for a total purchase price of $20.5 million. Immediately
after Plug Power's IPO, the Company owned 13,704,315 shares of Plug
Power or approximately 31.9 percent of outstanding Plug Power stock.
The Company's contribution to Plug Power increased to $41.2 million as
of Plug Power's IPO date.
On October 21, 1999, the Company created a strategic alliance with
SatCon Technology Corporation (SatCon), an innovator of alternative
energy technologies. SatCon acquired Ling Electronics, Inc. and Ling
Electronics, Ltd. from the Company and the Company committed to invest
approximately $7 million in SatCon. In consideration for the
acquisition of Ling Electronics and the Company's investment, the
Company will receive 1,800,000 shares of SatCon's common stock and
warrants to purchase an additional 100,000 shares of SatCon's common
stock. The Company funded $2.57 million of its investment in SatCon and
will make the remaining investment by the end of January 2000. SatCon
will also receive warrants to purchase 100,000 shares of the Company's
common stock.
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 $12.8 million before offering costs of
approximately $158 thousand for net proceeds of approximately $12.7
million. The Company will use some or all of the proceeds of the offering
for investment into Plug Power. In addition, some proceeds may be used
for acquisitions, 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 $7.2 million before offering costs of
approximately $186 thousand for net proceeds of approximately $7 million.
The Company used substantially all of the proceeds of the offering for
investment in Plug Power. The remaining proceeds were used for efforts to
increase market share, working capital, general corporate purposes and
other capital expenditures.
The sale of the Company's Technology Division, the sole component of the
Technology segment, to NYFM, Incorporated (a wholly owned subsidiary of
Foster-Miller, Inc., a Waltham, Massachusetts-based technology company)
on March 31, 1998, completed management's planned sale of non-core
businesses. Accordingly, the Company no longer includes Technology among
its reportable business segments. 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. The
Company's prior year financial statements have been restated to conform
to this treatment. See Note 16 to the accompanying Consolidated
Financial Statements.
On September 30, 1997, the Company sold all of the assets of its L.A.B.
division to Noonan Machine Company of Franklin Park, IL. The Company
received $2.6 million in cash and two notes, totaling $650 thousand, from
Noonan Machine Company. The purchaser has requested that the principal
amount of the note be reduced to reflect the resale value of certain
assets of L.A.B. The Company is enforcing its rights with respect to the
note. The net proceeds from the sale were used to pay down all
outstanding debt and build working capital. The sale of L.A.B. resulted
in a $2.0 million gain, which was recorded in the fourth quarter of fiscal
year 1997.
On December 27, 1996, the Company and First Albany Companies Inc. ("FAC")
entered into a Settlement Agreement and Release whereby the Company issued
FAC 1.0 million shares of Common Stock in full satisfaction of its
obligations pursuant to the Claim Participation Agreement dated December
21, 1993 and amended December 14, 1994, among United Telecontrol
Electronics, Inc. ("UTE"), the Company and First Commercial Credit
Corporation, in the principal amount of $3.0 million plus accrued interest
of $1.2 million. As a result, the Company in the first quarter of fiscal
1997 realized a gain on the extinguishment of debt totaling $2.5 million,
net of approximately $100 thousand of transaction related expenses and net
of taxes of $106 thousand.
Business Segments
The Company currently conducts business in two business segments:
Alternative Energy Technology and Test and Measurement.
Alternative Energy Technology
The Alternative Energy Technology segment incubates companies that
research, develop, manufacture and distribute alternative energy
technology solutions. Investments at September 30, 1999 consist of a 40.65
percent equity interest in Plug Power L.L.C. Plug Power is a leading
designer and developer of on-site, electricity generation systems
utilizing proton exchange membrane ("PEM") fuel cells for residential
applications. GE Fuel Cell Systems, LLC, a joint venture that is owned by
General Electric's GE Power Systems business (75%) and Plug Power (25%)
will market, sell, service, and install Plug Power's products once they
are developed.
On October 29, 1999 Plug Power Inc. made an initial public offering
("IPO") of its common stock on the NASDAQ National Market under the
symbol "PLUG." The initial public offering price for the 6 million
shares issued was $15 per share.
Immediately prior to the Plug Power IPO, the Company purchased an
additional 2,733,333 shares of Plug Power at $7.50 per share for a total
purchase price of $20.5 million. The Company financed the acquisition
of these shares through a $22.5 million loan from KeyBank N.A.
Immediately after Plug Power's IPO, the Company owned 13,704,315 shares
of Plug Power or approximately 31.9 percent of outstanding Plug Power
stock.
Plug Power is developing a PEM fuel cell for residential and automotive
applications. As of December 1999, Plug Power has reported achieving
the following milestones:
June 1998 Powered a three-bedroom home ("Demonstration Home")
with a hydrogen-fueled residential fuel cell system
November 1998 Demonstrated a methanol-fueled residential fuel cell
system
December 1998 Selected to design and manufacture 80 test and
evaluation residential fuel cell systems for the
State of New York for installation at various test
sites over the next two years
December 1998 Demonstrated a natural gas-fueled residential fuel
cell system
February 1999 Entered into agreement with GE On-Site Power to
distribute and service Plug Power residential fuel
cell systems
June 1999 Began construction of a state-of-the-art, 51,000
square foot manufacturing facility in Latham, New
York
August 1999 Powered the Demonstration Home with a residential
fuel cell system connected to its existing natural
gas pipeline
September 1999 Filed their 50th patent application relating to fuel
cell technology, system designs and manufacturing
processes
December 1999 Announced successful completion of a four-month test
of a natural gas powered fuel cell system in the
Demonstration Home
In October, 1999, MTI sold Ling to SatCon in exchange for common stock and
purchased or made commitments to purchase SatCon common stock and
warrants. Assuming all funding commitments are made and warrants
exercised, MTI will own approximately 16% of SatCon's issued and
outstanding common stock.
SatCon manufactures and sells power and energy management products for
telecommunications, silicon wafer manufacturing, factory automation,
aircraft, satellites and automotive applications. SatCon has four
operating divisions: Film Microelectronics, Inc. designs and manufactures
microelectronic circuits and interconnect products; Magmotor manufactures
motors and magnetic suspension systems; Beacon Power manufactures
flywheel energy storage devices; and the Technology Center is responsible
for new technology and product development.
Test and Measurement
Test and Measurement offers a wide range of technology-based equipment and
systems for improved manufacturing, product testing, and inspection for
industry. Business units in this segment include the Advanced Products
Division, Ling Electronics, Inc. (sold on October 21, 1999) and the L.A.B.
Division (sold on September 30, 1997).
Advanced Products designs, manufactures and markets high-performance test
and measurement instruments and systems. These products are categorized
in two general product families: non-contact sensing instrumentation and
computer-based balancing systems. The Division's largest customers
include industry leaders in the computer, electronic, semiconductor,
automotive, aerospace, aircraft and bioengineering fields.
The non-contact sensing instrumentation products utilize fiber optic,
laser and capacitance technology to perform high precision position
measurements for product design and quality control inspection
requirements, primarily in the semiconductor and computer disk drive
industries. Product trademarks such as the Fotonic Sensor and Accumeasure
are recognized worldwide.
The Division's computer-based aircraft engine balancing systems include an
on-wing jet engine balancing system used by both commercial and military
aircraft fleet maintenance personnel. This product provides trim
balancing and vibration analysis in the field or in test cells.
Ling, of Anaheim, California, designs, manufactures, and markets
electro-dynamic vibration test systems, high-intensity-sound
transducers, power conversion equipment and power amplifiers used to
perform reliability testing and stress screening during product
development and quality control. This mode of testing is used by
industry and the military to reveal design and manufacturing flaws in a
broad range of precision products, from satellite parts to computer
components. Recent Ling products for power and frequency conversion and
"clean power" applications include systems capable of output up to 432
kVA. Ling was sold on October 21, 1999 to SatCon in exchange for
770,000 shares of SatCon common stock (with a market value of $6.738
million on the transaction date).
The L.A.B. Division, which was sold on September 30, 1997, designed,
manufactured and marketed mechanically driven and hydraulically driven
test systems for package and product reliability testing. Among other
uses, this equipment simulates the conditions a product will encounter
during transportation and distribution including shock, compression,
vibration and impact. This type of testing is widely conducted by
businesses involved in product design, packaging and distribution.
The Company believes that the test and measurement industry will undergo
substantial consolidation in the near future. The challenges facing MTI
today are similar to those facing other smaller companies in industries
where consolidation is a part of the landscape. The Company believes
that consolidation may become a competitive necessity and that Advanced
Products is well-positioned to combine with complementary, synergistic
businesses to enhance and expand product offerings and increase
profitability and market position. Accordingly, the Company is actively
exploring strategic acquisitions and alliances for its businesses.
The business units in the Test and Measurement segment have numerous
customers and are not dependent upon a single or a few customers.
Backlog
The backlog of orders believed to be firm as of September 30, is $2.1
million for 1999 and 1998 (of which $997 thousand and $487 thousand,
respectively, relates to the Company's Advanced Products Division). The
backlog relates to contracts awarded by commercial customers or government
agencies.
Marketing and Sales
The Company sells its products and services through a combination of a
direct sales force, manufacturer's representatives, distributors and
commission salespeople. Each business unit is responsible for its own
sales organization. Typically, the Company's product businesses employ
regional manufacturer's representatives on an exclusive geographic basis
to form a nationwide or worldwide distribution organization; the business
unit is responsible for marketing and sales management and provides the
representatives with sales and technical expertise on an "as-required"
basis. To a great extent, the marketing and sales of the Company's larger
products and systems consist of a joint effort by the business unit's
senior management, its direct sales force and manufacturer's
representatives to sophisticated customers. The manufacturer's
representatives are compensated on a commission basis.
Research and Development
The Company conducts considerable research and development to support
existing products and develop new products. (See the accompanying
Consolidated Statements of Operations). The Company holds patents and
rights in various fields of technology. The technology of the Company is
generally an advancement of the "state of the art", and the Company
expects to maintain a competitive position by continuing such advances
rather than relying on patents. Licenses to other companies to use
Company-developed technology have been granted and are expected to be of
benefit to the Company, though royalty income received in recent years has
not been material in amount and is not expected to be material in the
foreseeable future.
Competition
The Company and each of its business units are subject to intense
competition. The Company faces competition from at least several
companies, many of which are larger than MTI and have greater financial
resources. While the business units in the Company's Test and Measurement
segment each have a major share of their respective markets, the Company
does not consider any of them to be dominant within its industry.
The primary competitive considerations in the test and measurement segment
are product quality and performance, price and timely delivery. The
Company believes that its product development skills and reputation are
competitive advantages.
Employees
The total number of employees of the Company and its subsidiaries was 104
as of September 30, 1999, compared to 123 as of the beginning of the
fiscal year.
Executive Officers
The executive officers of the registrant (all of whom serve at the
pleasure of the Board of Directors), their ages, and the position or
office held by each, are as follows:
Position or Office Name Age
Chief Executive Officer, George C. McNamee 53
and a Director
Vice President and Chief Cynthia A. Scheuer 38
Financial Officer
Vice President and General Manager, Denis P. Chaves 59
Advanced Products
President and Chief Executive Officer James R. Clemens 50
Ling Electronics, Inc.
Mr. McNamee has been Chief Executive Officer of the Company since April
1998 and a director since 1996.
Ms. Scheuer was appointed Vice President and Chief Financial Officer of
the Company in November 1997. Prior to joining the Company, she was a
senior business assurance manager at Coopers & Lybrand L.L.P. where she
was employed since 1983.
Mr. Chaves has been Vice President and General Manager of the Company's
Advanced Products Division since 1987 and was Vice President and General
Manager of the Company's L.A.B. Division from January 1994 until it was
sold in September, 1997. Previously, he served as Manager of Corporate
Marketing for the Company from 1981 to 1987.
Mr. Clemens has been President and Chief Executive Officer of Ling
Electronics, Inc., a wholly owned subsidiary of the Company, since April
1998. Mr. Clemens was previously Vice President and General Manager of
Ling from April 1997 to April 1998. Mr. Clemens resigned as an officer of
the Company on October 21, 1999, to join SatCon Technology Corporation.
From December 1994 to March 1997, he was a site manager for Teleflex
Control. From September 1992 to November 1994, he was President and Chief
Operating Officer of MTI's former subsidiary United Telecontrol
Electronics, Inc.
ITEM 2: PROPERTIES
The Company leases property in New York and, prior to the sale of Ling,
leased space in California. In management's opinion, the facilities are
generally well-maintained and adequate to meet the Company's current and
future needs.
The Company's corporate headquarters were located in a building in Latham,
New York which was sold to Plug Power during 1999 and a portion of which was
leased back to the Company until November 1999. The building contained a
total of approximately 31,000 square feet. In November 1999, the Company
completed its relocation to Albany, New York, where it leases a facility for
Advanced Products and corporate headquarters. The facility has approximately
20,700 square feet of office and manufacturing space. The lease expires on
November 30, 2009.
Ling Electronics, Inc. (Ling) leases approximately 85,000 square feet of
office and manufacturing space in Anaheim, California. The lease will
expire in June of 2003. Ling was sold, and the lease assigned, to SatCon
Technology Corporation on October 21, 1999.
ITEM 3: LEGAL PROCEEDINGS
At any point in time, the Company and its subsidiaries may be involved in
various lawsuits or other legal proceedings; these could arise from the
sale of products or services or from other matters relating to its regular
business activities, may relate to compliance with various governmental
regulations and requirements, or may be based on other transactions or
circumstances. The Company does not believe there are any such proceedings
presently pending that could have a material adverse effect on the
Company's financial condition except for the matters described in Note 14
to the accompanying Consolidated Financial Statements (which description
is incorporated herein by reference).
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 ("FAC"), 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 MTI
stock from the Plaintiffs. The complaint alleged that Defendants
purchased MTI stock from the Plaintiffs in violation of sections 10b, 20,
20A and rule 10b-5 of the Securities Exchange Act of 1934. In December
1998, the complaint was amended to add MTI as a defendant and assert a
claim for common law fraud against all the Defendants including MTI. The
case concerns the Defendants' 1998 purchase of MTI shares from the
Plaintiffs at the price of $2.25 per share. Ownership of the shares was
disputed and several of the Plaintiffs were in bankruptcy at the time of
the sale. 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
compliant, which was denied. In June 1999, the parties agreed to stay
discovery and amend Defendants time to answer the amended complaint until
September 17, 1999. In October 1999, Defendants answered the amended
Complaint.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the registrant's security
holders during the fourth quarter of fiscal 1999.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock
On April 16, 1999, the stock began trading on the NASDAQ National Market
System under the same symbol, MKTY. From August 1994 through April 15,
1999, the Company's Common Stock traded on the over-the-counter market
under the symbol MKTY on the OTC Bulletin Board. Set forth below are the
highest and lowest prices at which shares of the Company's Common Stock
have been traded during each of the Company's last two fiscal years.
Prices as Adjusted to
Effect for April 30,1999
Prices as Reported Three for Two Stock Split
High Low High Low
Fiscal Year 1999
First Quarter 8-5/8 6-3/4 5-3/4 4-1/2
Second Quarter 21 8 14 5-1/3
Third Quarter 30 11-11/12 30 7-15/16
Fourth Quarter 35-9/16 23-6/16 35-9/16 23-6/16
Fiscal Year 1998
First Quarter 6-3/4 3-3/4 4-1/2 2-1/2
Second Quarter 8-1/8 3-1/2 5-5/12 2-1/3
Third Quarter 8-1/8 5-11/16 5-5/12 3-3/4
Fourth Quarter 9-3/8 6 6-1/4 4
Number of Equity Security Holders
As of December 20, 1999, the Company had approximately 479 holders of its
$1.00 par value Common Stock. In addition, there are approximately 4,154
beneficial owners holding stock in "street" name.
Dividends
The payment of dividends is within the discretion of the Company's Board
of Directors and will depend, among other factors, on earnings, capital
requirements, and the operating and financial condition of the Company.
The Company has never paid and does not anticipate paying dividends in the
foreseeable future.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth summary financial information regarding
Mechanical Technology Incorporated for the years ended September 30, as
indicated:
Statement of Earnings Data (In thousands, except per share data)
Restated Restated Restated
1999 1998 1997 1996 1995
Net Sales $ 12,885 $ 21,028 $ 24,102 $ 22,755 $ 18,140
Gain on Sale of
Subsidiary/Division or
Building - - 2,012 750 6,779
(Loss) Income from Continuing
Operations before
Extraordinary Item and
Income Taxes (10,692) (2,006) 2,701 673 3,352
(Loss) Income from Continuing
Operations before
Extraordinary Item (10,729) (2,031) 2,558 598 3,256
Extraordinary Item -
Gain on Extinguish-
ment of Debt, Net of
Taxes ($106) - - 2,507 - -
(Loss) Income from
Continuing Operations (10,729) (2,031) 5,065 598 3,256
Income (Loss) from
Discontinued
Operations, Net
of Taxes 41 (2,285)2 (545) 3,150 (334)
Net(Loss)Income $ (10,688) $ (4,316) $ 4,520 $ 3,748 $ 2,922
Diluted Earnings
Per Share1,3
(Loss) Income from
Continuing Operations
before Extraordinary
Item $ (0.94) $ (0.21) $ 0.28 $ 0.09 $ 0.57
Extraordinary Item - - 0.27 - -
(Loss)Income from
Discontinued
Operations - (0.24) (0.06) 0.50 (0.06)
Net (Loss)Income $ (0.94) $ (0.45) $ 0.49 $ 0.59 $ 0.51
Weighted Average Shares
Outstanding and
Equivalents1 11,330,530 9,576,672 9,149,176 6,310,094 5,742,045
Balance Sheet Data:
Working Capital $ 18,662 $ 5,779 $ 7,696 $ 7,086 $ 2,712
Total Assets 31,780 21,128 14,003 13,481 13,444
Total Long- Term Debt - - - 5,508 6,960
Total Shareholders' Equity (Deficit) 27,786 11,124 8,213 2,164 (3,490)
__________________________
1 Earnings per share information has been retroactively adjusted to reflect the April 30, 1999 3 for 2 stock split.
2 Includes a net charge of $1,769 related to the discontinuance of the Company's Technology Division and a $516 loss
from operations prior to discontinuance.
3 Earnings per share have been restated to comply with SFAS No. 128, "Earnings Per Share."
Prior years have been restated to reflect the Technology and
Defense/Aerospace segments as discontinued operations. (See Note 16 to
the accompanying Consolidated Financial Statements).
There were no cash dividends on common stock declared for any of the
periods presented.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations: 1999 in Comparison with 1998
The following three paragraphs summarize significant organizational
changes, which impact the comparison of 1999 and 1998 results of
operations.
On June 27, 1997, the Company and Edison Development Corp. ("EDC"), a
subsidiary of DTE Energy Co. formed a joint venture, Plug Power L.L.C.
("Plug Power") to further develop the Company's Proton Exchange Membrane
("PEM") Fuel Cell technology. In exchange for its contribution of
employees, contracts, intellectual property and certain other assets that
had comprised the fuel cell research and development business activity of
the Technology segment (which assets had a net book value of $357
thousand), the Company received a 50% interest in Plug Power. EDC made an
initial cash contribution of $4.75 million in exchange for the remaining
50% interest in Plug Power. The Company's investment in Plug Power is
included in the balance sheet caption "Investment in Plug Power"; the
assets contributed by the Company to Plug Power had previously been
included in the assets of the Company's Technology segment. See the
supplemental disclosure regarding Contribution of Net Assets to Plug Power
in the Consolidated Statements of Cash Flows for additional information
regarding the assets contributed by the Company to Plug Power.
Since Plug Power was formed in 1997 the Company, EDC and other investors
have contributed substantial amounts of cash and other assets to Plug
Power. Contributions to Plug Power by the Company totaled $20.7 million
as of September 30, 1999 and increased to $41.2 million as of Plug
Power's IPO date. After Plug Power' s IPO, the Company owned 13,704,315
shares or 31.9% of outstanding Plug Power stock.
The sale of the Company's Technology Division, the sole component of the
Technology segment, to NYFM, Incorporated (a wholly owned subsidiary of
Foster-Miller, Inc., a Waltham, Massachusetts-based technology company)
on March 31, 1998 completed management's planned sale of non-core
businesses. Accordingly, the Company no longer includes Technology among
its reportable business segments. 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.
The following is management's discussion and analysis of certain
significant factors, which have affected the Company's results of
operations for 1999 compared to 1998. This discussion relates only to the
Company's continuing operations before the sale of Ling, which occurred in
October 1999.
Sales for fiscal 1999 totaled $12.9 million compared to $21.0 million for
the prior year, a decrease of $8.1 million or 38.7%. This decrease is the
result of continuing weak market conditions. Advanced Products and Ling
reported sales decreases of 48.7% and 31.6%, respectively in the year
ended September 30, 1999.
Selling, general and administrative expenses for fiscal 1999 were 38.4% of
sales, as compared to 27.6% in 1998. Higher levels of
general/administrative expenses as a percentage of sales for fiscal 1999
resulted primarily from the 38.7% decrease in sales. Actual selling,
general and administrative expenses decreased $.863 million from 1998 to
1999.
Product development and research costs during fiscal 1999 were 8.6% of
sales, compared to 4% for 1998. Development costs increased $.274 million
from 1998 to 1999 reflecting the Advanced Products Division's commitment
to developing diagnostic and other new products.
The operating loss of $1.4 million for the year ended September 30, 1999
represents a $3.4 million or 170.4% decrease from the $2 million
operating income reported during the same period last year. The
decrease is the result of decreased sales levels and corresponding
decreases in gross profits due to fixed cost absorption at lower sales
levels. Gross profit decreased to 36% of sales in fiscal 1999 from 41%
of sales in fiscal 1998.
In addition to the matters noted above, the Company recorded a $9.4
million loss from the recognition of the Company's proportionate share of
losses of Plug Power compared to a $3.8 million loss in 1998.
Results during fiscal 1999 were adversely effected by the sales decrease.
Further, as a result of ownership changes in 1996, the availability of net
operating loss carryforwards to offset future taxable income will be
significantly limited pursuant to the Internal Revenue Code.
Results of Operations: 1998 in Comparison with 1997
The following two paragraphs summarize significant organizational changes,
which impact the comparison of 1998 and 1997 results of operations.
Net assets of the discontinued technology operation were $8 thousand and
$3,186 thousand at September 30, 1998 and 1997, respectively, and the loss
on discontinued operations included a loss from operations of $516
thousand and a loss on disposal of $1,769 thousand at September 30, 1998.
The loss on disposal includes a provision for estimated operating results
prior to disposal. The Company's prior year financial statements have
been restated to conform to this treatment.
On September 30, 1997, the Company sold all of the assets of its L.A.B.
Division to Noonan Machine Company of Franklin Park, IL. The Company
received $2.6 million in cash and two notes, totaling $650 thousand, from
Noonan Machine Company. The purchaser has requested that the principal
amount of the note be reduced to reflect the resale value of certain
assets of L.A.B. The Company is enforcing its rights with respect to the
note. The net proceeds from the sale were used to pay down outstanding
debt and build working capital. The sale of L.A.B. resulted in a $2.0
million gain, which was recorded in the fourth quarter of fiscal year
1997. In addition, $250 thousand of the proceeds associated with one of
the notes was recorded as deferred revenue due to the possible reduction
of the $250 thousand note receivable, in the event of a sale of certain
fixed assets, in accordance with the terms of the note.
The following is management's discussion and analysis of certain
significant factors, which have affected the Company's results of
operations for 1998 compared to 1997. This discussion relates only to the
Company's continuing operations.
Sales for fiscal 1998 totaled $21.0 million compared to $24.1 million for
the prior year, a decrease of $3.1 million or 12.8%. This decrease is
attributable to the reduction of sales resulting from the sale of the
L.A.B. Division on September 30, 1997, which reported sales of
$3.3 million and operating income of $500 thousand at September 30, 1997.
Advanced Products reported a sales increase of 26.2% and Ling reported a
sales decrease of 11.3% in the year ended September 30, 1998.
Selling, general and administrative expenses for fiscal 1998 were 27.6% of
sales, as compared to 29.1% in 1997. Product development and research
costs during fiscal 1998 were 4% of sales, compared to 4.2% for 1997.
Lower levels of selling, general and administrative expenses for fiscal
1998 resulted primarily from cost reduction efforts during fiscal 1998 as
well as the elimination of costs for L.A.B. of $600 thousand.
Operating income of $2 million at September 30, 1998 represented a $400
thousand or 25.5% increase from the $1.6 million operating income
recorded during the same period last year. The increase is the result
of increased sales levels for Advanced Products and improved margins as
a result of cost control measures. Excluding the L.A.B. division
results in 1997, operating income increased $900 thousand.
In addition to the matters noted above, during the fourth quarter of
fiscal 1998, the Company recorded a $3.8 million loss from the recognition
of the Company's proportionate share of losses in Plug Power compared to a
$330 thousand loss in 1997. During the fourth quarter of fiscal 1997, the
Company recorded a $2.0 million gain on the sale of the L.A.B. Division.
Further, the Company recorded a $2.5 million extraordinary gain, net of
taxes, on the extinguishment of debt during the first quarter of fiscal
1997.
Results during fiscal 1998 were enhanced by lower interest expense,
principally resulting from reduced indebtedness. Moreover, the Company
benefited from reduced income tax expense due to the loss generated by
discontinued operations and the use of net operating loss carryforwards.
However, as a result of recent ownership changes, the availability of
further net operating loss carryforwards to offset future taxable income
will be significantly limited pursuant to the Internal Revenue Code.
Liquidity and Capital Resources
At September 30, 1999, the Company's order backlog was $2.1 million,
representing no change from the prior year-end.
Inventories in 1999 remained stable at $3.75 million to support expected
sales increases during the first quarter of 2000. Additionally, accounts
receivable decreased by $1.1 million in 1999 due to the reduced sales
during fiscal 1999.
Cash flow used by continuing operations was $2.3 million in 1999 compared
with $.5 million provided in 1998 and $1.1 million provided in 1997. Cash
flow from operating activities was impacted in 1999 by operating losses
and 1998 and 1997 were impacted by positive operating income and
fluctuations in working capital components.
Working capital was $18.7 million at September 30, 1999, a $12.9 million
increase from $5.8 million at fiscal year-end 1998. Capital increased
$12.7 million in 1999 which reflects the proceeds received from the sale
of common shares to existing shareholders through a rights offering.
Capital expenditures were $2.7 million for 1999, $3.2 million for 1998 and
$.4 million for 1997. The capital expenditures in 1999 were in accordance
with the higher level of planned expenditures including the construction
of a new facility for Advanced Products and corporate headquarters and
renovations to an existing building, which were subsequently sold to Plug
Power in July 1999. Capital expenditures in 2000 are expected to
approximate $.4 million, which consists of expenditures for facility fit-
up and computer and manufacturing equipment. The Company expects to
finance these expenditures with cash from operations and existing credit
facilities.
Cash and cash equivalents were $5.9 million at September 30, 1999 compared
to $5.6 million at September 30, 1998. Investments in marketable
securities were $7.9 million at September 30, 1999. These increases are
primarily attributable to $12.7 million of net cash proceeds from the sale
of common shares to existing shareholders through a rights offering, which
closed on July 12, 1999 net of payments associated with the Company's
construction project. During 1999, the Company also funded $4 million of
previously accrued capital contributions to Plug Power.
At September 30, 1999 and 1998, there were no borrowings outstanding on
the lines of credit. The Company has a working capital line of credit
available in the amount of $4 million and a $1 million equipment line of
credit. These lines of credit expire on January 31, 2000. The Company is
currently negotiating an extension of these lines of credit.
The reduction in net assets of discontinued operations to a net liability
of $.5 million reflects the collection of receivables and settlement of
liabilities. The sale of the Technology Division was completed as of
March 31, 1998.
KeyBank issued a letter of credit for approximately $6 million in
connection with the issuance of $6 million of Industrial Development
Revenue Bonds ("IDR Bonds"). The KeyBank credit agreements 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 may be reduced. The IDR Bond Obligation,
letter of credit and unexpended bond proceeds were transferred to Plug
Power in connection with the sale of the MTI facility and adjacent
residence effective July 1, 1999.
The Industrial Development Agency for the Town of Colonie issued $6
million in IDR Bonds on behalf of the Company to assist in the
construction of a new building for Advanced Products and the Company's
corporate staff and renovation of existing buildings leased to Plug Power.
The bond closing was completed December 17, 1998 and proceeds of the IDR
Bonds were deposited with a trustee for the bondholders. The Company has
drawn bond proceeds to cover qualified project costs.
On November 1, 1999, the Company entered into a $22.5 million Credit
Agreement with KeyBank, N.A. ("the $22.5 million Credit Agreement"). The
proceeds of this loan were used to fund the Company's remaining $20.5
million balance of its Mandatory Capital Commitment to contribute $22.5
million to Plug Power. Pursuant to the Mandatory Capital Commitment, the
Company purchased 266,667 shares of Plug Power for $2 million on September
30, 1999 and 2,733,333 shares of Plug Power for $20.5 million in November
1999. The Company may sell shares of Plug Power Common Stock to pay
monthly interest and or quarterly principal payments (beginning May 2001)
on the Loan. Plug Power's stock is currently traded on the NASDAQ,
therefore the stock is subject to stock market conditions. Due to the
Company's significant ownership position, sales of Plug Power stock will
be subject to SEC Rule 144 limitations including a limit of one (1)
percent of total outstanding shares per quarter.
The $22.5 million Credit Agreement requires the Company to meet certain
covenants, including maintenance of a collateral account which at all
times has a minimum market value of $600 thousand and a balance on
November 1, 1999 of $2.65 million, and maintenance of a collateral
coverage ratio. The existing covenants under the original letter of
credit were eliminated pursuant to the $22.5 million Credit Agreement.
The $22.5 million Credit Agreement is collateralized by 100% of the
Company's equity interest in Plug Power.
On October 21, 1999, the Company created a strategic alliance with
SatCon Technology Corporation (SatCon). SatCon acquired Ling
Electronics, Inc. and Ling Electronics, Ltd. from the Company and the
Company committed to invest approximately $7 million in SatCon. In
consideration for the acquisition of Ling Electronics and the Company's
investment, the Company will receive 1,800,000 shares of SatCon's common
stock and warrants to purchase an additional 100,000 shares of SatCon's
common stock. The Company funded $2.57 million of its investment in
SatCon and will make the remaining investment by the end of January
2000. SatCon will also receive warrants to purchase 100,000 shares of
the Company's common stock.
The Company anticipates that it will be able to meet the liquidity needs
of its continuing operations and its investment commitment to SatCon
from current cash resources, cash flow generated by operations and
borrowing under its existing lines of credit.
Market Risk
Market risk represents the risk of changes in value of a financial
instrument, caused by fluctuations in interest rates and equity prices.
Because the Company's cash and investment position exceeds both short
and long term obligations, the Company's exposure to interest rate risk
relates primarily to its investment in marketable debt securities. The
investments are at variable rates, which generally reflect market
conditions. The Company manages its investments to increase return on
investment and only invests in instruments with high credit quality.
The Company has performed a sensitivity analysis on its marketable debt
securities and its investment in Plug Power common stock. The
sensitivity analysis presents the hypothetical change in fair value of
those financial instruments held by the Company at September 30, 1999
which are sensitive to changes in interest rates. Market risk is
estimated as the potential change in fair value resulting from an
immediate hypothetical one-percentage point parallel shift in the yield
curve. The fair values of the Company's investments in marketable
securities have been based on quoted market prices. As the carrying
amounts on short-term investments maturing in less than 180 days
approximate the fair value, these are not included in the sensitivity
analysis. The fair value of marketable securities over 180 days is $3.0
million. A one-percentage point change in the interest rates would
change the fair value of investments over 180 days by $85 thousand.
The Company also has an investment in Plug Power, which is accounted for
on the equity method. The fair market value of the investment is $164.6
million based on the October 28, 1999 $15 per share initial public
offering price. If the market price on the Plug Power stock would
decrease by ten percent the fair value of the stock would decrease by
$16.5 million.
Year 2000
The Company's Year 2000 plan is complete. The plan addresses the issue
of computer programs and embedded computer chips being unable to
distinguish between the year 1900 and the year 2000 as well as the
ability to recognize the leap year date of February 29, 2000. The plan
has been divided into six areas: (1)Systems evaluation, (2) Software
evaluation, (3) Third-party suppliers, (4) Facility systems, (5)
Products and (6)Contingency plans. The general phases common to all
segments are: (1) Inventorying Year 2000 items, (2) Assigning priorities
to identified items, (3) Assessing the Year 2000 compliance of items
determined to be material to the Company, (4) Repairing or replacing
material items that are determined not to be Year 2000 compliant, (5)
Testing material items and (6) Designing and implementing contingency
and business continuation plans for each organization and company
location.
Systems Evaluation
All internal systems have been identified, inventoried, prioritized and
assessed for Year 2000 compliance. Systems found to be non-compliant
were replaced and compliant systems were assessed to determine what if
any maintenance is required to keep them compliant. Plans have been
developed to ensure that staff is available to oversee restarting
certain machines and manually adjusting their dates.
Software Evaluation
All software material to the Company has been identified, evaluated, and
is now in compliance and certified as such by vendors or new software
has been purchased.
Third-Party Suppliers
Third-party suppliers have been identified and reviewed to determine
whether their products and supplies are Year 2000 compliant. Any
provider identified as non-compliant has been or will be replaced with
an alternative provider if they cannot serve our needs.
Facility Systems
All facility systems are believed to be Year 2000 compliant including
telephone, fire alarm, security and network components.
Products
The Company has evaluated both current product offerings and products in
the field to determine their ability to comply with Year 2000 issues.
The products were found to fall into three categories, non-compliant,
compliant if modifications are made and fully compliant or not impacted
(that is, the product does not have a computer or contains an embedded
computer but does not use a date function). All products currently sold
by the Company are fully Year 2000 compliant. The Company has produced
and made available for sale, upgrades to products requiring
modifications to be Year 2000 compliant. Those products identified as
non-compliant are products that have been in the field for a number of
years and must be replaced by the customer.
Contingency Plans
In the event the Company's Year 2000 plan is ineffective or
unanticipated problems arise, the Company has developed contingency
plans which are now in place. The plans include use of hard copy data
and alternate suppliers.
Costs
The total cost associated with required modifications to become Year
2000 compliant is not expected to be material to the Company's financial
position. The estimated total cost of the Year 2000 project was
approximately $120 thousand, which included software, hardware and
cabling upgrade and replacement costs. This estimate does not include
the Company's potential share of Year 2000 costs that may be incurred by
joint ventures, in which the company participates but is not the
operator. The total amount expended on the Plan through September 30,
1999 was $124 thousand for the upgrade and replacement of hardware.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. Due
to the general uncertainty inherent in the Year 2000 problem, resulting
in part from the uncertainty of the Year 2000 readiness of third-party
suppliers and customers, the Company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material
impact on the Company's results of operations, liquidity or financial
condition. The Year 2000 Plan is expected to significantly reduce the
Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its material
customers. The Company believes that, with its Year 2000 Plan, the
possibility of significant interruptions of normal operations should be
reduced.
Forward Looking Statements
Statements in this Form 10-K or in documents incorporated herein by
reference that are not historical facts or information constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, including, but not limited to, the
information set forth herein. Such forward looking statements involve
known and unknown risks, uncertainties or other factors which may cause
the actual results, levels of activity, performance or achievement of
Company or industry results to be materially different from any future
results, levels of activity, performance or achievement expressed or
implied by such forward-looking statements. Such factors include, among
others, the following: general economic and business conditions; the
ability of the Company to implement its business strategy; the Company's
access to financing; the Company's ability to successfully identify new
business opportunities; the Company's ability to attract and retain
employees; changes in the industry; competition; the effect of regulatory
and legal proceedings and other factors discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
As a result of the foregoing and other factors, no assurance can be given
as to the future results and achievements of the Company. Neither the
Company nor any other person assumes responsibility for the accuracy and
completeness of these statements.
ITEM 8: FINANCIAL STATEMENTS
The financial statements filed herewith are set forth on the Index to
Consolidated Financial Statements on Page F-1 of the separate financial
section which follows page 29 of this report and are incorporated herein
by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Executive Officers" in Item 1
of this Form 10-K Report, and the information which will be set forth in
the section entitled "Election of Directors", and under the captions
"Security Ownership of Certain Beneficial Owners" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the section
entitled "Additional Information", in the definitive Proxy Statement to be
filed by the registrant, pursuant to Regulation 14A, for its Annual
Meeting of Shareholders to be held on March 16, 2000 (the "2000 Proxy
Statement"), is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information which will be set forth under the captions "Executive
Compensation", "Compensation Committee Report", "Compensation Committee
Interlocks and Insider Participation", "Employment Agreements", and
"Directors Compensation", in the section entitled "Additional Information"
in the registrant's 2000 Proxy Statement, is incorporated herein by
reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information which will be set forth under the captions "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" in the section entitled "Additional Information" in the
registrant's 2000 Proxy Statement, is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information which will be set forth under the caption "Certain
Information Regarding Nominees" in the section entitled "Election of
Directors", and under the captions "Directors Compensation", "Security
Ownership of Certain Beneficial Owners", and "Certain Relationships and
Related Transactions", in the section entitled "Additional Information",
in the registrant's 2000 Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K
(a) (1) The financial statements filed herewith are set forth on the
Index to Consolidated Financial Statements on page F-1 of the separate
financial section which accompanies this Report, which is incorporated
herein by reference.
The following exhibits are filed as part of this Report:
Exhibit
Number Description
3.1 Certificate of Incorporation of the registrant,
as amended and restated. (6)
3.2 By-Laws of the registrant, as restated. (6)
4.93 Credit Agreement dated as of September 22, 1998
among Mechanical Technology Incorporated and
KeyBank National Association ("KeyBank"). (8)
4.94 Security Agreement, dated as of September 22,
1998, executed by the registrant in favor of
KeyBank and securing the registrant's
obligations to KeyBank. (8)
4.95 Security Agreement, dated as of September 22,
1998, executed by Ling Electronics, Inc. (a
wholly owned subsidiary of the registrant) in
favor of KeyBank and securing the registrant's
obligations to KeyBank. (8)
4.96 Guaranty of Payment and Performance, dated as of
September 22, 1998, executed by Ling
Electronics, Inc. (a wholly-owned subsidiary of
the registrant) in favor of KeyBank and
guaranteeing payment of the registrant's
obligations to KeyBank. (8)
4.103 Assignment and Assumption Agreement, dated as of
July 1, 1999, by and among Town of Colonie
Industrial Development Agency, the registrant,
Plug Power, LLC, KeyBank National Association
and First Albany Corporation in connection with
the sale of the MTI facility to Plug Power and
the assignment and assumption of rights and
obligations in connection with the Industrial
Development Revenue Bonds (Letter of Credit
Secured) Series 1998 A in the original
aggregate amount of $6,000,000. (10)
4.104 Credit Agreement, dated as of November 1, 1999,
between the registrant and KeyBank National
Association for a $22.5 million term loan to
finance a capital contribution to Plug Power,
LLC. (11)
4.105 Stock Pledge Agreement, dated as of November 1,
1999, by the registrant with KeyBank National
Association pledging 13,704,315 shares of Plug
Power stock in support of the $22.5 million
credit agreement. (11)
10.1 Mechanical Technology Incorporated Restricted
Stock Incentive Plan. Filed as Exhibit 28.1 to
the registrant's Form S-8 Registration
Statement No. 33-26326 and incorporated herein
by reference. (1)
10.14 Mechanical Technology Incorporated Stock
Incentive Plan - included as Appendix A to the
registrant's Proxy Statement, filed pursuant to
Regulation 14A, for its December 20, 1996
Special Meeting of Shareholders and
incorporated herein by reference. (2)
10.17 Agreement, dated March 14, 1998, between the
Registrant and Mr. James Clemens, Vice President
and General Manager of Ling Electronic, Inc.,
regarding his employment. (3)
10.18 Limited Liability Company Agreement of Plug
Power, L.L.C., dated June 27, 1998, between
Edison Development Corporation and Mechanical
Technology, Incorporated. (4)(5)
10.19 Contribution Agreement, dated June 27, 1998,
between Mechanical Technology, Incorporated and
Plug Power, L.L.C. (4)(5)
10.20 Asset Purchase Agreement, dated as of September
22, 1998, between Mechanical Technology,
Incorporated and Noonan Machine Company. (4)
10.21 Asset Purchase Agreement between MTI and NYFM,
Incorporated, dated as of March 31, 1998. (7)
10.24 Contribution Agreement between Edison Development
Corporation and MTI, dated as of June 10, 1998.
(7)
10.30 Mechanical Technology Incorporated 1999 Employee
Stock Incentive Plan. (9)
10.31 Agreement of Sale, dated June 23, 1999, by and
between the registrant and Plug Power, LLC for
the sale of the MTI campus and adjacent
residence. (10)
10.32 Stock Purchase Agreement, dated October 21,
1999, between the registrant, Ling Electronics,
Inc., Ling Electronics, Ltd. and SatCon
Technology Corporation.
10.33 Securities Purchase Agreement, dated October 21,
1999, between the registrant and SatCon
Technology Corporation.
10.34 Mechanical Technology Incorporated Registration
Rights Agreement, dated October 21, 1999, between
the registrant and SatCon Technology Corporation.
10.35 SatCon Technology Corporation Registration
Rights Agreement, dated October 21, 1999, between
SatCon Technology Corporation and the registrant.
10.36 Mechanical Technology Incorporated Stock
Purchase Warrant dated October 21, 1999.
10.37 SatCon Technology Corporation Stock Purchase
Warrant dated October 21, 1999.
10.38 Lease dated August 10, 1999 between Carl E.
Touhey and Mechanical Technology, Inc.
10.39 Registration Rights Agreement, dated November
1, 1999 by and among Plug Power Inc. and the
registrant.
10.40 Plug Power Inc. Lock-Up Agreement, dated
November 1, 1999.
21 Subsidiaries of the registrant.
27 Financial Data Schedule
______________________
Certain exhibits were previously filed (as indicated below) and are
incorporated herein by reference. All other exhibits for which no
other filing information is given are filed herewith:
(1) Filed as Exhibit 28.1 to the registrant's Form S-8 Registration
Statement No. 33-26326, filed December 29, 1988, and incorporated
herein by reference.
(2) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report for its fiscal year ended September
30, 1996.
(3) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 8-K Report dated May 12, 1997.
(4) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report for the fiscal year ended September
30,1997.
(5) Refiled herewith after confidential treatment request with
respect to certain schedules and exhibits were denied by the
Commission. Confidential treatment with respect to certain
schedules and exhibits was granted.
(6) Filed as an Exhibit to the Proxy Statement, Schedule 14A,
dated March 9, 1998.
(7) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form S-2 dated August 18, 1998.
(8) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report for the fiscal year ended September
30, 1998.
(9) Filed as an Exhibit to the registrant's Proxy Statement,
Schedule 14A, dated February 12, 1999.
(10) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-Q Report for its fiscal quarter ended June
25, 1999.
(11) Filed as an Exhibit to the registrant's 13D Report dated
November 4, 1999.
(a) (2) Schedule. The following consolidated financial statement
schedule for each of the three years in the period ended September 30,
1999 is included pursuant to Item 14(d):
Report of Independent Accountants on Financial Statements
Schedule
Schedule II--Valuation and Qualifying Accounts
(b) Two reports on Form 8-K were filed during the quarter ended
September 30, 1999 and three reports were filed subsequent to the
quarter ended September 30, 1999.
The Company filed a Form 8-K Report, dated July 2, 1999, reporting
under item 5 thereof its intention to release 125,000 shares for the
Rights Offering over-subscription and pre-releasing preliminary third
quarter 1999 results.
The Company filed a Form 8-K Report, dated August 30, 1999, reporting
under item 5 thereof that the Company's fuel cell affiliate, Plug
Power, filed a registration statement with the Securities and
Exchange Commission, in connection with the initial public offering
of its common stock. If the public offering price is greater than
$7.50 per share, the Company has agreed to purchase 3 million shares
of Plug Power stock at the fixed price of $7.50 per share, pursuant
to the Mandatory Capital Contribution Agreement dated as of January
26, 1999.
The Company filed a Form 8-K Report, dated October 4, 1999, reporting
under item 5 thereof that Plug Power filed an amendment to its
registration statement with the Securities and Exchange Commission
stating that shares of Plug Power would be offered at an estimated
price range of $13 to $15 per share. On September 30, 1999, the
Company purchased 266,667 shares of Plug Power at $7.50 per share
thereby reducing the Company's commitment to purchase shares at the
public offering from 3 million to 2,733,333 shares.
The Company filed a Form 8-K Report, dated October 22, 1999,
reporting under item 5 thereof the creation of a strategic alliance
with SatCon Technology Corporation. SatCon acquired Ling
Electronics, Inc. and Ling Electronics, Ltd. from the Company and the
Company will invest approximately $7,000,000 in SatCon. In
consideration for the acquisition of Ling Electronics and the
Company's investment, the Company will receive 1,800,000 shares of
SatCon's common stock and warrants to purchase an additional 100,000
shares of SatCon's common stock. The Company immediately funded
$2,570,000 of its investment in SatCon and will make the remaining
investment by the end of January 2000. SatCon will also receive
warrants to purchase 100,000 shares of the Company's common stock.
The Company filed a Form 8-K Report, dated November 16, 1999,
reporting under item 5 thereof that on November 8, 1999 Plug Power
received correspondence from counsel to DCT, Inc., alleging , among
other things, that the Company misappropriated from DCT, Inc.
business and technical trade secrets, ideas, know-how and strategies
relating to fuel cell systems, and that certain contractual
obligations owed to DCT, Inc. were breached.
(d) Separate financial statements for Plug Power, Inc., a less than fifty
percent owned entity, will be filed as an amendment to this Form 10-K as
soon as they become available. Plug Power's fiscal year ends December 31,
1999 and their financial statements should be available by March 30, 1999,
the SEC filing deadline for their Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MECHANICAL TECHNOLOGY INCORPORATED
Date: December 28,1999 By: /s/ G.C. McNamee
George C. McNamee
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ George C. McNamee Chief Executive Officer and
George C. McNamee Chairman of the Board of
Directors December 28, 1999
/s/ Cynthia A. Scheuer Chief Financial Officer
Cynthia A. Scheuer (Principal Financial and
Accounting Officer) "
/s/ Dale W. Church Director "
Dale W. Church
/s/ Edward A. Dohring Director "
Edward A. Dohring
/s/ Alan P. Goldberg Director "
Alan P. Goldberg
/s/ E. Dennis O'Connor Director "
E. Dennis O'Connor
/s/ Walter L. Robb Director "
Dr. Walter L. Robb
/s/ Beno Sternlicht Director "
Dr. Beno Sternlicht
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders
of Mechanical Technology Incorporated
Our audits of the consolidated financial statements referred to in our
report dated November 12, 1999 appearing on page F-2 of this Form 10-K
of Mechanical Technology Incorporated also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers L.L.P.
Albany, New York
November 12, 1999
SCHEDULE II
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
Additions
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Deductions period
Allowance for
doubtful accounts
Year ended
September 30:
1999 $ 99 $ 76 $ - $ 62 $ 113
1998 94 95 - 90 99
1997 73 49 - 28 94
Includes accounts written off as uncollectible, recoveries and the effect
of currency exchange rates.
Valuation allowance
for deferred tax assets
Year ended
September 30:
1999 $ 4,089 $ 5,092 $ - $ 5,431 $ 3,750
1998 2,754 1,335 - - 4,089
1997 4,264 - - 1,510 2,754
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants. . . . . . . . . . . F-2
Consolidated Financial Statements:
Balance Sheets as of September 30, 1999 and 1998 . . F-3 & F-4
Statements of Operations for the Years Ended
September 30, 1999, 1998 and 1997 . . . . . . . . F-5
Statements of Shareholders' Equity for the Years Ended
September 30, 1999, 1998 and 1997 . . . . . . . . F-6
Statements of Cash Flows for the Years Ended
September 30, 1999, 1998 and 1997 . . . . . . . . F-7 - F-8
Notes to Consolidated Financial Statements . . . . . F-9 - F-35
Separate financial statements of the registrant alone are omitted because
the registrant is primarily an operating company and all subsidiaries
included in the consolidated financial statements being filed, in the
aggregate, do not have minority equity interest and/or indebtedness to
any person other than the registrant or its consolidated subsidiaries in
amounts which together exceed 5% of the total assets as shown by the most
recent year-end consolidated balance sheet.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Mechanical Technology Incorporated
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and retained earnings and
of cash flows present fairly, in all material respects, the financial
position of Mechanical Technology Incorporated and Subsidiaries at
September 30, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting
principles. 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 generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, 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 the opinion expressed above.
/s/PricewaterhouseCoopers L.L.P.
Albany, New York
November 12, 1999
F-2
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
(Dollars in thousands)
1999 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,870 $ 5,567
Investments in marketable securities 7,876 -
Accounts receivable, less allowance of
$113 (1999) and $99 (1998) 3,852 4,959
Other receivables - related parties 105 87
Inventories 3,752 3,748
Taxes receivable 10 8
Note receivable - current 329 327
Prepaid expenses and other current assets 265 472
Net assets of a discontinued operation - 8
______ ______
Total Current Assets 22,059 15,176
Property, Plant and Equipment, net 827 4,467
Note receivable - noncurrent 184 264
Investment in Plug Power 8,710 1,221
_______ ________
Total Assets $ 31,780 $ 21,128
======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, 1999 and 1998
(Dollars in thousands)
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Income taxes payable $ - $ 5
Accounts payable 614 2,064
Accrued liabilities 2,243 3,328
Contribution payable-Plug Power - 4,000
Net liabilities of discontinued operations 540 -
_______ _______
Total Current Liabilities 3,397 9,397
LONG-TERM LIABILITIES
Deferred income taxes and other credits 597 607
_______ _______
Total Liabilities $ 3,994 $ 10,004
_______ _______
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share,
authorized 15,000,000; issued
11,649,959 (1999) and 10,773,968(1998) 11,649 10,775
Paid-in capital 42,755 16,274
Deficit (26,573) (15,885)
_______ _______
27,831 11,164
Accumulated Other Comprehensive Loss:
Unrealized loss on available for sale
securities, net (5) -
Foreign currency translation adjustment (11) (11)
_______ _______
Accumulated Other Comprehensive Loss (16) (11)
Common stock in treasury, at cost,
6,750 shares (1999) and
4,500 shares (1998) (29) (29)
_______ _______
Total Shareholders' Equity 27,786 11,124
Total Liabilities and Shareholder's Equity $ 31,780 $ 21,128
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1999, 1998 and 1997
(Dollars in thousands, except per share)
Restated
1999 1998 1997
Net sales $ 12,885 $ 21,028 $ 24,102
Cost of sales 8,239 12,386 14,474
_______ _______ _______
Gross profit 4,646 8,642 9,628
Selling, general and administrative
expenses 4,949 5,812 7,015
Product development and research costs 1,105 831 1,020
_______ _______ _______
Operating (loss) income (1,408) 1,999 1,593
Interest expense (106) (102) (323)
Gain on sale of division/subsidiary - - 2,012
Equity in losses of Plug Power (9,363) (3,806) (330)
Other income(expense), net 185 (97) (251)
_______ _______ _______
(Loss)income from continuing operations
before extraordinary item and income
taxes (10,692) (2,006) 2,701
Income tax expense 37 25 143
_______ _______ _______
(Loss)income from continuing operations
before extraordinary item (10,729) (2,031) 2,558
Extraordinary item- gain on extinguishment
of debt, net of taxes ($106) - - 2,507
_______ _______ _______
(Loss)income from continuing operations (10,729) (2,031) 5,065
Income(loss)from discontinued operations 41 (2,285) (545)
_______ _______ _______
Net(loss)income $(10,688) $ (4,316) $ 4,520
======= ======= =======
Earnings (loss) per share (Basic and Diluted):
(Loss)income before extraordinary item $ (.94) $ (.21) $ .28
Extraordinary item - - .27
(Loss)from discontinued operations - (.24) (.06)
_______ _______ _______
Net(loss)income $ (.94) $ (.45) $ .49
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 1999, 1998 and 1997
(Dollars in thousands)
Restated
1999 1998 1997
COMMON STOCK
Balance, October 1
(1997 balance as previously reported) $ 10,775 $ 8,864 $ 4,902
Three-for-two common stock split effected
in the form of a 50% stock dividend
effective April 30, 1999 - - 2,451
Issuance of shares - options 56 117 -
Issuance of shares 818 1,794 1,511
_______ _______ _______
Balance, September 30 $ 11,649 $ 10,775 $ 8,864
======= ======= =======
PAID-IN-CAPITAL
Balance, October 1
(1997 balance as previously reported) $ 16,274 $ 10,968 $ 13,423
Three-for-two common stock split effected
in the form of a 50% stock dividend
effective April 30, 1999 - - (2,451)
Issuance of shares - options 168 108 -
Issuance of shares 11,826 5,198 (4)
Plug Power investment 14,487 - -
_______ _______ _______
Balance, September 30 $ 42,755 $ 16,274 $ 10,968
======= ======= =======
DEFICIT
Balance, October 1 $(15,885) $(11,569) $(16,089)
Net(loss)income (10,688) (4,316) 4,520
_______ _______ _______
Balance, September 30 $(26,573) $(15,885) $(11,569)
======= ======= =======
UNREALIZED LOSS ON AVAILABLE FOR SALE
SECURITIES, NET
Balance, October 1 $ - $ - $ -
Unrealized loss on available for
for sale securities, net (5) - -
_______ _______ _______
Balance, September 30 $ (5) $ - $ -
======= ======= =======
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance, October 1 $ (11) $ (19) $ (19)
Adjustments - 8 -
_______ _______ _______
Balance, September 30 $ (11) $ (11) $ (19)
======= ======= =======
TREASURY STOCK
Balance, October 1 $ (29) $ (29) $ (29)
Restricted stock grants - - -
_______ _______ _______
Balance, September 30 $ (29) $ (29) $ (29)
======= ======= =======
RESTRICTED STOCK GRANTS
Balance, October 1 $ - $ (2) $ (24)
Grants issued/vested, net - 2 22
_______ _______ _______
Balance, September 30 $ - $ - $ (2)
======= ======= =======
SHAREHOLDERS' EQUITY
September 30 $ 27,786 $ 11,124 $ 8,213
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended September 30, 1999, 1998 and 1997
(Dollars in thousands)
Restated
1999 1998 1997
OPERATING ACTIVITIES
(Loss)income from continuing operations $ (10,729) $ (2,031) $ 5,065
Adjustments to reconcile net (loss) income to net cash
provided (used) by continuing operations:
Depreciation and amortization 581 323 243
Gain on extinguishment of debt, net of taxes - - (2,507)
Gain on sale of subsidiaries - - (2,012)
Unrealized loss on marketable securities (5) - -
Equity in losses of Plug Power 9,363 3,806 330
Accounts receivable reserve 14 5 21
Loss on sale of fixed assets 28 9 -
Deferred income taxes and other credits (10) 13 (170)
Other - - 31
Stock option compensation 55 - -
Changes in operating assets and liabilities net
of effects from discontinued operations:
Accounts receivable 1,093 (1,069) (44)
Accounts receivable - related parties (18) - -
Inventories (4) (362) 228
Prepaid expenses and other current assets (174) (346) (18)
Accounts payable (1,450) 788 (87)
Income taxes (7) (76) (49)
Accrued liabilities (1,085) (519) 58
________ _______ _______
Net cash (used) provided by continuing operations (2,348) 541 1,089
________ _______ _______
Discontinued Operations:
Income/(loss)from discontinued operations 41 (2,285) (574)
Adjustments to reconcile income to net cash
provided (used) by discontinued operations:
Changes in net assets/liabilities
of discontinued operations 548 3,178 31
Net assets transferred from discontinued operations - (878) -
________ _______ _______
Net cash provided (used) by discontinued operations 589 15 (543)
________ _______ _______
Net cash (used) provided by operations (1,759) 556 546
________ _______ _______
INVESTING ACTIVITIES
Purchases of property, plant & equipment (2,738) (3,166) (377)
Investment in marketable securities (7,876) - -
Proceeds from sale of subsidiaries - - 2,600
Principal payments from note receivable 78 59 -
Investment in Plug Power (6,000) - -
Note receivable Plug Power - (500) -
________ _______ _______
Net cash (used)provided by investing activities (16,536) (3,607) 2,223
________ _______ _______
FINANCING ACTIVITIES
Borrowings under IDA financing, less restricted
cash 5,858 - -
Proceeds from options exercised 153 225 -
Proceeds from rights offering 12,820 7,178 -
Costs of rights offering (158) (186) -
Debt issue costs (75) (28) -
Net (payments) under line-of-credit and note
agreement - - (100)
Principal payments on long-term debt - - (1,310)
________ _______ _______
Net cash provided(used)by financing activities 18,598 7,189 (1,410)
________ _______ _______
Effect of exchange rate changes on cash flows - 8 -
Increase in cash and cash equivalents 303 4,146 1,359
Cash and cash equivalents - beginning of year 5,567 1,421 62
________ _______ _______
Cash and cash equivalents - end of year $ 5,870 $ 5,567 $ 1,421
======== ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
F-7
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For The Years Ended September 30, 1999, 1998 and 1997
(Dollars in thousands)
Restated
1999 1998 1997
Supplemental Disclosures
NONCASH INVESTING ACTIVITIES
Contribution of net assets to Plug Power:
Accounts receivable $ - $ 500 $ -
Note receivable - 500 -
Inventories - - 1
Property, plant and equipment, net - - 452
Accounts payable - - (46)
Accrued liabilities - - (50)
Contribution payable - Plug Power - 4,000 -
______ ______ ________
$ - $ 5,000 $ 357
______ ______ ________
Proceeds from sale of subsidiary
Notes receivable $ - $ - $ 650
______ ______ ________
Net noncash provided by investing activities $ - $ 5,000 $ 1,007
______ ______ ________
NONCASH FINANCING ACTIVITIES
Conversion of Note Payable to Common Stock:
Note Payable extinguishment $ - $ - $ (3,000)
Common stock issued - - 1,500
Accrued interest - Note Payable - - (1,213)
Additional paid-in capital - Other Investors 14,487 - -
Campus contribution to Plug Power:
Debt (6,000) - -
Fixed assets 5,861 - -
Prepaid expenses 364 - -
Restricted cash 142 - -
______ ______ ________
Net noncash provided (used) by
financing activities $14,854 $ - $ (2,713)
______ ______ ________
Net noncash provided (used) by
investing and financing activities $14,854 $ 5,000 $ (1,706)
====== ====== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and
accounts have been eliminated. The Company has a 40.65% interest in Plug
Power, L.L.C. ("Plug Power"). The consolidated financial statements
include the Company's investments in Plug Power (including obligations to
invest), plus its share of losses. The investment is included in the
financial line "Investment in Plug Power".
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, line-of-credit, note payable and long-term
debt, approximates carrying value. Fair values were estimated based on
quoted market prices, where available, or on current rates offered to the
Company for debt with similar terms and maturities.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant, and Equipment
Property, plant and equipment are stated at cost and depreciated using
primarily the straight-line method over their estimated useful lives:
Buildings and improvements 20 to 40 years
Leasehold improvements 10 years
Machinery and equipment 2 to 10 years
Office furniture and fixtures 3 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.
F-9
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies (continued)
When items are sold or retired, related gains or losses are included in
net income.
Income Taxes
The Company accounts for taxes in accordance with Financial Accounting
Standard No. 109, "Accounting for Income Taxes," which requires the use
of the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable for future years to differences between
financial statement and tax bases of existing assets and liabilities.
Under FAS No. 109, the effect of tax rate changes on deferred taxes is
recognized in the income tax provision in the period that includes the
enactment date. The provision for taxes is reduced by investment and
other tax credits in the years such credits become available.
Revenue Recognition
Sales of products are recognized when products are shipped to customers.
Sales of products under long-term contracts are recognized under the
percentage-of-completion method. 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 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
F-10
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies (continued)
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 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
income (expense), 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.
Earnings (Loss) Per Share
Effective October 1, 1997, the Company adopted Financial Accounting
Standard No. 128, "Earnings per Share." In accordance with this
Standard, net income(loss) per share is computed using the weighted
average number of common shares outstanding during each year. Diluted
net income(loss) per share includes the effects of all potentially
dilutive securities. Earnings per share amounts for all periods
presented have been computed in accordance with this Standard.
Advertising
The costs of advertising are expensed as incurred. Advertising expense
was approximately $102, $83 and $92 thousand in 1999, 1998, and 1997,
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.
Reclassification and Restatement
Certain 1998 and 1997 amounts have been reclassified to conform to the
1999 presentation. The financial statements for 1997 have also been
restated to reflect the discontinuance of the Company's Technology
Division (See Note 16).
F-11
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Investments in Marketable Securities
The following is a summary of the investments in marketable securities
classified as current assets:
(Dollars in thousands) 1999 1998
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 1999, 1998 and 1997.
The estimated fair value of available for sale securities by contractual
maturity is as follows:
(Dollars in thousands) 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) Inventories
Inventories consist of the following:
(Dollars in thousands) 1999 1998
Finished goods $ 73 $ 112
Work in process 916 791
Raw materials, components and
Assemblies 2,763 2,845
______ ______
$ 3,752 $ 3,748
====== ======
F-12
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following:
(Dollars in thousands) 1999 1998
Land and improvements $ - $ 125
Buildings and improvements 26 6,111
Leasehold improvements 470 517
Machinery and equipment 3,686 4,285
Office furniture and fixtures 621 866
_____ ______
4,803 11,904
Less accumulated depreciation 3,976 7,437
_____ ______
$ 827 $ 4,467
===== ======
At the beginning of 1998, assets with a net book value of $878 thousand
consisting primarily of land, building and management information systems
were transferred from discontinued operations to continuing operations.
Construction in progress, included in buildings and improvements, was
approximately $1,371 thousand in 1998.
At the end of 1999, the Company was committed to approximately $387
thousand of future expenditures for new furniture, equipment and
fixtures.
Depreciation expense was $489, $317 and $216 thousand for 1999, 1998
and 1997, respectively. Repairs and maintenance expense was $166, $177
and $175 thousand for 1999, 1998 and 1997, respectively.
Prior to the sale of all land and buildings to Plug Power in 1999, the
cost and accumulated depreciation of buildings and improvements leased
to Plug Power was:
(Dollars in thousands) 1998 1997
Cost $ 1,547 $ 21
Accumulated depreciation (660) (17)
______ _____
$ 887 $ 4
====== =====
F-13
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Notes Receivable
Notes receivable consists of the following:
(Dollars in thousands) 1999 1998
Notes receivable with an interest
rate of 10%, interest and principal
due September 30, 1998 (A) $ 250 $ 250
Notes receivable with an interest
rate 10%, due in monthly installments
through September 30, 2002 263 341
______ _____
513 591
Less: Current portion (329) (327)
______ _____
$ 184 $ 264
====== =====
(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 L.A.B. The Company is
enforcing its rights with respect to the note and is currently litigating
for the collection of this note.
(6) Investment in Plug Power, L.L.C.
On June 27, 1997, the Company and Edison Development Corp. ("EDC"), a
subsidiary of DTE Energy Co. formed a joint venture, Plug Power, L.L.C.
("Plug Power"), to further develop the Company's Proton Exchange Membrane
("PEM") Fuel Cell technology. In exchange for its contribution of
contracts and intellectual property and certain other net assets that had
comprised the fuel cell research and development business activity of the
Technology segment (which assets had a net book value of $357 thousand),
the Company received a 50% interest in 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 "Investment in Plug Power"; the
assets contributed by the Company to Plug Power in fiscal 1997 had
previously been included in the assets of the Company's Technology
segment. See the supplemental disclosure regarding Contribution of Net
Assets to Plug Power in the Consolidated Statements of Cash Flows for
additional information regarding the assets contributed by the Company to
Plug Power. The Company recorded the carrying value of the net assets
contributed as its initial investment in Plug Power in recognition of the
nature of the venture's undertaking.
F-14
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Investment in Plug Power, L.L.C. (continued)
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 dollars (in cash, accounts receivable and research credits) to
Plug Power between August 5, 1998 and March 31, 1999 and recorded a
liability representing this obligation. 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
F-15
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Investment in Plug Power, L.L.C. (continued)
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 MTI 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 MTI 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 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.
The Company's total contributions to Plug Power (including contributions
of cash, assets, research credits, below market lease and real estate)
for the period commencing on June 27, 1997, and ending September 30,
1999 total $20.7 million.
During calendar 1999, Plug Power's equity increased approximately
$50.628 million primarily due to investments by investors. Of this
amount, $30.368 million was received in cash, $9.010 million in property
and services and $11.250 million represents mem