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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee required]
For the fiscal year ended June 28, 1997
[ ] 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
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(2) Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of August 29, 1997, 6,178,262 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 $7.50 per
share for the registrant's Common Stock, as reported on the Nasdaq National
Market as of August 29, 1997 was $45,260,175.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
ITEM PAGE
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PART I
<S> <C> <C>
1 Business.............................................................................. 1
2. Properties............................................................................ 9
3. Legal Proceedings..................................................................... 10
4. Submission of Matters to a Vote of Security Holders................................... 10
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters ............................................................... 11
6. Selected Consolidated Financial Data.................................................. 12
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 13
8. Financial Statements and Supplementary Data........................................... 19
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................ 45
PART III
10. Directors and Executive Officers of the Registrant.................................... 45
11. Executive Compensation................................................................ 45
12. Security Ownership of Certain Beneficial Owners
and Management...................................................................... 45
13. Certain Relationships and Related Transactions........................................ 46
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 46
(a) Financial Statement Schedules
(b) Reports on Form 8-K
Signatures............................................................................ 51
</TABLE>
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PART I
ITEM 1. BUSINESS
Founded in 1968, Ferrofluidics Corporation (the "Company" or
"Ferrofluidics") is engaged principally in developing, manufacturing and
marketing ferrofluids and products based on or derived from its proprietary
ferrofluid technology. Ferrofluids, the Company's core technology, are stable
magnetic liquids that can be precisely positioned or controlled with a magnetic
force. Ferrofluids consist of molecular-sized magnetic particles that are
surface treated so that they can be dispersed in various fluids, usually 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 utilization of ferrofluids in audio loudspeakers)
or by combining proprietary ferrofluid technology with broad applications
engineering to develop ferrofluid-based (Ferrofluidic(R)) products, such as the
Company's various sealing devices and fluid-film bearings. The Company
synthesizes all ferrofluids for sale, or for use in its own proprietary
products. With respect to its products incorporating ferrofluids, the Company
generally designs the product and then procures from third party vendors the
fabrication of all or a substantial proportion of machined parts and components
for the product. The Company assembles, tests and ships the product from its
Nashua, New Hampshire plant.
The Company seeks to apply its Ferrofluidic(R) technologies in
situations where its use significantly enhances the final product into which the
technology is incorporated. As a result, pricing reflects value added rather
than the direct cost of producing the fluid or Ferrofluidic(R) product supplied
to the Company's customers. The Company also seeks to supply markets in which it
can achieve a position of market leadership. The Company believes that it, along
with its licensee, currently supplies the vast majority of the ferrofluids and
ferrofluid-based products used in the world.
As a vertical integration of its ferrofluid sealing technology, the
Company designs, assembles and markets systems for growing crystals of silicon,
germanium, gallium arsenide and other metal alloys for the semiconductor,
photovoltaic, military and advanced materials markets.
CORPORATE STRUCTURE
The Company has its headquarters in Nashua, New Hampshire where it
conducts substantially 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"), with headquarters in
Nurtingen, Germany, with sales offices in Oxford, England and Madrid,
Spain, which:
(a) markets and services Ferrofluidic(R) 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 Ferrofluidics' components to the semiconductor industry and
for application in vacuum-related products. FJC also provides after-sales
service for these components, and distributes ferrofluids to the audio
loudspeaker industry. In addition, FJC 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(R) exclusion seals for
use on computer peripheral equipment.
OPERATING STRUCTURE
The Company is organized into three business segments:
(i) the COMPONENTS DIVISION, or FERROFLUIDIC 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; and
(b) Ferrofluidic(R) sealing devices and subsystems, primarily
for use in the semiconductor process, industrial process,
lamp and fiber optic manufacturing, and medical equipment
industries.
Sales generated by the Components Division accounted for
approximately 24.6%, 25.8% and 41.3% of total product sales in
fiscal 1997, 1996 and 1995, 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 63.0%,
62.7% and 34.5% of total product sales in fiscal 1997, 1996 and
1995, 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 12.4%, 11.5% and 24.2% of total product sales in fiscal 1997,
1996 and 1995, respectively.
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In fiscal 1997, $31,684,000, or 46.7%, 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
1996 and 1995 totaled $54,080,000 (74.1%) and $21,412,000 (62.7%), 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 has distribution
agreements with the Kurt J. Lesker Company ("KJLC"), a worldwide distributor of
vacuum related products, and with Varian Associates. In addition, the Company
has established distributor relationships for its ferrofluid and Ferrofluidic(R)
products in Korea, Taiwan, India, China, and developing Pacific Rim countries.
PRODUCT LINES
The Company manufactures and sells products in three major product
categories: (i) ferrofluids; (ii) magnetic fluid seals, sealing subsystems, and
other Ferrofluidic(R) 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, for use in home and automotive loudspeakers,
for nondestructive testing, and for use in sensors and stepper motors.
The Company currently supplies fluids for approximately 40 million
speakers per year, representing the vast majority of the ferrofluid
applications in speakers. Sales of ferrofluids accounted for
approximately 3.7%, 3.6% and 7.0% of total product sales in fiscal
1997, 1996 and 1995, respectively. The Company supplies
Ferrofluidic(R)inertia dampers that are used in semiconductor
equipment, disk drives testers, XY plotters, computer printers and
other computer peripheral equipment. The dampers eliminate resonance,
reduce settling time, eliminate corrosion and improve positional
accuracies.
(ii) MAGNETIC FLUID SEALS AND SUBSYSTEMS. The Company combines proprietary
ferrofluid technology with applications engineering to develop a
variety of products that provide state-of-the-art seals and sealing
subsystems that either seal the environment from a manufacturing
process or seal a manufacturing process from the environment. In each
of the applications in which the Company provides Ferrofluidic(R)
seals and sealing subsystems it is the leading provider of such
technology products. Sales of magnetic fluid seals accounted for
approximately 20.9%, 22.2% and 32.1% of total product sales in fiscal
1997, 1996 and 1995 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, unmeasurable leakage and high-speed
capability for rotary motion penetrations into vacuum and other highly
controlled, ultra-clean process environments. The Company
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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 semiconductor processing, 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 ("OEMs") 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 automotive, 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. During fiscal 1997, a new series of gas tight seals
(GT-6) for the industrial market was introduced. This product series
is targeted at industrial fans, blowers, and other low pressure gas
handling devices where emissions control and process contamination are
critical. Other products within the GT family will be introduced
periodically and targeted other equipment such as compressors,
centrifuges, mixers, agitators and pumps. The GT-6 product recently
received certification from TA Luft, the German air quality authority.
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
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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 electronic 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, Taiwan 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 63.0%, 62.7% and 34.5% of total product sales in fiscal
1997, 1996, and 1995, respectively. Silicon crystal growing systems
typically sell at prices ranging from $350,000 and $2,000,000 or more,
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 1997, sales by the Systems Division to companies affiliated with
MEMC Electronic Materials, Inc. ("MEMC") totaled $28,017,000 and accounted for
41.3% of consolidated product sales. Sales to these and other affiliates of MEMC
totaled $45,344,000 and $6,419,000 in fiscal 1996 and 1995, which represented
62.1% and 18.8%, respectively, of consolidated product sales in those fiscal
years. Management believes that the loss of this customer, and its affiliates,
could have a material adverse effect on its future results of operations.
COMPETITION
The Company believes that its competitive advantage will continue to depend
upon its trade secrets, know-how and ability to develop both ferrofluids for
specific applications and technologically-advanced products which use
ferrofluids. The Company believes that its competitive position with respect to
its proprietary products, while aided by its patents, is not now 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 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 have lower 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.
In industrial process applications, Ferrofluidics' sealing system competes
with various nonmagnetic fluid sealing devices and sealing subsystems;
however, the Company believes that the competitive devices 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 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 high-demand periods, only
one or two suppliers generate most of the equipment sales. During the past
three years, the Company has shipped over 100 systems to customers in the
U.S., Europe, 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. In addition,
the Company may need to invest in manufacturing facilities to stay
competitive in the developing larger diameter crystal growing systems
market.
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 261 employees worldwide, of which
207 are employed in the United States, 47 in Europe and 7 in Japan.
In the United States, the Company markets its products through a direct
field sales force and an applications engineering staff with headquarters 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.
During 1997, the Company invested in some modifications to its facility for
assembling crystal growing systems to accommodate the manufacture of its first
300mm system. More substantial increases in its capacity for assembly and test
of its crystal growing systems were made during 1996 and 1995 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,
supplies a portion of the Company's need for precision machined component parts,
reducing its reliance on outside suppliers. It is not, however, the intent of
management to conduct all of the component production in-house.
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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 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.
INTELLECTUAL PROPERTY RIGHTS
The Company owns a number of U.S. and foreign patents for its seals,
dampers, bearings and systems, with expiration dates ranging up to 2006. In
addition, the Company has applied for additional patents for these products as
well as for certain new features developed for crystal growing machinery. 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 Ferromedic, 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, as well as
at developing new products in the crystal growing systems business. The Company
spent (and charged to expense) $2,033,000, $1,723,000 and $1,479,000 in fiscal
years 1997, 1996 and 1995, respectively, on the development of new products and
the improvement of existing products.
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 a laser melt level control and a continuous feed system for
polysilicon. In 1996 the Company embarked on the development of a 300mm crystal
growing system in connection with an order received from a foreign customer.
This system is expected to ship in the first quarter of fiscal 1998. In fiscal
1997, the Company undertook the development of another 300mm crystal growing
system for another customer.
BACKLOG
As of June 28, 1997, the Company had a consolidated order backlog of
$37,483,000, as compared to $59,020,000 at June 30, 1996. A comparative summary
of the consolidated backlog by business segment is as follows:
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1997 1996
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Systems $30,276,000 $53,072,000
Components 4,787,000 3,944,000
Distributed Products 2,420,000 2,004,000
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Total Backlog $37,483,000 $59,020,000
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Of the total backlog at June 28, 1997, approximately 78% is expected to
ship during fiscal 1998.
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. 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 for its short and long term debt. (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.
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ITEM 3. LEGAL PROCEEDINGS
Securities and Exchange Commission
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On February 19, 1993, the Company received an informal inquiry from the SEC
requesting that the Company provide the SEC with certain documents concerning
publicity relating to the Company for the period of January 1, 1992 to February
19, 1993. In August 1993, the SEC issued an order directing a private
investigation to determine whether certain unnamed persons have violated or
caused the Company to violate the federal securities laws. Among the areas of
inquiry identified in the order is whether publicity about the Company,
including research reports, were published without fully disclosing
consideration given or received therefor. The order also indicates that the
inquiry will examine possible manipulation by certain unnamed persons of the
Company's securities, payment in connection therewith, and failure to disclose
such activities in public filings made by the Company (including the financial
statements contained or incorporated therein), as well as possible nondisclosure
of transactions with the Company in which such persons may have had a material
interest. Throughout the investigation, the Company has cooperated fully with
the SEC's inquiry. In June 1997, the SEC completed its investigation with
respect to the Company, and on June 23, 1997, the Company entered into a Consent
and Understanding, whereby it agreed to be permanently enjoined from violating
the federal securities laws. The Company is continuing to cooperate with the SEC
as it completes its investigation with respect to certain unnamed persons.
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 28, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Ferrofluidics' Common Stock is traded on the Nasdaq National Market under
the stock symbol "FERO". The following table sets forth the high and low closing
transactions for the Common Stock of the Company for the fiscal periods
indicated, as reported by the Nasdaq National Market.
1997 HIGH LOW
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7/1/96 - 9/30/96 13 3/4 8 1/4
10/9/96 - 12/31/96 9 5/8 7 3/8
1/1/97 - 3/31/97 10 7/8 7 1/4
4/1/97 - 6/30/97 8 3/4 5 3/4
1996
----
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
On August 29, 1997, the closing sale price for the Company's Common Stock,
as reported by the Nasdaq National Market, was $7.50. On that date, there were
approximately 3,137 holders of record of the common stock of the Company.
DIVIDEND POLICY
The Company has never paid a cash dividend on its Common Stock. Its policy
is to retain earnings and use funds for the operation and expansion of its
business. Future dividend policy will be determined by the Board of Directors
based upon the Company's earnings, financial condition and capital requirements.
11
<PAGE> 14
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the five years ended June 28,
1997, 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.
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------
June 28, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
- ----------------------
Net product sales $ 67,785,000 $ 72,967,000 $ 34,149,000 $ 26,379,000 $ 32,905,000
Royalty revenues -- -- 6,000 82,000 372,000
------------ ------------ ------------ ------------ ------------
Total net sales and 67,785,000 72,967,000 34,155,000 26,461,000 33,277,000
revenues
Engineering & 4,811,000 4,440,000 3,410,000 3,390,000 3,129,000
product development
expenses
Nonrecurring -- -- (1,156,000) 3,108,000 8,594,000
operating expenses
(income)
Operating income 1,530,000 4,937,000 943,000 (9,662,000) (11,716,000)
(loss)
Interest expense, net (765,000) (443,000) (406,000) (356,000) (254,000)
Income tax benefit 1,175,000 (487,000) 322,000 (1,169,000) (466,000)
(expense)
Net income (loss) $ 1,672,000 $ 3,820,000 $ 889,000 $(10,713,000) $(12,446,000)
Per Share Data:
Net income (loss) $ 0.27 $ 0.61 $ 0.16 $ (2.00) $ (2.49)
Weighted average 6,239,581 6,313,045 5,563,160 5,366,350 5,005,120
shares outstanding
Balance Sheet Data:
Working capital $ 13,323,000 $ 12,350,000 $ 7,811,000 $ (1,601,000) $ 6,775,000
Total assets 45,001,000 43,429,000 39,529,000 32,508,000 36,884,000
Total liabilities 23,420,000 23,727,000 23,748,000 21,325,000 15,107,000
Long-term debt 5,000,000 5,000,000 5,036,000 28,000 --
Stockholders' equity 21,581,000 19,702,000 15,781,000 11,183,000 21,777,000
</TABLE>
Note: (a) No dividends have been declared or paid during the five years ended
June 28, 1997.
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 1997 Versus Fiscal 1996:
- -------------------------------
In fiscal 1997, net income declined to $1,672,000, or $.27 per share,
compared to $3,820,000, or $.61 per share, recorded in fiscal 1996. The decline
was the result of lower sales volumes and increased expenses, particularly in
the areas of marketing and product development.
In fiscal 1997, product revenues decreased 7.1% to $67,785,000 from
$72,967,000 in fiscal 1996. This decrease in the Company's level of business can
be directly attributed to a significant decline in the semiconductor industry in
general, which accounts for all of the revenues of the Systems segment and a
substantial portion of the Components segment revenues. The changes in revenues
by segment are summarized as follows:
1997 1996
---- ----
Systems $42,691,000 $45,741,000
Components 16,685,000 18,827,000
Distributed Products 8,409,000 8,399,000
----------- -----------
Total Revenues $67,785,000 $72,967,000
=========== ===========
The decrease in revenues in the Systems segment in 1997 was due principally
to a delay in the contractual shipment schedules relating to certain multi-unit
orders received in the prior year from the Company's largest customer. Further
slowdowns in the schedule of shipping machines to this customer are expected in
the next fiscal year, as the customer has at present committed to receive one
machine per month for the fiscal year, a decline from the average of a little
under three machines per month in fiscal 1997. During the first three quarters
of fiscal 1997, a slowdown in the production of capital equipment for the
semiconductor industry caused demand for the Company's rotary feedthrough seals
to decline sharply, resulting in an 11% decrease in consolidated revenues from
the Components segment. During the fourth quarter, the order rate for seals
began to improve as the outlook for the industry improved. Revenues in the
Distributed Products segment, which principally serves the thin-film deposition
industry, remained relatively level with those of last year.
Total sales from the Company's European subsidiary, AP&T, which includes
the sale of the Company's components and fluid products in Europe, as well as
comprising the Distributed Products segment, decreased 5.7% to $11,979,000 in
1997, as compared to $12,702,000 in fiscal 1996. The decrease was entirely
within the Ferrofluidic product lines, as the distributed products revenues
remained level with the prior year. Sales by the Company's Japanese subsidiary,
FJC, increased to $11,825,000 over the $568,000 of revenues in 1996. Sales of
seals and fluids increased over 200% in 1997, evidencing the Company's
penetration into that market. In addition, the Company sold a significant number
of crystal growing systems, both of a prototype and production nature, to five
of the major Japanese silicon wafer manufacturers, resulting in a substantial
increase in revenues in Japan. Despite the significant increase in business with
Japan, total foreign sales declined to
13
<PAGE> 16
$31,684,000 from $54,080,000 in 1996, because the majority of the non-Japanese
crystal puller shipments were to domestic customers in 1997, whereas 1996
shipments were primarily to Korean and Taiwanese wafer manufacturing facilities.
Bookings in 1997 decreased 51%, to $46,487,000, from $94,231,000 in 1996,
as orders for crystal growing systems declined substantially as a result of
industry over-capacity. Fiscal 1997 bookings included $19,892,000 in orders of
crystal growing systems and related equipment, as compared to $66,427,000 in
1996. The majority of the 1996 bookings were from one affiliated group of
customers. In contrast, the crystal growing systems orders received during 1997
included orders from a number of different and unrelated international wafer
suppliers in Scandinavia, Eastern Europe, Taiwan, China, and Japan. These orders
reflect the success of the Company's efforts in the past two years to reduce its
dependence on one customer.
Order bookings in the Company's Components Division, which includes the
sale of seals and fluids, totaled $17,511,000, which includes bookings in the
fourth quarter of fiscal 1997 of $6,300,000, a record for the segment. The
resulting order backlog for that segment at the end of the fiscal year was
$4,787,000, an increase of 21% over the Components Division backlog at June 30,
1996. Consolidated order backlog at June 28, 1997 totaled $37,742,000 as
compared to $59,020,000 at June 30, 1996. Of the consolidated backlog at June
28, 1997, approximately 78% is expected to ship during the coming fiscal year.
The consolidated gross margin for the year ended June 28, 1997 of 28.9%
increased slightly over the gross margin of 28.8% in the previous year. Although
revenues declined, the overall product mix was essentially unchanged. Lower
gross margins were experienced in the crystal growing systems business due to
expenses related to the development of machines for new customers, but this was
offset by an increase in the margins in the Components segment. Consolidated
operating income before general corporate and non-operating expenses declined
in 1997 to 8.8% of product revenues as compared to 11.2% in 1996. This was the
result of lower revenues, higher sustaining engineering, and higher product
development costs.
The Company spent $4,811,000 during fiscal 1997 on engineering and product
development, an amount equal to 7.1% of product revenues compared to $4,440,000
or 6.1% of product revenues in the preceding year. Engineering costs as a
percent of revenues increased in 1997 principally due to the increased level of
first-time, or prototype, systems sold during 1997, as well as the increased
development work in the area of 300mm crystal growing systems. Of the total
engineering and product development expenditures in fiscal 1997, $2,904,000 was
in the Systems Division as compared to $2,194,000 in the prior fiscal year. The
balance of engineering and product development expenditures were made for
development of seals and fluids products.
Selling, general and administrative ("SG&A") expenses in 1997 increased
$1,577,000 or 13.5% over such expenses in 1996, and increased as a percent of
revenues from 16% in 1996 to 19.5% in 1997. Selling and marketing costs
increased by $450,000, due in part to a $130,000 increase in selling expenses in
Japan, a $160,000 increase in sales commissions and a $100,000 increase in
selling expenses in Europe. Administrative expenses accounted for the rest of
the increase, which was due in part to increases in legal costs ($230,000),
personnel costs ($420,000), severance ($210,000), and insurance and stock-based
compensation ($100,000).
Interest income in 1997 was down from that in 1996, due principally to
lower levels of invested cash. Interest expense of $854,000 is up 47% over the
$580,000 in the prior year as a result of
14
<PAGE> 17
higher borrowings against the Company's revolving line of credit. See Note E to
the Consolidated Financial Statements for a more complete discussion of the
Company's debt obligations.
The Company records transaction gains and losses resulting from
fluctuations of foreign currency as other income or expense. During fiscal 1997,
$217,000 of net foreign currency transaction losses were recorded as compared to
a net gain of $33,000 in fiscal 1996. The losses in 1997, primarily incurred by
the Company's Japanese subsidiary whose functional currency is the U.S. dollar
for accounting purposes, arose as a result of the weakening of the Japanese yen
against the dollar during much of 1997. Gains and losses resulting from the
translation of the financial statements of subsidiaries whose functional
currency is other than the U.S. dollar are recorded directly to equity. The
balance of other income (expense) in 1997 was principally amortization of bank
financing costs, which did not change materially from the previous fiscal year.
In accordance with FASB Statement No. 109, Accounting for Income Taxes, the
Company recorded, in the fourth quarter of 1997, a $1,200,000 tax benefit from a
reduction of the valuation allowance against deferred tax assets that is
required to be recorded when the Company's management is of the opinion that the
tax benefit is more likely than not to be realized. The recording of this
benefit may affect the Company's effective corporate tax rate in future periods.
Income tax expense of $487,000 in 1996 consisted of a provision for state and
foreign income taxes on the Company's earnings and a federal alternative minimum
tax provision. See Note D to the Consolidated Financial Statements for a more
complete discussion of income taxes.
Fiscal 1996 Versus Fiscal 1995:
- -------------------------------
In fiscal 1996, net income was $3,820,000, or $.61 per share, as compared
to $889,000, or $.16 per share, in 1995.
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 are
summarized as follows:
1996 1995
---- ----
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
=========== ===========
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 have 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
15
<PAGE> 18
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 28, 1997 totaled $59,020,000 as compared to
$37,756,000 at June 30, 1996. During July and August of 1996, the Company, in
consultation with its customers, rescheduled approximately one half of the
shipments of crystal pullers initially scheduled for fiscal 1997 into future
years.
The consolidated gross margin for the year ended June 28, 1997 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 those of 1995, however, 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.
As more fully discussed in Note B to the Consolidated Financial Statements,
in September 1994, the Company discontinued the operations of a subsidiary and,
in November 1994, entered into an agreement to license certain of its technology
to a third party. As a result of these transactions, the Company recorded
nonrecurring operating income in fiscal 1995 of $1,156,000.
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
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.
16
<PAGE> 19
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. 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 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.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, the operations of the business used $2,153,000 of cash, which was
principally the result of the increases in accounts receivable and inventories
and the decline in the balance of deposits from systems customers. This cash
requirement was financed from borrowings under the Company's expanded revolving
line of credit as discussed 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 the order,
submission of accepted engineering drawings, shipment and final acceptance of
the units. In 1997 and 1996, the Company received advance payments of $6,523,000
and $12,547,000, respectively, in connection with orders for crystal growing
systems. In order to secure its sources of supply for critical long lead
inventory items, the Company has also had to make advance payments to its
vendors. The balance remaining on deposit with vendors was $1,341,000 at June
28, 1997. The Company has purchase contracts for inventory with various
suppliers which, in some cases, extend beyond two years. At June 28, 1997,
outstanding purchase commitments pursuant to these contracts totaled
approximately $15,000,000.
The ratio of current assets to current liabilities was 1.7 at the end of
both 1997 and 1996. Working capital at June 28, 1997 increased to $13,323,000
from $12,350,000 at June 30, 1996. Current assets increased, principally due to
higher accounts receivable balances, as the receivable turnover decreased in
1997 compared to 1996 as a softening in the semiconductor industry caused
customers to lengthen their payment terms. Inventory balances increased somewhat
in 1997 as compared to 1996, but reduced business levels caused overall
inventory turnover to decline to 3.3 times annual consumption in 1997 from 3.7
in 1996.
In December 1996, the Company entered into a new agreement with its bank
which resulted in the expansion of its revolving line of credit from $2,500,000
to $8,500,000. This change is discussed in more detail in Note E to the
consolidated financial statements.
Capital expenditures totaled $1,249,000 in 1997, as compared to $2,422,000
in 1996. The spending in both years consisted primarily of various improvements
to the Company's Nashua facility, including the final acceptance of a machine
for its in-house machine shop, and additions to the Company's computer hardware
and software. The Company is considering plans to undertake a significant
increase in its facilities in connection with the development of its 300mm
crystal puller
17
<PAGE> 20
business. Proceeding with these plans, if decided upon, may require the Company
to develop new sources of financing to supplement its internal cash generation
and current borrowing arrangements.
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 nontaxable rates (at June 28, 1997, 4.9%), 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 $13,900,000, $5,400,000
of which is in the form of a stand-by letter of credit for the Company's VRIRB,
and $8,500,000 (increased from $2,500,000 in December 1996) of which is a
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
credit facility bears interest at prime rate plus 1% with a fee of 1/8% on the
unused portion. At June 28, 1997, $6,170,000 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 had interest at prime plus
1%. In 1997, this demand note was canceled as the balance was rolled into the
newly increased revolving line of credit. Also during 1996, the Company borrowed
$800,000, in the form of an installment demand note with its bank, to finance
the capital expansion of its in-house machine shop, which bears interest at
9.75%. At June 28, 1997, the balance on this note was $611,000. 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 28, 1997.
During 1997, the maximum outstanding borrowing on these foreign credit lines was
$329,000. The weighted average interest rates during the year on these
facilities ranged from 7.4% to 9% and the interest rates at June 28, 1997 ranged
from 7.0% to 9.5%.
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, with the possible
exception of financing related to the facility expansion referred to above. The
Company has undertaken to develop new sources of financing to supplement its
present capabilities in this area.
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.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. There are many factors that could cause actual results to
differ materially from those anticipated by such forward-looking statements.
These include, but are not limited to, cancellation of letters of intent,
further rescheduling of existing crystal puller orders, additional crystal
puller orders from existing or new customers, including those mentioned in the
report, lack of new crystal puller orders from existing or new customers,
change in revenues in the Company's components, fluids, and thin film
deposition businesses, and a material change in the market conditions within
the semiconductor industry. For additional information concerning these and
other important factors which may cause the Company's actual results to differ
materially from expectations and underlying assumptions, please refer to the
reports filed by the Company with the Securities and Exchange Commission.
18
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Reports of Independent Auditors..........................................................20-21
Consolidated Balance Sheets as of June 28, 1997 and June 30, 1996...........................22
Consolidated Statements of Operations for each of the three years
in the period ended June 28, 1997.....................................................23
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended June 28, 1997..................................24
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 28, 1997.....................................................25
Notes to Consolidated Financial Statements...............................................26-45
</TABLE>
19
<PAGE> 22
Report of Independent Auditors
------------------------------
To the Stockholders and Directors of Ferrofluidics Corporation
We have audited the accompanying consolidated balance sheets of Ferrofluidics
Corporation as of June 28, 1997 and June 30, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. Our audits also included the financial statement schedule, for the
years ended June 28, 1997 and 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 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 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 28, 1997 and June 30, 1996, and the
consolidated results of its operations and its cash flows for the years 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
August 21, 1997
20
<PAGE> 23
Report of Independent Accountants
---------------------------------
To the Stockholders and Directors of Ferrofluidics Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Ferrofluidics Corporation for the year
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 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 results of operations and
cash flows of Ferrofluidics Corporation for the year 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
21
<PAGE> 24
FERROFLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 28, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 883,000 $ 1,701,000
Accounts receivable - trade, less allowance
of $199,000 ($320,000 in 1996) 13,609,000 12,757,000
Inventories 15,263,000 13,829,000
Advances to suppliers 1,341,000 1,916,000
Prepaid and other current assets 474,000 672,000
------------ ------------
Total Current Assets 31,570,000 30,875,000
------------ ------------
Property, plant and equipment, at cost, net
of accumulated depreciation of $10,961,000 ($9,583,000 in 1996) 8,377,000 8,784,000
Cash value of life insurance, net 1,751,000 1,731,000
Deferred income taxes, net 1,815,000 615,000
Other assets, net 1,488,000 1,424,000
------------ ------------
TOTAL ASSETS $ 45,001,000 $ 43,429,000
============ ============
LIABILITIES
- -----------
Current Liabilities:
Bank notes payable $ 6,781,000 $ 4,262,000
Accounts payable 5,126,000 6,366,000
Customer deposits 2,426,000 4,368,000
Accrued expenses and other current liabilities 3,914,000 3,529,000
------------ ------------
Total Current Liabilities 18,247,000 18,525,000
------------ ------------
Long-term debt obligations 5,000,000 5,000,000
Other liabilities 173,000 202,000
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 - 6,178,262
(6,060,902 in 1996) 25,000 24,000
Additional paid-in capital 36,477,000 35,871,000
Accumulated deficit (13,971,000) (15,643,000)
Currency translation adjustments (950,000) (550,000)
------------ ------------
Total Stockholders' Equity 21,581,000 19,702,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,001,000 $ 43,429,000
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE> 25
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 28, 1997, AND JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales and revenues $ 67,785,000 $ 72,967,000 $ 34,155,000
Cost of sales 48,218,000 51,941,000 20,264,000
------------ ------------ ------------
Gross profit 19,567,000 21,026,000 13,891,000
Operating expenses:
Engineering and product development expense 4,811,000 4,440,000 3,410,000
Selling, general and administrative expense 13,226,000 11,649,000 10,694,000
Nonrecurring operating income -- -- (1,156,000)
------------ ------------ ------------
Operating income 1,530,000 4,937,000 943,000
Interest income 89,000 137,000 232,000
Interest expense (854,000) (580,000) (638,000)
Other income (expense), net (268,000) (187,000) 30,000
------------ ------------ ------------
Income before income taxes 497,000 4,307,000 567,000
Income taxes (benefit) (1,175,000) 487,000 (322,000)
------------ ------------ ------------
Net income $ 1,672,000 $ 3,820,000 $ 889,000
============ ============ ============
Net income per share $ .27 $ .61 $ .16
============ ============ ============
Weighted average common and
common equivalent shares 6,239,581 6,313,045 5,563,160
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE> 26
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED JUNE 28, 1997, AND
JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Additional Currency
------------------------ Paid-In Accumulated Translation
Shares Par Value Capital Deficit Adjustments
------ --------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994 5,366,949 $21,467 $32,109,000 $(20,352,000) $(595,000)
Issuance of common stock for:
Settlement of stockholder 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)
--------- ------- ----------- ------------ ---------
Issuance of common stock for:
Restricted stock plan, charge to operations 93,762 375 511,000 -- --
Exercise of options 33,138 132 166,000 -- --
Redemption of stock for taxes (9,540) (38) (71,000) -- --
Net income -- -- -- 1,672,000 --
Current year translation adjustments -- -- -- -- (400,000)
--------- ------- ----------- ------------ ---------
BALANCE, JUNE 28, 1997 6,178,262 $24,713 $36,477,000 $(13,971,000) $(950,000)
========= ======= =========== ============ =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE> 27
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 28, 1997, AND JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,672,000 $ 3,820,000 $ 889,000
Adjustments to reconcile net income to cash flow
provided by (used in) operating activities:
Depreciation and amortization 1,602,000 1,145,000 1,030,000
Deferred income taxes (credits) (1,200,000) -- (615,000)
Increase in cash surrender value (20,000) (3,000) (202,000)
Gain on sale of assets (16,000) (9,000) (4,000)
Stock-related compensation 511,000 467,000 290,000
Foreign transaction (gains) losses 217,000 (33,000) (260,000)
Other (508,000) 457,000 224,000
Changes in operating assets and liabilities,
net of disposition of business:
Accounts receivable, net (1,144,000) (5,663,000) (3,150,000)
Inventories (1,632,000) 134,000 (3,710,000)
Prepaid and other current assets 764,000 (900,000) (2,047,000)
Accounts payable and accrued expenses (463,000) 1,857,000 330,000
Customer deposits (1,936,000) (4,073,000) 7,855,000
----------- ----------- -----------
Net cash provided by (used in) operating activities (2,153,000) (2,801,000) 630,000
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (1,249,000) (2,422,000) (1,880,000)
Proceeds from cancellation of key-man policies -- 1,248,000 --
Proceeds from notes receivable -- -- 350,000
Sale of investment in affiliate -- -- 3,991,000
Proceeds from sales of assets 37,000 34,000 753,000
----------- ----------- -----------
Net cash provided by (used in) investing activities (1,212,000) (1,140,000) 3,214,000
----------- ----------- -----------
Cash flows from financing activities:
Short-term borrowings, net 2,519,000 4,262,000 (2,775,000)
Exercise of stock options 166,000 -- --
Payments under capital lease obligations -- (76,000) (72,000)
Proceeds from borrowing of cash surrender value -- -- 189,000
----------- ----------- -----------
Net cash provided by (used in) financing activities 2,685,000 4,186,000 (2,658,000)
----------- ----------- -----------
Effect of currency rate changes on cash (138,000) (107,000) 55,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (818,000) 138,000 1,241,000
----------- ----------- -----------
Cash and cash equivalents at beginning of year 1,701,000 1,563,000 322,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 883,000 $ 1,701,000 $ 1,563,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE> 28
FERROFLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 is attributable to the
semiconductor industry, which can experience cyclical fluctuations. A prolonged
decline in the semiconductor industry could have a materially adverse effect on
the Company's operating results.
Fiscal Year
- -----------
Effective July 1, 1996, the Company changed its fiscal year end from June
30 to a 52 or 53-week year ending on the Saturday nearest June 30. Accordingly,
the 1997 fiscal year ended June 28, whereas the previous two fiscal years ended
on June 30.
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 or
other acceptable guarantees. With regard to the Company's Components segment,
concentrations of trade credit risk are limited due to the large number of
26
<PAGE> 29
customers and their dispersion across many different geographical regions. In
the Company's Crystal Growing Systems segment, customers belonging to an
affiliated group of companies, some foreign and some domestic, accounted for
65.6% of that segment's fiscal 1997 net sales (41.3% of consolidated net sales)
and 39.9% of gross consolidated accounts receivable at June 28, 1997.
Additionally, the Company has made advance payments to suppliers for
inventory aggregating $1,341,000 at June 28, 1997.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories consist of the following elements at June 28, 1997 and June
30, 1996:
1997 1996
---- ----
Raw materials and purchased parts $ 8,082,000 $ 6,845,000
Work-in-process 2,962,000 3,188,000
Finished goods 4,219,000 3,796,000
----------- -----------
$15,263,000 $13,829,000
=========== ===========
The Company has purchase contracts for inventory with various suppliers
which, in some cases, extend beyond two years. At June 28, 1997, outstanding
purchase commitments pursuant to these contracts totaled approximately
$15,000,000.
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 (expense) at the time of disposition.
Property, plant and equipment consisted of the following at June 28, 1997
and June 30, 1996:
1997 1996
---- ----
Land $ 321,000 $ 321,000
Buildings and improvements 8,033,000 6,633,000
Machinery and equipment 5,399,000 4,420,000
Furniture, fixtures and vehicles 5,408,000 5,263,000
Construction in process 177,000 1,730,000
------------ -----------
19,338,000 18,367,000
Less: Accumulated depreciation
and amortization 10,961,000 9,583,000
---------- -----------
$ 8,377,000 $ 8,784,000
=========== ===========
27
<PAGE> 30
Intangible Assets
- -----------------
At June 28, 1997, the Company had recorded goodwill in an amount of
$1,064,000, which is included on the accompanying balance sheet with other
assets, resulting from the acquisition in fiscal 1989 of AP&T. This amount is
being amortized over a 16 year life on a straight line basis.
Accumulated amortization as of June 28, 1997 amounted to $514,000.
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.
Income Taxes
- ------------
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
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 28, 1997, 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 Expenses
- ----------------------------
Product development expenditures are charged to expense when first
incurred. The Company incurred $2,033,000, $1,723,000 and $1,479,000 in product
development during 1997, 1996 and 1995, respectively.
Translation Of Foreign Currencies
- ---------------------------------
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with Financial Accounting Standards Board ("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.
Transaction 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 to
hedge against adverse exchange losses on certain assets or liabilities
denominated in a foreign currency. Market value gains and losses are recognized,
with the resulting credit or debit offsetting foreign exchange gains or losses
on those instruments. At June 28, 1997, there was one foreign exchange contract
outstanding, in which there was no material exchange gain or loss.
28
<PAGE> 31
Other Income (Expense)
- ----------------------
Other income (expense) consisted of the following for the years ended June
28, 1997 and June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Foreign transaction gains
(losses) $(217,000) $ 33,000 $ 260,000
Gain on sale of fixed assets 16,000 9,000 4,000
Other (67,000) (229,000) (234,000)
--------- --------- ---------
$(268,000) $(187,000) $ 30,000
========= ========= =========
</TABLE>
Stock-based Compensation
------------------------
The Company has stock-based compensation programs and has elected to
account for them in accordance with Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and, accordingly, except for
restricted stock awards, recognizes no compensation expense for the stock option
grants (See Note H).
Earnings Per Share
- ------------------
Net income per share for fiscal 1997, 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.
Statement Of Cash Flows
- -----------------------
For the years ended June 28, 1997 and June 30, 1996 and 1995, cash
payments for income taxes amounted to $473,000, $290,000 and $121,000,
respectively. Cash payments for interest in each of the three years amounted to
$795,000, $421,000 and $427,000, respectively.
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.
Impact Of Recently Issued Accounting Standards
- ----------------------------------------------
In February 1997, the FASB issued Statement No. 128, Earnings per Share,
which must be adopted by the Company in fiscal 1998, and which establishes
standards for computing and presenting earnings per share by simplifying
previous standards and making them comparable to international standards. The
Company will then be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new requirements
for calculating primary earnings per share, the dilutive effect of stock options
will be excluded. This change would not have affected the primary earnings per
share calculation for the years ended June 28, 1997 and June 30, 1995, but it
would have increased primary earnings per share by $.01 for the year ended June
30, 1996. The impact of Statement 128 on the calculation of fully diluted
earnings per share for these years is not expected to be material.
In February 1997, the FASB also issued Statement No. 129, Disclosure of
Information about Capital Structure, which must also be adopted by the Company
in fiscal 1998. Statement 129 establishes standards for disclosing information
about the Company's capital structure.
29
<PAGE> 32
In July 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income and Statement No. 131, Disclosure about Segments of an Enterprise and
Related Information. Both statements must be adopted by the Company in fiscal
year 1999. Statement No. 130 establishes standards for the reporting and display
of comprehensive income and its components in a complete set of financial
statements. Statement No. 131 changes the way segment information is reported
and establishes standards for related disclosures about products and services,
geographic areas, and major customers.
The Company believes that the adoption of these standards is not likely to
have a material impact on the Company's financial position or results of
operations.
Reclassifications
- -----------------
Certain amounts for 1996 have been reclassified to conform to 1997
presentation.
Fourth Quarter Adjustments
- --------------------------
The Company made adjustments to its financial statements in the fourth
quarter ended June 28, 1997 which included approximately $570,000 in valuation
reserves for slow moving inventory and anticipated field costs resulting from
the delivery of new equipment. Additionally, the Company recorded a $1,200,000
tax benefit resulting from a reduction of the valuation allowance against
deferred tax assets (See Note D).
B. NONRECURRING OPERATING TRANSACTIONS
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 expenses.
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.
30
<PAGE> 33
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. The allowable borrowings under
these policies approximated the earnings accruing to the Company. The Company
did not recognize earnings under these policies to the extent they were subject
to the executive borrowing rights.
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 (See Note J). Upon cancellation of the other two policies, the Company
received the net cash value of approximately $1,248,000.
At June 28, 1997, the remaining two policies on the life of the former CFO
had an aggregate cash value of $1,931,000, against which the Company had
$1,908,000 in loans and accrued interest outstanding at an interest rate of 8%.
In addition, the Company has recorded its interest in the value of other
key man life insurance policies under split-dollar agreements with the
aforementioned former CEO of $1,728,000 and $1,699,000 at June 28, 1997 and June
30, 1996, 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.
D. INCOME TAXES
Income before income taxes for the years ended June 28, 1997 and June 30,
1996 and 1995 was taxed in the following jurisdictions:
1997 1996 1995
----------- ----------- -----------
Domestic $ 371,000 $ 4,000,000 $ 1,012,000
Foreign 126,000 307,000 (445,000)
----------- ----------- -----------
Total $ 497,000 $ 4,307,000 $ 567,000
=========== =========== ===========
Significant components of the provision for income taxes (benefit) are as
follows:
31
<PAGE> 34
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ (48,000) $ 133,000 $ --
State 54,000 233,000 20,000
Foreign 19,000 121,000 273,000
----------- ----------- -----------
Total current 25,000 487,000 293,000
----------- ----------- -----------
Deferred:
Federal (1,200,000) -- --
State -- -- --
Foreign -- -- (615,000)
----------- ----------- -----------
Total deferred (1,200,000) -- (615,000)
----------- ----------- -----------
Total $(1,175,000) $ 487,000 $ (322,000)
=========== =========== ===========
</TABLE>
The following is a reconciliation between the statutory provision for
federal income taxes and the effective income taxes for the years ended June 28,
1997 and June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income tax expense at federal statutory rate $ 169,000 $ 1,464,000 $ 193,000
Change in valuation allowance (1,190,000) (1,180,000) (1,629,000)
Settlement of stockholders' class
action suit -- -- 1,247,000
State income tax, net of federal tax benefit 36,000 153,000 20,000
Foreign income taxes at differing
statutory rates (24,000) 17,000 (342,000)
Other (166,000) 33,000 189,000
----------- ----------- -----------
Income tax expense (benefit) $(1,175,000) $ 487,000 $ (322,000)
=========== =========== ===========
</TABLE>
The components of the net deferred tax asset as of June 28, 1997 and June 30,
1996 were as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1997 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforwards $ 10,443,000 $ 10,689,000
Capital loss carryforward 1,821,000 1,766,000
Compensation related items 167,000 235,000
Investment writedowns 631,000 612,000
Valuation allowances 210,000 160,000
Inventories 1,155,000 1,016,000
Research & development credits 150,000 150,000
Alternative minimum tax credits 186,000 172,000
Other 207,000 340,000
------------ ------------
Total deferred tax assets 14,970,000 15,140,000
Valuation allowance for deferred tax assets (12,027,000) (13,217,000)
------------ ------------
Net deferred tax assets 2,943,000 1,923,000
Deferred tax liabilities:
Depreciable assets (965,000) (1,118,000)
Other (163,000) (190,000)
------------ ------------
Total deferred tax liabilities (1,128,000) (1,308,000)
------------ ------------
Net deferred tax assets $ 1,815,000 $ 615,000
============ ============
</TABLE>
32
<PAGE> 35
FASB Statement No. 109, Accounting for Income Taxes, requires a valuation
allowance against deferred tax 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 $12,027,000 has been
established at June 28, 1997. Reported earnings in 1997 and projected earnings
in 1998 partially alleviated this uncertainty and, accordingly, resulted in a
reduction in the valuation allowance and a corresponding reduction in income tax
expense of $1,200,000 for the year ended June 28, 1997. The valuation allowance
relating to a foreign deferred tax asset was reduced by $615,000 during 1995.
As of June 28, 1997, the Company had remaining net operating loss
carryforwards for Federal income tax purposes of approximately $25,576,000, and
for foreign income tax purposes of approximately $5,073,000, 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.
E. SHORT TERM BORROWINGS AND OTHER DEBT OBLIGATIONS
As of June 28, 1997 and June 30, 1996, the Company and its subsidiaries
have the following debt obligations outstanding:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revolving line of credit $ 6,170,000 $ 2,500,000
1984 Industrial Revenue Bond 5,000,000 5,000,000
Bank notes 611,000 1,762,000
----------- -----------
11,781,000 9,262,000
Less: current portion of debt obligations 6,781,000 4,262,000
----------- -----------
Long term debt obligations $ 5,000,000 $ 5,000,000
=========== ===========
</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 28, 1997 was 4.9%. 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 stand-by letter
of credit (through August 15, 1998) which is a part of the credit facility
extended to the Company by a bank as described below.
On June 30, 1994, the Company entered into a credit facility with a bank
which provided the Company with a 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. As further discussed below, in December 1996, the
credit facility was amended and increased. The stand-by letter of credit has a
term of five
33
<PAGE> 36
years with a fee of 1% per year and the revolving line of credit carries an
interest rate at the bank's 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
on the revolving line of credit at an interest rate of 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 was payable on demand and bore
interest at the bank's prime plus 1% (9.25% at June 30, 1996) and was
collateralized by substantially all of the assets of the Company. Also as
discussed below, this demand note was consolidated into an increased line of
credit in December 1996.
Also during 1996, the Company borrowed $800,000 in the form of an
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. The note bears interest at 9.75% and is collateralized by
the machinery and equipment acquired. At June 28, 1997, the balance on this note
was $611,000.
In December 1996, the bank agreed to increase the Company's revolving line
of credit agreement from $2,500,000 to $8,500,000, which included the
consolidation of the $1,000,000 demand note outstanding at the end of 1996.
Interest on the line is at prime plus 1% (9.5% at June 28, 1997). Under the new
arrangement with its bank, the Company has available to it a total credit
facility of approximately $13,900,000, which includes the $5,400,000 standby
letter of credit for the Company's VRIRB and the revolving line of credit. The
credit facility is collateralized by substantially all of the assets of the
Company. At June 28, 1997, there was approximately $6,170,000 outstanding under
the revolving line of credit agreement.
In February 1997, the Company obtained an additional increase of
approximately $1,500,000 in the credit facility from its bank in the form of a
stand-by letter of credit to secure a customer prepayment received with an order
for crystal growing systems. The letter of credit carries a fee of $17,300 and
will be reduced by the amount of the prepayment for each system upon shipment.
The systems are expected to ship before the end of calendar 1997.
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 28, 1997. Approximately $329,000 was borrowed against one of
these facilities during fiscal 1997, and repaid prior to the end of the fiscal
year. No borrowings were made against these short-term facilities during 1996.
The weighted average interest rates during the year on these facilities ranged
from 7.4% to 9.0% and the interest rates at June 28, 1997 ranged from 7.0% to
9.5%.
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
1997 amount to: $315,000 in 1998; $116,000 in 1999; $104,000 in 2000; $104,000
in 2001; and $73,000 in 2002. Rent expense under operating leases amounted to
$489,000 in 1997, $459,000 in 1996, and $336,000 in 1995.
During 1997, the Company terminated its agreement to lease to a third
party approximately 11,000 square feet of its headquarters office in Nashua in
exchange for payment to the tenant of
34
<PAGE> 37
$100,000, which was charged to operations during fiscal 1997. The Company
received total lease payments of $28,000 in 1997 from this third party.
As part of the sale, in June 1990, of the Company's former UK subsidiary,
AF Technologies, Ltd. (AF), the Company agreed to provide a guarantee of the
lease of AF's' 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 (P) 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 P300,000
into an escrow account, which currently earns interest at a rate of 2.2%,
pursuant to the terms of the guarantee. The Company would be relieved of this
obligation before the ten-year expiration date if the new tenant were to attain
certain minimum pretax operating results over any period of three consecutive
years. The Company has provided a reserve in the amount of $265,000 against this
deposit in recognition of the uncertainty surrounding the ultimate
collectibility of the amount.
In June 1997, the Company was notified by the landlord of the property
that the tenant had accumulated approximately $112,000 of arrearages under the
lease, and that the landlord intended to draw that amount from the deposit.
After consulting with counsel in Great Britain, the Company believes that the
ultimate resolution of this issue will be within the reserve established and,
thus, the Company has made no additional provision.
At June 28, 1997, 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 28, 1997, an aggregate of 793,054 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
- -----------------------
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
35
<PAGE> 38
"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
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 may not exceed five percent of
the total number of outstanding shares of common stock at the time of any award
of restricted stock. Upon adoption of the plan, the Board of Directors initially
reserved and authorized 271,000 shares of common stock for issuance, which
represented not more than five percent of the outstanding shares of common stock
as of the date of adoption. The grants were 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
beginning one year from the date of grant. The charge to operations in
connection with these restricted stock awards for the years ended June 28, 1997
and June 30, 1996 and 1995 amounted to $511,000, $467,000 and $290,000,
respectively.
A summary of the changes in outstanding shares of restricted stock for the
years ended June 28, 1997 and June 30, 1996 and 1995 is set forth below:
Weighted
Shares Average Price
------ -------------
OUTSTANDING, JUNE 30, 1994 121,096 $ 5.00
Granted 102,580 6.04
Forfeited (5,940) 5.00
Vested (38,385) 5.00
-------
OUTSTANDING, JUNE 30, 1995 179,351 $ 5.60
Granted 40,000 9.75
Forfeited (3,400) 5.00
Vested (70,878) 5.55
-------
OUTSTANDING, JUNE 30, 1996 145,073 $ 6.80
Granted 10,000 12.50
Forfeited (2,454) 8.87
Vested (93,762) 6.56
-------
OUTSTANDING, JUNE 28, 1997 58,857 $ 8.06
=======
36
<PAGE> 39
Nonqualified and Incentive Stock Option Plans
- ---------------------------------------------
The Company has a Nonqualified Stock Option Plan for its employees which
was adopted in 1984 (the "1984 Plan"). During fiscal year 1995, the 1984 Plan's
term expired and, accordingly, no further shares may be granted thereunder. 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 Nonqualified Stock Option Plan (the "1995 Plan") with the intent to replace
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.
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 fiscal 1995,
1996 and 1997 is set forth below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------------------------------------------------------------ ------------------
"1995
Incentive
"1984 Plan" "1995 Plan" Plan" Total
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OUTSTANDING, JUNE 30, 1994 253,768 -- -- 253,768 $11.85
Granted -- -- 255,550 255,550 9.17
Canceled/expired (13,640) -- -- (13,640) 10.89
Exercised -- -- -- -- --
-------- -------- -------- --------
OUTSTANDING, JUNE 30, 1995 240,128 -- 255,550 495,678 $10.49
Granted 4,125 71,925 151,000 227,050 12.01
Canceled/expired (56,324) -- (1,000) (57,324) 8.17
Exercised -- -- -- -- --
-------- -------- -------- --------
OUTSTANDING, JUNE 30, 1996 187,929 71,925 405,550 665,404 $11.21
Granted -- -- 95,210 95,210 8.41
Canceled/expired (58,416) (11,363) (20,500) (90,279) 13.23
Exercised (33,138) -- -- (33,138) 5.00
-------- -------- -------- --------
OUTSTANDING, JUNE 28, 1997 96,375 60,562 480,260 637,197 $10.83
======== ======== ======== ========
</TABLE>
37
<PAGE> 40
The following table summarizes information about stock options outstanding
at June 28, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Excercisable
---------------------------- ----------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life (In Years) Price Shares Price
- --------------- ------ --------------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
$ 7.63 - $10.21 394,947 7.71 $ 9.08 190,322 $ 9.38
$11.00 - $15.25 242,250 5.80 $13.68 177,250 $13.79
$ 7.63 - $15.25 637,197 6.98 $10.83 367,572 $11.51
</TABLE>
As of June 28, 1997 and June 30, 1996 and 1995, options to purchase
367,572, 326,729 and 195,641 shares were exercisable at a weighted average
exercise price of $11.51, $11.08 and $10.60 per share, respectively.
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 28, 1997 and June 30, 1996 and 1995, 97,000
shares, 259,829 shares and 281,267 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:
<TABLE>
<CAPTION>
Shares
- -----------------------------------------------------
June 28, 1997 June 30, 1996 June 30, 1995 Price Expiration Date
- ------------- ------------- ------------- ----- ---------------
<S> <C> <C> <C> <C>
- - 10,000 $8.50 September 3, 1995
- - 9,188 5.00 October 10, 1995
- - 4,250 10.00 March 13, 1996
- - 12,500 9.13 April 30, 1996
- 3,000 3,000 14.50 September 29, 1996
- 37,329 37,329 5.00 October 10, 1996
- 17,500 17,500 14.00 February 4, 1997
- 17,500 17,500 14.50 February 24, 1997
- 40,000 40,000 15.60 February 24, 1997
- 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 14,500 - 9.75 October 10, 2000
-------- -------- --------
97,000 259,829 281,267
======== ======== ========
</TABLE>
38
<PAGE> 41
A summary of the changes in outstanding stock purchase warrants for the
three years ended June 28, 1997 is set forth below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
OUTSTANDING, JUNE 30, 1994 296,142 $12.06
Granted -- --
Canceled/expired (14,875) 15.78
Exercised -- --
---------
OUTSTANDING, JUNE 30, 1995 281,267 $11.87
Granted 14,500 9.75
Canceled/expired (35,938) 8.00
Exercised -- --
---------
OUTSTANDING, JUNE 30, 1996 259,829 $12.28
Granted -- --
Canceled/expired (162,829) $12.87
Exercised -- --
---------
OUTSTANDING, JUNE 28, 1997 97,000 $11.30
=========
</TABLE>
At June 28, 1997, all 97,000 warrants were exercisable at a weighted
average price of $11.30.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation ("FAS 123"). Under this Statement, the Company had a
choice of adopting a fair-value based method of accounting for employee
stock-based compensation plans, as established by FAS 123, or retaining the
intrinsic value-based method in accordance with APB Opinion No. 25 ("APB 25"),
provided certain pro forma disclosures were made. The Company chose to retain
the intrinsic value-based method of accounting for stock-based compensation in
accordance with APB 25 and adopted the pro-forma disclosure provisions of FAS
123. Accordingly, no compensation expense has been recognized for stock option
awards or warrants as they are granted at prices not less than fair market value
of the stock on the date of grant.
The following pro-forma disclosures required by FAS 123 have been prepared
as if the Company accounted for the stock options and warrants using the
fair-value method of accounting (in thousands, except per share data):
Year Ended June
---------------
1997 1996
Net Income
As reported $ 1,672 $ 3,820
Pro-forma 603 2,938
Net Income per share
As reported $ 0.27 $ 0.61
Pro-forma 0.10 0.47
39
<PAGE> 42
The fair value of each option and warrant is estimated on the date of
grant using the following weighted-average assumptions in fiscal 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Risk-free interest rate 6.12% 6.08%
Expected stock price volatility 60.0 % 60.0 %
Expected life of options and warrants (years) 4.3 4.1
</TABLE>
The weighted average fair value of options granted during the years ended
June 28, 1997 and June 30, 1996 were $4.47 and $6.21, respectively. For
purposes of this disclosure, the Company amortizes the fair value of the options
and warrants over the vesting period of the option or warrant. In estimating the
fair value of each option, the Company uses the Black-Scholes option valuation
method. The Black-Scholes model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models, such as the Black-Scholes
model, require the input of highly subjective assumptions, including the
expected stock price volatility, which are subject to change from time to time.
For this reason, and because the FAS 123 fair value-based method of accounting
has not been applied to options and warrants granted prior to July 1, 1996, the
resulting pro-forma compensation costs are not necessarily indicative of costs
to be expected in future years.
Deferred Income (401-K) Plan
- ----------------------------
The Company has an elective employees savings plan for all eligible
employees. Ferrofluidics Corporation Tax Savings Deposit and Investment Plan
(the "401-k Plan") is a qualified trust under Section 401(a) of the Internal
Revenue Code and is, therefore, exempt from federal income taxes under the
provisions of Section 501(a). The 401-k Plan allows an employee to contribute
between 1% and 20% of his or her salary and bonus to the 401-k Plan, up to a
maximum of $9,500 (for calendar 1997) 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 fiscal 1997, 1996 and 1995, the Company made matching
contributions to the Plan, and corresponding charges to operations, in the
amounts of $155,000, $208,000 and $92,000, respectively. 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
40
<PAGE> 43
of life insurance, net of loans, in the amount of $1,751,000 and $1,731,000 at
June 28, 1997 and June 30, 1996, respectively.
In fiscal 1997, sales by the Systems Division to companies affiliated with
MEMC Electronic Materials, Inc. ("MEMC") totaled $28,017,000 and accounted for
41.3% of consolidated product sales. Sales to these and other affiliates of MEMC
totaled $45,344,000 and $6,419,000 in fiscal 1996 and 1995, which represented
62.1% and 18.8%, respectively, of consolidated product sales in those fiscal
years. Management believes that the loss of this customer, and its affiliates,
could have a materially adverse effect on its future results of operations.
The following table presents financial information for the Company's
industry segments for the years ended June 28, 1997 and June 30, 1996 and 1995.
All amounts are expressed in thousands of dollars.
41
<PAGE> 44
<TABLE>
<CAPTION>
FERROFLUIDIC PRODUCTS
---------------------
CRYSTAL
GROWING THIN FILM
COMPONENTS SYSTEMS DEPOSITION CONSOLIDATED
---------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Year ended June 28, 1997:
- -------------------------
Sales to unaffiliated customers $ 16,685 $ 42,691 $ 8,409 $ 67,785
========
Segment operating profit 3,699 2,303 (35) $ 5,967
General corporate expenses (4,437)
--------
Operating Income $ 1,530
========
Net identifiable assets 17,641 18,247 2,854 $ 38,742
General corporate assets 6,259
--------
Total Assets $ 45,001
========
Depreciation and amortization 1,193 248 161
Capital expenditures 919 205 125
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 5,791
--------
Total Assets $ 43,429
========
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
</TABLE>
42
<PAGE> 45
The following is a summary of certain financial data by geographic areas:
<TABLE>
<CAPTION>
UNITED STATES EUROPEAN JAPANESE
OPERATIONS OPERATIONS OPERATIONS ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
Year ended June 28, 1997
- ------------------------
Sales to unaffiliated domestic customers $ 36,101 $ -- $ -- $ -- $ 36,101
Sales to unaffiliated foreign customers 7,880 11,979 11,825 -- 31,684
Sales to subsidiaries 12,390 -- -- (12,390) --
-------- -------- -------- -------- --------
Total net sales and revenues 56,371 11,979 11,825 (12,390) $ 67,785
========
Geographic operating profit (loss) 5,891 174 (99) 1 $ 5,967
General corporate expenses (4,437)
--------
Operating Income $ 1,530
========
Net identifiable assets 34,466 4,416 2,388 (2,528) $ 38,742
General corporate assets 6,259
--------
Total Assets $ 45,001
========
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 5,791
--------
Total Assets $ 43,429
========
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
========
</TABLE>
43
<PAGE> 46
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. 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 in March 1994, and in June 1994,
a Consolidated Amended Complaint was filed in the actions.
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 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 Court in August 1994, and the settlement became
effective on September 23, 1994.
Securities and Exchange Commission
- ----------------------------------
In February 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 from 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. Throughout the investigation, the Company has cooperated fully with
the SEC's inquiry. In June 1997, the SEC completed its investigation with
respect to the Company and on June 23, 1997, the Company entered into a Consent
and Understanding, whereby it agreed to be permanently enjoined from violating
the federal securities laws. The Company is continuing to cooperate with the SEC
as it completes its investigation with respect to certain unnamed persons.
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. In
connection with the investigation, in September 1993, the Company announced the
retirement of Dr. Ronald Moskowitz, its then Chairman and Chief Executive
Officer, 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 in advisory fees The Company charged the entire
$725,000 to nonrecurring operating charges in fiscal 1994. During fiscal 1996
and 1995, the Company made cash payments under this agreement totaling $37,000
and $200,000, respectively.
44
<PAGE> 47
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.
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.
45
<PAGE> 48
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.
<TABLE>
<CAPTION>
(a) FINANCIAL STATEMENT SCHEDULES
<S> <C>
for the years ended June 28, 1997 and June 30, 1996 and 1995 PAGE
Schedule II - Valuation and Qualifying Accounts 56
</TABLE>
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 28, 1997.
(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).
46
<PAGE> 49
3.5 Articles of Amendment, filed November 25, 1987, eliminating certain
liabilities of directors and reducing the vote required to effect
certain corporate actions (incorporated by reference to Exhibit 4E to
the Registrant's Form 10-K for the year ended 6/30/88).
3.6 Articles of Amendment, filed November 14, 1989, effecting reverse stock
split and amending terms of Preferred Stock (incorporated by reference
to Exhibit 3.6 to the Registrant's Registration Statement on Form S-3
(Registration No. 33-33736), filed March 5, 1990 (the "1990 Registration
Statement").
3.7 By-Laws of the Registrant (incorporated by reference to Exhibit 4G to
the Registrant's Form 10K for the year ended 6/30/90).
3.8 Certificate of Vote of Directors Establishing the Series A Junior
Participating Cumulative Preferred Stock, par value $.001 per share,
dated August 3, 1994.(1)
4.1 Shareholder Rights Agreement, dated as of August 3, 1994, between the
Registrant and American Stock Transfer and Trust Company (incorporated
by reference to Exhibit 4.1 to Registrant's current report on Form 8-K
dated August 3, 1994).
10.1 Revolving Loan and Security Agreement, dated June 30, 1994, by and among
the Registrant and Bank of New Hampshire.(1)
10.2 Letter of Credit Reimbursement Agreement, dated June 30, 1994 made by
Ferrofluidics Corporation in favor of Bank of New Hampshire.(1)
10.3 Guarantee Agreement, dated June 30, 1994, between the Registrant, the
Business Finance Authority of the State of New Hampshire and Bank of New
Hampshire.(1)
10.4 Interbank Letter of Credit Agreement, dated June 30, 1994, between Bank
of New Hampshire, a New Hampshire trust company and BayBank, a
Massachusetts trust company.(1)
10.5 Master Term Note, dated June 30, 1994, by and among the Registrant and
Bank of New Hampshire.(1)
10.6 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)
47
<PAGE> 50
10.10 Consent and Undertaking of Ferrofluidics Corporation, dated June 20,
1997, In re the matter of the Securities and Exchange Commission vs.
Ferrofluidics Corporation, et al, United States District Court, Southern
District of New York.(4)
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
1000 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).
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).
10.19 Amended and Restated Employment Agreement, dated May 17, 1996, between
the Registrant and Salvatore J. Vinciguerra.(3)
10.20 Consulting Agreement, dated May 1, 1997, between the Registrant and Paul
F. Avery, Jr.(4)
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 Nonqualified Stock
Option Plan.(3)
10.26 Employment Agreement, dated September 23, 1996, between the Registrant
and William B. Ford.(4)
48
<PAGE> 51
10.27 First Amendment to Note and Loan Agreement, dated December 3, 1996, by
and between the Registrant and Bank of New Hampshire.(4)
10.28 Amended Master Term Note, dated December 3, 1996, by and between the
Registrant and Bank of New Hampshire.(4)
10.29 Amendment to Mortgage, dated December 3, 1996, by and between the
Registrant and Bank of New Hampshire.(4)
10.30 Amendment to Assignment of Leases, dated December 3, 1996, by and
between the Registrant and Bank of New Hampshire.(4)
10.35 Form of Stock Purchase Agreement between the Registrant and certain
Selling Stockholders (incorporated by reference to Exhibit 10.53 to
Amendment No. 1, filed April 9, 1992, to the Registrant's Registration
Statement on Form S-3 (Registration No. 33-46888), filed April 1, 1992
(the "April 1992 Registration Statement").
10.36 Form of Stock Purchase Agreement between the Registrant and certain
Selling Stockholders (incorporated by reference to Exhibit 10.54 to
Amendment No. 2, filed April 30, 1992, to the April 1992 Registration
Statement).
10.37 Form of Stock Purchase Agreement between the Registrant and certain
Selling Stockholders (incorporated by reference to Exhibit 10.55 to
Amendment No. 2 to the April 1992 Registration Statement).
10.55 Termination Agreement, dated November 25, 1993, between Registrant and
Fuji Seiki, Inc. for the purpose of termination of The Patent, Technical
Information and Trademark License Agreement, dated March 30, 1993,
between the Registrant and Fuji Seiki, Inc.(2)
10.56 Preferred Vendor Agreement, dated November 30, 1993, between the
Registrant and Fuji Seiki, Inc.(2)
10.57 Patent, Technical Information and Trademark License Agreement, dated
November 30, 1993, between the Registrant and Fuji Seiki, Inc.(2)
10.58 Agreement, dated March 8, 1993, among the Registrant, Fuji Seiki, Inc.,
VSE Austria GmbH, and AP&T GmbH for the purchase of 80% of VSE GmbH by
AP&T GmbH.(2)
10.59 Letter Agreement, dated September 15, 1993, between the Registrant and
Dr. Ronald Moskowitz concerning Dr. Moskowitz' retirement from
Ferrofluidics.(2)
10.62 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)
49
<PAGE> 52
10.66 Amended and Restated Insurance Loan Agreement, dated June 30, 1991,
between the Registrant and Ronald Moskowitz (incorporated by reference
to Exhibit 10R to the Registrant's Form 10-K for the year ended
6/30/91).
10.67 Amended and Restated Insurance Loan Agreement, dated May 31, 1989,
between the Registrant and Frank Bloom (incorporated by reference to
Exhibit 10.37 to the 1990 Registration Statement).
10.68 Form of Common Stock Purchase Warrant -- directors and key employees
(incorporated by reference to Exhibit 10T to the Registrant's Form 10-K
for the year ended 6/30/88).
10.69 Form of Common Stock Purchase Warrant -- employees (incorporated by
reference to Exhibit 10U to the Registrant's Form 10-K for the year
ended 6/30/88).
10.70 1984 Non-Qualified Stock Option Plan, as amended through December 15,
1992.(2)
10.71 1983 Employee Stock Purchase Plan, as amended through December 14, 1990
(incorporated by reference to Exhibit 4 to Post-Effective Amendment No.
1, filed January 23, 1991, to the Registrant's Registration Statement on
Form S-8 (Registration No. 2-95090)).
10.72 Settlement Agreement and Release, dated June 30, 1993, between Nippon
Ferrofluidics Corporation, Akira Yamamura, Koichi Goto, Yoshitada
Akahori, Tadao Ishizawa, Atsumi Nakamura, Nobuo Yamamura, past and
present members of NFC's Board of Directors and the Registrant.(2)
10.73 Stock Subscription Agreement, dated June 30, 1993 between the Registrant
and Nippon Ferrofluidics Corporation pursuant to the acquisition of
Nippon Ferrofluidics Corporation Common Stock by Ferrofluidics.(2)
10.74 Superseding 1993 Fluids License Agreement, dated June 30, 1993, between
the Registrant and Nippon Ferrofluidics Corporation.(2)
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)
27 Financial Data Schedule
(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) Incorporated by reference to the designated exhibit of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996.
(4) Filed herewith
50
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorize, this 4th day of
September, 1997.
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.
<TABLE>
<CAPTION>
Signatures Title Dated Signed
- ---------- ----- ------------
<S> <C> <C>
/s/ Salvatore J. Vinciguerra Chief Executive Officer, 9/4/97
- ---------------------------- President
Salvatore J. Vinciguerra
/s/ William B. Ford Vice President Finance 9/4/97
- ---------------------------- (Chief Financial Officer)
William B. Ford
/s/ Stephen B. Hazard Director 9/4/97
- ----------------------------
Stephen B. Hazard
/s/ Dean Kamen Director 9/4/97
- ----------------------------
Dean Kamen
/s/ Howard F. Nichols Director 9/4/97
- ----------------------------
Howard F. Nichols
/s/ Robert P. Rittereiser Director 9/4/97
- ----------------------------
Robert P. Rittereiser
/s/ Dennis R. Stone Director 9/4/97
- ----------------------------
Dennis R. Stone
</TABLE>
51
<PAGE> 54
EXHIBIT 11
Ferrofluidics Corporation
Statement Re: Computation of Per Share Earnings
For the Years ended June 28, 1997 and June 30, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Primary
Average shares outstanding 6,234,534 6,196,934 5,563,160
Net effect of dilutive stock options - based
on the treasury stock method using
average market price 5,047 116,111 N/A
---------- ---------- ----------
Total 6,239,581 6,313,045 5,563,160
Net income $1,672,000 $3,820,000 $ 889,000
Per share amount $ .27 $ .61 $ .16
========== ========== ==========
Fully Diluted
Average shares outstanding 6,234,534 6,196,934 5,563,160
Net effect of dilutive stock options - based
on the treasury stock method using
year-end market price, if higher than
average market price 5,047 156,817 N/A
---------- ---------- ----------
Total 6,239,581 6,353,751 5,563,160
Net income $1,672,000 $3,820,000 $ 889,000
Per share amount $ .27 $.60 (A) $ .16
========== ========== ==========
</TABLE>
(A) Earnings per share assuming full dilution is not presented in the Statement
of Operations for 1996 as it is less than 3% more dilutive than the primary
computation.
52
<PAGE> 55
EXHIBIT 21
Subsidiaries of the Ferrofluidics Corporation
As of June 28, 1997
NAME PLACE OF ORGANIZATION
- ---- ---------------------
Advanced Products and Technologies, GmbH Nurtingen, Germany
Advanced Products and Technologies, Ltd. Oxford, England
Advanced Products and Technologies, S.A. Madrid, Spain
Ferrofluidics Japan Corporation Tokyo, Japan
Ferrohydrodynamics Corporation Massachusetts
53
<PAGE> 56
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-38642) pertaining to the 1983 Employee Stock Purchase Plan,
(Form S-8 No. 33-38643) pertaining to the 1984 Non-Qualified Stock Option Plan,
and (Form S-8 No. 333-13587) pertaining to the 1995 Stock Option and Incentive
Plan, the 1995 Non-Qualified Stock Option Plan, and the 1994 Restricted Stock
Plan of Ferrofluidics Corporation of our report dated August 21, 1997, with
respect to the consolidated financial statements and schedule of Ferrofluidics
Corporation for the year ended June 28, 1997, included in the Annual Report
(Form 10-K) for the year ended June 28, 1997.
/s/ Ernst & Young LLP
Manchester, New Hampshire
September 19, 1997
54
<PAGE> 57
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of Ferrofluidics Corporation on Form S-8 (File No. 33-38642, File No. 33-38643
and File No. 333-13587) of our report dated August 31, 1995, on our audit of the
consolidated financial statements and financial statement schedule of
Ferrofluidics Corporation as of June 30, 1995 and for the year ended June 30,
1995, which report is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
September 19, 1997
55
<PAGE> 58
FERROFLUIDICS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
JUNE 28, 1997, JUNE 30, 1996 AND JUNE 30, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------------------------- --------------- ---------------------- ----------- ----------
BALANCE AT CHARGED CHARGED BALANCE
BEGINNING TO COSTS TO OTHER AT END OF
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- ------------ -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended June 28, 1997:
- -------------------------
(a) Amounts deducted from the assets
to which they apply:
Reserve for doubtful accounts - trade $ 320,000 $ 50,000 -- $ 171,000 $ 199,000
Reserve for excess and obsolete inventory 962,000 326,000 -- -- 1,288,000
Reserve for rent guarantee 265,000 -- -- -- 265,000
(b) Other Reserves:
Warranty reserve 291,000 550,000 -- 438,000 403,000
Self-Insurance reserve 113,000 -- -- -- 113,000
Sales related reserve 447,000 -- -- 53,000 394,000
---------- ---------- ---------- ----------
Total $2,398,000 $ 926,000 -- $ 662,000 $2,662,000
========== ========== ========== ==========
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 $ 278,000 -- $1,801,000 $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
========== ========== ========== ==========
</TABLE>
56
<PAGE> 1
EXHIBIT 10.10
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
- ----------------------------------------------------
:
SECURITIES AND EXCHANGE COMMISSION :
450 Fifth Street, N.W. :
Washington, D.C. 20549, :
:
Plaintiff, :
v. : 97 Civ. _____
:
Ferrofluidics CORPORATION, :
RONALD MOSKOWITZ, :
JEROME R. ALLEN, :
JAN R. KIRK, :
STEPHEN P. MORIN, :
BRUCE S. MOODY, and :
THE 1991 RPM IRREVOCABLE TRUST, :
:
Defendants. :
- ----------------------------------------------------
CONSENT AND UNDERTAKING OF FERROFLUIDICS CORPORATION
1. Defendant Ferrofluidics Corporation ("Ferrofluidics") enters a
general appearance, admits the jurisdiction of this Court over it and over the
subject matter of this action, waives service upon it of a Summons and of the
Complaint of Plaintiff Securities and Exchange Commission (the "Commission") in
this action, and the filing of an Answer.
2. Defendant Ferrofluidics without admitting or denying the
allegations in the Complaint, except as to jurisdiction, which it admits, and
without. trial, argument or adjudication of any issue of fact or law, consents
to the entry of the Final Judgment of Permanent Injunction as to Ferrofluidics
Corporation (the "Final Judgment"), in the form annexed hereto and incorporated
by reference herein, which permanently restrains and
<PAGE> 2
enjoins Ferrofluidics from violating Section 17(a) of the Securities Act of 1933
(the "Securities Acts") Sections 10(b), 13(a), 13(b) (2) (A), 13(b) (2) (B) and
14(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5,
12b- 20, 13a-1, 13a-13, and 14a-9 thereunder.
3. Defendant Ferrofluidics waives the entry of findings of fact and
conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.
4. Defendant Ferrofluidics waives any right it may have to appeal
from the entry of the Final Judgment.
5. Defendant Ferroflutdics enters into this Consent and Undertaking
of Ferrofluidics Corporation (the "Consent") voluntarily and of its own accord
and represents that no threats, offers, promises or inducements of any kind have
been made by the Commission or any member, officer, employee, agent or
representative of the Commission to induce it to enter into this Consent.
6. Defendant Ferrofluidics agrees that this Consent shall be
incorporated into the Final Judgment with the same force and effect as if fully
set forth therein.
7. Defendant Ferrofluidics agrees that it will not oppose the
enforcement of the Final Judgment on the ground, if any exists, that it fails to
comply with Rule 65(d) of the Federal Rules of Civil Procedure, and hereby
waives any objection it may have based thereon.
2
<PAGE> 3
8. Defendant Ferrofluidics agrees that the Final Judgment may be
presented by the Commission to the Court for signature and entry without further
notice.
9. Defendant Ferrofluidics waives service of the Final Judgment
entered herein upon it and agrees that entry of the Final Judgment by the Court
and filing with the Clerk in the Southern District of New York will constitute
notice to it of the terms and conditions of such Final Judgment.
10. Defendant Ferrofluidics agrees and undertakes that, at the
Commission's request, on reasonable notice and without service of a subpoena, it
will instruct its employees, agents and representatives to cooperate with the
Commission and its staff and to truthfully disclose all information with respect
to their activities and the activities of others about which the Commission or
its staff may inquire with respect to the matters alleged in the Complaint;
designate representatives to testify in all investigations, administrative and
judicial proceedings at which the Commission or its staff makes requests for its
testimony; make its employees, agents and representatives available as may be
required by the Commission or its staff; produce any documents within its
possession, custody or control, domestic or foreign, which are requested by the
Commission or its staff; be accompanied at any time it so desires by counsel of
its choice; and give truthful and accurate information and testimony and not
assert any evidentiary or other privilege, other than the attorney-client and
work product privileges.
3
<PAGE> 4
11. Consistent with the provisions of 17 C.F.R. secs. 202.5(f),
Defendant Ferrofluidics waives any claim of Double Jeopardy based upon the
settlement of this proceeding, including the imposition of any remedy or civil
penalty herein.
12. Defendant Ferrofluidics understands and agrees to comply with
the Commission's policy "not to permit a defendant or respondent to consent to a
judgment or order that imposes a sanction while denying the allegations in the
complaint or order for proceedings" (17 C.F.R. secs.202.5(e)). In compliance
with this policy, Defendant Ferrofluidics agrees not to take any action or to
make or permit to be made any public statement denying, directly or indirectly,
any allegation in the Complaint or creating the impression that the Complaint is
without factual basis. If Defendant Ferrofluidics breaches this agreement, the
Commission may petition the Court to vacate the Final Judgment and restore this
case to its active docket. Nothing in this provision affects Defendant
Ferrofluidics' testimonial obligations or right to take legal positions in
litigation in which the Commission is not a party.
4
<PAGE> 5
13. Defendant Ferrofluidics agrees that this Court shall retain
jurisdiction over this matter for the purpose of enforcing the terms of the
Final Judgment.
FERROFLUIDICS CORPORATION
By: /s/ ??? ?????????
-------------------------------
Its: Chief Executive Officers
Dated: 6-20-1997
County of Hillsborrough
State of New Hampshire
On this 20th day of June, 1997, Salvatore J. Vinciguerra being known to
me and who executed the foregoing CONSENT AND UNDERTAKING OF FERROFLUIDICS
CORPORATION, personally appeared before me and did duly acknowledge to me that
he executed the same.
/s/ Joan C. Deichler
---------------------------------
Notary Public
My Commission expires Sept. 8, 1999
Approved as to form
/s/ Kenneth J. Parsigian
- ------------------------------------
Kenneth J. Parsigian, Esq.
Goodwin, Proctor & Hoar LLP
Exchange Place
Boston, Massachusetts 02109-2881
Attorney for Defendant Ferrofluidics Corporation
Dated:
5
<PAGE> 6
CERTIFICATION
I, Stuart M. Cable, the Secretary of Ferrofluidics Corporation
(the "Corporation"), hereby certify that, at a meeting of the Board of Directors
(the "Board") of the Corporation on June 20, 1997, the Board adopted a
Resolution, which is still in effect and which appears in the minutes of the
Corporation in the form attached hereto; that all approvals referred to in said
Resolution have been obtained; and that Salvatore S. Vinciguerra, the Chief
Executive Officer of the Corporation, is an officer of the Corporation
who is authorized to execute the documents referred to in the Resolution on
behalf of the Corporation.
Dated: Nashua, New Hampshire
June 20, 1997
/s/ Stuart M. Cable
----------------------------------
6
<PAGE> 1
EXHIBIT 10.20
CONSULTING AGREEMENT
--------------------
This Consulting Agreement (the "Agreement") is made as of May 1, 1997,
by and between Ferrofluidics Corporation (the "Company"), a Massachusetts
corporation with its principal place of business at 40 Simon Street, Nashua, New
Hampshire, and Paul F. Avery, Jr. ("Consultant") of 178 Drinkwater Road,
Kensington, New Hampshire.
WHEREAS, Consultant has been employed by the Company as its Chairman of
the Board of Directors and Treasurer pursuant to that certain Amended and
Restated Employment Agreement dated as of May 17, 1996 (the "Employment
Agreement");
WHEREAS, the Company and Consultant desire to terminate the Employment
Agreement and the Consultant's employment with the Company;
WHEREAS, the Company desires to retain Consultant to render consulting
and advisory services to the Company on an independent contractor basis and on
the terms and conditions set forth herein;
WHEREAS, Consultant desires to furnish such consulting and advisory
services to the Company on an independent contractor basis and on the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual promises, terms, provisions and conditions set forth in this Agreement,
the parties hereby agree:
1. TERMINATION OF EMPLOYMENT: ENGAGEMENT OF CONSULTANT. The Company
and Consultant acknowledge and agree that Consultant's employment with the
Company pursuant to the Employment Agreement is terminated effective as of the
date hereof, and that the Employment Agreement shall be deemed to have been
terminated as of the date hereof and shall be of no further force or effect.
Subject to the terms and conditions set forth in this Agreement, the Company
hereby retains Consultant for the term set forth in Section 2 as a consultant
and advisor to the Company.
2. TERM. This Agreement shall commence on the date hereof and shall
continue for a period of three (3) years (such period being referred to as the
"Consultation Period"), unless sooner terminated in accordance with the
provisions of Section 5. The parties hereto may extend the Consultation Period
upon mutual written agreement.
3. SERVICES. Consultant agrees to perform such consulting, advisory
and related services for the Company as may be reasonably requested from time to
time by the Company (the "Services"). During the Consultation Period, Consultant
shall perform the Services under the direction and restriction of the Chief
Executive Officer of the Company.
<PAGE> 2
4. COMPENSATION.
a. CONSULTING FEES. During the term of this Agreement,
Company shall pay to Consultant consulting fees at a rate of $10,000 per month,
payable in arrears on the last day of each month. Payment for any partial month
shall be prorated.
b. MATTERS CONCERNING RESTRICTED STOCK AND STOCK OPTIONS.
(i) Notwithstanding any provision to the contrary
contained in any other agreement, all shares of restricted stock granted to
Consultant pursuant to any plan maintained by the Company and held by Consultant
on the date hereof (whether vested or unvested) shall become fully vested as of
the date hereof.
(ii) Notwithstanding any provision to the contrary
contained in any other agreement, all options to purchase stock of the Company
granted to Consultant under any plan maintained by the Company and held by
Consultant on the date hereof (whether exercisable or unexercisable) shall
become fully vested and exercisable and may hereafter be exercised by Consultant
until the expiration date thereof.
c. LIFE INSURANCE. The Company and Consultant acknowledge
that the Company has paid all premiums due or payable through November 5, 1997
(the "Paid-Up Premium Date"), relating to that certain life insurance policy
(Policy # 41019258) on the life of Consultant in the amount of one million
dollars ($1,000,000) (the "Life Insurance Policy"). The Company and Consultant
agree that the Company shall not take any action that would be inconsistent with
maintaining such policy through the Paid-Up Premium Date, but that the Company
shall have no obligation to maintain such policy at any time following the
Paid-Up Premium Date; provided, however, that Consultant shall be entitled to
assume the Company's obligations under the Life Insurance Policy and continue to
maintain such policy in accordance with its terms following the Paid-Up Premium
Date. Each of the Company and Consultant shall use its or his best efforts to
arrange for the assumption by Consultant on the Paid-Up Premium Date of the
Company's obligations under the Life Insurance Policy.
d. RETIREMENT PLANS. In connection with the termination of
Consultant's employment with the Company on the date hereof, Consultant shall be
entitled to participate in and enjoy the benefit of the Company's retirement,
supplementary retirement, deferred compensation or similar plans, programs or
arrangements as available to the Company's management as of the date hereof.
e. HEALTH, MEDICAL AND WELFARE PLANS. Consultant may, at
his sole expense, elect to continue his group health insurance pursuant to
COBRA.
f. 401(k) PLAN. The Company shall use its best efforts to
assist Consultant in the roll over or withdrawal of his interest in the
Company's Tax Savings and Deposit and
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<PAGE> 3
Investment Plan (the "401(k) Plan"), all in accordance with and subject to
applicable law and the terms of the 401(k) Plan.
g. REIMBURSEMENT OF EXPENSES. The Company shall reimburse
Consultant for all reasonable and necessary expenses incurred or paid by
Consultant in connection with, or related to, the performance of the Services
under this Agreement; provided, however, that the Company shall provide all
airline tickets to Consultant on a prepaid basis in connection with all travel
by Consultant for purposes of performance of the Services hereunder. Consultant
shall submit to the Company itemized monthly statements, in a form reasonably
satisfactory to the Company, of such expenses incurred in the previous month.
The Company shall pay to Consultant amounts shown on each such statement within
thirty (30) days after receipt thereof.
5. TERMINATION OF CONSULTANCY AND TERMINATION COMPENSATION.
a. GENERAL TERMINATION COMPENSATION. If Consultant's
consultancy is terminated pursuant to Sections 5b or 5d, the Company shall
continue to make payments to Consultant (or, if applicable, to Consultant's
beneficiary) as provided in Section 4a for the balance of the Consultation
Period.
b. DEATH OR DISABILITY.. In the event Consultant dies or
becomes disabled during the Consultation Period, his consultancy hereunder shall
automatically terminate. For the purpose of this Agreement, "disability" shall
refer to a situation in which Consultant is totally disabled from performing
Services for the Company during a period of thirteen (13) consecutive weeks.
If any question shall arise as to whether during any period Consultant
has suffered a disability, Consultant may, and at the request of the Company
will, submit to the Company a certification in reasonable detail by a physician
selected by Consultant or his guardian to whom the Company has no reasonable
objection as to whether Consultant was so disabled and such certification shall
for the purposes of this Agreement be conclusive of the issue. If such question
shall arise and Consultant shall fail to submit such certification, the
Company's determination of such issue shall be binding on Consultant.
c. BY THE COMPANY FOR CAUSE. The Company may terminate
Consultant's consultancy hereunder for cause at any time upon notice to
Consultant setting forth in reasonable detail the nature of such cause. The
following, as determined by the Board of Directors of the Company in its good
faith and reasonable judgment, shall constitute "cause" for termination:
(1) Consultant's embezzlement of funds of or theft
from the Company or other material dishonesty with respect to the Company or any
of its affiliates; or
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<PAGE> 4
(2) Conviction of, or plea of nolo contendere to, a
felony or other crime involving moral turpitude (it being understood that
violation of a motor vehicle code does not constitute such a crime); or
(3) Conduct engaged in or action taken or omitted to
be taken by Consultant which is in material breach of this Agreement, in which
case where such breach is incapable of being cured and remains uncured after
written notice by the Company to Consultant; or
(4) Gross or willful misconduct of Consultant with
respect to the Company or any subsidiary or affiliate thereof.
Upon the giving of notice of termination of Consultant's consultancy
hereunder for cause, the Company shall have no further obligation or liability
to Consultant, other than the payment of consulting fees earned and unpaid at
the date of termination and the contribution by the Company to the cost of
Consultant's participation (subject to any required contribution by Consultant
under the terms of the applicable plans) in the Company's group health and
medical plans as the same are in effect from time to time for so long as
Consultant is entitled to continue such participation under applicable law and
plan terms.
d. BY THE COMPANY OTHER THAN FOR CAUSE. The Company may
terminate Consultant's consultancy hereunder other than for cause at any time
upon sixty (60) days' written notice to Consultant.
e. BY CONSULTANT. Consultant may terminate his consultancy
hereunder at any time upon sixty (60) days' written notice to the Company.
6. INDEPENDENT CONTRACTOR STATUS. Consultant shall perform all
services under this Agreement as an "independent contractor" and not as an
employee or agent of the Company. Consultant is not authorized to assume or
create any obligation or responsibility, express or implied, on behalf of, or in
the name of, the Company or to bind the Company in any manner.
7. ASSIGNMENT. Neither the Company nor Consultant may make any
assignment of this Agreement or any interest herein, by operation of law or
otherwise, without the prior written consent of the other party; provided,
however, that (i) the Company may assign its rights and obligations under this
Agreement without the consent of Consultant in the event that the Company shall
hereafter effect a reorganization, consolidate with, or merge into, any other
person or entity or transfer all of its properties or assets to any other person
or entity, and (ii) Consultant may assign its rights and obligations under this
agreement without the consent of the Company to P.F. Avery Corporation. This
Agreement shall inure to the benefit of and be binding upon the Company and
Consultant, their respective successors, executors, administrators, heirs and
permitted assigns.
4
<PAGE> 5
8. SEVERABILITY. If any portion or provision of this Agreement
shall to any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
9. WAIVER. No waiver of any provision hereof shall be effective
unless made in writing and signed by the waiving party. The failure of either
party to require the performance of any term or obligation of this Agreement, or
the waiver by either party of any breach of this Agreement, shall not prevent
any subsequent enforcement of such term or obligation or be deemed a waiver of
any subsequent breach.
10. NOTICES. Any and all notices, requests, demands and other
communications provided for by this Agreement shall be in writing and shall be
deemed given when delivered by hand, telex or facsimile, or if mailed, five days
after mailing (two business days in the case of courier service), to the parties
as follows:
If to Consultant: Paul F. Avery, Jr.
178 Drinkwater Road
Kensington, NH 03833
If to the Company: Ferrofluidics Corporation
40 Simon Street
Nashua, NH 03061
Attn: Salvatore J. Vinciguerra
11. ENTIRE AGREEMENT. This Agreement and the
Non-Disclosure/Non-Compete Agreement dated September 22, 1993 between the
Company and Consultant constitute the entire agreement between the parties and
supersede all prior communications, agreements and understandings, written or
oral, with respect to the terms and conditions of Consultant's consultancy and
prior employment with the Company.
12. AMENDMENT. This Agreement may be amended or modified only by a
written instrument signed by Consultant and by an expressly authorized
representative of the Company.
13. HEADINGS. The headings and captions in this Agreement are for
convenience only and in no way define or describe the scope of or content of any
provision of this Agreement.
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<PAGE> 6
14. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be an original and all of which together shall
constitute one and the same instrument.
15. GOVERNING LAW. This is a New Hampshire contract and shall be
construed and enforced under and be governed in all respects by the laws of The
State of New Hampshire, without regard to the conflict of laws principles
thereof.
[END OF TEXT]
6
<PAGE> 7
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Company, by its duly authorized representative, and by
Consultant, as of the date first above written.
"CONSULTANT" FERROFLUIDICS CORPORATION
/s/ Paul F. Avery, Jr. By: /s/ Salvatore J. Vinciguerra
- ---------------------------- -------------------------------------
Paul F. Avery, Jr. Salvatore J. Vinciguerra
President and Chief Executive Officer
7
<PAGE> 8
ASSIGNMENT AND ASSUMPTION
Paul F. Avery, Jr. ("Avery") hereby assigns his rights and obligations under the
second sentence of Section 1, Sections 2, 3, 4a, and 4g, Sections 6 through 10
and Sections 12 through 15 (collectively, the "Assigned Provisions"), of the
Consulting Agreement dated May 1, 1997 between Ferrofluidics Corporation and
Avery, and P.F. Avery Corporation ("P.F. Avery") hereby agrees to be bound by
and perform all of Avery's obligations under the Assigned Provisions of the
Consulting Agreement as if a party thereto. P.F. Avery further agrees to make
Avery available to provide the Services set forth in Section 3 of the Consulting
Agreement. Avery and P.F. Avery acknowledge that the provisions of Section 5b
shall relate to the death or disability of Avery and that the provisions of
Section 5c shall relate to the conduct of Avery or P.F. Avery.
Date: May 2, 1997
/s/ Paul F. Avery, Jr.
-------------------------------
Paul F. Avery, Jr.
P.F. AVERY CORPORATION
/s/ Paul F. Avery, Jr.
-------------------------------
Name Paul F. Avery, Jr.
Title: President
8
<PAGE> 1
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement"), dated September 23, 1996, is
entered into by and between Ferrofluidics Corporation (the "Company"), a
Massachusetts corporation with its principal place of business at 40 Simon
Street, Nashua, New Hampshire, and William B. Ford ("Employee"), of 3 Bruce
Road, Winchester, Massachusetts 01890.
WHEREAS, the financial operations of the Company are a complex matter
requiring direction and leadership in a variety of areas;
WHEREAS, Employee possesses the experience and expertise to provide the
direction and leadership required by the Company; and
WHEREAS, subject to the terms and conditions hereinafter set forth, the
Company, therefore, wishes to establish the terms of employment of Employee as
its Vice President and Chief Financial Officer, and Employee agrees to so
establish such terms of this employment;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
promises, terms, provisions and conditions set forth in this Agreement, the
parties hereby agree:
1. EMPLOYMENT. Subject to the terms and conditions set forth in this
Agreement, the Company hereby offers and Employee hereby accepts employment on
the terms and conditions set forth in this Agreement.
2. EFFECTIVE DATE. The effective date (the "Effective Date") of this
Agreement shall be September 23, 1996.
3. Capacity and Performance.
-------------------------
a. Employee shall be employed by the Company as its Vice President and
Chief Financial Officer, and shall have all powers and duties consistent
with those positions, subject to the direction of the Company's Board of
Directors.
b. Employee shall devote his best efforts, business judgment, skill
and knowledge to the advancement of the business and interests of the
Company and its affiliates, and to the discharge of his duties and
responsibilities hereunder. In accordance with the foregoing, Employee
shall not engage in any other business activity, except as may be approved
by the Board of Directors; PROVIDED, HOWEVER, that nothing herein shall be
construed as preventing Employee from investing his assets in a manner not
otherwise prohibited by this Agreement, and in such form or manner as shall
not require any material services on his part in the operations or affairs
of the companies or other entities in which such investments are made.
c. Except for required travel on the Company's business, Employee
shall not be required to work on a regular basis at any location outside of
Hillsborough County in the State of New Hampshire.
<PAGE> 2
4. Compensation and Benefits.
--------------------------
a. BASE SALARY. The Company shall pay Employee a base salary at an
annual rate (the "Base Salary") equal to $140,000 per year, payable in
accordance with the payroll practices of the Company for its executives,
subject to annual salary reviews by the Compensation Committee of the
Company's Board of Directors (the "Compensation Committee") or the
President, as appropriate, on October 1st of each year for the duration of
the Term of this Agreement.
b. BONUS. Employee shall be entitled to participate in the Company's
Cash Incentive Plan (the "Bonus Plan"), whereby Employee will be eligible
to, and may, in the sole discretion of the Compensation Committee, earn as
an annual bonus a percentage of his Base Salary based 50% upon the
percentage of the Bonus Plan goals, as established by the Board of
Directors of the Company, achieved by the Company and 50% on individual
goals established by the President of the Company, in any given year, as
follows:
Percentage of Bonus Plan Percentage of Base Salary
Goals Achieved* Earned as Bonus
------------------------ ------------------------
80% 0%
100% 20%
120% 40%
* For percentages between 80% and 120%, the percentage of Base
Salary that may be earned by Employee will be determined by
linear interpolation.
c. On the Effective Date of this Agreement, Employee will be awarded
an incentive stock option to purchase 30,000 shares of Common Stock (the
"Stock Option") pursuant to the Company's 1995 Stock Option and Incentive
Plan (the "Stock Option Plan"). The Stock Option will be granted to
Employee at the market price of the shares of Common Stock underlying such
Stock Option as of the Effective Date and shall vest as follows:
Percentage of Shares Cumulative
Vesting Date Becoming Vested Percentage Vested
------------ --------------- -----------------
September 23, 1997 25% 25%
September 23, 1998 25% 50%
September 23, 1999 25% 75%
September 23, 2000 25% 100%
As provided in Section 15 of the Stock Option Plan, all of the shares subject to
the Stock Option above shall become immediately vested and exercisable in full,
whether or not the Stock Option or any portion thereof is vested and exercisable
at such time, upon the occurrence of a "Change of Control" of the Company as
such term is defined in the Stock Option Plan.
2
<PAGE> 3
d. VACATIONS. Employee shall be entitled to the number of paid
vacation days to which he would be entitled in accordance with the
Company's normal vacation policy, to be taken at such times and intervals
as shall be determined by Employee, subject to the reasonable business
needs of the Company.
e. RETIREMENT PLANS. Employee shall be entitled to participate in and
enjoy the benefit of the Company's retirement, supplementary retirement,
deferred compensation or similar plans, programs or arrangements as
available to the Company's management from time to time.
f. HEALTH, WELFARE AND FRINGE BENEFIT PLANS, ETC. Employee shall be
entitled to participate in and enjoy the benefit of all the health,
medical, dental, cafeteria, reimbursement, death (including life
insurance), accident, travel insurance, long-term disability, short-term
disability, sick leave, other leaves of absence, holidays and other similar
welfare, fringe-benefit or employment-related plans, programs,
arrangements, policies or perquisites available to the Company's management
from time to time. Participation shall be subject to the terms of the
applicable plan documents and the discretion of the Board of Directors or
any administrative or other committee provided for in or contemplated by
such plan. The Company may alter, modify, add to or delete its employee
benefit plans as they apply to the Company's management at such times and
in such manner as the Company determines to be appropriate, without
recourse by Employee.
g. BUSINESS EXPENSES. The Company shall pay or reimburse Employee for
reasonable business expenses incurred or paid by him in the performance of
his duties and responsibilities hereunder, subject to any restrictions on
such expenses set by the Board of Directors and to such reasonable
substantiation and documentation as may be specified by the Company from
time to time.
h. MOVING EXPENSES. The Company shall reimburse Employee for
reasonable moving expenses incurred in connection with Employee's
relocation to New Hampshire, including without limitation costs and
expenses of moving furniture and family.
5. Termination of Employment and Severance Benefits.
-------------------------------------------------
a. GENERAL SEVERANCE BENEFITS. The Company or Employee may terminate
this employment at will upon six (6) months prior written notice if such
notice is given within one year of Employee's employment hereunder, or
upon one year's prior written notice if such notice is given after the
first year of Employee's employment hereunder.
b. Change of Control Benefits.
---------------------------
(1) If the Company undergoes a Change of Control (as defined
below) during the Term of this Agreement, and a Terminating Event
(as defined below) occurs within twelve (12) months after the
date on which such Change of Control occurs, Employee shall be
entitled to receive an amount equal to six (6) months' Base
Salary at the rate then in effect under this Agreement if such
Terminating Event occurs within the first year of Employee's
employment hereunder, and an amount equal to twelve (12) months'
Base Salary at the rate then in effect under
3
<PAGE> 4
this Agreement if such Terminating Event occurs after the first
year of Employee's employment hereunder.
(2) "Change of Control" shall mean the occurrence of any one
of the following events:
(i) any "person" (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Act")) becomes a "beneficial owner" (as
such term is defined in Rule 13d-3 promulgated under the
Act) (other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of the
Company, or any corporation owned, directly or indirectly,
by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company),
directly or indirectly, of securities of the Company
representing 15% or more of the combined voting power of
the Company's then outstanding securities; or
(ii) persons who, as of the Effective Date, constituted
the Company's Board of Directors (the "Incumbent Board")
cease for any reason, including without limitation as a
result of a tender offer, proxy contest, merger or similar
transaction, to constitute at least a majority of the Board
of Directors, provided that any person becoming a director
of the Company subsequent to the Effective Date whose
election was approved by at least a majority of the
directors then comprising the Incumbent Board shall, for
purposes of this Agreement, be considered a member of the
Incumbent Board; or
(iii) the stockholders of the Company approve a merger
or consolidation of the Company with any other corporation
or other entity, other than (a) a merger or consolidation
which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity)
more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation
or (b) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no "person" (as hereinabove defined) acquires more
than 50% of the combined voting power of the Company's then
outstanding securities; or
(iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially
all of the Company's assets.
(3) A "Terminating Event" shall mean any voluntary or
involuntary termination of Employee's employment occurring
subsequent to a Change of Control, other than the termination of
Employee's employment pursuant to Section 5d hereunder.
c. DEATH OR DISABILITY. In the event Employee dies or becomes
disabled during the Term this Agreement, his employment hereunder
shall automatically terminate. In such case, the Company shall pay to
Employee or his beneficiary, as the case may be, any earned but unpaid
4
<PAGE> 5
salary as of the date of his death or disability. For the purpose of
this Agreement, "disability" shall refer to a situation in which
Employee is totally disabled from performing his duties for the
Company during a period of thirteen (13) consecutive weeks.
If any question shall arise as to whether during any period
Employee has suffered disability, Employee may, and at the request of
the Company will, submit to the Company a certification in reasonable
detail by a physician selected by Employee or his guardian to whom the
Company has no reasonable objection as to whether Employee was so
disabled and such certification shall for the purposes of this
Agreement be conclusive of the issue. If such question shall arise and
Employee shall fail to submit such certification, the Company's
determination of such issue shall be binding on Employee.
d. BY THE COMPANY FOR CAUSE. The Company may terminate Employee's
employment hereunder for cause at any time upon notice to Employee
setting forth in reasonable detail the nature of such cause. The
following, as determined by the Board of Directors in its reasonable
judgment, shall constitute "cause" for termination:
(1) Employee's falsification of the accounts of the Company,
embezzlement of funds of the Company or other material dishonesty
with respect to the Company or any of its affiliates; or
(2) Conviction of, or plea of nolo contendere to, a felony
or other crime involving moral turpitude (it being understood
that violation of a motor vehicle code does not constitute such a
crime); or
(3) Conduct engaged in or action taken or omitted to be
taken by Employee which is in material breach of this Agreement;
or
(4) Material failure to perform a substantial portion of
Employee's duties and responsibilities hereunder, which failure
continues for more than thirty (30) days after written notice
given to Employee pursuant to a vote of the Board of Directors,
such vote to set forth in reasonable detail the nature of such
failure; or
(5) Gross or willful misconduct of Employee' with respect to
the Company or any subsidiary or affiliate thereof.
Upon the giving of notice of termination of Employee's employment
hereunder for cause, the Company shall have no further obligation or
liability to Employee, other than the payment of salary earned and unpaid
at the date of termination and the contribution by the Company to the cost
of Employee's participation (subject to any required employee contribution
by Employee under the terms of the applicable plans) in the Company's group
medical and dental insurance plans as the same are in effect from time to
time for so long as Employee is entitled to continue such participation
under applicable law and plan terms.
<PAGE> 6
e. LIMITATION OF BENEFITS. It is the intention of Employee and of the
Company that no payments by the Company to or for the benefit of Employee
under this Agreement or any ether agreement or plan pursuant to which he is
entitled to receive payments or benefits shall be non-deductible to the
Company by reason of the operation of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") relating to "parachute payments,"
Accordingly, and notwithstanding any other provision of this Agreement or
any such agreement or plan, if by reason of the operation of said Section
280G, any such payments exceed the amount which can be deducted by the
Company, the payments which Employee is entitled to receive under this
Agreement shall be reduced by that amount which exceeds the maximum amount
deductible by the Company under Section 280G. To the extent that payments
exceeding such maximum deductible amount have been made to or for the
benefit of Employee, such excess payments shall be refunded to the Company
with interest thereon at the applicable federal rate determined under
Section 1274(d) of the Code, compounded annually, or at such other rate as
may be required in order that no such payments shall be non-deductible to
the Company by reason of the operation of said Section 280G.
6. WITHHOLDING. All payments made by the Company under this Agreement shall
be reduced by any tax or other amounts required to be withheld by the Company
under applicable law.
7. ASSIGNMENT. Neither the Company nor Employee may make any assignment of
this Agreement or any interest herein, by operation of law or otherwise,
without the prior written consent of the other; provided, however, that the
Company may assign its rights and obligations under this Agreement without the
consent of Employee in the event that the Company shall hereafter affect a
reorganization, consolidate with, or merge into, any other person or entity or
transfer all of its properties or assets to any other person or entity. This
Agreement shall inure to the benefit of and be binding upon the Company and
Employee, their respective successors, executors, administrators, heirs and
permitted assigns.
8. SEVERABILITY. If any portion or provision of this Agreement shall to any
extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
9. WAIVER. No waiver of any provision hereof shall be effective unless made
in writing and signed by the waiving party. The failure of either party to
require the performance of any term or obligation of this Agreement, or the
waiver by either party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
10. NOTICES. Any and all notices, requests, demands and other
communications provided for by this Agreement shall be in writing and shall be
deemed given when delivered by hand, telex or facsimile, or if mailed, five days
after mailing (two business days in the case of courier service), to the parties
as follows: to Employee at his last known address on the books of
6
<PAGE> 7
the Company and, in the case of the Company, to its principal place of business,
attention of Clerk or to such other address as either party may specify by
notice to the other.
11. ENTIRE AGREEMENT. This Agreement and the Non-Disclosure/Non-Compete
Agreement executed by Employee constitute the entire agreement between the
parties and supersedes all prior communications, agreements and understandings,
written or oral, with respect to the terms and conditions of Employee's
employment.
12. AMENDMENT. This Agreement may be amended or modified only by a written
instrument signed by Employee and by an expressly authorized representative of
the Company.
13. HEADINGS. The headings and captions in this Agreement are for
convenience only and in no way define or describe the scope of or content of any
provision of this Agreement.
14. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be an original and all of which together shall
constitute one and the same instrument.
15. GOVERNING LAW. This is a Massachusetts contract and shall be construed
and enforced under and be governed in all respects by the laws of The
Commonwealth of Massachusetts, without regard to the conflict of laws principles
thereof.
[END OF TEXT]
7
<PAGE> 8
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Company, by its duly authorized representative, and by Employee, as of
the date first above written.
FERROFLUIDICS CORPORATION
/s/ William B. Ford By: /s/ Salvatore J. Vinciguerra
- ---------------------- ----------------------------
William B. Ford Salvatore J. Vinciguerra
President and Chief Executive
Officer
<PAGE> 1
EXHIBIT 10.27
FIRST AMENDMENT TO NOTE AND LOAN AGREEMENT
This First Amendment to Note and Loan Agreement is made this 3rd day of
December, 1996 between Ferrofluidics Corporation, whose address is 40 Simon
Street, Nashua, New Hampshire 03061 ("Borrower") and Bank of New Hampshire,
whose address is 191 Main Street, Nashua, New Hampshire 03060 ("Lender").
WHEREAS, Lender and Borrower are party to a certain Revolving Loan and
Security Agreement dated June 30, 1994 ("Loan Agreement") pursuant to which the
Lender has provided the Borrower with (i) a Revolving Line of Credit in the
amount of Two Million Five Hundred Thousand Dollars ($2,500,000); and (ii) a
Reimbursement Agreement Line of Credit in the amount of Five Million Four
Hundred Eleven Thousand Dollars ($5,411,000) all in accordance with the terms of
the $7,911,000 Master Term Note also dated June 30, 1994 ("Note") and the other
documents and agreements between Borrower and Lender ("Loan Documents");
WHEREAS, Borrower is willing to pay to Lender a fee of Fifteen Thousand
Dollars ($15,000) in consideration of Lender's agreement to increase the amount
that Borrower may borrower from Lender under the Revolving Line of Credit, from
Two Million Five Hundred Thousand Dollars ($2,500,000) to Eight Million Five
Hundred Thousand Dollars ($8,500,000) as more particularly set forth in this
First Amendment.
NOW THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged, the Lender and Borrower hereby agree as follows:
1. The Loan Agreement, the Note and other Loan Documents, effective
as of the date of this First Amendment to Note and Loan Agreement, shall be
amended as follows:
1.1 The Note.
1.1.1 The amount stated in the Note as "$7, 911,000" is
hereby changed to "$13,911,000."
1.1.2 The Maturity Date is hereby changed to November 30,
1997.
1.1.3 The first two paragraphs of Section I of the Note
are hereby amended to read as follows:
FOR VALUE RECEIVED, Maker hereby promises to
pay to the order Of Bank of New Hampshire,
("Lender") at its of/fives at 191 Main Street,
Nashua, New Hampshire, or at such other place Lender
or any subsequent holder hereof may in writing
designate, in immediately available funds, the
Principal Amount,
<PAGE> 2
Page 2
as from time to time advanced and readvanced by Lender to Borrower
for the following purposes and amounts:
(i) Eight Million Five Hundred Thousand dollars
($8,500,000) advanced to Borrower as a Revolving Line of
Credit for purposes of working capital pursuant to Section
3.1 et seq. of the Loan Agreement.
1.1.4 In addition, the Borrower shall execute a conformed and
amended Master Term Note in the form attached hereto as Exhibit 1.
1.2 The Loan Agreement.
1.2.1 Paragraph 1 of the Loan Agreement is hereby amended to read
as follows:
1. RECITALS.
1.1 Borrower has requested and Lender has agreed
to provide Borrower lines of credit consisting of a
revolving line of credit loan in the amount of up to Eight
Million Five Hundred Thousand Dollars ($8,500,000.00) and a
line of credit in the amount of up to Five Million Four
Hundred Eleven Thousand Dollars ($5,411,000.00) to fund
Borrower's obligations under a Letter of Credit
Reimbursement Agreement, of even date by and between
Borrower and Lender, whereby Lender has agreed to establish
a Letter of Credit in the face amount of Five Million Four
Hundred Eleven Thousand Dollars ($5,411,000.00), all as
evidenced in the Master Term Note of even date in the
principal amount of Thirteen Million Nine Hundred Eleven
Thousand Dollars ($13,911,000.00) ("Note").
1.2.2 Paragraph 2.7 of the Loan Agreement is hereby amended to
read as follows:
2.7 "Cash Flow" means, for any period, Net Income of
Borrower, plus depreciation and amortization, plus deferred
taxes resulting from the tax basis net operating losses
reduced by amounts expended to acquire fixed assets.
1.2.3 Paragraph 2.13 of the Loan Agreement is hereby amended to
read as follows:
2.13 "Earnings Before Interest Charges and Taxes" means,
for any period, Net .Income for such period plus (i)
Interest Charges for such period, and (ii) income and
excess profit taxes for such period and all other taxes for
such period which are imposed on or measured by income
after deduction of Interest Charges.
<PAGE> 3
Page 3
1.2.4 Paragraph 7.1.c of the Loan Agreement is hereby amended to
read as follows:
7.1.c Within thirty (30) days of a written request by
Lender, Borrower shall prepare consolidated and
consolidating internal financial reports, in a form
satisfactory to Lender, and deliver same to Lender.
Borrower shall upon request by Lender make and deliver to
Lender reports on accounts receivable aging, accounts
payable aging and an inventory listing and such other
information as Lender may request to determine Borrower's
Availability.
1.2.5 Paragraph 7.12 of the Loan Agreement is hereby amended to
read as follows:
7.12 Borrower shall use the proceeds of the Loans for the
purpose of Borrower's proposed short term working capital
requirements, which shall not include (i) payments of
expenses for or settlements of any claim against the
Borrower in excess of $200,000 during any fiscal year for
any single claim or related claims; (ii) capital
expenditures in excess of $250,000 during any fiscal year
for any single or related items; or (iii) payments,
advances or loans to or recapitalizations of any subsidiary
or affiliate in excess of $500,000 during any fiscal year
for all such items. Except as permitted by the express
terms hereof,, no proceeds shall be commingled with funds
of any stockholder, or any general or limited partner, nor
shall any proceeds be transferred to any stockholder,
Subsidiary or Affiliate or any general or limited partner.
1.2.6 Paragraph 7.14(b) of the Loan Agreement is hereby amended
to read as follows:
7.14.b Indebtedness to Tangible Net Worth. Commencing
October 1, 1996 and continuing thereafter, Borrower shall
maintain a ratio of Indebtedness to Tangible Net Worth
(which for purposes of the calculation required in this
Section 7.14.b shall be defined to exclude all investments
or loans to Subsidiaries or Affiliates and customer
deposits) of not more than 1.25:1, such ratio to be
measured at the end of each quarter of Borrower.
1.3 Amendment to Mortgage. The Borrower shall execute and deliver to
Lender an Amendment to Mortgage, in the form attached as EXHIBIT 1.3 which shall
amend paragraph 1 of the Mortgage Deed from Borrower to Lender, recorded in
<PAGE> 4
Page 4
the Hillsborough County Registry of Deeds at Book 5561, Page 1011, to read as
follows:
1. That Mortgagor in order to secure its payment in the
amount of Thirteen Million Nine Hundred Eleven Thousand
Dollars ($13,911,000.00) plus interest, together with all
advances, readvances, extensions, charges, expenses, fees,
amendments and other charges as set forth in the Master
Term Note from Mortgagor to Mortgagee ("Note") in the
amounts of (i) Eight Million Five Hundred Thousand Dollars
($8,500,000.00) for a revolving line of credit of even
date; and (ii) Five Million Four Hundred Eleven Thousand
Dollars ($5,411,000.00), for a line of credit to fund
Borrower's obligations under an agreement with Lender of
even date ("Reimbursement Agreement"); and (iii) the
Revolving Loan and Security Agreement of even date herewith
("Loan Agreement"), including the performance of all
conditions, undertakings and obligations contained therein,
and in the Loan Agreement and in other instruments and
documents executed in connection therewith the obligations
described in paragraphs (i) through (iii), inclusive, shall
be referred to collectively as the "Liabilities" (the Note,
the Reimbursement Agreement, the Loan Agreement and all
ancillary documents are referred to in the aggregate as the
"Instruments"), and for other good and valuable
consideration paid by Borrower to Mortgagee, hereby grants
to Mortgagee, with Mortgage Covenants, certain property
with all buildings and improvements thereon located in
Nashua, Hillsborough County, New Hampshire, as more
particularly described on Exhibit A hereto (the
"Premises").
1.4 Amendment to Subordination, Non-Disturbance and Attornment
Agreement. The second paragraph after the word "Witnesseth" is hereby amended to
read as follows:
WHEREAS, Lender has agreed to loan the Landlord the amount
of Thirteen Million Nine Hundred Eleven Thousand Dollars
($13,911,000.00) (the "Loan") which Loans are secured by
a certain mortgage from Landlord to Lender recorded in the
Hillsborough County Registry of Deeds at Book 5561, Page
1011, and an Assignment of Leases recorded in the
Hillsborough County Registry of Deeds at Book 5561, Page
1020, (collectively the "Mortgage"), which Mortgage
encumbers the Premises and Landlord's interest in the
Lease; and,
1.5 Amendment to Environmental Indemnity. The first paragraph after
the word "Witnesseth" is hereby amended to read as follows:
WHEREAS, Beneficiary provided Indemnitor with a loan in an
amount of up to Thirteen Million Nine Hundred Eleven
Thousand Dollars ($13,911,000.00) (the "Loan"), evidenced
by a Master Term Note of even date in the amount of the
Loan and executed by Indemnitor (the "Note");
1.6 Amendment to Assignment of Leases. The Borrower shall execute and
deliver to Lender an Amendment to Assignment of Leases, in the form attached as
<PAGE> 5
Page 5
EXHIBIT 1.6 which shall amend the Assignment of Leases from Borrower to
Lender, recorded in the Hillsborough County Registry of Deeds at Book
5561, Page 1020, by changing the first paragraph after the word
"Witnesseth" to read as follows:
WHEREAS, Lender has agreed to provide Borrower with lines
of credit consisting of.' (i) a revolving line of credit
loan in the amount of up to Eight Million Five Hundred
Thousand Dollars ($8,500, 000. 00) and (ii) a line of
credit in the amount of up to Five Million Four Hundred
Eleven Thousand Dollars ($5,411,000.00) pursuant to an
agreement with Lender of even date herewith ("Reimbursement
Agreement"), all as evidenced in the Master Term Note of
even date in the principal amount of Thirteen Million Nine
Hundred Eleven Thousand Dollars ($13, 911, 000. 00)
("Note") ;
2. Legal Effect. In all other respects, the Note and Loan Agreement
and all other Loan Documents shall remain in full force and effect in accordance
with their original terms and the rights and obligations of the Lender and
Borrower shall remain enforceable in accordance therewith.
3. No Defenses; Reaffirmation of Obligations. Borrower acknowledges
and agrees and represents to Lender that there are no defenses, offsets, rights
or other claims which Borrower or any other party can assert that would affect
the obligations of Borrower or the rights of Lender under the Note and Loan
Agreement as amended by this First Amendment to Note and Loan Agreement.
4. Borrower's Representations. Borrower further represents to Lender
that: (i) Borrower is in full compliance with all requirements and conditions of
the Note and Loan Agreement and all of Loan Documents; (ii) all representations
and warranties and information contained in schedules are true as of the date of
this First Amendment to Note and Loan Agreement; and (iii) there is no Event of
Default in existence and there is no condition in existence which, with the
passage of time, would constitute an Event of Default under the Note or Loan
Agreement; (iv) the matters contemplated by this First Amendment to Note and
Loan Agreement have been fully authorized by all necessary corporate action of
Borrower's shareholders, directors and officers and have received all necessary
governmental approvals, including without limitation, such approvals as may be
required by the New Hampshire Public Utilities Commission.
<PAGE> 6
Page 6
In Witness whereof, the parties have hereunto set their hands this 3rd
day of December 1996 to this First Amendment to Note and Loan Agreement.
WITNESS: BORROWER:
FERROFLUIDICS CORPORATION
/s/ Stephen P. Morin
- --------------------------- By: /s/ William B. Ford
--------------------------------
Name: William B. Ford
Title Vice President
LENDER:
BANK OF NEW HAMPSHIRE
/s/ Stephen P. Morin By: /s/ Paul E. Duffy
- --------------------------- --------------------------------
Name: Paul E. Duffy
Title: Senior Vice President
STATE OF NEW HAMPSHIRE
COUNTY OF
On this the 3rd day of December, 1996, before me, the undersigned
officer, personally appeared William B. Ford, who acknowledged himself to be the
Vice President and Chief Financial Officer of FERROFLUIDICS CORPORATION and that
he, as such Vice President and Chief Financial Officer, being authorized to do
so, executed the foregoing First Amendment to Note and Loan Agreement for the
purposes therein contained, by signing the name of the corporation by himself as
Vice President and Chief Financial Officer with the intention that it be
effective as of the date first above written.
/s/ Joan C. Deichler
---------------------------------------
Joan C. Deichler
Justice of the Peace/Notary Public
My Commission expires: Sept. 8, 1999
<PAGE> 7
Page 7
STATE OF NEW HAMPSHIRE
COUNTY OF HILLSBOROUGH
On this the 3rd day of December, 1996, before me, the undersigned
officer, personally appeared Paul E. Duffy, II, who acknowledged himself to be a
Senior Vice President of Bank of New Hampshire, and that he as such Senior Vice
President being authorized to do so, executed the foregoing First Amendment to
Note and Loan Agreement for the purposes therein contained by signing the name
of the Bank of New Hampshire by himself as Senior Vice President with the
intention that it be effective as of the date first above written.
IN WITNESS WHEREOF I hereunto set my hand and official seal.
/s/ Joan C. Deichler
---------------------------------------
Joan C. Deichler
Justice of the Peace/Notary Public
My Commission expires: Sept. 8, 1999
<PAGE> 8
Page 8
EXHIBIT I AMENDED MASTER TERM NOTE
$13,911,000.00 Concord, New Hampshire
Initially executed June 30,1994
Amended November__, 1996
MAKER: Ferrofluidics Corporation, a Massachusetts corporation
40 Simon Street
Nashua, New Hampshire 03061 ("Maker").
PRINCIPAL AMOUNT: Thirteen Million Nine Hundred Eleven Thousand Dollars
($13,911,000.00) ("Principal Amount"), as provided in
the Revolving Loan and Security Agreement by and among
Ferrofluidics Corporation and Bank of New Hampshire
("Loan Agreement").
MATURITY DATE: November 30, 1997 ("Maturity Date").
LATE CHARGE: Five percent (5%) of the overdue amount of any regularly
scheduled payment after any applicable grace period
including Principal, Interest, costs and any
accelerated amount.
MONTHLY PAYMENT
DATE: The first day of each month unless otherwise specified
herein.
1. PROMISE TO PAY.
FOR VALUE RECEIVED, Maker hereby promises to pay to the order of Bank of
New Hampshire, ("Lender") at its offices at 191 Main Street, Nashua, New
Hampshire, or at such other place Lender or any subsequent holder hereof may in
writing designate, in immediately available funds, the Principal Amount, as from
time to time advanced and readvanced by Lender to Borrower for the following
purposes and amounts:
(i) Eight Million Five Hundred Thousand dollars ($8,500,000)
advanced to Borrower as a Revolving Line of Credit for purposes of
working capital pursuant to Section 3.1 et seq. of the Loan Agreement.
(ii) Five Million Four Hundred Eleven Thousand dollars
($5,411,000) advanced to Borrower pursuant to Section 3A et seq. of the
Loan Agreement for purposes of funding Borrower's obligations under a
Reimbursement Agreement with Lender of even date herewith.
<PAGE> 9
Page 9
All payments shall be made in lawful currency of the United States of
America ("Dollars"), as provided herein, and in the Loan Agreement, including
all subsequent modifications, extensions and amendments thereto, but in any
event at the Maturity Date, together with payments as provided herein of
interest thereon from the date hereof on the Principal Amount from time to time
outstanding at the Applicable Rate or Rates (as defined below) and in the manner
hereinafter provided. All payments by Maker hereunder shall be applied in such
fashion as Lender deems appropriate in its complete discretion.
2. INTEREST AND PRINCIPAL PAYMENTS.
2.1 APPLICABLE INTEREST RATE. The Applicable Interest Rate will be a
variable rate, which will be calculated as provided below:
The Applicable Interest Rate will be equal to One percent (1%) per
annum above the Lender's Prime Rate, as adjusted by Lender from time to
time, calculated on the basis of a 360 day year. The Applicable Interest
Rate will change each time and as of the date that the Lender's Prime
Rate is changed without notice to Maker ("Payment Change Date"). Each new
Applicable Interest Rate will become effective on the Payment Change Date
and shall remain in effect until the next Payment Change Date.
2.2 INTEREST PAYMENTS. Interest, which has accrued during the preceding
month on the outstanding principal at the Applicable Interest Rate set forth
above, shall be paid monthly, commencing August 1, 1994 and continuing on the
same day of each successive month thereafter with a final payment of all unpaid
interest due on the Maturity date.
3. PREPAYMENT.
Borrower shall have the right to prepay all or any portion of the
Principal Amount at any time during the term hereof.
4. EVENTS OF DEFAULT.
Upon the occurrence of any of the following Events of Default, all sums
payable under this Note shall, at the option of Lender, become immediately due
and payable without further notice or demand:
4.1 failure to make a payment of principal or interest on this Note not
cured in accordance with the Loan Agreement and the Reimbursement Agreement or
any other sum payable hereunder, as and when due, or within any applicable cure
period, or on any other obligation of Maker to Lender, now existing or
subsequently created, whether by direct
<PAGE> 10
Page 10
loan, guarantee or otherwise, or acceleration with respect thereto and not paid
within the applicable cure period; and,
4.2 any Event of Default of Maker pursuant to the Loan Agreement, the
Reimbursement Agreement or other Instruments or with any other document now or
subsequently evidencing any indebtedness or obligation of Maker to Lender.
5. WAIVERS.
Maker and all sureties and endorser of this Note hereby (a) waive demand,
presentment for payment, notice of nonpayment, protest, notice of protest and
all other notice, filing of suit and diligence in collecting this Note, in
enforcing any of the security rights or in proceeding against any of the
property covered by the Instruments, (b) agree to any substitution, exchange,
addition or release of any such property or the addition or release of any party
or person primarily or secondarily liable hereon, (c) agree that Lender shall
not be required first to institute any suit, or to exhaust its remedies against
Maker or any other person or party in order to enforce payment of this Note or
any guarantee, (d) consent to any extension, rearrangement, renewal or
postponement of time of payment of this Note and to any other indulgence with
respect hereto without notice, consent or consideration to any of them, (e)
waive any defense arising out of the alleged negligent release of any parties,
and (f) agree that, notwithstanding the occurrence of any of the foregoing,
except as to any such person expressly released in writing by Lender they shall
be and remain jointly and severally, directly and primarily, liable for all sums
due hereunder and under any and all of the Instruments.
6. RIGHT OF SET-OFF.
In the event of an Event of Default, and in addition to the other rights
contained herein, Lender shall have the immediate and unconditional right of
offset against all demand deposits, accounts, certificates, securities, chases
in action and all other rights or property of Maker reflecting an obligation of
Lender to Maker or any endorser, or any of them, which are then maintained with
(or in existence as against) Lender ("Cash Collateral").
7. LATE PAYMENT.
In the event a payment is not made by Maker when due, Maker shall in
addition to all other amounts then due pay a late charge (as liquidated damages)
equal to the Late Charge defined above. Acceptance by Lender of payment of the
Late Charge shall not be deemed a waiver of any default.
8. GENERAL PROVISIONS.
<PAGE> 11
Page 11
8.1 No delay or omission on the part of Lender in exercising any right
hereunder shall operate as a waiver of such right, or of any other right of
Lender, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. No
single or partial exercise of a power hereunder shall preclude other exercises
thereof, or the exercise of any other power hereunder.
8.2 Any reference herein to a party in the masculine gender shall be
construed in the feminine or neuter gender, as the context may require.
8.3 If an Event of Default exists under the Note, or this Note is
collected or attempted to be collected by the initiation or prosecution of any
suit or through any probate or bankruptcy court, or by any other judicial
proceeding, or is placed in the hands of an attorney for collection, then Maker
shall pay, in addition to all other amounts owing hereunder, all collection
costs, appraisal costs, court costs and reasonable attorney's fees and all other
out-of-pocket expenses incurred by Lender.
8.4 This Note is fully negotiable, and upon negotiation may be
enforced by Lender or any holder in accordance with its terms.
8.5 This Note shall be governed exclusively by the laws of the State
of New Hampshire. Maker hereby agrees that any action under this Note shall be
maintained in a court of competent jurisdiction located therein, and consents to
the jurisdiction of any such New Hampshire court for all purposes connected
herewith. Maker consents to the jurisdiction of any court in any state in which
property of Maker is located. Any action by Maker against Lender may be
maintained only in the State and Federal courts in the State of New Hampshire.
8.6 In the event any payment of principal or interest received upon
this obligation and paid by Maker or any surety, co-maker or endorser, shall be
deemed by final order of a court of competent jurisdiction to have been a
voidable preference or fraudulent conveyance under the bankruptcy or insolvency
laws of the United States, or otherwise, then in such event to the extent such
payment is returned pursuant to such order, the obligation of the undersigned,
or any surety, co-maker or endorser shall, jointly and severally, survive as an
obligation due hereunder and shall not be discharged or satisfied by said
payment or payments, which obligation shall be payable ON DEMAND, with interest
as provided herein, notwithstanding return by Lender hereof to said parties of
this original hereof or any endorsement or the like.
8.7 This Note shall inure to the benefit of Lender, its successors,
assigns, endorsees and any person to whom Lender may grant any interest in this
Note, including without limitation, interests granted to the New Hampshire
Business Finance Authority, and shall be binding upon the undersigned and the
successors, assigns, heirs, executors,
<PAGE> 12
Page 12
administrators and other legal representatives thereof; this Note is not
intended to create any right or other cause of action in or on behalf of any
person other than Lender, its successors, assigns, endorsees and any person to
whom Lender may grant any interest in this Note.
8.8 To the extent possible, each provision of this Note shall be
interpreted in a manner as to be valid, legal and enforceable under applicable
law. If any provision of this Note shall be held invalid, illegal or
unenforceable, such provision shall be ineffective only to the extent of such
invalidity, illegality or unenforceability and the validity, legality and
enforceability of the remaining provisions hereof will not in any way be
affected or impaired thereby.
8.9 This Note may be extended, modified, or renewed by agreement of
Maker and Lender without releasing, discharging or affecting the liability of
Maker or any sureties, endorser or guarantors of this Note.
8.10 All capitalized terms used herein and not herein defined shall
have the meaning given to them in the Loan Agreement.
8.11 This Note shall have the effect of an instrument executed under
seal.
IN WITNESS WHEREOF, Maker has caused this Note to be duly executed as of
the date first above written.
IN THE PRESENCE OF: MAKER:
FERROFLUIDICS CORPORATION
- --------------------------- By:
------------------------------
Name:
Title:
<PAGE> 13
Page 13
STATE OF NEW HAMPSHIRE
COUNTY OF
On this the __ day of September, 1996, before me, the undersigned officer,
personally appeared William B. Ford, the Vice President and Chief Financial
Officer of Ferrofluidics Corporation, known to me (or satisfactorily proven) to
be the person whose name is subscribed to the within instrument, and
acknowledged that he executed this instrument as a free act and deed and for the
purposes therein contained on behalf of the corporation.
----------------------------------
Notary Public/Justice of the Peace
My Commission expires:
<PAGE> 14
Page 14
EXHIBIT 1.3
Amendment To Mortgage
For valuable consideration, the sufficiency of which is hereby
acknowledged, Ferrofluidics Corporation, a Massachusetts business corporation
with a place of business at 40 Simon Street, Nashua, New Hampshire ("Mortgagor")
hereby amends the Mortgage Deed, previously given by Mortgagor to Bank of New
Hampshire, a bank chartered under the laws of the State of New Hampshire, with a
place of business at 191 Main Street, Nashua, New Hampshire 03060, ("Mortgagee")
which Mortgage is dated June 30, 1994 and recorded in the Hillsborough County
Registry of Deeds at Book 5551, Page 1011, ("Mortgage") for the purpose of
increasing the amount secured by said Mortgage from $7,911,000 to $13,911,000.
Accordingly, Mortgagor hereby amends the Mortgage as follows:
Paragraph one of the Mortgage is hereby amended to read as follows:
1. That Mortgagor in order to secure its payment in the amount
of Thirteen Million Nine Hundred Eleven Thousand Dollars
($13,911,000.00) plus interest, together with all advances,
readvances, extensions, charges, expenses, fees, amendments and
other charges as set forth in the Master Term Note from Mortgagor
to Mortgagee ("Note") in the amounts of (i) Eight Million Five
Hundred Thousand Dollars ($8,500,000.00) for a revolving line of
credit of even date; and (ii) Five Million Four Hundred Eleven
Thousand Dollars ($5,411,000.00), for a line of credit to fund
Borrower's obligations under an agreement with Lender of even date
("Reimbursement Agreement"); and (iii) the Revolving Loan and
Security Agreement of even date herewith (" Loan Agreement"),
including the performance of all conditions, undertakings and
obligations contained therein, and in the Loan Agreement and in
other instruments and documents executed in connection therewith
the obligations described in paragraphs (i) through (iii),
inclusive, shall be referred to collectively as the "Liabilities"
(the Note, the Reimbursement Agreement, the Loan Agreement and all
ancillary documents are referred to in the aggregate as the
"Instruments"), and for other good and valuable consideration paid
by Borrower to Mortgagee, hereby grants to Mortgagee, with
Mortgage Covenants, certain property with all buildings and
improvements thereon located in Nashua, Hillsborough County, New
Hampshire, as more particularly described on Exhibit A hereto (the
"Premises").
In all other respects, the Mortgage shall remain in full force and effect
in accordance with its original terms and priority and the and obligations of
the Mortgagor shall remain enforceable in accordance therewith. Mortgagor
acknowledges and agrees and represents to Mortgagee that there are no defenses,
offsets, rights or
<PAGE> 15
Page 15
other claims which Mortgagor or any other party can assert that would affect the
obligations of Mortgagor or the rights of Mortgagor under the Mortgage.
WITNESS: BORROWER:
FERROFLUIDICS CORPORATION
- --------------------------- By:
------------------------------
Name:
Title:
STATE OF NEW HAMPSHIRE
COUNTY OF
On this the __ day of ,1996, before me, the undersigned officer,
personally appeared William B. Ford, who acknowledged himself to be the Vice
President and Chief Financial Officer of Ferrofluidics CORPORATION and that he,
as such Vice President and Chief Financial Officer, being authorized to do so,
executed the foregoing First Amendment to Note and Loan Agreement for the
purposes therein contained, by signing the name of the corporation by himself as
Vice President and Chief Financial Officer with the intention that it be
effective as of the date first above written.
-------------------------------------------
Justice of the Peace/Notary Public
<PAGE> 16
Page 16
EXHIBIT 1.6
Amendment To Assignment of Leases
For valuable consideration, the sufficiency of which is hereby
acknowledged, Ferrofluidics Corporation, a Massachusetts business corporation
with a place of business at 40 Simon Street, Nashua, New Hampshire ("Borrower")
hereby amends the Assignment of Leases, previously given by Mortgagor to Bank of
New Hampshire, a bank chartered under the laws of the State of New Hampshire,
with a place of business at 191 Main Street, Nashua, New Hampshire 03060,
("Lender") which Mortgage is dated June 30, 1994 and recorded in the
Hillsborough County Registry of Deeds at Book 5551, Page 1020, for the purpose
of increasing the amount secured by said Assignment, as follows
1. The first Recital paragraph, after the "Witnesseth" clause, is hereby
amended to read as follows:
WHEREAS, Lender has agreed to provide Borrower with lines of credit
consisting of: (i) a revolving line of credit loan in the amount of up to
Eight Million Five Hundred Thousand Dollars ($8,500, 000. 00) and (ii) a
line of credit in the amount of up to Five Million Four Hundred Eleven
Thousand Dollars ($5,411,000.00) pursuant to an agreement with Lender of
even date herewith ("Reimbursement Agreement"), all as evidenced in the
Master Term Note of even date in the principal amount of Thirteen Million
Nine Hundred Eleven Thousand Dollars ($13,911,000.00) ('"Note"):
In all other respects, the aforesaid Assignment of Leases shall remain in
full force in effect, entitled to its priority in accordance with the original
date of execution and recording.
IN WITNESS WHEREOF, Borrower has executed this instrument as of this day
of November, 1996.
WITNESS: BORROWER:
FERROFLUIDICS CORPORATION
- --------------------------- By:
------------------------------
Name:
Title:
<PAGE> 17
Page 17
STATE OF NEW HAMPSHIRE
COUNTY OF
On this the __ day of November, 1996, before me, the undersigned officer,
personally appeared William B. Ford who acknowledged himself to be the Vice
President and Chief Financial Officer of Ferrofluidics Corporation, a
_________________ corporation, and that he, as such Vice President and Chief
Financial Officer, being authorized to do so, executed the foregoing Assignment
of Leases for the purposes therein contained, by signing the name of the
corporation by himself as Vice President and Chief Financial Officer with the
intention that it be effective as of the date first above written.
-----------------------------------------
Justice of the Peace/Notary Public
<PAGE> 1
EXHIBIT 10.28
AMENDED MASTER TERM NOTE
$13,911,000.00 Concord, New Hampshire
Initially executed June 30,1994
Amended December 3, 1996
MAKER: Ferrofluidics Corporation, a Massachusetts corporation
40 Simon Street
Nashua, New Hampshire 03061 ("Maker").
PRINCIPAL AMOUNT: Thirteen Million Nine Hundred Eleven Thousand Dollars
($13,911,000.00) ("Principal Amount"), as provided in
the Revolving Loan and Security Agreement by and among
Ferrofluidics Corporation and Bank of New Hampshire
("Loan Agreement").
MATURITY DATE: November 30, 1997 ("Maturity Date").
LATE CHARGE: Five percent (5%) of the overdue amount of any regularly
scheduled payment after any applicable grace period
including Principal, Interest, costs and any accelerated
amount.
MONTHLY PAYMENT
DATE: The first day of each month unless otherwise specified
herein.
1. PROMISE TO PAY.
FOR VALUE RECEIVED, Maker hereby promises to pay to the order of Bank of
New Hampshire, ("Lender") at its offices at 191 Main Street, Nashua, New
Hampshire, or at such other place Lender or any subsequent holder hereof may in
writing designate, in immediately available funds, the Principal Amount, as from
time to time advanced and readvanced by Lender to Borrower for the following
purposes and amounts:
(i) Eight Million Five Hundred Thousand dollars
($8,500,000) advanced to Borrower as a Revolving Line of Credit
for purposes of working capital pursuant to Section 3.1 et seq. of
the Loan Agreement
(ii) Five Million Four Hundred Eleven Thousand dollars
($5,411,000) advanced to Borrower pursuant to Section 3A et seq.
of the Loan Agreement for purposes of funding Borrower's
obligations under a Reimbursement Agreement with Lender of even
date herewith.
All payments shall be made in lawful currency of the United States of
America ("Dollars"), as provided herein, and in the Loan Agreement, including
all subsequent modifications, extensions and amendments thereto, but in any
event at the Maturity Date,
<PAGE> 2
Page 2
together with payments as provided herein of interest thereon from the date
hereof on the Principal Amount from time to time outstanding at the Applicable
Rate or Rates (as defined below) and in the manner hereinafter provided. All
payments by Maker hereunder shall be applied in such fashion as Lender deems
appropriate in its complete discretion.
2. INTEREST AND PRINCIPAL PAYMENTS.
2.1 APPLICABLE INTEREST RATE. The Applicable Interest Rate will be a
variable rate, which will be calculated as provided below:
The Applicable Interest Rate will be equal to One percent (1%) per
annum above the Lender's Prime Rate, as adjusted by Lender from time to
time, calculated on the basis of a 360 day year. The Applicable Interest
Rate will change each time and as of the date that the Lender's Prime
Rate is changed without notice to Maker ("Payment Change Date"). Each new
Applicable Interest Rate will become effective on the Payment Change Date
and shall remain in effect until the next Payment Change Date.
2.2 INTEREST PAYMENTS. Interest, which has accrued during the
preceding month on the outstanding principal at the Applicable Interest Rate set
forth above, shall be paid monthly, commencing August 1, 1994 and continuing on
the same day of each successive month thereafter with a final payment of all
unpaid interest due on the Maturity DATE.
3. PREPAYMENT.
Borrower shall have the right to prepay all or any portion of the
Principal Amount at any time during the term hereof.
4. EVENTS OF DEFAULT.
Upon the occurrence of any of the following Events of Default, all sums
payable under this Note shall, at the option of Lender, become immediately due
and payable without further notice or demand:
4.1 failure to make a payment of principal or interest on this Note
not cured in accordance with the Loan Agreement and the Reimbursement Agreement
or any other sum payable hereunder, as and when due, or within any applicable
cure period, or on any other obligation of Maker to Lender, now existing or
subsequently created, whether by direct loan, guarantee or otherwise, or
acceleration with respect thereto and not paid within the applicable cure
period; and,
<PAGE> 3
Page 3
4.2 any Event of Default of Maker pursuant to the Loan Agreement, the
Reimbursement Agreement or other Instruments or with any other document now or
subsequently evidencing any indebtedness or obligation of Maker to Lender.
5. WAIVERS.
Maker and all sureties and endorser of this Note hereby (a) waive demand,
presentment for payment, notice of nonpayment, protest, notice of protest and
all other notice, filing of suit and diligence in collecting this Note, in
enforcing any of the security rights or in proceeding against any of the
property covered by the Instruments, (b) agree to any substitution, exchange,
addition or release of any such property or the addition or release of any party
or person primarily or secondarily liable hereon, (c) agree that Lender shall
not be required first to institute any suit, or to exhaust its remedies against
Maker or any other person or party in order to enforce payment of this Note or
any guarantee, (d) consent to any extension, rearrangement, renewal or
postponement of time of payment of this Note and to any other indulgence with
respect hereto without notice, consent or consideration to any of them, (e)
waive any defense arising out of the alleged negligent release of any parties,
and (f) agree that, notwithstanding the occurrence of any of the foregoing,
except as to any such person expressly released in writing by Lender they shall
be and remain jointly and severally, directly and primarily, liable for all sums
due hereunder and under any and all of the Instruments.
6. RIGHT OF SET-OFF.
In the event of an Event of Default, and in addition to the other rights
contained herein, Lender shall have the immediate and unconditional right of
offset against all demand deposits, accounts, certificates, securities, chases
in action and all other rights or property of Maker reflecting an obligation of
Lender to Maker or any endorser, or any of them, which are then maintained with
(or in existence as against) Lender ("Cash Collateral").
7. LATE PAYMENT.
In the event a payment is not made by Maker when due, Maker shall in
addition to all other amounts then due pay a late charge (as liquidated damages)
equal to the Late Charge defined above. Acceptance by Lender of payment of the
Late Charge shall not be deemed a waiver of any default.
<PAGE> 4
Page 4
8. GENERAL PROVISIONS.
8.1 No delay or omission on the part of Lender in exercising any right
hereunder shall operate as a waiver of such right, or of any other right of
Lender, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. No
single or partial exercise of a power hereunder shall preclude other exercises
thereof, or the exercise of any other power hereunder.
8.2 Any reference herein to a party in the masculine gender shall be
construed in the feminine or neuter gender, as the context may require.
8.3 If an Event of Default exists under the Note, or this Note is
collected or attempted to be collected by the initiation or prosecution of any
suit or through any probate or bankruptcy court, or by any other judicial
proceeding, or is placed in the hands of an attorney for collection, then Maker
shall pay, in addition to all other amounts owing hereunder, all collection
costs, appraisal costs, court costs and reasonable attorney's fees and all other
out-of-pocket expenses incurred by Lender.
8.4 This Note is fully negotiable, and upon negotiation may be
enforced by Lender or any holder in accordance with its terms.
8.5 This Note shall be governed exclusively by the laws of the State
of New Hampshire. Maker hereby agrees that any action under this Note shall be
maintained in a court of competent jurisdiction located therein, and consents to
the jurisdiction of any such New Hampshire court for all purposes connected
herewith. Maker consents to the jurisdiction of any court in any state in which
property of Maker is located. Any action by Maker against Lender may be
maintained only in the State and Federal courts in the State of New Hampshire.
8.6 In the event any payment of principal or interest received upon
this obligation and paid by Maker or any surety, co-maker or endorser, shall be
deemed by final order of a court of competent jurisdiction to have been a
voidable preference or fraudulent conveyance under the bankruptcy or insolvency
laws of the United States, or otherwise, then in such event to the extent such
payment is returned pursuant to such order, the obligation of the undersigned,
or any surety, co- maker or endorser shall, jointly and severally, survive as an
obligation due hereunder and shall not be discharged or satisfied by said
payment or payments, which obligation shall be payable ON DEMAND, with interest
as provided herein, notwithstanding return by Lender hereof to said parties of
this original hereof or any endorsement or the like.
8.7 This Note shall inure to the benefit of Lender, its successors,
assigns, endorsees and any person to whom Lender may grant any interest in this
Note, including
<PAGE> 5
Page 5
without limitation, interests granted to the New Hampshire Business Finance
Authority, and shall be binding upon the undersigned and the successors,
assigns, heirs, executors, administrators and other legal representatives
thereof;, this Note is not intended to create any right or other cause of action
in or on behalf of any person other than Lender, its successors, assigns,
endorsees and any person to whom Lender may grant any interest in this Note.
8.8 To the extent possible, each provision of this Note shall be
interpreted in a manner as to be valid, legal and enforceable under applicable
law. If any provision of this Note shall be held invalid, illegal or
unenforceable, such provision shall be ineffective only to the extent of such
invalidity, illegality or unenforceability and the validity, legality and
enforceability of the remaining provisions hereof will not in any way be
affected or impaired thereby.
8.9 This Note may be extended, modified, or renewed by agreement of
Maker and Lender without releasing, discharging or affecting the liability of
Maker or any sureties, endorser or guarantors of this Note.
8.10 All capitalized terms used herein and not herein defined shall
have the meaning given to them in the Loan Agreement.
8.11 This Note shall have the effect of an instrument executed under
seal.
IN WITNESS WHEREOF, Maker has caused this Note to be duly executed as of
the date first above written.
IN THE PRESENCE OF: MAKER:
FERROFLUIDICS CORPORATION
/s/ Stephen P. Morin
- -------------------------- By: /s/ William B. Ford
------------------------------------
Name: William B. Ford
Title: Vice President
<PAGE> 6
Page 6
STATE OF NEW HAMPSHIRE
COUNTY OF
On this the 3rd day of December 1996, before me, the undersigned officer,
personally appeared William B. Ford, the Vice President and Chief Financial
Officer of Ferrofluidics Corporation, known to me (or satisfactorily proven) to
be the person whose name is subscribed to the within instrument, and
acknowledged that he executed this instrument as a free act and deed and for the
purposes therein contained on behalf of the corporation.
/s/ Joan C. Deichler
--------------------------------------------
Joan C. Deichler
Notary Public/Justice of the Peace
My Commission expires: Sept. 8, 1999
<PAGE> 1
EXHIBIT 10.29
AMENDMENT TO MORTGAGE
For valuable consideration, the sufficiency of which is hereby
acknowledged, Ferrofluidics Corporation, a Massachusetts business corporation
with a place of business at 40 Simon Street, Nashua, New Hampshire ("Mortgagor")
hereby amends the Mortgage Deed, previously given by Mortgagor to Bank of New
Hampshire, a bank chartered under the laws of the State of New Hampshire, with a
place of business at 191 Main Street, Nashua, New Hampshire 03060, ("Mortgagee")
which Mortgage is dated June 30,1994 and recorded in the Hillsborough County
Registry of Deeds at Book 5551, Page 1011, ("Mortgage") for the purpose of
increasing the amount secured by said Mortgage from $7,911,000 to $13,911,000.
Accordingly, Mortgagor hereby amends the Mortgage as follows:
Paragraph one of the Mortgage is hereby amended to read as follows:
1. That Mortgagor in order to secure its payment in the amount
of Thirteen Million Nine Hundred Eleven Thousand Dollars
($13,911,000.00) plus interest, together with all advances,
readvances, extensions, charges, expenses, fees amendments and
other charges as set forth in the Master Term Note from Mortgagor
to Mortgagee ("Note") in the amounts of (i) Eight Million Five
Hundred Thousand Dollars ($8,500,000.00) for a revolving line of
credit of even date; and (ii) Five Million Four Hundred Eleven
Thousand Dollars ($5,411,000.00), for a line of credit to fund
Borrower's obligations under an agreement with Lender of even date
("Reimbursement Agreement"); and (ii) the Revolving Loan and
Security Agreement of even date herewith ("Loan Agreement"),
including the performance of all conditions, undertakings and
obligations con rained therein, and in the Loan Agreement and in
other instruments and documents executed in connection therewith
the obligations described in paragraphs (i) through (iii),
inclusive, shall be referred to collectively as the "Liabilities"
(the Note, the Reimbursement Agreement, the Loan Agreement and all
ancillary documents are referred to in the aggregate as the
"Instruments"), and for other good and valuable consideration paid
by Borrower to Mortgagee, hereby grants to Mortgagee, with
Mortgage Covenants, certain property with all buildings and
improvements thereon located in Nashua, Hillsborough County, New
Hampshire, as more particularly described on Exhibit A hereto (the
"Premises").
In all other respects, the Mortgage shall remain in full force and effect
in accordance with its original terms and priority and the and obligations of
the Mortgagor shall remain enforceable in accordance therewith. Mortgagor
acknowledges and agrees and represents to Mortgagee that there are no defenses,
offsets, rights or other claims which Mortgagor or any other party can assert
that would affect the obligations of Mortgagor or the rights of Mortgagor under
the Mortgage.
<PAGE> 2
Page 2
WITNESS: BORROWER:
FERROFLUIDICS CORPORATION
/S/ William B. Ford By: /s/ Stephen P. Morin
- ------------------------ -----------------------------
Name: Stephen P. Morin
Title: Controller
STATE OF NEW HAMPSHIRE
COUNTY OF
On this the 3rd day of December, 1996, before me, the undersigned
officer, personally appeared Stephen P. Morin, who acknowledged himself to be
the Controller of FERROFLUIDICS CORPORATION and that he, as such Controller,
being authorized to do so, executed the foregoing First Amendment to Note and
Loan Agreement for the purposes therein contained, by signing the name of the
corporation by himself as Controller with the intention that it be effective as
of the date first above written.
/s/ Joan C. Deichler
------------------------------------
Justice of the Peace/Notary Public
My Commission Expires Sept. 8, 1999
<PAGE> 1
EXHIBIT 10.30
AMENDMENT TO ASSIGNMENT OF LEASES
For valuable consideration, the sufficiency of which is hereby
acknowledged, Ferrofluidics Corporation, a Massachusetts business corporation
with a place of business at 40 Simon Street, Nashua, New Hampshire ("Borrower")
hereby amends the Assignment of Leases, previously given by Mortgagor to Bank of
New Hampshire, a bank chartered under the laws of the State of New Hampshire,
with a place of business at 191 Main Street, Nashua, New Hampshire 03060,
("Lender") which Mortgage is dated June 30,1994 and recorded in the Hillsborough
County Registry of Deeds at Book 5551, Page 1020, for the purpose of increasing
the amount secured by said Assignment, as follows
1. The first Recital paragraph, after the "Witnesseth" clause, is hereby
amended to read as FOLLOWS:
WHEREAS, Lender has agreed to provide Borrower with lines of credit
Consisting of: (i) a revolving line of credit loan in the amount of up to
Eight Million Five Hundred Thousand Dollars ($8,500,000.00) and (ii) a
line of credit in the amount of up to Five Million Four Hundred Eleven
Thousand Dollars ($5,411,000.00) pursuant to an agreement with Lender of
even date herewith ("Reimbursement Agreement"), all as evidenced in the
Master Term Note of even date in the principal amount of Thirteen Million
Nine Hundred Eleven Thousand Dollars ('$13,911,000.00) ("Note"):
In all other respects, the aforesaid Assignment of Leases shall remain in
full force in effect, entitled to its priority in accordance with the original
date of execution and recording.
IN WITNESS WHEREOF, Borrower has executed this instrument as of this 3rd
day of December, 1996.
WITNESS: BORROWER:
FERROFLUIDICS CORPORATION
/s/ Stephen P. Morin By: /s/ William B. Ford
- ------------------------ ------------------------------
Stephen P. Morin Name: William B. Ford
Title: Vice President
<PAGE> 2
Page 2
STATE OF NEW HAMPSHIRE
COUNTY OF
On this the 3rd day of December, 1996, before me, the undersigned officer,
personally appeared William B. Ford, who acknowledged himself to be the Vice
President and Chief Financial Officer of Ferrofluidics Corporation,
Massachusetts corporation, and that he, as such Vice President and Chief
Financial Officer, being authorized to do so, executed the foregoing Assignment
of Leases for the purposes therein contained, by signing the name of the
corporation by himself as Vice President and Chief Financial Officer with the
intention that it be effective as of the date first above written.
/s/ Joan C. Deichler
-----------------------------------------
Joan C. Deichler
Justice of the Peace/Notary Public
My Commission Expire Sept. 8, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FERROFLUIDICS CORP.'S BALANCE SHEETS AS OF JUNE 28, 1997 AND THE RESULTS OF
OPERATION FOR THE YEAR ENDED JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 28, 1997.
</LEGEND>
<CIK> 0000353286
<NAME> FERROFLUIDICS CORP.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-28-1997
<EXCHANGE-RATE> 1
<CASH> 883,000
<SECURITIES> 0
<RECEIVABLES> 13,808,000
<ALLOWANCES> 199,000
<INVENTORY> 15,263,000
<CURRENT-ASSETS> 31,570,000
<PP&E> 19,338,000
<DEPRECIATION> 10,961,000
<TOTAL-ASSETS> 45,001,000
<CURRENT-LIABILITIES> 18,247,000
<BONDS> 5,000,000
0
0
<COMMON> 36,502,000
<OTHER-SE> (14,921,000)
<TOTAL-LIABILITY-AND-EQUITY> 45,001,000
<SALES> 67,785,000
<TOTAL-REVENUES> 67,785,000
<CGS> 48,218,000
<TOTAL-COSTS> 48,218,000
<OTHER-EXPENSES> 18,037,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 854,000
<INCOME-PRETAX> 497,000
<INCOME-TAX> (1,175,000)
<INCOME-CONTINUING> 1,672,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,672,000
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
