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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended July 3, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For transition period from _________ to _________
Commission file number 1-12198
FERROFLUIDICS CORPORATION
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS 02-0275185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 SIMON STREET
NASHUA, NEW HAMPSHIRE 03061
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 883-9800
--------------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.004 per share
(Title of class)
Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [X] No [ ]
(2) Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 1, 1999, 6,226,675 shares of $.004 par value Common Stock of
the registrant were outstanding. The aggregate market value of the voting stock
held by non-affiliates of the registrant based upon the closing price of $3.50
per share for the registrant's Common Stock, as reported on the NASDAQ National
Market as of September 1, 1999 was $19,235,377.
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TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business............................................................... 3
2. Properties............................................................. 8
3. Legal Proceedings...................................................... 8
4. Submission of Matters to a Vote of Security Holders.................... 9
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters .............................................. 9
6. Selected Consolidated Financial Data .................................. 10
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 11
7A. Quantitative and Qualitative Disclosures about Market Risk............. 17
8. Financial Statements and Supplementary Data............................ 19
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................... 42
PART III
10. Directors and Executive Officers of the Registrant................... 42
11. Executive Compensation............................................... 42
12. Security Ownership of Certain Beneficial Owners
and Management.................................................... 42
13. Certain Relationships and Related Transactions....................... 42
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 42
(a) Financial Statement Schedules
(b) Reports on Form 8-K
Signatures............................................................. 47
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ITEM 1. BUSINESS
Founded in 1968, Ferrofluidics Corporation (the "Company" or
"Ferrofluidics") is engaged principally in developing, manufacturing and
marketing ferrofluids and products based on or derived from its proprietary
ferrofluid technology. Ferrofluids, the Company's core technology, are stable
magnetic liquids that can be precisely positioned or controlled with a magnetic
force. Ferrofluids consist of molecular-sized magnetic particles that are
surface treated so that they can be dispersed in various fluids, usually a
synthetic lubricating oil. Ferrofluids are designed to have a choice of
properties such as viscosity, magnetic strength and vapor pressures to perform
numerous specific functions such as sealing, sensing, lubricating, damping and
heat transfer.
The Company creates commercial applications for its ferrofluid technology
either by creating a ferrofluid to serve one or more functions in an existing
product (such as the utilization of ferrofluids in audio loudspeakers) or by
combining proprietary ferrofluid technology with applications engineering to
develop ferrofluid-based (Ferrofluidic(R)) products, such as the Company's
various sealing devices. The Company manufactures all ferrofluids for sale or
for use in its own proprietary products. With respect to its products
incorporating ferrofluids, the Company generally designs the product and then
procures from third party vendors the fabrication of all or a substantial
proportion of machined parts and components for the product. The Company
assembles, tests and ships the product from its Nashua, New Hampshire plant.
The Company seeks to apply its Ferrofluidic(R) technologies in situations
where their use significantly enhances the final product into which the
technology is incorporated. As a result, pricing reflects value added rather
than the direct cost of producing the fluid or Ferrofluidic(R) product supplied
to the Company's customers. The Company also seeks to supply markets in which it
can achieve a position of market leadership. The Company believes that it, along
with a licensee, currently supplies the vast majority of the ferrofluids and
ferrofluid-based products used in the world.
On September 23, 1998, the Company entered into an agreement with General
Signal Technology Corporation, an SPX Corporation company ("General Signal")
whereby General Signal purchased the intellectual property and certain other
assets of the Company's Crystal Growing Systems Division (the "Systems
Division") for $10,800,000 in cash on such date (the "Systems Division Sale").
The Company recorded, in fiscal 1999, an estimated gain on the Systems Division
Sale of $5,319,000. In accordance with generally accepted accounting principles,
the Company reported the results of operations of this business as discontinued
operations in fiscal 1998. The Company's consolidated financial statements for
prior periods, as well as all related footnote and financial discussions, were
restated to reflect this accounting treatment of the Systems Division in those
periods. See Note K to the Consolidated Financial Statements for additional
information about the Systems Division Sale.
The System Division Sale did not include any accounts receivable or
liabilities outstanding as of the closing of the Systems Division Sale
($6,472,000 and $2,777,000, respectively), which remained with the Company. The
Systems Division Sale also did not include the obligation by the Company to
complete backlog as of the date of the System Division Sale, and of which
approximately $1,680,000 remained to be completed at July 3, 1999. In addition,
the Company retained approximately $5,873,000 ($1,411,000 at July 3, 1999) in
inventory, all of which was needed to fulfill existing backlog.
In addition to the Systems Division Sale, the Company, in December 1998,
decided to discontinue the Component Parts business of its wholly-owned Japanese
subsidiary (Ferrofluidics Japan Corporation ("FJC")). The Company intends to
dissolve FJC in fiscal 2000. No significant gain or loss is expected from the
discontinuance of the Component Parts business and no significant income or loss
from operations of the Component Parts business of FJC occurred during fiscal
1999. The loss from the discontinuance, in September 1998, of the Systems
business at FJC has been included in the estimated gain from the Systems
Division Sale on September 23, 1998. The Company's consolidated financial
statements for prior periods, as well as all related footnote and financial
discussions, were restated to reflect this accounting treatment of the Component
Parts business of FJC.
CORPORATE STRUCTURE
The Company has its headquarters in Nashua, New Hampshire where it conducts
substantially all of the engineering and manufacturing of its products. The
Company conducts its operations overseas through the following wholly owned
subsidiaries:
(1) FERROFLUIDICS, GmbH (FORMERLY ADVANCED PRODUCTS & TECHNOLOGIES, GmbH)
("GmbH"), with headquarters in Nurtingen, Germany and sales offices in
Madrid, Spain, and Milan, Italy, which:
(a) markets and services Ferrofluidic(R) products in Europe;
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(b) designs, manufactures and markets products for the optical coating
and thin-film deposition industries such as electron beam guns and
related controllers; and
(c) serves as an exclusive distributor in Europe for several U.S. and
European corporations that manufacture products primarily for the
vacuum coating industry.
(2) FERROFLUIDICS LTD ("LTD"),with an office at Bicester (near Oxford),
England which markets and services Ferrofluidic(R) products in the United
Kingdom and Ireland, and also distributes GmbH's products as well as
products of other manufacturers to the vacuum coating and other
industries.
(3) The Company also has a wholly-owned subsidiary, FJC, which currently
conducts no business and which the Company intends to dissolve in fiscal
2000. (see Note K to the Consolidated Financial Statements).
In addition to its wholly-owned subsidiaries, the Company has licensed
its vacuum rotary feedthrough seals and ferrofluid technology, originally
on a non-exclusive basis but converted to an exclusive basis in fiscal
1999, to Ferrotec Corporation ("Ferrotec," formerly Nippon Ferrofluidics
Corporation), a former subsidiary located in Japan. In addition, under an
exclusive license granted by Ferrofluidics in August 1993, Ferrotec
manufactures and sells Ferrofluidic(R) exclusion seals for use on
computer peripheral equipment.
OPERATING STRUCTURE
Following the Sale, the Company is organized into three business segments:
(i) the COMPONENTS DIVISION, which manufactures and markets
Ferrofluidic(R) sealing devices and subsystems, primarily for use
in the semiconductor process, industrial process, lamp and fiber
optic manufacturing, and medical equipment industries.
Sales generated by the Components Division accounted for
approximately 47.9%, 57.4% and 54.3% of total product sales from
continuing operations in fiscal 1999, 1998 and 1997, respectively.
(ii) the FLUIDS DIVISION, which manufactures and markets ferrofluids
used in the Company's own engineered core products, audio
loudspeakers for the commercial, home and automotive markets, and
for use in nondestructive testing, inertia dampers, stepper motors
and sensor applications.
Sales generated by the Fluids Division accounted for approximately
9.7%, 8.1% and 10.5% of total product sales from continuing
operations in fiscal 1999, 1998 and 1997, respectively.
(iii) the DISTRIBUTED PRODUCTS DIVISION, which includes the sale in
Europe and Asia by GmbH of products on an exclusive basis for
several U.S. and European companies, as well as of products
designed and assembled by GmbH itself.
Sales generated by the Distributed Products Division accounted for
42.4%, 34.5% and 35.2% of total product sales from continuing
operations in fiscal 1999, 1998 and 1997, respectively.
In fiscal 1999, $14,463,000, or 62.5%, of the Company's sales from
continuing operations were to unaffiliated foreign customers, primarily through
GmbH. Sales to unaffiliated foreign customers in fiscal 1998 and 1997 totaled
$15,557,000 (57.2%) and $12,941,000 (54.2%), respectively.
All manufacturing and assembly of products for the Components and Fluids
Divisions are conducted at the Company's headquarters in Nashua, NH. Marketing
of those products for all markets, excluding Europe and Japan, is principally
conducted by its direct sales force at the Company's headquarters. In the case
of its standard seals to end-user markets, the Company has distribution
agreements with the Kurt J. Lesker Company ("KJLC"), a worldwide distributor of
vacuum related products, and with Varian Associates. In addition, the Company
has established distributor relationships for its ferrofluid and Ferrofluidic(R)
products in Korea, Taiwan, India, China, and developing Pacific Rim countries.
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PRODUCT LINES
Following the Systems Division Sale, the Company manufactures and sells
products in three major product categories: (i) ferrofluids; (ii) magnetic fluid
seals, sealing subsystems, and other Ferrofluidic(R) components products and
(iii) distributed products.
(i) FERROFLUIDS. The Company supplies ferrofluids for use in the
Company's own engineered products, for use in home and automotive
loudspeakers, for nondestructive testing, and for use in sensors
and stepper motors. The Company currently supplies fluids for
approximately 65 million speakers per year, representing the vast
majority of the ferrofluid sold . The Company supplies
Ferrofluidic(R) viscous inertia dampers that are used in
semiconductor equipment, disk drives testers, XY plotters,
computer printers and other computer peripheral equipment. The
dampers eliminate resonance, reduce settling time, eliminate
corrosion and improve positional accuracy.
(ii) MAGNETIC FLUID SEALS AND SUBSYSTEMS. The Company combines
proprietary ferrofluid technology with applications engineering to
develop a variety of products that provide state-of-the-art seals
and sealing subsystems that seal the environment from a
manufacturing process. In each of the applications in which the
Company provides Ferrofluidic(R) seals and sealing subsystems, it
is the leading provider of such technology products. The Company's
major magnetic sealing products are:
Rotary Seals for Critical Process Applications: Historically, one
of the Company's core commercial applications of ferrofluids is a
rotary seal assembly with long life, virtually unmeasurable
leakage and high-speed capability for transferring rotary motion
into vacuum and other highly controlled, ultra-clean process
environments. The Company supplies the semiconductor and other
process industries with low vapor pressure seal assemblies and
subsystems, which help exclude atmospheric contamination from
manufacturing processes. These applications include semiconductor
processing, electro-optical subsystems, thin-film vacuum coating,
excimer laser and x-ray-based machines. The Company produces
standard and custom-engineered sealing components and subsystems
including multiport rotary valve assemblies. Customers include
both original equipment manufacturers ("OEMs") and end users. The
selling price for the majority of such seal assemblies sold by the
Company is in the range of $500 to $25,000, with some seal
subsystems approaching $100,000, depending on design complexity.
In addition, the Company has two additional commercial
applications for its rotary seals: (a) a Lamp Process Sealing
System that is supplied to General Electric and certain other
lighting manufacturers for use as an integral part of the process
to produce energy efficient lamps for automotive, commercial and
residential lighting; and (b) a Medical X-Ray Sealing System that
is supplied to major medical equipment manufacturers for use to
rotate, seal and cool target anodes inside the x-ray vacuum
chamber of computer aided tomography scan equipment.
Industrial Process Seals: The Company's industrial process seals
eliminate volatile organic compounds and volatile hazardous air
pollutants from petroleum refining and chemical processing plants.
Using this magnetic fluid sealing technology, these facilities can
comply cost-effectively with the strictest regulations, which
mandate decreasing "fugitive emissions" (as they are referred to
under the Federal Clean Air Act of 1990 and its Amendments of
1990) according to a phased program over the next few years and
are subject to acceleration by certain state and local
authorities. During fiscal 1997, a new series of gas tight seals
(GT-6) for the industrial market was introduced. This product
series is targeted at industrial fans, blowers, and other
low-pressure gas handling devices where emissions control and
process contamination are critical. Other products within the GT
family will be introduced periodically and target other equipment
such as compressors, centrifuges, mixers, agitators and pumps. The
GT-6 product has received certification from TA Luft, the German
air quality authority.
Subsystems: As an extension of its core capability to design and
manufacture rotary seals for a variety of vacuum processing
applications, the Company sells sealing sub-systems to OEMs, which
incorporate existing Ferrofluidic(R) sealing technology with other
mechanical and electrical components to produce a fully integrated
sub-system. Sub-systems allow the Company's customers to outsource
more of their manufacturing without compromising quality. Some of
the new opportunities include robotics, cluster tooling, and other
semiconductor processing sub-assemblies.
The Company continues to develop equipment and process
technologies in several other areas in cooperation with major
industrial companies and specific product specialists.
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(iii) DISTRIBUTED PRODUCTS. For more than ten years, GmbH has been the
exclusive distributor for the products of IGC-Polycold Systems
Inc. in most European countries: Austria, Belgium, Denmark,
Germany, Netherlands, Italy, Liechtenstein, Luxembourg, Portugal,
Spain and Switzerland.
The product spectrum covers a wide range of cryogenerators which
are used to capture water vapor or vacuum pump oil in high vacuum
deposition systems by cryocondensation. This system supplements
the high vacuum pumping system which results in an increased
productivity of the vacuum deposition system and a better product
quality. Significant operations cost savings and short payback
times are achieved.
Polycold cryogenerators have developed into a standard component
in most industrial vacuum applications, including coatings on
glass, plastic and other materials used in the automotive,
housing, optical computer and other industries. A variety of
non-vacuum applications includes the cooling of chucks in
semiconductor production systems, selective cryotrapping of
volatiles, testing of materials at low temperatures and detector
cooling.
As almost all Polycold cryogenerators are used in industrial
production where high reliability of the equipment is required. To
meet the customers' demands, GmbH maintains inventories of spare
parts in several locations in Europe, offers service contracts
with a 24 hour reaction time, and provides service and maintenance
training for customer repair personnel.
Electron Beam Products: The Company manufactures and distributes
products for thin film deposition by means of electron beam
technology through GmbH in Germany. The product range includes
electron beam evaporators for use in both R&D and production
oriented vacuum systems and state-of-the-art high voltage power
supplies and controllers. The Company supplies end users and
original equipment manufacturers in the thin-film vacuum coating
industry with electron beam subsystems and components which can be
easily integrated in new vacuum systems or retrofitted into
existing systems. The applications include optical and ophthalmic
coating as well as semiconductor processing.
Thin Film Products: The Company also distributes products for the
thin-film coating industry in Europe from various American
manufacturers. The Company supplies sputtering cathodes from
Angstrom Sciences, Inc. as well as sputtering materials from
Target Materials, Inc. through GmbH. The products are used in the
photovoltaic, wear coating, flat panel display, and semiconductor
industries.
COMPETITION
The Company believes that its competitive advantage will continue to depend
upon its trade secrets, know-how and ability to develop both ferrofluids for
specific applications and technologically advanced products which use
ferrofluids. The Company believes that its competitive position with respect to
its proprietary products, while aided by its patents, is not now materially
dependent upon them. The Company does, however, believe that several of its
pending patents, if issued, could further strengthen its competitive position.
The Company's ferrofluids are proprietary to the Company.
(i) MAGNETIC FLUIDS. Numerous other companies around the world supply various
forms of magnetic fluids for commercial applications. Nevertheless, the
Company, in conjunction with Ferrotec, its Japanese licensee and former
subsidiary, supplies the vast majority of the world's commercial
applications of ferrofluids and believes that its ferrofluids are the
principal product used in applications utilizing magnetic fluids. The
Company believes its principal competitor in the audio ferrofluid market
is Ferrotec with respect to sales in the Pacific Rim.
(ii) SEALS AND SEALING SUBSYSTEMS. In semiconductor and other process industry
applications, the Company's magnetic fluid sealing devices and sealing
subsystems compete against traditional, non-ferrofluid based sealing
methods marketed by other vendors, some of which have lower initial cost
than the Company's products. In comparison to the Company, some of these
firms have greater financial, marketing, technical or other resources
available to them. In the Pacific Rim, the Company's licensee competes
with other suppliers of magnetic fluid seals, and one Japanese competitor
sells feedthroughs in the United States. In addition, the Company has a
significant competitor in the United Kingdom which competes throughout
Europe.
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In industrial process applications, Ferrofluidics' sealing system
competes with various nonmagnetic fluid sealing devices and sealing
subsystems; however, the Company believes that the competitive devices
are either more expensive or have higher maintenance costs and are not
adequate at the stricter compliance levels mandated by the EPA.
EMPLOYEES AND MARKETING
The Company currently has approximately 143 employees worldwide, of which 97
are employed in the United States and 46 in Europe.
In the United States, the Company markets its products through a direct
field sales force and an applications engineering staff with headquarters in
Nashua, NH which is augmented by a third-party sales representative organization
in the U.S and Europe with respect to its Components business. Abroad, products
are sold in Europe through GmbH, the Company's wholly-owned German subsidiary,
and elsewhere in Europe and Asia through various sales representative and
distributor relationships.
MANUFACTURING
The Company produces all of its ferrofluids at its headquarters, and, to
protect the proprietary nature of its ferrofluid technology, conducts such
activities in a limited-access environment. The Company's manufacturing
presently consists primarily of assembly and test operations, although it has
in-house precision machining capabilities in the United States in support of
special marketing and customer requirements. The Company's manufacturing
operations rely substantially on outside vendors who fabricate components and
subassemblies to the Company's specifications. These components are assembled at
the Company's facilities and subjected to the Company's rigorous test and
inspection procedures. The Company does however, have a state-of-the-art
machining center, established in 1996, which has proven to be critical in the
ability to meet ever shortening lead times for delivery of component products to
customers.
OUTSIDE SUPPLIERS
With respect to its sealing devices, the Company relies on outside suppliers
to manufacture, to the Company's specifications, a substantial portion of its
metal components requirements. The Company performs assembly and quality control
procedures at its headquarters. If the Company's current suppliers were unable
to continue to manufacture components, the Company believes that other suppliers
would be available to do such work, although there is no guarantee that the
Company would be able to obtain all of its supply requirements from such other
suppliers on terms comparable to those of its current suppliers. The in-house
machining center supplies a portion of the Company's need for precision machined
component parts, reducing its reliance on outside suppliers. It is not, however,
the intent of management to conduct all of the component production in-house.
INTELLECTUAL PROPERTY RIGHTS
The Company owns a number of U.S. and foreign patents for its seals, dampers
and bearings, with expiration dates ranging up to 2016. In addition, the Company
has applied for additional patents for these and other products. In many cases,
however, the Company relies more upon its trade secrets, know-how and ability to
develop technological advances than patents to protect its technologies and
products.
The Company has registered trademarks for a logo design utilizing an "F" and
for Ferromedic, Ferrofluidic, FerroSound, FerroSound-The solution is loud and
clear, FerroMotion, FerroDamp, FerroStep, and Spin Technology.
INTERNAL RESEARCH AND DEVELOPMENT
The Company's internal research and development effort is aimed at
developing proprietary ferrofluids and using the unique properties of magnetic
fluid technology to develop new products and business. In addition, GmbH, the
Company's German subsidiary conducts a research and development effort aimed at
improving and expanding its electron beam gun products. The Company spent (and
charged to expense) $1,373,000, $890,000 and $685,000 in fiscal years 1999, 1998
and 1997, respectively, on the development of new products and the improvement
of existing products.
All research is Company-directed and is conducted primarily by employees of
the Company or its subsidiaries. The Company's research and development is
carried out by an interdisciplinary group of product development engineers,
physicists, chemists, technicians and marketing professionals who seek to apply
ferrofluid technology in diverse and expanding markets where that
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technology adds a significant value. The Company is experimenting with new
ferrofluids and seals for higher speed and higher vacuum applications for new
and existing markets.
BACKLOG
As of July 3, 1999, the Company had a consolidated order backlog from
continuing operations of $6,536,000, as compared to $8,226,000 at June 27, 1998.
A comparative summary of the consolidated backlog by business segment is as
follows:
1999 1998
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Components $3,473,000 $3,670,000
Distributed Products 2,631,000 3,891,000
Fluids 432,000 665,000
---------- ----------
Total Backlog $6,536,000 $8,226,000
========== ==========
A majority of the backlog at July 3, 1999 is expected to ship
during fiscal 2000.
WARRANTY POLICY
With respect to sales of seals to the semiconductor and other industries for
controlled environment applications, the Company offers a one-year warranty.
Warranty expenses have been within the reserves established by the Company.
With respect to the Company's former Systems Division, the Company generally
offered a one-year warranty as to workmanship and materials from date of
acceptance by the customer. Warranty expenses have historically been within the
reserves established by the Company.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information with respect to the Company's industry segments is
hereby incorporated by reference to Note I to the Consolidated Financial
Statements in Item 8 of this report.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Financial information about the Company's foreign and domestic operations
and export sales is hereby incorporated by reference to Note I of Notes to the
Consolidated Financial Statements in Item 8 of this report.
ITEM 2. PROPERTIES
The Company's offices, engineering and manufacturing operations are located
in Nashua, New Hampshire in a 71,000 square foot facility situated on
approximately 4.5 acres of land owned by the Company. This land, the building,
and substantially all the Company's machinery and equipment at its Nashua
facility have been pledged as security for its short and long term debt. (See
Notes A and D to the Consolidated Financial Statements in Item 8.) In May 1999,
the Company leased approximately 10,000 square feet of the former Systems
Division floor space in its headquarters office in Nashua to an unaffiliated
company. The operating lease expires in May 2002.
The Company and its subsidiaries lease office space, aggregating
approximately 15,000 square feet, under varying terms in Oxford, England;
Nurtingen, Germany; Madrid, Spain; and Milan, Italy.
ITEM 3. LEGAL PROCEEDINGS
None
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year ended July 3, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Ferrofluidics' Common Stock is traded on the NASDAQ National Market under
the stock symbol "FERO". The following table sets forth the high and low closing
transactions for the Common Stock of the Company for the fiscal periods
indicated, as reported by the NASDAQ National Market.
1999 High Low
---- ---- ---
7/1/98 - 9/30/98 4 7/8 2 5/8
10/1/98 - 12/31/98 3 13/16 2
1/1/99 - 3/31/99 3 13/16 2 1/2
4/1/99 - 6/30/99 4 9/16 2 1/2
1998 High Low
---- ---- ---
7/1/97 - 9/30/97 8 7/8 5 7/8
10/1/97 - 12/31/97 7 13/16 4 5/8
1/1/98 - 3/31/98 6 7/16 4 5/8
4/1/98 - 6/30/98 5 11/16 3 1/8
On September 1, 1999, the closing sale price for the Company's Common Stock,
as reported by the NASDAQ National Market, was $3.50. On that date, there were
approximately 2,237 holders of record of the Common Stock of the Company.
DIVIDEND POLICY
The Company does not pay cash dividends on its Common Stock. Its policy is
to retain earnings and use funds for the operation and expansion of its
business. Future dividend policy will be determined by the Board of Directors
based upon the Company's earnings, financial condition and capital requirements.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the five years ended July 3,
1999, should be read in conjunction with the Consolidated Financial Statements,
including the notes thereto, in Item 8 of this report and with Management's
Discussion and Analysis of Financial Condition and Results of Operations in Item
7 of this report.
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------
July 3, 1999 June 27, 1998(b)(c) June 28, 1997(b)(c) June 30, 1996(b)(c)
------------ ------------------- ------------------- -------------------
Income Statement Data:
- ----------------------
<S> <C> <C> <C> <C>
Net sales $35,323,000 $52,700,000 $67,785,000 $72,967,000
Net sales from continuing operations 23,143,000 27,204,000 23,856,000 26,807,000
Nonrecurring operating income -- -- -- --
Income (loss) from continuing operations (476,000) 1,546,000 260,000 342,000
Income (loss) from discontinued 5,319,000 (5,018,000) 1,412,000 3,478,000
operations
Net income (loss) 4,843,000 (3,472,000) 1,672,000 3,820,000
Per Share Data:
Earnings Per Common Share-Basic:
Income (loss) from continuing (0.08) 0.25 0.04 0.06
operations
Income (loss) from discontinued 0.87 (0.81) 0.23 0.57
operations
Net income (loss) 0.79 (0.56) 0.27 0.63
Earnings Per Common Share-Diluted:
Income (loss) from continuing (0.08) 0.25 0.04 0.05
operations
Income (loss) from discontinued 0.87 (0.81) 0.23 0.56
operations
Net income (loss) 0.79 (0.56) 0.27 0.61
Balance Sheet Data:
Working capital $15,095,000 $ 8,182,000 $13,323,000 12,350,000
Total assets 28,923,000 44,019,000 45,001,000 43,429,000
Total liabilities 8,394,000 25,818,000 23,420,000 23,727,000
Long-term debt 5,000,000 5,000,000 5,000,000 5,000,000
Stockholders' equity 20,529,000 18,201,000 21,581,000 19,702,000
Fiscal Years Ended
------------------
June 30, 1995(b)(c)
-------------------
Income Statement Data:
- ----------------------
Net sales $34,155,000
Net sales from continuing operations 22,152,000
Nonrecurring operating income 1,156,000
Income (loss) from continuing operations 2,639,000
Income (loss) from discontinued (1,750,000)
operations
Net income (loss) 889,000
Per Share Data:
Earnings Per Common Share-Basic:
Income (loss) from continuing 0.47
operations
Income (loss) from discontinued (0.31)
operations
Net income (loss) 0.16
Earnings Per Common Share-Diluted:
Income (loss) from continuing 0.47
operations
Income (loss) from discontinued (0.31)
operations
Net income (loss) 0.16
Balance Sheet Data:
Working capital $ 7,811,000
Total assets 39,529,000
Total liabilities 23,748,000
Long-term debt 5,036,000
Stockholders' equity 15,781,000
</TABLE>
Note: (a) Dividends have neither been declared nor paid during the five years
ended July 3, 1999.
(b) Certain amounts for fiscal years 1998, 1997, 1996 and 1995 have
been restated to reflect the discontinuance of the Component Parts
business of FJC as discontinued operations.
(c) Certain amounts for fiscal years 1998, 1997, 1996 and 1995 have
been reclassified to conform with the presentation of similar
amounts in fiscal year 1999.
10
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides information to assist in the understanding
of the Company's results from continuing operations, unless otherwise noted, and
financial condition. As described in Item 1, 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. See Note K to the Consolidated Financial Statements for
more information regarding the Systems Division Sale. In addition to the Systems
Division Sale, in December 1998, management also decided to discontinue the
Component Parts business of its wholly-owned Japanese subsidiary, FJC. 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 and the Component Parts business of FJC as discontinued
operations and that the Company's Consolidated Financial Statements for fiscal
1999 and prior periods, as well as all related footnotes, have been revised to
reflect this accounting treatment of the Systems Division and the Component
Parts business of FJC in those periods. It should be read in conjunction with
the selected financial data in the preceding section and the consolidated
financial statements and notes thereto that appear elsewhere herein.
RESULTS OF OPERATIONS
FISCAL 1999 VERSUS FISCAL 1998:
In fiscal 1999, the Company's consolidated net revenues decreased to $23,143,000
from $27,204,000 in fiscal 1998. The changes in revenues by segment are shown in
the following table:
1999 1998
----------- -----------
Components $11,096,000 $15,626,000
Distributed Products 9,810,000 9,390,000
Fluids 2,237,000 2,188,000
----------- -----------
Total Revenues $23,143,000 $27,204,000
=========== ===========
Sales in the Components product lines decreased primarily due to the continued
slow recovery of the semi-conductor industry from which the Company generates
approximately 30% of its component sales. In the Distributed Products business
segment, sales of components and power supplies for the thin film deposition
industry contributed to the increase in sales. Sales of magnetic fluids
increased by approximately 2% over the prior year; however, on a volume basis,
unit sales in fiscal 1999 increased by 27% over 1998. Heavy competition in the
audio fluid business, particularly in Asia, resulted in a significant decrease
in the per unit sales price.
Total sales of the Company's wholly-owned German subsidiary, GmbH, which
includes the sale of the Company's components and fluid products in Europe, as
well as comprising the Distributed Products segment, decreased in fiscal 1999 by
6.0% to $12,966,000 as compared to $13,801,000 in fiscal 1998. The decrease was
primarily in the Ferrofluidic(R) product lines sold in the United Kingdom ("the
U.K.") which was caused by a decrease in sales to its largest customer in the
U.K. due to the slow-down in the semi-conductor market in the U.K.
Bookings decreased from $31,263,000 in fiscal 1998 to $23,850,000 in fiscal
1999. The decrease is due primarily to a decrease in components bookings which
is consistent with the decrease in sales of component parts for fiscal 1999.
Bookings for magnetic fluid sales for 1999 were $2,510,000, as compared to
$2,758,000 for 1998. The decrease was due to competitive pricing pressure in the
Asian marketplace. Order backlog at the end of fiscal 1999 was $6,536,000, as
compared to the backlog in the prior year of $8,226,000. The majority of the
order backlog at the end of fiscal 1999 is expected to ship in fiscal 2000.
Consolidated gross margin for fiscal 1999 was 41.4%, a decrease from 45.0%
in fiscal 1998. The decrease in gross margin in the current year was due
principally to the reduced sales of component parts, which shifted the product
mix toward a lower gross margin, and resulted in reduced manufacturing
efficiencies.
Engineering and product development expenses in fiscal 1999 totaled
$2,387,000, an increase of $410,000, or 20.7%, compared to $1,977,000 spent in
fiscal 1998. As a percentage of revenues, engineering and product development
expenses increased from 7.3% in fiscal 1998 to 10.3% for fiscal 1999. The
increase in fiscal 1999 was due to increased labor costs as more personnel have
been added to the newly created New Business Development group. Specifically,
additional costs are being incurred in connection with the Company's development
of its material separation applications and its transformer applications
11
<PAGE> 12
(the latter in collaboration with ABB Power T&D Company, Inc., a major
transformer manufacturer). The Company remains committed to a significant level
of new product development in order to continue to maintain its leadership in
the core ferrofluid technology. Engineering and product development expenses
have been allocated between continuing operations and discontinued operations on
the basis of the amounts actually spent by each Division.
Selling, general and administrative ("SG&A") expenses in fiscal 1999 totaled
$7,182,000, which is $917,000 or 11.3% less than the $8,099,000 incurred in 1998
but, as a percent of revenues, SG&A increased from 29.8% in 1998 to 31.0% in
1999. Selling and marketing costs decreased by $648,000, due in part to a
$321,000 decrease in selling expenses at GmbH which was the result of the
closure of the sales office in France in fiscal 1998. GmbH now uses sales
representatives in France to sell its products. The remaining decrease in
selling expenses was due primarily to cost reductions (head count reduction and
reduced spending) made in the second quarter of fiscal 1999 which had a
favorable impact on operations. Administrative expenses accounted for the
remainder of the decrease, which was due primarily to a decrease in
restructuring charges of $263,000 in fiscal 1999. In fiscal 1998, the Company
had a significant layoff in March 1998, which resulted in severance costs of
$383,000. Although the Company had layoffs in fiscal 1999, the severance
payments ($120,000) were not as large as in fiscal 1998. Other expenses have
been charged to continuing operations and discontinued operations on the basis
of the actual amounts incurred on behalf of the respective divisions.
Net interest expense in fiscal 1999 was $128,000, a decrease of $473,000
from net interest expense incurred in fiscal 1998. The decrease is due to the
payoff of all short-term debt in fiscal 1999 with the proceeds from the Systems
Division Sale (see Note K to the Consolidated Financial Statements regarding the
Systems Division Sale). Net interest expense and other bank charges and fees
have been allocated between continuing operations and discontinued operations on
the basis of the net identifiable assets used in those operations. See Note D to
the Consolidated Financial Statements for a more complete discussion of the
Company's debt obligations.
The Company records transaction gains and losses resulting from fluctuations
of foreign currency as other income or expense. During fiscal 1999, $21,000 of
net foreign currency transaction gains were recorded as compared to a net gain
of $13,000 in fiscal 1998. The gains in 1999 and 1998 were generated by the
Company's wholly-owned German subsidiary, GmbH, on sales to foreign countries in
currencies other than its functional currency (the German Mark). The translation
of the financial statements of subsidiaries whose functional currency is other
than the U.S. dollar are recorded directly to equity as other comprehensive
income (loss).
The income tax expense of continuing operations in 1999 and 1998 of $350,000
and $74,000, respectively, is comprised of a provision for foreign income taxes
on the Company's earnings. Due to the continued uncertainty surrounding the
Company's ability to realize the benefit of the deferred tax asset, a valuation
allowance in the amount of $11,210,000 is reflected at July 3, 1999. See Note C
to the Consolidated Financial Statements for a more complete discussion of
income taxes.
The Company recorded an estimated gain on disposal of discontinued
divisions, net of taxes, of $5,319,000 in 1999. The loss from operations of the
discontinued divisions, net of income taxes, was approximately $5,018,000 for
1998.
FISCAL 1998 VERSUS FISCAL 1997:
In fiscal 1998, the Company's consolidated net revenues increased to $27,204,000
from the $23,856,000 reported in fiscal 1997. The changes in revenues by segment
are shown in the following table:
1998 1997
----------- -----------
Components $15,626,000 $12,957,000
Distributed Products 9,390,000 8,409,000
Fluids 2,188,000 2,490,000
=========== ===========
Total Revenues $27,204,000 $23,856,000
=========== ===========
Sales in the Components product lines increased due primarily to the upturn in
semiconductor equipment manufacturing that began in the fourth quarter of fiscal
1997, and from a significant increase in sales of rotary feedthrough seals in
Europe primarily in non-semiconductor markets. In addition, the recently
introduced line of industrial gas tight seals also contributed to the increase
in sales in fiscal 1998. In the Distributed Products business segment, sales of
components and power supplies for the thin film
12
<PAGE> 13
deposition industry contributed significantly to the increase. Sales of magnetic
fluids decreased by 12% from the prior year as heavy competition in the audio
fluid business, particularly in Asia, prevented a significant sales increase.
Total sales of the Company's European subsidiary, GmbH, which includes the
sale of the Company's components and fluid products in Europe, as well as
comprising the Distributed Products segment, increased by 15.2% to $13,801,000
as compared to $11,979,000 in fiscal 1997. The increases were in both the
Ferrofluidic(R) product lines and in the distributed products.
Bookings increased from $26,595,000 in fiscal 1997 to $31,263,000 in fiscal
1998. This increase was both in Distributed Products and in rotary feedthrough
seals. Bookings for magnetic fluid sales for 1998 were $2,758,000, which is
slightly higher than the $2,542,000 for 1997. Order backlog at the end of fiscal
1998 was $8,226,000, as compared to the backlog in the prior year of $7,207,000.
The majority of the order backlog at the end of fiscal 1998 shipped in fiscal
1999.
Consolidated gross margin for fiscal 1998 was 45.0%, a decrease from the
49.5% reported in fiscal 1997. The decrease in margin was due to decreases in
margin in the magnetic fluids product line and in the Company's European
operations, which in turn was due to pricing pressures.
Engineering and product development expenses in fiscal 1998 were $1,977,000,
which is comparable to the $1,907,000 spent in fiscal 1997. Engineering and
product development expenses have been allocated between continuing operations
and discontinued operations on the basis of the amounts actually spent by each
Division.
Selling, general and administrative ("SG&A") expenses in fiscal 1998 were
$8,099,000, which is $1,470,000 or 15.4% less than the $9,569,000 incurred in
1997 and, as a percent of revenues, decreased from 40.1% in 1997 to 29.8% in
1998. Selling and marketing costs decreased by $1,998,000, due primarily to a
$872,000 decrease in selling expenses at GmbH which was the result of
restructuring efforts undertaken in late fiscal 1997. Administrative expenses
accounted for the remainder of the decrease, which was due in part to decreases
in legal costs ($278,000) and insurance ($260,000). Other expenses have been
allocated between continuing operations and discontinued operations on the basis
of the actual amounts incurred on behalf of the respective divisions.
Net interest expense in fiscal 1998 was $601,000, an increase of $178,000
from net interest expense incurred in fiscal 1997. The increase is due to higher
average borrowings under the Company's line-of-credit agreement. Net interest
expense and other bank charges and fees have been allocated between continuing
operations and discontinued operations on the basis of the net identifiable
assets used in those operations. See Note D to the Consolidated Financial
Statements for a more complete discussion of the Company's debt obligations.
The Company records transaction gains and losses resulting from fluctuations
of foreign currency as other income or expense. During fiscal 1998, $13,000 of
net foreign currency transaction gains were recorded as compared to a net gain
of $5,000 in fiscal 1997. The gains in 1998 and 1997, were incurred by the
Company's German subsidiary on sales to foreign countries in currencies other
than its functional currency (the German Mark). The translation of the financial
statements of subsidiaries whose functional currency is other than the U.S.
dollar are recorded directly to equity as other comprehensive income (loss).
The income tax expense in 1998 of $74,000 is comprised of a provision for
foreign income taxes on the Company's earnings. The income tax benefit of
$448,000 in 1997 consisted principally of a tax benefit of $467,000 recorded in
the fourth quarter of 1997 which represents a reduction in the valuation
allowance against deferred tax assets. See Note C to the Consolidated Financial
Statements for a more complete discussion of income taxes.
Income (loss) from discontinued operations, net of income taxes, was
approximately $(5,018,000) for 1998 as compared to $1,412,000 for 1997.
LIQUIDITY AND CAPITAL RESOURCES
The discussion in this section reflects both continuing and discontinued
operations.
In fiscal 1999, the operations of the business provided $7,006,000 of cash,
as compared to using $9,000 of cash in 1998. For fiscal 1999, the net income of
$4,843,000 was augmented by decreases in accounts receivable, inventories and
prepaids and other current assets of $8,144,000, $4,684,000 and $1,236,000,
respectively. The aforementioned decreases in assets were partially offset by
decreases in accounts payable and accrued liabilities and customer deposits of
$4,834,000 and $2,778,000, respectively.
13
<PAGE> 14
The cash requirements for 1998 were financed primarily from borrowings under the
Company's revolving line of credit. The Company typically received advance
payments from the sale of crystal growing systems under large multi-unit
contracts as certain milestones were met, including receipt of the order,
submission of accepted engineering drawings, shipment and final acceptance of
the units. As a result of the Systems Division Sale in September 1998, no new
customer orders were received in fiscal 1999, whereas, in 1998, the Company
received advance payments of $4,196,000, in connection with orders for crystal
growing systems. The Company has purchase contracts for inventory with various
suppliers which, in some cases, extend beyond two years. At July 3, 1999,
outstanding purchase commitments pursuant to these contracts totaled
approximately $1,244,000, almost all of which were related to the component
parts business.
Cash flow from investing activities for fiscal 1999 consisted primarily of
proceeds of $10,800,000 from the Systems Division Sale. In addition, during
fiscal 1999, the Company sold a 300mm crystal growing system that had been
included in property, plant and equipment, at its approximate book value of
$1,610,000. Financing activities of the Company during fiscal 1999 included the
complete paydown of all short-term debt from the cash proceeds of the Systems
Division Sale (see also Note K to the Consolidated Financial Statements and the
discussion below regarding the Systems Division Sale). In addition, in fiscal
1999, the Company initiated a stock buyback program pursuant to which 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 August 20, 1999, the Company had
repurchased a total of 652,498 shares of common stock for $2,628,633 and is
holding such shares as treasury stock. The consolidated results of operations
for fiscal 1999 and 1998 includes a non-cash charge of $31,000 and $287,000,
respectively, for compensation to employees as a result of restricted stock
grants made in prior years.
The ratio of current assets to current liabilities was 5.5 to 1 at July 3,
1999, which is up from 1.4 to 1 at June 27, 1998. Working capital at July 3,
1999 increased to $15,095,000 from $8,182,000 at June 27, 1998. Current assets
decreased, principally due to lower accounts receivable, inventories and
advances to suppliers as the Systems Division backlog was completed and
receivables collected. The decrease in receivables resulted in a small
improvement in receivable turnover in 1999 from 4.1 times in 1998 to 4.4 times
in 1999. Although inventories decreased significantly in fiscal 1999, inventory
turnover actually decreased slightly from 2.7 times annual consumption in 1998
to 2.4 times in 1999.
Capital expenditures on a consolidated basis totaled $969,000 in fiscal
1999, as compared to $2,399,000 in fiscal 1998. The spending in both years
consisted primarily of improvements to the Company's Nashua, NH facility, and,
in 1998, included the construction of a 300mm machine and the replacement of two
old and outdated lathes in the Company's in-house machine shop. Other spending
included modifications to the manufacturing facility and upgrades to computer
equipment and software, primarily for engineering purposes. Also, during 1998,
the Company spent approximately $1,500,000, not including engineering costs
which have been expensed, on the construction of a 300mm machine for
demonstration purposes. As discussed above, on September 21, 1998, the Company
sold this machine and certain optional equipment for approximately book value.
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 (4.02% at July 3, 1999), the
proceeds of which were primarily used to fund the construction of the Company's
Nashua, NH headquarters. The VRIRB is payable in full on September 1, 2004. The
Company also had a credit facility with its bank which provided the Company with
total credit of approximately $15,400,000, $5,400,000 of which was in the form
of a stand-by letter of credit for the Company's VRIRB, $8,500,000 of which was
a revolving line of credit for working capital purposes and $1,500,000 of which
was in the form of a 90-day promissory note. The Company used a portion of the
cash proceeds from the Systems Division Sale to pay off the entire $7,907,000
balance of the line of credit and the entire $1,500,000 balance of the
promissory note outstanding at September 23, 1998. In connection with the
Systems Division Sale, the Company and its bank agreed to reduce the maximum
borrowings under the line of credit agreement from $8,500,000 to $2,000,000. See
Note K to the Consolidated Financial Statements for a more complete discussion
of the Systems Division Sale. As of June 30, 1999, the bank has agreed to renew
the line of credit agreement at a level of $2,500,000. The line will expire on
November 30, 1999. The stand-by letter of credit of $5,400,000 expires in August
2000. The letter of credit carries a fee of 1% per year and the revolving credit
facility will bear interest at prime rate plus .75% (8.5% at July 3, 1999) with
a fee of 1/8% on the unused portion. At July 3, 1999, there were no borrowings
under the revolving line of credit.
During 1996, the Company borrowed $800,000 in the form of an installment
demand note with its bank, to finance the capital expansion of its in-house
machine shop. The note bore interest at 9.75% and was scheduled to expire in
January 2001. In March 1999, the then outstanding balance of $343,000 was paid
off. In addition, the Company, through its wholly owned foreign subsidiaries,
has various short-term financing arrangements with local banks totaling
approximately $280,000 at July 3, 1999. During 1999, the maximum outstanding
borrowing on these foreign credit lines was $140,000. The weighted-average
interest rates during the year on these facilities ranged from 6.71% to 24.0%
and the interest rates at July 3, 1999 ranged from 6.25% to 24.0%.
14
<PAGE> 15
As described in Item 1, 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 (the "Systems Division Sale"). Assets sold included approximately
$2,818,000 in inventory, and approximately $625,000 in fixed assets and
intangibles. 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 income taxes of $1,400,000, the Company
recorded a gain on the Systems Division Sale of $5,319,000 during fiscal 1999.
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 period from September 27, 1998 to July 3, 1999, the Systems
Division's operations were approximately break-even. The Company also
anticipates approximately break-even operations for the Systems Division through
the end of the phase-out period which is expected to end on or about October 2,
1999. As discussed above, a portion of the cash proceeds from this Systems
Division Sale had 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 by the Company to complete approximately $18,433,000 ($1,680,000
at July 3, 1999) in Systems Division backlog, or approximately $5,873,000
($1,411,000 at July 3, 1999) in inventory on hand on the date of the Systems
Division Sale, all of which was needed to fulfill such 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 July
3, 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. On December 26, 1998, the customer
canceled delivery of the nine machines. 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.
Prior to June 15, 1999, the Company had settled almost all of its commitments
with its vendors at a cost of approximately $1,765,000, which had been
considered in calculating the estimated gain on disposal of the Systems Division
reflected during the first quarter of fiscal 1999. On June 15, 1999, the Company
and its customer negotiated a settlement with respect to the canceled delivery
of the nine machines, which settlement had no adverse financial impact to the
Company. The remaining backlog at July 3, 1999 of $1,680,000 is planned to be
completed and shipped in the first quarter of fiscal 2000.
The Systems Division Sale did not include approximately $6,472,000 ($210,000
at July 3, 1999) in accounts receivable which were outstanding as of the closing
of the Systems Division Sale. The Company believes that it will be able to
collect the remaining $210,000 of these receivables within established reserves,
but there can be no assurance that the Systems Division Sale has not adversely
affected their collectibility. See Note K to the Consolidated Financial
Statements for a more complete discussion of discontinued operations.
The proceeds received from the Systems Division Sale and other cash flow
have significantly reduced the Company's need for short-term borrowing
arrangements to finance working capital needs in the near future. Management,
therefore, believes that available cash, anticipated funds from operations and
the current borrowing arrangements will be adequate to meet cash requirements
for the year ahead.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted for all
fiscal quarters of all fiscal years beginning after June 15, 2000, as amended.
The Statement permits early adoption as of the beginning of any fiscal quarter
after its issuance. The Company expects to adopt the new Statement effective for
fiscal 2001 (beginning on July 2, 2000). The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If a
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset against the change in fair value
of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not anticipate that the
adoption of this Statement will have a significant effect on its results of
operations or financial position.
EFFECTS OF INFLATION
Inflation rates over the past three years have remained relatively low and,
as a result, have not had a material impact on the financial results of the
Company.
15
<PAGE> 16
YEAR 2000
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 is Year 2000 compliant. Consequently, the Company has no need to make any
changes to its products in anticipation of the Year 2000.
Prior to the Systems Division Sale, 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 has made no express warranties with respect to Year 2000
compliance in connection with such products.
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 now are 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 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. Systems critical to the
business which have been identified as vulnerable to the Year 2000 problem have
been replaced with new software or corrected by upgrades available from vendors.
The Company is currently in the process of making all other non-critical systems
Year 2000 compliant and the Company anticipates that this will be done by the
end of November 1999. Outside companies such as vendors, major customers,
service suppliers, communications providers and banks have been asked to verify
their Year 2000 readiness and the Company has tested 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 the Company will
not incur costs in excess of such amount in connection therewith.
The Company has concluded, based on this assessment, that all of the
Company's critical business systems software is Year 2000 compliant, and all
other non-critical systems will be Year 2000 compliant by the end of November
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. In the event that any such third
party fails to be compliant, the Company will have to make arrangements, if
necessary, with alternate third parties to obtain the products and services that
were previously provided by such non-compliant third party.
EURO CURRENCY
The Company derived approximately 56% of its revenue from continuing
operations in fiscal 1999 from its operations in Germany and England.
Historically, transactions in Europe have been denominated in a variety of
currencies.
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<PAGE> 17
Effective January 1, 1999, eleven of the fifteen 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 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 year ended July 3, 1999, GmbH derived approximately 76% of its
revenue (42.4% of the Company's consolidated revenues) from the sales of
products under distribution agreements with manufacturers other than the
Company. The reliance on these distribution agreements subjects GmbH to certain
risks, including continuation of the agreements, geographic exclusivity and
availability of inventory. In fiscal 1998, 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 resulted in a
decrease in sales of $1,000,000 in fiscal 1999. There can be no assurance that
GmbH will be able to maintain its distribution agreements at the current levels
and failure to do so could have an adverse impact on the Company's results of
operations.
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 thin film deposition businesses, expected working capital
needs of the continuing operations, 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 ability to collect accounts
receivable relating to the discontinued Systems Division, the possibility of
operations of the Systems Division through the end of the phase-out period
(which is expected to end on or about October 2, 1999) being less than
break-even, and 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,
the ability of GmbH to comply with the Euro requirements on a timely basis and
the ability of GmbH to maintain its distribution agreements at the current
levels. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains foreign operations in England and Germany and conducts
business in many other countries. As a result of these international activities,
the Company is exposed to changes in foreign currency exchange rates, which
could have some impact on the results of operations. The Company manages
exposure to changes in foreign currency exchange rates through its normal
operating and financing activities, as well as through the use of forward
exchange contracts.
The Company enters into forward foreign exchange contracts as a balance
sheet translation hedge for the remaining assets and liabilities of its
wholly-owned Japanese subsidiary. This subsidiary uses the U.S. dollar as its
functional currency and, as a result, the gains or losses on remeasurement are
recorded in the statement of operations. At July 3, 1999, the Company had a
one-month forward contract to sell 60 million Japanese Yen for $495,000.
At July 3, 1999, the Company also had foreign currency exposure relating to
its four subsidiaries located in Germany, the U.K., Spain and Italy. These
subsidiaries use the local currency as their functional currency, and gains or
losses on the translation of the local currency balance sheets and statements of
operations are recorded as a separate component of stockholders' equity as other
comprehensive income (loss). Relative to foreign currency exposures existing at
July 3, 1999, a 10% unfavorable movement in foreign exchange rates would not
significantly diminish the fair value of its financial instruments
(approximately a 1% impact on consolidated equity). The estimate assumes that
each exchange rate would change in the same direction relative to the U.S.
dollar. In addition to the direct effects of changes in exchange rates, such
changes typically affect the volume of sales or the foreign currency
17
<PAGE> 18
sales price as competitors' products become more or less attractive. The
Company's sensitivity analysis of the effects of changes in foreign currency
exchange rates does not factor in a potential change in sales levels or local
currency selling prices. In addition, it is unlikely that all currencies would
uniformly strengthen or weaken relative to the U.S. dollar. In reality, some
currencies may weaken while others may strengthen.
The Company engages neither in speculative nor derivative trading
activities.
The Company also is exposed to changes in interest rates primarily from its
long-term Variable Rate Industrial Revenue Bond ("VRIRB"). Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes. A hypothetical 100 basis point
increase in the interest rate on the VRIRB would adversely impact annual cash
flows by $50,000.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page(s)
Reports of Independent Auditors...............................................20
Consolidated Balance Sheets as of July 3, 1999 and June 27, 1998..............21
Consolidated Statements of Operations for each of the three years
in the period ended July 3, 1999.......................................22
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended July 3, 1999....................23
Consolidated Statements of Cash Flows for each of the three years
in the period ended July 3, 1999.......................................24
Notes to Consolidated Financial Statements....................................25
19
<PAGE> 20
Report of Independent Auditors
------------------------------
To the Stockholders and Directors of Ferrofluidics Corporation
We have audited the accompanying consolidated balance sheets of
Ferrofluidics Corporation as of July 3, 1999 and June 27, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended July 3, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ferrofluidics Corporation at July 3, 1999 and June 27, 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended July 3, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Manchester, New Hampshire
August 20, 1999
20
<PAGE> 21
FERROFLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
JULY 3, 1999 AND JUNE 27, 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ------ ----------- -----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 8,038,000 $ 1,516,000
Accounts receivable - trade, less allowance
of $260,000 ($329,000 in 1998) 3,855,000 12,083,000
Inventories 6,325,000 13,855,000
Advances to suppliers -- 578,000
Prepaid and other current assets 246,000 783,000
----------- -----------
Total Current Assets 18,464,000 28,815,000
----------- -----------
Property, plant and equipment, at cost, net of
accumulated depreciation of $11,205,000 ($12,462,000 in 1998) 6,403,000 8,826,000
Cash value of life insurance, net 2,097,000 1,921,000
Deferred income taxes, net 1,139,000 3,154,000
Other assets, net 820,000 1,303,000
----------- -----------
TOTAL ASSETS $28,923,000 $44,019,000
=========== ===========
LIABILITIES
- -----------
Current Liabilities:
Bank notes payable $ -- $ 9,710,000
Accounts payable 1,627,000 3,860,000
Customer deposits -- 2,777,000
Accrued expenses and other current liabilities 1,742,000 4,286,000
----------- -----------
Total Current Liabilities 3,369,000 20,633,000
----------- -----------
Long-term debt obligation 5,000,000 5,000,000
Other liabilities 25,000 185,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, authorized
100,000 shares, issued and outstanding - none -- --
Common stock, $.004 par value, authorized
12,500,000 shares, outstanding 6,226,675 (6,218,581 in 1998) 25,000 25,000
Additional paid-in capital 36,764,000 36,738,000
Accumulated deficit (12,600,000) (17,443,000)
Accumulated other comprehensive loss (1,461,000) (1,119,000)
----------- -----------
22,728,000 18,201,000
Treasury stock, at cost (553,998 shares) 2,199,000 --
----------- -----------
Total Stockholders' Equity 20,529,000 18,201,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $28,923,000 $44,019,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE> 22
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 3, 1999, AND JUNE 27, 1998, AND JUNE 28, 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $23,143,000 $27,204,000 $23,856,000
Cost of sales 13,568,000 14,959,000 12,036,000
----------- ----------- -----------
Gross profit 9,575,000 12,245,000 11,820,000
Operating expenses:
Engineering and product development expense 2,387,000 1,977,000 1,907,000
Selling, general and administrative expense 7,182,000 8,099,000 9,569,000
----------- ----------- -----------
Operating income 6,000 2,169,000 344,000
Interest income 197,000 33,000 80,000
Interest expense (325,000) (634,000) (503,000)
Other income (expense), net (4,000) 52,000 (109,000)
----------- ----------- -----------
Income (loss) from continuing operations before income taxes (126,000) 1,620,000 (188,000)
Income taxes (benefit) 350,000 74,000 (448,000)
----------- ----------- -----------
Income (loss) from continuing operations (476,000) 1,546,000 260,000
Discontinued operations--Note K:
Income (loss) from operations of discontinued
divisions, less applicable income taxes
(benefit) of $(1,339,000) in 1998; and
$(727,000) in 1997 -- (5,018,000) 1,412,000
Gain on disposal of discontinued division, less applicable income
taxes of $1,400,000 5,319,000 -- --
----------- ----------- -----------
Net income (loss) $ 4,843,000 $(3,472,000) $ 1,672,000
=========== =========== ===========
Per Share
Income (loss) from continuing operations:
Basic $ (0.08) $ 0.25 $ 0.04
Diluted $ (0.08) $ 0.25 $ 0.04
Income (loss) from discontinued operations:
Basic $ 0.87 $ (0.81) $ 0.23
Diluted $ 0.87 $ (0.81) $ 0.23
Net income (loss):
Basic $ 0.79 $ (0.56) $ 0.27
Diluted $ 0.79 $ (0.56) $ 0.27
Weighted average common shares outstanding:
Basic 6,137,192 6,198,603 6,116,176
Diluted 6,137,192 6,232,429 6,196,070
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE> 23
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 3, 1999, AND JUNE 27, 1998, AND JUNE 28, 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------------------- Paid-In Accumulated Comprehensive
Shares Par Value Capital Deficit Loss
--------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 6,060,902 $24,244 $35,871,000 $(15,643,000) $ (550,000)
Issuance of common stock for:
Restricted stock plan,
charge to operations 93,762 375 511,000 -- --
Exercise of options 33,138 132 166,000 -- --
Redemption of stock for (9,540) (38) (71,000) -- --
taxes
Net income -- -- -- 1,672,000 --
Current year translation
adjustments -- -- -- -- (400,000)
Comprehensive income -- -- -- -- --
--------- ------- ----------- ------------ -----------
BALANCE, JUNE 28, 1997 6,178,262 24,713 36,477,000 (13,971,000) (950,000)
--------- ------- ----------- ------------ -----------
Issuance of common stock
for restricted stock
plan, charge to 44,531 236 287,000 -- --
operations
Redemption of stock for (4,212) (17) (26,000) -- --
taxes
Net loss -- -- -- (3,472,000) --
Current year translation
adjustments -- -- -- -- (169,000)
Comprehensive loss -- -- -- -- --
--------- ------- ----------- ------------ -----------
BALANCE, JUNE 27, 1998 6,218,581 24,932 36,738,000 (17,443,000) (1,119,000)
--------- ------- ----------- ------------ -----------
Issuance of common stock
for restricted stock
plan, charge to 9,828 39 31,000 -- --
operations
Redemption of stock for (1,734) (7) (5,000) -- --
taxes
Purchase of treasury stock -- -- -- -- --
Net income -- -- -- 4,843,000 --
Current year translation
adjustments -- -- -- -- (342,000)
Comprehensive income -- -- -- -- --
--------- ------- ----------- ------------ -----------
BALANCE, JULY 3, 1999 6,226,675 $24,964 $36,764,000 $(12,600,000) $(1,461,000)
========= ======= =========== ============ ===========
Treasury
Stock Total
----------- -----------
BALANCE, JUNE 30, 1996 $19,702,244
Issuance of common stock for:
Restricted stock plan,
charge to operations 511,375
Exercise of options 166,132
Redemption of stock for (71,038)
taxes
Net income 1,672,000
Current year translation
adjustments (400,000)
-----------
Comprehensive income 1,272,000
-----------
BALANCE, JUNE 28, 1997 21,580,713
-----------
Issuance of common stock
for restricted stock
plan, charge to 287,236
operations
Redemption of stock for (26,017)
taxes
Net loss (3,472,000)
Current year translation
adjustments (169,000)
-----------
Comprehensive loss (3,641,000)
-----------
BALANCE, JUNE 27, 1998 18,200,932
-----------
Issuance of common stock
for restricted stock
plan, charge to 31,039
operations
Redemption of stock for (5,007)
taxes
Purchase of treasury stock $(2,199,000) (2,199,000)
Net income -- 4,843,000
Current year translation
adjustments -- (342,000)
-----------
Comprehensive income -- 4,501,000
----------- -----------
BALANCE, JULY 3, 1999 $(2,199,000) $20,528,964
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE> 24
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 3, 1999, AND JUNE 27, 1998, AND JUNE 28, 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 4,843,000 $(3,472,000) $1,672,000
Adjustments to reconcile net income (loss) to cash flow
provided by (used in) operating activities:
Depreciation and amortization 1,458,000 1,818,000 1,602,000
Deferred income taxes (credits) 2,015,000 (1,339,000) (1,200,000)
Increase in cash surrender value (176,000) (170,000) (20,000)
Gain on disposal of discontinued division (6,719,000) -- --
Stock-related compensation 31,000 287,000 511,000
Foreign currency transaction (gains) losses (33,000) 94,000 217,000
Other (865,000) (28,000) (524,000)
Changes in operating assets and liabilities:
Accounts receivable, net 8,144,000 1,432,000 (1,144,000)
Inventories 4,684,000 1,326,000 (1,632,000)
Prepaid and other current assets 1,236,000 451,000 764,000
Accounts payable and accrued expenses (4,834,000) (760,000) (463,000)
Customer deposits (2,778,000) 352,000 (1,936,000)
----------- ----------- ----------
Net cash provided by (used in) operating activities 7,006,000 (9,000) (2,153,000)
----------- ----------- ----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (969,000) (2,399,000) (1,249,000)
Proceeds from sale of assets 1,655,000 70,000 37,000
Proceeds from disposal of Systems Division 10,800,000 -- --
Other -- 90,000 --
----------- ----------- ----------
Net cash provided by (used in) investing activities 11,486,000 (2,239,000) (1,212,000)
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from (repayments of) short-term borrowings (9,710,000) 2,929,000 2,519,000
Purchase of treasury stock (2,199,000) -- --
Exercise of stock options -- -- 166,000
----------- ----------- ----------
Net cash provided by (used in) financing activities (11,909,000) 2,929,000 2,685,000
----------- ----------- ----------
Effect of currency rate changes on cash (61,000) (48,000) (138,000)
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 6,522,000 633,000 (818,000)
Cash and cash equivalents at beginning of year 1,516,000 883,000 1,701,000
----------- ----------- ----------
Cash and cash equivalents at end of year $ 8,038,000 $ 1,516,000 $ 883,000
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE> 25
FERROFLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Ferrofluidics Corporation (the "Company") is a multinational company engaged
principally in developing, manufacturing and marketing ferrofluids (magnetic
fluids) and rotary sealing devices based on or derived from its proprietary
ferrofluid technology. Note K to these consolidated financial statements
describes the discontinuance of the Company's Crystal Growing Systems business.
In addition, in December 1998, the Company also decided to discontinue the
Component Parts business of its wholly-owned Japanese subsidiary (Ferrofluidics
Japan Corporation ("FJC")). The Company plans to dissolve FJC in fiscal 2000.
Information on the Company's operations by segment and geographic area are
included in Note I.
Approximately 30% of the Company's sales are attributable to the
semiconductor industry, which can experience cyclical fluctuations. A prolonged
decline in the semiconductor industry could have, and has in the past had, a
materially adverse effect on the Company's operating results.
FISCAL YEAR
The Company has a 52 or 53-week year ending on the Saturday nearest June 30.
Accordingly, the 1999, 1998 and 1997 fiscal years ended July 3, 1999, June 27
and June 28, respectively,
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All inter-company accounts and transactions
have been eliminated.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, money market funds with
original maturities of less than 90 days and certificates of deposit that can be
liquidated without penalty.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable and accounts payable, approximate fair
value due to the short-term maturity of these instruments. Forward foreign
exchange contracts not designated to hedge specific receivables are valued at
the spot exchange rate in effect on the balance sheet date.
The carrying amount of the Company's long-term debt obligation under its
Variable Rate Industrial Revenue Bond approximates fair value because the
interest rate is at a variable rate of interest generally keyed to short-term
nontaxable rates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash investments and trade accounts
receivable. The Company places its cash and temporary cash investments with high
credit quality institutions. Such investments are often in excess of the FDIC
insurance limit.
The Company performs ongoing credit evaluations of its customers' financial
condition and, under certain conditions, requires collateral from its foreign
unaffiliated customers in the form of irrevocable letters of credit or other
acceptable guarantees. With regard to the Company's Components, Distributed
Products and Fluids segments, concentrations of trade credit risk are limited
due to the large number of customers and their dispersion across many different
geographical regions.
25
<PAGE> 26
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist of the following elements at July 3, 1999 and June 27, 1998:
1999 1998
----------- -----------
Raw materials and purchased parts $ 1,756,000 $ 6,348,000
Work-in-process 1,725,000 2,650,000
Finished goods 2,844,000 4,857,000
----------- -----------
$ 6,325,000 $13,855,000
=========== ===========
The Company has purchase contracts for inventory with various suppliers
which, in some cases, extend beyond two years. At July 3, 1999 and June 27,
1998, outstanding purchase commitments pursuant to these contracts totaled
approximately $1,244,000 and $7,000,0000, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation on
machinery and equipment and furniture and fixtures is computed on a
straight-line method over estimated useful lives of three to eight years;
leasehold improvements are amortized using the straight-line method over the
lesser of the life of the lease or the estimated useful life of the
improvements. Depreciation on buildings and building improvements is computed
using the straight-line method over estimated lives of ten to thirty years.
Depreciation charges for assets begin in the month after the asset is placed in
service.
Property, plant and equipment consisted of the following at July 3, 1999
and June 27, 1998:
1999 1998
----------- -----------
Land and improvements $ 330,000 $ 330,000
Buildings and improvements 7,875,000 8,072,000
Machinery and equipment 4,578,000 5,730,000
Furniture, fixtures and vehicles 4,533,000 5,597,000
Construction in process 292,000 1,559,000
----------- -----------
17,608,000 21,288,000
Less: Accumulated depreciation and amortization 11,205,000 12,462,000
----------- -----------
$ 6,403,000 $ 8,826,000
=========== ===========
INTANGIBLE ASSETS
At July 3, 1999, the Company had recorded goodwill in an amount of
$1,023,000, which is included on the accompanying balance sheet with other
assets, resulting from the acquisition in fiscal 1989 of Ferrofluidics GmbH, a
wholly-owned subsidiary. This amount is being amortized over a 16-year life on a
straight-line basis. Accumulated amortization as of July 3, 1999 and June 27,
1998 amounted to $642,000 and $578,000, respectively.
All other intangible assets, including patents and trademarks, are recorded
at cost and amortized on a straight-line basis over their estimated useful
lives, generally ten years.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, Accounting for Income Taxes.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of products to the customer.
26
<PAGE> 27
PRODUCT DEVELOPMENT EXPENSES
Product development expenditures are charged to expense when incurred. The
Company spent $1,373,000, $890,000, and $685,000 for product development during
1999, 1998, and 1997, respectively, from continuing operations.
TRANSLATION OF FOREIGN CURRENCIES
The Company translates the assets and liabilities of its foreign
subsidiaries whose functional currency is other than the U.S. dollar at the
exchange rates in effect at the balance sheet date. Income statement amounts are
translated at average exchange rates for the period. Translation adjustments are
reported in other comprehensive income (loss). In addition, the Company
recognizes, in current income, gains or losses from the remeasurement of
transactions denominated in currencies other than the Company's functional
currencies. The effect on the statements of operations of transaction gains and
losses is insignificant to all years presented.
FOREIGN EXCHANGE CONTRACTS
The Company, from time to time, enters into forward foreign exchange
contracts to hedge against adverse exchange losses on certain assets or
liabilities denominated in a foreign currency. Market value gains and losses are
recognized, with the resulting credit or debit offsetting foreign exchange gains
or losses on those instruments. At July 3, 1999, there was one foreign exchange
contract outstanding to sell 60 million Japanese Yen at 121.30 per U.S. Dollar,
or $495,000, for delivery, at the Company's option, between June 28 and July 15,
1999, in which there was no material exchange gain or loss.
STOCK-BASED COMPENSATION
The Company has stock-based compensation programs and has elected to account
for them in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and, accordingly, except for
restricted stock awards, recognizes no compensation expense for the stock option
grants (see Note H).
EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with FASB
Statement No. 128, Earnings per Share.
STATEMENT OF CASH FLOWS
For the years ended July 3, 1999, June 27, 1998 and June 28, 1997, cash
payments for income taxes amounted to $80,000, $20,000 and $473,000,
respectively. Cash payments for interest in each of the three years amounted to
$533,000, $1,092,000 and $795,000, respectively.
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 (loss) and comprehensive income (loss)
for the Company is from foreign currency translation adjustments. The Company
has elected to disclose comprehensive income in its Consolidated Statements of
Stockholders' Equity.
The earnings associated with the Company's investment in its foreign
subsidiaries are considered to be permanently invested and no provision for U.S.
federal and state income taxes on those earnings or translation adjustments has
been provided.
27
<PAGE> 28
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted for all
fiscal quarters of all fiscal years beginning after June 15, 2000, as amended.
The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged asset, liability, or firm
commitment through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
RECLASSIFICATION
Certain amounts for fiscal years 1998 and 1997 have been reclassified to
conform with the presentation of similar amounts in fiscal year 1999.
B. CASH VALUE OF LIFE INSURANCE
At July 3, 1999 and June 27, 1998, the Company had two single-premium life
insurance policies on the life of a former CFO. The policies had an aggregate
cash value of $2,232,000 and $2,075,000 at July 3, 1999 and June 27, 1998,
respectively, against which the Company had $2,232,000 and $2,064,000,
respectively, in loans and accrued interest outstanding at an interest rate of
8%.
In addition, the Company has recorded its interest in the value of certain
key man life insurance policies under split-dollar agreements with a former CEO
of $2,097,000 and $1,910,000 at July 3, 1999 and June 27, 1998, respectively.
This former CEO's estate is the principal beneficiary of the aggregate face
value of these policies of approximately $8,000,000, from which the Company will
receive, upon death or surrender, an amount equal to the premiums paid by the
Company plus interest at the rate of 6%.
C. INCOME TAXES
Income (loss) from continuing operations before income taxes for the years
ended July 3, 1999, June 27, 1998 and June 28, 1997 was taxed in the following
jurisdictions:
1999 1998 1997
----------- ---------- ---------
Domestic $(1,031,000) $ 642,000 $(392,000)
Foreign 905,000 978,000 204,000
----------- ---------- ---------
Total $ (126,000) $1,620,000 $(188,000)
=========== ========== =========
Significant components of the provision for income taxes (benefit) from
continuing and discontinued operations are as follows:
1999 1998 1997
---------- ----------- -----------
Continuing operations $ 350,000 $ 74,000 $ (448,000)
Discontinued operations 1,400,000 (1,339,000) (727,000)
---------- ----------- -----------
Total $1,750,000 $(1,265,000) $(1,175,000)
========== =========== ===========
28
<PAGE> 29
The components of the provision for income taxes (benefit) attributable to
continuing operations are as follows:
1999 1998 1997
-------- ------- ---------
Current:
Federal $ -- $ -- $ --
State -- -- --
Foreign (265,000) 74,000 19,000
-------- ------- ---------
Total current (265,000) 74,000 19,000
-------- ------- ---------
Deferred:
Federal -- -- (467,000)
State -- -- --
Foreign 615,000 -- --
-------- ------- ---------
Total deferred 615,000 -- (467,000)
-------- ------- ---------
Total income taxes $350,000 $74,000 $(448,000)
======== ======= =========
The following is a reconciliation between the statutory provision for federal
income taxes and the effective income taxes from continuing operations for the
years ended July 3, 1999, June 27, 1998 and June 28, 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory rate $(43,000) $ 551,000 $ (64,000)
Change in valuation allowance 58,000 (633,000) (194,000)
Foreign income taxes at differing
statutory rates 100,000 138,000 (24,000)
Restricted stock compensation -- (31,000) (109,000)
Adjustment to estimated income tax accruals 230,000 -- (82,000)
Meals and entertainment expenses disallowed 5,000 20,000 25,000
Other -- 29,000 --
-------- --------- ---------
Income tax expense (benefit) $350,000 $ 74,000 $(448,000)
======== ========= =========
</TABLE>
The components of the net deferred tax asset as of July 3, 1999 and June 27,
1998 were as follows:
1999 1998
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $11,506,000 $11,408,000
Capital loss carryforward -- 1,821,000
Compensation related items 52,000 276,000
Valuation allowances 134,000 142,000
Inventories 754,000 1,446,000
Research and development credits 150,000 150,000
Alternative minimum tax credits 186,000 186,000
Other 128,000 613,000
----------- -----------
Total deferred tax assets 12,910,000 16,042,000
Valuation allowance for deferred tax assets (11,210,000) (12,217,000)
----------- -----------
Net deferred tax assets 1,700,000 3,825,000
Deferred tax liabilities:
Depreciable assets (561,000) (461,000)
Other -- (210,000)
----------- -----------
Total deferred tax liabilities (561,000) (671,000)
----------- -----------
Net deferred tax assets $ 1,139,000 $ 3,154,000
=========== ===========
29
<PAGE> 30
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $200,000 at July 3, 1999. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation.
However, unrecognized foreign tax credit carryforwards would be available to
reduce some portion of the U.S. liability. Withholding taxes of approximately
$20,000 would be payable upon remittance of all previously unremitted earnings
at July 3, 1999.
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
about the Company's ability to realize the benefit of the entire deferred tax
asset, a valuation allowance in the amount of $11,210,000 has been established
at July 3, 1999.
As of July 3, 1999, the Company had remaining net operating loss
carryforwards for Federal income tax purposes of approximately $33,697,000,
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.
D. SHORT-TERM BORROWINGS AND OTHER DEBT OBLIGATIONS
As of July 3, 1999 and June 27, 1998, the Company and its subsidiaries have
the following debt obligations outstanding:
1999 1998
---------- -----------
Revolving line of credit $ -- $ 7,749,000
1984 Industrial Revenue Bond 5,000,000 5,000,000
Bank notes -- 1,961,000
---------- -----------
5,000,000 14,710,000
Less: current portion of debt obligations -- 9,710,000
---------- -----------
Long-term debt obligation $5,000,000 $ 5,000,000
========== ===========
In fiscal 1985, the Company secured 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 generally keyed to short-term nontaxable rates,
and has a seven-day call feature. The interest rate at July 3, 1999 was 4.02%.
The proceeds from these bonds were used to fund the construction of the
Company's Nashua, New Hampshire facility and the purchase of machinery and
equipment. The VRIRB is payable in full on September 1, 2004 and is guaranteed
by a bank stand-by letter of credit (through August 16, 2000) which is a part of
the credit facility extended to the Company by a bank as described below.
Prior to September 23, 1998, the Company had a credit facility with a bank
which provided the Company with a total credit of approximately $13,900,000,
including approximately $5,400,000 in the form of a stand-by letter of credit
for the Company's $5,000,000 VRIRB, and a $8,500,000 revolving line of credit
for working capital purposes. As further discussed below, the credit facility
was amended and decreased in September 1998. The stand-by letter of credit has a
one-year term, which expires in August 2000 and has a fee of 1% per year. The
revolving line of credit bore interest at the bank's prime rate plus 1% with a
fee of 1/8% on the unused portion. The credit facility is collateralized by
substantially all of the assets of the Company.
In February 1997, the Company obtained an additional increase of
approximately $1,500,000 in the credit facility from its bank in the form of a
stand-by letter of credit to secure a customer prepayment received with an order
for crystal growing systems. Subsequent to the shipment of the systems, the
letter of credit was rewritten into a 90-day promissory note. The $1,500,000
promissory note, which was renewed on June 30, 1998, bore interest at the same
rate as the revolving credit line. On September 23, 1998, in connection with the
Systems Division Sale (see Note K), the note was paid off.
30
<PAGE> 31
On September 23, 1998, in connection with the Systems Division Sale, the
Company used a portion of the cash proceeds to pay off the then outstanding
balance of the line of credit. As a result of the Systems Division 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. See Note K to the
Consolidated Financial Statements for additional discussion of the Systems
Division Sale.
As of June 30, 1999, the bank has agreed to renew the revolving line of
credit agreement at a level of $2,500,000. Interest on the line will be at prime
plus .75% per year (8.5% at July 3, 1999). Under the new arrangement with its
bank, the Company will have available to it a total credit facility of
approximately $7,900,000, which includes the $5,400,000 standby letter of credit
for the Company's VRIRB and the revolving line of credit. The credit facility is
collateralized by substantially all of the assets of the Company. At July 3,
1999, there were no borrowings outstanding under the line. The line will expire
in November 1999.
During 1996, the Company borrowed $800,000 in the form of an installment
note with its bank in order to finance the capital expansion of its in-house
machine shop. The note, which was payable upon demand, was being amortized in 59
monthly installments of $16,899 with a final payment due on January 25, 2001 of
$21,151. The note bore interest at 9.75% and was collateralized by the machinery
and equipment acquired. In March 1999, the Company paid off the then outstanding
balance of the note.
In addition, the Company, through its wholly-owned foreign subsidiaries, has
various short-term financing arrangements with local banks totaling
approximately $280,000 at July 3, 1999. Approximately $140,000 and $110,000 were
borrowed against one of these facilities during fiscal 1999 and 1998,
respectively, and repaid prior to the end of the fiscal year. The weighted
average interest rates during the year on these facilities ranged from 6.71% to
24.0%, and the interest rates at July 3, 1999 ranged from 6.25% to 24.0%.
E. COMMITMENTS AND CONTINGENCIES
The Company has entered into operating leases for office space and
equipment. Future minimum aggregate lease payments for the five years subsequent
to fiscal 1999 amount to: $268,000 in 2000; $84,000 in 2001; $72,000 in 2002;
$64,000 in 2003; and $64,000 in 2004. Rent expense under operating leases
amounted to $433,000 in 1999, $446,000 in 1998 and $489,000 in 1997.
During fiscal 1999, the Company entered into a royalty agreement with
Ferrotec Corporation ("Ferrotec", formerly Nippon Ferrofluidics Corporation), a
Japanese corporation, whereby the Company agreed to pay Ferrotec a 5% royalty on
all sales of Vacuum Rotary Feedthrough Seals and agreed to discontinue the sale
of such feedthroughs in Japan. The agreement expires on December 31, 2005. For
fiscal 1999, the Company incurred $272,000 in royalty expense under this
agreement.
In May 1999, the Company leased approximately 10,000 square feet in its
headquarters in Nashua to an unaffiliated company. The operating lease expires
in May 2002. Future minimum lease payments to be received for the three years
subsequent to fiscal 1999 amount to: $148,000 in 2000; $152,000 in 2001; and
$128,000 in 2002.
During 1997, the Company terminated its agreement to lease to a third party
approximately 11,000 square feet of its headquarters office in Nashua in
exchange for payment to the tenant of $100,000, which was charged to operations
during fiscal 1997. The Company received total lease payments of $28,000 in 1997
from this third party.
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, in the amount of (pound)300,000, which amount was
deposited in an interest-bearing escrow account under the terms of the
guarantee. In view of the uncertainty of the collectibility of the deposit, an
allowance of $265,000 was established. 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 escrow deposit. During fiscal 1999, this matter was settled
by negotiations, and the Company agreed to accept a return of (pound)76,000
($122,000), including accrued interest, on the deposit in exchange for release
of any further obligation under the guarantee. As a result, the Company charged
a net amount of $104,000 to operations during fiscal 1999.
31
<PAGE> 32
At July 3, 1999, the Company had possible indemnification liabilities to its
former CFO in connection with the single premium, paid-up life insurance
policies described in Note B. The unrecorded portion of this contingent
liability ranges from a nominal amount to $150,000.
F. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ----------
Numerator:
<S> <C> <C> <C>
Income (loss) from continuing operations $ (476,000) $ 1,546,000 $ 260,000
Income (loss) from discontinued operations 5,319,000 (5,018,000) 1,412,000
---------- ----------- ----------
Net income (loss) $4,843,000 $(3,472,000) $1,672,000
========== =========== ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares 6,137,192 6,198,603 6,116,176
Effect of dilutive securities:
Employee stock options -- 1,763 5,047
Non-vested restricted stock awards -- 32,063 74,847
---------- ----------- ----------
Dilutive potential common shares -- 33,826 79,894
---------- ----------- ----------
Denominator for diluted earnings per share -
adjusted weighted average shares 6,137,192 6,232,429 6,196,070
========== =========== ==========
Per Share:
Income (loss) from continuing operations:
Basic $ (0.08) $ 0.25 $ 0.04
Diluted $ (0.08) $ 0.25 $ 0.04
Income (loss) from discontinued operations:
Basic $ 0.87 $ (0.81) $ 0.23
Diluted $ 0.87 $ (0.81) $ 0.23
Net income (loss):
Basic $ 0.79 $ (0.56) $ 0.27
Diluted $ 0.79 $ (0.56) $ 0.27
</TABLE>
At July 3, 1999, June 27, 1998, and June 28, 1997, options and warrants to
purchase 673,505 shares at prices ranging from $3.16 to $13.00 per share,
443,259 shares at prices ranging from $6.13 to $13.50 per share and 688,987
shares at prices ranging from $9.00 to $15.25 per share, respectively, of common
stock were anti-dilutive and therefore were excluded from the computation of
diluted earnings per share.
32
<PAGE> 33
G. COMMON STOCK
At July 3, 1999, an aggregate of 673,505 shares of the Company's common
stock had been reserved for issuance in connection with the nonqualified and
incentive stock option plans, the restricted stock plan and stock purchase
warrants outstanding (see Note H). In addition, 230,613 shares of the Company's
common stock were available for future grants of options under the nonqualified
and incentive stock option plans and the restricted stock plan.
SHAREHOLDER RIGHTS PLAN
On August 3, 1994, the Board of Directors of the Company adopted a
Shareholder Rights Agreement (the "Rights Agreement"). Pursuant to the terms of
the Rights Agreement, the Board of Directors declared a dividend distribution of
one Preferred Stock Purchase Right (a "Right") for each outstanding share of
common stock of the Company to stockholders of record as of the close of
business on August 19, 1994 (the "Record Date"). Each Right entitles the
registered holder to purchase from the Company, upon the occurrence of certain
events, a unit consisting of one one-thousandth of a share (a "Unit") of Series
A Junior Participating Cumulative Preferred Stock, par value $0.001 per share
(the "Preferred Stock"), at a cash exercise price of $25.00 per Unit (the
"Exercise Price"), subject to adjustment.
The rights currently are not exercisable and are attached to and trade with
the outstanding shares of common stock. Under the Rights Agreement, the Rights
become exercisable (i) if a person becomes an "acquiring person" by acquiring
15% or more of the outstanding shares of common stock, (ii) if a person who owns
10% or more of the common stock is determined to be an "adverse person" by the
Board of Directors, or (iii) if a person commences a tender offer that would
result in that person owning 15% or more of the common stock. In the event that
a person becomes an "acquiring person" or is declared an "adverse person" by the
Board, each holder of a Right (other than the acquiring person or the adverse
person) would be entitled to acquire such number of shares of the Company's
preferred stock which are equivalent to such number of shares of common stock
having a value of twice the then-current exercise price of the Right. If the
Company is acquired in a merger or other business combination transaction after
any such event, each holder of a Right would then be entitled to purchase, at
the then-current exercise price, shares of the acquiring company's common stock
having a value of twice the exercise price of the Right.
Until a Right is exercised, the holder will have no rights as a stockholder
of the Company (beyond those as an existing stockholder), including the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders or to the Company, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for Units, other securities of the Company, other consideration or
for common stock of an acquiring company.
STOCK REPURCHASE PROGRAM
On February 23, 1999, the Company's Board of Directors authorized a stock
repurchase program pursuant to which 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 period ended July 3, 1999, the Company
repurchased a total of 553,998 shares of common stock for $2,199,000 (652,498
shares through August 20, 1999) and is holding such shares as treasury stock.
H. EMPLOYEE BENEFIT PLANS
RESTRICTED STOCK PLAN
In 1994, the Board of Directors adopted, and the stockholders approved, the
Ferrofluidics Corporation 1994 Restricted Stock Plan (the "Restricted Stock
Plan"). Persons eligible to participate in the Restricted Stock Plan are those
full or part-time officers and other employees of the Company and its
subsidiaries who are responsible for or contribute to the management, growth or
profitability of the Company and its subsidiaries. Under the Restricted Stock
Plan, the maximum number of shares of common stock that may be reserved and
authorized for issuance by the Board of Directors may not exceed five percent of
the total number of outstanding shares of common stock at the time of any award
of restricted stock. Upon adoption of the plan, the Board of Directors initially
reserved and authorized 271,000 shares of common stock for issuance, which
represented not more than five percent of the outstanding shares of common stock
as of the date of adoption. The grants are valued at the fair market value of
the common stock on the date of grant and generally vest at a rate of 33-1/3%
per year beginning one year from the date of grant. The charge to operations in
connection with these restricted stock awards for the years ended July 3, 1999
and June 27, 1998 and June 28, 1997 amounted to $31,000, $287,000 and $511,000,
respectively.
33
<PAGE> 34
A summary of the changes in outstanding shares of restricted stock for the
years ended July 3, 1999 and June 27, 1998 and June 28, 1997 is set forth below:
Weighted
Shares Average Price
OUTSTANDING, JUNE 30, 1996 145,073 $ 6.80
Granted 10,000 12.50
Forfeited (2,454) 8.87
Vested (93,762) 6.56
-------
OUTSTANDING, JUNE 28, 1997 58,857 $ 8.06
Granted -- --
Forfeited (4,500) 11.28
Vested (44,531) 7.37
-------
OUTSTANDING, JUNE 27, 1998 9,826 $ 9.75
Granted -- --
Forfeited -- --
Vested (9,826) 9.75
-------
OUTSTANDING, JULY 3, 1999 -- --
=======
NONQUALIFIED AND INCENTIVE STOCK OPTION PLANS
The Company has a Nonqualified Stock Option Plan for its employees which was
adopted in 1984 (the "1984 Plan"). During fiscal year 1995, the 1984 Plan's term
expired and, accordingly, no further shares may be granted thereunder. The
exercise price of the options granted under the plan is not less than the fair
market value of the stock at the date of the grant. Under the 1984 Plan, 800,000
shares of the Company's common stock were made available for grant.
In June 1995, the Board of Directors adopted the Ferrofluidics Corporation
1995 Nonqualified Stock Option Plan (the "1995 Plan") with the intent to replace
options that had been granted under the 1984 Plan which were expected to expire
during 1996. Neither directors nor employees of the Company who are subject to
the provisions of Section 16 of the Securities and Exchange Act of 1934 are
eligible to participate in the 1995 Plan and awards under the 1995 Plan consist
only of nonqualified options to purchase shares of the Company's common stock.
Under the 1995 Plan, 100,000 shares of the Company's common stock were made
available for grant.
On June 13, 1995, the Board of Directors adopted, and the stockholders
approved, the Ferrofluidics Corporation 1995 Stock Option and Incentive Plan
(the "1995 Incentive Plan"). Awards under the 1995 Incentive Plan include stock
options (both incentive options and nonqualified options), stock appreciation
rights, restricted and unrestricted stock, performance shares and dividend
equivalent rights. The Board of Directors has authorized 750,000 shares of the
Company's common stock for issuance pursuant to the 1995 Incentive Plan.
34
<PAGE> 35
Generally, options granted by the Company are exercisable at rates of 25% to
100% per year beginning one or two years after the date of the grant, and expire
from five to ten years from the grant date. A summary of the changes in
outstanding stock options under the three plans discussed above for fiscal 1997,
1998 and 1999 is set forth below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
----------------------------------------------------------------- --------------
"1995
"1984 Plan" "1995 Plan" Incentive Plan" Total
----------- ----------- --------------- -------
<S> <C> <C> <C> <C> <C>
OUTSTANDING, JUNE 30, 1996 187,929 71,925 405,550 665,404 $11.21
Granted -- -- 95,210 95,210 8.41
Canceled/expired (58,416) (11,363) (20,500) (90,279) 13.23
Exercised (33,138) -- -- (33,138) 5.00
------- ------ ------- -------
OUTSTANDING, JUNE 28, 1997 96,375 60,562 480,260 637,197 $10.83
Granted -- -- 115,000 115,000 4.68
Canceled/expired (96,375) (2,063) (125,000) (223,438) 12.63
Exercised -- -- -- -- --
------- ------ ------- -------
OUTSTANDING, JUNE 27, 1998 -- 58,499 470,260 528,759 $ 8.73
Granted -- 25,000 278,330 303,330 3.78
Canceled/expired -- (50,874) (119,710) (170,584) 8.89
Exercised -- -- -- -- --
------- ------ ------- -------
OUTSTANDING, JULY 3, 1999 -- 32,625 628,880 661,505 $ 6.37
======= ====== ======= =======
</TABLE>
In November 1998, the Company repriced stock options previously issued to
non-officers and non-directors of the Company between June 29, 1995 and January
2, 1998 under its 1995 Plans. A total of 170,584 options with exercise prices
ranging from $7.63 to $10.21 per share were cancelled and replaced with 68,910
options at an exercise price of $3.81 per share. The conversion ratio of the
previously issued options to the repriced options was computed using the
Black-Scholes method of valuing options. These options are reflected in the
table above as options granted and cancelled for fiscal 1999.
The following table summarizes information about stock options
outstanding at July 3, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------- ------------------------------
Weighted Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life (in years) Exercise Price Shares Exercise Price
- --------------- ------- --------------- -------------- ------- --------------
<C> <C> <C> <C> <C> <C>
$ 3.16 - $ 6.13 413,330 5.63 $ 4.01 365,830 $ 4.00
$ 9.00 - $ 13.00 248,175 6.41 $10.30 210,037 $10.48
------- -------
$ 3.16 - $ 13.00 661,505 5.92 $ 6.37 575,867 $ 5.54
======= =======
</TABLE>
As of July 3, 1999 and June 27, 1998 and June 28, 1997, options to purchase
575,867, 217,320 and 367,572 shares were exercisable at a weighted average
exercise price of, $5.54, $9.93 and $11.51 per share, respectively.
35
<PAGE> 36
STOCK PURCHASE WARRANTS
Stock purchase warrants have been granted by the Board of Directors to
officers, directors, key employees and to consultants of the Company, with the
exercise price of the warrant not less than the fair market value of the stock
on the date of grant. At July 3, 1999, June 27, 1998 and June 28, 1997, 12,000
shares, 14,500 shares, and 97,000 shares, respectively, of common stock were
reserved for issuance upon the exercise of outstanding stock purchase warrants
at prices, and subject to expiration dates, as set forth below:
<TABLE>
<CAPTION>
Shares
------------------------------------------------------------
JULY 3, 1999 June 27, 1998 June 28, 1997 Price Expiration Date
------------ ------------- ------------- ------ ----------------
<S> <C> <C> <C> <C>
-- -- 62,500 $11.75 August 31, 1997
-- -- 20,000 11.00 October 27, 1997
12,000 14,500 14,500 9.75 October 10, 2000
------ ------ ------
12,000 14,500 97,000
====== ====== ======
</TABLE>
A summary of the changes in outstanding stock purchase warrants for the
three years ended July 3, 1999 is set forth below:
Weighted Average
Shares Exercise Price
------- --------------
OUTSTANDING, JUNE 30, 1996 259,829 $12.28
Granted -- --
Canceled/expired (162,829) 12.87
Exercised -- --
-------
OUTSTANDING, JUNE 28, 1997 97,000 $11.30
Granted -- --
Canceled/expired (82,500) 11.57
Exercised -- --
-------
OUTSTANDING, JUNE 27, 1998 14,500 $ 9.75
Granted -- --
Canceled/expired (2,500) 9.75
Exercised -- --
=======
OUTSTANDING, JULY 3, 1999 12,000 $ 9.75
=======
At July 3, 1999, all 12,000 warrants were exercisable at a price of $9.75.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation ("FAS 123"). Under this Statement, the Company had a
choice of adopting a fair-value based method of accounting for employee
stock-based compensation plans, as established by FAS 123, or retaining the
intrinsic value-based method in accordance with APB Opinion No. 25 ("APB 25"),
provided certain pro forma disclosures were made. The Company chose to retain
the intrinsic value-based method of accounting for stock-based compensation in
accordance with APB 25 and adopted the pro-forma disclosure provisions of FAS
123. Accordingly, no compensation expense has been recognized for stock option
awards or warrants as they are granted at prices not less than fair market value
of the stock on the date of grant.
The following pro-forma disclosures required by FAS 123 have been prepared
as if the Company accounted for the stock options and warrants using the
fair-value method of accounting (in thousands, except per share data):
1999 1998 1997
------ ------- ------
Net income (loss), as reported $4,843 $(3,472) $1,672
Pro-forma net income (loss) 4,547 (3,607) 603
Net income (loss) per share, as reported - basic $ 0.79 $ (0.56) $ 0.27
Net income (loss) per share, as reported - diluted 0.79 (0.56) 0.27
Pro-forma net income (loss) per share - basic $ 0.74 $ (0.58) $ 0.10
Pro-forma net income (loss) per share - diluted 0.74 (0.58) 0.10
36
<PAGE> 37
The fair value of each option and warrant is estimated on the date of grant
using the following weighted-average assumptions in fiscal 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Risk-free interest rate 4.73% 5.57% 6.12%
Expected stock price volatility 71.0% 60.0% 60.0%
Expected life of options and warrants (years) 1.4 2.0 4.3
The weighted average fair value of options granted during the years ended
July 3, 1999, June 27, 1998 and June 28, 1997 were $1.25, $1.62 and $4.47,
respectively. For purposes of this disclosure, the Company amortizes the fair
value of the options and warrants over the vesting period of the option or
warrant. In estimating the fair value of each option the Company uses the
Black-Scholes option valuation method. The Black-Scholes model was developed for
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models,
such as the Black-Scholes model, require the input of highly subjective
assumptions, including the expected stock price volatility, which are subject to
change from time to time. For this reason, and because the FAS 123 fair
value-based method of accounting has not been applied to options and warrants
granted prior to July 1, 1996, the resulting pro-forma compensation costs are
not necessarily indicative of costs to be expected in future years.
DEFERRED INCOME (401-K) PLAN
The Company has an elective employees savings plan for all eligible
employees. Ferrofluidics Corporation Tax Savings Deposit and Investment Plan
(the "401-K Plan") is a qualified trust under Section 401(a) of the Internal
Revenue Code and is, therefore, exempt from federal income taxes under the
provisions of Section 501(a). The 401-K Plan allows an employee to contribute
between 1% and 20% of his or her salary and bonus to the 401-K Plan, up to a
maximum of $10,000 (for calendar 1998) per year (subject to annual adjustments
based on increases in the consumer price index over the 1988 base year). In
December 1993, the Board of Directors approved an annual Company match,
effective January 1, 1994, of 50% of an employee's contribution of up to 4% of
the employee's salary. In fiscal 1999, 1998 and 1997, the Company made matching
contributions to the Plan, and corresponding charges to operations, in the
amounts of $88,000, $105,000 and $155,000, respectively. The 401-K Plan consists
of four equity funds, a fixed income fund, a balanced fund and a money market
fund, and participants may choose to split their investments among funds.
I. SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way the Company is required to report information about its operating
segments. SFAS No. 131 did not materially change the manner in which the
Company's segments are reported; however, information for prior years has been
restated to conform to the 1999 presentation.
The Company's operations, after the discontinuation of the Systems Division,
are conducted in three industry segments: component products which combines
proprietary ferrofluid technology with applications engineering to develop a
variety of products that provide state-of-the-art seals and sealing subsystems
that seal the environment from a manufacturing process; ferrofluids for use in
the Company's own engineered products, for use in home and automotive
loudspeakers and nondestructive testing, and for use in sensors and stepper
motors; and distributed products manufactured and/or distributed by GmbH. Sales
among segments and geographic enterprises are accounted for at cost plus a
reasonable profit. See Note K for a further discussion regarding discontinued
operations.
Segment operating profit (loss) includes all costs and expenses directly
related to the segment. General corporate expenses principally represent the
costs associated with managing all industry segments which were not specifically
identified with a particular industry segment. General corporate assets consist
primarily of cash and cash equivalents, deferred income tax assets, certain
fixed assets, and other non-current assets, including cash surrender value of
life insurance, net of loans, at July 3, 1999 and June 27, 1998, respectively.
37
<PAGE> 38
The following table presents financial information for the Company's
industry segments from continuing operations for the years ended July 3, 1999,
June 27, 1998 and June 28, 1997. All amounts are expressed in thousands of
dollars.
<TABLE>
<CAPTION>
DISTRIBUTED
COMPONENTS PRODUCTS FLUIDS CONSOLIDATED
---------- -------- ------ ------------
YEAR ENDED JULY 3, 1999:
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $11,096 $9,810 $2,237 $23,143
=======
Segment operating profit 3,012 526 266 $ 3,804
General corporate expenses (3,798)
-------
Operating income $ 6
=======
Net identifiable assets, continuing operations 11,523 3,159 1,065 $15,747
Net identifiable assets, discontinued operations 1,102
General corporate assets 12,074
-------
Total assets $28,923
=======
Depreciation and amortization 941 279 19
Capital expenditures 46 182 41
YEAR ENDED JUNE 27, 1998:
Sales to unaffiliated customers $15,626 $9,390 $2,188 $27,204
=======
Segment operating profit 5,629 281 326 $ 6,236
General corporate expenses (4,067)
-------
Operating income $ 2,169
=======
Net identifiable assets, continuing operations 14,258 3,557 761 $18,576
Net identifiable assets, discontinued operations 17,280
General corporate assets 8,163
-------
Total assets $44,019
=======
Depreciation and amortization 1,262 268 27
Capital expenditures 542 157 9
YEAR ENDED JUNE 28, 1997:
Sales to unaffiliated customers $12,957 $8,409 $2,490 $23,856
=======
Segment operating profit 3,179 (35) 739 $ 3,883
General corporate expenses (3,539)
-------
Operating income $ 344
=======
Net identifiable assets, continuing operations 16,411 2,854 969 $20,234
Net identifiable assets, discontinued operations 18,508
General corporate assets 6,259
-------
Total assets $45,001
=======
Depreciation and amortization 1,167 161 26
Capital expenditures 919 125 --
</TABLE>
38
<PAGE> 39
The following is a summary of certain financial data from continuing
operations by geographic areas:
<TABLE>
<CAPTION>
U.S. EUROPEAN
OPERATIONS OPERATIONS ELIMINATIONS TOTAL
---------- ---------- ------------ -------
YEAR ENDED JULY 3, 1999:
<S> <C> <C> <C> <C>
Sales to unaffiliated domestic customers $ 8,680 $ -- $ -- $ 8,680
Sales to unaffiliated foreign customers 1,497 12,966 -- 14,463
Sales to subsidiaries 1,757 -- (1,757) --
------- ------- ------- -------
Total net sales and revenues 11,934 12,966 (1,757) $23,143
=======
Geographic operating profit 3,086 682 36 $ 3,804
General corporate expenses (3,798)
-------
Operating income $ 6
=======
Net identifiable assets, continuing operations 12,895 3,682 (830) $15,747
Net identifiable assets, discontinued operations 1,102
General corporate assets 12,074
-------
Total assets $28,923
=======
YEAR ENDED JUNE 27, 1998:
Sales to unaffiliated domestic customers $11,647 $ -- $ -- $11,647
Sales to unaffiliated foreign customers 1,756 13,801 -- 15,557
Sales to subsidiaries 2,133 -- (2,133) --
------- ------- ------- -------
Total net sales and revenues 15,536 13,801 (2,133) $27,204
=======
Geographic operating profit 5,363 870 3 $ 6,236
General corporate expenses (4,067)
-------
Operating income $ 2,169
=======
Net identifiable assets, continuing operations 18,137 4,973 (4,534) $18,576
Net identifiable assets, discontinued operations 17,280
General corporate assets 8,163
-------
Total assets $44,019
=======
YEAR ENDED JUNE 28, 1997:
Sales to unaffiliated domestic customers $10,915 $ -- $ -- $10,915
Sales to unaffiliated foreign customers 962 11,979 -- 12,941
Sales to subsidiaries 834 -- (834) --
------- ------- ------- -------
Total net sales and revenues 12,711 11,979 (834) $23,856
=======
Geographic operating profit 3,708 174 1 $ 3,883
General corporate expenses (3,539)
-------
Operating income $ 344
=======
Net identifiable assets, continuing operations 18,346 4,416 (2,528) $20,234
Net identifiable assets, discontinued operations 18,508
General corporate assets 6,259
-------
Total assets $45,001
=======
</TABLE>
39
<PAGE> 40
J. LITIGATION
From time to time, as a normal incidence of the nature of the Company's
business, various claims, charges or litigation are or may be asserted or
commenced against the Company relating to, among other things, contractual
matters, patent disputes, environmental matters and product liability. While
there can be no assurance that the Company will prevail in all these matters,
the Company does not believe that these matters will have a material adverse
effect on the Company's consolidated financial position or results of
operations. However, an adverse resolution of one or more of such matters could
have an adverse effect on the Company's consolidated results of operations in a
quarter in which such matters might be resolved.
K. 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 intangibles. 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 income taxes of $1,400,000, the
Company recorded a gain on the Systems Division Sale of $5,319,000 during fiscal
1999. 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 period from September 27, 1998 to July 3, 1999, the
Systems Division's operations were approximately break-even. The Company also
anticipates approximately break-even operations for the Systems Division through
the end of the phase-out period which is expected to end on or about October 2,
1999.
The Systems Division represented a separate line of business and,
accordingly, its net operating results have been reported, net of 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 accounts
receivable or liabilities, which remained with the Company. The Systems Division
Sale also did not include the obligation by the Company to complete
approximately $18,433,000 ($1,680,000 at July 3, 1999) in Systems Division
backlog, nor did it include approximately $5,873,000 ($1,411,000 at July 3,
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 July 3, 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. On December 26, 1998, the customer
canceled delivery of the nine machines. 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.
Prior to June 15, 1999, the Company had settled almost all of its commitments
with its vendors at a cost of approximately $1,765,000, which had been
considered in calculating the estimated gain on disposal of the Systems Division
reflected during the first quarter of fiscal 1999. On June 15, 1999, the Company
and its customer negotiated a settlement with respect to the canceled delivery
of the nine machines, which settlement had no adverse financial impact to the
Company. The remaining backlog at July 3, 1999 of $1,680,000 is planned to be
completed and shipped in the first quarter of fiscal 2000.
The Systems Division Sale also did not include approximately $6,472,000
($210,000 at July 3, 1999) in accounts receivable which were outstanding as of
the closing of the Systems Division Sale. The Company believes that it will be
able to collect the remaining $210,000 of these receivables within established
reserves, but there can be no assurance that the Systems Division Sale will not
adversely affect their collectibility.
The Company allocated approximately $490,000 and $593,000 of corporate
expenses and $459,000 and $352,000 of interest expense to the Systems Division
in determining income (loss) from discontinued operations for the years ended
June 27, 1998 and June 28, 1997, respectively. Corporate expenses were allocated
based on the actual amounts incurred on behalf of the Systems Division. Interest
expense was allocated based on the proportionate share of the Systems Division's
net identifiable assets to the total net assets of the Company.
40
<PAGE> 41
In addition to the Systems Division Sale, the Company, in December 1998,
decided to discontinue the Component Parts business of FJC, a wholly-owned
subsidiary (see also Note E). The Company intends to dissolve FJC in fiscal
2000. The Component Parts business of FJC represented a separate line of
business and, accordingly, its net operating results have been reported, net of
any applicable income taxes, as discontinued operations for all periods through
December 22, 1998, the date of the decision to dispose of the Component Parts
business of FJC. No significant gain or loss is expected from the discontinuance
of this business. For the period from June 28, 1998 to December 22, 1998, the
Component Parts business operations of FJC were approximately break-even and,
for the years ended June 27, 1998 and June 28, 1997, the Component Parts
operations of FJC had operating losses of $358,000 and $544,000, respectively.
The Company also anticipates approximately break-even operations for the
Component Parts business of FJC through the end of the phase-out period, which
is expected to end on or about October 2, 1999.
The operating results of the discontinued divisions are summarized as
follows (000's omitted):
1998 1997
------- -------
Net sales $25,496 $43,929
======= =======
Income (loss) from operations
before income taxes $(6,357) $ 685
Income taxes (benefit) (1,339) (727)
------- -------
Income (loss) from operations $(5,018) $ 1,412
======= =======
The net assets at July 3, 1999 of the discontinued divisions are summarized
as follows (000's omitted)
Current assets $1,621
Current liabilities (519)
------
Net assets of the discontinued divisions $1,102
======
41
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required to be furnished by this Item is set forth under the
captions "Information Regarding Directors," "Executive Officers" and "Executive
Compensation" in the Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished by this Item is set forth under the
captions "Information Regarding Directors" and "Executive Compensation" in the
Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished by this Item is set forth under the
caption "Principal and Management Stockholders" in the Proxy Statement and is
incorporated herein by reference. Solely for the purpose of calculating the
aggregate market value of the voting stock held by non-affiliates of the
Registrant as set forth on the cover of this report, it has been assumed that
directors and executive officers of the Registrant are affiliates.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished by this Item is set forth under the
caption "Certain Relationships and Related Transactions" in the Proxy Statement
and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The consolidated financial statements of the Company have been included in
Item 8 herein.
(a) FINANCIAL STATEMENT SCHEDULES
for the years ended July 3, 1999 and June 27,
1998 and June 28, 1997 PAGE
Schedule II - Valuation and Qualifying Accounts 48
Financial statement schedules other than that listed above are omitted
because they are either not required or not applicable or the required
information is shown in the financial statements or notes thereto. The
above financial schedule does not include discontinued operations.
42
<PAGE> 43
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by the Company during the last
quarter of the year ended July 3, 1999.
(c) EXHIBITS
3.1 Restated Articles of Organization of the Registrant (incorporated by
reference to Exhibit 2.1 to the Registrant's Registration Statement on
Form S-18 (Registration No. 2-72394-B), filed May 19, 1981 (the "1981
Registration Statement").
3.2 Articles of Amendment, filed November 19, 1980, increasing the
authorized shares of Common Stock (incorporated by reference to Exhibit
2.2 to the 1981 Registration Statement).
3.3 Articles of Amendment, filed February 19, 1981, further increasing the
authorized shares of Common Stock (incorporated by reference to Exhibit
2.3 to the 1981 Registration Statement).
3.4 Articles of Amendment, filed November 21, 1985, further increasing the
authorized shares of Common Stock (incorporated by reference to Exhibit
4E to the Registrant's Registration Statement on Form S-2 (Registration
No. 33-1000), filed October 18, 1985).
3.5 Articles of Amendment, filed November 25, 1987, eliminating certain
liabilities of directors and reducing the vote required to effect
certain corporate actions (incorporated by reference to Exhibit 4E to
the Registrant's Form 10-K for the year ended 6/30/88).
3.6 Articles of Amendment, filed November 14, 1989, effecting reverse stock
split and amending terms of Preferred Stock (incorporated by reference
to Exhibit 3.6 to the Registrant's Registration Statement on Form S-3
(Registration No. 33-33736), filed March 5, 1990 (the "1990
Registration Statement").
3.7 By-Laws of the Registrant (incorporated by reference to Exhibit 4G to
the Registrant's Form 10K for the year ended 6/30/90).
3.8 Certificate of Vote of Directors Establishing the Series A Junior
Participating Cumulative Preferred Stock, par value $.001 per share,
dated August 3, 1994.(1)
4.1 Shareholder Rights Agreement, dated as of August 3, 1994, between the
Registrant and American Stock Transfer and Trust Company (incorporated
by reference to Exhibit 4.1 to Registrant's current report on Form 8-K
dated August 3, 1994).(1)
10.1 Revolving Loan and Security Agreement, dated June 30, 1994, by and
among the Registrant and Bank of New Hampshire.(1)
10.2 Letter of Credit Reimbursement Agreement, dated June 30, 1994 made by
Ferrofluidics Corporation in favor of Bank of New Hampshire.(1)
10.3 Guarantee Agreement, dated June 30, 1994, between the Registrant, the
Business Finance Authority of the State of New Hampshire and Bank of
New Hampshire.(1)
10.4 Interbank Letter of Credit Agreement, dated June 30, 1994, between Bank
of New Hampshire, a New Hampshire trust company and BayBank, a
Massachusetts trust company.(1)
10.5 Master Term Note, dated June 30, 1994, by and among the Registrant and
Bank of New Hampshire.(1)
10.6 Ferrofluidics Corporation Amended and Restated 1994 Restricted Stock
Plan.(3)
43
<PAGE> 44
10.7 Stipulation of Settlement, dated June 23, 1994, IN RE FERROFLUIDICS
CORPORATION SECURITIES LITIGATION, Civil Action No. 93-11976PBS, United
States District Court, District of Massachusetts.(1)
10.8 Order and Final Approval of Settlement and Final Judgment, dated August
19, 1994, IN RE FERROFLUIDICS CORPORATION SECURITIES LITIGATION, Civil
Action No. 93-11976PBS, United States District Court, District of
Massachusetts.(1)
10.9 Release and Settlement Agreement, dated April 13, 1994, between the
Registrant and Molecular BioQuest, Incorporated.(1)
10.10 Consent and Undertaking of Ferrofluidics Corporation, dated June 20,
1997, In re the matter of the Securities and Exchange Commission vs.
Ferrofluidics Corporation, et al, United States District Court,
Southern District of New York.(4)
10.11 Amendment Agreement, dated December 23, 1987, to 1985 Letter of Credit
Reimbursement Agreement and 1984 Letter of Credit Reimbursement
Agreement between the Registrant and Fleet National Bank (incorporated
by reference to Exhibit 10I to the Registrant's Form 10-K for the year
ended 6/30/89).
10.14 Loan and Trust Agreement, dated September 1, 1984, among the
Registrant, The Industrial Development Authority of the State of New
Hampshire and State Street Bank and Trust Company, as Trustee
(incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q
for the quarter ended September 30, 1984).
10.15 Assignment, Assumption and Amendment Agreement, dated June 18, 1991, by
and among the Registrant, Chase Manhattan Capital Markets Corporation
and Fleet Norstar Securities, Inc. (incorporated by reference to
Exhibit 1000 to the Registrant's Form 10-K for the year ended 6/30/91).
10.16 Amendment Agreement, dated October 13, 1990, to 1984 Letter of Credit
Reimbursement Agreement and 1985 Letter of Credit Reimbursement
Agreement (incorporated by reference to Exhibit 10ZZ to the
Registrant's Form 10-K for the year ended 6/30/90).
10.17 Escrow, Pledge and Security Agreement dated January 31, 1991, made by
the Registrant in favor of State Street Bank and Trust Company, as
Trustee, and Fleet National Bank (incorporated by reference to Exhibit
10.36 to the 1991 Registration Statement).
10.19 Amended and Restated Employment Agreement, dated May 17, 1996, between
the Registrant and Salvatore J. Vinciguerra.(3)
10.20 Consulting Agreement, dated May 1, 1997, between the Registrant and
Paul F. Avery, Jr.(4)
10.21 License Agreement, dated February 27, 1987, between the Registrant,
Ferrofluidics GmbH and Ferrofluidics, Ltd. (incorporated by reference
to the Exhibit to the Registrant's Form 8-K dated 5/13/87).
10.22 Deed relating to repayment of a promissory note dated August 25, 1994
by and among the Registrant, Rumpack Limited and Arbuthnot Latham and
Co., Ltd.(1)
10.23 Release and discharge of certain guarantees and debentures and a Stock
Pledge Agreement dated August 25, 1994 by and among the Registrant and
Rumpack Limited and Arbuthnot Latham and Co., Ltd.(1)
10.24 Ferrofluidics Corporation Amended and Restated 1995 Stock Option and
Incentive Plan.(3)
10.25 Ferrofluidics Corporation Amended and Restated 1995 Nonqualified Stock
Option Plan.(3)
10.26 Employment Agreement, dated September 23, 1996, between the Registrant
and William B. Ford.(4)
10.27 First Amendment to Note and Loan Agreement, dated December 3, 1996, by
and between the Registrant and Bank of New Hampshire.(4)
10.28 Amended Master Term Note, dated December 3, 1996, by and between the
Registrant and Bank of New Hampshire.(4)
44
<PAGE> 45
10.29 Amendment to Mortgage, dated December 3, 1996, by and between the
Registrant and Bank of New Hampshire.(4)
10.30 Amendment to Assignment of Leases, dated December 3, 1996, by and
between the Registrant and Bank of New Hampshire.(4)
10.35 Form of Stock Purchase Agreement between the Registrant and certain
Selling Stockholders (incorporated by reference to Exhibit 10.53 to
Amendment No. 1, filed April 9, 1992, to the Registrant's Registration
Statement on Form S-3 (Registration No. 33-46888), filed April 1, 1992
(the "April 1992 Registration Statement").
10.36 Form of Stock Purchase Agreement between the Registrant and certain
Selling Stockholders (incorporated by reference to Exhibit 10.54 to
Amendment No. 2, filed April 30, 1992, to the April 1992 Registration
Statement).
10.37 Form of Stock Purchase Agreement between the Registrant and certain
Selling Stockholders (incorporated by reference to Exhibit 10.55 to
Amendment No. 2 to the April 1992 Registration Statement).
10.55 Termination Agreement, dated November 25, 1993, between Registrant and
Fuji Seiki, Inc. for the purpose of termination of The Patent,
Technical Information and Trademark License Agreement, dated March 30,
1993, between the Registrant and Fuji Seiki, Inc.(4)
10.56 Preferred Vendor Agreement, dated November 30, 1993, between the
Registrant and Fuji Seiki, Inc.(4)
10.57 Patent, Technical Information and Trademark License Agreement, dated
November 30, 1993, between the Registrant and Fuji Seiki, Inc.(4)
10.58 Agreement, dated March 8, 1993, among the Registrant, Fuji Seiki, Inc.,
VSE Austria GmbH, and AP&T GmbH for the purchase of 80% of VSE GmbH by
AP&T GmbH.(4)
10.59 Letter Agreement, dated September 15, 1993, between the Registrant and
Dr. Ronald Moskowitz concerning Dr. Moskowitz' retirement from
Ferrofluidics.(4)
10.62 Indemnification Agreement, dated October 1, 1993, between the
Registrant and Alvan F. Chorney.(4)
10.63 Indemnification Agreement, dated October 1, 1993, between the
Registrant and Stephen P. Morin.(2)
10.64 Severance Agreement dated October 1, 1993, between the Registrant and
Alvan F. Chorney.(4)
10.66 Amended and Restated Insurance Loan Agreement, dated June 30, 1991,
between the Registrant and Ronald Moskowitz (incorporated by reference
to Exhibit 10R to the Registrant's Form 10-K for the year ended
6/30/91).
10.67 Amended and Restated Insurance Loan Agreement, dated May 31, 1989,
between the Registrant and Frank Bloom (incorporated by reference to
Exhibit 10.37 to the 1990 Registration Statement).
10.68 Form of Common Stock Purchase Warrant -- directors and key employees
(incorporated by reference to Exhibit 10T to the Registrant's Form 10-K
for the year ended 6/30/88).
10.69 Form of Common Stock Purchase Warrant -- employees (incorporated by
reference to Exhibit 10U to the Registrant's Form 10-K for the year
ended 6/30/88).
10.70 1984 Non-Qualified Stock Option Plan, as amended through December 15,
1992.(4)
10.71 1983 Employee Stock Purchase Plan, as amended through December 14, 1990
(incorporated by reference to Exhibit 4 to Post-Effective Amendment No.
1, filed January 23, 1991, to the Registrant's Registration Statement
on Form S-8 (Registration No. 2-95090)).
45
<PAGE> 46
10.72 Settlement Agreement and Release, dated June 30, 1993, between Nippon
Ferrofluidics Corporation, Akira Yamamura, Koichi Goto, Yoshitada
Akahori, Tadao Ishizawa, Atsumi Nakamura, Nobuo Yamamura, past and
present members of NFC's Board of Directors and the Registrant.(4)
10.73 Stock Subscription Agreement, dated June 30, 1993 between the
Registrant and Nippon Ferrofluidics Corporation pursuant to the
acquisition of Nippon Ferrofluidics Corporation Common Stock by
Ferrofluidics.(4)
10.74 Superseding 1993 Fluids License Agreement, dated June 30, 1993, between
the Registrant and Nippon Ferrofluidics Corporation.(4)
10.75 Asset Purchase Agreement, dated September 23, 1998, by and between the
Registrant and General Signal Technology Corporation.(5)
10.76 Employment Agreement, dated June 3, 1998, between the Registrant and
Paul F. Avery, Jr.(5)
10.77 Amendment to Employment Agreement, dated June 3, 1999, between the
Registrant and Paul F. Avery, Jr.(6)
10.78 Letter Agreement, dated July 1, 1999, between the Registrant and
Timothy D. Barton.(6)
10.79 Letter Agreement, dated July 1, 1999, between the Registrant and Barry
D. Moskowitz.(6)
10.80 Letter Agreement, dated August 2 1999, between the Registrant and David
C. Lewandoski.(6)
10.81 Amendment to Employment Agreement, dated August 6, 1999, between the
Registrant and Alvan F. Chorney.(6)
10.82 Amendment to Employment Agreement, dated September 9, 1999, between the
Registrant and Paul F. Avery, Jr.(6)
21 Subsidiaries of the Registrant(6)
23.1 Consent of Ernst & Young LLP(6)
27 Financial Data Schedule for 1999(6)
27.1 Financial Data Schedule for 1998, as restated(6)
27.2 Financial Data Schedule for 1997, as restated(6)
1 Incorporated by reference to the designated exhibit of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994.
2 Incorporated by reference to the designated exhibit of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1993.
3 Incorporated by reference to the designated exhibit of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996.
Incorporated by reference to the designated exhibit of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 28, 1997.
5 Incorporated by reference to the designated exhibit of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 27, 1998.
6 Filed herewith.
46
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorize, this 10th day of
September, 1999.
FERROFLUIDICS CORPORATION
By: /s/ Paul F. Avery, Jr.
---------------------------------------
Paul F. Avery, Jr.
President, Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
Signatures Title Date Signed
- ---------- ----- -----------
/s/ Paul F. Avery, Jr. President, Chief Executive Officer and 9/10/99
- ----------------------- Chairman of the Board (Principal
Paul F. Avery, Jr. Executive Officer)
/s/ William B. Ford Vice President and Chief Financial 9/10/99
- ----------------------- Officer (Principal Financial Officer)
William B. Ford
/s/ Dean Kamen Director 9/10/99
- -----------------------
Dean Kamen
/s/ Howard F. Nichols Director 9/10/99
- -----------------------
Howard F. Nichols
/s/ Dennis R. Stone Director 9/10/99
- -----------------------
Dennis R. Stone
47
<PAGE> 48
FERROFLUIDICS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended July 3, 1999, June 27, 1998 and June 28, 1997
<TABLE>
<CAPTION>
Balance at Charges Balance at
Beginning To Deductions End of
of Period Expenses And Other Period
--------- -------- ---------- --------
1999
- ----
<S> <C> <C> <C> <C>
Reserve for doubtful accounts - trade $329,000 $ 88,000 $157,000(1) $260,000
======== ======== ======== ========
1998
- ----
Reserve for doubtful accounts - trade $199,000 $185,000 $ 55,000 (2) $329,000
======== ======== ======== ========
1997
- ----
Reserve for doubtful accounts - trade $320,000 $ 50,000 $171,000 (2) $199,000
======== ======== ======== ========
</TABLE>
(1) Uncollectible accounts written off, net of recoveries, of $99,000 and
reduction in the Systems Division reserve of $58,000 due to the collection
of the majority of the accounts.
(2) Uncollectible accounts written off, net of recoveries.
48
<PAGE> 1
EXHIBIT 10.77
This AGREEMENT, dated as of June 3, 1999, is entered into by and
between Ferrofluidics Corporation (the "Company"), a Massachusetts corporation
with its principal place of business at 40 Simon Street, Nashua, New Hampshire,
and Paul F. Avery, Jr. ("Avery").
WHEREAS, the Company and Avery entered into that certain Employment
Agreement, dated as of June 3, 1998 (the "Employment Agreement"); and
WHEREAS, the parties hereto desire to set forth certain additional
matters relating to Avery's employment with the Company as President, Chief
Executive Officer and Chairman of the Board as governed by the Employment
Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual promises, terms, provisions and conditions set forth herein, the parties
hereby agree:
1. The parties hereby consent, pursuant to Section 2 of the Employment
Agreement and effective as of June 3, 1999, to extend the term of the Employment
Agreement for a subsequent period of one (1) year, commencing June 3, 1999.
2. The parties hereby agree and acknowledge that, notwithstanding
anything contained in the Employment Agreement to the contrary, following any
termination of the Employment Agreement pursuant to Section 5 thereof
(termination by Avery of his employment at any time upon sixty (60) days'
written notice to the Company), the Company and Avery shall immediately
thereafter enter into an agreement pursuant to which Avery shall be engaged as a
consultant to the Company. The terms and conditions of such consultancy shall be
identical to those set forth in the Consulting Agreement, dated May 1, 1997,
between the Company and Avery. Notwithstanding the foregoing, upon the
engagement of Avery as a consultant as provided by the foregoing, the Company
may also request that Avery continue to serve as the Chairman of the Board of
Directors. If the Company so requests, and if Avery agrees to so serve, the
Company shall pay Avery an annual retainer of $50,000 for such service for so
long as Avery serves in such position. Such retainer shall be in addition to any
and all payments to be made to Avery under the consulting arrangement discussed
above.
<PAGE> 2
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Company, by its duly authorized representative, and by Avery,
as of the date first above written.
FERROFLUIDICS CORPORATION
/s/ Paul F. Avery, Jr. By: /s/ Robert P. Rittereiser
- ------------------------- ------------------------------
Paul F. Avery, Jr. Robert P. Rittereiser
Chairman, Compensation
Committee of the Board of
Directors
<PAGE> 1
EXHIBIT 10.78
[FERROFLUIDICS CORPORATION HEADER]
MEMO OF UNDERSTANDING
DATE: July 1, 1999
TO: Mr. Timothy D. Barton
c/o Ferrofluidics Corporation
Nashua, New Hampshire
This memo confirms our discussions leading to a change in your employment
agreement effective July 5, 1999, as outlined below:
- Your title remains Vice President, and your employment with the
corporation continues to be at will.
- If you should be severed from the company by a corporate change in
control, you will receive a lump-sum payment of six months salary.
- All other benefit entitlements, with the exception of the severance
payment described above, will be the same as for any other employee,
and all outstanding option and stock arrangements remain unchanged.
Please acknowledge your acceptance of these terms by signing below and
returning one copy of this letter to Human Resources.
/s/ Paul F. Avery, Jr.
- ---------------------------
Paul F. Avery, Jr.
President & CEO
ACCEPTED:
/s/ Timothy D. Barton
- ---------------------------
Timothy D. Barton
<PAGE> 1
EXHIBIT 10.79
[FERROFLUIDICS CORPORATION LETTERHEAD]
MEMO OF UNDERSTANDING
DATE: July 1, 1999
TO: Mr. Barry D. Moskowitz
c/o Ferrofluidics Corporation
Nashua, New Hampshire
This memo confirms our discussions leading to a change in your employment
agreement effective July 5, 1999, as outlined below:
* Your title remains Vice President, and your employment with the
corporation continues to be at will.
* If you should be severed from the company by a corporate change in
control, you will receive a lump-sum payment of six months salary.
* All other benefit entitlements, with the exception of the severance
payment described above, will be the same as for any other employee,
and all outstanding option and stock arrangements remain unchanged.
Please acknowledge your acceptance of these terms by signing below and
returning one copy of this letter to Human Resources.
/s/ Paul F. Avery, Jr.
- ------------------------
Paul F. Avery, Jr.
President & CEO
ACCEPTED:
/s/ Barry D. Moskowitz 08/18/99
- ------------------------
Barry D. Moskowitz
<PAGE> 1
EXHIBIT 10.80
[FERROFLUIDICS CORPORATION LETTERHEAD]
MEMO OF UNDERSTANDING
DATE: August 2, 1999
TO: Mr. David C. Lewandoski
31 Shipley Drive
Hollis, New Hampshire 03049
This memo confirms our discussions leading to a change in your employment
agreement effective August 2, 1999, as outlined below:
* Your title remains Controller, and your employment with the
corporation continues to be at will.
* If you should be severed from the company by a corporate change in
control, you will receive a lump-sum payment of six months salary.
* All other benefit entitlements, with the exception of the severance
payment described above, will be the same as for any other employee,
and all outstanding option and stock arrangements remain unchanged.
Please acknowledge your acceptance of these terms by signing below and returning
one copy of this letter to Human Resources.
/s/ Paul F. Avery, Jr.
- -------------------------
Paul F. Avery, Jr.
President & CEO
ACCEPTED:
/s/ David C. Lewandoski
- -------------------------
David C. Lewandoski
<PAGE> 1
EXHIBIT 10.81
[FERROFLUIDICS CORPORATION LETTERHEAD]
August 6, 1999
Mr. Alvan F. Chorney
10 Mt. Laurel Road
Unit 607
Nashua, N.H. 03061
Dear Mr. Chorney:
This letter sets forth our understanding with respect to severance pay to
which you would be entitled to in the event of change of control of the
Company, and within 12 months of that occurrence. For severance events other
than "change of control of the Company", our original agreement dated
October 1, 1993, remain in-place.
In the event that your employment with the Company is terminated, other
than by reason of your death, disability or for cause, you will be entitled to
receive severance pay ("Severance Payment") for a period of twenty-four (24)
months at a rate equal to the highest annual salary rate during the time of
employment. The Severance Payment shall be paid to you in fifty-two (52) equal
bi-weekly payments, commencing with the first pay date of the Company following
your termination of employment.
For purposes of this Agreement, in the event you shall be totally disabled
from performing your duties with the Company for a consecutive period of
thirteen weeks, the Board of Directors may terminate your employment after one
(1) month prior written notice to you, in which event the Company shall not be
liable to pay you any further compensation or the severance payment.
This Letter Agreement does not change in any way the at-will nature of
your employment with the Company, nor does it supersede the Non-Disclosure
Agreement dated January 29, 1990 between you and the Company that remains in
full force and effect.
This Letter Agreement shall in all respects be interpreted, enforced,
governed and construed by and under the laws of the State of New Hampshire,
exclusive of the conflicts of laws provisions thereof.
This Letter Agreement represents our entire understanding regarding the
terms of your severance from the Company and supersedes any prior understandings
or agreements between you and the Company or any of its representatives
regarding the terms of your severance from the Company. This Agreement may not
be modified, altered or changed except by a written instrument duly signed by
the parties.
Please signify your agreement to the terms of this Letter Agreement by
signing in the space provided.
Sincerely,
FERROFLUIDICS CORPORATION
By: /s/ Paul F. Avery, Jr.
-----------------------------
Paul F. Avery, Jr.
President & CEO
Agreed to: /s/ Alvan F. Chorney Date: August 6, 1999
------------------------ --------------------------
Alvan F. Chorney
<PAGE> 1
EXHIBIT 10.82
AGREEMENT
This AGREEMENT, dated as of September 9, 1999, is entered into by and
between Ferrofluidics Corporation (the "Company"), a Massachusetts corporation
with its principal place of business at 40 Simon Street, Nashua, New Hampshire,
and Paul F. Avery, Jr. ("Avery").
WHEREAS, the Company and Avery entered into that certain Employment
Agreement, dated as of June 3, 1998, as amended on June 3, 1999 (the "Employment
Agreement"); and
WHEREAS, the parties hereto desire to set forth certain additional
matters relating to Avery's employment with the Company as President, Chief
Executive Officer and Chairman of the Board as governed by the Employment
Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual promises, terms, provisions and conditions set forth herein, the parties
hereby agree:
1. For clarification purposes, the parties hereby agree and acknowledge
that, notwithstanding anything contained in the Employment Agreement to the
contrary, in the event that a Terminating Event (as defined in the Employment
Agreement) shall occur following a Change in Control (as defined in the
Employment Agreement), in addition to any payments to which Mr. Avery may be
entitled pursuant to Section 5b of the Employment Agreement, the Company and
Avery shall immediately thereafter enter into an agreement pursuant to which
Avery shall be engaged as a consultant to the Company. The terms and conditions
of such consultancy shall be identical to those set forth in the Consulting
Agreement, dated May 1, 1997, between the Company and Avery, and shall provide,
among other things, that Mr. Avery shall be engaged as a consultant to the
Company for a period of three (3) years and shall receive consulting fees at a
rate of $10,000 per month. Notwithstanding the foregoing, upon the engagement of
Avery as a consultant as provided by the foregoing, the Company may also request
that Avery continue to serve as the Chairman of the Board of Directors. If the
Company so requests, and if Avery agrees to so serve, the Company shall pay
Avery an annual retainer of $50,000 for such service for so long as Avery serves
in such position. Such retainer shall be in addition to any and all payments to
be made to Avery under the consulting arrangement discussed above.
<PAGE> 2
IN WITNESS WHEREOF, this Arrangement has been executed as a sealed
instrument by the Company, by its duly authorized representative, and by Avery,
as of the date first above written.
FERROFLUIDICS CORPORATION
/s/ Paul F. Avery, Jr. By: /s/ Dennis R. Stone
- --------------------------- ------------------------------
Paul F. Avery, Jr. Dennis R. Stone
Chairman, Compensation
Committee of the Board of
Directors
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Ferrofluidics Corporation
As of July 3, 1999
NAME PLACE OF ORGANIZATION
- ---- ---------------------
Ferrofluidics, GmbH(1) Nurtingen, Germany
Ferrofluidics, Ltd. Oxford, England
Ferrofluidics, S.A.(2) Madrid, Spain
Ferrofluidics, S.A.R.L. Milan, Italy
Ferrofluidics Japan Corporation(3) Tokyo, Japan
Ferrohydrodynamics Corporation Massachusetts
(1) Formerly Advanced Products and Technologies, GmbH.
(2) Formerly Advanced Products and Technologies, S.A.
(3) During fiscal 1999, the Company decided to discontinue operations in Japan.
The Company intends to formally dissolve the Japanese subsidiary in fiscal
2000.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-13587) pertaining to the 1995 Stock Option and Incentive Plan,
the 1995 Non-Qualified Stock Option Plan, and the 1994 Restricted Stock Plan of
Ferrofluidics Corporation of our report dated August 20, 1999, with respect to
the consolidated financial statements and schedule of Ferrofluidics Corporation
included in its Annual Report (Form 10-K) for the year ended July 3, 1999.
/s/ Ernst & Young LLP
Manchester, New Hampshire
September 8, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Ferrofluidics Corporation's Consolidated Balance Sheet as of July 3, 1999 and
its consolidated results of operations for the year then ended and is qualified
in its entirety by reference to such Annual statements on Form 10K for the year
ended July 3, 1999.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> JUL-03-1999
<CASH> 8,038,000
<SECURITIES> 0
<RECEIVABLES> 4,115,000
<ALLOWANCES> 260,000
<INVENTORY> 6,325,000
<CURRENT-ASSETS> 18,464,000
<PP&E> 17,608,000
<DEPRECIATION> 11,205,000
<TOTAL-ASSETS> 28,923,000
<CURRENT-LIABILITIES> 3,369,000
<BONDS> 5,000,000
0
0
<COMMON> 25,000
<OTHER-SE> 20,504,000
<TOTAL-LIABILITY-AND-EQUITY> 28,923,000
<SALES> 23,143,000
<TOTAL-REVENUES> 23,143,000
<CGS> 13,568,000
<TOTAL-COSTS> 13,568,000
<OTHER-EXPENSES> 9,569,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 325,000
<INCOME-PRETAX> (126,000)
<INCOME-TAX> 350,000
<INCOME-CONTINUING> (476,000)
<DISCONTINUED> 5,319,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,843,000
<EPS-BASIC> 0.79
<EPS-DILUTED> 0.79
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Ferrofluidics Corporation's consolidated balance sheet as of June 27, 1998 and
its consolidated results of operations, as restated, for the year then ended and
is qualified in its entirety by reference to such Annual Statements on Form 10K
for the year ended June 27, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> JUN-27-1998
<CASH> 1,516,000
<SECURITIES> 0
<RECEIVABLES> 12,412,000
<ALLOWANCES> 329,000
<INVENTORY> 13,855,000
<CURRENT-ASSETS> 28,815,000
<PP&E> 21,288,000
<DEPRECIATION> 12,462,000
<TOTAL-ASSETS> 44,019,000
<CURRENT-LIABILITIES> 20,633,000
<BONDS> 5,000,000
0
0
<COMMON> 25,000
<OTHER-SE> 18,176,000
<TOTAL-LIABILITY-AND-EQUITY> 44,019,000
<SALES> 27,204,000
<TOTAL-REVENUES> 27,204,000
<CGS> 14,959,000
<TOTAL-COSTS> 14,959,000
<OTHER-EXPENSES> 10,076,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 634,000
<INCOME-PRETAX> 1,620,000
<INCOME-TAX> 74,000
<INCOME-CONTINUING> 1,546,000
<DISCONTINUED> (5,018,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,472,000)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Ferrofluidics Corporation's consolidated balance sheet as of June 28, 1997 and
its consolidated results of operations, as restated, for the year then ended and
is qualified in its entirety by reference to such Annual statements on Form 10K
for the year ended June 28, 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-28-1997
<CASH> 883,000
<SECURITIES> 0
<RECEIVABLES> 13,808,000
<ALLOWANCES> 199,000
<INVENTORY> 15,263,000
<CURRENT-ASSETS> 31,570,000
<PP&E> 19,338,000
<DEPRECIATION> 10,961,000
<TOTAL-ASSETS> 45,001,000
<CURRENT-LIABILITIES> 18,247,000
<BONDS> 5,000,000
0
0
<COMMON> 25,000
<OTHER-SE> 21,556,000
<TOTAL-LIABILITY-AND-EQUITY> 45,001,000
<SALES> 23,856,000
<TOTAL-REVENUES> 23,856,000
<CGS> 12,036,000
<TOTAL-COSTS> 12,036,000
<OTHER-EXPENSES> 11,476,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 503,000
<INCOME-PRETAX> (188,000)
<INCOME-TAX> (448,000)
<INCOME-CONTINUING> 260,000
<DISCONTINUED> 1,412,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,672,000
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.27
</TABLE>
