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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 December 31, 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 February 9, 1996.
Common Stock, $.004 par value per share 5,995,432
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(Class) (No. of Shares)
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TABLE OF CONTENTS
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Page Nos.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 1995 and June 30, 1995 3
Consolidated Statements of Operations -
Three Months Ended December 31, 1995 and 1994 4
Consolidated Statements of Operations -
Six Months Ended December 31, 1995 and 1994 5
Consolidated Statements of Cash Flows -
Six Months Ended December 31, 1995 and 1994 6
Notes to Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 9 - 11
Part II. Other Information
Item 3. Submission of Matters to a Vote of Security Holders 12
Signatures 13
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PART I. FINANCIAL INFORMATION
ITEM 1.
FERROFLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and June 30, 1995
(unaudited)
ASSETS December 31, 1995 June 30, 1995
- ------ ----------------- -------------
Current Assets:
Cash and cash equivalents $ 1,578,000 $ 1,563,000
Accounts receivable - trade, less allowance
for doubtful accounts of $342,000 at
December 31, 1995 and $357,000 at June 30, 1995 10,006,000 7,774,000
Inventories 15,132,000 14,130,000
Prepaid and other current assets 2,719,000 2,659,000
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Total Current Assets 29,435,000 26,126,000
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Property, plant and equipment, at cost, net
of accumulated depreciation of $9,298,000 at
December 31, 1995 and $8,895,000 at June 30, 1995 8,685,000 8,116,000
Cash value of life insurance 2,997,000 2,976,000
Other assets, principally goodwill 1,940,000 2,311,000
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TOTAL ASSETS $43,057,000 $39,529,000
=========== ===========
LIABILITIES
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Current Liabilities:
Bank notes payable 3,550,000 -
Accounts payable 4,128,000 5,318,000
Customer deposits 8,351,000 9,403,000
Accrued expenses 4,086,000 3,594,000
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Total Current Liabilities 20,115,000 18,315,000
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Long-term debt obligations 5,000,000 5,036,000
Other liabilities 252,000 397,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
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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 December 31,
1995 and 5,997,198 shares at June 30, 1995 24,000 24,000
Additional paid-in capital 35,698,000 35,485,000
Retained deficit (17,662,000) (19,463,000)
Currency translation adjustments (370,000) (265,000)
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Total Stockholders' Equity 17,690,000 15,781,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $43,057,000 $39,529,000
=========== ===========
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 December 31, 1995 and 1994
(unaudited)
1995 1994
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Net sales and revenues $18,849,000 $5,698,000
Cost of goods sold 13,309,000 3,118,000
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5,540,000 2,580,000
Engineering and product development expenses 1,153,000 683,000
Selling, general and administrative expense 2,973,000 2,754,000
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Income (loss) from operations, before license fees 1,414,000 (857,000)
License fee income - 1,300,000
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Operating income 1,414,000 443,000
Interest income 13,000 13,000
Interest expense (148,000) (149,000)
Other expense (60,000) (260,000)
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Income before income taxes 1,219,000 47,000
Provision for income taxes 132,000 3,000
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Net income $ 1,087,000 $ 44,000
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Per Share Data:
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Net income $.18 $.01
==== ====
Weighted average common and common equivalent
shares outstanding 6,183,148 5,546,949
The accompanying notes are an integral part of the consolidated financial
statements.
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FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended December 31, 1995 and 1994
(unaudited)
1995 1994
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Net sales and revenues $33,860,000 $15,485,000
Cost of goods sold 23,462,000 9,141,000
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10,398,000 6,344,000
Engineering and product development expenses 2,146,000 1,564,000
Selling, general and administrative expense 5,892,000 5,129,000
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Income (loss) from operations, before license fees 2,360,000 (349,000)
License fee income - 1,300,000
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Operating income 2,360,000 951,000
Interest income 37,000 70,000
Interest expense (266,000) (308,000)
Other expense (98,000) (257,000)
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Income before income taxes 2,033,000 456,000
Provision for income taxes 232,000 8,000
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Net income $ 1,801,000 $ 448,000
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Per Share Data:
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Net income $.29 $.08
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Weighted average common and common equivalent
shares outstanding 6,178,862 5,469,806
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 Six Months Ended December 31, 1995 and 1994
(unaudited)
1995 1994
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Cash flows from operating activities:
Net income $1,801,000 $ 448,000
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization 500,000 450,000
Disposal of subsidiary - 501,000
Other 367,000 257,000
Changes in assets and liabilities:
Accounts receivable (2,217,000) 1,254,000
Inventory (1,002,000) 760,000
Prepaid expenses and other current assets (60,000) 8,000
Bank notes payable 3,550,000 (290,000)
Accounts payable and accrued expenses (698,000) (1,616,000)
Customer deposits (1,052,000) (1,391,000)
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Net cash provided by operating activities 1,189,000 381,000
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Cash flow from investing activities:
Acquisition of property, plant and equipment (1,069,000) (151,000)
Proceeds from note receivable - 350,000
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Net cash provided (used) by investing activities (1,069,000) 199,000
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Cash flow from financing activities:
Short term borrowing, net - -
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Net cash provided by financing activities - -
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Effect of currency rate changes on cash (105,000) 45,000
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Net increase in cash 15,000 625,000
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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 $1,578,000 $ 947,000
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Cash paid for interest and income taxes for the six months ended December 31, 1995
and 1994 is as follows:
1995 1994
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Interest $130,000 $203,000
Income taxes $ 7,000 $ 38,000
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 December 31, 1995
and June 30, 1995:
Dec. 31, 1995 June 30, 1995
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Raw materials and purchased parts $10,479,000 $ 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 $15,132,000 $14,130,000
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C. CASH VALUE OF LIFE INSURANCE
In October 1995, the Company terminated certain insurance agreements with
the former chief executive officer and commenced a series of transactions which
will ultimately transfer the ownership in the policies to him in exchange for an
amount approximating their net book value. In addition, the Company eliminated
certain indemnification liabilities relating to these agreements, extended the
covenant not to compete with the former chief executive officer through the year
2000, and made a present valued 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. After this transfer is
completed, the Company will continue to maintain insurance policies on the lives
of this and one other former executive officer with an aggregate cash surrender
value of approximately $4,000,000, against which there are policy loans
outstanding of approximately $1,300,000.
D. BANK NOTES PAYABLE
The Company has available to it a total credit facility with its bank of
approximately $7,900,000, which includes approximately $5,400,000 in the form of
a stand-by letter of credit for the Company's $5,000,000 1984 Series Industrial
Revenue Bonds, and a $2,500,000 revolving line of credit for working capital
purposes. The credit facility is collateralized by substantially all of the
assets of the Company. During the quarter ended December 31, 1995, the Company
made borrowings against this line of credit totaling $2,500,000 and at December
31, 1995, there was $2,500,000 outstanding against the revolving line of credit.
Additionally, the bank has made available, and the Company has borrowed, amounts
aggregating $1,050,000 for short term working capital needs. At June 30, 1995,
there were no amounts outstanding against the revolving line of credit. The
interest rate on the revolving line at December 31, 1995 was 9.75%.
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E. DISCONTINUED OPERATIONS
In September 1994, in connection with the discontinuation of the
operations of VSE, a former majority-owned subsidiary in Austria, the Company
entered into a fifteen year agreement with a Swiss vacuum-valve manufacturer
pursuant to which the manufacturer has been granted exclusive right to utilize
certain rotary feedthrough sealing technology of the Company and ownership of
all patents and technical information of VSE in exchange for $1,300,000 in cash,
with an additional payment of $200,000 by June 30, 1996 upon the occurrence of
certain events by that date. During October and November 1994, the Company
received an aggregate of $1,300,000 in cash payments pursuant to this license
arrangement and has recorded the payments as license fee income in the quarter
ended December 31, 1994.
F. EARNINGS PER SHARE
Net income per share for the three and six months ended December 31, 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 settlement of the matter. In October 1994
and May 1995, the Company issued 180,000 and 420,000 shares to the class,
respectively, and accordingly, the shares have been included in the weighted
average outstanding common shares for the three and six months ended December
31, 1995. Additionally, the weighted average outstanding shares reflects the
granting of approximately 240,000 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
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Six months ended December 31, 1995 and 1994:
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In the six months ended December 31, 1995, the Company generated net
income of $1,801,000, or $.29 per share, as compared to net income in the same
period of fiscal 1995 of $448,000, or $.08 per share. As more fully discussed in
Note E to the Consolidated Financial Statements, the results of operations for
the first six months of 1995 includes a nonrecurring license fee received
pursuant to a license agreement entered into with a Swiss vacuum-valve
manufacturer.
Net sales and revenues for the six months ended December 31, 1995
increased 119% to $33,860,000 as compared to $15,485,000 in the same period of
the prior year. A product line comparison of the net sales and revenues, for the
six months ended December 31, 1995 and 1994 is as follows:
1995 1994
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Crystal growing systems $21,271,000 $ 5,209,000
Seals 7,168,000 5,268,000
Fluid 1,172,000 1,037,000
Other 4,249,000 3,971,000
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Total net sales and revenues $33,860,000 $15,485,000
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Of the revenues in the first half of fiscal 1996, approximately $20.8
million, or 61%, 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 six months ended December 31, 1995
amounted to 30.7% of product sales as compared to 40.9% of product sales in the
prior years' six months. The decline in gross margin in the current year
compared to the prior year is due principally to the mix of product lines, with
approximately 63% of the product revenues in the current year's first half
attributable to the Company's crystal growing systems, which generate lower
gross margins, as compared to 34% in the first half of the prior year.
Consolidated order bookings for the six months ended December 31, 1995
totaled $53,492,000 as compared to $12,297,000 in the same period of the prior
year. Of the current year's bookings, $39,188,000 represent orders for silicon
crystal growing systems as compared to $1,625,000 in the previous period.
Bookings for the remaining product lines increased 34% from $10,672,000 in the
prior period to $14,304,000 in the first six months of the current year.
Consolidated backlog at December 31, 1995 was $57,625,000 compared to
$11,488,000 at December 31, 1994 and $37,756,000 at June 30, 1995. Backlog for
the Company's crystal growing systems at December 31, 1995 was $50,630,000
compared to $4,878,000 at December 31, 1994. Backlog of all other products
increased from $6,610,000 at December 31, 1994 to $6,995,000 at December 31,
1995, reflecting an increased booking rate in the current year. Of the order
backlog for the Company at December 31, 1995, approximately 50% is expected to
be shipped during the current fiscal year.
Engineering and product development expenditures in the six months totaled
$2,146,000, or 6.3% of revenues, as compared to $1,564,000, or 10.1% of revenues
in the comparable period last year. The total engineering expenditures in the
first six months are comprised of $747,000 related to research and development
of the Company's current and future products and $1,399,000 related to current
applications and other engineering in support of the six month's revenues. In
the prior year's first half, product development expenditures totaled $615,000
and all other engineering totaled $949,000.
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Selling, general and administrative expenses for the six months ended
December 31, 1995 totaled $5,892,000, up $763,000, or 15%, from the same period
of the prior year. The increase is due primarily to increased staffing and sales
and marketing expenditures necessary to support the increased level of business.
Interest expense for the first six months ended December 31, 1995 of
$266,000 represents principally the interest on the Company's $5,000,000 of
industrial development bonds and the interest accruing on certain loans
outstanding against certain keyman life insurance policies on the life of a
former executive. As more fully discussed in Note C to the Consolidated
Financial Statements, during the third quarter of fiscal 1996, management
expects to complete the transfer of these policies to the former executive,
thereby eliminating the loans and the related interest expense on a going
forward basis. In the prior year, interest expense for the six months ended
December 31, 1994 totaled $308,000, or $42,000 higher than the current period
due principally to borrowings against the Company's revolving line of credit
during the prior year.
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 tax provision for the six months ended December 31, 1995 includes a
provision for certain state and alternative minimum taxes, as well as a
provision for foreign income taxes.
Three months ended December 31, 1995 and 1994:
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In the quarter ended December 31, 1995, the Company generated net income
of $1,087,000, or $.18 per share, as compared to net income in the same quarter
of fiscal 1995 of $44,000, or $.01 per share, which included the income from a
nonrecurring license fee which is more fully discussed in Note E to the
Consolidated Financial Statements.
Net sales and revenues for the quarter ended December 31, 1995 totaled
$18,849,000 as compared to $5,698,000 in the same period of the prior year. A
product line comparison of the net sales and revenues, in thousands, for the
three months ended December 31, 1995 and 1994 is as follows:
1995 1994
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Crystal growing systems $12,024,000 $ 283,000
Seals 4,185,000 2,855,000
Fluid 615,000 502,000
Other 2,025,000 2,058,000
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Total net sales and revenues $18,849,000 $5,698,000
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Of the revenues in the second quarter, approximately $11.7 million, or
62%, 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 second quarter of fiscal 1996 amounted
to 29.4% of product sales as compared to 45.3% of product sales in the prior
years' second quarter. The decline in gross margin in the current quarter
compared to the prior year is due principally to the product mix of revenues,
which is weighted heavily toward the crystal growing systems, which, as noted
above, generate lower gross margins than the Company's core products.
Consolidated order bookings for the second quarter ended December 31, 1995
totaled $32,917,000 as compared to $7,698,000 in the second quarter of the prior
year. During the second quarter, orders for crystal growing systems and related
parts totaled $25,960,000 as compared to $1,619,000 in the previous year's
second quarter.
Engineering expenses in the second quarter increased to $1,153,000 as
compared to $683,000 in the second quarter of fiscal year 1995 and $993,000 in
the first quarter of fiscal year 1996. Engineering expenses in the first two
quarters of the current year approximated 6% of revenues and this relationship
is expected to remain through the remainder of the fiscal year. Selling, general
and administrative expenses totaled $2,973,000 in the current quarter, an
increase of approximately 220,000 over the $2,754,000 in the second quarter of
the prior year, however, relatively unchanged from the first quarter of fiscal
year 1996 ($2,919,000).
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LIQUIDITY AND CAPITAL RESOURCES
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Working capital at December 31, 1995 totaled $9,320,000 as compared to
$7,811,000 at June 30, 1995, due principally to increases in accounts receivable
($2,217,000) and inventory ($1,002,000), and a reduction in accounts payable,
which was financed by $3,550,000 in short-term bank borrowings during the
period. In addition, customer deposits declined in the period by $1,052,000 as
the related crystal growing systems were delivered to the customer. During the
first six months of fiscal 1996, the operations of the business generated
$1,189,000 of cash, driven by its positive operating results. At December 31,
1995, the Company had outstanding purchase commitments for inventory of
approximately $18,000,000.
During the third quarter, management expects to receive the advance
payment on a previously reported $28 million multi-unit order for its crystal
growing systems. Management expects this to enable it to reduce its outstanding
bank borrowings.
Investing activities during the six months ended December 31, 1995 were
comprised only of the acquisition of property, plant and equipment of
$1,069,000. At December 31, 1995, the Company did not have any material purchase
commitments with respect to property and equipment. The Company did not have any
financing activities during the six-month period ended December 31, 1995.
The Company believes it has sufficient working capital resources to fund
its operations through fiscal 1996. However, 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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting in lieu of the Annual Meeting of Stockholders of the
Company was held on November 15, 1995, for the purpose of: (i) the election of
Paul F. Avery, Jr. and Dean Kamen as the two Class III Directors to serve until
the third annual meeting following the annual meeting held on November 15, 1995
and until their successors are duly elected and qualified; and (ii) the approval
of the Ferrofluidics 1995 Stock Option and Incentive Plan. The following table
sets forth the results of the shareholder votes.
Votes Votes
In Favor Withheld
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Election of Paul F. Avery, Jr.
as Class III Director 5,109,772 29,131
Election of Dean Kamen
as Class III Director 5,106,883 32,020
Votes
In Favor Against Abstain Non-votes
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Approval of 1995 Stock Option and
Incentive Plan 2,405,028 591,049 84,121 2,058,705
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) During the three months ended December 31, 1995, the Company filed the
following Current Reports on Form 8-K:
(1) Current Report on Form 8-K dated November 21, 1995, reporting the
termination of Coopers & Lybrand, LLP as the Company's independant
accountants.
(2) Current Report on Form 8-K/A dated November 21, 1995 reporting the
termination of Coopers & Lybrand, LLP as the Company's independant
accountants.
(3) Current Report on Form 8-K dated December 13, 1995, reporting the
engagement of Ernst & Young, LLP as the Company's independant accountants
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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
--------------------------------
(Registrant)
Date: February 14, 1996 By: /s/ Stephen P. Morin
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Stephen P. Morin
Principal Accounting Officer
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