<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 OCTOBER 31, 1996
----------------
[ ] 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 of (IRS Employer Identification No.)
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:
2,786,575 SHARES OF THE ISSUER'S COMMON STOCK WERE OUTSTANDING AS OF OCTOBER 31,
1996.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
AT OCTOBER 31, 1996 (UNAUDITED) AND JULY 31, 1996
<TABLE>
<CAPTION>
ASSETS OCTOBER 31, 1996 JULY 31, 1996
------------------ ---------------
<S> <C> <C>
Current assets:
Cash, including interest-bearing deposits of $1,261,768 and $476,325
at October 31, 1996 and July 31, 1996, respectively $ 1,709,601 $ 846,363
Accounts receivable, less allowance for doubtful accounts of $116,975 and
$120,000 at October 31, 1996 and July 31, 1996, respectively 1,282,910 2,027,821
Inventories 3,643,256 3,470,874
Deferred income taxes 295,700 338,100
Prepaids and other current assets 101,983 100,140
--------- ---------
Current assets 7,033,450 6,783,298
Property, plant and equipment, net 1,933,354 1,992,635
Deferred income taxes 493,000 454,400
Other assets 507,550 514,300
--------- ---------
$ 9,967,354 $ 9,744,633
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 3,580,450 $ 3,349,380
Notes payable 1,117,830 1,217,830
Current portion of long-term debt and capital lease obligations 321,528 321,528
Billings in excess of costs and estimated earnings on contracts in
process 103,616
--------- ---------
Current liabilities 5,019,808 4,992,354
Long-term debt and capital lease obligations 1,676,627 1,726,243
--------- ---------
Total liabilities 6,696,435 6,718,597
--------- ---------
Stockholders' equity:
Common stock - $.15 par value;
Authorized - 15,000,000 shares
Issued and outstanding - 2,786,575 and 2,786,584 shares at
October 31, 1996 and July 31, 1996, respectively 417,986 417,988
Stock warrants outstanding for 22,500 shares of common stock, valued at
$82,500, net of unamortized deferred expense of $21,840 and $26,895 at
October 31, 1996 and July 31, 1996, respectively 60,660 55,605
Additional paid-in capital 7,645,910 7,645,921
Cumulative translation adjustment (2,663) 2,359
Accumulated deficit (4,850,974) (5,095,837)
--------- ---------
Total stockholders' equity 3,270,919 3,026,036
--------- ---------
$ 9,967,354 $ 9,744,633
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
2
<PAGE> 3
<TABLE>
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED OCTOBER 31, 1996 AND OCTOBER 31, 1995
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
------------------ ------------------
<S> <C> <C>
Net sales $5,608,996 $6,825,012
Cost of sales 4,667,489 6,034,231
--------- ---------
Gross profit 941,507 790,781
Selling, general and administrative expenses 621,176 699,354
--------- ---------
Operating earnings 320,331 91,427
Interest expense 61,502 63,798
Other income and expenses, net (7,459) (5,156)
--------- ---------
Income before income taxes 266,288 32,785
Provision for income taxes 21,425 9,450
--------- ---------
Net income 244,863 23,335
Accumulated deficit beginning (5,095,837) (3,079,201)
--------- ---------
Accumulated deficit ending ($4,850,974) ($3,055,866)
=========== ===========
THREE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
------------------ ------------------
PRIMARY PRIMARY
------- -------
Earnings per common share:
Net income per share $ .09 $ .01
========= =========
Weighted average number of shares 2,875,424 2,921,924
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
3
<PAGE> 4
<TABLE>
MAGNETIC TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED OCTOBER 31, 1996 AND OCTOBER 31, 1995
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
------------------ -------------------
<S> <C> <C>
Net cash provided by operating activities $ 1,059,952 $ 579,357
----------- -----------
Cash flows from investing activities:
Capital expenditures (57,853) (100,957)
Proceeds from the sale of fixed assets 9,447
----------- -----------
Net cash used by investing activities (48,406) (100,957)
----------- -----------
Cash flows from financing activities:
Principal payments on borrowings and capital leases (153,586) (76,008)
Purchase and retirement of common stock (13) (95)
----------- -----------
Net cash used by financing activities (153,599) (76,103)
----------- -----------
Effect of exchange rate changes on cash 5,291 (1,654)
----------- -----------
Net increase in cash 863,238 400,643
Cash and cash equivalents at the beginning of the period 846,363 746,434
----------- -----------
Cash and cash equivalents at the end of the period $ 1,709,601 $ 1,147,077
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
4
<PAGE> 5
MAGNETIC TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 1996
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 preparation of financial statements in conformity with such
principles requires the use of estimates by management during the reporting
period. Actual results could differ from those estimates.
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.
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. 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 cumulative translation adjustment, a component of
stockholders' equity.
REVENUE RECOGNITION
- -------------------
The Company accounts for long-term contracts 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.
EARNINGS PER SHARE OF COMMON STOCK AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------
Earnings per common share amounts are based on the weighted average number
of shares outstanding during the period after consideration of the dilutive
effect of stock options and warrants.
SALE OF AUSTRO MOLD GROUP ASSETS
- --------------------------------
During the fourth quarter of fiscal 1996, the Company sold its Austro Mold
Group fixed assets, the mold manufacturing work in process and the majority of
the plastics injection molding inventory to an unrelated third party. The Austro
Mold Group results are reflected in the consolidated statement of income for the
three month period ended October 31, 1995.
5
<PAGE> 6
INVENTORIES
- -----------
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:
OCTOBER 31, 1996 JULY 31, 1996
---------------- -------------
Raw material $2,578,642 $1,995,447
Work in process 933,779 1,400,556
Finished goods 130,835 74,871
---------- ----------
$3,643,256 $3,470,874
========== ==========
COSTS, ESTIMATED EARNINGS AND BILLINGS ON CONTRACTS IN PROCESS
- --------------------------------------------------------------
The following is a summary of costs, estimated earnings and billings on
contracts in process:
JULY 31, 1996
-------------
Costs and estimated earnings $ 87,134
Billings to date (190,750)
---------
($103,616)
=========
Costs, estimated earnings and billings were presented in the accompanying
balance sheet as:
JULY 31, 1996
-------------
Costs and estimated earnings in excess of
billings on contracts in process $ 0
Billings in excess of costs and estimated
earnings on contracts in process (103,616)
---------
$(103,616)
=========
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
Major classifications of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, 1996 JULY 31, 1996
---------------- -------------
<S> <C> <C>
Equipment under capital lease $ 537,513 $ 537,513
Machinery and engineering equipment 3,436,181 3,405,256
Furniture and fixtures 1,461,313 1,414,578
Leasehold improvements 378,327 378,326
Vehicles 20,944 46,320
---------- ----------
5,834,278 5,781,993
LESS: Accumulated depreciation and amortization 3,900,924 3,789,358
---------- ----------
$1,933,354 $1,992,635
========== ==========
</TABLE>
CAPITAL EXPENDITURES
- --------------------
Capital expenditures for the three month period ended October 31, 1996
amounted to $57,853. These expenditures were funded with working capital.
6
<PAGE> 7
INCOME TAXES
- ------------
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (SFAS 109), ACCOUNTING FOR INCOME TAXES. The
statement 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 following is a summary of current and long-term deferred tax assets and
the related valuation allowances:
<TABLE>
<CAPTION>
AT OCTOBER 31, 1996 AT JULY 31, 1996
------------------- ----------------
Current deferred tax assets:
<S> <C> <C>
Accrued expenses $ 214,100 $252,600
Inventory 22,900 28,500
Warranty reserves 10,300 10,300
Other deferred tax assets 48,400 46,700
----------- --------
$ 295,700 $338,100
=========== ========
Long-term deferred tax assets:
Federal net operating loss carryforwards $ 776,500 $832,600
State net operating loss carryforwards 185,300 202,100
Federal investment tax credit carryforwards 40,900 40,900
State investment tax credit carryforwards 272,700 272,700
Federal alternative minimum tax credit carryforwards 52,400 51,000
State alternative minimum tax credit carryforwards 22,200 6,000
Depreciation 445,500 430,500
Other deferred tax assets 96,000 90,000
----------- --------
1,891,500 1,925,800
LESS: Valuation allowances 1,398,500 1,471,400
----------- --------
$ 493,000 $454,400
=========== ========
</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.
BORROWINGS
- ----------
The Company had $339,742 available and $910,258 outstanding on its bank
line of credit at October 31, 1996. The Company's entire $1,500,000 revolving
loan was outstanding at October 31, 1996. The line of credit and revolving loan
require interest payments at prime plus .25%.
STOCK OPTION PLAN
- -----------------
During the first quarter of fiscal 1997, the Company's Board of Directors
approved the 1996 Stock Option Plan, subject to stockholder vote and approval at
the December 17, 1996 Annual Meeting. The plan authorizes the Board of Directors
to grant qualified incentive stock options and non-qualified options for the
purchase of the Company's common stock to directors, officers, key employees and
consultants. Twelve key employees received qualified incentive stock option
grants under the plan to purchase an aggregate of 77,500 shares of common stock
at an exercise price of $3.50 per share. A consultant also received a
non-qualified option to purchase 10,000 shares of common stock at the same
price. All of these option grants are subject to approval of the plan by the
stockholders at the Annual Meeting.
7
<PAGE> 8
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 PERIODS ENDED
OCTOBER 31, 1996 AND OCTOBER 31, 1995
RESULTS OF OPERATIONS
- ---------------------
THREE MONTH PERIOD COMPARISON
The Company's consolidated net sales of $5,608,996 for the three months
ended October 31, 1996 decreased $1,216,016, or 18%, from the comparable period
last year. The primary reason for the decrease was the sale of the Company's
Austro Mold Group assets in July 1996. Austro Mold had reported sales of
$1,012,749 for the first quarter of the prior year. The fiscal 1997 results
included sales of $4,950,714 for the Magnetic Assembly Group, a decrease of
$423,398, or 8%, from the comparable prior year period. The decrease in the
Magnetic Assembly sales was the result of unusually high remanufacturing sales
levels in the first quarter of the prior year. This was due to the fact that the
Company's major customer had a sizable backlog of remanufacturing work which it
shifted to the Company at the start of the program. The Company's European
subsidiary, Magnetic Technologies Europe Ltd. (MTE), reported sales of $658,282
for the first quarter of fiscal 1997, compared with $438,151 for the first
quarter of the prior year, an increase of $220,131, or 50%.
Consolidated gross profit of $941,507 for the quarter ended October 31,
1996 increased $150,726 over the comparable period in the prior year, and the
consolidated gross margin increased from 12% to 17%. The primary factor
affecting the gross margin was the sale of Austro Mold, which had experienced a
negative 7% gross profit of $75,082 for the first quarter of the prior year. The
Magnetic Assembly Group's gross margin for the first quarter of fiscal year 1997
was $806,979, or 16%, compared with 15% for the first quarter of fiscal 1996.
MTE reported a gross margin of 20% for the quarter ended October 31, 1996,
versus a 9% gross margin for the comparable prior year period.
Consolidated selling, general and administrative expenses for the first
quarter of fiscal 1997 decreased $78,178 from the comparable fiscal 1996
quarter. The decrease was partially the result of the Austro Mold sale. That
Group had reported selling, general and administrative expenses of $173,296 for
the first quarter of fiscal 1996. This decrease was partially offset by
increases in selling, general and administrative expenses over the prior year
for the Magnetic Assembly Group and MTE of $69,959 and $25,159, respectively.
The increases were the result of several factors, including new product
development costs, stockholder relations expenses and employer 401(k)
contributions. The consolidated selling, general and administrative costs for
the quarter ended October 31, 1996 were 11% of net sales, compared with 10% the
prior year. Interest expense for the first quarter of fiscal 1997 remained
relatively consistent with a $2,296 decrease from the comparable prior year
period.
The three month period ended October 31, 1996 resulted in consolidated net
income of $244,863 versus $23,335 in the comparable fiscal 1996 period, an
improvement of $221,528 over the prior year. The improvement was primarily the
result of the Austro Mold sale, which had reported a net loss of $248,693 for
the first quarter of fiscal 1996. The Magnetic Assembly Group reported net
income of $212,479 for the first quarter of fiscal 1997, and MTE reported net
income of $32,384.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Even though the Company's debt increased due to the acquisition of MTE in
March 1995 and the earlier acquisition of its Austro Mold Group in November
1992, its cash flow should be adequate to fund the $207,000 payment in
settlement of the noncompete agreement with the previous owners of Austro Mold,
which is due in January 1997, as well as the interest and principal on the
current portion of long-term debt.
Cash provided by operating activities totaled $1,059,952 for the three
month period ended October 31, 1996 compared with $579,357 for the comparable
period of the prior year, an increase of $480,596. The variance was primarily
the result of an increase in net income of $221,528 and liquidation of the
Austro Mold Group accounts receivable.
Cash used for investing activities decreased $52,551 for the three month
period ended October 31, 1996 from the comparable period in the prior year. The
variance was primarily due to lower capital expenditures in fiscal 1997.
Cash used for financing cash flows increased $77,496 for the first quarter
of fiscal 1997 compared with the prior year period. The variance was primarily
the result of additional principal payments made on the Company's outstanding
line of credit balance.
FROM TIME TO TIME, THE COMPANY MAY PUBLISH FORWARD-LOOKING STATEMENTS
RELATING TO SUCH MATTERS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS
PROSPECTS, TECHNOLOGICAL IMPROVEMENTS AND NEW PRODUCT DEVELOPMENTS. ALL SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING ANTICIPATIONS, EXPECTATIONS AND
PROJECTIONS CONTAINED IN THIS FORM 10-QSB REPORT, ARE MADE BY THE COMPANY
PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. ALL SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM SUCH PROJECTIONS.
THE RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THE COMPANY'S
DEPENDENCE UPON OBTAINING ORDERS FROM ITS CUSTOMERS TO SUPPLY COMPONENT PARTS
FOR CERTAIN OF THEIR PRODUCT LINES, WHICH ORDERS ARE IN TURN DEPENDENT UPON THE
MARKET SUCCESS OF THOSE PARTICULAR PRODUCTS -- A MATTER OVER WHICH THE COMPANY
HAS LITTLE INFLUENCE OR CONTROL.
9
<PAGE> 10
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
During the first quarter of fiscal 1997, the Company's Board of Directors
approved the 1996 Stock Option Plan, subject to stockholder vote and approval at
the December 17, 1996 Annual Meeting. The plan authorizes the Board of Directors
to grant qualified incentive stock options and non-qualified options for the
purchase of the Company's common stock to directors, officers, key employees and
consultants.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not applicable.
10
<PAGE> 11
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: December 11, 1996 By: /s/ Gordon H. McNeil
- ----------------------------------- ---------------------------------
Gordon H. McNeil, President and
Principal Executive Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 1,709,601
<SECURITIES> 0
<RECEIVABLES> 1,399,885
<ALLOWANCES> 116,975
<INVENTORY> 3,643,256
<CURRENT-ASSETS> 7,033,450
<PP&E> 5,834,278
<DEPRECIATION> 3,900,924
<TOTAL-ASSETS> 9,967,354
<CURRENT-LIABILITIES> 5,019,808
<BONDS> 0
<COMMON> 417,986
0
0
<OTHER-SE> 2,852,933
<TOTAL-LIABILITY-AND-EQUITY> 9,967,354
<SALES> 5,608,996
<TOTAL-REVENUES> 5,608,996
<CGS> 4,667,489
<TOTAL-COSTS> 4,667,489
<OTHER-EXPENSES> 610,717
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 61,502
<INCOME-PRETAX> 266,288
<INCOME-TAX> 21,425
<INCOME-CONTINUING> 244,863
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 244,863
<EPS-PRIMARY> $.09
<EPS-DILUTED> $.09
</TABLE>
