<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended APRIL 30, 1995
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 0-4277
------
MAGNETIC TECHNOLOGIES CORPORATION
---------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 16-0961159
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
770 LINDEN AVENUE
ROCHESTER, NEW YORK 14625
-------------------------
(Address of principal executive offices)
(716) 385-8711
--------------
(Issuer's telephone number)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ] N/A
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
2,786,700 SHARES OF THE ISSUER'S COMMON STOCK WERE OUTSTANDING AS OF APRIL 30,
1995.
<PAGE> 2
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AT APRIL 30, 1995 AND JULY 31, 1994
<CAPTION>
ASSETS APRIL 30, 1995 JULY 31, 1994
-------------- -------------
<S> <C> <C>
Current assets:
Cash, including interest-bearing deposits of $91,550 and $312,000 at
April 30, 1995 and July 31, 1994, respectively $ 271,172 $ 399,861
Accounts receivable, less allowance for doubtful accounts of $27,000 and
$15,000 at April 30, 1995 and July 31, 1994, respectively 2,495,909 2,032,020
Inventories 3,394,981 2,602,256
Costs and estimated earnings in excess of billings on contracts in process 430,858 314,322
Deferred income taxes 309,270 309,900
Prepaid taxes, expenses and other current assets 151,792 101,913
------------ ------------
Current assets 7,053,982 5,760,272
Property, plant and equipment, net 4,063,816 3,636,153
Excess of cost over net assets acquired, net of accumulated amortization of
$124,802 and $117,748 at April 30, 1995 and July 31, 1994, respectively 58,790 65,844
Investment in affiliate 250,000
Deferred income taxes 477,100 477,100
Other assets 422,134 337,505
------------ ------------
$ 12,075,822 $ 10,526,874
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 3,147,103 $ 2,504,763
Note payable 526,108
Current portion of long-term debt and capital lease obligations 287,010 308,014
Billings in excess of costs and estimated earnings on contracts in process 285,565 93,234
------------ ------------
Current liabilities 4,245,786 2,906,011
Long-term debt and capital lease obligations 2,599,174 1,957,997
------------ ------------
Total liabilities 6,844,960 4,864,008
------------ ------------
Stockholders' equity:
Common stock - $.15 par value;
Authorized - 15,000,000 shares
Issued and outstanding - 2,786,700 and 2,739,857 shares at
April 30, 1995 and July 31, 1994, respectively 418,005 410,979
Stock warrants outstanding for 22,500 shares of common stock, valued at
$82,500, net of unamortized deferred expense of $52,170 and $67,335
at April 30, 1995 and July 31, 1994, respectively 30,330 15,165
Additional paid-in capital 7,646,405 7,541,058
Accumulated translation adjustment (115)
Accumulated deficit (2,863,763) (2,304,336)
------------ ------------
Total stockholders' equity 5,230,862 5,662,866
------------ ------------
$ 12,075,822 $ 10,526,874
============ ============
<FN>
See accompanying Notes to Financial Statements.
</TABLE>
2
<PAGE> 3
<TABLE>
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED APRIL 30, 1995 AND APRIL 30, 1994
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1995 APRIL 30, 1995 APRIL 30, 1994 APRIL 30, 1994
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $5,454,268 $16,323,042 $4,683,290 $13,293,197
Cost of sales 4,785,370 14,187,876 3,951,648 11,211,723
------------ ------------ ------------ ------------
Gross profit 668,898 2,135,166 731,642 2,081,474
Selling, general and administrative
expenses 1,147,297 2,532,002 692,886 1,949,485
------------ ------------ ------------ ------------
Operating (loss) earnings (478,399) (396,836) 38,756 131,989
Interest expense 63,950 174,396 38,108 104,291
Other income and expenses, net (4,952) (12,180) (1,353) (5,822)
------------ ------------ ------------ ------------
(Loss) income before income taxes and
change in accounting principle (537,397) (559,052) 2,001 33,520
Provision for income taxes 125 375 200 21,645
------------ ------------ ------------ ------------
(Loss) income before change
in accounting principle (537,522) (559,427) 1,801 11,875
Cumulative effect of a change in
accounting principle relating to
income taxes 676,000
------------ ------------ ------------ ------------
Net (loss) income (537,522) (559,427) 1,801 687,875
Accumulated deficit beginning (2,326,241) (2,304,336) (1,679,483) (2,365,557)
------------ ------------ ------------ ------------
Accumulated deficit ending ($2,863,763) ($ 2,863,763) ($1,677,682) ($1,677,682)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1995 APRIL 30, 1995 APRIL 30, 1994 APRIL 30, 1994
--------------------- ---------------------- --------------------- ----------------------
FULLY FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings per share:
(Loss) income before
change in accounting
principle ($.18) ($.18) ($.19) ($.19) $.00 $.00 $.00 $.00
Change in accounting
principle .23 .23
------ ------ ------ ------ ----- ----- ----- -----
Net (loss) income per
share ($.18) ($.18) ($.19) ($.19) $.00 $.00 $.23 $.23
====== ====== ====== ====== ===== ===== ===== =====
Weighted average number
of shares 2,920,249 2,913,696 2,920,248 2,916,358 2,957,150 2,961,094 2,955,390 2,968,722
========= ========= ========= ========= ========= ========= ========= =========
<FN>
See accompanying Notes to Financial Statements.
</TABLE>
3
<PAGE> 4
<TABLE>
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED APRIL 30, 1995 AND APRIL 30, 1994
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1995 APRIL 30, 1994
------------------ ------------------
<S> <C> <C>
Net cash (used) provided by operating activities ($ 85,188) $153,284
---------- ----------
Cash flows from investing activities:
Capital expenditures (836,627) (374,691)
Purchase of Magnetic Technologies Europe Limited, net of cash
acquired (511,721)
Proceeds from sale of property, plant and equipment 158,000
---------- ----------
Net cash used by investing activities (1,190,348) (374,691)
---------- ----------
Cash flows from financing activities:
New borrowings 1,631,518 360,000
Principal payments on borrowings and capital leases (597,044) (537,197)
Proceeds from exercise of stock options 112,500 5,000
Purchase and retirement of common stock (127) (5,319)
---------- ----------
Net cash provided (used) by financing activities 1,146,847 (177,516)
---------- ----------
Net decrease in cash (128,689) (398,923)
Cash and cash equivalents at the beginning of the period 399,861 1,041,687
---------- ----------
Cash and cash equivalents at the end of the period $271,172 $642,764
========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------
NINE MONTHS ENDED APRIL 30, 1995
Capital lease obligations of $111,807 were incurred when the Company
entered into a lease for new manufacturing equipment during the third quarter.
NINE MONTHS ENDED APRIL 30, 1994
Capital lease obligations of $597,263 were incurred when the Company
entered into a lease for new manufacturing equipment and refinanced an existing
equipment operating lease.
During the quarter ended April 30, 1994, the Company declared a
three-for-two stock split. In connection with the stock split, $137,021 of
additional paid-in capital was transferred to common stock issued and
outstanding.
See accompanying Notes to Financial Statements.
4
<PAGE> 5
MAGNETIC TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 1995
INTERIM ACCOUNTING POLICY
- -------------------------
The unaudited consolidated financial statements herein have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to these rules and
regulations.
The financial information included in this quarterly report should be read
in conjunction with the Company's most recent Form 10-KSB and annual report.
In the opinion of Management, the information furnished reflects all
adjustments necessary to present a fair statement of the financial condition,
results of operations and cash flows for the periods covered.
RECLASSIFICATIONS
- -----------------
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year presentation.
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of the Company
for the periods presented and the accounts of its wholly-owned foreign
subsidiary, Magnetic Technologies Europe Limited (MTE), as of March 1, 1995.
(See acquisition disclosures following.) All significant intercompany
balances, transactions and profits have been eliminated.
TRANSLATION OF FOREIGN CURRENCIES
- ---------------------------------
Assets and liabilities of MTE have been translated into U.S. dollars at
currency exchange rates in effect at the end of the balance sheet period.
Revenues and expenses have been translated at average exchange rates in effect
during the related income statement periods. Gains and losses resulting from
foreign currency translations have been included in the results of operations.
Gains and losses resulting from the translation of the foreign subsidiary
balance sheet have been recorded directly to the accumulated translation
adjustment, a component of stockholders' equity.
REVENUE RECOGNITION
- -------------------
The Company accounts for contracts for the manufacture of precision plastic
molds and custom tooling using the percentage of completion method of
accounting. Revenue is recognized in the ratio that costs incurred bear to
total estimated costs of the contracts. Contract costs include direct material
and labor costs as well as indirect costs related to contract performance.
Losses expected to be incurred are charged to operations in the period such
losses are determined.
INVENTORIES
- -----------
<TABLE>
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis and are summarized as follows:
<CAPTION>
APRIL 30, 1995 JULY 31, 1994
---------------- --------------
<S> <C> <C>
Raw material $1,984,354 $1,646,222
Work in process 1,092,742 745,819
Finished goods 317,885 210,215
---------- ----------
$3,394,981 $2,602,256
========== ==========
</TABLE>
5
<PAGE> 6
COSTS, ESTIMATED EARNINGS AND BILLINGS ON CONTRACTS IN PROCESS
- --------------------------------------------------------------
<TABLE>
The following is a summary of costs, estimated earnings and billings on
contracts in process:
<CAPTION>
APRIL 30, 1995 JULY 31, 1994
---------------- ----------------
<S> <C> <C>
Costs and estimated earnings $1,352,645 $1,330,160
LESS: Billings to date 1,207,352 1,109,072
---------- ----------
$ 145,293 $ 221,088
========== ==========
</TABLE>
<TABLE>
Costs, estimated earnings and billings are presented in the accompanying
consolidated balance sheets as:
<CAPTION>
APRIL 30, 1995 JULY 31, 1994
-------------- -------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
contracts in process $430,858 $314,322
Billings in excess of costs and estimated earnings on
contracts in process (285,565) (93,234)
-------- --------
$145,293 $221,088
======== ========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
<TABLE>
Major classifications of property, plant and equipment are as follows:
<CAPTION>
APRIL 30, 1995 JULY 31, 1994
-------------- -------------
<S> <C> <C>
Equipment under capital lease $ 844,202 $ 732,395
Machinery and engineering equipment 4,774,545 4,212,076
Furniture and fixtures 1,300,978 1,168,827
Leasehold improvements 493,898 448,608
Vehicles 105,006 51,052
Construction in process 407,959 238,435
---------- ----------
7,926,588 6,851,393
LESS: Accumulated depreciation and amortization 3,862,772 3,215,240
---------- ----------
$4,063,816 $3,636,153
========== ==========
</TABLE>
SALE OF PROPERTY, PLANT AND EQUIPMENT
- -------------------------------------
On March 31, 1995, the Company closed its Austro Mold Group Clearwater,
Florida plant. The Company had been previously shifting manufacturing from
that plant to Austro Mold's Rochester, New York, facility and had only three
remaining employees at the time of the plant closing. The Company sold the
machinery and equipment of the Florida plant to a local business for $158,000.
The Company recognized a $26,120 loss on the sale of those assets during the
third quarter of fiscal 1995.
6
<PAGE> 7
ACQUISITION
- -----------
In April, 1993, Magnetic Technologies Corporation (MTC) entered into an
agreement with the Cookson Group plc (Cookson) of London, England, in which the
two corporations formed a new company, Magnetic Technologies Europe Limited
(MTE), to manufacture and sell precision magnetic, electronic and mechanical
devices in Europe. Headquartered in Rochester, England, MTE was capitalized
with $1,000,000, of which $750,000 was contributed by Cookson for all of the
voting "A" shares of stock and $250,000 was contributed by MTC for all of the
non-voting "B" shares of stock, constituting a 25% interest in MTE. The
investment in MTE was accounted for under the cost method due to the Company's
inability to exercise significant influence over the operating and financial
policies of MTE.
Concurrent with the formation of MTE, the Company sold Cookson and MTE a
license for the use of the Company's technology in connection with the
manufacture of products to be sold in Europe and the Near East. Cookson paid
the Company $1,250,000 for the technology and the Company agreed to discontinue
selling to the European market. (The Company's export sales in the immediately
preceding twelve month period had aggregated $2,200,000.) At the closing of
the transaction, Cookson also placed a $1,040,000 order on behalf of itself and
MTE for the Company to produce manufacturing machinery and related software to
be shipped to England.
In March, 1994, Cookson sold certain of its businesses to Calder Group
Limited (Calder) and Calder's subsidiary, Magnet Applications Limited, became
the owner of all of MTE's voting "A" shares of stock. A year later, Calder
decided to dispose of certain of its operations, including MTE. On March 31,
1995, the Company acquired all of the voting shares of stock of MTE from
Calder's subsidiary. The acquisition was effective as of February 28, 1995 and
the accounts of MTE have been consolidated with those of the Company from
March 1, 1995 forward. The Company acquired MTE for $186,597 cash and a note to
Calder of $351,000 payable in equal monthly installments of $9,750 over a
thirty-six month period commencing May 1, 1995. The note payable to Calder has
no stated interest; therefore, interest on the note payable was imputed at a
rate of 9.25%. The balance of the note payable was $305,410 at April 30, 1995
and was reflected in the Company's consolidated balance sheet as current
portion of long-term debt of $98,470 and long-term debt of $206,940.
During the quarter ended April 30, 1995, the Company incurred a $312,302
write-down of its investment in MTE to account for an impairment in asset
value. This impairment in value primarily related to the write-down of MTE
fixed assets at the acquisition date for the amount of gross profit on those
assets that the Company had previously recognized. This write-down became
necessary when the Company acquired MTE. The acquisition of MTE was accounted
for under the purchase method. Prior to the acquisition, the Company accounted
for its 25% non-voting investment in MTE under the cost method. Under this
method, the Company assessed the valuation of its investment in MTE by
reviewing the monthly operating performance of that company to determine
whether any permanent impairment in the value of its investment had occurred.
MTE engages in the same business as the Company's traditional domestic
operations, namely, the design and manufacture of precision magnetic assemblies
for office equipment manufacturers. In the two years since its formation, MTE
has obtained business from the Company's prior customer in Europe, as well as
orders from new European customers. Management anticipates that MTE will reach
a break-even level within one year.
Subsequent to the closing of the acquisition agreement, MTE
adopted a revised Memorandum of Association and Articles of Association
establishing a single class of stock and containing provisions to facilitate
the Company's operation of the business from the United States.
Gordon H. McNeil, President and Chief Executive Officer of the Company, became
MTE's sole Director and its President. MTE has fewer than ten employees.
7
<PAGE> 8
The following table presents unaudited pro forma results of operations as
if the acquisition of MTE had occurred at the beginning of each of the periods
presented, after giving effect to certain adjustments for intercompany
transactions, depreciation, interest and related income tax effects. In
accordance with the regulations of the Securities and Exchange Commission,
extraordinary amounts have been excluded from the combined income statement and
earnings per share presentations. These pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of what would
have occurred had the acquisition been made at the beginning of the periods
presented or of results which may occur in the future. The unaudited pro forma
combined results should be read in conjunction with the historical financial
statements of MTC and with the historical financial statements of MTE as filed
with the Company's most recent Form 8-K. (See Part II - Other Information,
Item 6. Exhibits and Reports on Form 8-K.)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1995 APRIL 30, 1995 APRIL 30, 1994 APRIL 30, 1994
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $5,418,062 $16,367,091 $4,676,974 $13,027,124
Loss before extraordinary
item ($255,864) ($356,767) ($361,174) ($368,462)
LOSS PER SHARE BEFORE
EXTRAORDINARY ITEM:
Primary ($.09) ($.12) ($.12) ($.12)
Fully Diluted ($.09) ($.12) ($.12) ($.12)
WEIGHTED AVERAGE NUMBER
OF SHARES:
Primary 2,920,249 2,920,248 2,957,150 2,955,390
Fully Diluted 2,913,696 2,916,358 2,961,094 2,968,722
</TABLE>
EARNINGS PER SHARE OF COMMON STOCK AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------
Earnings per common share have been based on the weighted average number of
shares outstanding during the period after consideration of the dilutive effect
of stock options and stock warrants.
In November, 1993, the Company issued stock warrants for 22,500 shares of
common stock to an investment securities consultant. The warrants are
exercisable at a price of $5.00 per share of common stock and expire on
December 31, 1997. The warrants were valued at $82,500 utilizing the
Black-Scholes method of securities valuation. The deferred expense related to
the issuance of the warrants is being amortized ratably to expense over a
period of forty-nine months. The unamortized deferred expense was $52,170 at
April 30, 1995. The value of the outstanding warrants, net of unamortized
deferred expense, or $30,330, was reflected in stockholders' equity at
April 30, 1995.
The Company declared a three-for-two stock split which became effective
February 16, 1994. The split was approved by the Board of Directors to create
additional liquidity in the Company's stock and thereby provide a more
efficient trading market for shareholders. All per share data and information
concerning outstanding stock options and warrants presented have been
retroactively restated to reflect the impact of the stock split.
STOCK OPTIONS
- -------------
On March 8, 1995, the Company issued stock options to a director for the
purchase of 5,000 shares of the Company's $.15 par value common stock. The
options are immediately exercisable at a price of $4.63 per share until the
earlier of their expiration date on March 7, 2000, or after a specified period
upon termination of the director's position with the Company.
8
<PAGE> 9
CAPITAL EXPENDITURES
- --------------------
Capital expenditures for the nine month period ended April 30, 1995
amounted to $836,627. These expenditures were funded with advances on the
Company's bank line of credit and outstanding revolving bank note, proceeds
from the exercise of stock options and with working capital.
In addition to the above capital expenditures, the Company also acquired
manufacturing equipment for $111,807 which it financed under a five-year
capital lease.
INCOME TAXES
- ------------
Effective fiscal 1994, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), ACCOUNTING FOR INCOME TAXES. The
adoption of SFAS 109 changes the Company's method of accounting for income
taxes from the deferred method under Accounting Principles Board Opinion No. 11
(APB 11), Accounting for Income Taxes, to an asset and liability approach.
Previously, the Company deferred the past tax effects of timing differences
between financial reporting and taxable income. The asset and liability
approach requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities.
The adjustment to adopt SFAS 109 amounted to $676,000. This amount was
reflected in net income for last year's nine month period ended April 30, 1994
as the effect of a change in accounting principle. It primarily represents the
impact of adjusting deferred taxes to reflect the existing net operating loss
and tax credit carryforwards.
<TABLE>
The following is a summary of current and long-term prepaid and deferred
tax assets and the related valuation allowances:
<CAPTION>
AT APRIL 30, 1995
---------------------
<S> <C>
Current deferred tax assets:
Federal net operating loss carryforwards $102,000
State net operating loss carryforwards 27,000
Accrued vacation 77,472
Warranty reserve 37,017
Other deferred tax assets 65,781
------------
$309,270
============
AT APRIL 30, 1995
---------------------
Long-term deferred tax assets:
Federal net operating loss carryforwards $723,900
State net operating loss carryforwards 106,920
Federal investment tax credit carryforwards 81,000
State investment tax credit carryforwards 182,000
Other carryforward credits 52,000
Depreciation 187,846
Other deferred tax assets 19,034
------------
1,352,700
LESS: Valuation allowances 875,600
------------
$477,100
============
</TABLE>
The realization of the deferred tax assets related to the net operating
loss and tax credit carryforwards is dependent upon future taxable income. In
addition, if certain substantial changes in the Company's ownership should
occur, there would be an annual limitation on the amount of net operating loss
and tax credit carryforwards which could be utilized.
9
<PAGE> 10
BORROWINGS
- ----------
On March 13, 1995, the Company refinanced its bank line of credit and
revolving bank note with First National Bank of Rochester (First National).
While the Company's aggregate bank debt did not materially change, First
National offered a lower interest rate of .25% above prime than had the
Company's prior bank. The First National credit accommodation includes a
$2,000,000 revolving bank note which matures on March 1, 1997, but which the
Company has an option to then convert to a five-year term loan. The revolving
note requires monthly interest payments at prime plus .25% and had an available
balance of $193,350 at April 30, 1995.
First National also provided the Company with a $1,000,000 line of credit.
The Company had $473,892 of its bank line of credit available at April 30,
1995. In addition, the line of credit requires monthly interest payments at
prime plus .25%. Effective June 12, 1995, the bank increased the Company's
line of credit to $1,250,000.
The outstanding balance on the Company's $1,000,000 bank master lease line
of credit was $551,230 at April 30, 1995. The lease balance requires varying
rates of interest payments which were established at 275 points over the
Treasury Bill Index at the time of each borrowing. The master lease line of
credit with the Company's previous bank was terminated effective June 5, 1995,
as had been anticipated by Management.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Even though the Company's debt increased by reason of the acquisition of
its Austro Mold Group in November, 1992, and its acquisition of MTE in March,
1995, its current cash flow position should be adequate to fund the related
Austro Mold non-compete agreement payments as well as the interest and
principal on current long-term debt.
Operating cash flows decreased $238,356 for the nine month period ended
April 30, 1995 over the comparable period in fiscal 1994. The variance was
primarily the result of the Company's operating loss of $537,397 during the
third quarter. This loss included a write-down of $312,302 to account for an
impairment in asset value in connection with the acquisition of MTE. This
impairment in value primarily related to the write-down of MTE fixed assets at
the acquisition date for the amount of gross profit on those assets that the
Company had previously recognized. This write-down became necessary when the
Company acquired MTE. In addition, accounts receivable, inventories and
accounts payable balances increased due to higher volumes of sales activity in
fiscal 1995.
Investing cash flows decreased $815,657 for the nine month period ended
April 30, 1995 over the comparable period in fiscal 1994. The decrease was due
to two factors: increased capital expenditures for production equipment and
vehicles and the acquisition of MTE. The decrease was partially offset by the
$158,000 cash received for the sale of the Florida plant equipment.
Financing cash flows increased by $1,324,363 for the nine month period
ended April 30, 1995 over the comparable period in the prior year. The
variance was primarily due to advances on the Company's line of credit and
revolving bank note. In addition, proceeds from the exercise of stock options
increased by $107,500 over the prior year.
During the quarter ended October 31, 1994, the Company borrowed $500,000 on
its bank line of credit and repaid $200,000 during the same quarter. The
remainder of the funds were repaid during the second quarter of fiscal 1995
with the proceeds of a $300,000 advance on the Company's revolving bank note.
During the third quarter of fiscal 1995, the Company borrowed $526,108 on the
line of credit, the balance of which remained outstanding at April 30, 1995.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MAGNETIC TECHNOLOGIES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (UNAUDITED)
COMPARISON OF THE THREE MONTH AND NINE MONTH PERIODS ENDED
APRIL 30, 1995 AND APRIL 30, 1994
RESULTS OF OPERATIONS
- ---------------------
THREE MONTH PERIODS COMPARISON
The Company's net sales for the three months ended April 30, 1995 increased
$770,978 over the third quarter of fiscal 1994. The sales variance was
attributable to increased volumes for the Magnetic Assembly Group, primarily
with its major customer. Of the $770,978 increase, $227,053 was attributable
to MTE. In addition, the Austro Mold Group showed slight increases in sales
volumes near the end of the third quarter. Gross profit decreased $62,744 over
the comparable period in the prior year, or a decline from 15.62% to 12.26%.
The decrease in the gross margin resulted from (a) pricing pressure from the
Company's major customers, (b) the continued maturing of prior prototype
business into narrower margin production runs and (c) a change in the sales mix
from more labor intensive products to products with higher concentrations of
material components, which generally yield a lower margin. The Austro Mold
Group also experienced decreases in its gross margin due to continued
operational difficulties and inefficiencies in the injection molding
operations.
The three month period ended April 30, 1994 included several transactions
attributable to MTE: sales to MTE of $176,300, cost of sales of $59,894 and
gross profits of $116,406, as compared with sales of $959, cost of sales of
$480 and gross profits of $479 recognized during the three month period ended
April 30, 1995. Subsequent to the acquisition of MTE as of February 28, 1995,
intercompany sales of $85,028, cost of sales of $83,680 and gross profits of
$1,348 were eliminated in consolidation for that quarter.
Selling, general and administrative expenses increased $454,411 over the
comparable period of the prior year, of which $63,662 is attributable to MTE.
Included in this amount was a non-recurring expense of $312,302 related to an
impairment of assets related to the MTE acquisition. This impairment in value
primarily related to the write-down of MTE fixed assets at the acquisition date
for the amount of gross profit on those assets that the Company had previously
recognized. This write-down became necessary when the Company acquired MTE. A
large portion of the remaining increase in selling, general and administrative
expenses was due to higher costs for sales commissions and sales promotions
targeted at reducing the Company's dependence on its major customers. The
remainder of the variance resulted from increased expenditures for
compensation, travel expenses and depreciation. In addition, the Company
recognized a $26,120 loss on the sale of the Florida plant machinery and
equipment during the third quarter of fiscal 1995.
Interest expense increased $25,842 from the third quarter of fiscal 1994
due to higher interest rates in fiscal 1995, higher balances outstanding on the
Company's revolving bank note, as well as outstanding principal balances on the
Company's bank line of credit and master lease line.
Despite the favorable sales trend, the three month period ended April 30,
1995 resulted in a net loss of $537,522. Included in this amount was a
non-recurring expense of $312,302 related to the acquisition of MTE. The
operating loss for the period was $197,656 compared with an operating profit of
$2,00l in the comparable prior period. The loss was attributable to
operational difficulties at the Company's Austro Mold Group, a net loss of
$46,606 for MTE for the two month period since acquisition, as well as
increased selling, general and administrative costs.
11
<PAGE> 12
NINE MONTH PERIODS COMPARISON
The Company's net sales for the nine months ended April 30, 1995 increased
$3,029,845 over the same period last year. The sales variance was attributable
to increased volumes for the Magnetic Assembly Group, primarily with the
Company's major customer, and sales of $227,053 for MTE. The increase was
partially offset by a $356,235 decrease in sales for the Austro Mold Group.
Gross profit increased $53,692 over the comparable period in the prior year,
although the gross margin decreased to 13.49% from 15.66%. The gross margin
for the Magnetic Assembly Group decreased by 0.6% during the period from the
prior year, while the gross margin for the Austro Mold Group decreased by 12%.
The decreased margins were a result of (a) pricing pressure from the Company's
major customers, (b) the continued maturing of prior prototype business into
narrower margin production runs and (c) a change in the sales mix from more
labor intensive products to products with higher concentrations of material
components, which generally yield a lower margin. The Austro Mold Group also
experienced decreases in its gross margin due to costs associated with changes
in management for the injection molding and tooling operations, increased
depreciation expense, as well as operational difficulties and inefficiencies in
the injection molding operations, which resulted in increased costs of
approximately $225,000 for the nine month period despite a decline in sales.
The nine month period ended April 30, 1994 included several transactions
attributable to MTE: sales to MTE of $513,653, cost of sales of $301,640 and
gross profits of $212,013, as compared with sales of $311,627, cost of sales of
$282,388 and gross profits of $29,239 recognized during the three month period
ended April 30, 1995. Subsequent to the acquisition of MTE as of February 28,
1995, intercompany sales of $85,028, cost of sales of $83,680 and gross profits
of $1,348 were eliminated in consolidation for the third quarter of fiscal
1995.
Selling, general and administrative expenses increased $582,517 from the
comparable period of the prior year. Of this amount $63,662 was attributable
to MTE. Included in this amount was a non-recurring expense of $312,302
related to an impairment of assets related to the MTE acquisition. This
impairment in value primarily related to the write-down of MTE fixed assets at
the acquisition date for the amount of gross profit on those assets that the
Company had previously recognized. This write-down became necessary when the
Company acquired MTE. Sales commissions and sales promotion expenses increased
approximately $38,000 over the comparable period in fiscal 1994. These
expenditures were targeted at reducing the Company's dependency on its major
customers. The remainder of the variance resulted from increased expenditures
for compensation associated with changes in management, travel expense and
depreciation expense. In addition, the Company recognized a $26,120 loss on
the sale of the Florida plant machinery and equipment during the third quarter
of fiscal 1995.
Interest expense increased $70,105 due to higher interest rates in fiscal
1995, higher balances outstanding on the Company's revolving bank note, as well
as outstanding principal balances on the Company's bank line of credit and
master lease line.
The nine month period ended April 30, 1995 resulted in a net loss of
$559,427 compared to net income of $687,875 from the comparable period last
year. Included in the net loss was a non-recurring expense of $312,302 related
to the acquisition of MTE. Included in net income for the nine month period
ended April 30, 1994 was non-recurring income of $676,000 related to the
adoption of SFAS 109, which was effective August 1, 1993. The loss for the
nine month period ended April 30, 1995, before the impact of the non-recurring
expense, was $219,561 compared to income of $11,875 before the impact of the
non-recurring income in the prior year. The loss, which was incurred primarily
during the third quarter of fiscal 1995, was attributable to operational
difficulties at the Company's Austro Mold Group, a net loss of $46,606 for MTE
for the two month period since acquisition, as well as increased selling,
general and administrative costs.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
The Company filed a Form 8-K dated March 31, 1995 with the Securities and
Exchange Commission disclosing the acquisition of Magnetic Technologies Europe
Limited on March 31, 1995, the sale of the Austro Mold Group Florida plant
assets on March 31, 1995 and the refinancing of the Company's bank debt on
March 13, 1995. Included in the filing were pro forma consolidated financial
statements and notes related to the acquisition. Included as Exhibits to the
Form 8-K were the following:
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
1
Share Purchase Agreement relative to the Company's acquisition of Magnetic
Technologies Europe Limited
2 Revised Memorandum of Association and Articles of Association for Magnetic
Technologies Europe Limited
3 Credit Agreement, General Security Agreement, $2,000,000 Revolving Line of Credit
Note and $1,000,000 Commercial Line of Credit Note with First National Bank of
Rochester
4 Audited Financial Statements of Magnetic Technologies Europe Limited as of, and for
the year ended, December 31, 1993
5 Audited Financial Statements of Magnetic Technologies Europe Limited as of, and for
the year ended, December 31, 1994
</TABLE>
13
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MAGNETIC TECHNOLOGIES CORPORATION
Date: 6/14/95 By: /s/ Gordon H. McNeil
- -------------------------------- -----------------------------------------
Gordon H. McNeil, President and
Principal Executive Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1995; CONSOLIDATED BALANCE
SHEET AT APRIL 30, 1995; CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTH
PERIOD ENDED APRIL 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-START> AUG-01-1994
<PERIOD-END> APR-30-1995
<CASH> 271,172
<SECURITIES> 0
<RECEIVABLES> 2,522,909
<ALLOWANCES> 27,000
<INVENTORY> 3,394,981
<CURRENT-ASSETS> 7,053,982
<PP&E> 7,926,588
<DEPRECIATION> 3,862,772
<TOTAL-ASSETS> 12,075,822
<CURRENT-LIABILITIES> 4,245,786
<BONDS> 2,886,184
<COMMON> 418,005
0
0
<OTHER-SE> 4,812,857
<TOTAL-LIABILITY-AND-EQUITY> 12,075,822
<SALES> 16,323,042
<TOTAL-REVENUES> 16,323,042
<CGS> 14,187,876
<TOTAL-COSTS> 14,187,876
<OTHER-EXPENSES> 2,694,218
<LOSS-PROVISION> 4,000
<INTEREST-EXPENSE> 174,396
<INCOME-PRETAX> (559,052)
<INCOME-TAX> 375
<INCOME-CONTINUING> (559,427)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (559,427)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
