<PAGE>
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 27, 1999
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ----------------------
Commission file number 1-12198
------------------------------------
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, 1999.
<TABLE>
<CAPTION>
Common stock, $.004 Par value per share 6,226,675
- --------------------------------------- ---------
<S> <C>
(Class) (No. of Shares)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page Nos.
---------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 27, 1999 and June 27, 1998 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 27, 1999 and March 28, 1998 4
Condensed Consolidated Statements of Operations -
Nine Months Ended March 27, 1999 and March 28, 1998 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended March 27, 1999 and March 28, 1998 6
Notes to Condensed Consolidated Financial Statements 7 - 14
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Position 15 - 21
Item 3. Quantitative and Qualitative Disclosure of Market Risk 22
Part II. Other Information 22
Signatures 23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
FERROFLUIDICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 27, 1999 and June 27, 1998
<TABLE>
<CAPTION>
March 27, 1999 June 27, 1998
(Unaudited) (Note A)
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,339,000 $ 1,516,000
Accounts receivable - trade, less allowance for doubtful accounts
of $211,000 at March 27, 1999 and $329,000 at June 27, 1998 6,134,000 12,083,000
Inventories 9,064,000 13,855,000
Prepaid and other current assets 375,000 1,361,000
------------ ------------
Total Current Assets 21,912,000 28,815,000
------------ ------------
Property, plant and equipment, at cost, net
of accumulated depreciation of $11,477,000 at
March 27, 1999 and $12,462,000 at June 27, 1998 6,359,000 8,826,000
Cash value of life insurance 2,037,000 1,921,000
Deferred income taxes, net 1,772,000 3,154,000
Other assets, principally goodwill 873,000 1,303,000
------------ ------------
TOTAL ASSETS $ 32,953,000 $ 44,019,000
------------ ------------
------------ ------------
LIABILITIES
Current Liabilities:
Bank notes payable $ -- $ 9,710,000
Accounts payable 1,896,000 3,860,000
Customer deposits 48,000 2,777,000
Accrued expenses 3,063,000 4,286,000
------------ ------------
Total Current Liabilities 5,007,000 20,633,000
------------ ------------
Long-term debt obligations 5,000,000 5,000,000
Other liabilities 165,000 185,000
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 6,226,675 shares (6,218,581 at June 27, 1998) 25,000 25,000
Additional paid-in capital 36,762,000 36,738,000
Retained deficit (12,671,000) (17,443,000)
Currency translation adjustments (1,217,000) (1,119,000)
------------ ------------
22,899,000 18,201,000
Treasury stock, at cost (40,700 shares) 118,000 --
------------ ------------
Total Stockholders' Equity 22,781,000 18,201,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,953,000 $ 44,019,000
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
FERROFLUIDICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 27, 1999 and March 28, 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net sales $ 5,423,000 $ 7,549,000
Cost of goods sold 2,931,000 4,201,000
----------- -----------
2,492,000 3,348,000
Engineering and product development expenses 505,000 529,000
Selling, general and administrative expense 1,767,000 2,083,000
----------- -----------
Income from operations 220,000 736,000
Interest income 51,000 6,000
Interest expense (62,000) (150,000)
Other income (expense), net (58,000) 5,000
----------- -----------
Income from continuing operations before income taxes 151,000 597,000
Income taxes 112,000 6,000
----------- -----------
Income from continuing operations 39,000 591,000
Discontinued operations--Note D:
Loss from discontinued operations, less applicable
income tax benefit of $1,486,000 -- (3,033,000)
----------- -----------
Net income (loss) $ 39,000 $(2,442,000)
----------- -----------
----------- -----------
Per Share:
Income from continuing operations:
Basic $ 0.01 $ 0.10
Diluted $ 0.01 $ 0.10
Loss from discontinued operations:
Basic -- $ (0.49)
Diluted -- $ (0.49)
Net income (loss):
Basic $ 0.01 $ (0.39)
Diluted $ 0.01 $ (0.39)
Weighted average common shares outstanding:
Basic 6,216,126 6,208,941
Diluted 6,216,126 6,208,941
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
FERROFLUIDICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended March 27, 1999 and March 28, 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net sales $ 17,709,000 $ 21,016,000
Cost of goods sold 10,408,000 11,174,000
------------ ------------
7,301,000 9,842,000
Engineering and product development expenses 1,839,000 1,494,000
Selling, general and administrative expense 5,476,000 5,763,000
------------ ------------
Income (loss) from operations (14,000) 2,585,000
Interest income 99,000 11,000
Interest expense (256,000) (463,000)
Other income (expense), net (261,000) 31,000
------------ ------------
Income (loss) from continuing operations before income taxes (432,000) 2,164,000
Income taxes 115,000 135,000
------------ ------------
Income (loss) from continuing operations (547,000) 2,029,000
Discontinued operations--Note D:
Loss from discontinued operations, less applicable
income tax benefit of $1,445,000 -- (3,204,000)
Estimated gain on disposal of Systems Division, less applicable
income taxes of $1,400,000 5,319,000 --
------------ ------------
Net income (loss) $ 4,772,000 $ (1,175,000)
------------ ------------
------------ ------------
Per Share:
Income (loss) from continuing operations:
Basic $ (0.09) $ 0.33
Diluted $ (0.09) $ 0.33
Income (loss) from discontinued operations:
Basic $ 0.86 $ (0.52)
Diluted $ 0.86 $ (0.52)
Net income (loss):
Basic $ 0.77 $ (0.19)
Diluted $ 0.77 $ (0.19)
Weighted average common shares outstanding:
Basic 6,219,001 6,192,696
Diluted 6,219,001 6,201,030
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
FERROFLUIDICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended March 27, 1999 and March 28, 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,772,000 $ (1,175,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,127,000 1,304,000
Deferred income taxes (credits) 1,400,000 (1,486,000)
Increase in cash surrender value (116,000) --
Estimated gain on disposal of Systems Division (6,592,000) --
Stock-related compensation 31,000 283,000
Foreign currency transaction (gains) losses (194,000) 96,000
Other (324,000) (323,000)
Changes in operating assets and liabilities:
Accounts receivable, net 5,966,000 (282,000)
Inventories 1,932,000 2,120,000
Prepaid expenses and other current assets 992,000 421,000
Accounts payable and accrued expenses (3,213,000) (387,000)
Customer deposits (2,729,000) (1,324,000)
------------ ------------
Net cash provided by (used in) operating activities 3,052,000 (753,000)
------------ ------------
Cash flow from investing activities:
Acquisition of property, plant, equipment (600,000) (2,231,000)
Proceeds from sale of assets 1,431,000 --
Proceeds from the disposal of Systems Division 10,800,000 --
Other -- 90,000
------------ ------------
Net cash provided by (used in) investing activities 11,631,000 (2,141,000)
------------ ------------
Cash flow from financing activities:
Proceeds from (repayments of) short term borrowings, net (9,710,000) 3,427,000
Purchase of treasury stock (118,000) --
------------ ------------
Net cash provided by (used in) financing activities (9,828,000) 3,427,000
------------ ------------
Effect of currency rate changes on cash (32,000) (61,000)
------------ ------------
Net increase in cash and cash equivalents 4,823,000 472,000
------------ ------------
Cash and cash equivalents at beginning of period 1,516,000 883,000
------------ ------------
Cash and cash equivalents at end of period $ 6,339,000 $ 1,355,000
------------ ------------
------------ ------------
</TABLE>
Cash paid for interest and income taxes for the nine months ended March 27, 1999
and March 28, 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest $ 446,000 $ 776,000
Income taxes, net $ 77,000 $ 5,000
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
FERROFLUIDICS CORPORATION
NOTES TO CONDENSED 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.
The balance sheet at June 27, 1998 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
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 27, 1998 ("fiscal 1998").
B. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are comprised of the following elements at March 27, 1999
and June 27, 1998:
<TABLE>
<CAPTION>
March 27, 1999 June 27, 1998
-------------- -------------
<S> <C> <C>
Raw materials and purchased parts $4,856,000 $ 6,348,000
Work-in-process 1,571,000 2,650,000
Finished goods 2,637,000 4,857,000
---------- -----------
$9,064,000 $13,855,000
---------- -----------
---------- -----------
</TABLE>
C. SHORT-TERM BORROWINGS AND OTHER DEBT OBLIGATIONS
On September 23, 1998, in connection with the sale of the Systems
Division, the Company used a portion of the cash proceeds to pay off the then
outstanding balance under the Company's line of credit with its bank and
$1,500,000 that was then outstanding under a 90-day promissory note with its
bank. As a result of this sale, the Company and its bank agreed to reduce the
maximum available borrowings under the line of credit agreement from $8,500,000
to $2,000,000. The line of credit agreement expired at the end of November 1998.
The Company is in the process of renewing the line of credit agreement with its
bank. There were no borrowings under the line of credit at March 27, 1999.
On March 26, 1999, the Company paid off the then outstanding balance of
$343,000 on its installment note with its bank.
D. DISCONTINUED OPERATIONS
On September 23, 1998, the Company sold certain assets of the Systems
Division to General Signal Technology Corporation, an SPX Corporation company
("General Signal"), for $10,800,000 in cash (the "Systems Division Sale").
Assets sold included approximately $2,818,000 in inventory, and approximately
$625,000 in fixed assets and intangible assets in the first quarter of fiscal
1999. As discussed below, the Systems Division is currently being operated by
the Company only to complete existing backlog. After providing for transaction
fees of $333,000 and
7
<PAGE>
income taxes of $1,400,000, the Company recorded an estimated gain on the
Systems Division Sale of $5,253,000. The gain on the Systems Division Sale is
net of an operating loss of $368,000 that was incurred by the Systems Division
during the quarter ended September 26, 1998. For the quarter ended December 26,
1998 , the Systems Division's operations generated an operating profit of
$66,000 whereas for the quarter ended March 27, 1999, the Systems Division's
operations were break-even. The Company also anticipates break-even operations
for the Systems Division through the end of the phase-out period.
The Systems Division represented a separate line of business and,
accordingly, its net operating results have been reported, after applicable
income taxes, as discontinued operations for all periods through June 29, 1998,
the date management decided to dispose of the Systems Division. The Systems
Division Sale, as structured, did not include any Systems Division liabilities,
which remain with the Company. The Systems Division Sale did not include the
obligation by the Company to complete approximately $18,433,000 ($1,770,000 at
March 27, 1999) in Systems Division backlog, which obligation remains with the
Company, nor did it include approximately $5,873,000 ($1,426,000 at March 27,
1999) in inventory on hand on the date of the Systems Division Sale, all of
which was needed to fulfill existing backlog. The terms of the Systems Division
Sale provided that, generally, any backlog existing on December 31, 1998 would
be transferred to General Signal. The remaining backlog at March 27, 1999,
however, will be completed and shipped by the Company as agreed to by General
Signal. The backlog at September 23, 1998 included a purchase order from a
customer for nine machines (valued at approximately $7,658,000) for which the
customer did not provide firm delivery dates. The customer canceled delivery of
the nine machines during the quarter ended December 26, 1998. The Company
believes that, under the terms of the purchase order, the customer is obligated
to pay the Company the costs incurred up to cancellation of the delivery. In
connection with these machines and other orders, on September 23, 1998, the
Company had inventory of approximately $1,712,000 on hand and approximately
$2,471,000 in parts on order at vendors. As of March 27, 1999, the Company had
settled almost all of its commitments with its vendors at a cost of
approximately $1,765,000. The Company and the customer are actively negotiating
a settlement of the Company's claims under this purchase order. If the Company
is unable to recover these cancellation charges from the customer, the Company
may be required to take a material write-down of the inventory relating to the
purchase order, which would require the Company to adjust the estimated gain on
disposal of the Systems Division recorded in the first quarter of fiscal 1999.
The Systems Division Sale also did not include approximately $6,472,000
in accounts receivable which were outstanding as of the closing of the Systems
Division Sale ($1,398,000 remains outstanding at March 27, 1999). The Company
believes that it will be able to collect these receivables with no material
adverse financial impact but there can be no assurance that the Systems Division
Sale will not adversely affect their collectibility.
The operating results of the discontinued Systems Division for the
three month and nine month periods ended March 28, 1998 is summarized as follows
(000's omitted):
<TABLE>
<CAPTION>
Three months ended Nine months ended
3/28/98 3/28/98
------------------ -----------------
<S> <C> <C>
Net sales $ 4,196 $21,493
-------- -------
-------- -------
Loss from operations before income taxes $(4,519) $(4,649)
Income tax benefit 1,486 1,445
-------- -------
Loss from operations $(3,033) $(3,204)
-------- -------
-------- -------
</TABLE>
The net assets at March 27, 1999 of the discontinued business are
summarized as follows (000's omitted)
<TABLE>
<S> <C>
Current assets $4,856
Current liabilities 327
------
Net assets of the discontinued Systems Division $4,529
------
------
</TABLE>
8
<PAGE>
E. 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 $12,217,000
was established at June 27, 1998. As a result of the $5,187,000 gain on the
System Division Sale, the valuation allowance was reduced by an additional
$1,100,000 during the first quarter of fiscal 1999 ($1,400,000 of the valuation
allowance had previously been reduced during fiscal 1998 based on a preliminary
estimate of the gain on disposal of the Systems Division). However, based upon a
current assessment of the future earnings prospects for the Company through the
third quarter of fiscal 2000, management concluded that no further adjustment to
the valuation allowance was necessary as of March 27, 1999.
As of March 27, 1999, the Company had remaining net operating loss
carryforwards for Federal income tax purposes of approximately $28,000,000, and
for foreign income tax purposes of approximately $2,900,000, 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 2013. 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.
F. COMMITMENTS AND CONTINGENCIES
In connection with the sale of the Company's former UK subsidiary, AF
Technologies, Ltd. (AF), in June 1990, 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 (pound) 300,000 guarantee, over the next ten years, for
a new tenant under the lease, allowing AF to vacate the premises and relocate to
a less expensive location. On July 2, 1992, the Company deposited (pound)300,000
into an escrow account, which currently earns interest at a rate of 2.55%,
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 pre-tax operating results over any period of three consecutive
years. The Company originally 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 believed that the
ultimate resolution of this issue would be within the reserve established and
the Company had therefore made no additional provision. In December 1998, the
Company received notification from the landlord that the arrearage was now
approximately $300,000 and that the landlord was going to draw that amount from
the account. Upon further review, management determined, in the quarter ended
December 26, 1998, that the full value of the deposit should be reserved and,
accordingly, the Company recorded, as "Other Expense" in the second quarter, a
charge of $227,000.
G. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" in the first quarter of fiscal 1999.
Statement 130 established new rules for reporting and disclosure of
comprehensive income and its components. Such disclosure, however, has no impact
on the Company's results of operations, financial position or cash flows.
Comprehensive income is defined as the change in equity of a company during a
reporting period which is a result of certain transactions and other events and
circumstances, but not including transactions resulting from investments by
owners and distributions to owners. The difference between net income and
comprehensive income for the Company is from foreign currency translation
adjustments.
9
<PAGE>
The components of comprehensive income (loss) for the three and nine month
periods ended March 27, 1999 and March 28, 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
3/27/99 3/28/98 3/27/99 3/28/98
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 39,000 $(2,442,000) $4,772,000 $(1,175,000)
Foreign currency translation adjustments (365,000) (92,000) (98,000) (192,000)
---------- ------------ ---------- -----------
Comprehensive income (loss) $(326,000) $(2,534,000) $4,674,000 $(1,367,000)
---------- ------------ ---------- -----------
---------- ------------ ---------- -----------
</TABLE>
The components of comprehensive income (loss) for the three and six month
periods ended December 26, 1998 and December 27, 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
12/26/98 12/27/97 12/26/98 12/27/97
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ (89,000) $612,000 $4,733,000 $1,268,000
Foreign currency translation adjustments (26,000) (20,000) 267,000 (100,000)
---------- --------- ----------- -----------
Comprehensive income (loss) $(115,000) $592,000 $5,000,000 $1,168,000
---------- --------- ----------- -----------
---------- --------- ----------- -----------
</TABLE>
The components of comprehensive income for the three-month periods ended
September 26, 1998 and September 27, 1997 are as follows:
<TABLE>
<CAPTION>
9/26/98 9/27/97
---------- --------
<S> <C> <C>
Net income $4,822,000 $656,000
Foreign currency translation adjustments 293,000 (80,000)
---------- --------
Comprehensive income $5,115,000 $576,000
---------- --------
---------- --------
</TABLE>
H. STOCK REPURCHASE PROGRAM
On February 23, 1999, the Company's Board of Directors authorized a
stock repurchase program whereby up to 1,000,000 shares of its common stock may
be purchased in the open market, as market and business conditions warrant, over
the next year. During the quarter ended March 27, 1999, the Company repurchased
a total of 40,700 shares of common stock for $118,000 and is holding such shares
as treasury stock.
I. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
3/27/99 3/28/98 3/27/99 3/28/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing operations $39,000 $ 591,000 $ (547,000) $ 2,029,000
Income (loss) from discontinued operations -- (3,033,000) 5,319,000 (3,204,000)
------- ------------ ----------- ------------
Net income (loss) $39,000 $(2,442,000) $4,772,000 $(1,175,000)
------- ------------ ----------- ------------
------- ------------ ----------- ------------
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Denominator for basic earnings per
share - weighted average shares 6,216,126 6,208,941 6,219,001 6,192,696
Effect of dilutive securities:
Employee stock options -- -- -- --
Non-vested restricted stock -- -- -- 8,334
----------- ----------- ----------- -----------
Dilutive potential common shares -- -- -- 8,334
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 6,216,126 6,208,941 6,219,001 6,201,030
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Per Share:
Income (loss) from continuing operations:
Basic $ 0.01 $ 0.10 $ (0.09) $ 0.33
Diluted $ 0.01 $ 0.10 $ (0.09) $ 0.33
Income (loss) from discontinued operations:
Basic -- $ (0.49) $ 0.86 $ (0.52)
Diluted -- $ (0.49) $ 0.86 $ (0.52)
Net income (loss):
Basic $ 0.01 $ (0.39) $ .077 $ (0.19)
Diluted $ 0.01 $ (0.39) $ 0.77 $ (0.19)
</TABLE>
At March 27, 1999 and March 28, 1998, options and warrants to purchase
634,505 shares of the Company's common stock at exercise prices ranging from
$3.50 to $13.00 per share and 651,697 shares of the Company's common stock at
exercise prices ranging from $7.63 to $15.25 per share, respectively, were
anti-dilutive and therefore were excluded from the computation of diluted
earnings per share.
J. RECLASSIFICATION
Certain corporate salary expenses previously reported in discontinued
operations have been reallocated to continuing operations as a result of a
re-interpretation of the applicable accounting rules. In the first quarter of
fiscal 1999, when the estimated gain on disposal was calculated, the Company
expected the operations during the phase-out to be break-even including the
expenses that are now being reallocated. As a result, previously reported
statements of operations have been reclassified to reflect this change in
allocation. The impact was approximately $66,000 in the first and second
quarters of fiscal 1999. The impact of the reclassification on the quarters that
were affected is as follows:
<TABLE>
<CAPTION>
Nine Months Ended March 27, 1999
-----------------------------------------------
Before After
Reclassification Reclass Reclassification
---------------- ------- ----------------
<S> <C> <C> <C>
Loss from continuing operations $ (415,000) $(132,000) $ (547,000)
Estimated gain on disposal of Systems Division, net of taxes 5,187,000 132,000 5,319,000
----------- ---------- -----------
Net income $4,772,000 $ -- $4,772,000
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C>
Per Share:
Loss from continuing operations:
Basic $ (0.08) $ (0.09)
Diluted $ (0.08) $ (0.09)
Income from discontinued operations:
Basic $ 0.85 $ 0.86
Diluted $ 0.85 $ 0.86
Net loss:
Basic $ 0.77 $ 0.77
Diluted $ 0.77 $ 0.77
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended December 26, 1998
-----------------------------------------------
Before After
Reclassification Reclass Reclassification
---------------- ------- ----------------
<S> <C> <C> <C>
Loss from continuing operations $(89,000) $(66,000) $(155,000)
Estimated gain on disposal of Systems Division, net of taxes -- 66,000 66,000
--------- -------- ---------
Net loss $(89,000) $ -- $ (89,000)
--------- -------- ---------
--------- -------- ---------
Per Share:
Loss from continuing operations:
Basic $ (0.01) $ (0.02)
Diluted $ (0.01) $ (0.02)
Income from discontinued operations:
Basic -- $ 0.01
Diluted -- $ 0.01
Net loss:
Basic $ (0.01) $ (0.01)
Diluted $ (0.01) $ (0.01)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 26, 1998
--------------------------------------------------
Before After
Reclassification Reclass Reclassification
---------------- ------- ----------------
<S> <C> <C> <C>
Loss from continuing operations $ (365,000) $(66,000) $ (431,000)
Estimated gain on disposal of Systems Division, net of taxes 5,187,000 66,000 5,253,000
----------- --------- ----------
Net income $4,822,000 $ -- $4,822,000
----------- --------- ----------
----------- --------- ----------
Per Share:
Loss from continuing operations:
Basic $ (0.06) $ (0.07)
Diluted $ (0.06) $ (0.07)
Income from discontinued operations:
Basic $ 0.84 $ 0.85
Diluted $ 0.84 $ 0.85
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net income:
Basic $ 0.78 $ 0.78
Diluted $ 0.78 $ 0.78
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended March 28, 1998
--------------------------------------------------
Before After
Reclassification Reclass Reclassification
---------------- ------- ----------------
<S> <C> <C> <C>
Income from continuing operations $ 2,216,000 $(187,000) $ 2,029,000
Estimated gain on disposal of Systems Division, net of taxes (3,391,000) 187,000 (3,204,000)
------------ ---------- ------------
Net income $(1,175,000) $ -- $(1,175,000)
------------ ---------- ------------
------------ ---------- ------------
Per Share:
Loss from continuing operations:
Basic $ 0.36 $ 0.33
Diluted $ 0.36 $ 0.33
Income from discontinued operations:
Basic $ (0.55) $ (0.52)
Diluted $ (0.55) $ (0.52)
Net loss:
Basic $ (0.19) $ (0.19)
Diluted $ (0.19) $ (0.19)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 28, 1998
---------------------------------------------------
Before After
Reclassification Reclass Reclassification
---------------- ------- ----------------
<S> <C> <C> <C>
Income from continuing operations $ 654,000 $(63,000) $ 591,000
Loss from discontinued operations, net of taxes (3,096,000) 63,000 (3,033,000)
------------- ---------- ------------
Net loss $(2,442,000) $ -- $(2,442,000)
------------- ---------- ------------
------------- ---------- ------------
Per Share:
Income from continuing operations:
Basic $ 0.11 $ 0.10
Diluted $ 0.11 $ 0.10
Loss from discontinued operations:
Basic $ (0.50) $ (0.49)
Diluted $ (0.50) $ (0.49)
Net loss:
Basic $ (0.39) $ (0.39)
Diluted $ (0.39) $ (0.39)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended December 27, 1997
--------------------------------------------------
Before After
Reclassification Reclass Reclassification
---------------- ------- ----------------
<S> <C> <C> <C>
Income from continuing operations $ 888,000 $(62,000) $ 826,000
Loss from discontinued operations, net of taxes (276,000) 62,000 (214,000)
---------- --------- ----------
Net income $ 612,000 $ -- $ 612,000
---------- --------- ----------
---------- --------- ----------
Per Share:
Income from continuing operations:
Basic $ 0.14 $ 0.13
Diluted $ 0.14 $ 0.13
Loss from discontinued operations:
Basic $ (0.04) $ (0.03)
Diluted $ (0.04) $ (0.03)
Net income:
Basic $ 0.10 $ 0.10
Diluted $ 0.10 $ 0.10
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 27, 1997
--------------------------------------------------
Before After
Reclassification Reclass Reclassification
---------------- ------- ----------------
<S> <C> <C> <C>
Income from continuing operations $317,000 $(62,000) $255,000
Income from discontinued operations, net of taxes 339,000 62,000 401,000
--------- --------- --------
Net income $656,000 $ -- $656,000
--------- --------- --------
--------- --------- --------
Per Share:
Income from continuing operations:
Basic $ 0.05 $ 0.04
Diluted $ 0.05 $ 0.04
Income from discontinued operations:
Basic $ 0.06 $ 0.07
Diluted $ 0.06 $ 0.07
Net income:
Basic $ 0.11 $ 0.11
Diluted $ 0.11 $ 0.11
</TABLE>
14
<PAGE>
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 from continuing operations, unless
otherwise noted, and financial condition. As more fully described in Note D to
the Condensed Consolidated Financial Statements, on September 23, 1998, certain
of the assets of the Company's Systems Division were sold to General Signal for
$10,800,000 in cash. This discussion reflects the fact that, in accordance with
generally accepted accounting principles, the Company is reporting the results
of operations from the Systems Division as discontinued operations and that the
Company's Condensed Consolidated Financial Statements for fiscal 1999 and prior
periods have been revised to reflect this accounting treatment of the Systems
Division in those periods. The discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto that appear
elsewhere herein.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 27, 1999 AND MARCH 28, 1998:
In the quarter ended March 27, 1999, the Company's continuing
operations generated income of $39,000, or $0.01 per share (both basic and
diluted), as compared to income in the same period of fiscal 1998 of $591,000,
or $0.10 per share (both basic and diluted). The decrease in income from
continuing operations in the third quarter of fiscal 1999 was due primarily to
the decrease in sales of component parts of $1,412,000 from the same period of
the prior year (see discussion below regarding net sales). Operations of the
Systems Division in the current quarter were at break-even, and management
continues to believe that the operations through final phase-out, which is
expected to be completed by the end of the fiscal year, will be break-even.
Discontinued operations relating to the Systems Division for the third quarter
of the prior fiscal year had a loss of $3,033,000 or $0.49 per share (both basic
and diluted). (See Note J to the Condensed Consolidated Financial Statements
regarding the reclassification of certain expenses from discontinued operations
to continuing operations.) Net income for the current quarter was $39,000, or
$0.01 per share (both basic and diluted) as compared to a net loss of
$2,442,000, or $0.39 per share (both basic and diluted) in the quarter ended
March 28, 1998. The improvement in net income in the current quarter is due
primarily to the Systems Division operating at break-even versus generating a
loss of $3,033,000 for the same period of fiscal 1998.
Net sales from continuing operations for the quarter ended March 27,
1999 totaled $5,423,000 as compared to $7,549,000 in the same period of the
prior year. A comparison of the net sales and revenues by major product line is
as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Components $2,867,000 $4,279,000
Fluids 467,000 545,000
Distributed products 2,089,000 2,725,000
---------- ----------
Total net sales and revenues $5,423,000 $7,549,000
---------- ----------
---------- ----------
</TABLE>
Sales of component parts for the three months ended March 27, 1999
decreased by $1,412,000, or 33%, from the same period in the prior year. The
decrease is due to primarily to the continued slow recovery of the
semi-conductor industry from which the Company generates approximately 60% of
its component sales. The decrease in fluid sales of approximately $78,000, or
14.3%, from the prior year is due to customer mix and in particular, a shift in
geographic mix to regions where pricing for audio fluid products is more
competitive. The decrease in distributed products sales by Ferrofluidics GmbH, a
subsidiary of the Company, of approximately $636,000, or 23.3%,in the current
quarter is due primarily to a change in a distribution agreement with a supplier
in fiscal 1999 which resulted in a decrease in sales of approximately $250,000
for that particular line of products (see "Distribution Agreements" below). In
addition, sales of another product line, which is the largest line of the
Company's distributed products, decreased by approximately $110,000 from the
prior year.
15
<PAGE>
Consolidated gross margins for the third quarter of fiscal 1999
amounted to 46.0% of product sales as compared to 44.4% of product sales in the
prior year's third quarter. The improvement in gross margin in the third quarter
of the current year compared to the same period in the prior year was across all
product lines. Gross margin for component parts, fluids and distributed products
increased by 9.7%, 14.7% and 8.7%, respectively, over the same period in the
prior year. The increase in gross margin in the current quarter was due to a
shift in product mix toward products with higher gross margins. However, the
Company still continues to be adversely impacted by reduced manufacturing
efficiencies resulting from lower product volume due to the lower sales.
Consolidated order bookings for the three months ended March 27, 1999
totaled $6,408,000 as compared to $7,134,000 in the same period of the prior
year. The decrease is due primarily to a decrease in components' bookings which
is consistent with the decrease in sales of components parts for the current
quarter. Bookings for the third quarter for distributed products by
Ferrofluidics GmbH decreased by 9.6% to $2,851,000 as compared to $3,154,000 in
the same quarter of fiscal 1998.
Consolidated backlog at March 27, 1999 was $7,114,000 as compared to
$8,226,000 at June 27, 1998. The backlog of orders for components and fluids
decreased from $4,335,000 at June 27, 1998 to $3,514,000 at March 27, 1999.
Backlog for distributed products decreased from $3,891,000 at June 27, 1998 to
$3,600,000 at March 27, 1999. Approximately half of the order backlog at March
27, 1999 is expected to ship in fiscal 1999.
Engineering and product development expenditures in the three months
ended March 27, 1999 totaled $505,000, a decrease of $24,000, or 4.5%, compared
to $529,000 in the same period last year. The decrease in the current quarter is
due to research and development resources being used in a one-time test market
effort for a fluids product with certain of the associated expenses being
charged to selling expense. As a percentage of revenues, engineering and product
development expenses increased from 7.0% in the March 1998 quarter to 9.3% in
the March 1999 quarter. The increase in the current quarter, as a percent of
sales, is due to the $2,126,000 decrease in sales from the third quarter of the
prior year without an equivalent decrease in expenditures.
Selling, general and administrative expenses (SG&A) for the three
months ended March 27, 1999 totaled $1,767,000, a decrease of 15.2% from the
SG&A of $2,083,000 in the same period of the prior year. The decrease is due to
cost reductions (head count reduction, reduced spending, and management salary
reductions) made at the beginning of the second quarter of fiscal 1999.
Interest expense of $62,000 for the three months ended March 27, 1999
decreased 58.7% from the $150,000 incurred during the same period in fiscal
1998. The decrease is due principally to the payoff of the Company's revolving
line-of-credit balance and the short-term promissory note in the first quarter
of fiscal 1999 with the proceeds of the Systems Division Sale (see Note D to the
Condensed Consolidated Financial Statements and the discussion below regarding
the System Division Sale).
As of December 26, 1998, the Company had remaining net operating loss
carryforwards for Federal income tax purposes of approximately $28,000,000, and
for foreign income tax purposes of approximately $2,900,000, 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 2013. 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. The tax provision for the three months ended
March 27, 1999 relates to foreign income taxes on the earnings of Ferrofluidics
GmbH.
16
<PAGE>
NINE MONTHS ENDED MARCH 27, 1999 AND MARCH 28, 1998:
In the nine months ended March 27, 1999, the Company's continuing
operations had a loss of $547,000, or $0.09 per share (both basic and diluted),
as compared to income in the same period of fiscal 1998 of $2,029,000, or $0.33
per share (both basic and diluted). The decrease in income from continuing
operations for the nine months ended March 27, 1999 was due primarily to the
$3,300,000 decrease in sales and the 12% decrease in gross margin from the same
period of the prior year. The Systems Division Sale, which occurred in the first
quarter of fiscal 1999, resulted in an estimated aggregate gain of $5,319,000,
or $0.86 per share (both basic and diluted). Discontinued operations relating to
the Systems Division for the same period of the prior fiscal year had a net loss
of $3,204,000 or $0.52 per share (both basic and diluted). (See Note J to the
Condensed Consolidated Financial Statements regarding the reclassification of
certain expenses from discontinued operations to continuing operations.) Net
income for the current period was $4,772,000, or $0.77 per share (both basic and
diluted) as compared to a net loss of $1,175,000, or $0.19 per share (both basic
and diluted), for the same period in the prior year. The increase in net income
in the current period was due to Systems Division Sale.
Net sales for the nine months ended March 27, 1999 declined to
$17,709,000 as compared to $21,016,000 in the same period of the prior year. A
product line comparison of the net sales and revenues, for the nine months ended
March 27, 1999 and March 28, 1998 is as follows:
<TABLE>
<CAPTION>
1999 1997
---- ----
<S> <C> <C>
Components $ 8,140,000 $12,259,000
Fluids 1,620,000 1,676,000
Distributed products 7,949,000 7,081,000
----------- -----------
Total net sales and revenues $17,709,000 $21,016,000
----------- -----------
----------- -----------
</TABLE>
Sales of components parts for the nine months ended March 27, 1999
decreased by $4,119,000 or 33.6% from the same period in the prior year. The
decrease is due primarily to the continued slow recovery of the semi-conductor
industry from which the Company generates approximately 60% of its component
sales. Sales of fluids remained relatively level with the same period in the
prior year while sales of distributed products increased $868,000 or 12.3% from
the same period in the prior year. The increase in distributed products was due
to strong sales of the principal product line, which increased by $1,200,000
from the same period in the prior year. The increase in sales in this product
line occurred primarily in the first and second quarters, with sales decreasing
in the third quarter of fiscal 1999 from the third quarter of fiscal 1998.
Consolidated gross margins for the nine months ended March 27, 1999
amounted to 41.2% of product sales as compared to 46.8% of product sales in the
same period of the prior year. The decline in gross margin in the current year
as compared to the same period in the prior year is due principally to the
reduced sales of components parts, which also shifted the product mix toward a
lower gross margin, and resulted in reduced manufacturing efficiencies.
Consolidated order bookings for the nine months ended March 27, 1999
totaled $18,086,000 as compared to $21,558,000 in the same period of the prior
year. The decrease is due primarily to a decrease in components' bookings which
is consistent with the decrease in sales of component parts for the current nine
month period. Bookings for distributed products by Ferrofluidics GmbH decreased
from $8,435,000 at March 28, 1998 to $7,713,000 for the current period.
Engineering and product development expenditures in the nine months
ended March 27, 1999 totaled $1,839,000, an increase of $345,000, or 23%,
compared to $1,494,000 in the same period last year. As a percentage of
revenues, engineering and product development expenses increased from 7.1% in
the nine-month period ended March 1998 to 10.4% for the current period. The
increase in the current period is due to increased labor costs as more personnel
have been added to the newly created Product Development group. Specifically,
additional costs are being incurred in connection with the Company's development
of its material separation applications and its transformer applications (the
latter in partnership with ABB Power T & D Company, Inc., a major transformer
manufacturer). The Company remains
17
<PAGE>
committed to a significant level of new product development in order to continue
to maintain its leadership in the core ferrofluid technology.
Selling, general and administrative expenses (SG&A) for the nine months
ended March 27, 1999 totaled $5,476,000, which is $287,000 or 5.0% less than the
SG&A of $5,763,000 in the same period of the prior year. In the second quarter
of fiscal 1999, the Company implemented cost reductions (head count reduction,
reduced spending, and management salary reductions) which had a favorable impact
in the second and third quarters of fiscal 1999 as compared to the same periods
in the prior year.
Interest expense of $256,000 for the nine months ended March 27, 1999
decreased 44.7% from the $463,000 incurred during the same period in fiscal
1998. The decrease is due principally to the payoff of the Company's revolving
line-of-credit balance and the short-term promissory note in the first quarter
of fiscal 1999 with the proceeds of the Systems Division Sale (see Note D to the
Condensed Consolidated Financial Statements and the discussion below regarding
the System Division Sale).
LIQUIDITY AND CAPITAL RESOURCES
Net working capital at March 27, 1999 was $16,905,000 as compared to
$8,182,000 at June 27, 1998. Current assets of the Company declined during the
nine months ended March 27, 1999, due primarily to the collection of accounts
receivable and a reduction in inventory levels, but total current liabilities
declined further, resulting in the increase in working capital. Current
liabilities decreased $15,626,000 during the nine month period ended March 27,
1999 due principally to a $9,710,000 decrease in short term borrowings. See
discussion below regarding the repayment of debt. Accounts payable also
decreased by $1,964,000 due principally to the decrease in inventory.
During the nine months ended March 27, 1999, the operations of the
Company's business provided $3,052,000 of cash, due principally to the
collection of accounts receivable and the reduction in inventories. At March 27,
1999, the Company had outstanding purchase commitments for material of
approximately $666,000, almost all of which was related to the component parts
business.
Cash flow from investing activities during the nine months ended March
27, 1999 consisted primarily of proceeds from the Systems Division Sale. In
addition, during such period, the Company sold a 300mm crystal growing system
that had been included in property, plant and equipment, at approximately book
value. Upon signing of the sales agreement for this machine, the Company
received $1,385,000 in cash with the balance of $225,000 due upon shipment of
the machine. The machine shipped at the end of April 1999 and the $225,000 was
collected in full. Financing activities of the Company during the nine months
ended March 27, 1999 included the complete paydown of all short term debt from
the cash proceeds of the Systems Division Sale (see also Note D to the Condensed
Consolidated Financial Statements and the discussion below regarding the Systems
Division Sale). In addition, in the quarter ended March 27, 1999, the Company
initiated a stock buyback program whereby up to 1,000,000 shares of the
Company's common stock may be purchased in the open market over a twelve month
period. As of March 27, 1999, the Company had repurchased a total of 40,700
shares of common stock for $118,000 and is holding such shares as treasury
stock. The consolidated results of operations for the nine months ended March
27, 1999 includes a non-cash charge of $31,000 for compensation to employees as
a result of restricted stock grants made in prior years. In the same period last
year, a charge of $283,000 was made for the same purpose.
The Company has long-term financing in the form of a $5,000,000
Variable Rate Industrial Revenue Bond ("VRIRB"). The VRIRB is subject to a
variable rate of interest keyed to short-term nontaxable rates (at March 27,
1999, 3.85%). Under an arrangement with its bank, and throughout most of the
first quarter of fiscal 1999, the Company had available to it a total credit
facility of approximately $15,400,000, which included approximately $5,400,000
in the form of a stand-by letter of credit for the Company's VRIRB, which
expires in September 1999 and carries a fee of 1% per year, an $8,500,000
revolving line-of-credit for working capital purposes, and $1,500,000 of which
was in the form of a 90 day promissory note, which bears interest at the same
rate as the revolving line of credit. In addition, the Company had
18
<PAGE>
an installment demand note with its bank that was used to finance the expansion
of its in-house machine shop. The installment note balance of $343,000 was paid
off on March 26, 1999. The entire credit facility is collateralized by
substantially all of the assets of the Company.
On September 23, 1998, the date of the Systems Division Sale, there was
approximately $7,907,000 outstanding against the revolving line-of-credit. This
amount, together with the $1,500,000 outstanding on the short-term promissory
note, was repaid from the proceeds of the Systems Division Sale (see Note D to
the Condensed Consolidated Financial Statements and the discussion below
regarding the Systems Division Sale). At the same time, the Company and the bank
agreed to reduce the availability under the revolving line of credit to
$2,000,000 to reflect the Company's reduced working capital needs after the
Systems Division Sale. The revolving line-of-credit agreement, which expired in
November 1998, is in the process of being renewed at a level which management
believes will be in line with the working capital needs of continuing
operations. It is expected that the proceeds received from the Systems Division
Sale and other cash flow (including collection of accounts receivable of the
Systems Division and completion of backlog of the Systems Division) will
significantly reduce the Company's need for short-term borrowing arrangements to
finance working capital needs in the near future. Management therefore believes
that anticipated funds from operations and the borrowing arrangements that are
expected to be put into place will be adequate to meet cash requirements for the
year ahead. There were no outstanding borrowings under the line-of-credit
agreement at March 27, 1999.
As more fully described in Note D to the Condensed Consolidated
Financial Statements, certain of the assets of the Company's Systems Division
were sold on September 23, 1998 to General Signal for $10,800,000 in cash. A
portion of the cash proceeds from this sale has been used to pay off certain
outstanding debt as of the closing of the Systems Division Sale. The Systems
Division Sale, as structured, did not include any of the Systems Division
accounts receivable or liabilities, which remained with the Company. The Systems
Division Sale also did not include the obligation to complete approximately
$18,433,000 ($1,770,000 at March 27, 1999) in Systems Division backlog, which
obligation remains with the Company, nor did it include approximately $5,873,000
($1,426,000 at March 27, 1999) in inventory on hand on the date of the Systems
Division Sale, all of which was needed to fulfill existing backlog. The terms of
the Systems Division Sale provide that, generally, any backlog existing on
December 31, 1998, will be transferred to General Signal. The remaining backlog
at March 27, 1999, however, will be completed and shipped by the Company as
agreed to by General Signal. The backlog at September 23, 1998 included a
purchase order from a customer for nine machines (valued at approximately
$7,658,000) for which the customer did not provide firm delivery dates. The
customer canceled delivery of the nine machines during the quarter ended
December 26, 1998. The Company believes that, under the terms of the purchase
order, the customer is obligated to pay the Company the costs incurred up to
cancellation of the delivery. In connection with these machines and other
orders, on September 23, 1998, the Company had inventory of approximately
$1,712,000 on hand and approximately $2,471,000 in parts on order at vendors. As
of March 27, 1999, the Company had settled almost all of its commitment with its
vendors at a cost of approximately $1,765,000. The Company and the customer are
actively negotiating a settlement of the Company's claims under this purchase
order. If the Company is unable to recover these cancellation charges from the
customer, the Company may be required to take a material write-down of the
inventory relating to the purchase order, which would require the Company to
adjust the estimated gain on disposal of the Systems Division recorded in the
first quarter of fiscal 1999.
YEAR 2000 READINESS DISCLOSURES
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is a result of computer
programs being written using two digits (rather than four) to define the
applicable year.
The Company's products in the Components and Fluids Businesses are
mechanical devices or fluids and do not contain any electronic components. The
Company's products in its Distributed Products Business include an electron beam
gun for use in vacuum deposition processes which is electronically controlled,
but includes no date-sensitive
19
<PAGE>
devices. Consequently, the Company has no need to make any changes to its
products in anticipation of the Year 2000.
Prior to the sale of the Company's Systems Division, the Division sold
products that were controlled by computerized hardware and software. The
software involved was purchased off-the-shelf, and was not customized by the
Company, and accordingly, some systems contain versions of the software that may
not be Year 2000 compliant. The Company is currently undertaking a review of
Year 2000 compliance matters as they relate to products previously sold by the
Systems Division.
The Company has sent requests to all of its principal providers of
services and component parts to advise the Company of their progress in making
their internal systems Year 2000 compliant. The Company believes it has a
sufficient base of critical component suppliers so that if any supplier is
unable to deliver parts due to Year 2000 problems, alternate sources will be
available and that any supply interruption will not be material to its
operations. There can be no assurances, however, that the Company would be able
to obtain all of its supply requirements from such alternate sources on terms
comparable with that of its current suppliers. The Company has identified one
critical service supplier (its bank), the failure of whose systems for an
extended period for any reason, including Year 2000 problems, could cause
financially material adverse consequences to the Company. The bank has provided
assurance in writing to the Company that its systems will be Year 2000
compliant.
With respect to its internal systems, the Company has undertaken an
assessment of its vulnerability to the Year 2000 issue. The Company does not
rely on electronic interaction with customers or vendors, and has in recent
years relied almost entirely on purchased off-the-shelf software packages for
both business and engineering purposes. These packages have not been materially
customized by the Company for its purposes. These software packages run on a
personal computer-based local area network which was installed by the Company in
1993, and which has been upgraded as needed since such time. 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. Systems critical to
the business which have been identified as vulnerable to the Year 2000 problem
either have been, or are being, replaced with new purchased software or
corrected by upgrades available from vendors. Outside companies such as vendors,
major customers, service suppliers, communications providers and banks are being
asked to verify their Year 2000 readiness and the Company is testing interaction
with such systems where appropriate. The assessment has been completed utilizing
the Company's existing resources. To date, the Company has incurred less than
$35,000 on efforts directed towards Year 2000 compliance (most of which was the
replacement of a software application that was primarily undertaken to improve
efficiency in sales management) and expects to incur a total of less than
$50,000 when the process of making the Company's internal systems Year 2000
compliant is completed, although there can be no assurance that this will be the
case.
The Company has concluded, based on this assessment, that all of the
Company's major business systems software is Year 2000 compliant, or will be
Year 2000 compliant by the end of calendar year 1999, and that the Year 2000
issue is not likely to have a material impact on the Company's operations.
However, there can be no assurances that the systems or software of third
parties on which the Company relies will be timely converted and the Company may
be adversely affected by the failure of such a third party to become Year 2000
compliant. The Company has not yet developed a plan to deal with this
contingency but expects to have such a plan in place by the end of fiscal 1999.
EURO CURRENCY
For the nine months ended March 27, 1999, the Company derived
approximately 57% of its revenues from continuing operations from its operations
in Germany and England. Historically, the majority of the transactions in Europe
have been denominated in a variety of currencies.
Effective January 1, 1999, 11 member countries of the European Union
established fixed conversion rates between their sovereign currencies and the
Euro and adopted the Euro as their common legal currency. During the three-year
transition, the Euro will be available for non-cash transactions and legacy
currencies will remain legal
20
<PAGE>
tender. Ferrofluidics GmbH, the Company's German subsidiary, is continuing to
address the Euro impact on its business, including the ability to handle the
conversion in the accounting and other information systems, ability of foreign
banks to report on dual currencies, the legal and contractual implications of
contracts, and reviewing pricing strategies. The Company expects that any
additional modifications to its operations and systems will be completed on a
timely basis and does not believe the conversion will have a material adverse
impact on the Company's operations. However, there can be no assurance that the
Company will be able to successfully modify all systems and contracts to comply
with the Euro requirements on a timely basis.
DISTRIBUTION AGREEMENTS
For the nine months ended March 27, 1999, Ferrofluidics GmbH derived
approximately 79% of its revenue from the sales of products under distribution
agreements with manufacturers other than the Company. The reliance on these
distribution agreements subjects Ferrofluidics GmbH to many risks, including
continuation of the agreements, geographic exclusivity and availability of
inventory. In fiscal 1999, one of Ferrofluidics GmbH's main suppliers reduced
the geographic exclusivity from continental Europe to the United Kingdom and
Spain. The reduction in distribution territory results in a decrease in sales of
$250,000. There can be no assurance that Ferrofluidics GmbH will be able to
maintain its distribution agreements at the current levels and failure to do so
would have an adverse impact on the Company's results of operations.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results for any particular quarter are
difficult to predict and may be subject to significant fluctuation. These
fluctuations can be caused by a wide variety of factors including the timing of
orders, the introduction and acceptance of new products and technologies, price
competition, general conditions and trends in the semi-conductor industry,
disruption in international markets, and general economic conditions. The
Company attempts to identify changes in market conditions as soon as possible;
however, the dynamics of the market make predictions of and timely reaction to
such events difficult. Due to the foregoing and other factors, past results,
including those described in this report, are much less reliable predictors of
the future than is the case in many more stable and less dynamic industries.
Based on the factors noted herein, the Company may experience substantial
period-to-period fluctuations in future operating results.
FORWARD-LOOKING STATEMENTS
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 results
to differ materially from those anticipated by the statements made above. These
include, but are not limited to, changes in revenues in the Company's
components, fluids and distributed products businesses, expected working capital
needs of continuing operations including the adequacy of the financing
arrangements to be put in place by the Company and its bank, a material change
in the market conditions within the semiconductor industry and, changes in
management's assessments regarding the Company's obligations under outstanding
purchase orders, ability to fulfill existing sales order backlog, the
recoverability of inventory and the ability to collect accounts receivable
relating to the discontinued Systems Division, changes in management's
estimation of operations during the phase out of the discontinued Systems
Division, the resolution of a dispute with a customer over the validity of a
purchase order relating to the discontinued Systems Division ,failure of the
Company's systems or software, or the systems or software of a third party on
which the Company relies to be Year 2000 compliant, and the ability of
Ferrofluidics GmbH to comply with the Euro requirements on a timely basis. 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.
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K
for the year ended June 26, 1998.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K:
None
22
<PAGE>
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 17, 1999 By: /s/ Paul F. Avery, Jr.
------------ ------------------------------------------
Paul F. Avery, Jr.
President, Chief Executive Officer and
Chairman of the Board
By: /s/ William B. Ford
------------------------------------------
William B. Ford
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FERROFLUIDICS CORPORATION'S CONSOLIDATED BALANCE SHEET AS OF MARCH 27, 1999 AND
FOR ITS CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY STATEMENT ON FORM 10-Q
FOR THE NINE MONTHS ENDED MARCH 27, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-29-1998
<PERIOD-END> MAR-27-1999
<CASH> 6,339,000
<SECURITIES> 0
<RECEIVABLES> 6,345,000
<ALLOWANCES> (211,000)
<INVENTORY> 9,064,000
<CURRENT-ASSETS> 21,912,000
<PP&E> 17,836,000
<DEPRECIATION> (11,477,000)
<TOTAL-ASSETS> 32,953,000
<CURRENT-LIABILITIES> 5,007,000
<BONDS> 5,000,000
0
0
<COMMON> 36,787,000
<OTHER-SE> (14,006,000)
<TOTAL-LIABILITY-AND-EQUITY> 32,953,000
<SALES> 17,709,000
<TOTAL-REVENUES> 17,709,000
<CGS> 10,408,000
<TOTAL-COSTS> 10,408,000
<OTHER-EXPENSES> 7,315,000<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256,000
<INCOME-PRETAX> (432,000)
<INCOME-TAX> 115,000
<INCOME-CONTINUING> (547,000)
<DISCONTINUED> 5,319,000<F1>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,772,000
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
<FN>
<F1>RESULTS OF OPERATIONS HAVE BEEN RECLASSIFIED TO REFLECT CERTAIN CORPORATE
EXPENSES REALLOCATED FROM DISCONTINUED OPERATIONS TO CONTINUING OPERATIONS.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FERROFLUIDICS CORPORATION'S CONSOLIDATED BALANCE SHEET AS OF MARCH 28, 1998 AND
ITS CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY STATEMENT ON FORM 10-Q
FOR THE NINE MONTHS ENDED MARCH 28, 1998.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> MAR-28-1998
<CASH> 1,335,000
<SECURITIES> 0
<RECEIVABLES> 14,003,000
<ALLOWANCES> (231,000)
<INVENTORY> 13,059,000
<CURRENT-ASSETS> 29,578,000
<PP&E> 21,489,000
<DEPRECIATION> (11,923,000)
<TOTAL-ASSETS> 45,446,000
<CURRENT-LIABILITIES> 19,530,000
<BONDS> 5,000,000
0
0
<COMMON> 36,744,000
<OTHER-SE> (16,288,000)
<TOTAL-LIABILITY-AND-EQUITY> 45,446,000
<SALES> 21,016,000<F1>
<TOTAL-REVENUES> 21,016,000
<CGS> 11,174,000
<TOTAL-COSTS> 11,174,000
<OTHER-EXPENSES> 7,257,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 463,000
<INCOME-PRETAX> 2,164,000
<INCOME-TAX> 135,000
<INCOME-CONTINUING> 2,029,000
<DISCONTINUED> (3,204,000)<F1>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,175,000)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
<FN>
<F1>RESTATED TO REFLECT THE SYSTEMS DIVISION AS DISCONTINUED OPERATIONS.
</FN>
</TABLE>
