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UNITED STATES
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, 1996
[ ] 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, 1996
were $25,227,635.
The aggregate market value of the issuer's voting common stock held by
non-affiliates as of September 16, 1996 was approximately $8,366,924
(2,308,117 shares x $3.625 average of bid and asked prices).
2,786,584 shares of the issuer's common stock were outstanding as of
September 16, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
The issuer's proxy statement for the December 17, 1996 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 ]
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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's Magnetic Assembly Group has
historically concentrated on designing and manufacturing magnetic, electronic
and mechanical subassemblies of copiers and printers for the electronic office
equipment manufacturing industry.
During 1993, the Company undertook two unrelated steps in an effort to
decrease its reliance on a single customer (Xerox Corporation and its English
subsidiary, which historically accounted for approximately 90% of the Company's
business). It licensed to an English corporation the magnetic assembly European
business which it had been performing for Xerox, and it acquired the Austro Mold
Group, which designs and builds plastic molds and manufactures custom injection
molded parts and assemblies. The combined actions reduced the Company's
percentage of Xerox business to 74% in its fiscal year ended July 31, 1995
(fiscal 1995) and 80% in its fiscal year ended July 31, 1996 (fiscal 1996);
however, both actions have been nullified by subsequent events, and the
Company's percentage of business with Xerox is expected to increase somewhat in
the current fiscal year.
In the second half of fiscal 1995, the Company reacquired its European
business by purchasing Magnetic Technologies Europe Limited ("MTE"), located in
Rochester, Kent, England, from its parent corporation at a purchase price
considerably below the licensing fee originally received by the Company for that
business. Although MTE has diversified, and is expected to further diversify its
customer base, 48% of MTE's fiscal 1996 sales of $2,030,000 were to a Xerox
subsidiary.
The Austro Mold acquisition did not prove beneficial to the Company. After
the acquisition, Austro Mold suffered both a sales decline and cost overruns,
incurring net losses of approximately $2,000,000 in the two years prior to
fiscal 1996, and the Magnetic Assembly Group's profits were insufficient to
offset Austro Mold's losses. In fiscal 1995, the Company replaced the Vice
President in charge of the Austro Mold Group with an experienced plastics
industry executive and took corrective cost-control actions. In spite of these
measures, the Austro Mold Group losses continued. In its Form 10-KSB for fiscal
1995, the Company stated that fiscal 1996 would be the "defining, or pivotal,
year in which the future of Austro Mold will be determined". Accordingly, when
Austro Mold's losses continued through the first half of fiscal 1996, management
recommended, and the Board of Directors approved, its sale.
On July 15, 1996, the Company sold the Austro Mold Group assets to an
unrelated third party. The purchaser acquired Austro Mold's fixed assets and the
bulk of its inventory, while the Company retained Austro Mold's accounts
receivable, accounts payable and a lesser portion of its inventory. The
purchaser also subleased Austro Mold's premises in Rochester, New York, from the
Company through December 17, 1997, the duration of the original lease term. The
Company agreed to purchase its requirements for plastic molded parts from the
purchaser for a period of five years after the closing, provided that the
purchaser remains competitive in terms of quality, cost and delivery. The
purchaser paid $916,000 in cash for Austro Mold's fixed assets at the closing,
assumed $168,000 of equipment leases and tendered a $343,000 five-year note for
the inventory which it acquired. The note is personally guaranteed by the vice
president and majority shareholder of the newly formed Austro Mold corporation
and is secured by the conveyed assets (subordinate to the purchaser's bank
debt). The Company recorded an estimated $1,800,000 loss in the third quarter of
fiscal 1996 in connection with the Board of Director's approval of the sale of
Austro Mold's assets.
The Company incurred a net loss of $2,017,000 for fiscal 1996, including
the final loss on the sale of the Austro Mold Group assets of $1,774,000, on
revenues of $25,228,000; however, in the fourth quarter of fiscal 1996, the
Company returned to profitability with a net profit of $204,000 on sales of
$5,820,000.
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(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 (a) precision magnetic, electronic and mechanical devices
and (b) the remanufacturing of components and subassemblies for reuse by office
equipment manufacturers.
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 Company's wholly-owned European subsidiary,
MTE, operates out of a facility in Rochester, Kent, 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
the prototype stage.
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 historically
set the high standards which some Japanese competitors have been able to meet in
recent years. In the area of pricing, the Company has faced continuous pressure
not only from competitors but also 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 somewhat of a competitive advantage, and the Company utilizes
this RIM process both domestically and at MTE. Because MTE is located in
England, management believes it may have a competitive advantage over Japanese
companies in obtaining European business from new customers. In September 1996,
the Company announced that MTE had signed a multi-year contract to produce
magnetic assembly components for Xeikon N.V., a Belgian company.
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 been
readily obtainable.
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 continues to work with Xerox to find
methods of reducing their mutual reliance upon each other.
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 recent fiscal years.
The Company's expenditures in company-sponsored research and development
activities have been nominal ($1,000 in fiscal 1996 and $6,000 in fiscal
1995). Considering the integration of its engineering and manufacturing
operations, the Company cannot readily identify the amount of customer-funded
research and development activities.
The Company had 75 full-time employees at September 16, 1996.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company operates out of two leased facilities 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 up to $35,000,000 to $40,000,000 of
sales volume per year. Under the terms of its lease expiring October 31, 2000,
the Company pays rental 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.
MTE operates out of an 8,350 square foot facility in Rochester, Kent,
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. Since the MTE operation is presently relatively small, it could easily
be moved to a more permanent location in England if sales volume increases made
such a move necessary or desirable.
The Company also has a residual obligation for the lease of its former
Austro Mold Group facility in Rochester, New York, through December 1997. The
Company's rental for three buildings at that location aggregating 40,000 square
feet is $13,650 per month. The Company has subleased that property to the
purchaser of the Austro Mold assets for $11,500 per month. The total aggregate
difference between the rental payments and rental receipts for that facility,
or $36,550, was accrued and included in the total loss on the sale of the
Austro Mold Group assets in fiscal 1996. The lease for Austro Mold's former
Florida facility in Clearwater expired on December 17, 1995. The rental expense
for that facility was accrued in fiscal 1995.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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/NNM: MTCC). 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 1996 FISCAL 1995
----------------- -----------------
HIGH LOW HIGH LOW
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter (August - October) $5.28 $4.00 $5.50 $4.00
Second Quarter (November - January) $5.00 $4.00 $5.38 $4.25
Third Quarter (February - April) $4.44 $3.38 $5.38 $4.25
Fourth Quarter (May - July) $4.00 $3.25 $5.88 $4.75
</TABLE>
Note: The above quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not represent actual transactions.
(b) Holders
On September 16, 1996, the Company had 4,652 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. Under
its current loan arrangements, the Company cannot pay cash dividends without
approval of its bank.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
In fiscal 1996, the Company reported consolidated sales of $25,228,000, a
$3,018,000, or 14%, increase over the prior year. The Company's Magnetic
Assembly Group reported sales of $19,485,000, an increase of $2,516,000, or 15%,
over fiscal 1995 sales levels. MTE contributed sales totaling $2,030,000 for the
full fiscal year 1996, compared with sales of $558,000 in the last five months
of fiscal 1995 following its acquisition by the Company. The Company's Austro
Mold Group reported sales of $3,712,000 through July 15, 1996, compared with
$4,683,000 in fiscal 1995, a decrease of $971,000. A portion of the decrease in
Austro Mold Group sales was due to the closing of its Florida facility during
fiscal 1995, which reported sales of $308,000 for that year.
The continuing difficulties at Austro Mold contributed to the deterioration
of the Company's gross margins over the past few fiscal years. Fiscal 1996 gross
margin was 12.6%, versus 13.1% in fiscal 1995, 13.5% in fiscal 1994 and 17.7%
in fiscal 1993. Pricing pressure from the Company's principal customer was the
other primary reason for the gross margin declines. The Magnetic Assembly Group
gross margin was 14.8% in fiscal 1996 compared with 17.6% in the prior year. MTE
reported gross margins of 12.8% and 10.4% in fiscal years 1996 and 1995,
respectively. The Austro Mold Group reported gross margins of .9% and a
negative 2.6% in fiscal years 1996 and 1995, respectively.
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Fiscal 1996 selling, general and administrative expenses decreased
$236,000, or 7%, from fiscal 1995. In fiscal 1995, selling, general and
administrative expenses included a $312,000 write-down related to the
acquisition of the remaining interest in MTE, primarily due 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 from 14% to 12% of net sales in
fiscal 1996. The decline was primarily the result of successful cost controls at
Austro Mold during the period preceding its sale, as well as increased sales
levels at MTE and a reduction in its selling, general and administrative
expenses as a percentage of sales. The Company recorded a loss of $1,774,000 in
fiscal 1996 on the sale of the Austro Mold Group assets. The loss was the result
of three primary factors; a loss of $901,000 for the write-off of the remaining
unamortized cost of the noncompete agreement with the two previous owners of
Austro Mold, a loss of $533,000 on the sale of the fixed assets, and various
accrued expenses related to the sale. Interest expense increased $58,000, or
22%, as a result of increased borrowings during fiscal 1996. Total other income
and expenses improved by $104,000 in fiscal 1996 due to a $107,000 loss included
in fiscal 1995 results on the disposition of fixed assets, including the closing
of the Austro Mold Group Florida facility.
The Company incurred a net loss of $2,017,000 for fiscal 1996, compared
with a net loss of $775,000 for fiscal 1995. Included in the fiscal 1996 net
loss was a $1,774,000 loss related to the sale of the Austro Mold Group assets.
Included in the fiscal 1995 net loss was a $312,000 write-down related to the
acquisition of the remaining interest in MTE. Excluding those adjustments,
fiscal 1996 reported a loss of $242,000 and fiscal 1995 reported a loss of
$463,000. The losses in fiscal years 1996 and 1995 resulted primarily from
sizable losses for Austro Mold, as well as start-up costs for the MTE
subsidiary. The sales and profit performances of the Company's Magnetic Assembly
Group were 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 1996, the Company recorded sales of
$5,820,000, compared with sales of $5,887,000 for the fourth quarter of fiscal
1995, a slight decrease of $66,000. The Magnetic Assembly Group, MTE and Austro
Mold reported fourth quarter sales of $5,113,000, $460,000 and $247,000,
respectively. The fourth quarter gross margin for 1996 rebounded to 20% from 13%
in the fourth quarter of fiscal 1995, resulting in net income of $204,000 for
the fiscal 1996 fourth quarter, compared with a net loss of $215,000 in the
fourth quarter of the previous year.
In fiscal 1995, the Company experienced a $4,593,000, or 26%, sales
increase, most of which was attributable to its Magnetic Assembly Group.
Magnetic assemblies, including remanufacturing, had revenues of $16,969,000 in
fiscal 1995, 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 15.5% in fiscal 1994.
In fiscal 1995, 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.
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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 lower sales levels and
continuing 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 was 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 1996, the Magnetic Assembly Group reported a sales increase of
$2,516,000, or 15%. The increased sales were primarily attributable to increased
remanufacturing operations with the Company's largest customer. The Group's
gross margin declined to 14.8% from 17.6% the prior year due to continued
pricing pressure from that customer and lower margins in the remanufacturing
business. Magnetic Assembly's selling, general and administrative expenses
decreased $84,000 from the prior year due to the inclusion of a $312,000
write-down in fiscal 1995 recorded in connection with the MTE acquisition. In
fiscal 1996, the Magnetic Assembly Group recorded a loss of $1,774,000 on the
sale of the Austro Mold Group assets. Excluding the impact of those nonrecurring
events, selling, general and administrative expenses increased $228,000;
however, as a percentage of sales, selling, general and administrative costs
remained consistent as a percentage of net sales of 11%. The Magnetic Assembly
Group reported a net loss of $1,287,000 for the year ended July 31, 1996
compared with net income of $573,000 the prior year. Excluding the impact of the
nonrecurring events described above, the Group reported income of $487,000 and
$885,000 for fiscal years 1996 and 1995, respectively. The decrease of $398,000
is the result of the deterioration in the gross margin in fiscal 1996.
The Austro Mold Group reported sales of $3,713,000 through July 15, 1996
compared with $4,683,000 the prior fiscal year. The decrease of $971,000 is
partially attributable to the closing of its Florida facility, which reported
sales of $308,000 in fiscal 1995, as well as the continued deterioration of this
business. The gross margins were .9% in fiscal 1996 and a negative 2.6% in
fiscal 1995. The selling, general and administrative expenses decreased by
$297,000, and from 21% to 19% of net sales. The decrease was the result of cost
control procedures put into place by management during the period preceding the
sale of the Group. Austro Mold reported net losses of $690,000 and $1,250,000
in fiscal 1996 and fiscal 1995, respectively.
The Company's management does not believe that the losses which the Company
experienced in the last few fiscal years represent a pattern or continuing
trend. Management believes that the Company's magnetic assembly operations have
been strengthened by the broadened use of its technology in the areas of
remanufacturing, additional European business through MTE and an expanding
customer base.
The Company's backlog at July 31, 1996 was $8,513,000 compared with
$12,667,000 at July 31, 1995. The decrease in the backlog of $4,154,000 from
the previous year was the result of an unusually high backlog level at July 31,
1995.
As a result of the losses during the past three fiscal years, the Company's
liquidity has deteriorated. As of July 31, 1996, the Company's cash balance was
$846,000, versus $746,000 at July 31, 1995 and $400,000 at July 31, 1994;
working capital was $1,791,000, versus $2,623,000 and $2,854,000 at July 31,
1995 and 1994, respectively; the current ratio was 1.4 to 1.0 at July 31, 1996,
versus 1.5 to 1.0 and 2.0 to 1.0 at July 31, 1995 and 1994, respectively. Due to
increased borrowings to meet its cash needs, the Company's interest expense has
increased $58,000 in fiscal 1996 and $106,000 in fiscal 1995, despite better
loan terms which the Company obtained in a mid-year refinancing in fiscal 1995.
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In connection with the sale of the Austro Mold Group assets, the Company
received $916,000 cash, which was utilized to fund a principal payment of
$500,000 on the Company's revolving line of credit and for various expenses
related to the Austro Mold closing. In addition, the funds were used for a
$225,000 payment in settlement of the noncompete agreement with the previous
owners of Austro Mold. The settlement also requires a final payment of $207,000
in January 1997. Even though the Company's debt increased due to the acquisition
of MTE in March 1995 and the acquisition of its Austro Mold Group in November
1992, its cash flow should be adequate to fund the $207,000 settlement payment,
as well as the interest and principal on the current portion of long-term debt.
Operating cash flows in fiscal 1996 remained relatively consistent, showing
an improvement of $33,000 over the comparable period in fiscal 1995.
Cash provided by investing activities increased $1,242,000 in fiscal 1996
over the prior year. The increase is due to two factors; $916,000 cash proceeds
from the Austro Mold closing and decreased capital expenditures for production
equipment and vehicles.
Cash used by financing activities increased $1,517,000 in fiscal 1996 over
the prior year. The increase is the result of net loan payments over borrowings
of $446,000 in fiscal 1996 compared with net loan borrowings over payments of
$959,000 in fiscal 1995. In addition, fiscal 1995 cash flows included $113,000
of proceeds from the exercise of stock options.
In fiscal 1995, the Company was offered improved loan rates on its
then-existing bank debt and changed banks. The new loan accommodation remains
secured by the assets of the Company and includes both a $1,500,000 revolving
line of credit convertible into a term loan on March 1, 1997, as well as a
$1,250,000 line of credit. The maximum borrowing permitted under the revolving
line of credit was reduced from $2,000,000 in connection with the sale of the
Austro Mold Group assets in fiscal 1996. At July 31, 1996, the Company had
$1,500,000 of principal outstanding on the revolving line of credit and
$1,010,000 on the line of credit. In connection with the MTE reacquisition, the
Company had a loan due to the Calder Group with an outstanding balance of
$188,000 at July 31, 1996. The Company also had other long-term debt totaling
$63,000 outstanding at July 31, 1996 and $296,000 of equipment leases with
another bank.
Capital expenditures totaled $319,000 in fiscal 1996, as compared with
$1,014,000 in fiscal 1995. Included in fiscal 1995 capital expenditures were
$112,000 of equipment financed with proceeds from the master lease line of
credit. The fiscal 1996 capital expenditures were financed with working capital
and a $184,000 advance on the Company's line of credit. Management estimates
that capital expenditures will approximate $425,000 in fiscal 1997, a portion of
which is expected to be funded with capital lease financing.
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-KSB 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.
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ITEM 7. FINANCIAL STATEMENTS
Following is an index to the consolidated financial statements filed as
part of this report.
<TABLE>
<CAPTION>
Financial Statements Page No.
- -------------------- --------
<S> <C>
Report of Independent Accountants 13
Consolidated Balance Sheets at July 31, 1996 and 1995 14
Consolidated Statements of Operations for the three years ended July 31, 1996 15
Consolidated Statements of Changes in Stockholders' Equity for the three years ended 16
July 31, 1996
Consolidated Statements of Cash Flows for the three years ended July 31, 1996 17
Notes to Consolidated Financial Statements 18 - 29
</TABLE>
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 17, 1996, under the headings entitled "Voting Securities",
"Election of Directors", "Transactions Involving Directors and Executive
Officers", "Executive Compensation" and "Section 16(a) Beneficial Ownership
Reporting Compliance", which proxy statement will be filed within 120 days after
the end of fiscal 1996.
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
pages 11-12 following the signature page and are numbered in accordance with
Item 601 of Regulation S-B. The Company will furnish a copy of the Exhibits
without charge to any stockholder submitting a written request addressed to
Susan M. Weise, Corporate Secretary, at 770 Linden Avenue, Rochester, New York
14625.
During the last quarter of fiscal 1996, the Company filed a report on Form
8-K dated July 15, 1996, relating to the Company's sale of its Austro Mold Group
assets. No financial statements were filed with the Form 8-K.
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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 22, 1996 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 22, 1996 By: /s/ Gordon H. McNeil
-----------------------------------------
Gordon H. McNeil, Director,
President, Principal Executive
Officer and Principal Financial
Officer
Date: October 22, 1996 By: /s/ Isadore Diamond
-----------------------------------------
Isadore Diamond, Director,
Chairman of the Board
Date: October 22, 1996 By: /s/ Dana L. Limperis
-----------------------------------------
Dana L. Limperis, Controller
and Principal Accounting
Officer
Date: October 22, 1996 By: /s/ G. Thomas Clark
-----------------------------------------
G. Thomas Clark, Director
Date: October 22, 1996 By: /s/ Catherine D'Amico
-----------------------------------------
Catherine D'Amico, Director
Date: October 22, 1996 By: /s/ Bernard Kozel
-----------------------------------------
Bernard Kozel, Director
10
<PAGE> 11
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 IBR to Exhibit A of Form 10-KSB for fiscal
year ended July 31, 1995
(10) (a) 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) (b) 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) (c) Lease of Austro Mold facility, Rochester, IBR to Exhibit 5 of Form 8-K as amended dated
New York January 28, 1992
(10) (d) Share Purchase Agreement relative to the IBR to Exhibit 1 of Form 8-K as amended dated
acquisition of Magnetic Technologies Europe March 31, 1995
Limited
(10) (e) Credit Agreement, General Security IBR to Exhibit 3 of Form 8-K as amended dated
Agreement, Revolving Line of Credit Note and March 31, 1995
Commercial Line of Credit Note with First
National Bank of Rochester
(10) (f) Stock Option Contract held by IBR to Exhibit E of Form 10-K for fiscal year
G. Thomas Clark (a Director) dated ended July 31, 1992
September 18, 1992
(10) (g) Stock Option Contract held by IBR to Exhibit D of Form 10-K for fiscal year
Gordon H. McNeil (President and Chief ended July 31, 1992
Executive Officer) dated May 19, 1992
(10) (h) Stock Option Contract held by IBR to Exhibit B of Form 10-KSB for fiscal
Gordon H. McNeil (President and Chief year ended July 31, 1993
Executive Officer) dated January 7, 1993
(10) (i) Stock Option Contract held by IBR to Exhibit B of Form 10-KSB for fiscal
Bernard Kozel (a Director) dated year ended July 31, 1995
March 8, 1995
(10) (j) Asset Purchase Agreement relative to the Exhibit A to this Report
sale of the Austro Mold Group assets dated
July 15, 1996
(10) (k) Austro Mold sale Promissory Note, Security Exhibit B to this Report
Agreement and Subordination Agreement,
each dated July 12, 1996 or July 15, 1996
(10) (l) Sublease Agreement of Austro Mold facility Exhibit C to this Report
for lease term remainder dated July 15, 1996
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
(CONTINUATION)
EXHIBIT STATUS OR INCORPORATION
NO. DESCRIPTION BY REFERENCE (IBR)
- -------------- ------------------------------------------- ------------------------------------------
<S> <C> <C>
(10) (m) Promissory Note and Acceptance and Consent Exhibit D to this Report
in settlement of remaining obligations with
the former owners of Austro Mold, Inc.,
dated July 12, 1996 and
July 15, 1996, respectively
(21) Subsidiaries of the Registrant IBR to Exhibit C of Form 10-KSB for fiscal
year ended July 31, 1995
</TABLE>
12
<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 operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Magnetic Technologies Corporation and its subsidiary at July 31,
1996 and 1995, and the results of their operations and their cash flows for each
of the three fiscal years in the period ended July 31, 1996, 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
September 30, 1996
13
<PAGE> 14
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
-----------------------------------
ASSETS 1996 1995
------------------ ------------
Current assets:
<S> <C> <C>
Cash, including interest-bearing deposits of $476,325, and $490,445
at July 31, 1996 and 1995, respectively $ 846,363 $ 746,434
Accounts receivable, less allowance for doubtful accounts of $120,000
and $31,500 at July 31, 1996 and 1995, respectively 2,027,821 2,265,794
Inventories 3,470,874 4,182,773
Costs and estimated earnings in excess of billings on contracts in
process 291,288
Deferred income taxes 338,100 278,000
Prepaids and other current assets 100,140 109,613
------------ ------------
Current assets 6,783,298 7,873,902
Property, plant and equipment, net 1,992,635 3,877,951
Excess of cost over net assets acquired, net of accumulated amortization
of $127,154 at July 31, 1995 56,438
Deferred income taxes 454,400 514,500
Other assets 514,300 482,517
------------ ------------
$ 9,744,633 $ 12,805,308
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 3,349,380 $ 3,961,287
Notes payable 1,217,830 826,108
Current portion of long-term debt and capital lease obligations 321,528 291,784
Billings in excess of costs and estimated earnings on contracts in
process 103,616 171,497
------------ ------------
Current liabilities 4,992,354 5,250,676
Long-term debt and capital lease obligations 1,726,243 2,533,666
------------ ------------
Total liabilities 6,718,597 7,784,342
------------ ------------
Stockholders' equity:
Common stock - $.15 par value;
Authorized - 15,000,000 shares
Issued and outstanding - 2,786,584 and 2,786,675 shares at
July 31, 1996 and 1995, respectively 417,988 418,001
Stock warrants outstanding for 22,500 shares of common stock, valued at
$82,500, net of unamortized deferred expense of $26,895 and
$47,115 at July 31, 1996 and 1995, respectively 55,605 35,385
Additional paid-in capital 7,645,921 7,646,302
Cumulative translation adjustment 2,359 479
Accumulated deficit (5,095,837) (3,079,201)
------------ ------------
Total stockholders' equity 3,026,036 5,020,966
------------ ------------
$ 9,744,633 $ 12,805,308
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
14
<PAGE> 15
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 25,227,635 $ 22,209,634 $ 17,616,480
Cost of sales 22,056,953 19,290,099 15,241,215
------------- ------------- -------------
Gross profit 3,170,682 2,919,535 2,375,265
Selling, general and administrative expenses 3,105,905 3,341,450 2,837,504
Loss on sale of Austro Mold Group assets 1,774,167
------------- ------------- -------------
Operating loss (1,709,390) (421,915) (462,239)
Interest expense 323,192 265,233 159,395
Other (income) expense (16,446) 87,217 (7,355)
------------- ------------- -------------
Loss before income taxes and change in accounting
principle (2,016,136) (774,365) (614,279)
Provision for income taxes 500 500 500
------------- ------------- -------------
Loss before change in accounting principle (2,016,636) (774,865) (614,779)
Cumulative effect of a change in accounting principle
relating to income taxes 676,000
------------- ------------- -------------
Net (loss) income ($ 2,016,636) ($ 774,865) $ 61,221
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------------------------------------
1996 1995 1994
------------------ ------------------- --------------------
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
(Loss) earnings per common
share:
Loss before change in
accounting principle ($.72) ($.72) ($.28) ($.28) ($.21) ($.21)
Change in accounting
principle .23 .23
------- ------ ------ ------ ------ -------
Net (loss) income per share ($.72) ($.72) ($.28) ($.28) $.02 .02
======= ====== ====== ====== ====== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
15
<PAGE> 16
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- STOCK PAID-IN ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL DEFICIT
--------- ---------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
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)
--------- ---------- -------- ------------ ------------
Balance at July 31, 1995 2,786,675 418,001 35,385 7,646,302 ( 3,079,201)
Repurchase and retirement of
fractional shares related
to stock split (91) (13) (381)
Amortization of deferred
stock warrants expense 20,220
Net loss ( 2,016,636)
--------- ---------- -------- ------------ ------------
Balance at July 31, 1996 2,786,584 $ 417,988 $ 55,605 $ 7,645,921 ($5,095,837)
========= ========== ======== ============ ============
</TABLE>
The cumulative translation adjustment was $2,359 and $479 at July 31, 1996
and 1995, respectively.
See accompanying Notes to Consolidated Financial Statements.
16
<PAGE> 17
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------
1996 1995 1994
------------ --------------- --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net (loss) income ($ 2,016,636) ($ 774,865) $ 61,221
----------- ----------- -----------
Adjustments to reconcile net income to cash provided by
operating activities -
Cumulative effect of a change in accounting principle (676,000)
Depreciation and amortization 1,006,508 1,079,062 988,353
Loss on disposal of property 3,788 106,734 910
Loss on sale of Austro Mold Group assets 1,774,167
Provision for bad debts 91,042 16,500 (9,719)
Imputed interest on long-term debt 20,056 9,153
Decrease (increase) in accounts receivable 144,004 (98,048) 163,908
Decrease (increase) in inventories 393,617 (1,511,516) 60,969
Decrease (increase) in costs, estimated earnings and
billings on contracts in process 140,716 101,297 (29,121)
Increase in deferred income taxes (5,500)
Decrease (increase) in prepaids and other current
assets 1,809 (7,926) (28,262)
Payments under noncompete agreement (555,000) (330,000) (330,000)
Increase in other assets (16,825) (17,053) (77,166)
(Decrease) increase in accounts payable and accrued
expenses (1,041,753) 1,344,753 25,982
Decrease in other long-term liabilities (9,045)
----------- ----------- -----------
Total adjustments 1,962,129 687,456 80,809
----------- ----------- -----------
Net cash (used) provided by operating activities (54,507) (87,409) 142,030
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (318,962) (902,346) (592,712)
Purchase of Magnetic Technologies Europe (MTE), net of
cash acquired (206,311)
Write-down of investment in MTE 312,302
Proceeds from sale of Austro Mold Group assets 916,497
Proceeds from the sale of fixed assets 7,718 160,000 4,100
----------- ----------- -----------
Net cash provided (used) by investing activities 605,253 (636,355) (588,612)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings 602,500 3,457,758 660,000
Payments for expenses incurred for stock splits (5,243)
Principal payments on borrowings and capital leases (1,048,031) (2,498,581) (854,800)
Purchase and retirement of common stock (394) (234) (201)
Proceeds from stock options exercise 112,500 5,000
----------- ----------- -----------
Net cash (used) provided by financing activities (445,925) 1,071,443 (195,244)
Effect of exchange rate changes on cash (4,892) (1,106)
----------- ----------- -----------
Net increase (decrease) in cash 99,929 346,573 (641,826)
Cash and cash equivalents at beginning of year 746,434 399,861 1,041,687
----------- ----------- -----------
Cash and cash equivalents at end of year $ 846,363 $ 746,434 $ 399,861
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
17
<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. The Company's Austro Mold Group, sold in July 1996, was
engaged in the design and manufacture of precision plastic molds and custom
injection molded plastic parts and assemblies. Austro Mold had 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 Notes 2 and 3.)
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. 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.
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 3.) 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 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.
18
<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, or over the expected useful life of the related
intangible asset, whichever is shorter. During fiscal 1996, the remaining excess
of cost over net assets acquired was charged to expense.
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 an original maturity of three months or less to
be cash equivalents.
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable and inventories are valued
at their carrying amounts, which are reasonable estimates of fair value. The
fair value of long-term debt is estimated using rates currently available to the
Company for debt with similar terms and maturities and is not materially
different from the carrying amount. The fair value of all other financial
instruments approximates cost as stated.
Reclassifications
Certain amounts in the prior years' financial statements were reclassified
to conform with current year presentation.
(Loss) Earnings Per Common Share
All per share amounts for fiscal 1996 and 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 losses in those years. Per share amounts for
fiscal 1994 are based on the weighted average number of shares outstanding
during the period after consideration of the dilutive effect of stock options
and warrants.
Weighted average shares of common stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------------------
1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
Primary 2,786,644 2,779,521 2,948,161
Fully Diluted 2,786,644 2,779,521 2,963,865
</TABLE>
Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS TO BE DISPOSED OF, effective for fiscal years beginning
after December 15, 1995. The Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. The adoption of SFAS 121 is not expected to significantly
impact the Company's future operating results.
19
<PAGE> 20
The FASB issued Statement of Financial Accounting Standards No. 123 (SFAS
123), ACCOUNTING FOR STOCK-BASED COMPENSATION, effective for fiscal years
beginning after December 15, 1995, which establishes accounting and reporting
for stock-based employee compensation plans. This Statement defines a fair value
based method of accounting for an employee stock option or similar equity
instrument, but also allows an entity to continue to measure compensation cost
for those plans using the current method of accounting prescribed by Accounting
Principles Board Opinion No. 25 (APB 25), ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. The Company has elected not to change its method of accounting for
employee stock options and will provide the pro forma fair value disclosures
required by the new pronouncement.
NOTE 2 - SALE OF AUSTRO MOLD GROUP ASSETS:
During fiscal 1993, the Company completed the acquisition of 100% of the
outstanding stock of Austro Mold, Inc. Austro Mold was 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 line of credit 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.
In connection with the acquisition, the Company entered into a noncompete
agreement with the two previous owners of Austro Mold. The agreement was
effective from November 1992 through December 2000 and required payment of
$1,650,000 in 60 equal monthly installments commencing January 1993. The cost of
the noncompete agreement was being amortized to expense ratably over the period
in which it was in effect. The total amortization expense was $193,622, $202,041
and $202,041 for fiscal years 1996, 1995 and 1994, respectively. The excess of
unamortized cost of $1,074,388 over the remaining amount due under the agreement
of $797,500, or $276,888, was reflected in other assets at July 31, 1995.
On July 15, 1996, the Company sold the Austro Mold fixed assets, the mold
manufacturing work in process and the majority of the plastics injection molding
inventory to an unrelated third party. In exchange for these assets, the Company
received cash of $916,497 and a promissory note receivable of $342,683. The
purchaser also assumed three capital lease obligations totaling $168,325 for
various manufacturing equipment. The Company remains obligated under the leases
as a secondary guarantor, with the purchaser's vice president and majority
shareholder as the primary guarantor on the leases.
The promissory note receivable is payable in 48 equal monthly payments at a
stated rate of interest of 8% with payments and the accrual of interest
commencing on August 15, 1997. The note was discounted to $311,846 to reflect
the accrual of interest from the closing at the Company's 8.5% bank borrowing
rate on the date of closing. The discounted balance of $311,846 was reflected in
other assets at July 31, 1996. The note is secured by the personal guarantee of
the purchaser's vice president and majority shareholder and by the conveyed
fixed assets, subordinated to the purchaser's bank security interests.
In connection with the sale, the Company's remaining obligation of $467,500
under the noncompete agreement with the two previous owners of Austro Mold was
settled for a payment of $225,000 at closing and $207,572 payable in January
1997. The unamortized cost of the noncompete agreement of $900,766 at July 31,
1996 was charged to the loss on the sale in fiscal 1996.
The Company incurred a total loss on the sale of the Austro Mold Group
assets of $1,774,167, which was included in the net loss for fiscal 1996. (See
also Notes 6, 8, 9 and 14.)
20
<PAGE> 21
NOTE 3 - 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, to form 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 36 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 $103,908 and long-term debt of $84,461 at July 31,
1996. (See Note 8.)
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 in fiscal 1995. The
accounts of MTE are included in the consolidated financial statements of the
Company as of March 1, 1995 forward.
21
<PAGE> 22
The following tables present unaudited pro forma results of operations as
if the acquisition of MTE had occurred at the beginning of each of the periods
presented, after giving effect to certain adjustments for intercompany
transactions, depreciation, interest and related income tax effects. These
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition been
made at the beginning of the periods presented or of results which may occur in
the future.
<TABLE>
<CAPTION>
PRO FORMA RESULTS (UNAUDITED)
YEAR ENDED JULY 31,
-------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Net Sales $ 22,420,698 $ 17,323,672
Cost of sales 19,364,900 15,437,090
------------ ------------
Gross profit 3,055,798 1,886,582
Selling, general and administration expenses 3,684,645 3,200,201
------------ ------------
Operating loss (628,847) (1,313,619)
Interest, other income and expenses 415,621 208,289
------------ ------------
Loss before income taxes and change in accounting
principle (1,044,468) (1,521,908)
Provision for income taxes 500 500
------------ ------------
Loss before change in accounting principle ($ 1,044,968) ($ 1,522,408)
============ ============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA RESULTS (UNAUDITED)
YEAR ENDED JULY 31,
-------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Loss per common share:
Loss before change in accounting principle
Primary ($.38) ($.56)
Fully diluted ($.38) ($.56)
Weighted average number of shares
Primary 2,779,521 2,736,545
Fully diluted 2,779,521 2,736,545
NOTE 4 - INVENTORIES:
Inventories consist of the following:
JULY 31,
-------------------------------
1996 1995
------------ ------------
Raw material $ 1,995,447 $ 2,558,700
Work in process 1,400,556 1,271,105
Finished goods 74,871 352,968
------------ ------------
$ 3,470,874 $ 4,182,773
============ ============
</TABLE>
22
<PAGE> 23
NOTE 5 - 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,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Costs and estimated earnings $ 87,134 $ 1,136,537
Billings to date (190,750) (1,016,746)
----------- -----------
($ 103,616) $ 119,791
=========== ===========
</TABLE>
Costs, estimated earnings and billings were presented in the accompanying
balance sheet as:
<TABLE>
<CAPTION>
JULY 31,
---------------------------
1996 1995
---------- ---------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
contracts in process $ 0 $ 291,288
Billings in excess of costs and estimated earnings on
contracts in process (103,616) (171,497)
---------- ---------
($ 103,616) $ 119,791
========== =========
</TABLE>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
Major classifications of property, plant and equipment were as follows:
<TABLE>
<CAPTION>
JULY 31,
-----------------------------
1996 1995
---------- ------------
<S> <C> <C>
Equipment under capital lease $ 537,513 $ 844,202
Machinery and engineering equipment 3,405,256 4,887,098
Furniture and fixtures 1,414,578 1,393,874
Leasehold improvements 378,326 513,453
Vehicles 46,320 101,243
Construction in process 116,526
---------- -----------
5,781,993 7,856,396
LESS: Accumulated depreciation and amortization 3,789,358 3,978,445
---------- -----------
$ 1,992,635 $ 3,877,951
=========== ===========
</TABLE>
The accumulated amortization for capital leases was $137,133 and $157,379
at July 31, 1996 and 1995, respectively. Amortization expense was $76,835,
$90,756 and $53,909 in fiscal years 1996, 1995 and 1994, respectively.
On March 31, 1995, the Company closed its Austro Mold Group Clearwater,
Florida plant. 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.
On July 15, 1996, the Company sold its Austro Mold Group's fixed assets to
an unrelated third party. The book value of these assets at the time of the sale
was $1,449,139, for which the Company received $916,497. The Company recognized
a loss on the sale of these assets of $532,642 in fiscal 1996. (See also
Note 2.)
23
<PAGE> 24
NOTE 7 - NOTES PAYABLE:
Notes payable at July 31, 1996, consisted of $1,010,258 outstanding on the
Company's bank line of credit and $207,572 payable in January 1997 related to
the settlement of the noncompete agreement with the two previous owners of
Austro Mold. (See Note 2.) At July 31, 1996, the Company had $239,742 available
under its bank line of credit bearing interest at prime plus .25%. The Company
utilized $409,158 of its available line of credit during fiscal 1996.
The line of credit is collateralized by equipment, receivables, contract
rights and inventory of the Company. The line of credit agreement contains a
provision requiring the Company to maintain a 30 day out of debt period during
each 12 month period. The Company has obtained a waiver from its bank related to
this provision for fiscal 1996 and fiscal 1997.
NOTE 8 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
<TABLE>
<CAPTION>
Long-term debt consisted of the following:
PRINCIPAL BALANCE
CURRENT JULY 31,
INTEREST PORTION ------------------------------
DESCRIPTION DUE DATE RATE DUE 1996 1995
- -------------------- ---------------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revolving bank line March 2002 (see
of credit conversion option
outlined below) Prime + .25% $ 81,460 $ 1,500,000 $ 1,806,650
Obligations under Various to
capital leases February 2000 6.95% to 9.15% 125,548 295,914 644,975
Calder loan April 1998 Imputed 9.25% 103,908 188,369 283,130
Other long-term debt March 2002 5.00% 10,612 63,488 90,695
--------- ----------- -----------
$ 321,528 2,047,771 2,825,450
=========
LESS: Current portion due within one year 321,528 291,784
----------- -----------
$ 1,726,243 $ 2,533,666
=========== ===========
</TABLE>
The bank prime rate was 8.25% at July 31, 1996.
During fiscal 1996, the Company utilized the remaining $193,350 of its
available balance on the revolving bank line of credit. In connection with the
sale of the Company's Austro Mold Group assets in fiscal 1996, the Company made
a principal payment of $500,000 on the note, and the maximum allowable borrowing
under the note was reduced to $1,500,000. (See Note 2.) The revolving line of
credit 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. It is the current
intention of the Company's management to refinance the note under the five-year
term loan option; therefore, an appropriate portion of the note has been
reclassified to current portion of long-term debt in the Company's balance
sheet at July 31, 1996 and is reflected accordingly in the five-year repayment
table below. The revolving line of credit had no available balance at July 31,
1996. The note is collateralized by the equipment, inventory, accounts
receivable and other personal property of the Company. The revolving line of
credit 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
or has obtained waivers related to the restrictive covenants at July 31, 1996.
The Company had an available master lease line of credit of $1,000,000 with
its previous bank, which was eliminated during fiscal 1995. Two outstanding
balances under the lease line of credit were eliminated in connection with the
sale of the Austro Mold Group assets during fiscal 1996. (See Note 2.) The
Company remains obligated under these leases as a secondary guarantor. The
outstanding total of the remaining lease line of credit balances was $295,914 at
July 31, 1996. These lease balances require monthly payments totaling $11,919
including 7.31% interest. The lease balances mature in October 1998. The total
obligations under capital leases are secured by equipment with a net book value
of $400,380 at July 31, 1996.
24
<PAGE> 25
During fiscal 1996, the Company became the guarantor for a maximum
liability of $100,000 for its wholly-owned subsidiary, MTE, with respect to a
vendor relationship.
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 1997 $ 185,368 $125,548 $10,612
Fiscal 1998 343,105 135,040 10,318
Fiscal 1999 281,506 35,326 10,846
Fiscal 2000 306,388 11,401
Fiscal 2001 333,470 11,984
Later 238,532 8,327
---------- -------- -------
$1,688,369 $295,914 $63,488
========== ======== =======
</TABLE>
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 $613,619, $590,868
and $748,600 during fiscal years 1996, 1995 and 1994, respectively. The Linden
Avenue facility is leased from a related party. (See Note 12.)
The Austro Mold Group Rochester, New York plant was subleased in connection
with the sale of the Austro Mold Group assets effective July 15, 1996. The
sublease requires monthly payments of $11,500 through December 1997. The Company
remains obligated under the original lease for the plant for $13,650 per month
through December 1997. The difference in the monthly lease rentals of $2,150 per
month is reflected in the future minimum payments required under the
noncancelable operating lease schedule below. The difference in rental payments
and rental receipts for the remainder of the lease term, or $36,550, was accrued
and reflected in the loss on the sale of the Austro Mold Group assets for the
year ended July 31, 1996. (See Note 2.)
Future minimum payments required under noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
FACILITIES VEHICLES
------------- -----------
<S> <C> <C>
Fiscal 1997 $ 391,411 $11,509
Fiscal 1998 376,364
Fiscal 1999 365,616
Fiscal 2000 365,616
Fiscal 2001 91,404
----------- -------
$ 1,590,411 $11,509
=========== =======
</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 were 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
was reflected in the Company's balance sheet as of July 31, 1994. Payment was
made to stockholders for any fractional share interests.
25
<PAGE> 26
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 $26,895 and $47,115
at July 31, 1996 and 1995, respectively. The value of the outstanding warrants,
net of unamortized deferred expense, or $55,605 and $35,385, was reflected in
stockholders' equity at July 31, 1996 and 1995, respectively.
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.)
All stock options and warrants granted by the Company were issued at the
fair market value price of the Company's common stock on the date of grant.
There was no activity in the outstanding number of stock options during
fiscal 1996.
<TABLE>
<CAPTION>
OPTION PRICE
SUMMARY OF STOCK OPTIONS NUMBER RANGE PER SHARE
----------------------------------- ------------ ----------------------
<S> <C> <C>
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 and
July 31, 1996 275,000 $2.34 - $4.63
=======
Exercisable at July 31, 1996 237,500 $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.
Subsequent to July 31, 1996, the Company issued stock options to purchase
87,500 shares of common stock under the 1996 Stock Option Plan approved by the
Board of Directors. The options were issued to a consultant and Company
employees. (See Note 15.)
26
<PAGE> 27
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 changed 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 cumulative effect of a change in
accounting principle. It primarily represented 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 years 1996,
1995 or 1994.
The following tables summarize the current and long-term deferred tax
assets and the related valuation allowances:
<TABLE>
<CAPTION>
AT JULY 31,
------------------------------
1996 1995
--------- ----------
<S> <C> <C>
Current deferred tax assets:
Accrued expenses $ 252,600 $ 109,700
Inventory 28,500 44,800
Warranty reserves 10,300 15,100
Other deferred tax assets 46,700 11,800
Losses on fixed asset disposals 96,600
--------- ---------
$ 338,100 $ 278,000
========= =========
AT JULY 31,
-----------------------------
1996 1995
--------- ---------
Long-term deferred tax assets:
Federal net operating loss carryforwards $ 832,600 $ 306,700
State net operating loss carryforwards 202,100 45,500
Federal investment tax credit carryforwards 40,900 96,300
State investment tax credit carryforwards 272,700 218,300
Federal alternative minimum tax credit carryforwards 51,000 51,000
State alternative minimum tax credit carryforwards 6,000 6,000
Depreciation 430,500 315,500
Other deferred tax assets 90,000 102,900
--------- ---------
1,925,800 1,142,200
LESS: Valuation allowance 1,471,400 627,700
--------- ---------
$ 454,400 $ 514,500
========= =========
</TABLE>
The federal net operating loss carryforwards expire periodically from
fiscal years 2002 through 2011, while federal tax credit carryforwards expire
periodically from fiscal years 1997 through 2002. For state tax purposes, the
net operating loss carryforwards expire periodically from fiscal years 2009
through 2011 and tax credit carryforwards expire periodically through fiscal
year 2011.
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.
27
<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. (See Note 10.)
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
$365,616, $367,680 and $368,400 in fiscal years 1996, 1995 and 1994,
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 8.) Rental expense for the
equipment amounted to $27,000 in fiscal year 1994.
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 $20,000, $68,000 and $21,000
in fiscal years 1996, 1995 and 1994, 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
previously performed at the Austro Mold Group prior to the sale of its assets in
July 1996. All three units of the Company's business were effectively integrated
since the acquisition of Austro Mold in November 1992 and the acquisition of MTE
in February 1995. (See Notes 2 and 3.)
Sales outside the United States, principally to Europe and Canada, amounted
to $3,269,000, $1,851,000 and $1,140,000 in fiscal years 1996, 1995 and 1994,
respectively.
During the years ended July 31, 1996, 1995 and 1994, gross sales to one
customer amounted to $20,261,000, $16,494,000 and $10,755,000, respectively.
28
<PAGE> 29
NOTE 14 - SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS:
The following transactions represent noncash investing and financing
activities:
YEAR ENDED JULY 31, 1996:
During fiscal 1996, a promissory note of $342,683, discounted to $311,846,
was received by the Company in connection with the sale of the Austro Mold Group
assets. (See Note 2.)
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 3.)
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 was reflected as an
increase to stockholders' equity at July 31, 1994.
NOTE 15 - SUBSEQUENT EVENT:
Subsequent to July 31, 1996, 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. (See also Note 10.)
29
<PAGE> 1
EXHIBIT (A)
ASSET PURCHASE AGREEMENT
Dated as of July 15, 1996
by and between
MAGNETIC TECHNOLOGIES CORPORATION
AND
AUSTRO MOLD, INC.
<PAGE> 2
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1. ASSETS TO BE ACQUIRED................................................. 1
1.1 Description of Purchased Assets.................................... 1
1.2 Excluded Assets.................................................... 5
SECTION 2. THE PURCHASE PRICE AND RELATED MATTERS................................ 6
2.1 Purchase Price. ................................................... 6
2.2 Purchase Price Adjustments......................................... 7
2.3 Allocation of Purchase Price....................................... 8
SECTION 3. ASSUMPTION OF ENUMERATED LIABILITIES.................................. 8
3.1 General Limitation on Assumption of Liabilities.................... 8
3.2 Excluded Liabilities............................................... 9
3.3 Employees. ........................................................ 11
SECTION 4. REPRESENTATIONS AND WARRANTIES OF SELLER.............................. 11
4.1 Organization and Good Standing..................................... 11
4.2 Corporate Authority................................................ 12
4.3 No Violation....................................................... 12
4.4 Consents and Approvals of Governmental Authorities and Others...... 13
4.5 Financial Statements............................................... 13
4.6 Litigation: Compliance with Laws.................................. 14
4.7 Intellectual Property.............................................. 14
4.8 No Prior Sale or Licensing of Purchased Assets..................... 15
4.9 Certain Fees....................................................... 15
4.10 Disclosure......................................................... 16
4.11 Solvency........................................................... 16
4.12 Purchased Assets................................................... 16
4.13 Technical Information.............................................. 17
4.14 Inventory.......................................................... 17
4.15 Contracts.......................................................... 17
4.16 Open Orders........................................................ 18
4.17 Permits and Licenses............................................... 18
4.18 Insurance.......................................................... 19
4.19 Product Liability.................................................. 19
4.20 Absence of Sensitive Payments...................................... 19
4.21 Taxes.............................................................. 19
4.22 Environmental Issues............................................... 20
4.23 Benefit Plans and Employment Arrangements.......................... 23
4.24 Undisclosed Liabilities............................................ 23
4.25 Transaction Relationship........................................... 24
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER............................... 25
5.1 Organization, Good Standing and Corporate Authority................ 25
5.2 No Violation....................................................... 25
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
5.3 Consents and Approvals of Governmental Authorities and Others...... 25
5.4 Certain Fees....................................................... 26
5.5 Business Records................................................... 26
5.6 Seller's Accounts Receivable....................................... 26
SECTION 6. SELLER'S COVENANTS.................................................... 26
6.1 Employees.......................................................... 26
6.2 Sales Taxes; Equipment Appraisal................................... 26
6.3 Access to Offices, Officers, Accountants, Due Diligence, Etc....... 27
6.4 Environmental Investigation........................................ 27
6.5 Approvals; Consents................................................ 28
6.6 Preservation of Business Organization.............................. 28
6.7 Approval of Certain Transactions................................... 28
6.8 Exclusive Dealing.................................................. 29
6.9 Update Schedules................................................... 29
6.10 Employees; WARN.................................................... 29
6.11 Further Assurances................................................. 30
SECTION 7. THE CLOSING........................................................... 30
SECTION 8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER...................... 30
8.1 Corporate Action................................................... 30
8.2 Representations and Warranties..................................... 31
8.3 Performance of Obligations......................................... 31
8.4 Instruments of Conveyance, Etc..................................... 31
8.5 Delivery........................................................... 31
8.6 Opinion of Counsel................................................. 31
8.7 Required Consents.................................................. 31
8.8 Litigation......................................................... 32
8.9 Satisfactory Financing............................................. 32
8.10 No Material Adverse Change......................................... 32
8.11 Sublease........................................................... 32
8.12 Requirements Contract.............................................. 33
8.13 Release of Right of First Refusal.................................. 33
8.14 Backlog of Open Orders............................................. 33
SECTION 9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER..................... 33
9.1 Representations and Warranties..................................... 33
9.2 Execution and Delivery............................................. 33
9.3 Payment............................................................ 34
SECTION 10. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS; FURTHER ACTION BY SELLER...................................... 34
10.1 Survival of Representations and Warranties......................... 34
10.2 Further Action by Seller........................................... 34
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 11. INDEMNIFICATION...................................................... 34
11.1 Indemnity by Seller............................................... 34
11.2 Indemnity by Buyer................................................ 36
11.3 Notice of Claim................................................... 36
11.4 Limitation of Indemnification..................................... 37
11.5 Set Off........................................................... 37
SECTION 12. TERMINATION; MODIFICATION OR WAIVER.................................. 37
12.1 Termination....................................................... 37
12.2 Modification...................................................... 37
12.3 Waiver............................................................ 38
SECTION 13. COSTS INCIDENT TO PREPARATION OF AGREEMENT........................... 38
SECTION 14. RISK OF LOSS; DAMAGE PRIOR TO CLOSING................................ 38
SECTION 15. BEST EFFORTS......................................................... 39
SECTION 16. GENERAL.............................................................. 39
16.1 Parties in Interest............................................... 39
16.2 Assignment........................................................ 39
16.3 Confidentiality................................................... 40
16.4 Public Statements................................................. 40
16.5 Choice of Law..................................................... 40
16.6 Mediation......................................................... 40
16.7 Notices........................................................... 41
16.8 Entire Agreement.................................................. 42
16.9 No Waiver......................................................... 42
16.10 Severability...................................................... 42
16.11 Headings.......................................................... 43
16.12 Counterparts...................................................... 43
16.13 Construction...................................................... 43
16.14 WAIVER OF JURY TRIAL.............................................. 43
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
SCHEDULES
<S> <C>
1.1.1 Intellectual Property
1.1.3 Fixed Assets and Equipment Leases
1.1.4(a) Rejected Inventory
1.1.4(b) Polaroid Inventory
1.1.4 Inventory and Supplement
1.1.5 Open Orders
1.1.6 Other Contracts
1.1.7 Permits
1.1.10 Computer Software Assets
1.1.11 Prepaid Expenses
1.2 Excluded Assets
2.2(d) Four Tools Detail
2.2(e) Agreed Inventory Value
2.2 Allocation of Purchase Price
4.5 Balance Sheet and Material Adverse Changes
4.6 Litigation
4.7 Intellectual Property Exceptions
4.13 Technical Information Additions
4.15 Contracts
4.16 Open Order Margins and Costs
4.21 Contested Taxes
4.22.1 Compliance with Environmental Law.
4.22.2 Environmental Permits
4.22.4 Off-Site Disposals
4.22.5 Hazardous or Toxic Materials
4.22.6 Environmentally Sensitive Areas
4.23 Benefit Plans and Employment Arrangements
EXHIBITS
A Real Property Lease
B Seller's Counsel Opinion
</TABLE>
<PAGE> 6
GLOSSARY OF TERMS
<TABLE>
<CAPTION>
Defined Term Section
------------ -------
<S> <C>
Agreement Heading
Balance Sheet 4.5
Books and Records 4.5
Business Recitals
Buyer Heading
CERCLA 4.22.3
Closing 7
Closing Date 7
Code 4.23.2
Computer Software Assets 1.1.10
Contamination 4.22.3
Contracts 1.1.6
Dandora 2.1
Disposal 4.22.4
Disposed 4.22.4
Environmental Permits 4.22
Environmental Laws 4.22
Equipment 1.1.3
Equipment Leases 1.1.3
ERISA 4.23.1
Excluded Assets 1.2
Excluded Liabilities 3.2
GAAP 1.1.11
Governmental Authority 4.22.4.2
Hazardous Substances 4.22.3
Hired Employees 3.3
Indebtedness 4.24
Indemnified Party 11.3
Indemnifying Party 11.3
Intellectual Property 1.1.1
Inventory 1.1.4
Liens 4.12.2
Losses 11.1
Note 2.1
Open Orders 1.1.5
Permits 1.1.7
Person 3.1
Polaroid Inventory 1.2.5
Product Liability 3.1
Purchase Price 2.1
Purchased Assets 1.1
Real Property Leases 1.1.8
Rejected Inventory 1.1.4
Related Rights 1.1.1
Seller Heading
Taxes 1.2.4
Technical Information 1.1.2
</TABLE>
<PAGE> 7
ASSET PURCHASE AGREEMENT
------------------------
ASSET PURCHASE AGREEMENT dated this 15th day of July, 1996 ("Agreement") by
and between Magnetic Technologies Corporation, a Delaware corporation
("Seller"), and Austro Mold, Inc., a New York corporation ("Buyer").
RECITALS:
Seller is engaged, inter alia, in the business of tool and die production
and plastic injection molding (the "Business") through its Austro Mold division
(the "Division"). Seller desires to sell, and Buyer desires to acquire, certain
of the assets of the Business, free and clear of all liabilities and Liens
(capitalized terms shall be used as defined in the Sections mentioned in the
Glossary of Terms to this Agreement), all upon the terms and conditions set
forth herein.
In consideration of the mutual covenants, agreements, representations and
warranties contained herein, and in reliance thereon, Buyer and Seller,
intending to be legally bound, agree as follows:
SECTION 1. ASSETS TO BE ACQUIRED.
1.1 DESCRIPTION OF PURCHASED ASSETS. Subject to the terms and
conditions of this Agreement, and in reliance on the representations, warranties
and covenants contained herein, on and as of the Closing Date, Seller will sell,
convey, assign, transfer and deliver to Buyer, and Buyer will purchase and
acquire, the Business as a going concern and all of Seller's right, title and
interest in and to the assets, properties and rights of every kind and
description, real, personal and mixed, tangible and intangible, wherever
situated constituting or used in the Business (the "Purchased Assets"), as the
same shall exist on the Closing Date (other than the Excluded Assets), including
without limitation:
1.1.1 Intellectual Property and Related Rights. All unpatented
inventions, invention disclosures, multinational invention registrations,
patents and patent applications (including, but not limited to, all reissues,
divisions, continuations, continuations-in-part, extensions and
<PAGE> 8
reexaminations) and all rights therein provided by law, multinational treaties
or conventions; publications and copyrights; trade secrets, know-how and
show-how; formulas; and all common law and registered trademarks, trademark
registrations, applications for trademark registrations, tradenames, trade
dress, brand names, service marks and logos; the Division's name
Austro Mold; including in each case without limitation, those identified on
SCHEDULE 1.1.1, together with the goodwill associated therewith and symbolized
thereby, and an assignment of any licenses therefor to or from Seller including
the consent to such assignment where required by the terms of the license
(collectively, the "Intellectual Property"); together with an assignment of all
rights of Seller in and to, including rights to enforce the terms of,
confidentiality agreements and noncompetition agreements of, and any agreements
relating to the assignment of inventions made by, prior and present employees of
Seller and any such agreements with any other Person with respect to the
Intellectual Property (collectively, the "Related Rights");
1.1.2 Technical Information. All customer, dealer, supplier and
installation lists; serial number records; engineering, manufacturing, design,
installation and other technical drawings and specifications, calculations and
manufacturing and production processes and techniques; research and development
information; operating, maintenance and repair manuals and instruction books;
cost and estimating information, cost records, vendor data and other business
records (including without limitation, sales histories); sales inquiries;
consultant's reports; bills of material, test data and selected test material
samples; advertising and promotional literature, including reproducible masters
and all other commercial, sales, marketing and technical data (including, but
not limited to, data stored electronically or on other format, together with an
assignment of any third party licenses necessary to use such data)
(collectively, the "Technical Information");
1.1.3 Equipment. All of the machinery, equipment, leasehold
improvements,
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trucks, automobiles, office furniture, office equipment, computing
and telecommunications equipment of the Business listed on SCHEDULE 1.1.3,
including the software loaded on such equipment as on SCHEDULE 1.1.10
(collectively, the "Equipment") subject to the rights of third parties in the
equipment leases listed on SCHEDULE 1.1.3 (the "Equipment Leases");
1.1.4 Inventory. All raw materials inventory, work-in-process
inventory, finished goods inventory and spare parts inventory, including that
identified on SCHEDULE 1.1.4 (as updated in a supplement to SCHEDULE 1.1.4 to be
delivered at Closing), (a) less any raw materials, work-in-process and finished
goods inventory which Buyer may in its discretion designate at the Closing, as
set forth on SCHEDULE 1.1.4(a) (the "Rejected Inventory") and (b) less the
Polaroid Inventory, as set forth on SCHEDULE 1.1.4(b), excluded in Section
1.2.5, together with all manufacturing supplies and boxing, labeling and other
shipping materials and an assignment of all related manufacturer or fabricator
warranties, guaranties and indemnities (collectively, the "Inventory");
1.1.5 Open Orders. Open orders for goods and services with
customers of Seller set forth on SCHEDULE 1.1.5 (the "Open Orders"), together
with related purchase orders, contracts, subcontracts and credit support
associated with such Open Orders;
1.1.6 Other Contracts. All contracts, orders for spare parts,
distribution agreements, service agreements, development agreements, consulting
agreements, leases of machinery, equipment and other personal property,
guarantees, commitments, instruments and other agreements relating to the
acquisition or ownership or any of the Purchased Assets or the operation of the
Business, including those listed on SCHEDULE l.l.6 (the "Contracts");
1.1.7 Permits, Licenses. All governmental permits, licenses,
registrations, orders and approvals relating to the Business including those
listed on SCHEDULE 1.1.7, to the extent
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such permits, licenses, registrations, orders and approvals are transferrable to
Buyer (collectively, the "Permits");
1.1.8 Real Property. All rights in a lease dated December 18,
1992 for the land and buildings situate at 25-45 Rutter Street and 55 Rutter
Street, Rochester, New York in which Seller is the tenant together with all
leasehold improvements thereon. A copy of the lease is attached hereto as
EXHIBIT A (the "Real Property Lease");
1.1.9 Business Records. All other records of Seller relating to
the Business, including property records;
1.1.10 Computer Software Assets. All other computer software,
data rights, documentation and associated license, escrow, support and
maintenance agreements, used in the conduct of the Business, including those
listed on SCHEDULE 1.1.10, which excludes Windows NT and Symix software, to the
extent they are transferrable by Seller with or without the consent of any other
party; provided, for any such software for which a consent to transfer is not
obtained, Seller shall arrange for Buyer to obtain the right to use that
software including payment of any transfer fees (the "Computer Software
Assets");
1.1.11 Prepaid Expenses. All payments made by Seller with respect
to the Business, except for those prepaid items listed in Section 1.2, which
constitute prepaid expenses of the Business in accordance with generally
accepted accounting principles ("GAAP") consistently applied, to the extent the
benefits thereof are transferable to Buyer, set forth on SCHEDULE 1.1.11 (the
"Prepaid Expenses");
1.1.12 Other Intangible Assets. All other assets (including
causes of action, rights of action, contract rights and warranty and product
liability claims against third parties) relating to the Purchased Assets or the
Business.
4
<PAGE> 11
1.2 EXCLUDED ASSETS. Notwithstanding Section 1.1, the following assets
(collectively, the "Excluded Assets") shall be excluded from this Agreement and
shall not be sold, assigned or transferred to Buyer:
1.2.1 Any insurance policies maintained by Seller with respect to
the Business;
1.2.2 Corporate minute books and stock books;
1.2.3 Any claims and rights against third parties (including,
without limitation, insurance carriers), to the extent they relate to
liabilities or obligations that are not assumed by Buyer;
1.2.4 All payments made by Seller with respect to the Business
which constitute prepaid Taxes of the Business and all claims for refunds of
Taxes and other governmental charges to the extent such refunds relate to
periods ending on or prior to the Closing Date; as used in this Agreement, the
term "Taxes" shall mean all income or profits taxes (including, but not limited
to, federal income taxes and state income taxes), estimated taxes, payroll and
employee withholding taxes, unemployment insurance, social security taxes, sales
and use taxes, value added taxes, excise taxes, capital stock or franchise
taxes, gross receipts taxes, business license taxes, occupation taxes, stamp
taxes, environmental taxes, transfer taxes, workers' compensation, Pension
Benefit Guaranty Corporation premium and other governmental charges, and other
obligations of the same or of a similar nature to any of the foregoing, which a
corporation may be required to pay, withhold or collect, imposed by any federal,
territorial, state, local or foreign government or any agency or political
subdivision of any such government;
1.2.5 Certain of Seller's plastic inventory of raw material (not
finished goods) relating to Polaroid Corp. will remain the property of Seller
(see SCHEDULE 1.1.4(b)) (the"Polaroid Inventory"). If Seller does not sell the
Polaroid Inventory to a third party it will remain at the
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<PAGE> 12
Business premises and Buyer agrees to segregate it for a period of one (1) year
after Closing, in which event Buyer will pay for any Polaroid Inventory it uses
at Seller's cost. At the conclusion of one year after Closing Seller may remove
the Polaroid Inventory or abandon it in place, at its option; and
1.2.6 Cash, accounts receivable and any assets listed on SCHEDULE
1.2.
SECTION 2. THE PURCHASE PRICE AND RELATED MATTERS.
2.1 PURCHASE PRICE. In consideration of the sale, conveyance, assignment,
transfer and delivery of the Purchased Assets, Buyer agrees to pay and deliver
to Seller $1,635,504, subject to adjustments set forth in Section 2.2 (the
"Purchase Price"), on the Closing Date as follows:
(a) $167,007 by assumption of Seller's obligation under the Equipment
leases;
(b) $916,497 by wire transfer of immediately available funds to
Seller's bank account as designated by notice to Buyer at least three days
before the Closing Date (subject to adjustment provided in Section 2.2);
(c) $342,683 by a promissory note dated the date of Closing (subject
to adjustment provided in Section 2.2) payable with interest at the rate of 8%
per annum commencing to accrue one year after Closing with 48 level monthly
payments of principal and interest payable thereafter commencing on the first
day of the 13th month after Closing (the "Note"). The Note will be secured by a
lien upon the Purchased Assets, their replacement and the proceeds thereof which
lien will be subordinate in all respects to the lien to be held by one or more
financial institutions with an aggregate indebtedness not to exceed $1,750,000.
Collection of the Note shall be personally guaranteed by Nathu R. Dandora, Vice
President and majority shareholder of Buyer ("Dandora").
In addition to the above Buyer will pay to Seller at the Closing by check
the sum of the Prepaid Expenses.
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<PAGE> 13
2.2 PURCHASE PRICE ADJUSTMENTS. $342,683.00 of the Purchase Price is based
upon a discount from the Division's physical inventory at cost which Purchase
Price will be recomputed at Closing based upon the physical inventory on that
date using the following percentage discounts; provided, however, that no
discount shall apply to work-in-process and tool room percentage of completion
contracts allocated to purchase orders of Seller:
(a) 25% discount from the physical inventory at cost of plastic raw
material inventory, less Rejected Inventory of plastic raw material and
less Polaroid Inventory;
(b) 30% discount from the physical inventory at cost of plastic
work-in-process less the Rejected Inventory of work-in-process;
(c) 25% discount from the physical inventory at cost of finished goods
less the Rejected Inventory of finished goods;
(d) 25% discount from the gross book value of tool room percentage of
completion contracts, which gross book value shall after a
contract-by-contract analysis provide, on an aggregate basis, that the
balance of billings on the contracts is adequate to cover (i) the costs to
completion and (ii) a percentage of the original estimated profit thereof
(such percentage being determined by taking the original estimated profit
to the total purchase order value and multiply by the balance of billings).
Notwithstanding the foregoing, four tools are excluded from the calculation
for which Seller will issue a purchase order on July 16, 1996 to build,
repair or complete the tools on a time and material basis, with time billed
at $40.00 per hour, with a maximum number of billable hours for each tool
set forth on Schedule 2.2(d); and
(e) Notwithstanding the above discount provisions, Buyer and Seller
can agree upon a value for the Inventory value which shall if so agreed be
set forth on SCHEDULE 2.2.(e) as the parties shall determine.
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<PAGE> 14
The principal amount of the Note and the monthly payments due will be
modified to reflect the adjustment provided in this Section 2.2. above.
The $916,497 cash portion of the Purchase Price shall be adjusted by 50% of
the amount that the total of the assumed Equipment Lease liability is greater
than or less than $167,007. The variance shall be added to or subtracted from
the Purchase Price and shall be reflected by a change in the amount of cash paid
at Closing.
2.3 ALLOCATION OF PURCHASE PRICE. Seller and Buyer agree that the Purchase
Price shall be allocated to the various assets comprising the Purchased Assets
in accordance with SCHEDULE 2.2., including $1,083,504 for the Equipment. Seller
and Buyer acknowledge that such allocation represents the fair market value of
the Purchased Assets and shall be binding upon the parties for all applicable
federal, state, local and foreign tax purposes. Seller and Buyer covenant to
report gain or loss or cost basis, as the case may be, in a manner consistent
with Schedule 2.2 on all tax returns filed by either of them subsequent to
Closing and not to voluntarily take any inconsistent position therewith in any
administrative or judicial proceeding relating to such returns. Seller and Buyer
shall exchange mutually acceptable and completed IRS Forms 8594, which they
shall use to report the transaction contemplated hereunder to the Internal
Revenue Service in accordance with such allocation.
SECTION 3. ASSUMPTION OF ENUMERATED LIABILITIES.
3.1 GENERAL LIMITATION ON ASSUMPTION OF LIABILITIES. Seller shall transfer
the Purchased Assets to Buyer free and clear of all Liens, and without any
assumption of liabilities and obligations, except the Equipment Leases and
nonrent portion of the Real Property Lease and Buyer shall not, by virtue of its
purchase of the Purchased Assets, assume or become responsible for any
liabilities or obligations of Seller or any other Person except for the
Equipment Leases and Real Property Lease.
8
<PAGE> 15
As used in this Agreement, "Person" shall mean an individual, partnership,
corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, limited liability company or any other entity of
whatever nature; and for purposes of this Section 3.1, the phrase "liabilities
and obligations" shall include, without limitation, any direct or indirect
indebtedness, guaranty, endorsement, claim, loss, damage, deficiency, cost,
expense, obligation or responsibility, fixed or unfixed, known or unknown,
asserted or unasserted, choate or inchoate, liquidated or unliquidated, secured
or unsecured, whether arising in contract, tort or otherwise, whether now
existing or hereafter arising, related to, arising from or connected with the
Purchased Assets or the Business, including, but not limited to, any liability
for property damage, death or personal injury (whether suffered prior to or
after the Closing) with respect to products or services sold or delivered by
Seller or Seller's agents, whether sold, delivered or placed in use prior to or
after the Closing ("Product Liability"), and Seller shall convey no such
obligations or liabilities, contingent or otherwise, to Buyer, it being the
intention of Buyer and Seller that Buyer shall not be deemed a successor to
Seller.
3.2 EXCLUDED LIABILITIES. Without limiting the generality of Section 3.1,
the following liabilities and obligations, together with the liabilities and
obligations excluded in Section 3.1 and the employee obligations excluded in
Section 3.3 (collectively, the "Excluded Liabilities") shall specifically not be
assumed by Buyer and shall be paid by Seller:
3.2.1 the liabilities or obligations of Seller to its stockholders
respecting dividends, distributions to its stockholders in liquidation,
redemptions of stock, or otherwise;
3.2.2 liabilities or obligations of Seller arising out of any
transactions occurring, or obligations incurred, after the Closing;
3.2.3 any obligations of Seller for expenses, Taxes or fees incident
to or arising out of the negotiation, preparation, approval or authorization of
this Agreement or the
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<PAGE> 16
consummation of the transactions contemplated hereby, including, without
limitation, all attorneys and accountants fees and all brokers or finders fees
or commissions payable by Seller;
3.2.4 any obligation of Seller under or arising out of this Agreement;
3.2.5 liabilities against which Seller is insured or otherwise
indemnified or which would have been covered by insurance (or indemnification)
but for a claim by the insurer (or the indemnitor) that the insured (or the
indemnities) had breached its obligations under the policy of insurance (or the
contract of indemnity) or had committed fraud in the insurance application;
3.2.6 any liabilities or obligations, the existence of which
constitute a breach of the representations, warranties or covenants of Seller
contained in this Agreement;
3.2.7 any obligations or liabilities of Seller to indemnify its
officers, directors, employees or agents;
3.2.8 all Taxes imposed on Seller, including any Tax of any other
corporation, which Tax is assessed against Seller by virtue of its status, prior
to the Closing Date, as a member of any consolidated group of which such other
corporation was also a member; and
3.2.9 all other liabilities of Seller relating to the Business that
arise as a result of actions or events occurring on or before the Closing Date,
including without limitation, accounts payable, Product Liability, liabilities
related to the infringement by Seller of any Intellectual Property or Related
Rights, liabilities of Seller relating to any environmental matters, and any
liabilities related to any lawsuit, cause of action, litigation or legal
proceeding with respect to any losses, occurrences or events occurring prior to
Closing, whether commenced prior to or after Closing.
Buyer in no event assumes any obligation of Seller for incidental,
consequential or punitive damages or for Product Liability.
3.3 EMPLOYEES. Buyer shall assume no and shall have no obligations to any
of Seller's
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<PAGE> 17
employees for accrued benefits, severance or deferred pay, pension, medical or
disability benefits or any other payments or benefits, which may be or become
due to such employees from Seller. Seller agrees that, with respect to claims
for workers' compensation and all claims under Seller's employee benefit
programs by persons working for the Business arising out of events occurring
prior to the Closing, whether reported or unreported as of the Closing and
whether insured or uninsured (including, but not limited to, workers'
compensation, life insurance, medical and disability programs), Seller shall, at
its own expense, honor or cause its insurance carriers to honor such claims in
accordance with the terms and conditions of such programs or applicable workers'
compensation statutes. Without limiting the scope of the preceding sentence,
Seller shall be responsible for any and all claims and liabilities arising out
of or relating to (a) its employment of its employees, (b) the termination by
Seller of such employment of any such employees and (c) the provision of any
employee benefits to such employees (and their beneficiaries and eligible
dependents) attributable to their employment with, or their participation in any
plans or programs maintained or contributed to by Seller.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller hereby represents and warrants to Buyer that:
4.1 ORGANIZATION AND GOOD STANDING. Seller is a corporation duly organized,
validly existing and in good standing under the laws of Delaware, with full
corporate power and authority to carry on the Business as presently conducted by
it, and Seller is qualified to do business in the State of New York, which is
the only foreign jurisdiction where the failure to be so qualified would
materially and adversely affect the condition (financial or otherwise),
properties, assets or operations of Seller.
4.2 CORPORATE AUTHORITY. Seller has full corporate power and authority to
execute and
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<PAGE> 18
deliver this Agreement and the instruments of transfer and other documents
delivered or to be delivered pursuant hereto, to perform all the terms and
conditions hereof and thereof to be performed by it and to consummate the
transactions contemplated hereby and thereby. This Agreement and all instruments
of transfer and other documents delivered or to be delivered by Seller in
connection with this Agreement have been duly authorized and approved by all
necessary and proper corporate action of Seller (including authorization by
Seller's Board of Directors) and constitute, and will constitute, the valid and
binding obligations of Seller enforceable in accordance with their respective
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws or equitable principles
from time to time in effect relating to or affecting the rights of creditors
generally.
4.3 NO VIOLATION. Neither the execution and delivery by Seller of this
Agreement or the instruments of transfer and other documents delivered or to be
delivered pursuant hereto by Seller and the performance by Seller hereunder or
thereunder, nor the consummation of the transactions contemplated hereby or
thereby, will violate, conflict with, result in the breach of or accelerate the
performance required by any of the terms, conditions or provisions of the
Articles of Incorporation or Bylaws of Seller or any covenant, agreement or
understanding to which Seller is a party or any order, ruling, decree, judgment,
arbitration award or stipulation to which Seller is subject, or constitute a
default thereunder or result in the creation or imposition of any Lien upon any
of the Purchased Assets or allow any Person to interfere with Buyer's full use
and enjoyment of any of the Purchased Assets.
4.4 CONSENTS AND APPROVALS OF GOVERNMENTAL AUTHORITIES AND OTHERS. No
approval or authorization of, filing or registration with, or notification to,
any governmental or regulatory authority is required in connection with the
execution and delivery of this Agreement by Seller or the
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<PAGE> 19
performance of its obligations hereunder or the consummation of the transactions
contemplated hereby. No consent, approval or authorization of any Person is
required in connection with the execution or delivery of this Agreement by
Seller, the transfer to Buyer of the Purchased Assets or the performance by
Seller of any other obligation under this Agreement except the approval of the
landlord to sublet the premises under the Real Property Lease and the waiver by
the landlord of its right of first refusal to purchase the Purchased Assets,
which waiver has been obtained (the "Landlord Option").
4.5 FINANCIAL STATEMENTS. The summary balance sheets for the 12 month
periods ending July 31, 1993, 1994 and 1995 and the ten month period ending
May 24, 1996 and attached hereto as SCHEDULE 4.5 (the "Balance Sheet") has been
prepared in accordance with GAAP consistently applied except as may be noted
therein, is true and correct and presents fairly the financial condition of
Seller on those dates.
Except as set forth in SCHEDULE 4.5, there has not been since May 24, 1996
any material adverse change in the condition (financial or other), properties,
assets, liabilities or prospects of the Business, and Seller has no liabilities
or obligations (as defined in Section 3.1) relating to the Business, except:
4.5.1 those liabilities and obligations set forth on the Balance Sheet
and not heretofore paid or discharged;
4.5.2 those liabilities and obligations incurred in the ordinary
course of business consistent with past practice since May 24, 1996.
All books of account and other financial records of Seller directly
relating to the Business (the "Books and Records") are complete and correct and
have been made available to Buyer. All of the Books and Records have been
maintained in conformity with GAAP and in compliance with
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<PAGE> 20
applicable laws, regulations and other requirements.
4.6 LITIGATION: COMPLIANCE WITH LAWS. Except as disclosed on SCHEDULE 4.6,
Seller is not engaged in, or a party to, or threatened with, any legal action,
suit, investigation or other proceeding by or before any court, arbitrator or
administrative agency concerning the Business, and after diligent inquiry,
Seller does not know of any basis for any such action, investigation or
proceeding. There are no outstanding orders, rulings, decrees, judgments or
stipulations or proceedings to which Seller is a party or by which Seller is
bound, by or with any court, arbitrator or administrative agency concerning the
Business. Seller is operating the Business in compliance with the requirements
of all federal, state and local laws, regulations, judgments, injunctions,
decrees, court orders and administrative orders regarding such operations.
4.7 INTELLECTUAL PROPERTY. To the best of Seller's knowledge, the
Intellectual Property includes all intellectual property that is necessary or
related to the operation of the Business. Except as described on SCHEDULE 4.7,
all patents, copyrights (where such registration is permitted or required by
applicable law), trademarks, tradenames and service marks included in the
Intellectual Property are registered to or owned by or licensed to Seller, are
valid and enforceable (and in the case of any unregistered or unpatented rights
may be freely used by Seller) or pending (in the case of patents), and all
annuities, if any, are fully paid. To the best of its knowledge, Seller has not
infringed and is not infringing, nor has Seller contributed to or is
contributing to the infringement of, any valid patents, copyrights, trademarks,
tradenames or service marks of any third party that are currently required for
the Business, and there are no pending or threatened actions against Seller for
infringement of any such patents, copyrights, trademarks, tradenames or service
marks. None of the patents or patent applications included in the Intellectual
Property is involved in a reissue, reexamination, interference, opposition or
similar proceeding, and there is no threat or other
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<PAGE> 21
indication that any such proceeding will be declared or commenced. To the best
of its knowledge, Seller requires no rights under any patent, trade secret or
other proprietary information or computer software license which Seller does not
have or does not have the lawful right to use in order to conduct the Business
as currently conducted or to manufacture, sell, use or service any product
manufactured or serviced by the Business. To the best of its knowledge, Seller
is not using, without authorization, any trade or other business secret,
know-how or technical information of any Person in the conduct of the Business.
All licenses permitting Seller to use any Intellectual Property, Technical
Information or Computer Software Assets are in full force and effect, and the
terms of such licenses do not provide that they shall be terminated or
restricted as a result of the consummation of the transactions contemplated by
this Agreement.
4.8 NO PRIOR SALE OR LICENSING OF PURCHASED ASSETS. The Seller is not a
party to any license with respect to, and has not made any sale, pledge or other
transfer of, and has not granted any rights or options to purchase or acquire,
all or any part of the Purchased Assets, except as contemplated by this
Agreement except the Landlord Option.
4.9 CERTAIN FEES. Neither Seller nor any of its officers, directors,
employees or other affiliates has agreed to pay or has incurred any claims for
any brokerage fees, commissions or finders' fees in connection with the
transactions contemplated hereby except that Seller will pay a fee to Eugene
Miller for his services rendered in connection with the sale of the Purchased
Assets and the management of the Business prior to Closing.
4.10 DISCLOSURE. No representations or warranties made by Seller in this
Agreement and no statements made by Seller in any certificate, schedule, exhibit
or other writing delivered by Seller to Buyer or referred to in or pursuant to
this Agreement contain, or at the date of its delivery will contain, any untrue
statement of a material fact or omit or will omit any statement of a material
fact
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necessary to make complete, accurate and not misleading every representation,
warranty and statement of Seller set forth in this Agreement or any such
certificate, schedule, exhibit or other writing.
4.11 SOLVENCY. The transfer of the Purchased Assets by Seller in return for
the Purchase Price will not render Seller insolvent or unable to pay its debts
as they become due in the ordinary course or leave Seller with an unreasonably
small capital for the business in which it will continue to engage.
4.12 PURCHASED ASSETS.
4.12.1 The use to which the property subject to the Real Property
Lease is put is not subject to any restriction or condition and conforms to
zoning, subdivision and/or planning regulations, fire and safety regulations, to
the requirements of the relevant local authorities and to all statutes governing
such property or use thereof and is not a temporary use. All necessary consents
to such existing use have been obtained. Seller has not received notice of
violation of any such regulation, ordinance or other law, order or requirement
from any court or Governmental Authority or of taking by eminent domain or
condemnation proceeding.
4.12.2 Seller has good and marketable title to, and all right, title
and interest in, all the personal properties and assets included in the
Purchased Assets, and will transfer and convey the Purchased Assets to Buyer,
free and clear of all Liens. None of such personal properties or assets were
purchased by Seller in a bulk sale. As used in this Agreement, "Liens" shall
mean and include all mortgages, liens, pledges, charges, title retention or
security agreements, claims, restrictions, leases, options, rights of first
offer or first refusal, confidentiality or secrecy agreements, noncompetition
agreements, defects of title or other encumbrances or rights of others not
otherwise disclosed herein.
4.12.3 All the tangible assets of Seller used and operated in the
Business are
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in conformity with all applicable laws and regulations and are in good operating
order and condition, subject to reasonable wear and tear, and are suitable for
their intended uses.
4.12.4 The Purchased Assets include all tangible and intangible
personal property which are related to the operation of the Business, except the
Excluded Assets.
4.13 TECHNICAL INFORMATION. To the best of Seller's knowledge, except as
expressly noted on the manufacturing drawings or on SCHEDULE 4.13, there exists
no undocumented manufacturing or assembly procedure nor any variance between
manufacturing drawings included in the Technical Information and the actual
manufacturing and assembly practices of Seller and Seller's vendors and
subcontractors. On the Closing Date, Seller will have delivered all patterns,
manufacturer's manuals and copies of all other Technical Information in its
possession to Buyer, and will have caused all third parties to return all
patterns and return or destroy all copies of Technical Information. All
Technical Information in electronic form and Computer Software Assets have been
scanned for and cleaned of all computer viruses.
4.14 INVENTORY. Except for the Polaroid Inventory and Rejected Inventory,
the physical counting of the Inventory was performed in accordance with GAAP
consistently applied.
4.15 CONTRACTS.
4.15.1 A true and correct copy of each Contract, including
manufacturer representative contracts, has previously been made available to
Buyer. All Contracts are valid, binding and in full force and effect, and
neither Seller nor, to Seller's knowledge, any other party to any such Contracts
is in default thereunder.
4.15.2 Except as set forth on SCHEDULE 4.15, none of the Contracts
contains any provision giving any party thereto the right to terminate such
agreement by reason of the execution of this Agreement or the consummation of
the transactions contemplated herein, and none
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of the terms of any Contract will be adversely altered in any material respect
by reason of the execution of this Agreement or the consummation of the
transactions contemplated herein.
4.16 OPEN ORDERS. To the best of Seller's knowledge, all Open Orders are
valid, binding and in full force and effect and neither Seller nor the other
party thereto is in default thereunder. Seller will deliver copies of all Open
Orders to Buyer for review of assignability at least five days prior to the
Closing Date. Seller will at Buyer's request use its best efforts to obtain
consents to assignment of any Open Order Buyer determines to be material to its
obtaining the backlog of Open Orders under Section 8.14. Seller has no
obligation to make any payments to representatives or any other Person on or
with respect to Open Orders, except for commissions due to manufacturer
representatives as set forth on SCHEDULE 4.16, which remain the Seller's
obligation with respect to goods shipped by the Business prior to the Closing
and will be the Buyer's obligation with respect to goods shipped by the Business
subsequent to the Closing. To the best of Seller's knowledge, the anticipated
margins and costs to complete each Open Order are correctly stated with respect
to each Open Order on SCHEDULE 4.16.
4.17 PERMITS AND LICENSES. The Permits and the Environmental Permits are
the only permits, franchises, licenses or authorizations used in or necessary
for the conduct of the Business. All Permits are in full force and effect and no
suspension or cancellation of any has been threatened. No Permits or parts
thereof are subject to loss by reason of dormancy or non-use. No claims have
been made by any third parties relating to the Permits and, to Seller's
knowledge, no such claim is contemplated by any Governmental Authority or other
Person nor does any basis therefor exist. No Permit will be terminated or
require the consent of the issuer as a result of the consummation of the
transactions contemplated by this Agreement, except those issued in the name of
Seller's corporate entity. True and correct copies of all Permits have been
delivered to Buyer for which assignment will
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be obtained.
4.18 INSURANCE. Seller maintains such types and amounts of insurance
against such risks and losses as are required by law or the terms of any
contract and as are customary for companies similarly situated in the business
in which Seller is engaged and at the locations where Seller conducts such
business, and Seller has not received any notice of actual or proposed
cancellation or of reduction in coverage of, or of any increase in premium
under, such policies of insurance.
4.19 PRODUCT LIABILITY. There is not presently any action, suit,
proceeding, claim or investigation pending, or to Seller's knowledge threatened,
against Seller for personal injury or property damage or otherwise relating to
the safety or fitness of the goods or products of Seller.
4.20 ABSENCE OF SENSITIVE PAYMENTS. Seller has not made any contributions,
payments or gifts to or for the private use of any governmental official,
governmental employee or governmental agent in any amount where either the
payment or the purpose in making such contribution, payment or gift is illegal
under the laws of the United States or any other jurisdiction; Seller has not
established or maintained any unrecorded fund or asset for any purpose or made
any false or artificial entries on its books; and Seller has not made any
payments to any Person with the intention or understanding that any part of such
payment was to be used for any purpose other than that described in the document
supporting the payment.
4.21 TAXES. Except as described on SCHEDULE 4.21 attached hereto, Seller
has duly and timely filed all tax returns required to be filed by it or for
which it may be held responsible, and has paid all Taxes, interest, penalties,
duties, assessments and deficiencies due and payable by it.
4.22 ENVIRONMENTAL ISSUES.
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4.22.1 Except as set forth in SCHEDULE 4.22.1, all activities of the
Business while under Seller's ownership have been conducted in compliance with,
and all properties owned, leased or operated in connection with the Business
comply with, all environmental or health and safety statutes, ordinances,
regulations, orders, directives, decrees and requirements of common law
concerning (1) those activities, (2) those properties, (3) repairs or
construction of any improvements, (4) handling of any materials, (5) discharges
to the air, soil, surface water or ground water, and (6) storage, treatment or
disposal of any waste at or connected with any activity at such properties
("Environmental Laws").
4.22.2 All permits necessary for the operation of the Business in
compliance with Environmental Laws ("Environmental Permits") have been obtained
by Seller and are listed in SCHEDULE 4.22.2. SCHEDULE 4.22.2 also lists all of
the conditions contained in the Environmental Permits which remain unsatisfied.
Except as disclosed in SCHEDULE 4.22.2, all Environmental Permits are in full
force and effect and are not subject to any appeals or further proceedings or to
any unsatisfied conditions. No modification, suspension, recision, relocation or
cancellation of any Environmental Permit is pending or threatened, and no
Environmental Permit will be adversely affected by the consummation of the
transactions contemplated by this Agreement. Seller has made or caused to have
been made all notifications and done all other things necessary, or will do so
before Closing, to ensure that, following the consummation of the transactions
contemplated by this Agreement, all previously issued Environmental Permits in
connection with the Business shall remain in full force and effect.
4.22.3 To the best of Seller's knowledge, no Contamination is present
at any property now or previously owned, leased or operated by Seller in
connection with the Business. The term "Contamination" means the uncontained
presence of Hazardous Substances at any property, or
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arising from any property, which may require remediation under any applicable
law, and the term "Hazardous Substances" means "hazardous substances" or
"pollutant" or contaminants" as defined pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), as amended,
"regulated substances" within the meaning of subtitle I of the Resource
Conservation and Liability Act, as amended, hazardous substances as defined
under any applicable state or local Environmental Laws, petroleum or petroleum
products, or any other substance considered toxic, hazardous or a potential
threat to human health or the environment under any applicable law, the presence
of which might result in (1) an environmental Lien, or (2) a party incurring
costs or being ordered or directed to investigate, remediate or otherwise
respond to a potential environmental threat posed by such substance.
4.22.4 To the best of Seller's knowledge, SCHEDULE 4.22.4 identifies
all sites at or to which any waste generated by or on behalf of the Business, or
otherwise, in connection with any of its respective operations has been
transported, stored, treated or disposed ("Disposed" or "Disposal") and all
arrangements for Disposal. Except as identified in SCHEDULE 4.22.4:
4.22.4.1 To the best of Seller's knowledge, none of the sites
identified in SCHEDULE 4.22.4 is or may become the subject of a response action
under CERCLA or any similar federal, state or local law imposing liability for
remediation;
4.22.4.2 Seller has not received in connection with the
Business (A) a request for information from any Governmental Authority with
respect to any discharge or removal of any Hazardous Substance, or (B) other
notice that it has been identified in any litigation, administrative proceeding
or investigation as a responsible party or a potentially responsible party for
any liability under any Environmental Law. "Governmental Authority" shall mean
the government of the United States, any state or political subdivision
thereof, or any foreign country and any entity
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exercising executive, legislative, regulatory or administrative functions of or
pertaining to government;
4.22.4.3 Seller has not filed on behalf of the Business any notice
under any federal, state or local law, regulation or order reporting a release
of Hazardous Substances;
4.22.4.4 Seller has not entered into on behalf of the Business any
negotiations or agreements with any Person relating to any response action or
other cleanup or remediation of any Hazardous Substance, except that the Seller
charged the prior owner of the Business in connection with the removal of an
underground fuel oil tank.
4.22.5 Except as set forth in SCHEDULE 4.22.5, no portion of any
property owned, leased or operated by Seller in connection with the Business
contains any of the following:
4.22.5.1 polychlorinated biphenyls or substances containing
polychlorinated biphenyls;
4.22.5.2 asbestos or materials containing asbestos; or
4.22.5.3 urea formaldehyde foam insulation;
4.22.5.4 tanks presently or formerly used for the storage of any
liquid or gas above or below ground.
4.22.6 To the best of Seller's knowledge, except as set forth in
SCHEDULE 4.22.6, no portion of any property owned, leased or operated by Seller
in connection with the Business constitutes any of the following:
4.22.6.1 a wetland or other "water of the United States" for purposes
of Section 404 of the federal Clean Water Act, or any similar area regulated
under any applicable state law;
4.22.6.2 a floodplain or other flood hazard area;
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4.22.6.3 a portion of the coastal zone for purposes of the
federal Coastal Zone Management Act; or
4.22.6.4 any other area development of which is specifically
restricted under applicable law by reason of its physical characteristics or
prior use.
4.23 BENEFIT PLANS AND EMPLOYMENT ARRANGEMENTS.
4.23.1 Except for Seller's 401(k) plan and cafeteria benefit plan,
Seller has not maintained, for the benefit of employees of the Business, and
does not maintain, any welfare plan as defined in the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"); pension plan, as defined in Section
3(2) of ERISA; or retirement, insurance, bonus, deferred compensation or other
plan or arrangement.
4.23.2 Except as set forth in SCHEDULE 4.23, each group health plan
that provides health coverage to any present or former employee of the Business
has operated in compliance with all requirements of Sections 601 through 608 of
ERISA and Section 4980B of the Internal Revenue Code and the regulations
promulgated under former Section 162(i)(2) and (u) of the Code relating to the
continuation of coverage under certain circumstances in which coverage would
otherwise cease.
4.23.3 Seller has not carried on discussions regarding organization
with any labor union for the Business and there has not been any strike, work
stoppage, labor dispute or other labor trouble relating to employees of the
Business, and there are no significant threats of work stoppage or labor trouble
by employees of Seller.
4.24 UNDISCLOSED LIABILITIES. Seller has no liability or obligation of any
nature in connection with the Business, whether due or to become due, absolute,
contingent or otherwise, including without limitation, liabilities for or in
respect of Indebtedness or Taxes or penalties except for
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liabilities that (a) are disclosed in this Agreement or on a schedule to this
Agreement, (b) are incurred in the ordinary course of business since May 24,
1996, and fully reflected as liabilities on the Seller's Books and Records or
(c) Seller's obligations under two covenants-not-to-compete and the Real
Property Lease with the prior owners of the Business. "Indebtedness" shall mean
all items which, in accordance with GAAP, would be included in determining total
liabilities as shown on the liabilities side of the balance sheet as at the date
Indebtedness is to be determined, except accounts payable which are not more
than 90 days past due and accrued liabilities arising in the ordinary course of
business, and in any event shall include (i) all indebtedness for borrowed money
or for the deferred purchase price of property or services, (ii) liabilities as
lessee under leases of real and/or personal property which have been or should
be, in accordance with GAAP, recorded as capital leases, (iii) liabilities
secured by any Lien on property owned or acquired, whether or not such liability
shall have been assumed, (iv) indemnities, guarantees, endorsements (other than
for collection in the ordinary course of business) and other contingent
obligations whether secured or not in respect of the obligations of other
Persons, (v) liabilities in respect of unfunded vested benefits, including
without limitation, under employee benefit plans and severance or termination
pay obligations, (vi) reimbursement or other obligations in respect of letters
of credit, banker's acceptances, surety or other bonds and similar instruments
whether or not matured, and (vii) all obligations arising under any consulting
or noncompetition agreement entered into in connection with an acquisition of
assets or the purchase of shares or other equity interests of any Person, to the
extent such obligations have been capitalized.
4.25 TRANSACTION RELATIONSHIP. This Agreement has been entered into as a
result of arms length negotiations between Buyer and Seller and there is no
special relationship between Buyer and Seller or facts and circumstances whereby
Seller is obligated to obtain a fairness opinion as to the
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Purchase Price for the Purchased Assets and the value thereof.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer represents and warrants to Seller as follows:
5.1 ORGANIZATION, GOOD STANDING AND CORPORATE AUTHORITY. Buyer is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of New York and has full corporate power authority to execute
this Agreement and the other documents delivered or to be delivered pursuant
hereto, to perform all the terms and conditions hereof and thereof to be
performed by it and to consummate the transactions contemplated hereby and
thereby, and this Agreement and the other documents delivered or to be delivered
pursuant hereto constitute the valid and binding obligations of Buyer,
enforceable in accordance with their terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws or equitable principles from time to time in effect relating to or
affecting the rights of creditors generally.
5.2 NO VIOLATION. Neither the execution and delivery by Buyer of this
Agreement or the instruments of transfer and other documents delivered or to be
delivered pursuant hereto by Buyer and the performance by Buyer hereunder or
thereunder, nor the consummation of the transactions contemplated hereby or
thereby, will violate, conflict with, result in the breach of or accelerate the
performance required by any of the terms, conditions or provisions of the
Certificate of Incorporation or Bylaws of Buyer or any covenant, agreement or
understanding to which Buyer is a party or any order, ruling, decree, judgment,
arbitration award or stipulation to which Buyer is subject, or constitute a
default thereunder.
5.3 CONSENTS AND APPROVALS OF GOVERNMENTAL AUTHORITIES AND OTHERS. No
approval or authorization of, filing or registration with, or notification to,
any Governmental Authority is required
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in connection with the execution and delivery of this Agreement by Buyer or the
performance of its obligations hereunder or the consummation of the transactions
contemplated hereby.
5.4 CERTAIN FEES. Neither Buyer nor any of its officers, directors,
employees or other affiliates has agreed to pay or has incurred any claims for
any brokerage fees, commissions or finders' fees in connection with the
transactions contemplated hereby.
5.5 BUSINESS RECORDS. From and after Closing Buyer will provide Seller and
its representatives access, from time to time, to the Business records acquired
by Buyer hereunder as may be reasonably required by Seller and will permit
Seller to make copies thereof.
5.6 SELLER'S ACCOUNTS RECEIVABLE. From and after the Closing, Buyer upon
receipt of payments on account of Seller's Accounts Receivable, based upon a
customers notification on the check, will promptly deliver them to Seller in the
form received. If a payment is received covering accounts receivable of both
Buyer and Seller, Buyer upon the check of the customer clearing will promptly
transmit to Seller the amount due to it. Buyer will not suggest to or otherwise
persuade customers to pay an invoice of Buyer prior to paying an invoice of
Seller.
SECTION 6. SELLER'S COVENANTS.
6.1 EMPLOYEES. Seller shall permit Buyer to discuss the possibility of
employment with current employees of the Business, and shall not interfere with
or impede Buyer's right to do so, either directly or indirectly.
6.2 SALES TAXES; EQUIPMENT APPRAISAL. Buyer and Seller agree that they will
share and pay equally all sales, use and transfer Taxes, if any, arising from
the sale of the Purchased Assets pursuant hereto and provided that, if the
closing is completed hereunder, Seller will pay one-half of the Buyer's cost of
an appraisal of the Equipment.
6.3 ACCESS TO OFFICES, OFFICERS, ACCOUNTANTS, DUE DILIGENCE, ETC. Seller
will continue to
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afford to the officers and authorized representatives of Buyer (including
without limitation, attorneys, accountants, surveyors, building inspectors,
engineers, environmental consultants, insurance brokers, financial advisors and
bankers) access to the offices, officers, properties, books and records of
Seller concerning the Business and of the Business, including contact with
attorneys, accountants and other representatives of Seller and with any and all
Persons Buyer deems appropriate in order to consummate the transactions
contemplated hereby, and will furnish Buyer with such additional financial and
operating data and other information as to the Business and Purchased Assets as
Buyer may from time to time reasonably request. Seller will cooperate with Buyer
to facilitate Buyer's contacting vendors, dealers, customers and such other
Persons as Buyer and its representatives may reasonably desire to contact in
connection with Buyer's investigation of the Business. Investigations conducted
by Buyer and its agents shall be conducted in such a manner as to minimize, to
the extent reasonably practicable, the disruption of orderly business operations
of Seller and the Business and properties examined shall be returned to their
preexamination condition by Buyer.
6.4 ENVIRONMENTAL INVESTIGATION. Seller has commissioned at its expense an
update of its Phase I investigation of the premises and operation of the
Business to determine compliance with Environmental Laws, the presence of
Hazardous Substances or other toxic or hazardous materials on properties owned
or operated by the Business. Buyer shall be under no obligation to continue with
its due diligence investigation or to close under this Agreement if, at any
time, the results of its due diligence investigation under Section 6.3 or this
Section 6.4 are not satisfactory to Buyer for any reason in its sole discretion.
6.5 APPROVALS; CONSENTS. Seller will use its best efforts to obtain the
consents of all parties to all Contracts, Open Orders, Permits, Environmental
Permits and rights of Seller, which require the consent of such parties for the
consummation of the transactions contemplated hereby.
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6.6 PRESERVATION OF BUSINESS ORGANIZATION. Seller will conduct the Business
in the ordinary course, in a manner consistent with applicable federal and state
regulations, and will use its best efforts to preserve Seller's business
relationships intact and to preserve the goodwill of Seller with its suppliers,
customers and others having business relations with it.
6.7 APPROVAL OF CERTAIN TRANSACTIONS. Except as specifically contemplated
by this Agreement, without the prior written consent of Buyer, Seller will not,
in the conduct of the Business:
6.7.1 incur or agree to incur any liability or obligation or enter
into any agreement or transaction which cannot be cancelled upon thirty days
(30) notice, except renewals or replacements of existing Contracts in the
ordinary course on substantially the same terms;
6.7.2 mortgage, pledge, sell, lease, distribute, dispose of or
otherwise encumber or convey any interest in any Purchased Assets, except the
sale of finished goods inventory in the ordinary course of business;
6.7.3 make capital expenditures in excess of $15,000;
6.7.4 conduct its business other than in the ordinary course;
6.7.5 waive or release any material rights with respect to the
Purchased Assets or the Business;
6.7.6 change its methods of accounting; or
6.7.7 take any other action (i) which would result in a material
adverse change in the condition (financial or other), of the Business or the
Purchased Assets or (ii) which if taken prior to the date hereof would
constitute a breach of any representation or warranty contained in Section 4 of
this Agreement.
6.8 EXCLUSIVE DEALING. Seller will not:
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6.8.1 solicit or initiate discussions or engage in negotiations with
any Person, other than Buyer (whether or not such discussions are initiated by
Seller), with respect to the possible acquisition of the Business or the
Purchased Assets by such Person (whether by merger, purchase of capital stock,
purchase of assets or otherwise);
6.8.2 provide any information with respect to the Business or the
Purchased Assets to any Person, other than Buyer, seeking the possible
acquisition of the Business or the Purchased Assets by such Person (whether by
merger, purchase of capital stock, purchase of assets or otherwise); or
6.8.3 enter into a transaction with any Person, other than Buyer,
concerning the possible acquisition of the Business or the Purchased Assets by
such Person (whether by merger, purchase of capital stock, purchase of assets or
otherwise).
6.9 UPDATE SCHEDULES. Seller will promptly disclose to Buyer any
information contained in the representations and warranties of Seller contained
in Section 4 or in the Schedules which is no longer true or complete; provided
that no such disclosure shall be deemed to modify, amend or supplement Seller's
representations and warranties.
6.10 EMPLOYEES; WARN. Seller will pay all wages, salaries and other sums
due employees through the close of business on the day before the Closing Date,
and terminate the employment of all employees as of the close of business on the
day before the Closing Date. Seller shall give all required notices and make all
filings and otherwise comply with all provisions of the Worker Adjustment
Retraining and Notification Act and any similar state statutes with respect to
termination of employees of Seller.
6.11 FURTHER ASSURANCES. From time to time after the Closing, at Buyer's
reasonable request and without further consideration, Seller will execute and
deliver such other and further instruments
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of conveyance, assignment and transfer, and take such other action, as Buyer may
reasonably request for the more effective conveyance and transfer of the
Purchased Assets to Buyer. To the extent that the assignment of confidentiality
agreements to Buyer is not enforceable against the other parties to such
agreements, Seller shall use its best efforts to enforce such agreements with
respect to the Business. Seller shall cooperate with Buyer in obtaining
execution of any documents by current employees of Seller with respect to
inventions, invention disclosures and patent applications for goods or processes
invented prior to the Closing Date.
SECTION 7. THE CLOSING.
The closing of the sale and purchase of the Purchased Assets (the
"Closing") shall take place at the offices of the Seller, 770 Linden Avenue,
Rochester, New York at 10:00 a.m. local time on July 15, 1996 or such other time
and place as shall be mutually agreed. In the event that Buyer's bank is unable
to close the loan for acquisition of the Purchased Assets and working capital by
July 15, 1996, the Closing will be postponed on a day to day basis, but no later
than July 15, 1996 (such date being herein sometimes referred to as the "Closing
Date").
SECTION 8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER.
The obligation of Buyer to acquire the Purchased Assets and to pay the
Purchase Price is subject to the satisfaction, or waiver in writing by Buyer, on
or prior to the Closing Date of each of the following conditions:
8.1 CORPORATE ACTION. All corporate and other actions necessary to
authorize and effectuate the consummation of the transactions contemplated
hereby by Seller and Buyer shall have been duly taken prior to the Closing, and
Seller shall have delivered to Buyer a certificate of duly authorized officers
or employees of Seller to that effect with respect to Seller, together with
certified copies of resolutions of the Board of Directors of Seller authorizing
the execution and delivery of this
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Agreement and the consummation of the transactions contemplated hereby.
8.2 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Seller set forth in this Agreement shall be true and correct on and as of the
Closing Date with the same effect as though all such representations and
warranties had been made on and as of such date and there shall have been
delivered to Buyer a certificate to that effect, dated the Closing Date, signed
by a duly authorized officer of Seller.
8.3 PERFORMANCE OF OBLIGATIONS. Each and all of the covenants and
agreements of Seller to be performed or complied with pursuant to this Agreement
on or prior to the Closing Date shall have been duly performed and complied with
or duly waived and there shall have been delivered to Buyer a certificate to
that effect, dated the Closing Date, signed by a duly authorized officer of
Seller.
8.4 INSTRUMENTS OF CONVEYANCE. ETC. Seller shall have executed and
delivered to Buyer such bills of sale, assignments and instruments of transfer
and conveyance and certificates of title as shall be reasonably required by
Buyer for the transfer to Buyer of all of Seller's right, title and interest to
and in the Purchased Assets free and clear of Liens.
8.5 DELIVERY. On the Closing Date, Seller shall deliver physical possession
of all Equipment, Inventory, Technical Information and tangible property
included in the Purchased Assets and any tangible evidence of all Intellectual
Property and Open Orders to Buyer.
8.6 OPINION OF COUNSEL. Buyer shall have been provided with an opinion of
Seller's counsel substantially in form attached as Exhibit B.
8.7 REQUIRED CONSENTS. Seller shall have obtained all consents and
approvals of all third parties and all Governmental Authorities required for the
transactions contemplated hereby.
8.8 LITIGATION. No order of any court or administrative agency shall be in
effect which restrains or prohibits the transactions contemplated hereby and
there shall not have been threatened,
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nor shall there be pending, any action or proceeding by or before any court or
governmental agency or other regulatory or administrative agency or commission,
challenging any of the transactions contemplated by this Agreement or seeking
monetary relief by reason of the consummation of such transactions.
8.9 SATISFACTORY FINANCING. Buyer shall have received on or before July 15,
1996, a commitment for financing from such lenders as Buyer in its sole
discretion shall have deemed satisfactory to effectuate the transactions covered
by this Agreement.
8.10 NO MATERIAL ADVERSE CHANGE. There shall not have occurred any material
adverse change in the business, financial condition prospects, assets or
operations of the Business.
8.11 SUBLEASE. Buyer shall have executed a sublease for the real property
occupied by the Business on terms satisfactory to it from the Seller for a term
ending December 31, 1997 at a monthly rental of $11,500, and Buyer will assume
all of the nonrent obligations of Seller under the Real Property Lease. Buyer
will name Seller as a loss payee under the insurance policies which Buyer will
obtain relative to the leased premises for the duration of the sublease. At the
termination of the sublease, Buyer and Seller will jointly cause a Phase I
environmental report to be prepared relative to the leased premises and will
each pay for one-half of the cost thereof. Buyer will indemnify and hold Seller
harmless, for a period of three (3) years from the end of the Sublease Term,
from and against any claim brought in such period by reason of, or pertaining
to, the failure by Buyer to have complied with any Environmental Statutes or
regulations promulgated thereunder during the sublease period or thereafter,
including without limitation any failures or violations reported in such Phase I
environmental report which were not reported in the Phase I environmental report
to be delivered by Seller to the Buyer at the Closing.
8.12 REQUIREMENTS CONTRACT. Seller and Buyer shall have entered into a
contract under
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which Seller agrees for a period of 5 years after the Closing to purchase from
Buyer all of Seller's requirements for the products currently being produced by
the Business for the Seller, provided that, Buyer is at all times competitive
with third party sources for such products in terms of quality, cost and
delivery.
8.13 RELEASE OF RIGHT OF FIRST REFUSAL. Seller shall have delivered to
Buyer on or before Closing either (i) a release of the right of first refusal to
acquire the Purchased Assets held by a third party, or (ii) an affidavit of a
corporate officer of the Seller that the third party has forfeited their right
to exercise the right of first refusal under the terms thereof.
8.14 BACKLOG OF OPEN ORDERS. There shall exist a backlog of Open Orders
obtained in the ordinary course of business in an amount between $1,000,000 and
$1,300,000 as shown on an update to SCHEDULE 4.16.
SECTION 9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER.
The obligation of Seller to sell or otherwise transfer the benefits of the
Purchased Assets hereunder is subject to the satisfaction, or waiver in writing
by Seller, on or prior to the Closing Date of each of the following conditions:
9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Buyer set forth in this Agreement shall be true and correct on and as of the
Closing Date with the same effect as though all such representations and
warranties had been made on and as of such date and there shall have been
delivered to Seller a certificate to that effect, dated the Closing Date, signed
by a duly authorized officer of Buyer.
9.2 EXECUTION AND DELIVERY. The execution and delivery of this Agreement by
Buyer and consummation by Buyer of the transactions contemplated hereby shall
have been duly authorized by all necessary corporate action of Buyer and there
shall have been delivered to Seller a certificate of
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duly authorized officers or employees of Buyer to that effect, together with
certified copies of resolutions of the Board of Directors of Buyer authorizing
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby.
9.3 PAYMENT. Buyer shall have paid the Purchase Price to Seller according
to Section 2 of this Agreement, including delivery of the cash payment, and the
Note, guarantee of Note by Dandora, security agreement and financing statements
all in form and substance reasonably satisfactory to Seller.
SECTION 10. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; FURTHER
ACTION BY SELLER.
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made by Seller or Buyer as to any fact or condition existing on or
before the Closing Date in this Agreement, in any Schedule or in any certificate
delivered pursuant hereto, shall survive the Closing for a period of three (3)
years. All such representations and warranties shall be unaffected by any
investigation made by or on behalf of Buyer or by knowledge obtained as a result
thereof or otherwise. Except as otherwise expressly provided in this Agreement,
all covenants, agreements, undertakings and indemnities set forth in this
Agreement shall survive for a period of three (3) years.
10.2 FURTHER ACTION BY SELLER. Immediately following Closing, Seller will
withdraw its registration of the trade name "Austro Mold" and shall execute any
consents necessary to Buyer's or its designee's use of such name.
SECTION 11. INDEMNIFICATION.
11.1 INDEMNITY BY SELLER. The Seller shall defend, indemnify and hold
Buyer, its officers, directors, employees and subsidiaries harmless from and
against all claims, damages, losses, liabilities, costs and expenses (including
attorneys' fees and disbursements and any other legal costs)
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<PAGE> 41
(collectively, "Losses") arising out of or resulting from:
11.1.1 any and all events or occurrences occurring prior to the
Closing Date and any and all obligations of Seller relating to the Business, the
Purchased Assets, and the Excluded Liabilities, now or hereafter arising except
the Equipment Leases and any other obligations expressly assumed by Buyer at the
Closing;
11.1.2 any infringement of patent, trademark, copyright and/or unfair
competition rights arising out of Buyer's or customer's use of any Intellectual
Property, Technical Information or Computer Software Assets, or the manufacture,
use or sale by Buyer or customers of any products or services incorporating or
reflecting any Intellectual Property or Technical Information and all suits or
legal proceedings based thereon or resulting therefrom except by reason of
either (a) Buyer's misuse or different use of Technical Information or Computer
Software, or (b) new third-party patent, trademark, copyright and/or unfair
competition rights which might be created subsequent to the Closing;
11.1.3 all Losses arising out of or resulting from the breach by
Seller of any of its covenants contained herein;
11.1.4 all Losses arising out of or resulting from the failure of any
representation or warranty of Seller contained herein, in any Schedule hereto or
in any certificate delivered pursuant hereto to be true and correct; and
11.1.5 any Loss resulting from a failure by Seller to comply with or
to have complied with any Environmental Statutes or regulations promulgated
thereunder.
11.2 INDEMNITY BY BUYER. Buyer will indemnify and hold the Seller harmless
from and against all Losses arising out of or resulting from Buyer's operation
or ownership of the Business or
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the Purchased Assets on and after the Closing Date.
11.3 NOTICE OF CLAIM. Promptly after service of notice of any claim or of
process on Buyer or on the Seller (hereinafter in this Section 11.3, the
"Indemnified Party") by any third party, or promptly after obtaining actual
knowledge by the Indemnified Party of any other claim, in any matter in respect
of which indemnity may be sought pursuant to this Section 11, the Indemnified
Party shall promptly notify Buyer or the Seller (hereinafter in this Section
11.3, the "Indemnifying Party") of the receipt thereof. In the case of any
action or proceeding by a third party, the Indemnifying Party shall have the
right to participate in, or assume, at its own expense, the defense of any such
claim or process or settlement thereof. After notice from the Indemnifying Party
of its election so to assume the defense thereof, the Indemnified Party shall
not be liable to the Indemnifying Party for any legal or other expense in
connection with such defense. Such defense shall be conducted expeditiously (but
with due regard for obtaining the most favorable outcome reasonably likely under
the circumstances, taking into account costs and expenditures) and the
Indemnified Party shall be advised of all developments. With respect to any
matter which is the subject of any such claim and as to which the Indemnified
Party fails to give the Indemnifying Party such notice as aforesaid, and such
failure adversely affects the ability of the Indemnifying Party to defend such
claim or materially increases the amount of indemnification which the
Indemnifying Party is obligated to pay hereunder, the amount of indemnification
which the Indemnified Party shall be entitled to receive shall be reduced to an
amount which the Indemnified Party would have been entitled to receive had such
notice been timely given.
11.4 LIMITATION OF INDEMNIFICATION. The obligation of Seller to indemnify
Buyer under Section 11.1 shall terminate three years after the Closing Date and
the obligation of Buyer to
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indemnify the Seller under Section 11.2 shall terminate three years after the
Closing Date, except in each case as to matters as to which an Indemnified
Person has given notice of a claim for indemnification in accordance with
Section 11.3 on or prior to such date, in which case the Buyer's or Seller's
obligation shall survive until the claim is finally resolved, and (b) except
with respect to any fraudulent misrepresentation or fraudulent material omission
or fraudulent breach of warranty, which shall terminate five years after the
Closing Date.
11.5 SET OFF. Buyer and Seller are each hereby authorized at any time and
from time to time to set off and apply against any sum which is due and payable
to the other, the amount of any sum which may be owed to the offsetting party by
the other party under this Agreement. The rights under this Section 11.5 are in
addition to any other rights and remedies which Buyer or Seller may otherwise
have.
SECTION 12. TERMINATION; MODIFICATION OR WAIVER.
12.1 TERMINATION. This Agreement may be terminated at any time prior to the
Closing:
12.1.1 by mutual written agreement of Buyer and Seller;
12.1.2 by Buyer pursuant to Section 6.4 of this Agreement;
12.1.3 by Buyer if such transactions have not been consummated,
through no fault or failure of Buyer, on or before July 31, 1996; or
12.1.4 by Seller if such transactions have not been consummated,
through no fault or failure of Seller, on or before July 31, 1996.
12.2 MODIFICATION. This Agreement may be amended, modified and supplemented
only by written agreement of the parties hereto.
12.3 WAIVER. Any failure of the Seller or Buyer to comply with any
obligation, covenant,
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agreement or condition contained herein may be expressly waived in writing by
Buyer in the case of any such failure by the Seller or by the Seller in the case
of any such failure by Buyer, but such waiver or failure to insist upon strict
compliance shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure. Whenever this Agreement requires or permits consent
by or on behalf of any party hereto, such consent shall be given in writing in a
manner consistent with the requirements for a waiver of compliance as set forth
in this Section 12.3.
SECTION 13. COSTS INCIDENT TO PREPARATION OF AGREEMENT.
Except as set forth in the next sentence, each of the parties hereto shall
pay, without right of reimbursement from the other, all costs incurred by it
incident to the preparation, execution and delivery of this Agreement and the
performance of its obligations hereunder, whether or not the transactions
contemplated by this Agreement shall be consummated, including without
limitation fees and disbursements of legal counsel, accountants and consultants
employed by the respective parties hereto in connection with the transactions
contemplated by this Agreement. In the event the transactions contemplated by
this Agreement are terminated as a result of a breach of a representation or
warranty or failure of a party to perform it obligations hereunder, the
breaching party shall be responsible for payment of the nonbreaching party's
expenses incurred in connection with due diligence and the negotiation and
preparation of this Agreement.
SECTION 14. RISK OF LOSS; DAMAGE PRIOR TO CLOSING.
14.1 All risk of damage or loss of any sort from any cause with respect to
the Purchased Assets shall remain with Seller until the Closing.
14.2 This Agreement as well as all obligations and liabilities of Seller
and Buyer hereunder shall terminate in the event of (i) a seizure prior to
Closing by any Governmental Authority of all or
38
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a material portion of the Purchased Assets, or (ii) material damage, destruction
or other impairment of or to all or a material portion of the Purchased Assets
including, without limitation, damage, destruction or other impairment caused by
theft, fire, any casualty or the negligence of any Person, including Seller, if
such seizure, damage, destruction or impairment shall not in Buyer's sole
opinion have been satisfactorily cured or remedied prior to the Closing Date;
provided, however, that nothing herein shall impose on Seller any obligation to
rebuild, repair or replace all or any portion of the Purchased Assets in the
event of any such seizure, damage, destruction or other impairment.
SECTION 15. BEST EFFORTS.
Each of the parties covenants to use its best efforts to cause the
satisfaction of all conditions to Closing to be performed by it or satisfied on
its part at or prior to Closing.
SECTION 16. GENERAL.
16.1 PARTIES IN INTEREST. This Agreement shall be binding upon, and inure
to the benefit of, the parties hereto and their respective successors and
permitted assigns. This Agreement is not made for the benefit of any Person not
a party hereto, and nothing in this Agreement will be construed as giving any
Person, other than the parties hereto and their respective successors and
permitted assigns, any right, remedy or claim under or in respect of this
Agreement, or any provision hereof.
16.2 ASSIGNMENT. Buyer may assign this Agreement, provided that Buyer shall
remain liable for all obligations to be performed by the assignee hereunder.
Seller shall not assign its rights and obligations under this Agreement without
the prior written consent of Buyer.
16.3 CONFIDENTIALITY. Each party to this Agreement shall take all
reasonable precautions to maintain the confidentiality of the negotiation or
existence of this Agreement, the identity of the parties hereto and any
nonpublic information concerning the other parties or their subsidiaries or
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affiliates provided to or discovered by it or its representatives and shall not
disclose any of the above information to anyone other than (i) those people
directly involved in the investigation and negotiations pertaining to the
transactions contemplated by this Agreement, including without limitation,
attorneys, accountants and similar representatives, (ii) such lenders or
investors as may be necessary to finance the transactions contemplated hereby,
(iii) such Persons or Governmental Authorities whose consents or approvals may
be necessary or to whom notice needs to be given to permit consummation of the
transactions contemplated hereby and (iv) to the Securities and Exchange
Commission in filings and reports required by the Securities Exchange Act of
1934. In the event of termination of this Agreement prior to Closing, Buyer
shall promptly return or destroy all documents, records or other information
concerning Seller and/or the Business and shall not retain any copies of same.
16.4 PUBLIC STATEMENTS. Seller shall make or cause to be made such press
release or other public statement or announcement that may be required to comply
with applicable securities laws and regulations.
16.5 CHOICE OF LAW. This Agreement shall be governed by, construed,
interpreted and the rights of the parties determined in accordance with the
laws, including equitable principles but without regard to principles of
conflict of laws, of the State of New York.
16.6 MEDIATION. In the event of a dispute arising out of or related to this
Agreement, the parties shall, prior to initiating litigation, first submit the
dispute to non-binding mediation under the commercial mediation rules of the
American Arbitration Association. The parties hereby acknowledge and agree that
such mediation shall be deemed to be in the nature of settlement discussions and
that neither the fact that such discussions took place, nor any statement or
conduct of any participant in
40
<PAGE> 47
such discussions shall be admissible into evidence in any subsequent litigation
or in any arbitration or other dispute resolution proceeding involving the
parties. It is further understood and agreed that any disclosure in any form,
including oral, by any Person participating in such mediation shall not operate
as a waiver of any privilege, including work product or attorney-client
privilege, applicable to the subject matter thereof.
16.7 NOTICES. Any notice, request, consent, waiver or other communication
required or permitted to be given hereunder shall be effective only if in
writing and shall be deemed sufficiently given only if delivered in person or
sent by express delivery service, telecopy, telegram, cable or by certified or
registered mail, postage prepaid, return receipt requested, addressed as
follows:
If to Buyer:
Austro Mold, Inc.
3030 Darnell Road
Philadelphia, Pennsylvania 19154
Attn: Nathu R. Dandora, President
with a copy to:
Curtin and Heefner
250 North Pennsylvania Avenue
Morrisville, Pennsylvania 19067
Attn: Edward I. Dobin, Esquire
If to Seller:
Magnetic Technologies Corporation
770 Linden Avenue
Rochester, New York 14625
Attn: Gordon H. McNeil, President
with a copy to:
Gerald B. Fincke, Esquire
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<PAGE> 48
2300 E. Graves Avenue
Orange City, Florida 32763
or to such other Person or address as any such party may have specified in a
notice duly given by the sender as provided herein. Such notice or communication
shall be deemed to have been given as of the day after transmittal by express
delivery service; the day of transmittal by telecopy, telegram or cable; and
three days after posting by certified or registered mail.
16.8 ENTIRE AGREEMENT. This Agreement (including the schedules and exhibits
attached hereto) and the documents referred to herein as having been entered
into by any of the parties hereto or delivered by a party hereto to another
party hereto constitute the entire agreement and understanding of the parties
relating to the subject matter hereof and supersede all prior and
contemporaneous agreements and understandings, representations and warranties,
whether oral or written, relating to the subject matter hereof. The terms of
this Agreement cannot be changed, modified, released or discharged orally.
16.9 NO WAIVER. No delay or failure on the part of any party in exercising
any rights hereunder, and no partial or single exercise thereof, will constitute
a waiver of such rights or of any other rights hereunder. The rights and
remedies provided in this Agreement are cumulative and are not exclusive of any
rights or remedies a party may otherwise have at law or in equity.
16.10 SEVERABILITY. The unenforceability or invalidity of any Section or
subsection or provision of this Agreement shall not affect the enforceability or
validity of the balance of this Agreement. If any provision of this Agreement is
so broad as to be unenforceable, such provision shall be interpreted to be only
as broad as is enforceable.
16.11 HEADINGS. The headings of the Sections and subsections contained in
this Agreement
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<PAGE> 49
are for reference purposes only and shall not in any way affect the meaning,
interpretation, enforceability or validity of this Agreement.
16.12 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which so executed will be deemed to be an original, but
all of which together will constitute one and the same agreement.
16.13 CONSTRUCTION. Within this Agreement, the singular shall include the
plural and the plural shall include the singular, and any gender shall include
all other genders, all as the meaning and the context of this Agreement shall
require.
16.14 WAIVER OF JURY TRIAL. SELLER AND BUYER HEREBY WAIVE ALL RIGHT TO A
TRIAL BY JURY IN ANY LITIGATION RELATING TO THIS AGREEMENT AND THE OTHER
DOCUMENTS EXECUTED IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
MAGNETIC TECHNOLOGIES CORPORATION
By: /s/ Gordon H. McNeil, President
-----------------------------------
Title: President
--------------------------------
AUSTRO MOLD, INC.
By: /s/ Nathu R. Dandora
-----------------------------------
Title: Vice President
--------------------------------
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<PAGE> 1
EXHIBIT (B)
THIS INSTRUMENT IS SUBJECT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED
JULY 12, 1996, IN FAVOR OF PNC BANK, NATIONAL ASSOCIATION, WHICH SUBORDINATION
AGREEMENT IS INCORPORATED HEREIN BY REFERENCE. NOTWITHSTANDING ANY CONTRARY
STATEMENT CONTAINED IN THE WITHIN INSTRUMENT, NO PAYMENT ON ACCOUNT OF THE
PRINCIPAL OR INTEREST THEREOF SHALL BECOME DUE OR BE PAID EXCEPT IN ACCORDANCE
WITH THE TERMS OF SUCH SUBORDINATION AGREEMENT.
PROMISSORY NOTE
---------------
$342,683.00 8% interest after first year
FOR VALUE RECEIVED, the undersigned, AUSTRO MOLD, INC., hereby promises to
pay to MAGNETIC TECHNOLOGIES CORPORATION, or order the sum of Three Hundred
Forty-two thousand six hundred eighty-three dollars and no cents ($342,683.00)
as follows. No interest will accrue on this Note from the date hereof through
July 15, 1997 and no payments will be due on this Note until August 15, 1997.
Commencing on July 15, 1997, interest will accrue on this Note at the rate of
eight percent (8%) per annum. Commencing on August 15, 1997 and continuing
through July 15, 2001, the undersigned will discharge this Note in the form of
forty-eight (48) equal consecutive monthly installments of principal and
interest payable on the first day of each month. All payments on this Note
shall be made in lawful funds of the United States.
The undersigned shall have the right to prepay this Note at any time, and
from time to time, provided that payment is concurrently made for all accrued
interest hereon.
This Note shall not be subordinated to the claims of any unsecured creditor
of the undersigned. In the event that the undersigned shall fail to make any
payment hereunder within five (5) days of the due date, the Holder hereof shall
have the right to declare the entire amount of this Note and all accrued
interest hereon immediately due and payable. This Note is secured by a Security
Agreement of even date herewith, and all of the terms thereof are incorporated
by reference herein, including provisions concerning the right of the Holder
hereof to declare this Note in default and to accelerate this Note for reasons
other than nonpayment and the obligation of the undersigned to pay all
reasonable attorneys' fees and expenses of collection incurred by the holder
hereof in connection with its collection efforts in the event that any default
occurs. The delay or omission by the Holder hereof in exercising any right or
remedy hereunder will not operate as a waiver thereof or of any other right or
remedy.
1
<PAGE> 2
IN WITNESS WHEREOF, the undersigned has executed this Note on and as of
July 15, 1996.
AUSTRO MOLD, INC.
By: /s/ Nathu R. Dandora
-----------------------------
Nathu R. Dandora,
Vice President
Attest:
/s/ Nathu R. Dandora
-----------------------------
The undersigned, Nathu R. Dandora, hereby guarantees to Magnetic Technologies
Corporation, after it completes its collection attempts against Austro Mold,
Inc., the collection of the above Note.
/s/ Nathu R. Dandora
Dated: July 15, 1996 -----------------------------
Nathu R. Dandora
2
<PAGE> 3
THIS INSTRUMENT IS SUBJECT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED
JULY 12, 1996, IN FAVOR OF PNC BANK, NATIONAL ASSOCIATION, WHICH SUBORDINATION
AGREEMENT IS INCORPORATED HEREIN BY REFERENCE. NOTWITHSTANDING ANY CONTRARY
STATEMENT CONTAINED IN THE WITHIN INSTRUMENT, NO PAYMENT ON ACCOUNT OF THE
PRINCIPAL OR INTEREST THEREOF SHALL BECOME DUE OR BE PAID EXCEPT IN ACCORDANCE
WITH THE TERMS OF SUCH SUBORDINATION AGREEMENT.
SECURITY AGREEMENT
------------------
THIS AGREEMENT made by and between AUSTRO MOLD, INC., a New York
corporation having offices at 3 Rutter Street, Rochester, New York 14606 (herein
referred to as the "Obligor") and MAGNETIC TECHNOLOGIES CORPORATION, a Delaware
corporation having offices at 770 Linden Avenue, Rochester, New York 14625
(herein referred to as the "Secured Party").
W I T N E S S E T H:
In order to secure the payments to be made by the Obligor to the Secured
party under a Note of even date herewith (herein referred to as the "Note"), the
parties hereto hereby agree as follows:
The Obligor hereby grants and conveys to the Secured party a security
interest in all of the Obligor's assets, including accounts receivable,
inventory (including raw materials, work in process and finished goods),
machinery, equipment, furniture, computer software and all other tangible and
intangible assets, together with all increases, substitutions, replacements,
additions, accessions thereto and all proceeds thereof (herein collectively
referred to as the "Collateral"), subordinate, however, to any and all security
interests in the Collateral held at any time (now or in the future) by the
Obligor's banking institutions to secure indebtedness not to exceed $1,750,000
in the aggregate. The security interest hereby granted by the Obligor to the
Secured Party is and shall be pursuant to, and include, all of the following
terms and conditions of this Agreement.
I. PROTECTION OF THE COLLATERAL
The Obligor warrants and covenants as follows:
1.1 DEFEND TITLE. To defend title to the collateral against all parties and
against all claims and demands whatsoever.
1.2 ASSURANCE OF TITLE. On demand of the Secured Party to do the following:
furnish further assurances of title in the Collateral; execute any instrument or
statement required by law or otherwise in order to perfect, continue or
terminate the security interest of the Secured Party in the Collateral,
including UCC-1 financing statements; and pay all the costs of filing in
connection therewith.
1.3 OWNERSHIP. To retain ownership and possession of the Collateral as long
as the Note remains outstanding and during the existence of this Agreement and
not to make any bulk sale of the Collateral without the written consent of the
Secured Party.
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1.4 LOCATION. Not to remove the Collateral from the Obligor's premises in
Rochester, New York, except in connection with sales and exchanges of the
Collateral from time to time in the ordinary course of business, or if not in
the ordinary course of business, with the written consent of the Secured Party.
1.5 LIENS. To keep the collateral free and clear of all liens, charges,
encumbrances and assessments except as may be held by banking institutions to
secure indebtedness by the Obligor not to exceed the sum of $1,750,000 in the
aggregate to secure indebtedness by the Secured Party; to make all payments when
due on the Obligor's bank loans secured by the Collateral; and to notify the
Secured Party immediately upon any default by the Obligor with respect to any
such bank loan.
1.6 TAXES. To pay, when due, all taxes, assessments and license fees
relating to the Collateral.
1.7 REPAIRS. To keep the Collateral, at the Obligor's expense, in good
repair and condition.
1.8 INSURANCE. To keep the Collateral insured with licensed insurers
against loss by fire, theft or other casualties, to the extent adequate for the
Obligor's type of business and to name the Secured Party as a loss payee on such
insurance policies.
1.9 INSPECTION. To permit the Secured Party to inspect the Collateral upon
reasonable notice during normal business hours.
1.10 LEASE TERMS. To comply with all of the lease or sublease terms with
respect to the Obligor's premises where the Collateral is located.
2. ENFORCEMENT OF THE SECURITY INTEREST
2.1 ASSIGNMENT. The Secured Party may assign its rights hereunder to a bank
or to any other party, in which event all of the rights and remedies of the
Secured Party shall inure to the benefit of the Secured Party's assignee.
2.2 DEFAULT. Any of the following conditions shall constitute an event of
default under this Agreement:
2.2.1 Nonpayment by the Obligor of any payments due under the Note
within the time periods provided for in the Note, whether by acceleration
or otherwise, or any other event of default specified in the Note;
2.2.2 The failure of the Obligor to observe or perform any of the
terms, covenants and conditions of this Agreement, unless such failure is
cured within fifteen (15) days after the Obligor's receipt of written
notice of such failure from the Secured Party;
2.2.3 Any event of default by the Obligor under its bank lending
arrangements, including the failure to make any bank loan payment when due;
2.2.4 In the event that Nathu R. Dandora becomes no longer an officer
and owner of a majority of the outstanding voting shares of stock of the
Obligor;
2
<PAGE> 5
2.2.5 The entry of a judgment in excess of $10,000 or the filing of a
tax lien against the Obligor, either of which is not satisfied within
thirty (30) days; or the commencement of bankruptcy proceedings or an
assignment for the benefit of creditors by or against the Obligor; or the
dissolution, merger or liquidation of the Obligor; or the bulk sale of
substantially all of the Obligor's assets; or the insolvency of the
Obligor, in the form of a negative net worth; or the discontinuance of the
Obligor's business; or the appointment of a trustee or receiver with
respect to the Obligor's business or the Collateral.
2.3 REMEDIES ON DEFAULT. Upon any event of default hereunder and at the
option of the Secured party, the Secured Party shall have all such rights and
remedies as are granted under law and under the Note, including without
limitation the following:
2.3.1 Acceleration of the Note;
2.3.2 All of the rights, remedies and privileges with respect to the
repossession, retention and sale of the Collateral and disposition of the
proceeds as are accorded by the applicable provisions of the Uniform
Commercial Code respecting "Default" in the State of New York, including
without limitation the rights to enter the premises where the Collateral is
located, to assemble the Collateral and to enforce, sue upon, settle,
discount and compromise payment of any account receivable, subordinate
however to superior rights to the Collateral held by the Obligor's bank;
2.3.3 The right to receive payment from the Obligor of all reasonable
attorneys' fees incurred by the Secured Party in enforcing and collecting
the indebtedness represented by the Note and in enforcing the Secured
Party's rights in the Collateral.
All of the rights and remedies of the Secured Party are cumulative, and no
remedy is intended to be an exclusive remedy.
2.4 NONWAIVER. The waiver or acquiescence in any default by the Obligor, or
the failure of the Secured party to insist upon strict performance by the
Obligor of any warranties or covenants contained in this Agreement, shall not
constitute a waiver of any subsequent or other default or failure.
3. GENERAL
3.1 NOTICES. Notices to either party hereto shall be in writing and mailed,
postage prepaid and return receipt requested, to that party's address(es) as set
forth at the beginning of this Agreement or to any address subsequently
established in like manner by any party hereto.
3.2 INTERPRETATION. This Agreement contains the entire agreement with
respect to the granting of a security interest in the Collateral to the Secured
Party and may be modified only by a subsequent written instrument executed by
both parties hereto.
3.3 HEADINGS. The headings of this Agreement are inserted as a matter of
convenience and for reference only and in no way define, limit or describe the
scope of this Agreement nor the intent of any provision hereof.
3
<PAGE> 6
IN WITNESS WHEREOF, this Agreement has been executed in several
counterparts by the Obligor and the Secured Party on July 15, 1996.
THE OBLIGOR:
AUSTRO MOLD, INC.
By: /s/ Nathu R. Dandora
-----------------------------------
Nathu R. Dandora, Vice President
THE SECURED PARTY:
MAGNETIC TECHNOLOGIES CORPORATION
By: /s/ Gordon H. McNeil, President
-----------------------------------
Gordon H. McNeil, President
4
<PAGE> 7
SUBORDINATION AGREEMENT
-----------------------
THIS SUBORDINATION AGREEMENT (this "AGREEMENT") is made effective as of the
12th day of July, 1996, by and among MAGNETIC TECHNOLOGIES CORPORATION
("CREDITOR"), AUSTRO MOLD, INC. ("BORROWER") and PNC BANK, NATIONAL ASSOCIATION
("BANK").
BACKGROUND
----------
A. Borrower is or may become indebted to Creditor, Creditor is interested
in the welfare of Borrower and will benefit if Bank extends or maintains credit
to Borrower.
B. Borrower has requested that Bank extend and maintain credit to Borrower.
Bank is willing to do so provided this Agreement is executed.
NOW, THEREFORE, the parties hereto, as an inducement for Bank to extend and
maintain credit to Borrower, and with the understanding that Bank is relying
upon the provisions of this Agreement and intending to be legally bound hereby,
agree as follows:
1. DEFINITIONS. The following words and phrases as used in capitalized form
in this Agreement, whether in singular or plural, shall have the meanings
indicated:
(A) "ADDITIONAL SUBORDINATED DEBT" shall mean Subordinated Debt other
than Scheduled Subordinated Debt.
(B) "SCHEDULED SUBORDINATED DEBT" shall mean: (a) the principal of,
premium, if any, and all interest on the Subordinated Note and all fees, costs
and expenses (including attorney's fees and legal expenses) related thereto, (b)
all other sums payable under the Subordinated Debt Loan Documents, and (c) all
increases of principal thereof (subject to the consents required herein) and all
extensions, amendments, replacements and renewals thereof.
(C) "SENIOR DEBT" shall mean all liabilities and obligations of any
nature, whether primary, secondary, absolute, contingent, sole, joint, several
or joint and several, and all interest thereon and all fees, costs and expenses
(including attorney's fees and legal expenses) related thereto, now or at any
time or times hereafter existing, contracted or incurred, of or by Borrower to
Bank, including without limitation, the obligations of Borrower with respect to
that certain Five Hundred Thousand Dollar ($500,000.00) line of credit from Bank
to Borrower and that certain term loan in the original principal amount of Seven
Hundred Fifty Thousand Dollars ($750,000.00) from Bank to Borrower and all other
sums payable under that certain Loan Agreement between Borrower and Bank dated
July 12, 1996, as it may be amended, modified or supplemented and all Loan
Documents as defined therein, and all increases, decreases, extensions,
amendments, replacements and renewals of any of such liabilities and
obligations. Without limiting the foregoing, Bank shall have the option to make
advances and provide financing in the future to Borrower or to a receiver,
trustee or other fiduciary appointed by a court in any insolvency or court
proceeding for Borrower or to Borrower as a debtor-in-possession. Creditor
consents to the financing of Borrower or such fiduciary or debtor-inpossession
after any such insolvency or court proceeding and agrees that such financing
shall be included within the Senior Debt and the subordination and other
restrictions and provisions of this Agreement shall be applicable thereto.
Notwithstanding the foregoing, for purposes of this Agreement, the amount of the
Senior Debt shall not exceed One Million Seven Hundred Fifty
1
<PAGE> 8
Thousand Dollars ($1,750,000.00) of principal plus all accrued and unpaid
interest owing thereon to Bank and all other costs, fees and expenses,
including, without limitation, attorney's fees, owing by Borrower to Bank under
any instruments or agreements executed in connection with any Senior Debt.
(D) "SUBORDINATED DEBT" shall mean all liabilities and
obligations of any nature, whether primary, secondary, absolute, contingent,
sole, joint, several or joint and several, and all interest thereon and all
fees, costs and expenses (including attorney's fees and legal expenses) related
thereto, now or at any time or times hereafter existing, contracted or incurred,
of Borrower to Creditor, including without limitation, the Scheduled
Subordinated Debt.
(E) "SUBORDINATED DEBT LOAN DOCUMENTS" shall mean the
Subordinated Note and all other documents attached hereto as EXHIBIT "A".
(F) "SUBORDINATED NOTE" shall mean that certain note, a copy
of which is attached hereto as EXHIBIT "B".
2. SUBORDINATION.
(A) Creditor subordinates all Subordinated Debt and all claims
and demands arising therefrom to all the Senior Debt. Creditor agrees that all
of the Senior Debt shall be paid before Creditor shall be paid anything (of any
kind or character) on account of the principal of or interest on any
Subordinated Debt or any other sums payable in connection therewith. Until all
of the Senior Debt is paid, performed and complied with in full and this
Agreement is terminated, Borrower will not make, and Creditor will not demand or
accept, either directly or indirectly, payment (of any kind or character) of all
or any part of the Subordinated Debt without the prior written consent of Bank.
The Senior Debt shall not be deemed to have been paid, performed or complied
with in full unless the Bank has unconditionally and irrevocably received
payment of the Senior Debt and this Agreement has been terminated.
(B) Notwithstanding the foregoing, commencing after the one
year anniversary of the date hereof, Borrower may make the regularly scheduled,
non-accelerated payments of non-default principal and interest on the Scheduled
Subordinated Debt in accordance with the terms of the Subordinated Note,
provided that, (a) no event of default, or event which, with the giving of
notice, passage of time or both, would constitute an event of default with
respect to the Senior Debt or any documents executed in connection therewith,
has occurred; and (b) such payment would not result in such an event of default.
(C) Creditor hereby subordinates all of its right, title,
lien, security interest and remedies in all Scheduled Subordinated Debt
Collateral (as defined in SECTION 7(C)), and all products and proceeds thereof
and all guaranties of any of the Subordinated Debt to Bank and Bank's right,
title, lien, security interest and remedies therein. Creditor agrees that all
rights, liens, security interests and remedies in the Scheduled Subordinated
Debt Collateral granted to Bank and all rights of Bank against any guarantors of
the Subordinated Debt shall have priority over all rights, liens, security
interests and remedies granted to Creditor therein and all rights of Creditor
against any such guarantor, regardless of the time or order of attachment; the
time, order or manner of perfection; or the time or order of filing of any
mortgage, assignment, security agreement, financing statement or other document.
(D) The right of Bank to enforce the subordination provisions
and any other provisions hereof shall not in any way be prejudiced or impaired
by any act or failure to act on the part of Bank, Borrower or Creditor, or by
any noncompliance by Borrower or the Creditor with the terms, provisions and
covenants of this Agreement.
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<PAGE> 9
3. IN FURTHERANCE OF SUBORDINATION.
(A) Upon any distribution of any of the assets of Borrower,
any guarantor of any of the Subordinated Debt or any collateral securing the
Subordinated Debt, upon or in connection with any dissolution, winding up,
liquidation, arrangement or reorganization of Borrower, any guarantor of any of
the Subordinated Debt or any other person or entity, or upon any assignment for
the benefit of creditors or any other marshalling of the assets and/or
liabilities of Borrower or any guarantor of any of the Subordinated Debt or
otherwise, any payment, dividend or distribution of any kind (whether in cash,
securities or other property) which would otherwise be payable or deliverable
with respect to the Subordinated Debt, shall be paid or delivered directly to
Bank for application (in the case of cash) to or as collateral (in the case of
securities or other property) for the Senior Debt.
(B) In the event that (i) the total amount of all cash
payments actually received by Bank related to the Subordinated Debt exceeds all
of the Senior Debt; (ii) Bank has no further agreement or understanding with
Borrower pursuant to which Bank may extend credit to Borrower; and (iii) any
such cash payment received by Bank may no longer be set aside as preferential
under any federal or state bankruptcy law, then Bank shall reassign to Creditor,
without recourse or representation, the remaining balance due under the
Subordinated Debt and all collateral and guaranties securing the Subordinated
Debt, or make such other disposition thereof as may be required by applicable
law or court order.
4. LIMITATIONS ON CREDITOR'S RIGHTS. Without the prior written consent
of Bank, Creditor agrees that it will not, until all Senior Debt is paid in full
and Bank has no agreement or commitment to provide any credit facility or
accommodation to Borrower, except for the Permitted Actions, as hereafter
defined: (a) demand or accelerate any of the Subordinated Debt, (b) institute
any court proceedings against Borrower or any guarantor of any of the
Subordinated Debt to collect any Subordinated Debt, (c) enter judgment by
confession or exercise any other right or remedy against Borrower, Borrower's
assets, any guarantor of any of the Subordinated Debt or any of such guarantor's
assets, or any right or remedy against any of the Scheduled Subordinated Debt
Collateral, (d) amend or modify, alter, increase or extend the terms of any of
the Subordinated Debt, or (e) amend or modify any of the Subordinated Debt Loan
Documents. For purposes of the foregoing, the following shall constitute
Permitted Actions:
(a) accelerate payment of all sums then due under the
Subordinated Note and/or enter judgment against Borrower for the sums then due
under the Subordinated Note if and only if (i) Creditor is in compliance with
all other terms and conditions of this Agreement, (ii) an Event of Default has
occurred under the Subordinated Note or any of the other Subordinated Debt Loan
Documents; and (iii) Creditor has delivered to Bank written notice of the
occurrence of any Event of Default under the Subordinated Note or any of the
other Subordinated Debt Loan Documents and Bank has failed to cure such Event of
Default (or event or circumstance giving rise thereto) within twenty (20)
calendar days of receipt by Bank of such notice; and/or
(b) enforcement of Creditor's rights against Nathu Ram Dandora
under the guaranty included in the Subordinated Note if and only if (i) Creditor
is in compliance with all other terms and conditions of this Agreement, (ii) an
Event of Default has occurred under the Subordinated Note or any of the other
Subordinate Debt Loan Documents; and (iii) Creditor has delivered to Bank
written notice of the occurrence of any such Event of Default under the
Subordinated Note or any of the other Subordinated Debt Loan Documents and Bank
has failed to cure such Event of Default (or event or circumstances giving rise
thereto) within ninety (90) days of receipt by Bank of such notice.
Creditor acknowledges and agrees that (i) Bank has no obligation or
commitment of any kind
3
<PAGE> 10
to cure any Event of Default under the Subordinated Note or Subordinated Debt
Loan Documents, (ii) Creditor may take the Permitted Actions only if the
foregoing conditions have been satisfied, and (iii) except for the Permitted
Actions taken by Creditor upon compliance with the foregoing conditions,
Creditor may not take any other action against Borrower, Nathu Ram Dandora, the
Subordinated Debt Collateral or any other assets of Borrower, and without
limiting the foregoing, may not seek to enforce, levy or execute on, foreclose
or otherwise enforce any judgment Creditor obtains pursuant to a Permitted
Action against Borrower or any assets of Borrower.
5. PAYMENTS HELD IN TRUST. In the event that Creditor receives any
dividend, distribution or payment referred to in SECTION 3, or receives any
payment (of any kind or character) of any Subordinated Debt or security therefor
in violation of this Agreement, Creditor will (a) not credit such payments
against the Subordinated Debt, (b) notify Bank immediately thereof, and (c)
receive the same in trust for Bank and will immediately pay and deliver the same
to Bank in precisely the form received, except for any requisite endorsement or
assignment, which Creditor will make and authorizes Bank or any of its officers
or employees to make in the event that Creditor does not make the same. Bank
will apply any such moneys so received by it in reduction of the Senior Debt and
will hold any property other than money so received by it as collateral security
therefor. In the event Creditor shall obtain any lien, judgment or decree
against Borrower, Creditor will immediately assign the same to Bank, or mark the
same to Bank's use. If Creditor fails to make any endorsement or assignment
required hereunder, Bank is hereby appointed attorney for Creditor with full
power of substitution to make any such endorsement or assignment. Such power of
attorney being coupled with an interest is irrevocable.
6. BANK'S RIGHTS. Without notice to Creditor and without affecting or
releasing any obligation or agreement of Creditor under this Agreement or the
subordination provided herein, Bank may at any time or times do any of the
following with respect to any of the Senior Debt: (a) amend, modify, alter or
waive any of the terms thereof or any of the documents executed in connection
therewith, (b) renew or extend the time for payment of all or any part thereof,
(c) increase (subject to the principal limitation contained in SECTION 1(C)
above) or decrease the amount thereof, (d) accept collateral security or
guaranties therefor and sell, exchange, fail to perfect, release or otherwise
deal with all or any part of any such collateral or guaranties, (e) release any
party primarily or secondarily obligated thereon, (f) grant indulgences and take
or refrain from taking any action with regard to the collection or enforcement
thereof, and (g) take any action which might otherwise constitute a defense to
or a discharge of Borrower or any guarantor. Nothing contained in this Agreement
shall impair any right of Bank with respect to any of the Senior Debt or any
collateral security or guaranties therefor or the proceeds thereof.
7. REPRESENTATIONS. Creditor represents to Bank that:
(A) The Scheduled Subordinated Debt constitutes all of the now
existing liabilities of any nature whatsoever of Borrower to Creditor and/or
Creditor and others. There is no event of default or event which with the giving
of notice, passage of time or both would constitute an event of default existing
under the Scheduled Subordinated Debt.
(B) Creditor is the owner and holder of the Subordinated Note,
which has not been transferred or encumbered. The copy of the Subordinated Note
attached hereto is a true and complete copy of such note, which has not been
amended or modified.
(C) The Scheduled Subordinated Debt is solely secured by a
security interest in and against the assets of Borrower as described on EXHIBIT
"A" attached hereto and by the guaranty of Nathu R. Dandora, all as evidenced by
the documents described on EXHIBIT "A" attached hereto (the "SCHEDULED
SUBORDINATED DEBT COLLATERAL"). The Subordinated Debt Loan Documents
4
<PAGE> 11
described on EXHIBIT "A" attached hereto are the only agreements, guaranties and
other documents collateral to or securing the Scheduled Subordinated Debt, none
of which has been amended or modified.
(D) The execution, delivery and performance by Creditor of
this Agreement, the consummation of the transactions contemplated herein and the
fulfillment and compliance with the respective terms, conditions and provisions
contained herein: (i) have been duly authorized by all necessary corporate
action of Creditor, and (ii) will not conflict with or result in a breach of, or
constitute a default under, any of the terms, conditions or provisions of any
applicable statute, law, rule, regulation or ordinance, or Creditor's Articles
of Incorporation or By-Laws or any judgment, or order of any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign by which Creditor is bound or affected.
(E) This Agreement has been duly executed and delivered by
Creditor and constitutes the valid and binding obligation of Creditor,
enforceable in accordance with its terms.
(F) No consent, approval or authorization of or designation,
declaration or filing with any governmental authority is required in connection
with the execution, delivery or performance by Creditor of this Agreement.
5
<PAGE> 12
8. COVENANTS.
(A) Creditor and Borrower agree that the only evidence of any
Additional Subordinated Debt which Borrower will issue and Creditor will accept
will be a note in the principal amount thereof made by Borrower and payable and
delivered to Creditor; and that such a note will be executed and delivered
immediately when such Additional Subordinated Debt is incurred. Creditor and
Borrower acknowledge that Additional Subordinated Debt is permitted only with
the prior written consent of Bank.
(B) Creditor and Borrower agree that Borrower will not give or
permit to be given, and Creditor will not accept any security or guaranty for
any Subordinated Debt without the prior written consent of Bank except the
Scheduled Subordinated Debt Collateral which secures only the Scheduled
Subordinated Debt.
(C) Creditor will give Bank immediate written notice of any
event of default or any event of which Creditor has knowledge, which might, upon
the passage of time or the giving of notice or both, constitute a default under
the Subordinated Debt.
(D) Creditor will permit Bank to inspect and copy all books,
records, instruments and documents evidencing or pertaining to the Subordinated
Debt. Borrower consents to such inspection.
(E) In the event that Creditor at any time has any
indebtedness or other obligations owing to Borrower for any reason, including
without limitation any accounts receivable owing to Borrower and any sums owing
under that certain Requirements Contract dated July 15, 1996 between Borrower
and Creditor, Creditor will not offset the indebtedness or other obligations
owing to Borrower against any of the Subordinated Debt.
9. LIMITATION ON CONSENT TO PAYMENT OR GRANTING OF SECURITY. In the
event that Bank consents in writing to the making of a payment on account of the
Subordinated Debt or to the granting of collateral security or any guaranties
for the Subordinated Debt, which payment or grant would otherwise be prohibited
pursuant to SECTIONS 2 OR 8, such consent shall be deemed to be a consent to the
payment or grant specifically referred to in such written consent and shall not
be construed as a waiver of SECTIONS 2 OR 8 generally as to all future payments
or grants. A consent by Bank to any request shall not be deemed to be a consent
to future similar requests.
10. SUBORDINATION LEGEND. Creditor and Borrower shall cause each
instrument that at any time evidences or secures all or any portion of the
Subordinated Debt, including, without limitation, the Subordinated Note and the
other Subordinated Debt Loan Documents, to be conspicuously marked as follows:
"THIS INSTRUMENT IS SUBJECT TO THE TERMS OF A SUBORDINATION
AGREEMENT DATED JULY 12, 1996 IN FAVOR OF PNC BANK, NATIONAL
ASSOCIATION, WHICH SUBORDINATION AGREEMENT IS INCORPORATED HEREIN BY
REFERENCE. NOTWITHSTANDING ANY CONTRARY STATEMENT CONTAINED IN THE
WITHIN INSTRUMENT, NO PAYMENT ON ACCOUNT OF THE PRINCIPAL OR INTEREST
THEREOF SHALL BECOME DUE OR BE PAID EXCEPT IN ACCORDANCE WITH THE TERMS
OF SUCH SUBORDINATION AGREEMENT."
11. NO ASSIGNMENT. Creditor agrees that any assignee or holder of the
Subordinated Note shall be subject to the terms and conditions of this
Subordination Agreement.
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<PAGE> 13
12. TERMINATION. This Agreement will continue in full force and effect
as long as any Senior Debt remains outstanding, and thereafter, even if there
is no longer any Senior Debt remaining unpaid, so long as Bank has any
agreement or understanding with Borrower pursuant to which Bank may extend
credit to Borrower. To the extent any payment or payments of any Senior Debt or
any Subordinated Debt received by Bank are subsequently invalidated, declared
to be fraudulent or preferential, set aside or are required to be repaid to a
trustee, receiver or other person or entity under any bankruptcy act, state or
federal law, common law or equitable cause, then this Agreement will be revived
and continue in full force and effect. This Agreement may not be terminated
except by an instrument in writing signed by the Bank.
13. WAIVERS.
(A) Creditor hereby waives, to the extent permitted by
applicable law, any right to notice from Bank prior to disposition of any assets
of Borrower or any guarantor or any collateral securing any of the Senior Debt.
To the extent Creditor is not permitted by applicable law to waive notice,
Creditor agrees that five (5) days notice prior to any such disposition shall be
reasonable. Creditor agrees not to interfere with any disposition of assets of
Borrower or any Guarantor or any collateral securing any of the Senior Debt by
or at the direction of Bank and waives, to the extent permitted by applicable
law, the right to challenge any such disposition as not commercially reasonable.
(B) Creditor waives any right to require the Bank to marshall
any assets of Borrower or any guarantor or to otherwise proceed in any fashion
against Borrower, any guarantor or any other person.
(C) Creditor waives notice of any default by Borrower under
the Senior Debt and all other notices of any kind, and waives protest of all
notes and other instruments evidencing any of the Senior Debt.
(D) Creditor waives any right to reimbursement or indemnity in
connection with any of the Senior Debt.
(E) Bank is irrevocably authorized to demand and receive
specific performance of this Agreement by Creditor, even if Borrower has
breached its agreements hereunder, at any time upon the breach by Creditor of
its agreements hereunder. Creditor irrevocably waives any defense based on the
adequacy of a remedy at law which might be asserted as a bar to such remedy of
specific performance.
14. RELEASES. Bank may release any one or more parties hereto, or the
successors or assigns thereof, from any or all obligations hereunder, and such
release, or any release by operation of law, shall not release any other party
hereto from, nor in any way affect, any of the obligations of any other party
under this Agreement, or affect the subordination of any of the Subordinated
Debt to the Senior Debt.
15. NOTICES. All notices, requests and other communications made or
given in connection with this Agreement shall be in writing and, unless receipt
is stated herein to be required, shall be deemed to have been validly given if
delivered personally against receipt or by private carrier, registered or
certified mail, return receipt requested, or by telecopy with the original
forwarded by first class mail, in all cases with charges prepaid, addressed as
follows, or delivered to the individual or division or department to whose
attention notices to a party are to be addressed, until some other address (or
individual or division or department for attention) shall have been designated
by notice given by a party to the other:
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<PAGE> 14
To Creditor: Magnetic Technologies Corporation
770 Linden Avenue
Rochester, NY 14625-2764
Attention: Gordon H. McNeil, President
To Borrower: Austro Mold, Inc.
3 Rutter Street
Rochester, NY
Attention: Nathu R. Dandora, Vice President
To Bank: PNC Bank, National Association
100 South Broad Street
Philadelphia, PA 19111
Attention: Frank M. Porrazza, Vice President
With copy to: Lesser & Kaplin, P.C.
640 Six Sentry Parkway
Blue Bell, PA 19422
Attention: Katherine F. Bastian, Esquire
16. SUBMISSION TO JURISDICTION. Borrower and Creditor hereby consent to
the exclusive jurisdiction of any state or federal court located within the
Commonwealth of Pennsylvania, and irrevocably agree that, subject to the Bank's
election, all actions or proceedings relating to this Agreement or the
transactions contemplated hereunder shall be litigated in such courts, and
Borrower and Creditor waive any objection which they may have based on improper
venue or FORUM NON CONVENIENS to the conduct of any proceeding in any such court
and waive personal service of any and all process upon them, and consent that
all such service of process be made by mail or messenger directed to them at the
address set forth in SECTION 15. Nothing contained in this Section shall affect
the right of Bank to serve legal process in any other manner permitted by law or
affect the right of Bank to bring any action or proceeding against Borrower or
Creditor or their property in the courts of any other jurisdiction.
17. DELAY OR OMISSION NOT WAIVER. Neither the failure nor any delay on
the part of Bank to exercise any right, remedy, power or privilege hereunder
shall operate as a waiver thereof or impair any such right, remedy, power or
privilege. No single, partial or full exercise of any rights, remedies, powers
and privileges by Bank shall preclude further or other exercise thereof. No
course of dealing between Bank and Borrower or Creditor shall operate as or be
deemed to constitute a waiver of Bank's rights hereunder or affect the duties or
obligations of Borrower or Creditor.
18. MISCELLANEOUS. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective permitted successors and
assigns. If any party hereto is a partnership, all provisions of this Agreement
applicable to such party shall be binding upon and include not only the
partnership but each and all of the partners thereof individually. This
Agreement may not be modified except in writing executed by the party against
whom enforcement of such modification is sought. The rights granted to Bank
hereby shall be in addition to any other rights of Bank under any other
subordination agreement, if any, now or hereafter outstanding. All rights and
remedies of Bank shall be cumulative. The provisions of this Agreement shall
operate only in favor of and only for the benefit of Bank, its successors and
assigns, and not in favor of or for the benefit of Borrower, Creditor or any
other person or entity.
19. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto
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<PAGE> 15
may execute this Agreement by signing any such counterpart.
20. GOVERNING LAW. This Agreement shall be governed by and construed
according to the laws of the Commonwealth of Pennsylvania.
21. SEVERABILITY. If any provision herein shall for any reason be held
invalid or unenforceable, no other provision shall be affected thereby, and this
Agreement shall be construed as if the invalid or unenforceable provision had
never been a part of it.
22. ENTIRE AGREEMENT. This instrument embodies the entire agreement of
the parties hereto with respect to the subject matter hereof, and there are no
courses of dealing, usages of trade, or other representations, promises, terms
or conditions referring to such subject matter, and no inducements or
representations leading to the execution hereof other than as mentioned herein.
23. WAIVER OF RIGHT TO TRIAL BY JURY. BORROWER, CREDITOR AND BANK WAIVE
ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A)
ARISING UNDER THIS AGREEMENT OR ANY OTHER DOCUMENT OR INSTRUMENT ATTACHED
HERETO, REFERRED TO HEREIN OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY
WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE BORROWER,
CREDITOR OR BANK WITH RESPECT TO THIS AGREEMENT OR ANY OTHER DOCUMENT OR
INSTRUMENT ATTACHED HERETO, REFERRED TO HEREIN OR DELIVERED IN CONNECTION
HEREWITH, OR THE TRANSACTIONS RELATED HERETO, IN EACH CASE WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE. BORROWER, CREDITOR AND BANK AGREE AND CONSENT
THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT
TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF BORROWER, CREDITOR AND BANK TO THE WAIVER OF THEIR RIGHT TO TRIAL BY
JURY. BORROWER AND CREDITOR ACKNOWLEDGE THAT THEY HAVE HAD THE OPPORTUNITY TO
CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT THEY FULLY UNDERSTAND ITS
TERMS, CONTENT AND EFFECT, AND THAT THEY VOLUNTARILY AND KNOWINGLY AGREE TO THE
TERMS OF THIS SECTION.
/s/ GHM /s/ NRD /s/ FMP
- ---------- ------------ -----------
Creditor's Borrower's Bank's
Initials Initials Initials
9
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, intending to be legally bound hereby, effective as of the day and
year first above written.
CREDITOR:
---------
MAGNETIC TECHNOLOGIES CORPORATION
By: /s/ Gordon H. McNeil, President
--------------------------------
Gordon H. McNeil, President
BORROWER:
---------
AUSTRO MOLD, INC.
By: /s/ Nathu R. Dandora
------------------------------
Nathu R. Dandora,
Vice President and Secretary
BANK:
-----
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Frank M. Porrazza
------------------------------
Frank M. Porrazza, Vice President
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<PAGE> 17
Sublease Agreement
EXHIBIT A
1. Creditor's security interest shall apply to all assets of Borrower,
including accounts, inventory, machinery, equipment and intangibles.
2. The Subordinated Debt Loan Documents include:
a. The Subordinated Note (with the guaranty of Nathu R. Dandora on the
face thereof);
b. Security Agreement dated July 15, 1996 from Borrower to Creditor; and
c. UCC-1 financing statements naming Creditor as Secured Party and
Borrower as Debtor.
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<PAGE> 1
EXHIBIT (C)
SUBLEASE AGREEMENT
------------------
THIS SUBLEASE AGREEMENT made by and between MAGNETIC TECHNOLOGIES
CORPORATION, with an office located at 770 Linden Avenue, Rochester, New York
14625 (herein, the "Sublessor") and AUSTRO MOLD, INC., with an office located at
3 Rutter Street, Rochester, New York 14606 (herein, the "Sublessee").
WHEREAS, on this date the Sublessor has sold and conveyed to the
Sublessee the assets comprising its business knows as "Austro Mold" housed in
leased premises consisting of various buildings located at 3 to 59 Rutter
Street, Rochester, New York 14606 (herein, the "Leased Premises") under a Lease
in which the Sublessor is Tenant (identified in said Lease as "Austro Mold,
Inc.", as a result of a merger with Tenant), expiring December 17, 1997 (herein,
the "Lease"); and
WHEREAS, the Sublessee desired to utilize the Leased Premises to
conduct the Austro Mold business for the remainder of the Lease term but at a
rent less than the rent paid by the Sublessor under the Lease;
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants hereinafter contained, the parties hereto hereby agree as
follows:
1. The Sublessor hereby subleases to the Sublessee, and the Sublessee
hereby leases from the Sublessor the entire Leased Premises from the date hereof
through December 17, 1997.
2. The Sublessee will pay the Sublessor the sum of Eleven Thousand Five
Hundred Dollars ($11,500) per month as rent for the Leased Premises, such
payments to be made in full in advance on the first day of each calendar month,
except that the first and last month's rent shall be less than a full month's
rent prorated on a per diem basis with respect to the number of days in each of
said months which are a part of this sublease Agreement (i.e., 17 days in the
last month).
3. The Sublessee will comply with all the provisions of the Lease, a
copy of which is attached hereto, as if the Sublessee were the Tenant
thereunder, including without limitation provisions relating to insurance,
maintenance, environmental compliance, payment of utilities and payment of real
estate taxes; but expressly excluding the following provisions of the Lease: the
payment of rent set forth in Article II; "Options to Extend" - Article III;
"Right of First Refusal" - Article XXX; and "Option to Purchase" - Article XXXI.
4. The Sublessee will name the Sublessor as a loss payee under the
insurance policies which the Sublessee will obtain relative to the Leased
Premises for the duration of this Sublease Agreement.
5. At the termination of this Sublease Agreement, the Sublessee and
Sublessor will jointly cause a Phase I environmental report to be prepared
relative to the Leased Premises and will each pay for one-half of the cost
thereof. The Sublessee will indemnify and hold the Sublessor harmless, for a
period of three (3) years from the end of the term of this Sublease Agreement,
from and against any claim brought in such period by reason of, or pertaining
to, the failure by the Sublessee to have complied with any environmental
statutes or regulations promulgated thereunder during the period of this
Sublease Agreement or thereafter, including without limitation any failures or
violations reported in such Phase I environmental report which were not reported
in the Sublessor's Phase I environmental report which has been delivered by the
Sublessor to the Sublessee as of this date.
<PAGE> 2
6. Provided that the Sublessee complies with all of the terms of the
Sublease Agreement, the Sublessee will have the right to negotiate a new lease
directly with the landlord under the Lease at or before the end of the term of
this Sublease Agreement, in which event the Sublessor will relinquish all of its
rights with respect to the Leased Premises from and after December 17, 1997 and
waive all of its rights under the Lease to renew the Lease or to purchase the
Leased Premises.
7. Pursuant to the terms of the Lease, the Sublessor hereby affirms
that it has obtained the express approval and written consent of Alfred
Puchebner and Frederick Brazda (the "Landlord") under the Lease to enter into
this Sublease Agreement with Sublessee.
8. Should the Sublessee be required to pay any amount of rent above and
beyond the amount specified in Item 2 herein due to the Sublessor's failure to
pay to Landlord any amount of its portion of rent due, then Sublessee may
exercise its right, reserved hereby, to set off the amount paid by Sublessee on
behalf of Sublessor against Sublessee's obligation to pay under a Promissory
Note between the Sublessee and Sublessor of even date herewith.
IN WITNESS WHEREOF, the parties hereto have executed this Sublease
Agreement on July 15, 1996, in several counterparts, each of which shall be
deemed to be an original.
THE SUBLESSOR:
MAGNETIC TECHNOLOGIES CORPORATION
By: /s/ Gordon H. McNeil, President
----------------------------------
Gordon H. McNeil, President
THE SUBLESSEE:
AUSTRO MOLD, INC.
By: Nathu R. Dandora
----------------------------------
Nathu R. Dandora,
Vice President
2
<PAGE> 1
EXHIBIT D
PROMISSORY NOTE
$200,000 8% Interest
FOR VALUE RECEIVED, the undersigned, MAGNETIC TECHNOLOGIES CORPORATION,
hereby promises to pay to the order of FREDERICK BRAZDA and ALFRED PUCHEBNER,
jointly, the sum of Two Hundred Thousand Dollars ($200,000), together with
interest at the rate of eight percent (8%) per annum, on January 2, 1997, such
payment to be made in currency of the United States of America to, or in care
of, (at the choice of the Holders hereof) Philip M. Silver, Esq. and delivered
to 13 South Fitzhugh Street, Rochester, New York 14614.
This Note has been executed and delivered in substitution for, and
cancellation of, all obligations remaining from the undersigned to the Holders
hereof, including all obligations under separate Consulting Agreements and
Covenants Not to Compete dated December 18, 1992, with each of them,
respectively. Notwithstanding the foregoing, this Note shall be secured by a
security interest in all of the assets of the undersigned, other than the assets
of the Austro Mold division located at 3 to 59 Rutter Street, Rochester, New
York, subordinated to security interests in such assets held by banking
institutions, as represented by a Security Agreement dated December 18, 1992,
and UCC-1 financing statements previously filed in 1992 securing the obligations
under the aforementioned Consulting Agreements and Covenants Not to Compete;
provided, however, that by their acceptance of this Note the Holders hereof
hereby release from said Security Agreement their security interests in all of
the assets of the Austro Mold division of the undersigned located in various
buildings at 3 to 59 Rutter Street, Rochester, New York.
In the event that the undersigned shall fail to make payment hereunder
within five (5) days of the due date, this Note shall automatically be in
default without notice by the Holders hereof, and the entire amount of this Note
and all accrued interest hereon shall be immediately due and payable. This Note
is secured by the aforementioned Security Agreement, and all of the terms
thereof are incorporated by reference herein, including the obligation of the
undersigned to pay all reasonable attorneys' fees and expenses incurred by the
Holders hereof in connection with their collection efforts of this Note in the
event that any default hereunder occurs. The delay or omission by the Holders
hereof in exercising any right or remedy hereunder will not operate as a waiver
thereof or of any other right or remedy. Concurrent with the payment of this
Note the Holders hereof will execute and deliver to the undersigned UCC-3
statements releasing the security interests held by the Holders hereof in those
assets of the undersigned.
1
<PAGE> 2
The undersigned and all parties who may become liable on this note
agree to all of the foregoing and severally waive presentment for payment,
demand, protest, notice of nonpayment and any other notice in connection with
this note; agree that nothing except payment in full to the holder shall release
them or any of them; that additional makers, guarantors, and other persons may
become parties to this note and may be released and security may be released,
all without affecting the liabilities of the undersigned or any other party. Any
guarantor and any endorser unconditionally guarantee to the holder the prompt
payment of this note when due, irrespective of the genuineness, validity,
regularity or enforceability of this note, and further agree that without notice
this note may be extended, in whole or in part and/or the interest rate changed,
all without affecting the liability of the undersigned or any of such parties.
IN WITNESS WHEREOF, the undersigned has executed this Note on and as of
July 15, 1996.
MAGNETIC TECHNOLOGIES CORPORATION
By: /s/ Gordon H. McNeil
----------------------------------
Gordon H. McNeil, President
STATE OF NEW YORK )
) SS.:
COUNTY OF MONROE )
On the 15 day of July, 1996, before me, the subscriber, personally
appeared Gordon H. McNeil, to me known, who, being by me duly sworn, did depose
and say that he resides at 770 Linden Ave., Rochester, New York and is the
President of Magnetic Technologies Corporation, the corporation described in and
which executed the foregoing instrument; and that he signed his name thereto by
authority of the Board of Directors of said Corporation.
/s/ Susan M. Weise
---------------------------
Notary Public
2
<PAGE> 3
ACCEPTANCE AND CONSENT
The undersigned, FREDERICK BRAZDA and ALFRED PUCHEBNER (herein, the
"Obligees"), hereby accept the Promissory Note in the principal amount of
$200,000 of even date herewith (herein, "the Note") executed and delivered to
the Obligees by Magnetic Technologies Corporation (herein, the "Obligor"); and,
in consideration therefor, the Obligees hereby agree as follows:
1. The security interests held by the Obligees in the assets of the
Austro Mold division of the Obligor (formerly, Austro Mold, Inc., a
subsidiary of the Obligor) located at 3 to 59 Rutter Street,
Rochester, New York, are hereby released.
2. The Obligees hereby consent to the Obligor's sublease to Austro Mold,
Inc. of the premises located at 3 to 59 Rutter Street, Rochester, New
York, for the balance of the current lease term through December 17,
1997; provided that the Obligor shall remain fully liable to the
Obligees under the lease of such premises between the Obligees and the
Obligor dated December 18, 1992. Obligees agree to send to Austro
Mold, Inc. a copy of any ten (10) day written notice referred to in
Section 17.01 A of the lease given to Obligor. Austro Mold, Inc. shall
have the right to make payment of the past due payment or payments
referred to in such notice within the ten (10) day period referred to
in such notice. Such notice shall be addressed to Austro Mold, Inc.,
Attention: Nathu Dandora, Vice President, and shall be sent by
registered or certified mail, return receipt requested, postage
prepaid, to 3 Rutter Street, Rochester, NY 14606.
3. The Obligees hereby waive their rights of first refusal contained in
Paragraphs 10 of the respective Consulting Agreements and Covenants
Not to Compete between each of them and the Obligor dated December 18,
1992 (herein, "the Agreements"), with respect to the Obligor's sale of
its Austro Mold division to Austro Mold, Inc.
4. Simultaneously with the execution of this Acceptance and Consent,
Obligor will make the July 1996 payment of $13,750.00 U.S. Dollars to
each of Obligees and Obligor will further pay Obligees $225,000.00
U.S. Dollars as part payment of Obligor's monetary obligations to
Obligees under the Agreements. Such payments will be made by certified
checks or bank checks or wire transfer.
1
<PAGE> 4
5. The Note is substitution for, and cancellation of, all monetary
obligations of the Obligor to the Obligees under the Agreements, all
of which monetary obligations are hereby released, other than
Obligor's obligation with respect to the payments required by
paragraphs 4 and 7 of this Acceptance and Consent.
6. The Note is and will be secured by the assets of the Obligor (but not
the assets of the Obligor's Austro Mold division) until payment of the
Note including interest thereon shall have been made. Concurrent with
payment of the Note, the Obligees will execute and deliver to Obligor
UCC-3 termination statements with respect to their security interest
in the assets of the Obligor.
7. Obligor will pay Obligees' attorneys' fees in the amount of $2,500.00
with respect to this transaction.
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Acceptance and Consent on July 12, 1996.
/s/ Frederick Brazda /s/ Alfred Puchebner
- ------------------------------ ------------------------------
Frederick Brazda Alfred Puchebner
The undersigned, Obligor, agrees to the terms and conditions contained in
the above Acceptance and Consent.
Magnetic Technologies Corporation
July 15, 1996
By: /s/ Gordon H. McNeil, President
--------------------------------
Gordon H. McNeil, President
2
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