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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10734
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FERROFLUIDICS CORPORATION
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(Exact name of registrant as specified in its charter)
Massachusetts 02-0275185
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization Identification No.)
40 Simon Street,
Nashua, New Hampshire 03061
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (603) 883-9800
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(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
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(2) Yes X No
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Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of November 5, 1995.
Common Stock, $.004 par value per share 5,997,198
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(Class) (No. of Shares)
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TABLE OF CONTENTS
Page Nos.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1995 and June 30, 1995 3
Consolidated Statements of Operations -
Three Months Ended September 30, 1995 and 1994 4
Consolidated Statements of Cash Flows -
Three Months Ended September 30, 1995 and 1994 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Position 8 - 9
Part II. Other Information 10
Signatures 11
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PART I. FINANCIAL INFORMATION
ITEM 1.
FERROFLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1995 and June 30, 1995
(unaudited)
Sept. 30, 1995 June 30, 1995
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ASSETS
Current Assets:
Cash and cash equivalents $ 1,321,000 $ 1,563,000
Accounts receivable - trade, less allowance
for doubtful accounts of $331,000 at
September 30, 1995 and $357,000 at June 30, 1995 6,743,000 7,774,000
Inventories 15,752,000 14,130,000
Prepaid and other current assets 2,472,000 2,659,000
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Total Current Assets 26,288,000 26,126,000
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Property, plant and equipment, at cost, net
of accumulated depreciation of $9,117,000 at
September 30, 1995 and $8,895,000 at June 30, 1995 8,289,000 8,116,000
Cash value of life insurance 2,939,000 2,976,000
Other assets, principally goodwill 2,240,000 2,311,000
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TOTAL ASSETS $ 39,756,000 $ 39,529,000
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LIABILITIES
Current Liabilities:
Accounts payable 3,465,000 5,318,000
Customer deposits 10,531,000 9,403,000
Accrued expenses 3,951,000 3,594,000
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Total Current Liabilities 17,947,000 18,315,000
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Long-term debt obligations 5,029,000 5,036,000
Other liabilities 272,000 397,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, authorized
100,000 shares, issued and outstanding, none -- --
Common stock, $.004 par value, authorized
12,500,000 shares, issued 5,997,198 at September 30,
1995 and 5,997,198 shares at June 30, 1995 24,000 24,000
Additional paid-in capital 35,591,000 35,485,000
Retained deficit (18,749,000) (19,463,000)
Currency translation adjustments (358,000) (265,000)
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Total Stockholders' Equity 16,508,000 15,781,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,756,000 $ 39,529,000
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The accompanying notes are an integral part of the consolidated financial
statements
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FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1995 and 1994
(unaudited)
1995 1994
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Net sales and revenues $ 15,011,000 $ 9,931,000
Cost of goods sold 10,153,000 6,125,000
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4,858,000 3,806,000
Engineering and product development expenses 993,000 881,000
Selling, general and administrative expense 2,919,000 2,382,000
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Operating income 946,000 543,000
Interest income 24,000 57,000
Interest expense (118,000) (194,000)
Other income (expense) (38,000) 3,000
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Income before income taxes 814,000 409,000
Provision for income taxes 100,000 5,000
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Net income $ 714,000 $ 404,000
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Per Share Data:
Net income $ .12 $ .07
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Weighted average common shares outstanding 6,173,148 5,411,949
The accompanying notes are an integral part of the consolidated financial
statements.
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FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 1995 and 1994
(unaudited)
1995 1994
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Cash flows from operating activities:
Net income $ 714,000 $ 404,000
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization 347,000 225,000
Other 24,000 (218,000)
Changes in assets and liabilities:
Accounts receivable 1,057,000 1,001,000
Inventory (1,622,000) 1,659,000
Prepaid expenses and other current assets 187,000 (65,000)
Accounts payable and accrued expenses (1,496,000) (2,333,000)
Customer deposits 1,128,000 (1,372,000)
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Net cash provided (used) by operating activities 339,000 (699,000)
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Cash flow from investing activities:
Acquisition of property, plant and equipment (488,000) (125,000)
Proceeds from note receivable -- 350,000
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Net cash provided (used) by investing activities (488,000) 225,000
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Cash flow from financing activities:
Short term borrowing, net -- 1,481,000
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Net cash provided by financing activities -- 1,481,000
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Effect of currency rate changes on cash (93,000) 45,000
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Net increase (decrease) in cash (242,000) 1,052,000
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Cash and cash equivalents at beginning of period 1,563,000 322,000
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Cash and cash equivalents at end of period $ 1,321,000 $ 1,374,000
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Cash paid for interest and income taxes for the three months ended September 30, 1995 and 1994 is as follows:
1995 1994
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Interest $50,000 $132,000
Income taxes $ 3,000 $25,000
The accompanying notes are an integral part of the consolidated financial
statements.
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FERROFLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Ferrofluidics
Corporation and its subsidiaries have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of operations
of any interim period are subject to year-end audit and adjustments, and are not
necessarily indicative of the results of operations for the fiscal year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended June 30, 1995.
The Company has reclassified the presentation of certain prior year
information to conform with the current presentation format.
B. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories are comprised of the following elements at September 30, 1995 and
June 30, 1995:
Sept.30, 1995 June 30, 1995
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Raw materials and purchased parts $ 11,099,000 $ 8,018,000
Work-in-process 2,932,000 2,634,000
Finished goods 1,721,000 3,478,000
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Total inventories $ 15,752,000 $ 14,130,000
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C. CASH VALUE OF LIFE INSURANCE
The Company currently has $5,000,000 invested in single premium life
insurance policies on the lives of two former officers, who are also partial
beneficiaries of the policies. These policies currently yield their minimum
guaranteed rate of return of 6.0%, less a nominal charge for the cost of
insurance. The Company is entitled to borrow the entire $5,000,000 aggregate
premium. At September 30, 1995, there was $2,651,000 in loans and accrued
interest outstanding against these policies.
Under a series of related insurance loan agreements, the former
officers were given the right to borrow, up to a specified date, certain
amounts from the insurance company approximating the Company's earnings on the
policies. The former officers' estates are beneficiaries of these policies to
the extent of their borrowing rights under the policies. The Company has
indemnified the officers from any income tax consequences resulting from these
agreements. In addition, the agreements also provided the officers the ability
to deposit amounts with the Company equal to the amounts borrowed, and in the
future, borrowable from the insurance company by each officer. These deposited
amounts are, under certain circumstances, repayable by the Company to the
former officers upon their death or the surrender of the policies. At September
30, 1995, approximately $1,407,000 is reflected as an offset to the cash
surrender value of these policies in recognition of these deposited amounts.
In October 1995, the Company entered into an agreement with the former
chief executive officer pursuant to which the Company (i) transferred the
ownership in the policies to him in exchange for an amount approximating their
net book value, (ii) eliminated certain indemnification liablities relating to
the insurance loan agreements, (iii) extended the covenant not to compete with
the former chief executive officer through the year 2000, and (iv) made a
discounted cash payment to him settling its obligations to him under a
termination agreement. The termination agreement originally called for payments
to the former officer through June 1997. The new agreement supersedes the
termination agreement and all other agreements between the company and the
former chief executive officer.
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D. EARNINGS PER SHARE
Net income per share for the quarters ended September 30, 1995 and 1994 is
based on the weighted average number of common shares outstanding as well as the
effect of all dilutive common stock equivalents. Pursuant to the terms of the
settlement of the shareholder class action lawsuit against the Company, which
became final on September 23, 1994, the Company agreed to issue 600,000 shares
of its common stock. In October 1994 and May 1995, the Company issued 180,000
and 420,000 shares to the class, respectively, and accordingly, the shares are
included in the weighted average outstanding common shares for the quarter ended
September 30, 1995. Additionally, the weighted average outstanding shares
reflects the granting of approximately 200,000 shares of common stock pursuant
to the Company's 1994 Restricted Stock Plan during 1994 and 1995.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL POSITION
The following discussion provides information to assist in the
understanding of Ferrofluidics' results of operations and financial condition.
It should be read in conjunction with the consolidated financial statements and
notes thereto that appear elsewhere herein.
RESULTS OF OPERATIONS
In the first quarter ended September 30, 1995, the Company generated net
income of $714,000, or $.12 per share, as compared to net income in the first
quarter of fiscal 1995 of $404,000, or $.07 per share. As discussed in Note D to
the Consolidated Financial Statements, the per share data for the quarter ended
September 30, 1995 reflects the issuance, during the second and fourth quarters
of fiscal 1995, of 600,000 additional shares of common stock in settlement of a
shareholder class action suit, which was concluded in September of 1994.
Net sales and revenues for the quarter ended September 30, 1995 totaled
$15,011,000 as compared to $9,931,000 in the same period of the prior year. A
product line comparison of the net sales and revenues is as follows:
Q1 96 Q1 95
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Seals $ 3,332,000 $ 2,594,000
Fluid 557,000 535,000
Crystal growing systems 9,250,000 4,926,000
Other 1,872,000 1,876,000
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Total net sales and revenues $15,011,000 $ 9,931,000
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Of the revenues in the first quarter, approximately $9.2 million, or 60%,
represented sales to one affiliated group of companies. Management expects this
concentration of revenues with this customer group to continue throughout the
current fiscal year.
Consolidated gross margins for the first quarter of fiscal 1996 amounted to
32.4% of product sales as compared to 38.3% of product sales in the prior years'
first quarter. The decline in gross margin in the current quarter compared to
the prior year is due principally to the mix of product lines, with
approximately 61% of the product revenues in the current year's first quarter
attributable to the Company's crystal growing systems, which generate lower
gross margins, as compared to 50% in the prior period.
Consolidated order bookings for the quarter ended September 30, 1995
totaled $20,472,000 as compared to $4,603,000 in the first quarter of the prior
year. The current period includes $13,228,000 of orders for silicon crystal
growing systems as compared to $294,000 in the previous period. Bookings in the
remaining product lines increased 68% from $4,309,000 in the prior period to
$7,244,000 in the current quarter.
Consolidated backlog at September 30, 1995 was $43,185,000 compared to
$9,634,000 at September 30, 1994 and $37,756,000 at June 30, 1995. Backlog for
the Company's crystal growing systems at September 30, 1995 was $36,430,000
compared to $3,475,000 at September 30, 1994. In October 1995, the Company
announced that it had received an additional $23.0 million order for crystal
growing systems and related equipment which is not included in these amounts.
Backlog of all other products increased approximately 10% from $6,159,000 at
September 30, 1994 to $6,756,000 at September 30, 1995, reflecting an increased
booking rate in the current year. Of the order backlog for the Company at
September 30, 1995, approximately 92% is expected to be shipped during the
current fiscal year.
Engineering and product development expenditures in the quarter
totaled $993,000, or 6.6% of revenues, as compared to $881,000, or 8.9% of
revenues. The total engineering expenditures in the current quarter are
comprised of $399,000 related to development of the Company's current and future
products and $594,000 related to applications and other sustaining engineering
in support of the quarter's revenues. In the prior year's first quarter, product
development totaled $332,000 and all other engineering totaled $548,000.
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Selling, general and administrative expenses for the quarter ended
September 30, 1995 totaled $2,919,000, up $537,000, or 18%, from the first
quarter of the prior year. The increase is due primarily to increased staffing
and expenditures necessary to support the additional systems business the
Company has obtained and an increase in general corporate expenses over the
comparable period of the prior year.
Interest expense for the quarter ended September 30, 1995 of $118,000
represents principally the interest on the Company's $5,000,000 of industrial
development bonds and the interest accruing on certian loans outstanding against
certain keyman life insurance policies on the lives of former executives. As
more fully discussed in Note C to the Consolidated Financial Statements, during
the second quarter of fiscal 1996, management will complete the transfer of
these poicies to the former executive, thereby eliminating the loans and the
related interest expense going forward. In the prior year's first quarter,
interest expense totaled $194,000 due to the fact that the Company had fully
borrowed on its working capital line of credit during that quarter. In addition,
the prior year includes interest on certain loans at the Company's former
Austrian subsidiary, which was discontinued during the second quarter of 1995.
The Company has available to it approximately $30,000,000 in net operating
loss carryforwards for Federal income tax purposes which can be used to offset
future taxable income, if any, and will expire at various dates through 2010.
The current quarter's tax provision includes a provision for certain state and
alternative minimum taxes, as well as a provision for foreign income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1995 totaled $8,341,000 as compared to
$7,811,000 at June 30, 1995, due principally to the reduction in trade payables
to suppliers. During the first quarter of fiscal 1996, the operations of the
business generated $339,000 of cash, reflecting the positive results of
operations and the receipt of additional customer deposits from systems
equipment customers, which funded the increase in inventories. At September 30,
1995, the Company had outstanding purchase commitments for inventory of
approximately $20,000,000.
Investing activities during the current quarter included only the
acquisition of property, plant and equipment of $488,000. At September 30, 1995,
the Company had purchase commitments with respect to certain machinery and
equipment totaling approximately $800,000. The equipment is expected to be
installed and operational during the second quarter. The Company did not have
any financing activities during the quarter ended September 30, 1995.
The Company believes it has sufficient working capital resources to fund
its operations through fiscal 1996 and thereafter. Additionally, management
believes that the Company continues to be heavily reliant upon the receipt of
contractual advance payments from customers in its systems business with regard
to its ability to satisfy that business's obligations in the normal course.
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PART II. OTHER INFORMATION
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FERROFLUIDICS CORPORATION
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(Registrant)
Date: November 13, 1995 By: /s/ Stephen P. Morin
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Stephen P. Morin
Principal Accounting Officer
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