<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended APRIL 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____ to _____
Commission file number 0-4277
MAGNETIC TECHNOLOGIES CORPORATION
---------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 16-0961159
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
770 LINDEN AVENUE
ROCHESTER, NEW YORK 14625
-------------------------
(Address of principal executive offices)
(716) 385-8711
--------------
(Issuer's telephone number)
NONE
----
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ] N/A
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
2,786,611 SHARES OF THE ISSUER'S COMMON STOCK WERE OUTSTANDING AS OF APRIL 30,
1996.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AT APRIL 30, 1996 AND JULY 31, 1995
<TABLE>
<CAPTION>
ASSETS APRIL 30, 1996 JULY 31, 1995
Current assets: -------------- -------------
<S> <C> <C>
Cash, including interest-bearing deposits of $372,709 and $490,445 at
April 30, 1996 and July 31, 1995, respectively $ 723,359 $ 746,434
Accounts receivable, less allowance for doubtful accounts of $35,500 and
$31,500 at April 30, 1996 and July 31, 1995, respectively 2,189,837 2,265,794
Inventories 3,733,355 4,182,773
Costs and estimated earnings in excess of billings on contracts in process 324,668 291,288
Deferred income taxes 211,400 181,400
Prepaid taxes, expenses and other current assets 302,920 109,613
------------ ------------
Current assets 7,485,539 7,777,302
Property, plant and equipment, net 3,435,883 3,877,951
Excess of cost over net assets acquired, net of accumulated amortization of
$134,208 and $127,154 at April 30, 1996 and July 31, 1995, respectively 49,384 56,438
Deferred income taxes 581,475 611,100
Other assets 577,513 482,517
------------ ------------
$ 12,129,794 $ 12,805,308
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 3,648,778 $ 3,938,329
Accrued loss on sale of the Austro Mold Group 1,800,000
Note payable 832,758 826,108
Current portion of long-term debt and capital lease obligations 291,784 291,784
Billings in excess of costs and estimated earnings on contracts in process 230,848 171,497
Accrued income taxes 22,958
------------ ------------
Current liabilities 6,804,168 5,250,676
Long-term debt and capital lease obligations 2,504,594 2,533,666
------------ ------------
Total liabilities 9,308,762 7,784,342
------------ ------------
Stockholders' equity:
Common stock-$ .15 par value;
Authorized-15,000,000 shares
Issued and outstanding-2,786,611 and 2,786,675 shares at
April 30, 1996 and July 31, 1995, respectively 417,992 418,001
Stock warrants outstanding for 22,500 shares of common stock, valued at
$82,500, net of unamortized deferred expense of $31,950 and $47,115 at
April 30, 1996 and July 31, 1995, respectively 50,550 35,385
Additional paid-in capital 7,646,023 7,646,302
Cumulative translation adjustment 6,025 479
Accumulated deficit (5,299,558) (3,079,201)
------------ ------------
Total stockholders' equity 2,821,032 5,020,966
------------ ------------
$ 12,129,794 $ 12,805,308
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
2
<PAGE> 3
MAGNETIC TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED APRIL 30, 1996 AND APRIL 30, 1995
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1996 APRIL 30, 1996 APRIL 30, 1995 APRIL 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $6,806,339 $19,407,273 $5,454,268 $16,323,042
Cost of sales 6,199,253 17,429,374 4,785,370 14,187,876
---------- ----------- ---------- -----------
Gross profit 607,086 1,977,899 668,898 2,135,166
Selling, general and administrative
expenses 727,603 2,188,041 1,147,297 2,532,002
Provision for loss on sale of the
Austro Mold Group 1,800,000 1,800,000
---------- ----------- ---------- -----------
Operating loss (1,920,517) (2,010,142) (478,399) (396,836)
Interest expense 77,129 219,213 63,950 174,396
Other income and expenses, net (3,486) (9,373) (4,952) (12,180)
---------- ----------- ---------- -----------
Loss before income taxes (1,994,160) (2,219,982) (537,397) (559,052)
Provision for income taxes 125 375 125 375
---------- ----------- ---------- -----------
Net loss (1,994,285) (2,220,357) (537,522) (559,427)
Accumulated deficit beginning (3,305,273) (3,079,201) (2,326,241) (2,304,336)
---------- ----------- ---------- -----------
Accumulated deficit ending ($5,299,558) ($ 5,299,558) ($2,863,763) ($ 2,863,763)
========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS THREE MONTHS ENDED NINE MONTHS
ENDED ENDED ENDED ENDED
APRIL 30, 1996 APRIL 30, 1996 APRIL 30, 1995 APRIL 30, 1995
-------------- -------------- -------------- --------------
PRIMARY PRIMARY PRIMARY PRIMARY
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss per share ($.72) ($.80) ($ .18) ($.19)
========= ========= ========= =========
Weighted average number of
shares outstanding 2,786,626 2,786,640 2,920,249 2,920,248
========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
3
<PAGE> 4
MAGNETIC TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED APRIL 30, 1996 AND APRIL 30, 1995
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1996 APRIL 30, 1995
-------------- --------------
<S> <C> <C>
Net cash provided (used) by operating activities $ 270,761 ($ 85,188)
--------- -----------
Cash flows from investing activities:
Capital expenditures (244,732) (836,627)
Purchase of Magnetic Technologies Europe Limited, net of cash
acquired (511,721)
Proceeds from sale of property, plant and equipment 158,000
--------- -----------
Net cash used by investing activities (244,732) (1,190,348)
--------- -----------
Cash flows from financing activities:
New borrowings 200,000 1,631,518
Principal payments on long-term borrowings and capital leases (237,761) (597,044)
Proceeds from exercise of stock options 112,500
Purchase and retirement of common stock (288) (127)
--------- -----------
Net cash (used) provided by financing activities (38,049) 1,146,847
--------- -----------
Effect of exchange rate changes on cash (11,055)
Net decrease in cash (23,075) (128,689)
Cash and cash equivalents at the beginning of the period 746,434 399,861
--------- -----------
Cash and cash equivalents at the end of the period $ 723,359 $ 271,172
========= ===========
</TABLE>
SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS:
- ------------------------------------------------------------------
NINE MONTHS ENDED APRIL 30, 1995
Capital lease obligations of $111,807 were incurred when the Company
entered into a lease for new manufacturing equipment during the third quarter of
fiscal 1995.
See accompanying Notes to Consolidated Financial Statements (Unaudited).
4
<PAGE> 5
MAGNETIC TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 1996
INTERIM ACCOUNTING POLICY
The unaudited consolidated financial statements herein have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to these rules and
regulations.
The financial information included in this quarterly report should be read
in conjunction with the Company's most recent Form 10-KSB and annual report. In
the opinion of Management, the information furnished reflects all adjustments
necessary to present a fair statement of the financial condition, results of
operations and cash flows for the periods covered.
RECLASSIFICATIONS
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
for the periods presented and the accounts of its wholly-owned foreign
subsidiary, Magnetic Technologies Europe Limited (MTE), as of March 1, 1995.
(See acquisition disclosures following.) All significant intercompany balances,
transactions and profits are eliminated.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of MTE are translated into U.S. dollars at currency
exchange rates in effect at the end of the balance sheet period. Revenues and
expenses are translated at average exchange rates in effect during the related
income statement periods. Gains and losses resulting from foreign currency
transactions are included in the results of operations. Gains and losses
resulting from the translation of the foreign subsidiary balance sheet are
recorded directly to the accumulated translation adjustment, a component of
stockholders' equity.
REVENUE RECOGNITION
The Company accounts for contracts for the manufacture of precision plastic
molds and custom tooling using the percentage of completion method of
accounting. Revenue is recognized in the ratio that costs incurred bear to total
estimated costs of the contracts. Contract costs include direct material and
labor costs as well as indirect costs related to contract performance. Losses
expected to be incurred are charged to operations in the period such losses are
determined.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis and are summarized as follows:
<TABLE>
<CAPTION>
APRIL 30, 1996 JULY 31, 1995
-------------- -------------
<S> <C> <C>
Raw material $1,962,426 $2,558,700
Work in process 1,536,938 1,271,105
Finished goods 233,991 352,968
---------- ----------
$3,733,355 $4,182,773
========== ==========
</TABLE>
5
<PAGE> 6
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>
APRIL 30, 1996 JULY 31, 1995
-------------- -------------
<S> <C> <C>
Costs and estimated earnings $1,513,181 $1,136,537
LESS: Billings to date 1,419,361 1,016,746
---------- ----------
$ 93,820 $ 119,791
========== ==========
</TABLE>
Costs, estimated earnings and billings are presented in the accompanying
balance sheets as:
<TABLE>
<CAPTION>
APRIL 30, 1996 JULY 31, 1995
-------------- -------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
contracts in process $ 324,668 $ 291,288
Billings in excess of costs and estimated earnings on
contracts in process (230,848) (171,497)
--------- ---------
$ 93,820 $ 119,791
========= =========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Major classifications of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
APRIL 30, 1996 JULY 31, 1995
-------------- -------------
<S> <C> <C>
Equipment under capital lease $ 844,202 $ 844,202
Machinery and engineering equipment 4,996,505 4,887,098
Furniture and fixtures 1,492,277 1,393,874
Leasehold improvements 526,776 513,453
Vehicles 99,981 101,243
Construction in process 134,510 116,526
---------- ----------
8,094,251 7,856,396
LESS: Accumulated depreciation and amortization 4,658,368 3,978,445
---------- ----------
$3,435,883 $3,877,951
========== ==========
</TABLE>
ACQUISITION
In April 1993, the Company entered into an agreement with the Cookson
Group plc (Cookson) of London, England, in which the two corporations formed a
new company, Magnetic Technologies Europe Limited (MTE), to manufacture and sell
precision magnetic, electronic and mechanical devices in Europe. Headquartered
in Rochester, England, MTE was capitalized with $1,000,000, of which $750,000
was contributed by Cookson for all of the voting "A" shares of stock and
$250,000 was contributed by the Company for all of the non-voting "B" shares of
stock, constituting a 25% interest in MTE. The investment in MTE was accounted
for under the cost method due to the Company's inability to exercise 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.
6
<PAGE> 7
In March 1994, Cookson sold certain of its businesses to Calder Group
Limited (Calder) and Calder's subsidiary, Magnet Applications Limited, became
the owner of all of MTE's voting "A" shares of stock. A year later, Calder
decided to dispose of certain of its operations, including MTE. On March 31,
1995, the Company acquired all of the voting shares of stock of MTE from
Calder's subsidiary. The acquisition was effective as of February 28, 1995 and
the accounts of MTE are consolidated with those of the Company from March 1,
1995 forward. The purchase price of the acquisition of the remaining 75%
interest in MTE was $492,007 plus closing costs of $23,054, before cash acquired
of $3,340. In connection with the acquisition, the Company incurred a note
payable to Calder of $351,000, payable in equal monthly installments of $9,750
over a thirty-six month period commencing May 1, 1995. The note payable to
Calder has no stated interest; therefore, interest was imputed at a rate of
9.25%. The balance of the note payable was $305,410 at acquisition and was
reflected in the Company's consolidated balance sheet at April 30, 1996 as
current portion of long-term debt of $94,761 and long-term debt of $118,123.
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 to budgeted amounts, 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 MTE was then accounted for under the purchase method. At
acquisition, the Company incurred a $312,302 write-down of its investment in MTE
to account for an impairment in asset value. This impairment in value primarily
related to the write-off of previously recognized profit in equipment
manufactured by the Company and sold to MTE, as well as various costs related to
the acquisition.
MTE engages in the same business as the Company's traditional domestic
operations, namely, the design and manufacture of precision magnetic assemblies
for office equipment manufacturers. In the two years since its formation, MTE
has obtained business from the Company's prior customer in Europe, as well as
orders from new European customers.
Subsequent to the closing of the acquisition agreement, MTE adopted a
revised Memorandum of Association and Articles of Association establishing a
single class of stock and containing provisions to facilitate the Company's
operating of the business from the United States. Gordon H. McNeil, President
and Chief Executive Officer of the Company, became MTE's sole Director and its
President.
The following table presents unaudited pro forma results of operations as
if the acquisition of MTE had occurred at the beginning of each of the periods
presented, after giving effect to certain adjustments for intercompany
transactions, depreciation, interest and related income tax effects. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition been
made at the beginning of the periods presented or of results which may occur in
the future. The unaudited combined pro forma results should be read in
conjunction with the historical financial statements of the Company and with the
historical financial statements of MTE as filed with the Company's most recent
Form 8-K.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1995 APRIL 30, 1995
-------------- --------------
<S> <C> <C>
Net sales $ 5,418,062 $ 16,367,091
Net loss ($ 255,864) ($ 356,767)
NET LOSS PER SHARE:
Primary ($ .09) ($ .12)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary 2,920,249 2,920,248
</TABLE>
7
<PAGE> 8
EARNINGS PER SHARE OF COMMON STOCK AND STOCKHOLDERS' EQUITY
Earnings per common share are based on the weighted average number of
shares outstanding during the period. In November 1993, the Company issued stock
warrants for 22,500 shares of common stock to an investment securities
consultant. The warrants are exercisable at a price of $5.00 per share of common
stock and expire on December 31, 1997. The warrants were valued at $82,500
utilizing the Black-Scholes method of securities valuation. The deferred expense
related to the issuance of the warrants is being amortized ratably to expense
over a period of forty-nine months. The unamortized deferred expense was $31,950
at April 30, 1996. The value of the outstanding warrants, net of unamortized
deferred expense, or $50,550, was reflected in stockholders' equity at April 30,
1996.
CAPITAL EXPENDITURES
Capital expenditures for the nine month period ended April 30, 1996
amounted to $244,732. These expenditures were funded with working capital and
$200,000 of proceeds from additional borrowings on the Company's revolving loan
and bank line of credit.
INCOME TAXES
Effective fiscal 1994, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), ACCOUNTING FOR INCOME TAXES. The
adoption of SFAS 109 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 following is a summary of current and long-term deferred tax assets and
the related valuation allowances:
<TABLE>
<CAPTION>
AT APRIL 30, 1996 AT JULY 31, 1995
----------------- ----------------
<S> <C> <C>
Current deferred tax assets:
Accrued expenses $ 91,500 $109,700
Inventory 71,800 44,800
Warranty reserves 32,900 15,100
Other deferred tax assets 15,200 11,800
--------- ---------
$211,400 $181,400
========= =========
Long-term deferred tax assets:
Federal net operating loss carryforwards $306,700 $306,700
State net operating loss carryforwards 45,500 45,500
Federal investment tax credit carryforwards 24,100 96,300
State investment tax credit carryforwards 218,300 218,300
Federal alternative minimum tax credit carryforwards 51,000 51,000
State alternative minimum tax credit carryforwards 5,400 6,000
Depreciation 509,600 412,100
Other deferred tax assets 48,575 102,900
--------- ---------
1,209,175 1,238,800
LESS: Valuation allowances 627,700 627,700
--------- ---------
$581,475 $611,100
========= =========
</TABLE>
The realization of the deferred tax assets related to the net operating
loss and tax credit carryforwards is dependent upon future taxable income. In
addition, if certain substantial changes in the Company's ownership should
occur, there would be an annual limitation on the amount of net operating loss
and tax credit carryforwards which could be utilized.
8
<PAGE> 9
BORROWINGS
The Company borrowed $6,650 on its bank line of credit and $193,350 on its
revolving bank loan for total borrowings of $200,000 during the third quarter of
fiscal 1996. The Company had $417,242 available and $832,758 outstanding on its
bank line of credit at April 30, 1996. The Company's entire $2,000,000 revolving
loan was outstanding at April 30, 1996. The line of credit and revolving loan
require interest payments at prime plus .25%.
SUBSEQUENT EVENT
In June 1996, the Company's Board of Directors approved a tentative
agreement to sell its Austro Mold Group. The sale is expected to result in an
asset and restructuring write-down of approximately $1,800,000. A reserve for
the anticipated loss was accrued at April 30, 1996 and was reflected in
operating results for the third quarter of fiscal 1996. The related accrual is
reflected in current liabilities on the Company's balance sheet at April 30,
1996. The transaction is scheduled to close in July 1996.
The Austro Mold Group designs and builds plastic molds and manufactures
custom injection molded plastic parts and assemblies. Austro Mold was acquired
by the Company in fiscal 1993 and has since operated at a loss. During the
fiscal year ended July 31, 1995 and during fiscal 1996, Austro Mold losses have
more than offset the profits realized by the Company's Magnetic Assembly Group.
Due to the continuing losses, Management had determined that fiscal 1996 would
be pivotal in determining whether the Company would retain the Austro Mold
Group. (See related comments in Management's Discussion and Analysis in the July
31, 1995 Form 10-KSB.)
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MAGNETIC TECHNOLOGIES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (UNAUDITED)
COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED
APRIL 30, 1996 AND APRIL 30, 1995
RESULTS OF OPERATIONS
THREE MONTH PERIOD COMPARISON
The Company's consolidated net sales for the three months ended April 30,
1996 increased $1,352,071, or 25%, over the comparable period last year. The
results included sales of $5,106,497 for the Magnetic Assembly Group, an
increase of $1,274,129, or 33%, over the prior year. The Company's European
subsidiary, MTE, reported sales of $559,323 for the third quarter of fiscal
1996. (MTE's results have been included in the Company's consolidated financial
statements beginning March 1, 1995.) The Austro Mold Group reported sales of
$1,140,519 for the quarter ended April 30, 1996 versus $1,394,847 for the
comparable period of fiscal 1995, a $254,328, or 18%, decrease.
Consolidated gross profit of $607,086 for the quarter ended April 30, 1996
decreased $61,812 over the comparable period in the prior year, and the
consolidated gross margin decreased from 12% to 9%. The Magnetic Assembly
Group's gross margin for the third quarter of fiscal year 1996 was $514,395, or
10%, compared with 17% for the third quarter of fiscal 1995. The decrease was a
result of a shift in the sales mix toward remanufacturing sales volume carrying
lower gross margins, as well as continuing pricing pressure from the Company's
major customer. MTE reported a gross margin of 20% for the quarter ended April
30, 1996. The Austro Mold Group experienced a negative 1% gross margin of
$16,983 for the third quarter of fiscal 1996, versus a near break-even gross
margin in the comparable period the prior year.
Selling, general and administrative expenses decreased $419,694 over the
comparable fiscal 1995 quarter. The decrease was partially the result of a
$312,302 write-down in fiscal 1995 related to the acquisition of MTE. The
remaining decrease of $107,392 was the result of management restructuring and
cost management efforts for the domestic operations. The selling, general and
administrative costs for the quarter ended April 30, 1996 were 10% of net sales.
Adjusted to eliminate the impact of the non-recurring loss on the acquisition of
MTE, selling, general and administration costs were 15% of net sales in the
third quarter of fiscal 1995. Interest expense increased $13,179, or 21%, over
the comparable prior year period due to higher borrowings outstanding during the
fiscal 1996 period.
Operating results for the third quarter ended April 30, 1996 included a
$1,800,000 provision for the anticipated loss on the sale of the Company's
Austro Mold Group. (See Subsequent Event note disclosure previous to Item 2 of
this report.)
The three month period ended April 30, 1996 resulted in a consolidated net
loss of $1,994,285 versus a consolidated net loss of $537,522 in the comparable
fiscal 1995 period, a decline of $1,456,763 over the prior year. The fiscal 1996
net loss included a $1,800,000 reserve for the anticipated loss on the sale of
the Austro Mold Group. The third quarter fiscal 1995 loss included a
non-recurring write-down of $312,302 related to the acquisition of MTE.
Excluding the Austro Mold reserve, the Magnetic Assembly Group reported net
income of $25,826 for the third quarter of fiscal 1996, MTE reported net income
of $17,507, and the Austro Mold Group reported a net loss of $185,966.
10
<PAGE> 11
NINE MONTH PERIOD COMPARISON
The Company's consolidated net sales for the nine months ended April 30,
1996 increased $3,084,231, or 19%, over the comparable period last year. The
increased volumes included sales of $14,372,286 for the Magnetic Assembly Group,
an increase of $2,223,067, or 18%, over the prior year, primarily with the
Company's major customer. In addition, the Company's European subsidiary, MTE,
reported sales of $1,570,064 through the third quarter of fiscal 1996. (MTE's
results have been included in the Company's consolidated financial statements
beginning March 1, 1995). The Austro Mold Group reported sales of $3,464,923 for
the nine month period versus $3,946,770 for the comparable period of fiscal
1995, a $481,847, or 12%, decrease. Fiscal year 1996 results included no sales
for Austro Mold's former Florida tooling operation, which was closed during the
third quarter of fiscal 1995, whereas fiscal 1995 included sales of $308,962 for
that operation.
Consolidated gross profit of $1,977,899 for the period ended April 30,
1996, decreased $157,267 over the comparable period in the prior year, and the
consolidated gross margin decreased from 13% to 10%. The Magnetic Assembly
Group's gross margin for the first three quarters of fiscal year 1996 was
$1,910,918, or 13%, compared with 18% for the comparable period of fiscal 1995.
The decrease was a result of the addition of significant remanufacturing sales
volume carrying lower gross margins, as well as continuing pricing pressure from
the Company's major customer. MTE reported a gross margin of 15% for the first
nine months of fiscal 1996. The Austro Mold Group experienced a negative 5%
gross margin of $171,986 versus a negative 1% in the comparable period the prior
year. The decrease is partially attributable to training costs related to the
addition of automated equipment to establish unattended tool making capability.
The purpose of upgrading Austro Mold to a more automated manufacturing
environment was to reduce the overall dependence on labor, to add
state-of-the-art capability, and to assist in the goal of better containing
manufacturing costs, with which Austro Mold has experienced continuing
difficulty.
Selling, general and administrative expenses decreased $343,961 over the
comparable fiscal 1995 period. The decrease was primarily the result of a
$312,302 write-down in fiscal 1995 related to the acquisition of MTE. The
remaining variance of $31,659 was due to nine months of selling, general and
administrative expenses for MTE totaling $262,909 for fiscal 1996 versus two
months of expenses totaling $63,662 during the comparable fiscal 1995 period.
That increase was partially offset by savings in this category for the domestic
operations. For the nine month period ended April 30, 1996, the consolidated
selling, general and administrative costs decreased to 11% from 15% as a
percentage of net sales from the comparable period a year ago as a result of the
Company's continued cost management efforts. Interest expense increased $44,517,
or 26%, over the comparable prior year period due to higher borrowings
outstanding during fiscal 1996.
Operating results for the nine month period ended April 30, 1996 included a
$1,800,000 provision for the anticipated loss on the sale of the Company's
Austro Mold Group. (See Subsequent Event note disclosure previous to Item 2 of
this report.)
The nine month period ended April 30, 1996 resulted in a consolidated net
loss of $2,220,357 versus a net loss of $559,427 a year ago, a decrease of
$1,660,930 from the comparable period last year. The fiscal 1996 net loss
included a $1,800,000 reserve for the anticipated loss on the sale of the Austro
Mold Group. The fiscal 1995 loss included a non-recurring write-down of $312,302
related to the acquisition of MTE. Excluding the Austro Mold reserve, the
Magnetic Assembly Group reported net income of $290,328 for the nine month
period ended April 30, 1996. MTE and Austro Mold reported net losses of $20,509
and $690,176, respectively, for the nine month period ended April 30, 1996.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Even though the Company's debt increased by reason of the acquisition of
its Austro Mold Group in November 1992, and its acquisition of MTE in March
1995, its current cash flow position should be adequate to fund the non-compete
agreement payments related to the Austro Mold acquisition, as well as the
interest and principal on current long-term debt. (See Subsequent Event note
disclosure previous to Item 2 of this report.)
Cash provided by operating activities totaled $270,761 for the nine month
period ended April 30, 1996 compared to cash used by operations of $85,188 for
the comparable period of the prior year, an increase of $355,949. The variance
was primarily the result of decreases in inventory levels in fiscal 1996
compared with increasing inventory levels in fiscal 1995. This variance was
partially offset by decreasing accounts payable in fiscal 1996 compared with
increasing accounts payable in the prior year.
Cash used for investing activities decreased $945,616 for the nine month
period ended April 30, 1996 over the comparable period in fiscal 1995. The
variance was due to lower capital expenditures in fiscal 1996. In addition,
fiscal 1995 included an investment in MTE of $511,721 and proceeds from the sale
of the Austro Mold Florida plant assets of $158,000.
Cash used for financing cash flows totaled $38,049 for the nine month
period ended April 30, 1996 compared to cash provided from financing activities
of $1,146,847 for the comparable period of the prior year, a decrease in
financing cash flows of $1,184,896. The variance was primarily due to increased
borrowings and the proceeds from the exercise of stock options in the prior
year. The Company had total borrowings of $200,000 during the first three
quarters of fiscal 1996 and no stock options were exercised during the nine
month period ended April 30, 1996.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not applicable.
13
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAGNETIC TECHNOLOGIES CORPORATION
Date: June 11, 1996 By: /s/ Gordon H. McNeil
- --------------------------------- -----------------------------------
Gordon H. McNeil, President and
Principal Executive Officer
14
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<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> APR-30-1996
<CASH> 723,359
<SECURITIES> 0
<RECEIVABLES> 2,225,337
<ALLOWANCES> 35,500
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<CURRENT-ASSETS> 7,485,539
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<TOTAL-ASSETS> 12,129,794
<CURRENT-LIABILITIES> 6,804,168
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<COMMON> 417,992
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<OTHER-SE> 2,403,040
<TOTAL-LIABILITY-AND-EQUITY> 12,129,794
<SALES> 19,407,273
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<OTHER-EXPENSES> 3,978,668
<LOSS-PROVISION> 6,000
<INTEREST-EXPENSE> 219,213
<INCOME-PRETAX> (2,219,982)
<INCOME-TAX> 375
<INCOME-CONTINUING> (2,220,357)
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