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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 (Fee Required)
For the fiscal year ended September 30, 1995
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period from ---------- to ----------
Commission file number 0-6890
MECHANICAL TECHNOLOGY INCORPORATED
(Exact name of registrant as specified in its charter)
New York 14-1462255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
968 Albany-Shaker Rd, Latham, New York 12110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518)785-2211
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act
$1.00 Par Value Common Stock
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this form 10-k. [ ]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
The aggregate market value of the registrant's Common Stock held by
nonaffiliates of the registrant on December 15,1995 (based on the
last sale price of $.44 per share for such stock reported by NASDAQ
for that date) was approximately $1,560,000.
As of December 15, 1995, the registrant had 3,568,868 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 28, 1996
PART I
ITEM 1: BUSINESS
Mechanical Technology Incorporated and its subsidiaries produce
products and render services in two business segments:
* Test and Measurement
* Technology
The major markets for these products and services are the electron-
ics, aerospace, capital goods, and defense industries. 61% of the
Company's revenues from operations were derived from product sales
in the Company's fiscal year ended September 30, 1995; the remain-
ing 39% of revenues were derived from technology support and
research and development contracts.
Mechanical Technology Incorporated was incorporated in New York in
1961. Unless the context otherwise requires, the "registrant",
"Company", "Mechanical Technology", and "MTI" refers to Mechanical
Technology Incorporated and its subsidiaries. The Company's
principal executive offices are located at 968 Albany-Shaker Road,
Latham, New York 12110 and its telephone number is (518) 785-2211.
Significant Developments in the Business
- ----------------------------------------
The Company's wholly owned subsidiary, United Telecontrol Electron-
ics, Inc. ("UTE") of Asbury Park, New Jersey, filed a voluntary
bankruptcy under Chapter 11 of the Federal Bankruptcy Code in April
1994. During October 1994, UTE commenced an orderly liquidation.
Accordingly, the Company no longer includes Defense/Aerospace
amongst its reportable business segments and UTE has been classi-
fied as a "discontinued operation" in the Company's Financial
Statements; prior year information has been restated to conform to
this treatment. (See Note 16 to the accompanying Consolidated
Financial Statements).
During November 1994, the Company sold all of the outstanding
capital stock of its subsidiary, ProQuip Inc. ("ProQuip") of Santa
Clara, CA for approximately $13.3 million. The sale resulted in a
gain of approximately $6.8 million. (See Note 17 to the accompany-
ing Consolidated Financial Statements). ProQuip's financial results
are included as part of the Company's Test and Measurement segment
for the periods covered by this Form 10-K until November 22, 1994
(the date of its sale).
Business Segments
- -----------------
The Company currently conducts business in two business segments:
Test and Measurement and Technology. (Certain financial informa-
tion regarding the Company's business segments is included in Note
19 to the accompanying Consolidated Financial Statements and is
incorporated herein by reference.) In the Test and Measurement
segment, the Company primarily produces products for sale, while in
the Technology segment the Company primarily performs technology
support and research and development under contract. The Company
believes its technology support and research and development
activities provide a competitive advantage to the product segments
through the performance of related research which, for the most
part, is funded by outside parties.
Test and Measurement
- --------------------
The Company derived 61% of its revenues from the Test and Measure-
ment segment in 1995. 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 Ling Electronics Inc., Advanced Products
Division, and L.A.B. Division. ProQuip Inc. was also included in
this segment prior to its sale on November 22, 1994.
Ling Electronics Inc., of Anaheim, California, designs, manufac-
tures, and markets electrodynamic and high-intensity-sound vibra-
tion test systems for product reliability testing and environmental
stress screening. This mode of testing is used increasingly by
industry and the military to reveal design and manufacturing flaws
in a broad range of precision products, from satellite parts to
computer components.
The Advanced Products Division designs, manufactures, and markets
high-performance test and measurement instruments and systems.
These products are categorized in two general product families:
noncontact sensing instrumentation and computer-based balancing
systems. The noncontact sensing instrumentation products utilize
fiber optic and capacitance technology and are used to perform high
precision position measurements for product design and quality
control inspection requirements. Designed for most manufacturing
environments, the MICROTRAK 7000 (tm), a new laser triangulation
sensor product, measures distance, displacement, vibration or
thickness without contact at various operating distances . The
computer-based balancing system (the PBS-4100 product line) is an
on-wing jet engine balancing system used by commercial and military
aircraft fleet maintenance personnel.
The L.A.B. Division designs, manufactures, and markets mechani-
cally- and hydraulically-driven test systems for package and
product reliability testing. Among other uses, this equipment
simulates the conditions a product will encounter during transpor-
tation 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
VALVIEW (tm) software for the VALIDATOR (tm) compression test
system is an example of a new product enhancement during the
current fiscal year.
The business units in the Test and Measurement segment have numer-
ous customers and are not dependent upon a single or a few custom-
ers.
Technology
- ----------
The Technology segment includes the Technology Division and Turbo-
netics Energy, Inc. The Company derived 39% of its revenues from
the Technology segment in 1995. The activities of the Technology
segment are directed toward the performance of research and devel-
opment and engineering and technical services for the government
and industrial customers, technology commercialization/product
development, intracompany support, and strategic/teaming relation-
ships with other companies. The Technology Segment, with special-
ized skills in mechanical and electrical engineering, is structured
into four business areas: machinery and components; power and
energy systems; monitoring and diagnostics; and new initiatives.
The machinery and components business area develops advanced
technology for rotating machinery systems including bearings and
seals, custom test equipment, and magnetic bearings. This business
area also provides a wide range of engineering support services
within the following specialties: machinery audit and failure
analysis; analysis of materials and evaluation of heat transfer,
thermodynamics, and stress; and generation of computer codes for
machinery design, analysis, and control, to government, industrial,
and utility customers.
The power and energy systems business area develops advanced
technology for fuel cells, flywheel-based energy systems, and
hybrid electric vehicle control systems. These systems are intended
to control, store, and generate electrical energy for industrial,
utility, and automotive customers with less environmental impact
than current systems.
The monitoring and diagnostics business area provides engineering
services, computer-based monitoring of high-value machinery, and
develops automated maintenance systems. Monitoring equipment and
services are offered to utility and industrial customers. Automated
systems are provided to U.S. Air Force logistic centers.
The new initiative business area is developing mapping systems and
advanced sensor applications. The mapping systems involve an inte-
grated package consisting of a structured light mapping system and
3D visualization software to support DOE environmental remediation
efforts. The advanced sensor applications employ fibre-optic
displacement, white-light interferometric, and precision capacita-
tive displacement technologies for both the commercial and govern-
ment market.
Finally, Turbonetics Energy Inc. ("Turbonetics") manufactured and
sold a commercial line of high efficiency steam turbines for
electric power generation in the 1 to 10 MW range, through waste
heat recovery application. During the current fiscal year, the
Company entered into an agreement to license the use of Turbonetics
developed technology and expected to benefit through royalty
income, however, this arrangement is being terminated. At this
time, Turbonectics will remain inactive and only the few remaining
outstanding commitments will be fulfilled.
The Technology segment, either directly or as a subcontractor,
received approximately 77% of its 1995 revenues (versus 66% in
1994) from various agencies of the U.S. Government; approximately
74% of the segment's revenues were derived from two agencies, the
Departments of Defense and Energy. Contracts with the U.S. Govern-
ment are subject to termination, at any time, by the Government
either for convenience or for other causes as determined by the
contracts. The Technology Group has had no government contracts
terminated which when terminated resulted in a material adverse
effect on the Company.
Backlog
- -------
The backlog of orders believed to be firm as of September 30, 1995
and 1994 is as follows:
1995 1994
------ ------
(In thousands)
Technology $ 2,809 $ 6,103
Test and Measurement 4,502 13,758
------- ------
Total $ 7,311 $19,861
======= =======
All amounts shown above have been awarded by government agencies or
released to manufacture by commercial customers; however, app-
roximately $70 thousand of the orders included in the September 30,
1995 backlog may not be filled during the Company's current fiscal
year (as compared to approximately $244 thousand not expected to be
so filled at the end of the prior year). Test and Measurement
includes backlog related to ProQuip of $0 and $10,086 thousand for
1995 and 1994, respectively. (See Note 17 to the accompanying
Consolidated Financial Statements).
Marketing and Sales
- -------------------
The Company sells its products and services through a combination
of a direct sales force, manufacturer's representatives, distribu-
tors and commission salesmen. Each business unit is responsible
for its own sales organization. Typically, the Company's product
businesses employ regional manufacturer's representatives on an
exclusive geographic basis to form a nationwide or worldwide
distribution organization; the business unit is responsible for
marketing and sales management and provides the representatives
with sales and technical expertise on an "as-required" basis.
To a great extent, the marketing and sales of the Company's larger
products and systems consist of a joint effort by the business
unit's senior management, its direct sales force, and manufacture-
r's representatives to sophisticated customers. The manufacturer's
representatives are compensated on a commission basis.
The Company's technology support and research and development
services are sold on a direct basis. Reputation and personal
contacts within the specialized technical areas are critical to the
identification and receipt of support contracts. The Company
believes it has an excellent reputation within the technical areas
in which it operates.
Research and Development
- ------------------------
The Company conducts considerable research and development. The
following table summarizes company- and customer-sponsored expendi-
tures on technology support, research and development, and product
development for the last three years:
1995 1994 1993
---- ---- ----
(In thousands)
Company-Sponsored $ 1,425 $ 3,270 $ 2,620
Customer-Sponsored 8,492 7,742 9,095
------ ------ ------
Total $ 9,917 $11,012 $11,715
====== ====== ======
While the amount estimated above as customer-sponsored research
activities is often not directly related to the development of new
products or the improvement of existing products, it is the belief
of the Company that these expenditures contribute to the growth of
the Company's technological base.
Product Protection
- ------------------
The Company holds numerous patents and rights in various fields of
technology. However, these patents, either individually or collec-
tively, are not believed to be material to the success of any of
the Company's business segments. The technology of the Company is
generally an advancement of the "state of the art", and the Company
expects to maintain a competitive position by continuing such
advances rather than relying on patents. Licenses to other compa-
nies to use Company-developed technology have been granted.
Licenses which have been granted or agreed to be granted have been
and are expected to be of benefit to the Company, though royalty
income received in recent years has not been material in amount and
is not expected to be material in the foreseeable future.
Competition
- -----------
The Company and each of its business segments are subject to
intense competition. In each of its business segments, the Company
faces competition from at least several companies, many of which
are larger than MTI and have greater financial resources. While
the business units in the Company's Test and Measurement segment
each have a major share of their respective markets, the Company
does not consider any of them to be dominant within its industry.
The Company's Technology Division has a negligible share of its
respective market and competes with dozens (and perhaps hundreds)
of competing providers of similar products and services, many of
whom have greater financial and technical resources.
The primary competitive considerations in the business segments in
which the Company operates are: product quality and performance,
price, and timely delivery. The Company believes that its research
and development skills and reputation are competitive advantages.
Employees
- ---------
The total number of employees of the Company and its subsidiaries
was 232 as of September 30, 1995, compared to 317 as of the begin-
ning of the fiscal year (Prior year numbers include 63 employees of
ProQuip, sold in November 1994).
Executive Officers
- ------------------
The executive officers of the registrant (all of whom serve at the
pleasure of the Board of Directors), their ages, and the position or
office held by each, are as follows:
Position or Office Name Age
------------------ ---- ---
President, R. Wayne Diesel 50
Chief Executive Officer,
Chief Operating Officer,
and a Director
Chief Financial Officer Stephen T. Wilson 43
Vice-President and General Manager Douglas McCauley 47
Technology Division
President and Chief Operating Officer, Stephen S. Sullivan 61
Ling Electronics Inc.
Vice-President and General Manager,
LAB Division and Advanced Denis P. Chaves 55
Product Division
Mr. Diesel was elected President and Chief Executive Officer of the
Company in February 1994. Prior to February 1994, he had been Chief
Financial Officer since 1991 and President since March 1993 of
Lawrence Management Group, and Treasurer of the Lawrence Insurance
Group, Inc. since March 1993. From 1988 until his association with
Lawrence Group, Inc., Mr. Diesel was Administrative Vice President
responsible for corporate administration, human resources and
strategic planning at KeyCorp. Previously, he held various executive
positions with the State of New York.
Mr. Wilson joined the registrant in March 1995 and was appointed Chief
Financial Officer. Prior to joining the registrant, he had been the
Manager-Corporate Accounting/Banking of Lawrence Management Group
since January 1991. Prior to 1991, he held various management
positions with Fleet Financial Group.
Mr. McCauley has been Vice-President and General Manager of the
Technology Group since August 1994. He was previously Director of
Business Development from January 1989 to September 1991 and from
October 1993 to August 1994. From October 1991 to October 1993 he had
been Vice President of Corporate Development for Chamberlain
Manufacturing Corporation, responsible for business conversion from
defense to commercial products. Prior to 1989, he held various
management positions with the General Electric Company.
Mr. Sullivan has been President and Chief Operating Officer of Ling
Electronics Inc., a wholly owned subsidiary of the Company, since
August 1992. Mr. Sullivan was previously Executive Vice President of
Ling Electronics Inc. from January 1990 through August 1992. Prior
to 1990, he held various management positions with Ling Electronics
Inc. since his employment in 1977.
Mr. Chaves has been Vice-President and General Manager of the
Company's Advanced Products Division since 1987 and Vice-President and
General Manager of the Company's LAB Division since January 1994.
Previously, he served as Manager of Corporate Marketing for the
Company from 1981 to 1987.
ITEM 2: PROPERTIES
The Company and its subsidiaries presently own or lease real estate
principally in New York and California. In management's opinion,
these facilities are generally well maintained and are adequate to
meet the Company's current and anticipated future needs.
Owned Properties
- ----------------
The Company's corporate headquarters and certain of its research and
development and manufacturing facilities are located in a three-
building complex of approximately 103,000 square feet on 38 acres in
Latham, New York, which is owned by the Company. This complex is
divided approximately equally between office and laboratory /
manufacturing areas. Corporate staff, the Technology Segment,
and the Advanced Products Division (part of the Test and Measurement
segment) are located at the Latham facility.
The property referred to in the preceding paragraph is subject to
mortgages to secure the Company's indebtedness described in Note 7 to
the accompanying Consolidated Financial Statements.
Leased Properties
- -----------------
The Company and its subsidiaries lease the following facilities in
which its various business units conduct operations; generally, these
are stand-alone low-rise buildings containing primarily manufacturing
space, with some portion of each used for office space.
Approximate Lease
Location Square feet Segment Used By Expires
-------- ----------- --------------- -------
Anaheim, CA 85,000 Test and Measurement June,1998
Malta, NY 18,000 Technology Dec.,1999
Skaneateles, NY 18,000 Test and Measurement June,1998
In addition to the above properties, the Company and its subsidiaries
lease several small offices for field engineering and/or marketing
personnel at various locations in the U.S. and U.K.
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 the
regular business activities, could relate to compliance with various
governmental regulations and requirements, or could be based on other
transactions or circumstances. Except for the matters described in
Notes 11, 12, and 16 to the accompanying Consolidated Financial
Statements (which description is incorporated herein by reference),
management of the Company does not believe there are any such
proceedings presently pending which, if ultimately resolved in a
manner adverse to the Company, would have a material adverse effect
on the Company's financial position.
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 1995.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock
- ---------------------------
In August 1994 the Company was notified by the National Association
of Securities Dealers, Inc. ("NASD") that it no longer met certain
minimum requirements to maintain the listing of its common stock on
the NASDAQ National Market System, or to be listed on the NASDAQ
Smallcap Market. Since that time, the Company's Common Stock has been
traded on the over-the-counter market and is quoted in the so-called
"pink sheets" published by the National Quotation Bureau or on NASD's
electronic OTC Bulletin Board under the symbol MTIX. Set forth below
are the highest and lowest prices at which shares of the Company's
Common Stock have been traded during each of the Company's last two
fiscal years.
High Low
---- ---
Fiscal Year 1995
First Quarter 3/8 1/16
Second Quarter 1-3/8 3/8
Third Quarter 2 1-1/4
Fourth Quarter 1-5/8 15/16
Fiscal Year 1994
First Quarter 3-5/8 1-3/4
Second Quarter 3-1/2 2-1/2
Third Quarter 3 3/4
Fourth Quarter 1 1/16
Number of Equity Security Holders
- --------------------------------- Approximate Number of Record
Title of Class Holders* (as of December 15,1995)
-------------- -------------------------
Common Stock, $1.00 Par Value 530
- ---------------------------------
*In addition, there are approximately 550 beneficial owners holding
stock in "street" name.
Dividends
- ---------
The Company has never paid cash dividends on its Common Stock.
Subject to the terms of the Company's loan agreements (described in
Note 7 to the accompanying Consolidated Financial Statements), under
which the payment of cash dividends is currently prohibited, 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 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:
(In thousands, except per share amounts)
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Net Sales $29,748 $40,234 $41,500 $42,462 $47,523
Income (Loss) from
Continuing Operations 2,922(1) 141 1,162 (335) (8,728)
Net Income (Loss) 2,922 (24,378) 1,056 57 (8,574)
Earnings (Loss) Per
Share:
From Continuing
Operations .82 .04 .33 (.09) (2.46)
Net (Loss) Inco .82 (6.91) .30 .02 (2.42)
As of September 30:
Total Assets 14,483 25,317 42,428 38,890 43,093
Long-term Obligations 6,222 2,144(2) 11,699 13,142 0(3)
- ---------------------
(1) Current year information contains ProQuip (sold in November 1994)
results through the sale date and the $6.8 million gain on its sale. All
prior periods include the results of ProQuip. (See Note 17 to the
accompanying Consolidated Financial Statements).
(2) Does not include approximately $8.0 million classified as a current
liability and paid in the first quarter of fiscal year 1995 from the net
proceeds received from the sale of a subsidiary in November 1994. (See
Note 7 to the accompanying Consolidated Financial Statements).
(3) Does not include $16.0 million classified as a current liability.
Consistent with 1995 data, prior years have been restated to reflect the
Defense/Aerospace segment as a discontinued operation. (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
The Company's United Telecontrol Electronics, Inc. ("UTE") subsidiary
filed for voluntary bankruptcy under Chapter 11 of the Federal
Bankruptcy Code in April 1994 and commenced an orderly liquidation in
October 1994, as described in Note 16 to the accompanying Consolidated
Financial Statements. Accordingly, UTE's results and the impact of the
liquidation on the Company's results have been classified as "discon-
tinued operations" in the Consolidated Financial Statements; prior
years information has been restated to conform with this treatment.
During the fourth quarter of fiscal 1995, UTE signed settlement
agreements with the various parties which resolve all outstanding dis-
putes and claims with the United States Government related to the
Maverick, AMRAAM, and Stinger missile programs. Under the terms of
these agreements, the Company would be released from performance
guarantees it had provided, and all claims against it associated
therewith. The Company and UTE in turn would release the government
from all claims for equitable adjustment under these contracts. This
settlement is subject to notification of the creditors and the entry of
a formal order of the bankruptcy court. The Company and UTE are also
party to a settlement agreement, which was reached with the official
committee of the unsecured creditors of UTE in a hearing before the
bankruptcy court. This settlement is also subject to the entry of a
formal order of the bankruptcy court.
The Company expects the final liquidation of UTE will occur during
fiscal year 1996. At that time any final adjustments to the Company's
financial statements as a result of the UTE bankruptcy will be made.
For 1995, no additional loss from discontinued operations was recorded
because the estimated net realizable value including the reserves for
future termination and liquidation costs recorded as of September 30,
1994 remains, in management's opinion, a reasonable estimate. A
$24,519,000 net loss was recorded in 1994 for discontinued operations,
including $15,415,000 to write down all assets to net realizable value
and establish a reserve for estimated future termination and liquida-
tion cost. In 1993 UTE recorded a $106,000 net loss.
Results of Operations: 1995 in Comparison with 1994
- ----------------------------------------------------
The following is managements's discussion and analysis of certain
significant factors which have affected the Company's results of
operations for 1995 compared to 1994. This discussion relates only to
the Company's continuing operations, which include ProQuip Inc. prior
to its sale in November 1994:
Sales for 1995 of $29,748,000 were $10,486,000 or 26% lower than 1994.
The decrease in sales was entirely attributable to the sale of
ProQuip. Excluding ProQuip, sales increased $2,161,000 or 9% in 1995
as compared to 1994.
Selling, general and administrative expenses for 1995 were 26.8% of
sales, versus 24.7% in 1994. Product development and research costs
for 1995 were 4.8% of sales versus 8.1% in 1994. The Company continues
to narrow the focus its internal research and development activities.
Due to continuing operating and cash flow losses at Ling Electronics,
Inc. ("Ling"), a $1,590,000 impairment loss was recognized in 1995 to
reduce the carrying value of the Company's investment in that subsid-
iary.
As reported in Note 17 to the accompanying Consolidated Financial
Statements, the Company sold its ProQuip subsidiary for $13,250,000
which resulted in a gain of $6,779,000 before income taxes.
1995 income from continuing operations of $2,922,000 was $2,781,000
higher than 1994. The increase is attributed to the $6,779,000 gain on
the sale of ProQuip reduced by the $1,590,000 impairment loss on Ling;
in addition, 1994 included a $1,856,000 gain on the sale of a building.
The Test and Measurement segment's financial results include ProQuip
until November 22, 1994, the date of its sale. The Test and Measurement
segment recorded sales of $18,140,000 in 1995, $11,581,000 lower than
the $29,721,000 in 1994. The decrease in sales was entirely attribut-
able to the sale of ProQuip. Excluding ProQuip, the Test and Measure-
ment segment reported a sales increase of $1,066,000 or 7%.
LAB, Advanced Products, and Ling divisions reported sales increases of
28%, 11%, and 3%, respectively. The Operating results of the Test and
Measurement segment for 1995 were a $1,889,000 loss (including an
impairment loss of $1,590,000; see Note 18 to the accompanying
Consolidated Financial Statements) as compared to a $2,172,000 profit
in the prior year. Excluding ProQuip and the impairment loss, the
operating results were a $997,000 loss as compared to a $1,897,000 loss
or a $900,000 reduction in operating losses, 1995 compared to 1994. All
divisions reported improvements, however, Ling reported an operating
loss of $1,979,000 (excluding impairment loss) for 1995 compared to
$2,572,000 loss for 1994. Ling's poor results reflect continued
inadequate margins, unfavorable adjustments to inventory, account
receivable write-offs, and severance cost associated with work force
reductions. Export license restrictions on certain of Ling's products,
imposed in the first quarter of the fiscal year 1995, caused numerous
inefficiencies and delays in shipments.
The Technology segment recorded sales of $11,608,000 in 1995,
$1,095,000 or 10% higher than the $10,513,000 recorded in 1994. The
operating loss for 1995 was $463,000 or a $1,440,000 improvement from
the $1,903,000 loss recorded in 1994. The segment's performance was
favorably impacted by work completed on a major new order along with
lower product development and selling expenses, partially offset by a
contract cost overrun of $243,000, and inventory write-offs of $160,000
on a contract with performance contingencies and $150,000 on
the unsuccessful funding of an anticipated project. Given the
historically low level of backlog, a continued improvement in fiscal
year 1996 will depend on success in procuring and fulfilling
orders within the fiscal year. The Technology division was reorganized
in late 1995 and continues to evolve to a business focused on develop-
ment of technology for products that meet emerging market needs.
Results of Operations: 1994 in Comparison with 1993
- ----------------------------------------------------
The following discussion relates to the continuing operation of the
Company:
Sales for 1994 of $40,234,000 were $1,266,000 or 3% lower than 1993.
The Technology segment reported sales decreases of $2,592,000 or 20%,
while the Test and Measurement segment reported a sales increase of
$1,326,000 or 5%. The 1994 income from continuing operations of
$141,000 was $1,021,000 lower than 1993. The decline is the result of
lower operating results for both the Technology and Test and
Measurement segments and a higher effective income tax rate, partially
offset by profit on the sale of real estate.
Selling, general and administrative expenses for 1994 were 24.7% of
sales, versus 23.5% in 1993. Product development and research costs
for 1994 were 8.1% of sales versus 6.3% in 1993.
As reported in Note 14 to the accompanying Consolidated Financial
Statements, the Company sold its facility located in the Town of
Colonie, New York, during 1994 with a resultant $1,856,000 gain before
income taxes.
The Test and Measurement segment's results include ProQuip, Inc.
("ProQuip") which was sold in November 1994. (See Note 17 to the
accompanying Consolidated Financial Statements). The Test and Measure-
ment segment recorded sales of $29,721,000 in 1994, $1,326,000 higher
than the $28,395,000 in 1993. ProQuip had a sales increase for 1994
over 1993 of $4,533,000, which was partially offset by a
$2,821,000 decrease by Ling Electronics, Inc. ("Ling"). Operating
profit for the segment were $2,171,000 in 1994 versus $3,022,000 in
1993. ProQuip recorded a $1,774,000 increase reflecting their higher
sales level. However, this increase was more than offset by a
$2,656,000 decrease recorded by Ling. Ling's poor results reflect the
sales decline noted above and unfavorable adjustments (mainly inventory
related) of $1,520,000 recorded in the fourth quarter. The Advanced
products and LAB Divisions both recorded operating income in 1994 close
to the amounts recorded in 1993.
The Technology segment recorded sales of $10,513,000 in 1994,
$2,592,000 lower than the $13,105,000 recorded in 1993. The operating
loss for 1994 was $1,524,000 higher than 1993, reflecting the sales
decrease noted above and a $400,000 write-down of a limited partner-
ship interest to its estimated realizable value.
Liquidity and Capital Resources
- -------------------------------
During the first quarter of fiscal year 1995, the Company sold its
ProQuip subsidiary for $13,250,000. The sale resulted in a gain of
$6,779,000. Approximately $8,000,000 of the net proceeds were applied
to the Company's term debt.
At September 30, 1995 cash and cash equivalents were $78,000 versus
$1,820,000 at September 30, 1994. Working capital was a positive
$594,000 at September 30, 1995 versus a negative $8,588,000 at fiscal
year-end 1994. Cash used by continuing operations was
$558,000 in 1995 versus $1,996,000 cash provided in 1994. Continued
operating losses at Ling was the most significant negative factor
impacting the cash used from operations. Line of credit borrowing at
September 30, 1995 was $3,408,000, while at September 30, 1994 there
was line of credit borrowing of the maximum $4,000,000. Capital was
used in 1995 to, among other things, increase inventories, reduce
liabilities and debt, and acquire capital equipment.
Capital spending for 1995 was $667,000, a slight increase from 1994
capital spending levels of $645,000.
During November 1995, the lending institution agreed to extend the
maturity of the Company's term debt to October 1998 with scheduled
principal payments outlined below. At fiscal 1995 year-end, the Company
had current installments on long-term debt of $738,000 and the
remaining balance of $1,260,000 due beyond fiscal 1996. The scheduled
principal payments on the Company's bank term loan are as follows:
$738,000 in fiscal year 1996, $604,000 in fiscal year 1997, $604,000 in
fiscal year 1998, and on October 31, 1998 the balance of $52,000 is
payable in full.
The Company has a line of credit available in the amount of
$4,000,000, of which $3,408,000 was outstanding on September 30, 1995.
In October 1995, the lending institution agreed to extend the maturity
of the line of credit until October 31, 1998 when the outstanding
balance becomes due and payable. This line of credit continues to be
collateralized by a guarantee from a former shareholder and expires on
October 31, 1998.
During December 1993 UTE borrowed $3,000,000 from a finance company.
The agreement states that the Company shall pay amounts due thereunder
which are not paid by UTE when due. The obligation matured in October
1994, which was subsequently extended to December 31, 1995; and on
December 27, 1995, the lender agreed to extend the due date until
December 31, 1996. UTE filed for bankruptcy under the Federal Bankrupt-
cy Code in April 1994, and commenced an orderly liquidation in October
31, 1994; any obligation the Company has under the agreement is not
affected by the UTE bankruptcy filing.
The Company anticipates that it will be able to meet the liquidity
needs of its continuing operations from cash flow generated by those
operations and borrowing under its existing line of credit, including
sufficient cash flow to make all payments due on its indebtedness
during 1996. However, the Company's ability to achieve these objectives
is dependent upon an orderly liquidation of its United Telecontrol
Electronics, Inc. subsidiary and attaining overall profitability and
positive cash flow. There is no assurance that the Company will be able
to achieve these objectives.
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 24 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 28,
1996 (the "1996 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 Infor-
mation" in the registrant's 1996 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 1996 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 Informa-
tion", in the registrant's 1996 Proxy Statement is incorporated herein
by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The financial statements filed herewith are set forth on the
Index to Consolidated Financial Statements on page F-1 of the
separate financial section which accompanies this Report, which is
incorporated by reference.
The following exhibits are filed as part of this Report:
Exhibit
Number Description
------- -----------
2.1 Purchase Agreement, dated as of November 23, 1994,
among the Registrant, ProQuip Inc. and Phase
Metrics(7)
3.1 Certificate of Incorporation of the registrant, as
amended(1)
3.2 By-Laws of the registrant, as amended(4)
4.1 Certificate of Amendment of the Certificate of
Incorporation of the registrant, filed on March 6,
1986 (setting forth the provisions of the Certificate
of Incorporation, as amended, relating to the
authorized shares of the registrant's Common Stock) -
included in the copy of the registrant's Certificate
of Incorporation, as amended, filed as Exhibit 3.1
hereto
4.20 Loan Agreement, dated as of June 1, 1987, between
the registrant and Chase Lincoln First Bank, N.A.
("Chase Lincoln"), relating to a $20,000,000 term loan
to finance the registrant's acquisition of United
Telecontrol Electronics, Inc. (the "UTE Loan
Agreement")(1)
4.21 First Amendment to Loan Agreement, dated as of
September 30, 1988, amending certain provisions of the
UTE Loan Agreement(1)
4.22 Second Amendment to Loan Agreement, dated as of
February 21, 1990, amending certain provisions of the
UTE Loan Agreement(1)
4.24 Third Amendment to Loan Agreement, dated as of
January 1, 1991, amending certain provisions of the
UTE Loan Agreement(2)
4.25 Form of Note, in the amount of $9,181,700, executed
by the registrant on January 1, 1991 to evidence its
indebtedness under the UTE Loan Agreement(2)
4.26 Form of Note, in the amount of $2,000,000, executed
by the registrant on January 1, 1991 to evidence its
indebtedness under the UTE Loan Agreement(2)
4.27 Form of Note, in the amount of $1,000,000, executed
by the registrant on January 1, 1991 to evidence its
indebtedness under the UTE Loan Agreement(2)
4.28 Mortgage, dated January 31, 1991, executed by the
registrant in favor of Chase Lincoln and securing the
registrant's obligation to Chase Lincoln, including
those under the UTE and ProQuip Loan Agreements(2)
4.30 Loan Agreement, dated as of September 30, 1988,
between the registrant and Chase Lincoln relating to
an $8,000,000 term loan to finance the registrant's
acquisition of ProQuip, Inc. (the "ProQuip Loan
Agreement")(1)
4.31 Negative Pledge Agreement, dated as of September 30,
1988, executed by the registrant in favor of Chase
Lincoln in connection with the ProQuip Loan
Agreement(1)
4.32 Security Agreement, dated as of September 30, 1988,
executed by the registrant in favor of Chase Lincoln
and securing the registrant's obligations to Chase
Lincoln, including those under the UTE and ProQuip
Loan Agreements (the "Chase Lincoln Security
Agreement")(1)
4.33 First Amendment to Loan Agreement, dated as of
February 21, 1990, amending certain provisions of the
ProQuip Loan Agreement(1)
4.34 Form of Note, in the amount of $3,375,817.80,
executed by the registrant on February 21, 1990 to
evidence its indebtedness under the ProQuip Loan
Agreement(1)
4.35 Amendment Number One to Security Agreement, executed
by the registrant on February 21, 1990, amending the
Chase Lincoln Security Agreement(1)
4.36 Mortgage, dated February 21, 1990, executed by the
registrant in favor of Chase Lincoln and securing the
registrant's obligations to Chase Lincoln, including
those under the UTE and ProQuip Loan Agreements(1)
4.37 Second Amendment to Loan Agreement, dated as of
January 1, 1991, amending certain provisions of the
ProQuip Loan Agreement(2)
4.38 Mortgage Modification and Allocation Agreement,
dated January 1, 1991, executed by the registrant and
Chase Lincoln(2)
4.40 Form of Payment Guaranty, dated as of September 1,
1988 [as of September 30, 1988, in the case of
ProQuip, Inc.], executed by the subsidiaries of the
registrant in favor of Chase Lincoln and guaranteeing
payment of the registrant's obligations to Chase
Lincoln, including those under the UTE and ProQuip
Loan Agreements(1)
4.41 Form of Negative Pledge Agreement, dated as of
September 30, 1988, executed by the subsidiaries of
the registrant in favor of Chase Lincoln in connection
with the ProQuip Loan Agreement(1)
4.42 Form of Security Agreement, dated as of September
30, 1988, executed by the subsidiaries of the
registrant in favor of Chase Lincoln and securing the
registrant's obligations to Chase Lincoln, including
those under the UTE and ProQuip Loan Agreements(1)
4.43 Acknowledgment, Confirmation and Further Agreement,
made as of February 21, 1990, executed by the
subsidiaries of the registrant in favor of Chase
Lincoln with respect to the registrant's obligations
under the UTE and ProQuip Loan Agreements(1)
4.50 Debt Restructure Agreement, made as of February 21,
1990, between the registrant, Chase Lincoln, and
Manufacturers Hanover Trust Company ("Manufacturers
Hanover"), providing for a restructuring of the
registrant's indebtedness to Chase Lincoln under the
UTE and ProQuip Loan Agreements and of the
registrant's outstanding indebtedness to Manufacturers
Hanover (the "MHTCo. Existing Debt"), among other
things(1)
4.55 Second Amendment to Debt Restructure Agreement, made
as of January 1, 1991, between the registrant, Chase
Lincoln, and Manufacturers Hanover, amending certain
provisions of the Debt Restructure Agreement(2)
4.56 Second Debt Restructure Agreement, as of July 22,
1992, between the registrant, Chase Lincoln First
Bank, N. A. ("CLFB"), and Chemical Bank ("Chemical"),
as successor in interest to Manufacturers Hanover
Trust Company, providing for a restructuring of the
registrant's indebtedness to CLFB under the UTE and
ProQuip Loan Agreements and of the registrant's
outstanding indebtedness to Chemical, among other
things(3)
4.63 Promissory Note, in the amount of $4,000,000 and
dated July 22, 1992, executed by the registrant to
evidence its indebtedness to Chemical from time to
time with respect to a line of credit in such amount
(The Chemical Line of Credit)(3)
4.64 Form of Payment Guaranty, dated as of July 24, 1992,
executed by Masco Corporation in favor of Chemical and
guaranteeing payment of the registrant's obligations
to Chemical under the Chemical Line of Credit(3)
4.65 Promissory Note, in the amount of $4,000,000 and
dated October 31, 1994, extending the maturity date
of the Promissory note dated July 22, 1992, executed
by the registrant to evidence its indebtedness to
Chemical under The Chemical Line of Credit(8)
4.66 Promissory Note, in the amount of $4,000,000 and
dated October 31, 1995, extending the maturity date
of the Promissory note dated October 31, 1994,
executed by the registrant to evidence its
indebtedness to Chemical under The Chemical Line of
Credit
4.67 Form of Payment Guaranty, dated October 31, 1995
executed by Masco Corporation in favor of Chemical and
guaranteeing payment of the registrant's obligations
to Chemical under the Chemical Line of
Credit
4.80 Amended and Restated Loan Agreement, dated as of
July 22, 1992, between the registrant and Chase
Lincoln First Bank, N.A., which amends, restates,
combines, and supersedes in full the UTE and the
ProQuip loan agreements(3)
4.81 Form of Note, in the amount of $5,000,000, executed
by the registrant on July 24, 1992 to evidence its
indebtedness to CLFB under the July 22, 1992 Loan
Agreement(3)
4.82 Form of Note, in the amount of $7,984,770, executed
by the registrant on July 24, 1992 to evidence its
indebtedness to CLFB under the July 22, 1992 Loan
Agreement(3)
4.83 Additional Mortgage Note, dated July 24, 1992,
executed by the registrant in favor of CLFB and
securing the registrant's obligation to CLFB under the
Loan Agreement(3)
4.84 Additional Mortgage and Security Agreement, dated as
of July 22, 1992, executed by the registrant in favor
of CLFB and securing the registrant's obligations to
CLFB(3)
4.85 Mortgage Consolidation, Spreader, Modification
Extension and Security Agreement, dated July 22, 1992,
executed by the registrant and CLFB(3)
4.86 Confirmation of Guaranties and Security Agreements,
dated July 22, 1992, executed by subsidiaries of the
registrant in favor of CLFB with respect to the
registrant's obligations to CLFB(3)
4.87 Consent and waiver, dated December 21, 1993, from
CLFB to the registrant with respect to the Amended and
Restated Loan Agreement(5)
4.88 Amendment One to Amended and Restated Loan
Agreement, dated as of August 1, 1994, between the
registrant and Chase Manhattan Bank, N. A. which
amends the Amended and Restated Loan Agreement to
defer the payment due on June 30, 1994(6)
4.89 Amendment Two to Amended and Restated Loan
Agreement with waiver, dated as of November 22,
1994, between the registrant and Chase Manhattan
Bank, N. A. which amends the Amended and Restated
Loan Agreement and waives any existing defaults.(8)
4.90 Additional Mortgage and Security Consolidation
Agreement, dated as of October 6, 1995 executed
by the registrant in favor of Chase Manhattan Bank,
N.A. and securing the registrant's obligations to
Chase Manhattan Bank, N.A.
4.91 Form of Note, in the amount of $340,000, executed
by the registrant on October 6, 1995 to evidence its
indebtedness to Chase Manhattan Bank, N.A. under the
July 22, 1992 Loan Agreement
4.92 Amendment Three to Amended and Restated Loan Agreement
with waiver, dated as of November 30, 1995, between
the registrant and Chase Manhattan Bank, N. A. which
amends the Amended and Restated Loan Agreement and
waives any existing defaults.
10.1 Mechanical Technology Incorporated Restricted Stock
Incentive Plan - filed as Exhibit 28.1 to the
registrant's Form S-8 Registration Statement No. 33-
26326 and incorporated herein by reference
10.3 MTI Employee 1982 Stock Option Plan(1)
10.4 Agreement, dated December 21, 1993, between UTE,
First Commercial Credit Corporation ("FCCC") and the
registrant, relating to an advance against certain
receivables.(5)
10.6 Agreement, dated June 2, 1993, between the
registrant and Mr. Harry Apkarian, Director, regarding
his employment.(5)
10.7 Agreement, dated February 22, 1994, between the
registrant and Mr. R. Wayne Diesel, President and
Chief Executive Officer, regarding his employment.(8)
10.8 Agreement, dated December 14, 1994, between
FCCC and the registrant, modifying the Agreement dated
December 21, 1993 relating to an advance against
certain receivables.(8)
10.9 Agreement, dated May 30, 1995, between FCCC and
the registrant, extending the maturity of the
Agreement dated December 14, 1994 relating to an
advance against certain receivables.
10.10 Agreement, dated June 28, 1995, between FCCC and
the registrant, extending the maturity of the
Agreement dated December 14, 1994 relating to an
advance against certain receivables.
10.11 Agreement, dated September 21, 1995, between FCCC
and the registrant, extending the maturity of the
Agreement dated December 14, 1994 relating to an
advance against certain receivables.
10.12 Agreement, dated October 25, 1995, between FCCC
and the registrant, extending the maturity of the
Agreement dated December 14, 1994 relating to an
advance against certain receivables.
10.13 Agreement, dated December 27, 1995, between FCCC
and the registrant, extending the maturity of the
Agreement dated December 14, 1994 relating to an
advance against certain receivables.
22.1 Subsidiaries of the registrant
- ------------------------------------------
Certain exhibits were previously filed (as indicated below) and
are incorporated herein by reference. All other exhibits for
which no other filing information is given are filed herewith:
(1) Filed as an Exhibit (bearing the same exhibit number) to
the registrant's Form 10-K Report, as amended, for its fiscal
year ended September 30, 1989.
(2) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-Q Report for its fiscal quarter ended
December 29, 1990.
(3) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-Q Report for its fiscal quarter ended June
27, 1992.
(4) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report for its fiscal year ended Septem-
ber 30, 1991.
(5) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report for its fiscal year ended Septem-
ber 30, 1993.
(6) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-Q Report for its fiscal quarter ended July
2, 1994.
(7) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 8-K Report dated November 23, 1994.
(8) Filed as an Exhibit (bearing the same exhibit number) to the
registrant's Form 10-K Report for its fiscal year ended Septem-
ber 30, 1994.
(b) No reports on Form 8-K were filed by the registrant during the
last quarter of the period covered by this Form 10-K Report.
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, 1995 by: /s/ R. Wayne Diesel
------------------- R. Wayne Diesel--------------------------
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/ Lawrence A. Shore Chairman of the Board of Directors 12/28/95
- -----------------------
Lawrence A. Shore
/s/ R. Wayne Diesel President, Chief Executive Officer,
- ----------------------- (Principal Executive Officer),
R.Wayne Diesel Chief Operating Officer, and a
Director "
/s/ Stephen T. Wilson Chief Financial Officer
- ----------------------- (Principal Financial and Accounting
Stephen T. Wilson Officer) "
/s/ Harry Apkarian Director "
- -----------------------
Harry Apkarian
/s/ Albert W. Lawrence Director "
- -----------------------
Albert W. Lawrence
/s/ Stanley Landgraf Director "
- -----------------------
Stanley Landgraf
/s/ E. D. O'Connor Director "
- -----------------------
E. D. O'Connor
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, 1995 and 1994 . . F-3 & F-4
Statements of Income for the Years Ended
September 30, 1995, 1994 and 1993 . . . . . . . . F-5
Statements of Shareholders' Equity for the Years Ended
September 30, 1995, 1994 and 1993 . . . . . . . . F-6
Statements of Cash Flows for the Years Ended
September 30, 1995, 1994 and 1993 . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . F-8 - F-22
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 consoli-
dated subsidiaries in amounts which together exceed 5% of the total
assets as shown by the most recent year-end consolidated balance
sheet.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Mechanical Technology Incorporated
We have audited the consolidated financial statements of Mechanical
Technology Incorporated and Subsidiaries listed in the accompanying
index in Item 8 of this Form 10-K. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Mechanical Technology Incorporated and Subsidiaries as of September 30,
1995 and 1994, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
September 30, 1995, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 13
to the financial statements, the Company has suffered operating losses
and negative cash flows from its continuing operations for the year
ended September 30, 1995, and has a shareholders' deficiency at
September 30, 1995. The Company's continuance is dependent on the
resolution of uncertainties surrounding the pending liquidation of the
Company's wholly owned subsidiary, United Telecontrol Electronics, Inc.
(Notes 1, 11 and 16), and its ability to achieve profitability and
adequate cash flow from operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regards to these matters are also described in
Note 13. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
/s/ Coopers & Lybrand L.L.P.
Albany, New York
November 22, 1995, except as to the information
in Note 7, for which the date is December 27, 1995
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1995 and 1994
(Dollars in thousands)
1995 1994
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 78 $ 1,820
Accounts receivable, less allowance of
$120 (1995) and $101 (1994) 6,793 11,625
Income taxes receivable - 122
Inventories 3,484 6,068
Escrow deposit 750 -
Deferred Income Taxes - 306
Prepaid expenses and other current assets 461 214
------- ------
Total Current Assets 11,566 20,155
Excess of cost over net assets of
acquired companies, net 59 1,726
Other 60 227
Property, Plant and Equipment, net 2,798 3,209
------- -------
$ 14,483 $ 25,317
======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, 1995 and 1994
(Dollars in thousands)
1995 1994
------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line-of-Credit $ 1,446 $ 4,000
Note Payable - 3,000
Current installments on long-term debt 738 9,038
Income taxes payable 13 -
Accounts payable 2,290 3,684
Accrued liabilities 3,729 6,265
Net liabilities of discontinued operations 2,756 2,756
------ ------
Total Current Liabilities 10,972 28,743
LONG-TERM LIABILITIES
Line-of-Credit 1,962 -
Note Payable 3,000 -
Long-term debt, net of current maturities 1,260 2,144
Deferred income taxes and other credits 779 848
------- -------
Total Liabilities 17,973 31,735
------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share,
authorized 15,000,000; issued 3,568,868
(1995) and 3,546,493 (1994) 3,569 3,546
Paid-in capital 12,856 12,944
Retained earnings (19,837) (22,759)
------- -------
(3,412) (6,269)
Foreign currency translation adjustment (20) (31)
Common stock in treasury, at cost,
3,000 shares (1995) and 10,200 (1994) (29) (100)
Restricted stock grants (29) (18)
------- -------
Total shareholders' equity (3,490) (6,418)
------- -------
$ 14,483 $ 25,317
======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, 1995, 1994 and 1993
(Dollars in thousands, except per share)
1995 1994 1993
------ ------ ------
Product revenue $18,516 $30,347 $28,710
Research & development revenue 11,232 9,887 12,790
------ ------ ------
Total revenue 29,748 40,234 41,500
Product cost of sales 12,616 19,033 17,399
Research & development contract costs 8,492 7,742 9,095
Selling, general and administrative
expenses 7,977 9,921 9,743
Product development and
research costs 1,425 3,270 2,620
Impairment loss on long-lived assets 1,590 - -
------ ------ ------
Operating (loss) income from
continuing operations (2,352) 268 2,643
Interest expense (1,081) (1,157) (1,170)
Gain on sale of subsidiary, ProQuip 6,779 - -
Gain on sale of building - 1,856 -
Other income (expense), net (338) (249) (40)
------ ------ ------
Income from continuing operations
before income taxes 3,008 718 1,433
Income tax expense 86 577 271
------ ------ ------
Income from continuing operations 2,922 141 1,162
Loss from discontinued operations - (24,519) (106)
------ ------ ------
Net income (loss) $ 2,922 $(24,378) $ 1,056
====== ======= ======
Earnings (loss) per share:
Continuing operations $ .82 $ .04 $ .33
Discontinued operations .00 (6.95) (.03)
------ ------- ------
Net income (loss) $ .82 $ (6.91) $ .30
====== ======= ======
The accompanying notes are an integral part of the consolidated
financial statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 1995, 1994 and 1993
(Dollars in thousands)
1995 1994 1993
------- -------- --------
COMMON STOCK
Balance, October 1 $ 3,546 $ 3,546 $ 3,546
Issuance of shares 23 - -
------- ------- -------
Balance, September 30 $ 3,569 $ 3,546 $ 3,546
======= ======= =======
PAID-IN-CAPITAL
Balance, October 1 $ 12,944 $ 13,049 $ 13,033
Restricted stock grants (88) (105) 16
------- ------- -------
Balance, September 30 $ 12,856 $ 12,944 $ 13,049
======= ======= =======
RETAINED EARNINGS
Balance, October 1 $(22,759) $ 1,619 $ 563
Net income (loss) 2,922 (24,378) 1,056
------- ------- -------
Balance, September 30 $(19,837) $(22,759) $ 1,619
======= ======= =======
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance, October 1 $ (31) $ (44) $ (8)
Adjustments 11 13 (36)
------- ------- -------
Balance, September 30 $ (20) $ (31) $ (44)
======= ======= =======
TREASURY STOCK
Balance, October 1 $ (100) $ (201) $ (149)
Restricted stock grants 71 101 (52)
------- ------- ------
Balance, September 30 $ (29) $ (100) $ (201)
======= ======= ======
RESTRICTED STOCK GRANTS
Balance, October 1 $ (18) $ - $ -
Grants issued (11) (18) -
------- ------- -------
Balance, September 30 $ (29) $ (18) $ -
======= ======= =======
SHAREHOLDERS' EQUITY
September 30 $ (3,490) $ (6,418) $ 17,969
======= ======= =======
The accompanying notes are an integral part of the consolidated finan-
cial statements.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended September 30, 1995, 1994 and 1993
(Dollars in thousands)
1995 1994 1993
-------- -------- --------
OPERATING ACTIVITIES
Income from continuing operations $ 2,922 $ 141 $ 1,162
Adjustments to reconcile net income to net cash
(used) provided by continuing operations:
Depreciation and amortization 837 1,017 1,379
Impairment loss on long-lived assets 1,590 - -
Gain on sale of building - (1,856) -
Gain on sale of subsidiary (6,779) - -
Deferred income taxes and other credits (1) 595 (392)
Foreign currency translation 11 12 63
Other (5) 463 (49)
Changes in operating assets and liabilities net
of effects from discontinued operations:
Accounts receivable 1,611 (824) (2,444)
Inventories (230) (50) 245
Escrow deposit (750) - -
Prepaid expenses and other current assets (19) 299 163
Accounts payable 355 499 850
Income taxes 394 (651) 553
Accrued liabilities (494) 2,351 728
------- ------- ------
Net cash (used) provided by continuing operations (558) 1,996 2,258
------- ------- ------
Discontinued Operations:
Loss from discontinued operations - (24,519) (106)
Adjustments to reconcile loss to net cash
(used) provided by discontinued operations:
Write-down of assets to net realizable value - 15,415 -
Changes in net assets/liabilities
of discontinued operations - 4,839 (1,515)
------- ------- ------
- (4,265) (1,621)
------- ------- ------
Net cash (used) provided by operations (558) (2,269) 637
------- ------- ------
INVESTING ACTIVITIES
Discontinued operations - - (335)
Purchases of property, plant & equipment (667) (645) (540)
Proceeds from sale of building - 1,959 -
Proceeds from sale of subsidiary, net of
cash balance and expenses 9,125 - -
------ ------- ------
Net cash provided (used) in investing activities 8,458 1,314 (875)
------ ------- ------
FINANCING ACTIVITIES
Net borrowings (payments) under line-of-credit (592) 1,000 1,440
Borrowings under note payable agreement - 3,000 -
Principal payments of long-term debt (9,050) (1,900) (1,508)
------- ------- ------
Net cash (used) provided in financing activities (9,642) 2,100 (68)
------- ------- -------
(Decrease) increase in cash and cash equivalents (1,742) 1,145 (306)
Cash and cash equivalents - beginning of year 1,820 675 981
------- ------- -------
Cash and cash equivalents - end of year $ 78 $ 1,820 $ 675
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
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.
Basis of Presentation
- ---------------------
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles applicable to a going concern, which
except as otherwise disclosed, assume that assets will be realized and liabil-
ities will be discharged in the normal course of business (See Note 13). As
described in Note 16, United Telecontrol Electronics, Inc. ("UTE"), a wholly
owned subsidiary which filed for bankruptcy under Chapter 11 of federal
bankruptcy laws in April 1994, commenced an orderly liquidation in October
1994. Accordingly, the financial results for UTE are reported as a discontin-
ued operation in the accompanying financial statements. At September 30, 1995
and 1994 the net liabilities of discontinued operations reflect UTE's pre- and
post-petition liabilities net of the estimated realizable value of the assets.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or market.
Depreciation and Amortization
- -----------------------------
Property, plant and equipment are stated at cost and depreciated using primar-
ily the straight-line method over their estimated useful lives ranging from 3
to 40 years. When assets are sold, retired or otherwise disposed of, the
applicable cost and accumulated depreciation or amortization are removed from
the accounts and the resulting gain or loss is recognized.
Excess of Cost Over Net Assets of Acquired Companies
- ----------------------------------------------------
Costs in excess of net assets acquired in business combinations are amortized
using the straight-line method over 20 to 35 year periods. Accumulated
amortization was $114,787 and $5,338,198 at September 30, 1995 and 1994,
respectively.
During fiscal 1995, the Company adopted the provisions of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of". This Statement requires that long-lived assets (e.g., goodwill)
be reviewed for impairment whenever events indicate that the carrying amount
of the assets may not be recoverable and provides guidelines for measuring the
impairment. Recoverability is based on estimated undiscounted future cash
flows. If the sum of the expected future cash flows is less than the carrying
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies (continued)
-------------------
amount of the asset, an impairment loss is recognized. Measurement of an
impairment loss is based on the fair value of the asset (See Note 18).
Income Taxes
- ------------
During 1993, the Company elected to adopt Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes", which was issued by
the Financial Accounting Standards Board (FASB) in February 1992.
Under SFAS 109, deferred tax consequences represent the future effects on
income taxes, as measured by the applicable enacted tax rate and provisions of
the enacted tax law, resulting from temporary differences and carryforwards,
at the end of the current year.
Revenue Recognition
- -------------------
Sales of products are recognized when products are shipped to customers.
Sales of products under long-term contracts are recognized under the percent-
age-of-completion method. Sales of contract research and development services
are also recognized on the percentage-of-completion method. Percentage-of-
completion is based on the ratio of incurred costs to current estimated total
costs at completion. Total contract losses are charged to operations during
the period such losses are estimated.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of the foreign subsidiary are translated at year-end
rates of exchange, and revenues and expenses are translated at the average
rates of exchange for the year. Gains and losses resulting from the transla-
tion of the foreign subsidiary's balance sheet are accumulated as a separate
component of shareholders' equity.
Statement of Cash Flows
- -----------------------
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and repurchase agreements with maturities of less than three months.
Reclassification
- ----------------
Certain 1994 and 1993 amounts have been reclassified to conform with the 1995
presentation.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Long-Term Contracts Receivable
------------------------------
Included in accounts receivable are the following:
(Dollars in thousands) 1995 1994
------ ------
U.S. Government:
Amounts billed and billable $ 2,722 $ 1,602
Retainage 396 536
------ ------
3,118 2,138
Commercial Customers: ------ ------
Amounts billed and billable 207 674
Retainage 223 175
------ ------
430 849
------ ------
$ 3,548 $ 2,987
====== ======
The balances billed but not paid by customers pursuant to retainage provisions
in contracts are due upon completion of the contracts and acceptance by the
customer. Based on the Company's experience, most retainage amounts are expected
to be collected within the ensuing year.
In addition, the Company periodically incurs costs in excess of funded contract
limits. Such costs are incurred in the expectation of future authorization by
the contract sponsor. Management believes these costs, classified as inventory,
will become billable and collectible.
(3) Inventories
-----------
Inventories consist of the following:
(Dollars in thousands) 1995 1994
------ ------
Finished goods $ 249 $ 197
Work in process 1,119 2,231
Raw materials, components and assemblies 2,116 3,640
------ ------
$ 3,484 $ 6,068
====== ======
(4) Property, Plant and Equipment
-----------------------------
Property, plant and equipment consist of the following:
(Dollars in thousands) 1995 1994
------ ------
Land and improvements $ 125 $ 125
Buildings and improvements 3,513 3,513
Leasehold improvements 694 709
Machinery and equipment 13,028 14,330
Office furniture and fixtures 1,755 1,952
------ ------
19,115 20,629
Less accumulated depreciation 16,317 17,420
------ ------
$ 2,798 $ 3,209
====== ======
Depreciation expense was $646,000, $813,000 and $1,170,000 for 1995, 1994 and
1993, respectively. Repairs and maintenance expense was $362,000, $417,000 and
$499,000 for 1995, 1994 and 1993, respectively.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Income Taxes
------------
As discussed in Note 1, the Company adopted SFAS No. 109, during the fiscal year
ended September 30, 1993. Under SFAS 109, the deferred tax assets and liabili-
ties are determined based on the temporary differences between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates. Prior to fiscal year 1993, the Company accounted for income taxes in
accordance with SFAS 96. As permitted by SFAS 109, prior period financial
statements have not been restated; the cumulative effect of adopting SFAS 109 on
prior years was not significant.
Income tax expense (benefit) consists of the following:
(Dollars in thousands) 1995 1994 1993
------ ------ ------
Current tax provision:
Federal $ - $ (477) $ 675
State 86 436 219
Deferred tax provision - 265 (392)
------ ------ ------
$ 86 $ 224 $ 502
====== ====== ======
The income tax (benefit) expense is reflected in the accompanying statements of
income as follows:
(Dollars in thousands) 1995 1994 1993
------ ------ ------
Continuing operations $ 86 $ 577 $ 271
Discontinued operations - (353) 231
------ ------ ------
$ 86 $ 224 $ 502
====== ====== ======
The Company's effective income tax rate from continuing operations differed from
the Federal statutory rate as follows:
1995 1994 1993
------ ------ ------
Federal statutory tax rate 34% 34% 34%
State taxes, net of
federal tax effect 2% 38% 7%
Amortization of goodwill 1% 1% 2%
Impairment loss on long-lived
assets 18% - -
Current FSC earnings
permanently deferred - - (10%)
Change in valuation allowances (9%) - -
Worthless stock deduction (40%) - -
Reversal of prior year contingencies - - (14%)
Other, net (3%) 7% -
------ ------ ------
3% 80% 19%
====== ====== ======
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Income Taxes (continued)
------------
The deferred tax assets and liabilities as of September 30, 1995 and 1994
consist of the following tax effects relating to temporary differences and
carryforwards:
(Dollars in thousands) 1995 1994
------ ------
Current deferred tax assets (liabilities):
Net deferral of income from
discontinued operations $ (295) $ -
Net operating loss - 1,134
Loss provisions for discontinued
operations - 2,458
Investment in subsidiary held for sale - 1,394
Bad debt reserve 41 35
Inventory valuation 261 467
Inventory capitalization 70 58
Vacation pay 180 195
Warranty and other sale obligations 50 201
Other 178 192
------ ------
485 6,134
Valuation allowance (485) (5,828)
------ ------
Net current deferred tax assets $ - $ 306
Noncurrent Deferred tax assets ====== ======
(liabilities):
Net operating loss $ 5,288 $ -
Property, plant and equipment (408) (493)
Other 200 187
Net long-term deferred tax asset ------ ------
(liabilities) 5,080 (306)
Valuation allowance (5,080) -
Other credits (779) (542)
Noncurrent net deferred tax asset ------ ------
(liabilities) and other credits $ (779) $ (848)
====== ======
During the year ended September 30, 1994, a valuation allowance of $5,828,000
was established. The valuation allowance at September 30, 1995 is $5,565,000.
During the year ended September 30, 1995, the valuation allowance decreased by
$263,000.
At September 30, 1995, the company had an unused Federal net operating loss
carryforward of approximately $15,553,000. The Federal net operating loss
carryforward if unused will begin to expire during the year ended September 30,
2009.
During 1995, the Company received a net cash refund for income taxes of $266,000
and, for 1994 and 1993 made cash payments for income taxes of $365,000 and
$312,000, respectively.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Accrued Liabilities
-------------------
Accrued liabilities consist of the following:
(Dollars in thousands) 1995 1994
------ ------
Contract billings in excess of
costs and estimated earnings $ - $ 1,911
Salaries, wages and related expenses 666 1,265
Interest expense 881 655
Deferred income - ProQuip sale 750 -
Warranty and other sale obligations 223 584
Acquisition costs 373 405
Commissions 269 397
Legal and professional fees 89 341
Contingent liabilities 185 150
Other 293 557
------ ------
$ 3,729 $ 6,265
====== ======
(7) Indebtedness
------------
Indebtedness consists of the following:
(Dollars in thousands) 1995 1994
------ ------
Term loan $ 1,998 $11,041
Note payable 3,000 3,000
Line-of-credit 3,408 4,000
Capitalized lease obligations - 141
------ ------
8,406 18,182
Less current portion 2,184 16,038
------ ------
$ 6,222 $ 2,144
====== ======
The Company paid $8,000,000 on its term loan as a result of the sale of the
Company's ProQuip subsidiary during November 1994. The loan agreement covering
the term loan was amended in November 1995 and now provides for principal
payments as follows: $738,000, fiscal year 1996; $604,000, fiscal year 1997;
$604,000, fiscal year 1998; and the balance of $52,000 is payable on October 31,
1998. The term debt is collateralized by accounts receivable, inventories, real
estate, machinery and equipment. The interest on the debt is payable monthly at
the rate of prime plus 1-1/2% (10.25% at September 30, 1995).
The Company borrowed $3,000,000 from a finance company in December 1993 and the
note payable agreement for this loan was modified in December 1994. On December
27, 1995, the lender agreed to extend the due date to December 31, 1996.
Interest is presently accruing at the rate of $1,250 per day (15.2% per annum).
The finance company has loans from an affiliate of the Company. Since the
modification in December 1994, one-third of the interest accrued is paid and as
of September 30, 1995 and 1994 accrued but unpaid interest was $781,000 and
$508,000, respectively.
The Company has a line of credit available in the amount of $4,000,000 with
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Indebtedness (continued)
------------
interest payable monthly at a rate of prime plus .625% (9.375% at September 30,
1995). As of September 30, 1995, the Company had standby letters of credit
outstanding of $89,400 against the line of credit. In October 1995 the maturity
date of the line of credit was extended and expires on October 31, 1998. The
line of credit is collateralized by a guarantee from a former shareholder.
The weighted average interest rate for the note payable and line of credit was
13.2%, 12.9%, and 6.6% during 1995, 1994, and 1993, respectively.
Cash payments for interest were $695,000, $1,109,000 and $1,139,000 for 1995,
1994 and 1993, respectively.
(8) Shareholders' Equity
--------------------
The Company has outstanding stock options which were granted under a 1982 Stock
Option Plan. All options are exercisable 20% per year, on a cumulative basis,
after a two-year waiting period and expire ten years and six months after they
are granted. The Plan expired in 1992 and no further options may be granted. At
September 30, 1995, options were outstanding and exercisable to purchase 5,000
shares at $6.50 per share. During 1995 and 1994, no options were exercised.
The Company has a Restricted Stock Incentive Plan, which awards restricted
common stock of the Company to officers and other key employees. During the
first quarter of 1995, 32,500 shares were granted, amounting to $14,375 based on
the market value of the stock at the date of grant. The Plan expired on December
31, 1994. During 1994, 15,000 shares were granted, amounting to $18,750 based on
the market value of the stock at the date of grant. For accounting purposes, the
value of the grants represents compensation, which has been deferred and is
being amortized over the 5-year and 10-year vesting periods. The shares granted
during 1995 and 1994 are recorded as a component of Shareholders' Equity. The
value of the grants, net of accumulated amortization and write-offs, was
$29,000 at September 30, 1995 and $18,000 at September 30, 1994.
The Company's term loan obligations prohibit the payment of dividends.
(9) Earnings (Loss) Per Share
-------------------------
Earnings (loss) per share is computed on the basis of the weighted average
number of shares outstanding plus the common stock equivalents which would arise
from the exercise of stock options, unless such common stock equivalents would
be anti-dilutive. Weighted average outstanding shares are: 1995, 3,559,789;
1994, 3,529,881; and 1993, 3,527,835.
(10) Pension Plans
-------------
The Company maintains a savings and retirement plan (Internal Revenue Code
Section 401(k) Plan) covering substantially all employees. The Company
plan allows eligible employees to contribute a percentage of their compensation;
the Company makes additional contributions in amounts as determined by
management and the Board of Directors. The expense for the plan was $346,000,
$420,000 and $420,000 for 1995, 1994 and 1993, respectively.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Commitments and Contingencies
-----------------------------
The Company may be obligated for certain environmental cleanup costs in
connection with the sale of a subsidiary in 1989, and is potentially liable for
another environmental matter as described in Note 12.
The Company guaranteed the performance of a contract of United Telecontrol
Electronics, Inc. ("UTE"), a wholly owned subsidiary which is now in liquidation
,as described in Note 16. In addition, UTE was served a subpoena, on March 12,
1990, by the Defense Criminal Investigative Services of the U.S. Government
Inspector General's office, for various records relating to UTE's performance of
a now completed government contract. During the ensuing investigation, UTE has
at all times cooperated with the Government. UTE entered into settlement
discussions with the United States Attorney's Office, the Air Force Debarment
Authority, and the Department of Justice. As a result of these discussions, in
December 1992 UTE entered a plea agreement under which it agreed to plead guilty
to one count of conspiracy to defraud the United States and one count of mail
fraud. Pursuant to this settlement agreement, in April 1993 UTE entered its plea
in United States District Court. UTE has recently signed settlement agreements
with the various parties which resolve all outstanding disputes and claims with
the United States Government. Under the terms of these agreements, the Company
would be released from performance guarantees it provided, and all claims
against it associated therewith. The Company and UTE in turn would release the
government from all claims for equitable adjustment under these contracts. This
settlement is subject to notification of the creditors and the entry of a formal
order of the bankruptcy court. The Company believes there will be no adverse
consequences to the Company in connection with any future agreements or actions
on these matters due to the bankruptcy status of UTE.
During 1994, two separate legal actions against the Company related to compensa-
tion matters were commenced by two former company officer/ directors. Management
is vigorously defending the actions and believes the likelihood of a loss in
either action is not probable. The final outcome of these actions is not
presently determinable and, therefore no provision for any liability that may
result has been recorded in the Company's financial statements.
In February 1995, Ling Electronics Inc. ("Ling"), a wholly owned subsidiary of
the Company, made a voluntary disclosure to the United States Department of
Commerce regarding unlicensed exports of certain products shipped in the first
four months of fiscal 1995. Ling is fully cooperating with the Office of Export
Enforcement which has not concluded its investigation or taken any action to
date. Possible administrative sanctions include: no action; a warning letter;
denial of export privileges; and/or imposition of civil penalties. Foreign sales
represent a significant portion of Ling's total revenue. The final outcome of
this matter is not presently determinable and, therefore no provision for any
liability that may result has been recorded in the Company's financial state-
ments.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Commitments and Contingencies (continued)
-----------------------------
Future minimum rental payments required under noncancelable operating leases are
$539,000, 1996; $536,000, 1997; $523,000, 1998; $495,000, 1999; and $452,000,
2000. Rent expense under all leases was $564,000, $672,000 and $626,000 for
1995, 1994 and 1993, respectively.
(12) Potential Environmental Liability
---------------------------------
The Company is potentially liable in connection with an environmental matter; no
amount is reflected in the Company's financial statements in respect to the
following:
In October 1989, the Environmental Protection Agency (EPA) issued an Order under
Section 106(a) of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA) alleging that there has been a release of
hazardous materials into the environment at a site in Malta, New York (Site) and
directing the respondents named in the Order, including the Company, to
undertake a remedial investigation and feasibility study (RI/FS) of the Site.
The Order states that responsibility to undertake the RI/FS (estimated to cost
between $1.5 and $2.5 million) is a joint and several obligation of the various
potentially responsible parties (PRPs), including the Company, named in the
Order. The PRPs named in the Order are most of the parties (other than federal
government agencies) who have at any time owned or operated any portion of the
Site, which, beginning in 1945, has been used primarily for development and
testing of rocket fuels, propellants and other propulsion systems. The Company
has leased a small portion of the Site, for unrelated activities, since 1976.
Since the Company believes that it has not been involved with the release of any
hazardous substances at the Site and that issuance of the Order to it is,
therefore, unjustified and an arbitrary and capricious abuse of EPA's discretion
under CERCLA, the Company has advised EPA that it cannot comply with the Order
(which became effective November 3, 1989). To date EPA has not, to the best of
the Company's knowledge, taken any steps to enforce the Order against the
Company; and, the Company understands that one of the other PRP's named in the
Order has been carrying out the RI/FS as directed by the Order.
While the Company believes that the expense (including any liability) it will
incur in connection with this matter will not be material, the costs that it
might incur to establish its nonresponsibility, should EPA seek to enforce the
Order against the Company, could be significant. At this time, however, the
Company is unable to estimate the amount of such costs. If EPA seeks to enforce
the Order against the Company and the Company is unable to establish that it is
not responsible, the Company could be liable for substantial amounts under
CERCLA, including fines of up to $25,000 per day for failure to comply with the
Order and punitive damages equal to as much as three times EPA's cost to
undertake the work itself.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Going Concern
-------------
The Company's ability to continue as a going concern, given its shareholders'
deficiency, is dependent upon achieving an orderly liquidation of its United
Telecontrol Electronics, Inc. ("UTE") subsidiary (See Note 16), and its ability
to demonstrate ongoing income and cash flow from operations. The orderly
liquidation of UTE is underway and appropriate Bankruptcy Court approvals are
expected to occur during calendar year 1996. Subsequent to year end, in October
and November 1995, the line of credit and term loan were extended for three
years, respectively. In addition, on December 27, 1995, the due date on the note
payable was extended to December 31, 1996. The Company's business plans
developed for fiscal 1996 are focused on achieving profitability and positive
cash flow. There is, however, no assurance that the Company will be able to
achieve these objectives.
(14) Related Party Transactions
--------------------------
During 1995 and 1994, the Company made several rental payments for laboratory
space to an officer/director of the Lawrence Insurance Group Inc. and purchased
various insurance coverage from the Lawrence Insurance Group Inc. or companies
owned directly or indirectly by the Lawrence Insurance Group Inc. totalling
$493,000 and $444,000, respectively. During 1993, the Company paid management
fees and purchased various insurance coverage from the Lawrence Insurance Group
Inc. or companies owned directly or indirectly by the Lawrence Insurance Group
Inc. for $560,000. (Several companies of the Lawrence Insurance Group Inc.
("LIG") collectively own approximately 24% of the Company's Common Stock. In
addition, an LIG subsidiary which is now in liquidation, owns an additional 25%
of the Company's Common Stock.)
During November 1993, the Company sold its facility located on New Karner Road
in the Town of Colonie, N.Y. to the Secretary\Director of the Lawrence Insurance
Group Inc. for $1,975,000. The sale resulted in a gain of $1,856,000 in fiscal
1994, of which $1,450,000 of the proceeds were utilized to reduce long-term
debt.
(15) Fourth Quarter Adjustments
--------------------------
During the fourth quarter of 1995, the Company recorded the following adjust-
ments: goodwill write-off, $1,590,000; inventory write-off and reserve
increases, $774,000; accounts receivable write-down and allowance increases,
$128,000; severance expenses, $35,000; and all other, $64,000. These adjustments
reduced fourth quarter and full year income before income taxes from continuing
operations by $2,591,000.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Discontinued Operations
-----------------------
The Company's United Telecontrol Electronics, Inc. ("UTE") subsidiary, the sole
component of the Defense/Aerospace segment, filed for voluntary bankruptcy under
Chapter 11 of the Federal Bankruptcy Code in April 1994. This action was taken
after UTE was notified by the U.S. Air Force that its $7.8 million Request for
Equitable Adjustment on the Advanced Medium Range Air to Air Missile ("AMRAAM")
launcher contract was denied. Subsequent to the bankruptcy filing, UTE attempted
to reorganize and continued to operate as a debtor-in-possession. However,
during October 1994, UTE commenced an orderly liquidation. Accordingly, the
Company no longer includes Defense/Aerospace amongst its reportable business
segments, UTE is reported as a discontinued operation at September 30, 1995, and
the consolidated financial statements have been reclassified to report
separately the net liabilities and operating results of the business. The
Company's prior years financial statements have been restated to conform to this
treatment.
In 1990, when the AMRAAM contract was awarded, the Company guaranteed the
performance by UTE on this contract. The guaranty states, among other things,
that if the Government terminates the AMRAAM launcher contract due to a default
by UTE and awards the uncompleted portion of the contract to another source at
a fair and reasonable price, the Company shall be liable for any excess costs
incurred by the Government as a result of such procurement and for the repayment
of any unrecouped partial payments, progress payments or advanced payments paid
to UTE by the Government. In addition, the guaranty provides that the Company
would be liable for all costs and expenses paid or incurred by the Government in
enforcing the guaranty. The Government has not terminated the contract due to
default. UTE has recently signed settlement agreements with the various parties
which resolve all outstanding disputes and claims with the United States
Government. Under the terms of these agreements, the Company would be released
from the performance guarantee it provided, and all claims against it associated
therewith. The Company and UTE in turn would release the government from all
claims for equitable adjustment under these contracts. This settlement is
subject to notification of the creditors and the entry of a formal order of the
bankruptcy court. The Company and UTE are also party to a settlement agreement,
which was reached with the official committee of the unsecured creditors of UTE
in a hearing before the bankruptcy court. This settlement is also subject to
entry of a formal order of the bankruptcy court.
Included in the fiscal 1994 loss from discontinued operations was a $15,415,000
before income tax charge to write-down the carrying value of all UTE related
assets to their estimated net realizable value, including the establishment of
a reserve for the future costs of the termination and final liquidation of UTE.
The Company expects that the final liquidation of UTE and related court approval
will occur in calendar year 1996. At that time the final adjustments will be
made.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Discontinued Operations (continued)
-----------------------
Discontinued operations consist of the following:
(Dollars in thousands) 1995 1994 1993
------- -------- -------
Sales $ 0 $ 2,299 $ 26,506
======= ======== =======
(Loss) income from operations
before income tax $ 0 $(24,872) $ 125
Income tax (benefit) expense 0 (353) 231
Net loss from discontinued ------- ------- -------
operations $ 0 $(24,519) $ (106)
======= ======= =======
The assets and liabilities of the Company's discontinued operations at September
30, 1995 and 1994 are as follows:
(Dollars in thousands) 1995 1994
-------- --------
Assets:
Cash $ 162 $ 78
Assets held for sale 1,658 2,400
-------- -------
Total Assets $ 1,820 $ 2,478
Liabilities: -------- -------
Post-petition liabilities $ 166 $ 824
Pre-petition liabilities 4,410 4,410
-------- -------
Total Liabilities $ 4,576 $ 5,234
-------- -------
Net Liabilities $ 2,756 $ 2,756
======== =======
(17) Sale of Subsidiary - ProQuip, Inc.
----------------------------------
On November 22, 1994, the Company sold all of the outstanding capital stock of
its ProQuip Inc. subsidiary to Phase Metrics of San Diego, CA. The Company
received $13,250,000 in cash from Phase Metrics and ProQuip forgave a $316,000
intercompany debt due from the Company. The net proceeds from the sale were used
to reduce term debt by $8,000,000 and to increase working capital by $3,776,000.
The sale resulted in a $6,779,000 gain, which was recorded during the first
quarter of fiscal year 1995. In addition, $750,000 of the net proceeds has been
escrowed to provide a fund for any indemnity payments that the Company may be
obligated to pay Phase Metrics. Any amount not required for this purpose will
be returned to the Company and will be recorded as income in a future period.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) Sale of Subsidiary - ProQuip, Inc. (continued)
----------------------------------
ProQuip, a component of the Test & Measurements segment, is included in the
Company's financial statements for the years ended September 30, 1995 (through
November 22, 1994, the date of its sale), 1994, and 1993 as follows:
(Dollars in thousands) 1995 1994 1993
------- ------- ------
Sales $ 2,584 $ 15,231 $ 10,698
======== ======== ========
Income from continuing operations
before income tax $ 730 $ 4,019 $ 2,302
Income tax expense 293 1,564 894
-------- -------- --------
Net Income $ 437 $ 2,455 $ 1,408
======== ======== ========
The following unaudited condensed pro forma income statement from continuing
operations for the year ended September 30, 1995 and 1994 reflects the effects
of the sale of ProQuip, assuming the sale had occurred October 1, 1993. The pro
forma adjusted results include a reduction of interest on term debt, assuming a
payment of $8,000,000 was made; a reduction of interest on the line of credit,
assuming the excess net proceeds after the term debt pay down are used to reduce
or pay down any outstanding line of credit balance; and interest income earned
on excess cash after the pay down of the term debt and line of credit.
(Dollars in thousands) 1995 1994
Pro Forma Pro Forma
--------- ---------
Sales $ 27,164 $25,003
======= =======
Operating Income $ (3,074) $ (3,801)
------- -------
Interest Expense 914 290
Other Income (expense), net (346) 1,670
------- -------
Income (loss) from continuing
operations before income tax (4,334) (2,421)
Income tax (benefit) expense (142) (645)
------- -------
Income (loss) from continuing
operations $ (4,192) $ (1,776)
======= =======
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Impairment Loss on Long-Lived Assets
------------------------------------
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
to be Disposed Of" (SFAS 121). SFAS 121 requires that long-lived assets and
identifiable intangibles to be held and used by an entity shall be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable.
During 1995, the Company elected to adopt the provisions of SFAS 121. According-
ly, the realizability of goodwill associated the Company's investment in Ling
Electronics, Inc. (Ling), a wholly owned subsidiary, was analyzed for impairment
due to its history of operating and cash flow losses. The Company determined
that the goodwill would not likely be recoverable based on the estimated future
cash flows at Ling. As a result, a $1,590,000 impairment loss was recognized to
reduce the carrying value of the Company's investment in Ling.
(19) Information on Business Segments
--------------------------------
The Company's operations comprise two business segments.
Technology - provides contract research and development,
design and prototype manufacturing services in mechanical
engineering, machinery dynamics and diagnostics, tribology,
electrical engineering, measurement science, and energy
technology.
Test and Measurement - develops and manufactures high-accuracy
inspection systems, shock and vibration testing systems, and
electronic instruments using noncontact measurement techniques.
The information below includes the results of ProQuip, Inc.
which was sold in November 1994 (See Note 17).
A summary of financial data for these business segments at September 30, 1995,
1994, 1993, and for the fiscal years then ended follows:
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19) Information on Business Segments (continued)
--------------------------------
(Dollars in thousands)
SALES
----------------------------------------------------
1995 1994 1993
------ ------ ------
Technology $11,608 $10,513 $13,105
Test and Measurement 18,140 29,721 28,395
------ ------ ------
$29,748 $40,234 $41,500
====== ====== ======
OPERATING INCOME (LOSS)
----------------------------------------------------
1995 1994 1993
------ ------ ------
Technology $ (463) $(1,903) $ (379)
Test and Measurement (1,889) 2,171 3,022
------ ------ ------
$(2,352) $ 268 $ 2,643
====== ====== ======
DEPRECIATION
----------------------------------------------------
1995 1994 1993
------ ------ ------
Technology $ 440 $ 510 $ 631
Test and Measurement 203 298 533
Corporate 3 5 6
------ ------ ------
$ 646 $ 813 $ 1,170
====== ====== ======
ASSETS EMPLOYED
-----------------------------------------------------
1995 1994 1993
------ ------ ------
Technology $ 5,753 $ 6,120 $ 7,772
Test and Measurement 7,492 18,167 15,134
Corporate 1,238 1,030 2,024
------ ------ ------
$14,483 $25,317 $24,930
====== ====== ======
CAPITAL EXPENDITURES
----------------------------------------------------
1995 1994 1993
------ ------ ------
Technology $ 227 $ 219 $ 352
Test and Measurement 437 426 184
Corporate 3 0 4
------ ------ ------
$ 667 $ 645 $ 540
====== ====== ======
The U.S. Government is the largest customer of the Technology segment and
accounted for 30%, 17% and 23% of consolidated revenues in 1995, 1994 and 1993,
respectively. The largest single government agency customer of the Technology
segment accounted for 23%, 12% and 12% of the Company's consolidated revenues in
1995, 1994 and 1993, respectively. The largest customer of the Test & Measure-
ment segment accounted for 7%, 13%, and 15% of consolidated revenues in 1995,
1994, and 1993, respectively.