<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________to_________________
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Commission file number 0-10734
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FERROFLUIDICS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
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
--------------
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
--- ---
(2) Yes X No
--- ---
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of April 30, 1998.
Common Stock, $.004 par value per share 6,218,303
- --------------------------------------- ---------------
(Class) (No. of Shares)
<PAGE> 2
TABLE OF CONTENTS
Page Nos.
---------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
March 28, 1998 and June 28, 1997 3
Consolidated Statements of Operations -
Three Months Ended March 28, 1998 and March 29, 1997 4
Consolidated Statements of Operations -
Nine Months Ended March 28, 1998 and March 29, 1997 5
Consolidated Statements of Cash Flows -
Nine months Ended March 28, 1998 and March 29, 1997 6
Notes to Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Position 9 - 14
Part II. Other Information 14
Signatures 15
2
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PART I.FINANCIAL INFORMATION
ITEM 1.
FERROFLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
March 28, 1998 and June 28, 1997
<TABLE>
<CAPTION>
ASSETS March 28, 1998 June 28, 1997
- ------ -------------- -------------
Current Assets: (unaudited) (note)
<S> <C> <C>
Cash and cash equivalents $ 1,355,000 $ 883,000
Accounts receivable - trade, less allowance
for doubtful accounts of $231,000 at
March 28, 1998 and $199,000 at June 28, 1997 13,772,000 13,609,000
Inventories 13,059,000 15,263,000
Advances to suppliers 889,000 1,341,000
Prepaid and other current assets 503,000 474,000
------------ -----------
Total Current Assets 29,578,000 31,570,000
------------ -----------
Property, plant and equipment, at cost, net
of accumulated depreciation of $11,923,000 at
March 28, 1998 and $10,961,000 at June 28, 1997 9,566,000 8,377,000
Cash value of life insurance 1,872,000 1,751,000
Deferred income taxes, net 3,301,000 1,815,000
Other assets, principally goodwill 1,129,000 1,488,000
------------ -----------
TOTAL ASSETS $ 45,446,000 $45,001,000
============ ===========
LIABILITIES
- -----------
Current Liabilities:
Bank notes payable 10,064,000 6,781,000
Accounts payable 3,196,000 5,126,000
Customer deposits 1,102,000 2,426,000
Accrued expenses 5,168,000 3,914,000
------------ -----------
Total Current Liabilities 19,530,000 18,247,000
------------ -----------
Long-term debt obligations 5,000,000 5,000,000
Other liabilities 460,000 173,000
STOCKHOLDERS' EQUITY
- --------------------
Preferred stock, $.001 par value, authorized
100,000 shares, issued and outstanding, none - -
Common stock, $.004 par value, authorized
12,500,000 shares, issued and outstanding 6,215,539 shares
at March 28, 1998 and 6,178,262 at June 28, 1997 25,000 25,000
Additional paid-in capital 36,719,000 36,477,000
Retained deficit (15,146,000)
Currency translation adjustments (1,142,000) (950,000)
------------ -----------
Total Stockholders' Equity 20,456,000 21,581,000
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,446,000 $45,001,000
============ ===========
</TABLE>
Note: The balance sheet at June 28, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE> 4
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS For the
Three Months Ended March 28, 1998 and March 29, 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net sales and revenues $11,745,000 $17,252,000
Cost of goods sold 9,774,000 12,011,000
----------- -----------
1,971,000 5,241,000
Engineering and product development expenses 1,178,000 1,245,000
Selling, general and administrative expense 2,748,000 3,199,000
Restructuring expenses 721,000 -
Provision for impairment of asset values 1,006,000 -
----------- -----------
Income (loss) from operations (3,682,000) 797,000
Interest income 6,000 6,000
Interest (expense) (256,000) (217,000)
Other income (expense) 10,000 (266,000)
----------- -----------
Income (loss) - before income taxes (3,922,000) 320,000
Provision (benefit) - before income taxes (1,480,000) 36,000
----------- -----------
Net income (loss) $(2,442,000) $ 284,000
=========== ===========
Per Share Data:
- ---------------
Net income (loss) - per common share $ (.39) $ .05
=========== ===========
Net income (loss) - per common share - assuming dilution $ (.39) $ .05
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS For the
Nine months Ended March 28, 1998 and March 29, 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net sales and revenues $42,509,000 $50,320,000
Cost of goods sold 31,060,000 34,704,000
----------- -----------
11,449,000 15,616,000
Engineering and product development expenses 3,270,000 4,031,000
Selling, general and administrative expense 8,066,000 9,552,000
Restructuring Expense 721,000 -
Provision for impairment of asset values 1,006,000 -
----------- -----------
Income (loss) from operations (1,614,000) 2,033,000
Interest income 16,000 37,000
Interest (expense) (794,000) (579,000)
Other (expense) (92,000) (279,000)
----------- -----------
Income (loss) before income taxes (2,484,000) 1,212,000
Provision (benefit) for income taxes (1,309,000) 137,000
----------- -----------
Net income (loss) $(1,175,000) $ 1,075,000
=========== ===========
Per Share Data:
- ---------------
Net income (loss) per common share $ (.19) $ 0.18
=========== ===========
Net income (loss) per common share - assuming dilution $ (.19) $ 0.17
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine
Months Ended March 28, 1998 and March 29, 1997
(unaudited)
1998 1997
----------- -----------
Cash flows from operating activities:
Net income $(1,175,000) $ 1,075,000
Adjustments to reconcile net income to net
cash used in operations:
Depreciation and amortization 1,304,000 1,219,000
Provision for impairment of asset values 1,006,000 -
Deferred income taxes (credits) (1,486,000) -
Restricted stock expense 283,000 381,000
Other (227,000) (122,000)
Changes in assets and liabilities:
Accounts receivable (282,000) (1,931,000)
Inventories 2,120,000 (1,462,000)
Prepaid expenses and other current assets 421,000 161,000
Accounts payable and accrued expenses (387,000) (1,785,000)
Customer deposits (1,324,000) 1,172,000
----------- -----------
Net cash used in operating activities 253,000 (1,291,000)
----------- -----------
Cash flow from investing activities:
Additions to property, plant, equipment (3,237,000) (1,006,000)
Proceeds from sale of assets - 38,000
Restricted cash and other 90,000 -
----------- -----------
Net cash used in investing activities (3,147,000) (968,000)
----------- -----------
Cash flow from financing activities:
Proceeds from issuance of common stock - 156,000
Short term borrowing, net 3,538,000 2,167,000
Payments on installment debt obligations (111,000) (101,000)
----------- -----------
Net cash provided by financing activities 3,427,000 2,222,000
----------- -----------
Effect of currency rate changes on cash (61,000) (107,000)
----------- -----------
Net increase (decrease) in cash 472,000 (144,000)
----------- -----------
Cash and cash equivalents at beginning of period 883,000 1,701,000
----------- -----------
Cash and cash equivalents at end of period $ 1,355,000 $ 1,557,000
=========== ===========
Cash paid for interest and income taxes for the nine months ended March 28, 1998
and March 29, 1997 is as follows:
1998 1997
-------- --------
Interest $776,000 $582,000
Income taxes $ 5,000 $416,000
The accompanying notes are an integral part of the consolidated financial
statements.
6
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FERROFLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Ferrofluidics
Corporation and its subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. They do not therefore include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of
operations of any interim period are subject to year-end adjustments, and are
not necessarily indicative of the results of operations for the fiscal year.
For further information, refer to the consolidated financial statements and
the footnotes thereto included in the Company's Annual Report on Form 10-K
for the year ended June 28, 1997 ("fiscal 1997").
FOREIGN EXCHANGE CONTRACTS
At March 28, 1998, the Company had outstanding approximately $2.3 million
in foreign exchange contracts used to hedge against fluctuations in the
translation of the balance sheets of foreign subsidiaries. These contracts
were marked to market at March 28, 1998. Separately, the Company had
outstanding at March 28, 1998 two additional contracts to sell forward, for
periods up to three months, approximately $1.8 million in anticipated foreign
currency receipts in connection with a contract for the sale of crystal
growing systems. No gain or loss has been recognized on these contracts as of
March 28, 1998.
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.
B. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are as follows at March 28, 1998
and June 28, 1997:
March 28, 1998 June 28, 1997
-------------- -------------
Raw materials and purchased parts $ 6,726,000 8,082,000
Work-in-process 2,761,000 2,962,000
Finished goods 3,572,000 4,219,000
----------- -----------
Total inventories $13,059,000 $15,263,000
=========== ===========
C. INCOME TAXES
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
had been established at June 28, 1997. Based upon a current assessment of the
future earnings prospects for the Company through fiscal 1999 after the
restructuring and other expenses recorded in the quarter ended March 28,
1998, and the overall outlook for revenue levels in all of the Company's
product lines, management has concluded that it is more likely than not that
the Company will be sufficiently profitable to utilize the additional
deferred tax asset resulting from the operating losses in the current
quarter.
7
<PAGE> 8
As of March 28, 1998, the Company had remaining net operating loss
carryforwards for Federal income tax purposes of approximately $27,600,000,
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
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.
D. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("Statement 128"), which is required to
be adopted for financial statements issued for periods ending after December
15, 1997, including interim periods. Accordingly, the Company has adopted
Statement 128 as of December 27, 1998 and has changed the method previously
used to compute earnings per share. Under the requirements of Statement 128
for calculating basic earnings per share, the dilutive effect of stock
options, warrants and other common stock equivalents is excluded. Statement
128 also requires that fully diluted earnings per share be reported, and that
all prior periods be restated.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------- ------------------------------
3/28/98 3/29/97 3/28/98 3/29/97
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net Income $(2,442,000) $ 284,000 $(1,175,000) $1,075,000
Denominator:
Denominator for basic earnings per
share - weighted average shares 6,208,941 6,094,625 6,192,696 6,080,172
Effect of dilutive securities:
Employee stock options - 4,857 - 32,101
Non-vested restricted stock - 50,314 - 58,460
----------- ---------- ----------- ----------
Dilutive potential common shares - 55,171 - 90,561
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 6,208,941 6,149,709 6,192,696 6,170,733
=========== ========== =========== ==========
Net income per common share $ (.39) $ .05 $ (.19) $ .18
=========== ========== =========== ==========
Net income pr common share - assuming dilution $ (.39) $ .05 $ (.19) $ .17
=========== ========== =========== ==========
</TABLE>
E. RESTRUCTURING AND OTHER CHARGES
During the quarter ended March 28, 1998, the Company recorded
restructuring and other charges totaling $3,663,000, which, after an income
tax benefit of $1,306,000, reduced net income by $2,357,000, or $.38 per
share. The charges were principally the result of a detailed review of the
crystal growing systems business undertaken by the Company in the current
quarter, which concluded that existing backlog and prospective new business
is not likely to be sufficient to support the existing structure of the
division. These charges include restructuring expenses of $721,000 which is
principally severance pay. Other charges, totaling $1,747,000 were made to
cost of goods sold, and include the establishment of inventory reserves and
other inventory
8
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adjustments, an anticipated claim for canceling open orders for inventory,
and charges for anticipated costs to complete certain field installations. In
addition, an amount totaling $1,006,000 for writedown of certain fixed assets
to reflect current estimates of recoverability of value was charged to
income. For a more detailed discussion, see Item 2 - Results of Operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL POSITION
The following discussion provides information to assist in the
understanding of the Company's results of operations and financial condition.
It should be read in conjunction with the consolidated financial statements
and notes thereto that appear elsewhere herein.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 28, 1998 AND MARCH 29, 1997:
In the quarter ended March 28, 1998, the Company recorded a net loss of
$2,442,000 or $.39 per share, (basic and diluted), as compared to net income
in the same period of fiscal 1997 of $284,000, or $.05 per share (basic and
diluted). The decline in net income was due to a combination of reduced
revenues in the Company's crystal growing systems business and increased
expenses in the current quarter due to the provision of $3,663,000 in
restructuring and other charges as a result of the decline in demand for
crystal growing equipment and the consequent decision to downsize this
division in response to that decline.
Net sales and revenues for the quarter ended March 28, 1998 totaled
$11,745,000 as compared to $17,252,000 in the same period of the prior year.
A comparison of the net sales and revenues by major product line is as
follows:
Three months ended
--------------------------------
March 28, 1998 March 29, 1997
-------------- --------------
Crystal growing systems $ 4,249,000 $11,142,000
Seals 4,226,000 3,797,000
Fluids 545,000 600,000
Distributed products 2,725,000 1,713,000
----------- -----------
Total net sales and revenues $11,745,000 $17,252,000
=========== ===========
Of the revenues in the quarter ended March 28, 1998, approximately
$1,680,000, or 14%, represented sales to one affiliated group of companies,
as compared to approximately $4,500,000, or 26% in the same quarter of the
previous year. This is the result of reductions in scheduled deliveries to
this customer.
Third quarter revenues in the Systems Division declined 61% from the
$11,142,000 recorded in the same quarter of the previous fiscal year. This
was a result of the decline in demand for crystal growing systems that has
taken place in the last several months. In addition, shipment of two machines
scheduled for this quarter was delayed into the fourth quarter as a result of
customer requirements. These developments led the Company to conduct a
detailed review of its participation in the crystal growing business, which
resulted in the decision to substantially reduce the commitment of resources
to this business as is described later.
Consolidated gross margins for the third quarter of fiscal 1998 amounted
to 16.8% of product sales as compared to 30.4% of product sales in the prior
year's third quarter. This decline in gross margin is principally a result of
the decision to downsize the crystal growing systems business and the
consequent writeoffs and charges to expense, as well as to a provision for
the estimated costs to complete certain field installations. Total charges to
cost of goods sold for these purposes were $1,747,000, or 14.9% of product
sales for the quarter. Partly offsetting this reduction in margin was the
improved mix of sales due to the higher proportion of components and
distributed products in the mix of business sold. These product lines carry
higher gross margins than the systems business.
9
<PAGE> 10
Consolidated order bookings for the three months ended March 28, 1998
totaled $9,215,000 as compared to $14,271,000 in the same period of the prior
year. This was primarily the result of a decline in bookings for crystal
growing systems, which decreased from $6,954,000 in the third quarter of
fiscal 1997 to $2,081,000 in the current quarter. Bookings for the Company's
other proprietary products of $3,981,000 in the third quarter of fiscal 1998
represented a decrease of 28% from the $5,544,000 achieved in the third
quarter of fiscal 1997, which reflected the effects of Asia's financial
problems on certain customers and an increasing trend amongst semiconductor
companies toward fewer long term booking commitments. Bookings for the third
quarter for distributed products by the Company's European subsidiary ("AP &
T") increased 78% to $3,154,000 as compared to $1,773,000 in the same quarter
of fiscal 1997. This was the result of the improved economic activity in
Europe, and increased orders for certain of the power supply products
distributed in England and Europe by AP&T.
Consolidated backlog at March 28, 1998 was $24,246,000 compared to
$37,483,000 at June 28, 1997. The decrease is primarily due to the decrease
in backlog for the Company's crystal growing systems, which at March 28, 1998
totaled $16,789,000 as compared to $30,276,000 at June 28, 1997. Included in
order backlog is an amount of $10,080,000 on an order from the Company's
largest customer for which no delivery schedule has been established. The
rest of the Company's backlog of systems is expected to ship in the current
fiscal year and in the first quarter of fiscal 1999. During the third quarter
of this fiscal year, the Company received a letter of intent from a customer
to place an order of approximately $9,000,000, but late in the quarter, the
customer indicated that the actual order would be scaled back substantially
to approximately $5,400,000. Backlog for crystal growing systems decreased as
a result of the decreased order activity in the business in general, and
continued shipment of product from backlog previously sold. The backlog of
orders for components products, including fluids, declined from $4,787,000 at
June 28, 1997 to $3,473,000 at March 28, 1998 and the backlog for distributed
products increased from $2,420,000 at June 28, 1997 to $3,984,000 at March
28, 1998.
Engineering and product development expenditures in the three months
ended March 28, 1998 totaled $1,178,000, a decrease of $67,000, or 5%,
compared to $1,245,000 in the same period last year. As a percentage of
revenues, net engineering and product development expenses increased from
7.2% in the March 1997 quarter to 10.0% in the current quarter. This increase
was primarily the result of continued spending on sustaining engineering
projects and product development efforts in the components and fluids
business, and certain remaining engineering efforts in the systems business.
Selling, general and administrative expenses (SG&A) for the three months
ended March 28, 1998 totaled $2,748,000, a decrease of 14.1% from the SG&A of
$3,199,000 in the same period of the prior year. The decrease is due
primarily to the reduction in corporate staffing undertaken in April 1997 as
well as to a reduction in restricted stock vesting and legal costs.
Interest expense of $256,000 for the three months ended March 28, 1998
represented an increase of $39,000 over that in the same period in fiscal
1997 due principally to higher borrowings under the Company's credit facility
made available by its bank.
As a result of the decline in demand for products of the Company's
crystal growing systems business that has taken place in recent months, a
detailed review of this business was undertaken in the third quarter of
fiscal 1998. The conclusion of this study was that the Company's commitment
of resources to the business was greater than could be justified by the
prospects for new sales in this product line, and the Company determined that
this commitment of resources should be reduced and redirected toward the
components and fluids businesses, where management believes the prospects for
future growth appear to be better. The Company therefore concluded that a
substantial downsizing of its systems division was warranted, and developed
and implemented a plan to reduce the size of the division. Included in this
plan was the decision to reduce the overall staffing of the division from
close to 100 employees to approximately 35, and to review all assets devoted
to the business. As a result of this review, the Company recorded a
restructuring charge of $721,000 for employee severance expenses and certain
consulting fees related to the restructuring. It was also concluded that the
full recovery of the carrying value of certain fixed assets devoted to the
systems business had become unlikely, and a provision for impairment of
$1,006,000 was charged to expense. In addition, the Company charged to cost
of goods sold purchase contract cancellation charges and reserves against the
systems business inventories (which may have
10
<PAGE> 11
had their value impaired by this decision) totaling $1,747,000. The Company
estimates that the restructuring plan and other charges and writedowns will
reduce future annual employment and other costs by approximately $2,400,000.
The operating loss for the quarter that was the result of these decisions
has increased the deferred tax asset on the Company's books by $1,486,000.
Based upon a current assessment of the future earnings prospects for the
Company through fiscal 1999 after the restructuring and other expenses
described in the preceding paragraph and on the overall outlook for revenue
levels in all of the Company's product lines, the Company has concluded that
it is more likely than not that the Company will be sufficiently profitable
to utilize the additional deferred tax asset resulting from the operating
losses in the current quarter. See Note C to the financial statements.
As of March 28, 1998, the Company had remaining net operating loss
carryforwards for Federal income tax purposes of approximately $27,600,000,
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 at the time such benefits are
realized. The tax provision for the three months ended March 28, 1998
includes a provision for certain state alternative minimum and foreign income
taxes.
NINE MONTHS ENDED MARCH 28, 1998 AND MARCH 29, 1997:
In the nine months ended March 28, 1998, the Company had a net loss of
$1,175,000, or $.19 per share (basic and diluted), as compared to net income
in the same period of fiscal 1997 of $1,075,000, or $.18 per share basic and
$.17 per share diluted. The decline in net income is a result of the
restructuring expenses and other costs incurred in the current quarter in
connection with the downsizing of the Company's crystal growing systems
business. See Note E to the financial statements.
Net sales and revenues for the nine months ended March 28, 1998 declined
to $42,509,000 as compared to $50,320,000 in the same period of the prior
year. A product line comparison of the net sales and revenues, for the nine
months ended March 28, 1998 and March 29, 1997 is as follows:
1998 1997
----------- -----------
Crystal growing systems $20,821,000 $32,334,000
Seals 12,931,000 9,870,000
Fluids 1,676,000 1,853,000
Distributed products 7,081,000 6,263,000
----------- -----------
Total net sales and revenues $42,509,000 $50,320,000
=========== ===========
Of the revenues in the first nine months of fiscal 1998 and fiscal 1997,
approximately $7,000,000 (16%) and $21,600,000 (43%), respectively,
represented sales to one affiliated group of companies. This decline is the
result of reductions in the scheduled deliveries to this customer.
Revenues in the Systems Division for the nine months ended March 28, 1998
declined to $20,821,000 from the $32,334,000 recorded in the same period of
the previous fiscal year. A substantial part of this decline took place in
the third quarter of the current fiscal year due to the decline in industry
demand for crystal growing systems and the delay in shipment of two machines
into the fourth quarter of fiscal 1998. Reduced deliveries in prior months to
the Company's principal customer for crystal growing systems contributed to
the rest of the decline.
Consolidated gross margins for the nine months ended March 28, 1998
amounted to 26.9% of product sales as compared to 31.0% of product sales in
the same period of the prior year. The decline in gross margin in the current
year is due to the charges to cost of goods sold made in the current quarter
as a result of the decision described above to undertake the restructuring
and downsizing of the crystal growing systems business. These charges
included accruals for
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<PAGE> 12
anticipated expenses in connection with the cancellation of purchase orders
for inventory, and establishment of inventory reserves. See also Note E to
the financial statements.
Consolidated order bookings for the nine Months ended March 28, 1998
totaled $29,158,000 as compared to $41,741,000 in the same period of the
prior year. Of the current year's bookings, $7,600,000 represent orders for
silicon crystal growing systems as compared to $22,990,000 in the previous
period. Bookings for the remaining product lines increased 15% from
$18,759,000 in the prior period to $21,558,000 in the first nine months of
the current year.
Engineering and product development expenditures in the nine months ended
March 28, 1998 totaled $3,270,000 a decrease of $761,000 or 19% compared to
$4,031,000 in the same period last year. As a percentage of revenues, net
engineering and product development expenses decreased from 8.0% in the nine
months ended March 29, 1997 quarter to 7.7% in the nine months ended March
28, 1998. This decrease was primarily because spending on sustaining
engineering projects and project development efforts in systems business were
at high levels in the previous fiscal year as several new crystal growing
systems were being designed and built.
Interest expense of $794,000 for the nine months ended march 28, 1998
represented an increase of $215,000 over that in the same period in fiscal
1997 due to higher borrowings under the Company's credit facility made
available by its bank.
Selling, general and administrative expenses for the nine months ended
March 28, 1998 totaled $8,066,000, a decrease of 16% from the $9,552,000
recorded in the nine months ended March 29, 1997. This decrease was due to
reduced staffing and related expenses initiated in April 1997, reduced
charges for restricted stock expense, and reduced legal costs.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital at March 28, 1998 was $10,048,000 as compared to
$13,323,000 at June 28, 1997. The current assets of the Company decreased
during the first nine months of fiscal 1998 due primarily to a decrease in
inventories. The decrease in inventory was principally due to the reduction
in inventory values recorded in connection with the downsizing of the systems
business (see Note E to the financial statements). A reduction in advances to
suppliers was offset by an increase in cash and other current assets. Current
liabilities, however, increased during the first nine months of fiscal 1998
as a result of additional short term borrowings against the Company's
revolving line of credit, and because of an increase in accrued expenses
related to the downsizing of the systems business. Although there was a
significant decrease in accounts payable and customer deposits, total current
liabilities increased during the period which was a factor in the decrease in
net working capital.
During the nine months ended March 28, 1998, the operations of the
business provided cash from operations of $253,000, as non-cash charges to
income, and a decrease in inventories was largely offset by decreases in
accounts payable, customer deposits, and an increase in deferred taxes. At
March 28, 1998, the Company had outstanding purchase commitments for material
of approximately $9,000,000 representing long lead-time items and other
component parts for the Company's crystal growing system business.
Investing activities during the nine months ended March 28, 1998 included
the collection of $90,000 from a restricted cash deposit, and $3,237,000 of
investment in property plant and equipment. Of the latter amount,
approximately $762,000 represented acquisitions of general property, plant
and equipment. The remainder was an investment of approximately $2,475,000 in
the construction of a 300mm crystal growing system which it intends to
operate as part of a demonstration facility in its manufacturing plant for
display to prospective customers as well as for the production of 300mm
silicon ingots for sale. In connection with the decision to downsize the
systems business, it was concluded that the overall uncertainties in the
outlook for the business introduced doubt as to the recoverability of the
full value of the 300mm machine, and the Company decided to write down its
value to an amount which, in management's judgment, represents recoverable
value. This charge was included as an asset impairment loss in the third
quarter of fiscal 1998. At March 28, 1998, the Company did not have any
material purchase commitments with respect to property and equipment.
Financing activities of the Company during the nine months ended March 28,
1998
12
<PAGE> 13
were comprised entirely of increases in net borrowings of $3,427,000
from its bank credit facilities (described below). The consolidated results
of operations for the nine months ended March 28, 1998 includes a non-cash
charge of $267,000 for compensation to employees as a result of restricted
stock grants made in prior years. In the same period last year, a charge of
$391,000 was made for the same purpose.
The restructuring and other charges to expense made in the third quarter
of fiscal 1998 include approximately $1,347,000 in accruals for future
expenses which will become cash outlays during the next six to nine months.
The majority of this amount represents employee severance expense which will
actually be paid as the business restructuring plan for the systems business
is implemented in stages over the next three quarters, and in accruals for
expenses relating to certain field installations, which also will be incurred
over the next three quarters. The fixed asset writedowns will reduce
depreciation expense in future years, and the remaining charges are all
non-cash adjustments in carrying value of assets. The Company intends to
vigorously pursue selling these assets, which, if successful, would result in
cash inflows to the Company.
Under an arrangement with its bank, the Company has available to it a
total credit facility of approximately $14,400,000, which includes
approximately $5,400,000 in the form of a stand-by letter of credit for the
Company's $5,000,000 1984 Series Industrial Revenue Bonds, an $8,500,000
revolving line-of-credit for working capital purposes, and $500,000
representing the remaining balance of an installment payment note used to
finance the expansion of its in-house machine shop. In addition, in October
1997, the Company entered into an agreement with its bank under which the
bank advanced to the Company $1,500,000 in the form of a 90-day promissory
note in order to cover anticipated short term financing needs. This note
bears interest at the same rate as the revolving credit line, and remained
outstanding at March 28, 1998. The entire credit facility is collateralized
by substantially all of the assets of the Company. As of March 28, 1998, the
entire $8,500,000 was outstanding against the revolving line-of-credit. The
interest rate on the revolving line-of-credit was 9.5% at March 28, 1998.
This credit arrangement currently expires on May 31, 1998, and the Company is
actively discussing with the bank the renewal of the credit line. Although
management expects that the credit line will be renewed, there is no
assurance that it will be renewed.
With its current banking agreement and the Company's anticipated
operating cash flow, the Company believes it has sufficient working capital
resources to fund its operations through fiscal 1998 and into fiscal 1999.
Early in the third quarter of fiscal 1998, the Company announced that it had
withdrawn from the competition to supply a 300mm crystal growing system to
its major customer for evaluation purposes. This has led to substantially
reduced capital expenditure requirements, and the Company now believes that
these requirements can be met out of current working capital and banking
relationships. In addition, the Company continues to obtain contractual
advance payments from customers in its systems business in order to assist in
the financing of that business.
YEAR 2000 ISSUE
The Company has undertaken an assessment of its vulnerability to the
so-called "Year 2000 issue" with respect to its computer systems. The Company
has in recent years relied almost entirely on purchased off-the-shelf
software packages for both business and engineering purposes, and has not
materially customized these packages for its purposes. These software
packages run on a personal computer based local area network which was
installed in 1993, and which has been upgraded as needed since then. The
assessment was based upon formal and informal communications with the
software vendors, literature supplied with the software, literature received
in connection with maintenance contracts, and test evaluations of the
software.
As a result of the assessment the Company believes that all of its major
business systems software is year 2000 compliant and that the year 2000 issue
is not likely to have a material impact on the Company's operations.
Nevertheless, a project to further verify year 2000 compliance in the
Company's systems has been undertaken and is expected to be completed by the
end of fiscal 1998. This project will be completed with the Company's
existing resources, and is not expected to have a material effect on the
Company's financial results.
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 certain factors that could cause actual
13
<PAGE> 14
results to differ materially from those anticipated by the statements made
above. 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 above, lack of new crystal puller orders from existing or new
customers, change in revenues in the Company's other business, and material
changes in the market conditions within the semiconductor industry, failure
to obtain renewal of the credit line, and inability to utilize deferred tax
credits. 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.
PART II. OTHER INFORMATION
ITEM B. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K:
None.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FERROFLUIDICS CORPORATION
-------------------------
(Registrant)
Date: May 12, 1998 By: /s/ Salvatore J. Vinciguerra
------------ ---------------------------------
Salvatore J. Vinciguerra
President and Chief Executive Officer
By: /s/ William B. Ford
---------------------------------
William B. Ford
Vice President Finance
15
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