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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee required]
For the fiscal year ended 06/30/95
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required]
For transition period from _________ to _________
Commission file number 0-10734
FERROFLUIDICS CORPORATION
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS 02-0275185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 SIMON STREET
NASHUA, NEW HAMPSHIRE 03061
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 883-9800
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.004 per share
(Title of class)
Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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.
(1) Yes No x
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(2) Yes x No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to
this Form 10-K. [ ]
As of September 8, 1995, 5,997,198 shares of $.004 par value Common Stock of
the registrant were outstanding. The aggregate market value of the voting
stock held by non-affiliates of the registrant based upon the closing price of
$14.00 per share for the registrant's Common Stock, as reported on the NASDAQ
National Market as of September 8, 1995 was $83,600,496.
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<TABLE>
TABLE OF CONTENTS
<CAPTION>
ITEM PAGE
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PART I
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . 10
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . 12
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . 20
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . 45
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . 45
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . 45
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . 46
(a) Financial Statement Schedule
(b) Reports on Form 8-K
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
</TABLE>
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PART I
ITEM 1. BUSINESS
Founded in 1968, Ferrofluidics Corporation (the "Company" or
"Ferrofluidics") is engaged principally in developing, manufacturing and
marketing ferrofluids and products based on or derived from its proprietary
ferrofluid technology. Ferrofluids, the Company's core technology, are stable
magnetic liquids that can be precisely positioned or controlled when a magnetic
force is employed. Ferrofluids are comprised of molecular-sized magnetic
particles that are surface treated so that they can be dispersed in a synthetic
lubricating oil. Ferrofluids are designed to have a choice of properties such
as viscosity, magnetic strength and vapor pressures to perform numerous
specific functions such as sealing, sensing, lubricating, damping and heat
transfer.
The Company creates commercial applications for its ferrofluid technology
either by creating a ferrofluid to serve one or more functions in an existing
product (such as the Company's utilization of ferrofluids in audio
loudspeakers) or by combining proprietary ferrofluid technology with broad
applications engineering to develop ferrofluid-based (Ferrofluidic(R))
products, such as the Company's various sealing devices and fluid-film
bearings. The Company synthesizes all ferrofluids for sale,or for use in its
own proprietary products. With respect to its products incorporating
ferrofluids, the Company generally designs the product or application, then
outsources the fabrication of all critical machined parts and components. The
product is then assembled, tested and shipped from the Company's headquarters
in Nashua, New Hampshire.
The Company seeks to apply its Ferrofluidic technologies in situations
where its use significantly enhances the final product into which the
technology is incorporated. As a result, pricing reflects value added rather
than the direct cost of producing the fluid or Ferrofluidic(R) product supplied
to the Company's customers. The Company also seeks to supply markets in which
it can achieve a position of market leadership. The Company believes that it,
along with its licensee, currently supplies the vast majority of the
ferrofluids and ferrofluid-based products used in the world.
As a vertical integration of its ferrofluid sealing technology, the
Company designs, assembles and markets systems for growing crystals of silicon,
germanium, gallium arsenide and other metal alloys for the semiconductor,
photovoltaic, military and advanced materials markets.
CORPORATE STRUCTURE
The Company is headquartered and conducts its domestic operations in
Nashua, New Hampshire and operates overseas through the following wholly-owned
subsidiaries:
(1) ADVANCED PRODUCTS & TECHNOLOGIES, GmbH ("AP&T"), headquartered in
Neurtingen, Germany which:
(a) designs, manufactures and markets products for the optical coating
and thin-film deposition industries such as electron beam guns and
related controllers;
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(b) serves as an exclusive distributor in Europe for several U.S. and
European corporations that manufacture compatible products for
similar industries; and
(c) markets and services Ferrofluidic(R) products in Europe through its
sales offices in Germany, England and Spain.
(2) FERROFLUIDICS JAPAN CORPORATION ("FJC"), located in Tokyo, Japan which
distributes and services Ferrofluidics' vacuum rotary feedthrough seals to
the semiconductor industry, ferrofluid to the audio loudspeaker industry
and provides sales and service for the Company's crystal growing systems
customers located in Japan.
In addition to its wholly-owned subsidiaries, the Company has
licensed its vacuum rotary feedthrough seals and ferrofluid technology, on
a non-exclusive basis, to Nippon Ferrofluidics Corporation ("NFC"), a
former subsidiary located in Japan. In addition, under an exclusive
license granted by Ferrofluidics in August 1993, NFC manufactures and
sells Ferrofluidic exclusion seals for use on computer peripheral
equipment.
OPERATING STRUCTURE
The Company is organized into three business segments:
(i) the COMPONENTS BUSINESS, or FERROFLUIDIC(R) PRODUCTS segment, which
manufactures and markets:
(a) ferrofluids used in the Company's own engineered core products,
loudspeakers for the home and automotive markets, and for use
in nondestructive testing, inertia dampers, stepper motors and
sensor applications;
(b) Ferrofluidic(R) sealing devices and subsystems, primarily for
use in the semiconductor process, industrial process, lamp and
fiber optic manufacturing, and medical equipment industries;
and
(c) fluid-film bearing spindles for the optical scanning, laser
printing and computer peripheral industries.
Sales generated by the Components Business accounted for
approximately 41.3%, 42.7% and 25.5% of total product sales in
fiscal 1995, 1994 and 1993, respectively.
(ii) the SYSTEMS BUSINESS, or CRYSTAL GROWING SYSTEMS segment, which
designs, assembles and markets fully-integrated systems for growing
crystals of silicon, germanium, gallium arsenide and other metal
alloys for the semiconductor, photovoltaic, military, and advanced
materials markets.
Sales generated by the Systems Business accounted for 34.5%, 32.7%
and 52.8% of total product sales in fiscal 1995, 1994 and 1993,
respectively.
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(iii) DISTRIBUTED PRODUCTS BUSINESS, or Thin Film Deposition segment,
which includes the sale in Europe by AP&T of compatible
products on an exclusive basis for several U.S. and European
companies.
Sales generated by the Distributed Products Business accounted
for 24.2%, 24.6% and 21.7% of total product sales in fiscal
1995, 1994 and 1993, respectively.
In fiscal 1995, $21,412,000, or 62.7%, of the Company's total sales were
to foreign customers, primarily through AP&T, FJC and to the Systems Business'
customers in Europe and the Pacific Rim. Sales to unaffiliated foreign
customers in fiscal 1994 and 1993 totaled $16,229,000 (61.5%) and $20,733,000
(61.5%), respectively.
All manufacturing and assembly of products for the Components Business and
the Systems Business is conducted at the Company's headquarters. Marketing of
those products for all markets, excluding Europe and Japan, is principally
conducted by its direct sales force at the Company's headquarters or, in the
case of standard vacuum rotary feedthrough seals to the end-user markets,
through the Kurt J. Lesker Company ("KJLC"), a worldwide distributer of vacuum
related products. The Company has established, and continues to develop,
distributor relationships for its ferrofluid and Ferrofluidic(R) products in
Korea, Taiwan, India, China, and developing Pacific Rim countries.
PRODUCT LINES
The Company manufactures and sells products in four major product
categories: (i) ferrofluids; (ii) magnetic fluid seals, sealing subsystems, and
other Ferrofluidic(R) products; (iii) crystal growing systems and related
equipment; and (iv) fluid-film bearing spindles. In addition, the Company
distributes advanced technology component and systems products for use in the
manufacture of semiconductors and in the thin film deposition and optical
coating industries through AP&T in Europe.
(i) FERROFLUIDS. The Company supplies ferrofluids for use in the Company's
own engineered products and for use in home and automotive loudspeakers
and for nondestructive testing, sensors and stepper motors. The Company,
in conjunction with its licensees, currently supplies fluids for
approximately 30 million speakers per year, representing the vast majority
of the ferrofluid applications in speakers. Sales of ferrofluids
accounted for approximately 7.0%, 7.7% and 4.7% of total product sales in
fiscal 1995, 1994 and 1993, respectively. The selling price for the
majority of the Company's third-party ferrofluid applications ranges from
$1,000 to $10,000 per liter.
(ii) MAGNETIC FLUID SEALS AND SUBSYSTEMS. The Company combines proprietary
ferrofluid technology with broad applications engineering to develop a
variety of products that provide state-of-the-art seals and sealing
subsystems that either seal the environment out of a manufacturing process
or seal a manufacturing process out of the environment. In each of the
applications in which the Company provides Ferrofluidic(R) seals and
sealing subsystems it is the leading provider of such technology. Sales
of magnetic fluid sealing devices accounted for approximately 32.1%, 33.4%
and 19.9% of total product sales in fiscal 1995, 1994 and 1993
respectively. The Company's major magnetic sealing products are:
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Rotary Seals for Critical Process Applications: Historically,
one of the Company's core commercial applications of ferrofluids is
a rotary seal assembly with long life, unmeasurable leakage and
high-speed capability for rotary motion penetrations into vacuum and
other highly controlled, ultra-clean process environments. The
Company supplies the semiconductor and other critical process
industries with low vapor pressure seal assemblies and subsystems
which help exclude atmospheric contamination from manufacturing
processes. These applications include electro-optical subsystems,
thin-film vacuum coating, excimer laser and x-ray based machines.
The Company produces standard and custom-engineered sealing
components and subsystems including multiport rotary valve
assemblies. Customers include both original equipment manufacturers
("OEM's") and end users. The selling price for the majority of such
seal assemblies sold by the Company is in the range of $500 to
$25,000, with some seal subsystems approaching $100,000, depending
on design complexity.
The Company, in fiscal 1992, introduced two new commercial
applications of its rotary seals: (a) a Lamp Process Sealing System
now being supplied to General Electric and certain other lighting
manufacturers for use as an integral part of the process to produce
energy efficient lamps for commercial and residential lighting and
(b) a Medical X-Ray Sealing System now being supplied to major
medical equipment manufacturers for use to rotate, seal and cool
target anodes inside the x-ray vacuum chamber of Computer Aided
Tomography ("CAT") scan equipment.
Industrial Process Seals: Following approximately three years
of development and close cooperation with two key strategic partners
in the petroleum refining and chemical processing industries,
Ferrofluidics, during fiscal 1993, introduced its industrial process
seals for the elimination of volatile organic compounds ("VOCs") and
volatile hazardous air pollutants ("VHAPs") from petroleum refining
and chemical processing plants. Using this magnetic fluid sealing
technology, these facilities can comply cost-effectively with the
strictest regulations, which mandate decreasing "fugitive emissions"
(as they are referred to under the Federal Clean Air Act of 1990 and
its Amendments of 1990) according to a phased program over the next
few years and are subject to acceleration by certain state and local
authorities.
The Company's other Ferrofluidic(R) products include:
Inertia Dampers: The Company supplies Ferrofluidic(R) inertia
dampers that are used in semiconductor equipment, disk drives, XY
plotters, computer printers and other computer peripheral equipment.
The dampers eliminate resonance, reduce settling time and improve
positional accuracies.
Computer Exclusion Seals: The Company, through its Japanese
licensee, supplies the computer peripheral industry with
Ferrofluidic exclusion seals for use on hard disk drives. The seals
are used to prevent contaminants and small particles from entering
the critical head-to-disk recording region in disk drive memories.
Such contaminants can cause "head crash" failures resulting in loss
of information.
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(iii) CRYSTAL GROWING SYSTEMS. The Company entered the crystal growing
capital equipment business through an acquisition in 1981 as a
vertical integration to its supply of sealing subsystems. Since
entering the business, the Company has focused on building
technologically advanced crystal growing systems that incorporate
advanced design, unique technical features, comprehensive automation
and proprietary operational software. The Company's principal
product within this product line, silicon crystal growing systems,
facilitates the growth of silicon for the electronics industry. The
crystals, grown from molten poly-silicon, are then sliced into
wafers and used by the semiconductor industry in the manufacture of
integrated circuits and other memory components. Typically, the
Company customizes each system for a particular customer
incorporating proprietary designs with its own technology.
The Company designs all aspects of its crystal growing systems and
subcontracts the manufacture of system components. Assembly and testing
of each system is performed at the Company's headquarters. Upon the
completion of testing, a system is partially disassembled, shipped to the
customer and reassembled by the Company's technical support staff.
During the past three years, the Company has experienced a rise in
orders for silicon systems for semiconductor manufacturing as well as
equipment for making other advanced materials for new applications,
including multiple-unit orders from major companies in the U.S., Japan and
Korea. Typically, shipments are spread over many months, timed for the
customer's start-up of new plants or production ramp-ups. Sales of
silicon crystal growing systems accounted for approximately 34.5%, 32.7%
and 52.8% of total product sales in fiscal 1995, 1994, and 1993,
respectively. Silicon crystal growing systems typically sell at prices
ranging between $300,000 and $1,000,000, depending on the size crystals to
be grown and special features included in the systems.
The Company continues to develop equipment and process technologies
in several other areas in cooperation with major industrial companies and
specific product specialists.
(iv) FLUID-FILM BEARING SPINDLES. Incorporating over ten years of experience
in ferrofluid film and hydrodynamic bearings, the Company has developed a
high accuracy, ultra-high speed aerodynamic bearing spindle ("air
bearing"). This air bearing spindle was developed to meet the increasing
demands for higher speeds -- in excess of 20,000 rpm -- and for improved
accuracy of less than 0.5 arc seconds in high-end laser scanning,
imagesetter and laser printer applications. For traditional ball bearing
spindles, the major source of runout (which can be defined as the total
amount of random motion that the shaft experiences while being rotated at
the design speed) is the ball bearing itself. Air bearing spindles have
no inherent nonrepeatable runout. Sales of ferrofluid-film and air
bearing spindles accounted for approximately 2.2%, 1.6% and 0.8% of total
product sales in fiscal 1995, 1994 and 1993, respectively.
SIGNIFICANT CUSTOMERS
In fiscal 1995, sales to one foreign customer of the Systems Business of
$6,209,000 accounted for 18.2% of consolidated product sales. In fiscal 1994,
sales to this same customer in the amount of $5,667,000 accounted for 21.5% of
consolidated product sales. Management believes that the loss of this customer
could have a material adverse effect on its future results of operations.
Sales under
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related contracts to that same foreign customer and a related U.S. customer
accounted for approximately $9,907,000 and $5,959,000, or 30.1% and 18.1%,
respectively, of consolidated sales in fiscal 1993.
COMPETITION
The Company believes that its competitive business will continue to be
dependent upon its trade secrets, know-how and ability to develop both
ferrofluids for specific applications and technologically-advanced products
which utilize ferrofluids. The Company believes that its competitive position
with respect to its proprietary products, while aided by its patents, is not at
present materially dependent upon them. The Company does, however, believe
that several of its pending patents, if issued, could further strengthen its
competitive position. The Company's ferrofluids are proprietary to the
Company.
(i) MAGNETIC FLUIDS. Numerous other companies around the world supply various
forms of magnetic fluids for commercial applications. Nevertheless, the
Company, in conjunction with NFC, its former Japanese subsidiary and
licensee, supplies the vast majority of the world's commercial
applications of ferrofluids and believes that its ferrofluids are the
principal product used in applications utilizing magnetic fluids. The
Company believes its principal competitors in the audio ferrofluid market
are NFC with respect to sales in the Pacific Rim.
(ii) SEALS. In semiconductor and other critical process industry applications,
the Company's magnetic fluid sealing devices and sealing subsystems
compete against traditional, non-ferrofluid based sealing methods marketed
by other vendors, some of which are less expensive in terms of initial
cost than the Company's products. In comparison to the Company, some of
these firms have greater financial, marketing, technical or other
resources available to them. In the Pacific Rim, the Company's licensees
compete with other suppliers of magnetic fluid seals. In addition, one
competitor in Japan ships seals into the United States; however, it
represents a minor competitor to the Company's seals business in terms of
relative market share.
In industrial process applications, Ferrofluidics' sealing system
competes with various nonmagnetic fluid sealing devices and sealing
subsystems; however, the Company believes all other solutions are either
more expensive or have higher maintenance costs and are not adequate at
the stricter compliance levels mandated by the EPA.
(iii) CRYSTAL GROWING SYSTEMS. The Company is aware that there are
currently two other companies worldwide that manufacture silicon
crystal growing systems. These companies historically have had
established market shares and are subsidiaries of larger
corporations. In addition, several crystal producers, principally
in Japan, manufacture their own growing systems through captive
equipment affiliates. Of the total worldwide installed base of
crystal growing systems, the Company estimates that approximately
40% are Ferrofluidics crystal growers. However, of the non-captive
market for silicon crystal growing systems used in the production of
200 millimeter diameter wafers, the Company believes that it
currently is the major supplier with a greater than 85% market share.
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There are a limited number of large customers for silicon crystal
growing systems. The market is cyclical and even during "up" cycles, one
or two suppliers generate most of the equipment sales. The Company during
the past three years has shipped more than 45 systems to customers in the
U.S., Japan and Korea. However, there is no assurance that these sales
will continue. The need to develop new crystal growing systems
technology, including larger diameter wafers, could require investment in
research and development well into the future.
(iv) FLUID-FILM BEARING SPINDLES. The Company's fluid-film bearing spindles
compete with conventional ball bearing and other air- bearing spindles
manufactured by established companies, some of which have substantially
greater resources than the Company. The Company's design and manufacture
of spindles is currently being directed toward higher-end applications,
such as laser optical scanning, which require higher rotational speeds and
greater accuracy.
SEASONALITY
While the Company is not impacted by the seasonal demands of its
customers, the Systems Division, and as a result the Company, is affected by
the delivery demands of its customers. A typical customer of the Company's
crystal growing systems segment orders multiple units for delivery under time
schedules specifically defined by the customer. As a result, quarter to
quarter operating results and working capital requirements may fluctuate
considerably.
EMPLOYEES AND MARKETING
The Company currently has approximately 249 employees worldwide, of which
203 are employed in the United States, 40 in Europe and 6 in Japan.
In the United States, the Company markets all of its products through a
direct field sales force and an applications engineering staff headquartered in
Nashua, NH which is augmented by a third party sales representative
organization. Abroad, products are sold in Europe through AP&T, the Company's
wholly-owned German subsidiary, its U.K. sales office, and unaffiliated
distributors and sales representatives in other European countries and in Japan
through its licensee, NFC, and through its wholly- owned subsidiary, FJC. The
Company has also sold certain products through MSB, a former licensee in
Israel.
MANUFACTURING
The Company produces all of its ferrofluids at its headquarters, and, to
protect the proprietary nature of its ferrofluid technology, conducts such
activities in a limited-access environment. The Company's manufacturing
presently consists primarily of assembly and test operations, although it has
in-house precision machining capabilities in the United States in support of
special marketing and customer requirements. The Company's manufacturing
operations rely substantially on outside vendors who fabricate components and
subassemblies to the Company's specifications. These components are assembled
at the Company's facilities and subjected to the Company's rigorous test and
inspection procedures.
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During 1995, the Company substantially expanded its capacity for assembly
and test with respect to its crystal growing systems in order to meet the
increasing order backlog for such systems.
OUTSIDE SUPPLIERS
With respect to its sealing devices, the Company relies on outside
suppliers to manufacture, to the Company's specifications, substantially all of
its metal components requirements. The Company performs assembly and quality
control procedures at its headquarters. If the Company's current suppliers
were unable to continue to manufacture components, the Company believes that
other suppliers would be available to do such work, although there is no
guarantee that the Company would be able to obtain all of its supply
requirements on comparable terms. The Company does not presently have the
capacity to conduct a substantial portion of component production in-house.
A substantial portion of the cost of the components of the crystal growing
systems, including electrical components and machined parts, are purchased from
third parties. The Company believes that there are a number of suppliers for
these parts.
INDUSTRIAL PROPERTY RIGHTS
The Company has a number of U.S. and foreign patents and patent
applications for its seals, dampers, bearings and systems, with expiration
dates from 1995 to 2006. In many cases, however, the Company relies more upon
its trade secrets, know-how and ability to develop technological advances than
patents to protect its technologies and products.
The Company has registered trademarks for a logo design utilizing an "F"
and for Ferrometic, Ferrofluidic, FerroSound, FerroSound-The solution is loud
and clear, and Spin Technology.
INTERNAL RESEARCH AND DEVELOPMENT
The Company's internal research and development effort is aimed at
synthesizing proprietary ferrofluids and using the unique properties of
magnetic fluid technology to develop new products and business opportunities.
The Company spent (and charged to expense) $1,479,000, $1,237,000 and
$1,269,000 in fiscal years 1995, 1994 and 1993, respectively, on the
development of new products and the improvement of existing products.
Substantially all research is Company-directed and is conducted primarily
by employees of the Company. The Company's research and development is carried
out by an interdisciplinary group of product development engineers, physicists,
chemists, technicians and marketing professionals who seek to apply ferrofluid
technology in diverse and expanding markets where that technology adds a
significant value.
The Company is experimenting with new ferrofluids and seals for new higher
speed and higher vacuum applications for new and existing markets.
Additionally, the Company has developed a
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number of new technical advances in crystal growing systems, including laser
melt level control and a continuous feed system for polysilicon.
BACKLOG
<TABLE>
As of June 30, 1995, the Company had a consolidated order backlog of
$37,756,000, as compared to $14,613,000 at June 30, 1994. A comparative
summary of the consolidated backlog by business segment is as follows:
<CAPTION>
1995 1994
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Components $ 3,839,000 $ 3,939,000
Systems 32,406,000 8,162,000
Distributed Products 1,511,000 2,512,000
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Total Backlog $37,756,000 $14,613,000
</TABLE>
Of the total backlog at June 30, 1995, approximately 98% is expected to
ship during fiscal 1996.
WARRANTY POLICY
With respect to the sale of ferrofluids and the sale of seals and other
products to the computer peripheral industry, the Company warrants only as to
workmanship and materials, and its express warranties for such products
terminate upon acceptance by the customer. With respect to sales of seals to
the semiconductor and other industries for controlled environment applications,
the Company offers a one-year warranty. Its warranty service expenses for such
products have not been significant. Because of the low warranty service rate,
the cost of warranty returns to date has been expensed as incurred, and no
reserves for warranty service have been established.
With respect to crystal growing systems, the Company generally offers a
one-year warranty as to workmanship and materials from date of acceptance by
the customer. Product refinement and increased field experience have
continually reduced warranty costs on a per unit basis and warranty expenses
have historically been well within the reserves established by the Company.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information with respect to the Company's industry segments is
hereby incorporated by reference to Note K to the Consolidated Financial
Statements in Item 8 of this report.
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FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Financial information about the Company's foreign and domestic operations
and export sales is hereby incorporated by reference to Note K of Notes to the
Consolidated Financial Statements in Item 8 of this report.
ITEM 2. PROPERTIES
The Company's offices, product development facility and principal
manufacturing plant are located in Nashua, New Hampshire in a 71,000 square
foot facility situated on approximately 4.5 acres of land owned by the Company.
This land, the building, and substantially all the Company's machinery and
equipment at its Nashua facility have been pledged as security against an
industrial revenue bond. (See Note A and H to the Consolidated Financial
Statements in ITEM 8.)
The Company and its subsidiaries lease office space, aggregating
approximately 15,000 square feet, under varying terms in Oxford, England;
Nurtingen, Germany and Tokyo, Japan.
ITEM 3. LEGAL PROCEEDINGS
Securities and Exchange Commission
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On February 19, 1993, the Company received an informal inquiry from the
SEC requesting that the Company provide the SEC with certain documents
concerning publicity relating to the Company for the period of January 1, 1992
to February 19, 1993. In August 1993, the SEC issued an order directing a
private investigation to determine whether certain unnamed persons have
violated or caused the Company to violate the federal securities laws. Among
the areas of inquiry identified in the order is whether publicity about the
Company, including research reports, were published without fully disclosing
consideration given or received therefor. The order also indicates that the
inquiry will examine possible manipulation by certain unnamed persons of the
Company's securities, payment in connection therewith, and failure to disclose
such activities in public filings made by the Company (including the financial
statements contained or incorporated therein), as well as possible
nondisclosure of transactions with the Company in which such persons may have
had a material interest. Since inception of the investigation, the Company has
cooperated fully with the SEC's inquiry.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year ended June 30, 1995.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Ferrofluidics' Common Stock is traded on the NASDAQ National Market under
the stock symbol "FERO". The following table sets forth the high and low
closing transactions for the Common Stock of the Company for the fiscal periods
indicated, as reported by NASDAQ.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
1994
- ----
7/1/93 - 9/30/93 16 1/4 5 3/4
10/1/93 - 12/31/93 8 1/4 5 1/2
1/1/94- 3/31/94 6 3/4 3 3/4
4/1/94 - 6/30/94 7 4 3/4
1995
- ----
7/1/94 - 9/30/94 6 1/8 4 3/4
10/1/94 - 12/31/94 7 1/8 4 1/8
1/1/95- 3/31/95 8 1/8 5 1/4
4/1/95 - 6/30/95 10 1/4 5 1/4
</TABLE>
On September 8, 1995, the closing sale price for the Company's Common
Stock, as reported by NASDAQ, was $14.00. On that date, there were
approximately 3,970 holders of record of the common stock of the Company.
DIVIDEND POLICY
The Company has never paid a cash dividend on its Common Stock. Its
policy is to retain earnings and use funds for the operation and expansion of
its business. Future dividend policy will be determined by the Board of
Directors based upon the Company's earnings, financial condition and capital
requirements.
11
<PAGE> 14
<TABLE>
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the five years ended June 30, 1995, should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto, in ITEM 8 of this report and with Management's Discussion and
Analysis of Financial Condition and Results of Operations in ITEM 7 of this report.
<CAPTION>
Fiscal Years Ended June 30,
---------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
- ----------------------
Net product sales $34,149,000 $ 26,379,000 $32,905,000 $ 20,926,000 $23,855,000
Royalty revenues 6,000 82,000 372,000 767,000 527,000
----------- ------------- ----------- ------------ -----------
Total net sales and revenues 34,155,000 26,461,000 33,277,000 21,693,000 24,382,000
Engineering & product development expenses 3,410,000 3,390,000 3,129,000 1,757,000 1,474,000
Nonrecurring operating expenses (income) (1,156,000) 3,108,000 8,594,000 (470,000) (930,000)
Operating income (loss) 943,000 (9,662,000) (11,716,000) 35,000 4,165,000
Interest expense, net (406,000) (356,000) (254,000) (567,000) (366,000)
Income tax benefit (expense) 322,000 (1,169,000) (466,000) 30,000 (1,225,000)
Income (loss) from continuing operations 889,000 (10,713,000) (12,446,000) (167,000) 2,802,000
Net income (loss) $889,000 $ (10,713,000) $(12,446,000) $ (167,000) $ 3,890,000
=========== ============= ============ ============ ===========
PER SHARE DATA:
- ---------------
Income (loss) from continuing operations $.16 $(2.00) $(2.49) $(.06) $ .93
Net income (loss) $.16 $(2.00) $(2.49) $(.06) $1.23
==== ====== ====== ===== =====
Weighted average shares outstanding 5,563,160 5,366,350 5,005,120 3,008,916 3,595,887
BALANCE SHEET DATA:
- -------------------
Working capital $ 7,811,000 $ (1,601,000) $ 6,775,000 $ 16,994,000 $ 7,470,000
Total assets 39,529,000 32,508,000 36,884,000 35,209,000 27,640,000
Total liabilities 23,748,000 21,325,000 15,107,000 11,678,000 18,256,000
Long-term debt 5,036,000 28,000 - 7,500,000 8,827,000
Stockholders' equity 15,781,000 11,183,000 21,777,000 23,531,000 9,386,000
<FN>
Note: (a) No dividends had been declared or paid during the five years ended June 30, 1995.
</TABLE>
12
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides information to assist in the
understanding of Ferrofluidics' results of operations and financial condition.
It should be read in conjunction with the selected financial data in the
preceding section and the consolidated financial statements and notes thereto
that appear elsewhere herein.
RESULTS OF OPERATIONS
<TABLE>
Fiscal 1995 Versus Fiscal 1994:
- -------------------------------
In fiscal 1995, net product sales and revenues increased 29% to
$34,155,000 from $26,461,000 in fiscal 1994. Revenues from the Company's
Crystal Growing Systems segment increased 37% from $8,612,000 in 1994 to
$11,782,000 in 1995. The increase in revenues for this product line can be
attributed to the industry-wide increase in the demand for 200 millimeter (8
inch) silicon wafers and the resulting increase in the demand for the equipment
for growing the silicon crystals. The Company's model CZ-150, which is capable
of growing silicon ingots from which 200 millimeter diameter wafers are made,
has received strong acceptance worldwide by silicon wafer manufacturers.
Further, product revenues in this segment are impacted by customers' contracted
delivery schedules, and often are not recorded evenly over the reporting
period. Worldwide revenues in the Company's Components business rose 25% from
$11,285,000 in 1994 to $14,119,000 in 1995. The comparison of revenues by
major product line within the Components Business is as follows:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Seals $10,986,000 $8,822,000
Bearings 746,000 429,000
Ferrofluid 2,387,000 2,034,000
------------ -----------
Total Components Business $14,119,000 $11,285,000
</TABLE>
Sales from the Company's European operations, AP&T, which includes the
sale of the Company's core products in Europe as well comprising the Thin Film
Deposition segment, increased 20% to $11,201,000 in 1995 as compared to
$9,354,000 in fiscal 1994.
Bookings in 1995 amounted to $56,911,000, (including $35,734,000 of
orders for crystal growing systems) compared to $30,317,000 in 1994 (including
$12,091,000 of systems orders). Backlog at June 30, 1995 totaled $37,756,000
(including $32,406,000 of crystal growing systems) compared to $14,613,000 at
June 30, 1994 (including $8,162,000 of crystal growing systems). Of the order
backlog at June 30, 1995, approximately 98% is expected to be shipped in fiscal
1996.
Consolidated gross margin for the year ended June 30, 1995 amounted to
40.7% of product sales as compared to 33.9% of product sales in the previous
year. Higher production volumes in 1995 contributed to the improved gross
margins through better absorption of overhead costs. Additionally, improved
pricing and inventory and production management contributed to the improvement
in overall gross margins in 1995. In addition, gross margins benefitted from
management's decision to discontinue the operations of VSE Vakuumtechnik GmbH
("VSE") an Austrian majority-owned company for which AP&T and the Company
distributed products and which had experienced prolonged operating losses. The
gross margin in 1994 reflected the impact of poor margins of VSE
13
<PAGE> 16
products and certain higher than normal warranty costs relating to the crystal
growing systems and certain excess inventory charges pertaining to feedthrough
seals.
As more fully discussed in Note B to the Consolidated financial
statements, in November 1994, the Company entered into a license agreement with
a Swiss vacuum-valve manufacturer pursuant to which the manufacturer has been
granted the exclusive right to incorporate certain Ferrofluidic(R) technology
into its products in exchange for the receipt of $1,300,000 in cash. The
$1,300,000 has been included in nonrecurring operating income in the
consolidated statement of operations for the year ended June 30, 1995. The
agreement also provides for the receipt of an additional $200,000 by June 30,
1996, contingent upon the occurrence of certain events by that time. The
Company will record any additional cash receipts as income when they become
assured.
In connection with the aforementioned license agreement, in September
1994, management decided to abandon the operations of VSE due to its prolonged
operating losses and its inability to compete effectively in the standard
vacuum-valve industry. The results of operations for VSE for fiscal 1995 has
been reclassified and included in nonrecurring operating income (expense) in
the accompanying consolidated statements of operations .
The Company expended $3,410,000 during fiscal 1995 on engineering and
product development, representing 10% of net sales and revenues compared to
$3,390,000, or 12.8% of net sales and revenues in the preceding year. Of the
total amount expended in 1995, $1,930,000 represents design and applications
engineering and $1,480,000 represents amount spent on the development of new
products. In fiscal 1994, the design and applications engineering totaled
$2,153,000 and the new product development totaled $1,237,000. Of the total
fiscal 1995 engineering and product development expenditures, $1,135,000 was in
the crystal growing systems segment as compared to $1,496,000 in the prior
fiscal year. The remaining balance of expenditures related to engineering and
development of the Company's core products, including seals and fluids.
Selling, general and administrative ("SG&A") expenses decreased 12% from
$12,133,000 in 1994 to $10,694,000 in fiscal 1995. The decline in SG&A
expenses were principally the result of cost cutting measures undertaken at the
Company's headquarters in Nashua, with approximately $150,000 of reductions in
the Europe and Japan operations combined.
Interest income in 1995 of $232,000 represents principally the income
earned on certain paid-up insurance policies on the lives of former officers.
Interest expense of $638,000 includes approximately $243,000 of interest on the
Company's variable rate industrial revenue bond and approximately $140,000 in
interest expense on amounts drawn on a revolving credit line. See Note G for a
more complete discussion of the Company's debt obligations. At June 30, 1995,
there were no amounts outstanding against this revolving credit line.
Additionally, the Company recorded $201,000 of interest expense pertaining to
loans against certain keyman insurance policies, which are more fully discussed
in Note E to the Consolidated Financial Statements.
The Company records translation and exchange gains and losses resulting
from fluctuations of foreign currency as other income (expense). In 1995, the
Company realized a gain upon the sale of its investment in NFC (see Note D to
the Consolidated Financial Statements) of approximately $200,000. The
remaining balance in other income (expense) was principally amortization of
bank financing costs.
14
<PAGE> 17
The tax provision in 1995 includes a benefit of approximately $620,000
resulting from the recording of a tax asset in Europe at AP&T reflecting that
business's return to profitability from continuing operations. Additionally,
the provision includes the recording of approximately $300,000 in tax reserves
pertaining to various state and foreign taxes.
<TABLE>
Fiscal 1994 Versus Fiscal 1993:
- -------------------------------
In fiscal 1994, net product sales and revenues decreased 20% to
$26,461,000 from $33,277,000 in fiscal 1993. Revenues from the Company's
Crystal Growing Systems segment declined nearly $8,779,000 from $17,391,000 in
1993 to $8,612,000 in 1994. Revenues of the Company's Components Business rose
35% from $8,382,000 in 1993 to $11,285,000 in 1994. The comparison of revenues
by product line within the Components Business is as follows:
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Seals $ 8,822,000 $ 6,544,000
Air bearings 429,000 279,000
Ferrofluid 2,034,000 1,559,000
----------- -----------
Total Components Business $11,285,000 $ 8,382,000
</TABLE>
Sales of sealing devices and subsystems in 1994 include approximately
$870,000 of sales of standard product to The Kurt J. Lesker Company, a
components distributor servicing the semi-conductor and other vacuum
process-related industries, which also acts as a sales representative for the
Company's custom seals to end users in these markets. Sales from the Company's
European operations, AP&T, which includes the sale of the Company's core
products in Europe as well as the Thin Film Deposition segment, totaled
$9,354,000 in 1994, relatively unchanged from the $9,417,000 of sales in fiscal
1993.
Additionally, consolidated product revenue for the years ended June 30,
1994 and 1993 include royalties from the sale of Ferrofluidics products by the
Company's two licensees, NFC in Japan and MSB in Israel, of $82,000 and
$372,000, respectively.
Bookings in 1994 amounted to $30,317,000, (including $12,091,000 of orders
for the Company's crystal growing systems) compared to $27,925,000 in 1993,
which included $9,120,000 of systems orders. Backlog at June 30, 1994 totaled
$14,613,000 (including $8,162,000 of crystal growing systems) compared to
$11,451,000 at June 30, 1993 (including $4,982,000 of crystal growing systems).
Consolidated gross margin for the year ended June 30, 1994 amounted to
33.9% of product sales as compared to 38.8% of product sales in the previous
year. The decline in the gross margin is primarily attributable to product mix
in the crystal growing systems and components segments. The introduction of
new, lower margin, products within the Company's components segment, lower than
expected margins on the VSE product line in Austria and certain warranty costs
relating to the crystal growing systems all contributed to the decline in the
gross margin. Additionally, in 1994, the Company has provided $400,000 of
reserves for excessive inventory levels with respect to its standard line of
feedthrough seals.
15
<PAGE> 18
The Company expended $3,390,000, during fiscal 1994 on engineering and
product development, representing 12.8% of total net sales and revenues
compared to $3,129,000, or 9.4% of total net sales and revenues in the
preceding year. Of the total amount expended in 1994, $2,153,000 represents
design and applications engineering and $1,237,000 represents amount spent on
the development of new products. In fiscal 1993, the design and applications
engineering totaled $1,860,000 and the new product development totaled
$1,269,000. Of the total fiscal 1994 engineering and product development
expenditures, $1,496,000 was in the crystal growing systems segment as compared
to $1,483,000 in the prior fiscal year. The remaining balance of expenditures
related to engineering and development of the Company's fluids and other core
products.
Selling, general and administrative ("SG&A") expenses decreased from
$13,136,000 in 1993 to $12,133,000 in fiscal 1994. However, SG&A at the
Company's headquarters in Nashua was reduced from $8,700,000 to $7,004,000 as a
result of the restructuring of operations implemented by new management. The
reductions in Nashua were partially offset by increases in SG&A in Japan and
Europe of $471,000 and $222,000, respectively. Administrative expenses for
fiscal 1993 include charges of approximately $890,000 principally representing
reserves against certain long term receivables, potential indemnification
liabilities associated with the insurance loan agreements with former officers
and certain sales related costs.
The results of operations in 1994 includes a loss from operations at
Ferrofluidics Japan of $949,000 and a loss from operations at AP&T in Europe of
$620,000. The loss in Europe included a loss from operations of VSE, the
Company's majority owned subsidiary in Austria which was acquired in May 1993,
of $429,000.
Settlement of NFC Litigation
- ----------------------------
As more fully discussed in Note D to the Consolidated Financial
Statements, on June 30, 1993, Ferrofluidics entered into a series of new
license and other agreements ending all litigation between Ferrofluidics and
NFC, its former Japanese subsidiary. Pursuant to the agreements, in August
1993, Ferrofluidics received one billion Japanese Yen (approximately $9.5
million), in settlement of all claims against NFC including all future
royalties owing to the Company under the new and a previous license agreement,
any past due royalties owing under the previous agreement, and reimbursement of
expenses incurred by Ferrofluidics in connection with the litigation. The one
billion Yen (approximately $9.5 million) was remitted to the Company net of
$815,000 in Japanese withholding tax on that portion of the settlement
representing royalty payments, which has been included in income tax expense
for the year ended June 30, 1994. Also pursuant to the agreements,
Ferrofluidics acquired 125,000 shares of NFC's common stock, approximately 16%
of NFC's outstanding stock, for one billion Japanese Yen, and was given a seat
on NFC's board of directors. Given that the transactions involved an exchange
of identical amounts, it has been treated as a nonmonetary transaction and,
therefore, the value assigned to the settlement is equivalent to the fair
market value of the NFC shares purchased. In September 1993 and August 1994,
Ferrofluidics engaged an independent firm to ascertain the fair market value of
its investment in NFC as of the transaction date and June 30, 1994 for purposes
of recording the transaction. The results of the valuations placed the fair
market value of the 125,000 NFC shares at $4,286,000 which was recorded in the
first quarter of fiscal 1994. In fiscal 1994 the Company has established a
valuation reserve against this investment and a corresponding charge to
operations in the amount of $600,000, net of
16
<PAGE> 19
approximately $258,000 of translation gains, in recognition of NFC losses for
its fiscal year ended March 31, 1994. The resulting gain of $3,322,000, which
is the $4,286,000, less the valuation reserve and expenses related to the
transaction, has been recorded in the Statement of Operations for the year
ended June 30, 1994.
Nonrecurring Operating Charges
- ------------------------------
Settlement of class action lawsuit
----------------------------------
On June 23, 1994, the Company and certain other parties to the
shareholder litigation described in Note M to the Consolidated Financial
Statements entered into a Stipulation of Settlement which provided for the
settlement of all claims against the Company and certain other defendants.
Following the preparation and execution of definitive settlement documents
satisfactory to the settling parties, the Massachusetts federal district
court approved the settlement as fair and reasonable and dismissed the case
on August 19, 1994. In the settlement, the Company issued 600,000 freely
tradable shares of the Company's Common Stock. The Company recorded its
portion of the settlement and related expenses totaling $3,300,000 as a
charge to nonrecurring operating charges in the third quarter of fiscal 1994
($2,925,000 representing the estimated value of the 600,000 shares of the
Company's common stock and $375,000 representing for legal and other
costs). In the fourth quarter of 1994, the Company recorded an additional
$225,000 charge to nonrecurring operating charges which adjusted the value
of the shares to the approximate market price of the Company's common stock
on August 19, 1994.
Management Restructuring
------------------------
As more fully discussed in Note M to the Consolidated Financial
Statements, in September 1993, the former chief executive officer retired
from the Company and entered into a Termination Agreement with the Company,
superseding his existing employment agreement. Pursuant to the Termination
Agreement, the former CEO is receiving payments aggregating $725,000 over
four years for making himself available to be used as a senior advisor to
the Company during that period (the "Consultancy Period"), whether or not
the Company elects to use his services. The Company has charged the entire
$725,000 to nonrecurring operating expenses in the first quarter of fiscal
1994. Additionally, the Company incurred $175,000 of severance and other
termination charges relating to the reduction of its executive management
and operating staff in the fall of 1993.
Molecular BioQuest, Inc.
------------------------
As more fully discussed in Note D to the Consolidated Financial
Statements, in 1994 the Company advanced $300,000 commitment to Molecular
BioQuest, Inc. ("BioQuest") pursuant to certain commitments outstanding at
the time. In April 1994, the Company entered into an agreement with
BioQuest pursuant to which the Company paid an additional $175,000 in full
satisfaction of all obligations to BioQuest and, in exchange, received
ownership of 5% of the outstanding common stock of BioQuest. The entire
$475,000 paid to BioQuest has been charged to operations in the first
quarter of 1994, in recognition of BioQuest's undeveloped technology and its
continued operating losses.
Other Charges
-------------
As more fully discussed in Note D to the Consolidated Financial
Statements, in 1994 and 1993, the Company advanced $209,000 and $85,000,
respectively, to Ferrofluidics Taiwan
17
<PAGE> 20
Corporation (FTC) for operating purposes. In July 1994, the Company made an
investment in FTC of $75,000, representing a 19.9% interest in that
company. Of the combined investment in and advances made to FTC, $230,000
and $85,000 have been charged to nonrecurring operating expenses on the
Consolidated Statement of Operations in 1994 and 1993, respectively. In
fiscal 1993, the Company incurred approximately $1,205,000 of legal costs
pertaining principally to the class action litigation and matters
associated with the inquiry and investigation of the Securities and
Exchange Commission (see Note M to the Consolidated Financial Statements
for a more complete discussion). These amounts have been charged to
nonrecurring operating expenses on the Consolidated Statement of
Operations for the year ended June 30, 1994.
LIQUIDITY AND CAPITAL RESOURCES
In 1995, the operations of the business provided $630,000 of cash. During
1994 and 1993, the operations of the business used cash $6,044,000 and
$665,000, respectively. The recent growth in orders for the Company's products
has required the investment of capital into accounts receivable and inventory.
The Company continues to rely heavily on advance payments received from
customers with respect to its crystal growing systems to fund the growth in
that segment. Cash receipts from the sale of crystal growing systems under
large multiunit contracts are typically received by the Company as certain
milestones are met, including receipt of order, submission of accepted
engineering drawings, shipment and final acceptance of the units. In 1995 and
1994, the Company received advance payments of $7,855,000 and $1,539,000,
respectively. In order to secure its sources of supply for critical long lead
inventory items, the Company has made advance payments to its vendors
aggregating $2,145,000 at June 30, 1995. At June 30, 1995, the Company had
outstanding purchase commitments for inventory of approximately $25,000,000.
Working capital at June 30, 1995 totaled $7,811,000 as compared to a
working capital deficit at June 30, 1994 of ($1,601,000), which included the
classification of the $5,000,000 industrial development bond as a current
liability. Renegotiation of the terms of the agreements with its bank, along
with the correction of certain defaults that existed as of June 30, 1994, has
enabled the Company to reclassify the bonds, which mature in 2004, to a
non-current liability at June 30, 1995.
During 1995, investing activities provided $3,142,000 in cash. As more
fully discussed in Note D to the Consolidated Financial Statements, in 1995,
the Company completed the sale of its 125,000 shares of NFC common stock to
several Japanese financial institutions for an aggregate price of Y.362,500,000
(approximately $4.0 million) in cash. Additionally, as more fully discussed in
Note C to the Consolidated Financial Statements, during 1995 the Company
received $350,000 in full satisfaction of a note receivable from the sale of a
former subsidiary. Investing activities used cash of $907,000 and $7,824,000
in 1994 and 1993, respectively. due principally to $785,000 of capital
investments. Investing activities in fiscal 1993 used cash of $7,824,000,
including $3,926,000 of cash paid for the Company's investment in Fuji Seiki,
which is net of $2,500,000 received from Fuji Seiki in connection with the
March 1993 license agreement relating to the manufacture and sale of the
Company's vacuum rotary feedthroughs in Japan.
Capital expenditures totaled $1,880,000 in 1995, as compared to $785,000
in 1994 and $3,387,000 in 1993. During 1995, the increase in the demand for
the Company's crystal growing equipment necessitated an investment in plant and
equipment in order to enhance the Company's production capacity. Management
expects additional capital expenditures of in excess of $1,000,000
18
<PAGE> 21
during fiscal 1996 to complete the upgrade of its manufacturing facility,
including the installation of approximately $700,000 of equipment for
fabrication and machining of critical component parts. The significant capital
expenditures in 1993 were incurred primarily in connection with the acquisition
of $675,000 of equipment in Japan, $905,000 of fixed assets acquired in the
purchase of VSE, as well as the expansion of the Company's existing
manufacturing capabilities and computer hardware and software systems.
Financing activities used $2,586,000 in cash in 1995, principally
representing the repayment of the outstanding balances on revolving lines of
credit. With the significant advance payments received from its crystal grower
customers in 1995, the Company has not needed to utilize its revolving credit
lines for working capital. Also included in the cash from financing activities
in 1995 is the elimination of approximately $1,700,000 of bank debts in Austria
upon the abandonment of the VSE operation (See Note B to the Consolidated
Financial Statements). Financing activities provided cash of $1,270,000 in
1994. Due to its need for working capital, the Company borrowed $823,000
during 1994 against the revolving credit lines discussed above. Additionally,
during 1994, the Company elected to retire its $2,500,000 1985 Series
Industrial Revenue Bonds, which were due to mature in December 1995. The bonds
carried a fixed interest rate of 7.25%, plus the cost of the standby letter of
credit and various administrative costs, and as such, management elected to
redeem the bonds early utilizing borrowings of cash surrender value in the
amount of $2,927,000. In fiscal 1993, the exercise of stock purchase options
and warrants ($5,302,000) and the sale of 315,000 shares of the Company's
common stock to Fuji Seiki ($4,173,000) were the principal source of cash.
In connection with the audit of the Company's financial statements for the
fiscal year ended June 30, 1993, the Company received a disclaimer of opinion
with respect to the consolidated statements of operations, stockholders' equity
and cash flows for the year ended June 30, 1993. As a result of receiving the
disclaimer, the Company is precluded from accessing the capital markets for
financing until it obtains three years of audited financial statements.
Management expects that it will meet this requirement after its fiscal year
1996, at which time the Company will have the option of raising capital, if
needed, through the sale of its common stock in the public markets.
On June 30, 1994, the Company entered into a series of credit agreements
with a new bank which provides the Company with total credit of approximately
$7,900,000, including approximately $5,400,000 in the form of a standby letter
of credit for the Company's $5,000,000 1984 Series Industrial Revenue Bonds,
and a $2,500,000 revolving line of credit for working capital purposes. As of
June 30, 1995, the entire $2,500,000 was available to be borrowed.
Through its foreign subsidiaries, the Company has various short-term
facilities with local banks aggregating approximately $2,000,000. At June 30,
1995, $35,000 was outstanding against these facilities. Throughout fiscal
1995, the average outstanding balance on these facilities was $18,000. The
weighted average interest rates during the year on these facilities ranged from
9.0% to 9.2%, and the interest rates at June 30, 1994 ranged from 8.0% to
9.75%.
While the Company believes it has sufficient working capital resources to
fund current operations and future growth of its components and thin film
deposition segments, its crystal growing systems segment continues to rely
heavily upon the receipt of customer deposits to fund the manufacture and
delivery of systems.
19
<PAGE> 22
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
-----------------------------
<CAPTION>
Page(s)
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Consolidated Balance Sheets as of June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Changes in Stockholders' Equity for each
of the three years in the period ended June 30, 1995 . . . . . . . . . . . . . . . . . . 24
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 26-44
</TABLE>
20
<PAGE> 23
Report of Independent Accountants
---------------------------------
To the Shareholders and Directors of Ferrofluidics Corporation
We have audited the accompanying consolidated balance sheet of Ferrofluidics
Corporation as of June 30, 1995 and 1994 and the related statements of
operations, stockholders equity, and cash flows for the years ended June 30,
1995 and 1994. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audits provide a reasonable basis for our
report.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Ferrofluidics Corporation as of June 30, 1995 and 1994 and the results of its
operations and its cash flows for the years ended June 30, 1995 and 1994, in
conformity with generally accepted accounting principles.
We were also engaged to audit the accompanying consolidated statement of
operations, stockholders' equity and cash flows of Ferrofluidics Corporation
for the year ended June 30, 1993. These financial statements are the
responsibility of the Company's management. During 1994, the Company's then
chairman and chief executive officer and its then chief financial officer
relinquished all positions with the Company. Based on our understanding of the
underlying circumstances leading to the departure of these individuals from the
Company, we believe we cannot rely on their representations nor can we be
certain we have been provided with all appropriate documentation relevant to
the transactions which they have initiated or for which they were responsible.
Because of these matters, the scope of our work was not sufficient to enable us
to express, and we do not express, an opinion on the consolidated statements of
operations, stockholders' equity and cash flows for the year ended June 30,
1993.
/s/ Coopers & Lybrand L.L.P.
Manchester, New Hampshire
August 31, 1995
21
<PAGE> 24
<TABLE>
FERROFLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and June 30, 1994
<CAPTION>
ASSETS 1995 1994
- ------ ---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,563,000 $ 322,000
Accounts receivable - trade, less allowance
for doubtful accounts of $357,000 at
June 30, 1995 and $705,000 at June 30, 1994 7,774,000 4,676,000
Inventories 14,130,000 10,169,000
Note receivable - 350,000
Prepaid and other current assets 2,659,000 590,000
----------- -----------
Total Current Assets 26,126,000 16,107,000
----------- -----------
Property, plant and equipment, at cost, net
of accumulated depreciation of $8,895,000 at
June 30, 1995 and $8,240,000 at June 30, 1994 8,116,000 7,935,000
Investment in affiliates - 3,669,000
Cash value of life insurance, net 2,976,000 2,963,000
Other assets, net 2,311,000 1,834,000
----------- -----------
TOTAL ASSETS $39,529,000 $32,508,000
=========== ===========
LIABILITIES
- -----------
Current Liabilities:
Industrial revenue bonds payable - 5,000,000
Bank notes payable - 2,801,000
Accounts payable 5,318,000 4,371,000
Customer deposits 9,403,000 1,543,000
Accrued expenses and other
current liabilities 3,594,000 3,993,000
----------- -----------
Total Current Liabilities 18,315,000 17,708,000
----------- -----------
Long term debt obligations 5,036,000 28,000
Other liabilities 397,000 439,000
Class action settlement reserve - 3,150,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
- --------------------
Preferred stock, $.001 par value, authorized
100,000 shares, issued and outstanding, none - -
Common stock, $.004 par value, authorized
12,500,000 shares, issued 5,997,198 at June 30,
1995 and 5,366,949 shares at June 30, 1994 24,000 21,000
Additional paid-in capital 35,485,000 32,109,000
Retained deficit (19,463,000) (20,352,000)
Currency translation adjustments (265,000) (595,000)
----------- -----------
Total Stockholders' Equity 15,781,000 11,183,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $39,529,000 $32,508,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
22
<PAGE> 25
<TABLE>
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Net sales and revenues $34,155,000 $26,461,000 $33,277,000
Cost of sales 20,264,000 17,492,000 20,134,000
----------- ------------ ------------
Gross profit 13,891,000 8,969,000 13,143,000
Operating expenses:
Engineering and product development expense 3,410,000 3,390,000 3,129,000
Selling, general and administrative expense 10,694,000 12,133,000 13,136,000
Nonrecurring operating (income) expenses (1,156,000) 3,108,000 8,594,000
----------- ------------ ------------
Operating income (loss) 943,000 (9,662,000) (11,716,000)
Interest income 232,000 224,000 319,000
Interest expense (638,000) (580,000) (573,000)
Other income (expense), net 30,000 474,000 (10,000)
----------- ------------ ------------
Income (loss) before income taxes 567,000 (9,544,000) (11,980,000)
Income taxes (322,000) 1,169,000 466,000
----------- ------------ ------------
Net Income (Loss) $ 889,000 $(10,713,000) $(12,446,000)
=========== ============ ============
Net Income (Loss) per common share:
Net Income (Loss) $ 0.16 $ (2.00) $ (2.49)
=========== ============ ============
Weighted average common and
common equivalent shares outstanding 5,563,160 5,366,350 5,005,120
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE> 26
<TABLE>
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<CAPTION>
Retained
Common Stock Additional Earnings Currency
------------ Paid-In (Accumulated Translation
Shares Par Value Capital Deficit) Adjustments
------ --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1992 4,129,621 $16,518 $20,821,000 $ 2,807,000 $(114,000)
Issuance of common stock for:
Options and warrants exercised 816,046 3,264 5,258,000 - -
Investment in affiliates 415,000 1,660 5,824,000 - -
Employee stock purchase plan 3,154 13 38,000 - -
Valuation of warrants granted to non-
employees - - 100,000 - -
Net loss - - - (12,446,000) -
Current year translation adjustments - - - - (532,000)
--------- ------- ----------- ------------ ---------
BALANCE, JUNE 30, 1993 5,363,821 21,455 32,041,000 (9,639,000) (646,000)
--------- ------- ----------- ------------ ---------
Issuance of common stock for:
Options and warrants exercised 812 3 4,000 - -
Employee stock purchase plan 2,316 9 16,000 - -
Restricted stock plan, charge to operations - - 48,000 - -
Net loss - - - (10,713,000) -
Current year translation adjustments - - - - 51,000
--------- ------- ----------- ------------ ---------
BALANCE, JUNE 30, 1994 5,366,949 21,467 32,109,000 (20,352,000) (595,000)
--------- ------- ----------- ------------ ---------
Issuance of common stock for:
Settlement of shareholder class action suit 600,000 2,400 3,148,000 - -
Restricted stock plan, charge to operations 38,385 154 290,000 - -
Redemption of stock for taxes (8,136) (33) (62,000) - -
Net income - - - 889,000 -
Current year translation adjustments - - - - 330,000
--------- ------- ----------- ------------ ---------
BALANCE, JUNE 30, 1995 5,997,198 $23,988 $35,485,000 $(19,463,000) $(265,000)
========= ======= =========== ============ =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE> 27
<TABLE>
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 889,000 $(10,713,000) $(12,446,000)
Adjustments to reconcile net income (loss) to cash flow
from operating activities:
Depreciation and amortization 1,030,000 1,150,000 1,801,000
Deferred taxes (615,000) 176,000 252,000
Provision for doubtful accounts (397,000) (107,000) 348,000
Interest on long-term investments (132,000) (167,000) (113,000)
Increase in cash surrender value (70,000) (412,000) (250,000)
Gain on sale of fixed assets (4,000) (90,000) -
Stock related compensation 290,000 48,000 100,000
Nonrecurring operating charges - 450,000 8,125,000
Translation (gains) losses (322,000) (336,000) 1,000
Gain on settlement with licensee, net of allowances - (3,411,000) -
Other 286,000 (42,000) (244,000)
Changes in assets and liabilities, net of acquisitions and
dispositions of businesses:
Accounts receivable (2,753,000) 1,358,000 (2,004,000)
Inventories (3,710,000) (1,379,000) 2,483,000
Prepaid and other current assets (2,047,000) 296,000 179,000
Accounts payable and accrued expenses 330,000 2,446,000 1,103,000
Customer deposits 7,855,000 1,539,000 -
Settlement reserve - 3,150,000 -
----------- ----------- -----------
Net cash provided by (used in) operating activities 630,000 (6,044,000) (665,000)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from notes receivable 350,000 125,000 63,000
Payments under capital lease obligations (72,000) - -
Sale of investment in affiliate 3,991,000 - -
Investment in affiliates, net - - (3,926,000)
Restricted cash - (449,000) (574,000)
Acquisition of property, plant and equipment (1,880,000) (785,000) (3,387,000)
Proceeds from sales of assets 753,000 202,000 -
----------- ----------- -----------
Net cash provided by (used in) investing activities 3,142,000 (907,000) (7,824,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock - 20,000 9,475,000
Redemption of industrial revenue bond - (2,500,000) -
Proceeds from borrowing of cash surrender value 189,000 2,927,000 -
Short-term borrowings, net (2,775,000) 823,000 (30,000)
----------- ----------- -----------
Net cash provided by (used in) financing activities (2,586,000) 1,270,000 9,445,000
----------- ----------- -----------
Effect of currency rate changes on cash 55,000 (46,000) (50,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,241,000 (5,727,000) 906,000
----------- ----------- -----------
Cash and cash equivalents at beginning of year 322,000 6,049,000 5,143,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,563,000 $ 322,000 $ 6,049,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE> 28
FERROFLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of
Ferrofluidics Corporation and its majority-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
Reclassification
- ----------------
Certain amounts in 1994 and 1993 have been reclassified to conform with
the 1995 financial statement presentation.
Revenue Recognition
- -------------------
The Company generally recognizes product revenue upon shipment of products
to the customer; royalty revenue is recognized as it is earned.
Concentration of Credit Risk
- ----------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
accounts receivable. The Company places its cash and temporary cash
investments with high credit quality institutions. At times, such investments
may be in excess of the FDIC insurance limit.
The Company performs ongoing credit evaluations of its customers'
financial condition and, under certain conditions, requires collateral from its
foreign unaffiliated customers in the form of irrevocable letters of credit.
With regard to the Company's Core Products segment, concentrations of credit
risk with respect to trade accounts receivable are limited due to the large
number of customers and their dispersion across many different geographical
regions. In the Company's crystal growing systems segment, one Pacific Rim
customer accounted for 52.7% of that segment's fiscal 1995 net sales and 14.1%
of gross consolidated accounts receivable at June 30, 1995. This customer has
provided the Company with irrevocable letters of credit as security for
payment.
Additionally, the Company has made advance payments to suppliers for
inventory aggregating $2,145,000 as of June 30, 1995, which have been
classified as prepaid and other current assets on the accompanying Consolidated
Balance Sheet.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist of cash on hand, money market funds and
commercial paper with original maturities of less than 90 days. Amounts of
interest bearing deposits at June 30, 1995 and 1994 totaled $1,549,000 and
$661,000, respectively.
<TABLE>
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are comprised of the following elements at June 30, 1995
and 1994, respectively:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Raw materials and purchased parts $ 8,018,000 $ 4,278,000
Work-in-process 2,634,000 2,513,000
Finished goods 3,478,000 3,378,000
----------- -----------
$14,130,000 $10,169,000
=========== ===========
</TABLE>
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are recorded at cost. Depreciation on
machinery and equipment and furniture and fixtures is computed on a
straight-line method over estimated useful lives to eight years; leasehold
improvements are amortized using the straight-line method over the lesser of
the life of the lease
26
<PAGE> 29
or the estimated useful life of the improvements. Depreciation on buildings
and building improvements is computed using the straight-line method over
estimated lives from ten to thirty years. Depreciation charges for assets
begin in the month subsequent to the asset being placed in service.
Maintenance and repairs are charged to expense as incurred. Upon
retirement or sale, the cost of disposed assets and the related accumulated
depreciation are eliminated from the accounts. Gains or losses on disposition
are reflected in other income (loss) at the time of disposition.
<TABLE>
Property, plant and equipment consisted of the following at June 30, 1995 and 1994:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 321,000 $ 435,000
Buildings and improvements 6,573,000 6,854,000
Machinery and equipment 4,717,000 4,499,000
Furniture, fixtures and vehicles 4,307,000 4,076,000
Construction in process 1,093,000 311,000
---------- ----------
17,011,000 16,175,000
Less: Accumulated depreciation and amortization 8,895,000 8,240,000
---------- ----------
$8,116,000 $7,935,000
========== ==========
</TABLE>
Intangible Assets
- -----------------
At June 30, 1995, the Company had goodwill resulting from the acquisition
in fiscal 1989 of AP&T GmbH of $1,334,000 that is being amortized over a 16
year life on a straight line basis. Accumulated amortization as of June 30,
1995 amounted to $477,000.
All other intangible assets, including patents and trademarks, are
recorded at cost and amortized on a straight-line basis over their estimated
useful lives, generally ten years.
Product Development and Advertising Expenses
- --------------------------------------------
Product development expenditures and advertising costs are charged to expense
when first incurred.
Income Taxes
- ------------
The Company accounts for income taxes under the provisions of Statement of
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). Under
---------------------------
this statement, deferred tax assets and liabilities are recognized based on
temporary differences between the financial statements and tax bases of these
amounts using enacted tax rates in effect for the year in which the temporary
differences are expected to reverse. It also requires a valuation reserve
against deferred assets if it is more likely than not that some or all of the
deferred tax assets will not berealized. The adoption of this standard in
1994 did not have a material impact on the financial statements.
Taxes are not provided on undistributed income of subsidiaries not
consolidated for U.S. tax purposes as it is intended that such earnings will
remain invested in those companies or, if distributed, the tax effect would not
be material. As of June 30, 1995, each of these subsidiaries had an
accumulated loss.
Translation of Foreign Currencies
- ---------------------------------
All asset and liability amounts in the balance sheets of foreign
subsidiaries whose functional currency is other than the U.S. dollar are
translated at year-end exchange rates. Income statement amounts are translated
at average exchange rates during the year. Translation gains and losses are
accumulated as a separate component of stockholders' equity. Translation gains
and losses of foreign subsidiaries whose functional currency is the U.S. dollar
are charged directly to operations as incurred.
Foreign Exchange Contracts
- --------------------------
The Company from time to time enters into foreign exchange contracts as a
hedge against certain debts denominated in a foreign currency. Market value
gains and losses are recognized, and the resulting credit or
27
<PAGE> 30
debit offsets foreign exchange gains or losses on those debts. At June 30,
1995, there were no foreign exchange contracts outstanding.
<TABLE>
Other Income (Expense)
- ----------------------
Other income (expense) consisted of the following for the years ended June 30, 1995, 1994 and 1993:
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Translation gain (loss), net $241,000 $336,000 $ (1,000)
Exchange gain (loss), net 19,000 (144,000) 234,000
Gain (loss) on sale of fixed assets 4,000 90,000 (126,000)
Other (234,000) 192,000 (117,000)
-------- -------- ---------
$ 30,000 $474,000 $ (10,000)
======== ======== =========
</TABLE>
Earnings (Loss) Per Share
- -------------------------
Income per share for fiscal 1995 is based on the weighted average number
of common shares outstanding as well as the effect of all dilutive common stock
equivalents. Losses per share for 1994 and 1993 are based on the weighted
average number of common shares outstanding as the inclusion of common stock
equivalents would have been antidilutive in those years.
Statement of Cash Flows
- -----------------------
For the years ended June 30, 1995, 1994 and 1993, cash payments for income
taxes amounted to $121,000, $1,200,000 and $220,000, respectively. Cash
payments for interest in each of the three years amounted to $427,000, $624,000
and $494,000, respectively.
Significant non-cash investing, financing and operating activities during
the three years ended June 30, 1995 were as follows:
As more fully discussed in Note D, in August 1993, Ferrofluidics received
one billion Japanese Yen (approximately $9.5 million), in settlement of all
claims against NFC including all future royalties owing to the Company under
the new and a previous license agreement, any past due royalties owing under
the previous agreement, and reimbursement of expenses incurred by Ferrofluidics
in connection with the litigation. The one billion Yen (approximately $9.5
million) was remitted to the Company net of $815,000 in Japanese withholding
tax on that portion of the settlement representing royalty payments. Also
pursuant to the agreements, Ferrofluidics acquired 125,000 shares of NFC's
common stock, approximately 16% of NFC's outstanding stock, for one billion
Japanese Yen, and was given a seat on NFC's board of directors. Given that the
transactions involve an exchange of identical amounts, it is being treated as a
noncash transaction (See Note D).
In May 1993, the Company acquired 80% of VSE by assuming 80% of VSE's
existing obligations. The Company recorded $1,885,000 of VSE bank debt. The
Company applied the excess of the liabilities assumed over the assets acquired
of $1,298,000 to goodwill, which was fully written off as of June 30, 1993.
(See Note B)
In October 1992, the Company sold 100,000 shares of its common stock at
$18.00 per share to Molecular BioQuest ("BioQuest"), receiving in return a
$1,800,000 promissory note, convertible into 10% of the outstanding common
stock of BioQuest. (See Note D)
Fourth Quarter Adjustments
- --------------------------
The Company made adjustments to its financial statements in the fourth
quarter ended June 30, 1995, including approximately $200,000 in reductions in
the reserve for doubtful accounts and other valuation accounts, and a net
change of $415,000 to the provision for income taxes including a $615,000
reduction to the valuation reserve for a foreign deferred tax asset and
$200,000 in additional foreign income tax provision.
28
<PAGE> 31
B. VSE
In May 1993, the Company acquired, through its wholly-owned subsidiary
AP&T, 80% of VSE for a nominal amount and the guarantee of its bank debts. VSE
is an Austrian manufacturer of high precision vacuum valves for the
semiconductor and other process industries. The Company acquired VSE from VSE
management (27%) and Fuji Seiki (53%). As of the date of acquisition, VSE had
liabilities of approximately $3,503,000, including bank debt of $1,885,000.
The remaining 20% interest in VSE was held by VSE management. Also included in
VSE's liabilities were amounts advanced from Fuji Seiki of approximately
$1,150,000 (Y.120,000,000). In connection with the acquisition, the Company
recorded an intangible asset of $2,239,000.
The pro forma combined results of operations of the Company and VSE for
the year ended June 30, 1993 would not have differed materially from those
presented in the accompanying financial statements had the acquisition occurred
at the beginning of fiscal 1993.
In October 1993, Fuji Seiki entered into an agreement with the Company
that provided, among other things, for the forfeiture by Fuji Seiki of amounts
due it by VSE (See Note D). As of June 30, 1993, the Company had eliminated
this liability to Fuji Seiki with an offsetting reduction to intangible assets
recorded in the purchase of VSE. Additionally, as of June 30, 1993, the
Company had written off all intangibles recorded in connection with the
transaction in recognition of the uncertainty surrounding its future economic
value.
In September 1994, management decided to discontinue the operations of
VSE, its majority owned subsidiary in Austria, due to prolonged operating
losses and its inability to compete effectively in the standard vacuum-valve
industry. In the process of liquidating the subsidiary, VSE went into
technical receivership and, in October, the minority owner acquired the
business out of receivership and assumed all of its liabilities. The loss from
operations of VSE in fiscal 1995 until the date of abandonment of $205,000, in
addition to the one-time gain on the abandonment of $61,000, have been
presented on the Consolidated Statement of Operations for the year ended June
30, 1995 as nonrecurring operating charges.
In November 1994, the Company entered into a fifteen-year agreement with
VAT Vakuumventile (VAT), a Swiss vacuum-valve manufacturer, pursuant to which
VAT has been granted exclusive right to utilize certain rotary feedthrough
sealing technology of the Company in exchange for $1,300,000 in cash, with an
additional payment of $200,000 by June 30, 1996 contingent upon the occurrence
of certain events by that date. During October and November 1994, the Company
received an aggregate of $1,300,000 in cash payments pursuant to this
arrangement and has recorded the payments as nonrecurring operating income in
the Consolidated Statement of Operations for fiscal 1995.
C. NOTES RECEIVABLE
In June 1990, the Company sold its manufacturing subsidiary in the United
Kingdom, AF Technologies, to Rumpack, Ltd. ("Rumpack") for $3,380,000 in cash
and a note. The note called for quarterly installments of $12,500 with a
$250,000 balloon payment on June 30, 1994 and with any remaining balance paid
on June 30, 1995. The note was collateralized by a lien on the fixed assets of
AF Technologies as well as the common stock of AF Technologies. On June 30,
1993, Rumpack defaulted on the note when it failed to make its scheduled
payment. In the fourth quarter of 1993, the Company established a valuation
reserve in the amount of $260,000 against the note. During 1994, Rumpack made
payments totalling $125,000, reducing the carrying value to $522,000. In May
1994, the Company entered into negotiations with Rumpack and its bank to settle
the debt in full. At June 30, 1994, the carrying value of the note was reduced
to $350,000, after
29
<PAGE> 32
a charge of $172,000 to operations in the fourth quarter of 1994. In August
1994, the Company received $350,000 in full settlement of the note.
D. INVESTMENTS IN AFFILIATES
Nippon Ferrofluidics Corporation
- --------------------------------
On June 30, 1993, Ferrofluidics consummated a series of new license and
other agreements ending all litigation between Ferrofluidics and NFC, its
former Japanese subsidiary. Due to uncertainties with respect to the license
and other related agreements that existed at June 30, 1993, the transaction is
being accounted for in the first quarter of fiscal 1994. Pursuant to these
agreements, in August 1993, Ferrofluidics received one billion Japanese Yen
(approximately $9.5 million), in settlement of all claims against NFC including
all future royalties owing to the Company under the new and a previous license
agreement, any past due royalties owing under the previous agreement, and
reimbursement of expenses incurred by Ferrofluidics in connection with the
litigation. The one billion Yen (approximately $9.5 million) was remitted to
the Company net of $815,000 in Japanese withholding tax on that portion of the
settlement representing royalty payments. Also pursuant to the agreements,
Ferrofluidics acquired 125,000 shares of NFC's common stock, approximately 16%
of NFC's outstanding stock, for one billion Japanese Yen, and was given a seat
on NFC's board of directors.
Given that the transactions involved an exchange of identical amounts, it
is being treated as a nonmonetary transaction and, therefore, the value
assigned to the settlement is equivalent to the fair market value of the NFC
shares acquired. Ferrofluidics engaged an independent firm to ascertain the
fair market value of its investment in NFC as of August 1993 and June 1994 for
purposes of recording the transaction. As a result of the valuation, the
Company recorded the estimated fair market value of the NFC shares as of August
1993 of $4,286,000 during the first quarter of fiscal 1994. In recognition of
NFC losses during its fiscal year ended March 31, 1994, the Company has
established a valuation reserve against this investment in the amount of
$600,000, net of a translation gain of $258,000, in the fourth quarter of 1994
in the consolidated statement of operations.
Under the new license agreement, effective upon signing of the agreements:
(i) NFC was granted a worldwide license with respect to Ferrofluidic exclusion
seals for computer disc drive memories; (ii) Ferrofluidics retains its
worldwide exclusive rights to its Ferrofluidic environmental sealing system
(developed and being marketed by Ferrofluidics in response to the global
problem of fugitive emissions into the atmosphere from petroleum-refining and
chemical processing facilities), and (iii) both companies will have
nonexclusive rights to market vacuum rotary feedthrough seals and ferrofluids
in Asia.
In the fall of 1994, management began discussions with NFC to find a buyer
for the 125,000 shares after concluding a financial interest in NFC was not
strategically in the best interest of the Company. In March 1995 the Company
completed the sale of its 125,000 shares of NFC common stock to several
Japanese financial institutions for an aggregate price of Y.362,500,000
(approximately $4.0 million) in cash. The sale generated a gain of
approximately $245,000, principally the result of currency translation, which
has been included in other income in the consolidated statement of operations
for the year ended June 30, 1995.
Fuji Seiki, Inc.
- ----------------
On September 19, 1992, the Company entered into a series of agreements
with Fuji Seiki, a Japanese pump and valve manufacturer, in which the Company
acquired 900,000 shares of Fuji Seiki common stock, representing an
approximately 20% ownership interest, for $7,450,000, and established an
alliance for joint marketing and service of certain of each other's products,
as well as joint development of new products. In a related transaction, Fuji
Seiki acquired 315,000 shares of the Company's common stock. These
transactions have been accounted for as a nonmonetary transaction at $13.25,
the market value of the Ferrofluidics shares at the time of their investment.
As of June 30, 1993, in recognition of a reevaluation of its investment in Fuji
Seiki by an investment banking firm, the Company established a valuation
reserve in an amount equivalent
30
<PAGE> 33
to the entire remaining investment balance of $3,926,000. This valuation
reserve was included in nonrecurring operating expenses in the Statement of
Operations for the year ended June 30, 1993.
Also during fiscal 1993, Fuji Seiki entered into a license agreement with
the Company for which it paid the Company $2,500,000 as a non-refundable
license fee for the non-exclusive rights to manufacture and sell Ferrofluidics'
proprietary rotary feedthrough seals in Japan. The agreement had a term of ten
years and granted Fuji Seiki a royalty-free period for the first $10,000,000 of
revenues generated by the sale of Ferrofluidics rotary feedthrough seals, and a
royalty of 5% on all sales thereafter. The Company applied the $2,500,000 of
cash payments under this agreement as a reduction of its investment in Fuji
Seiki
In October 1993, under new management direction, Ferrofluidics terminated
its relationship with Fuji Seiki by entering into a series of agreements
whereby Ferrofluidics: (i) returned its entire ownership interest in Fuji
Seiki; (ii) granted to Fuji Seiki the exclusive rights to manufacture, sell,
market and distribute VSE vacuum valves in Asia for 15 years, and (iii) agreed
that Fuji Seiki may be granted preferred vendor status for certain Ferrofluidic
products in certain markets. In return, Fuji Seiki: (i) terminated its current
nonexclusive licensing agreement for Ferrofluidics product discussed above and
(ii) forgave 120 million Japanese Yen (approximately $1,150,000) in advance
royalty payments due to Fuji Seiki from VSE, the Company's 80%-owned subsidiary
(See Note B).
Molecular BioQuest, Inc.
- ------------------------
During 1993, Ferrofluidics entered into a series of agreements with
Molecular BioQuest, Inc. ("BioQuest"), a private company engaged in the
development and manufacture of biotechnology and pharmaceutical products. Under
these agreements, Ferrofluidics was to provide consulting services and BioQuest
acquired 100,000 shares of Ferrofluidics common stock at a valuation of $18.00
per share, paid in the form of a debenture convertible into 10% of BioQuest's
common stock and paying interest at a rate of 8%. The fair market value of the
Ferrofluidics common stock on that date was $16.50, and as such the investment
has recorded at a value of $1,650,000. The Company also agreed to make
available a line of credit in the amount of $825,000 at an interest rate of 8%.
On June 15, 1993, the Company committed to loan up to an additional $750,000 to
BioQuest, $500,000 in fiscal 1994 and $250,000 in fiscal 1995, in return for a
note, convertible under certain circumstances, into 3.4% of the common stock of
BioQuest, and the option to acquire an additional 5% of such common stock for
$1,100,000 or 55,000 shares of Ferrofluidics' common stock. During 1993,
BioQuest borrowed $620,000 against the line of credit, of which $545,000 was
repaid in 1993. No further amounts could be borrowed under this line.
Additionally, the agreement provided Ferrofluidics with an option to acquire
another 10% of Bioquest for $1,800,000. During 1993, the Company received
$19,000 in consulting fees and $50,000 of interest payments related to the
notes which have been accounted for as reductions in the investment.
In fiscal 1993 the Company had reduced its investment in BioQuest by a
charge against earnings of $1,594,000, which represented a charge for the
undeveloped technology of BioQuest and the Company's share of BioQuest's
estimated losses since the date of the Company's investment. These amounts are
included in nonrecurring operating expenses in the Statement of Operations for
the year ended June 30, 1993.
In April 1994, the Company entered into an agreement with BioQuest
pursuant to which: (i) the Company paid $175,000 in full satisfaction of all
obligations to BioQuest ($300,000 had previously been advanced under the
$750,000 commitment discussed above), (ii) the Company's options to acquire
additional shares of BioQuest were cancelled and (iii) it received 5% of the
outstanding common stock of BioQuest. Under this agreement, the obligation of
BioQuest under the convertible debenture was cancelled, it was entitled to
retain the shares of Ferrofluidics common stock purchased in October 1992 and
was required to restrict its use of the name "The Ferrofluid Company" in the
future. The entire $475,000 paid to BioQuest had been charged to operations in
the first quarter of 1994, in recognition of BioQuest's undeveloped technology
and its continued operating losses.
31
<PAGE> 34
Ferrofluidics Taiwan Corporation
- --------------------------------
In May 1993, the Company entered into an agreement with Junsun
Technologies, Inc., a Taiwanese distributor of semiconductor process equipment,
to form Ferrofluidics Taiwan Corporation (FTC), which would distribute
Ferrofluidics products in Taiwan, Korea, and Peoples Republic of China. The
Company acquired a 19.9% interest in FTC for $75,000 and agreed to fund the
start-up and FTC's first year operating costs. Pursuant to this agreement, the
Company advanced, and charged to nonrecurring operating expenses, $85,000 and
$230,000 in 1993 and 1994, respectively. The Company is not obligated to make
any further advances and has entered into negotiations with FTC to have its
investment of $75,000 returned in exchange for the 19.9% interest. In 1995,
the Company established new third party distribution relationships in Taiwan
for its products and has discontinued its association with FTC.
E. CASH VALUE OF LIFE INSURANCE
During fiscal 1988 and 1989, the Company invested an aggregate of
$5,000,000 in single premium life insurance policies on the lives of the former
CEO and the former CFO, who are also partial beneficiaries of the policies.
These policies currently yield their minimum guaranteed rate of return of 6.0%,
less a nominal charge for the cost of insurance.
Under the terms of certain insurance loan agreements relating to these
policies, the former CEO and the former CFO referred to above were given the
right to borrow specified amounts annually from the insurance company, to a
specified date. Such allowable borrowings approximate the earnings accruing to
the Company under the policies. The former CFO's borrowing rights were fixed
at $243,000, all of which has been borrowed. At June 30, 1995, outstanding
borrowings by the former chief executive officer under the policies, including
accrued interest, approximated $2,354,000 and approximately $151,000 of
additional amounts could be borrowed. The former officers' estates are
beneficiaries of these policies to the extent of their borrowing rights under
the policies.
Earnings under these policies are not recognized as income to the extent
they are subject to the executive borrowing rights. The accompanying financial
statements do not include a liability for future borrowing rights, as
management believes such rights terminate upon termination of the underlying
policies, which termination is at the sole discretion of the Company.
During fiscal 1991, the former chief executive officer and the Company
entered into an agreement permitting the officer to deposit amounts with the
Company equivalent to the amounts borrowed, and in the future, borrowable from
the insurance company by him. During fiscal 1992, the Company entered into a
similar agreement with the former chief financial officer. Deposited amounts
are, under certain circumstances, repayable by the Company to the former
officers upon their death or the surrender of the policies. At June 30, 1995,
approximately $1,407,000 is reflected as an offset to the cash surrender value
of these policies in recognition of these deposited amounts.
Borrowings bear interest at a rate of 8% with a borrowing limit equal to
the total single premium of $5,000,000, less the declining termination charge.
At June 30, 1995, the Company had $2,604,000 in loans and accrued interest
outstanding against these policies and is restricted from further borrowing
under its new credit facility (Note G).
In addition to the above, the Company has recorded the cash surrender
value of other key man life insurance policies under split dollar agreements
with the former CEO of $1,696,000 and $1,626,000 at June 30, 1995 and 1994,
respectively. The former CEO's estate will be the principal beneficiary of the
aggregate face value of these policies of approximately $8,000,000, from which
the Company will receive, upon death or surrender, an amount approximating the
cash surrender value of the policies at that time.
32
<PAGE> 35
F. INCOME TAXES
Effective July 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes", which requires the use of the asset and liability approach for
accounting for income taxes. Under SFAS 109, deferred tax assets and
liabilities are recognized based on temporary differences between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the temporary differences are expected to reverse.
The standard also requires a valuation reserve against deferred assets if it is
more likely than not that some or all of the deferred tax assets will not be
realized. Due to the uncertainty surrounding the Company's ability to realize
the benefit of the entire deferred tax asset, a valuation allowance in the
amount of $14,229,000 has been established. The cumulative effect of the
adoption of SFAS 109 resulted in no material charge to operations in the year
ended June 30, 1994.
<TABLE>
Income (loss) before income taxes and the related income tax expense for the years ended
June 30, 1995, 1994 and 1993 are as follows:
<CAPTION>
Income (loss) before income taxes: 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Domestic $1,012,000 $ (8,000,000) $(9,648,000)
Foreign (445,000) (1,544,000) (2,332,000)
---------- ------------ -----------
Total 567,000 (9,544,000) (11,980,000)
Currently payable:
Federal - - -
State $ 20,000 $ 20,000 $ 115,000
Foreign 273,000 973,000 99,000
---------- ------------ -----------
Total current 293,000 993,000 214,000
---------- ------------ -----------
Deferred:
Federal - 176,000 252,000
State - - -
Foreign (615,000) - -
---------- ------------ -----------
Total deferred (615,000) 176,000 252,000
---------- ------------ -----------
Total income tax expense (benefit) $ (322,000) $ 1,169,000 $ 466,000
========== ============ ===========
</TABLE>
The income tax benefit in 1995 is principally the result of adjustments
to the valuation reserve relating to the deferred tax asset in the amount of
$615,000. The provision of $293,000 is principally related to a reserve for
income taxes at a foreign subsidiary. The income tax provision in 1994 is
primarily attributable to foreign taxes paid in connection with the Company's
settlement with NFC and changes in the deferred tax asset valuation allowance.
The income tax provision of $466,000 in 1993 is attributable primarily to income
taxes paid as a result of examinations of prior tax years by certain states and
foreign countries and a valuation adjustment made to a deferred tax asset.
33
<PAGE> 36
<TABLE>
The following is a reconciliation between the statutory provision for federal income taxes and the
effective income taxes for the years ended June 30, 1995, 1994 and 1993:
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at federal statutory rate $ 193,000 $(3,245,000) $(4,073,000)
Change in valuation allowance (1,629,000) 3,469,000 -
Settlement of stockholders class action suit 1,247,000 - -
Net operating losses for which no tax is
provided - - 4,303,000
Adjustment to deferred tax assets - - 252,000
State income tax 20,000 20,000 76,000
Permanent differences 189,000 (58,000) (191,000)
Foreign income taxes at differing statutory rates (342,000) 973,000 99,000
Other - 10,000 -
---------- ----------- -----------
Income tax expense (benefit) $ (322,000) $ 1,169,000 $ 466,000
========== =========== ===========
</TABLE>
<TABLE>
The components of the net deferred tax asset as of June 30, 1995 and 1994 was as follows:
Deferred tax assets:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 11,163,000 $ 10,206,000
Capital loss carryforward 1,808,000 -
Compensation related 391,000 365,000
Investment writedowns 617,000 2,395,000
Reserves 297,000 1,749,000
Inventory 900,000 900,000
Other 157,000 269,000
Research & development credits 174,000 174,000
Foreign tax credits 873,000 873,000
------------ ------------
Gross deferred tax asset 16,380,000 16,931,000
Valuation allowance (14,229,000) (15,857,000)
------------ ------------
Net deferred tax asset 2,151,000 1,074,000
Deferred tax liabilities:
Other (381,000) -
Depreciable assets (1,155,000) (1,074,000)
------------ ------------
Net deferred tax asset $ 615,000 -
============ ============
</TABLE>
As of June 30, 1995, the Company had remaining net operating loss
carryforwards for Federal income tax purposes of approximately $30,000,000, and
for foreign income tax purposes of approximately $3,000,000 which can be used to
offset future taxable income, if any, and will expire at various dates through
2010. Included in the loss carryforward, for income tax purposes, is
approximately $16,800,000 of tax deductions resulting from the excess of the
market price over the exercise price on the date of exercise of the Company's
stock purchase options and warrants which were exercised during 1993 and prior
years (See Note L).
34
<PAGE> 37
G. SHORT TERM BORROWINGS AND OTHER DEBT OBLIGATIONS
<TABLE>
As of June 30, 1995 and 1994, the Company and its subsidiaries have the following long term debt
obligations outstanding:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Revolving line of credit - $1,200,000
1984 Industrial Revenue Bond $5,000,000 5,000,000
Bank loans, Germany 36,000 46,000
Bank loans, Austria - 1,583,000
---------- ----------
5,036,000 7,829,000
Less: current portion of debt obligations - 7,801,000
---------- ----------
Long term debt obligations $5,036,000 $ 28,000
========== ==========
</TABLE>
In fiscal 1985 and 1986, the Company secured long-term financing in the
form of a $5,000,000 Variable Rate Industrial Revenue Bond ("VRIRB") and a
$2,500,000 Fixed Rate (7.25%) Industrial Revenue Bond ("FRIRB" and together
with the VRIRBs, the "IRBs"), respectively. The VRIRB is subject to a variable
rate of interest generally keyed to short-term nontaxable rates, and has a
seven day call feature. The interest rate at June 30, 1995 was 5.0%. The
proceeds from these bonds were used to fund the construction of the Company's
Nashua, New Hampshire facility and the purchase of machinery and equipment.
The VRIRB is payable in full on September 1, 2004 and is guaranteed by a bank
standby letter of credit (through August 15, 1998) for which substantially all
of the Company's assets are pledged as collateral.
In December 1993, upon expiration of the standby letter of credit for the
$2,500,000 FRIRB, which had been provided by its former banks, the bonds were
redeemed and the letter of credit was drawn upon, repaying the bondholders in
full. The Company borrowed against certain keyman insurance contracts to
satisfy the resulting obligations to its banks.
On June 30, 1994, the Company entered into a new credit facility with a
new bank ("New Bank"). Under the new credit facility, the Company is provided
with total credit of approximately $7,900,000, including approximately
$5,400,000 in the form of a stand-by letter of credit for the Company's
$5,000,000 VRIRB, and a $2,500,000 revolving line of credit for working capital
purposes. The stand-by letter of credit has a term of five years with a fee of
1% per year and the revolving line of credit carries an interest rate of prime
rate plus 1% with a fee of 1/8% on the unused portion. The Company also is
required to make annual principal reduction payments equal to 5% of the total
credit facility. At June 30, 1995, in lieu of a principal payment, the
available credit line was reduced by $395,000. The credit facility is
collateralized by substantially all of the assets of the Company.
Additionally, the Business Finance Authority of the State of New Hampshire (the
"BFA") has provided a guarantee of 60% of the entire credit facility. At June
30, 1995, there were no amounts outstanding against the revolving line of
credit. The average balance outstanding during 1995 amounted to $1,500,000.
The interest rate on the revolving line at June 30, 1995 was 10%.
Through its wholly-owned foreign subsidiaries, the Company has various
short-term facilities with local banks totaling approximately $2,000,000 at
June 30, 1995. Throughout fiscal 1995, the average outstanding balance on
these facilities was $18,000. The weighted average interest rates during the
year on these facilities was 9.0% and the interest rates at June 30, 1995
ranged from 8.0% to 9.75%.
Future principal payments for the five years subsequent to fiscal 1995
amount to: $21,000 in 1996, $15,000 in 1997 and $5,000,000 in 2004.
35
<PAGE> 38
H. COMMITMENTS AND CONTINGENCIES
The Company has entered into operating leases for office space and
equipment in Europe. Future minimum lease payments for the five years
subsequent to fiscal 1995 amount to: $463,000 in 1996; $172,000 in 1997;
$73,000 in 1998, $278,000 in 1999 and $61,000 in 2000. Rent expense under
operating leases amounted to $336,000 in 1995, $349,000 in 1994 and $195,000 in
1993. The Company also leases approximately 11,000 square feet of its
headquarters in Nashua to a third party. Under the terms of the lease, which
expires in February 1997, the Company will receive future minimum lease
payments of $113,000 in 1996 and $75,000 in 1997.
During 1995, the Company acquired $210,000 in computer hardware and
software under a capital lease. The lease has a term of 36 months and expires
in July 1998. The Company made payments totaling $75,000 in 1995 and will make
future lease payments of $81,000 in 1996, $81,000 in 1997 and $7,000 in 1998.
As part of the sale in June 1990 of the Company's former UK subsidiary, AF
Technologies, the Company agreed to provide a guarantee of the lease of AF
Technologies' facility. On June 26, 1992, the Company entered into a new
agreement with the landlord of the property, whereby the Company would provide
a British Pound Sterling (L.) 300,000 guarantee, over the next ten years, for a
new tenant under the lease, allowing AF to vacate the premises and relocate to
a less expensive location. On July 2, 1992, the Company deposited L.300,000
into an escrow account, which currently earns interest at a rate of 6.0%,
pursuant to the terms of the guarantee and was recorded as restricted cash at
June 30, 1995. The Company is relieved of this obligation before the ten year
term has expired upon the new tenant attaining certain minimum pretax operating
results over any three consecutive year period. The Company has provided a
reserve in the amount of $275,000 against this restricted cash in recognition
of the uncertainty surrounding the ultimate collectibility of the cash.
At June 30, 1995, the Company had possible indemnification liabilities to
its former CEO and CFO in connection with its single premium, paid up life
insurance policies described in Note F. The unrecorded portion of this
contingent liability ranges from a nominal amount to $750,000. The
accompanying financial statements also do not include a liability for future
borrowing rights under insurance loan agreements associated with these
policies, as management believes such rights terminate upon termination of the
underlying policies, which termination is at the sole discretion of the
Company.
I. COMMON STOCK
At June 30, 1995, an aggregate of 956,296 shares of the Company's common
stock has been reserved for issuance in connection with the nonqualified stock
option plan, the restricted stock plan and stock purchase warrants outstanding
(See Note J).
In October 1992, certain officers, employees and advisors exercised
options and warrants for the purchase of 474,374 shares of the Company's common
stock. In connection with these exercises, the Company provided financing to
the individuals in an aggregate amount of $3,998,000, at 5% interest, with the
underlying shares held by the Company as collateral. All loans have either
been repaid with interest or cancelled, and the underlying stock retired.
Shareholder Rights Plan
- -----------------------
On August 3, 1994, the Board of Directors of the Company adopted a
Shareholder Rights Agreement (the "Rights Agreement"). Pursuant to the terms
of the Rights Agreement, the Board of Directors declared a dividend
distribution of one Preferred Stock Purchase Right (a "Right") for each
outstanding share of Common Stock of the Company (the "Common Stock") to
stockholders of record as of the close of business on August 19, 1994 (the
"Record Date"). Each Right entitles the registered holder to purchase from the
Company, upon the occurrence of certain events, a unit consisting of one
one-thousandth of a share (a "Unit")
36
<PAGE> 39
of Series A Junior Participating Cumulative Preferred Stock, par value $0.001
per share (the "Preferred Stock"), at a cash exercise price of $25.00 per Unit
(the "Exercise Price"), subject to adjustment.
The rights currently are not exercisable and are attached to and trade
with the outstanding shares of Common Stock. Under the Rights Agreement, the
Rights become exercisable (i) if a person becomes an "acquiring person" by
acquiring 15% or more of the outstanding shares of Common Stock, (ii) if a
person who owns 10% or more of the Common Stock is determined to be an"adverse
person" by the Board of Directors, or (iii) if a person commences a tender
offer that would result in that person owning 15% or more of the Common Stock.
In the event that a person becomes an "acquiring person" or is declared an
"adverse person" by the Board, each holder of a Right (other than the
acquiring person or the adverse person) would be entitled to acquire such
number of shares of the Company's preferred stock which are equivalent to such
number of shares of Common Stock having a value of twice the then-current
exercise price of the Right. If the Company is acquired in a merger or other
business combination transaction after any such event, each holder of a Right
would then be entitled to purchase, at the then-current exercise price, shares
of the acquiring company's common stock having a value of twice the exercise
price of the Right.
Until a Right is exercised, the holder will have no rights as a
stockholder of the Company (beyond those as an existing stockholder), including
the right to vote or to receive dividends. While the distribution of the
Rights will not be taxable to stockholders or to the Company, stockholders may,
depending upon the circumstances, recognize taxable income in the event that
the Rights become exercisable for Units, other securities of the Company, other
consideration or for common stock of an acquiring company.
J. EMPLOYEE BENEFIT PLANS
Employee Stock Purchase Plan
- ----------------------------
An aggregate of 35,000 shares of common stock is issuable pursuant to the
Company's 1983 Employee Stock Purchase Plan, dated July 21, 1983 (the "Stock
Purchase Plan"). Under the Stock Purchase Plan, non-officer eligible employees
may acquire common stock through authorized payroll deductions. As a result of
receiving the disclaimer of opinion discussed below, the registration statement
on Form S-8 on file with the Securities and Exchange Commission for this plan
may no longer be used to effect sales under it and, accordingly, the Company
has temporarily suspended activity under this plan.
The Stock Purchase Plan provides for shares to be purchased four times a
year, on the last business day of each quarterly payment period at a purchase
price of 85% of the fair market value of the shares on the lower of the first
or the last day of the fiscal quarter. The maximum number of shares that an
eligible participant is allowed to purchase in any year is the lesser of 1,000
shares or the number of whole shares equal in value to 15% of the participant's
compensation divided by the option price. The Stock Purchase Plan will
terminate when all, or substantially all, of the unissued shares of common
stock reserved for the purpose of the plan have been purchased, or earlier if
the plan is terminated by the Board of Directors. As of June 30, 1995, 31,727
shares of the Company's common stock had been purchased pursuant to this plan.
Nonqualified and Incentive Stock Option Plans
- ---------------------------------------------
The Company has a Nonqualified Stock Option Plan for its employees which
was adopted in 1984 (the "1984 Plan"). During fiscal year 1995, the 1984
Plan's term expired and, accordingly, no further shares may be granted
thereunder. A registration statement on Form S-8 relating to the shares of
common stock which may be acquired pursuant to the plan is on file with the
Securities and Exchange Commission. The exercise price of the options granted
under the plan is not less than the fair market value of the stock at the date
of the grant. In connection with the audit of the Company's financial
statements for the fiscal year ended June 30, 1993, the Company received a
disclaimer of opinion with respect to the balance sheet as of June 30, 1992 and
the consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 1993. As a result of
receiving the disclaimer, the Company suspended activity under the 1984 Plan
and, in addition, the registration statement on Form S- 8 relating to the plan
may no
37
<PAGE> 40
longer be used to effect sales under the plan. Under the 1984 Plan, 800,000
shares of the Company's common stock were made available for grant.
In June 1995, the Board of Directors adopted the Ferrofluidics Corporation
1995 Nonqualified Stock Option Plan (the "1995 Plan") with the intent to
replace options that had been granted under the 1984 Plan which are expected to
expire during 1996. As discussed above, employees holding options granted
under the prior plan may not use the Company's Registration Statement under
Form S-8 to effect sales under that plan, which condition is expected to
continue beyond the date that certain granted options are scheduled to expire.
Employees of the Company who are subject to the provisions of Section 16 of the
Securities and Exchange Act of 1934 are not eligible to participate in the 1995
Plan and awards under the 1995 Plan consist only of nonqualified options to
purchase shares of the Company's common stock. Under the 1995 Plan, 60,000
shares of the Company's common stock have been made available for grant.
At June 30, 1995, no options were outstanding pursuant to the 1995 Plan.
<TABLE>
Generally, options granted by the Company are exercisable at rates of 25%
to 100% per year commencing one or two years after the date of the grant, and
expire five years from the grant date. At June 30, 1995, as a result of the
aforementioned disclaimer of opinion in 1993, there were no options currently
exercisable under the plans. A summary of the changes in outstanding stock
options for the three years ended June 30, 1995 is set forth below:
<CAPTION>
Shares Price Range
---------- -----------
<S> <C> <C>
OUTSTANDING, JUNE 30, 1992 291,399 $5.00 - $16.76
Granted 160,200 11.75 - 15.25
Cancelled (17,621) 5.00 - 16.00
Exercised (54,123) 5.00 - 14.50
--------
OUTSTANDING, JUNE 30, 1993 379,855 $5.00 - $16.76
Granted - -
Cancelled (125,275) 5.00 - 16.00
Exercised (812) 5.00 - 9.13
--------
OUTSTANDING, JUNE 30, 1994 253,768 $5.00 - $16.76
Granted - -
Cancelled (13,640) 5.00 - 16.76
Exercised - -
--------
OUTSTANDING, JUNE 30, 1995 240,128 $5.00 - $15.25
========
</TABLE>
On June 13, 1995, the Board of Directors adopted, subject to stockholder
approval, the Ferrofluidics Corporation 1995 Stock Option and Incentive Plan
(the "1995 Incentive Plan"). Awards under the 1995 Incentive Plan include
stock options (both incentive options and nonqualified options), stock
appreciation rights, restricted and unrestricted stock, performance shares and
dividend equivalent rights. The Board of Directors has authorized 750,000
shares of the Company's common stock for issuance pursuant to the 1995
Incentive Plan. At June 30, 1995, options for the purchase of 255,550 shares
of the Company's common stock had been granted by the Board under this plan at
100% of the fair market value on the date of grant, which ranged from $9.13 to
$9.63.
Restricted Stock Plan
- ---------------------
In 1994, the Board of Directors adopted, and the stockholders approved,
the Ferrofluidics Corporation 1994 Restricted Stock Plan (the "Restricted Stock
Plan"). Persons eligible to participate in the Restricted Stock Plan are those
full or part-time officers and other employees of the Company and its
subsidiaries who are responsible for or contribute to the management, growth or
profitability of the Company and its subsidiaries. The Board of Directors has
reserved and authorized 271,000 shares of the Company's common stock for
issuance pursuant to the Restricted Stock Plan. The grants are valued at the
fair market value of the common stock on the date of grant and vest at a rate
of 33-1/3% per year commencing one year from the date of grant. The charge to
operations in connection with these restricted stock awards for the years ended
June 30, 1995 and 1994 amounted to $290,000 and $48,000, respectively.
38
<PAGE> 41
<TABLE>
A summary of the changes in outstanding shares of restricted stock for the
years ended June 30, 1995 and 1994 is set forth below:
<CAPTION>
Shares
----------
<S> <C>
OUTSTANDING, JUNE 30, 1993 -
Granted 143,264
Forfeited (22,168)
Vested -
-------
OUTSTANDING, JUNE 30, 1994 121,096
Granted 102,580
Forfeited (5,940)
Vested (38,385)
-------
OUTSTANDING, JUNE 30, 1995 179,351
=======
</TABLE>
<TABLE>
Stock Purchase Warrants
- -----------------------
Stock purchase warrants have been granted by the Board of Directors to
officers, directors, key employees and to consultants of the Company, with the
exercise price of the warrant not less than the fair market value of the stock
on the date of grant. At June 30, 1995, 1994 and 1993, 281,267 shares, 296,142
shares and 405,392 shares, respectively, of common stock were reserved for
issuance upon the exercise of outstanding stock purchase warrants at prices,
and subject to expiration dates, as set forth below.
<CAPTION>
Shares
---------------------------------------------------
JUNE 30, 1995 June 30, 1994 June 30, 1993 Price Expiration Date
------------- ------------- ------------- ----- ---------------
<S> <C> <C> <C> <C>
- - 2,500 10.00 February 7, 1994
- - 625 16.00 April 11, 1994
- 1,250 1,250 13.28 July 11, 1994
- 8,500 8,500 18.00 November 13, 1994
- 2,500 2,500 12.28 November 30, 1994
- 2,625 3,750 13.13 May 22, 1995
10,000 10,000 10,000 8.50 September 3, 1995
9,188 9,188 9,188 5.00 October 10, 1995
4,250 4,250 4,250 10.00 March 13, 1996
12,500 12,500 12,500 9.13 April 30, 1996
3,000 3,000 3,000 14.50 September 29, 1996
37,329 37,329 37,329 5.00 October 10, 1996
17,500 17,500 55,000 14.00 February 4, 1997
17,500 17,500 17,500 14.50 February 24, 1997
40,000 40,000 40,000 15.60 February 24, 1997
47,500 47,500 77,500 15.63 June 18, 1997
62,500 62,500 100,000 11.75 August 31, 1997
20,000 20,000 20,000 11.00 October 27, 1997
------- ------- ------
281,267 296,142 405,392
======= ======= =======
</TABLE>
39
<PAGE> 42
<TABLE>
A summary of the changes in outstanding stock purchase warrants for the three years ended June 30, 1995
is set forth below:
<CAPTION>
Shares Price Range
------ -----------
<S> <C> <C>
OUTSTANDING, JUNE 30, 1992 948,937 $ 5.00 - $18.00
Granted 277,500 11.75 - 15.63
Cancelled (4,125) 13.76
Exercised (816,920) 5.00 - 15.25
---------
OUTSTANDING, JUNE 30, 1993 405,392 $ 5.00 - $18.00
Granted - -
Cancelled (109,250) 10.00 - 16.00
Exercised - -
---------
OUTSTANDING, JUNE 30, 1994 296,142 $ 5.00 - $18.00
Granted - -
Cancelled (14,875) 12.28 - 18.00
Exercised - -
---------
OUTSTANDING, JUNE 30, 1995 281,267 $ 5.00 - $15.63
=========
</TABLE>
At June 30, 1995, 241,595 warrants are exercisable at prices ranging from
$5.00 - $15.63. During 1996, an additional 27,172 warrants will become
exercisable at prices ranging from $5.00 - $15.63 and 12,500 warrants will
become exercisable in 1997 at $11.75.
Deferred Income (401-K) Plan
- ----------------------------
The Company has an elective employees savings plan for all eligible
employees. Ferrofluidics Corporation Tax Savings Deposit and Investment Plan
(the "401-k Plan") is a qualified trust under Section 401(a) of the Internal
Revenue Code and is, therefore, exempt from federal income taxes under the
provisions of Section 501(a). The 401-k Plan allows an employee to contribute
between 1% and 20% of his or her salary and bonus to the 401-k Plan, up to a
maximum of $9,240 (for calendar 1995) per year (subject to annual adjustments
based on increases in the consumer price index over the 1988 base year). In
December 1993, the Board of Directors approved an annual Company match,
effective January 1, 1994, of 50% of an employee's contribution of up to 4% of
the employee's salary. In 1995, the Company made a matching contribution to the
Plan, and a corresponding charge to operations, in the amount of $92,000. No
contributions were made in fiscal 1993 or 1994. The 401-k Plan consists of two
equity funds, a fixed income fund, a balanced fund and a money market fund, and
participants may choose to split their investments among funds.
K. INDUSTRY SEGMENT AND GEOGRAPHICAL AREA INFORMATION
The Company's operations are conducted in three industry segments:
component products utilizing ferrofluid technology, including ferrofluids for
audio loudspeakers and nondestructive testing and sensing, rotary sealing
devices and bearings (collectively, "core products"); crystal growing systems
and related products; and thin film deposition products manufactured and/or
distributed by AP&T.
Segment operating profit (loss) includes all costs and expenses directly
related to the segment. General corporate expenses principally represent the
costs associated with managing all industry segments and cannot be specifically
identified with a particular industry segment. General corporate assets consist
primarily of cash and cash equivalents, short and long-term investments, notes
receivable, deferred income tax assets, certain fixed assets, and other assets,
including cash surrender value of life insurance in the amount of $2,976,000 and
$2,963,000 in 1995 and 1994, respectively.
For the year ended June 30, 1995, one foreign customer accounted for
$6,209,000 of revenues in the Crystal Growing Systems industry segment. For the
year ended June 30, 1994, the same foreign customer accounted for approximately
$5,667,000 of revenues in the Crystal Growing Systems industry segment. For the
year ended June 30, 1993, two related customers accounted for approximately
$9,900,000 and $5,900,000, respectively, of revenues in the Crystal Growing
Systems industry segment.
40
<PAGE> 43
<TABLE>
The following table presents financial information for the Company's industry segments for the years ended June 30, 1995,
1994 and 1993. All amounts are expressed in thousands of dollars.
<CAPTION>
Ferrofluidic Products
---------------------
Crystal
Core Growing Thin Film
Products Systems Deposition Consolidated
-------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1995:
- -------------------------
Sales to unaffiliated customers $ 14,119 $11,782 $ 8,248 $34,149
Royalty revenues 6 - - 6
-------- ------- ------- -------
Total net sales and revenues 14,125 11,782 8,248 34,155
=======
Segment operating profit 1,682 646 200 2,528
General corporate expenses (2,741)
Nonrecurring operating income, net 1,156
-------
Operating Income $ 943
=======
Identifiable assets 12,594 16,191 3,585 32,370
General corporate assets 7,159
-------
Total Assets $39,529
=======
Depreciation and amortization 715 168 132
Capital expenditures 1,885 73 138
Year ended June 30, 1994:
- -------------------------
Sales to unaffiliated customers $11,285 $ 8,612 $ 6,482 $26,379
Royalty revenues 82 - - 4,262
------- ------- ------- -------
Total net sales and revenues 11,367 8,612 6,482 30,641
=======
Segment operating profit (loss) (1,449) (2,018) (434) (3,901)
General corporate expenses (2,653)
Nonrecurring operating income (expense), net (3,108)
-------
Operating Loss $(9,662)
=======
Identifiable assets 16,310 6,819 3,589 26,718
General corporate assets 5,790
-------
Total Assets $32,508
=======
Depreciation and amortization 823 148 179
Capital expenditures 494 127 164
Year ended June 30, 1993
- ------------------------
Sales to unaffiliated customers $ 8,382 $17,391 $ 7,132 $32,905
Royalty revenues 372 - - 372
-------- ------- ------- -------
Total net sales and revenues 8,754 17,391 7,132 33,277
=======
Segment operating profit (loss) (245) 1,392 108 1,255
General corporate expenses (4,377)
Nonrecurring operating charges (8,594)
-------
Operating Loss (11,716)
=======
Identifiable assets 13,772 6,690 3,004 23,466
General corporate assets 13,418
-------
Total Assets $36,884
=======
Depreciation and amortization 1,002 72 409
Capital expenditures 2,111 512 1,187
</TABLE>
41
<PAGE> 44
<TABLE>
The following is a summary of certain financial data by geographic areas:
<CAPTION>
UNITED STATES EUROPEAN JAPANESE
OPERATIONS OPERATIONS OPERATIONS ELIMINATIONS TOTAL
---------- ---------- ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1995:
- -------------------------
Sales to unaffiliated domestic customers $12,737 - - - $12,737
Sales to unaffiliated foreign customers 9,919 11,201 292 - 21,412
Sales to subsidiaries 1,691 - 2 (1,693) -
Royalty and other revenues 6 - - - 6
------- ------- ---- ------- -------
Total net sales and revenues $24,353 $11,201 $294 ($1,693) $34,155
======= ======= ==== ======= =======
Geographic operating profit (loss) 2,882 510 (826) (38) 2,528
General corporate expenses (2,741)
Nonrecurring operating income, net 1,156
-------
Operating Income 943
=======
Net identifiable assets 28,107 4,917 247 (901) 32,370
General corporate assets 7,159
-------
Total Assets $39,529
=======
Year ended June 30, 1994:
- -------------------------
Sales to unaffiliated domestic customers $10,150 - - - $10,150
Sales to unaffiliated foreign customers 6,778 9,354 97 - 16,229
Sales to subsidiaries 1,360 - 48 (1,408) -
Royalty and other revenues 82 - - - 82
------- ------- ---- ------- -------
Total net sales and revenues $18,370 $9,354 $145 ($1,408) $26,461
======= ======= ==== ======= =======
Geographic operating profit (loss) (2,358) (620) (949) 26 (3,901)
General corporate expenses (2,653)
Nonrecurring operating gains and charges, net (3,108)
-------
Operating Income (9,662)
=======
Net identifiable assets 21,952 5,127 236 (597) 26,718
General corporate assets 5,790
-------
Total Assets $32,508
=======
Year ended June 30, 1993:
- -------------------------
Sales to unaffiliated domestic customers $12,172 - - - $12,172
Sales to unaffiliated foreign customers 11,306 9,417 10 - 20,733
Sales to subsidiaries 1,258 - - (1,258) -
Royalty revenues 372 - - - 372
------- ------- ---- ------- -------
Total net sales and revenues $25,108 $ 9,417 $ 10 ($1,258) $33,277
======= ======= ==== ======= =======
Geographic operating profit (loss) 1,589 143 (534) 57 1,255
General corporate expenses (4,377)
Legal and nonrecurring operating charges (8,594)
-------
Operating Income (11,716)
=======
Net identifiable assets 18,809 4,292 595 (230) 23,466
General corporate assets 13,418
-------
Total Assets $36,884
=======
</TABLE>
42
<PAGE> 45
L. RELATED PARTY TRANSACTIONS
During fiscal 1992 and 1993, certain trusts, established by the former
CEO for the benefit of his children and grandchildren, exercised warrants
to purchase an aggregate of 1,300,000 shares of common stock having an aggregate
fair market value on the date exercised of $19,596,000 for an aggregate
purchase price of $6,500,000.The warrants were transferred to the trusts by the
former CEO in January 1991. The former CEO has disclaimed any beneficial
interest in these trusts.
During 1993, the Company advanced $619,000 to a financial advisor and
granted him warrants to purchase 100,000 shares of the Company's common stock,
for which the Company has recorded a charge to operations for the estimated
value of these warrants of $100,000.
(Also, see Note E for the borrowings by the former CEO under certain life
insurance policies.)
M. LITIGATION
Shareholder Class Action Lawsuits
- ---------------------------------
During the period from August 13, 1993, through September 30, 1993,
four actions were brought against the Company and certain of its officers and
former officers. Each of these actions was sought on behalf of classes of
persons who purchased the Company's securities during the period from March 30,
1992 through September 3, 1993. These actions alleged violations of federal
securities law, fraud and deceit and negligent misrepresentation based upon
alleged misrepresentations in certain statements made by the Company in
various public documents. The actions were consolidated in the federal
district court in Massachusetts on March 9, 1994.
On June 21, 1994, a Consolidated Amended Complaint was filed in the
actions. The Consolidated Amended Complaint alleged, among other things, that
certain statements were false and misleading because they failed to disclose
that the Company allegedly made payments to obtain favorable coverage and
reports concerning its operations and prospects and because they allegedly
misstated the Company's earnings in various respects during its 1992 and 1993
fiscal years. The Complaint set forth claims for liability under the federal
securities laws on behalf of all purchasers of the common stock of the Company
during the period from June 30, 1991 through January 31, 1994, and, in
addition, set forth certain claims against the Company's Directors on a
derivative basis.
On June 23, 1994 the parties entered into a Stipulation of Settlement
which provided for the settlement of all of the actions and a release of all
claims which were made or could have been made in the litigation in the class
period extending from June 30, 1991 through January 31, 1994, and including
the derivative claims as well. In exchange, the Company agreed to issue 600,000
shares of its common stock and other defendants agreed to pay $3,110,000 in
cash. The settlement of these actions on these terms was approved by the United
States District Court for the District of Massachusetts on August 19, 1994, and
the settlement became effective upon the expiration of the appeal period from
the Court's Order of Approval, on September 23, 1994.
The Company recorded its portion of the settlement and related expenses
totaling $3,525,000 as a charge to nonrecurring operating charges in fiscal
1994 ($3,150,000 representing the value of the 600,000 shares of the Company's
common stock on August 19, 1994 and $375,000 representing legal and other
costs).
Securities and Exchange Commission
- ----------------------------------
On February 19, 1993, the Company received an informal inquiry from the
SEC requesting that the Company provide the SEC with certain documents
concerning publicity relating to the Company for the period of January 1,
1992 to February 19, 1993. In August 1993, the SEC issued an order directing a
private investigation to determine whether certain unnamed persons have violated
or caused the Company to violate the federal securities laws. Among the areas
of inquiry identified in the order is whether publicity about the Company,
including research reports, were published without fully disclosing
consideration given or received therefor. The order also indicates that the
inquiry will examine possible manipulation by certain unnamed persons of the
Company's securities, payment in connection therewith, and failure to disclose
such activities
43
<PAGE> 46
in public filings made by the Company (including the financial statements
contained or incorporated therein), as well as possible nondisclosure of
transactions with the Company in which such persons may have had a material
interest. Since the inception of this investigation, the Company has cooperated
fully with the SEC's inquiry.
In March 1993, a special committee of three outside directors was
appointed by the Company's Board of Directors to conduct an internal
investigation, with the assistance of counsel retained by that committee.
Afterinvestigating the matters raised in the SEC's inquiry and related issues,
the special committee called a special meeting of the Board of Directors, to
be held on August 30, 1993, for the purpose of considering the removal of Dr.
Ronald Moskowitz as Chairman, Chief Executive Officer, and all other offices
he held with the Company on the grounds that he had taken various improper
actions. At the August 30 meeting, Dr. Moskowitz was granted a three week
period, until September 20, 1993, to respond to the special committee's
charges. On September 15, 1993, five days before the Board of Directors was
to reconvene to consider the removal of Dr. Moskowitz, the Company
announced that he had retired from the Company and that the Company and
Dr. Moskowitz had entered into a Termination Agreement that superseded his
previous employment agreement. Pursuant to the agreement, the former CEO
will receive payments aggregating $725,000 over the four years ended June
30, 1997 for making himself available to be used, at the Company's sole
discretion, as a senior advisor to the Company during that period. During
this period, the former CEO will be available to render such services as
the Company may reasonably request, provided, however, that he will receive the
agreed upon payments whether or not the Company elects to use his services.
The Company charged the entire $725,000 to nonrecurring operating charges in
fiscal 1994. During 1995 and 1994, the Company made cash payments under this
agreement totalling $200,000 and $275,000, respectively. Of the remaining
balance, $100,000 has been classified as a non-current liability on the
consolidated balance sheet as of June 30, 1995.
44
<PAGE> 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required to be furnished by this Item is set forth
under the captions "Information Regarding Directors," "Executive Officers" and
"Executive Compensation" in the Proxy Statement and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished by this Item is set forth under
the captions "Information Regarding Directors" and "Executive Compensation" in
the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished by this Item is set forth under
the caption "Principal and Management Stockholders" in the Proxy Statement
and is incorporated herein by reference. Solely for the purpose of calculating
the aggregate market value of the voting stock held by non-affiliates of the
Registrant as set forth on the cover of this report it has been assumed that
directors and executive officers of the Registrant are affiliates.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished by this Item is set forth under
the caption "Certain Relationships and Related Transactions" in the Proxy
Statement and is incorporated herein by reference.
45
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The consolidated financial statements of the Company have been included
in Item 8 herein.
(a) FINANCIAL STATEMENT SCHEDULES
for the years ended June 30, 1995, 1994 and 1993 PAGE
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . 53
Financial statement schedules other than those listed above are omitted
because they are either not required or not applicable or the required
information is shown in the financial statements or notes thereto. The above
financial schedules do not include discontinued operations.
(b) REPORTS ON FORM 8-K
-------------------
No reports on Form 8-K have been filed by the Company during the last
quarter of the year ended June 30, 1995.
(c) EXHIBITS
--------
3.1 Restated Articles of Organization of the Registrant (incorporated
by reference to Exhibit 2.1 to the Registrant's Registration
Statement on Form S-18 (Registration No. 2-72394-B), filed May 19,
1981 (the "1981 Registration Statement")
3.2 Articles of Amendment, filed November 19, 1980, increasing the
authorized shares of Common Stock (incorporated by reference to
Exhibit 2.2 to the 1981 Registration Statement)
3.3 Articles of Amendment, filed February 19, 1981, further increasing
the authorized shares of Common Stock (incorporated by reference
to Exhibit 2.3 to the 1981 Registration Statement)
3.4 Articles of Amendment, filed November 21, 1985, further increasing
the authorized shares of Common Stock (incorporated by
reference to Exhibit 4E to the Registrant's Registration
Statement on Form S-2 (Registration No. 33-1000), filed October 18,
1985)
3.5 Articles of Amendment, filed November 25, 1987, eliminating certain
liabilities of directors and reducing the vote required to effect
certain corporate actions (incorporated by reference to Exhibit 4E
to the Registrant's Form 10-K for the year ended 6/30/88)
3.6 Articles of Amendment, filed November 14, 1989, effecting reverse
stock split and amending terms of Preferred Stock (incorporated by
reference to Exhibit 3.6 to the Registrant's Registration Statement
on Form S-3 (Registration No. 33-33736), filed March 5, 1990 (the "1990
Registration Statement")
3.7 By-Laws of the Registrant (incorporated by reference to Exhibit 4G
to the Registrant's Form 10K for the year ended 6/30/90)
3.8 Certificate of Vote of Directors Establishing the Series A Junior
Participating Cumulative Preferred Stock, par value $.001 per
share, dated August 3, 1994.1
46
<PAGE> 49
4.1 Shareholder Rights Agreement, dated as of August 3, 1994, between
the Registrant and American Stock Transfer and Trust Company
(incorporated by reference to Exhibit 4.1 to Registrant's current
report on Form 8-K dated August 3, 1994)
10.1 Revolving Loan and Security Agreement, dated June 30, 1994, by and
among the Registrant and Bank of New Hampshire.1
10.2 Letter of Credit Reimbursement Agreement, dated June 30, 1994 made
by Ferrofluidics Corporation in favor of Bank of New Hampshire.1
10.3 Guarantee Agreement, dated June 30, 1994, between the Registrant,
the Business Finance Authority of the State of New Hampshire and
Bank of New Hampshire.1
10.4 Interbank Letter of Credit Agreement, dated June
30, 1994, between Bank of New Hampshire, a New
Hampshire trust company and BayBank, a Massachusetts
trust company.1
10.5 Master Term Note, dated June 30, 1994, by and among the Registrant
and Bank of New Hampshire.1
10.6 The Ferrofluidics Corporation 1994 Restricted Stock Plan.1
10.7 Stipulation of Settlement, dated June 23, 1994, In
re Ferrofluidics Corporation Securities Litigation,
Civil Action No. 93-11976PBS, United States District
Court, District of Massachusetts.1
10.8 Order and Final Approval of Settlement and Final
Judgment, dated August 19, 1994, In re
Ferrofluidics Corporation Securities Litigation,
Civil Action No. 93-11976PBS, United States
District Court, District of Massachusetts.1
10.9 Release and Settlement Agreement, dated April 13,
1994, between the Registrant and Molecular
BioQuest, Incorporated.1
10.11 Amendment Agreement, dated December 23, 1987, to
1985 Letter of Credit Reimbursement Agreement and
1984 Letter of Credit Reimbursement Agreement
between the Registrant and Fleet National Bank
(incorporated by reference to Exhibit 10I to the
Registrant's Form 10-K for the year ended 6/30/89)
10.12 Employment Agreement, dated April 1, 1995, between
the Registrant and Paul F. Avery, Jr.
10.13 Employment Agreement, dated December 19, 1994,
between the Registrant and Salvatore J. Vinciguerra.
10.14 Loan and Trust Agreement, dated September 1,
1984, among the Registrant, The Industrial
Development Authority of the State of New Hampshire
and State Street Bank and Trust Company, as Trustee
(incorporated by reference to Exhibit 10 to the
Registrant's Form 10-Q for the quarter ended
September 30, 1984)
10.15 Assignment, Assumption and Amendment Agreement,
dated June 18, 1991, by and among the Registrant,
Chase Manhattan Capital Markets Corporation and
Fleet Norstar Securities, Inc. (incorporated by
reference to Exhibit 10OO to the Registrant's Form
10-K for the year ended 6/30/91)
10.16 Amendment Agreement, dated October 13, 1990, to
1984 Letter of Credit Reimbursement Agreement and
1985 Letter of Credit Reimbursement Agreement
(incorporated by reference to Exhibit 10ZZ to the
Registrant's Form 10-K for the year ended 6/30/90)
47
<PAGE> 50
10.17 Escrow, Pledge and Security Agreement dated January
31, 1991, made by the Registrant in favor of State
Street Bank and Trust Company, as Trustee, and Fleet
National Bank (incorporated by reference to Exhibit
10.36 to the 1991 Registration Statement)
10.21 License Agreement, dated February 27, 1987, between
the Registrant, Ferrofluidics GmbH and Ferrofluidics,
Ltd. (incorporated by reference to the Exhibit to the
Registrant's Form 8-K dated 5/13/87)
10.22 Deed relating to repayment of a promissory note
dated August 25, 1994 by and among the
Registrant, Rumpack Limited and Arbuthnot Latham and
Co., Ltd.1
10.23 Release and discharge of certain guarantees and
debentures and a Stock Pledge Agreement dated August
25, 1994 by and among the Registrant and Rumpack
Limited and Arbuthnot Latham and Co., Ltd.1
10.35 Form of Stock Purchase Agreement between the
Registrant and certain Selling Stockholders
(incorporated by reference to Exhibit 10.53 to
Amendment No. 1, filed April 9, 1992, to the
Registrant's Registration Statement on Form S-3
(Registration No. 33-46888), filed April 1, 1992
(the "April 1992 Registration Statement"))
10.36 Form of Stock Purchase Agreement between the
Registrant and certain Selling Stockholders
(incorporated by reference to Exhibit 10.54 to
Amendment No. 2, filed April 30, 1992, to the
April 1992 Registration Statement)
10.37 Form of Stock Purchase Agreement between the
Registrant and certain Selling Stockholders
(incorporated by reference to Exhibit 10.55 to
Amendment No. 2 to the April 1992 Registration
Statement)
10.55 Termination Agreement, dated November 25, 1993,
between Registrant and Fuji Seiki, Inc. for the
purpose of termination of The Patent, Technical
Information and Trademark License Agreement, dated
March 30, 1993, between the Registrant and Fuji
Seiki, Inc.2
10.56 Preferred Vendor Agreement, dated November 30, 1993,
between the Registrant and Fuji Seiki, Inc.2
10.57 Patent, Technical Information and Trademark
License Agreement, dated November 30, 1993,
between the Registrant and Fuji Seiki, Inc.2
10.58 Agreement, dated March 8, 1993, among the
Registrant, Fuji Seiki, Inc., VSE Austria GmbH, and
AP&T GmbH for the purchase of 80% of VSE GmbH by AP&T
GmbH.2
10.59 Letter Agreement, dated September 15, 1993, between
the Registrant and Dr. Ronald Moskowitz concerning
Dr. Moskowitz' retirement from Ferrofluidics.2
10.60 Employment Agreement, dated October 1, 1993, between
the Registrant and Paul F. Avery, Jr.2
10.61 Amendment No. 1 To Employment Agreement between the
Registrant and Paul F. Avery, Jr., dated November
15, 1993.2
10.62 Indemnification Agreement, dated October 1, 1993,
between the Registrant and Alvan F. Chorney.2
10.63 Indemnification Agreement, dated October 1, 1993,
between the Registrant and Stephen P. Morin.2
10.64 Severance Agreement dated October 1, 1993, between
the Registrant and Alvan F. Chorney.2
48
<PAGE> 51
10.66 Amended and Restated Insurance Loan Agreement,
dated June 30, 1991, between the Registrant and
Ronald Moskowitz (incorporated by reference to
Exhibit 10R to the Registrant's Form 10-K for the
year ended 6/30/91)
10.67 Amended and Restated Insurance Loan Agreement, dated
May 31, 1989, between the Registrant and Frank Bloom
(incorporated by reference to Exhibit 10.37 to the
1990 Registration Statement)
10.68 Form of Common Stock Purchase Warrant --
directors and key employees (incorporated by
reference to Exhibit 10T to the Registrant's Form
10-K for the year ended 6/30/88)
10.69 Form of Common Stock Purchase Warrant -- employees
(incorporated by reference to Exhibit 10U to the
Registrant's Form 10-K for the year ended 6/30/88)
10.70 1984 Non-Qualified Stock Option Plan, as amended
through December 15, 1992.2
10.71 1983 Employee Stock Purchase Plan, as amended
through December 14, 1990 (incorporated by
reference to Exhibit 4 to Post-Effective Amendment
No. 1, filed January 23, 1991, to the Registrant's
Registration Statement on Form S-8 (Registration No.
2-95090))
10.72 Settlement Agreement and Release, dated June 30,
1993, between Nippon Ferrofluidics Corporation,
Akira Yamamura, Koichi Goto, Yoshitada Akahori,
Tadao Ishizawa, Atsumi Nakamura, Nobuo Yamamura,
past and present members of NFC's Board of Directors
and the Registrant.2
10.73 Stock Subscription Agreement, dated June 30, 1993
between the Registrant and Nippon Ferrofluidics
Corporation pursuant to the acquisition of
Nippon Ferrofluidics Corporation Common Stock
by Ferrofluidics.2
10.74 Superseding 1993 Fluids License Agreement, dated
June 30, 1993, between the Registrant and Nippon
Ferrofluidics Corporation.2
21 Subsidiaries of the Registrant
23 Report of Independent Accountants On Financial Statement Schedules
1 Incorporated by reference to the designated exhibit of
the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994.
2 Incorporated by reference to the designated exhibit of
the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1993.
49
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorize, this 26th day of
September, 1995.
Ferrofluidics Corporation
By: /s/ Paul F. Avery, Jr.
-------------------------------------------------
Paul F. Avery, Jr.
Chief Executive Officer, Chief Financial Officer,
Treasurer and Chairman of the Board
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
<CAPTION>
Signatures Title Dated signed
- ---------- ----- ------------
<S> <C> <C>
/s/ Paul F. Avery, Jr. Chief Executive Officer, September 26, 1995
- --------------------------------- Chairman of the Board,
Paul F. Avery, Jr. Chief Financial Officer,
Treasurer (Principal Financial
and Accounting Officer)
/s/ Salvatore J. Vinciguerra President, Chief Operating September 26, 1995
- --------------------------------- Officer
Salvatore J. Vinciguerra
/s/ Alvan F. Chorney Senior Vice President September 26, 1995
- ---------------------------------
Alvan F. Chorney
/s/ Stephen B. Hazard Director September 26, 1995
- ---------------------------------
Stephen B. Hazard
Dean Kamen Director
- ---------------------------------
Dean Kamen
/s/ Howard F. Nichols Director September 26, 1995
- ---------------------------------
Howard F. Nichols
/s/ Robert P. Rittereiser Director September 26, 1995
- ---------------------------------
Robert P. Rittereiser
/s/ Dennis R. Stone Director September 26, 1995
- ---------------------------------
Dennis R. Stone
</TABLE>
50
<PAGE> 53
<TABLE>
FERROFLUIDICS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended June 30, 1995, June 30, 1994 and June 30, 1993
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------------------------------------------- ----------- ------------------------- ------------ ----------
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING TO COSTS TO OTHER END OF
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- ------------ -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1995:
- -------------------------
(a) Amounts deducted from the assets
to which they apply:
Investment valuation reserve $600,000 - - ($600,000) -
Reserve for doubtful accounts - trade 705,000 34,000 - (382,000) $357,000
Reserve for uncollectible note receivable 432,000 - - (432,000) -
Reserve for excess and obsolete inventory 1,372,000 195,000 - (619,000) 948,000
Reserve for rent guarantee 275,000 - - - 275,000
Reserve against cash surender value 1,407,000 - - - 1,407,000
(b) Other Reserves:
Performance bond reserve 300,000 - - (300,000) -
Insurance Indemnification reserve 150,000 - - (150,000) -
Warranty reserve 359,000 55,000 - (30,000) 384,000
Self-Insurance reserve 81,000 22,000 - - 103,000
Sales related reserve 397,000 50,000 - - 447,000
Reserve for employee benefit plan 66,000 - - (66,000) -
Year ended June 30, 1994:
- -------------------------
(a) Amounts deducted from the assets
to which they apply:
Investment valuation reserve - $600,000 - - $600,000
Reserve for doubtful accounts - trade $779,000 - ($74,000) 705,000
Reserve for uncollectible note receivable 260,000 172,000 - - 432,000
Reserve for excess and obsolete inventory 1,090,000 282,000 - - 1,372,000
Reserve for rent guarantee 447,000 - - (172,000) 275,000
Reserve against cash surender value 1,407,000 - - - 1,407,000
(b) Other Reserves:
Performance bond reserve - 300,000 - - 300,000
Insurance Indemnification reserve 150,000 - - - 150,000
Warranty reserve 150,000 209,000 - - 359,000
Self-Insurance reserve 92,000 - - (11,000) 81,000
Sales related reserve 397,000 - - - 397,000
Reserve for employee benefit plan - 66,000 - - 66,000
Year ended June 30, 1993:
- -------------------------
(a) Amounts deducted from the assets
to which they apply:
Reserve for doubtful accounts - trade 431,000 348,000 - - 779,000
Reserve for uncollectible note receivable - 260,000 - - 260,000
Reserve for excess and obsolete inventory 860,000 230,000 - - 1,090,000
Reserve for rent guarantee - 447,000 - - 447,000
Reserve against cash surender value - 1,407,000 - - 1,407,000
(b) Other Reserves:
Insurance Indemnification reserve - 150,000 - - 150,000
Warranty reserve 100,000 50,000 - - 150,000
Self-Insurance reserve 91,000 1,000 - - 92,000
Sales related reserve - 397,000 - - 397,000
</TABLE>
<PAGE> 1
Exhibit 10.12
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), dated April 1,
1995, is entered into by and between Ferrofluidics Corporation
(the "Company"), a Massachusetts corporation with its principal
place of business at 40 Simon Street, Nashua, New Hampshire, and
Paul F. Avery, Jr. ("Avery"), of 178 Drinkwater Road, Kensington,
New Hampshire, and supersedes and replaces the employment
agreement dated October 1, 1993 between Avery and the Company, as
amended on November 15, 1993.
WHEREAS, the operations of the Company are a complex matter
requiring direction and leadership in a variety of areas;
WHEREAS, Avery possesses the experience and expertise to
provide the direction and leadership required by the Company;
and
WHEREAS, subject to the terms and conditions hereinafter set
forth, the Company, therefore, wishes to establish the terms of
employment of Avery as its Chief Executive Officer, and Avery
agrees to so establish such terms of this employment;
NOW, THEREFORE, in consideration of the foregoing premises
and the mutual promises, terms, provisions and conditions set
forth in this Agreement, the parties hereby agree:
1. EMPLOYMENT. Subject to the terms and conditions set
forth in this Agreement, the Company hereby offers and Avery
hereby accepts employment on the terms and conditions set forth
in this Agreement.
2. EFFECTIVE DATE AND TERM. The commencement date (the
"Commencement Date") of this Agreement shall be April 1, 1995.
Subject to the provisions of Section 5, the initial term (the
"Initial Term") of Avery's employment hereunder shall be from the
Commencement Date to the second anniversary of the Commencement
Date (the "Initial Expiration Date"); provided, however, that
this Agreement shall automatically be extended for successive one
(1) year terms commencing on the Initial Expiration Date and
ending on each subsequent anniversary thereof (each subsequent
annual period being referred to as a "Subsequent Term"), unless
either Avery or the Employer provides sixty (60) days' written
notice prior to the Initial Expiration Date (or sixty (60) days'
written notice prior to the last day of any Subsequent Term) of
his or its intention, as the case may be, not to extend the term
of this Agreement.
3. CAPACITY AND PERFORMANCE.
a. Avery shall be employed by the Company as its
Chief Executive Officer, and shall have all powers and duties
consistent with those positions, subject to the direction of the
Company's Board of Directors.
<PAGE> 2
b. Avery shall devote his best efforts, business
judgment, skill and knowledge to the advancement of the business
and interests of the Company and its affiliates, and to the
discharge of his duties and responsibilities hereunder. In
accordance with the foregoing, Avery shall not engage in any
other business activity, except as may be approved by the Board
of Directors; provided, however, that nothing herein shall be
construed as preventing Avery from:
(1) devoting a portion of his efforts,
from time to time, to certain other business interests
with which he is involved, provided that such
activity does not materially impair Avery's
ability to discharge his obligations and responsibilities
as Chief Executive Officer of the Company hereunder;
(2) investing his assets in a manner
not otherwise prohibited by this Agreement,
and in such form or manner as shall not require
any material services on his part in the operations
or affairs of the companies or other entities
in which such investments are made;
(3) serving on the board
of directors of any company, provided that he
shall not be required to render any material
services with respect to the operations or
affairs of any such company; or
(4) engaging in religious, charitable or
other community or non-profit activities which do
not impair his ability to fulfill his duties and
responsibilities under this Agreement.
c. Except for required travel on the Company's
business and except for attendance at meetings of the Board of
Directors of the Company and/or its affiliates, Avery shall not
be required to work on a regular basis at any location outside of
Hillsborough County in the State of New Hampshire.
4. COMPENSATION AND BENEFITS.
a. BASE SALARY. For the first twelve (12) month
period of the Initial Term, the Company shall pay Avery a base
salary at an annual rate (the "Base Salary") equal to $225,000
per year, payable in accordance with the payroll practices of the
Company for its executives. For the second twelve (12) month
period of the Initial Term and for the twelve (12) month period
of any Subsequent Term, such Base Salary shall equal $200,000.
b. STOCK BONUS PLAN. On the effective date of this
Agreement, Avery will be awarded 15,000 shares of Common Stock of
the Company as a restricted stock award under the Company's 1994
Restricted Stock Plan (the "Plan") to be vested as follows:
<PAGE> 3
<TABLE>
<CAPTION>
Cumulative
Percentage of Shares Percentage
Vesting Date Becoming Vested Vested
------------ -------------------- --------
<S> <C> <C>
January 1, 1996 33 1/3% 33 1/3%
January 1, 1997 33 1/3% 66 2/3%
January 1, 1998 33 1/3% 100%
</TABLE>
As provided in Section 10 of the Plan, all of the shares subject
to the Restricted Stock Award above shall vest upon the
occurrence of a "Change of Control" as such term is defined in
the Plan.
c. LIFE INSURANCE. During the period from the
Commencement Date through the Initial Expiration Date and through
the last day of any Subsequent Term, the Company shall maintain a
life insurance policy on the life of Avery in the amount of two
million dollars ($2,000,000) payable as directed by Avery;
provided, however, that the Company shall have no obligation to
maintain such policy at any time following the termination of
Avery's employment pursuant to Section 5d hereunder.
d. VACATIONS. Avery shall be entitled to the number
of paid vacation days to which he would entitled in accordance
with the Company's normal vacation policy, to be taken at such
times and intervals as shall be determined by Avery, subject to
the reasonable business needs of the Company.
e. RETIREMENT PLANS. Avery shall be entitled to
participate in and enjoy the benefit of the Company's retirement,
supplementary retirement, deferred compensation or similar plans,
programs or arrangements as available to the Company's management
from time to time.
f. HEALTH, WELFARE AND FRINGE BENEFIT PLANS, ETC.
Avery shall be entitled to participate in and enjoy the benefit
of all the health, medical, dental, cafeteria, reimbursement,
death (including life insurance), accident, travel insurance,
long-term disability, short-term disability, sick leave, other
leaves of absence, holidays and other similar welfare, fringe-
benefit or employment-related plans, programs, arrangements,
policies or perquisites available to the Company's management
from time to time. Participation shall be subject to the terms
of the applicable plan documents and the discretion of the Board
or any administrative or other committee provided for in or
contemplated by such plan. The Company may alter, modify, add to
or delete its employee benefit plans as they apply to the
Company's management at such times and in such manner as the
Company determines to be appropriate, without recourse by Avery.
g. BUSINESS EXPENSES. The Company shall pay or
reimburse Avery for all reasonable business expenses incurred or
paid by him in the performance of his duties and responsibilities
hereunder, subject to any restrictions on such expenses set by
the Board and
<PAGE> 4
to such reasonable substantiation and documentation
as may be specified by the Company from time to time.
h. AUTO LEASE. The Company shall furnish Avery,
during the Initial Term and any Subsequent Term, with an
automobile for his use, and the Company shall pay or reimburse
all costs incurred in connection therewith including, without
limitation, any leasing fees, insurance, operating or repairs
costs, tax obligations, etc. In the event that Avery's
employment hereunder is terminated pursuant to Section 5 hereof,
he shall surrender the automobile to the Company not later than
thirty (30) days following the termination of such employment.
5. TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS.
a. GENERAL SEVERANCE BENEFITS. If terminated for
reasons other than as set forth under Section 5b or 5d hereof,
Avery shall be entitled to receive as a severance payment an
amount equal to the greater of (i) the aggregate Base Salary
which Avery would have received had he been employed by Employer
through the last day of the Initial Term or (ii) twelve (12)
months' Base Salary at the rate then in effect under this
Agreement.
b. CHANGE OF CONTROL BENEFITS.
(1) If the Company undergoes a Change of Control
(as defined below) during the Initial Term or any Subsequent
Term, and a Terminating Event (as defined below) occurs within
twenty-four (24) months after the date on which such Change of
Control occurs, Avery shall be entitled to receive an amount
equal to twenty-four (24) months' Base Salary at the rate then in
effect under this Agreement.
(2) "Change of Control" shall mean the occurrence
of any one of the following events:
(i) any "person" (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Act")) becomes a "beneficial
owner" (as such term is defined in Rule 13d-3 promulgated
under the Act) (other than the Company, any trustee or other
fiduciary holding securities under an employee benefit plan
of the Company, or any corporation owned, directly or
indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of
stock of the Company), directly or indirectly, of securities
of the Company representing 15% or more of the combined
voting power of the Company's then outstanding securities;
or
(ii) persons who, as of the Commencement
Date, constituted the Company's Board of Directors (the
"Incumbent Board") cease for any reason, including without
limitation as a result of a tender offer, proxy contest,
merger or similar transaction, to constitute at least a
majority of the Board, provided that any person becoming a
director of the Company subsequent to the Commencement Date
<PAGE> 5
whose election was approved by at least a majority of the
directors then comprising the Incumbent Board shall, for
purposes of this Agreement, be considered a member of the
Incumbent Board; or
(iii) the stockholders of the Company
approve a merger or consolidation of the Company with any
other corporation or other entity, other than (a) a merger or
consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity)
more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation
or (b) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no "person" (as hereinabove defined) acquires more
than 50% of the combined voting power of the Company's then
outstanding securities; or
(iv) the stockholders of the Company approve
a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all
or substantially all of the Company's assets.
(3) A "Terminating Event" shall mean any
voluntary or involuntary termination of Avery's employment
occurring subsequent to a Change in Control, other than the
termination of Avery's employment pursuant to Section 5d
hereunder.
c. DEATH OR DISABILITY. In the event Avery dies or
becomes disabled during the Initial Term or any Subsequent Term
of this Agreement, his employment hereunder shall automatically
terminate. In such case, the Company shall pay to Avery or his
beneficiary, as the case may be, any earned but unpaid salary as
of the date of his death or disability. For the purpose of this
Agreement, "disability" shall refer to a situation in which Avery
is totally disabled from performing his duties for the Company
during a period of thirteen (13) consecutive weeks.
If any question shall arise as to whether during any period
Avery has suffered disability, Avery may, and at the request of
the Company will, submit to the Company a certification in
reasonable detail by a physician selected by Avery or his
guardian to whom the Company has no reasonable objection as to
whether Avery was so disabled and such certification shall for
the purposes of this Agreement be conclusive of the issue. If
such question shall arise and Avery shall fail to submit such
certification, the Company's determination of such issue shall be
binding on Avery.
d. BY THE COMPANY FOR CAUSE. The Company may
terminate Avery's employment hereunder for cause at any time upon
notice to Avery setting forth in reasonable detail the nature of
such case. The following, as determined by the Board in its
reasonable judgment, shall constitute "cause" for termination:
<PAGE> 6
(1) Avery's falsification of the accounts of the
Company, embezzlement of funds of the Company or other
material dishonesty with respect to the Company or any of
its affiliates; or
(2) Conviction of, or plea of nolo contendere to,
a felony or other crime involving moral turpitude (it being
understood that violation of a motor vehicle code does not
constitute such a crime); or
(3) Conduct engaged in or action taken or omitted
to be taken by Avery which is in material breach of this
Agreement; or
(4) Material failure to perform a substantial
portion of Avery's duties and responsibilities hereunder,
which failure continues for more than thirty (30) days after
written notice given to Avery pursuant to a vote of the
Board of Directors, such vote to set forth in reasonable
detail the nature of such failure; or
(5) Gross or willful misconduct of Avery with
respect to the Company or any subsidiary or affiliate
thereof.
Upon the giving of notice of termination of Avery's
employment hereunder for cause, the Company shall have no further
obligation or liability to Avery, other than the payment of
salary earned and unpaid at the date of termination and the
contribution by the Company to the cost of Avery's participation
(subject to any required employee contribution by Avery under the
terms of the applicable plans) in the Company's group medical and
dental insurance plans as the same are in effect from time to
time for so long as Avery is entitled to continue such
participation under applicable law and plan terms.
e. BY THE COMPANY OTHER THAN FOR CAUSE. The Company
may terminate Avery's employment hereunder other than for cause
at any time upon sixty (60) days' written notice to Avery.
f. BY AVERY. Avery may terminate his employment
hereunder at any time upon sixty (60) days' written notice to the
Company.
g. LIMITATION OF BENEFITS. It is the intention of
Avery and of the Company that no payments by the Company to or
for the benefit of Avery under this Agreement or any other
agreement or plan pursuant to which he is entitled to receive
payments or benefits shall be non-deductible to the Company by
reason of the operation of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") relating to parachute
payments. Accordingly, and notwithstanding any other provision
of this Agreement or any such agreement or plan, if by reason of
the operation of said Section 280G, any such payments exceed the
amount which can be deducted by the Company, the payments which
Avery is entitled to receive under this Agreement shall be
reduced by that amount which exceeds the maximum amount
deductible by the Company under Section 280G. To the extent that
payments exceeding such maximum deductible amount have been made
to or for the benefit
<PAGE> 7
of Avery, such excess payments shall be refunded to the Company with
interest thereon at the applicable federal rate determined under Section
1274(d) of the Code, compounded annually, or at such other rate as may be
required in order that no such payments shall be non-deductible to the Company
by reason of the operation of said Section 280G.
6. WITHHOLDING. All payments made by the Company under
this Agreement shall be reduced by any tax or other amounts
required to be withheld by the Company under applicable law.
7. ASSIGNMENT. Neither the Company nor Avery may make any
assignment of this Agreement or any interest herein, by operation
of law or otherwise, without the prior written consent of the
other; provided, however, that the Company may assign its rights
and obligations under this Agreement without the consent of Avery
in the event that the Company shall hereafter affect a
reorganization, consolidate with, or merge into, any other person
or entity or transfer all of its properties or assets to any
other person or entity. This Agreement shall insure to the
benefit of and be binding upon the Company and Avery, their
respective successors, executors, administrators, heirs and
permitted assigns.
8. SEVERABILITY. If any portion or provision of this
Agreement shall to any extent be declared illegal or
unenforceable by a court of competent jurisdiction, then the
remainder of this Agreement, or the application of such portion
or provision in circumstances other than those as to which it is
so declared illegal or unenforceable, shall not be affected
thereby, and each portion and provision of this Agreement shall
be valid and enforceable to the fullest extent permitted by law.
9. WAIVER. No waiver of any provision hereof shall be
effective unless made in writing and signed by the waiving party.
The failure of either party to require the performance of any
term or obligation of this Agreement, or the waiver by either
party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a
waiver of any subsequent breach.
10. NOTICES. Any and all notices, requests, demands and
other communications provided for by this Agreement shall be in
writing and shall be deemed given when delivered by hand, telex
or facsimile, or if mailed, five days after mailing (two business
days in the case of courier service), to the parties as follows:
to Avery at his last known address on the books of the Company
and, in the case of the Company, to its principal place of
business, attention of Clerk or to such other address as either
party may specify by notice to the other.
11. ENTIRE AGREEMENT. This Agreement and the
Non-Disclosure/Non-Compete Agreement executed by Avery constitute
the entire agreement between the parties and supersede all prior
communications, agreements and understandings, written or oral,
with respect to the terms and conditions of Avery's employment.
12. AMENDMENT. This Agreement may be amended or modified
only by a written instrument signed by Avery and by an expressly
authorized representative of the Company.
<PAGE> 8
13. HEADINGS. The headings and captions in this Agreement
are for convenience only and in no way define or describe the
scope of or content of any provision of this Agreement.
14. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be an original and all of
which together shall constitute one and the same instrument.
15. GOVERNING LAW. This is a New Hampshire contract and
shall be construed and enforced under and be governed in all
respects by the laws of The State of New Hampshire, without
regard to the conflict of laws principles thereof.
[END OF TEXT]
<PAGE> 9
IN WITNESS WHEREOF, this Agreement has been executed as a
sealed instrument by the Company, by its duly authorized
representative, and by Avery, as of the date first above
written.
FERROFLUIDICS CORPORATION
/s/ Paul F. Avery, Jr. By: /s/ Robert P. Rittereiser
- --------------------------- -------------------------------
Paul F. Avery, Jr. Robert P. Rittereiser
Chairman, Compensation Committee
of the Board of Directors
<PAGE> 1
Exhibit 10.13
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into
by and between Ferrofluidics Corporation (the "Company"), a
Massachusetts corporation with its principal place of business at
40 Simon Street, Nashua, New Hampshire, and Salvatore J.
Vinciguerra ("Vinciguerra"), of 5 Byfield Road, Newton,
Massachusetts 02168, and is to be effective as of January 1,
1995.
WHEREAS, the operations of the Company are a complex matter
requiring direction and leadership in a variety of areas;
WHEREAS, Vinciguerra possesses the experience and expertise
to provide the direction and leadership required by the Company;
and
WHEREAS, subject to the terms and conditions hereinafter set
forth, the Company, therefore, wishes to establish the terms of
employment of Vinciguerra as its President and Chief Operating
Officer, and Vinciguerra agrees to so establish such terms of
this employment;
NOW, THEREFORE, in consideration of the foregoing premises
and the mutual promises, terms, provisions and conditions set
forth in this Agreement, the parties hereby agree:
1. EMPLOYMENT. Subject to the terms and conditions set
forth in this Agreement, the Company hereby offers and
Vinciguerra hereby accepts employment on the terms and conditions
set forth in this Agreement.
2. CAPACITY AND PERFORMANCE.
(a) Vinciguerra shall be employed by the Company as
its President and Chief Operating Officer, and shall have all
powers and duties consistent with those positions, subject to the
direction of the Company's Chief Executive Officer.
(b) Vinciguerra shall devote his best efforts,
business judgment, skill and knowledge to the advancement of the
business and interests of the Company and its affiliates, and to
the discharge of his duties and responsibilities hereunder. In
accordance with the foregoing, Vinciguerra shall not engage in
any other business activity, except as may be approved by the
Board of Directors; PROVIDED, HOWEVER, that nothing herein shall
be construed as preventing Vinciguerra from:
(1) investing his assets in a manner not otherwise prohibited
by this Agreement, and in such form or manner as shall not
require any
<PAGE> 2
material services on his part in the operations
or affairs of the companies or other entities in which such
investments are made;
(2) serving on the board of directors of any
company, provided that he shall not be required to
render any material services with respect to the
operations or affairs of any such company; or
(3) engaging in religious, charitable or other
community or non-profit activities which do not impair
his ability to fulfill his duties and responsibilities
under this Agreement.
(c) Except for required travel on the Company's
business Vinciguerra shall not be required to work on a regular
basis at any location outside of Hillsborough County in the State
of New Hampshire.
3) COMPENSATION AND BENEFITS.
(a) BASE SALARY. The Company shall pay Vinciguerra a
base salary at an annual rate equal to $185,000 per year, payable
in accordance with the payroll practices of the Company for its
executives. After six (6) months of satisfactory performance, as
determined by the CEO, said base salary will be increased to an
annual rate equal to $200,000 per year.
(b) STOCK BONUS PLAN. On the effective date of this
Agreement, Vinciguerra will be awarded 75,000 shares of Common
Stock of the Company as a restricted stock award under the
Company's 1994 Restricted Stock Plan (the "Plan") to be vested as
follows:
<TABLE>
<CAPTION>
Cumulative
Percentage of Shares Percentage
Vesting Date Becoming Vested Vested
------------ -------------------- ----------
<S> <C> <C>
January 1, 1996 33 1/3% 33 1/3%
January 1, 1997 33 1/3% 66 2/3%
January 1, 1998 33 1/3% 100%
</TABLE>
As provided in Section 10 of the Plan, the shares subject to the
Restricted Stock Award above shall vest upon the occurrence of a
"Change of Control" as such term is defined in the Plan.
(c) VACATIONS. Vinciguerra shall be entitled to the
number of paid vacation days to which he would entitled in
accordance with the Company's normal vacation policy, to be taken
at such times and intervals as shall be determined by
Vinciguerra, subject to the reasonable business needs of the
Company.
<PAGE> 3
(d) RETIREMENT PLANS. Vinciguerra shall be entitled
to participate in and enjoy the benefit of the Company's
retirement, supplementary retirement, deferred compensation or
similar plans, programs or arrangements as available to the
Company's management from time to time.
(e) HEALTH, WELFARE AND FRINGE BENEFIT PLANS, ETC.
Vinciguerra shall be entitled to participate in and enjoy the
benefit of all the health, medical, dental, cafeteria,
reimbursement, death (including life insurance), accident, travel
insurance, long-term disability, short-term disability, sick leave,
other leaves of absence, holidays and other similar welfare,
fringe-benefit or employment-related plans, programs, arrangements,
policies or perquisites available to the Company's management
from time to time. participation shall be subject to the terms
of the applicable plan documents and the discretion of the Board
or any administrative or other committee provided for in or
contemplated by such plan. The Company may alter, modify, add to
or delete its employee benefit plans as they apply to the
Company's management at such times and in such manner as the
company determines to be appropriate, without recourse by
Vinciguerra.
(f) BUSINESS EXPENSES. The Company shall pay or
reimburse Vinciguerra for all reasonable business expenses
incurred or paid by him in the performance of his duties and
responsibilities hereunder, subject to any restrictions on such
expenses set by the Board and to such reasonable substantiation
and documentation as may be specified by the Company from time to
time.
4) TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS. If
employed for 6 months or less, Vinciguerra shall be entitled to
receive as a severance payment if terminated for reasons other
than "cause" an amount equal to 6 months' salary, or 12 months'
salary if employed for a period of more than 6 months. If the
Company undergoes a Change of Control (as defined in the Plan)
and a Terminating Event (as defined below) occurs within a 24
month period of the date on which the Change of Control occurs
then Vinciguerra will be paid an amount equal to 18 month's base
salary at the rate then in effect under this Agreement. If
Vinciguerra desires to terminate his employment, then 8 weeks'
notice must be given to the Company. Vinciguerra's employment
shall terminate under the following circumstances:
For purpose of this Agreement, a "Terminating
Event" shall mean (A) termination by the
Company or its successor entity of the
employment of Vinciguerra for any reason
other than death, disability or cause
pursuant to Section 5(a) or (b) of this
Agreement, or (B) resignation of Vinciguerra
upon the occurrence of any of the following
events: (1) there is a significant change in
the nature or scope of Vinciguerra's
responsibilities, authorities, powers,
functions or duties from the
responsibilities, authorities, powers,
functions or duties exercised by Vinciguerra
immediately prior to the Change in Control or
(2) Vinciguerra is required to relocate outside
<PAGE> 4
Hillborough County, New Hampshire in
order to maintain his employment hereunder
after the Change in Control or (3) there is a
decrease in the total annual compensation
payable by the surviving or successor entity,
as applicable, to Vinciguerra from the total
annual compensation paid to Vinciguerra by
the Company prior to the Change in Control.
(a) DEATH OR DISABILITY. In the event Vinciguerra
dies or becomes disabled during the term of this Agreement, his
employment hereunder shall automatically terminate. In such
case, the Company shall pay to Vinciguerra or his beneficiary, as
the case may be, in addition to such amounts as may be payable to
Vinciguerra pursuant to Section 3(b) of this Agreement, any earned
but unpaid salary as of the date of his death or disability. For
the purpose of this Agreement, "disability" shall refer to a
situation in which Vinciguerra is totally disabled from
performing his duties for the Company during a period of 13
consecutive weeks, in which case the Company's Chief Executive
Officer may terminate his employment, on account thereof.
(b) BY THE COMPANY FOR CAUSE. The Company may
terminate Vinciguerra's employment hereunder for cause at any
time upon notice to Vinciguerra setting forth in reasonable
detail the nature of such case. The following, as determined by
the Board in its reasonable judgment, shall constitute cause for
terminate:
(i) Vinciguerra's falsification of the accounts
of the Company, embezzlement of funds of the Company or
other material dishonesty with respect to the Company or any
of its affiliates; or
(ii) Conviction of, or plea of nolo contendere to,
a felony or other crime involving moral turpitude (it being
understood that violation of a motor vehicle code does not
constitute such a crime); or
(iii) Conduct engaged in or action taken or omitted
to be taken by Vinciguerra which is in material breach of
this Agreement; or
(iv) Material failure to perform a substantial
portion of Vinciguerra's duties and responsibilities
hereunder, which failure continues for more than thirty days
after written notice given to Vinciguerra pursuant to a vote
of the Board of Directors, such vote to set forth in
reasonable detail the nature of such failure; or
(v) Gross or willful misconduct of Vinciguerra
with respect to the Company or any subsidiary or affiliate
thereof.
If any question shall arise as to whether during any period
Vinciguerra has suffered disability, Vinciguerra may, and at the
request of the Company will, submit to the Company a
certification in reasonable detail by a physician selected by
Vinciguerra or his guardian to whom the Company has no reasonable
objection as to whether Vinciguerra was so disabled
<PAGE> 5
and such certification shall for the purposes of this Agreement be
conclusive of the issue. If such question shall arise and Vinciguerra shall
fail to submit such certification, the Company's determination of such issue
shall be binding on Vinciguerra.
Upon the giving of notice of termination of Vinciguerra's
employment hereunder for cause, the Company shall have no further
obligation or liability to Vinciguerra, other than the payment of
salary earned and unpaid at the date of termination and the
contribution by the Company to the cost of Vinciguerra's
participation (subject to any required employee contribution by
Vinciguerra under the terms of the applicable plans) in the
Company's group medical and dental insurance plans as the same
are in effect from time to time for so long as Vinciguerra is
entitled to continue such participation under applicable law and
plan terms.
(c) BY THE COMPANY OTHER THAN FOR CAUSE. The Company
may terminate Vinciguerra's employment hereunder other than for
cause at any time upon notice to Vinciguerra. In the event of
such termination, the Company shall continue to pay Vinciguerra
the salary and other benefits specified by Section 3 and 4 of this
Agreement, to the end of its term.
(d) BY VINCIGUERRA. Vinciguerra may terminate his
employment hereunder at any time upon sixty (60) days' notice to
the Company.
5) WITHHOLDING. All payments made by the Company under
this Agreement shall be reduced by any tax or other amounts
required to be withheld by the Company under applicable law.
6) ASSIGNMENT. Neither the Company nor Vinciguerra may
make any assignment of this Agreement or any interest herein, by
operation of law or otherwise, without the prior written consent
of the other; provided, however, that the Company may assign its
rights and obligations under this Agreement without the consent
of Vinciguerra in the event that the Company shall hereafter
affect a reorganization, consolidate with, or merge into, any
other person or entity or transfer all of its properties or
assets to any other person or entity. This Agreement shall
insure to the benefit of and be binding upon the Company and
Vinciguerra, their respective successors, executors,
administrators, heirs and permitted assigns.
7) SEVERABILITY. If any portion or provision of this
Agreement shall to any extent be declared illegal or
unenforceable by a court of competent jurisdiction, then the
remainder of this Agreement, or the application of such portion
or provision in circumstances other than those as to which it is
so declared illegal or unenforceable, shall not be affected
thereby, and each portion and provision of this Agreement shall
be valid and enforceable to the fullest extent permitted by law.
8) WAIVER. No waiver of any provision hereof shall be
effective unless made in writing and signed by the waiving party.
The failure of either party to require the performance of any
term or obligation of this Agreement, or the waiver by either
party of
<PAGE> 6
any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a
waiver of any subsequent breach.
9) NOTICES. Any and all notices, requests, demands and
other communications provided for by this Agreement shall be in
writing and shall be deemed given when delivered by hand, telex
or facsimile, or if mailed, five days after mailing (two business
days in the case of courier service), to the parties as follows:
to Vinciguerra at his last known address on the books of the
Company and, in the case of the Company, to its principal place
of business, attention of Chairman of the Board or to such other
address as either party may specify by notice to the other.
10) ENTIRE AGREEMENT. This Agreement and the Non-
Disclosure/Non-Compete agreement to be signed by Vinciguerra and
the Company constitute the entire agreement between the parties
and supersede all prior communications, agreements and
understandings, written or oral, with respect to the terms and
conditions of Vinciguerra's employment.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 7
11) AMENDMENT. This Agreement may be amended or modified
only by a written instrument signed by Vinciguerra and by an
expressly authorized representative of the Company.
12) HEADINGS. The headings and captions in this Agreement
are for convenience only and in no way define or describe the
scope of or content of any provision of this Agreement.
13) COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be an original and all of
which together shall constitute one and the same instrument.
14) GOVERNING LAW. This is a New Hampshire contract and
shall be construed and enforced under and be governed in all
respects by the laws of The State of New Hampshire, without
regard to the conflict of laws principles thereof.
IN WITNESS WHEREOF, this Agreement has been executed as a
sealed instrument by the Company, by its duly authorized
representative, and by Vinciguerra, as of the date first above
written.
FERROFLUIDICS CORPORATION
/s/ Salvatore J. Vinciguerra By: /s/ Paul F. Avery, Jr.
- ------------------------------- ------------------------------
Salvatore J. Vinciguerra Paul F. Avery, Jr.
Chief Executive Officer
<PAGE> 1
<TABLE>
Exhibit 21
Subsidiaries of the Ferrofluidics
Corporation As of June 30, 1995
<CAPTION>
NAME PLACE OF ORGANIZATION
---- ---------------------
<S> <C>
Advanced Products and Technologies, GmbH Nurtingen, Germany
Advanced Products and Technologies, Ltd. Oxford, England
Advanced Products and Technologies, S.A. Spain
Ferrofluidics Japan Corporation Tokyo, Japan
Ferrohydrodynamics Corporation Massachusetts
Ferrofluid Finance Corporation, N.V. Netherlands Antilles
</TABLE>
51
<PAGE> 1
Exhibit 23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Ferrofluidics Corporation:
Our report on the consolidated financial statements of Ferrofluidics
Corporation is included on page 21 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 46 of this Form 10-K.
In our opinion, based on our audit of the Company's balance sheet as of June
30, 1995 and 1994 and the related statements of operations, retained earnings
and cash flows for the years ended June 30, 1995 and 1994, the amounts
contained in the financial statement schedule referred to above as of June
30, 1995 and 1994 and for the years ended June 30, 1995 and 1994, when
considered in relation to the basic financial statements taken as whole,
present fairly, in all material respects, the information required to be
included as of that date. Because of the matters referred to in the fourth
paragraph of our report, we are unable to and do not report on other amounts
contained in the financial statement schedule.
/s/ Coopers & Lybrand L.L.P.
Manchester, New Hampshire
August 31, 1995
52
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1995 AND 1994 AND THE CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 1,563,000
<SECURITIES> 0
<RECEIVABLES> 8,131,000
<ALLOWANCES> 357,000
<INVENTORY> 14,130,000
<CURRENT-ASSETS> 26,126,000
<PP&E> 17,011,000
<DEPRECIATION> 8,895,000
<TOTAL-ASSETS> 39,529,000
<CURRENT-LIABILITIES> 18,315,000
<BONDS> 5,000,000
<COMMON> 35,509,000
0
0
<OTHER-SE> (19,728,000)
<TOTAL-LIABILITY-AND-EQUITY> 39,529,000
<SALES> 34,155,000
<TOTAL-REVENUES> 34,155,000
<CGS> 20,264,000
<TOTAL-COSTS> 14,104,000
<OTHER-EXPENSES> (1,156,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 406,000
<INCOME-PRETAX> 567,000
<INCOME-TAX> (322,000)
<INCOME-CONTINUING> 889,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 889,000
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
