<PAGE> 1
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 [NO FEE REQUIRED]
For the fiscal year ended July 31, 1997
[ ] 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 issuer's revenues for its most recent fiscal year ended July 31, 1997 were
$20,803,518
The aggregate market value of the issuer's voting common stock held by
non-affiliates as of October 1, 1997 was approximately $11,540,240 (2,308,048
shares x $5.00 trading price).
2,869,015 shares of the issuer's common stock were outstanding as of October 1,
1997.
DOCUMENTS INCORPORATED BY REFERENCE:
There are no documents incorporated by reference in the body
of this Annual 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
The Company is engaged in contract manufacturing. Incorporated in
1969, the Company has historically concentrated on designing and manufacturing
magnetic, electronic and mechanical subassemblies of copiers and printers for
the electronic office equipment manufacturing industry ("the Magnetic Assembly
Group").
Because a single customer historically accounted for approximately 90%
of the Company's business (Xerox Corporation and its English subsidiary), during
1993 the Company attempted to reduce that percentage through two unrelated
actions. First, it licensed the magnetic assembly European business which it had
been performing for Xerox to an English Corporation. Second, it acquired its
former 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 80% in its fiscal year
ended July 31, 1996 ("Fiscal 1996") and 74% in its fiscal year ended July 31,
1995 ("Fiscal 1995"); however, both actions have been nullified by subsequent
events, and Xerox's percentage of the Company's business increased to
approximately 94% in its fiscal year ended July 31, 1997 ("Fiscal 1997").
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 English 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, approximately half of MTE's Fiscal 1997 sales of
$3,064,000 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 operating 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 spite of corrective actions
which the Company took in Fiscal 1995, the losses continued in Fiscal 1996.
Accordingly, the Company's Board of Directors authorized the disposition of
Austro Mold, and on July 15, 1996, the Company sold Austro Mold to an unrelated
party.
The Company incurred a net loss of $2,017,000 for Fiscal 1996, including
a $1,774,000 loss on the sale of Austro Mold, 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 (after recording the Austro Mold
loss in the third quarter of Fiscal 1996). The Company remained profitable
throughout Fiscal 1997, with a net income of $746,200 on sales of $20,804,000
for the full fiscal year. The Company ended Fiscal 1997 with a backlog of
approximately $19,252,000, versus $8,513,000 at July 31, 1996.
On August 7, 1997, the Company's Board of Directors voted to approve, and
to submit to the Company's stockholders for adoption and approval, an Agreement
and Plan of Merger among the Company, SPS Technologies, Inc. ("SPS") and MTC
Acquisition Corp., a subsidiary of SPS. Under the terms of the Agreement, the
Company will be acquired by SPS, and the Company's stockholders will receive
$5.00 for each share of the Company's Common Stock held by them, payable in
cash; except that 13 of the Company's larger stockholders have agreed to
exchange approximately 41.7% of the Company's total outstanding shares of Common
Stock, valued at $5.00 per share, for shares of SPS common stock valued at the
average of the daily last sales prices of such stock on the New York Stock
Exchange for the last 20 days ending one day prior to the stockholders' meeting.
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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 competition includes Hitachi and Aoyama in Japan and several
smaller service companies in the United States; 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 more 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 both domestically and at MTE
provides it with somewhat of a competitive advantage. 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, most of which
business will be realized in future fiscal years. In Fiscal 1997, MTE accounted
for $3,064,000 of the Company's $20,804,000 in revenues, of which Xeikon sales
were approximately $245,000.
Magnets, the Company's key raw material for magnetic assemblies, are
available through fewer than a dozen suppliers, no one of which dominates the
industry. Three magnet manufacturers (Kane Magnetics, Crucible and Arnold) are
located in the United States. At least four Japanese firms also supply magnets.
The vendors whom the Company has utilized in the past have generally delivered
acceptable quality materials, and in recent years supplies of magnets have been
readily obtainable. Arnold has not been a significant supplier to the Company in
the past, but may be in the future.
Since Xerox Corporation continues to be a major customer of the Company,
the loss of Xerox as a customer would have a materially adverse impact on the
Company. The Company expects to have a continuing commercial relationship with
Xerox after the merger with SPS on the same basis as in the past, which has been
essentially a "relationship at will". The Company from time to time has
contracts with, or orders from, Xerox relating to specific Xerox products and
for specific time periods, which contracts either do not extend beyond 18 months
or are subject to renegotiations after a year. The forward-looking statements
contained in this paragraph are made by the Company pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, and actual
results could differ materially therefrom, particularly given the fact that
Xerox could terminate the relationship at any time.
The Company has no material patents, trademarks, licenses, franchises,
concessions, royalty agreements or labor contracts, although 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 in recent fiscal years.
The Company's expenditures in company-sponsored research and development
activities have been nominal ($4,000 in Fiscal 1997 and $1,000 in Fiscal 1996).
Because of the integration of its engineering and manufacturing operations, the
Company cannot readily identify the amount of customer-funded research and
development activities.
The Company, including MTE, had 75 full-time employees at October 1, 1997.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company operates out of two leased facilities described below.
The Company's corporate headquarters, engineering staff and domestic
magnetic assembly manufacturing and 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, 2006, the Company currently
pays a rent of $32,979 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 $5,000,000 of annual sales
volume. A ten-year lease agreement, with an option to terminate every two years,
is under negotiation.
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 rent 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 Austro Mold 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.
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). On August 6, 1997, the day
preceding the public announcement of the Merger Agreement with SPS, the high and
low bid prices of the Company's Common Stock were both $3.625. 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 1997 FISCAL 1996
----------------- -----------------
HIGH LOW HIGH LOW
---- ----- ----- ----
<S> <C> <C> <C> <C>
First Quarter (August - October) $4.00 $3.00 $5.28 $4.00
Second Quarter (November - January) $4.75 $3.25 $5.00 $4.00
Third Quarter (February - April) $4.25 $3.13 $4.44 $3.38
Fourth Quarter (May - July) $4.25 $3.13 $4.00 $3.25
</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 October 1, 1997 the Company had 4,422 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, if the merger with SPS is not approved by the
stockholders, 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 1997, the Company reported consolidated sales of $20,804,000, a
$4,424,000, or 17.5%, decrease from the prior year. The primary cause of the
decrease was the sale of the Company's Austro Mold Group assets at the end of
Fiscal 1996, since the Austro Mold Group had contributed net sales of $3,712,000
during Fiscal 1996. In addition, the Company's Magnetic Assembly Group's Fiscal
1997 sales ($17,739,000) declined $1,746,000, or 9%, from Fiscal 1996 due to (a)
reduced demand for certain more mature product lines of the Company's major
customer in which the company supplies components and (b) nonrecurring sales in
Fiscal 1996 for the establishment of inventory at several new distribution
centers of the Company's major customer. The Company's European subsidiary (MTE)
reported sales of $3,064,000 in Fiscal 1997, compared with Fiscal 1996 sales of
$2,030,000, an increase of $1,034,000, or 51%, primarily attributable to growth
of MTE's remanufacturing business.
Fiscal 1997 consolidated gross profit of $3,424,000 increased $253,000, or
8%, from the prior fiscal year and consolidated gross margin increased to 16.4%
from 12.6%. The Magnetic Assembly Group gross margin increased to 16.4% from 15%
from Fiscal 1996 due to improvements in production efficiencies and resulting
labor force reductions. In addition, the gross margin for the prior fiscal year
was unusually low due to a large number of lower margin tooling projects in the
sales mix. MTE reported gross margins of 17% and 12.8% in Fiscal 1997 and 1996,
respectively. The sale of the Austro Mold Group had little effect on the change
in the gross margin from the previous fiscal year. The Austro Mold Group
contributed only .9% to the gross margin in Fiscal 1996.
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Fiscal 1997 selling, general and administrative expenses decreased
$2,429,000, or 50%, from Fiscal 1996. The decrease was primarily attributable to
the sale of the Austro Mold Group assets at the end of Fiscal 1996. Fiscal 1996
expenses included $1,774,000 of loss related to the sale, including: a $901,000
write-off of the remaining unamortized cost of noncompete agreements 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. Also included in
Fiscal 1996 selling, general and administrative expenses was $707,800 incurred
by the Austro Mold Group. Excluding the impact of the loss on the sale of the
Austro Mold Group assets and the expenses reported by the Austro Mold Group,
selling, general and administrative expenses increased $53,000 in Fiscal 1997
and were therefore consistent with the prior year at 12% of net sales. The
Magnetic Assembly Group had a slight increase of $16,000, or 1%, and MTE
increased $37,000, or 12%. Included in the Company's consolidated selling,
general and administrative expenses for Fiscal 1997 was $180,000 of nonrecurring
expenses related to the pending merger with SPS (see Note 15 to the financial
statements). Interest expense in Fiscal 1997 decreased $96,000 from the
comparable prior year period due to reductions in outstanding debt balances.
The Company's Fiscal 1997 consolidated net income of $746,000 represented
a $2,763,000 improvement over the Fiscal 1996 net loss of $2,017,000. The
Magnetic Assembly Group contributed $556,000 and MTE contributed $190,000 to
Fiscal 1997 profits. Included in the net loss for Fiscal 1996 was the $1,774,000
loss related to the sale of the Austro Mold Group assets in July 1996, and that
Group's operating loss of $690,000. Excluding the impact of the losses related
to the sale and operations of the Austro Mold Group, the balance of the Company
experienced a net income of $447,000 in Fiscal 1996, which included a net profit
of $487,000 at the Magnetic Assembly Group and a net loss of $40,000 at MTE.
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 during Fiscal 1996 and 1995. Fiscal 1996 gross
margin was 12.6%, versus 13.1% in Fiscal 1995. 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 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.
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.
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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 net loss of
$463,000. The net 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.
Management believes that the Company's magnetic assembly operations have
been strengthened in the past two fiscal years by the broadened use of its
technology in the areas of remanufacturing, additional European business through
MTE and an expanding customer base. The Company is anticipating continued growth
for its core business.
The Company's backlog at July 31, 1997 was $20,760,000 compared with
$8,513,000 at July 31, 1996. Excluding MTE's backlog of $1,002,000 at July 31,
1997, the Company's backlog increased $11,245,000 over the previous year.
The Company's liquidity significantly improved during Fiscal 1997 and the
last quarter of Fiscal 1996 as a result of a decrease in outstanding debt and
the sale of the Austro Mold Group on July 15, 1996. The Company received
$916,000 cash from the Austro Mold closing, which was utilized to fund a
principal payment of $500,000 on the Company's revolving line of credit and a
$225,000 payment in settlement of the noncompete agreement with the previous
owners of Austro Mold. That settlement also required a final payment of
$207,000, which was made in January 1997.
As of July 31, 1997, the Company's cash balance was $840,000, versus
$846,000 at July 31, 1996 and $746,000 at July 31, 1995. Working capital was
$2,767,000, $1,791,000 and $2,623,000 at July 31, 1997, 1996 and 1995,
respectively; the current ratio was 1.8 to 1.0 at July 31, 1997, versus 1.4 to
1.0 and 1.5 to 1.0 at July 31, 1996 and 1995, respectively.
Net cash flows remained relatively consistent in Fiscal 1997, showing a
net decrease of $6,700 compared to a $99,900 increase in Fiscal 1996. Cash
provided by operating activities increased $1,080,000 and cashed used in
investing activities decreased $793,000 over the prior fiscal year. Fiscal 1996
cash flows included $916,000 cash proceeds from the Austro Mold closing. Cash
used by financing activities increased $411,700 in Fiscal 1997, the result of
note and loan payments totaling $857,000.
In Fiscal 1995, the Company was offered improved loan rates on its
then-existing bank debt and changed banks. The loan accommodation is secured by
the Company's assets and includes both a $1,500,000 revolving line of credit
convertible into a five-year 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. In March 1997, the conversion privilege on the
revolving line of credit agreement was extended one year until March 1, 1998. At
July 31, 1997, the Company had $1,500,000 of principal outstanding on the
revolving line of credit and $410,000 on the line of credit. In connection with
the MTE reacquisition, the Company has a loan due to the English company from
which the Company purchased MTE with an outstanding balance of $84,000 at July
31, 1997. The Company had other long-term debt totaling $53,000 outstanding at
July 31, 1997, and $276,000 of equipment leases with leasing companies.
Capital expenditures totaled $316,000 in Fiscal 1997, as compared with
$319,000 in Fiscal 1996. The Fiscal 1997 capital expenditures were financed from
a capital lease totaling $110,000 and the balance with working capital.
Management estimates that capital expenditures will approximate $800,000 in
fiscal 1998, a portion of which is expected to be financed with capital lease
financing.
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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 RISK OF THE LOSS OF
XEROX, THE COMPANY'S PRINCIPAL CUSTOMER AND 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 17
Consolidated Balance Sheets at July 31, 1997 and 1996 18
Consolidated Statements of Operations for the three years ended July 31, 1997 19
Consolidated Statements of Changes in Stockholders' Equity for the three years ended
July 31, 1997 20
Consolidated Statements of Cash Flows for the three years ended July 31, 1997 21
Notes to Consolidated Financial Statements 22-33
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Following is information about each director, executive officer and control
person of the Company as of October 1, 1997, as well as the recent business
experience of each:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE CURRENT COMPANY OFFICES
- --------------------- ------- ----------- -------------------------------------
<S> <C> <C> <C>
G. Thomas Clark 59 1992 None (a)
Catherine D'Amico 41 1995 None (b)
Isadore Diamond 78 1969 Chairman of Board (c)
Bernard Kozel 76 1994 None (d)
Gordon H. McNeil 56 1974 President and Chief Executive Officer (c)
<FN>
(a) Mr. Clark is retired as Senior Vice President - Finance, Secretary and
Treasurer of Paychex, Inc. He remains a member of its Board of Directors.
(b) Ms. D'Amico is Chief Financial Officer, Senior Vice President of Finance
and Treasurer of Monro Muffler Brake, Inc. Prior to joining that
corporation in August 1993, she was a Senior Audit Manager with Price
Waterhouse, the Company's auditor, and supervised the Company's annual
audit.
(c) Mr. Diamond served as Chief Executive Officer of the Company until Mr.
McNeil assumed that position in 1985. Based upon their joint management of
the Company for more than two decades and their aggregate beneficial
ownership of 18% of the Company's outstanding shares of Common Stock, they
could be considered to be "control persons" or "parents" with respect to
the Company.
(d) Mr. Kozel is President of KG Capital Corporation, a venture capital
company. Formerly, he was the founder and Chairman of Kayex Corporation
prior to its sale to General Signal Corporation. He is a member of the
Board of Directors of Performance Technologies Inc.
</TABLE>
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Messrs. Diamond and McNeil are the sole executive officers of the Company,
and there are no other significant employees as defined by Regulation S-B, Item
401(b). There are no family relationships among the Company's directors,
executive officers or persons nominated or chosen to become directors or
executive officers. During the past five years none of the above-named persons
has been involved in any bankruptcy proceeding, nor has any bankruptcy petition
been filed by or against any business of which any of the above-named persons
has been a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time; nor have any of the
above-named persons been convicted in a criminal proceeding or are now subject
to a pending criminal proceeding (excluding traffic violations and other minor
offenses); nor have any of the above-named persons been the subject of any
order, judgment or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or limiting any involvement by any of the above-named
persons in any type of business, securities or banking activities; nor have any
of the above-named persons been found by a court of competent jurisdiction (in a
civil action), the Securities and Exchange Commission or the Commodities Futures
Trading Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended or vacated.
Based upon a review of Forms 3, 4 and 5 furnished to the Company by
directors, officers and beneficial owners of more than 10% of the Company's
Common Stock during, and with respect to Fiscal 1997, to the best of the
Company's knowledge, no person subject to Section 16 of the Securities Exchange
Act of 1934 failed to file such reports on a timely basis during Fiscal 1997 or
prior fiscal years as required by that Act.
ITEM 10. EXECUTIVE COMPENSATION
(a) Three-year Compensation Summary
The following table summarizes the Company's compensation of its executive
officers for the past three fiscal years:
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION(a)
-------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- -------------------------------------
SECURITIES
-------------------------------------
OTHER ALL
ANNUAL RESTRICTED UNDER OTHER
COMPEN- STOCK LYING LTIP COMPEN-
NAME AND SALARY BONUS SATION AWARDS OPTIONS/ PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($)(b) ($) SARS(#) ($) ($)(c)
- ------------------ ---- ------ ----- ------ ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gordon H. McNeil 1997 $238,360(d) $4,202 $50,000(e) -- -- -- $12,075
President and CEO 1996 $222,200 -- -- -- -- -- $15,995
1995 $218,623 -- -- -- -- -- $ 5,609
Isadore Diamond 1997 $132,000 $2,640 $30,000(f) -- -- --
Chairman of Board 1996 $132,000 -- -- -- -- -- $ 363
1995 $132,000 -- -- -- -- -- --
<FN>
(a) Covers awards (grants) and payouts, but excludes options. See the table
below for the number and value of the executive officers' options as of
the end of Fiscal 1997.
(b) Does not include certain perquisites and other personal benefits the
value of which in each case did not exceed the lesser of $50,000 or 10%
of the executive officer's total salary and bonus in the fiscal year.
(c) Includes Company-paid insurance premiums on policies in which the
executive or his estate is the beneficiary.
(d) Includes $210,080 in base salary plus $28,280 pay in lieu of vacations
for two fiscal years (Fiscal 1997 and Fiscal 1996).
</TABLE>
10
<PAGE> 11
(e) Consists of a special $50,000 bonus in recognition of the Company's
performance in Fiscal 1997 and Mr. McNeil's service to the Company in
excess of 25 years, which was charged to Fiscal 1997, but which will be
payable to him only upon the closing of the merger with SPS, currently
scheduled for November 1997.
(f) Represents the approximate value of a leased vehicle utilized by Mr.
Diamond which, in recognition of the Company's performance in Fiscal
1997 and Mr. Diamond's service to the Company in excess of 25 years,
will be transferred to him upon the closing of the merger with SPS, but
which was charged to Fiscal 1997.
(b) Option/SAR Grants in Last Fiscal Year
No new stock options or stock appreciation rights ("SARs") were granted by
the Company to executive officers during Fiscal 1997. There are no outstanding
SARs. In Fiscal 1997 the Board of Directors extended for five years an existing
Non-Qualified stock option held by Gordon H. McNeil, which option had been due
to expire on May 18, 1997. Other than the extension of the exercise term, there
were no changes in the option including the exercise price. The extension of the
option is reported below as if it were the grant of a new option.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL MARKET PRICE
SECURITIES OPTIONS/SARS EXERCISE PER SHARE ON
UNDERLYING GRANTED TO OR BASE GRANT DATE
OPTIONS/SARS EMPLOYEES IN PRICE (AVERAGE OF EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) HIGH & LOW) DATE
---- ----------- ----------- ------ ----------- ----
<S> <C> <C> <C> <C> <C>
Gordon H. McNeil 150,000 66% $ 2.33 $3.75 May 18, 2002
</TABLE>
(c) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year-End Option/SAR Values
No stock options were exercised by any of the Company's Executive Officers
during Fiscal 1997. The following table sets forth information concerning the
amounts and values of unexercised stock options as of the end of Fiscal 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY-END (#) OPTIONS/SARS AT FY-END ($)(A)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------- --------------------------- -----------------------------
<S> <C> <C>
Gordon H. McNeil 262,500 /-- $320,813/--
Isadore Diamond -- / -- -- / --
</TABLE>
(a) Figures represent the difference between the $3.625 trading price of
the Company's Common Stock on July 29, 1997 (no trades were made on
July 30 and 31, 1997) and the exercise prices of the outstanding
options.
(d) Long-Term Incentive Plans
During Fiscal 1997, the Company made no awards to executive officers of
long-term plans providing compensation intended to serve as incentive for
performance.
11
<PAGE> 12
(e) Compensation of Directors
Executive officers are not separately compensated by the Company for
services rendered in their capacity as directors or members of any committee of
the Board of Directors. The three outside directors, consisting of Ms. D'Amico
and Messrs. Clark and Kozel, were compensated at the rate of $1,250 per Board
meeting and $750 per committee meeting attended in Fiscal 1997 (which fee
structure was reduced by 50% near the end of Fiscal 1997 prospectively for
fiscal 1998). In addition, during Fiscal 1997, each of the three outside
directors was granted an option to purchase 7,500 shares of the Company's Common
Stock, for a ten-year period expiring December 2006, at a price of $4.00 per
share, which was the market price on the date of the grant. As of July 31, 1997
fiscal year end, two of the outside directors also held the following additional
options (which were granted to each upon becoming a director): Mr. Clark held an
option to purchase 7,500 shares of the Company's Common Stock at a price of
$2.55 per share expiring in September 1997; and Mr. Kozel held an option to
purchase 5,000 shares of the Company's Common Stock at a price of $4.63 per
share expiring March 2000.
(f) Employment Contracts and Termination of Employment and
Change-in-Control Arrangements
The Company has no employment contracts with any of its executive officers.
The Company has no pension plan, nor any severance plan, salary continuation
policy, "golden parachute" plan, or any other plan or arrangement pertaining to
the resignation, retirement or other termination of any executive officer's
employment or to any change of control of the Company, or to any change in the
responsibilities of any executive officer following a change in control, which
would provide compensation to any executive officer in an amount exceeding
$100,000.
(g) Repricing of Options/SAR's
The Company did not adjust or amend the exercise price of any outstanding
stock options or SAR's during Fiscal 1997.
12
<PAGE> 13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 1, 1997, the number of shares
of the Company's Common Stock held by, or issuable to, (a) each director (there
are no director nominees), (b) each executive officer, (c) all directors and
executive officers as a group and (d) each person known by the Company to be the
beneficial owner of more than 5% of the Company's Common Stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNER CLASS (a)
- --------------------------------------------------- -------------------- -----------
<S> <C> <C>
Named Directors and Executive Officers:
G. Thomas Clark 49,875 (b) 1.7
1492 East Avenue
Rochester, NY 14610
Catherine D'Amico 7,500(b) 0.3
55 Great Wood Circle
Fairport, NY 14450
Isadore Diamond 293,312 10.2
7811 NW 85th Avenue
Tamarac, FL 33321
Bernard Kozel 24,500(c) 0.9
1 Woodbury Place
Rochester, NY 14618
Gordon H. McNeil 400,780(d) 14.0
44 Oak Meadow Trail
Pittsford, NY 14534
Directors and Executive Officers as a Group 775,967 27.0
Other 5% Beneficial Owners:
Richard Hall 275,899(e) 9.6
280 Estrellita
Ft. Myers Beach, FL 33931
Elliott Landsman 219,390 7.6
3 Townline Circle
Rochester, NY 14623
<FN>
(a) Based, in each case, upon the Company's current outstanding shares plus
that number of shares which the named person or group has the right to
acquire (that is, options which are exercisable within 60 days).
(b) Includes an option to purchase 7,500 shares at $4.00 per share expiring December 2006.
(c) Includes 5,000 shares held by Mr. Kozel's wife. Includes an option to
purchase 5,000 shares at $4.63 per share expiring March 2000, and an option
to purchase 7,500 shares at $4.00 per share expiring December 2006.
(d) Includes 15,375 shares held by Mr. McNeil's wife as custodian for their two
minor children (in which shares Mr. McNeil disclaims beneficial interest).
Includes the following two options to purchase shares: (i) 75,000 shares at
$2.33 per share expiring May 18, 2002 (Mr. McNeil purchased 75,000 of the
150,000 shares originally covered by the option), and (ii) 112,500 shares
at $2.50 per share expiring January 6, 2003.
(e) Includes 27,500 shares owned by a foundation which Mr. Hall controls and a
total of 21,780 shares owned by his two adult sons, neither of whom resides
with him.
</TABLE>
13
<PAGE> 14
In addition to the above persons, SPS might be deemed to be a beneficial
owner of more than 5% of the Company's Common Stock by reason of Voting
Agreements pursuant to which five of the Company's stockholders have agreed to
vote an aggregate of 26.7% of the Company's outstanding shares of Common Stock
in favor of the Company's proposed merger with SPS and/or certain Stock Purchase
Agreements pursuant to which thirteen of the Company's stockholders have agreed
to exchange an aggregate of 41.7% of the outstanding shares of the Company's
Common Stock for shares of SPS common stock in the merger.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company subleases a building to house its main plant and offices at 770
Linden Avenue, Rochester, New York, at a rent of $32,979 per month through
October 2006. The sublessor of the premises is Linden Properties, a New York
general partnership in which the two principal partners are Isadore Diamond, who
is a director, executive officer and owner of more than 5% of the Company's
Common Stock, and Elliott Landsman, who is also an owner of more than 5% of the
Company's Common Stock.
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 $24,400, $20,000 and $68,000
in fiscal years 1997, 1996 and 1995, respectively.
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 of this report.
The exhibits filed with this report are listed on the Index to Exhibits on
the page following the signature page of this report 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, Secretary of the Company, at 770 Linden Avenue,
Rochester, New York 14625.
The Company did not file any reports on Form 8-K during the last quarter of
Fiscal 1997.
14
<PAGE> 15
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 24, 1997 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 24, 1997 By: /s/ Gordon H. McNeil
-----------------------------------
Gordon H. McNeil, Director,
President and Principal
Executive Officer
Date: October 24, 1997 By: /s/ Isadore Diamond
-----------------------------------
Isadore Diamond, Director
Chairman of the Board,
Date: October 24, 1997 By: /s/ Gloria R. Stulb
-----------------------------------
Gloria R. Stulb,
Principal Accounting Officer
Date: October 24, 1997 By: /s/ G. Thomas Clark
-----------------------------------
G. Thomas Clark, Director
Date: October 24, 1997 By: /s/ Catherine D'Amico
-----------------------------------
Catherine D'Amico, Director
Date: October 24, 1997 By: /s/ Bernard Kozel
-----------------------------------
Bernard Kozel, Director
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT STATUS OR INCORPORATION
NO. DESCRIPTION BY REFERENCE (IBR)
- ------------- ----------------------------------------- -------------------------------------------
<S> <C> <C>
(3) By-Laws IBR to Exhibit A of Form 10-KSB for fiscal
year ended July 31, 1995
(10) (a) Sublease Agreement with Linden Properties Exhibit A to this Report
effective November 1, 1996
(10) (b) Master Lease Agreement with Real Lease, Inc. Exhibit B to this Report
for equipment dated May 12, 1997
(10) (c) Magnetic Technologies Europe Limited IBR to Exhibit 1 of Form 8-K as amended dated
acquisition agreement March 31, 1995
(10) (d) Credit Agreement, General Security IBR to Exhibit 3 of Form 8-K as amended dated
Agreement and Commercial Line of Credit March 31, 1995
Note with First National Bank of Rochester
(10) (e) Revolving Line of Credit Note with Bank Exhibit C to this Report
National
(10) (f) Stock Option Contract held by G. Thomas IBR to Exhibit E of Form 10-K for fiscal year
Clark (a director) dated September ended July 31, 1992
18, 1992
(10) (g) Stock Option Contract held by Gordon H. Exhibit D to this Report
McNeil (Pres. & CEO) dated May 19, 1992
(10) (h) Stock Option Contract held by Gordon H. IBR to Exhibit B of Form 10-KSB for fiscal
McNeil (Pres. & CEO) dated Jan. 7, 1993 year ended July 31, 1993
(10) (i) Stock Option Contract held by Bernard Kozel IBR to Exhibit B of Form 10-KSB for fiscal
(a director) dated March 8, 1995 year ended July 31, 1995
(10) (j) Magnetic Technologies Corporation 1996 IBR to Exhibit 4.1 of Form S-8 Registration
Stock Option Plan Statement dated December 17, 1996
(10) (k) Form of Stock Option Contract to purchase IBR to Exhibit 4.3 of Form S-8 Registration
7,500 shares of Common Stock @ $4.00 per Statement dated December 17, 1996
share granted to each outside director in
December, 1996 (a total of 22,500 shares)
(10) (l) Asset Purchase Agreement dated July 15, 1996 IBR to Exhibit A of Form 10-KSB for fiscal
relative to the Austro Mold sale year ended July 31, 1996
(10) (l) Austro Mold sale $342,683 Promissory Note, IBR to Exhibit B of Form 10-KSB for fiscal
Security Agreement and Subordination year ended July 31, 1996
Agreement, each dated July 12 or 15, 1996
(10) (m) Sublease Agreement of Austro Mold facility IBR to Exhibit C of Form 10-KSB for fiscal
for lease term remainder dated July 15, 1996 year ended July 31, 1996
(10) (n) $200,000 Promissory Note and Acceptance and IBR to Exhibit D of Form 10-KSB for fiscal
Consent in settlement of remaining year ended July 31, 1996
obligations with the former owners of Austro
Mold, Inc., dated July 12 and 15, 1996
(21) Subsidiaries of the Registrant IBR to Exhibit C of Form 10-KSB for fiscal
year ended July 31, 1995
(23) Consent of Independent Accountants Exhibit E to this Report
</TABLE>
16
<PAGE> 17
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,
1997 and 1996, and the results of their operations and their cash flows for each
of the three fiscal years in the period ended July 31, 1997, 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.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Rochester, New York
September 26, 1997
17
<PAGE> 18
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
-----------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash, including interest-bearing deposits of $362,100, and $476,325
at July 31, 1997 and 1996, respectively $ 839,663 $ 846,363
Accounts receivable, less allowance for doubtful accounts of
$50,000 and $120,000 at July 31, 1997 and 1996, respectively 1,147,291 2,027,821
Inventories 3,633,307 3,470,874
Deferred income taxes 331,000 470,600
Prepaids and other current assets 262,617 100,140
----------- -----------
Current assets 6,213,878 6,915,798
Property, plant and equipment, net 1,769,778 1,992,635
Deferred income taxes 363,000 321,900
Other assets 471,957 514,300
----------- -----------
$ 8,818,613 $ 9,744,633
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 2,708,365 $ 3,349,380
Notes payable 410,258 1,217,830
Current portion of long-term debt and capital lease obligations 328,685 321,528
Billings in excess of costs and estimated earnings on contracts in
process 103,616
----------- -----------
Current liabilities 3,447,308 4,992,354
Long-term debt and capital lease obligations 1,584,624 1,726,243
----------- -----------
Total liabilities 5,031,932 6,718,597
----------- -----------
Stockholders' equity:
Common stock - $.15 par value;
Authorized - 15,000,000 shares
Issued and outstanding - 2,786,531 and 2,786,584 shares at
July 31, 1997 and 1996, respectively 417,979 417,988
Stock warrants outstanding for 22,500 shares of common stock, valued at
$82,500, net of unamortized deferred expense of $6,675 and
$26,895 at July 31, 1997 and 1996, respectively 75,825 55,605
Additional paid-in capital 7,645,631 7,645,921
Cumulative translation adjustment (3,161) 2,359
Accumulated deficit (4,349,593) (5,095,837)
----------- -----------
Total stockholders' equity 3,786,681 3,026,036
----------- -----------
$ 8,818,613 $ 9,744,633
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
18
<PAGE> 19
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 20,803,518 $ 25,227,635 $ 22,209,634
Cost of sales 17,379,567 22,056,953 19,290,099
------------ ------------ ------------
Gross profit 3,423,951 3,170,682 2,919,535
Selling, general and administrative expenses 2,451,412 3,105,905 3,341,450
Loss on sale of Austro Mold Group assets 1,774,167
------------ ------------ ------------
Operating income (loss) 972,539 (1,709,390) (421,915)
Interest expense 227,467 323,192 265,233
Other (income) expense (101,672) (16,446) 87,217
------------ ------------ ------------
Income (loss) before income taxes 846,744 (2,016,136) (774,365)
Provision for income taxes 100,500 500 500
------------ ------------ ------------
Net income (loss) $ 746,244 ($ 2,016,636) ($ 774,865)
============ ============ ============
Net income (loss) per common share $.26 ($.72) ($.28)
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
19
<PAGE> 20
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------------ STOCK PAID-IN ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL DEFICIT
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
(5,905,837)
Repurchase and retirement of
fractional shares related
to stock split (53) (9) (290)
Amortization of deferred
stock warrants expense 20,220
Net income 746,244
--------- ----------- ----------- ----------- -----------
Balance at July 31, 1997 2,786,531 $ 417,979 $ 75,825 $ 7,645,631 ($4,349,593)
========= =========== =========== =========== ===========
</TABLE>
The cumulative translation adjustment was ($3,161) and $2,359 at July 31,
1997 and 1996, respectively.
See accompanying Notes to Consolidated Financial Statements.
20
<PAGE> 21
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DECREASE) INCREASE IN CASH
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 746,244 ($2,016,636) ($ 774,865)
----------- ----------- -----------
Adjustments to reconcile net income to cash provided by
(used in) operating activities -
Depreciation and amortization 567,955 1,006,508 1,079,062
(Gain) loss on disposal of property (11,308) 3,788 106,734
Loss on sale of Austro Mold Group assets 1,774,167
Provision for bad debts 24,669 91,042 16,500
Imputed interest on long-term debt 13,092 20,056 9,153
Decrease (increase) in accounts receivable 790,114 144,004 (98,048)
(Increase) decrease in inventories (140,419) 393,617 (1,511,516)
(Increase) decrease in costs, estimated earnings and
billings on contracts in process (103,616) 140,716 101,297
Decrease (increase) in deferred income taxes 98,500 (5,500)
(Increase) decrease in prepaids and other current
assets (83,440) 1,809 (7,926)
Payments under noncompete agreement (207,572) (555,000) (330,000)
Decrease (increase) in other assets 42,343 (16,825) (17,053)
(Decrease) increase in accounts payable and accrued
expenses (710,952) (1,041,753) 1,344,753
----------- ----------- -----------
Total adjustments 279,366 1,962,129 687,456
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,025,610 (54,507) (87,409)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (205,724) (318,962) (902,346)
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 18,477 7,718 160,000
----------- ----------- -----------
Net cash (used in) provided by investing activities (187,247) 605,253 (636,355)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings 602,500 3,457,758
Payments on note payable (600,000)
Principal payments on borrowings and capital leases (257,339) (1,048,031) (2,498,581)
Purchase and retirement of common stock (299) (394) (234)
Proceeds from stock options exercise 112,500
----------- ----------- -----------
Net cash (used in) provided by financing activities (857,638) (445,925) 1,071,443
Effect of exchange rate changes on cash 12,575 (4,892) (1,106)
----------- ----------- -----------
Net (decrease) increase in cash (6,700) 99,929 346,573
Cash and cash equivalents at beginning of year 846,363 746,434 399,861
----------- ----------- -----------
Cash and cash equivalents at end of year $ 839,663 $ 846,363 $ 746,434
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
21
<PAGE> 22
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
the design, manufacture and assembly of precision magnetic, electronic and
mechanical devices for sale to office equipment manufacturers. 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. Magnetic
Technologies Europe Limited (MTE), a wholly-owned foreign subsidiary, is engaged
in the same business as the Company's domestic operations but serving European
customers. MTE has one facility located in Rochester, England. (See Note 3.) The
Company's former 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. (See
Note 2.)
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. 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 recognizes revenue from product sales upon shipment. Austro
Mold accounted for contracts for the manufacture of precision plastic molds and
custom tooling using the percentage of completion method of accounting. Under
this method, 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 cost 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.
22
<PAGE> 23
Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired was amortized over ten years using
the straight-line method, or over the expected useful life of the related
intangible asset, whichever was 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.
Earnings (Loss) Per Common Share
All per share amounts for Fiscal 1997, 1996 and 1995 are based on the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of stock options and
warrants as computed using the treasury stock method. For Fiscal 1996 and 1995,
common equivalent shares from stock options or warrants are excluded due to the
antidilutive effect they have on the net losses in those years.
Weighted average shares of common stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------------
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Primary 2,880,528 2,786,644 2,779,521
Fully Diluted 2,880,528 2,786,644 2,779,521
</TABLE>
Accounting Pronouncements
In February 1997, the Financial Accounting Standard Board (FASB) issued
Statement No. 128, (SFAS 128) EARNINGS PER SHARE, which requires presentations
of earnings per share by all entities that have issued common stock or potential
common stock if those securities trade in a public market. SFAS No. 128 requires
basic and diluted earnings per share be presented for all periods for which a
statement of earnings is presented. The Corporation is required to adopt SFAS
No. 128 in fiscal 1998. The pro forma effect of SFAS 128 would result in basic
earnings (loss) per share of $.27, ($.72) and ($.28) in Fiscal 1997, 1996, and
1995 respectively. The pro forma effect of SFAS 128 would result in diluted
earnings (loss) per share of $.26, ($.72) and ($.28) in Fiscal 1997, 1996, and
1995, respectively.
23
<PAGE> 24
NOTE 2 - SALE OF AUSTRO MOLD GROUP ASSETS:
During fiscal 1993, the Company acquired the outstanding stock of Austro
Mold, Inc. (and subsequently merged that corporation into the Company). The
acquisition was reflected under the purchase method of accounting for business
combinations. The purchase price of $1,910,177 was financed with a $2,000,000
revolving line of credit, which was refinanced during Fiscal 1995 at an 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 and
$202,041 for fiscal years 1996 and 1995, 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 forty-eight 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. As of July 31, 1997, the principal
and accrued interest is reflected as prepaid and other assets of $74,395 and
other assets of $265,015. 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 a final payment of $207,572 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.)
NOTE 3 - INVESTMENT IN AFFILIATE AND SALE OF TECHNOLOGY:
In Fiscal 1993, the Company 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). 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.
24
<PAGE> 25
In March 1994, Cookson sold certain of its businesses to Calder Group
Limited (Calder), and a Calder subsidiary became the owner of all of MTE's
voting "A" shares of stock. A year later, Calder decided to dispose of certain
of its operations, including MTE. On March 31, 1995, the Company acquired all of
the voting shares of stock of MTE from Calder's subsidiary. The acquisition was
effective as of February 28, 1995 and the accounts of MTE are consolidated with
those of the Company from March 1, 1995 forward. The purchase price of the
acquisition of the remaining 75% interest in MTE was $492,007 plus closing costs
of $23,054, before cash acquired of $3,340. In connection with the acquisition,
the Company incurred a note payable to Calder of $351,000, payable in equal
monthly installments of $9,750 over a thirty-six month period commencing May 1,
1995. The note payable to Calder has no stated interest; therefore, interest was
imputed at a rate of 9.25%. The balance of the note payable, less imputed
interest, was $305,410 at acquisition. The loan was reflected in the Company's
consolidated balance sheet as current portion of long-term debt of $84,461 at
July 31, 1997. (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.
The following table presents unaudited pro forma results of operations as
if the acquisition of MTE had occurred at the beginning of Fiscal 1995, 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 period presented or of results which may occur in the future.
<TABLE>
<CAPTION>
PRO FORMA RESULTS (UNAUDITED)
YEAR ENDED JULY 31, 1995
---------------------------------
<S> <C>
Net sales $ 22,420,698
Cost of sales 19,364,900
------------
Gross profit 3,055,798
Selling, general and administrative expenses 3,684,645
------------
Operating loss (628,847)
Interest, other income and expenses 415,621
------------
Loss before income taxes (1,044,468)
Provision for income taxes 500
------------
Net loss ($ 1,044,968)
============
Loss per share of Common Stock (2,779,521 weighted average number of
shares)
Primary ($.38)
Fully Diluted ($.38)
</TABLE>
25
<PAGE> 26
NOTE 4 - INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $2,761,408 $1,995,447
Work in process 825,100 1,400,556
Finished goods 46,799 74,871
---------- -----------
$3,633,307 $ 3,470,874
========== ===========
</TABLE>
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 as of July 31, 1996.
<TABLE>
<S> <C>
Costs and estimated earnings $ 87,134
LESS: Billings to date 190,750
-----------
($ 103,616)
===========
</TABLE>
Costs, estimated earnings and billings were presented in the accompanying
balance sheet as:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings on
contracts in process $ 0
Billings in excess of costs and estimated earnings on
contracts in process
(103,616)
---------
($103,616)
=========
</TABLE>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
Major classifications of property, plant and equipment were as follows:
<TABLE>
<CAPTION>
JULY 31,
--------------------------------
1997 1996
------------- -----------
<S> <C> <C>
Equipment under capital lease $ $ 537,513
647,298
Machinery and engineering equipment 3,284,222 3,405,256
Furniture, fixtures and computer equipment 1,296,757 1,414,578
Leasehold improvements 400,717 378,326
Vehicles 21,110 46,320
Construction in process 21,735
------------- -----------
5,671,839 5,781,993
LESS: Accumulated depreciation and amortization 3,902,061 3,789,358
------------- -----------
$ 1,769,778 $ 1,992,635
============= ===========
</TABLE>
The accumulated amortization for capital leases was $200,096 and $137,133
at July 31, 1997 and 1996, respectively. Amortization expense was $62,963,
$76,835 and $90,756 in fiscal years 1997, 1996 and 1995, respectively.
In Fiscal 1995, the Company closed its Austro Mold Group Clearwater,
Florida plant and recognized a $35,000 loss on the sale of the plant's machinery
and equipment. In Fiscal 1996, the Company sold the remaining fixed assets of
the Austro Mold Group in Rochester, New York, and recognized a $532,642 loss on
the sale. (See also Note 2.)
26
<PAGE> 27
NOTE 7 - NOTES PAYABLE:
Notes payable at July 31, 1997, consisted of $410,258 outstanding on the
Company's bank line of credit bearing interest at prime plus .25% At July 31,
1997, the Company had $839,742 available under its bank line of credit.
Notes payable at July 31, 1996, consisted of $1,010,258 outstanding on the
Company's bank line of credit bearing interest at prime plus .25% 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.
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 thirty-day out of debt period
during each twelve-month period. The Company has obtained a waiver from its bank
related to this provision for Fiscal 1997 and Fiscal 1998.
NOTE 8 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
CURRENT JULY 31,
INTEREST PORTION ------------------------------
DESCRIPTION DUE DATE RATE DUE 1997 1996
- --------------------- ------------------- ---------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revolving bank line March 2002 (see
of credit conversion option
outlined below) Prime + .25% $ 80,953 $1,500,000 $ 1,500,000
Obligations under Various to
capital leases February 2000 7.31% to 11.57% 152,953 275,970 295,914
Calder loan April 1998 Imputed 9.25% 84,461 84,461 188,369
Other long-term debt March 2002 5.00% 10,318 52,878 63,488
-------- ---------- -----------
$328,685 1,913,309 2,047,771
LESS: Current portion due within one year ======== 328,685 321,528
---------- -----------
$1,584,624 $ 1,726,243
========== ===========
</TABLE>
The bank prime rate was 8.50% at July 31, 1997.
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, 1998, 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, 1997 and is reflected accordingly in the five-year repayment table
below. 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, 1997.
The Company formerly had an available master lease line of credit of
$1,000,000 with its previous bank, which credit line was terminated when the
Company changed banks in 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, although the Company remains obligated under
these leases as a secondary guarantor. (See Note 2.) The remaining outstanding
balance on the lease line of credit was $170,365 at July 31, 1997. The lease
line requires monthly payments totaling $11,919, including 7.31% interest, with
a final payment due in October 1998.
27
<PAGE> 28
In Fiscal 1997, the Company entered into a master lease agreement, through
which it financed an initial equipment acquisition at an interest rate of 11.57%
for sixty months. The total obligations under the Company's capital leases
(excluding the leases assigned with the Austro Mold sale) are secured by
equipment with a net book value of $345,259 at July 31, 1997.
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
PAYABLE LEASES LONG-TERM DEBT
------- ------ --------------
<S> <C> <C> <C>
Fiscal 1998 $ 165,414 $152,953 $10,318
Fiscal 1999 257,467 55,311 10,846
Fiscal 2000 280,921 22,298 11,401
Fiscal 2001 306,511 24,878 11,984
Fiscal 2002 334,433 20,530 8,329
Later 239,715
---------- -------- -------
$1,584,461 $275,970 $52,878
========== ======== =======
</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 $480,483, $613,619,
and $590,868 during fiscal years 1997, 1996 and 1995, 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 is 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 1998 $ 406,500 $12,131
Fiscal 1999 395,752 4,935
Fiscal 2000 395,752
Fiscal 2001 409,463
Fiscal 2002 414,033
---------- -------
$2,021,500 $17,066
========== =======
</TABLE>
NOTE 10 - COMMON STOCK, STOCK OPTIONS, STOCK WARRANTS AND INCENTIVE PLANS:
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 $6,675 and $26,895 at July 31, 1997 and 1996,
respectively. The value of the outstanding warrants, net of unamortized deferred
expense, or $75,825 and $55,605, was reflected in stockholders' equity at July
31, 1997 and 1996, respectively.
28
<PAGE> 29
In September 1992, the Company issued a stock option to a director for the
purchase of 7,500 shares of the Company's common stock at an exercise price of
$2.55 per share, expiring in September 1997. In March 1995, the Company issued a
stock options to another director for the purchase of 5,000 shares at an
exercise price of $4.63 per share, expiring in March 7, 2000, or after a
specified period upon termination of the director's position with the Company.
(See Note 12.)
In January 1993, the Company issued two stock options for the purchase of
an aggregate of 225,000 shares to two officers of the Company at an exercise
price of $2.50 per share. Each option vested at a rate of 37,500 shares per year
starting in Fiscal 1994. During Fiscal 1995, 37,500 shares under one of the
options were exercised and the remaining 75,000 shares under that option expired
upon termination of the officer's employment. The remaining option expires at
the earlier of January 2003 or within a specified period after termination of
the officer's employment.
Also during Fiscal 1995, a director exercised 9,375 shares under a
previously granted stock option. (See Note 12.)
There was no activity in the outstanding number of stock options during
Fiscal 1996.
In Fiscal 1997, the Company established the "1996 Stock Option Plan" (the
"Plan") pursuant to which 125,000 shares of common stock have been reserved for
grant by the Board of Directors. Under the Plan, options may be granted to
directors, officers, key employees and consultants at not less than fair market
value at the date of grant (not less than 110% of the fair market value in the
case of holders of more than 10% of the Company's Stock). The Plan was
authorized by the Company's Board of Directors in September 1996, and approved
by the stockholders in December 1996.
Under the Plan, the Board of Directors authorized the issuance of stock
options to eleven employees of the Company and one consultant aggregating 85,000
shares at an exercise price of $3.50 per share. These shares vest at a rate of
25% per year starting in Fiscal 1997 and expire at the earlier of September 2006
or three months after the termination of the employee's employment with the
Company.
Also under the Plan, stock options were later issued to three directors
aggregating 22,500 shares at an exercise price of $4.00 per share. These shares
expire at the earlier of December 2006 or three months after the cessation of
the directorship. (See Note 12.)
In May 1992, the Company issued a stock option to an officer of the Company
aggregating 150,000 shares at an exercise price of $2.33 per share. In April
1997, the expiration date of these shares was extended to the earlier of May
2002 or within a specified period after termination of employment. (See Note
12.)
All stock options and warrants granted by the Company have been issued at
the fair market value price of the Company's common stock on the date of grant.
<TABLE>
<CAPTION>
OPTION PRICE
SUMMARY OF STOCK OPTIONS NUMBER RANGE PER SHARE
------------------------ ------ ---------------
<S> <C> <C> <C>
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
Granted 107,500 $3.50 - $4.00
-----------
Outstanding July 31, 1997 382,500 $2.33 - $4.63
===========
Exercisable at July 31, 1997 318,750 $2.33 - $4.63
===========
</TABLE>
29
<PAGE> 30
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), ACCOUNTING FOR STOCK-BASED
COMPENSATION. Accordingly no compensation cost has been recognized for the stock
option plan.
Had compensation cost for the Company's outstanding stock options been
determined based on the fair value at the grant date for awards issued and
modified in Fiscal 1997 consistent with the provisions of SFAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts of $599,441 and $.21, respectively. Since no stock options were
issued in Fiscal 1996, no compensation cost would have been recorded.
The assumption regarding the stock options issued to non-directors was that
25% of such options vested and for the modified award, 20% vested in Fiscal
1997. The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in Fiscal 1997: dividend yield of 0%, expected
volatility of 35%, risk-free interest rate of 6.02%, expected lives of five to
ten years.
NOTE 11 - INCOME TAXES:
The provisions for income taxes for Fiscal 1997, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Current:
Federal $ 0 $ 0 $ 0
State 2,000 500 500
--------------- --------------- ---------------
2,000 500 500
Deferred:
Federal 78,600 0 0
State 19,900 0 0
--------------- --------------- ---------------
98,500 0 0
--------------- --------------- ---------------
Total $100,500 $500 $500
=============== =============== ===============
</TABLE>
For Fiscal 1997, the provision for income taxes differs from that
computed using the federal rate of 34% due to the following:
<TABLE>
<CAPTION>
<S> <C> <C>
Federal income tax at statutory rate $287,900 34.0%
State tax provision 72,400 8.5%
Reversal of deferred tax
valuation allowance (252,500) (29.8%)
Foreign tax net operating loss (64,700) (7.6%)
Merger cost 34,000 4.0%
Other 23,400 2.8%
----------------- -----------
Total provision for income taxes $100,500 11.9%
================= ===========
</TABLE>
30
<PAGE> 31
The following tables summarize the current and long-term deferred tax
assets and the related valuation allowances:
<TABLE>
<CAPTION>
AT JULY 31,
--------------------------
1997 1996
-------- ---------
Current deferred tax assets:
<S> <C> <C>
Accrued expenses $154,200 $ 252,600
Inventory 159,200 161,000
Warranty reserves 0 10,300
Other deferred tax assets 17,600 46,700
-------- ---------
$331,000 $ 470,600
======== =========
</TABLE>
<TABLE>
<CAPTION>
AT JULY 31,
-----------------------------
1997 1996
---------- ----------
Long-term deferred tax assets:
<S> <C> <C>
Federal net operating loss carryforwards $ 506,100 $ 705,700
State net operating loss carryforwards 134,200 187,100
Federal investment tax credit carryforwards 40,900 40,900
State investment tax credit carryforwards 268,300 272,700
Federal alternative minimum tax credit carryforwards 51,000 51,000
State alternative minimum tax credit carryforwards 6,000 6,000
Depreciation 411,800 430,500
Other deferred tax assets 154,200 90,000
----------- ------------
1,572,500 1,783,900
LESS: Valuation allowance 1,209,500 1,462,000
----------- ------------
$ 363,000 $ 321,900
=========== ============
</TABLE>
The federal net operating loss carryforwards of approximately $1,489,000
expire periodically from fiscal years 2002 through 2011, while federal tax
credit carryforwards expire periodically from fiscal years 1998 through 2002.
For state tax purposes, the net operating loss carryforwards of approximately
$1,493,000 expire periodically from fiscal years 2009 through 2011, and tax
credit carryforwards expire periodically through fiscal year 2011. MTE has
cumulative tax losses of approximately (pound)418,000 available to offset future
taxable income in the United Kingdom. Deferred tax benefits have not been
provided for these foreign tax losses.
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.
The change in the valuation allowance from July 31, 1996 to July 31, 1997
is a result of the reversal of a portion of the allowance relating to Fiscal
1997 utilization of federal and state net operating loss carryforwards.
31
<PAGE> 32
NOTE 12 - RELATED PARTIES:
In Fiscal 1990 the Company issued a stock option to a director to purchase
of 9,375 shares of the Company's common stock at a price of $2.00 per share,
which option was exercised during Fiscal 1995. In Fiscal 1992, the Company
issued an option to an officer to purchase 150,000 shares at $2.33 per share,
and an option to a director to purchase 7,500 shares at $2.55 per share. In
Fiscal 1993, the Company issued two options to two officers to each purchase
112,500 shares at $2.50 per share. During Fiscal 1995, 37,500 of the shares
under one of those options were exercised and the remaining 75,000 shares under
that option expired upon the officer's termination of employment. Also during
Fiscal 1995, the Company issued an option to a director to purchase 5,000 shares
at $4.63 per share. During Fiscal 1997, the Company issued three options to
three directors to each purchase 7,500 shares at $4.00 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 nine years and requires monthly rental payments of
$32,979, rising to $36,102 by the end of the lease term. The sublease also
requires the Company to pay real estate taxes, maintenance and utility costs.
Rent expense for the facility amounted to $391,314, $365,616 and $367,400 in
fiscal years 1997, 1996 and 1995, respectively.
The Company also contracts with a local firm, owned by the stockholder
referred to above, for the construction of various building renovations and
improvements at an aggregate cost to the Company of $24,400, $20,000 and $68,000
in fiscal years 1997, 1996 and 1995, respectively.
NOTE 13 - BUSINESS SEGMENT AND MAJOR CUSTOMER INFORMATION:
The Company operates in one business segment defined as contract
manufacturing. This segment encompasses the design, manufacture and assembly of
precision magnetic, electronic and mechanical devices at both the Magnetic
Assembly Group and Magnetic Technologies Europe, as well as the 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 $3,419,000, $3,269,000 and $1,851,000 in fiscal years 1997, 1996 and 1995,
respectively.
During the fiscal years ended July 31, 1997, 1996 and 1995, gross sales to
one customer amounted to $17,484,000, $20,261,000 and $16,494,000, respectively.
NOTE 14 - SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS:
The following transactions represent noncash investing and financing
activities:
YEAR ENDED JULY 31, 1997:
- -------------------------
During Fiscal 1997, capital lease obligations of $109,785 were incurred when
the company entered into a lease for new manufacturing equipment.
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.)
32
<PAGE> 33
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.)
NOTE 15 - SUBSEQUENT EVENT:
On August 7, 1997, the Company entered into a merger agreement with SPS
Technologies, Inc. ("SPS") and an acquisition subsidiary of SPS. Under the
agreement, the Company's stockholders will receive $5.00 for each share of the
Company's Common Stock held by them, payable in cash; except that a limited
number of the Company's largest stockholders have agreed to exchange at least
41.7%, but no more than 51%, of the Company's total outstanding shares of Common
Stock, valued at $5.00 per share, for unregistered shares of SPS common stock
valued at the average of the daily last sales prices of such stock on the New
York Stock Exchange for the last 20 days ending one day prior to the meeting of
the Company's stockholders to vote upon approval of the merger.
The agreement contains provisions, among others, for bonus payments and
other forms of compensation for certain officers of the Company for services
provided for Fiscal 1997, which expenses have been accrued as of July 31, 1997.
The agreement also contains provisions for the Company's purchase of all
outstanding stock options, vested or non-vested, at the difference between $5.00
per share and the option price.
The agreement is subject to the approval of the Company's stockholders at a
meeting to be held in December 1997.
33
<PAGE> 1
Exhibit A
SUBLEASE AGREEMENT
BETWEEN
LINDEN PROPERTIES
AND
MAGNETIC TECHNOLOGIES CORPORATION
700,000 SQ. FT.
770 LINDEN AVENUE
ROCHESTER, NEW YORK 14625 NOVEMBER 1, 1996
<PAGE> 2
TABLE OF CONTENTS
SUBJECT PAGE
------- ----
ALTERATIONS .......................................................... 5
ASSIGNMENT ........................................................... 4
CASUALTY ............................................................. 7
COMPLIANCE BY TENANT WITH GOVERNMENTAL REQUIREMENTS................... 3
COMPLIANCE WITH ENVIRONMENTAL LAWS ................................... 3
CONDEMNATION ......................................................... 9
CONDITION OF LEASED PROPERTY ......................................... 2
CONSENT OF LANDLORD AND TENANT ....................................... 10
CONSTRUCTION ......................................................... 11
DEFAULT .............................................................. 8
EXCULPATION .......................................................... 6
INDEMNITY ............................................................ 6
INDUSTRIAL DEVELOPMENT BOND FINANCING ................................ 12
INSPECTION ........................................................... 7
INSURANCE ............................................................ 6
LATE CHARGES ......................................................... 2
LIMITATION ON PERSONAL LIABILITY ..................................... 11
MAINTENANCE OF ROAD, YARD AND PARKING LOT ............................ 3
NO ABATEMENT ......................................................... 7
NO WAIVER BY LANDLORD ................................................ 9
NOTICES .............................................................. 10
QUIET ENJOYMENT ...................................................... 10
REMEDIES ............................................................. 8
RENT ................................................................. 1
i
<PAGE> 3
Table of Contents
(Continued)
REPAIRS .............................................................. 2
REVIEW OF ASSESSMENTS ................................................ 4
RIGHT TO MORTGAGE .................................................... 9
RUBBISH REMOVAL ...................................................... 7
SIGNS ................................................................ 10
SNOW REMOVAL AND AREA LIGHTING ....................................... 3
TAXES ................................................................ 4
TENANTS WAIVER OF RIGHT TO REDEEM .................................... 10
USE .................................................................. 2
UTILITIES ............................................................ 4
WAIVER OF SUBROGATION ................................................ 11
ii
<PAGE> 4
WHEREAS, COUNTY OF MONROE, INDUSTRIAL DEVELOPMENT AGENCY, a public
benefit corporation duly existing under the laws of the State of New York,
having its office at 183 East Main Street, Rochester, New York, hereinafter
described as OWNER, is the Owner of certain premises located at 770 Linden
Avenue, Rochester, New York 14625, and
WHEREAS, LINDEN PROPERTIES, with offices at 3 Townline Circle,
Rochester, New York 14623, hereinafter designated as LANDLORD has leased the
building from OWNER, and
WHEREAS, MAGNETIC TECHNOLOGIES CORPORATION, with offices at 770 Linden
Avenue, Rochester New York 14625, hereinafter designated as TENANT, wishes to
sublet certain premises from Landlord;
NOW, THEREFORE,
WITNESSETH:
The Landlord hereby leases to Tenant and Tenant hereby hires from
Landlord approximately 70,000 square feet of space in the building located at
770 Linden Avenue, Rochester New York 14625, as set forth on Schedule "A"
attached hereto and made a part hereof, for a term of ten years to commence
November 1, 1996 and expire October 31, 2006.
1. RENT
Tenant covenants and agrees to pay to Landlord, at Landlord's office, 3
Townline Circle, Rochester, New York 14623, or at such other place as Landlord
may from time to time designate in writing, the annual rent as follows:
<TABLE>
<CAPTION>
Term Annual Rent Monthly Rent
---- ----------- ------------
<S> <C> <C>
11/1/1996-10/31/2000 $395,752.00 $32,979.35
11/1/2000-10/31/2003 414,033.00 34,502.75
11/1/2003-10/31/2006 433,227.00 36,102.25
</TABLE>
The rent shall be paid in equal monthly installments, as shown above, in advance
on the first day of each month of the term, together with any additional rent or
other charges which may be due the Landlord.
The rent shall be paid to the Landlord without notice or demand and
without abatement, deduction or setoff except as otherwise specifically provided
in the Lease. Nothing contained in the Lease shall require the Tenant to pay any
franchise, corporate, estate, inheritance, succession, capital levy or transfer
tax of the Landlord, or any income, profits or revenue tax, or any other tax,
assessment, charge or levy upon the rent payable by the Tenant under this Lease.
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<PAGE> 5
2. LATE CHARGES
If any installment of rent or any other amount due from the Tenant is
not received by the Landlord within ten (10) days after the first of the month
in the case of rent, or within fifteen days after receipt of notice and demand,
in the case of other charges the Tenant will pay to the Landlord a late charge
equal to 4% of such overdue amount. The late charge represents a fair and
reasonable estimate of the cost the Landlord will incur by reason of the late
payment. Acceptance of the late charge by the Landlord will not constitute a
waiver of the Tenant's default with respect to such overdue amount nor prevent
Landlord from exercising any other remedies granted hereunder. If a late charge
is payable hereunder, whether or not collected for three consecutive
installments of rent, then rent will automatically become due and payable
quarterly in advance, rather than monthly in advance, notwithstanding any other
provision of this Lease to the contrary. Furthermore, in the event that the late
charge is payable hereunder, whether or not collected for three consecutive
installments of rent, or any other monetary obligation of the Tenant under the
terms of this lease is not paid when due, the Tenant will pay to the Landlord,
if the Landlord shall so request, a monthly advance installment payable at the
same time as the monthly rent as estimated by the Landlord to cover real
property taxes and other charges which are payable by the Tenant under the terms
of this lease. Such funds will be used to insure payment when due before
delinquency of real property taxes and other charges.
3. USE
The Leased Property will be used only for the permitted use and such
other use which is reasonably comparable. The use of the Leased Property by the
Tenant will be subject to all governmental codes, regulations, ordinances and
restrictions of record. The Tenant will not use the Leased Property for any
purpose or in any manner which would be reasonably objectionable to the
Landlord, or which would prevent the Landlord from obtaining insurance.
4. CONDITION OF LEASED PROPERTY
Unless otherwise specified herein, the Tenant accepts the Leased
Property in its existing condition. No representation, statement or other
warranty, express or implied had been made by or on behalf of the Landlord as to
the condition of the Leased Property or the suitability of the Leased Property
for the conduct of the Tenant's business.
5. REPAIRS
The Landlord's obligation to maintain and repair the Leased Property
will be limited to the exterior walls, foundations, roofs, driveways and parking
areas. Except for the foregoing, the Tenant will have complete responsibility to
maintain and repair the Leased Property including, without limitation, all
plumbing, heating, air conditioning, electrical, lighting fixtures, equipment,
ceilings, floors, windows, doors and plate glass located within the Leased
Property. All repairs will be of a quality and class at least equal to the
original work. If the Tenant fails to perform its obligations hereunder, The
Landlord may elect to enter the Leased Property after ten days' prior notice to
the Tenant, except in the case of emergency where
2
<PAGE> 6
no notice will be required, and perform the obligations on the Tenant's behalf.
Upon the last day of the term of the Lease, or upon any sooner termination, the
Tenant will surrender the Leased Property to the Landlord in the same condition
as when received, ordinary wear excepted, clean and free of debris. The Tenant
will repair any damage to the Leased Property occasioned by the installation or
removal of the Tenant's fixtures, furnishings and equipment. Unless the Landlord
has elected that the Tenant remove such items, the Tenant will leave the air
lines, power panels, electrical distribution systems, lighting fixtures, space
heaters, air conditioning and plumbing in the Leased Property in good operating
condition.
6. MAINTENANCE OF ROAD, YARD AND PARKING LOT; SNOW REMOVAL AND AREA
LIGHTING
The Tenant shall be responsible for maintaining and removing snow from
the parking areas, driveways, and the entrances from the road leading to the
Leased Property and for yard maintenance and area lighting.
7. COMPLIANCE BY TENANT WITH GOVERNMENTAL REQUIREMENTS
Tenant shall, at Tenant's own cost and expense, promptly execute and
comply with all statutes, ordinances, rules, orders, regulations and
requirements of the Federal, State and local governments and of any and all of
their Departments and Bureaus as well as any orders and regulations of the
National Board of Fire Underwriters or any other body exercising similar
functions, applicable to Tenant's use of the Leased Property, for the
correction, prevention and abatement of nuisances or other grievances connected
with Tenant's use of the Leased Property during the term, except where a
structural change is required.
8. COMPLIANCE WITH ENVIRONMENTAL LAWS
The Tenant acknowledges that the leased premises, the building in which
the leased premises are located and adjacent areas (the "Premises Area"), are
subject to federal and state environmental laws and regulations now in effect
that new environmental laws and regulations may be enacted applicable to the
Premises Area. The Tenant will comply with all applicable current and future
environmental laws and regulations and terms of all environmental permits issued
by any governmental agency to the Tenant. The Tenant will not dispose of any
hazardous substances or waste material other than in accordance with applicable
environmental laws and regulations. The Tenant promptly will furnish the
Landlord with a copy of any notice from any governmental agency with respect to
any environmental matter. The Tenant will be responsible for investigation,
inspection and cleanup of all hazardous substances and waste materials that are
determined to be present at the Premises Area by reason of the Tenant's
activities in accordance with applicable environmental laws and regulations. If
the Landlord, in good faith, believes that a potential environmental problem
exists by reason of the Tenant's activities, the Landlord may require that an
environmental inspection and audit be undertaken at the Tenant's expense. The
Tenant will indemnify and hold the Landlord and its successors and assigns
harmless from any claim, loss, damage and expense, including professional and
counsel fees and expenses, resulting from the use of the leased premises by the
Tenant in violation of applicable environmental
3
<PAGE> 7
laws and regulations and the failure to promptly and diligently take such action
with respect to environmental liabilities including investigation, containment,
removal and cleanup and other remedial action required under applicable
environmental laws and regulations. The liability of the Tenant hereunder will
not be affected by the amendment, extension or termination of this lease, the
invalidity or unenforceability of any provision herein, the sale of the building
in which the leased premises are located, any investigation made by the Landlord
or others or any other circumstance which might be a legal or equitable defense
available to the Tenant.
9. TAXES
Tenant shall pay before the same become delinquent any and all real
estate taxes and other taxes, assessments and other levies assessed, levied or
made against the Leased Property, the building and land of which the Leased
Property is a part and Landlord's personal property therein or thereon.
10. UTILITIES
The Tenant will pay for all water, gas, oil, electricity, pollution,
pure water and other environmental control charges and telephone and other
services supplied to the Leased Property together with any taxes thereon. The
Landlord will not be liable for the interruption of any utilities or other
services.
11. REVIEW OF ASSESSMENTS
Tenant shall have the right to contest or review by legal proceedings
or in such other manner as may be legal (which, if instituted, shall be
conducted promptly at Tenant's own expense and free of all expense to Landlord)
any tax, assessments, water rent or charge, or other governmental imposition
aforementioned upon condition that, before instituting any such proceedings,
Tenant shall pay (under protest) such tax, assessment, water charge or other
governmental imposition duties, and charges aforementioned. In such event, the
Landlord will offer no objections and at the request of Tenant, but without
expense to the Landlord, will cooperate with the Tenant.
Landlord, at Landlord's option, may, but shall not be obligated to,
contest or review by legal proceedings, or in such manner as may be legal, and
at Landlord's own expense, any tax, assessment, water rent or charge, or other
governmental imposition aforementioned, which shall not be contested or
reviewed, as aforesaid, by Tenant and unless Tenant shall promptly join with
Landlord in such contest or review, Landlord shall be entitled to receive and
retain any refund payable by the governmental authority with respect thereto.
12. ASSIGNMENT
The Tenant will not voluntarily or by operation of law assign,
transfer, mortgage, sublet or otherwise encumber all or part of the Tenant's
interest in this Lease or in the Leased Property without Landlord's prior
consent, which the Landlord will not unreasonably withhold.
4
<PAGE> 8
The Landlord will respond to Tenant's request for consent hereunder in a timely
manner. Any attempted assignment, transfer, mortgage, subletting or encumbrance
without the consent of the Landlord will be unenforceable and will constitute a
breach of this Lease. Consent to an assignment or subletting will not release
the Tenant of its obligations or alter the primary liability of the Tenant to
pay Rent and to perform all other obligations hereunder. The acceptance of Rent
by the Landlord from another person will not be deemed to be a waiver by
Landlord of any provision hereof. Consent to one assignment or subletting will
not be deemed consent to any subsequent assignment or subletting. In the event
of default by any assignee or successor of the Tenant in the performance of the
terms hereof, the Landlord may proceed directly against the Tenant without the
necessity of exhausting remedies against the assignee. The Landlord may consent
to subsequent assignments or subletting of this Lease or amendments or
modifications of this Lease with assignees of the Tenant without notifying the
Tenant or any successor of the Tenant and without obtaining consent thereto. In
the event that the assets of the Tenant are purchased by another corporation or
the Tenant shall merge with another corporation, such transaction shall not be
deemed to constitute an assignment, transfer or sublease hereunder.
13. ALTERATIONS
The Tenant will not change or alter the exterior of the Leased Property
without first obtaining the Landlord's consent. The Tenant will not make any
alterations, other than interior non-structural alterations not exceeding $5,000
in cumulative cost, without first obtaining the Landlord's consent. Should the
Tenant make any alterations without the required approval of the Landlord, the
Landlord may require that the Tenant remove the alterations immediately at the
Tenant's expense. Detailed plans for any alterations will be furnished to the
Landlord for approval. The Landlord's approval will be conditioned upon the
Tenant securing all governmental approvals required for the alterations. The
Landlord may require that the Tenant procure a completion bond in an amount of
100% of the estimated cost of the alterations. The Tenant will pay all claims
for labor or materials furnished, or claimed to have been furnished, to or for
the Tenant or for use in the Leased Property. Any lien filed against the Leased
Property for work or materials claimed to have been furnished to the Tenant will
be promptly satisfied or bonded against by the Tenant in a manner to the
reasonable satisfaction of the Landlord. The Tenant shall also defend for the
Landlord and at the Tenant's sole cost and expense, any action, suit or
proceeding which may be brought thereon or for the enforcement of the same, and
will pay any damages and satisfy and discharge any judgment entered therein and
save harmless the Landlord from any liability, claim or damage resulting
therefrom. Nothing in this Lease authorizing the Tenant to make repairs,
alterations, improvements and rebuilding shall authorize the Tenant to do any
act or make any contract with any contractor, subcontractor, or materialman
which shall in any way encumber or in any way affect the fee title of the
Landlord. At the expiration of this Lease, the Landlord may require the Tenant
to remove any or all of the alterations, including air lines, power panels,
electrical distribution systems, lighting fixtures, space heaters and similar
items at the expense of the Tenant and require the Tenant to restore the Leased
Property to its condition on the Lease Commencement Date.
5
<PAGE> 9
14. INSURANCE
The Landlord will obtain and keep in force policies of insurance
containing an "agreed amounts" provision covering loss or damage to the Leased
Property covering the amount of the full replacement value thereof, against all
perils, including fire, extended coverage, vandalism, malicious mischief and
special extended perils. The insurance policies will provide for payment of loss
thereunder to the Landlord or to the holders of mortgages on the Leased
Property. The Landlord will not insure the Tenant's fixtures, furniture,
equipment or tenant improvements, unless the tenant improvements have become
part of the Leased Property. The Tenant will obtain and keep in force a policy
of combined single limit bodily injury and property damage insuring the Landlord
and Tenant against liability arising out of the ownership, occupancy and
maintenance of the Leased Property and all areas adjacent thereto with a single
policy limit in an amount not less than $1,000,000 per occurrence. The policy
will ensure performance by the Tenant of the indemnity provisions in this Lease,
but the limits of the insurance will not limit the liability of the Tenant
hereunder. The Tenant shall deliver to Landlord certificates of such insurance
or certified copies of the policy or policies. If Tenant's use of the Leased
Property increases the premiums on insurance required by this Lease, the Tenant
will reimburse the Landlord the amounts of additional insurance premiums.
15. INDEMNITY
The Tenant will indemnify and hold the Landlord harmless against any
claim by or on behalf of any person arising from the Tenant's use of the Leased
Property or the conduct of its business, or from any activity permitted or
suffered in or about the Leased Property. The Tenant will further indemnify and
hold the Landlord harmless from any claim arising from any breach or default on
the Tenant's part and performance of any obligation to be performed under the
terms of this Lease or arising from any negligence of the Tenant or any of its
agents, contractors, employees or invitees and from all costs, reasonable
counsel fees, expenses and liabilities incurred in connection with any suit
brought against the Landlord by reason of any such claim. The Tenant, upon
notice from the Landlord, will defend such suit by counsel reasonably
satisfactory to the Landlord. The Tenant hereby assumes all risk of damage to
property or injury to persons in or about the Leased Property arising from any
cause and the Tenant hereby waives all claims with respect thereto against the
Landlord.
16. EXCULPATION
The Landlord will not be liable for injury to Tenant's business or for
any loss of income or for damage to the inventory or other property of the
Tenant, its agents, employees or invitees, or any person in or about the Leased
Property. The Landlord will not be responsible for injury to the Tenant, its
agents, employees, contractors or invitees, whether such damage is caused by or
results from fire, breakage, leakage, obstruction or any other cause. Any
obligation on the Landlord's part to perform hereunder for the benefit of the
Tenant will not be deemed a breach if the Landlord is unable to perform by
reason of governmental regulation, accidents, strike, labor difficulties or any
other cause beyond the Landlord's control.
6
<PAGE> 10
17. CASUALTY
In case of damage by fire or other casualty to the Leased Property, the
Landlord may elect to repair the damage. If the Landlord so elects, the damage
will be repaired with reasonable dispatch. If the damage has rendered the Leased
Property untenantable in whole or in part, there will be an equitable adjustment
in the Rent until the damage has been repaired. In determining what constitutes
reasonable dispatch, consideration will be given to delays caused by
construction problems, adjustments of insurance claims and other causes beyond
the Landlord's control. The Landlord will not be obligated to repair or replace
tenant's fixtures, furniture, equipment or tenant improvements. If the damage is
caused by the Tenant's negligence or willful conduct and is not covered by the
insurance required under this lease, the Tenant will reimburse the Landlord for
the entire cost of the repair of the Leased Property. If the Landlord does not
elect to repair the damage to the Leased Property, the Landlord may elect to
terminate this lease as of the date of the occurrence of the damage by giving
notice to the Tenant of its election to do so within sixty (60) days after the
date of the occurrence of the damage. Landlord or Tenant may cancel this Lease
on thirty (30) days notice, each to the other, in the event that more than 50%
of the Leased Property shall become untenantable.
18. RUBBISH REMOVAL
The Tenant shall keep the Leased Property clean, at its own expense,
and will remove the garbage and other refuse from said premises. The Tenant
shall not burn any materials or rubbish of any description upon said premises.
Tenant agrees to keep all accumulated rubbish in covered containers and to have
same removed regularly. In the event the Tenant fails to keep the Leased
Property in the proper condition, the Landlord may cause the same to be done for
the Tenant, and the Tenant hereby agrees to pay the expense thereof on demand,
as additional rent.
19. NO ABATEMENT
Except as may otherwise be specifically provided in this Lease, no
abatement, diminution, or reduction of the rent, or other charges, payable by
Tenant under this Lease, shall be claimed by or allowed to Tenant for any
inconvenience, interruption, cessation, or loss of business or otherwise caused
directly or indirectly by any event to which business operations may be normally
affected, or by priorities, rationing or curtailment of labor or materials, or
by war or any matter or thing resulting therefrom, or by any other causes beyond
the control of Landlord, nor shall this Lease be affected by any such causes.
20. INSPECTION
Tenant shall permit Landlord or Landlord's agents to enter the Leased
Property at all reasonable hours for the purpose of inspecting the same, or of
making repairs that Tenant may neglect or refuse to make in accordance with the
terms, covenants, and conditions of this Lease, and also for the purpose of
showing the Leased Property to persons wishing to
7
<PAGE> 11
purchase the same, and during the ninety (90) day period prior to the expiration
of this Lease shall permit inspection thereof by, or on behalf of, prospective
tenants.
21. DEFAULT
The occurrence of one or more of the following events will constitute a
material default under this lease by the Tenant:
a. The vacating or abandonment of the Leased Property by the Tenant.
b. The failure of the Tenant to make payment of rent, additional rent,
or any other payment required to be made by the Tenant hereunder when due, where
the failure will continue for a period of ten (10) days after written notice
thereof is received by the Tenant.
c. The failure of the Tenant to observe or perform any of the
provisions of this Lease to be observed or performed by the Tenant other than
described above where the failure will continue for a period of thirty (30) days
after notice thereof is received by the Tenant.
d. The making by the Tenant of any arrangement or assignment for the
benefit of the creditors, the Tenant becoming a "debtor" as defined by the
bankruptcy laws, the appointment of a trustee or receiver to take possession of
substantially all of the Tenant's assets located in the Leased Property or the
Tenant's interest in this Lease, or the attachment, execution or judicial
seizure of substantially all of Tenant's assets located in the Leased Property
or of the Tenant's interest in this Lease.
22. REMEDIES
In the event of a default by the Tenant, the Landlord may at any time
thereafter, without notice or demand and without limiting the Landlord in the
exercise of any right or remedy which Landlord may have by reason of such of the
default, take the following action:
a. Terminate the Tenant's right to possession of the Leased Property by
any lawful means, in which case the Lease will terminate and the Tenant shall
immediately surrender possession of the Leased Property to the Landlord. In such
case, the Landlord shall be entitled to recover from the Tenant all damages
incurred by the Landlord by reason of the Tenant's default including, without
limitation, the cost of recovering possession of the Leased Property, the
expenses of re-letting, including any necessary renovation and alteration of the
Leased Property, reasonable attorney's fees and any real estate commission
actually paid and the worth, at the time of award by the court having
jurisdiction thereof, of the amount by which the unpaid rent for the balance of
the term after the time of the award exceeds the amount of the rental loss for
the same period that could be reasonably avoided.
b. Maintain Tenant's right to possession, in which case this Lease will
continue in effect whether or not Tenant has abandoned the Leased Property. In
such event, the
8
<PAGE> 12
Landlord will be entitled to enforce all of Landlord's rights and remedies under
this Lease, including the right to recover the rent as it becomes due hereunder.
c. Pursue any other remedy now or hereafter available to the Landlord
under the laws of the State of New York. Unpaid installments of rent and other
unpaid obligations of the Tenant under the terms of the Lease will bear interest
from the date due at the maximum allowable by law.
d. It is agreed between Landlord and Tenant that the respective parties
hereto shall, and hereby do, waive trial by jury in any action, proceeding or
counterclaim brought by either of the parties against the other on any matters
whatsoever arising out of, or in any way connected with, this Lease, the
Tenant's use or occupancy of said premises, and/or claim or injury or damage.
23. RIGHT TO MORTGAGE
The Landlord reserves the right to subject and subordinate this Lease
at all times to the lien of any mortgage or mortgages now or hereafter placed
upon the Landlord's interest in the said Leased Property and on the land and
buildings of which the said property is a part or upon any buildings hereafter
placed upon the land of which the Leased Property forms a part. The Tenant
covenants and agrees to execute and deliver upon demand such further instrument
or instruments subordinating this Lease to the lien of any such mortgage or
mortgages as shall be desired by the Landlord and any mortgages or proposed
mortgages and provided, however, that under no circumstances shall Tenant's
rights and privileges under this Lease or any renewal thereof be diminished or
interfered with by any mortgagee, and provided, however, that any mortgagee
shall agree not to disturb Tenant in the event of Landlord's default.
Landlord will cause any such mortgage or mortgages to contain
provisions requiring the mortgagee to mail to Tenant by certified mail a copy of
each notice of breach of covenant, default or foreclosure. Should Landlord fail
to make payment of any sum due on any mortgage which encumbers the Leased
Property, the Tenant shall have the right to pay such sum and to apply the money
so advanced on account of the next maturing rent payment due to the Landlord.
24. NO WAIVER BY LANDLORD
Acceptance of rent or other charges after default in payment by the
Tenant, or any failure of Landlord to enforce the provisions of this Lease upon
any default by Tenant shall not be construed as creating custom or deferring
payment or as modifying in any way the terms of this Lease or as a waiver of
Landlord's right to terminate this Lease as herein provided, or otherwise to
enforce the provision hereof for any subsequent default.
25. CONDEMNATION
If the Leased Property or any part is taken under the power of eminent
domain or sold under the threat of eminent domain, the Landlord may elect to
terminate this Lease as of the
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<PAGE> 13
date of the occurrence of the condemnation. Any award for the taking of all or
part of the Leased Property or any payment made under the threat of the exercise
of the power of eminent domain will belong to the Landlord. The Tenant will be
entitled to any award for the loss or damage to Tenant's trade fixtures,
removable personal property, moving expenses, business interruption or loss of
profit. In the event that this lease is not terminated by the Landlord by reason
of a condemnation, the Landlord, to the extent of severance damages received by
the Landlord in connection with the condemnation, will repair any damage to the
Leased Property caused by the condemnation. If more than 10% of the floor area
of the Leased Property or more than 25% of the parking areas of the Leased
Property is taken by condemnation, the Tenant may elect to terminate this Lease
as of the date of the occurrence of the condemnation by giving the Landlord
notice of the election to do so within 60 days after the occurrence of the
condemnation.
26. TENANT'S WAIVER OF RIGHT TO REDEEM
The Tenant waives all rights to redeem under any law of the State of
New York.
27. NOTICES
All notices, demands, and communications hereunder shall be served or
given by mail and, if intended for Landlord, shall be addressed to Landlord at 3
Townline Circle, Rochester, New York 14623, or to such other address as may be
requested by Landlord in writing, and if intended for Tenant, shall be addressed
to Tenant at 770 Linden Avenue, Rochester, New York 14625, or at such other
address as may be requested by Tenant in writing. Any notice given hereunder by
mail shall be deemed delivered when deposited in a United States general or
branch post office, enclosed in a prepaid wrapper and addressed as above
provided. All such notices shall be sent by certified or registered mail, return
receipt requested.
28. QUIET ENJOYMENT
Landlord covenants that if, and so long as, Tenant pays the rent and
additional rent and other charges reserved by this Lease, and performs all the
terms, covenants and conditions of this Lease on the part of Tenant to be
performed, Tenant shall quietly enjoy the Leased Property.
29. CONSENT OF LANDLORD AND TENANT
Landlord and Tenant agree that the consent on the part of either of
them required under any provision of this Lease will not be unreasonably
withheld.
30. SIGNS
Tenant may install and maintain signs, indicating its business name
and/or activity in the Leased Property provided that Tenant obtains prior
written approval and consent of the
10
<PAGE> 14
Landlord as to size, design and location of the sign on the premises, and
obtains any governmental approvals which may be required for the installation of
such signs.
31. LIMITATION ON PERSONAL LIABILITY
The Tenant will look solely to the interest of the Landlord in the
Leased Property for the satisfaction of any claim against the Landlord. Should
the interest of the Landlord in the Leased Property be transferred, the Landlord
will be relieved from any liability to the Tenant with respect to any claim
arising after the transfer. In such event, the Landlord shall turn over to its
grantee all monies and security, if any, then held by Landlord on behalf of
Tenant and shall assign to such grantee all right, title and interest of
Landlord thereto, it being understood that the covenants and agreements
contained in this Lease on the part of Landlord to be performed shall, subject
as aforesaid, be binding on Landlord, its successors and assigns.
32. WAIVER OF SUBROGATION
Landlord and Tenant each hereby agree that, to the extent permitted by
law and by their respective policies, neither of them shall be liable to the
other for damage or destruction to the Leased Property or the buildings of which
the Leased Property is a part or to any of the contents thereof, whether owned
by Tenant or Landlord, caused by events insured against or for which insurance
is required hereunder covering such damaged or destroyed property.
33. CONSTRUCTION
This Lease contains all of the agreements of the parties relating to
this Lease or to the Leased Property. This Lease replaces all prior Leases and
Amendment thereto between the parties hereto, including a Lease dated October
18, 1993, and Amendment dated October 7, 1994, which Lease and Amendment are
hereby cancelled. There have been no representations made by the Landlord other
than as set forth herein. This Lease may not be modified except by a written
instrument duly executed by the parties. Receipt of rent with knowledge of a
default by the Tenant will not condone such default. The failure of the Landlord
to enforce any of the provisions herein for any length of time will not be
deemed a waiver of its rights set forth in this Lease, but such waiver may only
be made by an instrument in writing signed by the Landlord. Time is of the
essence with respect to all payments and performance required of the Tenant.
This Lease will bind and insure to the benefit of the parties and their
respective heirs and representatives, successors and assigns. The invalidity of
any provision will in no way affect the validity of any other provision. Either
party upon the request of the other will execute, acknowledge and deliver to the
other a memorandum of this Lease for recording purposes. No remedy or election
herein will be deemed exclusive but will, wherever possible, be cumulative with
all other remedies at law or in equity. This Lease will be governed by the laws
of the State of New York.
11
<PAGE> 15
34. INDUSTRIAL DEVELOPMENT BOND FINANCING
Tenant acknowledges that Landlord has financed the construction of the
demised premises through Industrial Development Bonds as issued by the County of
Monroe Industrial Development Agency. Said bonds are issued in compliance with
Section 103 et seq. of the Internal Revenue Code of the United States. During
the term of this lease and any renewals thereof, Tenant covenants not to do
anything to affect the status of the bonds as tax exempt under the Internal
Revenue Code. If any action of Tenant shall result in the imposition of an
interest rate higher than the rate at which said bonds were issued then and in
that event the annual rental provided for hereof, shall be increased by the
amount of increase of annual debt service for such bonds.
IN WITNESS WHEREOF, the parties hereunto set their hands and seals the
day and year first above written.
LINDEN PROPERTIES
LANDLORD
By: /s/ Elliot Landsman
--------------------------------
MAGNETIC TECHNOLOGIES CORPORATION
TENANT
By: /s/ Gordon H. McNeil
-------------------------------
STATE OF NEW YORK )
) ss
COUNTY OF MONROE )
On the 4th day of November, 1996, before me personally came Elliott
Landsman, to me known and known to me to be the individual described in, and who
executed, the foregoing instrument, and he/she acknowledged to me that he/she
executed the same.
/s/ Betty J. Sykes
-----------------------------------
Notary Public
BETTY J. SYKES
Notary Public, State of New York
Qualified in Ontario County
12 Commission Expires Aug. 14, 1997
<PAGE> 16
STATE OF NEW YORK )
)ss:
COUNTY OF MONROE )
On the 5th day of November, 1996, before me personally came Gordon H.
McNeil to me known, who being by me duly sworn, did depose and say that he/she
resides at No. 44 Oak Meadow Trail, Pittsford, NY, that he/she is the President
and CEO of Magnetic Technologies Corporations, the corporation mentioned in,
and which executed, the foregoing instrument; that he/she knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said corporation;
and that he/she signed his/her name thereto by like order.
/s/ Susan M. Weise
------------------------------
Notary Public
SUSAN M. WEISE, # 4804145
NOTARY PUBLIC, State of N.Y. Monroe Co.
My Commission Expires 5/31/98
13
<PAGE> 1
Exhibit B
MASTER LEASE AGREEMENT
----------------------
#79-0512001
-----------
This Master Lease Agreement ("Agreement") is made as of May 12, 1997 between
Real Lease, Inc., ("Lessor") having its principal place of business at 20 N.
Main St., Pittsford, NY, and Magnetic Technologies Corporation ("Lessee")
Corporation having its principal place of business at 770 Linden Avenue,
Rochester, NY 14625.
1. LEASE: Subject to the terms and conditions contained herein, Lessor
hereby leases to Lessee and Lessee leases from Lessor, various items of
personal property (collectively the "Equipment") or individually an "Item"
described in one or more Equipment Schedules to be executed substantially
in the form attached hereto. The terms "Equipment" and "Item" include, as
applicable, any associated software systems and programming. Each
Equipment Schedule incorporates the terms and conditions of this
Agreement, and shall constitute separate, distinct and independent lease
and contractual relationship between Lessor and Lessee. The term "Lease"
shall mean the applicable Equipment Schedule which incorporates the terms
and conditions of this Agreement and this Agreement. The term "Subsidiary"
means any corporation, the majority of the shares of voting stock of which
at any time outstanding is owned directly or indirectly by Lessee or by
one or more of its other subsidiaries or by Lessee in conjunction with one
or more of its other subsidiaries. By execution of this Agreement, the
parties hereto agree to the terms and conditions pursuant to which
Equipment may be leased from time to time by Lessor to Lessee.
2. TERMS AND RENTAL PAYMENTS: The terms of this Agreement shall
commence on the date set forth above and shall continue in effect
thereafter so long as any "Lease" remains in effect. The term of each
Equipment Schedule as to all or any item of Equipment designated on any
Equipment Schedule shall commence on the first day of the month next
succeeding the Acceptance Date, ("The Acceptance Date" is defined as the
date the Lessee executes the Certificate of Acceptance for such
equipment); and shall continue for a period ending that number of months
from the date the first periodic rental payment is due as specified on the
applicable Equipment Schedule. Lessee shall pay to LESSOR as BASIC RENT
("BASIC RENT") for each item the following:
(i) On the ACCEPTANCE DATE, an amount equal to the MONTHLY RENT (as
defined in the EQUIPMENT SCHEDULE) multiplied by a fraction, the numerator
of which is the number of days remaining in the month of acceptance
including the ACCEPTANCE DATE and the denominator of which is the actual
number of days in that month. (ii) On the first day of the month next
succeeding the ACCEPTANCE DATE and on the first of each month thereafter,
an amount equal to the MONTHLY RENT for the item. If the ACCEPTANCE DATE
occurs on the first of the month, BASIC RENT under (i) shall be due on the
ACCEPTANCE DATE and MONTHLY RENT under this (iii) shall commence on the
first of the next succeeding month.
Rent shall be specified and payable in accordance with the terms as set
forth in the Equipment Schedule. All payments shall be made at the office
of Lessor at 20 N. Main St., Pittsford, NY or as otherwise directed by
Lessor in writing.
If Lessee fails to pay any periodic rent payment or other sum to be paid to
Lessor after ten days of the due date, then, upon demand, Lessee shall pay
a late charge of five cents per dollar on, and in addition to, the amount
of such payment but not exceeding the maximum amount, if any, permitted by
law ("late Charge").
3. NET LEASE: This Lease is a net lease, it being the intention of the
parties that all costs, expenses and liability associated with the
Equipment or its lease shall be borne by Lessee unless expressly agreed to
the contrary in the Lease. Lessee's agreement to pay all obligations
hereunder, including by not limited to rent, shall be absolute and
unconditional and such agreement is for the benefit of Lessor and its
assignees. Lessee's obligations shall not be subject to any abatement,
determent, reduction, setoff, defense, counterclaim or recoupment for any
reason whatsoever. Except as may be otherwise expressly provided herein,
the Lease shall not terminate, nor shall such obligations of Lessee be
affected, by reason of any defect in or damage to, or any loss or
destruction of, or obsolescence of, the Equipment or any Unit thereof from
any cause whatsoever, or the interference with the use thereof by any
private person, corporation or governmental authority, or as a result of
any war, riot, insurrection or Act of God. It is the express intention of
Lessor and Lessee that all rent and other sums payable by Lessee hereunder
shall be, and continue to be, payable in all events throughout the term
hereof. The Lease shall be binding upon the Lessee, its successors and
assignees and shall inure to the benefit of Lessor and its successors and
assignees, and all references to the Lessor shall include such successors
and assignees.
4. LOCATION AND USE OF EQUIPMENT: Lessee shall be solely responsible to
install the Equipment or have it installed, to inspect the Equipment
during installation, upon completion of installation to test the Equipment
and to accept it pursuant to the terms of this Lease. The full risk of
loss arising out of or in connection with delays, partial performance or
non performance by supplier(s) shall be on Lessee, and Lessor shall not be
liable for specific performance of this Lease or for damages if, for any
reason, any supplier delays or fails to fill or improperly fills an order.
During the term of this Lease, the Equipment shall be located at the
address specified in the Equipment Schedule and shall not be removed from
that address without the prior written consent of the Lessor. Lessee
covenants and warrants that during the period any Equipment is leased to
Lessee, or its successors or assigns, the Equipment will at all times be
used and operated in compliance with the laws of the jurisdiction in which
it is located, and in compliance with all acts, rules, regulations, and
orders of any commission, board or other legislative, administrative, or
judicial body or officer having power to regulate or supervise the use or
operation of the Equipment. Lessee shall not install or use the Equipment
in such a manner or in such circumstances that any part of the Equipment
is deemed to be an accession to other personal property or deemed to be
real property or a fixture thereon.
5. ERRORS IN ESTIMATED COST: As used herein, "Total Cost" means the
cost to Lessor of purchasing and delivering the Equipment to Lessee,
including taxes and transportation and other charges. The amount of each
rental payment set forth on the Equipment Schedule is based on the Total
Cost initially set forth which is an estimate, and each shall be adjusted
proportionally if the actual cost of the Equipment differs from said
estimate. Lessee hereby authorizes Lessor to correct the figures set forth
on the Equipment Schedule(s) when the actual cost is known, and to add to
the amount of each rental payment any sales, use or other tax that may be
imposed on or measured by rental payments. If the actual cost of the
Equipment differs from the estimated cost by more than twenty percent (20%)
however, either party at its option may terminate the Lease with respect to
the Equipment as to subsequent obligations by giving written notice to the
other party within fifteen (15) days after receiving notice of the actual
cost or the corrected rentals and Lessee shall reimburse and indemnify
Lessor for any existing obligation and/or expenses incurred by Lessor such
as but not limited to, open purchase orders and progress payments made to
supplier(s). In this event all equipment and items shall be returned at
Lessee's expense.
6. INSPECTION: Lessee shall, whenever requested, advise Lessor of the
exact location and condition of the Equipment and shall give Lessor
immediate notice of any attachment or other judicial processes, liens or
encumbrances affecting the Equipment and indemnify and save Lessor
harmless from any loss or damage caused thereby. Lessor may for the
purpose of inspection, at all reasonable business hours, enter any
building or place where the Equipment is located. Lessor shall be entitled
to review Lessee's maintenance records relating to the Equipment.
7. PRESERVATION OF LESSEE'S EXISTENCE AND BUSINESS: (a) Lessee will
preserve and keep in full force and effect Lessee's existence, rights,
licenses and franchises and those of any Subsidiaries, necessary and
material to Lessee's and Subsidiaries' operations taken as a whole. (b)
Lessee will not make or permit to be made any material change in the
character of Lessee's business or operations.
8. FINANCIAL INFORMATION AND REPORTING: (a) Prior to and during the
term of the Lease, Lessee will furnish Lessor, when reasonably available,
with Lessee's audited financial statements. If Lessee is a subsidiary of
another company, Lessee shall supply such parent's financial statements
and guarantees as are acceptable to Lessor. Lessee shall also provide
Lessor with such other statements and information concerning the Lessee's
business condition, property, assets, including the Equipment, as Lessor
may, from time to time, reasonably request. This obligation on the part of
the Lessee includes litigation, claims of creditors, governmental claims
and the like.
<PAGE> 2
(b) Lessee will at all times maintain true and complete records and books
of accounts including, without limiting the generality of the foregoing,
appropriate reserves for possible losses and liabilities, all in accordance
with generally accepted accounting principles consistently applied.
(c) Lessee shall permit, and cause any Subsidiary to permit,
representatives of Lessor (i) to visit and inspect any of the properties of
Lessee or any Subsidiary (ii) to examine its or their corporate or
partnership books and records, (iii) to make extracts or copies of such
books and records, and (iv) to discuss its or their affairs, finances with
its or their officers or partners, as applicable. The foregoing may be done
at any time within regular business hours.
(d) Lessee will at all times maintain true and complete records and books
of account including, without limiting the generality of the foregoing,
appropriate reserves for possible losses and liabilities, all in accordance
with generally accepted accounting principles consistently applied.
(e) Lessee shall permit, and cause any Subsidiary to permit,
representatives of Lessor (i) to visit and inspect any of the properties of
Lessee or any subsidiary (ii) to examine its or their corporate or
partnership books and records, (iii) to make extracts or copies of such
books and records, and (iv) to discuss its or their affairs, finances and
accounts with its or their officers or partners, as applicable. The
foregoing may be done at any time within regular business hours.
(f) Lessee will promptly notify Lessor in writing of the commencement
of any litigation to which Lessee or any of its affiliates may be a party
(except for litigation in which Lessee's (or the affiliate's) contingent
liability is fully covered by insurance) which if decided adversely to
Lessee would adversely affect or impair the title of Lessor to the
equipment of which, if decided adversely to Lessee would materially
adversely affect the business operations or financial condition of Lessee.
In addition, Lessee will immediately notify Lessor, in writing, of any
judgment against Lessee, if such judgment would have the effect described
in the preceding sentence.
9. PAYMENT OF TAXES, DEBTS AND OBLIGATIONS: (a) Lessee shall pay all
taxes, assessments, fees, charges, penalties and fines imposed upon the
Equipment and/or arising out of the lease, use, possession or operation
thereof and whether levied or assessed against Lessee or against Lessor.
All Taxes, fees and similar charges imposed on the ownership, possession
or use of the Equipment during the term of this Lease shall be paid by the
Lessee. In case of failure of Lessee to pay said taxes, fees and similar
charges, Lessor may pay the same, and the amount thereof shall be payable
by Lessee as additional rent with the next rental payment.
(b) Lessee will cause to be paid and discharged all its obligations
when due and all lawful taxes, assessments and governmental charges or
levies imposed upon Lessee or any Subsidiary, or upon any property, real,
personal or mixed, belonging to Lessee or any Subsidiaries, or upon any
part thereof, before the same shall become in default, as well as all
lawful claims for labor, materials supplies which, if unpaid, might become
a lien or charge upon the property or any part of it or the equipment.
Notwithstanding the previous sentence, neither Lessee, if permitted by
law, nor any Subsidiary shall be required to cause to be paid and
discharged and obligation, tax assessment, charge, levy or claim so long
as its validity is contested in the normal course of business and in good
faith by appropriate and timely proceedings and Lessee or any Subsidiary,
as the case may be, sets aside on its books adequate reserves in the
amount of the contested tax or charge with respect to each tax,
assessment, charge, levy or claim so contested, nor shall Lessee nor any
Subsidiary be required to pay or discharge any trade indebtedness which is
not past its stated due date by more than thirty (30) days.
10. MAINTENANCE: Lessee shall enter into and maintain in force
throughout the term of this Lease a maintenance agreement with the
equipment manufacturer(s), or such other qualified maintenance
organization as Lessee may select, covering maintenance of the Equipment.
Lessee will cause the Equipment to be kept in good working order, repair
and maintenance in accordance with the provisions of each maintenance
agreement and will make all necessary adjustments and repairs to the
Equipment. Any parts installed or replacements made by Lessee to any item
pursuant to Lessee's obligation to maintain the Equipment shall be
considered accessions and title thereto shall immediately vest in Lessor.
Each manufacturer or service organization is hereby authorized to accept
the directions of Lessee with respect thereto. Lessee shall allow the
manufacturer(s) or service organization full and free access to the
Equipment. All maintenance and service charges, whether under a
maintenance agreement or otherwise, shall be borne by Lessee, including
the expense, if any, of a manufacturer's or service organization's
customer engineer charged in connection with maintenance and repair
services. Lessee covenants that the Equipment will at all times be used and
operated in accordance with each manufacturer's instructions and in
compliance with any restriction contained in each manufacturer's
warranties regarding the Equipment.
11. ALTERATIONS AND ATTACHMENTS: Upon prior written notice to Lessor,
Lessee may, at its own expense, make alterations in or add attachments to
the Equipment provided any alteration or attachment shall not interfere
with the normal operation of the Equipment or diminish the value of the
collateral or result in a loss of manufacturer's warranty of the
Equipment. The manufacturer may incorporate engineering changes or make
temporary alterations to the Equipment upon request by Lessee. All such
alterations and attachments, unless Lessor shall otherwise agree in
writing, shall be removed by Lessee and the Equipment restored to its
original condition, reasonable wear and tear excepted, upon termination of
this Lease. If the alteration or attachment interferes with the normal and
satisfactory operation or maintenance of the Equipment in a manner as to
increase the cost of the Equipment, or create a safety hazard. Lessee
shall promptly remove the alteration or attachment and restore the
Equipment to its normal condition.
12. INSURANCE: NOTICE OF ACCIDENT: (a) At its sole expense, Lessee shall secure
and maintain in full force and effect throughout the term of all Equipment
Schedules and any extension or renewals thereof, insurance against all
risks including, but not limited to, theft, damage, or destruction of the
Equipment in an amount equal to the aggregate Total Cost of all Equipment
Schedules written in the broadest form available on usual commercial terms
and with carriers acceptable to Lessor. Lessee shall also maintain public
liability insurance satisfactory to Lessor and with at least the minimum
limits as set forth in the Equipment Schedule.
(b) Upon execution of the Certificate of Acceptance, Lessee shall deliver
the policy or policies or duplicates or certificates thereof, to Lessor.
Lessee shall maintain a loss payable endorsement on all such policies
in favor of Lessor and its successors and assigns and shall afford to
Lessor and its successors and assigns such additional protection as Lessor
and its successors and assigns shall reasonably require. All such insurance
policies shall name Lessor, its successors and assigns, as additional
insured and expressly provide that any obligations imposed upon the insured
(including, without limitation, the obligation to pay premiums) shall be
the obligation solely of Lessee and not the obligations of Lessor, its
successors and assigns. Each policy shall expressly provide that (1) the
insurance as to Lessor and its successors and assigns shall not be
invalidated by any act, omission or neglect of Lessee, (2) the same may not
be canceled, modified or allowed to lapse (for failure to renew or
otherwise, without at least thirty (30) days prior written notice to Lessor
or its successors and assigns), and (3) the insurance shall be primary,
without right or contribution of any other insurance carried by or on
behalf of Lessor with respect to its interests.
In the event that any policies insuring against liability risks described
above shall now or hereafter provide coverage on a "claim made" basis.
Lessee shall continue to maintain such policies in effect for a period of
not less than three years after the expiration of the Lease term of any
Equipment Schedule.
(c) Lessor and its successors and assigns may apply the proceeds of
insurance to replace or repair the Equipment and/or to satisfy Lessee's
obligation hereunder, as determined in Lessors's sole discretion. If Lessee
fails to pay when due any insurance premium for any policy written
hereunder, then Lessor may make such premium payment and add the amount
thereof to the next rent payment, and such premium amounts shall become
rent. Lessee appoints Lessor as Lessee's attorney-in-fact to make any claim
for, to receive payment for and to execute and endorse in the name of the
Lessee any documents, checks or other instruments in payment for loss,
theft or damage under any such insurance policy. Lessor shall be under no
duty to ascertain the existence of any insurance coverage or to examine any
certificate of insurance or other evidence of insurance coverage or to
advise Lessee in the event the insurance coverage does not comply with the
requirements of this Agreement.
(d) Lessee will maintain, and cause any Subsidiaries to maintain,
insurance from duly licensed and responsible insurers on all property of
Lessee and any Subsidiaries to its full insurable value, except to the
extent limited by applicable insurance law. This insurance shall be
against risks of fire and all other risks as fall within "extended
coverage" as that term is generally understood in the insurance industry.
Lessee shall also maintain, and cause any Subsidiaries to
<PAGE> 3
maintain, additional insurance in such amounts and against such risks,
including, without limitation product liability, personal injury, property
damage, and workers compensation, as is usually carried by owners of
similar businesses of similar size and profits or as Lessor may reasonably
require.
Lessee will promptly notify the appropriate insurer, Lessor and any
assignee, of any accident or occurrence which may become the basis of a
claim against the insured. In connection with any claim against Lessor
and/or Lessee arising out of the ownership, operation, maintenance and
use of the Equipment. Lessee agrees to cooperate with Lessor in defending
against such claims, including making Lessee's employees available to
Lessor without charge.
13. INDEMNIFICATION: To the fullest extent permitted by law, Lessor, its
officers, employees, agents, successors and assigns, shall not be liable
to Lessee for, and Lessee shall and does indemnify and hold Lessor, its
officers, employees, agents, successors and assigns, harmless with respect
to any third party from any liability (including liability for Lessee
negligence), claim, loss, damage or expense (including litigation expense)
of any kind or nature arising out of this Lease, or the transactions
contemplated in this Lease, including, but not limited to: (a) the
inadequacy of any item of Equipment for any purpose; (b) any deficiency or
defect of any item of Equipment; (c) the use or performance or maintenance
of any item of Equipment; (d) any interruption or loss of service, use or
performance of any item of Equipment or (e) any loss of business or other
consequential damage whether or not resulting from any of the foregoing.
IN PARTICULAR, LESSOR AND ITS SUCCESSORS AND ASSIGNS SHALL NOT
BE LIABLE FOR INJURIES TO PERSONS OR DAMAGE TO ANY ITEM OF EQUIPMENT OR
OTHER PROPERTY UNDER ANY THEORY INCLUDING STRICT LIABILITY, AND LESSEE
SHALL INDEMNIFY AND SAVE LESSOR AND ITS SUCCESSORS AND ASSIGNS HARMLESS
FROM ANY SUCH LIABILITY AND ALL COSTS AND EXPENSES IN DEFENDING THE SAME.
This obligation to indemnify shall apply from the date of the execution of
the Equipment Schedule out of which the claim arises, notwithstanding
that the lease term may not have commenced. All of Lessor's and its
successors' and assigns' rights under this section shall survive the
termination of this Lease. However Lessee shall not be required to
indemnify Lessor or its successors or assigns for claims arising from
events which occur after the Equipment has been redelivered to Lessor, its
successors or assigns.
14. RISK OF LOSS: (a) Lessee hereby assumes and shall bear the entire risk of
loss, theft, damage and destruction of the Equipment, whether partial or
complete, from any cause whatsoever. No loss, theft, damage or destruction
of Equipment shall relieve Lessee of the obligation to pay rent or any
other obligation of this Lease, and, except as provided below, this Lease
shall remain in full force and effect. Lessee shall promptly notify lessor
in writing of any such loss, theft, damage or destruction of the
Equipment. Lessor shall not be liable to lessee for any loss, damage or
expense of any kind or nature, caused directly or indirectly by any item
of Equipment or by the use, maintenance, repair, failure, destruction or
damage of any Equipment.
(b) In the event of damage of any kind whatsoever to the Equipment (unless
the same is damaged beyond repair), Lessee, at the option of Lessor, shall
at Lessee's expense (i) place the same in good repair, condition and
working order, or (ii) replace the same with like Equipment of the same or
a later model, and in good repair, condition and working order and
provide Lessor good and valid title thereto.
(c) In the event that the Equipment is lost, stolen, destroyed or damaged
beyond repair (any such event is referred to as an "Event of Loss"),
Lessee, at the option of Lessor, shall (i) at Lessee's expense replace the
same with like Equipment of the same or later model, in good repair,
condition and working order and provide Lessor good and valid title
thereto or (ii) pay to Lessor an amount equal to the unpaid balance of the
rent and any other sums then due or past due, (plus the Stipulated Loss
Value attributable to the Equipment as set forth on Attachment 1 to the
Equipment Schedule) calculated on the rental payment date immediately
preceding the date of the loss (this option shall only be applicable if a
Stipulated Loss Value table is referenced in the Equipment Schedule) or
(iii) pay to Lessor an amount equal to the unpaid balance of the rent and
any other sums then due plus, the balance of any remaining rents
(discounted at the rate of six (6) percent per annum) attributable to the
Equipment during the term and extension thereof, if any, of this Lease.
Upon such payment Lessee's obligation to pay further rent for such
Equipment shall cease, and Lessee thereupon shall become entitled to the
Equipment paid for "as-is-where-is", without recourse or warranty, express
or implied, with respect to any matter whatsoever.
(d) To the extent of Lessee's expense actually incurred to repair or
replace the Equipment or of Lessee's payment to Lessor for the loss,
theft, damage or destruction of any item of Equipment, Lessee shall then
be entitled to receive from Lessor any insurance or recovery received by
Lessor in connection with such loss, theft, damage or destruction, and any
amount of insurance or recovery received by Lessor in excess of Lessee's
expenses actually incurred or paid to Lessor shall belong to Lessor.
Lessor shall not be obligated to deliver to Lessee any insurance or
recovery received by Lessor in connection with any loss, theft, damage or
destruction until Lessee has provided Lessor with such documents as Lessor
shall deem necessary or desirable for purposes of evidencing that the
Equipment has been repaired or replaced in accordance with this Section
14.
15. OWNERSHIP OF EQUIPMENT: The Equipment shall at all times remain personal
property, and title thereto shall remain solely in Lessor or Lessor's
Assignee. The Equipment may be removed by Lessor at any time after
termination of this Lease. Lessee shall affix tags, decals or plates to
the Equipment indicating Lessor's ownership, which type of tag, decal or
plate and location may be specified by Lessor, and Lessee shall not permit
their removal or concealment. Lessee shall cause each item of Equipment to
be kept numbered with the serial number specified in the Certificate of
Acceptance. Lessee shall, at its own expense, protect and defend Lessor's
title in the Equipment against all claims and liens of Lessee's creditors
and keep the Equipment free and clear of all claims, liens and
encumbrances except those resulting from the agreements or acts of Lessor.
At Lessor's request Lessee shall obtain and record such instruments and
take such steps as may be necessary to prevent any entity from acquiring
any rights in the Equipment by reason of the Equipment being claimed as or
deemed as real property.
In the event this Agreement or any Equipment Schedule thereto shall be
adjudged or determined to be a Lease, the Lessor's retention of title to
the Equipment shall be construed to be, and Lessee does hereby grant to
lessor, a security interest in the Equipment, insurance covering the
Equipment and all of the proceeds of the foregoing.
16. ASSIGNMENT: Neither this Lease nor Lessee's rights hereunder shall be
assignable in whole or in part by Lessee except with Lessor's prior
written consent, and the provisions hereof shall bind any permitted
successors and assigns of Lessee. Lessor shall have the right to assign
this Lease or any part thereof. If Lessor assigns the rental reserved
herein or all or any of Lessor's other rights hereunder, or amounts
equal thereto, the right of the Assignee to receive the rentals as well as
any other right of the Assignee shall not be subject to any defense,
setoff, counterclaim, or recoupment which may arise out of any breach or
obligation of Lessor in connection herewith or by reason of any other
indebtedness or liability at any time owing by Lessor to Lessee. All
rentals due hereunder shall be payable to the Assignee by Lessee whether
or not this Lease is terminated by operation of Law or otherwise,
including without limitation, termination arising out of bankruptcy,
reorganization or similar proceeding involving Lessor. On receipt of
notification of such assignment, Lessee, subject to its rights hereunder,
shall become the pledgeholder of the Equipment for and on behalf of the
Assignee and will relinquish possession thereof only to the Assignee or
pursuant to its written order. Lessee, on receiving notice of any such
assignment, shall abide thereby and make payment as may herein be
directed. Following any such assignment the term "Lessor shall be deemed
to include or refer to Lessor's Assignee, provided that no such Assignee
shall be deemed to assume any obligation or duty imposed upon Lessor
hereunder, and Lessee shall look only to Lessor for performance thereof.
Lessee is further directed that after assignment of a Lease only Assignee
shall have the right or power to compromise, settle, extend or otherwise
negotiate the terms of payment under that Lease.
17. SECURITY INTEREST: Where appropriate, Lessor shall file all necessary
documents, including UCC financing statement, in connection with this Lease
so as to perfect Lessor's security interest under the Lease. Lessee shall
execute and deliver to Lessor such documents (including UCC financing
statements) as Lessor shall deem necessary or desirable for purposes of
evidencing, protecting or recording the rights and interest of Lessor in
the Equipment or this Lease and in furtherance of the performance of the
terms and conditions of this Lease. All reasonable expenses (including UCC
search and filing fees) related thereto shall be paid by Lessee. Lessee
hereby irrevocably appoints Lessor and Lessor's assignee as its lawful
attorney and agent to execute UCC financing statements on Lessee's behalf
and hereby authorizes Lessor and Lessor's assignee to file, at Lessee's
expense, such UCC financing statements in any appropriate public office.
18. EVENTS OF DEFAULT AND LESSOR'S REMEDIES: (a) Each of the following
events shall constitute an event of default ("Event of Default")
hereunder: (i) Lessee fails to pay any rent or other amount due hereunder
within ten (10) days after the same is due and payable; or (iii) Lessee
fails to perform any other
<PAGE> 4
obligation or observe any condition of this Lease required to be performed
or observed by Lessee; or (iii) any representation, warranty or statement
made to Lessor by Lessee (or any guarantor of Lessee's obligation under
this Agreement) in connection with the transactions contemplated under this
Lease shall have been false in any material respect when made; or (iv)
Lessee attempts to sell, transfer, encumber, part with possession of,
assign or sublet or move (except as expressly permitted by the provisions
hereof) any item of Equipment; or (v) Lessee fails to insure (pursuant to
Section 12 hereof) any item of Equipment; or (vi) Lessee fails to deliver
to Lessor any documents required by Lessor under the Lease; or (vii)
Lessee (or any guarantor of Lessee's obligations under this Agreement) is
in default under any other agreement with Lessor, Lessor's Assignee or any
of its affiliates; or (viii) Lessee ceases doing business as a going
concern; or (ix) Lessee (or any guarantor of Lessee's obligations under
this Agreement) shall consolidate with or merge into any other entity, or
convey, transfer or lease substantially all of its assets to any other
entity; or (x) the corporate existence of Lessee (or any guarantor of
Lessee's obligations under this agreement) shall terminate; or (xi) any of
Lessee's issued and outstanding shares of capital stock are sold,
assigned, pledged, transferred, exchanged in a corporate reorganization or
otherwise disposed of or new shares of such stock are issued and such
sale, assignment, pledge, transfer, exchange, issuance or other disposition
results in vesting the "control" of such corporation in a person (or
persons) not presently having control and not approved by Lessor in
writing prior to such vesting (except for involuntary transfers of such
stock by operation of law.) "Control" shall be deemed vested in the person
or persons owning more than fifty percent (50%) of the number of issued
and outstanding shares of such stock, however designated, or holding more
than fifty percent (50%) of the voting power for the election of members
of the Board of Directors of the Lessee; or (xii) Lessee (a) incurs any
accumulated funding deficiency within the meaning of the Employee
Retirement Income Security Act of 1974, as amended from time to time and
the regulations thereunder, equal to 5% of Consolidated Tangible Net Worth
of Lessee or (b) incurs any liability of comparable size to the Pension
Benefit Guaranty Corporation; or (xiii) Lessee or any subsidiary fails to
comply with the provisions of the Fair Labor Standard Act of 1938, as
amended; or (xiv) Lessee is, or permits any subsidiary to be, in violation
of any law or regulation, order, writ, injunction or decree of any court
of governmental instrumentality or is in breach of any agreement or
instrument to which Lessee or any Subsidiary is subject or is in default
thereunder; or (xv) Lessee (or any guarantor or Lessee's obligations under
this Agreement) applies for or consents to the appointment of a receiver,
trustee, assignee, custodian or liquidator of its business or any
substantial part of its property; or (xvi) Lessee (or any guarantor of
Lessee's obligations under this Agreement) fails to pay its debts
generally as they become due; or (xvii) Lessee (or any guarantor of
Lessee's obligations under this Agreement) makes a general assignment for
the benefit of creditors; or (xviii) Lessee (or guarantor of Lessee's
obligations under this Agreement) falls within sixty (60) days to lift any
execution, garnishment or attachment of such consequences as will impair
its ability to carry on its operations under this Lease; or (xix) Lessee
(or guarantor of Lessee obligations under this Agreement) commences (as
the debtor) a case in bankruptcy (including a petition for reorganization
or arrangement) under the United States Bankruptcy Code or a proceeding
under any state or federal insolvency law; or (xx) a case in
bankruptcy or any other proceeding (including a petition for
reorganization or arrangement) under the United States Bankruptcy Code or
any case or proceeding under any other insolvency law shall be commenced
against Lessee (or guarantor of Lessee's obligations under this
Agreement), (as the debtor) involuntarily or a decree or order for relief
against Lessee (or guarantor of Lessee's obligations under this Agreement)
(as the debtor) shall be entered in any court of competent jurisdiction,
and such case, proceeding or decree or order is not dismissed within forty
(40) days after such commencement or entry, or Lessee (or guarantor of
Lessee's obligations under this Agreement) shall consent to or admit the
material allegations against it in any such case or proceeding; or (xxi) a
trustee, assignee, receiver, custodian or agent (however named) is
appointed or authorized to take charge of any substantial part of Lessee's
for any guarantor of Lessee's obligations under this Agreement) property.
(b) Upon the occurrence of any event of Default, Lessor may declare the
Lessee in default. At its option, Lessor may declare a default in all
Leases and any other agreement between Lessor, or any affiliate of Lessor
and Lessee except as specifically exempted therefrom by Lessor in such
declaration. In the case of an Event of Default, Lessor or its agents
shall have the right, at their option, to exercise any or all of the
rights and remedies available to a secured party under the Uniform
Commercial Code and, in addition, to do any or all of the following: (i)
to declare immediately due and payable without notice or demand to Lessee
an amount equal to the balance of unpaid rent and any other sums then due
plus the balance of the rent and any other sums to become due
(discounted at a rate of four (4) percent per annum) during the term and
extension thereof, if any, of this Lease and/or (ii) to sue for and
recover from Lessee an amount equal to the unpaid balance of rent and any
other sums then due plus the balance of rents and any other sums to become
due (discounted at a rate of four (4) percent per annum), during the term
and extension thereof, if any, of this Lease (hereinafter "Unpaid Rent");
and/or (iii) to take possession of any or all item(s) of Equipment without
demand or notice wherever the same may be located without any court order
or other process of law. Upon taking possession of any or all Item(s) of
Equipment, Lessor at its option may (i) lease the repossessed Equipment to
any third party on such terms and conditions as Lessor may determine, or
(ii) sell the Equipment or any part thereof at public auction or at
private sale. In the event Lessor re-lets the repossessed Equipment, then
Lessor shall credit against the Unpaid Rent the present value of the
aggregate of the rent to be received from the re-lease during the
remaining term of the applicable Equipment Schedules (discounted at a rate
equal to the sum of the prime interest rate in effect at OnBank & Trust
Co., on the date such re-lease is entered into plus 2%). In the event
Lessor sells the repossessed Equipment, then Lessor shall credit all
amounts received from the sale, less expenses incurred in connection
therewith, to the Unpaid Rent due. Lessee hereby agrees to peaceably
deliver the Equipment to Lessor upon demand after an Event of Default is
declared by Lessor; Lessee waives any and all damages occasioned by such
taking possession. Any such taking of possession shall not constitute a
termination of this Lease and shall not relieve Lessee of its original
obligation hereunder unless Lessor expressly so notifies Lessee in
writing.
(c) Should any proceeding be instituted by Lessor to recover any monies
due and/or to become due hereunder and/or for the possession of the
Equipment, Lessee shall pay a reasonable sum as attorneys fees and
collection agency fees, court costs and repossession expenses.
The exercise, or the beginning of exercising by the Lessor of any one or
more of such remedies described above shall not constitute the exclusive
election of such remedies and shall not preclude the simultaneous or later
exercise by Lessor of any or all of such other remedies.
19. LESSEE'S AND LESSOR'S WARRANTIES: (a) Lessee hereby warrants and represents
to Lessor, its successors and assigns that: (i) Lessee's execution and
performance of this Lease has been duly authorized by all necessary
corporate action and is not now and will not be in conflict with Lessee's
charter or by-laws, or with any indenture, contract, or agreement by which
it is bound, or with any statute, judgment, decree, rule or regulation
binding upon it; (ii) no consent or approval of any trustee or holder of
any indebtedness or obligation of Lessee, and no consent or approval of any
governmental authority, is necessary for Lessee's execution of performance
of this lease; (iii) there is no litigation or other proceeding pending, or
to the best of the Lessee's knowledge, threatened against or affecting
Lessee which, if decided adversely to Lessee would adversely affect or
impair the title of Lessor to the Equipment or which, if decided adversely
to Lessee would materially adversely affect the business operations or
financial condition of Lessee; (iv) all balance sheets, statements of
profits and loss and other financial data that have been delivered to
Lessor with respect to Lessee are complete and correct in all material
respects, fairly present the financial condition of the Lessee on the dates
for which, and the results of its operations for the periods for which, the
same have been furnished and have been prepared in accordance with
generally accepted accounting principles consistently applied; (v) there
has been no material adverse change in the condition of Lessee, financial
or otherwise, since the data of the most recent financial statements
delivered to Lessor (vi) this Lease is valid and binding and enforceable
against Lessee in accordance with its terms, subject to enforcement
limitations imposed by rules of equity or by terms, subject to enforcement
limitations imposed by rules of equity or by bankruptcy or similar laws.
Upon Lessor's request, Lessee shall submit to Lessor an opinion of Lessee's
counsel that the above warranties and representations are true. These
warranties will be considered as renewed with the execution of such new
Equipment Schedule.
(b) Lessor hereby warrants and represents to Lessee, its successors and
assigns that: (i) Lessor's execution and performance of this Lease has
been duly authorized by all necessary corporate action and is not now and
will not be in conflict with Lessor's charter and by-laws, or with any
indenture, contract or agreement by which it is bound, or with any statute,
judgment, decree, rule or regulation binding upon it; (ii) no consent or
approval of any trustee or holder of any indebtedness or obligation of
Lessor, and no consent or approval of any government authority, is
necessary for Lessor's execution or performance of this Lease and (iii)
this Lease is valid and binding and enforceable against Lessor in
accordance with its terms, subject to enforcement limitations imposed by
rules of equity or by Bankruptcy or similar laws. These warranties will be
considered as renewed with the execution of each new Equipment Schedule.
20. JOINT AND SEVERAL LIABILITY; AUTHORITY TO SIGN; SUBSIDIARIES; PURCHASE OF
EQUIPMENT: If more than one party executes this Lease as Lessee, each such
party shall be jointly and severally bound by the terms and provisions of
this Lease. Any person who signs as an officer or agent for a corporation,
partnership or other entity warrants that the signer has authority for
such corporation, partnership or other entity to enter into this Lease on
its behalf. A violation of this warranty will mean personal liability of
the person so signing. Each Item of Equipment delivered pursuant to this
Lease by Lessor to a subsidiary of Lessee or to any entity or person
designated by Lessee, whether at the request of Lessee or such subsidiary,
entity or person shall be Equipment for all purposes of this Lease, and
Lessee shall be and remain primarily liable for its obligations under this
Lease with respect to such Equipment. Lessor shall not be obligated to
purchase and deliver any Item of Equipment unless Lessor has executed an
Equipment Schedule covering the Equipment.
<PAGE> 5
21. MODIFICATION: No change, modification, or alteration of, and no additions
to, the terms of this Lease shall be effective or binding on Lessor unless
the same is in writing and signed by Lessor. In the event of conflict
between the terms of this Lease and the Equipment Schedule, the Equipment
Schedule shall govern. Any additional terms contained in the Equipment
Schedule shall become part hereof.
22. NOTICES: (a) Lessee will immediately notify Lessor in writing with full
details if (i) any event occurs or any condition exists which constitutes,
or which but for a requirement of lapse of time or notice or both would
constitute and Event of Default under Section 18, or which might materially
and adversely affect the financial condition or operations of Lessee or of
any Subsidiary or (ii) any representation or warranty made in this Master
Lease Agreement or in any writing related to it may for any reason cease in
any material respect to be true and complete.
(b) All notices relating to this Lease, shall be in writing and shall be
deemed given when delivered or when deposited in the U.S. mail, certified,
postage prepaid and addressed with the full name and address of the
appropriate party set forth above, or to such other address as may have
been furnished by written notice from the party to whom notice is sent.
23. TIME OF ESSENCE; ENTIRE AGREEMENT; WAIVER; SURVIVAL OF TERMS: Time is of
the essence of this Lease. Except as herein provided, this lease
constitutes the entire agreement between parties and shall be binding upon
the parties and their respective successors or assigns, and shall only be
amended by a written instrument signed by Lessor and Lessee. Any waiver of
the performance of any of the terms, conditions or covenants hereof by
either party shall not be construed as thereafter waiving any such terms,
conditions or covenants, but the same shall remain in full force and
effect, as if no such waiver has occurred. Lessee's obligations and
liabilities under this Lease shall not be affected by the expiration or
earlier termination of this Lease.
24. APPLICABLE LAW: This Lease shall be governed by and in accordance with the
laws of the State of New York. At Lessor's option, any action or proceeding
relating directly or indirectly to this Lease shall be tried without a jury
in a court of competent jurisdiction located in the State of New York.
Lessee hereby consents to jurisdiction of any court of competent
jurisdiction chosen by Lessor. This Lease shall be deemed to have been made
in the State of New York, regardless of the order in which it was executed.
Lessee consents to venue as being in Onondaga County, New York.
25. HEADINGS: The Headings of each numbered paragraph are for reference only
and constitute no substantive part of this Lease.
26. ACKNOWLEDGEMENT AND WARRANTIES: Lessee acknowledges that it has selected
both (a) the Equipment and (b) the manufacturer(s) and/or supplier(s) from
whom Lessor is to purchase the Equipment. LESSOR MAKES NO WARRANTY, EXPRESS
OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING THE CONDITION OF THE
EQUIPMENT, ITS MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE, AND,
AS TO LESSEE, LESSOR LEASES THE EQUIPMENT AS IS, NO DEFECT OR UNFITNESS OF
THE EQUIPMENT SHALL RELIEVE LESSEE OF THE OBLIGATION TO PAY RENT OR OF ANY
OBLIGATION UNDER THIS LEASE. LESSOR WARRANTS TO LESSEE THAT, SO LONG AS NO
EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING, LESSOR WILL NOT INTERFERE
WITH THE LESSEE'S USE AND POSSESSION OF THE EQUIPMENT.
If the Equipment is unsatisfactory for any reason, Lessee's remedy shall be
to make any claim on account thereof solely against the manufacturer or
supplier. Lessor hereby agrees to assign to Lessee, solely for the purpose
of making and prosecuting any such claim, all of the rights which Lessor
has against such manufacturer or supplier for breach of warranty or other
representation respecting the Equipment to the extent the same are
assignable.
27. LESSOR'S RIGHT TO CURE: Upon Lessee's failure to perform any of its duties
under a Lease, Lessor may, but shall not be obligated to, perform any or
all such duties, and Lessee shall pay an amount equal to the expenses
thereof to Lessor forthwith upon demand by Lessor or such amount shall be
due as additional rent with the next rental payment. No such performance
of any or all such duties by Lessor shall be deemed to cure any Event of
Default of Lessee.
28. ADDITIONAL ASSURANCES: If Lessor shall request, Lessee shall execute and
deliver to Lessor such documents as Lessor shall reasonably deem
necessary, or desirable.
Lessee hereby authorizes Lessor to make corrections, if necessary to the
description of Equipment, quantities, model numbers and/or serial numbers
on the Equipment Schedule, Certificate of Acceptance, UCC-1 financing
statements covering the Equipment and all other related documents. Lessor
will provide Lessee with a copy of the corrected documents.
29. MODIFICATIONS/ADDITIONAL PROVISIONS: See attached Addendum, if there are
any modifications or additions thereto.
30. DELIVERY OF DOCUMENTS: Lessee agrees that upon request and without any
undue delay, Lessee will deliver to Lessor such documents as Lessor may
request to secure and/or complete Lease and/or complete any aspects of the
financing of this or any Lease including but not limited to a Certificate
of Delivery and Acceptance for the Equipment, an Incumbency Certificate,
and Opinion of Counsel on a matter Lessor may decide is reasonably
required, and Board of Director's Resolution Authorizing the transactions
contemplated by this Master lease, and if Lessee's publicly audited
financial statements are not available, or if the Lessor deems advisable, a
Guarantee of Performance by the Parent Corporation of Lessee or some other
acceptable Guarantee. If a request is made for any such documentation prior
to the delivery of any of Equipment, receipt by Lessor of such
documentation shall be a condition precedent to Lessor's obligation to
deliver said Equipment.
===============================================================================
IN WITNESS WHEREOF, THE PARTIES HAVE CAUSED THIS AGREEMENT TO BE DULY EXECUTED
AS OF THE DATE FIRST ABOVE WRITTEN
LESSOR: Real Lease, Inc. LESSEE: Magnetic Technologies Corporation
------------------------ --------------------------------------
BY: /s/ Paul Masiek BY: /s/ Gordon H. McNeil
---------------------------- ------------------------------------------
TITLE: EVP TITLE: President & C.E.O.
------------------------- ---------------------------------------
THIS IS COUNTERPART NO. 1 OF 2 SERIALLY NUMBERED, MANUALLY EXECUTED
COUNTERPARTS.
<PAGE> 6
PURCHASE OPTION RIDER
TO MASTER LEASE AGREEMENT DATED MAY 12, 1997
BETWEEN
REAL LEASE, INC. ("LESSOR")
AND
MAGNETIC TECHNOLOGIES CORPORATION ("LESSEE")
MASTER LEASE #79-0512001
UNDER
EQUIPMENT SCHEDULE 01 DATED MAY 12, 1997
ADDITIONAL PROVISION
--------------------
The following provision is hereby agreed upon and made a part of the referenced
lease:
Provided the Lessee has faithfully performed and carried out the terms and
conditions of the Lease, on its part to be kept and performed, and pursuant to
the terms of the "Purchase Option" section of the above referenced Equipment
Lease.
1. PURCHASE. At the end of the initial lease term, or at the end of any
subsequent renewal term, Lessee may purchase from Lessor, not less than all of
the Equipment leased hereunder "As-Is, Where-Is", without recourse or warranty
for a cash consideration ("Purchase Price") of $1.00 (One dollar), together
with any applicable sales tax.
2. TITLE. All of Lessor's rights, title and interest in and to the Equipment
shall pass to Lessee upon receipt by Lessor of the Purchase Price in full. This
Lease will automatically renew on a month to month basis and Lessee shall
continue making regular monthly lease payments to Lessor if purchase price is
not paid in full.
LESSOR: Real Lease, Inc. LESSEE: Magnetic Technologies
Corporation
BY: /s/ Paul Masiek BY: /s/ Gordon H. McNeil
------------------------- -------------------------------
TITLE: EVP TITLE: President & CEO
---------------------- ----------------------------
DATE: May 12, 1997 DATE: May 12, 1997
<PAGE> 1
Exhibit C
FIRST NATIONAL BANK
OF ROCHESTER
35 State Street REVOLVING LINE OF CREDIT NOTE
Rochester, New York 14614
- --------------------------------------------------------------------------------
Dated: March 14, 1997
Maximum Credit Amount: ONE MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS
($1,500,000.00)
FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to the
order of FIRST NATIONAL BANK OF ROCHESTER, a national banking association having
its chief executive office at 35 State Street, Rochester, New York 14614,
("Bank") at any of the banking offices of the Bank in lawful money of the United
States and in immediately available funds, the outstanding principal sum on the
revolving line of credit made available to the Borrower pursuant to the terms
and conditions hereof (the "Credit) plus interest on such principal sum in
accordance with the terms and conditions set forth in the following paragraphs.
1. OBTAINING ADVANCES ON CREDIT. The Borrower may obtain advances on the Credit
in multiples of the lesser of (a) $1,000.00 or (b) the unused balance of the
Maximum Credit Amount indicated above (the "Maximum Credit") by making written
or oral requests for such advances to Bank through any of its authorized
officers. Such requests may be made by the Borrower, by any authorized agent of
the Borrower (including any officer of the Borrower) or by any other person
designated by Borrower as a person having authority to authorize an advance
under this Note. Bank shall be entitled to rely upon the request of any person
it in good faith believes to be authorized by Borrower to borrow under this Note
and Bank shall not be liable to Borrower as a result of making or failing to
make any advance hereunder. Advances on the Credit will be deposited by Bank to
a demand deposit account of Borrower with Bank.
2. STATEMENT OF BALANCE DUE. Bank shall provide periodic statements to Borrower
describing, as of the effective date of such statement, the outstanding
principal balance, the interest owing, any other charges owing and the advances
and payments made during the period covered by the statement. The Bank's records
shall be presumptive evidence of the balances owing with respect to the Credit.
3. INTEREST RATE; INTEREST PAYMENTS. Borrower shall pay interest on the
outstanding principal sum of the Credit from and including the date of this Note
to but not including the date such sum is paid in full (including each day on
which Bank is closed) at a variable rate per year that shall on each day be 1/4%
above the rate per year in effect such day as that designated by Bank as the
prime rate of interest of Bank, with such interest to be calculated on the basis
of a 360-day year for the actual number of days of each year. Notwithstanding
the foregoing, the rate of interest per year after a default has occurred shall
on each day be 2% per year above the rate described in the preceding sentence.
Interest will be billed to Borrower monthly on the outstanding principal sum.
Notwithstanding the generality of the foregoing, in no event shall interest be
payable at a rate in
<PAGE> 2
Page 2 of 3
excess of the maximum rate permitted by applicable law.
4. LATE CHARGES. Borrower shall pay a late charge equal to 5% of the amount of
any scheduled payment with respect to each payment not received by Bank on or
before the 10th day after it is due.
5. MATURITY DATE; CONVERSION TO TERM LOAN. On March 1, 1998 (the "Maturity
Date"), all amounts owing pursuant to this Note shall be payable in full.
Provided that no unremedied event of default has occurred under this Note or
under any other Agreement of Borrower with Bank ("Event of Default"), at the
option of Borrower exercised in writing on or before the Maturity Date, the
Revolving Loan accommodation evidenced hereby may be converted to a Term Loan
under which the outstanding principal balance may be repaid to Bank in 60 equal
or substantially equal installment payments commencing the first business day of
the calendar month following conversion and continuing on the same day of each
subsequent month until all amounts owing hereunder have been paid in full. In
addition to installments of principal, interest payments will continue to be due
on the first of each calendar month after conversion to a Term Loan and at the
same rate as set forth in Paragraph 3 of this Note.
6. CHARGING DEPOSIT ACCOUNTS FOR PAYMENTS. Borrower agrees that Bank may, at its
option and in addition to the right of offset, charge any demand deposit account
of Borrower at Bank for any amount that has become due and owing to Bank
hereunder after the occurrence of an event of default pursuant to paragraph 10
hereof.
7. USE OF PROCEEDS. Borrower represents and warrants to Bank that the advances
to be made hereunder shall be used solely for business or commercial purposes.
8. FINANCIAL INFORMATION. Borrower agrees to provide Bank, promptly upon Bank's
request, with (a) periodic financial statements in form satisfactory to Bank,
(b) copies of federal and state income tax returns and (c) all other financial
information requested by Bank from time to time.
9. TERMINATION OF CREDIT. Borrower may terminate its rights to take advances
under the Credit at any time by giving written notice to Bank of its desire to
do so. Notice should be directed to the "Business and Professional Lending
Division" at the address above or at any other address provided to Borrower by
Bank for the purposes of such notices. The Credit shall become unavailable after
Bank has received such notice and has had a reasonable time to act thereon. The
Credit may be terminated by Bank at any time following the occurrence or
existence of an Event of Default without prior notice to Borrower. Termination
of the Credit shall not affect the Borrower's obligation to pay the outstanding
balance under the Credit and all interest and other applicable charges.
10. EVENTS OF DEFAULT AND ACCELERATION. All amounts owing pursuant to this Note
but not yet paid shall, without any notice, demand, presentment or protest of
any kind (each of which is waived by Borrower), automatically become immediately
due if Borrower commences or has commenced against it any bankruptcy or
insolvency proceeding. All amounts owing pursuant to this Note but not yet paid
shall, without any notice, demand, presentment or protest of any kind (each of
which is waived by Borrower), become immediately due at the sole option of Bank
if (a) any amount owing pursuant to this Note is not paid when due, (b) Borrower
is dissolved or becomes insolvent
<PAGE> 3
Page 3 of 3
(however such insolvency is evidenced), or (c) there occurs or exists any event
or condition of default for purposes of any mortgage, credit agreement, security
agreement, collateral assignment agreement or other agreement now or hereafter
in effect between Bank and Borrower.
11. COLLECTION EXPENSES. In the event of a default pursuant to paragraph 10
hereof, Borrower shall pay all costs and expenses incurred by Bank in
endeavoring to collect any amount owing pursuant to this Note or to otherwise
protect its rights with respect to this Note (including, but not limited to,
reasonable attorneys' fees for legal advice, litigation or other representation
of Bank).
12. NEW YORK LAW; CONSENT TO JURISDICTION AND VENUE. This Note shall be governed
by and interpreted and enforced in accordance with the internal law of the State
of New York, without regard to principles of conflict of laws. Borrower consents
to the jurisdiction of the courts of the State of New York and agrees that any
court located in the county in which Bank has its chief executive office shall
be the proper forum for any action or proceeding between Borrower and Bank
unless applicable law requires another forum.
MAGNETIC TECHNOLOGIES CORPORATION
By /s/ Gordon H. McNeil
---------------------------------------------------
Gordon H. McNeil, President & Chief Executive Officer
<PAGE> 1
Exhibit D
STOCK OPTION CONTRACT
THIS STOCK OPTION CONTRACT made by and between MAGNETIC TECHNOLOGIES
CORPORATION, having its offices located at 770 Linden Avenue, Rochester, New
York 14625 ("the Company") and GORDON H. McNEIL, residing at 44 Oak Meadow
Trail, Pittsford, New York 14534 ("the Employee").
WHEREAS, the Company desires to provide an incentive to the Employee to
maintain an employment relationship with the Company by enabling the Employee to
share in the success of the Company through an equity interest; and
WHEREAS, in the judgment of the Company's Board of Directors, the fair
market value of the Company's Common Stock on May 19, 1992 (the date this Stock
Option Contract was authorized) was $3.50 per share;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, the Company hereby grants to the Employee an option
to purchase an aggregate of one hundred thousand (100,000) shares of the
Company's $.15 par value Common Stock ("the Shares") at a price of Three Dollars
and Fifty Cents ($3.50) per Share, pursuant to the following terms and
conditions of this contract.
1. TERM. The term of the stock option granted hereunder (that is, the
period during which it may be exercised by the Employee in whole or in part)
will commence on the date of this Contract and will expire upon the earliest to
occur of the following dates: (a) May 18, 1997; (b) upon the mutual written
agreement of the Company and the Employee; and (c) in the event that the
Employee's employment with the Company becomes terminated, at the conclusion of
the following applicable time period:
A. In the event that the Employee's employment with the
Company shall be terminated for any reason other than death, the
Employee may exercise all rights hereunder for a period of thirty (30)
days after such employment termination; provided, however, that if such
termination is by reason of either the retirement of the Employee (as
mutually agreed upon by the Company and the Employee) or the disability
of the Employee, the exercise period will be one (1) year after such
event, rather than 30 days. For purposes hereof, the Employee's
employment status will be considered to remain intact during any period
in which the Employee is on sick leave, military duty or other bona
fide leave of absence to the extent that such leave does not exceed the
greater of (i) six (6) months or (ii) that period during which the
Employee has a right by statute or contract to resume such employment.
B. In the event that the Employee shall die prior to the
complete exercise of all rights under this Contract, the then
unexercised portion hereof may be exercised in whole or in part for a
period of six (6) months after the date of the
<PAGE> 2
Employee's death, either by the Employee's estate or by or on behalf of
such persons as to whom the Employee's rights hereunder shall pass
under the Employee's Will or by the laws of descent and distribution.
2. EXERCISE PROCEDURE. In order to exercise the stock option granted
hereunder, in whole or in part, the Employee must give written notice to the
Company, directed to its Secretary at its principal office, such notice to:
A. Specify the number of Shares being purchased and the
purchase price being paid therefor, accompanied by payment in full of
such purchase price; and
B. Contain, in form and substance satisfactory to counsel for
the Company, written acknowledgements, representations and covenants by
the Employee with respect to such limitations on the transferability of
the Shares as counsel for the Company may in its sole discretion
determine to be in effect at that time by reason of the
non-registration of the Shares under the Securities Act of 1933 as
amended ("the Act"), including the Employee's (i) acknowledgement that
the Shares are being purchased under a claim of exemption from
registration under the Act as a transaction not involving a public
offering, (ii) representations and warranties that the Shares are being
acquired for investment purposes and not with a view to the
distribution thereof, and (iii) agreement not to transfer, encumber or
dispose of the Shares unless (x) a registration statement with respect
to the Shares shall be effective under the Act and there shall have
been compliance with applicable state laws or (y) in compliance with
Rule 144 or some other exemption from registration under the Act.
The Company will issue stock certificate(s) to the Employee representing the
Shares purchased by the Employee hereunder as soon as practical after the
Company's receipt of the aforementioned notice and payment, including clearance
of funds. Each such certificate shall contain such restrictive legends as may be
established by counsel for the Company evidencing the aforementioned transfer
restrictions. The Employee will acquire rights as a stockholder of the Company
with respect to the Shares so purchased upon the date of the issuance of such
stock certificate(s).
3. NON-ASSIGNABILITY. The rights granted under this Contract may not be
assigned, pledged or transferred by the Employee, except by Will or the laws of
descent or distribution as set forth in Paragraph 1 hereof.
4. ANTI-DILUTION. The aggregate number and kind of Shares represented
by the stock option granted under this Contract, and the exercise price of such
option, will be automatically proportionately adjusted or changed to reflect any
increase, decrease or change in the total outstanding shares of the Company's
Common Stock resulting from a stock dividend, recapitalization, merger,
consolidation, split-up, combination, exchange of stock or similar transaction
which may occur subsequent to the date hereof but prior to the exercise of any
rights under this Contract (but not by reason of
<PAGE> 3
the issuance or purchase of the Company's Common Stock in consideration of
money, services or property).
5. RESERVATION OF SHARES. Because of the substantial conditions which
must be met to entitle the Employee to exercise the stock option rights
hereunder, the Company's Board of Directors will be under no obligation to
reserve the Shares under this Contract, and no particular shares of the
Company's Common Stock will be construed as optioned or reserved for the
Employee pursuant to this Contract. The Company will be deemed to have complied
with the terms of this Contract if, at the time of the Employee's exercise of
rights hereunder, it has a sufficient number of authorized and unissued shares
of Common Stock available for such purpose. Neither this Contract nor any
subsequent reservation of the Shares for the Employee will be construed as
constituting the establishment of a trust of the Shares.
IN WITNESS WHEREOF, the parties hereto have executed this Contract as
of May 19, 1992, in several counterparts, each of which shall be considered to
be an original and at least one of which has been delivered to each party
hereto.
MAGNETIC TECHNOLOGIES CORPORATION
By: /s/ Isadore Diamond
-----------------------------
Isadore Diamond, Chairman
THE EMPLOYEE:
/s/ Gordon H. McNeil
-----------------------------
Gordon H. McNeil
<PAGE> 4
AMENDMENT TO STOCK OPTION CONTRACT
The undersigned, MAGNETIC TECHNOLOGIES CORPORATION, having its offices located
at 770 Linden Avenue, Rochester, New York 14625 ("the Company") and GORDON H.
McNEIL, residing at 44 Oak Meadow Trail, Pittsford, New York 14534 ("the
Employee") hereby agree that Paragraph 1. ("TERM.") of a certain Stock Option
Contract dated May 19, 1992, is hereby amended to change the date which appears
on the fifth line of said Paragraph 1 from "May 18, 1997" to the new date of May
18, 2002. The parties further agree that the purpose of the aforesaid amendment
is to extend the term of the Stock Option Contract for a period of five years
unless said Contract becomes sooner terminated pursuant to the other terms of
said Paragraph 1.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as
of May 18, 1997, in several counterparts, each of which shall be considered to
be an original and at least one of which has been delivered to each party
hereto.
MAGNETIC TECHNOLOGIES CORPORATION
By: /s/ Isadore Diamond
--------------------------------
Isadore Diamond, Chairman
THE EMPLOYEE
By: /s/ Gordon H. McNeil
--------------------------------
Gordon H. McNeil
<PAGE> 1
Exhibit E
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 (No. 333-22805) of
Magnetic Technologies Corporation of our report dated September 26, 1997,
appearing on page 17 of this Form 10-KSB.
/s/ Price Waterhouse LLP
Rochester, New York
October 27, 1997
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<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
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0
0
<COMMON> 417,979
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