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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(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 06/30/96
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/ / 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 x No
----- -----
(2) Yes x No
----- -----
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 August 31, 1996, 6,060,902 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 $11.25 per
share for the registrant's Common Stock, as reported on the Nasdaq National
Market as of August 31, 1996 was $67,212,731.
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business........................................................... 1
2. Properties......................................................... 10
3. Legal Proceedings.................................................. 10
4. Submission of Matters to a Vote of Security Holders................ 11
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............................ 47
PART III
10. Directors and Executive Officers of the Registrant................. 48
11. Executive Compensation............................................. 48
12. Security Ownership of Certain Beneficial Owners
and Management................................................. 48
13. Certain Relationships and Related Transactions..................... 48
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 48
(a) Financial Statement Schedules
(b) Reports on Form 8-K
Signatures......................................................... 54
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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[Registered Trademark])
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[Registered Trademark]
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[Registered Trademark] 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 in Nashua, New Hampshire where it conducts all
of the engineering and manufacturing of its products. The Company conducts its
operations overseas through the following wholly-owned subsidiaries:
(1) ADVANCED PRODUCTS & TECHNOLOGIES, GMBH ("AP&T"), headquartered in
Nurtingen, Germany, with sales offices in Oxford, England and Madrid,
Spain, which:
(a) markets and services Ferrofluidic[Registered Trademark] products
in Europe.
(b) designs, manufactures and markets products for the optical coating
and thin-film deposition industries such as electron beam guns and
related controllers; and
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(c) serves as an exclusive distributor in Europe for several U.S. and
European corporations that manufacture compatible products for
similar industries.
(2) FERROFLUIDICS JAPAN CORPORATION ("FJC"), located in Tokyo, Japan, which
distributes and services Ferrofluidics' components 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 Ferrotec Corporation ("Ferrotec", formerly Nippon
Ferrofluidics Corporation), a former subsidiary located in Japan. In
addition, under an exclusive license granted by Ferrofluidics in August
1993, Ferrotec manufactures and sells Ferrofluidic[Registered Trademark]
exclusion seals for
use on computer peripheral equipment.
OPERATING STRUCTURE
The Company is organized into three business segments:
(i) the COMPONENTS DIVISION, or FERROFLUIDIC[Registered Trademark]
PRODUCTS segment, which manufactures and markets:
(a) ferrofluids used in the Company's own engineered core products,
audio loudspeakers for the commercial, home and automotive
markets, and for use in nondestructive testing, inertia
dampers, stepper motors and sensor applications;
(b) Ferrofluidic[Registered Trademark] sealing devices and
subsystems, primarily for use in the semiconductor process,
industrial process, lamp and fiber optic manufacturing, and
medical equipment industries; and
Sales generated by the Components Division accounted for
approximately 25.8%, 41.3% and 42.7% of total product sales in
fiscal 1996, 1995 and 1994, respectively.
(ii) the SYSTEMS DIVISION, 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 Division accounted for 62.7%, 34.5%
and 32.7% of total product sales in fiscal 1996, 1995 and 1994,
respectively.
(iii) DISTRIBUTED PRODUCTS DIVISION, or THIN FILM DEPOSITION segment,
which includes the sale in Europe and Asia by AP&T of compatible
products on an exclusive basis for several U.S. and European
companies.
Sales generated by the Distributed Products Division accounted for
11.5%, 24.2% and 24.6% of total product sales in fiscal 1996, 1995
and 1994, respectively.
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In fiscal 1996, $54,080,000, or 74.1%, of the Company's total sales were to
foreign customers, primarily through AP&T, FJC and to the Systems Divisions'
customers in the Pacific Rim. Sales to unaffiliated foreign customers in fiscal
1995 and 1994 totaled $21,412,000 (62.7%) and $16,229,000 (61.5%), respectively.
All manufacturing and assembly of products for the Components and Systems
Divisions is conducted at the Company's headquarters in Nashua, NH. Marketing of
those products for all markets, excluding Europe and Japan, is principally
conducted by its direct sales force at the Company's headquarters. In the case
of its standard seals to end-user markets, the Company utilizes the Kurt J.
Lesker Company ("KJLC"), a worldwide distributor of vacuum related products. In
addition, the Company has established distributor relationships for its
ferrofluid and Ferrofluidic[Registered Trademark] products in Korea, Taiwan,
India, China, and developing Pacific Rim countries.
PRODUCT LINES
The Company manufactures and sells products in three major product
categories:
(i) ferrofluids; (ii) magnetic fluid seals, sealing subsystems, and other
Ferrofluidic[Registered Trademark] components products and; (iii) crystal
growing systems and related equipment. In addition, the Company distributes
advanced technology component products and systems for use in the manufacture
of semiconductors and in the thin-film deposition and optical coating
industries through AP&T in Europe and Asia.
(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 3.6%,
7.0% and 7.7% of total product sales in fiscal 1996, 1995 and 1994,
respectively. The selling price for the majority of the Company's
third-party ferrofluid applications ranges from $1,000 to $10,000
per liter.
Inertia Dampers: The Company supplies Ferrofluidic[Registered
Trademark] 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.
(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[Registered Trademark] seals and
sealing subsystems it is the leading provider of such technology.
Sales of magnetic fluid sealing devices accounted for approximately
22.2%, 32.1% and 33.4% of total product sales in fiscal 1996, 1995
and 1994 respectively. The Company's major magnetic sealing
products are:
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,
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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.
Subsystems: During 1996, as an extension of its core capability to
design and manufacture rotary seals for a variety of vacuum
processing applications, the Company began marketing sealing
sub-systems to original equipment manufacturers, which incorporate
existing Ferrofluidic sealing technology with other mechanical and
electrical components to produce a fully integrated sub-system.
Sub-systems allow the Company's customers to outsource more of their
manufacturing without compromising quality. Some of the new
opportunities include robotics, cluster tooling, and other
semiconductor processing sub-assemblies.
(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
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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 62.7%, 34.5% and 32.7% of total product
sales in fiscal 1996, 1995, and 1994, respectively. Silicon crystal
growing systems typically sell at prices ranging between $350,000
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.
SIGNIFICANT CUSTOMERS
In fiscal 1996, sales to two foreign customers in the Systems Division, Posco
Huls Corporation ("PHC") and Taisil Electronic Materials Corporation ("Taisil"),
totaled $24,603,000 and $14,254,000, or 33.7% and 19.5% respectively, of
consolidated product sales. In fiscal 1995, sales to PHC totaled $6,209,000 and
accounted for 18.2% of consolidated product sales. In fiscal 1994, sales to PHC
in the amount of $5,667,000 accounted for 21.5% of consolidated product sales.
Management believes that the loss of these customers, or their affiliates, could
have a material adverse effect on its future results of operations.
COMPETITION
The Company believes that its competitive advantage 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.
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(i) MAGNETIC FLUIDS. Numerous other companies around the world supply various
forms of magnetic fluids for commercial applications. Nevertheless, the
Company, in conjunction with Ferrotec, 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 competitor in the audio ferrofluid market
is Ferrotec with respect to sales in the Pacific Rim.
(ii) SEALS AND SEALING SUBSYSTEMS. 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
supplier with the greatest market share.
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 nearly 75 systems to customers in the U.S.,
Japan and the Pacific Rim. 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.
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.
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EMPLOYEES AND MARKETING
The Company currently has approximately 300 employees worldwide, of which 249
are employed in the United States, 45 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
in the U.S and Europe with respect to its Components business. Abroad, products
are sold in Europe through AP&T, the Company's wholly-owned subsidiary, in Japan
through its wholly-owned subsidiary, Ferrofluidics Japan Corporation, and
elsewhere in Europe and Asia through various sales representative and
distributor relationships.
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.
During 1996, the Company increased its capacity for in-house precision
machining through the establishment of a state-of-the-art machining center and
the addition of a second shift of machine operators. This enhanced capability
has proven to be critical in the ability to meet ever shortening lead times for
delivery of component products to customers, in particular in Japan and Asia
where the competition has historically dominated market share.
Additionally, during 1996 and 1995, the Company substantially expanded its
capacity for assembly and test of 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, a substantial portion 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 new in-house machining center, established in 1996, will begin to
supply a portion of the Company's need for precision machined component parts,
reducing its reliance on outside suppliers; however, it is not the intent of
management to conduct all of the component production in-house.
A substantial portion of the cost of the crystal growing systems, including
electrical components and machined parts, are purchased from third-party
suppliers. Wherever possible, the Company has
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made efforts to dual source critical component parts and subassemblies for the
systems and believes that there are a number of other suppliers for these parts.
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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 1996 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) $1,723,000, $1,479,000 and $1,237,000 in fiscal
years 1996, 1995 and 1994, 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 number of new technical advances in crystal growing
systems, including laser melt level control and a continuous feed system for
polysilicon. In 1996 the Company embarked on the development of a 300mm crystal
puller in connection with an order received from a foreign customer.
BACKLOG
<TABLE>
As of June 30, 1996, the Company had a consolidated order backlog of
$59,020,000, as compared to $37,756,000 at June 30, 1995. A comparative summary
of the consolidated backlog by business segment is as follows:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Systems $53,072,000 $32,406,000
Components 3,944,000 3,839,000
Distributed Products 2,004,000 1,511,000
----------- -----------
Total Backlog $59,020,000 $37,756,000
=========== ===========
</TABLE>
Of the total backlog at June 30, 1996, approximately 57% is expected to ship
during fiscal 1997.
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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 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 I to the Consolidated Financial
Statements in Item 8 of this report.
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 I of Notes to the
Consolidated Financial Statements in Item 8 of this report.
ITEM 2. PROPERTIES
The Company's offices, engineering and manufacturing operation is 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 Notes A
and E 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; Madrid, Spain; 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
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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, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
<TABLE>
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 the Nasdaq National Market.
<CAPTION>
1996 High Low
---- ---- ---
<S> <C> <C>
7/1/95 - 9/30/95 14 3/8 9 1/2
10/9/95 - 12/31/95 13 5/8 9 3/4
1/1/96 - 3/31/96 11 5/8 8 5/8
4/1/96 - 6/30/96 18 7/8 9 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 August 31, 1996, the closing sale price for the Company's Common Stock, as
reported by the Nasdaq National Market, was $11.25. On that date, there were
approximately 3,357 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.
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ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
The selected consolidated financial data for the five years ended June 30,
1996, 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,
---------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
- ---------------------
Net product sales $72,967,000 $34,149,000 $ 26,379,000 $ 32,905,000 $20,926,000
Royalty revenues - 6,000 82,000 372,000 767,000
----------- ----------- ------------ ------------ -----------
Total net sales and revenues 72,967,000 34,155,000 26,461,000 33,277,000 21,693,000
Engineering & product development expenses 4,440,000 3,410,000 3,390,000 3,129,000 1,757,000
Nonrecurring operating expenses (income) - (1,156,000) 3,108,000 8,594,000 (470,000)
Operating income (loss) 4,937,000 943,000 (9,662,000) (11,716,000) 35,000
Interest expense, net (443,000) (406,000) (356,000) (254,000) (567,000)
Income tax benefit (expense) (487,000) 322,000 (1,169,000) (466,000) 30,000
Net income (loss) $ 3,820,000 $ 889,000 $(10,713,000) $(12,446,000) $ (167,000)
PER SHARE DATA:
- --------------
Net income (loss) $.61 $.16 $(2.00) $(2.49) $(.06)
Weighted average shares outstanding 6,313,045 5,563,160 5,366,350 5,005,120 3,008,916
BALANCE SHEET DATA:
- ------------------
Working capital $12,140,000 $ 7,811,000 $ (1,601,000) $ 6,775,000 $16,994,000
Total assets 43,639,000 39,529,000 32,508,000 36,884,000 35,209,000
Total liabilities 23,937,000 23,748,000 21,325,000 15,107,000 11,678,000
Long-term debt 5,000,000 5,036,000 28,000 - 7,500,000
Stockholders' equity 19,702,000 15,781,000 11,183,000 21,777,000 23,531,000
<FN>
Note: (a) No dividends had been declared or paid during the five years ended June 30, 1996.
</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
Fiscal 1996 Versus Fiscal 1995:
- ------------------------------
Record earnings were achieved in 1996 as the Company generated net income
of $3,820,000, or $.61 per share, on approximately 750,000 greater shares
outstanding as compared to $889,000, or $.16 per share, in 1995.
<TABLE>
In fiscal 1996, product revenues increased 114% to $72,967,000 from
$34,155,000 in fiscal 1995. The overall increase in the Company's level of
business can be directly attributed to the growth in the semiconductor industry
in general, which accounts for all of its Systems segment and a substantial
portion of its Components segment. The increases in revenues by segment is
summarized as follows:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Systems $45,741,000 $11,782,000
Components 18,827,000 14,125,000
Distributed Products 8,399,000 8,248,000
----------- -----------
Total Revenues $72,967,000 $34,155,000
=========== ===========
</TABLE>
The increase in revenues from systems is attributed to increased demand for
silicon wafers and the resulting increase in production capacity for the wafers.
During 1996 and 1995, the Company received orders for over 100 of its model
CZ-150 crystal growing system, which grows 200 millimeter diameter silicon
ingots. Increases in the production of capital equipment by OEM's in the
semiconductor industry has driven the demand for our component seals and sealing
subsystems resulting in a 33% increase in consolidated revenues from the
Components segment. Distributed Products, which principally serves the thin-film
deposition industry, showed a modest 2% revenue increase in 1996.
Total sales from the Company's European operations, AP&T, which includes
the sale of the Company's components and fluid products in Europe, as well as
comprising the Distributed Products segment, increased 13.4% to $12,702,000 in
1996 as compared to $11,201,000 in fiscal 1995. Sales by the Company's Japanese
operation, FJC, totaled $568,000, up 93% from $294,000 in 1995. During 1996, FJC
experienced a significant increase in its sales order activity for both
components products and crystal growing systems. Total foreign sales increased
over 150% to $54,080,000 in 1996 from $21,412,000 in 1995 due primarily to the
shipment of crystal growing systems to large scale wafer fabrication facilities
in Korea and Taiwan.
Bookings in 1996 increased 66% to $94,231,000 from $56,911,000 in the prior
year. Of the new business booked, $66,427,000 represented orders of crystal
growing systems and related equipment, as compared to $35,700,000 in the prior
year. Order backlog at June 30, 1996 totaled $59,020,000 as compared to
$37,756,000 at June 30, 1995. The Company,
13
<PAGE> 16
in consultation with its primary customers, has rescheduled approximately one
half of the shipments of crystal pullers initially scheduled for fiscal 1997
into fiscal 1998. However, the Company also expects that these delays will be
partially offset during fiscal 1997 by anticipated increases in shipments to
four leading international silicon wafer manufacturers. The major impact of the
rescheduling is expected to occur in the first two quarters of fiscal 1997.
There are certain factors that could cause actual results to differ
materially from those anticipated by these statements made above. These
include, but are not limited to, further rescheduling of existing crystal
puller orders, additional crystal puller orders from existing or new customers,
including those mentioned above, lack of new crystal puller orders from
existing or new customers, increased revenues in the Company's other business,
and a material change in the market conditions within the semiconductor
industry.
The consolidated gross margin for the year ended June 30, 1996 of 28.8%
declined from the gross margin of 40.7% in the previous year due to the change
in product mix of revenues. In 1996, 62.7% of consolidated revenues pertained to
crystal growing systems, which generate lower gross margins, as compared to
34.5% in the prior year. Consolidated operating income, before general corporate
expenses and nonrecurring operating income, improved in 1996 to 11.2% of product
revenues as compared to 7.4% in 1995. Operating income in the Systems segment
improved from 5.5% of revenues in 1995 to 10.8% in 1996. In the Components
segment, operating income improved from 11.9% of revenues to 15.2%.
The Company expended $4,440,000 during fiscal 1996 on engineering and
product development, representing 6.1% of revenues compared to $3,410,000 or 10%
of revenues in the preceding year. Of the total engineering and product
development expenditures in fiscal 1996, $2,194,000 was in the Systems segment
as compared to $1,135,000 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 in 1996 increased
$955,000 or 8.9% over that of 1995, but declined as a percent of revenues
from 31.3% in 1995 to 16% in 1996. Contributing to the increase in SG&A expenses
are increased warranty provisions and increased sales commissions to third
parties. Also included in the increase in SG&A expenses is a $520,000 increase
in general corporate expenses, which includes a $177,000 increase in non-cash
stock related compensation.
Interest income in 1996 was down from that in 1995 due principally to the
cancellation of certain paid-up insurance policies on the life of a former
executive officer which is more fully discussed in Note C to the Consolidated
Financial Statements. Invested cash remained at low levels as a result of the
need to finance the operations of the business. Interest expense of $580,000 is
also down from the prior year due to the elimination of borrowings against the
canceled insurance policies. See Note E to the Consolidated Financial Statements
for a more complete discussion of the Company's debt obligations.
The Company records translation and exchange gains and losses resulting
from fluctuations of foreign currency as other income (expense). The net impact
of currency translation and exchange was $33,000 and $260,000 of income in 1996
and 1995, respectively. Included in the income from currency translation in 1995
was a gain of approximately $245,000 which the Company realized upon the sale of
its investment in Ferrotec (see Note B to the Consolidated Financial
Statements). The balance of other income (expense) in 1996 and 1995 was
principally amortization of bank financing costs.
The income tax expense in 1996 of $487,000 is comprised principally of a
provision for state and foreign income taxes on the Company's earnings and a
federal alternative minimum tax
14
<PAGE> 17
provision. The tax provision in 1995 includes approximately $300,000 in various
state and foreign taxes, offset by a benefit of approximately $615,000 resulting
from the recording of a tax asset in Europe at AP&T reflecting that business's
return to profitability from continuing operations. See Note D to the
Consolidated Financial Statements for a more complete discussion of income
taxes.
Fiscal 1995 Versus Fiscal 1994:
- ------------------------------
<TABLE>
In fiscal 1995, revenues increased 29% to $34,155,000 from $26,461,000 in
fiscal 1994. Revenues from the Company's Systems segment increased 37% from
$8,612,000 in 1994 to $11,782,000 in 1995. 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.
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 segment 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 $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.
The most important development in fiscal 1995, however, was the level of
new orders received. 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).
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 benefited 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 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.
15
<PAGE> 18
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 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 E to the
Consolidated Financial Statements 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 C to the Consolidated Financial
Statements.
Nonrecurring Operating Income (Expenses)
- ----------------------------------------
Settlement of Ferrotec Litigation
- ---------------------------------
As more fully discussed in Note B to the Consolidated Financial Statements,
on June 30, 1993, the Company consummated a series of new license and other
agreements ending all litigation between the Company and Ferrotec Corporation
("Ferrotec"), its former Japanese subsidiary. Pursuant to these agreements, in
August 1993, the Company received one billion Japanese Yen (approximately
$9,500,000) in settlement of all claims against Ferrotec 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 the Company in connection with the litigation. The one
billion Yen 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, the Company acquired 125,000 shares of Ferrotec's
common stock, approximately 16% of Ferrotec's outstanding stock, for one billion
Japanese Yen, and was given a seat on Ferrotec's board of directors.
Given that the transactions involved an exchange of identical amounts, it
was treated as a nonmonetary transaction and, therefore, the value assigned to
the settlement was equivalent to the
16
<PAGE> 19
fair market value of the Ferrotec shares acquired. The estimated fair value of
the Ferrotec shares of $4,286,000 was recorded in the first quarter of 1994. In
recognition of Ferrotec's losses during its fiscal year ended March 31, 1994,
the Company established a valuation reserve against this investment and a
corresponding charge to operations 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. 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.
Settlement of Class Action Lawsuit
- ----------------------------------
On June 23, 1994, the Company and certain other parties to the shareholder
litigation described in Note J 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 J 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 first quarter of fiscal
1994.
Molecular BioQuest, Inc.
- ------------------------
As more fully discussed in Note B to the Consolidated Financial Statements,
in 1994 the Company advanced $300,000 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
- -------------
In 1994 the Company advanced $209,000 to Ferrofluidics Taiwan Corporation
(FTC), an affiliated sales representative in Taiwan, 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
17
<PAGE> 20
investment in and advances made to FTC, $230,000 has been charged to
nonrecurring operating expenses on the Consolidated Statement of Operations in
1994.
18
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
In 1996, the operations of the business used $2,801,000 of cash, which was
principally the result of the increase in accounts receivable and the decline in
the balance of deposits from systems customers. Borrowings under the Company's
revolving credit line were sufficient to finance $2,400,000 in capital
expenditures, principally to fund expansion of the Company's Nashua, NH
facility, as more fully described below. Cash receipts from the sale of crystal
growing systems under large multi-unit 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
1996 and 1995, the Company received advance payments of $12,547,000 and
$7,855,000, 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, the balance of which was $1,916,000 at June 30, 1996. The Company
has purchase contracts for inventory with various suppliers which, in some
cases, extend beyond two years. At June 30, 1996, outstanding purchase
commitments pursuant to these contracts totaled approximately $31,000,000.
The ratio of current assets to current liabilities was 1.7 at the end of
1996, as compared to 1.4 at the end of 1995. Working capital at June 30, 1996
increased to $12,140,000 from $7,811,000 at June 30, 1995. Current assets
increased, principally due to higher accounts receivable balances, despite
improvement to receivable turnover of 7.2 times in 1996 as compared to 5.5 times
in 1995. Inventory balances have remained relatively unchanged, however,
increased business levels have enabled management to improve overall inventory
turnover from 1.7 times in 1995 to 3.7 times in 1996.
As noted above, a primary customer of the Company has delayed the delivery
of certain crystal growing systems originally scheduled for fiscal 1997 into
fiscal 1998. As a result, the Company is in the process of increasing its
revolving line of credit with its bank from $2,500,000 to $7,500,000 in
anticipation of the need to finance working capital during the delay in
deliveries. In addition, management plans to make further improvements to
production scheduling and timing of materials purchased in order to minimize the
impact of the rescheduling and its need for bank borrowings. In addition, the
Company, through its foreign subsidiaries, has various short-term facilities
with local banks aggregating approximately $2,000,000. No borrowings were made
under the foreign short-term facilities during 1996.
Capital expenditures totaled $2,422,000 in 1996, as compared to $1,880,000
in 1995. During 1996 and 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. In addition, the capital
expenditures in 1996 included an upgrade of its in-house machining capability,
including the installation of state-of-the-art equipment for the fabrication of
critical component parts. Also during 1996, the Company canceled certain key man
life insurance policies on the life of a former chief executive officer which
provided cash of $1,248,000.
In 1995, the Company sold its investment in Ferrotec to several Japanese
financial institutions for an aggregate price of (Y)362,500,000 (approximately
$4.0 million) in cash, which enabled the Company to finance its capital
additions during that year and still reduce its short-term bank borrowings
outstanding. Additionally, during 1995, the Company received $350,000 in full
satisfaction of a note receivable from the sale of a former subsidiary.
19
<PAGE> 22
The Company has long-term financing in the form of a $5,000,000 Variable
Rate Industrial Revenue Bond ("VRIRB") that is subject to a variable rate of
interest keyed to short-term non-taxable rates (at June 30, 1996, 4.2%), the
proceeds of which were primarily used to fund the construction of the Company's
Nashua, NH headquarters. The Company has a credit facility with its bank which
provides the Company with total credit of approximately $7,900,000, $5,400,000
of which is in the form of a standby letter of credit for the Company's VRIRB,
and $2,500,000 of which is a revolving credit facility for working capital
purposes. The standby letter of credit has a term of five years with a fee of 1%
per year and the revolving credit facility bears interest at prime rate plus 1%
with a fee of 1/8% on the unused portion. At June 30, 1996, the entire
$2,500,000 was outstanding against the revolving line of credit.
During 1996, the Company borrowed $1,000,000, in the form of a demand note
with its bank, for working capital purposes, which bears interest at prime rate
plus 1%. During 1996, the Company also borrowed $800,000, in the form of an
installment demand note with its bank, to finance capital expansion of its
in-house machine shop, which bears interest at 9.75%. At June 30, 1996, the
balance on this note was $748,000. In addition, the Company, through its
wholly-owned foreign subsidiaries, has various short-term facilities with local
banks totaling approximately $2,000,000 at June 30, 1996, pursuant to which no
borrowings were made during 1996. The weighted average interest rates during
1996 on these facilities ranged from 8.3% to 12.9%.
In 1996, the Company's financing activities consisted of $4,186,000 in
various short-term borrowings, including its revolving line of credit. During
1995, financing activities used $2,658,000 in cash, 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 was able to pay off its revolving credit lines.
Management believes that current financial resources (working capital and
short-term borrowing arrangements) and anticipated funds from operations will be
adequate to meet cash requirements in the year ahead.
EFFECTS OF INFLATION
Inflation rates over the past three years have remained relatively low and,
as a result, have not had a material impact on the financial results of the
Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
-----------------------------
Page(s)
Reports of Independent Auditors.......................................... 21-22
Consolidated Balance Sheets as of June 30, 1996 and 1995................. 23
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 1996.................................. 24
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended June 30, 1996............... 25
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 1996.................................. 26
Notes to Consolidated Financial Statements............................... 27-47
20
<PAGE> 23
Report of Independent Auditors
------------------------------
To the Stockholders and Directors of Ferrofluidics Corporation
We have audited the accompanying consolidated balance sheet of Ferrofluidics
Corporation as of June 30, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. Our
audit also included the financial statement schedule, for the year ended June
30, 1996, listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on
our audit.
We conducted our audit 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 financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Ferrofluidics Corporation at June 30, 1996, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Manchester, New Hampshire
September 3, 1996
21
<PAGE> 24
Report of Independent Accountants
---------------------------------
To the Stockholders and Directors of Ferrofluidics Corporation
We have audited the accompanying consolidated balance sheet of Ferrofluidics
Corporation as of June 30, 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended June 30, 1995 and the financial statement schedule listed in
Item 14(a) of this Form 10-K. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule 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 financial statement 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 at June 30, 1995, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended June
30, 1995 in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
Manchester, New Hampshire
August 31, 1995
22
<PAGE> 25
FERROFLUIDICS CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and June 30, 1995
<CAPTION>
ASSETS 1996 1995
- ------ ---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,701,000 $ 1,563,000
Accounts receivable - trade, less allowance
of $320,000 ($357,000 in 1995) 12,757,000 7,774,000
Inventories 13,829,000 14,130,000
Advances to suppliers 1,916,000 2,145,000
Prepaid and other current assets 672,000 514,000
------------ ------------
Total Current Assets 30,875,000 26,126,000
------------ ------------
Property, plant and equipment, at cost, net
of accumulated depreciation of $9,583,000 ($8,895,000 in 1995) 8,784,000 8,116,000
Cash value of life insurance, net 1,731,000 2,976,000
Other assets, net 2,249,000 2,311,000
------------ ------------
TOTAL ASSETS $ 43,639,000 $ 39,529,000
============ ============
LIABILITIES
- -----------
Current Liabilities:
Bank notes payable $ 4,262,000 -
Accounts payable 6,366,000 $ 5,318,000
Customer deposits 4,368,000 9,403,000
Accrued expenses and other current liabilities 3,739,000 3,594,000
------------ ------------
Total Current Liabilities 18,735,000 18,315,000
------------ ------------
Long term debt obligations 5,000,000 5,036,000
Other liabilities 202,000 397,000
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, outstanding -- 6,060,902
(5,997,198 in 1995) 24,000 24,000
Additional paid-in capital 35,871,000 35,485,000
Accumulated deficit (15,643,000) (19,463,000)
Currency translation adjustments (550,000) (265,000)
------------ ------------
Total Stockholders' Equity 19,702,000 15,781,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,639,000 $ 39,529,000
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE> 26
FERROFLUIDICS CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996, 1995, AND 1994
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales and revenues $72,967,000 $34,155,000 $ 26,461,000
Cost of sales 51,941,000 20,264,000 17,492,000
----------- ----------- ------------
Gross profit 21,026,000 13,891,000 8,969,000
Operating expenses:
Engineering and product development expense 4,440,000 3,410,000 3,390,000
Selling, general and administrative expense 11,649,000 10,694,000 12,133,000
Nonrecurring operating (income) expenses - (1,156,000) 3,108,000
----------- ----------- ------------
Operating income (loss) 4,937,000 943,000 (9,662,000)
Interest income 137,000 232,000 224,000
Interest expense (580,000) (638,000) (580,000)
Other income (expense), net (187,000) 30,000 474,000
----------- ----------- ------------
Income (loss) before income taxes 4,307,000 567,000 (9,544,000)
Income taxes (benefit) 487,000 (322,000) 1,169,000
----------- ------------ ------------
Net Income (Loss) $ 3,820,000 $ 889,000 $(10,713,000)
=========== =========== ============
Net Income (Loss) per common share:
Net Income (Loss) $.61 $.16 $(2.00)
==== ==== ======
Weighted average common and
common equivalent shares outstanding 6,313,045 5,563,160 5,366,350
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE> 27
FERROFLUIDICS CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<CAPTION>
Common Stock Additional Currency
------------ Paid-In Accumulated Translation
Shares Par Value Capital Deficit Adjustments
--------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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)
--------- ------- ----------- ------------ ------------
Issuance of common stock for restricted
stock plan, charge to operations 70,878 284 467,000 - -
Redemption of stock for taxes (7,174) (28) (81,000) - -
Net income - - - 3,820,000 -
Current year translation adjustments - - - - (285,000)
--------- ------- ----------- ------------ ------------
BALANCE, JUNE 30, 1996 6,060,902 $24,244 $35,871,000 $(15,643,000) $ (550,000)
========= ======= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE> 28
FERROFLUIDICS CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996, 1995, AND 1994
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,820,000 $ 889,000 $(10,713,000)
Adjustments to reconcile net income (loss) to cash flow
provided by (used in) operating activities:
Depreciation and amortization 1,145,000 1,030,000 1,150,000
Deferred taxes (credits) - (615,000) 176,000
Provision for doubtful accounts 28,000 (397,000) (107,000)
Increase in cash surrender value (3,000) (202,000) (579,000)
Gain on sale of fixed assets (9,000) (4,000) (90,000)
Stock related compensation 467,000 290,000 48,000
Nonrecurring operating charges - - 450,000
Translation (gains) losses 460,000 (241,000) (336,000)
Gain on settlement with licensee, net of allowances - - (3,411,000)
Other (36,000) 205,000 (42,000)
Changes in operating assets and liabilities, net of
acquisitions and dispositions of businesses:
Accounts receivable (5,691,000) (2,753,000) 1,358,000
Inventories 134,000 (3,710,000) (1,379,000)
Prepaid and other current assets (900,000) (2,047,000) 296,000
Accounts payable and accrued expenses 1,857,000 330,000 2,446,000
Customer deposits (4,073,000) 7,855,000 1,539,000
Settlement reserve - - 3,150,000
----------- ----------- ------------
Net cash provided by (used in) operating activities (2,801,000) 630,000 (6,044,000)
----------- ----------- ------------
Cash flows from investing activities:
Proceeds from cancellation of key man policies 1,248,000 - -
Proceeds from notes receivable - 350,000 125,000
Sale of investment in affiliate - 3,991,000 -
Restricted cash - - (449,000)
Acquisition of property, plant and equipment (2,422,000) (1,880,000) (785,000)
Proceeds from sales of assets 34,000 753,000 202,000
----------- ----------- ------------
Net cash provided by (used in) investing activities (1,140,000) 3,214,000 (907,000)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock - - 20,000
Redemption of industrial revenue bond - - (2,500,000)
Payments under capital lease obligations (76,000) (72,000) -
Proceeds from borrowing of cash surrender value - 189,000 2,927,000
Short-term borrowings, net 4,262,000 (2,775,000) 823,000
----------- ----------- ------------
Net cash provided by (used in) financing activities 4,186,000 (2,658,000) 1,270,000
----------- ----------- ------------
Effect of currency rate changes on cash (107,000) 55,000 (46,000)
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents 138,000 1,241,000 (5,727,000)
----------- ----------- ------------
Cash and cash equivalents at beginning of year 1,563,000 322,000 6,049,000
----------- ----------- ------------
Cash and cash equivalents at end of year $ 1,701,000 $ 1,563,000 $ 322,000
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE> 29
FERROFLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
Ferrofluidics Corporation (the "Company") is a multinational company engaged
principally in developing, manufacturing and marketing ferrofluids (magnetic
fluids), rotary sealing devices based on or derived from its proprietary
ferrofluid technology, and systems for growing crystals of silicon, germanium,
gallium arsenide and other metal alloys for the semiconductor, photovoltaic,
military and advanced materials markets. Information on the Company's operations
by segment and geographic area are included in Note I.
Approximately 85% of the Company's sales were attributable to the
semiconductor industry, which can experience cyclical fluctuations. A prolonged
decline in the semiconductor industry could have a material adverse effect on
the Company's operating results.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All intercompany accounts and transactions have
been eliminated.
Use of Estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of the Company's financial instruments, including
accounts receivable, accounts payable and short-term and long-term debt,
approximate fair value.
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 Components 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, two affiliated Pacific Rim customers
accounted for 53.8% and 31.2%, respectively, of that segment's fiscal 1996 net
sales and 7.2% and 13.9%, respectively, of gross consolidated accounts
receivable at June 30, 1996. One of these customers has provided the Company
with an irrevocable letter of credit as security for payment.
27
<PAGE> 30
Additionally, the Company has made advance payments to suppliers for
inventory aggregating $1,916,000 at June 30, 1996.
<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, 1996 and 1995:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials and purchased parts $ 6,845,000 $ 8,018,000
Work-in-process 3,188,000 2,634,000
Finished goods 3,796,000 3,478,000
----------- -----------
$13,829,000 $14,130,000
=========== ===========
</TABLE>
The Company has purchase contracts for inventory with various suppliers
which, in some cases, extend beyond two years. At June 30, 1996, outstanding
purchase commitments pursuant to these contracts totaled approximately
$31,000,000.
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 of three to eight years;
leasehold improvements are amortized using the straight-line method over the
lesser of the life of the lease or the estimated useful life of the
improvements. Depreciation on buildings and building improvements is computed
using the straight-line method over estimated lives of 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,
1996 and 1995:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 321,000 $ 321,000
Buildings and improvements 6,633,000 6,573,000
Machinery and equipment 4,420,000 4,717,000
Furniture, fixtures and vehicles 5,263,000 4,307,000
Construction in process 1,730,000 1,093,000
----------- -----------
18,367,000 17,011,000
Less: Accumulated depreciation and amortization 9,583,000 8,895,000
----------- -----------
$ 8,784,000 $ 8,116,000
=========== ===========
</TABLE>
Intangible Assets
- -----------------
At June 30, 1996, the Company had goodwill (included in other assets)
resulting from the acquisition in fiscal 1989 of AP&T GmbH of $1,211,000 that is
being amortized over a 16 year life on a straight line basis. Accumulated
amortization as of June 30, 1996 amounted to $508,000.
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.
28
<PAGE> 31
Income Taxes
- ------------
Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, Accounting for Income Taxes.
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, 1996, each of these subsidiaries had an accumulated
loss.
Revenue Recognition
- -------------------
The Company generally recognizes product revenue upon shipment of products to
the customer; royalty revenue is recognized as it is earned.
Product Development and Advertising Expenses
- --------------------------------------------
Product development expenditures are charged to expense when first
incurred. The Company incurred $1,723,000, $1,479,000 and $1,237,000 in product
development during 1996, 1995 and 1994, respectively.
Translation of Foreign Currencies
- ---------------------------------
The financial statements of foreign subsidiaries have been translated
into U.S. dollars in accordance with FASB Statement No. 52, Foreign Currency
Translation. All balance sheet accounts of foreign subsidiaries whose functional
currency is other than the U.S. dollar have been translated at year-end exchange
rates. Income statement amounts have been translated at average exchange rates
during the year. Translation gains and losses have been accumulated as a
separate component of stockholders' equity. Translation gains and losses of
foreign subsidiaries whose functional currency is the U.S. dollar have been
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 debit offsets
foreign exchange gains or losses on those debts. At June 30, 1996, there were no
foreign exchange contracts outstanding.
<TABLE>
Other Income (Expense)
- ----------------------
Other income (expense) consisted of the following for the years ended
June 30, 1996, 1995 and 1994:
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Translation gain (loss), net $(460,000) $ 241,000 $ 336,000
Exchange gain (loss), net 493,000 19,000 (144,000)
Gain on sale of fixed assets 9,000 4,000 90,000
Other (229,000) (234,000) 192,000
--------- --------- ---------
$(187,000) $ 30,000 $ 474,000
========= ========= =========
</TABLE>
29
<PAGE> 32
Stock Based Compensation
- ------------------------
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
except for restricted stock awards (See Note H), recognizes no compensation
expense for the stock option grants.
Earnings (Loss) Per Share
- -------------------------
Net income per share for fiscal 1996 and 1995 is based on the weighted
average number of common shares outstanding as well as the effect of all
dilutive common stock equivalents. Net loss per share for 1994 is based on the
weighted average number of common shares outstanding as the inclusion of common
stock equivalents would have been antidilutive.
Statement of Cash Flows
- -----------------------
For the years ended June 30, 1996, 1995 and 1994, cash payments for
income taxes amounted to $290,000, $121,000 and $1,200,000, respectively. Cash
payments for interest in each of the three years amounted to $421,000, $427,000
and $624,000, respectively.
Significant non-cash investing, financing and operating activities
during the three years ended June 30, 1996 were as follows:
During 1996, the Company transferred its ownership in certain single
premium, paid-up life insurance policies on the life of a former CEO to the
former CEO. At the time of the transfer, the policies had a gross cash value of
approximately $2,300,000, against which the Company had outstanding borrowings
in the amount of approximately $1,300,000, and an offset for amounts due the
former CEO of approximately $1,000,000. As the policies had no net carrying
value to the Company, the transfer was treated as a noncash transaction (See
Notes C and J). Also during 1996, the Company transferred certain equipment with
a net book value of $488,000 into inventory.
In August 1993, the Company received one billion Japanese Yen
(approximately $9,500,000) in settlement of all claims against Ferrotec
Corporation ("Ferrotec", formerly Nippon Ferrofluidics Corporation) 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 the Company in connection with the
litigation. Also pursuant to the agreements, the Company acquired 125,000 shares
of Ferrotec's common stock, approximately 16% of Ferrotec's outstanding stock,
for one billion Japanese Yen, and was given a seat on Ferrotec's board of
directors. Given that the transactions involve an exchange of identical amounts,
it was treated as a noncash transaction (See Note B).
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement 121
in the first quarter of fiscal 1997 and, based on current circumstances, does
not believe the effect of the adoption will be material.
30
<PAGE> 33
Fourth Quarter Adjustments
- --------------------------
The Company made adjustments to its financial statements in the fourth quarter
ended June 30, 1996, including approximately $970,000 in valuation adjustments
to its inventories and approximately $400,000 pertaining to the reduction in
certain accruals for management bonuses.
B. INVESTMENT IN AFFILIATES
Ferrotec Corporation
- --------------------
On June 30, 1993, the Company consummated a series of new license and
other agreements ending all litigation between the Company and Ferrotec
Corporation ("Ferrotec", formerly Nippon Ferrofluidics Corporation), its former
Japanese subsidiary. Pursuant to these agreements, in August 1993, the Company
received one billion Japanese Yen (approximately $9,500,000) in settlement of
all claims against Ferrotec 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 the
Company in connection with the litigation. The one billion Yen 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, the
Company acquired 125,000 shares of Ferrotec's common stock, approximately 16% of
Ferrotec's outstanding stock, for one billion Japanese Yen, and was given a seat
on Ferrotec's board of directors.
Given that the transactions involved an exchange of identical amounts,
it was treated as a nonmonetary transaction and, therefore, the value assigned
to the settlement was equivalent to the fair market value of the Ferrotec shares
acquired. The estimated fair value of the Ferrotec shares of $4,286,000 was
recorded in the first quarter of 1994. In recognition of Ferrotec losses during
its fiscal year ended March 31, 1994, the Company 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) Ferrotec was granted a worldwide license with respect to
Ferrofluidic[Registered Trademark] exclusion seals for computer disc drive
memories; (ii) Ferrofluidics retains its worldwide exclusive rights to its
Ferrofluidic[Registered Trademark] environmental sealing system, 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 Ferrotec to find
a buyer for the 125,000 shares after concluding a financial interest in Ferrotec
was not strategically in the best interest of the Company. In March 1995, the
Company completed the sale of its 125,000 shares of Ferrotec common stock to
several Japanese financial institutions for an aggregate price of
[Yen]362,500,000 (approximately $4,000,000) 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.
Molecular BioQuest, Inc.
- ------------------------
During 1993, the Company entered into a series of agreements with
Molecular BioQuest, Inc. ("BioQuest"), a privately-owned company principally
engaged in the development and manufacture of biotechnology products. Under the
agreements, the Company provided certain consulting services and BioQuest
purchased 100,000 shares of the Company's common stock in exchange for a note
31
<PAGE> 34
convertible into 10% of BioQuest's outstanding common stock. The transaction was
accounted for as an investment in BioQuest, which was valued at $1,650,000, the
fair value of the 100,000 shares of the Company's common stock on that date. In
addition, the Company committed to make available to BioQuest a line of credit
of $825,000, as well as an additional loan of up to $750,000 in exchange for a
note convertible into additional common stock of BioQuest. During fiscal 1993,
the investment in BioQuest was reduced by a charge against earnings of
$1,594,000 representing undeveloped technology and the Company's share of
BioQuest's operating losses since the date of investment.
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
commitment discussed above), (ii) the Company's options to acquire additional
shares of BioQuest were canceled and (iii) it received 5% of the outstanding
common stock of BioQuest. Under this agreement, the obligation of BioQuest under
the convertible debenture was canceled, it was entitled to retain the 100,000
shares of Ferrofluidics common stock and was required to restrict its use of the
name "The Ferrofluid Company" in the future. The entire $475,000 paid to
BioQuest was charged to operations in the first quarter of 1994, in recognition
of BioQuest's undeveloped technology and its continued operating losses.
VSE
- ---
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.
VAT Vakuumventile, GmbH
- -----------------------
In November 1994, the Company entered into a fifteen-year agreement with
VAT Vakuumventile, GmbH ("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. 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.
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.
32
<PAGE> 35
33
<PAGE> 36
C. CASH VALUE OF LIFE INSURANCE
During fiscal 1988 and 1989, the Company invested an aggregate of
$5,000,000 in six single premium life insurance policies on the lives of Dr.
Ronald Moskowitz, a former CEO, and Mr. Frank Bloom, a former CFO. The policies
yielded a 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, this former CEO and CFO were given the right to
borrow specified amounts annually from the insurance company, to a specified
date, and the former officers' estates were beneficiaries of the policies to the
extent of their respective borrowing rights. Such allowable borrowings
approximated the earnings accruing to the Company under the policies. At June
30, 1995, outstanding borrowings by this former CEO under the policies,
including accrued interest, approximated $2,354,000 and approximately $151,000
of additional amounts could be borrowed. The Company has not recognized earnings
under these policies to the extent they were subject to the executive borrowing
rights.
During fiscal 1991 and 1992, the Company entered into agreements with
the aforementioned former officers permitting the officers to deposit amounts
with the Company equivalent to the amounts borrowed or borrowable from the
insurance company by them. Deposited amounts were, under certain circumstances,
repayable by the Company to such former officers upon their death or the
surrender of the policies. At June 30, 1995, approximately $1,407,000 was
reflected as an offset to the cash surrender value of these policies in
recognition of these deposited amounts.
During 1996, the Company entered into a settlement agreement with Dr.
Moskowitz which, among other things, required the transfer of ownership in two
of these policies to the former CEO and the cancellation of the remaining two
policies on his life. The transferred policies had no carrying value on the
Company's books and, accordingly, the Company did not incur a charge on the
transfer. Upon cancellation of the other two policies, the Company received the
net cash value of approximately $1,248,000 (See Note J).
At June 30, 1996, the remaining two policies on the life of the former
CFO had an aggregate cash value of $1,783,000, against which the Company had
$1,751,000 in loans and accrued interest outstanding at an interest rate of 8%.
In addition, the Company has recorded the cash surrender value of other key man
life insurance policies under split-dollar agreements with the aforementioned
former CEO of $1,699,000 and $1,696,000 at June 30, 1996 and 1995, respectively.
This former CEO's estate is 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.
34
<PAGE> 37
D. INCOME TAXES
<TABLE>
Income (loss) before income taxes for the years ended June 30, 1996,
1995 and 1994 was taxed in the following jurisdictions:
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Domestic $4,000,000 $1,012,000 $(8,000,000)
Foreign 307,000 (445,000) (1,544,000)
---------- ---------- -----------
Total $4,307,000 $ 567,000 $(9,544,000)
========== ========== ===========
</TABLE>
<TABLE>
Significant components of the provision for income taxes (benefit) is as
follows:
<CAPTION>
<S> <C> <C> <C>
Current:
Federal $133,000 - -
State 233,000 $ 20,000 $ 20,000
Foreign 121,000 273,000 973,000
-------- --------- ----------
Total current 487,000 293,000 993,000
-------- --------- ----------
Deferred:
Federal - - 176,000
State - - -
Foreign - (615,000) -
-------- --------- ----------
Total deferred - (615,000) 176,000
-------- --------- ----------
Total $487,000 $(322,000) $1,169,000
======== ========= ==========
</TABLE>
The income tax expense in 1996 of $487,000 is comprised principally of a
provision for state and foreign income taxes on the Company's earnings and a
federal alternative minimum tax provision. The deferred tax benefit in 1995 is
principally the result of net adjustments to the valuation allowance relating to
the foreign deferred tax asset in the amount of $615,000. The current provision
of $293,000 in 1995 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 Ferrotec
and changes in the deferred tax asset valuation allowance.
<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,
1996, 1995 and 1994:
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax expense (benefit)
at federal statutory rate $ 1,464,000 $ 193,000 $(3,245,000)
Change in valuation allowance (1,180,000) (1,629,000) 3,469,000
Settlement of stockholders' class
action suit - 1,247,000 -
State income tax, net of federal tax benefit 153,000 20,000 20,000
Foreign income taxes at differing
statutory rates 17,000 (342,000) 973,000
Other 33,000 189,000 (48,000)
----------- ----------- -----------
Income tax expense (benefit) $ 487,000 $ (322,000) $ 1,169,000
=========== =========== ===========
</TABLE>
35
<PAGE> 38
<TABLE>
The components of the net deferred tax asset as of June 30, 1996 and 1995 was as follows:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 9,789,000 $ 11,163,000
Capital loss carryforward 1,766,000 1,808,000
Compensation related 235,000 391,000
Investment writedowns 612,000 617,000
Reserves 160,000 297,000
Inventory 1,016,000 900,000
Research & development credits 82,000 174,000
Alternative minimum tax credits 172,000 -
Foreign tax credits 873,000 873,000
Other 340,000 157,000
------------ ------------
Total deferred tax assets 15,045,000 16,380,000
Valuation allowance for deferred tax assets (13,049,000) (14,229,000)
------------ ------------
Net deferred tax assets 1,996,000 2,151,000
Deferred tax liabilities:
Depreciable assets (1,191,000) (1,155,000)
Other (190,000) (381,000)
------------ ------------
Total deferred tax liabilities (1,381,000) (1,536,000)
Net deferred tax asset (included in other assets) $ 615,000 $ 615,000
============ ============
</TABLE>
FASB Statement No. 109, Accounting for Income Taxes, 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 $13,049,000
has been established.
As of June 30, 1996, the Company had remaining net operating loss
carryforwards for Federal income tax purposes of approximately $26,000,000, and
for foreign income tax purposes of approximately $2,750,000, which can be used
to offset future taxable income. The net operating loss carryforwards for
Federal income tax purposes 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. The tax benefit
to be realized upon utilization of the $16,800,000 of loss carryforwards will
result in a decrease in current income taxes payable and an increase to
additional paid-in capital. Foreign tax credits of $873,000 expire at various
dates through 1999.
36
<PAGE> 39
E. SHORT TERM BORROWINGS AND OTHER DEBT OBLIGATIONS
<TABLE>
As of June 30, 1996 and 1995, the Company and its subsidiaries have the
following debt obligations outstanding:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revolving line of credit $2,500,000 -
1984 Industrial Revenue Bond 5,000,000 $5,000,000
Bank notes 1,762,000 36,000
---------- ----------
9,262,000 5,036,000
Less: current portion of debt obligations 4,262,000 -
---------- ----------
Long term debt obligations $5,000,000 $5,036,000
========== ==========
</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, 1996 was 4.2%. 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, 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
its bank which provides the Company 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 credit facility is collateralized by substantially all of the assets of the
Company. At June 30, 1996, the entire $2,500,000 was outstanding against the
revolving line of credit. The average balance outstanding during 1996 amounted
to $1,250,000. The interest rate on the revolving line at June 30, 1996 was
9.25%.
During 1996, the Company borrowed $1,000,000, in the form of a demand
note with its bank, for working capital purposes to supplement the revolving
line of credit which was fully borrowed. The note is payable on demand and bears
interest at prime plus 1% (9.25% at June 30, 1996) and is collateralized by
substantially all of the assets of the Company. In addition, during 1996, the
Company borrowed $800,000 in the form of a installment note with its bank in
order to finance the capital expansion of its in-house machine shop. The note,
which is payable upon demand, is being amortized in 59 monthly installments of
$16,899 with a final payment on January 25, 2001 of $21,151. This note bears
interest at 9.75% and is collateralized by the machinery and equipment acquired.
At June 30, 1996, the balance on this note was $748,000.
37
<PAGE> 40
In addition, the Company, through its wholly-owned foreign subsidiaries,
has various short-term facilities with local banks totaling approximately
$2,000,000 at June 30, 1996. No borrowings were made against these short-term
facilities during 1996. The weighted average interest rates during the year on
these facilities ranged from 8.3% to 12.9% and the interest rates at June 30,
1996 ranged from 7.0% to 11.5%.
F. COMMITMENTS AND CONTINGENCIES
The Company has entered into operating leases for office space and
equipment. Future minimum lease payments for the five years subsequent to fiscal
1996 amount to: $421,000 in 1997; $154,000 in 1998; $106,000 in 1999; $99,000 in
2000; and $92,000 in 2001. Rent expense under operating leases amounted to
$459,000 in 1996, $336,000 in 1995 and $349,000 in 1994. The Company also leases
approximately 11,000 square feet of its headquarters in Nashua to a third party.
Due to increasing space needs, the Company has terminated the lease, effective
October 1, 1996, in exchange for payment to the tenant of $100,000, which will
be charged to operations during fiscal 1997. The Company will receive minimum
lease payments of $28,000 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 $81,000 in 1996 and will make
future lease payments of $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 ([pound]) 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 [pound]300,000
into an escrow account, which currently earns interest at a rate of 2.2%,
pursuant to the terms of the guarantee and was recorded as restricted cash at
June 30, 1996. The Company will be relieved of this obligation before the ten
year expiration date 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 $265,000 against this restricted cash in
recognition of the uncertainty surrounding the ultimate collectibility of the
cash.
At June 30, 1996, the Company had possible indemnification liabilities
to its former CFO in connection with the single premium, paid-up life insurance
policies described in Note C. The unrecorded portion of this contingent
liability ranges from a nominal amount to $150,000.
G. COMMON STOCK
At June 30, 1996, an aggregate of 1,073,579 shares of the Company's
common stock had been reserved for issuance in connection with the nonqualified
and incentive stock option plans, the restricted stock plan and stock purchase
warrants outstanding (See Note H).
Shareholder Rights Plan
- -----------------------
38
<PAGE> 41
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 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") 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.
H. 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.
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, 1996, 31,727 shares of the
Company's common stock had been purchased pursuant to this plan.
39
<PAGE> 42
Non-Qualified and Incentive Stock Option Plans
- ---------------------------------------------
The Company has a Non-Qualified 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. 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. 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 Non-Qualified Stock Option Plan (the "1995 Plan") with the
intention of replacing options that had been granted under the 1984 Plan which
were expected to expire during 1996. Neither directors nor employees of the
Company who are subject to the provisions of Section 16 of the Securities and
Exchange Act of 1934 are 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, 100,000 shares of the Company's
common stock were made available for grant.
On June 13, 1995, the Board of Directors adopted, and the stockholders
approved, 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.
<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 from five to ten years from the grant date. A summary of the changes
in outstanding stock options under the three plans discussed above for the three
years ended June 30, 1996 is set forth below:
<CAPTION>
Shares Price Range
------------------------------------------------------- ------------
"1995
"1984 Plan" "1995 Plan" Incentive Plan" Total
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OUTSTANDING, JUNE 30, 1993 379,855 - - 379,855 $5.00-$16.76
Granted - - - -
Canceled/expired (125,275) - - (125,275) 5.00- 16.00
Exercised (812) - - (812) 5.00- 9.13
-------------------------------------------------------
OUTSTANDING, JUNE 30, 1994 253,768 - - 253,768 $5.00-$16.76
Granted - - 255,550 255,550 9.13- 9.63
Canceled/expired (13,640) - - (13,640) 5.00- 16.76
Exercised - - - -
-------------------------------------------------------
OUTSTANDING, JUNE 30, 1995 240,128 - 255,550 495,678 $5.00-$15.25
Granted 4,125 71,921 151,000 227,050 9.75- 10.25
Canceled/expired (56,324) (1,000) (57,324) 5.00- 9.13
Exercised - - - -
-------------------------------------------------------
OUTSTANDING, JUNE 30, 1996 187,929 71,921 405,550 665,404 $5.00-$15.25
=======================================================
</TABLE>
40
<PAGE> 43
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. Under the Restricted Stock
Plan, the maximum number of shares of common stock that may be reserved and
authorized for issuance by the Board of Directors cannot exceed 5% of the total
number of outstanding shares of common stock at the time of any award of
restricted stock. At June 30, 1996, the Board of Directors had reserved and
authorized 302,000 shares of common stock for issuance, which represents not
more than 5% of the outstanding shares of common stock as of that date. 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, 1996, 1995 and 1994 amounted to $467,000,
$290,000 and $48,000, respectively.
<TABLE>
A summary of the changes in outstanding shares of restricted stock for
the years ended June 30, 1996, 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
Granted 40,000
Forfeited (3,400)
Vested (70,878)
-------
OUTSTANDING, JUNE 30, 1996 145,073
=======
</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, 1996, 1995 and 1994, 259,829 shares, 281,267
shares and 296,142 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.
41
<PAGE> 44
<TABLE>
<CAPTION>
S h a r e s
---------------------------------------------------
JUNE 30, 1996 June 30, 1995 June 30, 1994 Price Expiration Date
------------- ------------- ------------- ----- ---------------
<S> <C> <C> <C> <C>
- - 1,250 $13.28 July 11, 1994
- - 8,500 18.00 November 13, 1994
- - 2,500 12.28 November 30, 1994
- - 2,625 13.13 May 22, 1995
- 10,000 10,000 8.50 September 3, 1995
- 9,188 9,188 5.00 October 10, 1995
- 4,250 4,250 10.00 March 13, 1996
- 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 17,500 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 47,500 15.63 June 18, 1997
62,500 62,500 62,500 11.75 August 31, 1997
20,000 20,000 20,000 11.00 October 27, 1997
14,500 - - 9.75 October 10, 2000
------- ------- -------
259,829 281,267 296,142
======= ======= =======
</TABLE>
<TABLE>
A summary of the changes in outstanding stock purchase warrants for the
three years ended June 30, 1996 is set forth below:
<CAPTION>
Shares Price Range
------ -----------
<S> <C> <C>
OUTSTANDING, JUNE 30, 1993 405,392 $ 5.00 - $18.00
Granted - -
Canceled/expired (109,250) 10.00 - 16.00
Exercised - -
--------
OUTSTANDING, JUNE 30, 1994 296,142 $ 5.00 - $18.00
Granted - -
Canceled/expired (14,875) 12.28 - 18.00
Exercised - -
--------
OUTSTANDING, JUNE 30, 1995 281,267 $ 5.00 - $15.63
Granted 14,500 9.75
Canceled/expired (35,938) 5.00 - 10.00
Exercised - -
--------
OUTSTANDING, JUNE 30, 1996 259,829 $ 5.00 - $15.63
========
</TABLE>
At June 30, 1996, 247,329 warrants are exercisable at prices ranging from
$5.00 - $15.63. During 1997, an additional 12,500 warrants will become
exercisable at $11.75.
Deferred Income (401-K) Plan
- ----------------------------
The Company has an elective employees savings plan for all eligible
employees. Ferrofluidics Corporation Tax Savings and 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 $9,500 (for
42
<PAGE> 45
calendar 1996) 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 1996 and 1995, the Company made matching contributions
to the Plan, and corresponding charges to operations, in the amounts of $208,000
and $92,000 respectively. No contributions were made in fiscal 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.
I. 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, "components"); crystal growing systems and related
products; and thin film deposition products manufactured and/or distributed by
AP&T. Sales between segments and geographic enterprises are accounted for at
cost plus a reasonable profit.
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, restricted cash, notes receivable,
deferred income tax assets, certain fixed assets, and other non-current assets,
including cash surrender value of life insurance, net of loans, in the amount of
$1,731,000 and $2,976,000 at June 30, 1996 and 1995, respectively.
For the year ended June 30, 1996, two affiliated foreign customers, Posco
Huls Corporation ("PHC") and Taisil Electronic Materials Corporation ("Taisil"),
accounted for $24,603,000 and $14,254,000, respectively, of product revenues in
the Crystal Growing Systems industry segment. For the years ended June 30, 1995
and 1994, PHC accounted for $6,209,000 and $5,667,000 of revenues, respectively,
in the Crystal Growing Systems industry segment.
The following table presents financial information for the Company's industry
segments for the years ended June 30, 1996, 1995 and 1994. All amounts are
expressed in thousands of dollars.
43
<PAGE> 46
<TABLE>
<CAPTION>
FERROFLUIDIC PRODUCTS
---------------------
CRYSTAL
GROWING THIN FILM
COMPONENTS SYSTEMS DEPOSITION CONSOLIDATED
---------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1996:
- -------------------------
Sales to unaffiliated customers $18,827 $45,741 $8,399 $72,967
=======
Segment operating profit 2,854 4,957 387 $ 8,198
General corporate expenses (3,261)
-------
Operating Income $ 4,937
=======
Net identifiable assets 15,843 19,018 2,777 $37,638
General corporate assets 6,001
-------
Total Assets $43,639
=======
Depreciation and amortization 794 172 179
Capital expenditures 1,790 414 218
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
=======
Net 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 - - 82
------- ------- ------ -------
Total net sales and revenues 11,367 8,612 6,482 $26,461
=======
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)
=======
Net 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
</TABLE>
44
<PAGE> 47
<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, 1996
- ------------------------
Sales to unaffiliated domestic customers $18,887 - - - $18,887
Sales to unaffiliated foreign customers 40,835 $12,702 $ 543 - 54,080
Sales to subsidiaries 3,922 - 25 $(3,947) -
------- ------- ----- ------- -------
Total net sales and revenues 63,644 12,702 568 (3,947) $72,967
=======
Geographic operating profit (loss) 8,459 587 (829) (19) $ 8,198
General corporate expenses (3,261)
-------
Operating Income $ 4,937
=======
Net identifiable assets 33,393 4,208 1,450 (1,413) $37,638
General corporate assets 6,001
-------
Total Assets $43,639
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 l,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 l,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
</TABLE>
45
<PAGE> 48
J. LITIGATION
Shareholder Class Action Lawsuits
- ---------------------------------
In August and September 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, was published without fully disclosing consideration
given or received therefore. 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 the inception of this investigation, the Company has cooperated
fully with the SEC's inquiry.
46
<PAGE> 49
Former Management
- -----------------
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. After
investigating 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 was to 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 was to be available to render such
services as the Company may reasonably request, provided, however, that he was
to 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 1996, 1995 and 1994, the Company made cash
payments under this agreement totaling $37,000, $200,000 and $275,000,
respectively.
In September 1995, the Company and the former CEO entered into a
agreement (the "Settlement Agreement") to amend the Termination Agreement and
accelerate the termination of his relationship with the Company. Among other
things, the Settlement Agreement required (i) the extension of the former CEO's
covenant not to compete to June 30, 2000, (ii) a payment to the former CEO of
$196,000 in full satisfaction of the $213,000 in remaining payments owed him
under the Termination Agreement, (iii) a payment to the former CEO of $150,000
in full satisfaction of a $200,000 legal indemnification, and (iv) the transfer,
to the former CEO, of the Company's ownership in two single premium, paid-up
life insurance policies on his life (See Note C).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for by this Item 9 was previously reported in a
Current Report on Form 8-K filed with the SEC on November 28, 1995, as amended
by a Current Report on Form 8-K/A filed with the SEC on December 8, 1995, and in
a Current Report on Form 8-K filed with the SEC on December 14, 1995.
47
<PAGE> 50
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.
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, 1996, 1995 and 1994 PAGE
Schedule II - Valuation and Qualifying Accounts 55
48
<PAGE> 51
Financial statement schedules other than that 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 schedule does 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, 1996.
(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 10-K 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)
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)
49
<PAGE> 52
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 Ferrofluidics Corporation Amended and Restated 1994 Restricted Stock
Plan.(3)
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)
10.14 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)
50
<PAGE> 53
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)
10.18 Amended and Restated Employment Agreement, dated May 17, 1996, between
the Registrant and Paul F. Avery, Jr.(3)
10.19 Amended and Restated Employment Agreement, dated May 17, 1996, between
the Registrant and Salvatore J. Vinciguerra.(3)
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)
10.24 Ferrofluidics Corporation Amended and Restated 1995 Stock Option and
Incentive Plan.(3)
10.25 Ferrofluidics Corporation Amended and Restated 1995 Non-Qualified Stock
Option Plan.(3)
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)
51
<PAGE> 54
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)
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)
52
<PAGE> 55
10.74 Superseding 1993 Fluids License Agreement, dated June 30, 1993, between
the Registrant and Nippon Ferrofluidics Corporation.(2)
11 Computation of Per Share Earnings(3)
21 Subsidiaries of the Registrant(3)
23.1 Consent of Ernst & Young LLP(3)
23.2 Consent of Coopers & Lybrand L.L.P.(3)
(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.
(3) Filed herewith
53
<PAGE> 56
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 authorized, this 16th day of
September, 1996.
FERROFLUIDICS CORPORATION
By: /s/ Salvatore J. Vinciguerra
-------------------------------------
Salvatore J. Vinciguerra
Chief Executive Officer and President
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.
Signatures Title Dated signed
- ---------- ----- ------------
/s/ Paul F. Avery, Jr. Chairman of the Board, 9/16/96
- ------------------------------ Treasurer (Principal Financial
Paul F. Avery, Jr. Officer)
/s/ Salvatore J. Vinciguerra Chief Executive Officer, 9/16/96
- ------------------------------ President
Salvatore J. Vinciguerra
/s/ Stephen P. Morin Controller 9/16/96
- ------------------------------ (Principal Accounting Officer)
Stephen P. Morin
/s/ Stephen B. Hazard Director 9/16/96
- ------------------------------
Stephen B. Hazard
/s/ Dean Kamen Director 9/16/96
- ------------------------------
Dean Kamen
/s/ Howard F. Nichols Director 9/16/96
- ------------------------------
Howard F. Nichols
/s/ Robert P. Rittereiser Director 9/16/96
- ------------------------------
Robert P. Rittereiser
/s/ Dennis R. Stone Director 9/16/96
- ------------------------------
Dennis R. Stone
54
<PAGE> 57
FERROFULIDICS CORPORATION
<TABLE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
June 30, 1996, June 30, 1995 and June 30, 1994
<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, 1996:
(a)Amounts deducted from the assets
to which they apply:
Reserve for doubtful accounts - trade $ 357,000 $ 28,000 - $ 65,000 $ 320,000
Reserve for excess and obsolete inventory 948,000 240,000 - 226,000 962,000
Reserve for rent guarantee 275,000 - - 10,000 265,000
Reserve against cash surrender value 1,407,000 - - 1,407,000 -
(b)Other Reserves:
Warranty reserve 384,000 - - 93,000 291,000
Self-Insurance reserve 103,000 10,000 - - 113,000
Sales related reserve 447,000 - - - 447,000
Total $3,921,000 $ 250,000 - $1,773,000 $2,398,000
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 surrender 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 -
Total $6,144,000 $ 356,000 - $2,579,000 $3,921,000
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 surrender 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
Total $4,772,000 $1,629,000 - $ 257,000 $6,144,000
</TABLE>
55
<PAGE> 58
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorize, this 1st day of November, 1996.
FERROFLUIDICS CORPORATION
By: /s/ William B. Ford
-------------------
William B. Ford
Chief Financial Officer
Dated: November 1, 1996
----------------
