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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 [Fee required]
For the fiscal year ended June 28, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required]
For transition period from _________ to _________
Commission file number 0-10734
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
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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
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(2) Yes X No
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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 August 29, 1997, 6,178,262 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 $7.50 per
share for the registrant's Common Stock, as reported on the Nasdaq National
Market as of August 29, 1997 was $45,260,175.
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TABLE OF CONTENTS
ITEM PAGE
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PART I
1 Business.............................................................................. 1
2. Properties............................................................................ 9
3. Legal Proceedings..................................................................... 10
4. Submission of Matters to a Vote of Security Holders................................... 10
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters ............................................................... 11
6. Selected Consolidated Financial Data.................................................. 12
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 13
8. Financial Statements and Supplementary Data........................................... 19
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................ 45
PART III
10. Directors and Executive Officers of the Registrant.................................... 45
11. Executive Compensation................................................................ 45
12. Security Ownership of Certain Beneficial Owners
and Management...................................................................... 45
13. Certain Relationships and Related Transactions........................................ 46
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 46
(a) Financial Statement Schedules
(b) Reports on Form 8-K
Signatures............................................................................ 51
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PART I
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 broad applications
engineering to develop ferrofluid-based (Ferrofluidic(R)) products, such as the
Company's various sealing devices and fluid-film bearings. The Company
synthesizes 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 its 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 its licensee, currently supplies the vast majority of the ferrofluids and
ferrofluid-based products used in the world.
As a vertical integration of its ferrofluid sealing technology, the
Company designs, assembles and markets systems for growing crystals of silicon,
germanium, gallium arsenide and other metal alloys for the semiconductor,
photovoltaic, military and advanced materials markets.
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) ADVANCED PRODUCTS & TECHNOLOGIES, GMBH ("AP&T"), with headquarters in
Nurtingen, Germany, with sales offices in Oxford, England and Madrid,
Spain, which:
(a) markets and services Ferrofluidic(R) products in Europe;
(b) designs, manufactures and markets products for the optical coating
and thin-film deposition industries such as electron beam guns and
related controllers; and
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(c) serves as an exclusive distributor in Europe for several U.S. and
European corporations that manufacture compatible products for similar
industries.
(2) FERROFLUIDICS JAPAN CORPORATION ("FJC"), located in Tokyo, Japan, which
distributes Ferrofluidics' components to the semiconductor industry and
for application in vacuum-related products. FJC also provides after-sales
service for these components, and distributes ferrofluids to the audio
loudspeaker industry. In addition, FJC provides sales and service for the
Company's crystal growing systems customers located in Japan.
In addition to its wholly-owned subsidiaries, the Company has licensed its
vacuum rotary feedthrough seals and ferrofluid technology, on a
non-exclusive basis, 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
The Company is organized into three business segments:
(i) the COMPONENTS DIVISION, or FERROFLUIDIC PRODUCTS segment, which
manufactures and markets:
(a) 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; and
(b) 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 24.6%, 25.8% and 41.3% of total product sales in
fiscal 1997, 1996 and 1995, respectively.
(ii) the SYSTEMS DIVISION, or CRYSTAL GROWING SYSTEMS segment, which
designs, assembles and markets fully-integrated systems for
growing crystals of silicon, germanium, gallium arsenide and
other metal alloys for the semiconductor, photovoltaic, military,
and advanced materials markets.
Sales generated by the Systems Division accounted for 63.0%,
62.7% and 34.5% of total product sales in fiscal 1997, 1996 and
1995, respectively.
(iii) DISTRIBUTED PRODUCTS DIVISION, or THIN FILM DEPOSITION segment,
which includes the sale in Europe and Asia by AP&T of compatible
products on an exclusive basis for several U.S. and European
companies.
Sales generated by the Distributed Products Division accounted
for 12.4%, 11.5% and 24.2% of total product sales in fiscal 1997,
1996 and 1995, respectively.
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In fiscal 1997, $31,684,000, or 46.7%, of the Company's total sales were to
foreign customers, primarily through AP&T, FJC and to the Systems Divisions'
customers in the Pacific Rim. Sales to unaffiliated foreign customers in fiscal
1996 and 1995 totaled $54,080,000 (74.1%) and $21,412,000 (62.7%), respectively.
All manufacturing and assembly of products for the Components and Systems
Divisions is 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.
PRODUCT LINES
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) crystal growing systems and
related equipment. In addition, the Company distributes advanced technology
component products and systems for use in the manufacture of semiconductors and
in the thin-film deposition and optical coating industries through AP&T in
Europe and Asia.
(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 40 million
speakers per year, representing the vast majority of the ferrofluid
applications in speakers. Sales of ferrofluids accounted for
approximately 3.7%, 3.6% and 7.0% of total product sales in fiscal
1997, 1996 and 1995, respectively. The Company supplies
Ferrofluidic(R)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
accuracies.
(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 either seal the environment from a manufacturing
process or seal a manufacturing process from the environment. 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. Sales of magnetic fluid seals accounted for
approximately 20.9%, 22.2% and 32.1% of total product sales in fiscal
1997, 1996 and 1995 respectively. 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, unmeasurable leakage and high-speed
capability for rotary motion penetrations into vacuum and other highly
controlled, ultra-clean process environments. The Company
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supplies the semiconductor and other critical 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.
The Company, in fiscal 1992, introduced two new commercial
applications of its rotary seals: (a) a Lamp Process Sealing System
now being 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 now being 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 ("CAT") scan equipment.
Industrial Process Seals: Following approximately three years of
development and close cooperation with two key strategic partners in
the petroleum refining and chemical processing industries,
Ferrofluidics, during fiscal 1993, introduced its industrial process
seals for the elimination of volatile organic compounds ("VOCs") and
volatile hazardous air pollutants ("VHAPs") 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 targeted other equipment such as compressors,
centrifuges, mixers, agitators and pumps. The GT-6 product recently
received certification from TA Luft, the German air quality authority.
Subsystems: During 1996, as an extension of its core capability to
design and manufacture rotary seals for a variety of vacuum processing
applications, the Company began marketing sealing sub-systems to
original equipment manufacturers, which incorporate existing
Ferrofluidic 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.
(iii) CRYSTAL GROWING SYSTEMS. The Company entered the crystal growing
capital equipment business through an acquisition in 1981 as a
vertical integration to its supply of sealing subsystems. Since
entering the business, the Company has focused on building
technologically advanced crystal growing systems that incorporate
advanced design, unique technical features, comprehensive automation
and proprietary operational
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software. The Company's principal product within this product line,
silicon crystal growing systems, facilitates the growth of silicon for
the electronics industry. The crystals, grown from molten
poly-silicon, are then sliced into wafers and used by the
semiconductor industry in the manufacture of integrated circuits and
other electronic components. Typically, the Company customizes each
system for a particular customer incorporating proprietary designs
with its own technology.
The Company designs all aspects of its crystal growing systems and
subcontracts the manufacture of system components. Assembly and
testing of each system is performed at the Company's headquarters.
Upon the completion of testing, a system is partially disassembled,
shipped to the customer and reassembled by the Company's technical
support staff.
During the past three years, the Company has experienced a rise in
orders for silicon systems for semiconductor manufacturing as well as
equipment for making other advanced materials for new applications,
including multiple-unit orders from major companies in the U.S.,
Japan, Taiwan and Korea. Typically, shipments are spread over many
months, timed for the customer's start-up of new plants or production
ramp-ups. Sales of silicon crystal growing systems accounted for
approximately 63.0%, 62.7% and 34.5% of total product sales in fiscal
1997, 1996, and 1995, respectively. Silicon crystal growing systems
typically sell at prices ranging from $350,000 and $2,000,000 or more,
depending on the size crystals to be grown and special features
included in the systems.
The Company continues to develop equipment and process technologies in
several other areas in cooperation with major industrial companies and
specific product specialists.
SIGNIFICANT CUSTOMERS
In fiscal 1997, sales by the Systems Division to companies affiliated with
MEMC Electronic Materials, Inc. ("MEMC") totaled $28,017,000 and accounted for
41.3% of consolidated product sales. Sales to these and other affiliates of MEMC
totaled $45,344,000 and $6,419,000 in fiscal 1996 and 1995, which represented
62.1% and 18.8%, respectively, of consolidated product sales in those fiscal
years. Management believes that the loss of this customer, and its affiliates,
could have a material adverse effect on its future results of operations.
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.
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(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 former Japanese subsidiary and
licensee, 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 licensees compete
with other suppliers of magnetic fluid seals. In addition, one competitor
in Japan ships seals into the United States.
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.
(iii) CRYSTAL GROWING SYSTEMS. The Company is aware that there are currently two
other companies worldwide that manufacture silicon crystal growing
systems. These companies historically have had established market shares
and are subsidiaries of larger corporations. In addition, several crystal
producers, principally in Japan, manufacture their own growing systems
through captive equipment affiliates. Of the non-captive market for
silicon crystal growing systems used in the production of 200 millimeter
diameter wafers, the Company believes that it currently is the supplier
with the greatest market share.
There are a limited number of large customers for silicon crystal growing
systems. The market is cyclical and even during high-demand periods, only
one or two suppliers generate most of the equipment sales. During the past
three years, the Company has shipped over 100 systems to customers in the
U.S., Europe, Japan and the Pacific Rim. However, there is no assurance
that these sales will continue. The need to develop new crystal growing
systems technology, including larger diameter wafers, could require
investment in research and development well into the future. In addition,
the Company may need to invest in manufacturing facilities to stay
competitive in the developing larger diameter crystal growing systems
market.
SEASONALITY
While the Company is not impacted by the seasonal demands of its customers,
the Systems Division, and as a result the Company, is affected by the delivery
demands of its customers. A typical customer of the Company's crystal growing
systems segment orders multiple units for delivery under time schedules
specifically defined by the customer. As a result, quarter to quarter operating
results and working capital requirements may fluctuate considerably.
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EMPLOYEES AND MARKETING
The Company currently has approximately 261 employees worldwide, of which
207 are employed in the United States, 47 in Europe and 7 in Japan.
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 AP&T, the Company's wholly-owned subsidiary, in Japan
through its wholly-owned subsidiary, Ferrofluidics Japan Corporation, 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.
During 1996, the Company increased its capacity for in-house precision
machining through the establishment of a state-of-the-art machining center and
the addition of a second shift of machine operators. This enhanced capability
has proven to be critical in the ability to meet ever shortening lead times for
delivery of component products to customers, in particular in Japan and Asia
where the competition has historically dominated market share.
During 1997, the Company invested in some modifications to its facility for
assembling crystal growing systems to accommodate the manufacture of its first
300mm system. More substantial increases in its capacity for assembly and test
of its crystal growing systems were made during 1996 and 1995 in order to meet
the increasing order backlog for such systems.
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 on
comparable terms. The new in-house machining center, established in 1996,
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.
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A substantial portion of the cost of the crystal growing systems, including
electrical components and machined parts, are purchased from third-party
suppliers. Wherever possible, the Company has made efforts to dual source
critical component parts and subassemblies for the systems and believes that
there are a number of other suppliers for these parts.
INTELLECTUAL PROPERTY RIGHTS
The Company owns a number of U.S. and foreign patents for its seals,
dampers, bearings and systems, with expiration dates ranging up to 2006. In
addition, the Company has applied for additional patents for these products as
well as for certain new features developed for crystal growing machinery. 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, and Spin Technology.
INTERNAL RESEARCH AND DEVELOPMENT
The Company's internal research and development effort is aimed at
synthesizing proprietary ferrofluids and using the unique properties of magnetic
fluid technology to develop new products and business opportunities, as well as
at developing new products in the crystal growing systems business. The Company
spent (and charged to expense) $2,033,000, $1,723,000 and $1,479,000 in fiscal
years 1997, 1996 and 1995, 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. 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 technology adds a significant value.
The Company is experimenting with new ferrofluids and seals for new higher
speed and higher vacuum applications for new and existing markets. Additionally,
the Company has developed a number of new technical advances in crystal growing
systems, including a laser melt level control and a continuous feed system for
polysilicon. In 1996 the Company embarked on the development of a 300mm crystal
growing system in connection with an order received from a foreign customer.
This system is expected to ship in the first quarter of fiscal 1998. In fiscal
1997, the Company undertook the development of another 300mm crystal growing
system for another customer.
BACKLOG
As of June 28, 1997, the Company had a consolidated order backlog of
$37,483,000, as compared to $59,020,000 at June 30, 1996. A comparative summary
of the consolidated backlog by business segment is as follows:
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1997 1996
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Systems $30,276,000 $53,072,000
Components 4,787,000 3,944,000
Distributed Products 2,420,000 2,004,000
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Total Backlog $37,483,000 $59,020,000
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Of the total backlog at June 28, 1997, approximately 78% is expected to
ship during fiscal 1998.
WARRANTY POLICY
With respect to the sale of ferrofluids and the sale of seals and other
products to the computer peripheral industry, the Company warrants only as to
workmanship and materials, and its express warranties for such products
terminate upon acceptance by the customer. With respect to sales of seals to the
semiconductor and other industries for controlled environment applications, the
Company offers a one-year warranty. Its warranty service expenses for such
products have not been significant. Because of the low warranty service rate,
the cost of warranty returns to date has been expensed as incurred, and no
reserves for warranty service have been established.
With respect to crystal growing systems, the Company generally offers 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 operation is 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 E to the Consolidated Financial Statements in Item 8.)
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 Tokyo, Japan.
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ITEM 3. LEGAL PROCEEDINGS
Securities and Exchange Commission
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On February 19, 1993, the Company received an informal inquiry from the SEC
requesting that the Company provide the SEC with certain documents concerning
publicity relating to the Company for the period of January 1, 1992 to February
19, 1993. In August 1993, the SEC issued an order directing a private
investigation to determine whether certain unnamed persons have violated or
caused the Company to violate the federal securities laws. Among the areas of
inquiry identified in the order is whether publicity about the Company,
including research reports, were published without fully disclosing
consideration given or received therefor. The order also indicates that the
inquiry will examine possible manipulation by certain unnamed persons of the
Company's securities, payment in connection therewith, and failure to disclose
such activities in public filings made by the Company (including the financial
statements contained or incorporated therein), as well as possible nondisclosure
of transactions with the Company in which such persons may have had a material
interest. Throughout the investigation, the Company has cooperated fully with
the SEC's inquiry. In June 1997, the SEC completed its investigation with
respect to the Company, and on June 23, 1997, the Company entered into a Consent
and Understanding, whereby it agreed to be permanently enjoined from violating
the federal securities laws. The Company is continuing to cooperate with the SEC
as it completes its investigation with respect to certain unnamed persons.
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 June 28, 1997.
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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.
1997 HIGH LOW
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7/1/96 - 9/30/96 13 3/4 8 1/4
10/9/96 - 12/31/96 9 5/8 7 3/8
1/1/97 - 3/31/97 10 7/8 7 1/4
4/1/97 - 6/30/97 8 3/4 5 3/4
1996
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7/1/95 - 9/30/95 14 3/8 9 1/2
10/9/95 - 12/31/95 13 5/8 9 3/4
1/1/96 - 3/31/96 11 5/8 8 5/8
4/1/96 - 6/30/96 18 7/8 9 3/4
On August 29, 1997, the closing sale price for the Company's Common Stock,
as reported by the Nasdaq National Market, was $7.50. On that date, there were
approximately 3,137 holders of record of the common stock of the Company.
DIVIDEND POLICY
The Company has never paid a cash dividend 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 June 28,
1997, 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.
Fiscal Years Ended
------------------
June 28, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
------------- ------------- ------------- ------------- -------------
Income Statement Data:
- ----------------------
Net product sales $ 67,785,000 $ 72,967,000 $ 34,149,000 $ 26,379,000 $ 32,905,000
Royalty revenues -- -- 6,000 82,000 372,000
------------ ------------ ------------ ------------ ------------
Total net sales and 67,785,000 72,967,000 34,155,000 26,461,000 33,277,000
revenues
Engineering & 4,811,000 4,440,000 3,410,000 3,390,000 3,129,000
product development
expenses
Nonrecurring -- -- (1,156,000) 3,108,000 8,594,000
operating expenses
(income)
Operating income 1,530,000 4,937,000 943,000 (9,662,000) (11,716,000)
(loss)
Interest expense, net (765,000) (443,000) (406,000) (356,000) (254,000)
Income tax benefit 1,175,000 (487,000) 322,000 (1,169,000) (466,000)
(expense)
Net income (loss) $ 1,672,000 $ 3,820,000 $ 889,000 $(10,713,000) $(12,446,000)
Per Share Data:
Net income (loss) $ 0.27 $ 0.61 $ 0.16 $ (2.00) $ (2.49)
Weighted average 6,239,581 6,313,045 5,563,160 5,366,350 5,005,120
shares outstanding
Balance Sheet Data:
Working capital $ 13,323,000 $ 12,350,000 $ 7,811,000 $ (1,601,000) $ 6,775,000
Total assets 45,001,000 43,429,000 39,529,000 32,508,000 36,884,000
Total liabilities 23,420,000 23,727,000 23,748,000 21,325,000 15,107,000
Long-term debt 5,000,000 5,000,000 5,036,000 28,000 --
Stockholders' equity 21,581,000 19,702,000 15,781,000 11,183,000 21,777,000
Note: (a) No dividends have been declared or paid during the five years ended
June 28, 1997.
12
15
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 Ferrofluidics' results of operations and financial condition.
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 1997 Versus Fiscal 1996:
- -------------------------------
In fiscal 1997, net income declined to $1,672,000, or $.27 per share,
compared to $3,820,000, or $.61 per share, recorded in fiscal 1996. The decline
was the result of lower sales volumes and increased expenses, particularly in
the areas of marketing and product development.
In fiscal 1997, product revenues decreased 7.1% to $67,785,000 from
$72,967,000 in fiscal 1996. This decrease in the Company's level of business can
be directly attributed to a significant decline in the semiconductor industry in
general, which accounts for all of the revenues of the Systems segment and a
substantial portion of the Components segment revenues. The changes in revenues
by segment are summarized as follows:
1997 1996
---- ----
Systems $42,691,000 $45,741,000
Components 16,685,000 18,827,000
Distributed Products 8,409,000 8,399,000
----------- -----------
Total Revenues $67,785,000 $72,967,000
=========== ===========
The decrease in revenues in the Systems segment in 1997 was due principally
to a delay in the contractual shipment schedules relating to certain multi-unit
orders received in the prior year from the Company's largest customer. Further
slowdowns in the schedule of shipping machines to this customer are expected in
the next fiscal year, as the customer has at present committed to receive one
machine per month for the fiscal year, a decline from the average of a little
under three machines per month in fiscal 1997. During the first three quarters
of fiscal 1997, a slowdown in the production of capital equipment for the
semiconductor industry caused demand for the Company's rotary feedthrough seals
to decline sharply, resulting in an 11% decrease in consolidated revenues from
the Components segment. During the fourth quarter, the order rate for seals
began to improve as the outlook for the industry improved. Revenues in the
Distributed Products segment, which principally serves the thin-film deposition
industry, remained relatively level with those of last year.
Total sales from the Company's European subsidiary, AP&T, which includes
the sale of the Company's components and fluid products in Europe, as well as
comprising the Distributed Products segment, decreased 5.7% to $11,979,000 in
1997, as compared to $12,702,000 in fiscal 1996. The decrease was entirely
within the Ferrofluidic product lines, as the distributed products revenues
remained level with the prior year. Sales by the Company's Japanese subsidiary,
FJC, increased to $11,825,000 over the $568,000 of revenues in 1996. Sales of
seals and fluids increased over 200% in 1997, evidencing the Company's
penetration into that market. In addition, the Company sold a significant number
of crystal growing systems, both of a prototype and production nature, to five
of the major Japanese silicon wafer manufacturers, resulting in a substantial
increase in revenues in Japan. Despite the significant increase in business with
Japan, total foreign sales declined to
13
16
$31,684,000 from $54,080,000 in 1996, because the majority of the non-Japanese
crystal puller shipments were to domestic customers in 1997, whereas 1996
shipments were primarily to Korean and Taiwanese wafer manufacturing facilities.
Bookings in 1997 decreased 51%, to $46,487,000, from $94,231,000 in 1996,
as orders for crystal growing systems declined substantially as a result of
industry over-capacity. Fiscal 1997 bookings included $19,892,000 in orders of
crystal growing systems and related equipment, as compared to $66,427,000 in
1996. The majority of the 1996 bookings were from one affiliated group of
customers. In contrast, the crystal growing systems orders received during 1997
included orders from a number of different and unrelated international wafer
suppliers in Scandinavia, Eastern Europe, Taiwan, China, and Japan. These orders
reflect the success of the Company's efforts in the past two years to reduce its
dependence on one customer.
Order bookings in the Company's Components Division, which includes the
sale of seals and fluids, totaled $17,511,000, which includes bookings in the
fourth quarter of fiscal 1997 of $6,300,000, a record for the segment. The
resulting order backlog for that segment at the end of the fiscal year was
$4,787,000, an increase of 21% over the Components Division backlog at June 30,
1996. Consolidated order backlog at June 28, 1997 totaled $37,742,000 as
compared to $59,020,000 at June 30, 1996. Of the consolidated backlog at June
28, 1997, approximately 78% is expected to ship during the coming fiscal year.
The consolidated gross margin for the year ended June 28, 1997 of 28.9%
increased slightly over the gross margin of 28.8% in the previous year. Although
revenues declined, the overall product mix was essentially unchanged. Lower
gross margins were experienced in the crystal growing systems business due to
expenses related to the development of machines for new customers, but this was
offset by an increase in the margins in the Components segment. Consolidated
operating income before general corporate and non-operating expenses declined
in 1997 to 8.8% of product revenues as compared to 11.2% in 1996. This was the
result of lower revenues, higher sustaining engineering, and higher product
development costs.
The Company spent $4,811,000 during fiscal 1997 on engineering and product
development, an amount equal to 7.1% of product revenues compared to $4,440,000
or 6.1% of product revenues in the preceding year. Engineering costs as a
percent of revenues increased in 1997 principally due to the increased level of
first-time, or prototype, systems sold during 1997, as well as the increased
development work in the area of 300mm crystal growing systems. Of the total
engineering and product development expenditures in fiscal 1997, $2,904,000 was
in the Systems Division as compared to $2,194,000 in the prior fiscal year. The
balance of engineering and product development expenditures were made for
development of seals and fluids products.
Selling, general and administrative ("SG&A") expenses in 1997 increased
$1,577,000 or 13.5% over such expenses in 1996, and increased as a percent of
revenues from 16% in 1996 to 19.5% in 1997. Selling and marketing costs
increased by $450,000, due in part to a $130,000 increase in selling expenses in
Japan, a $160,000 increase in sales commissions and a $100,000 increase in
selling expenses in Europe. Administrative expenses accounted for the rest of
the increase, which was due in part to increases in legal costs ($230,000),
personnel costs ($420,000), severance ($210,000), and insurance and stock-based
compensation ($100,000).
Interest income in 1997 was down from that in 1996, due principally to
lower levels of invested cash. Interest expense of $854,000 is up 47% over the
$580,000 in the prior year as a result of
14
17
higher borrowings against the Company's revolving line of credit. See Note E 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 1997,
$217,000 of net foreign currency transaction losses were recorded as compared to
a net gain of $33,000 in fiscal 1996. The losses in 1997, primarily incurred by
the Company's Japanese subsidiary whose functional currency is the U.S. dollar
for accounting purposes, arose as a result of the weakening of the Japanese yen
against the dollar during much of 1997. Gains and losses resulting from the
translation of the financial statements of subsidiaries whose functional
currency is other than the U.S. dollar are recorded directly to equity. The
balance of other income (expense) in 1997 was principally amortization of bank
financing costs, which did not change materially from the previous fiscal year.
In accordance with FASB Statement No. 109, Accounting for Income Taxes, the
Company recorded, in the fourth quarter of 1997, a $1,200,000 tax benefit from a
reduction of the valuation allowance against deferred tax assets that is
required to be recorded when the Company's management is of the opinion that the
tax benefit is more likely than not to be realized. The recording of this
benefit may affect the Company's effective corporate tax rate in future periods.
Income tax expense of $487,000 in 1996 consisted of a provision for state and
foreign income taxes on the Company's earnings and a federal alternative minimum
tax provision. See Note D to the Consolidated Financial Statements for a more
complete discussion of income taxes.
Fiscal 1996 Versus Fiscal 1995:
- -------------------------------
In fiscal 1996, net income was $3,820,000, or $.61 per share, as compared
to $889,000, or $.16 per share, in 1995.
In fiscal 1996, product revenues increased 114% to $72,967,000 from
$34,155,000 in fiscal 1995. The overall increase in the Company's level of
business can be directly attributed to the growth in the semiconductor industry
in general, which accounts for all of its Systems segment and a substantial
portion of its Components segment. The increases in revenues by segment are
summarized as follows:
1996 1995
---- ----
Systems $45,741,000 $11,782,000
Components 18,827,000 14,125,000
Distributed Products 8,399,000 8,248,000
----------- -----------
Total Revenues $72,967,000 $34,155,000
=========== ===========
The increase in revenues from systems is attributed to increased demand for
silicon wafers and the resulting increase in production capacity for the wafers.
During 1996 and 1995, the Company received orders for over 100 of its model
CZ-150 crystal growing system, which grows 200 millimeter diameter silicon
ingots. Increases in the production of capital equipment by OEM's in the
semiconductor industry have driven the demand for our component seals and
sealing subsystems resulting in a 33% increase in consolidated revenues from the
Components segment. Distributed Products, which principally serves the thin-film
deposition industry, showed a modest 2% revenue increase in 1996.
Total sales from the Company's European operations, AP&T, which includes
the sale of the Company's components and fluid products in Europe, as well as
comprising the Distributed Products
15
18
segment, increased 13.4% to $12,702,000 in 1996 as compared to $11,201,000 in
fiscal 1995. Sales by the Company's Japanese operation, FJC, totaled $568,000,
up 93% from $294,000 in 1995. During 1996, FJC experienced a significant
increase in its sales order activity for both components products and crystal
growing systems. Total foreign sales increased over 150% to $54,080,000 in 1996
from $21,412,000 in 1995 due primarily to the shipment of crystal growing
systems to large scale wafer fabrication facilities in Korea and Taiwan.
Bookings in 1996 increased 66% to $94,231,000 from $56,911,000 in the prior
year. Of the new business booked, $66,427,000 represented orders of crystal
growing systems and related equipment, as compared to $35,700,000 in the prior
year. Order backlog at June 28, 1997 totaled $59,020,000 as compared to
$37,756,000 at June 30, 1996. During July and August of 1996, the Company, in
consultation with its customers, rescheduled approximately one half of the
shipments of crystal pullers initially scheduled for fiscal 1997 into future
years.
The consolidated gross margin for the year ended June 28, 1997 of 28.8%
declined from the gross margin of 40.7% in the previous year due to the change
in product mix of revenues. In 1996, 62.7% of consolidated revenues pertained to
crystal growing systems, which generate lower gross margins, as compared to
34.5% in the prior year. Consolidated operating income, before general corporate
expenses and nonrecurring operating income, improved in 1996 to 11.2% of product
revenues as compared to 7.4% in 1995. Operating income in the Systems segment
improved from 5.5% of revenues in 1995 to 10.8% in 1996. In the Components
segment, operating income improved from 11.9% of revenues to 15.2%.
The Company expended $4,440,000 during fiscal 1996 on engineering and
product development, representing 6.1% of revenues compared to $3,410,000 or 10%
of revenues in the preceding year. Of the total engineering and product
development expenditures in fiscal 1996, $2,194,000 was in the Systems segment
as compared to $1,135,000 in the prior fiscal year. The remaining balance of
expenditures related to engineering and development of the Company's core
products, including seals and fluids.
Selling, general and administrative ("SG&A") expenses in 1996 increased
$955,000 or 8.9% over those of 1995, however, declined as a percent of revenues
from 31.3% in 1995 to 16% in 1996. Contributing to the increase in SG&A expenses
are increased warranty provisions and increased sales commissions to third
parties. Also included in the increase in SG&A expenses is a $520,000 increase
in general corporate expenses, which includes a $177,000 increase in non-cash
stock related compensation.
As more fully discussed in Note B to the Consolidated Financial Statements,
in September 1994, the Company discontinued the operations of a subsidiary and,
in November 1994, entered into an agreement to license certain of its technology
to a third party. As a result of these transactions, the Company recorded
nonrecurring operating income in fiscal 1995 of $1,156,000.
Interest income in 1996 was down from that in 1995 due principally to the
cancellation of certain paid-up insurance policies on the life of a former
officer which is more fully discussed in Note C to the Consolidated Financial
Statements. Invested cash remained at low levels as a result of the need to
finance the operations of the business. Interest expense of $580,000 is also
down from the prior year due to the elimination of borrowings against the
canceled insurance policies. See Note E to the Consolidated Financial Statements
for a more complete discussion of the Company's debt obligations.
16
19
The Company records translation and exchange gains and losses resulting
from fluctuations of foreign currency as other income (expense). The net impact
of currency translation and exchange was $33,000 and $260,000 of income in 1996
and 1995, respectively. Included in the income from currency translation in 1995
was a gain of approximately $245,000 which the Company realized upon the sale of
its investment in Ferrotec. The balance of other income (expense) in 1996 and
1995 was principally amortization of bank financing costs.
The income tax expense in 1996 of $487,000 is comprised principally of a
provision for state and foreign income taxes on the Company's earnings and a
federal alternative minimum tax provision. The tax provision in 1995 includes
approximately $300,000 in various state and foreign taxes, offset by a benefit
of approximately $615,000 resulting from the recording of a tax asset in Europe
at AP&T reflecting that business's return to profitability from continuing
operations. See Note D to the Consolidated Financial Statements for a more
complete discussion of income taxes.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, the operations of the business used $2,153,000 of cash, which was
principally the result of the increases in accounts receivable and inventories
and the decline in the balance of deposits from systems customers. This cash
requirement was financed from borrowings under the Company's expanded revolving
line of credit as discussed below. Cash receipts from the sale of crystal
growing systems under large multi-unit contracts are typically received by the
Company as certain milestones are met, including receipt of the order,
submission of accepted engineering drawings, shipment and final acceptance of
the units. In 1997 and 1996, the Company received advance payments of $6,523,000
and $12,547,000, respectively, in connection with orders for crystal growing
systems. In order to secure its sources of supply for critical long lead
inventory items, the Company has also had to make advance payments to its
vendors. The balance remaining on deposit with vendors was $1,341,000 at June
28, 1997. The Company has purchase contracts for inventory with various
suppliers which, in some cases, extend beyond two years. At June 28, 1997,
outstanding purchase commitments pursuant to these contracts totaled
approximately $15,000,000.
The ratio of current assets to current liabilities was 1.7 at the end of
both 1997 and 1996. Working capital at June 28, 1997 increased to $13,323,000
from $12,350,000 at June 30, 1996. Current assets increased, principally due to
higher accounts receivable balances, as the receivable turnover decreased in
1997 compared to 1996 as a softening in the semiconductor industry caused
customers to lengthen their payment terms. Inventory balances increased somewhat
in 1997 as compared to 1996, but reduced business levels caused overall
inventory turnover to decline to 3.3 times annual consumption in 1997 from 3.7
in 1996.
In December 1996, the Company entered into a new agreement with its bank
which resulted in the expansion of its revolving line of credit from $2,500,000
to $8,500,000. This change is discussed in more detail in Note E to the
consolidated financial statements.
Capital expenditures totaled $1,249,000 in 1997, as compared to $2,422,000
in 1996. The spending in both years consisted primarily of various improvements
to the Company's Nashua facility, including the final acceptance of a machine
for its in-house machine shop, and additions to the Company's computer hardware
and software. The Company is considering plans to undertake a significant
increase in its facilities in connection with the development of its 300mm
crystal puller
17
20
business. Proceeding with these plans, if decided upon, may require the Company
to develop new sources of financing to supplement its internal cash generation
and current borrowing arrangements.
The Company has long-term financing in the form of a $5,000,000 Variable
Rate Industrial Revenue Bond ("VRIRB") that is subject to a variable rate of
interest keyed to short-term nontaxable rates (at June 28, 1997, 4.9%), the
proceeds of which were primarily used to fund the construction of the Company's
Nashua, NH headquarters. The Company has a credit facility with its bank which
provides the Company with total credit of approximately $13,900,000, $5,400,000
of which is in the form of a stand-by letter of credit for the Company's VRIRB,
and $8,500,000 (increased from $2,500,000 in December 1996) of which is a
revolving line of credit for working capital purposes. The stand-by letter of
credit has a term of five years with a fee of 1% per year and the revolving
credit facility bears interest at prime rate plus 1% with a fee of 1/8% on the
unused portion. At June 28, 1997, $6,170,000 was outstanding against the
revolving line of credit.
During 1996, the Company borrowed $1,000,000, in the form of a demand note
with its bank, for working capital purposes, which had interest at prime plus
1%. In 1997, this demand note was canceled as the balance was rolled into the
newly increased revolving line of credit. Also 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, which bears interest at
9.75%. At June 28, 1997, the balance on this note was $611,000. In addition, the
Company, through its wholly-owned foreign subsidiaries, has various short-term
facilities with local banks totaling approximately $2,000,000 at June 28, 1997.
During 1997, the maximum outstanding borrowing on these foreign credit lines was
$329,000. The weighted average interest rates during the year on these
facilities ranged from 7.4% to 9% and the interest rates at June 28, 1997 ranged
from 7.0% to 9.5%.
Management believes that current financial resources (working capital and
short-term borrowing arrangements) and anticipated funds from operations will be
adequate to meet cash requirements in the year ahead, with the possible
exception of financing related to the facility expansion referred to above. The
Company has undertaken to develop new sources of financing to supplement its
present capabilities in this area.
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.
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 many factors that could cause actual results to
differ materially from those anticipated by such forward-looking statements.
These include, but are not limited to, cancellation of letters of intent,
further rescheduling of existing crystal puller orders, additional crystal
puller orders from existing or new customers, including those mentioned in the
report, lack of new crystal puller orders from existing or new customers,
change in revenues in the Company's components, fluids, and thin film
deposition businesses, and a material change in the market conditions within
the semiconductor industry. 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.
18
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page(s)
Reports of Independent Auditors..........................................................20-21
Consolidated Balance Sheets as of June 28, 1997 and June 30, 1996...........................22
Consolidated Statements of Operations for each of the three years
in the period ended June 28, 1997.....................................................23
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended June 28, 1997..................................24
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 28, 1997.....................................................25
Notes to Consolidated Financial Statements...............................................26-45
19
22
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 June 28, 1997 and June 30, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. Our audits also included the financial statement schedule, for the
years ended June 28, 1997 and June 30, 1996, 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 June 28, 1997 and June 30, 1996, and the
consolidated results of its operations and its cash flows for the years then
ended 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 21, 1997
20
23
Report of Independent Accountants
---------------------------------
To the Stockholders and Directors of Ferrofluidics Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Ferrofluidics Corporation for the year
ended June 30, 1995 and the financial statement schedule listed in Item 14(a) of
this Form 10-K. These financial statements and the financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Ferrofluidics Corporation for the year ended June 30, 1995 in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Manchester, New Hampshire
August 31, 1995
21
24
FERROFLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 28, 1997 AND JUNE 30, 1996
1997 1996
---- ----
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 883,000 $ 1,701,000
Accounts receivable - trade, less allowance
of $199,000 ($320,000 in 1996) 13,609,000 12,757,000
Inventories 15,263,000 13,829,000
Advances to suppliers 1,341,000 1,916,000
Prepaid and other current assets 474,000 672,000
------------ ------------
Total Current Assets 31,570,000 30,875,000
------------ ------------
Property, plant and equipment, at cost, net
of accumulated depreciation of $10,961,000 ($9,583,000 in 1996) 8,377,000 8,784,000
Cash value of life insurance, net 1,751,000 1,731,000
Deferred income taxes, net 1,815,000 615,000
Other assets, net 1,488,000 1,424,000
------------ ------------
TOTAL ASSETS $ 45,001,000 $ 43,429,000
============ ============
LIABILITIES
- -----------
Current Liabilities:
Bank notes payable $ 6,781,000 $ 4,262,000
Accounts payable 5,126,000 6,366,000
Customer deposits 2,426,000 4,368,000
Accrued expenses and other current liabilities 3,914,000 3,529,000
------------ ------------
Total Current Liabilities 18,247,000 18,525,000
------------ ------------
Long-term debt obligations 5,000,000 5,000,000
Other liabilities 173,000 202,000
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 - 6,178,262
(6,060,902 in 1996) 25,000 24,000
Additional paid-in capital 36,477,000 35,871,000
Accumulated deficit (13,971,000) (15,643,000)
Currency translation adjustments (950,000) (550,000)
------------ ------------
Total Stockholders' Equity 21,581,000 19,702,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,001,000 $ 43,429,000
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
22
25
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 28, 1997, AND JUNE 30, 1996 AND 1995
1997 1996 1995
---- ---- ----
Net sales and revenues $ 67,785,000 $ 72,967,000 $ 34,155,000
Cost of sales 48,218,000 51,941,000 20,264,000
------------ ------------ ------------
Gross profit 19,567,000 21,026,000 13,891,000
Operating expenses:
Engineering and product development expense 4,811,000 4,440,000 3,410,000
Selling, general and administrative expense 13,226,000 11,649,000 10,694,000
Nonrecurring operating income -- -- (1,156,000)
------------ ------------ ------------
Operating income 1,530,000 4,937,000 943,000
Interest income 89,000 137,000 232,000
Interest expense (854,000) (580,000) (638,000)
Other income (expense), net (268,000) (187,000) 30,000
------------ ------------ ------------
Income before income taxes 497,000 4,307,000 567,000
Income taxes (benefit) (1,175,000) 487,000 (322,000)
------------ ------------ ------------
Net income $ 1,672,000 $ 3,820,000 $ 889,000
============ ============ ============
Net income per share $ .27 $ .61 $ .16
============ ============ ============
Weighted average common and
common equivalent shares 6,239,581 6,313,045 5,563,160
The accompanying notes are an integral part of the consolidated financial
statements.
23
26
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED JUNE 28, 1997, AND
JUNE 30, 1996 AND 1995
Common Stock Additional Currency
------------------------ Paid-In Accumulated Translation
Shares Par Value Capital Deficit Adjustments
------ --------- ------- ------- -----------
BALANCE, JUNE 30, 1994 5,366,949 $21,467 $32,109,000 $(20,352,000) $(595,000)
Issuance of common stock for:
Settlement of stockholder class action suit 600,000 2,400 3,148,000 -- --
Restricted stock plan, charge to operations 38,385 154 290,000 -- --
Redemption of stock for taxes (8,136) (33) (62,000) -- --
Net income -- -- -- 889,000 --
Current year translation adjustments -- -- -- -- 330,000
--------- ------- ----------- ------------ ---------
BALANCE, JUNE 30, 1995 5,997,198 23,988 35,485,000 (19,463,000) (265,000)
--------- ------- ----------- ------------ ---------
Issuance of common stock for restricted
stock plan, charge to operations 70,878 284 467,000 -- --
Redemption of stock for taxes (7,174) (28) (81,000) -- --
Net income -- -- -- 3,820,000 --
Current year translation adjustments -- -- -- -- (285,000)
--------- ------- ----------- ------------ ---------
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 taxes (9,540) (38) (71,000) -- --
Net income -- -- -- 1,672,000 --
Current year translation adjustments -- -- -- -- (400,000)
--------- ------- ----------- ------------ ---------
BALANCE, JUNE 28, 1997 6,178,262 $24,713 $36,477,000 $(13,971,000) $(950,000)
========= ======= =========== ============ =========
The accompanying notes are an integral part of the consolidated financial
statements.
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27
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 28, 1997, AND JUNE 30, 1996 AND 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 1,672,000 $ 3,820,000 $ 889,000
Adjustments to reconcile net income to cash flow
provided by (used in) operating activities:
Depreciation and amortization 1,602,000 1,145,000 1,030,000
Deferred income taxes (credits) (1,200,000) -- (615,000)
Increase in cash surrender value (20,000) (3,000) (202,000)
Gain on sale of assets (16,000) (9,000) (4,000)
Stock-related compensation 511,000 467,000 290,000
Foreign transaction (gains) losses 217,000 (33,000) (260,000)
Other (508,000) 457,000 224,000
Changes in operating assets and liabilities,
net of disposition of business:
Accounts receivable, net (1,144,000) (5,663,000) (3,150,000)
Inventories (1,632,000) 134,000 (3,710,000)
Prepaid and other current assets 764,000 (900,000) (2,047,000)
Accounts payable and accrued expenses (463,000) 1,857,000 330,000
Customer deposits (1,936,000) (4,073,000) 7,855,000
----------- ----------- -----------
Net cash provided by (used in) operating activities (2,153,000) (2,801,000) 630,000
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (1,249,000) (2,422,000) (1,880,000)
Proceeds from cancellation of key-man policies -- 1,248,000 --
Proceeds from notes receivable -- -- 350,000
Sale of investment in affiliate -- -- 3,991,000
Proceeds from sales of assets 37,000 34,000 753,000
----------- ----------- -----------
Net cash provided by (used in) investing activities (1,212,000) (1,140,000) 3,214,000
----------- ----------- -----------
Cash flows from financing activities:
Short-term borrowings, net 2,519,000 4,262,000 (2,775,000)
Exercise of stock options 166,000 -- --
Payments under capital lease obligations -- (76,000) (72,000)
Proceeds from borrowing of cash surrender value -- -- 189,000
----------- ----------- -----------
Net cash provided by (used in) financing activities 2,685,000 4,186,000 (2,658,000)
----------- ----------- -----------
Effect of currency rate changes on cash (138,000) (107,000) 55,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (818,000) 138,000 1,241,000
----------- ----------- -----------
Cash and cash equivalents at beginning of year 1,701,000 1,563,000 322,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 883,000 $ 1,701,000 $ 1,563,000
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
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28
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), rotary sealing devices based on or derived from its
proprietary ferrofluid technology, and systems for growing crystals of silicon,
germanium, gallium arsenide and other metal alloys for the semiconductor,
photovoltaic, military and advanced materials markets. Information on the
Company's operations by segment and geographic area are included in Note I.
Approximately 85% of the Company's sales is attributable to the
semiconductor industry, which can experience cyclical fluctuations. A prolonged
decline in the semiconductor industry could have a materially adverse effect on
the Company's operating results.
Fiscal Year
- -----------
Effective July 1, 1996, the Company changed its fiscal year end from June
30 to a 52 or 53-week year ending on the Saturday nearest June 30. Accordingly,
the 1997 fiscal year ended June 28, whereas the previous two fiscal years ended
on June 30.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All intercompany 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 and
commercial paper with original maturities of less than 90 days.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of the Company's financial instruments, including
accounts receivable, accounts payable and short-term and long-term debt,
approximate fair value.
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. At times, such investments may be 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 segment,
concentrations of trade credit risk are limited due to the large number of
26
29
customers and their dispersion across many different geographical regions. In
the Company's Crystal Growing Systems segment, customers belonging to an
affiliated group of companies, some foreign and some domestic, accounted for
65.6% of that segment's fiscal 1997 net sales (41.3% of consolidated net sales)
and 39.9% of gross consolidated accounts receivable at June 28, 1997.
Additionally, the Company has made advance payments to suppliers for
inventory aggregating $1,341,000 at June 28, 1997.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories consist of the following elements at June 28, 1997 and June
30, 1996:
1997 1996
---- ----
Raw materials and purchased parts $ 8,082,000 $ 6,845,000
Work-in-process 2,962,000 3,188,000
Finished goods 4,219,000 3,796,000
----------- -----------
$15,263,000 $13,829,000
=========== ===========
The Company has purchase contracts for inventory with various suppliers
which, in some cases, extend beyond two years. At June 28, 1997, outstanding
purchase commitments pursuant to these contracts totaled approximately
$15,000,000.
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 subsequent to the asset being
placed in service.
Maintenance and repairs are charged to expense as incurred. Upon
retirement or sale, the cost of disposed assets and the related accumulated
depreciation are eliminated from the accounts. Gains or losses on disposition
are reflected in other income (expense) at the time of disposition.
Property, plant and equipment consisted of the following at June 28, 1997
and June 30, 1996:
1997 1996
---- ----
Land $ 321,000 $ 321,000
Buildings and improvements 8,033,000 6,633,000
Machinery and equipment 5,399,000 4,420,000
Furniture, fixtures and vehicles 5,408,000 5,263,000
Construction in process 177,000 1,730,000
------------ -----------
19,338,000 18,367,000
Less: Accumulated depreciation
and amortization 10,961,000 9,583,000
---------- -----------
$ 8,377,000 $ 8,784,000
=========== ===========
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30
Intangible Assets
- -----------------
At June 28, 1997, the Company had recorded goodwill in an amount of
$1,064,000, which is included on the accompanying balance sheet with other
assets, resulting from the acquisition in fiscal 1989 of AP&T. This amount is
being amortized over a 16 year life on a straight line basis.
Accumulated amortization as of June 28, 1997 amounted to $514,000.
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
- ------------
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Taxes are not provided on undistributed income of subsidiaries not
consolidated for U.S. tax purposes as it is intended that such earnings will
remain invested in those companies or, if distributed, the tax effect would not
be material. As of June 28, 1997, each of these subsidiaries had an accumulated
loss.
Revenue Recognition
- -------------------
The Company generally recognizes product revenue upon shipment of products
to the customer. Royalty revenue is recognized as it is earned.
Product Development Expenses
- ----------------------------
Product development expenditures are charged to expense when first
incurred. The Company incurred $2,033,000, $1,723,000 and $1,479,000 in product
development during 1997, 1996 and 1995, respectively.
Translation Of Foreign Currencies
- ---------------------------------
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with Financial Accounting Standards Board ("FASB")
Statement No. 52, Foreign Currency Translation. All balance sheet accounts of
foreign subsidiaries whose functional currency is other than the U.S. dollar
have been translated at year-end exchange rates. Income statement amounts have
been translated at average exchange rates during the year. Translation gains and
losses have been accumulated as a separate component of stockholders' equity.
Transaction gains and losses of foreign subsidiaries whose functional currency
is the U.S. dollar have been charged directly to operations as incurred.
Foreign Exchange Contracts
- --------------------------
The Company from time to time enters into 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 June 28, 1997, there was one foreign exchange contract
outstanding, in which there was no material exchange gain or loss.
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31
Other Income (Expense)
- ----------------------
Other income (expense) consisted of the following for the years ended June
28, 1997 and June 30, 1996 and 1995:
1997 1996 1995
--------- --------- ---------
Foreign transaction gains
(losses) $(217,000) $ 33,000 $ 260,000
Gain on sale of fixed assets 16,000 9,000 4,000
Other (67,000) (229,000) (234,000)
--------- --------- ---------
$(268,000) $(187,000) $ 30,000
========= ========= =========
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
- ------------------
Net income per share for fiscal 1997, 1996, and 1995 is based on the
weighted average number of common shares outstanding as well as the effect of
all dilutive common stock equivalents.
Statement Of Cash Flows
- -----------------------
For the years ended June 28, 1997 and June 30, 1996 and 1995, cash
payments for income taxes amounted to $473,000, $290,000 and $121,000,
respectively. Cash payments for interest in each of the three years amounted to
$795,000, $421,000 and $427,000, respectively.
During 1996, the Company transferred its ownership in certain single
premium, paid-up life insurance policies on the life of a former CEO to the
former CEO. At the time of the transfer, the policies had a gross cash value of
approximately $2,300,000, against which the Company had outstanding borrowings
in the amount of approximately $1,300,000, and an offset for amounts due the
former CEO of approximately $1,000,000. As the policies had no net carrying
value to the Company, the transfer was treated as a noncash transaction (See
Notes C and J). Also during 1996, the Company transferred certain equipment with
a net book value of $488,000 into inventory.
Impact Of Recently Issued Accounting Standards
- ----------------------------------------------
In February 1997, the FASB issued Statement No. 128, Earnings per Share,
which must be adopted by the Company in fiscal 1998, and which establishes
standards for computing and presenting earnings per share by simplifying
previous standards and making them comparable to international standards. The
Company will then be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new requirements
for calculating primary earnings per share, the dilutive effect of stock options
will be excluded. This change would not have affected the primary earnings per
share calculation for the years ended June 28, 1997 and June 30, 1995, but it
would have increased primary earnings per share by $.01 for the year ended June
30, 1996. The impact of Statement 128 on the calculation of fully diluted
earnings per share for these years is not expected to be material.
In February 1997, the FASB also issued Statement No. 129, Disclosure of
Information about Capital Structure, which must also be adopted by the Company
in fiscal 1998. Statement 129 establishes standards for disclosing information
about the Company's capital structure.
29
32
In July 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income and Statement No. 131, Disclosure about Segments of an Enterprise and
Related Information. Both statements must be adopted by the Company in fiscal
year 1999. Statement No. 130 establishes standards for the reporting and display
of comprehensive income and its components in a complete set of financial
statements. Statement No. 131 changes the way segment information is reported
and establishes standards for related disclosures about products and services,
geographic areas, and major customers.
The Company believes that the adoption of these standards is not likely to
have a material impact on the Company's financial position or results of
operations.
Reclassifications
- -----------------
Certain amounts for 1996 have been reclassified to conform to 1997
presentation.
Fourth Quarter Adjustments
- --------------------------
The Company made adjustments to its financial statements in the fourth
quarter ended June 28, 1997 which included approximately $570,000 in valuation
reserves for slow moving inventory and anticipated field costs resulting from
the delivery of new equipment. Additionally, the Company recorded a $1,200,000
tax benefit resulting from a reduction of the valuation allowance against
deferred tax assets (See Note D).
B. NONRECURRING OPERATING TRANSACTIONS
VSE
- ---
In September 1994, management decided to discontinue the operations of
VSE, its majority owned subsidiary in Austria, due to prolonged operating losses
and its inability to compete effectively in the standard vacuum-valve industry.
In the process of liquidating the subsidiary, VSE went into technical
receivership and, in October, the minority owner acquired the business out of
receivership and assumed all of its liabilities. The loss from operations of VSE
in fiscal 1995 until the date of abandonment of $205,000, in addition to the
one-time gain on the abandonment of $61,000, have been presented on the
Consolidated Statement of Operations for the year ended June 30, 1995 as
nonrecurring operating expenses.
VAT Vakuumventile, GmbH
- -----------------------
In November 1994, the Company entered into a fifteen-year agreement with
VAT Vakuumventile, GmbH ("VAT"), a Swiss vacuum-valve manufacturer, pursuant to
which VAT has been granted exclusive right to utilize certain rotary feedthrough
sealing technology of the Company in exchange for $1,300,000 in cash. During
October and November 1994, the Company received an aggregate of $1,300,000 in
cash payments pursuant to this arrangement and has recorded the payments as
nonrecurring operating income in the Consolidated Statement of Operations for
fiscal 1995.
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33
C. CASH VALUE OF LIFE INSURANCE
During fiscal 1988 and 1989, the Company invested an aggregate of
$5,000,000 in six single premium life insurance policies on the lives of Dr.
Ronald Moskowitz, a former CEO, and Mr. Frank Bloom, a former CFO. The policies
yielded a minimum guaranteed rate of return of 6.0%, less a nominal charge for
the cost of insurance. Under the terms of certain insurance loan agreements
relating to these policies, this former CEO and CFO were given the right to
borrow specified amounts annually from the insurance company, to a specified
date, and the former officers' estates were beneficiaries of the policies to the
extent of their respective borrowing rights. The allowable borrowings under
these policies approximated the earnings accruing to the Company. The Company
did not recognize earnings under these policies to the extent they were subject
to the executive borrowing rights.
During 1996, the Company entered into a settlement agreement with Dr.
Moskowitz which, among other things, required the transfer of ownership in two
of these policies to the former CEO and the cancellation of the remaining two
policies on his life. The transferred policies had no carrying value on the
Company's books and, accordingly, the Company did not incur a charge on the
transfer (See Note J). Upon cancellation of the other two policies, the Company
received the net cash value of approximately $1,248,000.
At June 28, 1997, the remaining two policies on the life of the former CFO
had an aggregate cash value of $1,931,000, against which the Company had
$1,908,000 in loans and accrued interest outstanding at an interest rate of 8%.
In addition, the Company has recorded its interest in the value of other
key man life insurance policies under split-dollar agreements with the
aforementioned former CEO of $1,728,000 and $1,699,000 at June 28, 1997 and June
30, 1996, 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 approximating
the cash surrender value of the policies at that time.
D. INCOME TAXES
Income before income taxes for the years ended June 28, 1997 and June 30,
1996 and 1995 was taxed in the following jurisdictions:
1997 1996 1995
----------- ----------- -----------
Domestic $ 371,000 $ 4,000,000 $ 1,012,000
Foreign 126,000 307,000 (445,000)
----------- ----------- -----------
Total $ 497,000 $ 4,307,000 $ 567,000
=========== =========== ===========
Significant components of the provision for income taxes (benefit) are as
follows:
31
34
1997 1996 1995
----------- ----------- -----------
Current:
Federal $ (48,000) $ 133,000 $ --
State 54,000 233,000 20,000
Foreign 19,000 121,000 273,000
----------- ----------- -----------
Total current 25,000 487,000 293,000
----------- ----------- -----------
Deferred:
Federal (1,200,000) -- --
State -- -- --
Foreign -- -- (615,000)
----------- ----------- -----------
Total deferred (1,200,000) -- (615,000)
----------- ----------- -----------
Total $(1,175,000) $ 487,000 $ (322,000)
=========== =========== ===========
The following is a reconciliation between the statutory provision for
federal income taxes and the effective income taxes for the years ended June 28,
1997 and June 30, 1996 and 1995:
1997 1996 1995
----------- ----------- -----------
Income tax expense at federal statutory rate $ 169,000 $ 1,464,000 $ 193,000
Change in valuation allowance (1,190,000) (1,180,000) (1,629,000)
Settlement of stockholders' class
action suit -- -- 1,247,000
State income tax, net of federal tax benefit 36,000 153,000 20,000
Foreign income taxes at differing
statutory rates (24,000) 17,000 (342,000)
Other (166,000) 33,000 189,000
----------- ----------- -----------
Income tax expense (benefit) $(1,175,000) $ 487,000 $ (322,000)
=========== =========== ===========
The components of the net deferred tax asset as of June 28, 1997 and June 30,
1996 were as follows:
Deferred tax assets: 1997 1996
------------ ------------
Net operating loss carryforwards $ 10,443,000 $ 10,689,000
Capital loss carryforward 1,821,000 1,766,000
Compensation related items 167,000 235,000
Investment writedowns 631,000 612,000
Valuation allowances 210,000 160,000
Inventories 1,155,000 1,016,000
Research & development credits 150,000 150,000
Alternative minimum tax credits 186,000 172,000
Other 207,000 340,000
------------ ------------
Total deferred tax assets 14,970,000 15,140,000
Valuation allowance for deferred tax assets (12,027,000) (13,217,000)
------------ ------------
Net deferred tax assets 2,943,000 1,923,000
Deferred tax liabilities:
Depreciable assets (965,000) (1,118,000)
Other (163,000) (190,000)
------------ ------------
Total deferred tax liabilities (1,128,000) (1,308,000)
------------ ------------
Net deferred tax assets $ 1,815,000 $ 615,000
============ ============
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35
FASB Statement No. 109, Accounting for Income Taxes, requires a valuation
allowance against deferred tax assets if it is more likely than not that some or
all of the deferred tax assets will not be realized. Due to the uncertainty
surrounding the Company's ability to realize the benefit of the entire deferred
tax asset, a valuation allowance in the amount of $12,027,000 has been
established at June 28, 1997. Reported earnings in 1997 and projected earnings
in 1998 partially alleviated this uncertainty and, accordingly, resulted in a
reduction in the valuation allowance and a corresponding reduction in income tax
expense of $1,200,000 for the year ended June 28, 1997. The valuation allowance
relating to a foreign deferred tax asset was reduced by $615,000 during 1995.
As of June 28, 1997, the Company had remaining net operating loss
carryforwards for Federal income tax purposes of approximately $25,576,000, and
for foreign income tax purposes of approximately $5,073,000, which can be used
to offset future taxable income. The net operating loss carryforwards for
Federal income tax purposes will expire at various dates through 2010. Included
in the loss carryforward, for income tax purposes, is approximately $16,800,000
of tax deductions resulting from the excess of the market price over the
exercise price on the date of exercise of the Company's stock purchase options
and warrants which were exercised during 1993 and prior years. The tax benefit
to be realized upon utilization of the $16,800,000 of loss carryforwards will
result in a decrease in current income taxes payable and an increase to
additional paid-in capital.
E. SHORT TERM BORROWINGS AND OTHER DEBT OBLIGATIONS
As of June 28, 1997 and June 30, 1996, the Company and its subsidiaries
have the following debt obligations outstanding:
1997 1996
----------- -----------
Revolving line of credit $ 6,170,000 $ 2,500,000
1984 Industrial Revenue Bond 5,000,000 5,000,000
Bank notes 611,000 1,762,000
----------- -----------
11,781,000 9,262,000
Less: current portion of debt obligations 6,781,000 4,262,000
----------- -----------
Long term debt obligations $ 5,000,000 $ 5,000,000
=========== ===========
In fiscal 1985 and 1986, the Company secured long-term financing in the
form of a $5,000,000 Variable Rate Industrial Revenue Bond ("VRIRB") and a
$2,500,000 Fixed Rate (7.25%) Industrial Revenue Bond ("FRIRB" and, together
with the VRIRBs, the "IRBs"), respectively. 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 June 28, 1997 was 4.9%. 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 15, 1998) which is a part of the credit facility
extended to the Company by a bank as described below.
On June 30, 1994, the Company entered into a credit facility with a bank
which provided the Company with a total credit of approximately $7,900,000,
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 $2,500,000 revolving line of credit
for working capital purposes. As further discussed below, in December 1996, the
credit facility was amended and increased. The stand-by letter of credit has a
term of five
33
36
years with a fee of 1% per year and the revolving line of credit carries an
interest rate 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. At June 30, 1996, the entire $2,500,000 was outstanding
on the revolving line of credit at an interest rate of 9.25%.
During 1996, the Company borrowed $1,000,000, in the form of a demand note
with its bank, for working capital purposes to supplement the revolving line of
credit which was fully borrowed. The note was payable on demand and bore
interest at the bank's prime plus 1% (9.25% at June 30, 1996) and was
collateralized by substantially all of the assets of the Company. Also as
discussed below, this demand note was consolidated into an increased line of
credit in December 1996.
Also 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 is payable upon demand, is being
amortized in 59 monthly installments of $16,899 with a final payment on January
25, 2001 of $21,151. The note bears interest at 9.75% and is collateralized by
the machinery and equipment acquired. At June 28, 1997, the balance on this note
was $611,000.
In December 1996, the bank agreed to increase the Company's revolving line
of credit agreement from $2,500,000 to $8,500,000, which included the
consolidation of the $1,000,000 demand note outstanding at the end of 1996.
Interest on the line is at prime plus 1% (9.5% at June 28, 1997). Under the new
arrangement with its bank, the Company has available to it a total credit
facility of approximately $13,900,000, 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 June 28, 1997, there was approximately $6,170,000 outstanding under
the revolving line of credit agreement.
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. The letter of credit carries a fee of $17,300 and
will be reduced by the amount of the prepayment for each system upon shipment.
The systems are expected to ship before the end of calendar 1997.
In addition, the Company, through its wholly-owned foreign subsidiaries,
has various short-term facilities with local banks totaling approximately
$2,000,000 at June 28, 1997. Approximately $329,000 was borrowed against one of
these facilities during fiscal 1997, and repaid prior to the end of the fiscal
year. No borrowings were made against these short-term facilities during 1996.
The weighted average interest rates during the year on these facilities ranged
from 7.4% to 9.0% and the interest rates at June 28, 1997 ranged from 7.0% to
9.5%.
F. COMMITMENTS AND CONTINGENCIES
The Company has entered into operating leases for office space and
equipment. Future minimum lease payments for the five years subsequent to fiscal
1997 amount to: $315,000 in 1998; $116,000 in 1999; $104,000 in 2000; $104,000
in 2001; and $73,000 in 2002. Rent expense under operating leases amounted to
$489,000 in 1997, $459,000 in 1996, and $336,000 in 1995.
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
34
37
$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.
As part of the sale, in June 1990, of the Company's former UK subsidiary,
AF Technologies, Ltd. (AF), the Company agreed to provide a guarantee of the
lease of AF's' facility. On June 26, 1992, the Company entered into a new
agreement with the landlord of the property, whereby the Company would provide a
British Pound Sterling (P) 300,000 guarantee, over the next ten years, for
a new tenant under the lease, allowing AF to vacate the premises and relocate to
a less expensive location. On July 2, 1992, the Company deposited P300,000
into an escrow account, which currently earns interest at a rate of 2.2%,
pursuant to the terms of the guarantee. The Company would be relieved of this
obligation before the ten-year expiration date if the new tenant were to attain
certain minimum pretax operating results over any period of three consecutive
years. The Company has provided a reserve in the amount of $265,000 against this
deposit in recognition of the uncertainty surrounding the ultimate
collectibility of the amount.
In June 1997, the Company was notified by the landlord of the property
that the tenant had accumulated approximately $112,000 of arrearages under the
lease, and that the landlord intended to draw that amount from the deposit.
After consulting with counsel in Great Britain, the Company believes that the
ultimate resolution of this issue will be within the reserve established and,
thus, the Company has made no additional provision.
At June 28, 1997, the Company had possible indemnification liabilities to
its former CFO in connection with the single premium, paid-up life insurance
policies described in Note C. The unrecorded portion of this contingent
liability ranges from a nominal amount to $150,000.
G. COMMON STOCK
At June 28, 1997, an aggregate of 793,054 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).
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
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38
"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.
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 were valued at the fair market value of
the common stock on the date of grant and 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 June 28, 1997
and June 30, 1996 and 1995 amounted to $511,000, $467,000 and $290,000,
respectively.
A summary of the changes in outstanding shares of restricted stock for the
years ended June 28, 1997 and June 30, 1996 and 1995 is set forth below:
Weighted
Shares Average Price
------ -------------
OUTSTANDING, JUNE 30, 1994 121,096 $ 5.00
Granted 102,580 6.04
Forfeited (5,940) 5.00
Vested (38,385) 5.00
-------
OUTSTANDING, JUNE 30, 1995 179,351 $ 5.60
Granted 40,000 9.75
Forfeited (3,400) 5.00
Vested (70,878) 5.55
-------
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
=======
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39
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.
Generally, options granted by the Company are exercisable at rates of 25%
to 100% per year commencing 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 1995,
1996 and 1997 is set forth below:
Weighted Average
Shares Exercise Price
------------------------------------------------------------ ------------------
"1995
Incentive
"1984 Plan" "1995 Plan" Plan" Total
------------------------------------------------------------
OUTSTANDING, JUNE 30, 1994 253,768 -- -- 253,768 $11.85
Granted -- -- 255,550 255,550 9.17
Canceled/expired (13,640) -- -- (13,640) 10.89
Exercised -- -- -- -- --
-------- -------- -------- --------
OUTSTANDING, JUNE 30, 1995 240,128 -- 255,550 495,678 $10.49
Granted 4,125 71,925 151,000 227,050 12.01
Canceled/expired (56,324) -- (1,000) (57,324) 8.17
Exercised -- -- -- -- --
-------- -------- -------- --------
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
======== ======== ======== ========
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The following table summarizes information about stock options outstanding
at June 28, 1997:
Options Outstanding Options Excercisable
---------------------------- ----------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life (In Years) Price Shares Price
- --------------- ------ --------------- ----- ------ -----
$ 7.63 - $10.21 394,947 7.71 $ 9.08 190,322 $ 9.38
$11.00 - $15.25 242,250 5.80 $13.68 177,250 $13.79
$ 7.63 - $15.25 637,197 6.98 $10.83 367,572 $11.51
As of June 28, 1997 and June 30, 1996 and 1995, options to purchase
367,572, 326,729 and 195,641 shares were exercisable at a weighted average
exercise price of $11.51, $11.08 and $10.60 per share, respectively.
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 June 28, 1997 and June 30, 1996 and 1995, 97,000
shares, 259,829 shares and 281,267 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:
Shares
- -----------------------------------------------------
June 28, 1997 June 30, 1996 June 30, 1995 Price Expiration Date
- ------------- ------------- ------------- ----- ---------------
- - 10,000 $8.50 September 3, 1995
- - 9,188 5.00 October 10, 1995
- - 4,250 10.00 March 13, 1996
- - 12,500 9.13 April 30, 1996
- 3,000 3,000 14.50 September 29, 1996
- 37,329 37,329 5.00 October 10, 1996
- 17,500 17,500 14.00 February 4, 1997
- 17,500 17,500 14.50 February 24, 1997
- 40,000 40,000 15.60 February 24, 1997
- 47,500 47,500 15.63 June 18, 1997
62,500 62,500 62,500 11.75 August 31, 1997
20,000 20,000 20,000 11.00 October 27, 1997
14,500 14,500 - 9.75 October 10, 2000
-------- -------- --------
97,000 259,829 281,267
======== ======== ========
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A summary of the changes in outstanding stock purchase warrants for the
three years ended June 28, 1997 is set forth below:
Weighted Average
Shares Exercise Price
------ --------------
OUTSTANDING, JUNE 30, 1994 296,142 $12.06
Granted -- --
Canceled/expired (14,875) 15.78
Exercised -- --
---------
OUTSTANDING, JUNE 30, 1995 281,267 $11.87
Granted 14,500 9.75
Canceled/expired (35,938) 8.00
Exercised -- --
---------
OUTSTANDING, JUNE 30, 1996 259,829 $12.28
Granted -- --
Canceled/expired (162,829) $12.87
Exercised -- --
---------
OUTSTANDING, JUNE 28, 1997 97,000 $11.30
=========
At June 28, 1997, all 97,000 warrants were exercisable at a weighted
average price of $11.30.
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):
Year Ended June
---------------
1997 1996
Net Income
As reported $ 1,672 $ 3,820
Pro-forma 603 2,938
Net Income per share
As reported $ 0.27 $ 0.61
Pro-forma 0.10 0.47
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The fair value of each option and warrant is estimated on the date of
grant using the following weighted-average assumptions in fiscal 1997 and 1996:
1997 1996
---- ----
Risk-free interest rate 6.12% 6.08%
Expected stock price volatility 60.0 % 60.0 %
Expected life of options and warrants (years) 4.3 4.1
The weighted average fair value of options granted during the years ended
June 28, 1997 and June 30, 1996 were $4.47 and $6.21, 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 $9,500 (for calendar 1997) 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 1997, 1996 and 1995, the Company made matching
contributions to the Plan, and corresponding charges to operations, in the
amounts of $155,000, $208,000 and $92,000, respectively. The 401-k Plan consists
of two 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. INDUSTRY SEGMENT AND GEOGRAPHICAL AREA INFORMATION
The Company's operations are conducted in three industry segments:
component products utilizing ferrofluid technology, including ferrofluids for
audio loudspeakers and nondestructive testing and sensing, rotary sealing
devices and bearings (collectively, "components"); crystal growing systems and
related products; and thin film deposition products manufactured and/or
distributed by AP&T. Sales between segments and geographic enterprises are
accounted for at cost plus a reasonable profit.
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 and cannot be specifically
identified with a particular industry segment. General corporate assets consist
primarily of cash and cash equivalents, restricted cash, notes receivable,
deferred income tax assets, certain fixed assets, and other non-current assets,
including cash surrender value
40
43
of life insurance, net of loans, in the amount of $1,751,000 and $1,731,000 at
June 28, 1997 and June 30, 1996, respectively.
In fiscal 1997, sales by the Systems Division to companies affiliated with
MEMC Electronic Materials, Inc. ("MEMC") totaled $28,017,000 and accounted for
41.3% of consolidated product sales. Sales to these and other affiliates of MEMC
totaled $45,344,000 and $6,419,000 in fiscal 1996 and 1995, which represented
62.1% and 18.8%, respectively, of consolidated product sales in those fiscal
years. Management believes that the loss of this customer, and its affiliates,
could have a materially adverse effect on its future results of operations.
The following table presents financial information for the Company's
industry segments for the years ended June 28, 1997 and June 30, 1996 and 1995.
All amounts are expressed in thousands of dollars.
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FERROFLUIDIC PRODUCTS
---------------------
CRYSTAL
GROWING THIN FILM
COMPONENTS SYSTEMS DEPOSITION CONSOLIDATED
---------- ------- ---------- ------------
Year ended June 28, 1997:
- -------------------------
Sales to unaffiliated customers $ 16,685 $ 42,691 $ 8,409 $ 67,785
========
Segment operating profit 3,699 2,303 (35) $ 5,967
General corporate expenses (4,437)
--------
Operating Income $ 1,530
========
Net identifiable assets 17,641 18,247 2,854 $ 38,742
General corporate assets 6,259
--------
Total Assets $ 45,001
========
Depreciation and amortization 1,193 248 161
Capital expenditures 919 205 125
Year Ended June 30, 1996:
- -------------------------
Sales to unaffiliated customers $ 18,827 $ 45,741 $ 8,399 $ 72,967
========
Segment operating profit 2,854 4,957 387 $ 8,198
General corporate expenses (3,261)
--------
Operating Income $ 4,937
========
Net identifiable assets 15,843 19,018 2,777 $ 37,638
General corporate assets 5,791
--------
Total Assets $ 43,429
========
Depreciation and amortization 794 172 179
Capital expenditures 1,790 414 218
Year Ended June 30, 1995:
- -------------------------
Sales to unaffiliated customers $ 14,119 $ 11,782 $ 8,248 $ 34,149
Royalty revenues 6 -- -- 6
-------- -------- -------- --------
Total net sales and revenues 14,125 11,782 8,248 $ 34,155
========
Segment operating profit 1,682 646 200 $ 2,528
General corporate expenses (2,741)
Nonrecurring operating income, net 1,156
--------
Operating Income $ 943
========
Net identifiable assets 12,594 16,191 3,585 $ 32,370
General corporate assets 7,159
--------
Total Assets $ 39,529
========
Depreciation and amortization 715 168 132
Capital expenditures 1,885 73 138
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The following is a summary of certain financial data by geographic areas:
UNITED STATES EUROPEAN JAPANESE
OPERATIONS OPERATIONS OPERATIONS ELIMINATIONS TOTAL
Year ended June 28, 1997
- ------------------------
Sales to unaffiliated domestic customers $ 36,101 $ -- $ -- $ -- $ 36,101
Sales to unaffiliated foreign customers 7,880 11,979 11,825 -- 31,684
Sales to subsidiaries 12,390 -- -- (12,390) --
-------- -------- -------- -------- --------
Total net sales and revenues 56,371 11,979 11,825 (12,390) $ 67,785
========
Geographic operating profit (loss) 5,891 174 (99) 1 $ 5,967
General corporate expenses (4,437)
--------
Operating Income $ 1,530
========
Net identifiable assets 34,466 4,416 2,388 (2,528) $ 38,742
General corporate assets 6,259
--------
Total Assets $ 45,001
========
Year ended June 30, 1996:
- -------------------------
Sales to unaffiliated domestic customers $ 18,887 $ -- $ -- $ -- $ 18,887
Sales to unaffiliated foreign customers 40,835 12,702 543 -- 54,080
Sales to subsidiaries 3,922 -- 25 (3,947) --
-------- -------- -------- -------- --------
Total net sales and revenues 63,644 12,702 568 (3,947) $ 72,967
========
Geographic operating profit (loss) 8,459 587 (829) (19) $ 8,198
General corporate expenses (3,261)
--------
Operating Income $ 4,937
========
Net identifiable assets 33,393 4,208 1,450 (1,413) $ 37,638
General corporate assets 5,791
--------
Total Assets $ 43,429
========
Year ended June 30, 1995:
- -------------------------
Sales to unaffiliated domestic customers $ 12,737 $ -- $ -- $ -- $ 12,737
Sales to unaffiliated foreign customers 9,919 11,201 292 -- 21,412
Sales to subsidiaries l,691 -- 2 (1,693) --
Royalty and other revenues 6 -- -- -- 6
-------- -------- -------- -------- --------
Total net sales and revenues 24,353 11,201 294 (1,693) $ 34,155
========
Geographic operating profit (loss) 2,882 510 (826) (38) $ 2,528
General corporate expenses (2,741)
Nonrecurring operating income, net 1,156
--------
Operating Income $ 943
========
Net identifiable assets 28,107 4,917 247 (901) $ 32,370
General corporate assets 7,159
--------
Total Assets $ 39,529
========
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J. LITIGATION
Shareholder Class Action Lawsuits
- ---------------------------------
In August and September 1993, four actions were brought against the
Company and certain of its officers and former officers. These actions alleged
violations of federal securities law, fraud and deceit and negligent
misrepresentation based upon alleged misrepresentations in certain statements
made by the Company in various public documents. The actions were consolidated
in the federal district court in Massachusetts in March 1994, and in June 1994,
a Consolidated Amended Complaint was filed in the actions.
On June 23, 1994, the parties entered into a Stipulation of Settlement
which provided for the settlement of all of the actions and a release of all
claims which were made or could have been made in the litigation. In exchange,
the Company agreed to issue 600,000 shares of its common stock and other
defendants agreed to pay $3,110,000 in cash. The settlement of these actions on
these terms was approved by the Court in August 1994, and the settlement became
effective on September 23, 1994.
Securities and Exchange Commission
- ----------------------------------
In February 1993, the Company received an informal inquiry from the SEC
requesting that the Company provide the SEC with certain documents concerning
publicity relating to the Company for the period from January 1, 1992 to
February 19, 1993. In August 1993, the SEC issued an order directing a private
investigation to determine whether certain unnamed persons have violated or
caused the Company to violate the federal securities laws. Among the areas of
inquiry identified in the order is whether publicity about the Company,
including research reports, was published without fully disclosing consideration
given or received therefore. The order also indicates that the inquiry will
examine possible manipulation by certain unnamed persons of the Company's
securities, payment in connection therewith, and failure to disclose such
activities in public filings made by the Company (including the financial
statements contained or incorporated therein), as well as possible nondisclosure
of transactions with the Company in which such persons may have had a material
interest. Throughout the investigation, the Company has cooperated fully with
the SEC's inquiry. In June 1997, the SEC completed its investigation with
respect to the Company and on June 23, 1997, the Company entered into a Consent
and Understanding, whereby it agreed to be permanently enjoined from violating
the federal securities laws. The Company is continuing to cooperate with the SEC
as it completes its investigation with respect to certain unnamed persons.
Former Management
- -----------------
In March 1993, a special committee of three outside directors was
appointed by the Company's Board of Directors to conduct an internal
investigation, with the assistance of counsel retained by that committee. In
connection with the investigation, in September 1993, the Company announced the
retirement of Dr. Ronald Moskowitz, its then Chairman and Chief Executive
Officer, and that the Company and Dr. Moskowitz had entered into a Termination
Agreement that superseded his previous employment agreement. Pursuant to the
agreement, the former CEO was to receive payments aggregating $725,000 over the
four years ended June 30, 1997 in advisory fees The Company charged the entire
$725,000 to nonrecurring operating charges in fiscal 1994. During fiscal 1996
and 1995, the Company made cash payments under this agreement totaling $37,000
and $200,000, respectively.
44
47
In September 1995, the Company and the former CEO entered into a agreement
(the "Settlement Agreement") to amend the Termination Agreement and accelerate
the termination of his relationship with the Company. Among other things, the
Settlement Agreement required (i) the extension of the former CEO's
covenant-not-to-compete to June 30, 2000, (ii) a payment to the former CEO of
$196,000 in full satisfaction of the $213,000 in remaining payments owed him
under the Termination Agreement, (iii) a payment to the former CEO of $150,000
in full satisfaction of a $200,000 legal indemnification, and (iv) the transfer,
to the former CEO, of the Company's ownership in two single premium, paid-up
life insurance policies on his life (See Note C).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for by this Item 9 was previously reported in a
Current Report on Form 8-K filed with the SEC on November 28, 1995, as amended
by a Current Report on Form 8-K/A filed with the SEC on December 8, 1995, and in
a Current Report on Form 8-K filed with the SEC on December 14, 1995.
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.
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48
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 June 28, 1997 and June 30, 1996 and 1995 PAGE
Schedule II - Valuation and Qualifying Accounts 56
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.
(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 June 28, 1997.
(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).
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49
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).
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)
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)
47
50
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)
48
51
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)
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.(2)
10.56 Preferred Vendor Agreement, dated November 30, 1993, between the
Registrant and Fuji Seiki, Inc.(2)
10.57 Patent, Technical Information and Trademark License Agreement, dated
November 30, 1993, between the Registrant and Fuji Seiki, Inc.(2)
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.(2)
10.59 Letter Agreement, dated September 15, 1993, between the Registrant and
Dr. Ronald Moskowitz concerning Dr. Moskowitz' retirement from
Ferrofluidics.(2)
10.62 Indemnification Agreement, dated October 1, 1993, between the Registrant
and Alvan F. Chorney.(2)
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.(2)
49
52
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.(2)
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)).
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.(2)
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.(2)
10.74 Superseding 1993 Fluids License Agreement, dated June 30, 1993, between
the Registrant and Nippon Ferrofluidics Corporation.(2)
11 Computation of Per Share Earnings(3)
21 Subsidiaries of the Registrant(3)
23.1 Consent of Ernst & Young LLP(3)
23.2 Consent of Coopers & Lybrand L.L.P.(3)
27 Financial Data Schedule
(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.
(4) Filed herewith
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53
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 4th day of
September, 1997.
FERROFLUIDICS CORPORATION
By: /s/ Salvatore J. Vinciguerra
----------------------------
Salvatore J. Vinciguerra
Chief Executive Officer and President
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 Dated Signed
- ---------- ----- ------------
/s/ Salvatore J. Vinciguerra Chief Executive Officer, 9/4/97
- ---------------------------- President
Salvatore J. Vinciguerra
/s/ William B. Ford Vice President Finance 9/4/97
- ---------------------------- (Chief Financial Officer)
William B. Ford
/s/ Stephen B. Hazard Director 9/4/97
- ----------------------------
Stephen B. Hazard
/s/ Dean Kamen Director 9/4/97
- ----------------------------
Dean Kamen
/s/ Howard F. Nichols Director 9/4/97
- ----------------------------
Howard F. Nichols
/s/ Robert P. Rittereiser Director 9/4/97
- ----------------------------
Robert P. Rittereiser
/s/ Dennis R. Stone Director 9/4/97
- ----------------------------
Dennis R. Stone
51
54
EXHIBIT 11
Ferrofluidics Corporation
Statement Re: Computation of Per Share Earnings
For the Years ended June 28, 1997 and June 30, 1996 and 1995
1997 1996 1995
---- ---- ----
Primary
Average shares outstanding 6,234,534 6,196,934 5,563,160
Net effect of dilutive stock options - based
on the treasury stock method using
average market price 5,047 116,111 N/A
---------- ---------- ----------
Total 6,239,581 6,313,045 5,563,160
Net income $1,672,000 $3,820,000 $ 889,000
Per share amount $ .27 $ .61 $ .16
========== ========== ==========
Fully Diluted
Average shares outstanding 6,234,534 6,196,934 5,563,160
Net effect of dilutive stock options - based
on the treasury stock method using
year-end market price, if higher than
average market price 5,047 156,817 N/A
---------- ---------- ----------
Total 6,239,581 6,353,751 5,563,160
Net income $1,672,000 $3,820,000 $ 889,000
Per share amount $ .27 $.60 (A) $ .16
========== ========== ==========
(A) Earnings per share assuming full dilution is not presented in the Statement
of Operations for 1996 as it is less than 3% more dilutive than the primary
computation.
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EXHIBIT 21
Subsidiaries of the Ferrofluidics Corporation
As of June 28, 1997
NAME PLACE OF ORGANIZATION
- ---- ---------------------
Advanced Products and Technologies, GmbH Nurtingen, Germany
Advanced Products and Technologies, Ltd. Oxford, England
Advanced Products and Technologies, S.A. Madrid, Spain
Ferrofluidics Japan Corporation Tokyo, Japan
Ferrohydrodynamics Corporation Massachusetts
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-38642) pertaining to the 1983 Employee Stock Purchase Plan,
(Form S-8 No. 33-38643) pertaining to the 1984 Non-Qualified Stock Option Plan,
and (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 21, 1997, with
respect to the consolidated financial statements and schedule of Ferrofluidics
Corporation for the year ended June 28, 1997, included in the Annual Report
(Form 10-K) for the year ended June 28, 1997.
/s/ Ernst & Young LLP
Manchester, New Hampshire
September 19, 1997
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57
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of Ferrofluidics Corporation on Form S-8 (File No. 33-38642, File No. 33-38643
and File No. 333-13587) of our report dated August 31, 1995, on our audit of the
consolidated financial statements and financial statement schedule of
Ferrofluidics Corporation as of June 30, 1995 and for the year ended June 30,
1995, which report is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
September 19, 1997
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58
FERROFLUIDICS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
JUNE 28, 1997, JUNE 30, 1996 AND JUNE 30, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------------------------- --------------- ---------------------- ----------- ----------
BALANCE AT CHARGED CHARGED BALANCE
BEGINNING TO COSTS TO OTHER AT END OF
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- ------------ -------- ---------- ------
Year ended June 28, 1997:
- -------------------------
(a) Amounts deducted from the assets
to which they apply:
Reserve for doubtful accounts - trade $ 320,000 $ 50,000 -- $ 171,000 $ 199,000
Reserve for excess and obsolete inventory 962,000 326,000 -- -- 1,288,000
Reserve for rent guarantee 265,000 -- -- -- 265,000
(b) Other Reserves:
Warranty reserve 291,000 550,000 -- 438,000 403,000
Self-Insurance reserve 113,000 -- -- -- 113,000
Sales related reserve 447,000 -- -- 53,000 394,000
---------- ---------- ---------- ----------
Total $2,398,000 $ 926,000 -- $ 662,000 $2,662,000
========== ========== ========== ==========
Year ended June 30, 1996:
- -------------------------
(a) Amounts deducted from the assets
to which they apply:
Reserve for doubtful accounts - trade $ 357,000 $ 28,000 -- $ 65,000 $ 320,000
Reserve for excess and obsolete inventory 948,000 240,000 -- 226,000 962,000
Reserve for rent guarantee 275,000 -- -- 10,000 265,000
Reserve against cash surrender value 1,407,000 -- -- 1,407,000 --
(b) Other Reserves:
Warranty reserve 384,000 -- -- 93,000 291,000
Self-Insurance reserve 103,000 10,000 -- -- 113,000
Sales related reserve 447,000 -- -- -- 447,000
---------- ---------- ---------- ----------
Total $3,921,000 $ 278,000 -- $1,801,000 $2,398,000
========== ========== ========== ==========
Year ended June 30, 1995:
- -------------------------
(a) Amounts deducted from the assets
to which they apply:
Investment valuation reserve $ 600,000 -- -- $ 600,000 --
Reserve for doubtful accounts - trade 705,000 $ 34,000 -- 382,000 $ 357,000
Reserve for uncollectible note receivable 432,000 -- -- 432,000 --
Reserve for excess and obsolete inventory 1,372,000 195,000 -- 619,000 948,000
Reserve for rent guarantee 275,000 -- -- -- 275,000
Reserve against cash surrender value 1,407,000 -- -- -- 1,407,000
(b) Other Reserves:
Performance bond reserve 300,000 -- -- 300,000 --
Insurance Indemnification reserve 150,000 -- -- 150,000 --
Warranty reserve 359,000 55,000 -- 30,000 384,000
Self-Insurance reserve 81,000 22,000 -- -- 103,000
Sales related reserve 397,000 50,000 -- -- 447,000
Reserve for employee benefit plan 66,000 -- -- 66,000 --
---------- ---------- ---------- ----------
Total $6,144,000 $ 356,000 -- $2,579,000 $3,921,000
========== ========== ========== ==========
56