<PAGE> 1
[LOGO] "MASTERING THE CHALLENGE"
Dear Shareholder:
During fiscal 1995 we projected that revenues of our core business,
magnetic assemblies, would return to past levels and that, despite problems at
our Austro Mold Group, fiscal 1995 would be profitable.
It turned out that we were only partially correct. On one hand, our
Magnetic Assembly Group sales, spurred by growth in remanufacturing, not only
rebounded but reached a record high, increasing total Company revenues to $22
million, or 26% above fiscal 1994. On the other hand, the problems at our
Austro Mold Group proved to be more intractable than we had anticipated.
Although Austro Mold's tooling operation became profitable during the year and
we see signs of continuing improvement, there is much to be accomplished with
the plastic molding operation. During fiscal 1995 we closed Austro Mold's
Florida operation and took other remedial measures. We are taking further
corrective actions and fiscal 1996 will be the pivotal year that determines the
future of the Austro Mold Group in our Company.
In addition to the healthy sales increase, another achievement in fiscal
1995 was the reacquisition of our European business, at a price substantially
less than we received for our technology and the business two years ago.
Moreover, when we sold that business, it consisted of essentially one customer.
Now, because our new subsidiary, Magnetic Technologies Europe Limited (MTE),
operates from a European location under its own corporate identity, we are
already attracting additional customers in the Common Market. As a result of
the acquisition, accounting principles required us to write-down our investment
in MTE during the third quarter in order to eliminate part of the profit
recognized upon the sale of that technology in 1993. However, we believe the
benefit of returning to the European market with it's expanded sales potential
is worth the "reinvestment". We expect MTE to graduate from its start-up phase
and to become profitable during the current fiscal year.
Organizationally, our Board of Directors was strengthened this past year
with the addition of Bernard Kozel. Outside Directors now comprise a majority
of the Board and the Compensation Committee. The Audit Committee consists
entirely of outside Directors.
In the near term, your management is determined to resolve the operating
weaknesses at Austro Mold and to return the Group to profitability. In the
longer term, we believe that the Company has significant growth potential based
upon its record and reputation in the market for developing and manufacturing
high quality end components in the office equipment field.
Sincerely,
/s/ Gordon H. McNeil
- ------------------------
Gordon H. McNeil
President and CEO
<PAGE> 2
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No. 0-4277
MAGNETIC TECHNOLOGIES CORPORATION
Incorporated in Delaware I.R.S. Employer No. 16-0961159
770 Linden Avenue, Rochester, New York 14625
Telephone No. (716) 385-8711
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Names of exchanges on which registered
------------------- --------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock (Par Value $.15 per share)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past twelve 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[ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [ ]
The registrant's revenues for its most recent fiscal year ended July 31, 1995
were $22,209,634.
The aggregate market value of the registrant's voting common stock held by
nonaffiliates as of October 2, 1995 was approximately $10,879,649 (2,246,121
shares x $4.84375 average of bid and asked prices).
2,786,650 shares of the registrant's common stock were outstanding as of
October 2, 1995.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's proxy statement for the December 14, 1995 Annual Meeting of
Stockholders is incorporated by reference into Part III, Items 9, 10, 11 and 12
of this report.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
1
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) Business Development
Magnetic Technologies Corporation (the Company) is engaged in contract
manufacturing. Incorporated in 1969, the Company has historically concentrated
on designing and manufacturing magnetic, electronic and mechanical
subassemblies of copiers and printers for the electronic office equipment
manufacturing industry. Although the Company's Magnetic Assembly Group
constitutes its core business, in the past three years the Company has taken
the following actions both to diversify beyond magnetic assembly manufacturing
and to reduce its reliance on a single customer which previously accounted for
more than 90% of its revenues:
- In its fiscal year ended July 31, 1993 (fiscal 1993), the Company
purchased its Austro Mold Group, which designs and builds plastic
molds and manufactures custom injection molded plastic parts and
assemblies.
- In fiscal 1993, the Company licensed its European magnetic assembly
business to an English corporation in exchange for a one-time
licensing fee and equipment sale, plus a 25% passive interest in the
newly formed company, Magnetic Technologies Europe Limited (MTE).
- The Company has offered remanufacturing services in an effort to
obtain magnetic assembly business from office equipment manufacturers
with which it had obtained little or no business in the past.
The above actions, coupled with a $2,075,000 decline in magnetic assembly
deliveries in its fiscal year ended July 31, 1994 (fiscal 1994), served to
reduce the portion of the Company's revenues attributable to the single
customer (Xerox Corporation and its English subsidiary) to 66% in fiscal 1993
and 61% in fiscal 1994. However, two positive achievements during the
Company's most recent fiscal year ended July 31, 1995 (fiscal 1995) had the
ancillary effect of increasing the portion of the Company's business
attributable to Xerox to 74%.
1. The Company's core business experienced a sales rebound in
fiscal 1995. Magnetic Assembly Group revenues, including remanufacturing
business, climbed $4,446,000, or 36%, due to new Xerox orders.
2. In the third quarter of fiscal 1995, the Company reacquired
its European business by purchasing the remaining 75% interest in MTE at a
purchase price considerably below the licensing fee originally received by
the Company for that business. (The terms of the MTE acquisition were
reported by the Company in a Form 8-K Report dated March 31, 1995.)
Although MTE has diversified its customer base and it is expected to
further diversify, much of MTE's fiscal 1995 sales were to a Xerox
subsidiary.
On the negative side, the Austro Mold acquisition has not been a success to
date. In fiscal 1994, the Austro Mold Group suffered both a sales decline and
cost overruns, resulting in a $836,000 operating loss for the Group. At the
beginning of fiscal 1995, the Company replaced the Vice President in charge of
the Austro Mold Group with an experienced plastics industry executive. Since
then, management has taken corrective actions with respect to controlling
costs, and has closed Austro Mold's Florida plant. Although Austro Mold's
tooling operation returned to profitability in fiscal 1995, its plastics
molding operation did not, and total Austro Mold sales declined further, with
the Group incurring a $1,250,000 loss. In the short term, management is
concentrating attention on Austro Mold's plastics molding operations. In the
longer term, management views the current fiscal year as a defining, or
pivotal, year in which the future of Austro Mold will be determined.
In fiscal 1994, magnetic assembly operating profits were insufficient to
offset the Austro Mold Group losses; however, the Company also recorded
$676,000 of nonrecurring income due to a change in accounting principle related
to income taxes, resulting in a modest net profit for the Company. During
fiscal 1995, the Magnetic Assembly Group operating profits increased consistent
with sales, but this increase was more than offset by the Austro Mold Group
loss. In addition, in connection with its acquisition of MTE, the Company
recorded a $312,000 write-down related to an impairment in asset value and
costs related to the acquisition, plus MTE incurred a $98,000 operating loss
for the five month period ended July 31, 1995. In total, while the Company's
revenues increased 26% to $22,210,000 in fiscal 1995, the Company incurred a
$775,000 net loss.
2
<PAGE> 4
(b) Business of Issuer
The Company's contract manufacturing business consists of the development,
manufacture and assembly of products to the OEM market in various stages, from
engineering and design, to prototypes, to production runs. The products
currently consist of (1) precision magnetic, electronic and mechanical devices,
(2) the remanufacturing of components and subassemblies for reuse by office
equipment manufacturers, (3) precision plastic molds (tooling) and (4) custom
injection molded plastic parts and assemblies.
The Magnetic Assembly Group, including the Company's remanufacturing
operations, operates out of the Company's main facility in Rochester, New York,
marketing its products primarily to United States original equipment
manufacturers by direct sales. The Austro Mold Group operates out of a
separate Rochester plant utilizing a combination of direct sales and
manufacturers' representatives. The Company's wholly-owned European
subsidiary, MTE, operates out of a facility in Rochester, England, marketing
magnetic assemblies to European manufacturers by direct sales. The Company
promotes business by providing engineering, design and prototype services to
assist manufacturers in the development of new products. These services often
result in the Company obtaining production orders after the related products
evolve from prototype stages.
The Company's magnetic assembly business competition includes Hitachi in
Japan, GenCorp in the United States and several smaller service companies;
however, more competition is provided by the in-house capabilities of the
Company's customers. Quality and price are both important factors in the
marketplace. In the area of quality, the Magnetic Assembly Group has
historically been able to compete with the high standards established by the
Japanese, but has faced not only pricing pressure from competitors but also
continual pressure from its principal customer to lower prices. Management
believes that the Company's proprietary "reaction in mold" (RIM) injection
molding process utilized in the manufacture of magnetic brush cores provides it
with a competitive advantage.
The Austro Mold Group has numerous competitors in both plastic mold tooling
and plastic injection molding. Previously, management believed that Austro
Mold held a competitive edge based upon its ability to offer customers both the
precision design and manufacture of custom molds as well as thermoplastic
injection molding of parts and assembly services. However, Austro Mold's
performance during the past two fiscal years suggests that the combination of
tooling and plastic molding services may not provide a significant competitive
edge or, if so, that any such advantage is outweighed by other competitive
deficiencies which have prevented Austro Mold from retaining or obtaining
sufficient volume at adequate margins to cover its overhead.
As a result of the Company's acquisition of all of the outstanding shares
of MTE in the third quarter of fiscal 1995, MTE's operating results for five
months were included with the Company's fiscal 1995 results. MTE is currently
operating at a sales volume of approximately $150,000 per month. It has
obtained business from the Company's prior European customer, a Xerox
subsidiary, but has also generated orders from new European customers.
Management expects MTE to operate on a break-even basis by the end of the
current fiscal year.
Magnets, the Company's key raw material for magnetic assemblies, are
available through six suppliers, no one of which dominates the industry. Two
of the suppliers (Stackpole Corporation and GenCorp) are located in the United
States, while the other four are Japanese firms. All of the vendors deliver
acceptable quality materials, and in recent years supplies of magnets have
generally been readily obtainable. The basic components for manufacturing
plastic molds and injection molded plastic parts are various metals and
engineered thermoplastic resins, commodities that are available from numerous
sources.
Since Xerox Corporation continues to be a major customer of the Company
[see Item 1 (a) of this report] the loss of Xerox as a customer would have a
material adverse impact on the Company and would create a substantial burden to
replace the lost business. The Company is continuing to work with Xerox in
finding methods of reducing their mutual reliance upon each other.
3
<PAGE> 5
The Company has no material patents, trademarks, licenses, franchises,
concessions, royalty agreements or labor contracts. However, the Company's
proprietary RIM process is important to its business. No material portion of
the Company's products or services is dependent upon governmental approvals,
nor do existing or probable governmental regulations materially affect the
Company's business. Compliance with environmental statutes and regulations has
not had a material effect on the Company's capital expenditures, earnings or
competitive position in the past three fiscal years.
The Company does not invest a significant amount in company-sponsored
research and development activities, having spent $6,000, $50,000, and $110,000
on such activities in fiscal years 1995, 1994, and 1993, respectively. Because
of the integration of its engineering and manufacturing operations, the Company
cannot readily identify the amounts spent on customer-sponsored research and
development activities.
The Company had 117 full-time employees at October 2, 1995.
ITEM 2. DESCRIPTION OF PROPERTY
The Company operates out of three leased facilities, as described below.
The Company's corporate headquarters, core engineering staff and domestic
magnetic assembly manufacturing operations, including remanufacturing
operations, are located in a 70,000 square foot building at 770 Linden Avenue,
Rochester, New York. The facility is in good condition and management believes
that it has sufficient capacity to house between $18,000,000 to $20,000,000 of
sales volume per year. Under the terms of its lease expiring October 31, 2000,
the Company pays rent of $30,468 per month. The landlord of the building is
Linden Properties, a partnership in which one partner is the Chairman of the
Company's Board of Directors and holder of more than 5% of the Company's common
stock and the other partner is also an owner of more than 5% of the Company's
common stock.
Prior to the Company's termination of its Florida operation during fiscal
1995, the Austro Mold Group was housed in two facilities, both under leases
with the former owners of that business. Austro Mold's only current facility
consists of three buildings aggregating 40,000 square feet and located at 3
Rutter Street, Rochester, New York. The rent is $13,650 per month through
December 1997. The Company has two five-year renewal options with rental
adjustments based upon fluctuations in the cost of living index. These
buildings are in good condition and are adequate to support the Company's
plastic mold tooling and injection molding operations up to approximately
$7,500,000 of sales volume per year. The Company has a right of first refusal
to match any purchase offer for the property received by the landlord at any
time during the lease term and also has an option to purchase the property at
the end of the initial lease term at the then appraised value. The lease for
Austro Mold's former Florida facility in Clearwater expires on December 31,
1995, with a rental of $3,326 per month. The remainder of the noncancelable
rental expense associated with the Florida facility is accrued at July 31,
1995.
MTE operates out of an 8,350 square foot facility in Rochester, England as
a tenant at will terminable by either party upon 30 days notice. The location
is adequate to house up to approximately $4,000,000 of annual sales volume;
more than twice its current volume. Because the MTE operation is presently
relatively small, it could be easily moved to a more permanent location in
England if a substantial volume increase made such a move necessary or
desirable.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
4
<PAGE> 6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock is traded on the over-the-counter market and is
reported under the symbol "MTCC" on the National Association of Securities
Dealers Automated Quotation System (NASDAQ). The high and low bid prices of
the Company's common stock for each quarter during the past two fiscal years
were as follows:
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1994
---------------- ----------------
HIGH LOW HIGH LOW
---- ---- ---- ----
<S> <C> <C> <C> <C>
First Quarter (August - October) $5.50 $4.00 $7.09 $3.83
Second Quarter (November - January) $5.38 $4.25 $7.00 $5.00
Third Quarter (February - April) $5.38 $4.25 $7.00 $5.00
Fourth Quarter (May - July) $5.88 $4.75 $5.38 $4.00
</TABLE>
Note: The above quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions, and may not represent
actual transactions. Quotations for the first two quarters of
fiscal 1994 have been restated to reflect the effect of a
subsequent three-for-two stock split.
(b) Holders
On October 2, 1995, the Company had 4,655 stockholders of record, plus an
unknown number having their shares registered in "street name" or in the name
of a nominee.
(c) Dividends
The Company paid no cash dividends on its common stock during the past two
fiscal years and is unlikely to do so in the near future. Future profits are
more likely to be utilized to improve the Company's working capital base or to
fund an acquisition. Under its current loan arrangements, the Company cannot
pay cash dividends without approval of its bank.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company experienced a $4,593,000, or 26%, sales increase in fiscal
1995, most of which was attributable to its Magnetic Assembly Group. Magnetic
assemblies, including remanufacturing, had revenues of $16,969,000, a
$4,446,000 increase over fiscal 1994. The Company's total fiscal 1995 revenues
were $22,210,000 versus $17,616,000 the prior year. Included are Austro Mold
Group sales of $4,683,000 and $5,094,000 in fiscal 1995 and fiscal 1994,
respectively. MTE contributed $558,000 of sales in the last five months of
fiscal 1995 following its acquisition by the Company. The Company's fiscal
1995 gross margin decreased to 13.1% from 13.5% the previous year.
Selling, general and administrative expenses increased $504,000, or 18%,
from fiscal 1994; however, as a percentage of net sales, these expenses
decreased from 16% to 15%. Included in selling, general and administrative
expenses was a $312,000 write-down recorded in connection with the acquisition
of MTE, primarily related to the write-off of previously recognized profit in
equipment manufactured by the Magnetic Assembly Group and sold to MTE, as well
as various costs associated with the acquisition. Excluding the impact of the
MTE write-down, the selling, general and administrative costs of the Company
decreased to 14% of net sales. The decline was a result of successful cost
management efforts in fiscal 1995. Interest expense increased $106,000, or
66%, as a result of increased borrowings and interest rates. Total other
income and expenses of $87,000 for fiscal 1995 included losses of $107,000 on
the disposition of fixed assets.
5
<PAGE> 7
The Company incurred a net loss of $775,000 for fiscal 1995, compared with
a modest profit of $61,000 for fiscal 1994. Included in fiscal 1994 net income
was $676,000 of nonrecurring income representing the cumulative effect of a
change in accounting principle relating to income taxes. Excluding that
adjustment to income, fiscal 1994 resulted in an operating loss of $462,000.
The Company's loss before income taxes and extraordinary items was $774,000 and
$614,000 in fiscal years 1995 and 1994, respectively. The net loss in fiscal
1995 resulted from sizable losses at the Austro Mold Group as well as a net
loss of $98,000 for the MTE start-up operation. The rebound in sales and
profit performance of the Company's Magnetic Assembly Group was insufficient to
return the Company to profitability in the face of Austro Mold's continued
lower sales levels and operational problems.
During the fourth quarter of fiscal 1995, the Company recorded sales of
$5,887,000, compared with sales of $4,323,000 for the fourth quarter of fiscal
1994, an increase of $1,564,000, or 36%. The increase is attributable to the
Magnetic Assembly Group remanufacturing business. In fiscal 1995, the fourth
quarter gross margin was 13% compared with 7% in the fourth quarter of fiscal
1994. The net loss for the fiscal 1995 fourth quarter was $215,000 compared
with a net loss of $627,000 in the fourth quarter of the previous year.
In fiscal 1994, the Company experienced a sales decline of $2,178,000 as a
result of (1) the sale of the Company's European magnetic assembly business in
the third quarter of fiscal 1993, (2) the loss of business at Austro Mold and
(3) customer extensions of magnetic assembly delivery schedules. The sales
decline, coupled with cost overruns and other inefficiencies at Austro Mold,
significantly impacted fiscal 1994 profitability. The Company's gross margin
for fiscal 1994 decreased to 14% versus 18% in fiscal year 1993.
Selling, general and administrative expenses increased $311,000, or 12%,
from fiscal 1993 to 1994. As a percentage of net sales, these expenses
increased from 13% to 16%. Of the increase, $230,000 is attributable to the
fact that fiscal 1993 included only nine months of Company ownership of the
Austro Mold Group. The remaining increased costs in this area related to
increased sales commissions expenses, costs for changes in management for
Austro Mold, state sales tax audit adjustments, a nonrecurring administrative
fee for the Company's 401(k) plan and increased travel expenses. Interest
expense decreased $29,000 as a result of lower interest rates.
Fiscal 1994 net profits were $61,000, including $676,000 of nonrecurring
income representing the cumulative effect of a change in accounting principle
relating to income taxes; whereas fiscal 1993 had resulted in a net profit of
$1,663,000, including $984,000 of nonrecurring income from the European sale of
technology and $640,000 of extraordinary income from the reduction of income
taxes resulting from realization of net operating loss carryforwards.
Therefore, excluding the nonrecurring income items, operating results declined
from an operating profit of $973,000 in fiscal 1993 to an operating loss of
$462,000 in fiscal 1994, a decrease of $1,435,000. The Company's results
before nonrecurring income, income taxes and extraordinary items was a loss of
$614,000 for fiscal 1994 versus a profit of $811,000 for fiscal 1993.
Along with its fiscal 1995 sales increase of 36%, the Magnetic Assembly
Group maintained the approximate 17% gross margin experienced in the prior two
fiscal years. The increased sales were primarily attributable to increased
remanufacturing operations with the Company's largest customer. Magnetic
Assembly's selling, general and administrative expenses increased $264,000 over
fiscal 1994 due to the $312,000 write-down recorded in connection with the MTE
acquisition, which was partially offset by a $48,000 decrease attributable to
successful cost management efforts. As a percentage of sales, selling, general
and administrative costs decreased from 15% in fiscal 1994 to 13% in fiscal
1995 for the Group. Excluding the nonrecurring write-down for the MTE
acquisition, the percentage decreased even further to 11% of net sales. As a
result, the magnetic assemblies operation (including remanufacturing, but
excluding MTE) increased its contribution to operating profits to $805,000 as
compared with $374,000 in fiscal 1994.
6
<PAGE> 8
In fiscal 1995, Austro Mold's Rochester, New York tooling operation
returned to profitability, but its plastics molding operation and its
Clearwater, Florida tooling operation did not. At the time of its acquisition,
the Austro Mold Group had annual revenues of approximately $6,500,000, versus
$4,683,000 and $5,094,000 in fiscal 1995 and 1994, respectively. The entire
Group had an overall negative gross margin of 3% in fiscal 1995, versus a
positive gross margin of 4% in fiscal 1994.
Austro Mold's Rochester tooling operation had total sales of $2,139,000 for
fiscal 1995, compared with $1,834,000 the previous year, an increase of
$305,000, or 17%. It contributed $227,000, or 11% of gross margin versus
$145,000, or 8% the year prior. The plastic molding operation recorded sales
of $2,236,000 and $2,792,000 in fiscal 1995 and 1994, respectively, a decrease
of $556,000, or 20%. The molding operation recorded a negative margin of
$244,000 for fiscal 1995 versus a positive gross margin of $268,000 for fiscal
1994. The Austro Mold Florida tooling operation was closed during fiscal 1995.
It contributed $308,000 in net sales at a negative gross margin of $103,000
prior to its closing. The Florida operation recorded sales of $468,000 and a
negative gross margin of $221,000 in fiscal 1994.
The Austro Mold Group's selling, general and administrative expenses
totaled $1,004,000 in fiscal 1995, compared with $1,028,000 in fiscal 1994.
These costs include $202,000 of annual expense related to the amortization of
the noncompete agreement with the previous owners of Austro Mold. Austro Mold
also incurred $107,000 of costs related to the disposition of fixed assets,
including $35,000 related to the closing of the Florida plant and $71,000 for
the disposal of nonoperational equipment in the plastics molding operations.
Thus, Austro Mold made no contribution to its own Group's selling, general and
administrative overhead of $1,004,000, or the asset disposal costs, and
incurred a net loss of $1,250,000.
The Company has taken, and continues to take, what it believes are
corrective actions relative to the Austro Mold Group, including the replacement
of management personnel, the termination of its unprofitable Florida operations
and the elimination of smaller volume molding orders with insufficient margins.
Due to the fact that the plastics molding losses have been caused by a myriad
of operational problems, management cannot say with certainty that the molding
operation can be returned to profitability, and therefore survive in its
current form.
The Company's management does not believe that the losses which the Company
experienced in fiscal 1995 and fiscal 1994 represent a pattern or continuing
trend. Management believes that the Company's magnetic assembly operations
have been considerably strengthened due both to additional remanufacturing
business and the acquisition of MTE's European business. The Company's backlog
at July 31, 1995 was $12,667,000 compared with $7,000,000 at July 31, 1994.
Excluding MTE's backlog of $1,849,000 for 1995, the Company's backlog increased
$3,818,000 over the previous year. Furthermore, the current fiscal year 1996
will be the pivotal year for determining the future size and role of the Austro
Mold Group within the Company.
As a result of the fiscal 1995 and 1994 operating losses, the Company's
liquidity has deteriorated. As of July 31, 1995, cash was $746,000, versus
$400,000 at July 31, 1994 and $1,042,000 at July 31, 1993; working capital was
$2,623,000, versus $2,854,000 and $3,446,000 at July 31, 1994 and 1993,
respectively; the current ratio was 1.5 to 1.0 at July 31, 1995, versus 2.0 to
1.0 and 2.2 to 1.0 at July 31, 1994 and 1993, respectively. Due to increased
borrowings to meet its cash needs plus prime rate increases, the Company's
interest expense increased $106,000 in fiscal 1995, despite better loan terms
which the Company obtained in a mid-year refinancing.
Even though the Company's debt increased by reason of the acquisition of
MTE in March 1995 and the acquisition of its Austro Mold Group in November
1992, its current cash flow position should be adequate to fund the related
noncompete agreement payments as well as the interest and principal on the
current portion of long-term debt.
Operating cash flows decreased $229,000 for fiscal 1995 over the comparable
period in fiscal 1994. The variance is primarily the result of the Company's
operating loss of $775,000 for the year. This loss includes a write-down of
$312,000 to account for an impairment in asset value in connection with the
acquisition of MTE. In addition, accounts receivable, inventories and accounts
payable balances increased due to higher volumes of sales activity in fiscal
1995.
7
<PAGE> 9
Cash used by investing activities increased $48,000 for fiscal 1995 over
the prior year. The increase is due to two factors; increased capital
expenditures for production equipment and vehicles and the acquisition of MTE.
The increase was partially offset by the noncash write-down of $312,000 in
connection with the acquisition, as well as $160,000 of cash received for the
sale of the Florida plant equipment and other fixed asset disposals.
Cash provided by financing activities increased by $1,267,000 for fiscal
1995 over the prior year. The variance was primarily due to advances on the
Company's line of credit and revolving bank note. The Company incurred
additional borrowings of $305,000 in connection with the MTE acquisition which
are not reflected in the consolidated statement of cash flows for fiscal 1995
since the borrowing represents a noncash transaction. In addition, proceeds
from the exercise of stock options increased by $107,500 over the prior year.
In fiscal 1995, the Company was offered improved loan rates on its
then-existing bank debt, and therefore changed banks. The new loan
accommodation remains secured by the assets of the Company and includes both a
$2,000,000 revolving loan convertible into a term loan on March 1, 1997, as
well as a $1,250,000 line of credit. At July 31, 1995, the Company had
$1,807,000 of principal outstanding on the revolving note and $826,000 on the
line of credit. In connection with the MTE reacquisition, the Company has a
loan with the Calder Group with an outstanding balance of $283,000 at July 31,
1995. The Company also has other long-term debt totaling $91,000 outstanding
at July 31, 1995, and approximately $645,000 of equipment on lease with another
bank and an equipment leasing organization.
Capital expenditures totaled $1,014,000 in fiscal 1995, as compared with
$1,207,000 in fiscal 1994. Included in capital expenditures were $112,000 and
$614,000 in fiscal 1995 and fiscal 1994, respectively, of equipment financed
with proceeds from the master lease line of credit. The remaining fiscal 1995
capital expenditures were financed with proceeds from the Company's revolving
bank note, line of credit borrowings, sales of fixed assets and proceeds from
stock options exercises. Management estimates that capital expenditures will
approximate $600,000 in fiscal 1996, a portion of which is expected to be
financed with capital lease financing.
8
<PAGE> 10
ITEM 7. FINANCIAL STATEMENTS
Following is an index to the consolidated financial statements filed as
part of this report.
Financial Statements Page No.
- -------------------- --------
Report of Independent Accountants 12
Consolidated Balance Sheets at July 31, 1995 and 1994 13
Consolidated Statements of Income for the three years ended
July 31, 1995 14
Consolidated Statements of Changes in Stockholders' Equity
for the three years ended July 31, 1995 15
Consolidated Statements of Cash Flows for the three years
ended July 31, 1995 16
Notes to Consolidated Financial Statements 17 - 28
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
The information required by Items 9, 10, 11 and 12 of PART III of this
report is incorporated herein by reference to the Company's Proxy Statement
issued in connection with the Annual Meeting of Stockholders of the Company to
be held December 14, 1995, under the headings entitled "Voting Securities",
"Election of Directors", "Transactions Involving Directors and Executive
Officers", "Executive Compensation" and "Securities Reporting Requirements",
which Proxy Statement will be filed within 120 days after the end of fiscal
1995.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The financial statements filed as a part of this report are listed in Item
7 above.
The exhibits filed with this report are listed on the Index to Exhibits on
page 11 following the signature page and are numbered in accordance with Item
601 of Regulation S-B.
The Company did not file any reports on Form 8-K during the last quarter of
fiscal 1995.
9
<PAGE> 11
SIGNATURES
In accordance with Section 13 or 15(d) 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: October 23, 1995 By: /s/ Gordon H. McNeil
------------------------------------
Gordon H. McNeil, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: October 23, 1995 By: /s/ Gordon H. McNeil
-----------------------------------
Gordon H. McNeil, Director,
President and Principal
Executive Officer
Date: October 23, 1995 By: /s/ Isadore Diamond
-----------------------------------
Isadore Diamond, Director,
Chairman of the Board,
Treasurer and Principal
Financial Officer
Date: October 23, 1995 By: /s/ Dana L. Limperis
-----------------------------------
Dana L. Limperis, Controller
and Principal Accounting
Officer
Date: October 23, 1995 By: /s/ John B. Biemiller
-----------------------------------
John B. Biemiller, Director
Date: October 23, 1995 By: /s/ G. Thomas Clark
-----------------------------------
G. Thomas Clark, Director
Date: October 23, 1995 By: /s/ Bernard Kozel
-----------------------------------
Bernard Kozel, Director
10
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT STATUS OR INCORPORATION
NO. DESCRIPTION BY REFERENCE (IBR)
- -------------- ------------------------------------------ -------------------------------------------
<S> <C> <C>
(3) (a) Certificate of Incorporation as amended to IBR to Exhibit A of Form 10-KSB for fiscal
date year ended July 31, 1994
(3) (b) By-Laws Exhibit A to this Report
(10) (a) Consulting Agreements and Covenants Not to IBR to Exhibits 2, 3 and 4 of Form 8-K as
Compete and Security Agreement with the amended dated January 28, 1992
former owners of Austro Mold, Inc.
(10) (b) Sublease Agreement with Linden Properties IBR to Exhibit A of Form 10-KSB for fiscal
effective November 1, 1993 year ended July 31, 1993
(10) (c) Amendment to Sublease Agreement with Linden IBR to Exhibit B of Form 10-KSB for fiscal
Properties dated October 7, 1994 year ended July 31, 1994
(10) (d) Lease of Austro Mold facility, Rochester, IBR to Exhibit 5 of Form 8-K as amended
New York dated January 28, 1992
(10) (e) Share Purchase Agreement relative to the IBR to Exhibit 1 of Form 8-K as amended
acquisition of Magnetic Technologies Europe dated March 31, 1995
Limited
(10) (f) Credit Agreement, General Security IBR to Exhibit 3 of Form 8-K as amended
Agreement, Revolving Line of Credit Note dated March 31, 1995
and Commercial Line of Credit Note with
First National Bank of Rochester
(10) (g) Stock Option Contract held by G. Thomas IBR to Exhibit E of Form 10-K for fiscal
Clark (a Director) dated September 18, 1992 year ended July 31, 1992
(10) (h) Stock Option Contract held by Gordon H. IBR to Exhibit D of Form 10-K for fiscal
McNeil (President and Chief Executive year ended July 31, 1992
Officer) dated May 19, 1992
(10) (i) Stock Option Contract held by Gordon H. IBR to Exhibit B of Form 10-KSB for fiscal
McNeil (President and Chief Executive year ended July 31, 1993
Officer) dated January 7, 1993
(10) (j) Stock Option Contract held by Bernard Kozel Exhibit B to this Report
(a Director) dated March 8, 1995
(21) Subsidiaries of the Registrant Exhibit C to this Report
</TABLE>
11
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Magnetic Technologies Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Magnetic Technologies Corporation at July 31, 1995 and 1994, and
the results of its operations and its cash flows for each of the three fiscal
years in the period ended July 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 11 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES, in fiscal year 1994.
/s/ Price Waterhouse LLP
- ------------------------------------
PRICE WATERHOUSE LLP
Rochester, New York
October 10, 1995
12
<PAGE> 14
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
---------------------------------
ASSETS 1995 1994
--------------- --------------
<S> <C> <C>
Current assets:
Cash, including interest-bearing deposits of $490,445 and $312,000 at
July 31, 1995 and 1994, respectively $ 746,434 $ 399,861
Accounts receivable, less allowance for doubtful accounts of $31,500
and $15,000 at July 31, 1995 and 1994, respectively 2,265,794 2,032,020
Inventories 4,182,773 2,602,256
Costs and estimated earnings in excess of billings on contracts in
process 291,288 314,322
Deferred income taxes 278,000 309,900
Prepaid taxes, expenses and other current assets 109,613 101,913
--------------- --------------
Current assets 7,873,902 5,760,272
Property, plant and equipment, net 3,877,951 3,636,153
Excess of cost over net assets acquired, net of accumulated
amortization of $127,154 and $117,748 at July 31, 1995
and 1994, respectively 56,438 65,844
Investment in affiliate 250,000
Deferred income taxes 514,500 477,100
Other assets 482,517 337,505
--------------- --------------
$ 12,805,308 $10,526,874
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 3,938,329 $ 2,504,763
Note payable 826,108
Current portion of long-term debt and capital lease obligations 291,784 308,014
Billings in excess of costs and estimated earnings on contracts in
process 171,497 93,234
Accrued income taxes 22,958
--------------- --------------
Current liabilities 5,250,676 2,906,011
Long-term debt and capital lease obligations 2,533,666 1,957,997
--------------- --------------
Total liabilities 7,784,342 4,864,008
--------------- --------------
Stockholders' equity:
Common stock - $.15 par value;
Authorized - 15,000,000 shares
Issued and outstanding - 2,786,675 and 2,739,857 shares at
July 31, 1995 and 1994, respectively 418,001 410,979
Stock warrants outstanding for 22,500 shares of common stock, valued
at $82,500, net of unamortized deferred expense of $47,115 and
$67,335 at July 31, 1995 and 1994, respectively 35,385 15,165
Additional paid-in capital 7,646,302 7,541,058
Cumulative translation adjustment 479
Accumulated deficit (3,079,201) (2,304,336)
--------------- --------------
Total stockholders' equity 5,020,966 5,662,866
--------------- --------------
$12,805,308 $10,526,874
=============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
13
<PAGE> 15
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------------
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
Net sales $22,209,634 $17,616,480 $19,794,544
Cost of sales 19,290,099 15,241,215 16,294,606
------------- ------------ ------------
Gross profit 2,919,535 2,375,265 3,499,938
Selling, general and administrative expenses 3,341,450 2,837,504 2,526,918
------------- ------------ ------------
Operating (loss) earnings (421,915) (462,239) 973,020
Interest expense 265,233 159,395 188,164
Other 87,217 (7,355) (25,889)
Nonrecurring income from sale of technology, net of
related expenses (984,010)
------------- ------------ ------------
(Loss) income before income taxes, extraordinary item
and change in accounting principle (774,365) (614,279) 1,794,755
Provision for income taxes 500 500 771,500
------------- ------------ ------------
(Loss) income before extraordinary item and change in
accounting principle (774,865) (614,779) 1,023,255
Extraordinary item:
Reduction in income taxes resulting from
realization of operating loss carryforwards 640,000
------------- ------------ ------------
(Loss) income before change in accounting principle (774,865) (614,779) 1,663,255
Cumulative effect of a change in accounting principle
relating to income taxes 676,000
------------- ------------ ------------
Net (loss) income ($774,865) $ 61,221 $1,663,255
============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------------------------------------------
1995 1994 1993
--------------------- ----------------------- ---------------------
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
--------- --------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Loss) earnings per common
share:
(Loss) income before
extraordinary item and change
in accounting principle ($.28) ($.28) ($.21) ($.21) $.38 $.36
Extraordinary item .24 .23
--------- --------- --------- ---------- -------- --------
(Loss) income before change in
accounting principle (.28) (.28) (.21) (.21) .62 .59
Change in accounting principle .23 .23
--------- --------- --------- ---------- -------- --------
Net (loss) income per share ($.28) ($.28) $.02 .02 $.62 $.59
========= ========= ========= ========== ======== ========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
14
<PAGE> 16
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------------- STOCK PAID-IN ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL DEFICIT
------------ ------------ ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1992 1,629,767 $ 244,465 $ 0 7,289,563 ( $ 4,028,812)
Conversion of debentures 160,000 24,000 296,000
Exercise of stock options 31,000 4,650 44,950
Repurchase and retirement of
fractional shares
related to stock split (32) (5) (142)
Net income 1,663,255
------------ ------------ ------------- ------------- ----------------
Balance at July 31, 1993 1,820,735 273,110 0 7,630,371 (2,365,557)
Effect of three-for-two
stock split 910,368 136,555 (136,555)
Fees relating to stock
split (5,243)
Exercise of stock options 9,375 1,407 3,593
Repurchase and retirement of
fractional shares related to
stock split (621) (93) (108)
Tax benefits derived from
stock incentive plans 49,000
Stock warrants issued for
22,500 shares of common
stock 82,500
Deferral of stock warrants
issuance expense (82,500)
Amortization of deferred
stock warrants expense 15,165
Net income 61,221
------------ ------------ ------------- ------------- ----------------
Balance at July 31, 1994 2,739,857 410,979 15,165 7,541,058 ( 2,304,336)
Exercise of stock options 46,875 7,031 105,469
Repurchase and retirement of
fractional shares
related to stock
split (57) (9) (225)
Amortization of deferred
stock warrants expense 20,220
Net loss (774,865)
------------ ------------ ------------- ------------- ----------------
2,786,675 418,001 35,385 7,646,302 ( 3,079,201)
Translation adjustment 479
------------ ------------ ------------- ------------- ----------------
Balance at July 31, 1995 2,786,675 $418,001 $35,385 $7,646,302 ( $3,078,722)
============ ============ ============= ============= ================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
15
<PAGE> 17
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ($774,865) $ 61,221 $ 1,663,255
Adjustments to reconcile net income to cash provided by
operating activities -
Cumulative effect of a change in accounting principle (676,000)
Depreciation and amortization 877,021 786,312 685,224
Loss on disposal of property 106,734 910 5,543
Provision for bad debts 16,500 (9,719) 79,406
Imputed interest on long-term debt 9,153 35,060
(Increase) decrease in accounts receivable (98,048) 163,908 (227,695)
(Increase) decrease in inventories (1,511,516) 60,969 (254,437)
Decrease (increase) in costs, estimated earnings
and billings on contracts in process 101,297 (29,121) 106,485
Increase in deferred income taxes (5,500) (62,000)
Increase in prepaid income taxes, expenses and other
current assets (7,926) (28,262) (9,663)
Payments under noncompete agreement (330,000) (330,000) (192,500)
Decrease (increase) in other assets 184,988 124,875 (855)
Increase in accounts payable and accrued expenses 1,321,737 99,326 405,873
Increase (decrease) in accrued income taxes 23,016 (73,344) (149,929)
Decrease in other long-term liabilities (9,045) (5,436)
------------ ------------ ------------
Total adjustments 687,456 80,809 415,076
------------ ------------ ------------
Net cash provided by operating activities (87,409) 142,030 2,078,331
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (902,346) (592,712) (583,324)
Purchase of Magnetic Technologies Europe, (MTE), net of
cash acquired (206,311)
Purchase of Austro Mold, Inc., net of cash acquired (1,781,388)
Investment in affiliate (250,000)
Write-down of investment in MTE 312,302
Proceeds from the sale of fixed assets 160,000 4,100 10,000
------------ ------------ ------------
Net cash used by investing activities (636,355) (588,612) (2,604,712)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 3,457,758 660,000 2,000,000
Payments for expenses incurred related to stock splits (5,243)
Principal payments on borrowings and capital leases (2,498,581) (854,800) (2,121,737)
Purchase and retirement of common stock (234) (201) (147)
Proceeds from stock options exercise 112,500 5,000 49,600
------------ ------------ ------------
Net cash provided (used) by financing activities 1,071,443 (195,244) (72,284)
Effect of exchange rate changes on cash (1,106)
------------ ------------ ------------
Net increase (decrease) in cash 346,573 (641,826) (598,665)
Cash and cash equivalents at beginning of year 399,861 1,041,687 1,640,352
------------ ------------ ------------
Cash and cash equivalents at end of year $ 746,434 $ 399,861 $1,041,687
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
16
<PAGE> 18
MAGNETIC TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company is engaged in the contract manufacturing business, including
development, manufacture and assembly of precision magnetic, electronic and
mechanical devices. The Company was incorporated in the State of Delaware in
1969. The Company's corporate headquarters is located on Linden Avenue in
Rochester, New York. Austro Mold, Inc. (Austro Mold), a wholly-owned
subsidiary during fiscal 1993, is engaged in the design and manufacture of
precision plastic molds and custom injection molded plastic parts and
assemblies. Austro Mold was incorporated in New York State in 1976, but was
subsequently legally merged into Magnetic Technologies Corporation during the
first quarter of fiscal 1994. Austro Mold has one facility in Rochester, New
York. Magnetic Technologies Europe Limited (MTE), a wholly-owned foreign
subsidiary effective March 1, 1995, is engaged in the same business as the
Company's traditional domestic operations, namely, the design and manufacture
of precision magnetic assemblies for office equipment manufacturers. MTE has
one facility located in Rochester, England. (See Note 2.)
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, MTE, as of March 1, 1995. (See Note 2.) All significant
intercompany balances, transactions and profits are eliminated.
Translation of Foreign Currencies
Assets and liabilities of MTE are translated into U.S. dollars at currency
exchange rates in effect at the end of the balance sheet period. Revenues and
expenses are translated at average exchange rates in effect during the related
income statement periods. Gains and losses resulting from foreign currency
transactions are included in the results of operations. Gains and losses
resulting from the translation of the foreign subsidiary balance sheet are
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
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the related assets, which range from three to ten years. Leasehold
improvements are amortized over the shorter of the related lease lives or the
expected useful lives of the improvements using the straight-line method.
Maintenance and repairs are charged to operations as incurred. The costs
of renewals and betterments that increase the useful lives of property are
capitalized in the appropriate asset accounts. The gain or loss on items of
property retired or otherwise disposed of is credited or charged to operations,
and the cost and accumulated depreciation are removed from the accounts.
17
<PAGE> 19
Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired is amortized over ten years using
the straight-line method.
Research and Development
The Company charges research and development expenditures to operations as
incurred.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less to be cash
equivalents.
Reclassifications
Certain amounts in the prior years' financial statements were reclassified
to conform with current year presentation.
Earnings Per Common Share
All per share amounts for fiscal 1995 are based on the weighted average
number of shares outstanding during the period. The amounts do not include any
adjustments for stock options or warrants due to the antidilutive effect they
have on the net loss for the year. Earnings per common share amounts for
fiscal 1994 and 1993 are based on the weighted average number of shares
outstanding during the period after consideration of the dilutive effect of
stock options and warrants. Fully diluted earnings per common share amounts
for fiscal 1993 also assumes the conversion of convertible subordinated
debentures at the beginning of fiscal 1993. The net income included in the
computation was also adjusted for the interest expense (net of tax) applicable
to the debentures. Supplementary earnings per share gives effect to the
exercises of stock options in fiscal years 1994 and 1993 on primary earnings
per share. (See Note 10.) The exercises are reflected as though they had
occurred at the beginning of the periods.
Supplementary (loss) earnings per share were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
(Loss) income before extraordinary item and change
in accounting principle ($.28) ($.21) $.37
Extraordinary item .23
------------- ------------- -------------
(Loss) income before change in accounting principle (.28) (.21) .60
Change in accounting principle .23
------------- ------------- -------------
Net (Loss) income per share ($.28) $.02 $.60
============= ============= =============
</TABLE>
Weighted average shares of common stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Primary 2,779,521 2,948,161 2,662,832
Fully diluted 2,779,521 2,963,865 2,831,527
Supplementary 2,779,521 2,950,627 2,782,833
</TABLE>
Earnings per share and the weighted average shares of common stock have
been retroactively adjusted to reflect a three-for-two stock split which
occurred in fiscal 1994.
18
<PAGE> 20
NOTE 2 - ACQUISITIONS, INVESTMENT IN AFFILIATE AND SALE OF TECHNOLOGY:
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
nonvoting "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 any influence over the operating and financial policies
of MTE. The Company had no voting stock, no voting Board members, no
policy-making influence, and no interchange of personnel. Thus, management
believes that the cost method of accounting for this transaction was
appropriate.
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 are consolidated with those of the Company from March 1,
1995 forward. The purchase price of the acquisition of the remaining 75%
interest in MTE was $492,007 plus closing costs of $23,054, before cash
acquired of $3,340. In connection with the acquisition, the Company incurred a
note payable 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 was imputed at a
rate of 9.25%. The balance of the note payable, less imputed interest, was
$305,410 at acquisition. The loan was reflected in the Company's consolidated
balance sheet as current portion of long-term debt of $94,761 and long-term
debt of $188,369 at July 31, 1995. (See Note 7.)
Prior to the acquisition of the remaining 75% of the outstanding stock of
MTE in March 1995, the Company evaluated its investment in MTE by reviewing the
monthly operating performance to determine whether any permanent impairment in
the value of its investment had occurred. These reviews took into
consideration MTE's performance as compared with budgets as well as the
start-up plan for the company. Based upon those evaluations, the Company had
determined that the value of the investment had not been impaired.
Effective March 1, 1995, the acquisition of the remaining 75% interest in
MTE was completed, and the transaction was accounted for using the purchase
method of accounting for business combinations. Since MTE became a
wholly-owned subsidiary, the Company recorded a $312,302 write-down of its
investment in MTE to account for an impairment in asset value, primarily
related to the write-off of previously recognized profit in equipment
manufactured by MTC and sold to MTE, as well as various costs related to the
acquisition. The write-down was included in selling, general and
administrative expenses at July 31, 1995.
During fiscal 1993, the Company completed the acquisition of 100% of the
outstanding stock of Austro Mold, Inc. Austro Mold is engaged in the
manufacture of precision plastic molds and custom plastic injection molding and
assembly. The effective date of the transaction was November 1, 1992 and was
reflected under the purchase method of accounting for business combinations.
The purchase price was $1,910,177 before cash acquired of $128,789. The
purchase was financed with a $2,000,000 revolving bank note at an interest rate
of prime plus .5%, which was refinanced during fiscal 1995 at a reduced
interest rate of prime plus .25%. (See Note 8.) The Company also assumed and
retired Austro Mold's bank indebtedness of $725,000 from working capital during
fiscal 1993.
19
<PAGE> 21
In connection with the acquisition, the Company entered into a noncompete
agreement with the two previous owners of Austro Mold. The agreement is
effective from November 1992 through December 2000 and requires payment of
$1,650,000 in 60 equal monthly installments commencing January 1993. The cost
of the noncompete agreement is being amortized to expense ratably over the
period in which it is in effect. The total amortization expense was $202,041,
$202,041 and $151,531 for fiscal years 1995, 1994 and 1993, respectively. The
excess of unamortized cost of $1,094,388 over the remaining amount due under
the agreement of $797,500, or $296,888, was reflected in other assets at July
31, 1995.
The following table presents unaudited pro forma results of operations as
if the acquisitions of MTE and Austro Mold had occurred at the beginning of
each of the periods presented, after giving effect to certain adjustments for
intercompany transactions, depreciation, rent, 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 acquisitions been made at the beginning of
the periods presented or of results which may occur in the future. The per
share amounts and weighted average number of shares have been adjusted to
reflect a three-for-two stock split which occurred in fiscal 1994.
<TABLE>
<CAPTION>
PRO FORMA RESULTS (UNAUDITED)
YEAR ENDED JULY 31,
--------------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $22,420,698 $17,323,672 $21,284,590
Cost of sales 19,364,900 15,437,090 17,574,476
----------- ----------- -----------
Gross profit 3,055,798 1,886,582 3,710,114
Selling, general and administrative
expenses 3,684,645 3,200,201 2,734,330
----------- ----------- -----------
Operating (loss) earnings (628,847) (1,313,619) 975,784
Interest, other income and expenses 415,621 208,289 208,233
----------- ----------- -----------
(Loss) income before income taxes,
extraordinary item and change in accounting
principle (1,044,468) (1,521,908) 767,551
Provision for income taxes 500 500 330,863
----------- ----------- -----------
(Loss) income before extraordinary item and
change in accounting principle ($1,044,968) ($1,522,408) $ 436,688
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA RESULTS (UNAUDITED)
YEAR ENDED JULY 31,
--------------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
(Loss) earnings per common share:
Income before extraordinary item and change
in accounting principle
Primary ($.38) ($.56) $.16
Fully diluted ($.38) ($.56) $.15
Supplementary ($.38) ($.56) $.16
Weighted average number of shares:
Primary 2,779,521 2,736,545 2,662,832
Fully diluted 2,779,521 2,736,545 2,831,527
Supplementary 2,779,521 2,736,545 2,782,833
</TABLE>
20
<PAGE> 22
NOTE 3 - INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1995 1994
----------- ----------
<S> <C> <C>
Raw materials $2,558,700 $1,646,222
Work in process 1,271,105 745,819
Finished goods 352,968 210,215
----------- ----------
$4,182,773 $2,602,256
=========== ==========
</TABLE>
NOTE 4 - COSTS, ESTIMATED EARNINGS AND BILLINGS ON CONTRACTS IN PROCESS:
The following is a summary of costs, estimated earnings and billings on
contracts in process:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1995 1994
----------- ----------
<S> <C> <C>
Costs and estimated earnings $1,136,537 $1,330,160
LESS: Billings to date 1,016,746 1,109,072
----------- ----------
$ 119,791 $ 221,088
=========== ==========
</TABLE>
Costs, estimated earnings and billings were presented in the accompanying
balance sheet as:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1995 1994
----------- ----------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
contracts in process $ 291,288 $ 314,322
Billings in excess of costs and estimated earnings on
contracts in process (171,497) (93,234)
----------- ----------
$ 119,791 $ 221,088
=========== ==========
</TABLE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:
Major classifications of property, plant and equipment were as follows:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1995 1994
----------- ----------
<S> <C> <C>
Equipment under capital lease $ 844,202 $ 732,395
Machinery and engineering equipment 4,887,098 4,212,076
Furniture and fixtures 1,393,874 1,168,827
Leasehold improvements 513,453 448,608
Vehicles 101,243 51,052
Construction in process 116,526 238,435
----------- ----------
7,856,396 6,851,393
LESS: Accumulated depreciation and amortization 3,978,445 3,215,240
----------- ----------
$3,877,951 $3,636,153
=========== ==========
</TABLE>
The accumulated amortization for capital leases was $157,379 and $66,623 in
fiscal years 1995 and 1994, respectively. Amortization expense was $90,756,
$53,909 and $12,714 during the years ended July 31, 1995, 1994 and 1993,
respectively.
21
<PAGE> 23
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 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 $35,000 loss on the sale of those assets during fiscal
1995. (See also Note 9.)
NOTE 6 - NOTE PAYABLE:
During fiscal 1995, the Company refinanced its $1,250,000 line of credit
with another bank at a reduced interest rate. At July 31, 1995, the Company
had $423,892 available under its bank line of credit bearing interest at prime
plus .25%. The Company utilized $1,026,108 of its available line of credit
during fiscal 1995 and had $826,108 outstanding against the line at July 31,
1995. During fiscal 1995, a payment of $300,000 on the line of credit was
financed with the proceeds of the revolving bank note.
The line of credit is collateralized by equipment, receivables, contract
rights, inventory and general intangibles of the Company.
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
CURRENT JULY 31,
INTEREST PORTION ---------------------------
DESCRIPTION DUE DATE RATE DUE 1995 1994
- ---------------------- --------------- ---------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revolving bank note March 1997 Prime + .25% $ 1,806,650 $ 1,500,000
Obligations under Various to
capital leases February 2000 6.95% to 9.15% $ 179,484 644,975 684,374
Calder loan April 1998 Imputed 9.25% 94,761 283,130
Other long-term debt March 2002 5.00% to 8.25% 17,539 90,695 81,637
--------- ----------- ------------
$ 291,784 2,825,450 2,266,011
Less: Current portion due within one year ========= 291,784 308,014
---- ----------- ------------
$ 2,533,666 $ 1,957,997
=========== ============
</TABLE>
The bank prime rate was 8.75% at July 31, 1995.
During fiscal 1995, the Company refinanced its $2,000,000 revolving bank
note with another bank at a reduced interest rate. The note requires interest
payments at prime plus .25% through March 1, 1997, when the principal balance
can be refinanced at the Company's option under a five-year term loan at the
same interest rate as the note. The revolving note had an available balance of
$193,350 at July 31, 1995. The note is collateralized by the equipment,
inventory, accounts receivable, and other personal property of the Company.
The revolving bank note agreement contains, among other covenants, provisions
pertaining to mergers and acquisitions, capital expenditures, payment of
dividends, tangible net worth, working capital and debt ratios. The Company is
in compliance with the restrictive covenants at July 31, 1995.
Although the entire principal balance owed on the revolving bank note is
due on March 1, 1997, payments of outstanding principal are reflected in the
following table as due over a five-year period beginning in fiscal 1998. This
presentation is considered appropriate based upon the Company management's
current intent to refinance the note under a five-year term loan option
outlined above.
The Company had an available master lease line of credit of $1,000,000 with
its previous bank, which was eliminated during fiscal 1995. The outstanding
total of the lease line of credit balances was $528,034 at July 31, 1995. The
various lease balances require monthly payments totaling $14,860 at varying
rates of interest which were established at 275 points over the Treasury Bill
Index at the time of each borrowing. The lease balances mature between May
1997 and February 2000.
22
<PAGE> 24
In connection with the acquisition of MTE in February 1995, the Company
incurred a note payable 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 was
imputed at a rate of 9.25%, which was the Company's bank lending rate at the
time of the acquisition. The balance of the note payable, less imputed
interest, was $305,410 at the acquisition date. The loan was reflected in the
Company's consolidated balance sheet as current portion of long-term debt of
$94,761 and long-term debt of $188,369 at July 31, 1995.
Subsequent to July 31, 1995, the Company became the guarantor for a maximum
liability of $100,000 for its wholly-owned subsidiary, MTE, with respect to a
vendor relationship. (See Note 15.)
Total obligations under capital leases are secured by equipment with a net
book value of $686,823 at July 31, 1995, and require total monthly payments of
$18,380, including interest.
Future principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
NOTES CAPITAL OTHER LONG-
PAYABLE LEASES TERM DEBT
---------- --------- ---------
<S> <C> <C> <C>
Fiscal 1996 $ 94,761 $179,484 $17,539
Fiscal 1997 200,804 189,531 18,721
Fiscal 1998 393,148 198,872 11,875
Fiscal 1999 337,643 60,999 10,846
Fiscal 2000 369,316 16,089 11,401
Later 694,108 20,313
---------- --------- ---------
$2,089,780 $644,975 $90,695
========== ========= =========
</TABLE>
NOTE 8 - SENIOR CONVERTIBLE SUBORDINATED DEBENTURES:
During fiscal 1986, the Board of Directors issued $600,000 of 10% senior
convertible subordinated debentures, with an original maturity date of April
1991. The debentures were convertible in whole or in part into shares of
common stock at a conversion price of $2.00 per share. In fiscal year 1989,
debentures totaling $192,250 were converted into 96,125 shares of common stock.
In fiscal year 1990, debentures totaling $25,000 were converted into 12,500
shares of common stock. During fiscal 1991, the Company redeemed $232,750 of
the debentures. Of this amount, $170,000 of the debentures were subsequently
reissued. The remaining debenture holders, with $320,000 of debentures, agreed
to extend the maturity date until August 1994. In fiscal 1993, the remaining
debentures were converted into 160,000 shares of common stock. As a result of
the conversion, 110,000 shares were issued to related parties. (See Note 12.)
At the end of fiscal years 1995, 1994 and 1993, no debentures were
outstanding.
23
<PAGE> 25
NOTE 9 - OPERATING LEASES:
The Company leases office and manufacturing facilities and vehicles. Lease
terms range from one to seven years, with renewal options for additional
periods. Rental expense charged to operations amounted to $590,868, $748,600,
and $598,100 during fiscal years 1995, 1994 and 1993, respectively. The Linden
Avenue facility is leased from a related party. (See Note 12.)
The Austro Mold Group Florida plant was closed on March 31, 1995, however,
the Company is liable for the rentals on the Florida facility through December
1995. The total remaining rental payments of $16,625 were accrued at July 31,
1995. The future lease payments on the Florida facility are also included in
the operating lease payments schedule below. (See also Note 5.)
Future minimum payments required under noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
FACILITIES VEHICLES
----------- ---------
<S> <C> <C>
Fiscal 1996 $ 592,732 $17,460
Fiscal 1997 529,411 11,509
Fiscal 1998 433,864
Fiscal 1999 365,616
Fiscal 2000 365,616
Later 91,404
----------- ---------
$2,378,643 $28,969
=========== =========
</TABLE>
NOTE 10 - COMMON STOCK, STOCK OPTIONS, STOCK WARRANTS AND INCENTIVE PLANS:
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. Also during
fiscal 1995, a director exercised 9,375 of previously granted stock options.
(See Note 12.)
The Company declared a three-for-two stock split which became effective
February 16, 1994, increasing the number of outstanding shares of common stock
by 910,368. 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 stockholders. In connection with the stock split,
$136,555 was transferred from additional paid-in capital to common stock. The
transfer is reflected in the Company's balance sheet as of July 31, 1994.
Payment was made to stockholders for any fractional share interests. 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.
In December 1993, the Company's stockholders approved an amendment to the
Certificate of Incorporation increasing the authorized shares of common stock
from 5,000,000 to 15,000,000 and eliminating a series of authorized but
unissued preferred stock. Also in December 1993, 9,375 shares of common stock
were issued to a director upon exercise of outstanding stock options.
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 49 months. The unamortized deferred expense was $47,115 and $67,335
at July 31, 1995 and 1994, respectively. The value of the outstanding
warrants, net of unamortized deferred expense, or $35,385, was reflected in
stockholders' equity at July 31, 1995.
24
<PAGE> 26
In January 1993, the Board of Directors authorized the issuance of stock
options aggregating 225,000 shares to two officers of the Company. The options
have an exercise price of $2.50 per share. The options vest at a rate of
75,000 shares per year starting in fiscal 1994. During fiscal 1995, 37,500 of
the options were exercised and 75,000 of the options expired upon termination
of employment of one of the officers. The remaining options expire at the
earlier of January 2003 or within a specified period after termination of
employment. (See Note 12.)
In September 1992, the Board of Directors authorized the issuance of stock
options to a director for 7,500 shares of common stock at an exercise price of
$2.55 per share. The options expire in September 1997. (See Note 12.)
In May 1992, the Board of Directors authorized the issuance of stock
options to an officer of the Company aggregating 150,000 shares at an exercise
price of $2.33 per share. These shares expire at the earlier of May 1997 or
within a specified period after termination of employment. (See Note 12.)
During fiscal 1991, the Board authorized the issuance of stock options
aggregating 56,250 shares to three employees, exercisable at $1.07 per share of
common stock. Options to purchase 46,500 and 9,750 shares of common stock were
exercised during fiscal 1993 and 1992, respectively.
<TABLE>
<CAPTION>
OPTION PRICE
SUMMARY OF STOCK OPTIONS NUMBER RANGE PER SHARE
-------------------------- ------------ ---------------------
<S> <C> <C>
Outstanding July 31, 1992 215,250 $ .53 - $2.33
Granted 232,500 $ 2.50 - $2.55
Exercised (46,500) $ 1.07
------------
Outstanding July 31, 1993 401,250 $ .53 - $2.55
Exercised (9,375) $ .53
------------
Outstanding July 31, 1994 391,875 $ 2.00 - $2.55
Granted 5,000 $ 4.63
Exercised (46,875) $ 2.00 - $2.50
Expired (75,000) $ 2.50
------------
Outstanding July 31, 1995 275,000 $ 2.34 - $4.63
</TABLE> ============
The number of shares and option price per share have been adjusted to
reflect the three-for-two stock split which occurred in fiscal 1994 and a
five-for-four stock split which occurred in fiscal 1992.
NOTE 11 - INCOME TAXES:
Effective August 1, 1993, 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 the August 1, 1993 balance sheet to adopt SFAS 109
amounted to $676,000. This amount was reflected in net income for fiscal 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.
The Company had no provision for federal income taxes in fiscal 1995 or
1994. The Company's provision for federal income taxes for fiscal year 1993
was offset by extraordinary credits representing the tax benefits of net
operating loss carryforwards.
25
<PAGE> 27
The statutory federal income tax rate and the effective rate for fiscal
year 1993 are reconciled below:
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31, 1993
---------------
<S> <C>
Statutory federal income tax rate 34%
State income taxes, net of federal benefit 8
Other, net 1
---------------
43%
===============
</TABLE>
The following is a summary of current and long-term deferred tax assets and
the related valuation allowances:
<TABLE>
<CAPTION>
AT JULY 31,
--------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Current deferred tax assets:
Federal net operating loss carryforwards $ 102,000
State net operating loss carryforwards 27,000
Accrued expenses $ 109,700 109,000
Inventory 44,800 16,000
Warranty reserves 15,100 37,000
Other deferred tax assets 11,800 18,900
Losses on fixed asset disposals 96,600
-------------- --------------
$ 278,000 $ 309,900
============== ==============
AT JULY 31,
--------------------------------
1995 1994
-------------- --------------
Long term deferred tax assets:
Federal net operating loss carryforwards $ 306,700 $ 260,700
State net operating loss carryforwards 45,500 35,300
Federal investment tax credit carryforwards 96,300 96,300
State investment tax credit carryforwards 218,300 222,400
Federal alternative minimum tax credit carryforwards 51,000 51,000
State alternative minimum tax credit carryforwards 6,000
Depreciation 315,500 187,900
Other deferred tax assets 102,900 19,000
-------------- --------------
1,142,200 872,600
Less: Valuation allowance 627,700 395,500
---- -------------- --------------
$ 514,500 $ 477,100
============== ==============
</TABLE>
The federal net operating loss carryforwards expire periodically from
fiscal years 2002 through 2009, while federal tax credit carryforwards expire
periodically from fiscal years 1996 through 2002. For state tax purposes, the
net operating loss carryforwards expire in fiscal year 2009 and tax credit
carryforwards expire periodically through fiscal year 2004.
The realization of the deferred tax assets related to the net operating
loss and tax credit carryforwards is dependent upon the generation of 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.
26
<PAGE> 28
NOTE 12 - RELATED PARTIES:
Nonqualified stock options for the purchase of 9,375 shares at $.53 per
share were issued to a director during fiscal 1989. The director exercised the
options in December 1993. An additional 9,375 of nonqualified stock options
for the purchase of common stock at $2.00 per share were issued to the same
director during fiscal 1990. The director exercised these options during
fiscal 1995. In fiscal 1992, 150,000 stock options at $2.33 per share were
issued to an officer. In September 1992, the Company issued stock options to a
director for the purchase of 7,500 shares at $2.55 per share. In fiscal 1993,
the Company issued stock options to two officers for the purchase of 225,000
shares of common stock at $2.50 per share. During fiscal 1995, 37,500 of the
options were exercised and 75,000 of the options expired upon termination of
employment of one of the officers. Also during fiscal 1995, 5,000 options for
the purchase of common stock were issued to a director at $4.63 per share.
In fiscal 1986, debentures totaling $575,000 were issued to related
parties. During 1989, four holders converted debentures totaling $192,250 into
96,125 shares of common stock. During fiscal 1990, one holder converted
debentures totaling $25,000 into 12,500 shares of common stock. In fiscal
1991, the Company redeemed $207,750 of the debentures upon their maturity. A
director purchased $70,000 of those debentures and agreed to a maturity date of
August 1994. The remaining related party debenture holders, with $150,000 of
debentures, also agreed to extend the debentures' maturity date until August
1994. During fiscal year 1993, three related party holders converted the
remaining debentures totaling $220,000 into 110,000 shares of common stock.
(See Note 8.)
Since fiscal 1985, the Company has subleased office and manufacturing space
from a partnership, in which the Chairman of the Board of the Company is a 50%
partner and the other 50% partner is a stockholder of the Company. The current
term of the sublease is seven years and requires monthly rental payments of
$30,468. The sublease also requires the Company to pay real estate taxes,
maintenance and utility costs. Rent expense for the facility amounted to
$367,680, $368,400 and $340,000 in fiscal years 1995, 1994 and 1993,
respectively.
During fiscal 1989, the Company entered into a one-year operating lease
agreement with the aforementioned partnership for manufacturing equipment. The
lease was renewable at the option of the Company for four consecutive one-year
periods, and was renewed through the first quarter of fiscal 1994. The
original agreement required rental payments of $20,000 per month. The lease
was renegotiated effective August 1993 and the monthly rental was lowered to
$9,000 until November 1993, when the Company purchased the equipment and
financed it under a capital lease with a bank. (See Note 7.) Rental expense
for the equipment amounted to $27,000 and $240,000 in fiscal years 1994 and
1993, respectively.
The Company also contracts with a local firm, owned by the stockholder
referred to above, for the construction of various building renovations and
improvements at an aggregate cost to the Company of $68,000, $21,000 and
$37,000 in fiscal years 1995, 1994 and 1993, respectively.
NOTE 13 - BUSINESS SEGMENT AND MAJOR CUSTOMER INFORMATION:
The Company operates in one business segment defined as contract
manufacturing. This segment encompasses both the manufacture and assembly of
precision magnetic, electronic and mechanical devices at the Magnetic Assembly
Group and Magnetic Technologies Europe, as well as the design and manufacture
of precision plastic molds and custom injection molded plastic parts and
assemblies at the Austro Mold Group. All three units of the Company's business
have been effectively integrated since the acquisition of Austro Mold in
November 1992 and the acquisition of MTE in February 1995. (See Note 2.)
Export sales, principally to Europe and Canada, amounted to $1,293,000,
$1,140,000 and $1,516,000 in fiscal years 1995, 1994 and 1993, respectively.
During the years ended July 31, 1995, 1994 and 1993, gross sales to one
customer amounted to $16,494,000, $10,755,000 and $13,116,000, respectively.
27
<PAGE> 29
NOTE 14 - SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS:
The following transactions represent noncash investing and financing
activities:
YEAR ENDED JULY 31, 1995:
------------------------
During fiscal 1995, capital lease obligations of $111,807 were incurred when
the Company entered into a lease for new manufacturing equipment.
During fiscal 1995, a loan of $305,410 was incurred in connection with the
acquisition of MTE. The loan is payable to the previous parent company of MTE.
(See Note 2.)
YEAR ENDED JULY 31, 1994:
------------------------
During fiscal 1994, capital lease obligations of $614,395 were incurred
when the Company entered into leases for new manufacturing equipment and
refinanced an existing operating lease.
During fiscal 1994, the Company declared a three-for-two stock split. In
connection with the split, $136,555 of additional paid-in capital was
transferred to common stock issued and outstanding.
During fiscal 1994, the Company realized a $49,000 tax benefit from
employee stock incentive plans. The impact of the benefit is reflected as an
increase to stockholders' equity at July 31, 1994.
YEAR ENDED JULY 31, 1993:
------------------------
During fiscal 1993, capital lease obligations of $178,000 were incurred
when the Company entered into a lease for new manufacturing equipment.
During fiscal year 1993, debentures totaling $320,000 were converted into
160,000 shares of common stock.
In addition, the Company made cash payments for interest of $250,000,
$151,000 and $183,000, during fiscal 1995, 1994 and 1993, respectively. The
Company paid $18,000, $116,000 and $419,000 for income taxes in fiscal years
1995, 1994 and 1993, respectively.
NOTE 15 - SUBSEQUENT EVENT:
Subsequent to July 31, 1995, the Company became the guarantor for a maximum
liability of $100,000 for its wholly-owned subsidiary, MTE, with respect to a
vendor relationship. (See Note 7.)
28
<PAGE> 30
BOARD OF DIRECTORS
John B. Biemiller
G. Thomas Clark
Isadore Diamond
Chairman of the Board & Treasurer
Bernard Kozel
Gordon H. McNeil
President & Chief Executive Officer
SHAREHOLDER COMMUNICATIONS
Susan M. Weise
Corporate Secretary
Magnetic Technologies Corporation
770 Linden Avenue
Rochester, New York 14625
(716) 385-8711
CERTIFIED PUBLIC ACCOUNTANTS
Price Waterhouse LLP
1900 Chase Square
Rochester, New York 14604
LEGAL COUNSEL
Gerald B. Fincke
2401 East Graves Avenue, Suite 21
Orange City, Florida 32763
REGISTRAR & TRANSFER AGENT
The Trust Company of New Jersey
35 Journal Square
Jersey City, New Jersey 07306
