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SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
MAGNETIC TECHNOLOGIES CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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<PAGE> 2
[LOGO]
MAGNETIC TECHNOLOGIES CORPORATION
NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 9, 1997
A Special Meeting of Stockholders of Magnetic Technologies Corporation will
be held at the Industrial Management Council in the Hutchison House, 930 East
Avenue, Rochester, New York, on Thursday, October 9, 1997, at 11:30 A.M., for
the following purposes:
1. The approval and adoption of 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 which 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 a limited number of the
Company's largest stockholders have agreed or will agree to exchange between 45%
and 51% 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 meeting.
2. Such other matters as may properly come before the meeting.
All stockholders of record at the close of business on September 1, 1997,
will be entitled to vote at the meeting.
Susan M. Weise
Secretary
September 15, 1997
Rochester, New York
PLEASE SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING
POSTAGE-PAID ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY REVOKE THE
PROXY AND VOTE IN PERSON IF YOU SO DESIRE.
<PAGE> 3
[LOGO]
MAGNETIC TECHNOLOGIES CORPORATION
770 Linden Avenue, Rochester, New York 14625
PROXY STATEMENT
This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Magnetic Technologies Corporation, a
Delaware corporation ("the Company") for use at the Special Meeting of
Stockholders to be held on October 9, 1997, at 11:30 A.M., at 930 East Avenue,
Rochester, New York, and any adjournments thereof. The proxy statement and form
of proxy are first being mailed on or about September 15, 1997 to stockholders
of record as of the close of business on September 1, 1997 ("the Record Date").
PURPOSE OF THE MEETING
The purpose of the meeting is to consider and vote upon the approval and
adoption of an Agreement and Plan of Merger among the Company, SPS Technologies,
Inc. ("SPS") and MTC Acquisition Corp., a subsidiary of SPS ("the Merger
Agreement"), under the terms of which 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 a limited number of the
Company's largest stockholders have agreed or will agree to exchange between 45%
and 51% of the Company's total outstanding shares of Common Stock, valued at
$5.00 per share, for shares of SPS common stock ("SPS 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. A summary of
the terms of the transaction appears on page 5, a description of the Merger
Agreement starts on page 9 and the Merger Agreement is attached as Appendix A to
this Proxy Statement.
VOTING PROCEDURES AND PROXIES
Only holders of record of the Company's Common Stock at the close of
business on the Record Date are entitled to notice of, and to vote at, the
meeting or any adjournments thereof. As of the Record Date, there were
outstanding and entitled to vote 2,869,015 shares of the Company's Common Stock,
$.15 par value, each of which will be entitled to one vote on each matter
submitted to the Company's stockholders for voting at the meeting. The presence
at the meeting, in person or by proxy, of the holders of the majority of
outstanding shares of the Company's Common Stock is necessary to constitute a
quorum.
The approval and adoption of the Merger Agreement will require an
affirmative vote of the majority of the Company's outstanding shares of Common
Stock; any other matters submitted to a vote at the meeting will be decided by
the vote of a majority of all votes cast in person or by proxy at the meeting.
Therefore, any shares of Common Stock not voted at the meeting in person or by
proxy (including abstentions and broker non-votes) will have the effect of a
negative vote with respect to the proposed merger. Abstentions and broker
non-votes will be treated as shares present and entitled to vote for purposes of
determining the presence of a quorum at the meeting. If authority to vote a
proxy has not been withheld and no instruction is indicated, the shares will be
voted FOR approval of the merger. If any other matters are properly presented at
the meeting for action, including a question of adjourning the meeting, the
persons named in the proxies will have discretion to vote on such matters in
accordance with their best judgment.
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<PAGE> 4
Proxies in the accompanying form are solicited on behalf and at the
direction of the Board of Directors of the Company. All shares of Common Stock
represented by properly executed proxies will be voted at the meeting in
accordance with the instructions on the proxies, unless revoked. A stockholder
giving a proxy has the power to revoke it at any time prior to its exercise by
written revocation, by submission of a later-dated proxy or by the stockholder's
attendance and vote at the meeting.
The cost of solicitation of proxies will be borne by the Company. In
addition to solicitation by mail, officers of the Company may solicit proxies by
telephone or personal interviews. Arrangements may also be made with banks,
brokerage firms and others to forward proxy materials to beneficial owners of
the Company's Common Stock at the Company's expense. The Company may also elect
to engage an outside proxy soliciting firm to assist in the solicitation of
proxies, in which event the Company will pay the reasonable fees and expenses of
such firm.
Both of the Company's executive officers, two other Board members who are
stockholders and another stockholder who owns more than 5% of the Company's
outstanding shares of Common Stock have entered into Voting Agreements with SPS
to vote in favor of the merger and to vote against any competing proposal which
may arise. The Voting Agreements cover an aggregate of 744,982 shares, or 26%,
of the Company's Common Stock.
Dissenting stockholders will have the right of appraisal under the
provisions of Section 262 of the Delaware General Corporation Law ("DGCL").
Shares of the Company's Common Stock which are held by stockholders who do not
vote in favor of the merger and who give the Company a written demand for the
appraisal for such shares prior to the taking of the vote on the Merger
Agreement at the meeting pursuant to the DGCL ("Dissenting Shares") will not
receive the $5.00 per share consideration as provided in the Merger Agreement.
Such stockholders will instead be entitled to receive payment of the fair value
of their Dissenting Shares as determined in accordance with the provisions of
the DGCL; except that any Dissenting Shares held by stockholders who fail to
perfect or who effectively withdraw or lose their rights to appraisal of their
Dissenting Shares under the provisions of the DGCL will then receive the $5.00
per share consideration as provided in the Merger Agreement upon surrender of
the certificates representing such Dissenting Shares. Within ten days after the
effective date of the merger, MTC will notify all stockholders entitled to
appraisal rights (i.e. those who both gave the above notice and did not vote in
favor of the merger) that such appraisal rights are available. In order for a
stockholder to exercise his or her appraisal rights, such stockholder must,
within 120 days after MTC has mailed the above notice, then give a (second)
written notice to MTC demanding appraisal for the Dissenting Shares. The failure
by a stockholder to vote against the merger will not constitute a waiver of such
stockholder's right to receive appraisal. A stockholder's vote against the
merger, absent compliance with the above notice provisions will not be deemed to
satisfy the above notice requirements. The foregoing summary is not a complete
statement of the applicable statutory procedures and is qualified in its
entirety by reference to Section 262 of the DGCL, the text of which is attached
as Appendix C to this Proxy Statement.
RECOMMENDATION
THE COMPANY'S BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE
PROPOSED MERGER IS IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS AND THAT
THE CONSIDERATION IS FAIR TO THE COMPANY'S STOCKHOLDERS, HAS FORMALLY APPROVED
THE MERGER AGREEMENT AND RECOMMENDS THAT THE STOCKHOLDERS VOTE TO ADOPT THE
MERGER AGREEMENT.
VOTING SECURITIES
The following table sets forth, as of September 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:
3
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<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNER CLASS (a)
- - - ----------------------------------------------- -------------------- ----------
Named Directors and Executive Officers:
<S> <C> <C>
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 199,390 6.9
3 Townline Circle
Rochester, NY 14623
</TABLE>
(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.
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 the Voting
Agreements as described above (pursuant to which certain Company stockholders
have agreed to vote an aggregate of 26% of the Company's outstanding shares of
Common Stock in favor of the merger) and/or the Stock Purchase Agreements as
described above (pursuant to which SPS will acquire up to 51% of the outstanding
shares of the Company's Common Stock in exchange for SPS stock).
4
<PAGE> 6
SUMMARY OF THE MERGER TERMS
On August 7, 1997, the Company's Board of Directors voted unanimously to
approve the Merger Agreement and to submit it to the stockholders for adoption
at the meeting. Under the terms of the Merger Agreement, the Company will be
merged into MTC, which is a wholly-owned subsidiary of SPS, and MTC will be the
surviving corporation. The Company's Common Stock has been valued at $5.00 per
share in the transaction, and most stockholders will receive a cash payment
equal to $5.00 times the number of shares of the Company's Common Stock which
they own and submit for exchange with a transmittal letter to be mailed to them
after the meeting.
The transaction is intended to qualify as a tax-free reorganization under
the Internal Revenue Code ("the Code"). While most of the Company's stockholders
will receive cash for their shares of the Company's Common Stock and will be
subject to normal taxation on their gains or losses, a limited number of the
Company's largest stockholders have agreed or will agree to exchange at least
45%, but no more than 51%, of the Company's total outstanding shares of Common
Stock, valued at $5.00 per share, for shares of SPS 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. Each Company stockholder
receiving payment in the form of SPS Stock must have entered into a Stock
Purchase Agreement with SPS in which he or she represents that he or she is
taking the SPS Stock for investment purposes and not for distribution. The sale
of the SPS Stock thus issued will not be registered under the Securities Act of
1933 ("the Act") and such shares will be restricted from sale on the public
market until they are registered by SPS or their sale becomes eligible for an
exemption under Rule 144 as promulgated by the Securities and Exchange
Commission.
Immediately prior to the merger, all outstanding options and warrants to
purchase shares of the Company's Common Stock will be terminated. Each option
holder will be paid an amount of cash equal to the excess, if any, of $5.00 over
the applicable exercise price under the option for each such optioned share. The
warrants will be terminated without any payment to the warrant holders since
they are exercisable at $5.00 per share.
Effective upon the merger, the Company will be merged into MTC. Isadore
Diamond, founder of the Company and Chairman of the Board of Directors, will
retire upon the merger. As a condition of the transaction, SPS required that
Gordon H. McNeil, the Company's President and CEO, enter into a five-year
covenant-not-to-compete agreement, including a three-year employment agreement
at a salary rate approximately 70% of his current salary compensation, but with
bonus provisions that could increase his compensation closer to, or slightly
above, his current compensation if MTC meets certain performance levels in the
future. Mr. McNeil agreed to do so. Mr. McNeil will report to the President of
SPS's subsidiary, The Arnold Engineering Co. ("Arnold"), which is headquartered
in Marengo, Illinois. SPS has informed the Company that it plans to continue the
operation of the Company's business from its two plants in Rochester, New York
and Rochester, England.
PARTIES TO THE MERGER
The names, mailing addresses and telephone numbers of the three parties to
the merger are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Magnetic Technologies Corporation SPS Technologies, Inc. MTC Acquisition Corp.
770 Linden Avenue 101 Greenwood Avenue, Suite 470 101 Greenwood Avenue, Suite 470
Rochester, New York 14625 Jenkintown, Pennsylvania 19046 Jenkintown, Pennsylvania 19046
(716) 385-8711 (215) 517-2000 (215) 517-2000
</TABLE>
SPS is a multinational corporation listed on the New York Stock Exchange.
In 1996, SPS reported $486 million of net sales, $22.3 million in net earnings
and $3.54 earnings per share. SPS has ten manufacturing plants in the United
States and ten plants in six different countries located on five continents. SPS
manufactures (1) high-strength precision mechanical fasteners and components
("fasteners") and (2) superalloys in ingot form and magnetic materials
("materials"). Fasteners are sold primarily to aerospace and industrial users
and accounted for $335 million of SPS's net sales and $27 million of its
operating earnings in 1996. Materials, of which Arnold is a part, are sold
primarily to the precision investment casting, powdered metal, aerospace,
medical equipment, automotive, computer and communications industries. Materials
accounted for $151 million of SPS's net sales and $20 million of its operating
earnings in 1996. MTC is a Delaware Corporation, wholly-owned by SPS and formed
for the purpose of effectuating the merger.
5
<PAGE> 7
REASONS FOR THE TRANSACTION
The Company has for many years concentrated on the design and manufacture
of magnetic, electronic and mechanical subassemblies of copiers and printers for
the office equipment manufacturing industry. The Company's strength has been its
ability to produce precision products to high tolerances with a near-zero defect
rate. The Company's frailty has been its historic reliance on a single customer
(Xerox Corporation, including Xerox's English subsidiary) for approximately 90%
of its business. In order to reduce its reliance on Xerox, in 1993 the Company
(a) licensed its European magnetic assembly business to an English corporation
and (b) acquired a plastics company which thereafter operated as a new group
within the Company (Austro Mold).
For the next two fiscal years the above actions resulted in Xerox
accounting for a smaller, but still major, portion of the Company's business;
however, both actions became nullified by subsequent events. In 1995, the
Company reacquired its European business on favorable terms, and Magnetic
Technologies Europe Limited ("MTE") in Rochester, England became a wholly-owned
subsidiary. After several years of losses at Austro Mold, the Company sold most
of Austro Mold's assets at the end of its fiscal year ended July 31, 1996
("Fiscal 1996"). In Fiscal 1996 the Company incurred a net loss of $2,017,000 on
revenues of $25,228,000, including a $1,774,000 loss on the sale of Austro Mold.
In its fiscal year ended July 31, 1997 ("Fiscal 1997") the Company returned to
profitability (see the Company's Form 10-QSB for the first three quarters, which
is annexed as Appendix E); however, Xerox once again accounted for approximately
90% of the Company's revenues.
After its inability to diversify through acquisition and divestiture, the
Company's reliance on a single customer remained unabated. This limited the
Company's growth because both Xerox's and the Company's recognition of their
mutual reliance on each other has somewhat capped the amount of business
available from Xerox while, at the same time, Xerox's competitors may have been
cautious about doing business with the Company, given its close ties to a
competitor. Accordingly, in Fiscal 1997 the Company intensified its efforts to
obtain major business from new sources. Although these efforts have had some
success in the European market, to date the Company has not been able to obtain
a new domestic customer placing an order in excess of $5 million.
During the latter half of Fiscal 1997, the officers of the Company
interviewed four investment banking firms with a view to selecting a financial
advisor from among them. In the course of those interviews all four candidates
advised the Company to seek a merger partner in order to become a part of a
larger organization that might be more able to capitalize upon the Company's
strengths and capabilities. During that same period the Company's President (Mr.
McNeil) explored the possibility of a merger, acquisition or business
combination with several companies, one of which was Arnold. Prior and
subsequent to these discussions the Company and Arnold have had infrequent
business dealings (the Company has purchased less than $10,000 of magnets per
year from Arnold).
Mr. McNeil and the President of Arnold met at an industry conference in the
Spring of 1997, discussed their two businesses and identified possible
correlations. Arnold's President thereafter toured the Company's main plant, as
did SPS's Chairman and its Chief Financial Officer. Mr. McNeil then toured two
of Arnold's facilities at their invitation. These meetings led to merger
discussions during the Spring and Summer of 1997, about which the Company's
Board of Directors was apprised. With the Board's consent, Mr. McNeil and the
Company's legal counsel held further discussions and negotiations with SPS.
During these negotiations, SPS established the position that it would offer
a price of $5.00 per share for the Company only under certain conditions. These
conditions included, among others: the payment of the $5.00 consideration in the
form of cash to most of the Company's stockholders and unregistered SPS Stock to
a limited number of the largest stockholders; a 30-day due diligence period
after the Merger Agreement was signed, during which SPS would conduct its own
investigation with respect to the representations and warranties of the Company
contained in the Merger Agreement as well as of the Company's relationships with
its customers and suppliers; a restriction against the Board of Directors or
certain principals of the Company from soliciting another offer during the
post-signing 30-day due diligence period; and a "break-up fee" of $480,000 in
the event of a willful and material breach of the Merger Agreement or
misrepresentation by the Company, or the Board of Directors' withdrawal or
modification of its support for the Merger Agreement, or the failure of the
stockholders to approve the Merger Agreement at the meeting.
The negotiations culminated in the preparation of the Merger Agreement and
its presentation to the Company's Board for consideration on August 7, 1997.
6
<PAGE> 8
At its August 7, 1997 meeting, the Company's Board of Directors concluded
that the merger of the Company into a subsidiary of SPS was more efficacious
than potential alternate long-term strategies, that the merger was in the best
interests of the Company's stockholders and employees, that the $5.00 per share
selling price offered by SPS was higher than the price at which the Company's
Common Stock had been recently trading in the market place, and that the price
to be paid to stockholders receiving cash was fair and substantially equivalent
to the price to be paid to stockholders receiving SPS Stock. The Board voted to
approve the Merger Agreement and submit it to the stockholders for adoption and
approval.
FAIRNESS OPINION OF BLUESTONE
In connection with its deliberations, the Company's Board of Directors
retained BlueStone Capital Partners, L.P., a New York investment banking firm
("BlueStone"), to act as its financial advisor and to render a "fairness
opinion". Prior to the Company's Board of Directors meeting held on August 7,
1997, BlueStone delivered its written opinion to the Board concerning the
fairness of the transaction based upon its analysis. BlueStone concluded that
the consideration to be paid to the Company's stockholders in the merger was
"fair, from a financial point of view" and that stockholders receiving cash were
"receiving no less than the substantial equivalent of those holders of the
Company's Common Stock who are receiving ... Stock in exchange for their
shares".
A COPY OF THE FULL TEXT OF BLUESTONE'S OPINION DATED AUGUST 7, 1997, WHICH
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND LIMITATIONS ON THE
REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ANNEXED AS APPENDIX B TO
THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY OF
BLUESTONE'S OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF THE OPINION. BLUESTONE'S OPINION IS NOT INTENDED TO BE, AND DOES NOT
CONSTITUTE, A RECOMMENDATION TO ANY STOCKHOLDER OF THE COMPANY AS HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE MEETING. STOCKHOLDERS ARE URGED TO READ
BLUESTONE'S OPINION.
In rendering its opinion, BlueStone did not express any opinion as to: (a)
any effect that events subsequent to the date of its letter might have with
respect to the transaction; (b) the underlying business decision by the Company
to engage in the merger; (c) the relative merits of the merger vis-a-vis
possible alternative strategies; or (d) the legal, regulatory, tax or accounting
aspects of the merger. With respect to those stockholders receiving SPS Stock in
lieu of cash in the transaction, BlueStone did not express any opinion about the
price at which SPS Stock is likely to trade in the future, the effect of
restrictions on the SPS Stock and the tax effects resulting from such
stockholders receiving SPS Stock in lieu of cash consideration.
In rendering its opinion, BlueStone assumed that the final terms of the
Merger Agreement would be substantially similar to the terms of the draft of the
merger agreement reviewed by it and that the merger would qualify as a
reorganization within the meaning of Section 368(a) of the Code. BlueStone
reviewed: (a) a draft of the Merger Agreement; (b) certain publicly available
information concerning the Company and of other companies engaged in comparable
businesses, and the market prices of their comparable securities; (c) the
consideration received in certain transactions for comparable companies; (d)
current and historical market prices and trading volume of the Company's Common
Stock; (e) the Company's audited financial statements for Fiscal 1996 and its
unaudited quarterly financial statements for the first nine months of Fiscal
1997; and (f) certain financial analyses and forecasts prepared by the Company's
management. BlueStone also held discussions with members of the Company's senior
management. BlueStone reviewed such other matters as it deemed to be
appropriate, including economic, market and other conditions as in effect on the
date of its letter.
In connection with forecasts prepared by the Company and supplied to
BlueStone, the Company does not normally make public forecasts or projections as
to future performance or earnings except with respect to noting any general
short-term conditions. However, as part of its ongoing budgeting activities, the
Company's management periodically prepares and updates for internal use and
presentation to the Board of Directors projections of results for the current
fiscal year, and later in the year for the next fiscal year. Certain of such
projections were provided to BlueStone, as well as to SPS, and management
identified costs which were inherent in the Company's independent existence and
which would be reduced or eliminated if the Company became part of a larger
entity (including certain legal, auditing and management expenses).
7
<PAGE> 9
THE COMPANY'S PROJECTIONS WERE NOT PREPARED IN ACCORDANCE WITH PUBLISHED
GUIDELINES OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OR THE
SECURITIES AND EXCHANGE COMMISSION REGARDING PROJECTIONS AND FORECASTS, NOR HAVE
SUCH PROJECTIONS BEEN AUDITED, EXAMINED OR OTHERWISE REVIEWED BY INDEPENDENT
AUDITORS OF THE COMPANY OR ITS AFFILIATES. In addition, the Company's
projections are based upon estimates and are inherently subject to significant
economic and competitive uncertainties and contingencies, many of which are
beyond the control of the Company. Accordingly, actual results may be materially
higher or lower than projected.
Neither BlueStone nor any other party to whom or which any projections were
provided by the Company's management assumes any responsibility for the accuracy
thereof. In connection with its review, BlueStone assumed only that the
projections were "reasonably prepared based on assumptions reflecting the best
currently available estimates and judgments by management as to the expected
future results of operations and financial condition of the Company as which
such analyses or forecasts relate".
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Examining
portions of the analysis or of the summary set forth above without considering
the analysis as a whole could create an incomplete or misleading view of the
process underlying BlueStone's opinion. Furthermore, no company or transaction
used in the analysis as a comparison is identical to the Company or SPS or the
transaction contemplated by the Merger Agreement. BlueStone's analyses were
prepared solely for its purposes in providing its opinion as to the fairness of
the consideration to be paid to the Company's stockholders in the merger from a
financial point of view and do not purport to be appraisals or to necessarily
reflect the prices at which businesses or securities actually may be sold, which
may be significantly more or less favorable than as set forth in the analyses.
Similarly, any estimate of values or forecast of future results contained in the
analyses is not sufficiently indicative of actual values or actual future
results, which values or results may be significantly more or less favorable
than those suggested by the analyses. BlueStone made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters in its analyses. Such assumptions are inherently subject to
uncertainty, being based upon numerous factors or events beyond the control of
the parties, and future results or actual values may be materially different
from forecasts or estimates contained in the analyses.
As described above, BlueStone's opinion was one of several factors taken
into consideration by the Board of Directors of the Company in making its
determination to approve the Merger Agreement. While the foregoing summary
covers the material aspects of the analyses performed by BlueStone, the
foregoing summary does not purport to constitute a complete description of such
analyses and is qualified in its entirety by reference to BlueStone's written
opinion, which is attached as Appendix B to this Proxy Statement.
BlueStone is an investment banking firm which regularly engages in the
valuation of businesses and their securities in connection with mergers and
acquisitions, underwritings, secondary distributions of listed and unlisted
securities, private placements, leveraged buyouts and valuations for estate,
corporate and other purposes. The Board of Directors of the Company selected
BlueStone to act as its exclusive financial advisor on the basis of BlueStone's
expertise and its familiarity with companies having revenues less than $500
million.
In connection with BlueStone's services in rendering its opinion with
respect to the transaction, the Company paid BlueStone a fee of $100,000. The
Company also agreed to indemnify BlueStone and certain related parties against
certain liabilities in rendering its opinion including liabilities arising under
the federal securities laws. In the event that the Merger Agreement is not
adopted by the Company's stockholders, it is anticipated that BlueStone will be
further engaged by the Board of Directors to render financial advice.
8
<PAGE> 10
DESCRIPTION OF THE MERGER AGREEMENT
GENERAL. Material terms of the Merger Agreement are summarized below. Such
summary does not purport to represent a complete description of the transaction
and is qualified in its entirety by the terms of the Merger Agreement, which is
attached as Appendix A to this Proxy Statement.
Subject to the adoption of the Merger Agreement by the Company's
stockholders at the meeting, the satisfaction of the other conditions of closing
and the actual closing of the transaction after the meeting, the merger will be
consummated upon the filing of a Certificate of Merger with the State of
Delaware. At such time, the independent existence of the Company as a legal
entity will cease. Although MTC will continue as the surviving legal entity, it
is anticipated that MTC will change its name to a name similar or identical to
that of the Company.
PRINCIPAL CONDITIONS OF CLOSING. A required condition of the closing of the
merger is that the Company's stockholders adopt the Merger Agreement at the
meeting. Under the DGCL such stockholder approval requires the affirmative vote
of a majority of the Company's outstanding shares of Common Stock. In this
connection, both of the Company's executive officers, two other Board members
who are stockholders and another stockholder who owns more than 5% of the
Company's outstanding shares of Common Stock have entered into Voting Agreements
with SPS to vote in favor of the merger and to vote against any competing
proposal which may arise. The Voting Agreements cover an aggregate of 744,982
shares, or 26%, of the Company's Common Stock. A somewhat related condition of
closing is that SPS may cancel the closing and terminate the Merger Agreement if
Dissenting Shares aggregate more than 1% of the then outstanding shares of the
Company's Common Stock.
Apart from stockholder approval, the consummation of the merger is also
dependent upon several other conditions, including that SPS be satisfied as to
the operations and prospects of the Company after having conducted a due
diligence investigation relative to the Company. In addition, the Company's
representations and warranties must be true in all material respects as a
condition of closing notwithstanding the independent investigation of SPS.
Another condition of closing is that no more than ten of the Company's
largest stockholders agree to exchange an aggregate of at least 45%, but no more
than 51%, of the Company's total outstanding shares for SPS Stock based upon the
ratio of (a) 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 to
(b) $5.00 per share. Under the Merger Agreement, SPS retains the right to
approve a higher number than ten stockholders to be included in this category
and/or to decrease the 45% requirement or increase the 51% limit.
As of the Record Date, 13 stockholders owning an aggregate of 41% of the
Company's outstanding shares of Common Stock, including Messrs. Diamond and
McNeil, have entered into Stock Purchase Agreements with SPS in which they have
agreed to accept payment in the form of SPS Stock for all or most of their
shares of the Company's Common Stock if the merger is approved. (The Stock
Purchase Agreements do not commit these stockholders to vote for the merger;
however, four of these persons have also entered into separate Voting Agreements
with SPS in which they have agreed to vote to adopt the Merger Agreement). By
SPS having entered into Stock Purchase Agreements with all 13 of the above
parties, SPS has effectively waived the conditions that the number of persons
taking SPS Stock not exceed ten.
There exist a number of other conditions of closing, including the
cancellation of all outstanding options, the obtaining of any required third
party consents, the absence of any intervening litigation and the delivery of
tax opinions concerning the transaction.
PAYMENT OF CONSIDERATION BY SPS. Concurrently with the closing of the
merger, some or all of the shares of the Company's Common Stock owned by
stockholders who are parties to Stock Purchase Agreements will be exchanged for
SPS Stock as described above. The shares of the Company's Common Stock acquired
by SPS in this fashion will not be deemed to be outstanding at the closing and
will not be entitled to receive the $5.00 cash consideration at the closing. All
existing options and warrants to purchase shares of the Company's Common Stock
will be terminated prior to the closing. Each option holder will be paid an
amount of cash equal to the excess, if any, of $5.00 per share over the
applicable exercise price under the option for each such optioned share. The
warrants will be terminated without any payment to the warrant holders since
they are exercisable at $5.00 per share.
9
<PAGE> 11
All other stockholders not dissenting from the merger will be entitled to
receive a cash payment equal to the sum of $5.00 for each share of the Company's
Common Stock held by them effective upon the consummation of the merger. As soon
as practicable thereafter, an exchange agent selected by SPS will mail a
transmittal letter to each holder of record of shares of the Company's Common
Stock (other than to holders of Dissenting Shares) with instructions regarding
the exchange of such shares for the cash consideration of $5.00 per share. Upon
each stockholder's surrender of a stock certificate(s) representing shares of
the Company's Common Stock, together with a properly executed transmittal letter
and such other documents as SPS may reasonably request, such stock
certificate(s) will be cancelled and payment of the consideration will be mailed
to the stockholder. Until so surrendered, each such stock certificate will from
and after the closing represent only the right to receive the cash consideration
with respect to the shares of the Company's Common Stock represented thereby.
HOLDERS OF COMPANY COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES WITH THE
ENCLOSED PROXY CARD. SHAREHOLDERS SHOULD SEND STOCK CERTIFICATES ONLY TO THE
EXCHANGE AGENT AND ONLY AFTER THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
THE COMPANY'S REPRESENTATIONS, WARRANTIES AND COVENANTS. The Merger
Agreement contains many customary representations, warranties and covenants on
the part of the Company. Included among the covenants is the obligation of the
Company to conduct its business in the ordinary course, but restricting it from
doing so in certain respects. For instance, absent the approval of SPS, the
Company may not: change its capital structure, including the issuance of new
shares; nor declare any dividends; nor amend its Certificate of Incorporation or
By-Laws; nor enter into any other corporate merger or major acquisition; nor
dispose of or encumber any assets except in the ordinary course of business; nor
incur any significant indebtedness; nor grant any extraordinary salary or wage
increases, bonuses or other compensation; nor make any capital expenditures in
excess of $25,000 without SPS's prior approval; nor modify or terminate any
significant contract or lease. (For greater detail refer to Article V on pages
7-21 of the Merger Agreement regarding representations and warranties, and
Section 6.1 on pages 24-27 of the Merger Agreement regarding certain covenants
relating to operations.)
THE COMPANY'S OBLIGATIONS CONCERNING COMPETING OFFERS. The Company has
agreed that it will not, directly or indirectly, initiate, solicit or encourage
any inquiry or the making of any proposal which constitutes, or may be
reasonably expected to lead to, a competing offer or transaction. The
prohibition includes furnishing non-public information to any other parties and
extends to the Company's officers, directors, employees, representatives,
agents, affiliates, investments bankers, attorneys and accountants. Furthermore,
the Company must provide SPS with all relevant information about, or copies of,
any such inquiries or proposals. Exceptions to the above prohibition permit the
Company's Board of Directors (a) to comply with its fiduciary duties to
communicate any competing tender offer which might arise to the Company's
stockholders, together with any recommendation with respect thereto and (b) to
furnish information to, and enter discussions with, any party who, prior to
September 7, 1997, states in writing that it has a serious interest in making a
bona fide economically superior proposal; provided that the Board of Directors
determines that such action is necessary to comply with its fiduciary duties and
that the competing party is financially capable of completing such a
transaction, that the Company gives SPS two business days' notice that it is
taking such action and that the Company obtains a non-disclosure agreement from
such party as restrictive as that which it has previously obtained from SPS. In
addition to the above restrictions, the Company's Board of Directors may not,
prior to September 7, 1997, withdraw or modify its recommendation of the merger
nor endorse any competing proposal unless it determines that it must do so in
order to comply with its fiduciary duties, and then only upon prior notice to
SPS and the payment to SPS of a $480,000 termination fee as discussed below.
(For greater detail and definitions concerning competing offers and superior
proposals refer to Section 6.2 on pages 27-29 of the Merger Agreement.)
TERMINATION OF THE TRANSACTION. The Merger Agreement may be terminated at
any time prior to the closing: (a) by mutual consent of the Company and SPS; (b)
by either party if the merger is not consummated by December 31, 1997; (c) by
either party if any court issues a final, nonappealable decree prohibiting the
transaction; (d) by either party in the event of a material, uncured failure or
breach of the representations, warranties or covenants on the part of the other
party; (e) by SPS, prior to September 7, 1997, if its due diligence
investigation uncovers a material business problem or if it is unsatisfied with
respect to continuing relations with Xerox after the merger; (f) by SPS if the
Company's Board of Directors withdraws or modifies it recommendation in favor of
the merger or entertains, recommends or enters into a competing proposal, or if
the Company's stockholders fail to approve the merger at the meeting by the
necessary majority of outstanding shares of Common Stock or (g) by the Company
if it enters into a definitive agreement relating to a superior transaction by
September 7, 1997. (For greater detail refer to Sections 8.1-8.4 on pages 35-37
of the Merger Agreement.)
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<PAGE> 12
TERMINATION FEE PAYABLE BY THE COMPANY. The Company is obligated to pay SPS
a $480,000 termination fee if the transaction is terminated for any of the
following reasons: (a) in the event that the Company shall have willfully caused
a material failure or breach of its representations, warranties or covenants; or
(b) in the event that the Company's Board of Directors withdraws or modifies it
recommendation in favor of the merger or entertains, recommends or enters into a
competing proposal or (c) in the event that the Company's stockholders fail to
approve the merger at the meeting by the necessary majority of outstanding
shares of Common Stock. Otherwise, the Company and SPS are each responsible for
its own fees and expenses incurred in connection with the transaction. In the
case of the Company, this includes the $100,000 fee which the Company paid to
BlueStone in connection with its fairness opinion regarding the transaction.
FUTURE OPERATION AND AGREEMENTS WITH THE COMPANY'S MANAGEMENT. After the
merger, although MTC will be a subsidiary of SPS, it will operationally be a
part of Arnold, which is headquartered in Marengo, Illinois. SPS has informed
the Company that it plans to continue the operation of the Company's business
from its two plants in Rochester, New York and Rochester, England. Isadore
Diamond, founder of the Company and Chairman of the Board of Directors, will
retire upon the merger and will enter into a covenant-not-to-compete with MTC in
consideration of a payment of $10,000 per year plus MTC's maintenance of his
medical insurance. SPS has also agreed to indemnify the Company's officers and
directors, for a period of seven years after the closing, with respect to any
claims or actions arising out of any such party's prior position as an officer
or director of the Company. (For greater detail refer to Section 6.7 on pages
30-31 of the Merger Agreement.)
As a condition of the transaction, SPS required that Gordon H. McNeil, the
Company's President and CEO, enter into a five-year covenant-not-to-compete
agreement, including a three-year employment agreement at a salary rate
approximately 70% of his current salary compensation, although with bonus
provisions that could increase his compensation closer to, or slightly above,
his current compensation if MTC meets certain performance levels in the future.
Mr. McNeil agreed to do so.
In recognition of Messrs. Diamond's and McNeil's tenure with the Company
(each in excess of 25 years) and the Company's performance in Fiscal 1997, the
Company's Board of Directors took the following two actions at the same time it
approved the merger transaction (on August 7, 1997), both of which actions are
effective upon the closing of the transaction: (A) The Company will transfer to
Mr. Diamond the vehicle currently leased by the Company for his use, thereby
incurring an expense of approximately $30,000 in Fiscal 1997 in connection with
the termination of the vehicle lease. (B) The Company will pay Mr. McNeil a
bonus of $50,000, the expense of which will be charged against Fiscal 1997
operating results.
REGULATORY APPROVALS. No governmental approvals are required in connection
with the merger transaction.
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<PAGE> 13
ACCOUNTING AND TAX CONSEQUENCES OF THE MERGER
The merger will be treated by SPS as a "purchase" (rather than a "pooling")
for accounting purposes, and the Company's assets will be revalued by SPS
relative to their fair value effective upon the merger. All of the consideration
paid in the transaction will be delivered by SPS directly to the Company's
stockholders and the Company will cease its existence as a legal entity;
therefore, there will be no separate treatment of the transaction by the Company
for accounting purposes, nor will there be taxation at the corporate level.
Neither the Company, SPS nor MTC will recognize gain or loss as a result of the
transaction, MTC's holding period for the Company's assets after the transaction
will be the same as the Company's holding period for such assets prior to the
transaction, and MTC's tax basis in the assets will be the same as the Company's
tax basis in such assets prior to the transaction.
The following discussion summarizes the material federal income tax
consequences of the transaction to the Company's stockholders. THE FEDERAL
INCOME TAX DISCUSSION SET FORTH BELOW NECESSARILY IS NOT SPECIFIC TO THE
SITUATION OF A PARTICULAR STOCKHOLDER AND IS INCLUDED FOR GENERAL INFORMATION
ONLY. EACH STOCKHOLDER OF THE COMPANY SHOULD CONSULT HIS OR HER OWN TAX ADVISER
AS TO THE SPECIFIC TAX CONSEQUENCES OF THE TRANSACTION AS TO HIM OR HER,
INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, FEDERAL, STATE, LOCAL AND OTHER
TAX LAWS.
The federal income tax consequences to a stockholder depend upon (a) the
form of consideration received in exchange for the shares of the Company's
Common Stock actually owned by him or her and (b) in the case of a stockholder
receiving cash, or a combination of cash and SPS Stock, the form of
consideration received in exchange for shares of the Company's Common Stock
deemed to be constructively owned by him or her under Section 318(a) of the
Code. Generally, under Section 318(a), a stockholder is deemed to constructively
own shares owned directly or indirectly by certain related individuals
(including spouses, children, grandchildren and parents) or by certain related
entities (including partnerships, trusts, estates, and corporations in which the
stockholder owns, directly or indirectly, 50% or more in value of the stock).
Under Section 318(a), if any person has an option to acquire stock, such stock
is considered as owned by such person.
1. Stockholders Receiving Solely SPS Stock. A stockholder who receives
solely SPS Stock in the merger transaction (i.e. who enters into a Stock
Purchase Agreement with SPS) in exchange for all shares of MTC Common Stock
actually owned by him or her will not recognize any gain or loss upon such
exchange. The tax basis of the SPS Stock received in such exchange will be equal
to the basis of the shares of the Company's Common Stock surrendered and,
provided that the shares of the Company's Common Stock surrendered were held as
capital assets at the time of such exchange, the holding period of the SPS Stock
received will include the holding period of the shares of the Company's Common
Stock surrendered.
2. Stockholders Receiving Solely Cash. If all the shares of the Company's
Common Stock actually owned and deemed to be constructively owned under Code
Section 318(a) by a stockholder are exchanged in the merger transaction solely
for cash or upon the exercise of dissenters' rights, such stockholder will
recognize capital gain or loss (provided that he or she held the shares actually
owned by him or her as capital assets at the time of the exchange) measured by
the difference between such stockholder's tax basis in the shares of the
Company's Common Stock actually owned by him or her and the amount of cash
received by him or her in exchange for such shares. The stockholder's capital
gain (if any) will be taxed under the Code at the following maximum rates: 20%
if his or her holding period for such shares is greater than 18 months as of the
date of the transaction; 28% if his or her holding period is greater than one
year but not more than 18 months as of the date of the transaction; or at 39.6%
(the maximum ordinary income rate) if his or her holding period is one year or
less as of the date of the transaction.
If a stockholder exchanges all the shares of the Company's Common Stock
actually owned by him or her solely for cash or upon the exercise of dissenters'
rights, but shares of the Company's Common Stock constructively owned by him or
her under Code Section 318(a) are exchanged in whole or in part for SPS Stock,
then the tax consequences to such stockholder will be determined under Code
Section 302, which deals with redemptions. Section 302 contains three tests that
are relevant in this context to determine whether a redemption is taxed as
ordinary income or as a capital gain or loss (provided that the shares were held
as capital assets at the time of the exchange). Under Section 302, a redemption,
to the extent of available undistributed earnings and profits, is treated as a
dividend resulting in ordinary income unless it (a) is "not essentially
equivalent to a dividend"; (b) is "substantially disproportionate" with respect
to the stockholder; or (c) completely terminates the stockholder's interest. If
one of those tests is satisfied, capital gain or loss recognized will be
measured by the difference between the amount of cash received by the
stockholder in exchange for the shares of the Company's Common Stock
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<PAGE> 14
actually owned by him or her and his or her tax basis in those shares. If none
of the tests is satisfied, the stockholder will be treated as having received
dividend income equal to the amount of cash received (without deduction for such
stockholder's tax basis in the shares of the Company's Common Stock).
Whether the transaction will be "not essentially equivalent to a dividend"
with respect to a particular stockholder depends upon the particular
circumstances applicable to such stockholder, there being no precise
mathematical formula whereby it is possible to assure satisfaction of this test.
On the other hand, the "substantially disproportionate" test is a
mathematical test. The transaction will be "substantially disproportionate" with
respect to a stockholder if his or her percentage ownership of SPS voting stock
after the merger (considering shares actually and constructively owned) is less
than 50% of all SPS voting stock and less than 80% of his or her hypothetical
percentage ownership of the total number of shares of SPS voting stock
immediately after the transaction if all of the shares of the Company's voting
stock owned by him or her had been exchanged for SPS voting stock (considering
shares actually and constructively owned).
The third test is the complete termination of interest, which can only be
satisfied if all the shares of the Company's voting stock actually and
constructively owned by a stockholder are exchanged solely for cash or upon the
exercise of dissenters' rights, except that Code Section 302 sets forth a
procedure which, under certain circumstances, allows a waiver of the
constructive ownership rules as they apply to family members.
Under the rules of Section 302, a Company stockholder who receives cash for
any shares of the Company's Common Stock actually owned by him or her risks
having such amounts treated as a dividend rather than as capital gains if any
shares of the Company's Common Stock constructively owned by him or her are
exchanged in whole or in part for SPS Stock, the substantially disproportionate
test is not met, and the stockholder cannot or does not waive constructive
ownership of the shares held by others but which are attributed to him or her.
IF A STOCKHOLDER HAS A DIFFERING BASIS AND/OR HOLDING PERIODS IN RESPECT OF
HIS OR HER SHARES OF THE COMPANY'S COMMON STOCK, HE OR SHE SHOULD CONSULT HIS OR
HER TAX ADVISOR PRIOR TO THE MERGER AND THE SHARE EXCHANGES WITH REGARD TO
IDENTIFYING THE PARTICULAR BASIS AND/OR HOLDING PERIOD OF THE SHARES OF THE
COMPANY'S COMMON STOCK TO BE SOLD IN THE MERGER AND THE SHARE EXCHANGES AND THE
PARTICULAR BASES AND/OR HOLDING PERIODS OF THE PARTICULAR SHARES OF SPS STOCK HE
OR SHE RECEIVES IN THE TRANSACTION, SINCE SEVERAL METHODS OF DETERMINATION MAY
BE AVAILABLE.
3. Stockholders Receiving a Mixture of Cash and SPS Stock. A stockholder
who receives a combination of cash and SPS Stock in the transaction in exchange
for all the shares of the Company's Common Stock actually owned by him or her
will not recognize any loss realized on such exchange, but will recognize any
gain realized to the extent of the amount of cash received. Such recognized gain
will be eligible for capital gain treatment (provided that the shares of the
Company's Common Stock were held as capital assets at the time of the exchange)
unless the receipt of the cash has the effect of a distribution of a dividend
(determined with the application of the constructive ownership rules of Code
Section 318(a) as discussed above) as provided in Code Section 356(a)(2), in
which event all of such recognized gain would be taxed as dividend income (or,
if less, the portion thereof up to such stockholder's ratable share of the
undistributed earnings and profits of the Company). In determining dividend
equivalency under Section 356(a)(2), the Internal Revenue Service has stated
that it will apply the tests of Section 302 dealing with redemptions. Applying
the tests under Section 302, the cash received would be eligible for capital
gain treatment (rather than dividend income) only if the "not essentially
equivalent to a dividend" test or "substantially disproportionate" test
discussed above is satisfied. The stockholder's capital gain (if any) will be
taxed under the Code at the following maximum rates: 20% if his or her holding
period for such shares is greater than 18 months as of the date of the
transaction; 28% if his or her holding period is greater than one year but not
more than 18 months as of the date of the transaction; or at 39.6% (the maximum
ordinary income rate) if his or her holding period is one year or less as of the
date of the transaction.
The tax basis of the SPS Stock received by a stockholder who receives a
combination of cash and SPS Stock in exchange for shares of the Company's Common
Stock actually owned by him or her will be the same as the basis of the shares
of the Company's Common Stock exchanged, decreased by the amount of cash
received and increased by the amount of gain recognized, if any, including the
portion of any such gain treated as a dividend. The holding period of the SPS
Stock received will be the same as the holding period of the shares of the
Company's Common
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<PAGE> 15
Stock exchanged, provided that such shares of the Company's Common Stock were
held as capital assets at the time of the exchange.
NEITHER THE COMPANY NOR SPS NOR ANY OTHER PARTY GUARANTEES THAT THE ABOVE
TAX RESULTS WILL BE OBTAINED. ALL STOCKHOLDERS ARE ADVISED TO CONSULT THEIR OWN
TAX ADVISORS AS TO THE TAX CONSEQUENCES OF THE TRANSACTION AS IT RELATES TO
THEM, INCLUDING THE EFFECTS OF ANY FEDERAL, STATE OR LOCAL TAX LAWS.
RESTRICTIONS ON SPS STOCK TO BE ISSUED
While most of the Company's stockholders will receive cash for their shares
of the Company's Common Stock, a limited number of the Company's largest
stockholders have agreed or will agree to exchange at least 45%, but no more
than 51%, of the Company's total outstanding shares of Common Stock, valued at
$5.00 per share, for shares of SPS 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. The sale of the SPS Stock thus issued will
be unregistered under the Act and such shares will be restricted from sale on
the public market until they are registered by SPS or their sale becomes
eligible for an exemption under Rule 144 as promulgated by the Securities and
Exchange Commission.
Under Rule 144 as currently in effect, a stockholder may publicly sell his
or her shares of SPS Stock so obtained after one year has elapsed from the date
of the acquisition of the SPS Stock on the following bases. Each such
stockholder will be entitled to sell, within any three-month period thereafter,
that number of shares of SPS Stock that does not exceed the greater of 1% of the
then outstanding shares of SPS Stock or the average weekly trading volume of SPS
Stock during the four calendar weeks preceding the date on which notice of the
sale is filed with the Securities and Exchange Commission; provided that the
selling stockholder gives such prior notice, that each such sale is made in a
certain manner and that current information about SPS is publicly available. If,
however, a two-year holding period has elapsed from the date of the
stockholder's acquisition of the SPS Stock and the stockholder is not an
"affiliate" of SPS at any time during the 90 days prior to such sale, then such
stockholder may sell shares of SPS Stock publicly without regard to the above
limitations as to volume, prior notice, manner of sale or public information.
Each stockholder who receives SPS Stock will have entered into a Stock
Purchase Agreement with SPS in which he or she represents, among other things,
that he or she is an "accredited investor" within the meaning of Rule 501 as
promulgated under the Act and is taking the SPS Stock for investment purposes
and not for distribution. Prior to the execution of each such Stock Purchase
Agreement, SPS has provided, or will provide, to each of such stockholder a
private placement memorandum describing both the transaction and SPS, together
with copies of all of SPS's recent public filings with the Securities and
Exchange Commission. (The private placement memorandum has been provided only to
stockholders who are "accredited investors".)
As of the Record Date, 13 stockholders owning an aggregate of 41% of the
Company's outstanding shares of Common Stock, including Messrs. Diamond and
McNeil, have entered into Stock Purchase Agreements with SPS in which they have
agreed to accept payment in the form of SPS Stock for their shares of the
Company's Common Stock if the merger is approved (the Stock Purchase Agreements
do not commit these stockholders to vote for the merger, although four of them
have entered into separate Voting Agreements to do so).
In order to induce larger stockholders to enter into the necessary Stock
Purchase Agreements to tender their shares of the Company's Common Stock for SPS
Stock, SPS has offered limited registration rights to such stockholders under
which SPS may register their shares of SPS Stock under the Act.
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<PAGE> 16
MARKET FOR THE COMPANY'S COMMON STOCK
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
----------- -----------
Fiscal Quarter Ended High Low High Low
-------------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
July 31 (Fourth Quarter) $ 4.25 $ 3.13 $ 4.00 $ 3.25
April 30 (Third Quarter) 4.25 3.13 4.44 3.38
January 31 (Second Quarter) 4.75 3.25 5.00 4.00
October 31 (First Quarter) 4.00 3.00 5.28 4.00
</TABLE>
Note: The above quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions, and
may not represent actual transactions.
On the Record Date, the Company had approximately 2,600 stockholders of
record, plus an unknown number having their shares registered in "street name"
or in the name of a nominee.
The Company has paid no cash dividends on its Common Stock since its
inception and, if the Merger Agreement 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.
MARKET FOR SPS'S COMMON STOCK
SPS is authorized to issue 30,000,000 shares of $1.00 par value common
stock and 400,000 shares of $1.00 par value preferred stock. No shares of
preferred stock are outstanding. As of March 11, 1997, SPS had approximately
1,100 shareholders of record and 6,022,771 shares of common stock outstanding.
On July 29, 1997, the SPS Board of Directors declared a 2-for-1 stock split
effective as of August 20, 1997.
The common stock of SPS is listed on the New York Stock Exchange under the
symbol NYST:ST. On August 6, 1997, the day preceding the public announcement of
the Merger Agreement, the high and low sale prices of SPS's common stock were
$82.00 and $81.25, respectively. The price ranges at which SPS common stock
traded on the Exchange in the last eight quarters were as follows:
<TABLE>
<CAPTION>
Calendar Quarter Ended High Low
---------------------- ---- ---
<S> <C> <C>
Third Quarter of 1997 through July 31, 1997 $ 84.69 $ 70.25
Second Quarter of 1997 (ended June 30, 1997) 75.75 64.75
First Quarter of 1997 (ended March 31, 1997) 69.50 58.38
Fourth Quarter of 1996 65.38 58.63
Third Quarter of 1996 70.25 59.75
Second Quarter of 1996 71.25 55.63
First Quarter of 1996 56.63 51.25
Fourth Quarter of 1995 53.75 38.63
Third Quarter of 1995 41.00 36.00
</TABLE>
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<PAGE> 17
DESCRIPTION OF THE COMPANY
(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 74% and 80% in Fiscal 1995
and Fiscal 1996, respectively; however, both actions were nullified by
subsequent events, and Xerox's percentage of the Company's business increased to
approximately 90% in 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, almost half of MTE's Fiscal 1996 sales of
$2,020,000 were to a Xerox subsidiary.
The Austro Mold acquisition did not turn out to be beneficial to the
Company. After the acquisition, Austro Mold suffered both a sales decline and
cost overruns, incurring operating losses of approximately $2 million 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. (The Austro Mold loss was booked in the third quarter
of Fiscal 1996.) The Company remained profitable throughout Fiscal 1997. For the
first three quarters ended April 30, 1997, the Company reported a net income of
$742,519 on sales of $15,921,114. Sales for the full fiscal year were
approximately 21 million, and the Company's backlog at July 31, 1997 was
approximately $16 million, versus $8,513,000 at July 31, 1996.
(b) Current Business
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
16
<PAGE> 18
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
approximately $3 million of the Company's approximate $21 million 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 (Stackpole Corporation, GenCorp and Arnold)
are located in the United States. At least four Japanese firms also supply
magnets. The vendors which 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 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 ($1,000 in Fiscal 1996 and $6,000 in Fiscal 1995).
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 86 full-time employees at July 31, 1997.
(c) Properties
The Company operates out of two leased facilities described below.
The Company's corporate headquarters, core engineering staff and domestic
magnetic assembly manufacturing operations, including remanufacturing
operations, are located in a 70,000 square foot building at 770 Linden Avenue,
Rochester, New York. The facility is in good condition and management believes
that it has sufficient capacity to house up to $35 to $40 million of sales
volume per year. Under the terms of its lease expiring October 31, 2000, the
Company pays a rent of $30,468 per month. The landlord of the building is Linden
Properties, a partnership in which one partner is the Chairman of the Company's
Board of Directors and holder of more than 5% of the Company's Common Stock and
the other partner is also an owner of more than 5% of the Company's Common
Stock.
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 million of annual sales
volume. A ten-year lease agreement, with an option to terminate every two years,
is currently under negotiation, which lease will be subject to the approval of
both the Company's Board of Directors and SPS.
(d) Legal Proceedings
The Company is not now, and has not been in recent years, subject to any
material legal proceedings.
17
<PAGE> 19
INDEPENDENT PUBLIC ACCOUNTANTS
Price Waterhouse LLP has been the Company's independent auditor since 1988.
Representatives of Price Waterhouse LLP are expected to be present at the
meeting to respond to appropriate questions and to make a statement to
stockholders if they desire to do so.
STOCKHOLDER PROPOSALS AND OTHER MATTERS
If the Merger Agreement is not approved by the Company's stockholders at
the meeting, any proposal which a stockholder wishes to be presented at the
Annual Meeting of stockholders following Fiscal 1998 must be received by the
Secretary of the Company prior to July 31, 1998, in order to be placed before
the stockholders. (No such proposals were received in time to be eligible for
presentation at the Fiscal 1997 Annual Meeting if there be any.)
Because the meeting is a special meeting for the purposes set forth in this
Proxy Statement, it is anticipated that no other business will come before the
meeting. However, if any other matters properly come before the meeting, the
persons named as proxy holders in the enclosed proxy will have discretionary
authority to vote the shares represented thereby in accordance with their
judgment.
ADDITIONAL INFORMATION
Attached to this Proxy Statement are the following appendices:
Appendix A - The Merger Agreement
Appendix B - BlueStone's fairness opinion
Appendix C - Section 262 of the Delaware General Corporation Law
Appendix D - The Company's Annual Report on Form 10-KSB for
Fiscal 1996, as previously filed with the
Securities and Exchange Commission.
Appendix E - The Company's Form 10-QSB for the first three
quarters ended April 30, 1997 of Fiscal 1997, as
previously filed with the Securities and Exchange
Commission.
Incorporated by reference in this Proxy Statement are the following
additional documents as previously filed with the Securities and Exchange
Commission.
(1) SPS's Annual Report on Form 10-K for its fiscal year ended December 31,
1996.
(2) SPS's Quarterly Reports on Form 10-Q for its first quarter ended March
31, 1997, and its second quarter ended June 30, 1997.
(3) All documents subsequently filed by SPS with the Securities and
Exchange Commission.
Incorporated by reference in this Proxy Statement are all documents which
may be filed by the Company or SPS pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 subsequent to the date hereof and
prior to the date of the meeting to which this Proxy Statement relates, and
shall be deemed to be a part hereof from the date of the filings of such
documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein, or contained in this Proxy Statement, shall be
deemed to be modified or superseded for purposes of this Proxy Statement to the
extent that a statement contained herein or in any subsequently filed document
which also is deemed to be incorporated herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed to
constitute a part of this Proxy Statement, except as so modified or superseded.
18
<PAGE> 20
THE COMPANY WILL FURNISH WITHOUT CHARGE COPIES OF ANY INFORMATION INCORPORATED
BY REFERENCE HEREIN, EXCLUDING THE EXHIBITS THERETO, TO INTERESTED STOCKHOLDERS
WHOSE PROXY IS BEING SOLICITED HEREIN, UPON WRITTEN REQUEST OF SUCH PERSON AND
BY FIRST CLASS MAIL OR OTHER PROMPT MEANS WITHIN ONE BUSINESS DAY OF RECEIPT OF
SUCH REQUEST. THE COMPANY WILL ALSO FURNISH TO ANY SUCH PERSON ANY EXHIBITS
DESCRIBED IN SUCH REPORTS UPON PAYMENT OF REASONABLE FEES RELATING TO THE
COMPANY'S COST OF FURNISHING SUCH EXHIBITS. REQUESTS SHOULD BE DIRECTED TO SUSAN
M. WEISE, SECRETARY OF THE COMPANY, AT 770 LINDEN AVENUE, ROCHESTER, NY 14625.
By Order of the Board of Directors
Susan M. Weise
Secretary
September 15, 1997
Rochester, New York
19
<PAGE> 21
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
MAGNETIC TECHNOLOGIES CORPORATION
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS - OCTOBER 9, 1997
The undersigned hereby appoints ISADORE DIAMOND and GORDON H. McNEIL, and
each of them, proxies for the undersigned, with full power of substitution, to
vote as designated below all the shares of Common Stock of MAGNETIC TECHNOLOGIES
CORPORATION ("the Company") which the undersigned would be entitled to vote at
the Special Meeting of Stockholders to be held at the Industrial Management
Council in the Hutchison House, 930 East Avenue, Rochester, New York, on
Thursday, October 9, 1997, at 11:30 A.M., and at all adjournments thereof, on
the following matters:
(1) FOR [ ] or AGAINST [ ] or ABSTAIN [ ] with respect to a proposal to
approve and adopt an Agreement and Plan of Merger among the Company, SPS
Technologies, Inc. ("SPS") and MTC Acquisition Corp., a subsidiary of SPS, as
more fully described in the Proxy Statement relating to the meeting.
(2) OTHER BUSINESS: In their discretion, upon such other matters as may
come before the meeting.
THIS PROXY WILL BE VOTED AS DIRECTED ABOVE. IF AUTHORITY IS WITHHELD
PURSUANT TO ABOVE INSTRUCTIONS, THIS PROXY WILL BE VOTED FOR THE PROPOSAL TO
APPROVE AND ADOPT THE MERGER AGREEMENT.
(continued, and to be signed, on the other side)
(continued from the other side)
The undersigned acknowledges receipt of the Special Meeting Notice and
Proxy Statement.
Dated: , 1997
----------------------
---------------------------------
Signature of Stockholder
---------------------------------
Signature of Co-Owner
Please date this Proxy and sign exactly as
your name appears hereon. For a joint
account, all co-owners must sign. When
signing as attorney, executor,
administrator, trustee, guardian or officer
of a corporation, please use full title.
20
<PAGE> 22
Appendix A
AGREEMENT AND PLAN OF MERGER
AMONG
SPS TECHNOLOGIES, INC.,
MTC ACQUISITION CORP.
and
MAGNETIC TECHNOLOGIES CORPORATION
DATED AS OF AUGUST 7, 1997
<PAGE> 23
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
ARTICLE I - THE MERGER; EFFECTIVE TIME; CLOSING....................................................................
1.1 THE MERGER.......................................................................................
1.2 EFFECTIVE TIME...................................................................................
1.3 CLOSING..........................................................................................
1.4 EFFECTS OF THE MERGER............................................................................
ARTICLE II - CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE SURVIVING CORPORATION.................................
2.1 CERTIFICATE OF INCORPORATION.....................................................................
2.2 BY-LAWS..........................................................................................
ARTICLE III - DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION..................................................
3.1 DIRECTORS........................................................................................
3.2 OFFICERS.........................................................................................
ARTICLE IV - MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES IN THE MERGER; OPTIONS AND WARRANTS........
4.1 SHARE CONSIDERATION FOR THE MERGER; CONVERSION OR CANCELLATION OF SHARES IN THE MERGER; OPTIONS
AND WARRANTS.....................................................................................
4.2 EXCHANGE PROCEDURES..............................................................................
4.3 DISSENTING SHARES................................................................................
4.4 RELATED SHARE EXCHANGES..........................................................................
ARTICLE V - REPRESENTATIONS AND WARRANTIES.........................................................................
5.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................................................
5.2 REPRESENTATIONS AND WARRANTIES OF ACQUIROR.......................................................
ARTICLE VI - ADDITIONAL COVENANTS AND AGREEMENTS...................................................................
6.1 CONDUCT OF BUSINESS..............................................................................
6.2 NO SOLICITATION..................................................................................
6.3 MEETING OF STOCKHOLDERS..........................................................................
6.4 PROXY STATEMENT..................................................................................
6.5 ACCESS TO INFORMATION............................................................................
6.6 PUBLICITY........................................................................................
6.7 INDEMNIFICATION OF DIRECTORS AND OFFICERS........................................................
6.8 TAXES............................................................................................
6.9 MAINTENANCE OF INSURANCE.........................................................................
6.10 REPRESENTATIONS AND WARRANTIES...................................................................
</TABLE>
(i)
<PAGE> 24
<TABLE>
<S> <C>
6.11 REASONABLE BEST EFFORTS; OTHER ACTION............................................................
6.12 NOTIFICATION OF CERTAIN MATTERS..................................................................
ARTICLE VII - CONDITIONS...........................................................................................
7.1 CONDITIONS TO THE OBLIGATIONS OF ACQUIROR AND MERGER SUB.........................................
7.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY.....................................................
ARTICLE VIII - TERMINATION.........................................................................................
8.1 TERMINATION BY MUTUAL CONSENT....................................................................
8.2 TERMINATION BY EITHER ACQUIROR OR THE COMPANY....................................................
8.3 TERMINATION BY ACQUIROR..........................................................................
8.4 TERMINATION BY THE COMPANY.......................................................................
8.5 EFFECT OF TERMINATION AND ABANDONMENT............................................................
ARTICLE IX - MISCELLANEOUS AND GENERAL.............................................................................
9.1 PAYMENT OF EXPENSES..............................................................................
9.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.......................................................
9.3 MODIFICATION OR AMENDMENT........................................................................
9.4 WAIVER OF CONDITIONS.............................................................................
9.5 COUNTERPARTS.....................................................................................
9.6 GOVERNING LAW....................................................................................
9.7 NOTICES..........................................................................................
9.8 ENTIRE AGREEMENT; ASSIGNMENT.....................................................................
9.9 PARTIES IN INTEREST..............................................................................
9.10 CERTAIN DEFINITIONS..............................................................................
9.11 SEVERABILITY.....................................................................................
9.12 SPECIFIC PERFORMANCE.............................................................................
9.13 CAPTIONS.........................................................................................
</TABLE>
(ii)
<PAGE> 25
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of August 7,
1997, among SPS Technologies, Inc., a Pennsylvania corporation ("Acquiror"), MTC
Acquisition Corp., a Delaware corporation and direct wholly owned subsidiary of
Acquiror ("Merger Sub"), and Magnetic Technologies Corporation, a Delaware
corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of Acquiror, Merger Sub and the
Company have each determined that it is in the best interests of their
respective stockholders for the Company to merge with and into Merger Sub upon
the terms and subject to the conditions of this Agreement and the stockholder of
Merger Sub has approved this Agreement as required under the Delaware General
Corporation Law, as amended (the "DGCL");
WHEREAS, for federal income tax purposes, it is intended that the
Merger (as defined in Section 1.1) shall qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code");
WHEREAS, certain holders (each, a "Stockholder" and, collectively, the
"Stockholders") of Shares (as defined in Section 4.1(a)) are entering or will
enter into Stock Purchase Agreements and/or Voting Agreements, forms of which
are attached as EXHIBIT A hereto (the "Stock Purchase Agreements") and EXHIBIT B
hereto (the "Voting Agreements"); and
WHEREAS, Acquiror, Merger Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements set forth herein, Acquiror, Merger Sub and
the Company hereby agree as follows:
ARTICLE I - THE MERGER; EFFECTIVE TIME; CLOSING
1.1 THE MERGER. Upon the terms and subject to the conditions set forth
in this Agreement, and in accordance with the DGCL, at the Effective Time (as
defined in Section 1.2 below), the Company and Merger Sub shall consummate a
merger (the "Merger") in which (a) the Company shall be merged with and into
Merger Sub and the separate corporate existence of the Company shall thereupon
cease, and (b) Merger Sub shall continue as the surviving corporation in the
Merger (the "Surviving Corporation") and shall succeed to and assume all of the
rights, properties, liabilities and obligations of the Company.
<PAGE> 26
1.2 EFFECTIVE TIME. Subject to the provisions of this Agreement, as
promptly as practicable after all of the conditions set forth in Article VII
shall have been satisfied or, if permissible, waived by the party entitled to
the benefit of the same, Merger Sub and the Company shall cause the Merger to be
consummated by filing a Certificate of Merger (the "Certificate of Merger") with
the Secretary of State of the State of Delaware, in such form as required by,
and executed in accordance with, the relevant provisions of the DGCL as soon as
practicable on or after the Closing Date (as defined in Section 1.3). The Merger
shall become effective upon such filing or at such time thereafter as is
provided in the Certificate of Merger (the "Effective Time").
1.3 CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Article
VIII, and subject to the satisfaction or waiver of the conditions set forth in
Article VII, the closing of the Merger (the "Closing") shall take place at 10:00
a.m., Rochester time, on the date of the Stockholder Meeting (as hereinafter
defined) (or as soon as practicable thereafter following satisfaction or waiver
of the conditions set forth in Article VII (the "Closing Date"), in Rochester,
New York, unless another date, time or place is agreed to in writing by the
parties hereto.
1.4 EFFECTS OF THE MERGER. At the Effective Time, the Merger shall have
the effects set forth herein and in the applicable provisions of the DGCL.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all the property, rights, privileges, powers and franchises of
the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities, obligations, restrictions, disabilities and duties of the
Company and Merger Sub shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Corporation.
ARTICLE II - CERTIFICATE OF INCORPORATION AND
BY-LAWS OF THE SURVIVING CORPORATION
2.1 CERTIFICATE OF INCORPORATION. At the Effective Time, the
Certificate of Incorporation of Merger Sub as in effect immediately prior to the
Effective Time shall become the Certificate of Incorporation of the Surviving
Corporation, except that as of the Effective Time the name of the Surviving
Corporation shall be changed to Magnetic Technologies Corporation.
2.2 BY-LAWS. At the Effective Time, the By-Laws of Merger Sub as in
effect immediately prior to the Effective Time shall become the By-Laws of the
Surviving Corporation.
<PAGE> 27
ARTICLE III - DIRECTORS AND OFFICERS OF
THE SURVIVING CORPORATION
3.1 DIRECTORS. The directors of Merger Sub at the Effective Time shall,
from and after the Effective Time, be the directors of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Certificate of Incorporation and By-Laws.
3.2 OFFICERS. The officers of Merger Sub at the Effective Time shall,
from and after the Effective Time, be the officers of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Certificate of Incorporation and By-Laws.
ARTICLE IV - MERGER CONSIDERATION; CONVERSION
OR CANCELLATION OF SHARES IN THE MERGER; OPTIONS AND WARRANTS
4.1 SHARE CONSIDERATION FOR THE MERGER; CONVERSION OR CANCELLATION OF
SHARES IN THE MERGER; OPTIONS AND WARRANTS. The manner of converting shares of
the Company in the Merger and the treatment of Options and Warrants (each as
defined herein) shall be as follows:
(a) Subject to Section 4.4, at the Effective Time, each share
of common stock, $.15 par value ("Common Stock"), of the Company (the "Shares")
issued and outstanding as of the Effective Time (other than Shares owned by
Acquiror (including all Shares acquired by Acquiror pursuant to the Share
Exchanges contemplated by and defined in Section 4.4 hereof) or any direct or
indirect wholly owned subsidiary of Acquiror (collectively, "Acquiror
Companies") or by the Company and Shares subject to Section 4.3) at the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into the right to receive cash in the amount
of $5.00 per share (or a proportionate amount in the case of fractional shares)
(the "Merger Consideration"), upon surrender of the certificate representing
such shares of Common Stock in the manner provided in Section 4.2.
(b) Each Share that is directly owned by any of the Acquiror
Companies at the Effective Time (including, without limitation, those shares to
be exchanged immediately prior to the Closing pursuant to the Share Exchanges as
described in Section 4.4) and each Share that is directly owned by the Company
shall be canceled and retired and shall cease to exist and no consideration
shall be delivered or deliverable in exchange therefor.
(c) All Shares to be converted pursuant to this Section 4.1
shall, by virtue of the Merger and without any action on the part of the holders
thereof, cease to be outstanding, be canceled and retired and cease to exist,
and each holder of a certificate representing any such Shares (a "Company
Certificate") shall thereafter cease to have any rights with respect to such
3
<PAGE> 28
Shares, except the right to receive for each of the Shares, upon the surrender
of such certificate (or such instruments as are contemplated by Section 4.2(h))
in accordance with Section 4.2, the Merger Consideration.
(d) Prior to the Effective Time, the Company shall pay, or
cause to be paid, to each holder of then outstanding options to purchase Shares
(each, an "Option" and collectively, the "Options"), whether vested or unvested,
an amount of cash equal to the excess, if any, of $5.00 per share over the
applicable exercise price per share of Common Stock subject to such Option (such
difference to be computed separately for each Option outstanding immediately
prior to the Effective Time), subject in all cases to any required withholding
taxes (the "Option Consideration"). In return for the Option Consideration, each
such Option shall be settled and terminate at the Effective Time, in accordance
with (i) the terms thereof or (ii) an option termination agreement in form and
substance satisfactory to Acquiror. Said terminations shall be deemed a release
of any and all rights which such holders had or may have had in respect of such
Options. In connection with the Option terminations, the Company shall, when
applicable, obtain the consent of Option holders to the termination of their
Options by means of option termination agreements in form and substance
satisfactory to the Acquiror.
On or before August 8, 1997, the Company shall give notice of the
Merger to each holder of an outstanding warrant to purchase Common Stock (each,
a "Warrant" and collectively, the "Warrants") in accordance with the terms of
such Warrant and not later than October 7, 1997, all outstanding Warrants shall
terminate and be of no further force and effect in accordance with the terms
thereof.
As of and after the Effective Time, the Surviving Corporation shall not
be bound by any options, warrants, rights or agreements which would entitle any
person to own, purchase or receive any capital stock of the Company or the
Surviving Corporation, including without limitation the Options and Warrants,
all of which are listed in Section 4.1(d) of the Disclosure Schedule (as defined
in Section 5.1).
(e) At and after the Effective Time, the shares of capital
stock of Merger Sub shall remain outstanding.
4.2 EXCHANGE PROCEDURES.
(a) Prior to the Effective Time, Acquiror shall designate a
bank or trust company to act as agent for the holders of Shares(the "Exchange
Agent") to receive the funds to which holders of such Shares shall become
entitled pursuant to Section 4.1(a). At the Effective Time, Acquiror shall
transfer to the Exchange Agent by wire transfer to such account as the Exchange
Agent shall direct prior to the Effective Time the aggregate amount to be paid
to the holders of Shares pursuant to Section 4.1(a) (the "Exchange Fund"). The
Exchange Agent shall, pursuant to irrevocable instructions, deliver the Merger
Consideration pursuant to Section 4.1 out of the Exchange Fund as provided
herein.
4
<PAGE> 29
(b) As soon as reasonably practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of Shares
immediately prior to the Effective Time (excluding any Shares which will be
canceled pursuant to Section 4.1(b) or which are subject to Section 4.3) (i) a
letter of transmittal (the "Letter of Transmittal") (which shall specify that
delivery shall be effected, and risk of loss and title to the Company
Certificates shall pass, only upon delivery of such Company Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Acquiror shall specify) and (ii) instructions for use in effecting the surrender
of the Company Certificates in exchange for the Merger Consideration with
respect to the Shares formerly represented thereby.
(c) Upon surrender of a Company Certificate for cancellation
to the Exchange Agent, together with the Letter of Transmittal, duly executed,
and such other documents as Acquiror or the Exchange Agent shall reasonably
request, the holder of such Company Certificate shall be entitled to receive the
Merger Consideration for each Share represented thereby in exchange therefor.
Until surrendered as contemplated by this Section 4.2, each Company Certificate
shall be deemed at any time after the Effective Time to represent only the right
to receive the Merger Consideration with respect to the Shares formerly
represented thereby. No interest will be paid or will accrue on any amount
payable in cash pursuant to Section 4.1(a). Upon surrender of a Company
Certificate, such Company Certificate shall forthwith be canceled.
(d) If payment in respect of Shares surrendered to the
Exchange Agent is to be made to a person other than the person in whose name a
surrendered certificate is registered, it shall be a condition to such payment
that the certificate so surrendered shall be properly endorsed or shall be
otherwise in proper form for transfer and that the person requesting such
payment shall have paid any transfer and other taxes required by reason of such
payment or shall have established to the satisfaction of the Surviving
Corporation or the Exchange Agent that such taxes either have been paid or are
not payable.
(e) At the Effective Time, the stock transfer books of the
Company shall be closed and there shall be no further registration of transfers
of shares of Common Stock thereafter on the records of the Company. From and
after the Effective Time, the holders of certificates evidencing ownership of
shares of Common Stock outstanding immediately prior to the Merger shall cease
to have any rights as stockholders of the Company or otherwise with respect to
such shares, except as otherwise provided herein or by law. No dividends or
other distribution declared after the Effective Time with respect to any shares
of capital stock of the Company or the Surviving Corporation shall be paid to
the holder of any unsurrendered certificate or certificates formerly
representing shares of Common Stock.
(f) Notwithstanding anything to the contrary in this
Agreement, and subject to Section 4.2(g), none of the Exchange Agent, the
Surviving Corporation or any party hereto shall be liable to a holder of a
certificate or certificates formerly representing shares of Common Stock
5
<PAGE> 30
for any amount properly paid to a public official pursuant to any applicable
property, escheat or similar law.
(g) Promptly following the date of the first anniversary of
the Effective Time, the Exchange Agent shall return to the Surviving Corporation
all cash in its possession relating to the transactions described in this
Agreement, and the Exchange Agent's duties shall terminate. Thereafter, each
holder of a certificate formerly representing Shares may surrender such
certificates to the Surviving Corporation and (subject to applicable abandoned
property, escheat and similar law) receive in exchange therefor cash in
accordance with Section 4.1(a) hereof, without any interest thereon. If any
Company Certificates shall not have been surrendered prior to seven years after
the Effective Time (or, immediately prior to such earlier date on which any
Merger Consideration in respect of such Company Certificates would otherwise
escheat to or become the property of any governmental authority), any such
Merger Consideration in respect of the Shares represented by such Company
Certificates shall, to the extent permitted by applicable laws, become the
property of Acquiror.
(h) In the event that any Company Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
Person claiming such Company Certificate to be lost, stolen or destroyed and, if
required by Acquiror, the posting by such Person of a bond in such reasonable
amount as Acquiror may direct and/or an indemnification agreement as indemnity
against any claim that may be made against it with respect to such Company
Certificate, the Exchange Agent (or Acquiror, as the case may be) will issue in
exchange for such lost, stolen or destroyed Company Certificate the Merger
Consideration deliverable in respect of the Shares represented thereby pursuant
to this Agreement.
(i) Acquiror shall be entitled to, or shall be entitled to
cause the Exchange Agent to, deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of Shares such
amounts as are required to be deducted and withheld with respect to the making
of such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by Acquiror or the Exchange
Agent, as the case may be, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the Shares in
respect of which such deduction and withholding was made by Acquiror or the
Exchange Agent and such sums shall be remitted by Acquiror to the appropriate
taxing authorities.
4.3 DISSENTING SHARES. Notwithstanding any other provisions of this
Agreement to the contrary, Shares that are outstanding immediately prior to the
Effective Time and which are held by stockholders who shall have not voted in
favor of the Merger or consented thereto in writing and who shall have demanded
properly in writing appraisal for such shares in accordance with Section 262 of
the DGCL (collectively, the "Dissenting Shares") shall not be converted into or
represent the right to receive the Merger Consideration. Such stockholders
instead shall be entitled to receive payment of the appraised value of such
shares held by them in accordance with the provisions of Section 262 of the
DGCL, except that all Dissenting Shares held by stockholders who shall have
failed to perfect or who effectively shall have withdrawn or
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lost their rights to appraisal of such Shares under Section 262 of the DGCL
shall thereupon be deemed to have been converted into and to have become
exchangeable, at the Effective Time, for the right to receive, without any
interest thereon, the Merger Consideration upon surrender in the manner provided
in Section 4.1, of the Company Certificate or Certificates that, at the
Effective Time, evidenced such Shares. All payments with respect to Dissenting
Shares shall be paid by the Surviving Corporation with funds of the Company and
not with funds provided by any of the Acquiror Companies. The Company shall give
Acquiror (i) prompt notice of any written demands for appraisal of any Shares,
any withdrawals of such demands and any other instruments served pursuant to the
DGCL in connection therewith and (ii) the opportunity to direct all negotiations
and proceedings with respect to demands for appraisal under the DGCL. The
Company shall not, except with the prior written consent of Acquiror,
voluntarily make any payment with respect to any demands for appraisal of Common
Stock or offer to settle or settle any such demands.
4.4 RELATED SHARE EXCHANGES. Immediately prior to the Effective Time,
not greater than 10 (unless Acquiror has otherwise agreed) stockholders of the
Company shall have exchanged not less than 45% and not greater than 51% (unless
Acquiror has otherwise agreed) of the outstanding Shares for a number of shares
of Acquiror's Common Stock (the "Purchaser Shares"), equal to the quotient of
(a) the product of $5.00 times the number of Shares being exchanged, divided by
(b) the average of the daily last sales prices of Acquiror's Common Stock as
reported on the NYSE Composite Transactions reporting system (as reported in The
Wall Street Journal or, if not reported therein, in another mutually agreed upon
authoritative source) for the twenty consecutive full trading days in which such
shares are traded on the New York Stock Exchange ("NYSE") ending with the
closing of trading on the date which is one trading day prior to the date of the
Stockholder Meeting (as defined in Section 6.3), pursuant to Stock Purchase
Agreements substantially in the form attached hereto as EXHIBIT A. The closing
of such share exchanges (the "Share Exchanges") shall occur immediately prior to
and in conjunction with the Closing. All Shares exchanged in the Share Exchanges
shall not be deemed outstanding immediately prior to the Effective Time and,
accordingly, shall not be entitled to receive Merger Consideration.
ARTICLE V - REPRESENTATIONS AND WARRANTIES
5.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to Acquiror and Merger Sub that (except to the extent
set forth on the Disclosure Schedule previously delivered by the Company to
Acquiror (the "Disclosure Schedule"), which Disclosure Schedule specifically
references the lettered paragraph of this Section 5.1 to which any exceptions
stated therein relate):
(a) CORPORATE ORGANIZATION AND QUALIFICATION. Each of the
Company and its subsidiary Magnetic Technologies Europe Limited (the
"Subsidiary") is a corporation duly organized, validly existing and in good
standing under the laws of its respective
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jurisdiction of incorporation and is qualified and in good standing as a foreign
corporation in each jurisdiction where the properties owned, leased or operated,
or the business conducted, by it requires such qualification, except where
failure to so qualify or be in good standing would not have a Material Adverse
Effect (as defined in Section 9.10) with respect to the Company and the
Subsidiary. Each of the Company and the Subsidiary has all requisite power and
authority (corporate or otherwise) to own its properties and to carry on its
business as it is now being conducted. Except for the Subsidiary, the Company
has no subsidiaries or interests in other entities of any kind. The Company has
heretofore made available to Acquiror complete and correct copies of its
Certificate of Incorporation and By-Laws as currently in effect. Neither the
Company nor the Subsidiary is in violation of any of the provisions of its
Certificate of Incorporation, By-Laws or other charter documents.
(b) CAPITALIZATION. The authorized capital stock of the
Company consists of 15,000,000 Shares, of which, as of August 1, 1997, 2,786,515
Shares were issued and outstanding and no Shares were held in treasury. All of
the outstanding shares of capital stock of the Company and the Subsidiary have
been duly authorized and validly issued and are fully paid and nonassessable.
The Company has no outstanding stock appreciation rights. Except as set forth in
Section 5.1(b) of the Disclosure Schedule, no Shares are owned by any subsidiary
of the Company. All outstanding shares of capital stock or other equity
interests of the Subsidiary are owned by the Company, free and clear of all
liens, charges, encumbrances, claims and options of any nature. Except for the
Options and the Warrants, true, complete and correct copies of which have been
delivered to Acquiror prior to the date hereof, and except as set forth in
Section 5.1(b) of the Disclosure Schedule, there are not as of the date hereof
and there will not be at the Effective Time any outstanding or authorized
options, warrants, calls, rights (including preemptive rights), commitments or
any other agreements of any character to which the Company or the Subsidiary is
a party, or by which it may be bound, requiring it to issue, transfer, sell,
purchase, redeem or acquire any shares of capital stock or any securities or
rights convertible into, exchangeable for, or evidencing the right to subscribe
for, any shares of capital stock of the Company or the Subsidiary. There are not
as of the date hereof and there will not be at the Effective Time any
shareholder agreements, voting trusts or other agreements or understandings to
which the Company is a party or to which it is bound relating to the voting of
any shares of the capital stock of the Company (other than the Voting Agreements
between certain stockholders of the Company and Acquiror).
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<PAGE> 33
(c) APPROVALS; FAIRNESS OPINION.
(i) The Board of Directors of the Company at a
meeting duly called and held, has (i) determined that this Agreement and the
transactions contemplated hereby, including the Merger, are fair to and in the
best interests of the stockholders of the Company and has approved the same,
(ii) resolved to recommend that the holders of the Shares approve this Agreement
and the transactions contemplated hereby, including the Merger and (iii) taken
all action necessary with respect to the transactions contemplated hereby so as
to render inapplicable to such transactions, including, without limitation, the
agreements to purchase Shares pursuant to the Stock Purchase Agreements and the
purchase of such Shares, the restrictions on business combinations contained in
Section 203 of the DGCL.
(ii) The Board of Directors of the Company has
received an opinion from BlueStone Capital Partners ("BlueStone") to the effect
that the Merger Consideration to be offered to the holders of Shares in the
Merger is fair to such holders from a financial point of view and that the value
of cash consideration payable hereunder and the stock consideration payable in
connection with the Share Exchanges is substantially equivalent.
(d) AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has the
requisite corporate power and authority to approve, authorize, execute and
deliver this Agreement and to consummate the transactions contemplated hereby
(subject to the approval of the Merger by the affirmative vote of the holders of
a majority of the votes entitled to be cast by the holders of Shares in
accordance with the DGCL and the Company's Certificate of Incorporation). This
Agreement and the consummation by the Company of the transactions contemplated
hereby have been duly and validly authorized by the Board of Directors of the
Company and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby (other than the approval of the Merger by the affirmative
vote of the holders of a majority of the votes entitled to be cast by the
holders of Shares in accordance with the DGCL and the Company's Certificate of
Incorporation). This Agreement has been duly and validly executed and delivered
by the Company and, assuming this Agreement constitutes the valid and binding
agreement of Acquiror, constitutes the valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, subject,
as to enforceability, to bankruptcy, insolvency, reorganization and other laws
of general applicability relating to or affecting creditors, rights and to
general principles of equity.
(e) CONSENTS AND APPROVALS; NO VIOLATION. Neither the
execution and delivery of this Agreement by the Company nor the consummation by
the Company of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of the respective Certificate of
Incorporation (or other similar documents) or By-Laws (or other similar
documents) of the Company or the Subsidiary; (ii) require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
or regulatory authority or any other Person (including without limitation
pursuant to the Hart-
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<PAGE> 34
Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and
regulations promulgated thereunder), except (A) in connection with the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder, (B) the filing of the Certificate of
Merger pursuant to the DGCL and appropriate documents with the relevant
authorities of other states in which the Company is authorized to do business,
(C) such filings and consents as may be required under any environmental, health
or safety law or regulation pertaining to any notification, disclosure or
required approval triggered by the Merger or the transactions contemplated by
this Agreement, as set forth in Section 5.1(e) of the Disclosure Schedule, (D)
the consents, approvals, orders, authorizations, registrations declarations and
filings required under the laws of foreign countries (which consents, if any, it
shall be the obligation of Acquiror to obtain), (E) the approval of the holders
of a majority of the outstanding Shares required by the DGCL and the Company's
Certificate of Incorporation, (F) such filings as may be required with the
NASDAQ National Market or (G) where the failure to obtain such consent,
approval, authorization or permit, or to make such filing or notification, would
not in the aggregate have a Material Adverse Effect with respect to the Company
and the Subsidiary or adversely affect the ability of the Company to consummate
the transactions contemplated hereby; (iii) except as set forth in Section
5.1(e) of the Disclosure Schedule, result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default (or give
rise to any right of termination, cancellation or acceleration or result in the
creation of any lien or other charge or encumbrance) under any of the terms,
conditions or provisions of any note, license, agreement or other instrument or
obligation to which the Company or the Subsidiary or any of their assets may be
bound, except for such violations, breaches and defaults (or rights of
termination, cancellation or acceleration or creations of lien or other charge
or encumbrance) as to which requisite waivers or consents have been obtained or
which, in the aggregate, would not have a Material Adverse Effect with respect
to the Company or the Subsidiary or adversely affect the ability of the Company
to consummate the transactions contemplated hereby; or (iv) assuming the
consents, approvals, authorizations or permits and filings or notifications
referred to in this Section 5.1(e) are duly and timely obtained or made and the
approval of the Merger and the approval of this Agreement by the Company's
stockholders has been obtained, violate any order, writ, injunction, decree,
statute, rule or regulation applicable to the Company or the Subsidiary or to
any of their respective assets, except for violations which would not in the
aggregate have a Material Adverse Effect with respect to the Company and the
Subsidiary or adversely affect the ability of the Company to consummate the
transactions contemplated hereby. Except as set forth in Section 5.1(e) of the
Disclosure Schedule, the Company does not know of any pending or proposed
legislation, regulation or order (other than those affecting businesses such as
the Company's generally) applicable to the Company or the Subsidiary or to the
conduct of the business or operations of the Company or the Subsidiary which, if
enacted or adopted, could have a material Adverse Effect with respect to the
Company or the Subsidiary.
(f) LITIGATION; COMPLIANCE WITH LAWS. Except as disclosed in
the Company SEC Reports (as defined in Section 5.1(g)) filed and publicly
available prior to the date of this Agreement or as disclosed in Section 5.1(f)
of the Disclosure Schedule, there are no
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<PAGE> 35
actions, suits, or proceedings pending or, to the best knowledge of the Company,
threatened against the Company or the Subsidiary which could, individually or in
the aggregate, if adversely determined, reasonably be expected to have a
Material Adverse Effect with respect to the Company or the Subsidiary, nor is
there any judgment, decree, injunction, rule or order of any governmental or
regulatory authority or arbitrator outstanding against the Company or the
Subsidiary, which could, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect with respect to the Company or the
Subsidiary. Except as set forth in Section 5.1(f) of the Disclosure Schedule, as
of the date of this Agreement, no investigation or review by any governmental or
regulatory authority with respect to the Company or the Subsidiary is pending
or, to the knowledge of the Company, threatened, nor has the Company received
any notice from any governmental or regulatory authority indicating an intention
to conduct the same. Neither the Company nor the Subsidiary has violated or
failed to comply with any statute, law, ordinance, regulation, rule, judgment,
decree or order of any governmental authority or regulatory agency applicable to
its business or operations, except for violations and failures to comply that
could not, individually or in the aggregate, reasonably be expected to result in
a Material Adverse Effect with respect to the Company and the Subsidiary.
(g) SEC REPORTS; FINANCIAL STATEMENTS
(i) Since January 1, 1992, the Company has filed all
forms, reports and documents with the Securities and Exchange Commission (the
"SEC") required to be filed by it pursuant to the federal securities laws and
the SEC rules and regulations thereunder, all of which complied in all material
respects with all applicable requirements of the Securities Act of 1933, as
amended (the "Securities Act") and the Exchange Act and the rules and
regulations promulgated thereunder (collectively, the "Company SEC Reports").
None of the Company SEC Reports, including, without limitation, any financial
statements or schedules included therein, at the time filed contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(ii) The consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows (including the related notes thereto) of the Company included in the
Company SEC Reports complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a basis consistent with prior periods
(except as otherwise noted therein), and present fairly the consolidated
financial position of the Company and its consolidated subsidiaries as of their
respective dates, and the consolidated results of their operations and their
cash flows for the periods presented therein (subject, in the case of the
audited interim financial statements, to normal year-end adjustments). Except as
set forth in Section 5.1(g) of the Disclosure Schedule, since July 31, 1996,
there has not been any material change, or any application or request for any
material change, by the Company or the Subsidiary in accounting principles,
methods or policies for financial accounting purposes that
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<PAGE> 36
have affected or will affect the Company's consolidated financial statements
included in the Company SEC Reports or for tax purposes, except as required by
concurrent changes in GAAP.
(h) UNDISCLOSED LIABILITIES; ABSENCE OF CERTAIN CHANGES OR
EVENTS. Neither the Company nor the Subsidiary has any material indebtedness,
obligations or liabilities of any kind (whether accrued, absolute, contingent or
otherwise, and whether due or to become due or asserted or unasserted), and, to
the best knowledge of the Company, there is no basis for the assertion of any
claim or liability of any nature against the Company or the Subsidiary, which is
not fully reflected in, reserved against or otherwise described in the financial
statements included in the Company SEC Reports filed and publicly available
prior to the date of this Agreement. Except as disclosed in the Company SEC
Reports filed and publicly available prior to the date of this Agreement or in
Section 5.1(h) of the Disclosure Schedule, or as contemplated by this Agreement,
since July 31, 1996, the business of the Company and its subsidiaries has been
carried on only in the ordinary and usual course and there has not been (i) any
damage, destruction or loss, whether covered by insurance or not, which has, or
insofar as reasonably can be foreseen in the future is reasonably likely to
have, individually or in the aggregate, a material Adverse Effect with respect
to the Company or the Subsidiary; (ii) any declaration, setting aside or payment
of any dividend or other distribution (whether in cash, stock or property) with
respect to the Shares or any redemption, purchase or other acquisition of the
Shares; (iii) any change, occurrence or circumstance in the business, results of
operations, properties, assets, liabilities, prospects or condition (financial
or otherwise) of any character (whether or not in the ordinary course of
business) which, individually or in the aggregate, has had or is reasonably
likely to have, a Material Adverse Effect with respect to the Company or the
Subsidiary; (iv) other than in the ordinary course of business consistent with
past practice, any increase in the benefits payable under or establishment of
any bonus, insurance, severance, deferred compensation, pension, retirement,
profit sharing, stock option (including without limitation the granting of stock
options, stock appreciation rights, performance awards or restricted stock
awards), stock purchase or other employee benefit plan, or any other increase in
the compensation or other amounts payable or to become payable to any directors,
officers, key employees, representatives, consultants or advisers of the Company
or the Subsidiary, (v) any amendment to the charter or By-Laws of the Company or
the Subsidiary, (vi) any issuance or sale of any shares of capital stock of the
Company or the Subsidiary, or securities convertible into, or options with
respect to, or warrants to purchase the rights to subscribe to, any such shares,
or any agreements obligating the Company or any Subsidiary to do any of the
foregoing, (vii) any labor dispute affecting the Company or the Subsidiary,
other than routine labor matters, (viii) any transaction between the Company or
the Subsidiary on the one hand, and any affiliate of the Company (other than the
Subsidiary), on the other hand, other than transactions in the ordinary course
of business consistent with past practice, (ix) any commitment or transaction
entered into by the Company or the Subsidiary other than in the ordinary course
of its business consistent with past practice, (x) any change by the Company or
the Subsidiary in accounting principles or methods, except insofar as may be
required by a change in GAAP, or (xi) any other event or condition which is
reasonably likely to have a Materially Adverse Effect with respect to the
Company and the Subsidiary.
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(i) EMPLOYMENT AGREEMENTS. Except as set forth in Section
5.1(i) of the Disclosure Schedule, an Employment Agreement to be entered into
between the Company and Gordon H. McNeil as of the Closing Date and a covenant
not to compete to be entered into by the Company and Isadore Diamond as of the
Closing Date, the Company is not a party to any employment, consulting,
non-competition, severance, golden parachute, indemnification agreement or any
other agreement providing for payments or benefits or the acceleration of
payments or benefits upon the change of control of the Company (including,
without limitation, any contract to which the Company is a party involving
employees of the Company).
(j) BROKERS AND FINDERS. Except for the fees and expenses
payable to BlueStone, which fees and expenses are reflected in its agreement
with the Company, a true and complete copy of which (including all amendments)
has been furnished to Acquiror, the Company has not employed any investment
banker, broker, finder, consultant or intermediary in connection with the
transactions contemplated by this Agreement which would be entitled to any
investment banking, brokerage, finder's or similar fee or commission in
connection with this Agreement or the transactions contemplated hereby.
(k) PROXY STATEMENT. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the Proxy
Statement (as such term is defined in Section 6.4) will at the time of the
mailing of the Proxy Statement and at the time of the Stockholder Meeting (as
such term is defined in Section 6.3), contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. If at any time prior to the Effective
Time any event with respect to the Company, its officers and directors or the
Subsidiary should occur which is required to be described in a supplement to the
Proxy Statement, such event shall be so described, and such supplement shall be
promptly filed with the SEC and, as required by law, disseminated to the
stockholders of the Company. The Proxy Statement will (only with respect to the
Company) comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations promulgated thereunder.
(l) TAXES.
(i) The Company and the Subsidiary, and each
affiliated group (within the meaning of the Code) of which the Company or the
Subsidiary is or has ever been a member, has timely filed all federal income Tax
Returns (as defined below) and all other material Tax Returns and reports
required to be filed by it. All such Tax Returns are complete and correct in all
material respects. The Company and the Subsidiary have paid (or the Company has
paid on the Subsidiary's behalf) all Taxes (as defined below) shown due on such
Tax Returns. The most recent consolidated financial statements contained in the
SEC Reports reflect an adequate reserve for all Taxes payable by the Company and
the Subsidiary for all taxable periods and portions thereof through the date of
such financial statements.
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(ii) Except as disclosed on Section 5.1(1) of the
Disclosure Schedule, no material deficiencies for any Taxes have been proposed,
asserted or assessed against the Company or the Subsidiary that have not been
fully paid or adequately provided for in the appropriate financial statements of
the Company and the Subsidiary, no requests for waivers of the time to assess
any Taxes are pending, and no power of attorney with respect to any Taxes has
been executed or filed with any taxing authority. No material issues relating to
Taxes have been raised in writing by the relevant taxing authority during any
presently pending audit or examination.
(iii) No material liens for Taxes exist with respect
to any assets or properties of the Company or the Subsidiary, except for
statutory liens for Taxes not yet due.
(iv) Except as disclosed on Section 5.1(1) of the
Disclosure Schedule and other than with respect to contractual tax indemnity
obligations of the Company and the Subsidiary involving claims for state and
local Taxes which are not material in amount, neither the Company nor the
Subsidiary is a party to or is bound by any tax sharing agreement, tax indemnity
obligation or similar agreement, arrangement or practice with respect to Taxes
(including any advance pricing agreement, closing agreement or other agreement
relating to Taxes with any taxing authority).
(v) Neither the Company nor the Subsidiary has
taken or agreed to take any action that would prevent the Merger from
constituting a reorganization qualifying under the provisions of Section 368(a)
of the Code.
(vi) The Company and the Subsidiary have complied in
all material respects with all applicable laws, rules and regulations relating
to the payment and withholding of Taxes.
(vii) Except as disclosed in Section 5.1(1) of the
Disclosure Schedule, no Federal, state, local or foreign audits or other
administrative proceedings or court proceedings are presently pending with
regard to any federal income or material state, local or foreign Taxes or Tax
Returns of the Company or the Subsidiary and neither the Company nor the
Subsidiary has received a written notice of any pending audit or proceeding.
(viii) Neither the Company nor the Subsidiary has
agreed to or is required to make any adjustment under Section 481(a) of the
Code.
(ix) Neither the Company nor the Subsidiary has,
with regard to any assets or property held or acquired by any of them, filed a
consent to the application of Section 341(f) of the Code or agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as such term is defined in Section 141(f)(4) of the Code) owned by the Company
or the Subsidiary.
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(x) No property owned by the Company or the
Subsidiary (i) is property required to be treated as being owned by another
Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue
Code of 1954, as amended and in effect immediately prior to the enactment of the
Tax Reform Act of 1986; (ii) constitutes "tax exempt use property" within the
meaning of Section 168(h)(1) of the Code; or (iii) is tax exempt bond financed
property within the meaning of Section 168(g) of the Code. Neither the Company
nor the Subsidiary is currently, has been within the past five years, or
anticipates becoming a "United States real property holding corporation" within
the meaning of Section 897(c) of the Code.
(xi) For purpose of the Agreement (A) the terms
"Tax" or "Taxes" shall mean all taxes, charges, fees, imposts, levies, gaming or
other assessments, including, without limitation, all net income, gross
receipts, capital, sales, use, ad valorem, value added, transfer, franchise,
profits, inventory, capital stock, license, withholding, payroll, employment,
social security, unemployment, excise, severance, stamp, occupation, property
and estimated taxes, customs duties, fees, assessments and charges of any kind
whatsoever, together with any interest and any penalties, fines, additions to
tax or additional amounts imposed by any taxing authority (domestic or foreign)
and shall include any transferee liability in respect of Taxes, any liability in
respect of Taxes imposed by contract, tax sharing agreement, tax indemnity
agreement or any similar agreement and (B) the term "Tax Return" shall mean any
report, return, document, declaration or any other information or filing
required to be supplied to any taxing authority or jurisdiction (foreign or
domestic) with respect to Taxes, including, without limitation, information
returns, any document with respect to or accompanying payments or estimated
Taxes, or with respect to or accompanying requests for the extension of time in
which to file any such report, return document, declaration or other
information.
(m) EMPLOYEE BENEFITS. Section 5.1(m) of the Disclosure
Schedule contains an accurate and complete list of all Company Benefit Plans (as
defined below). None of the Company Benefit Plans is a multiemployer plan as
defined in Section 3(37) of the Employee Retirement Income Security Act, as
amended ("ERISA") or a multiple employer plan covered by Section 4063 or 4064 of
ERISA.
(i) Except as disclosed in Section 5.1(m) of the
Disclosure Schedule, each Company Benefit Plan intended to qualify under Section
401 of the Code does so qualify and the trust maintained pursuant thereto is
exempt from federal income taxation under Section 501 of the Code. Nothing has
occurred with respect to the operation of such plans which could cause the loss
of such qualification or exemption or the imposition of any liability, penalty,
or tax under ERISA or the Code.
(ii) True and correct copies of the following
documents with respect to each Company Benefit Plans have been made available or
delivered to Acquiror by the Company: (A) any plans, and amendments thereto, (B)
the most recent forms 5500 and any financial statements attached thereto, (C)
the last Internal Revenue Service determination letter
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(if any), (D) summary plan descriptions, (E) the two most recent actuarial
reports, including any such reports for purposes of FASB 87, 106 and 112, and
(F) written descriptions of all materials, non-written agreements relating to
the Company Benefit Plans.
(iii) The Company Benefit Plans have been maintained
in accordance with their terms and with all provisions of ERISA and other
applicable law. Neither the Company nor the Subsidiary has any liability with
respect to a non-exempt prohibited transaction within the meaning of Section
4975 of the Code or Section 406 of ERISA.
(iv) Neither the Company nor any ERISA Affiliate
maintains any Company Benefit Plan subject to Title IV of ERISA which has
unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA.
(v) Except as disclosed in Section 5.1(m) of the
Disclosure Schedule, neither the Company nor the Subsidiary maintains retiree
life insurance or retiree health plans which are "welfare benefit plans" within
the meaning of Section 3(l) of ERISA and which provide for continuing benefits
or coverage for any participant or any beneficiary of a participant after such
participant's termination of employment where such participant was an employee
of the Company or any subsidiary of the Company, other than as required by Part
6 of Title I of ERISA.
(vi) Except as disclosed in Section 5.1(m) of the
Disclosure Schedule, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will (A) result in any
payment (including, without limitation, bonus or other compensation severance,
unemployment compensation, golden parachute or otherwise) becoming due to any
employee of the Company under any Company Benefit Plan, any individual agreement
or otherwise, (B) increase any benefits otherwise payable under any Company
Benefit Plan or (C) result in the acceleration of the time of payment or vesting
of any such benefits.
(vii) (A) None of the employees of the Company
or the Subsidiary is represented in his or her capacity as an employee of such
company by any labor organization; (B) neither the Company nor the Subsidiary
has recognized any labor organization nor has any labor organization been
elected as the collective bargaining agent of any of their employees, nor has
the Company or the Subsidiary signed any collective bargaining agreement or
union contract recognizing any labor organization as the bargaining agent of any
of their employees; and (C) to the best knowledge of the Company, there is no
active or current union organization activity involving the employees of the
Company or any subsidiary of the Company, nor has there ever been union
representation involving employees of the Company and/or the Subsidiary.
(viii) For the purposes of this Agreement: (A) the
term "Company Benefit Plan" shall include all employee benefit plans (as defined
in Section 3(3) of ERISA) and all other employee benefit plans, arrangements or
payroll practices, including, without limitation, severance pay, sick leave,
vacation pay, salary continuation for disability, scholarship programs, deferred
compensation, incentive compensation, stock option or restricted stock plans
maintained
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by the Company or any ERISA Affiliate of the Company (whether formal or
informal, whether for the benefit of a single individual or for more than one
individual and whether for the benefit of current or former employees or their
beneficiaries) on behalf of the Company or any of the employees of the Company
or the Subsidiary or to which or under which or pursuant to which the Company or
any ERISA Affiliate of the Company has contributed or is obligated to make
contributions on behalf of the Company or any employees of the Company or the
Subsidiary; (B) the term "ERISA" shall refer to the Employee Retirement Income
Security Act of 1974, as amended; and (C) the term "ERISA Affiliate" shall refer
to any trade or business (whether or not incorporated) under common control or
treated as a single employer with the Company within the meaning of Section
414(b), (c), (m) or (o) of the Code.
(n) TITLE TO PROPERTIES; ASSETS OTHER THAN REAL PROPERTY
INTERESTS.
(i) The Company SEC Reports and Section 5.1(n) of
the Disclosure Schedule sets forth a complete list of all real property and
interests in real property owned or leased by the Company or the Subsidiary, and
indicates whether such property is owned or leased (each such owned property, an
"Owned Property" and each such leased property, a "Leased Property", and
collectively "Real Property"). Except as set forth in Section 5.1(n) of the
Disclosure Schedule or the Company SEC Reports, each of the Company or the
Subsidiary has good and marketable title to each Owned Property, or a valid
leasehold interest in each Leased Property, in each case free and clear of all
liens and except for easements, restrictive covenants and similar encumbrances
of record that, individually or in the aggregate, do not and will not materially
interfere with its ability to conduct its business as currently conducted.
Except as set forth in Section 5.1(n) of the Disclosure Schedule, each of the
Company and the Subsidiary has complied in all material respects with the terms
of all material leases to which it is a party, and all such leases are in full
force and effect. Each of the Company and the Subsidiary enjoys peaceful and
undisturbed possession under all such material leases.
(ii) Each of the Company or the Subsidiary has good
and valid title to all its properties and assets, in each case free and clear of
all liens, except (A) such as are set forth in section 5.1(n) of the Disclosure
Schedule, (B) mechanics', carriers', workmen's, repairmen's or other similar
liens arising or incurred in the ordinary course of business, (C) liens arising
under conditional sales contracts and equipment leases with third parties
entered into in the ordinary course of business, (D) liens for Taxes which are
not due and payable or which may thereafter be paid without penalty, (E) liens
which secure debt that is reflected as a liability on the most recent financial
statement included in the Company SEC Reports filed and publicly available prior
to the date of this Agreement and the existence of which is indicated in the
notes thereto and (F) other imperfections of title or encumbrances, if any,
which do not, individually or in the aggregate, materially impair the continued
use and operation of the assets to which they relate in the business of the
Company and the Subsidiary. This paragraph (ii) does not relate to Real Property
or interests in Real Property, such items being the subject of paragraph (i)
above.
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(iii) The occupancies and uses of the Real Property,
as well as the development, construction, management, maintenance, servicing and
operation of the Real Property, comply in all material respects with all
applicable laws, ordinances, rules, regulations, orders and requirements of all
governmental authorities having jurisdiction and are not in material violation
of any thereof; the certificate(s) of occupancy and all other licenses and
permits required by law for the proper use and operation of the Real Property
are in full force and effect; all approvals, consents, permits, utility
installations and connections, curb cuts and street openings required for the
development, construction, maintenance, operation and servicing of the Real
Property have been granted, effected, or performed and completed (as the case
may be), and all fees and charges therefor have been fully paid; and the Company
has not received written notice of, and does not otherwise have knowledge of,
any material violations, suits, orders, decrees or judgments relating to zoning,
building use and occupancy, traffic, fire, health, sanitation, air pollution,
ecological, environmental or other laws or regulations, against, or with respect
to, the Real Property.
(iv) There is adequate access between each Owned
Property or Leased Property and public roads and there are no pending or
threatened proceedings that could have the effects of impairing or restricting
such access; there are sufficient parking spaces on material Owned Property or
Leased Property to comply with all applicable provisions of any agreements to
which such Real Property is subject to local zoning requirements and all other
applicable laws and governmental requirements; the material improvements upon
the Real Property contain no asbestos and there are no material defects in the
roof, foundation, sprinkler mains, structural, mechanical and HVAC systems and
masonry walls in any of the material improvements upon the Real Property and no
significant repairs thereof are required, and all periodic maintenance has been
done and is being done which is consistent with first class maintenance standard
for Real Property of similar size and age in the vicinity of such Real Property.
(v) The assets and properties owned by the Company
and the Subsidiary are, in accordance with past practice, suitable and
sufficient for the conduct of their businesses as heretofore conducted and will
provide Acquiror with the capability to manufacture, use and sell the products
and conduct the businesses of the Company and the Subsidiary in substantially
the same manner as they have been conducted heretofore.
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(o) INTANGIBLE PROPERTY.
(i) Section 5.1(o) of the Disclosure Statement sets
forth a list of each patent, trademark, trade name, service mark, brand mark,
brand name, industrial design and copyright owned or used in business by the
Company and the Subsidiary, as well as all registrations thereof and pending
applications therefor, and each license or other contract relating thereto
(collectively with any other intellectual property owned or used in the business
by the Company and the Subsidiary, and all of the goodwill associated therewith,
the "Intangible Property") and indicates, with respect to each item of
Intangible Property listed thereon, the owner thereof and if applicable, the
name of the licensor and licensee thereof and the terms of such license or other
contract relating thereto. Except as set forth in Section 5.1(n) or (o) of the
Disclosure Schedule or the Company SEC Reports, each of the foregoing is owned
free and clear of any and all liens, mortgages, pledges, security interests,
levies, charges, options or any other encumbrances, restrictions or limitations
of any kind whatsoever and neither the Company nor the Subsidiary has received
any notice to the effect that any other entity has any claim of ownership with
respect thereto. To the best knowledge of the Company, the use of the foregoing
by the Company and the Subsidiary does not conflict with, infringe upon, violate
or interfere with or constitute an appropriation of any right, title, interest
or goodwill, including, without limitation, any intellectual property right,
patent, trademark, trade name, service mark, brand mark, brand name, computer
program, industrial design, copyright or any pending application therefor of any
other entity. Except as set forth in Section 5.1(o) of the Disclosure Schedule,
no claims have been made, and neither the Company nor the Subsidiary has
received any notice that any of the foregoing is invalid, conflicts with the
asserted rights of other entities, or has not been used or enforced (or has
failed to be used or enforced) in a manner that would result in the abandonment,
cancellation or unenforceability of any item of the Intangible Property.
(ii) The Company and the Subsidiary possess all
Intangible Property, including, without limitation, all know-how, formulae and
other proprietary and trade rights necessary for the conduct of their businesses
as now conducted. Neither the Company nor the Subsidiary has taken or failed to
take any action that would result in the forfeiture or relinquishment of any
such Intangible Property used in the conduct of their respective businesses as
now conducted.
(p) CERTAIN CONTRACTS. Section 5.1(p) of the Disclosure
Schedule lists all of the following contracts to which the Company or the
Subsidiary is a party or by which either of them or any of their properties or
assets may be bound ("Listed Agreements"): (i) all employment or other contracts
with any employee, consultant, officer or director of the Company or the
Subsidiary (or any company which is controlled by any such individual) whose
total rate of annual remuneration is estimated to exceed $50,000 in the fiscal
year ended July 31, 1997; (ii) union, guild or collective bargaining contracts
relating to employees of the Company or the Subsidiary; (iii) instruments for
money borrowed (including, without limitation, any indentures, guarantees, loan
agreements, sale and leaseback agreements, or purchase money obligations
incurred in connection with the acquisition of property other than in the
ordinary course of
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<PAGE> 44
business) in excess of $250,000; (iv) underwriting, purchase or similar
agreements entered into in connection with the Company's or the Subsidiary's
currently existing indebtedness; (v) agreements for acquisitions or dispositions
(by merger, purchase or sale of assets or stock or otherwise) of material assets
entered into within the last two years, as to which the transactions
contemplated have been consummated or are currently pending; (vi) joint venture
or partnership agreements entered into; (vii) material licensing, merchandising
and distribution contracts; (viii) contracts granting any person or other entity
registration rights; (ix) guarantees, suretyships, indemnification and
contribution agreements in excess of $250,000; and (x) other contracts which
materially affect the business, properties or assets of the Company and the
Subsidiary taken as a whole, and are not otherwise disclosed in this Agreement
or were entered into other than in the ordinary course of business. A true and
complete copy (including all amendments) of each Listed Agreement has been made
available to Acquiror. Neither the Company nor any subsidiary (i) is in breach
or default under any of the Listed Agreements or (ii) has any knowledge of any
other breach or default under any Listed Agreement by any other party thereto or
by any other person or entity bound thereby, except in the case of (i) or (ii)
breaches or defaults which would not, individually or in the aggregate, have a
Material Adverse Effect with respect to the Company and the Subsidiary. At the
Effective Time, no person will have the right, by contract or otherwise, to
become, nor does any entity have the right to designate or cause the Company to
appoint a person as, a director of the Company.
(q) INSURANCE. The Company and the Subsidiary have obtained
and maintained in full force and effect insurance with responsible and reputable
insurance companies or associations in such amounts, on such terms and covering
such risks, including fire and other risks insured against by extended coverage,
as is usually carried by companies engaged in similar businesses and owning
similar properties similarly situated or otherwise required by law, and each has
maintained in full force and effect public liability insurance, insurance
against claims for personal injury or death or property damage occurring in
connection with any of the activities of the Company or the Subsidiary or any of
the properties owned, occupied or controlled by the Company or the Subsidiary,
in such amount as reasonably deemed necessary by the Company or the Subsidiary.
To the extent the Company self-insures against such risks or damages, the
liabilities reflected or reserved against in the Company's most recent financial
statements (or the notes thereto) included in the Company SEC Reports filed and
publicly available prior to the date of this Agreement are adequate to cover
against such risks and damages.
(r) WARRANTIES, ETC.
(i) All products manufactured or sold by the
Company or its subsidiaries have been manufactured and sold in substantial
conformity with the applicable contractual commitments and specifications.
(ii) There are no recalls of products produced by
the Company or any of its subsidiaries pending or threatened and, to the
Company's knowledge, there is no basis for any material recall of any such
products.
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(s) UNLAWFUL PAYMENTS AND CONTRIBUTIONS. None of the Company,
any of its subsidiaries or, to the knowledge of the Company, any of their
respective directors, officers, employees or agents has, with respect to the
businesses of the Company and its subsidiaries, (i) used any funds for any
unlawful contribution, endorsement, gift, entertainment or other unlawful
expense relating to political activity; (ii) made any direct or indirect
unlawful payment to any foreign or domestic government official or employee;
(iii) violated or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or (iv) made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any person or entity.
(t) LISTINGS. The Company's securities are not listed or
quoted for trading on any U.S. domestic or foreign securities exchange, except
the NASDAQ Small-Cap Issues Market.
(u) ENVIRONMENTAL MATTERS. Except as disclosed in Section
5.1(u) of the Disclosure Schedule or in the Company SEC Reports filed and
publicly available prior to the date of this Agreement, (i) the Company and the
Subsidiary and the operations thereof are in material compliance with all
Environmental Laws (as defined below); (ii) there are no judicial or
administrative actions, suits or proceedings pending or, to the knowledge of the
Company, threatened and, to the knowledge of the Company, there are no
investigations pending or threatened against the Company or any subsidiary or
former subsidiary of the Company alleging the violation of any Environmental Law
and neither the Company nor the Subsidiary has received notice from any
governmental body or person alleging any violation of or liability under any
Environmental Laws, in either case which could reasonably be expected to result
in material Environmental Costs and Liabilities; and (iii) to the knowledge of
the Company, there are no facts, circumstances or conditions relating to,
arising from, associated with or attributable to the Company or its subsidiaries
or former subsidiaries or any real property currently or previously owned,
operated or leased by the Company or any subsidiary or former subsidiary of the
Company that could reasonably be expected to result in material Environmental
Costs and Liabilities. For the purpose of this Section 5.1(u), the following
terms have the following definitions. (A) "Environmental Costs and Liabilities"
means any losses, liabilities, obligations, damages, fines, penalties,
judgments, actions, claims, costs and expenses (including, without limitation,
fees, disbursements anti expenses of legal counsel, experts, engineers and
consultants and the costs of investigation and feasibility studies, remedial or
removal actions and cleanup activities) arising from or under any Environmental
Law; (B) "Environmental Laws" means any applicable federal, state, local, or
foreign law (including common law), statute, code, ordinance, rule, regulation
or other requirement relating to the environment, natural resources, or public
or employee health and safety; (C) "Hazardous Material" means any substance,
material or waste regulated by federal, state or local government, including,
without limitation, any substance , material or waste which is defined as a
"hazardous waste, "hazardous material," "hazardous substance", "toxic waste" or
"toxic substance under any provision or Environmental Law and including but not
limited to petroleum and petroleum products.
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(v) INVENTORIES; RECEIVABLES; PAYABLES.
(i) The inventories (after deducting the reserve
accounts as shown on the Company's financial statements) of the Company and the
Subsidiary are in good and marketable condition, and are saleable in the
ordinary course of business. Adequate reserves have been reflected on the most
recent balance sheet included in the Company SEC Documents and, after the date
of the most recent balance sheet included in the Company SEC Documents, will be
reflected on the books of the Company, for shorts, drops, off-cuts, obsolete or
otherwise unusable inventory, which reserves were calculated in accordance with
GAAP consistently applied.
(ii) All accounts receivable of the Company and the
Subsidiary have arisen from bona fide transactions in the ordinary course of
business. All accounts receivable of the Company and the Subsidiary reflected on
the most recent balance sheet included in the Company SEC Documents are good and
collectible at the aggregate recorded amounts thereof, net of any applicable
reserve for returns or doubtful accounts reflected thereon, which reserves are
adequate and were calculated in accordance with GAAP consistently applied. All
accounts receivable arising after the date of the most recent balance sheet
included in the Company SEC Documents are good and collectible at the aggregate
recorded amounts thereof, net of any applicable reserve for returns or doubtful
accounts, which reserves are adequate and were calculated in accordance with
GAAP consistently applied.
(iii) All accounts payable of the Company and the
Subsidiary reflected on the most recent balance sheet included in the Company
SEC Documents or arising after the date thereof are the result of bona fide
transactions in the ordinary course of business and have been paid or are not
yet overdue within their agreed-upon payment terms.
(w) TRANSACTIONS WITH AFFILIATES. Other than the transactions
contemplated by this Agreement and except to the extent disclosed in the Company
SEC Reports filed and publicly available prior to the date of this Agreement, or
as set forth in Section 5.1(w) of the Disclosure Schedule, since July 31, 1997,
there have been no transactions, agreements, arrangements or understandings
between the Company or the Subsidiary, on the one hand, and the Company's
Affiliates (other than wholly owned subsidiaries of the Company) or other
Persons, on the other hand, that would be required to be disclosed under Item
404 of Regulation S-K under the Securities Act.
(x) DISCLOSURE. No representation or warranty by the Company
in this Agreement and no statement contained in the Disclosure Schedules or any
certificate delivered by the Company to Acquiror pursuant to this Agreement,
contains any untrue statement of a material fact or omits any material fact
necessary to make the statements herein or therein not misleading when taken
together in light of the circumstances in which they were made, it being
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understood that as used in this Section 5.1(x) "material" means material to the
Company and the Subsidiary taken as a whole.
5.2 REPRESENTATIONS AND WARRANTIES OF ACQUIROR. Acquiror and
Merger Sub jointly and severally represent and warrant to the Company that:
(a) CORPORATE ORGANIZATION AND QUALIFICATION. Each of Acquiror
and Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation and is
qualified and in good standing as a foreign corporation in each jurisdiction
where the properties owned, leased or operated, or the business conducted, by it
require such qualification, except where the failure to so qualify or be in such
good standing would not have a Material Adverse Effect with respect to Acquiror
and its subsidiaries. Each of Acquiror and Merger Sub has all requisite power
and authority (corporate or otherwise) to own its properties and to carry on its
business as it is now being conducted. Acquiror has heretofore made available to
the Company complete and correct copies of the Certificate of Incorporation and
By-Laws of Merger Sub, which are the Certificate of Incorporation and By-Laws of
Merger Sub which shall be in effect immediately prior to the Effective Time.
(b) CAPITALIZATION. All of the outstanding shares of capital
stock of Acquiror have been duly authorized and validly issued and are fully
paid and nonassessable. All outstanding shares of capital stock or other equity
interests of the subsidiaries of Acquiror are owned by Acquiror or a direct or
indirect wholly owned subsidiary of Acquiror, free and clear of all liens,
charges, encumbrances, claims and options of any nature. The authorized capital
stock of Merger Sub consists of 100 shares of common stock, par value $.01 per
share. All of the outstanding shares of capital stock of Merger Sub have been
duly authorized and validly issued and are fully paid and nonassessable and are
owned by Acquiror, free and clear of all liens, charges, encumbrances, claims
and options of any nature.
(c) AUTHORIZATION FOR ACQUIROR COMMON SHARES. Acquiror has
taken all necessary action to permit it to issue the number of Acquiror Common
Shares required to be issued in connection with the Share Exchanges as
contemplated by Section 4.4. The Acquiror Common Shares issued pursuant to
Article IV will, when issued, be validly issued, fully paid and nonassessable
and no person will have any preemptive right of subscription of purchase in
respect thereof. Such Acquiror Common Shares will, when issued, be registered
under the Exchange Act and the issuance thereof in the Share Exchanges will be
exempt from registration under the Securities Act, and any applicable state
securities laws and will, when issued, be listed on the NYSE, subject to
official notice of issuance.
(d) AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Acquiror and
Merger Sub has the requisite corporate power and authority to approve,
authorize, execute and deliver this Agreement and to consummate the transactions
contemplated hereby. This Agreement and the consummation by Acquiror of the
transactions contemplated hereby have
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been duly and validly authorized by the respective Boards of Directors of
Acquiror and Merger Sub and by Acquiror as the sole shareholder of Merger Sub,
and no other corporate proceedings on the part of Acquiror or Merger Sub are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by each of Acquiror and Merger Sub and, assuming this Agreement
constitutes the valid and binding agreement of the Company, constitutes a valid
and binding agreement of each of Acquiror and Merger Sub, enforceable against
each of Acquiror and Merger Sub in accordance with its terms, subject, as to
enforceability, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to general
principles of equity.
(e) CONSENTS AND APPROVALS; NO VIOLATION. Neither the
execution and delivery of this Agreement by Acquiror and Merger Sub nor the
consummation by Acquiror and Merger Sub of the transactions contemplated hereby
will (i) conflict with or result in any breach of any provision of the charter
or the By-Laws of Acquiror or the Certificate of Incorporation or the By-Laws of
Merger Sub; (ii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority or any
other Person, except (A) pursuant to the applicable requirements of the
Securities Act and the Exchange Act and regulations promulgated thereunder, (B)
the filing of the Certificate of Merger pursuant to the DGCL and appropriate
documents with the relevant authorities of other states in which the Company is
authorized to do business, (C) as may be required by any applicable state
securities or takeover laws, (D) such filings and consents as may be required
under any environmental, health or safety law or regulation pertaining to any
notification, disclosure or required approval triggered by the Merger or the
transactions contemplated by this Agreement, (E) such filings, consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under the laws of any foreign country, (F) filings with, and
approval of, the NYSE, or (G) where the failure to obtain such consent,
approval, authorization or permit, or to make such filing or notification, would
not in the aggregate have a Material Adverse Effect with respect to Acquiror and
its subsidiaries or adversely affect the ability of Acquiror or Merger Sub to
consummate the transactions contemplated hereby; (iii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, cancellation or acceleration
or result in the creation of any lien or other charge or encumbrance) under any
of the terms, conditions or provisions of any note, license, agreement or other
instrument or obligation to which Acquiror or Merger Sub or any of their assets
may be bound, except for such violations, breaches and defaults (or rights of
termination, cancellation or acceleration or creations of lien or other charge
or encumbrance) as to which requisite waivers or consents have been obtained or
which, in the aggregate, would not have a Material Adverse Effect with respect
to Acquiror and its subsidiaries or adversely affect the ability of Acquiror or
Merger Sub to consummate the transactions contemplated hereby; or (iv) assuming
the consents, approvals, authorizations or permits and filings or notifications
referred to in this Section 5.2(e) are duly and timely obtained or made, violate
any order, writ, injunction decree, statute, rule or regulation applicable to
Acquiror or any of its subsidiaries or to any of their respective assets, except
for violations which would not in the aggregate have a Material Adverse Effect
with
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respect to Acquiror and its subsidiaries or adversely affect ability of
Acquiror or Merger Sub to consummate the transactions contemplated hereby.
(f) SEC REPORTS; FINANCIAL STATEMENTS.
(i) Since January 1, 1992, Acquiror has filed all
forms, reports and documents with the Securities and Exchange Commission ("SEC")
required to be filed by it pursuant to the federal securities laws and the SEC
rules and regulations thereunder, all of which complied in all material respects
with all applicable requirements of the Securities Act and the Exchange Act (the
"Acquiror SEC Reports"). None of the Acquiror SEC Reports, including, without
limitation, any financial statements or schedules included therein, at the time
filed contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(ii) The consolidated balance sheets and the related
statements of income, stockholders' equity and cash flow (including the related
notes thereto) of Acquiror included in the Acquiror SEC Reports comply as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a basis consistent with prior periods (except as otherwise noted
therein), and present fairly the consolidated financial position of Acquiror and
its consolidated subsidiaries as of their respective dates, and the results of
its operations and its cash flow for the periods presented therein (subject, in
the case of the unaudited interim financial statements, to normal year-end
adjustments).
(g) PROXY STATEMENT. None of the information to be supplied by
Acquiror or Merger Sub for inclusion or incorporation by reference in the Proxy
Statement will, at the time of the mailing of the Proxy Statement, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
(h) OPERATIONS OF MERGER SUB. Merger Sub was formed solely for
the purpose of engaging in the transactions contemplated by this Agreement and
has not engaged in any business activities or conducted any operations other
than in connection with the transactions contemplated by this Agreement.
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ARTICLE VI - ADDITIONAL COVENANTS AND AGREEMENTS
6.1 CONDUCT OF BUSINESS.
(a) The Company covenants and agrees that, during the period
from the date of this Agreement to the Effective Time (unless Acquiror shall
otherwise agree in writing, which agreement shall not be unreasonably withheld,
and except as otherwise contemplated by this Agreement), the Company will, and
will cause the Subsidiary to, conduct its operations according to its ordinary
and usual course of business consistent with past practice and, to the extent
consistent therewith, with no less diligence and effort than would be applied in
the absence of this Agreement, seek to preserve intact its current business
organizations, keep available the service of its current officers and employees
and preserve its relationships with customers, suppliers and others having
business dealings with it to the end that goodwill and ongoing businesses shall
be unimpaired at the Effective Time. Without limiting the generality of the
foregoing, and except as otherwise permitted in this Agreement or disclosed in
Section 6.1 of the Disclosure Schedule, prior to the Effective Time, neither the
Company nor the Subsidiary will, without the prior written consent of Acquiror,
which consent shall not be unreasonably withheld:
(i) (A) declare, set aside or pay any
dividends on, or make any other distributions in respect of, any of its capital
stock, other than dividends and distributions by any direct or indirect wholly
owned subsidiary of the Company to its parent, (B) split, combine or reclassify
any of its capital stock or, except pursuant to the exercise of options,
warrants, conversion rights, exchange rights and other contractual rights
existing on the date hereof, issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock or other equity interests, (C) purchase, redeem or otherwise
acquire or amend any shares of capital stock or other equity interests of the
Company or the Subsidiary or any other securities thereof or any rights,
warrants or options to acquire any such shares, interests or other securities or
(D) establish any new subsidiary;
(ii) issue, deliver, sell, pledge or otherwise
encumber or amend any shares of its capital stock, any other voting securities
or any securities convertible into, or any rights, warrants or options to
acquire, any such shares, interests, voting securities or convertible
securities, including pursuant to any option plans of the Company or the
Subsidiary, other than (A) the issuance of Shares upon the exercise of Options
outstanding on the date of this Agreement in accordance with their present terms
and (B) the issuance of Shares upon the exercise of the Warrants outstanding on
the date of this Agreement in accordance with their present terms;
(iii) amend its Certificate of Incorporation,
By-Laws or other comparable charter or organizational documents;
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(iv) acquire or agree to acquire (A) by merging
or consolidating with, or by purchasing a substantial portion of the assets of,
or by any other manner, any business or any corporation, partnership, joint
venture, association or other business organization or division thereof or (B)
any asset requiring or involving an expenditure or purchase price in excess of
$100,000, except (x) mergers and consolidations between or among one or more
wholly owned subsidiaries of the Company that will not create adverse tax
consequences to the Company or the Subsidiary, and (y) purchases of inventory in
the ordinary course of business consistent with past practice;
(v) sell, lease, license, mortgage or otherwise
encumber or subject to any lien or otherwise dispose of any of its properties or
assets, except in the ordinary course of business consistent with past practice;
(vi) (A) other than incurrences of indebtedness
(which term shall be deemed not to include trade payables incurred in the
ordinary course of business or draw-downs of the Company's existing bank and
lease lines in the ordinary course of business) which, in the aggregate, do not
exceed $50,000, incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or warrants or
other rights to acquire any debt securities of the Company or the Subsidiary,
guarantee any debt securities of another person, enter into any "keep well" or
other agreement to maintain any financial statement condition of another person
or enter into any arrangement having the economic effect of any of the foregoing
or (B) make any loans, advances or capital contributions to, or investments in,
any other person other than to the Company, or any direct or indirect wholly
owned subsidiary of the Company;
(vii) pay, discharge, settle or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge, settlement or
satisfaction, in accordance with their terms of liabilities reflected or
reserved against in the most recent consolidated financial statements (or the
notes thereto) of the Company included in the Company SEC Reports filed and
publicly available prior to the date of this Agreement or incurred in the
ordinary course of business consistent with past practice since the date of such
financial statements, or waive the benefits of, or agree to modify in any
manner, any confidentiality, standstill or similar agreement to which the
Company or the Subsidiary is a party;
(viii) (A) adopt, enter into, terminate or amend
any Company Benefit Plan or other arrangement for the benefit or welfare of any
director, officer, current or former employee, representative, consultant or
adviser of the Company or the Subsidiary, (B) increase in any manner the
compensation or fringe benefits of, or pay any bonus to, any such director,
officer, employee, representative, consultant or adviser except for normal
increases or bonuses as contractually required pursuant to agreements disclosed
in the Company SEC Reports filed and publicly available prior to the date of
this Agreement or in the ordinary course of business consistent with past
practice to employees other than directors and executive officers of
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the Company and that, in the aggregate, do not result in any material increase
in benefits or compensation expense to the Company and the Subsidiary relative
to the level in effect prior to such action (but in no event shall the aggregate
amount of the increases granted to any such director, officer or employee exceed
5% of the aggregate annualized compensation of such director, officer or
employee and in no event shall the aggregate amount of all such increases exceed
1% of the aggregate annualized compensation expense of the Company and the
Subsidiary reported in the most recent consolidated financial statements of the
Company included in the Company SEC Reports filed and publicly available prior
to the date of this Agreement) and except as contractually required pursuant to
agreements included as part of a Company SEC Reports filed and publicly
available prior to the date of this Agreement, (C) pay any benefit not provided
for under any Company Benefit Plan, (D) except for payments or awards in cash
permitted by clause (B), grant any awards under any bonus, incentive,
performance or other compensation plan or arrangement or Company Benefit Plan
(including the grant of stock options, stock appreciation rights, stock-based or
stock-related awards, performance units or restricted stock, or the removal of
existing restrictions in any company Benefit Plans or agreements or awards made
thereunder) or (E) take any action to fund or in any other way secure the
payment of compensation or benefits under any employee plan, agreement, contract
or arrangement or Company Benefit Plan;
(ix) make or agree to make any capital expenditure
or expenditures other than for maintenance purposes in excess of $25,000;
(x) modify, amend or terminate any contract or
agreement set forth in the Company SEC Reports or any real property lease to
which the Company or the Subsidiary is a party, or waive, release or assign any
material rights or claims thereunder;
(xi) take or agree to take any action that would
prevent the Merger from constituting a reorganization qualifying under the
provisions of Section 368(a) of the Code;
(xii) conduct its business in a manner or take, or
cause to be taken, any other action that would or might reasonably be expected
to prevent or materially delay the Company, Merger Sub or Acquiror from
consummating the transactions contemplated hereby in accordance with the terms
of this Agreement (regardless of whether such action would otherwise be
permitted or not prohibited hereunder); or
(xiii) agree to take any of, the foregoing actions.
(b) Acquiror covenants and agrees that, during the period from
the date of this Agreement to the Effective Time, neither Acquiror or the
Subsidiary will, without the prior written consent of the Company, which consent
shall not be unreasonably withheld:
(i) take or agree to take any action that would
prevent the Merger from constituting a reorganization qualifying under the
provisions of Section 368(a) of the Code;
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(ii) conduct its business in a manner or take, or
cause to be taken, any other action that would or might reasonably be expected
to prevent or materially delay Acquiror, Merger Sub or the Company from
consummating the transactions contemplated hereby in accordance with the terms
of this Agreement (regardless of whether such action would otherwise be
permitted or not prohibited hereunder); or
(iii) agree to take any of the foregoing actions.
(c) During the period of time from the date of this Agreement
to the Effective Time, Merger Sub shall not engage in any activities of any
nature, except as provided in or contemplated by this Agreement.
6.2 NO SOLICITATION.
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(a) The Company, the Subsidiary and their respective
officers, directors, employees, representatives, agents or affiliates
(including, without limitation, any investment banker, attorney or accountant
retained by the Company or the Subsidiary) (collectively, the "Company's
Representatives") shall immediately cease any discussions or negotiations with
any party that may be ongoing with respect to a Competing Transaction (as
defined below). From and after the date hereof until the termination of this
Agreement, neither the Company nor the Subsidiary will, nor will the Company
authorize or permit the Subsidiary or any of the Company Representatives to,
directly or indirectly, initiate, solicit or knowingly encourage (including by
way of furnishing non-public information), or take any other action to
facilitate, any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any Competing Transaction, or participate in
any discussions or negotiations regarding any Competing Transaction or agree to
or endorse any Competing Transaction, and the Company shall notify Acquiror
orally (within one business day) and in writing (as promptly as practicable) of
all of the relevant details relating to all inquiries and proposals which it or
the Subsidiary or any such Company Representative may receive relating to any
such matters and, if such inquiry or proposal is in writing, the Company shall
deliver to Acquiror a copy of such inquiry or proposal promptly; provided,
however, that nothing contained in this Section 6.2 shall prohibit the Company
or its Board of Directors from (i) taking and disclosing to its stockholders a
position contemplated by Exchange Act Rule 14e-2 or (ii) making any disclosure
to its stockholders that, in the good faith judgment of its Board of Directors,
after consultation with and based upon the advice of independent legal counsel
(who may be the Company's regularly engaged independent legal counsel), is
required under applicable law; provided, further, that until September 7, 1997
nothing contained in this Section 6.2 shall prohibit the Company from furnishing
information to, or entering into discussions or negotiations with, any person or
entity that after the date hereof and prior to September 7, 1997 states in an
unsolicited writing that it has a bona fide serious interest to make a Superior
Proposal (as defined below) if (1) (x) the Board of Directors of the Company,
after consultation with and based upon the advice of independent legal counsel
(who may be the Company's regularly engaged independent legal counsel)
determines in good faith that such action is necessary for the Board of
Directors of the Company to comply with its fiduciary duties to stockholders
under applicable law and (y) after consultation with and based upon the advice
of an independent financial advisor (who may be the Company's regularly engaged
independent financial advisor) determines in good faith that such person or
entity is capable of making, financing and consummating a Superior Proposal and
(2) prior to taking such action, the Company (x) provides at least two business
days' notice to Acquiror to the effect that it is taking such action and (y)
receives from such person or entity an executed confidentiality agreement on
terms no less restrictive than the Confidentiality Agreement (as defined below).
For purposes of this Agreement, "Competing Transaction" shall mean any of the
following (other than the transactions between the Company, Merger Sub and
Acquiror contemplated hereby) involving the Company: (i) any merger,
consolidation, share exchange, recapitalization, business combination, or other
similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition of all or a substantial portion of the assets of the
Company and the Subsidiary, taken as a whole, or of more than 25% of the equity
securities of the Company or the Subsidiary, in any case in a single transaction
or series of
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transactions; (iii) any tender offer or exchange offer for 25% or more of the
outstanding shares of capital stock of the Company or the filing of a
registration statement under the Securities Act in connection therewith; or (iv)
any public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing.
(b) Except as permitted by this Section 6.2, the Board of
Directors of the Company shall not, on or prior to September 7, 1997, (i)
withdraw or modify, or propose to withdraw or modify in a manner adverse to
Acquiror, the approval or recommendation by such Board of Directors of this
Agreement or the merger, or (ii) approve or recommend, or cause the Company to
enter into any agreement with respect to, any Competing Transaction.
Notwithstanding the foregoing, if prior to September 7, 1997 the Board of
Directors of the Company, after consultation with and based upon the advice of
independent legal counsel (who may be the Company's regularly engaged
independent legal counsel), determines in good faith that it is necessary to do
so in order to comply with its fiduciary duties to stockholders under applicable
law, the Board of Directors of the Company, prior to September 7, 1997, may
modify or withdraw its approval or recommendation of this Agreement and the
Merger, approve or recommend a Superior Proposal (as defined below) or cause the
Company to enter into an agreement with respect to a Superior Proposal, but in
each case only after providing at least two business days' written notice to
Acquiror (a "Notice of Superior Proposal") advising Acquiror that the Board of
Directors of the Company has received a Superior Proposal, specifying the
material terms and conditions of such Superior Proposal and identifying the
person making such Superior Proposal. In addition, if the Company proposes to
enter into an agreement with respect to any Competing Transaction, it shall
concurrently with entering into such an agreement pay, or cause to be paid, to
the Acquiror the fee required by Section 8.5(b) hereof. For purposes of this
Agreement, a "Superior Proposal" means any bona fide proposal to acquire,
directly or indirectly, for consideration consisting of cash and/or securities,
all or substantially all the Shares then outstanding or all or substantially all
the assets of the Company and otherwise on terms which the Board of Directors of
the Company determines in its good faith judgment (based on the advice of
BlueStone or another financial advisor of nationally recognized reputation) to
be more favorable to the Company's stockholders than the Merger and the related
Share Exchanges.
6.3 MEETING OF STOCKHOLDERS. The Company will take all action necessary
in accordance with applicable law and its Certificate of Incorporation and
By-Laws to convene a meeting of its stockholders (the "Stockholder Meeting") as
soon as practicable after the date hereof and in any case not later than October
30, 1997 to consider and vote upon the approval of this Agreement. Subject to
the fiduciary duties of the Company's Board of Directors under applicable law
after consultation with and based upon the advice of independent legal counsel,
except as otherwise provided in Section 6.2, the Board of Directors of the
Company shall recommend and declare advisable such approval and the Company
shall use its best efforts to solicit, and use its best efforts to obtain, such
approval.
6.4 PROXY STATEMENT. The Company will, as promptly as practicable,
prepare and file with the SEC a proxy statement and a form of proxy, in
connection with the vote of the
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Company's stockholders with respect to this Agreement (such proxy statement,
together with any amendments thereof or supplements thereto, in each case in the
form or forms mailed to the Company's stockholders, is herein called the "Proxy
Statement"). The Company will give Acquiror and its counsel a reasonable
opportunity to review and comment upon the Proxy Statement prior to its being
filed with the SEC and shall give Acquiror and its counsel a reasonable
opportunity to review all amendments and supplements to the Proxy Statement and
all responses to requests for additional information and replies to comments
prior to their being filed with, or sent to, the SEC and, in the case of the
Proxy Statement and any amendments or supplements thereto, prior to its being
disseminated to holders of shares of Common Stock. The Company will cause the
Proxy Statement to be mailed to stockholders of the Company at the earliest
practicable date and in any case not later than September 20, 1997, subject to
the approval of the same by the SEC or the lapse of any waiting period under
applicable SEC rules, and will coordinate and cooperate with Acquiror with
respect to the timing of the Stockholder Meeting.
6.5 ACCESS TO INFORMATION. Upon reasonable notice, the Company shall
(and shall cause each of the Subsidiary to) afford to officers, employees,
counsel, accountants and other authorized representatives of Acquiror
("Acquiror's Representatives") reasonable access, during normal business hours
throughout the period prior to the Effective Time, to its properties, books,
records and customers (including, without limitation, Xerox Corporation) and,
during such period, shall (and shall cause each of the Subsidiary to) furnish
promptly to Acquiror's Representatives all information concerning the business,
properties and personnel of the Company and the Subsidiary as may reasonably be
requested, provided that no investigation pursuant to this Section 6.5 shall
affect or be deemed to modify any of the representations or warranties made by
the Company. Acquiror agrees that it will not, and will cause Acquiror's
Representatives not to, use any information obtained pursuant to this Section
6.5 for any purpose unrelated to the consummation of the transactions
contemplated by this Agreement. In connection with the foregoing, the Company
agrees to cause the Company's independent accountants to provide their
workpapers to Acquiror upon the terms and subject to the conditions on which
such workpapers have previously been provided to Acquiror. The Non-Disclosure
Agreement, dated July 30, 1997 (the "Confidentiality Agreement"), between
Acquiror and the Company shall apply with respect to the information furnished
hereunder and survive any termination of this Agreement, subject to the terms
and conditions set forth in such Confidentiality Agreement.
6.6 PUBLICITY. The parties hereto agree that they will consult with
each other concerning any proposed press release or public announcement
pertaining to the Merger and the other transactions contemplated hereby in order
to seek to agree upon the text of any such press release or the making of such
public announcement.
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6.7 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) From and after the Effective Time and for a period of
seven years thereafter, Acquiror shall indemnify, defend and hold harmless each
person who is now, or has been at any time prior to the date hereof or who
becomes prior to the Effective Time, an officer or director of the Company or
the Subsidiary (the "Indemnified Parties") against all losses, claims, damages,
costs, expenses (including attorneys, fees and expenses), liabilities or
judgments or amounts that are paid in settlement of or in connection with any
threatened or actual claim, action, suit, proceeding or investigation based in
whole or in part on or arising in whole or in part out of the fact that such
person is or was a director or officer of the Company or the Subsidiary, whether
pertaining to any matter existing or occurring at or prior to the Effective Time
and whether asserted or claimed prior to, or at or after, the Effective Time
("Indemnified Liabilities"), including, without limitation, all Indemnified
Liabilities based in whole or in part on, or arising in whole or in part out of,
or pertaining to this Agreement or the transactions contemplated hereby, in each
case to the fullest extent a corporation is permitted under applicable law to
indemnify its own directors or officers, as the case may be; provided, however,
that all right to indemnification in respect of any claim asserted or made
within such period shall continue until the disposition of such claim. In the
event of an Indemnified Liability, (i) Acquiror shall pay the reasonable fees
and expenses of counsel selected by the Indemnified Parties, which counsel shall
be reasonably satisfactory to Acquiror, promptly after statements therefor are
received and otherwise advance to such Indemnified Party upon request
reimbursement of documented expenses reasonably incurred, in either case to the
extent not prohibited by applicable law and upon receipt of any affirmation and
undertaking required by applicable law, (ii) Acquiror will cooperate in the
defense of any such matter and (iii) any determination required to be made with
respect to whether an Indemnified Party's conduct complies with the standards
set forth under applicable law shall be made by independent counsel mutually
acceptable to Acquiror and the Indemnified Party; provided, however, that
Acquiror shall not be liable for any settlement effected without its written
consent (which consent shall not be unreasonably withheld) and that Acquiror
shall be liable for the fees and expenses of only one law firm for all
Indemnified Parties with respect to each related matter except to the extent
there is, in the opinion of counsel to an Indemnified Party, under applicable
standards of professional conduct, a conflict on any significant issue between
positions of any two or more Indemnified Parties.
(b) This Section 6.7 is intended to benefit the Indemnified
Parties and shall be binding on all successors and assigns of Acquiror, the
Company and the Surviving Corporation.
6.8 TAXES. In respect of Tax Returns of the Company or any subsidiary
not required to be filed prior to the date hereof, the Company shall, to the
extent permitted by law without any penalty, delay (or cause such subsidiary to
delay) the filing of any such Tax Returns until after the Effective Time;
provided, however, that the Company shall notify Acquiror of its intention to
delay (or cause such subsidiary to delay) any such filing and shall not so delay
the filing of a Tax Return if a penalty or interest would result therefrom or if
Acquiror and the
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Company agree that so delaying the filing of such Tax Return is
not in the best interests of either the Company or Acquiror. If any such Tax
Return is required to be filed on or prior to the Effective Time, the Company or
the Subsidiary, as the case may be, shall prepare and timely file such Tax
Return in a manner consistent with prior years and all applicable laws and
regulations; provided, however, that Acquiror shall be notified and given an
opportunity to review and to comment, prior to the filing thereof, on any such
Tax Return.
6.9 MAINTENANCE OF INSURANCE. Between the date hereof and through the
Effective Time the Company will maintain in full force and effect all of its
presently existing policies of insurance or insurance comparable to the coverage
afforded by such policies.
6.10 REPRESENTATIONS AND WARRANTIES. None of the Company, Acquiror or
Merger Sub will take any action that would cause any of the representations and
warranties set forth in Section 5.1 or 5.2, as the case may be, not to be true
and correct (subject to the standard set forth in the provision of Section
7.1(a) or 7.2(a), respectively) at and as of the Effective Time.
6.11 REASONABLE BEST EFFORTS; OTHER ACTION.
(a) Upon the terms and subject to the conditions set forth in
this Agreement, each of the parties agrees to use all reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and operate with the other parties in doing, all things necessary, proper
or advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by this
Agreement, including (i) the obtaining of all necessary actions or nonactions,
waivers, consents and approvals from all applicable governmental and regulatory
authorities and the making of all necessary registrations and filings (including
filings with governmental and regulatory authorities, if any) and the taking of
all reasonable steps as may be necessary to obtain an approval or waiver from,
or to avoid an action or proceeding by, any governmental and regulatory
authority, (ii) the obtaining of all necessary consents, approvals or waivers
from all other Persons, (iii) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of any of the transactions contemplated by this Agreement,
including seeking to have any stay or temporary restraining order entered by any
court or other governmental or regulatory authority vacated or reversed and (iv)
the execution and delivery of any additional instruments necessary to consummate
the transactions contemplated by, and to fully carry out the purposes of, this
Agreement. Each party hereto will notify the other party promptly of the receipt
of any comments from the SEC or its staff and of any other governmental
officials for amendments or supplements to the Proxy Statement or any other
filing described in or made pursuant this Section 6.11 and will supply the other
with copies of all correspondence between such party or any of its
representatives, on the one hand, and the SEC, its staff or any other
governmental officials, on the other hand, with respect to the Proxy Statement
or such other filings.
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6.12 NOTIFICATION OF CERTAIN MATTERS. Each of the Company, Merger Sub
and Acquiror shall give prompt notice to one another of (a) any notice of, or
other communication relating to, a default or event which, with notice or lapse
of time or both, would become a default, received by it subsequent to the date
of this Agreement and prior to the Effective Time, under any contract material
to the financial condition, properties, businesses or results of operations of
it to which it is a party or is subject, (b) any notice or other communication
from any third party alleging that the consent of such third party is or may be
required in connection with the transactions contemplated by this Agreement, (c)
any material adverse change in its (together with its subsidiaries taken as a
whole) businesses, results of operations, properties, assets, liabilities,
prospects or condition (financial or otherwise), other than changes resulting
from general economic conditions, (d) any representation or warranty made by it
contained in this Agreement becoming untrue or inaccurate in any material
respect (including in the case of representations or warranties by the Company
or Acquiror, as applicable, such party's receiving knowledge of any fact, event
or circumstance which may cause any representation qualified as to the knowledge
of such party to be or become untrue or inaccurate in any material respect) or
(e) the failure by it to comply with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
ARTICLE VII - CONDITIONS
7.1 CONDITIONS TO THE OBLIGATIONS OF ACQUIROR AND MERGER SUB. The
obligations of Acquiror and Merger Sub to consummate the Merger are subject to
the fulfillment at or prior to the Effective Time of the following conditions,
any or all of which may be waived in whole or in part by Acquiror to the extent
permitted by applicable law.
(a) CERTIFICATE. The representations and warranties of the
Company set forth in this Agreement shall be true and correct in all material
respects on and as of the Closing Date with the same force and effect as though
the same had been made on and as of the Closing Date (except to the extent they
relate to a particular date), the Company shall have performed in all material
respects all of its material obligations under this Agreement theretofore to be
performed, and Acquiror and Merger Sub shall have received at the Closing Date a
certificate to that effect dated the Closing Date, and executed by the Chief
Executive Officer/President of the Company, provided, however, that no
representation or warranty of the Company contained in Section 5.1 hereof shall
be deemed untrue or incorrect as a consequence of the existence of any fact,
circumstance or event unless such fact, circumstance or event, individually or
taken together with all other facts circumstances or events inconsistent with
any paragraph of Section 5.1 has had or is expected to have a Material Adverse
Effect with respect to the Company and the Subsidiary.
(b) COMPANY STOCKHOLDER APPROVAL. This Agreement shall have
been duly approved by the holders of
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a majority of the votes entitled to be cast by the holders of Shares at the
Stockholder Meeting, in accordance with applicable law and the Certificate of
Incorporation and By-Laws of the Company.
(c) NO LITIGATION. There shall not be pending or threatened by
any governmental authority or regulatory agency, any suit, action or proceeding
(A) challenging or seeking to restrain or prohibit the Merger or any of the
other transactions contemplated by this Agreement or seeking to obtain from
Acquiror or the Company or any of their respective subsidiaries in connection
with the Merger any material damages, (B) seeking to prohibit or limit the
ownership or operation by Acquiror or the Company or any of their respective
subsidiaries of any material portion of the business or assets of Acquiror or
the Company or any of their respective subsidiaries, or to compel Acquiror, the
Company or any of their respective subsidiaries to dispose of or hold separate
any material portion of the business or assets of Acquiror, the Company or any
of their respective subsidiaries in each case as a result of the Merger or any
of the other transactions contemplated by this Agreement, (C) seeking to impose
limitations on the ability of Acquiror to acquire or hold, or exercise full
rights of ownership of, the Shares, including the right to vote the Shares on
all matters properly presented to the stockholders of the Company, (D) seeking
to prohibit Acquiror or the Subsidiary from effectively controlling in any
material respect the business or operations of the Company or the Subsidiary or
(E) which otherwise is reasonably likely to have a Material Adverse Effect with
respect to the Company and the Subsidiary or Acquiror and its subsidiaries.
There shall be in effect no preliminary or permanent injunction or other order
of a court or governmental or regulatory agency of competent jurisdiction
directing that the transactions contemplated herein not be consummated.
(d) GOVERNMENTAL FILINGS AND CONSENTS. Subject in each case to
the provisions of Section 7.1(c), all governmental filings required to be made
prior to the Effective Time by the Company with, and all governmental consents
required to be obtained prior to the Effective Time from, governmental and
regulatory authorities in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby shall
have been made or obtained, except where the failure to make such filing or
obtain such consent would not reasonably be expected to have a Material Adverse
Effect with respect to the Company and the Subsidiary taken as a whole (assuming
the Merger had taken place).
(e) THIRD-PARTY CONSENTS. All required authorizations,
consents and approvals of any Person (other than a governmental authority), the
failure to obtain which would have a Material Adverse Effect with respect to the
Company and the Subsidiary taken as a whole (assuming the Merger had taken
place), shall have been obtained.
(f) EMPLOYMENT AND NON-COMPETITION AGREEMENT. The Company and
Acquiror shall have entered into an Employment and Non-Competition Agreement
with Mr. Gordon H. McNeil and a covenant not to compete with Isadore Diamond, in
each case on mutually satisfactory terms, and such agreements shall be in full
force and effect.
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(g) SHARE EXCHANGES. The Share Exchanges shall have
been consummated concurrently with one another immediately prior to the
Effective Time.
(h) OPTIONS AND WARRANTS. All Options listed in Section 4.1(d)
of the Disclosure Schedule shall have been exercised or terminated either in
accordance with their terms or pursuant to option termination agreements in form
and substance satisfactory to Acquiror. All Warrants listed in Section 4.1(d) of
the Disclosure Schedule shall have been exercised or terminated in accordance
with their terms. No options, warrants or similar rights to subscribe for or to
purchase equity securities of the Company or the Surviving Corporation shall be
outstanding and the Company shall have delivered to Acquiror a certificate to
the foregoing effect.
(i) DUE DILIGENCE. Acquiror shall have completed its due
diligence review of the Company and its affairs and in connection therewith
shall not have (A) identified any matter or matters not identified on the
Disclosure Schedule that in its reasonable judgement is reasonably likely to
give rise to a Material Adverse Effect on the Company and the Subsidiary taken
as a whole or that materially affects its valuation of the Company and (B) given
notice thereof to the Company within 30 days after the date hereof. Acquiror
shall have had the opportunity to have discussions with Xerox Corporation and
following such discussions shall not have notified the Company, in writing,
within 30 days after the date hereof, of Acquiror's determination to terminate
this Agreement due to its failure to be reasonably satisfied as to the
continuation of the Company's relationship with Xerox Corporation, the
continuing technological viability of the Company's products or the absence of
any current plan or intention of Xerox Corporation to replace the Company or
materially diminish its role as a key supplier subsequent to the Effective Time.
(j) DISSENTING SHARES. As of the Effective Time, Dissenting
Shares shall aggregate no more than 1% of the then outstanding shares of Common
Stock.
(k) TAX OPINION. Acquiror shall have received a written
opinion, in form and substance satisfactory to Acquiror, to the effect that the
Merger will constitute a tax-free reorganization within the meaning of Section
368(a) of the Code.
(l) OUTSTANDING SHARES. There shall be outstanding as of the
Effective Time less than 3,000,000 shares of the Company's Common Stock.
7.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligation of the
Company to consummate the Merger is subject to the fulfillment at or prior to
the Closing Date of the following conditions, any or all of which may be waived
in whole or in part by the Company to the extent permitted by applicable law.
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(a) CERTIFICATES. The representations and warranties of
Acquiror and Merger Sub shall be true and correct in all material respects on
and as of the Closing Date with the same force and effect as though the same had
been made on and as of the Closing Date (except to the extent they relate to a
particular date), Acquiror and Merger Sub shall have performed in all material
respects all of their respective obligations under this Agreement theretofore to
be performed, and the Company shall have received at the Closing Date
certificates to that effect dated the Closing Date and executed by the Chief
Executive Officer or President of each of Acquiror and Merger Sub, provided,
however, that no representation or warranty of Acquiror contained in Section 5.2
hereof shall be deemed untrue or incorrect as a consequence of the existence of
any fact, circumstance or event unless such fact, circumstance or event,
individually or taken together with all other facts, circumstances or events
inconsistent. with any paragraph of Section 5.2 has had or is expected to have a
Material Adverse Effect with respect to Acquiror and its subsidiaries.
(b) COMPANY STOCKHOLDER APPROVAL. This Agreement shall have
been duly approved by the holders of a majority of the votes entitled to be cast
by the holders of Shares at the Stockholder Meeting, in accordance with
applicable law and the Certificates of Incorporation and By-Laws of the Company.
(c) INJUNCTION. There shall be in effect no preliminary or
permanent injunction or other order of a court or governmental or regulatory
agency of competent jurisdiction directing that the Transactions contemplated
herein not be consummated; provided, however, that prior to invoking this
condition the Company shall use its best efforts to have such injunction or
order vacated.
ARTICLE VIII - TERMINATION
8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by holders of Shares, either by the mutual written consent of
Acquiror and the Company, or by mutual act of their respective Boards of
Directors.
8.2 TERMINATION BY EITHER ACQUIROR OR THE COMPANY. This Agreement may
be terminated and the Merger may be abandoned by action of the Board of
Directors of either Acquiror or the Company if (i) the Merger shall not have
been consummated by December 31, 1997 (provided that the right to terminate this
Agreement under this Section 8.2(i) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date); or (ii)
any court of competent jurisdiction in the United States or some other
governmental body or regulatory authority shall have issued an order, decree or
ruling or taken any other action permanently restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action shall have
become final and nonappealable.
38
<PAGE> 63
8.3 TERMINATION BY ACQUIROR. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the approval by holders of Shares, by action of the Board of Directors of
Acquiror, if (i) Acquiror so elects by September 7, 1997 pursuant to Section
7.1(i), (ii) the Company shall have failed to comply in any material respect
with any of the covenants or agreements contained in this Agreement to be
complied with or performed or fulfilled by the Company at or prior to such date
of termination, which failure to comply has not been cured within fifteen
business days following receipt by the Company of notice of such failure to
comply, (iii) any representation or warranty of the Company contained in the
Agreement shall not be true in all material respects when made (provided such
breach has not been cured within fifteen business days following receipt by the
Company of notice of the breach) or (except to the extent they relate to a
particular date) on and as of the Effective Time as if made on and as of the
Effective Time (in each case subject to the standard set forth in the proviso of
Section 7.1(a)), (iv) (A) the Board of Directors of the Company withdraws its
recommendation of this Agreement, fails to make such recommendation or modifies
or qualifies its recommendation in a manner adverse to Acquiror, (B) the Board
of Directors of the Company participates in (or authorizes participation in)
negotiations of the type described in Section 6.2 regarding the substantive
terms of a proposal for a Competing Transaction or approves or recommends a
competing transaction, (C) the Company shall have entered into any agreement
with respect to any Competing Transaction or (D) the Board of Directors of the
Company shall resolve to do any of the foregoing, or (v) the Merger shall have
been voted on by stockholders of the Company at a meeting duly convened therefor
and the vote shall not have been sufficient to satisfy the conditions set forth
in Sections 7.1(b) and 7.2(b).
8.4 TERMINATION BY THE COMPANY. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by holders of Shares, by action of the Board of Directors of
the Company, if (i) Acquiror or Merger Sub shall have failed to comply in any
material respect with any of the covenants or agreements contained in this
Agreement to be complied with or performed or fulfilled by Acquiror or Merger
Sub at or prior to such date of termination, which failure to comply has not
been cured within fifteen business days following receipt by the breaching party
of notice of such failure to comply, (ii) any representation or warranty of
Acquiror or Merger Sub contained in this Agreement shall not be true in all
material respects when made (provided such breach has not been cured within
fifteen business days following receipt by the breaching party of notice of the
breach) or (except to the extent they relate to a particular date) on and as of
the Effective Time as if made on and as of the Effective Time (in each case
subject to the standard set forth in the proviso of Section 7.2(a)) or (iii) on
or prior to September 7, 1997, the Company enters into a definitive agreement
relating to a Superior Proposal in accordance with Section 6.2(b), provided it
has complied with all of the provisions thereof and has made payment of the fee
required by Section 8.5(b) hereof.
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<PAGE> 64
8.5 EFFECT OF TERMINATION AND ABANDONMENT.
(a) In the event of termination of this Agreement by either
the Company or Acquiror as provided in this Article VIII, this Agreement shall
forthwith become void and there shall be no liability or obligation on the part
of Acquiror, Merger Sub, the Company or their respective affiliates, officers,
directors or stockholders except pursuant to this Section 8.5 and except to the
extent that such termination results from a willful breach by a party hereto or
any of its representations or warranties, or any of its covenants or agreements,
in each case, as set forth in this Agreement.
(b) In the event that this Agreement shall be terminated
pursuant to Section 8.3 (ii) or (iii) (each in the case of a willful breach),
Section 8.3(iv) or (v), or Section 8.4(iii), then the Company shall pay to
Acquiror an amount equal to $480,000.
(c) Any payment required to be made pursuant to this Section
8.5 shall be made as promptly as practicable but not later than two business
days after the occurrence of the event giving rise to such payment (or the date
required by Section 6.2(b), if applicable) and shall be made by wire transfer of
immediately available funds to an account designated by Acquiror.
ARTICLE IX - MISCELLANEOUS AND GENERAL
9.1 PAYMENT OF EXPENSES. Whether or not the Merger shall be
consummated, except as otherwise provided in Section 8.5, each party hereto
shall pay its own expenses incident to preparing for, entering into and carrying
out this Agreement and the consummation of the transactions contemplated hereby.
92 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties made herein shall not survive beyond the Effective Time or a
termination of this Agreement. This Section 9.2 shall not limit any covenant or
agreement of the parties hereto which by its terms contemplates performance
after the Effective Time.
9.3 MODIFICATION OR AMENDMENT. Subject to the applicable provisions of
the DGCL, at any time prior to the Effective Time, Acquiror, Merger Sub and the
Company may modify or amend this Agreement, by written agreement executed and
delivered by duly authorized officers of Acquiror, Merger Sub and the Company;
provided, however, that after approval of this Agreement by the stockholders of
the Company, no amendment shall be made which changes the consideration payable
in the Merger or adversely affects the rights of the Company's stockholders
hereunder without the approval of such stockholders.
9.4 WAIVER OF CONDITIONS. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
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<PAGE> 65
9.5 COUNTERPARTS. For the convenience of the parties hereto, this
Agreement may be executed in any number of counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute the same agreement.
9.6 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without regard to any
applicable conflicts of law.
9.7 NOTICES. Any notice, request, instruction or other document to be
given hereunder by any party to the other parties shall be in writing and
delivered personally or sent by registered or certified mail, postage prepaid,
or by facsimile transmission (with a confirming copy sent by overnight courier),
as follows:
(a) if to the Company, to
Magnetic Technologies Corporation
770 Linden Avenue
Rochester, NY 14625
Attention: Gordon H. McNeil, President
Telephone: (716) 385-8711
Facsimile: (716) 385-5625
with a copy to:
Gerald B. Fincke
Attorney at Law
2300 E. Graves Avenue
Orange City, FL 32763
Telephone: (904) 775-0221
Facsimile: (904) 775-1343
(b) if to Acquiror or Merger Sub, to
SPS Technologies, Inc.
101 Greenwood Avenue, Suite 470
Jenkintown, PA 19046-2611
Attention: James D. Dee, Esq.
William Shockley
Telephone: (215) 517-2000
Facsimile: (215) 517-2030
41
<PAGE> 66
with a copy to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attention: John R. LeClaire, P.C.
Telephone: (617) 570-1000
Facsimile: (617) 523-1231
or to such other persons or addresses as may be designated in writing by the
party to receive such notice.
9.8 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, including the
Disclosure Schedule and Exhibits and the Confidentiality Agreement, (i)
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all other prior agreements and understandings, both
written and oral, among the parties or any of them with respect to the subject
matter hereof, and (ii) shall not be assigned by operation of law or otherwise,
except that Merger Sub may assign, in its sole discretion, any or all of its
rights, interests and obligations under this Agreement to any direct wholly
owned subsidiary of Acquiror, provided that such subsidiary makes the
representations and warranties made by Merger Sub hereunder and that no such
assignment shall relieve Merger Sub of any of its obligations hereunder.
9.9 PARTIES IN INTEREST. Subject to Section 9.8, this Agreement shall
be binding upon and inure solely to the benefit of each party hereto and their
respective successors and assigns. Nothing in this Agreement, express or
implied, other than the right to receive the consideration payable in the Merger
pursuant to Article IV hereof, is intended to or shall confer upon any other
person any rights, benefits or remedies of any nature whatsoever under or by
reason of this Agreement; provided, however, that the provisions of Section 6.7
shall inure to the benefit of and be enforceable by the Indemnified Parties.
9.10 CERTAIN DEFINITIONS. As used herein:
(a) "Affiliate" shall mean, with respect to any Person, any
other Person directly or indirectly controlling, controlled by or under common
control with such other Person.
(b) "Material Adverse Effect" shall mean, with respect to any
person, any change or effect (or any development that, insofar as can reasonably
by foreseen, is likely to result in any change or effect) that is materially
adverse to the business, properties, assets, condition (financial or otherwise),
results of operations or prospects of such party and its subsidiaries taken as a
whole, other than changes or effects which result from the execution and
delivery of this Agreement or the consummation of any transactions contemplated
hereby; provided, however, that no single event or adjustment having a financial
effect of less than $75,000 nor any combination of events and adjustments having
a combined financial effect of less than
42
<PAGE> 67
$150,000 shall be deemed to constitute a condition which is "materially
adverse."
(c) "Person" shall mean an individual corporation,
partnership, trust or unincorporated organization or a government or any agency
or political subdivision thereof.
9.11 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or unenforceable, all other provisions of this Agreement shall
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party.
9.12 SPECIFIC PERFORMANCE. The parties hereto acknowledge that
irreparable damage would result if this Agreement were not specifically
enforced, and they therefore consent that the rights and obligations of the
parties under this Agreement may be enforced by a decree of specific performance
issued by a court of competent jurisdiction. Such remedy shall, however, not be
exclusive and shall be in addition to any other remedies, including arbitration,
which any party may have under this Agreement or otherwise.
9.13 CAPTIONS. The Article, Section and paragraph captions herein are
for convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
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<PAGE> 68
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officers of the parties hereto and shall be effective as
of the date first hereinabove written.
SPS TECHNOLOGIES, INC.
By: /s/ William Shockley
---------------------------------
Name: William Shockley
Title: Vice-President
MTC ACQUISITION CORP.
By: /s/ James D. Dee
---------------------------------
Name: James D. Dee
Title: Vice-President
MAGNETIC TECHNOLOGIES CORPORATION
By: /s/ Gordon H. McNeil
---------------------------------
Name: Gordon H. McNeil
Title: President & CEO
<PAGE> 69
[EXHIBIT A AND EXHIBIT B]
-------------------------
Forms of Stock Purchase Agreement and Voting Agreement
<PAGE> 70
STOCK PURCHASE AGREEMENT
------------------------
This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of August
__, 1997, is between SPS Technologies, Inc., a Pennsylvania corporation
("Purchaser"), and __________________________ ("Stockholder").
RECITALS
--------
WHEREAS, Purchaser, MTC Acquisition Corp., a Delaware corporation
("Acquisition"), and Magnetic Technologies Corporation, a Delaware corporation
(the "Company") have entered into an Agreement and Plan of Merger (the "Merger
Agreement") dated as of August 7, 1997, pursuant to which Purchaser, Acquisition
and the Company have agreed to engage in a merger transaction (the "Merger");
and
WHEREAS, Stockholder is a stockholder of the Company holding the number
of shares (the "Stockholder Shares") of the Company's common stock, par value
$.15 per share ("Company Common Stock"), set forth on the signature page hereto;
and
WHEREAS, in connection with the Merger Agreement and the Merger,
Purchaser wishes to acquire and Stockholder wishes to sell to Purchaser,
Stockholder Shares on the terms and conditions set forth herein.
NOW, THEREFORE, Purchaser and Stockholder agree as follows:
1. PURCHASE AND SALE OF STOCKHOLDER SHARES. On the Closing Date (as
hereinafter defined), (i) Stockholder shall transfer, assign and deliver to
Purchaser, and Purchaser shall purchase from Stockholder, the number of
Stockholder Shares set forth on the signature page hereof and (ii) in
consideration therefor, Purchaser shall issue or cause to be issued to
Stockholder that number of shares of Common Stock of Purchaser ("Purchaser
Shares") equal to the quotient of (a) the product of $5.00 times the number of
Stockholder Shares being exchanged pursuant hereto, divided by (b) the daily
last sales prices of Purchaser's Common Stock as reported on the New York Stock
Exchange ("NYSE") Composite Transactions reporting system (as reported in The
Wall Street Journal or, if not reported therein, in another mutually agreed upon
authoritative source) for the twenty consecutive full trading days in which such
shares are traded on the NYSE ending with the closing of trading on the date
which is one trading day prior to the date of the Stockholder Meeting (as
defined in the Merger Agreement).
2. CLOSING. Subject to the terms and conditions of this Agreement, the
closing of the purchase and sale of the Stockholder Shares (the "Closing") shall
take place (a) at the offices of the Company in Rochester, New York at 10:00
a.m., local time, immediately prior to the Effective Time (as defined in the
Merger Agreement) of the Merger, or (b) at such other time, date or place as the
parties hereto may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date." At the Closing, Stockholder shall deliver to
Purchaser (i) a certificate or certificates representing the Stockholder Shares
being purchased hereunder, duly endorsed for transfer or accompanied by stock
powers duly executed in blank and (ii) a certificate dated the Closing Date and
certifying that Stockholder has no plan or intention to sell, exchange or
otherwise dispose of the Purchaser Shares received in consideration for the
Stockholder Shares transferred to Purchaser hereunder, against delivery by
Purchaser to Stockholder of a certificate or certificates representing the
number of Purchaser Shares determined in accordance with Section 1.
3. REPRESENTATION AND WARRANTIES OF PURCHASER. Purchaser hereby
represents and warrants to Stockholder that the Purchaser Shares will be validly
issued, fully paid, non-assessable, listed on the New York Stock Exchange,
registered under the Securities and Exchange Act of 1934, and exempt from
registration under the Securities Act of 1933, when issued to Stockholder.
<PAGE> 71
4. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. Stockholder hereby
represents and warrants to Purchaser as follows:
(a) OWNERSHIP OF SHARES. Stockholder owns of record and
beneficially the Stockholder Shares. Stockholder will not sell or transfer any
Stockholder Shares prior to the Closing. Upon transfer and delivery by
Stockholder to Purchaser of the Stockholder Shares owned by Stockholder provided
for herein, Purchaser shall acquire good and valid title to such shares, free
and clear of all claims, liens, charges, proxies (other than any agreement with
Purchaser), encumbrances and security interests (other than any created by
Purchaser).
(b) POWER AND AUTHORIZATION. Stockholder has full legal right
to perform its obligations under this Agreement and the other agreements and
documents required to be delivered by it hereunder. This Agreement constitutes
the legal, valid and binding obligation of Stockholder, enforceable against him
or her in accordance with its terms, and the execution and performance of this
Agreement by Stockholder will not violate any of the terms, conditions or
provisions of any contract which Stockholder is a party.
(c) NO BROKERS. Stockholder has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of such entity or Purchaser to pay any finder's fees, brokerage or
agent's commissions or other like payments in connection with the negotiations
leading to this Agreement or consummation of the transactions contemplated
hereby.
(d) INVESTMENT REPRESENTATION. Stockholder represents that he
or she is an "accredited investor" within the meaning of Rule 501 promulgated
under the Securities Act of 1933, as amended (the "Securities Act"), inasmuch as
Stockholder has an individual or joint (with spouse) net worth of $1 million, or
had an individual income of $200,000 in the last two years or joint income with
Stockholder's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current year.
Stockholder has had an opportunity to ask questions and to receive all relevant
information in connection with his or her investment on the Purchaser Shares and
has such knowledge and experience in financial and business matters that he or
she is capable of evaluating the merits and risks of the investment in the
Purchaser Shares contemplated by this Agreement and making an informed
investment decision with respect thereto. Stockholder is purchasing the
Purchaser Shares for his or her own account, for investment only and not with a
view to, or any present intention of, effecting a distribution of such
securities or any part thereof except pursuant to a registration or an available
exemption under applicable law, including pursuant to Rule 144 under the
Securities Act. Stockholder acknowledges that the Purchaser Shares to be
acquired have not been registered under the Securities Act or the securities
laws of any state or other jurisdiction and cannot be disposed of unless they
are subsequently registered under the Securities Act and any applicable state
laws or exemption from such registration is available. Stockholder has no plan
or intention to sell, exchange or otherwise dispose of the Purchaser Shares
received in consideration for the Stockholder Shares transferred to Purchaser
hereunder.
5. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER. The obligation of
Purchaser to enter into and consummate the transactions contemplated hereby is
subject to (a) the continuing effectiveness of the Merger Agreement and the
satisfaction or waiver by the parties to the Merger Agreement of the conditions
set forth in Article VII of the Merger Agreement (other than the conditions set
forth in Section 7.1(g) thereof), (b) consummation of concurrent Share
Exchanges, (as defined in the Merger Agreement) and (c) the continuing accuracy
of the representations and warranties of Stockholder contained in this Agreement
on and as of the date hereof and on and as of the Closing Date.
6. CERTAIN CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDER. The
obligation of Stockholder to enter into and complete the transactions
contemplated hereby is subject to the fulfillment (or waiver in writing by
Stockholder in its sole discretion) on or prior to the Closing Date of the
conditions that (a) the representations and warranties of Purchaser contained in
this Agreement shall be true and correct on and as of the date hereof and in all
material respects on and as of the Closing Date with the same force and effect
as though made on and as of the
2
<PAGE> 72
Closing Date and (b) Stockholder shall have received a written opinion from
Purchaser to the effect that the Merger constitutes a tax-free reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended.
7. FURTHER ACTION. Stockholder and Purchaser shall, subject to the
fulfillment at or before the Closing Date of each of the conditions of
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may reasonably be required to effect the
transactions contemplated hereby.
8. ASSIGNMENT. Neither party to this Agreement may assign any of its
rights or obligations under this Agreement without the prior written consent of
the other party hereto. Subject to the foregoing, this Agreement shall be
binding upon, inure to the benefit of and be enforceable by the parties hereto
and their respective successors, heirs, assigns, administrators, executors and
estates.
9. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be delivered personally
or transmitted by telex, fax or telegram, to the respective parties at the
addresses following their names on the signature page hereof or to such other
address as any party may have furnished to the others in writing.
10. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the internal laws of the State of Delaware.
11. SURVIVAL. All representations, warranties, covenants and agreements
of the parties hereto shall survive indefinitely after the Closing and shall not
be merged therewith.
12. TERMINATION.
(a) This Agreement may be terminated and the transactions
contemplated herein may be abandoned at any time prior to the Closing:
(i) by Purchaser if the Merger Agreement shall have
been terminated (other than due to the failure of Purchaser to perform
its obligations under the Merger Agreement or any other agreement
required to be performed at or prior to the Closing);
(ii) by mutual consent of Purchaser and Stockholder;
(iii) by Purchaser or Stockholder, in the event the
purchase of Stockholder Shares hereunder shall not have occurred by
December 31, 1997;
(iv) by Stockholder, if Purchaser has failed to
perform in any material respect any of its respective obligations
required to be performed by it under this Agreement and such failure
continues for more than 30 days after notice unless failure to so
perform has been caused by or results from a breach of this Agreement
by Stockholder; or
(v) by Purchaser, if Stockholder shall have failed to
perform in any material respect any of the obligations required to be
performed by Stockholder under this Agreement and such failure
continues for more than 30 days after notice unless failure to so
perform has been caused by or results from a breach of this Agreement
by Purchaser.
(b) A party terminating this Agreement pursuant to this
Section 12 shall give written notice thereof to each other party hereto,
whereupon this Agreement shall terminate and the transactions contemplated
hereby shall be abandoned without further action by any party; PROVIDED,
however, that if such termination is by Purchaser pursuant to Section 12(a)(v)
or if such termination is by Stockholder pursuant to Section 12(a)(iv),
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<PAGE> 73
nothing herein shall affect the non-breaching party's or parties' right to
damages on account of such other party's or parties' breach.
(c) Stockholder acknowledges that the Stockholder Shares are
unique and that Purchaser will not have an adequate remedy at law if Stockholder
fails to perform any of its obligations hereunder, and Stockholder agrees that
Purchaser shall have the right, in addition to any other right it has, to
specific performance or equitable relief by way of injunction if Stockholder
fails to perform any of its obligations hereunder. Any requirements for the
securing or posting of any bond with respect to such remedy are hereby waived.
13. EXPENSES. Each of Purchaser and Stockholder shall pay the fees and
expenses it incurs in connection with this Agreement, other than as a result of
the breach hereof by the other party hereto.
14. CONDITION SUBSEQUENT. If for any reason the Merger does not become
effective within five business days after the Closing Date, the transactions
contemplated hereby shall be automatically rescinded, the parties shall return
any consideration they received to the parties who provided such consideration
(with duly executed stock powers, if appropriate).
4
<PAGE> 74
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written.
SPS TECHNOLOGIES, INC.
By:
---------------------------------------
Name:
Title:
Address:
101 Greenwood Avenue, Suite 470
Jenkintown, PA 19046-2611
STOCKHOLDER
---------------------------------------
Address:
---------------------------------------
---------------------------------------
Number of Stockholder Shares sold hereunder: ________
5
<PAGE> 75
VOTING AGREEMENT
VOTING AGREEMENT, dated as of August __, 1997 (the "Agreement"), among
SPS Technologies Inc., a Pennsylvania corporation ("Acquiror"), MTC Acquisition
Corp., a Delaware corporation ("Acquisition"), and the undersigned beneficial
owner (the "Stockholder") of Common Stock, par value $.15 per share ("Company
Common Stock"), of Magnetic Technologies Corporation, a Delaware corporation
(the "Company").
RECITALS
WHEREAS, Acquiror, Acquisition and the Company are contemporaneously
herewith entering into that certain Agreement and Plan of Merger of even date
herewith (the "Merger Agreement") providing for the merger of the Company with
and into Acquisition pursuant to the terms and conditions of the Merger
Agreement; and
WHEREAS, Stockholder (i) is the beneficial owner of and has the power
to vote an aggregate of _______ shares (the "Shares") of Company Common Stock
and (ii) at the request of Acquiror, desires to enter into this Agreement in
order to induce Acquiror and Acquisition to enter into the Merger Agreement, and
as a condition to their willingness to do so; and
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein, intending to be legally bound hereby,
the parties hereto agree as follows:
1. AGREEMENT TO VOTE SHARES. Stockholder agrees to vote all of the
Shares, as well as any and all other shares of the Company Common Stock as to
which Stockholder then possesses the power to vote or to direct the voting
(collectively, the "Voting Shares"), (a) in favor of adopting and approving the
Merger Agreement, the Merger and the transactions contemplated thereby at such
time as the Company conducts a meeting of, solicits written consents from or
otherwise seeks a vote of, its stockholders for the purpose of adopting and
approving the Merger Agreement, the Merger and the transactions contemplated
thereby and (b) against any action or agreement (other than the Merger Agreement
or the transactions contemplated thereby) that would impede, interfere with,
delay, postpone or attempt to discourage the Merger, including, but not limited
to: (i) any extraordinary corporate transaction, such as a merger, consolidation
or other business combination involving the Company or any of any of its
subsidiaries; (ii) a sale, lease or transfer of a material amount of assets of
the Company or any of its subsidiaries or a reorganization, recapitalization,
dissolution or liquidation of the Company or any of its subsidiaries; (iii) any
change in the management or board of directors of the Company, except as agreed
to in writing by Acquiror; (iv) any material change in the present
capitalization or dividend policy of the Company; (v) any amendment of the
Company's charter documents; or (vi) any other material change in the Company's
corporate structure, management or business.
2. TERMINATION OF AGREEMENT. This Agreement shall terminate upon the
earlier of consummation of the Merger or December 31, 1997.
3. EXCEPTIONS TO OBLIGATIONS. Except for the agreement of Stockholder
to vote the Shares in accordance with Section 1 hereof, nothing in this
Agreement shall: (a) require the Stockholder to acquire additional shares of
Company Common Stock; (b) require the Stockholder, in his or her capacity as a
director or officer of the Company, to refrain from taking any action consistent
with the provisions of Section 6.2 or 8.4(iii) of the Merger Agreement or take
or refrain from taking any action that would otherwise cause such person to
violate his or her fiduciary duties to the Company's shareholders under
applicable law; or (c) require Stockholder to take any action that would prevent
or impede the Company's ability to exercise its rights or fulfill its
obligations under Section 6.2 of the Merger Agreement.
<PAGE> 76
4. COVENANTS OF STOCKHOLDER. Except in accordance with the provisions
of this Agreement, Stockholder agrees, until this Agreement has been terminated
in accordance with Section 2 hereof, or as a result of death or otherwise by
operation of law, not to:
(a) directly or indirectly, sell, transfer, pledge, assign or
otherwise dispose of, or enter into any contract, option, commitment or
other arrangement or understanding with respect to the sale, transfer,
pledge, assignment or other disposition of any of the Shares except
pursuant to the Stock Purchase Agreement;
(b) except as may be required to vote the Voting Shares in
accordance with Section 1 hereof, grant any consents or proxies,
deposit any Voting Shares into a voting trust or enter into a voting
agreement with respect to any Voting Shares;
(c) take any action or omit to take any action (reasonably
within the control of Stockholder) which would prohibit, prevent or
preclude the Company from performing its obligations under the Merger
Agreement; or
(d)(1) solicit proxies or become a "participant" in a
"solicitation" (as such terms are defined in Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "1934 Act")) in
opposition to or competition with the consummation of the Merger or
otherwise encourage or assist any party in taking or planning any
action which would compete with, impede, interfere with or attempt to
discourage the Merger or inhibit the timely consummation of the Merger
in accordance with the terms of the Merger Agreement, (2) directly or
indirectly encourage, initiate or cooperate in a stockholders' vote or
action by consent of the Company's stockholders in opposition to or in
competition with the consummation of the Merger, or (c) become a member
of a "group" (as such term is used in Section 13(d) of the 1934 Act)
with respect to any voting securities of the Company for the purpose of
opposing or competing with the consummation of the Merger.
5. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. Stockholder hereby
represents and warrants to Acquiror and Acquisition as follows:
(a) Stockholder has all requisite power to deliver and perform
this Agreement and to vote the Voting Shares in accordance with Section
1 hereof. This Agreement has been duly executed and delivered by
Stockholder and is a valid and binding agreement of Stockholder,
enforceable against Stockholder in accordance with its terms, and the
execution, delivery and performance of this Agreement by Stockholder do
not violate any contract to which Stockholder is a party or by which
the Voting Shares are affected, and will not require the consent of any
third party.
(b) The Shares are not and, except in the event of the
Stockholder's death or as a result of operation of law, will at all
times during the term of this Agreement be held of record and owned
beneficially by the Stockholder free and clear of all liens, claims,
security interests or any other encumbrances whatsoever, other than
restrictions upon resale which may be imposed by federal or state
securities laws.
6. REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND ACQUISITION. Each of
Acquiror and Acquisition hereby represents and warrants to Stockholder that it
has the corporate power and authority to execute, deliver and perform this
Agreement; such execution, delivery and performance have been duly authorized by
all necessary corporate action; and this Agreement has been duly executed and
delivered by each of Acquiror and Acquisition and constitutes the valid and
binding agreement of Acquiror and Acquisition, enforceable against each of them
in accordance with its terms.
2
<PAGE> 77
7. SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement,
including, without limitation, the agreement of Stockholder to vote the Voting
Shares in accordance with Section 1 hereof, were not performed by the applicable
party hereto in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that, in the event of a breach of this Agreement, each
of the parties hereto shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement by the other and to enforce specifically the
terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which the
parties are entitled at law or in equity.
8. FURTHER ASSURANCES. Stockholder, Acquiror and Acquisition agree to
execute and deliver all such further documents and instruments and take all such
further reasonable action as may be necessary or appropriate, including
cooperation in obtaining any and all required regulatory approvals, in order to
consummate the transactions contemplated hereby, including, without limitation,
the agreement of Stockholder to vote the Voting Shares in accordance with
Section 1 hereof.
9. EXPENSES. Except as may otherwise be provided herein, no party
hereto shall be responsible for the payment of any other parties' expenses
incurred in connection with this Agreement.
10. THIRD PARTY BENEFICIARIES. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and its
respective successors and permitted assigns, and it is not the intention of the
parties to confer third party beneficiary rights upon any other person or
entity.
11. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing and delivered personally or by telecopy
transmission or sent by registered or certified mail or by any express mail
service, postage or fees prepaid to the addresses on the signature page hereof.
12. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (without regard to principles
of conflicts of laws).
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute but one agreement.
3
<PAGE> 78
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first written above.
SPS TECHNOLOGIES INC.
By:
----------------------------------------
NAME:
TITLE:
Address:
101 Greenwood Avenue, Suite 1170
Jenkintown, Pennsylvania 19046-2611
MTC ACQUISITION CORP.
By:
----------------------------------------
NAME:
TITLE:
Address:
c/o SPS Technologies, Inc.
101 Greenwood Avenue, Suite 470
Jenkintown, Pennsylvania 19046-2611
STOCKHOLDER
---------------------------------------
Name:
Address:
--------------------------------------
--------------------------------------
<PAGE> 79
Appendix B
August 7, 1997
Board of Directors
Magnetic Technologies Corporation
770 Linden Avenue
Rochester, New York 14625-2764
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the stockholders of Magnetic Technologies Corporation, Inc. (the
"Company") of the consideration proposed to be paid to them in connection with
the proposed merger (the "Merger") of the Company with a wholly-owned subsidiary
of SPS Technologies, Inc. (the "Buyer"). Pursuant to a draft of the Agreement
and Plan of Merger, dated as of August 7, 1997 (the "Agreement"), among the
Company and the Buyer, the Company shall be merged into a wholly-owned
subsidiary of the Buyer which shall continue as the surviving corporation. We
are assuming the final copy of the Agreement and Plan of Merger will be
substantially similar to the Agreement. For federal income tax purposes, it is
intended that the Merger shall qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code 1986, as amended. We are not
qualified to, and do not, express any opinion as to the tax treatment of the
proposed Merger.
Pursuant to the Agreement, shareholders of the Company shall receive for each
share of Common Stock of the Company held by them, consideration equal to $5.00.
Certain holders (as set forth in the following paragraph) of shares of the
Company's Common Stock are entering, or shall enter, into Stock Purchase
Agreements with the Buyer as to the form of consideration for their shares. All
other holders of the Company's Common Stock shall receive cash consideration of
$5.00 per share for each share of the Company's Common Stock.
Immediately prior to the effective time of the Merger, not greater than 10
(unless the Buyer has otherwise agreed) holders or not less than 45% and not
greater than 51% (unless the Buyer has otherwise agreed) of the outstanding
shares of Common Stock shall have exchanged their shares for a number of shares
of Buyer's Common Stock (the "Purchaser Shares"), equal to the quotient of (a)
the product of $5.00 times the number of shares being exchanged, divided by (b)
the average of the daily last sales prices of the Buyer's Common Stock as
reported on the NYSE Composite Transactions reporting system (as reported in The
Wall Street Journal or, if not reported therein, in another mutually agreed upon
authoritative source) for the twenty consecutive full trading days in which such
shares are traded on the New York Stock Exchange ending with the closing of
trading on the date which is one trading day prior to the stockholder meeting.
The Purchaser Shares will not be registered under the Securities Act of 1933, as
amended, and we understand that such shares may not be freely tradeable. The
closing of such share exchanges (the "Share Exchanges") shall occur immediately
prior to and in conjunction with the Closing. All shares exchanged in the Share
Exchanges shall not be deemed outstanding
<PAGE> 80
BOARD OF DIRECTORS
MAGNETIC TECHNOLOGIES CORPORATION
AUGUST 7, 1997
PAGE 2
immediately prior to the effective time and, accordingly, shall not be entitled
to receive merger consideration.
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) certain
publicly available information concerning the Company and of certain other
companies engaged in businesses comparable to those of the Company, and the
reported market prices for certain other companies' securities deemed
comparable; (iii) publicly available terms of certain transactions involving
companies comparable to the Company and the consideration received for such
companies; (iv) current and historical market prices and trading volume of the
common stock of the Company; (v) the audited financial statements of the Company
for the fiscal year ended July 31, 1996 and the quarterly financial statements
of the Company for the nine months ended April 30, 1997; (vi) certain financial
analyses and forecasts prepared by the Company and its management; and (vii) the
terms of the Merger that we deemed relevant.
In addition, we have held discussions with certain members of management of the
Company with respect to certain aspects of the Merger and the past and current
business operations of the Company, the financial condition and future prospects
and operations of the Company, and certain other matters we believed necessary
or appropriate to our inquiry. We have reviewed such other matters we believed
necessary or appropriate to our inquiry, including such other financial studies
and analyses and considered such other information as we deemed appropriate for
the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by the Company or otherwise reviewed by us. We
do not assume any responsibility or liability for the inaccuracy or
incompleteness of any such information. We have not conducted any valuation or
appraisal of any assets or liabilities of the Company, nor have any such
valuations or appraisals been provided to us. In relying on financial analyses
and forecasts provided to us, we have assumed, without verification, that they
have been reasonably prepared based on assumptions reflecting the best currently
available estimates and judgments by management as to the expected future
results of operations and financial condition of the Company to which such
analyses or forecasts relate. In rendering our opinion, we have assumed that
holders of the Company's Common Stock shall receive cash of $5.00 or Buyer
Common Stock valued at $5.00 per share, notwithstanding any restrictions on such
sale of Buyer Common Stock, any tax effect of receiving Buyer Common Stock in
lieu of cash consideration, or any fluctuation in the price of Buyer's Common
Stock between the date hereof and the Effective Date, as defined in the
Agreement. We have relied as to all legal matters relevant to rendering our
opinion upon the advice of Company counsel.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us, as of the date hereof. It
should be understood that subsequent developments may affect this opinion and
that we do not have any obligation to update, revise, or reaffirm this opinion.
We are expressing no opinion herein as to the price at which the Buyer's Common
Stock will trade at any future time, any restrictions thereon or any
<PAGE> 81
BOARD OF DIRECTORS
MAGNETIC TECHNOLOGIES CORPORATION
AUGUST 7, 1997
PAGE 3
tax effect from receiving stock in lieu of cash consideration. The opinion is
limited to the fairness, from a financial point of view, to the shareholders of
the Company of the consideration to be paid in the Merger and we express no
other opinion, including as to the merits of the underlying business decision by
the Company to engage in the Merger, as to the relative merits of the Merger and
alternative potential strategies or transactions, or as to any matters of a
legal, regulatory, tax or accounting nature.
For issuing an opinion of fairness on the Merger, we will receive a fee from the
Company for our service, which is not contingent on the consummation of the
transaction. In the ordinary course of their businesses, we or our affiliates
may actively trade the debt and equity securities of the Company or the Buyer
for their own account or for the accounts of customers and, accordingly, they
may at any time hold long or short positions in such securities. As you know, we
have not participated in negotiating or structuring the Merger. We were not
retained to, nor did we, solicit any bids for the Company.
On the basis of, and subject to, the foregoing, it is our opinion as of the date
hereof that the consideration to be paid to the Company's stockholders in the
proposed Merger as described above is fair, from a financial point of view, to
such stockholders and that those stockholders receiving cash are receiving no
less than the substantial equivalent of those holders of the Company's Common
Stock who are receiving Buyer Common Stock in exchange for their shares.
This letter is provided to the Board of Directors of the Company in connection
with and for the purposes of its evaluation of the Merger. This opinion does not
constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote with respect to the Merger. This opinion may not be
disclosed, referred to, or communicated (in whole or in part) to any third party
for any purpose whatsoever except with our prior written consent in each
instance, except that the Company may include a copy of this opinion, in full,
in any proxy statement used to solicit the approval of the Company's
stockholders of the Merger, provided that the Company furnishes BlueStone with a
final proxy statement three business days prior to mailing same to the Company's
stockholders.
Very truly yours,
BLUESTONE CAPITAL PARTNERS, L.P.
By: /s/ Matthew Castagna
---------------------
Name: Matthew Castagna
Title: Managing Director
<PAGE> 82
Appendix C
DELAWARE - GENERAL CORPORATION STATUTE
--------------------------------------
Section 262 APPRAISAL RIGHTS (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation: and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
section 251(g) of this title), Section 252, Section 254, Section 257,
Section 258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock
of a constituent corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to Sections 251, 252, 254, 257,
258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in respect
thereof, which shares of stock or depository receipts at the effective date of
the merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or held
of record by more than 2,0002 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in lieu
of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a. b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that
<PAGE> 83
appraisal rights are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this section. Each
stockholder electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares. A proxy
or vote against the merger or consolidation shall not constitute such a demand.
A stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to Section 228 or 253
of this title, each constituent corporation, either before the effective date of
the merger or consolidation or within ten days thereafter, shall notify each of
the holders of any class or series of stock of such constituent corporation who
are entitled to appraisal rights of the approval of the merger or consolidation
and that appraisal rights are available for any or all shares of such class or
series of stock of such constituent corporation, and shall include in such
notice a copy of this section; provided that, if the notice is given on or after
the effective date of the merger or consolidation, such notice shall be given by
the surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than 10
days prior to the date the notice is given, provided, that if the notice is
given on or after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
<PAGE> 84
(f) Upon filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register of Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder who name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the
<PAGE> 85
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
<PAGE> 86
Appendix D
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No. 0-4277
MAGNETIC TECHNOLOGIES CORPORATION
Incorporated in Delaware I.R.S. Employer No. 16-0961159
770 Linden Avenue, Rochester, New York 14625
Telephone No. (716) 385-8711
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Names of exchanges on which registered
------------------- --------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock (Par Value $.15 per share)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past twelve months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes[X] No[ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The registrant's revenues for its most recent fiscal year ended July 31, 1995
were $22,209,634.
The aggregate market value of the registrant's voting common stock held by
nonaffiliates as of October 2, 1995 was approximately $10,879,649 (2,246,121
shares x $4.84375 average of bid and asked prices).
2,786,650 shares of the registrant's common stock were outstanding as of
October 2, 1995.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's proxy statement for the December 14, 1995 Annual Meeting of
Stockholders is incorporated by reference into Part III, Items 9, 10, 11 and 12
of this report.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
1
<PAGE> 87
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) Business Development
Magnetic Technologies Corporation (the Company) is engaged in contract
manufacturing. Incorporated in 1969, the Company has historically concentrated
on designing and manufacturing magnetic, electronic and mechanical
subassemblies of copiers and printers for the electronic office equipment
manufacturing industry. Although the Company's Magnetic Assembly Group
constitutes its core business, in the past three years the Company has taken
the following actions both to diversify beyond magnetic assembly manufacturing
and to reduce its reliance on a single customer which previously accounted for
more than 90% of its revenues:
- In its fiscal year ended July 31, 1993 (fiscal 1993), the Company
purchased its Austro Mold Group, which designs and builds plastic
molds and manufactures custom injection molded plastic parts and
assemblies.
- In fiscal 1993, the Company licensed its European magnetic assembly
business to an English corporation in exchange for a one-time
licensing fee and equipment sale, plus a 25% passive interest in the
newly formed company, Magnetic Technologies Europe Limited (MTE).
- The Company has offered remanufacturing services in an effort to
obtain magnetic assembly business from office equipment manufacturers
with which it had obtained little or no business in the past.
The above actions, coupled with a $2,075,000 decline in magnetic assembly
deliveries in its fiscal year ended July 31, 1994 (fiscal 1994), served to
reduce the portion of the Company's revenues attributable to the single
customer (Xerox Corporation and its English subsidiary) to 66% in fiscal 1993
and 61% in fiscal 1994. However, two positive achievements during the
Company's most recent fiscal year ended July 31, 1995 (fiscal 1995) had the
ancillary effect of increasing the portion of the Company's business
attributable to Xerox to 74%.
1. The Company's core business experienced a sales rebound in
fiscal 1995. Magnetic Assembly Group revenues, including remanufacturing
business, climbed $4,446,000, or 36%, due to new Xerox orders.
2. In the third quarter of fiscal 1995, the Company reacquired
its European business by purchasing the remaining 75% interest in MTE at a
purchase price considerably below the licensing fee originally received by
the Company for that business. (The terms of the MTE acquisition were
reported by the Company in a Form 8-K Report dated March 31, 1995.)
Although MTE has diversified its customer base and it is expected to
further diversify, much of MTE's fiscal 1995 sales were to a Xerox
subsidiary.
On the negative side, the Austro Mold acquisition has not been a success to
date. In fiscal 1994, the Austro Mold Group suffered both a sales decline and
cost overruns, resulting in a $836,000 operating loss for the Group. At the
beginning of fiscal 1995, the Company replaced the Vice President in charge of
the Austro Mold Group with an experienced plastics industry executive. Since
then, management has taken corrective actions with respect to controlling
costs, and has closed Austro Mold's Florida plant. Although Austro Mold's
tooling operation returned to profitability in fiscal 1995, its plastics
molding operation did not, and total Austro Mold sales declined further, with
the Group incurring a $1,250,000 loss. In the short term, management is
concentrating attention on Austro Mold's plastics molding operations. In the
longer term, management views the current fiscal year as a defining, or
pivotal, year in which the future of Austro Mold will be determined.
In fiscal 1994, magnetic assembly operating profits were insufficient to
offset the Austro Mold Group losses; however, the Company also recorded
$676,000 of nonrecurring income due to a change in accounting principle related
to income taxes, resulting in a modest net profit for the Company. During
fiscal 1995, the Magnetic Assembly Group operating profits increased consistent
with sales, but this increase was more than offset by the Austro Mold Group
loss. In addition, in connection with its acquisition of MTE, the Company
recorded a $312,000 write-down related to an impairment in asset value and
costs related to the acquisition, plus MTE incurred a $98,000 operating loss
for the five month period ended July 31, 1995. In total, while the Company's
revenues increased 26% to $22,210,000 in fiscal 1995, the Company incurred a
$775,000 net loss.
2
<PAGE> 88
(b) Business of Issuer
The Company's contract manufacturing business consists of the development,
manufacture and assembly of products to the OEM market in various stages, from
engineering and design, to prototypes, to production runs. The products
currently consist of (1) precision magnetic, electronic and mechanical devices,
(2) the remanufacturing of components and subassemblies for reuse by office
equipment manufacturers, (3) precision plastic molds (tooling) and (4) custom
injection molded plastic parts and assemblies.
The Magnetic Assembly Group, including the Company's remanufacturing
operations, operates out of the Company's main facility in Rochester, New York,
marketing its products primarily to United States original equipment
manufacturers by direct sales. The Austro Mold Group operates out of a
separate Rochester plant utilizing a combination of direct sales and
manufacturers' representatives. The Company's wholly-owned European
subsidiary, MTE, operates out of a facility in Rochester, England, marketing
magnetic assemblies to European manufacturers by direct sales. The Company
promotes business by providing engineering, design and prototype services to
assist manufacturers in the development of new products. These services often
result in the Company obtaining production orders after the related products
evolve from prototype stages.
The Company's magnetic assembly business competition includes Hitachi in
Japan, GenCorp in the United States and several smaller service companies;
however, more competition is provided by the in-house capabilities of the
Company's customers. Quality and price are both important factors in the
marketplace. In the area of quality, the Magnetic Assembly Group has
historically been able to compete with the high standards established by the
Japanese, but has faced not only pricing pressure from competitors but also
continual pressure from its principal customer to lower prices. Management
believes that the Company's proprietary "reaction in mold" (RIM) injection
molding process utilized in the manufacture of magnetic brush cores provides it
with a competitive advantage.
The Austro Mold Group has numerous competitors in both plastic mold tooling
and plastic injection molding. Previously, management believed that Austro
Mold held a competitive edge based upon its ability to offer customers both the
precision design and manufacture of custom molds as well as thermoplastic
injection molding of parts and assembly services. However, Austro Mold's
performance during the past two fiscal years suggests that the combination of
tooling and plastic molding services may not provide a significant competitive
edge or, if so, that any such advantage is outweighed by other competitive
deficiencies which have prevented Austro Mold from retaining or obtaining
sufficient volume at adequate margins to cover its overhead.
As a result of the Company's acquisition of all of the outstanding shares
of MTE in the third quarter of fiscal 1995, MTE's operating results for five
months were included with the Company's fiscal 1995 results. MTE is currently
operating at a sales volume of approximately $150,000 per month. It has
obtained business from the Company's prior European customer, a Xerox
subsidiary, but has also generated orders from new European customers.
Management expects MTE to operate on a break-even basis by the end of the
current fiscal year.
Magnets, the Company's key raw material for magnetic assemblies, are
available through six suppliers, no one of which dominates the industry. Two
of the suppliers (Stackpole Corporation and GenCorp) are located in the United
States, while the other four are Japanese firms. All of the vendors deliver
acceptable quality materials, and in recent years supplies of magnets have
generally been readily obtainable. The basic components for manufacturing
plastic molds and injection molded plastic parts are various metals and
engineered thermoplastic resins, commodities that are available from numerous
sources.
Since Xerox Corporation continues to be a major customer of the Company
[see Item 1 (a) of this report] the loss of Xerox as a customer would have a
material adverse impact on the Company and would create a substantial burden to
replace the lost business. The Company is continuing to work with Xerox in
finding methods of reducing their mutual reliance upon each other.
3
<PAGE> 89
The Company has no material patents, trademarks, licenses, franchises,
concessions, royalty agreements or labor contracts. However, the Company's
proprietary RIM process is important to its business. No material portion of
the Company's products or services is dependent upon governmental approvals,
nor do existing or probable governmental regulations materially affect the
Company's business. Compliance with environmental statutes and regulations has
not had a material effect on the Company's capital expenditures, earnings or
competitive position in the past three fiscal years.
The Company does not invest a significant amount in company-sponsored
research and development activities, having spent $6,000, $50,000, and $110,000
on such activities in fiscal years 1995, 1994, and 1993, respectively. Because
of the integration of its engineering and manufacturing operations, the Company
cannot readily identify the amounts spent on customer-sponsored research and
development activities.
The Company had 117 full-time employees at October 2, 1995.
ITEM 2. DESCRIPTION OF PROPERTY
The Company operates out of three leased facilities, as described below.
The Company's corporate headquarters, core engineering staff and domestic
magnetic assembly manufacturing operations, including remanufacturing
operations, are located in a 70,000 square foot building at 770 Linden Avenue,
Rochester, New York. The facility is in good condition and management believes
that it has sufficient capacity to house between $18,000,000 to $20,000,000 of
sales volume per year. Under the terms of its lease expiring October 31, 2000,
the Company pays rent of $30,468 per month. The landlord of the building is
Linden Properties, a partnership in which one partner is the Chairman of the
Company's Board of Directors and holder of more than 5% of the Company's common
stock and the other partner is also an owner of more than 5% of the Company's
common stock.
Prior to the Company's termination of its Florida operation during fiscal
1995, the Austro Mold Group was housed in two facilities, both under leases
with the former owners of that business. Austro Mold's only current facility
consists of three buildings aggregating 40,000 square feet and located at 3
Rutter Street, Rochester, New York. The rent is $13,650 per month through
December 1997. The Company has two five-year renewal options with rental
adjustments based upon fluctuations in the cost of living index. These
buildings are in good condition and are adequate to support the Company's
plastic mold tooling and injection molding operations up to approximately
$7,500,000 of sales volume per year. The Company has a right of first refusal
to match any purchase offer for the property received by the landlord at any
time during the lease term and also has an option to purchase the property at
the end of the initial lease term at the then appraised value. The lease for
Austro Mold's former Florida facility in Clearwater expires on December 31,
1995, with a rental of $3,326 per month. The remainder of the noncancelable
rental expense associated with the Florida facility is accrued at July 31,
1995.
MTE operates out of an 8,350 square foot facility in Rochester, England as
a tenant at will terminable by either party upon 30 days notice. The location
is adequate to house up to approximately $4,000,000 of annual sales volume;
more than twice its current volume. Because the MTE operation is presently
relatively small, it could be easily moved to a more permanent location in
England if a substantial volume increase made such a move necessary or
desirable.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
4
<PAGE> 90
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock is traded on the over-the-counter market and is
reported under the symbol "MTCC" on the National Association of Securities
Dealers Automated Quotation System (NASDAQ). The high and low bid prices of
the Company's common stock for each quarter during the past two fiscal years
were as follows:
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1994
---------------- ----------------
HIGH LOW HIGH LOW
---- ---- ---- ----
<S> <C> <C> <C> <C>
First Quarter (August - October) $5.50 $4.00 $7.09 $3.83
Second Quarter (November - January) $5.38 $4.25 $7.00 $5.00
Third Quarter (February - April) $5.38 $4.25 $7.00 $5.00
Fourth Quarter (May - July) $5.88 $4.75 $5.38 $4.00
</TABLE>
Note: The above quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions, and may not represent
actual transactions. Quotations for the first two quarters of
fiscal 1994 have been restated to reflect the effect of a
subsequent three-for-two stock split.
(b) Holders
On October 2, 1995, the Company had 4,655 stockholders of record, plus an
unknown number having their shares registered in "street name" or in the name
of a nominee.
(c) Dividends
The Company paid no cash dividends on its common stock during the past two
fiscal years and is unlikely to do so in the near future. Future profits are
more likely to be utilized to improve the Company's working capital base or to
fund an acquisition. Under its current loan arrangements, the Company cannot
pay cash dividends without approval of its bank.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company experienced a $4,593,000, or 26%, sales increase in fiscal
1995, most of which was attributable to its Magnetic Assembly Group. Magnetic
assemblies, including remanufacturing, had revenues of $16,969,000, a
$4,446,000 increase over fiscal 1994. The Company's total fiscal 1995 revenues
were $22,210,000 versus $17,616,000 the prior year. Included are Austro Mold
Group sales of $4,683,000 and $5,094,000 in fiscal 1995 and fiscal 1994,
respectively. MTE contributed $558,000 of sales in the last five months of
fiscal 1995 following its acquisition by the Company. The Company's fiscal
1995 gross margin decreased to 13.1% from 13.5% the previous year.
Selling, general and administrative expenses increased $504,000, or 18%,
from fiscal 1994; however, as a percentage of net sales, these expenses
decreased from 16% to 15%. Included in selling, general and administrative
expenses was a $312,000 write-down recorded in connection with the acquisition
of MTE, primarily related to the write-off of previously recognized profit in
equipment manufactured by the Magnetic Assembly Group and sold to MTE, as well
as various costs associated with the acquisition. Excluding the impact of the
MTE write-down, the selling, general and administrative costs of the Company
decreased to 14% of net sales. The decline was a result of successful cost
management efforts in fiscal 1995. Interest expense increased $106,000, or
66%, as a result of increased borrowings and interest rates. Total other
income and expenses of $87,000 for fiscal 1995 included losses of $107,000 on
the disposition of fixed assets.
5
<PAGE> 91
The Company incurred a net loss of $775,000 for fiscal 1995, compared with
a modest profit of $61,000 for fiscal 1994. Included in fiscal 1994 net income
was $676,000 of nonrecurring income representing the cumulative effect of a
change in accounting principle relating to income taxes. Excluding that
adjustment to income, fiscal 1994 resulted in an operating loss of $462,000.
The Company's loss before income taxes and extraordinary items was $774,000 and
$614,000 in fiscal years 1995 and 1994, respectively. The net loss in fiscal
1995 resulted from sizable losses at the Austro Mold Group as well as a net
loss of $98,000 for the MTE start-up operation. The rebound in sales and
profit performance of the Company's Magnetic Assembly Group was insufficient to
return the Company to profitability in the face of Austro Mold's continued
lower sales levels and operational problems.
During the fourth quarter of fiscal 1995, the Company recorded sales of
$5,887,000, compared with sales of $4,323,000 for the fourth quarter of fiscal
1994, an increase of $1,564,000, or 36%. The increase is attributable to the
Magnetic Assembly Group remanufacturing business. In fiscal 1995, the fourth
quarter gross margin was 13% compared with 7% in the fourth quarter of fiscal
1994. The net loss for the fiscal 1995 fourth quarter was $215,000 compared
with a net loss of $627,000 in the fourth quarter of the previous year.
In fiscal 1994, the Company experienced a sales decline of $2,178,000 as a
result of (1) the sale of the Company's European magnetic assembly business in
the third quarter of fiscal 1993, (2) the loss of business at Austro Mold and
(3) customer extensions of magnetic assembly delivery schedules. The sales
decline, coupled with cost overruns and other inefficiencies at Austro Mold,
significantly impacted fiscal 1994 profitability. The Company's gross margin
for fiscal 1994 decreased to 14% versus 18% in fiscal year 1993.
Selling, general and administrative expenses increased $311,000, or 12%,
from fiscal 1993 to 1994. As a percentage of net sales, these expenses
increased from 13% to 16%. Of the increase, $230,000 is attributable to the
fact that fiscal 1993 included only nine months of Company ownership of the
Austro Mold Group. The remaining increased costs in this area related to
increased sales commissions expenses, costs for changes in management for
Austro Mold, state sales tax audit adjustments, a nonrecurring administrative
fee for the Company's 401(k) plan and increased travel expenses. Interest
expense decreased $29,000 as a result of lower interest rates.
Fiscal 1994 net profits were $61,000, including $676,000 of nonrecurring
income representing the cumulative effect of a change in accounting principle
relating to income taxes; whereas fiscal 1993 had resulted in a net profit of
$1,663,000, including $984,000 of nonrecurring income from the European sale of
technology and $640,000 of extraordinary income from the reduction of income
taxes resulting from realization of net operating loss carryforwards.
Therefore, excluding the nonrecurring income items, operating results declined
from an operating profit of $973,000 in fiscal 1993 to an operating loss of
$462,000 in fiscal 1994, a decrease of $1,435,000. The Company's results
before nonrecurring income, income taxes and extraordinary items was a loss of
$614,000 for fiscal 1994 versus a profit of $811,000 for fiscal 1993.
Along with its fiscal 1995 sales increase of 36%, the Magnetic Assembly
Group maintained the approximate 17% gross margin experienced in the prior two
fiscal years. The increased sales were primarily attributable to increased
remanufacturing operations with the Company's largest customer. Magnetic
Assembly's selling, general and administrative expenses increased $264,000 over
fiscal 1994 due to the $312,000 write-down recorded in connection with the MTE
acquisition, which was partially offset by a $48,000 decrease attributable to
successful cost management efforts. As a percentage of sales, selling, general
and administrative costs decreased from 15% in fiscal 1994 to 13% in fiscal
1995 for the Group. Excluding the nonrecurring write-down for the MTE
acquisition, the percentage decreased even further to 11% of net sales. As a
result, the magnetic assemblies operation (including remanufacturing, but
excluding MTE) increased its contribution to operating profits to $805,000 as
compared with $374,000 in fiscal 1994.
6
<PAGE> 92
In fiscal 1995, Austro Mold's Rochester, New York tooling operation
returned to profitability, but its plastics molding operation and its
Clearwater, Florida tooling operation did not. At the time of its acquisition,
the Austro Mold Group had annual revenues of approximately $6,500,000, versus
$4,683,000 and $5,094,000 in fiscal 1995 and 1994, respectively. The entire
Group had an overall negative gross margin of 3% in fiscal 1995, versus a
positive gross margin of 4% in fiscal 1994.
Austro Mold's Rochester tooling operation had total sales of $2,139,000 for
fiscal 1995, compared with $1,834,000 the previous year, an increase of
$305,000, or 17%. It contributed $227,000, or 11% of gross margin versus
$145,000, or 8% the year prior. The plastic molding operation recorded sales
of $2,236,000 and $2,792,000 in fiscal 1995 and 1994, respectively, a decrease
of $556,000, or 20%. The molding operation recorded a negative margin of
$244,000 for fiscal 1995 versus a positive gross margin of $268,000 for fiscal
1994. The Austro Mold Florida tooling operation was closed during fiscal 1995.
It contributed $308,000 in net sales at a negative gross margin of $103,000
prior to its closing. The Florida operation recorded sales of $468,000 and a
negative gross margin of $221,000 in fiscal 1994.
The Austro Mold Group's selling, general and administrative expenses
totaled $1,004,000 in fiscal 1995, compared with $1,028,000 in fiscal 1994.
These costs include $202,000 of annual expense related to the amortization of
the noncompete agreement with the previous owners of Austro Mold. Austro Mold
also incurred $107,000 of costs related to the disposition of fixed assets,
including $35,000 related to the closing of the Florida plant and $71,000 for
the disposal of nonoperational equipment in the plastics molding operations.
Thus, Austro Mold made no contribution to its own Group's selling, general and
administrative overhead of $1,004,000, or the asset disposal costs, and
incurred a net loss of $1,250,000.
The Company has taken, and continues to take, what it believes are
corrective actions relative to the Austro Mold Group, including the replacement
of management personnel, the termination of its unprofitable Florida operations
and the elimination of smaller volume molding orders with insufficient margins.
Due to the fact that the plastics molding losses have been caused by a myriad
of operational problems, management cannot say with certainty that the molding
operation can be returned to profitability, and therefore survive in its
current form.
The Company's management does not believe that the losses which the Company
experienced in fiscal 1995 and fiscal 1994 represent a pattern or continuing
trend. Management believes that the Company's magnetic assembly operations
have been considerably strengthened due both to additional remanufacturing
business and the acquisition of MTE's European business. The Company's backlog
at July 31, 1995 was $12,667,000 compared with $7,000,000 at July 31, 1994.
Excluding MTE's backlog of $1,849,000 for 1995, the Company's backlog increased
$3,818,000 over the previous year. Furthermore, the current fiscal year 1996
will be the pivotal year for determining the future size and role of the Austro
Mold Group within the Company.
As a result of the fiscal 1995 and 1994 operating losses, the Company's
liquidity has deteriorated. As of July 31, 1995, cash was $746,000, versus
$400,000 at July 31, 1994 and $1,042,000 at July 31, 1993; working capital was
$2,623,000, versus $2,854,000 and $3,446,000 at July 31, 1994 and 1993,
respectively; the current ratio was 1.5 to 1.0 at July 31, 1995, versus 2.0 to
1.0 and 2.2 to 1.0 at July 31, 1994 and 1993, respectively. Due to increased
borrowings to meet its cash needs plus prime rate increases, the Company's
interest expense increased $106,000 in fiscal 1995, despite better loan terms
which the Company obtained in a mid-year refinancing.
Even though the Company's debt increased by reason of the acquisition of
MTE in March 1995 and the acquisition of its Austro Mold Group in November
1992, its current cash flow position should be adequate to fund the related
noncompete agreement payments as well as the interest and principal on the
current portion of long-term debt.
Operating cash flows decreased $229,000 for fiscal 1995 over the comparable
period in fiscal 1994. The variance is primarily the result of the Company's
operating loss of $775,000 for the year. This loss includes a write-down of
$312,000 to account for an impairment in asset value in connection with the
acquisition of MTE. In addition, accounts receivable, inventories and accounts
payable balances increased due to higher volumes of sales activity in fiscal
1995.
7
<PAGE> 93
Cash used by investing activities increased $48,000 for fiscal 1995 over
the prior year. The increase is due to two factors; increased capital
expenditures for production equipment and vehicles and the acquisition of MTE.
The increase was partially offset by the noncash write-down of $312,000 in
connection with the acquisition, as well as $160,000 of cash received for the
sale of the Florida plant equipment and other fixed asset disposals.
Cash provided by financing activities increased by $1,267,000 for fiscal
1995 over the prior year. The variance was primarily due to advances on the
Company's line of credit and revolving bank note. The Company incurred
additional borrowings of $305,000 in connection with the MTE acquisition which
are not reflected in the consolidated statement of cash flows for fiscal 1995
since the borrowing represents a noncash transaction. In addition, proceeds
from the exercise of stock options increased by $107,500 over the prior year.
In fiscal 1995, the Company was offered improved loan rates on its
then-existing bank debt, and therefore changed banks. The new loan
accommodation remains secured by the assets of the Company and includes both a
$2,000,000 revolving loan convertible into a term loan on March 1, 1997, as
well as a $1,250,000 line of credit. At July 31, 1995, the Company had
$1,807,000 of principal outstanding on the revolving note and $826,000 on the
line of credit. In connection with the MTE reacquisition, the Company has a
loan with the Calder Group with an outstanding balance of $283,000 at July 31,
1995. The Company also has other long-term debt totaling $91,000 outstanding
at July 31, 1995, and approximately $645,000 of equipment on lease with another
bank and an equipment leasing organization.
Capital expenditures totaled $1,014,000 in fiscal 1995, as compared with
$1,207,000 in fiscal 1994. Included in capital expenditures were $112,000 and
$614,000 in fiscal 1995 and fiscal 1994, respectively, of equipment financed
with proceeds from the master lease line of credit. The remaining fiscal 1995
capital expenditures were financed with proceeds from the Company's revolving
bank note, line of credit borrowings, sales of fixed assets and proceeds from
stock options exercises. Management estimates that capital expenditures will
approximate $600,000 in fiscal 1996, a portion of which is expected to be
financed with capital lease financing.
8
<PAGE> 94
ITEM 7. FINANCIAL STATEMENTS
Following is an index to the consolidated financial statements filed as
part of this report.
Financial Statements Page No.
- - - -------------------- --------
Report of Independent Accountants 12
Consolidated Balance Sheets at July 31, 1995 and 1994 13
Consolidated Statements of Income for the three years ended
July 31, 1995 14
Consolidated Statements of Changes in Stockholders' Equity
for the three years ended July 31, 1995 15
Consolidated Statements of Cash Flows for the three years
ended July 31, 1995 16
Notes to Consolidated Financial Statements 17 - 28
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
The information required by Items 9, 10, 11 and 12 of PART III of this
report is incorporated herein by reference to the Company's Proxy Statement
issued in connection with the Annual Meeting of Stockholders of the Company to
be held December 14, 1995, under the headings entitled "Voting Securities",
"Election of Directors", "Transactions Involving Directors and Executive
Officers", "Executive Compensation" and "Securities Reporting Requirements",
which Proxy Statement will be filed within 120 days after the end of fiscal
1995.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The financial statements filed as a part of this report are listed in Item
7 above.
The exhibits filed with this report are listed on the Index to Exhibits on
page 11 following the signature page and are numbered in accordance with Item
601 of Regulation S-B.
The Company did not file any reports on Form 8-K during the last quarter of
fiscal 1995.
9
<PAGE> 95
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MAGNETIC TECHNOLOGIES CORPORATION
Date: October 23, 1995 By: /s/ Gordon H. McNeil
------------------------------------
Gordon H. McNeil, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: October 23, 1995 By: /s/ Gordon H. McNeil
-----------------------------------
Gordon H. McNeil, Director,
President and Principal
Executive Officer
Date: October 23, 1995 By: /s/ Isadore Diamond
-----------------------------------
Isadore Diamond, Director,
Chairman of the Board,
Treasurer and Principal
Financial Officer
Date: October 23, 1995 By: /s/ Dana L. Limperis
-----------------------------------
Dana L. Limperis, Controller
and Principal Accounting
Officer
Date: October 23, 1995 By: /s/ John B. Biemiller
-----------------------------------
John B. Biemiller, Director
Date: October 23, 1995 By: /s/ G. Thomas Clark
-----------------------------------
G. Thomas Clark, Director
Date: October 23, 1995 By: /s/ Bernard Kozel
-----------------------------------
Bernard Kozel, Director
10
<PAGE> 96
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT STATUS OR INCORPORATION
NO. DESCRIPTION BY REFERENCE (IBR)
- - - -------------- ------------------------------------------ -------------------------------------------
<S> <C> <C>
(3) (a) Certificate of Incorporation as amended to IBR to Exhibit A of Form 10-KSB for fiscal
date year ended July 31, 1994
(3) (b) By-Laws Exhibit A to this Report
(10) (a) Consulting Agreements and Covenants Not to IBR to Exhibits 2, 3 and 4 of Form 8-K as
Compete and Security Agreement with the amended dated January 28, 1992
former owners of Austro Mold, Inc.
(10) (b) Sublease Agreement with Linden Properties IBR to Exhibit A of Form 10-KSB for fiscal
effective November 1, 1993 year ended July 31, 1993
(10) (c) Amendment to Sublease Agreement with Linden IBR to Exhibit B of Form 10-KSB for fiscal
Properties dated October 7, 1994 year ended July 31, 1994
(10) (d) Lease of Austro Mold facility, Rochester, IBR to Exhibit 5 of Form 8-K as amended
New York dated January 28, 1992
(10) (e) Share Purchase Agreement relative to the IBR to Exhibit 1 of Form 8-K as amended
acquisition of Magnetic Technologies Europe dated March 31, 1995
Limited
(10) (f) Credit Agreement, General Security IBR to Exhibit 3 of Form 8-K as amended
Agreement, Revolving Line of Credit Note dated March 31, 1995
and Commercial Line of Credit Note with
First National Bank of Rochester
(10) (g) Stock Option Contract held by G. Thomas IBR to Exhibit E of Form 10-K for fiscal
Clark (a Director) dated September 18, 1992 year ended July 31, 1992
(10) (h) Stock Option Contract held by Gordon H. IBR to Exhibit D of Form 10-K for fiscal
McNeil (President and Chief Executive year ended July 31, 1992
Officer) dated May 19, 1992
(10) (i) Stock Option Contract held by Gordon H. IBR to Exhibit B of Form 10-KSB for fiscal
McNeil (President and Chief Executive year ended July 31, 1993
Officer) dated January 7, 1993
(10) (j) Stock Option Contract held by Bernard Kozel Exhibit B to this Report
(a Director) dated March 8, 1995
(21) Subsidiaries of the Registrant Exhibit C to this Report
</TABLE>
11
<PAGE> 97
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Magnetic Technologies Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Magnetic Technologies Corporation at July 31, 1995 and 1994, and
the results of its operations and its cash flows for each of the three fiscal
years in the period ended July 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 11 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES, in fiscal year 1994.
/s/ Price Waterhouse LLP
- - - ------------------------------------
PRICE WATERHOUSE LLP
Rochester, New York
October 10, 1995
12
<PAGE> 98
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
---------------------------------
ASSETS 1995 1994
--------------- --------------
<S> <C> <C>
Current assets:
Cash, including interest-bearing deposits of $490,445 and $312,000 at
July 31, 1995 and 1994, respectively $ 746,434 $ 399,861
Accounts receivable, less allowance for doubtful accounts of $31,500
and $15,000 at July 31, 1995 and 1994, respectively 2,265,794 2,032,020
Inventories 4,182,773 2,602,256
Costs and estimated earnings in excess of billings on contracts in
process 291,288 314,322
Deferred income taxes 278,000 309,900
Prepaid taxes, expenses and other current assets 109,613 101,913
--------------- --------------
Current assets 7,873,902 5,760,272
Property, plant and equipment, net 3,877,951 3,636,153
Excess of cost over net assets acquired, net of accumulated
amortization of $127,154 and $117,748 at July 31, 1995
and 1994, respectively 56,438 65,844
Investment in affiliate 250,000
Deferred income taxes 514,500 477,100
Other assets 482,517 337,505
--------------- --------------
$ 12,805,308 $10,526,874
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 3,938,329 $ 2,504,763
Note payable 826,108
Current portion of long-term debt and capital lease obligations 291,784 308,014
Billings in excess of costs and estimated earnings on contracts in
process 171,497 93,234
Accrued income taxes 22,958
--------------- --------------
Current liabilities 5,250,676 2,906,011
Long-term debt and capital lease obligations 2,533,666 1,957,997
--------------- --------------
Total liabilities 7,784,342 4,864,008
--------------- --------------
Stockholders' equity:
Common stock - $.15 par value;
Authorized - 15,000,000 shares
Issued and outstanding - 2,786,675 and 2,739,857 shares at
July 31, 1995 and 1994, respectively 418,001 410,979
Stock warrants outstanding for 22,500 shares of common stock, valued
at $82,500, net of unamortized deferred expense of $47,115 and
$67,335 at July 31, 1995 and 1994, respectively 35,385 15,165
Additional paid-in capital 7,646,302 7,541,058
Cumulative translation adjustment 479
Accumulated deficit (3,079,201) (2,304,336)
--------------- --------------
Total stockholders' equity 5,020,966 5,662,866
--------------- --------------
$12,805,308 $10,526,874
=============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
13
<PAGE> 99
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------------
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
Net sales $22,209,634 $17,616,480 $19,794,544
Cost of sales 19,290,099 15,241,215 16,294,606
------------- ------------ ------------
Gross profit 2,919,535 2,375,265 3,499,938
Selling, general and administrative expenses 3,341,450 2,837,504 2,526,918
------------- ------------ ------------
Operating (loss) earnings (421,915) (462,239) 973,020
Interest expense 265,233 159,395 188,164
Other 87,217 (7,355) (25,889)
Nonrecurring income from sale of technology, net of
related expenses (984,010)
------------- ------------ ------------
(Loss) income before income taxes, extraordinary item
and change in accounting principle (774,365) (614,279) 1,794,755
Provision for income taxes 500 500 771,500
------------- ------------ ------------
(Loss) income before extraordinary item and change in
accounting principle (774,865) (614,779) 1,023,255
Extraordinary item:
Reduction in income taxes resulting from
realization of operating loss carryforwards 640,000
------------- ------------ ------------
(Loss) income before change in accounting principle (774,865) (614,779) 1,663,255
Cumulative effect of a change in accounting principle
relating to income taxes 676,000
------------- ------------ ------------
Net (loss) income ($774,865) $ 61,221 $1,663,255
============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------------------------------------------
1995 1994 1993
--------------------- ----------------------- ---------------------
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
--------- --------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Loss) earnings per common
share:
(Loss) income before
extraordinary item and change
in accounting principle ($.28) ($.28) ($.21) ($.21) $.38 $.36
Extraordinary item .24 .23
--------- --------- --------- ---------- -------- --------
(Loss) income before change in
accounting principle (.28) (.28) (.21) (.21) .62 .59
Change in accounting principle .23 .23
--------- --------- --------- ---------- -------- --------
Net (loss) income per share ($.28) ($.28) $.02 .02 $.62 $.59
========= ========= ========= ========== ======== ========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
14
<PAGE> 100
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------------- STOCK PAID-IN ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL DEFICIT
------------ ------------ ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1992 1,629,767 $ 244,465 $ 0 7,289,563 ( $ 4,028,812)
Conversion of debentures 160,000 24,000 296,000
Exercise of stock options 31,000 4,650 44,950
Repurchase and retirement of
fractional shares
related to stock split (32) (5) (142)
Net income 1,663,255
------------ ------------ ------------- ------------- ----------------
Balance at July 31, 1993 1,820,735 273,110 0 7,630,371 (2,365,557)
Effect of three-for-two
stock split 910,368 136,555 (136,555)
Fees relating to stock
split (5,243)
Exercise of stock options 9,375 1,407 3,593
Repurchase and retirement of
fractional shares related to
stock split (621) (93) (108)
Tax benefits derived from
stock incentive plans 49,000
Stock warrants issued for
22,500 shares of common
stock 82,500
Deferral of stock warrants
issuance expense (82,500)
Amortization of deferred
stock warrants expense 15,165
Net income 61,221
------------ ------------ ------------- ------------- ----------------
Balance at July 31, 1994 2,739,857 410,979 15,165 7,541,058 ( 2,304,336)
Exercise of stock options 46,875 7,031 105,469
Repurchase and retirement of
fractional shares
related to stock
split (57) (9) (225)
Amortization of deferred
stock warrants expense 20,220
Net loss (774,865)
------------ ------------ ------------- ------------- ----------------
2,786,675 418,001 35,385 7,646,302 ( 3,079,201)
Translation adjustment 479
------------ ------------ ------------- ------------- ----------------
Balance at July 31, 1995 2,786,675 $418,001 $35,385 $7,646,302 ( $3,078,722)
============ ============ ============= ============= ================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
15
<PAGE> 101
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ($774,865) $ 61,221 $ 1,663,255
Adjustments to reconcile net income to cash provided by
operating activities -
Cumulative effect of a change in accounting principle (676,000)
Depreciation and amortization 877,021 786,312 685,224
Loss on disposal of property 106,734 910 5,543
Provision for bad debts 16,500 (9,719) 79,406
Imputed interest on long-term debt 9,153 35,060
(Increase) decrease in accounts receivable (98,048) 163,908 (227,695)
(Increase) decrease in inventories (1,511,516) 60,969 (254,437)
Decrease (increase) in costs, estimated earnings
and billings on contracts in process 101,297 (29,121) 106,485
Increase in deferred income taxes (5,500) (62,000)
Increase in prepaid income taxes, expenses and other
current assets (7,926) (28,262) (9,663)
Payments under noncompete agreement (330,000) (330,000) (192,500)
Decrease (increase) in other assets 184,988 124,875 (855)
Increase in accounts payable and accrued expenses 1,321,737 99,326 405,873
Increase (decrease) in accrued income taxes 23,016 (73,344) (149,929)
Decrease in other long-term liabilities (9,045) (5,436)
------------ ------------ ------------
Total adjustments 687,456 80,809 415,076
------------ ------------ ------------
Net cash provided by operating activities (87,409) 142,030 2,078,331
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (902,346) (592,712) (583,324)
Purchase of Magnetic Technologies Europe, (MTE), net of
cash acquired (206,311)
Purchase of Austro Mold, Inc., net of cash acquired (1,781,388)
Investment in affiliate (250,000)
Write-down of investment in MTE 312,302
Proceeds from the sale of fixed assets 160,000 4,100 10,000
------------ ------------ ------------
Net cash used by investing activities (636,355) (588,612) (2,604,712)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 3,457,758 660,000 2,000,000
Payments for expenses incurred related to stock splits (5,243)
Principal payments on borrowings and capital leases (2,498,581) (854,800) (2,121,737)
Purchase and retirement of common stock (234) (201) (147)
Proceeds from stock options exercise 112,500 5,000 49,600
------------ ------------ ------------
Net cash provided (used) by financing activities 1,071,443 (195,244) (72,284)
Effect of exchange rate changes on cash (1,106)
------------ ------------ ------------
Net increase (decrease) in cash 346,573 (641,826) (598,665)
Cash and cash equivalents at beginning of year 399,861 1,041,687 1,640,352
------------ ------------ ------------
Cash and cash equivalents at end of year $ 746,434 $ 399,861 $1,041,687
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
16
<PAGE> 102
MAGNETIC TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company is engaged in the contract manufacturing business, including
development, manufacture and assembly of precision magnetic, electronic and
mechanical devices. The Company was incorporated in the State of Delaware in
1969. The Company's corporate headquarters is located on Linden Avenue in
Rochester, New York. Austro Mold, Inc. (Austro Mold), a wholly-owned
subsidiary during fiscal 1993, is engaged in the design and manufacture of
precision plastic molds and custom injection molded plastic parts and
assemblies. Austro Mold was incorporated in New York State in 1976, but was
subsequently legally merged into Magnetic Technologies Corporation during the
first quarter of fiscal 1994. Austro Mold has one facility in Rochester, New
York. Magnetic Technologies Europe Limited (MTE), a wholly-owned foreign
subsidiary effective March 1, 1995, is engaged in the same business as the
Company's traditional domestic operations, namely, the design and manufacture
of precision magnetic assemblies for office equipment manufacturers. MTE has
one facility located in Rochester, England. (See Note 2.)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
for the periods presented and the accounts of its wholly-owned foreign
subsidiary, MTE, as of March 1, 1995. (See Note 2.) All significant
intercompany balances, transactions and profits are eliminated.
Translation of Foreign Currencies
Assets and liabilities of MTE are translated into U.S. dollars at currency
exchange rates in effect at the end of the balance sheet period. Revenues and
expenses are translated at average exchange rates in effect during the related
income statement periods. Gains and losses resulting from foreign currency
transactions are included in the results of operations. Gains and losses
resulting from the translation of the foreign subsidiary balance sheet are
recorded directly to the accumulated translation adjustment, a component of
stockholders' equity.
Revenue Recognition
The Company accounts for contracts for the manufacture of precision plastic
molds and custom tooling using the percentage of completion method of
accounting. Revenue is recognized in the ratio that costs incurred bear to
total estimated costs of the contracts. Contract costs include direct material
and labor costs as well as indirect costs related to contract performance.
Losses expected to be incurred are charged to operations in the period such
losses are determined.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the related assets, which range from three to ten years. Leasehold
improvements are amortized over the shorter of the related lease lives or the
expected useful lives of the improvements using the straight-line method.
Maintenance and repairs are charged to operations as incurred. The costs
of renewals and betterments that increase the useful lives of property are
capitalized in the appropriate asset accounts. The gain or loss on items of
property retired or otherwise disposed of is credited or charged to operations,
and the cost and accumulated depreciation are removed from the accounts.
17
<PAGE> 103
Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired is amortized over ten years using
the straight-line method.
Research and Development
The Company charges research and development expenditures to operations as
incurred.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less to be cash
equivalents.
Reclassifications
Certain amounts in the prior years' financial statements were reclassified
to conform with current year presentation.
Earnings Per Common Share
All per share amounts for fiscal 1995 are based on the weighted average
number of shares outstanding during the period. The amounts do not include any
adjustments for stock options or warrants due to the antidilutive effect they
have on the net loss for the year. Earnings per common share amounts for
fiscal 1994 and 1993 are based on the weighted average number of shares
outstanding during the period after consideration of the dilutive effect of
stock options and warrants. Fully diluted earnings per common share amounts
for fiscal 1993 also assumes the conversion of convertible subordinated
debentures at the beginning of fiscal 1993. The net income included in the
computation was also adjusted for the interest expense (net of tax) applicable
to the debentures. Supplementary earnings per share gives effect to the
exercises of stock options in fiscal years 1994 and 1993 on primary earnings
per share. (See Note 10.) The exercises are reflected as though they had
occurred at the beginning of the periods.
Supplementary (loss) earnings per share were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
(Loss) income before extraordinary item and change
in accounting principle ($.28) ($.21) $.37
Extraordinary item .23
------------- ------------- -------------
(Loss) income before change in accounting principle (.28) (.21) .60
Change in accounting principle .23
------------- ------------- -------------
Net (Loss) income per share ($.28) $.02 $.60
============= ============= =============
</TABLE>
Weighted average shares of common stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Primary 2,779,521 2,948,161 2,662,832
Fully diluted 2,779,521 2,963,865 2,831,527
Supplementary 2,779,521 2,950,627 2,782,833
</TABLE>
Earnings per share and the weighted average shares of common stock have
been retroactively adjusted to reflect a three-for-two stock split which
occurred in fiscal 1994.
18
<PAGE> 104
NOTE 2 - ACQUISITIONS, INVESTMENT IN AFFILIATE AND SALE OF TECHNOLOGY:
In April 1993, Magnetic Technologies Corporation (MTC) entered into an
agreement with the Cookson Group plc (Cookson) of London, England, in which the
two corporations formed a new company, Magnetic Technologies Europe Limited
(MTE), to manufacture and sell precision magnetic, electronic and mechanical
devices in Europe. Headquartered in Rochester, England, MTE was capitalized
with $1,000,000, of which $750,000 was contributed by Cookson for all of the
voting "A" shares of stock and $250,000 was contributed by MTC for all of the
nonvoting "B" shares of stock, constituting a 25% interest in MTE. The
investment in MTE was accounted for under the cost method due to the Company's
inability to exercise any influence over the operating and financial policies
of MTE. The Company had no voting stock, no voting Board members, no
policy-making influence, and no interchange of personnel. Thus, management
believes that the cost method of accounting for this transaction was
appropriate.
Concurrent with the formation of MTE, the Company sold Cookson and MTE a
license for the use of the Company's technology in connection with the
manufacture of products to be sold in Europe and the Near East. Cookson paid
the Company $1,250,000 for the technology and the Company agreed to discontinue
selling to the European market. (The Company's export sales in the immediately
preceding twelve month period had aggregated $2,200,000.) At the closing of
the transaction, Cookson also placed a $1,040,000 order on behalf of itself and
MTE for the Company to produce manufacturing machinery and related software to
be shipped to England.
In March 1994 Cookson sold certain of its businesses to Calder Group
Limited (Calder) and Calder's subsidiary, Magnet Applications Limited, became
the owner of all of MTE's voting "A" shares of stock. A year later, Calder
decided to dispose of certain of its operations, including MTE. On March 31,
1995, the Company acquired all of the voting shares of stock of MTE from
Calder's subsidiary. The acquisition was effective as of February 28, 1995 and
the accounts of MTE are consolidated with those of the Company from March 1,
1995 forward. The purchase price of the acquisition of the remaining 75%
interest in MTE was $492,007 plus closing costs of $23,054, before cash
acquired of $3,340. In connection with the acquisition, the Company incurred a
note payable to Calder of $351,000, payable in equal monthly installments of
$9,750 over a thirty-six month period commencing May 1, 1995. The note
payable to Calder has no stated interest, therefore, interest was imputed at a
rate of 9.25%. The balance of the note payable, less imputed interest, was
$305,410 at acquisition. The loan was reflected in the Company's consolidated
balance sheet as current portion of long-term debt of $94,761 and long-term
debt of $188,369 at July 31, 1995. (See Note 7.)
Prior to the acquisition of the remaining 75% of the outstanding stock of
MTE in March 1995, the Company evaluated its investment in MTE by reviewing the
monthly operating performance to determine whether any permanent impairment in
the value of its investment had occurred. These reviews took into
consideration MTE's performance as compared with budgets as well as the
start-up plan for the company. Based upon those evaluations, the Company had
determined that the value of the investment had not been impaired.
Effective March 1, 1995, the acquisition of the remaining 75% interest in
MTE was completed, and the transaction was accounted for using the purchase
method of accounting for business combinations. Since MTE became a
wholly-owned subsidiary, the Company recorded a $312,302 write-down of its
investment in MTE to account for an impairment in asset value, primarily
related to the write-off of previously recognized profit in equipment
manufactured by MTC and sold to MTE, as well as various costs related to the
acquisition. The write-down was included in selling, general and
administrative expenses at July 31, 1995.
During fiscal 1993, the Company completed the acquisition of 100% of the
outstanding stock of Austro Mold, Inc. Austro Mold is engaged in the
manufacture of precision plastic molds and custom plastic injection molding and
assembly. The effective date of the transaction was November 1, 1992 and was
reflected under the purchase method of accounting for business combinations.
The purchase price was $1,910,177 before cash acquired of $128,789. The
purchase was financed with a $2,000,000 revolving bank note at an interest rate
of prime plus .5%, which was refinanced during fiscal 1995 at a reduced
interest rate of prime plus .25%. (See Note 8.) The Company also assumed and
retired Austro Mold's bank indebtedness of $725,000 from working capital during
fiscal 1993.
19
<PAGE> 105
In connection with the acquisition, the Company entered into a noncompete
agreement with the two previous owners of Austro Mold. The agreement is
effective from November 1992 through December 2000 and requires payment of
$1,650,000 in 60 equal monthly installments commencing January 1993. The cost
of the noncompete agreement is being amortized to expense ratably over the
period in which it is in effect. The total amortization expense was $202,041,
$202,041 and $151,531 for fiscal years 1995, 1994 and 1993, respectively. The
excess of unamortized cost of $1,094,388 over the remaining amount due under
the agreement of $797,500, or $296,888, was reflected in other assets at July
31, 1995.
The following table presents unaudited pro forma results of operations as
if the acquisitions of MTE and Austro Mold had occurred at the beginning of
each of the periods presented, after giving effect to certain adjustments for
intercompany transactions, depreciation, rent, interest and related income tax
effects. In accordance with the regulations of the Securities and Exchange
Commission, extraordinary amounts have been excluded from the combined income
statement and earnings per share presentations. These pro forma results have
been prepared for comparative purposes only and do not purport to be indicative
of what would have occurred had the acquisitions been made at the beginning of
the periods presented or of results which may occur in the future. The per
share amounts and weighted average number of shares have been adjusted to
reflect a three-for-two stock split which occurred in fiscal 1994.
<TABLE>
<CAPTION>
PRO FORMA RESULTS (UNAUDITED)
YEAR ENDED JULY 31,
--------------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $22,420,698 $17,323,672 $21,284,590
Cost of sales 19,364,900 15,437,090 17,574,476
----------- ----------- -----------
Gross profit 3,055,798 1,886,582 3,710,114
Selling, general and administrative
expenses 3,684,645 3,200,201 2,734,330
----------- ----------- -----------
Operating (loss) earnings (628,847) (1,313,619) 975,784
Interest, other income and expenses 415,621 208,289 208,233
----------- ----------- -----------
(Loss) income before income taxes,
extraordinary item and change in accounting
principle (1,044,468) (1,521,908) 767,551
Provision for income taxes 500 500 330,863
----------- ----------- -----------
(Loss) income before extraordinary item and
change in accounting principle ($1,044,968) ($1,522,408) $ 436,688
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA RESULTS (UNAUDITED)
YEAR ENDED JULY 31,
--------------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
(Loss) earnings per common share:
Income before extraordinary item and change
in accounting principle
Primary ($.38) ($.56) $.16
Fully diluted ($.38) ($.56) $.15
Supplementary ($.38) ($.56) $.16
Weighted average number of shares:
Primary 2,779,521 2,736,545 2,662,832
Fully diluted 2,779,521 2,736,545 2,831,527
Supplementary 2,779,521 2,736,545 2,782,833
</TABLE>
20
<PAGE> 106
NOTE 3 - INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1995 1994
----------- ----------
<S> <C> <C>
Raw materials $2,558,700 $1,646,222
Work in process 1,271,105 745,819
Finished goods 352,968 210,215
----------- ----------
$4,182,773 $2,602,256
=========== ==========
</TABLE>
NOTE 4 - COSTS, ESTIMATED EARNINGS AND BILLINGS ON CONTRACTS IN PROCESS:
The following is a summary of costs, estimated earnings and billings on
contracts in process:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1995 1994
----------- ----------
<S> <C> <C>
Costs and estimated earnings $1,136,537 $1,330,160
LESS: Billings to date 1,016,746 1,109,072
----------- ----------
$ 119,791 $ 221,088
=========== ==========
</TABLE>
Costs, estimated earnings and billings were presented in the accompanying
balance sheet as:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1995 1994
----------- ----------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
contracts in process $ 291,288 $ 314,322
Billings in excess of costs and estimated earnings on
contracts in process (171,497) (93,234)
----------- ----------
$ 119,791 $ 221,088
=========== ==========
</TABLE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT:
Major classifications of property, plant and equipment were as follows:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1995 1994
----------- ----------
<S> <C> <C>
Equipment under capital lease $ 844,202 $ 732,395
Machinery and engineering equipment 4,887,098 4,212,076
Furniture and fixtures 1,393,874 1,168,827
Leasehold improvements 513,453 448,608
Vehicles 101,243 51,052
Construction in process 116,526 238,435
----------- ----------
7,856,396 6,851,393
LESS: Accumulated depreciation and amortization 3,978,445 3,215,240
----------- ----------
$3,877,951 $3,636,153
=========== ==========
</TABLE>
The accumulated amortization for capital leases was $157,379 and $66,623 in
fiscal years 1995 and 1994, respectively. Amortization expense was $90,756,
$53,909 and $12,714 during the years ended July 31, 1995, 1994 and 1993,
respectively.
21
<PAGE> 107
On March 31, 1995, the Company closed its Austro Mold Group Clearwater,
Florida plant. The Company had been previously shifting manufacturing from
that plant to Austro Mold's Rochester, New York, facility and had three
remaining employees at the time of the plant closing. The Company sold the
machinery and equipment of the Florida plant to a local business for $158,000.
The Company recognized a $35,000 loss on the sale of those assets during fiscal
1995. (See also Note 9.)
NOTE 6 - NOTE PAYABLE:
During fiscal 1995, the Company refinanced its $1,250,000 line of credit
with another bank at a reduced interest rate. At July 31, 1995, the Company
had $423,892 available under its bank line of credit bearing interest at prime
plus .25%. The Company utilized $1,026,108 of its available line of credit
during fiscal 1995 and had $826,108 outstanding against the line at July 31,
1995. During fiscal 1995, a payment of $300,000 on the line of credit was
financed with the proceeds of the revolving bank note.
The line of credit is collateralized by equipment, receivables, contract
rights, inventory and general intangibles of the Company.
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
CURRENT JULY 31,
INTEREST PORTION ---------------------------
DESCRIPTION DUE DATE RATE DUE 1995 1994
- - - ---------------------- --------------- ---------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revolving bank note March 1997 Prime + .25% $ 1,806,650 $ 1,500,000
Obligations under Various to
capital leases February 2000 6.95% to 9.15% $ 179,484 644,975 684,374
Calder loan April 1998 Imputed 9.25% 94,761 283,130
Other long-term debt March 2002 5.00% to 8.25% 17,539 90,695 81,637
--------- ----------- ------------
$ 291,784 2,825,450 2,266,011
Less: Current portion due within one year ========= 291,784 308,014
---- ----------- ------------
$ 2,533,666 $ 1,957,997
=========== ============
</TABLE>
The bank prime rate was 8.75% at July 31, 1995.
During fiscal 1995, the Company refinanced its $2,000,000 revolving bank
note with another bank at a reduced interest rate. The note requires interest
payments at prime plus .25% through March 1, 1997, when the principal balance
can be refinanced at the Company's option under a five-year term loan at the
same interest rate as the note. The revolving note had an available balance of
$193,350 at July 31, 1995. The note is collateralized by the equipment,
inventory, accounts receivable, and other personal property of the Company.
The revolving bank note agreement contains, among other covenants, provisions
pertaining to mergers and acquisitions, capital expenditures, payment of
dividends, tangible net worth, working capital and debt ratios. The Company is
in compliance with the restrictive covenants at July 31, 1995.
Although the entire principal balance owed on the revolving bank note is
due on March 1, 1997, payments of outstanding principal are reflected in the
following table as due over a five-year period beginning in fiscal 1998. This
presentation is considered appropriate based upon the Company management's
current intent to refinance the note under a five-year term loan option
outlined above.
The Company had an available master lease line of credit of $1,000,000 with
its previous bank, which was eliminated during fiscal 1995. The outstanding
total of the lease line of credit balances was $528,034 at July 31, 1995. The
various lease balances require monthly payments totaling $14,860 at varying
rates of interest which were established at 275 points over the Treasury Bill
Index at the time of each borrowing. The lease balances mature between May
1997 and February 2000.
22
<PAGE> 108
In connection with the acquisition of MTE in February 1995, the Company
incurred a note payable to Calder of $351,000, payable in equal monthly
installments of $9,750 over a thirty-six month period commencing May 1, 1995.
The note payable to Calder has no stated interest; therefore, interest was
imputed at a rate of 9.25%, which was the Company's bank lending rate at the
time of the acquisition. The balance of the note payable, less imputed
interest, was $305,410 at the acquisition date. The loan was reflected in the
Company's consolidated balance sheet as current portion of long-term debt of
$94,761 and long-term debt of $188,369 at July 31, 1995.
Subsequent to July 31, 1995, the Company became the guarantor for a maximum
liability of $100,000 for its wholly-owned subsidiary, MTE, with respect to a
vendor relationship. (See Note 15.)
Total obligations under capital leases are secured by equipment with a net
book value of $686,823 at July 31, 1995, and require total monthly payments of
$18,380, including interest.
Future principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
NOTES CAPITAL OTHER LONG-
PAYABLE LEASES TERM DEBT
---------- --------- ---------
<S> <C> <C> <C>
Fiscal 1996 $ 94,761 $179,484 $17,539
Fiscal 1997 200,804 189,531 18,721
Fiscal 1998 393,148 198,872 11,875
Fiscal 1999 337,643 60,999 10,846
Fiscal 2000 369,316 16,089 11,401
Later 694,108 20,313
---------- --------- ---------
$2,089,780 $644,975 $90,695
========== ========= =========
</TABLE>
NOTE 8 - SENIOR CONVERTIBLE SUBORDINATED DEBENTURES:
During fiscal 1986, the Board of Directors issued $600,000 of 10% senior
convertible subordinated debentures, with an original maturity date of April
1991. The debentures were convertible in whole or in part into shares of
common stock at a conversion price of $2.00 per share. In fiscal year 1989,
debentures totaling $192,250 were converted into 96,125 shares of common stock.
In fiscal year 1990, debentures totaling $25,000 were converted into 12,500
shares of common stock. During fiscal 1991, the Company redeemed $232,750 of
the debentures. Of this amount, $170,000 of the debentures were subsequently
reissued. The remaining debenture holders, with $320,000 of debentures, agreed
to extend the maturity date until August 1994. In fiscal 1993, the remaining
debentures were converted into 160,000 shares of common stock. As a result of
the conversion, 110,000 shares were issued to related parties. (See Note 12.)
At the end of fiscal years 1995, 1994 and 1993, no debentures were
outstanding.
23
<PAGE> 109
NOTE 9 - OPERATING LEASES:
The Company leases office and manufacturing facilities and vehicles. Lease
terms range from one to seven years, with renewal options for additional
periods. Rental expense charged to operations amounted to $590,868, $748,600,
and $598,100 during fiscal years 1995, 1994 and 1993, respectively. The Linden
Avenue facility is leased from a related party. (See Note 12.)
The Austro Mold Group Florida plant was closed on March 31, 1995, however,
the Company is liable for the rentals on the Florida facility through December
1995. The total remaining rental payments of $16,625 were accrued at July 31,
1995. The future lease payments on the Florida facility are also included in
the operating lease payments schedule below. (See also Note 5.)
Future minimum payments required under noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
FACILITIES VEHICLES
----------- ---------
<S> <C> <C>
Fiscal 1996 $ 592,732 $17,460
Fiscal 1997 529,411 11,509
Fiscal 1998 433,864
Fiscal 1999 365,616
Fiscal 2000 365,616
Later 91,404
----------- ---------
$2,378,643 $28,969
=========== =========
</TABLE>
NOTE 10 - COMMON STOCK, STOCK OPTIONS, STOCK WARRANTS AND INCENTIVE PLANS:
On March 8, 1995, the Company issued stock options to a director for the
purchase of 5,000 shares of the Company's $ .15 par value common stock. The
options are immediately exercisable at a price of $4.63 per share until the
earlier of their expiration date on March 7, 2000, or after a specified period
upon termination of the director's position with the Company. Also during
fiscal 1995, a director exercised 9,375 of previously granted stock options.
(See Note 12.)
The Company declared a three-for-two stock split which became effective
February 16, 1994, increasing the number of outstanding shares of common stock
by 910,368. The split was approved by the Board of Directors to create
additional liquidity in the Company's stock and thereby provide a more
efficient trading market for stockholders. In connection with the stock split,
$136,555 was transferred from additional paid-in capital to common stock. The
transfer is reflected in the Company's balance sheet as of July 31, 1994.
Payment was made to stockholders for any fractional share interests. All per
share data and information concerning outstanding stock options and warrants
presented have been retroactively restated to reflect the impact of the stock
split.
In December 1993, the Company's stockholders approved an amendment to the
Certificate of Incorporation increasing the authorized shares of common stock
from 5,000,000 to 15,000,000 and eliminating a series of authorized but
unissued preferred stock. Also in December 1993, 9,375 shares of common stock
were issued to a director upon exercise of outstanding stock options.
In November 1993, the Company issued stock warrants for 22,500 shares of
common stock to an investment securities consultant. The warrants are
exercisable at a price of $5.00 per share of common stock and expire on
December 31, 1997. The warrants were valued at $82,500 utilizing the
Black-Scholes method of securities valuation. The deferred expense related to
the issuance of the warrants is being amortized ratably to expense over a
period of 49 months. The unamortized deferred expense was $47,115 and $67,335
at July 31, 1995 and 1994, respectively. The value of the outstanding
warrants, net of unamortized deferred expense, or $35,385, was reflected in
stockholders' equity at July 31, 1995.
24
<PAGE> 110
In January 1993, the Board of Directors authorized the issuance of stock
options aggregating 225,000 shares to two officers of the Company. The options
have an exercise price of $2.50 per share. The options vest at a rate of
75,000 shares per year starting in fiscal 1994. During fiscal 1995, 37,500 of
the options were exercised and 75,000 of the options expired upon termination
of employment of one of the officers. The remaining options expire at the
earlier of January 2003 or within a specified period after termination of
employment. (See Note 12.)
In September 1992, the Board of Directors authorized the issuance of stock
options to a director for 7,500 shares of common stock at an exercise price of
$2.55 per share. The options expire in September 1997. (See Note 12.)
In May 1992, the Board of Directors authorized the issuance of stock
options to an officer of the Company aggregating 150,000 shares at an exercise
price of $2.33 per share. These shares expire at the earlier of May 1997 or
within a specified period after termination of employment. (See Note 12.)
During fiscal 1991, the Board authorized the issuance of stock options
aggregating 56,250 shares to three employees, exercisable at $1.07 per share of
common stock. Options to purchase 46,500 and 9,750 shares of common stock were
exercised during fiscal 1993 and 1992, respectively.
<TABLE>
<CAPTION>
OPTION PRICE
SUMMARY OF STOCK OPTIONS NUMBER RANGE PER SHARE
-------------------------- ------------ ---------------------
<S> <C> <C>
Outstanding July 31, 1992 215,250 $ .53 - $2.33
Granted 232,500 $ 2.50 - $2.55
Exercised (46,500) $ 1.07
------------
Outstanding July 31, 1993 401,250 $ .53 - $2.55
Exercised (9,375) $ .53
------------
Outstanding July 31, 1994 391,875 $ 2.00 - $2.55
Granted 5,000 $ 4.63
Exercised (46,875) $ 2.00 - $2.50
Expired (75,000) $ 2.50
------------
Outstanding July 31, 1995 275,000 $ 2.34 - $4.63
</TABLE> ============
The number of shares and option price per share have been adjusted to
reflect the three-for-two stock split which occurred in fiscal 1994 and a
five-for-four stock split which occurred in fiscal 1992.
NOTE 11 - INCOME TAXES:
Effective August 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), ACCOUNTING FOR INCOME TAXES. The
adoption of SFAS 109 changes the Company's method of accounting for income
taxes from the deferred method under Accounting Principles Board Opinion No. 11
(APB 11), ACCOUNTING FOR INCOME TAXES to an asset and liability approach.
Previously, the Company deferred the past tax effects of timing differences
between financial reporting and taxable income. The asset and liability
approach requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities.
The adjustment to the August 1, 1993 balance sheet to adopt SFAS 109
amounted to $676,000. This amount was reflected in net income for fiscal 1994
as the effect of a change in accounting principle. It primarily represents the
impact of adjusting deferred taxes to reflect the existing net operating loss
and tax credit carryforwards.
The Company had no provision for federal income taxes in fiscal 1995 or
1994. The Company's provision for federal income taxes for fiscal year 1993
was offset by extraordinary credits representing the tax benefits of net
operating loss carryforwards.
25
<PAGE> 111
The statutory federal income tax rate and the effective rate for fiscal
year 1993 are reconciled below:
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31, 1993
---------------
<S> <C>
Statutory federal income tax rate 34%
State income taxes, net of federal benefit 8
Other, net 1
---------------
43%
===============
</TABLE>
The following is a summary of current and long-term deferred tax assets and
the related valuation allowances:
<TABLE>
<CAPTION>
AT JULY 31,
--------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Current deferred tax assets:
Federal net operating loss carryforwards $ 102,000
State net operating loss carryforwards 27,000
Accrued expenses $ 109,700 109,000
Inventory 44,800 16,000
Warranty reserves 15,100 37,000
Other deferred tax assets 11,800 18,900
Losses on fixed asset disposals 96,600
-------------- --------------
$ 278,000 $ 309,900
============== ==============
AT JULY 31,
--------------------------------
1995 1994
-------------- --------------
Long term deferred tax assets:
Federal net operating loss carryforwards $ 306,700 $ 260,700
State net operating loss carryforwards 45,500 35,300
Federal investment tax credit carryforwards 96,300 96,300
State investment tax credit carryforwards 218,300 222,400
Federal alternative minimum tax credit carryforwards 51,000 51,000
State alternative minimum tax credit carryforwards 6,000
Depreciation 315,500 187,900
Other deferred tax assets 102,900 19,000
-------------- --------------
1,142,200 872,600
Less: Valuation allowance 627,700 395,500
---- -------------- --------------
$ 514,500 $ 477,100
============== ==============
</TABLE>
The federal net operating loss carryforwards expire periodically from
fiscal years 2002 through 2009, while federal tax credit carryforwards expire
periodically from fiscal years 1996 through 2002. For state tax purposes, the
net operating loss carryforwards expire in fiscal year 2009 and tax credit
carryforwards expire periodically through fiscal year 2004.
The realization of the deferred tax assets related to the net operating
loss and tax credit carryforwards is dependent upon the generation of future
taxable income. In addition, if certain substantial changes in the Company's
ownership should occur, there would be an annual limitation on the amount of
net operating loss and tax credit carryforwards which could be utilized.
26
<PAGE> 112
NOTE 12 - RELATED PARTIES:
Nonqualified stock options for the purchase of 9,375 shares at $.53 per
share were issued to a director during fiscal 1989. The director exercised the
options in December 1993. An additional 9,375 of nonqualified stock options
for the purchase of common stock at $2.00 per share were issued to the same
director during fiscal 1990. The director exercised these options during
fiscal 1995. In fiscal 1992, 150,000 stock options at $2.33 per share were
issued to an officer. In September 1992, the Company issued stock options to a
director for the purchase of 7,500 shares at $2.55 per share. In fiscal 1993,
the Company issued stock options to two officers for the purchase of 225,000
shares of common stock at $2.50 per share. During fiscal 1995, 37,500 of the
options were exercised and 75,000 of the options expired upon termination of
employment of one of the officers. Also during fiscal 1995, 5,000 options for
the purchase of common stock were issued to a director at $4.63 per share.
In fiscal 1986, debentures totaling $575,000 were issued to related
parties. During 1989, four holders converted debentures totaling $192,250 into
96,125 shares of common stock. During fiscal 1990, one holder converted
debentures totaling $25,000 into 12,500 shares of common stock. In fiscal
1991, the Company redeemed $207,750 of the debentures upon their maturity. A
director purchased $70,000 of those debentures and agreed to a maturity date of
August 1994. The remaining related party debenture holders, with $150,000 of
debentures, also agreed to extend the debentures' maturity date until August
1994. During fiscal year 1993, three related party holders converted the
remaining debentures totaling $220,000 into 110,000 shares of common stock.
(See Note 8.)
Since fiscal 1985, the Company has subleased office and manufacturing space
from a partnership, in which the Chairman of the Board of the Company is a 50%
partner and the other 50% partner is a stockholder of the Company. The current
term of the sublease is seven years and requires monthly rental payments of
$30,468. The sublease also requires the Company to pay real estate taxes,
maintenance and utility costs. Rent expense for the facility amounted to
$367,680, $368,400 and $340,000 in fiscal years 1995, 1994 and 1993,
respectively.
During fiscal 1989, the Company entered into a one-year operating lease
agreement with the aforementioned partnership for manufacturing equipment. The
lease was renewable at the option of the Company for four consecutive one-year
periods, and was renewed through the first quarter of fiscal 1994. The
original agreement required rental payments of $20,000 per month. The lease
was renegotiated effective August 1993 and the monthly rental was lowered to
$9,000 until November 1993, when the Company purchased the equipment and
financed it under a capital lease with a bank. (See Note 7.) Rental expense
for the equipment amounted to $27,000 and $240,000 in fiscal years 1994 and
1993, respectively.
The Company also contracts with a local firm, owned by the stockholder
referred to above, for the construction of various building renovations and
improvements at an aggregate cost to the Company of $68,000, $21,000 and
$37,000 in fiscal years 1995, 1994 and 1993, respectively.
NOTE 13 - BUSINESS SEGMENT AND MAJOR CUSTOMER INFORMATION:
The Company operates in one business segment defined as contract
manufacturing. This segment encompasses both the manufacture and assembly of
precision magnetic, electronic and mechanical devices at the Magnetic Assembly
Group and Magnetic Technologies Europe, as well as the design and manufacture
of precision plastic molds and custom injection molded plastic parts and
assemblies at the Austro Mold Group. All three units of the Company's business
have been effectively integrated since the acquisition of Austro Mold in
November 1992 and the acquisition of MTE in February 1995. (See Note 2.)
Export sales, principally to Europe and Canada, amounted to $1,293,000,
$1,140,000 and $1,516,000 in fiscal years 1995, 1994 and 1993, respectively.
During the years ended July 31, 1995, 1994 and 1993, gross sales to one
customer amounted to $16,494,000, $10,755,000 and $13,116,000, respectively.
27
<PAGE> 113
NOTE 14 - SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS:
The following transactions represent noncash investing and financing
activities:
YEAR ENDED JULY 31, 1995:
------------------------
During fiscal 1995, capital lease obligations of $111,807 were incurred when
the Company entered into a lease for new manufacturing equipment.
During fiscal 1995, a loan of $305,410 was incurred in connection with the
acquisition of MTE. The loan is payable to the previous parent company of MTE.
(See Note 2.)
YEAR ENDED JULY 31, 1994:
------------------------
During fiscal 1994, capital lease obligations of $614,395 were incurred
when the Company entered into leases for new manufacturing equipment and
refinanced an existing operating lease.
During fiscal 1994, the Company declared a three-for-two stock split. In
connection with the split, $136,555 of additional paid-in capital was
transferred to common stock issued and outstanding.
During fiscal 1994, the Company realized a $49,000 tax benefit from
employee stock incentive plans. The impact of the benefit is reflected as an
increase to stockholders' equity at July 31, 1994.
YEAR ENDED JULY 31, 1993:
------------------------
During fiscal 1993, capital lease obligations of $178,000 were incurred
when the Company entered into a lease for new manufacturing equipment.
During fiscal year 1993, debentures totaling $320,000 were converted into
160,000 shares of common stock.
In addition, the Company made cash payments for interest of $250,000,
$151,000 and $183,000, during fiscal 1995, 1994 and 1993, respectively. The
Company paid $18,000, $116,000 and $419,000 for income taxes in fiscal years
1995, 1994 and 1993, respectively.
NOTE 15 - SUBSEQUENT EVENT:
Subsequent to July 31, 1995, the Company became the guarantor for a maximum
liability of $100,000 for its wholly-owned subsidiary, MTE, with respect to a
vendor relationship. (See Note 7.)
28
<PAGE> 114
Appendix E
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended APRIL 30, 1997
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 0-4277
------
MAGNETIC TECHNOLOGIES CORPORATION
---------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 16-0961159
- - - --------------------------------- ------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
770 LINDEN AVENUE
ROCHESTER, NEW YORK 14625
-------------------------
(Address of principal executive offices)
(716) 385-8711
--------------
(Issuer's telephone number)
NONE
----
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ] N/A
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
2,786,515 SHARES OF THE ISSUER'S COMMON STOCK WERE OUTSTANDING AS OF APRIL 30,
1997.
<PAGE> 115
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAGNETIC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
AT APRIL 30, 1997 AND JULY 31, 1996
<TABLE>
<CAPTION>
(UNAUDITED)
ASSETS APRIL 30, 1997 JULY 31, 1996
-------------- -------------
<S> <C> <C>
Current assets:
Cash, including interest-bearing deposits of $540,700 and $476,325
at April 30, 1997 and July 31, 1996, respectively $ 803,427 $ 846,363
Accounts receivable, less allowance for doubtful accounts of
$128,033 and $120,000 at April 30, 1997 and July 31, 1996,
respectively 1,415,865 2,027,821
Inventories 3,756,282 3,470,874
Deferred income taxes 211,000 338,100
Prepaids and other current assets 242,743 100,140
----------- -----------
Current assets 6,429,317 6,783,298
Property, plant and equipment, net 1,704,535 1,992,635
Deferred income taxes 524,100 454,400
Other assets 505,898 514,300
----------- -----------
$ 9,163,850 $ 9,744,633
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 2,906,019 $ 3,349,380
Notes payable 610,259 1,217,830
Current portion of long-term debt and capital lease obligations 321,528 321,528
Billings in excess of costs and estimated earnings on contracts in
process 103,616
----------- -----------
Current liabilities 3,837,806 4,992,354
Long-term debt and capital lease obligations 1,547,890 1,726,243
----------- -----------
Total liabilities 5,385,696 6,718,597
----------- -----------
Stockholders' equity:
Common stock - $.15 par value;
Authorized - 15,000,000 shares
Issued and outstanding - 2,786,515 and 2,786,584 shares at
April 30, 1997 and July 31, 1996, respectively 417,977 417,988
Stock warrants outstanding for 22,500 shares of common stock, valued at
$82,500, net of unamortized deferred expense of $11,730 and $26,895 at
April 30, 1997 and July 31, 1996, respectively 70,770 55,605
Additional paid-in capital 7,645,686 7,645,921
Cumulative translation adjustment (2,961) 2,359
Accumulated deficit (4,353,318) (5,095,837)
----------- -----------
Total stockholders' equity 3,778,154 3,026,036
----------- -----------
$ 9,163,850 $ 9,744,633
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
2
<PAGE> 116
MAGNETIC TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED APRIL 30, 1997 AND APRIL 30, 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1997 APRIL 30, 1997 APRIL 30, 1996 APRIL 30, 1996
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $ 5,207,807 $ 15,921,114 $ 6,806,339 $ 19,407,273
Cost of sales 4,361,633 13,279,317 6,199,253 17,429,374
------------ ------------ ------------ ------------
Gross profit 846,174 2,641,797 607,086 1,977,899
Selling, general and administrative
expenses 554,336 1,757,526 727,603 2,188,041
Provision for loss on sale of the
Austro Mold Group 1,800,000 1,800,000
------------ ------------ ------------ ------------
Operating earnings (loss) 291,838 884,271 (1,920,517) (2,010,142)
Interest expense 38,736 166,420 77,129 219,213
Other income and expenses, net (40,151) (90,168) (3,486) (9,373)
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 293,253 808,019 (1,994,160) (2,219,982)
Provision (benefit) for income taxes 21,500 65,500 125 375
------------ ------------ ------------ ------------
Net income (loss) 271,753 742,519 (1,994,285) (2,220,357)
Accumulated deficit beginning (4,625,071) (5,095,837) (3,305,273) (3,079,201)
------------ ------------ ------------ ------------
Accumulated deficit ending ($ 4,353,318) ($ 4,353,318) ($ 5,299,558) ($ 5,299,558)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1997 APRIL 30, 1997 APRIL 30, 1996 APRIL 30, 1996
------------------ ----------------- ------------------ -----------------
PRIMARY PRIMARY PRIMARY PRIMARY
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) per share $ .09 $ .26 ($ .72) ($ .80)
=========== ========== =========== ===========
Weighted average number of
shares outstanding 2,882,246 2,879,651 2,786,626 2,786,640
=========== ============ =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
3
<PAGE> 117
MAGNETIC TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED APRIL 30, 1997 AND APRIL 30, 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1997 APRIL 30, 1996
----------------- -----------------
<S> <C> <C>
Net cash provided by operating activities $ 852,234 $ 270,761
--------- ---------
Cash flows from investing activities:
Capital expenditures (127,049) (244,732)
Proceeds from sales of property, plant and equipment 19,551
--------- ---------
Net cash used by investing activities (107,498) (244,732)
--------- ---------
Cash flows from financing activities:
New borrowings 200,000
Principal payments on long-term borrowings and capital leases (796,054) (237,761)
Purchase and retirement of common stock (246) (288)
--------- ---------
Net cash used by financing activities (796,300) (38,049)
--------- ---------
Effect of exchange rate changes on cash 8,628 (11,055)
--------- ---------
Net decrease in cash (42,936) (23,075)
Cash and cash equivalents at the beginning of the period 846,363 746,434
--------- ---------
Cash and cash equivalents at the end of the period $ 803,427 $ 723,359
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (Unaudited).
4
<PAGE> 118
MAGNETIC TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 1997
INTERIM ACCOUNTING POLICY
- - - -------------------------
The unaudited consolidated financial statements herein have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to these rules and
regulations. The preparation of financial statements in conformity with such
principles requires the use of estimates by management during the reporting
period. Actual results could differ from those estimates.
The financial information included in this quarterly report should be read
in conjunction with the Company's most recent Form 10-KSB and annual report. In
the opinion of Management, the information furnished reflects all adjustments
necessary to present a fair statement of the financial condition, results of
operations and cash flows for the periods covered.
PRINCIPLES OF CONSOLIDATION
- - - ---------------------------
The consolidated financial statements include the accounts of the Company
for the periods presented and the accounts of its wholly-owned foreign
subsidiary, Magnetic Technologies Europe Limited (MTE), as of March 1, 1995. All
significant intercompany balances, transactions and profits are eliminated.
TRANSLATION OF FOREIGN CURRENCIES
- - - ---------------------------------
Assets and liabilities of MTE are translated into U.S. dollars at currency
exchange rates in effect at the end of the balance sheet period. Revenues and
expenses are translated at average exchange rates in effect during the related
income statement periods. Gains and losses resulting from foreign currency
transactions are included in the results of operations. Gains and losses
resulting from the translation of the foreign subsidiary balance sheet are
recorded directly to the cumulative translation adjustment, a component of
stockholders' equity.
REVENUE RECOGNITION
- - - -------------------
The Company accounts for long-term contracts using the percentage of
completion method of accounting. Revenue is recognized in the ratio that costs
incurred bear to total estimated costs of the contracts. Contract costs include
direct material and labor costs as well as indirect costs related to contract
performance. Losses expected to be incurred are charged to operations in the
period such losses are determined.
EARNINGS (LOSS) PER SHARE OF COMMON STOCK AND STOCKHOLDERS' EQUITY
- - - ------------------------------------------------------------------
Fiscal 1997 earnings per common share amounts are based on the weighted
average number of shares outstanding during the period after consideration of
the dilutive effect of stock options and warrants. Per share amounts for fiscal
1996 are based on the weighted average number of shares outstanding during the
period. The amounts do not include any adjustments for stock options or warrants
due to the antidilutive effect they have on the net losses in that year.
SALE OF AUSTRO MOLD GROUP ASSETS
- - - --------------------------------
During the fourth quarter of fiscal 1996, the Company sold its Austro Mold
Group fixed assets, the mold manufacturing work in process and the majority of
the plastics injection molding inventory to an unrelated third party. An
estimated loss on the sale of $1,800,000 was recorded in the third quarter of
fiscal 1996 and is reflected in the accompanying statements. The Austro Mold
Group operating results are also reflected in the consolidated statement of
operations for the nine month period ended April 30, 1996.
5
<PAGE> 119
INVENTORIES
- - - -----------
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis and are summarized as follows:
<TABLE>
<CAPTION>
APRIL 30, 1997 JULY 31, 1996
-------------- -------------
<S> <C> <C>
Raw material $2,801,587 $1,995,447
Work in process 733,416 1,400,556
Finished goods 221,279 74,871
---------- ----------
$3,756,282 $3,470,874
========== ==========
</TABLE>
COSTS, ESTIMATED EARNINGS AND BILLINGS ON CONTRACTS IN PROCESS
- - - --------------------------------------------------------------
The following is a summary of costs, estimated earnings and billings on
contracts in process:
<TABLE>
<CAPTION>
JULY 31, 1996
-------------
<S> <C>
Costs and estimated earnings $ 87,134
Billings to date (190,750)
---------
($103,616)
=========
</TABLE>
Costs, estimated earnings and billings were presented in the accompanying
balance sheet as:
<TABLE>
<CAPTION>
JULY 31, 1996
-------------
<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>
PROPERTY, PLANT AND EQUIPMENT
- - - -----------------------------
Major classifications of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
APRIL 30, 1997 JULY 31, 1996
---------------- ---------------
<S> <C> <C>
Equipment under capital lease $ 537,513 $ 537,513
Machinery and engineering equipment 3,404,191 3,405,256
Furniture and fixtures 1,459,682 1,414,578
Leasehold improvements 378,326 378,326
Vehicles 20,861 46,320
---------- ----------
5,800,573 5,781,993
Less: Accumulated depreciation and amortization 4,096,038 3,789,358
---- ---------- ----------
$1,704,535 $1,992,635
========== ==========
</TABLE>
CAPITAL EXPENDITURES
- - - --------------------
Capital expenditures for the nine month period ended April 30, 1997
amounted to $127,049. These expenditures were funded with working capital.
6
<PAGE> 120
INCOME TAXES
- - - ------------
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. The
statement requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities.
The following is a summary of current and long-term deferred tax assets and
the related valuation allowances:
<TABLE>
<CAPTION>
AT APRIL 30, 1997 AT JULY 31, 1996
----------------- ----------------
<S> <C> <C>
Current deferred tax assets:
Accrued expenses $ 127,400 $ 252,600
Inventory 18,600 28,500
Warranty reserves 10,300 10,300
Other deferred tax assets 54,700 46,700
----------- ----------
$ 211,000 $ 338,100
=========== ==========
Long-term deferred tax assets:
Federal net operating loss carryforwards $ 641,200 $ 832,600
State net operating loss carryforwards 151,500 202,100
Federal investment tax credit carryforwards 40,900 40,900
State investment tax credit carryforwards 272,700 272,700
Federal alternative minimum tax credit carryforwards 55,000 51,000
State alternative minimum tax credit carryforwards 8,000 6,000
Depreciation 475,500 430,500
Other deferred tax assets 108,600 90,000
----------- ----------
1,753,400 1,925,800
Less: Valuation allowances 1,229,300 1,471,400
---- ----------- ----------
$ 524,100 $ 454,400
=========== ==========
</TABLE>
The realization of the deferred tax assets related to the net operating
loss and tax credit carryforwards is dependent upon future taxable income. In
addition, if certain substantial changes in the Company's ownership should
occur, there would be an annual limitation on the amount of net operating loss
and tax credit carryforwards which could be utilized.
BORROWINGS
- - - ----------
The Company had $639,742 available and $610,258 outstanding on its bank
line of credit at April 30, 1997. The Company's entire $1,500,000 revolving loan
was outstanding at April 30, 1997. The line of credit and revolving loan require
interest payments at prime plus .25%.
STOCK OPTION PLAN
- - - -----------------
Effective September 13, 1996, the Company's Board of Directors adopted the
1996 Stock Option Plan. The plan was approved by the Company's shareholders on
December 17, 1996. The plan authorizes the Board of Directors to grant qualified
incentive stock options and non-qualified options for the purchase of the
Company's common stock to directors, officers, key employees and consultants up
to an aggregate of 125,000 shares. During the first quarter of fiscal 1997,
twelve key employees received qualified incentive stock option grants under the
plan to purchase an aggregate of 77,500 shares of common stock at an exercise
price of $3.50 per share. A consultant also received a non-qualified option to
purchase 10,000 shares of common stock at the same price. During the second
quarter of fiscal 1997, a previously granted option for 2,500 shares expired
upon resignation of an employee. In addition, three directors received stock
option grants under the plan to purchase 7,500 shares each of common stock for a
total of 22,500 options at an exercise price of $4.00 per share. At April 30,
1997, options for an aggregate of 107,500 shares were outstanding under the
plan.
7
<PAGE> 121
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MAGNETIC TECHNOLOGIES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS (UNAUDITED)
COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED
APRIL 30, 1997 AND APRIL 30, 1996
RESULTS OF OPERATIONS
- - - ---------------------
THREE MONTH PERIOD COMPARISON
The Company's consolidated net sales of $5,207,807 for the three months
ended April 30, 1997 decreased $1,598,532, or 23%, from the comparable period
last year. The primary reason for the decrease was the sale of the Company's
Austro Mold Group assets in July 1996. Austro Mold had reported net sales of
$1,140,519 for the third quarter of fiscal 1996. The fiscal 1997 results
included net sales of $4,424,538 for the Magnetic Assembly Group, a decrease of
$681,959, or 13%, from the comparable prior year period. The decrease in the
Magnetic Assembly sales was the result of declines in sales volumes for the
Company's major customer as the sales mix shifted to mature product lines with
reduced demands. In addition, the comparable period in fiscal 1996 included
non-recurring sales to the Company's major customer for the establishment of
inventory at several new distribution centers. The Company's European
subsidiary, Magnetic Technologies Europe Ltd. (MTE), reported net sales of
$783,269 for the third quarter of fiscal 1997, compared with $559,323 for the
third quarter of the prior year, an increase of $223,946, or 40%.
Consolidated gross profit of $846,174 for the quarter ended April 30, 1997
increased $239,088 over the comparable period in the prior year, and the
consolidated gross margin increased from 9% to 16%. There were several factors
affecting the gross margin variance; first was the sale of Austro Mold, which
had experienced a negative 1% gross profit of $16,983 for the third quarter of
fiscal 1996, and second the Magnetic Assembly Group's gross margin for the third
quarter of fiscal year 1997 was $716,330, or 16%, compared with 10% for the
third quarter of fiscal 1996. The margin improved due to lower costs from
improvements in production efficiencies and the resulting labor force
reductions. In addition, the gross margin for the third quarter of the prior
year was unusually low due to the sales mix which included a large number of
lower margin tooling projects. MTE reported a gross margin of 17% for the
quarter ended April 30, 1997, versus a 20% gross margin for the comparable prior
year period.
Consolidated selling, general and administrative expenses for the third
quarter of fiscal 1997 decreased $173,267 from the comparable fiscal 1996
quarter. The decrease was primarily the result of the sale of the Austro Mold
Group assets in fiscal 1996. Austro Mold reported selling, general and
administrative expenses of $165,139 for the third quarter of the previous year.
The consolidated selling, general and administrative costs for the quarter ended
April 30, 1997 were consistent with the prior year at 11% of net sales. Interest
expense for the third quarter of fiscal 1997 decreased $38,393 from the
comparable prior year period due to reductions in outstanding debt balances.
The three month period ended April 30, 1997 resulted in consolidated net
income of $271,753 versus a consolidated net loss of $1,994,285 in the
comparable fiscal 1996 period, an improvement of $2,266,038 over the prior year.
The fiscal 1996 loss included an estimated loss on the sale of Austro Mold of
$1,800,000. In addition, the Austro Mold Group reported an net operating loss of
$185,966 for the third quarter of fiscal 1996. The Magnetic Assembly Group
reported net income of $258,091 for the third quarter of fiscal 1997 versus a
prior year net loss of $25,826. MTE reported net income of $13,662 for the
fiscal 1997 quarter.
8
<PAGE> 122
NINE MONTH PERIOD COMPARISON
The Company's consolidated net sales of $15,921,114 for the nine months
ended April 30, 1997 decreased $3,486,159, or 18%, from the comparable period
last year. The primary reason for the decrease was the sale of the Company's
Austro Mold Group assets in July 1996. Austro Mold had reported net sales of
$3,464,923 for the first three quarters of fiscal 1996. The Magnetic Assembly
Group reported net sales of $13,698,613 for the nine months ended April 30,
1997, compared with $14,372,286 in the comparable period of the prior year, a
decrease of $673,673, or 5%. The decrease was the result of declines in sales
volumes for the Company's major customer as the sales mix shifted to mature
product lines with reduced demands. In addition, the third quarter of fiscal
1996 included non-recurring sales to the Company's major customer for the
establishment of inventory at several new distribution centers. The Company's
European subsidiary, Magnetic Technologies Europe Ltd. (MTE), reported net sales
of $2,222,501 for the first nine months of fiscal 1997, compared with $1,570,064
for the comparable period of the prior year, an increase of $652,437, or 42%.
Consolidated gross profit of $2,641,797 for the nine months ended April 30,
1997 increased $663,898 over the comparable period in the prior year, and the
consolidated gross margin increased from 10% to 17%. There were several factors
affecting the gross margin variance. First was the sale of Austro Mold, which
had experienced a negative 5% gross profit of $171,986 during the comparable
nine month period of the prior year. The Magnetic Assembly Group's gross margin
for the first nine months of fiscal year 1997 was $2,225,500, or 16%, compared
with 13% for the same period in fiscal 1996. The margin improved due to lower
costs resulting from labor force reductions and improvements in production
efficiencies. In addition, the gross margin for the third quarter of the prior
year was unusually low due to the sales mix which included a large number of
lower margin tooling projects. MTE reported a gross margin of 19% for the nine
month period ended April 30, 1997, versus a 15% gross margin for the comparable
prior year period.
Consolidated selling, general and administrative expenses for the first
nine months of fiscal 1997 decreased $430,515 from the comparable fiscal 1996
period. The decrease was the result of the sale of the Austro Mold Group assets
in fiscal 1996. Austro Mold reported selling, general and administrative
expenses of $506,652 for the first nine months of fiscal 1996. The Magnetic
Assembly Group and MTE reported increases in selling, general and administrative
expenses during the first nine months of fiscal 1997 over the comparable prior
year period of $7,254 and $68,883, respectively. The increases were the result
of several factors, including new product development costs, stockholder
relations expenses and employer retirement contributions. The consolidated
selling, general and administrative costs for the nine month period ended April
30, 1997 were consistent with the prior year at 11% of net sales. Interest
expense for first nine months of fiscal 1997 decreased $52,793 from the
comparable prior year period due to reductions in outstanding debt balances.
The nine month period ended April 30, 1997 resulted in consolidated net
income of $742,519 versus a consolidated net loss of $2,220,357 in the
comparable fiscal 1996 period, an improvement of $2,962,876 over the prior year.
The improvement was the result of the Austro Mold sale. During the third quarter
of the prior year, the Company recorded a $1,800,000 estimated loss on the sale.
In addition, Austro Mold incurred a net operating loss of $690,176 for the first
three quarters of fiscal 1996. The Magnetic Assembly Group reported net income
of $655,180 for the first nine months of fiscal 1997 versus net income of
$290,328 in the comparable fiscal 1996 period. MTE reported net income of
$87,339 for the nine month period ended April 30, 1997, versus a net loss of
$20,509 in the comparable period of the prior year.
9
<PAGE> 123
LIQUIDITY AND CAPITAL RESOURCES
- - - -------------------------------
Even though the Company's debt increased due to the acquisition of MTE in
March 1995 and the earlier acquisition of its Austro Mold Group in November
1992, its cash flow should be adequate to fund the interest and principal on the
current portion of long-term debt.
Cash provided by operating activities totaled $852,234 for the nine month
period ended April 30, 1997 compared with $270,761 for the comparable period of
the prior year, an increase of $581,473. The variance was primarily the result
of an increase in net income and the liquidation of the Austro Mold accounts
receivable during fiscal 1997.
Cash used for investing activities decreased $137,234 for the nine month
period ended April 30, 1997 from the comparable period in the prior year. The
variance was primarily due to lower capital expenditures in fiscal 1997.
Cash used for financing cash flows increased $758,251 for the first nine
months of fiscal 1997 compared with the prior year period. The variance was
primarily the result of additional principal payments made on the Company's
outstanding line of credit balance. In addition, new borrowings of $200,000 were
incurred during the comparable fiscal 1996 period.
FROM TIME TO TIME, THE COMPANY MAY PUBLISH FORWARD-LOOKING STATEMENTS
RELATING TO SUCH MATTERS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS
PROSPECTS, TECHNOLOGICAL IMPROVEMENTS AND NEW PRODUCT DEVELOPMENTS. ALL SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING ANTICIPATIONS, EXPECTATIONS AND
PROJECTIONS CONTAINED IN THIS FORM 10-QSB REPORT, ARE MADE BY THE COMPANY
PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. ALL SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM SUCH PROJECTIONS.
THE RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THE COMPANY'S
DEPENDENCE UPON OBTAINING ORDERS FROM ITS CUSTOMERS TO SUPPLY COMPONENT PARTS
FOR CERTAIN OF THEIR PRODUCT LINES, WHICH ORDERS ARE IN TURN DEPENDENT UPON THE
MARKET SUCCESS OF THOSE PARTICULAR PRODUCTS -- A MATTER OVER WHICH THE COMPANY
HAS LITTLE INFLUENCE OR CONTROL.
10
<PAGE> 124
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective September 13, 1996, the Board of Directors of the Company adopted
the 1996 Stock Option Plan, which authorized option grants for the Company's
directors, officers, key employees and consultants to purchase up to an
aggregate of 125,000 shares of the Company's common stock. On December 17, 1996,
the Company's shareholders approved the plan. As of April 30, 1997, options for
an aggregate of 107,500 shares were outstanding under the plan.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Not applicable.
11
<PAGE> 125
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAGNETIC TECHNOLOGIES CORPORATION
Date: June 11, 1997 By: /s/ Gordon H. McNeil
- - - --------------------------------- -----------------------------------------
Gordon H. McNeil, President and
Principal Executive Officer
12
