SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 27, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For transition period from _________ to _________
Commission file number 0-10734
FERROFLUIDICS CORPORATION
(Exact name of registrant as specified in its charter)
--------------------
Massachusetts 02-0275185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 Simon Street
Nashua, New Hampshire 03061
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 883-9800
--------------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.004 per share
(Title of class)
Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes x No
-- --
(2) Yes x No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of October 1, 1998, 6,218,207 shares of $.004 par value Common Stock of
the registrant were outstanding. The aggregate market value of the voting stock
held by non-affiliates of the registrant based upon the closing price of $3.00
per share for the registrant's Common Stock, as reported on the NASDAQ National
Market as of October 1, 1998 was $17,130,846.
1
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1 Business ............................................................................................ 3
2. Properties .......................................................................................... 8
3. Legal Proceedings ................................................................................... 8
4. Submission of Matters to a Vote of Security Holders ................................................. 8
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters ............................................................................ 9
6. Selected Consolidated Financial Data ................................................................ 10
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................................................... 11
7A. Quantitative and Qualitative Disclosures about Market Risk .......................................... 17
8. Financial Statements and Supplementary Data ......................................................... 18
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................................................ 41
PART III
10. Directors and Executive Officers of the Registrant ................................................ 41
11. Executive Compensation ............................................................................ 43
12. Security Ownership of Certain Beneficial Owners
and Management ................................................................................. 54
13. Certain Relationships and Related Transactions .................................................... 55
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................................... 55
(a) Financial Statement Schedules
(b) Reports on Form 8-K
Signatures .......................................................................................... 60
2
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 manufactures all
ferrofluids for sale or for use in its own proprietary products. With respect to
its products incorporating ferrofluids, the Company generally designs the
product and then procures from third party vendors the fabrication of all or a
substantial proportion of machined parts and components for the product. The
Company assembles, tests and ships the product from its Nashua, New Hampshire
plant.
The Company seeks to apply its Ferrofluidic(R) technologies in situations
where 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 a licensee, currently supplies the vast majority of the ferrofluids and
ferrofluid-based products used in the world.
On September 23, 1998, the Company entered into an agreement with General
Signal Technology Corporation ("General Signal") whereby General Signal
purchased the intellectual property and certain other assets of the Company's
Crystal Growing Systems Division (the "Systems Division") for $10,800,000 in
cash on such date (the "Sale"). Although the Sale took place after the close of
fiscal 1998, in accordance with generally accepted accounting principles, the
Company is reporting the results of operations of this business as discontinued
operations in fiscal 1998, and the Company's consolidated financial statements
for prior periods, as well as all related footnote and financial discussions,
have been revised to reflect this accounting treatment of the Systems Division
in those periods. See Note K to the Consolidated Financial Statements for
additional information regarding the Sale.
The Sale did not include any liabilities or accounts receivable outstanding
as of the closing of the Sale, which remain with the Company. The Sale also did
not include the obligation by the Company to complete backlog, which obligation
remains with the Company, or approximately $5,873,000 in inventory on hand, all
of which is needed to fulfill existing backlog. The terms of the Sale provide
that, generally, any backlog existing on December 31, 1998 will be transferred
to General Signal.
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 and 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
(c) serves as an exclusive distributor in Europe for several U.S. and
European corporations that manufacture compatible products for
similar industries.
3
(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 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
Following the Sale, the Company is organized into two 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 66.7%, 66.5% and 69.1% of total product sales from
continuing operations in fiscal 1998, 1997 and 1996, respectively.
(ii) 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
33.3%, 33.5% and 30.9% of total product sales from continuing
operations in fiscal 1998, 1997 and 1996, respectively.
In fiscal 1998, $16,520,000, or 58.6%, of the Company's sales from
continuing operations were to foreign customers, primarily through AP&T and FJC.
Sales to unaffiliated foreign customers in fiscal 1997 and 1996 totaled
$14,180,000 (56.5%) and $14,941,000 (54.9%), respectively.
All manufacturing and assembly of products for the Components Division 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
Following the Sale, the Company manufactures and sells products in two
major product categories: (i) ferrofluids and (ii) magnetic fluid seals, sealing
subsystems, and other Ferrofluidic(R) components products. 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 65 million speakers per year, representing the vast
majority of the ferrofluid applications in speakers. Sales of
ferrofluids accounted for approximately 7.8%, 10% and 9.5% of
total product sales from continuing operations in fiscal 1998,
4
1997 and 1996, 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 accuracy.
(ii) Magnetic Fluid Seals and Subsystems. The Company combines
proprietary ferrofluid technology with applications engineering to
develop a variety of products that provide state-of-the-art seals
and sealing subsystems that seal the environment from a
manufacturing process. In each of the applications in which the
Company provides Ferrofluidic(R) seals and sealing subsystems it
is the leading provider of such technology products. Sales of
magnetic fluid seals accounted for approximately 58.9%, 56.5% and
59.6% of total product sales from continuing operations in fiscal
1998, 1997 and 1996 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 transferring rotary motion into vacuum
and other highly controlled, ultra-clean process environments. The
Company 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.
In addition, the Company has two additional commercial
applications for its rotary seals: (a) a Lamp Process Sealing
System that is supplied to General Electric and certain other
lighting manufacturers for use as an integral part of the process
to produce energy efficient lamps for automotive, commercial and
residential lighting; and (b) a Medical X-Ray Sealing System that
is supplied to major medical equipment manufacturers for use to
rotate, seal and cool target anodes inside the x-ray vacuum
chamber of computer aided tomography scan equipment.
Industrial Process Seals: The Company's industrial process seals
eliminate volatile organic compounds and volatile hazardous air
pollutants from petroleum refining and chemical processing plants.
Using this magnetic fluid sealing technology, these facilities can
comply cost-effectively with the strictest regulations, which
mandate decreasing "fugitive emissions" (as they are referred to
under the Federal Clean Air Act of 1990 and its Amendments of
1990) according to a phased program over the next few years and
are subject to acceleration by certain state and local
authorities. During fiscal 1997, a new series of gas tight seals
(GT-6) for the industrial market was introduced. This product
series is targeted at industrial fans, blowers, and other
low-pressure gas handling devices where emissions control and
process contamination are critical. Other products within the GT
family will be introduced periodically and target other equipment
such as compressors, centrifuges, mixers, agitators and pumps. The
GT-6 product recently received certification from TA Luft, the
German air quality authority.
Subsystems: During fiscal 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 OEMs, 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.
The Company continues to develop equipment and process
technologies in several other areas in cooperation with major
industrial companies and specific product specialists.
5
Competition
The Company believes that its competitive advantage will continue to depend
upon its trade secrets, know-how and ability to develop both ferrofluids for
specific applications and technologically advanced products which use
ferrofluids. The Company believes that its competitive position with respect to
its proprietary products, while aided by its patents, is not now materially
dependent upon them. The Company does, however, believe that several of its
pending patents, if issued, could further strengthen its competitive position.
The Company's ferrofluids are proprietary to the Company.
(i) Magnetic Fluids. Numerous other companies around the world supply various
forms of magnetic fluids for commercial applications. Nevertheless, the
Company, in conjunction with Ferrotec, its Japanese licensee and former
subsidiary, supplies the vast majority of the world's commercial
applications of ferrofluids and believes that its ferrofluids are the
principal product used in applications utilizing magnetic fluids. The
Company believes its principal competitor in the audio ferrofluid market
is Ferrotec with respect to sales in the Pacific Rim.
(ii) Seals and Sealing Subsystems. In semiconductor and other process industry
applications, the Company's magnetic fluid sealing devices and sealing
subsystems compete against traditional, non-ferrofluid based sealing
methods marketed by other vendors, some of which have lower initial cost
than the Company's products. In comparison to the Company, some of these
firms have greater financial, marketing, technical or other resources
available to them. In the Pacific Rim, the Company's 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.
Employees and Marketing
The Company currently has approximately 219 employees worldwide, of which
167 are employed in the United States, 46 in Europe and 6 in Japan. These
figures include 56 employees in the discontinued Systems Division.
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. 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.
6
Outside Suppliers
With respect to its sealing devices, the Company relies on outside
suppliers to manufacture, to the Company's specifications, a substantial portion
of its metal components requirements. The Company performs assembly and quality
control procedures at its headquarters. If the Company's current suppliers were
unable to continue to manufacture components, the Company believes that other
suppliers would be available to do such work, although there is no guarantee
that the Company would be able to obtain all of its supply requirements from
such other suppliers on terms comparable to those of its current suppliers. The
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.
Intellectual Property Rights
The Company owns a number of U.S. and foreign patents for its seals,
dampers and bearings, with expiration dates ranging up to 2006. In addition, the
Company has applied for additional patents for these products. In many cases,
however, the Company relies more upon its trade secrets, know-how and ability to
develop technological advances than patents to protect its technologies and
products.
The Company has registered trademarks for a logo design utilizing an "F"
and for Ferromedic, Ferrofluidic, FerroSound, FerroSound-The solution is loud
and clear, and Spin Technology.
Internal Research and Development
The Company's internal research and development effort is aimed at
developing proprietary ferrofluids and using the unique properties of magnetic
fluid technology to develop new products and business. The Company spent (and
charged to expense) $890,000, $685,000 and $782,000 in fiscal years 1998, 1997
and 1996, 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.
Backlog
As of June 27, 1998, the Company had a consolidated order backlog from
continuing operations of $8,226,000, as compared to $7,207,000 at June 28, 1997.
A comparative summary of the consolidated backlog by business segment is as
follows:
1998 1997
---- ----
Components $4,335,000 $4,787,000
Distributed Products 3,891,000 2,420,000
---------- ----------
Total Backlog $8,226,000 $7,207,000
========== ==========
The majority of the total backlog at June 27, 1998 is expected to ship
during fiscal 1999.
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.
7
With respect to the Company's former Systems Division, the Company
generally offered a one-year warranty as to workmanship and materials from date
of acceptance by the customer. Warranty expenses have historically been within
the reserves established by the Company.
Financial Information About Industry Segments
Financial information with respect to the Company's industry segments is
hereby incorporated by reference to Note I to the Consolidated Financial
Statements in Item 8 of this report.
Financial Information About Foreign and Domestic Operations and Export Sales
Financial information about the Company's foreign and domestic operations
and export sales is hereby incorporated by reference to Note I of Notes to the
Consolidated Financial Statements in Item 8 of this report.
ITEM 2. Properties
The Company's offices, engineering and manufacturing operations are located
in Nashua, New Hampshire in a 71,000 square foot facility situated on
approximately 4.5 acres of land owned by the Company. This land, the building,
and substantially all the Company's machinery and equipment at its Nashua
facility have been pledged as security for its short and long term debt. (See
Notes A and D to the Consolidated Financial Statements in Item 8.)
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 and Nagano, Japan.
ITEM 3. Legal Proceedings
Securities and Exchange Commission
- ----------------------------------
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 had violated or
caused the Company to violate the federal securities laws. Among the areas of
inquiry identified in the order was whether publicity about the Company,
including research reports, were published without fully disclosing
consideration given or received therefor. The order also indicated that the
inquiry would 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 27, 1998.
8
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.
1998 High Low
---- ---- ---
7/1/97 - 9/30/97 8 7/8 5 7/8
10/1/97 - 12/31/97 7 13/16 4 5/8
1/1/98 - 3/31/98 6 7/16 4 5/8
4/1/98 - 6/30/98 5 11/16 3 1/8
1997
----
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
On October 1, 1998, the closing sale price for the Company's Common Stock,
as reported by the NASDAQ National Market, was $3.00. On that date, there were
approximately 2,489 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.
9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the five years ended June 27,
1998, 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, June 30, June 30, June 30,
June 27, 1998 1997(b) 1996(b) 1995(b) 1994(b)
------------- ------- ------- ------- -------
Income Statement Data:
- ----------------------
Net sales $52,700,000 $67,785,000 $72,967,000 $34,155,000 $26,461,000
Net sales from continuing operations 28,170,000 25,094,000 27,226,000 22,373,000 17,849,000
Nonrecurring operating expenses (income) -- -- -- (1,156,000) 3,108,000
Income (loss) from continuing operations 1,338,000 (97,000) 498,000 2,166,000 (7,362,000)
Income (loss) from discontinued operations (4,810,000) 1,769,000 3,322,000 (1,277,000) (3,352,000)
Net income (loss) (3,472,000) 1,672,000 3,820,000 889,000 (10,713,000)
Per Share Data:
Earnings Per Common Share-Basic:
Income (loss) from continuing operations 0.22 (0.02) 0.08 0.39 (1.37)
Income (loss) from discontinued operations (0.78) 0.29 0.55 (0.23) (0.63)
Net income (loss) (0.56) 0.27 0.63 0.16 (2.00)
Earnings Per Common Share-Diluted:
Income (loss) from continuing operations 0.21 (0.02) 0.08 0.39 (1.37)
Income (loss) from discontinued operations (0.77) 0.29 0.53 (0.23) (0.63)
Net income (loss) (0.56) 0.27 0.61 0.16 (2.00)
Balance Sheet Data:
Working capital $8,182,000 $13,323,000 $12,350,000 $7,811,000 $(1,601,000)
Total assets 44,019,000 45,001,000 43,429,000 39,529,000 32,508,000
Total liabilities 25,818,000 23,420,000 23,727,000 23,748,000 21,325,000
Long-term debt 5,000,000 5,000,000 5,000,000 5,036,000 28,000
Stockholders' equity 18,201,000 21,581,000 19,702,000 15,781,000 11,183,000
Note: (a) Dividends have neither been declared nor paid during the five years
ended June 27, 1998.
(b) Certain amounts for fiscal 1997, 1996, 1995 and 1994 have been
restated to reflect the Systems Division as discontinued operations.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides information to assist in the
understanding of the Company's results from continuing operations, unless
otherwise noted, and financial condition. As described in Item 1, on September
23, 1998, certain of the assets of the Company's Systems Division were sold to
General Signal for $10,800,000 in cash. See Note K to the Consolidated Financial
Statements for more information regarding the Sale. This discussion reflects the
fact that in accordance with generally accepted accounting principles, the
Company is reporting the results of operations from the Systems Division as
discontinued operations and that the Company's Consolidated Financial Statements
for fiscal 1998 and prior periods, as well as all related footnotes, have been
revised to reflect this accounting treatment of the Systems Division in those
periods. It should be read in conjunction with the selected financial data in
the preceding section and the consolidated financial statements and notes
thereto that appear elsewhere herein.
Results of Operations
Fiscal 1998 Versus Fiscal 1997:
- -------------------------------
In fiscal 1998, the Company's consolidated net revenues increased to $28,170,000
from the $25,094,000 reported in fiscal 1997. The changes in revenues by segment
are shown in the following table:
1998 1997
---- ----
Components $18,780,000 $16,685,000
Distributed Products 9,390,000 8,409,000
Total Revenues $28,170,000 $25,094,000
=========== ===========
Sales in the Components product lines increased due primarily to the upturn
in semiconductor equipment manufacturing that began in the fourth quarter of
fiscal 1997, and from a significant increase in sales of rotary feedthrough
seals in Europe primarily in non-semiconductor markets. In addition, the
recently introduced line of industrial gas tight seals also contributed to the
increase in sales in fiscal 1998. In the Distributed Products business segment,
sales of components and power supplies for the thin film deposition industry
contributed significantly to the increase. Sales of magnetic fluids remained
relatively flat for the year as compared to the prior year, as heavy competition
in the audio fluid business, particularly in Asia, prevented a significant sales
increase.
Total sales of the Company's European subsidiary, AP&T, which includes the
sale of the Company's components and fluid products in Europe, as well as
comprising the Distributed Products segment, increased by 15.2% to $13,801,000
as compared to $11,979,000 in fiscal 1997. The increases were in both the
Ferrofluidic(R) product lines and in the distributed products. Sales from the
Company's Japanese subsidiary were 22% lower than in the previous fiscal year,
which was due to the competitive price pressures brought on by the decline of
the yen in relation to the dollar, putting products manufactured in the U.S. at
a significant cost disadvantage.
Bookings increased from $26,595,000 in fiscal 1997 to $31,263,000 in fiscal
1998. This increase was both in Distributed Products and in rotary feedthrough
seals. Bookings for magnetic fluid sales for 1998 were $2,758,000, which is
slightly higher than the $2,542,000 for 1997. Order backlog at the end of fiscal
1998 was $8,226,000, as compared to the backlog in the prior year of $7,207,000.
The majority of the order backlog at the end of fiscal 1998 is expected to ship
in fiscal 1999.
Consolidated gross margin for fiscal 1998 was 43.9%, a decrease from the
47.3% in fiscal 1997. The decrease in margin was due to decreases in margin in
the magnetic fluids product line and in the Company's European operations.
Engineering and product development expenses in fiscal 1998 were
$1,977,000, which is comparable to the $1,907,000 spent in fiscal 1997.
Engineering and product development expenses have been allocated between
continuing operations and discontinued operations on the basis of the amounts
actually spent by each Division.
Selling, general and administrative ("SG&A") expenses in fiscal 1998 were
$8,321,000, which is $1,595,000 or 16.1% less than the $9,916,000 incurred in
1997 and, as a percent of revenues, decreased from 39.5% in 1997 to
11
29.5% in 1998. Selling and marketing costs decreased by $1,200,000, due
primarily to a $872,000 decrease in selling expenses at AP&T which was the
result of restructuring efforts undertaken in late fiscal 1997 and a $151,000
decrease in selling expenses in Japan. Administrative expenses accounted for the
remainder of the decrease, which was due in part to decreases in legal costs
($278,000) and insurance ($260,000). General corporate expenses have been
allocated between continuing operations and discontinued operations on the basis
of the actual amounts incurred on behalf of the respective divisions. In
addition, certain expenses for Corporate Officers (salaries, travel, etc.) and
Accounting Department personnel (primarily salaries) were also allocated on the
basis of the estimated time and expenses incurred on behalf of each respective
Division.
Net interest expense in fiscal 1998 was $601,000, an increase of $178,000
from net interest expense incurred in fiscal 1997. The increase is due to higher
average borrowings under the Company's line-of-credit agreement. Net interest
expense and other bank charges and fees have been allocated between continuing
operations and discontinued operations on the basis of the net identifiable
assets used in those operations. See Note D to the Consolidated Financial
Statements for a more complete discussion of the Company's debt obligations.
The Company records transaction gains and losses resulting from
fluctuations of foreign currency as other income or expense. During fiscal 1998,
$47,000 of net foreign currency transaction losses were recorded as compared to
a net loss of $106,000 in fiscal 1997. The losses in 1998 and 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 1998 and 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 1998 was principally other
financing costs, which did not change materially from the previous fiscal year.
The income tax expense in 1998 of $74,000 is comprised of a provision for
foreign income taxes on the Company's earnings. The income tax benefit of
$448,000 in 1997 consisted principally of a tax benefit of $467,000 recorded in
the fourth quarter of 1997 which represents a reduction in the valuation
allowance against deferred tax assets. See Note C to the Consolidated Financial
Statements for a more complete discussion of income taxes.
Income (loss) from discontinued operations, net of income taxes, was
approximately $(4,810,000) for 1998 as compared to $1,769,000 for 1997.
Fiscal 1997 Versus Fiscal 1996:
- -------------------------------
In fiscal 1997, the Company incurred a loss of $(97,000) or $(.02) per
share, compared to income of $498,000, or $.08 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 7.8% to $25,094,000 from
$27,226,000 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 a substantial portion of the Components segment
revenues. The changes in revenues by segment are summarized as follows:
1997 1996
---- ----
Components $16,685,000 $18,827,000
Distributed Products 8,409,000 8,399,000
----------- -----------
Total Revenues $25,094,000 $27,226,000
=========== ===========
The decrease in Components revenues in 1997 was due to a slowdown in the
production of capital equipment for the semiconductor industry during the first
three quarters of 1997 which caused the demand for the Company's rotary
feedthrough seals to decline sharply, resulting in an 11.4% decrease in
revenues. During the fourth quarter of 1997, 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 1996.
12
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(R) product lines, as the distributed products revenues
remained level with the prior year. Sales of seals and fluids by the Company's
Japanese subsidiary, FJC, increased to $1,239,000 over the $419,000 of revenues
in 1996, evidencing the Company's penetration into that market. Despite the
increase in business with Japan, total foreign sales declined to $14,180,000
from $14,941,000 in 1996.
Bookings in 1997 decreased 4.4% to $26,595,000 from $27,804,000 in 1996,
which was due primarily to the slow-down in the semiconductor industry in 1997.
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 $7,207,000 as compared to
$5,948,000 at June 30, 1996.
The consolidated gross margin for the year ended June 28, 1997 was 47.3%,
an increase of over 2% from the gross margin of 45% in the previous year.
Although revenues declined, the overall product mix was essentially unchanged.
The improvement in margin was due to primarily to an increase in margin in the
magnetic fluids segment. Consolidated operating income before general corporate
and non-operating expenses increased in 1997 to 14.6% of product revenues as
compared to 11.9% in 1996. This was the result of better margins from the
Components' segment as well as lower sustaining engineering and product
development costs.
The Company spent $1,907,000 during fiscal 1997 on engineering and product
development, an amount equal to 7.6% of product revenues compared to $2,248,000
or 8.3% of product revenues in the preceding year. Engineering costs as a
percent of revenues decreased in 1997 principally due to the reallocating of
engineers to the former Systems Division. Engineering and product development
expenses have been allocated between continuing operations and discontinued
operations on the basis of the amounts actually spent by each Division.
Selling, general and administrative ("SG&A") expenses in 1997 increased
$806,000 or 8.9% over such expenses in 1996, and increased as a percent of
revenues from 33.5% in 1996 to 39.5% in 1997. Selling and marketing costs
increased by $162,000, due in part to a $60,000 increase in selling expenses in
Japan 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 ($233,000), personnel costs ($100,000) and severance
($207,000). General corporate expenses have been allocated between continuing
operations and discontinued operations on the basis of the actual amounts
incurred on behalf of the respective divisions. In addition, certain expenses
for corporate officers (salaries, travel, etc.) and Accounting Department
personnel (primarily salaries) were also allocated on the basis of the estimated
time and expenses incurred on behalf of each division.
Interest income in 1997 was down from that in 1996, due principally to
lower levels of invested cash. Interest expense of $503,000 was up 61.7% over
the $311,000 in the prior year as a result of higher borrowings against the
Company's revolving line of credit. Net interest expense and other bank charges
and fees have been allocated between continuing operations and discontinued
operations on the basis of the net identifiable assets used in those operations.
See Note D to the Consolidated Financial Statements for a more complete
discussion of the Company's debt obligations.
In accordance with FASB Statement No. 109, Accounting for Income Taxes, the
Company recorded, in the fourth quarter of 1997, a $467,000 tax benefit. The
benefit resulted 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 $121,000 in 1996 consisted of a
provision for foreign income taxes on the Company's foreign earnings. See Note C
to the Consolidated Financial Statements for a more complete discussion of
income taxes.
Income from discontinued operations, net of income taxes, was approximately
$1,769,000 for 1997 as compared to $3,322,000 for 1996.
13
Liquidity and Capital Resources
The discussion in this section reflects both continuing and discontinued
operations.
In 1998, the operations of the business used $9,000 of cash, as compared to
$2,153,000 in 1997. For fiscal 1998, the net loss of $(3,472,000) was offset by
decreases in accounts receivable, inventories, prepaids and other current assets
and an increase in customer deposits which amounted to $1,432,000, $1,326,000,
$451,000 and $352,000, respectively. The cash requirements for 1998 and 1997
were financed from borrowings under the Company's expanded revolving line of
credit as discussed below. The Company typically received advance payments from
the sale of crystal growing systems under large multi-unit contracts as certain
milestones were met, including receipt of the order, submission of accepted
engineering drawings, shipment and final acceptance of the units. In 1998 and
1997, the Company received advance payments of $4,196,000 and $6,523,000,
respectively, in connection with orders for crystal growing systems. In order to
secure its sources of supply for critical long lead-time inventory items, the
Company has also had to make advance payments to its vendors. The balance
remaining on deposit with vendors was $578,000 at June 27, 1998. The Company has
purchase contracts for inventory with various suppliers which, in some cases,
extend beyond two years. At June 27, 1998, outstanding purchase commitments
pursuant to these contracts totaled approximately $7,000,000.
The ratio of current assets to current liabilities was 1.4 at the end of
1998 which is down from 1.7 at the end of 1997. Working capital at June 27, 1998
decreased to $8,182,000 from $13,323,000 at June 28, 1997. Current assets
decreased, principally due to lower accounts receivable, inventories and
advances to suppliers. However, the decrease in receivables did not result in an
improvement in receivable turnover in 1998 as the softening in the semiconductor
industry caused customers to delay their payments. Due to the large decrease in
inventories from 1997, inventory turnover increased from 2.3 times annual
consumption in 1997 to 3.0 times in 1998.
In December 1996, the Company entered into a new credit agreement with its
bank which resulted in the expansion of its revolving line of credit from
$2,500,000 to $8,500,000. In October, 1997, the Company began to construct a
second 300mm machine with the intent to install it in a 300mm crystal growing
demonstration center at its Nashua facilities (see further discussion in next
paragraph). In connection with this project, the Company's bank agreed to lend
the Company an additional $1,500,000 on a 90-day promissory note to assist in
the financing of the construction of this machine. These changes are discussed
in more detail in Note D to the Consolidated Financial Statements.
Capital expenditures on a consolidated basis totaled $2,399,000 in fiscal
1998, as compared to $1,249,000 in fiscal 1997. The spending in both years
consisted primarily of improvements to the Company's Nashua facility, and in
1998 included the construction of a 300mm machine and the replacement of two old
and outdated lathes in the Company's in-house machine shop. Other spending
included modifications to the manufacturing facility and upgrades to computer
equipment and software, primarily for engineering purposes. Also, during 1998,
the Company spent approximately $1,500,000, not including engineering costs
which have been expensed, on the construction of a 300mm machine for
demonstration purposes. On September 21, 1998, the Company sold this 300mm
machine and certain optional equipment for approximately book value. Upon
signing of the sales agreement for this machine, the Company received $1,385,000
in cash with the balance due upon shipment of the machine, which is expected to
occur within six months.
The Company has long-term financing in the form of a $5,000,000 Variable
Rate Industrial Revenue Bond ("VRIRB"). The VRIRB is subject to a variable rate
of interest keyed to short-term nontaxable rates (at June 27, 1998, 4.25%), the
proceeds of which were primarily used to fund the construction of the Company's
Nashua, NH headquarters. The Company also has a credit facility with its bank
which provided the Company with total credit of approximately $15,400,000,
$5,400,000 of which is in the form of a stand-by letter of credit for the
Company's VRIRB, $8,500,000 of which was a revolving line of credit for working
capital purposes and $1,500,000 of which was in the form of a 90 day promissory
note. The stand-by letter of credit expired in August 1998, and has been renewed
for one year. The letter of credit carries a fee of 1% per year and the
revolving credit facility bears interest at prime rate plus 1% (9.5% at June 27,
1998) with a fee of 1/8% on the unused portion. At June 27, 1998, $7,749,000 was
outstanding against the revolving line of credit. The promissory note, which was
renewed on June 30, 1998, bears interest at the same rate as the revolving
credit line. The Company used a portion of the cash proceeds from the Sale to
pay off the entire $7,956,000 balance of the line of credit and the entire
$1,500,000 balance of the promissory note
14
outstanding as of September 23, 1998. See discussion below regarding the
reduction of the maximum available borrowings under the line of credit
agreement. See also Note K to the Consolidated Financial Statements for a more
complete discussion of the Sale.
During 1996, the Company borrowed $800,000 in the form of an installment
demand note with its bank, to finance the capital expansion of its in-house
machine shop. The note bears interest at 9.75% and expires in January 2001. At
June 27, 1998, the balance on this note was $461,000. In addition, the Company,
through its wholly owned foreign subsidiaries, has various short-term financing
arrangements with local banks totaling approximately $835,000 at June 27, 1998.
During 1998, the maximum outstanding borrowing on these foreign credit lines was
$110,000. The weighted-average interest rates during the year on these
facilities ranged from 7.0% to 10.2% and the interest rates at June 27, 1998
ranged from 7.0% to 10.5%.
As described in Item 1, certain of the assets of the Company's Systems
Division were sold on September 23, 1998 to General Signal for $10,800,000 in
cash. A portion of the cash proceeds from this Sale has been used to pay off
certain outstanding debt as of the closing of the Sale. The Sale, as structured,
did not include any of the Systems Division accounts receivable or liabilities,
which remain with the Company. The Sale also did not include the obligation to
complete approximately $18,433,000 in backlog for crystal growing systems, which
obligation remains with the Company, or approximately $5,873,000 in inventory on
hand, all of which is needed to fulfill such backlog. The terms of the Sale
provide that, generally, any unfulfilled backlog existing as of December 31,
1998, will be transferred to General Signal. The backlog includes a purchase
order from one customer for nine machines, representing approximately
$7,658,000. The Company believes that the customer is seeking to modify the
terms of the order, including its potential cancellation. However, the Company
believes that the purchase order remains legally valid, and that under its
terms, the customer is obligated to pay the Company the costs incurred up to
cancellation of the order. In connection with these machines, the Company has
inventory of approximately $3,104,000 on hand and approximately $2,471,000 in
parts on order at vendors. If the Company is unable to recover these
cancellation charges from the customer, the Company may be required to take a
material write-down of the inventory relating to the purchase order.
The Sale did not include approximately $6,472,000 in accounts receivable
which were outstanding as of the closing of the Sale. While the Company believes
that it will be able to collect these receivables within established reserves
but there can be no assurance that the Sale will not adversely affect their
collectibility. See Note K to the Consolidated Financial Statements for a more
complete discussion of discontinued operations.
The present line of credit from the Company's Bank expires in November
1998. In connection with the Sale, on September 23, 1998, the Company and its
bank agreed to reduce the maximum borrowings under the line of credit agreement
from $8,500,000 to $2,000,000. In the fall of 1998, management expects to begin
discussions with the bank to renew the line of credit at a level which
management believes will be in line with the working capital needs in the
continuing operations. It is expected that the proceeds received from the Sale
and other cash flow will significantly reduce the Company's need for short-term
borrowing arrangements to finance working capital needs in the near future.
Management therefore believes that anticipated funds from operations and the
borrowing arrangements that are expected to be put into place will be adequate
to meet cash requirements for the year ahead.
Impact of Recently Issued Accounting Standards
In June 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.
In March 1998, the Accounting Standards Executive Committee issued SOP
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1, which must be adopted by the Company in fiscal year
1999, requires capitalization of certain costs to develop or obtain internal-use
software.
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.
15
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.
Year 2000
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is a result of computer
programs being written using two digits (rather than four) to define the
applicable year.
The Company's products in the Components Business are mechanical devices or
fluids and do not contain any electronic components. The Company's products in
its Distributed Products Business include an electron beam gun for use in vacuum
deposition processes which is electronically controlled, but includes no
date-sensitive devices. Consequentially, the Company has no need to make any
changes to its products in anticipation of the Year 2000.
Prior to the Sale, the Company's Systems Division sold products that were
controlled by computerized hardware and software, but the processes involved
were inherently not date-sensitive. The software involved was purchased
off-the-shelf, and was not customized by the Company. All recent products
delivered to customers with Company-supplied control systems have been Year 2000
compliant, but some older systems contain older versions of the software and, as
a result, may not be Year 2000 compliant. Since these products are not in
warranty, and since the Company has not warranted their Year 2000 compliance,
the Company believes that it has no further obligations with respect to these
products. All products delivered with Company-supplied control systems out of
backlog prior to December 31, 1998, in accordance with the terms of the Sale,
will be Year 2000 compliant.
The Company has sent requests to all of its principal providers of services
and component parts to advise the Company of their progress in making their
internal systems Year 2000 compliant. The Company believes it has a sufficient
base of critical component suppliers so that if any supplier is unable to
deliver parts due to Year 2000 problems, alternate sources will be available and
that any supply interruption will not be material to its operations. There can
be no assurances, however, that the Company would be able to obtain all of its
supply requirements from such alternate sources on terms comparable with that of
its current suppliers. The Company has identified one critical service supplier
(its bank), the failure of whose systems for an extended period for any reason,
including Year 2000 problems, could cause financially material adverse
consequences to the Company. The bank has provided assurance in writing to the
Company that its systems will be Year 2000 compliant.
With respect to its internal systems, the Company has undertaken an
assessment of its vulnerability to the Year 2000 issue. The Company does not
rely on electronic interaction with customers or vendors, and has in recent
years relied almost entirely on purchased off-the-shelf software packages for
both business and engineering purposes. These packages have not been materially
customized by the Company for its purposes. These software packages run on a
personal computer based local area network which was installed by the Company in
1993, and which has been upgraded as needed since then. The assessment was based
upon formal and informal communications with the software vendors, literature
supplied with the software, literature received in connection with maintenance
contracts, and test evaluations of the software. Systems critical to the
business which have been identified as vulnerable to the Year 2000 problem
either have been, or are being, replaced with new purchased software or
corrected by upgrades available from vendors. Outside companies such as vendors,
major customers, service suppliers, communications providers and banks are being
asked to verify their Year 2000 readiness and the Company is testing interaction
with such systems where appropriate. The assessment thus far has been
accomplished, and is expected to be completed, utilizing the Company's existing
resources, and is not expected to have an adverse material effect on the
Company's financial results.
It is the Company's belief that the results of the assessment to date
indicate that all of the Company's major business systems software is Year 2000
compliant, or will be Year 2000 compliant by the end of calendar year 1998, and
that the Year 2000 issue is not likely to have a material impact on the
Company's operations. However, there can be no assurances that the systems or
software of third parties on which the Company relies will be timely converted
and the Company may be adversely affected by the failure of such a third party
to become Year 2000 compliant.
16
The Company has not yet developed a plan to deal with this contingency but
expects to have such a plan in place by the end of fiscal 1999.
Euro Currency
The Company derived approximately 49% of its revenue from continuing
operations in fiscal 1998 from its operations in Germany and England.
Historically, transactions in Europe have been denominated in a variety of
currencies.
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to adopt the Euro as their common legal currency. Following
the introduction of the Euro, the local currencies are scheduled to remain legal
tender in the participating countries until January 1, 2002. During this
transition period, goods and services may be paid for using either the Euro or
the participating country's local currency. Thereafter, the local currencies
will be canceled and the Euro currency will be used for all transactions between
the eleven participating members of the European Union.
The Euro conversion raises strategic as well as operational issues. The
conversion is expected to result in a number of changes, including the
stimulation of cross-border competition by creating cross-border price
transparency. The Company is evaluating the implications of the Euro conversion
and is uncertain as to the potential impact on its operations.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. There are certain factors that could cause actual results
to differ materially from those anticipated by the statements made above. These
include, but are not limited to, changes in revenues in the Company's
components, fluids and thin film deposition businesses, expected working capital
needs of the continuing operations, a material change in the market conditions
within the semiconductor industry and, changes in management's assessments
regarding the Company's obligations under outstanding purchase orders, ability
to fulfill existing sales order backlog, the recoverability of inventory and the
ability to collect accounts receivable relating to the discontinued Systems
Division, the resolution of a dispute with a customer over the validity of a
purchase order relating to the discontinued Systems Division and failure of the
Company's systems or software, or the systems or software of a third party on
which the Company relies to be Year 2000 compliant. For additional information
concerning these and other important factors, which may cause the Company's
actual results to differ materially from expectations and underlying
assumptions, please refer to the reports filed by the Company with the
Securities and Exchange Commission.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company maintains foreign operations in England, Germany and Japan and
conducts business in many other countries. As a result of these international
activities, the Company is exposed to changes in foreign currency exchange
rates, which could have some impact on the results of operations. The Company
manages exposure to changes in foreign currency exchange rates through its
normal operating and financing activities, as well as through the use of some
financial instruments. Generally, the only financial instruments the Company
utilizes are forward exchange contracts.
The purpose of the Company's hedging activities is to mitigate the impact
of changes in foreign currency exchange rates. The Company utilizes foreign
currency forward exchange contracts for such hedging purposes. These contracts
generally do not exceed 12 months in duration, and are designed to coincide with
settlement dates of the related transactions, or to hedge balance sheet
translation exposure.
The Company engages neither in speculative nor derivative trading
activities.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page(s)
Reports of Independent Auditors ........................................................................... 19
Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997 ......................................... 20
Consolidated Statements of Operations for each of the three years
in the period ended June 27, 1998 .................................................................. 21
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended June 27, 1998 ............................................... 22
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 27, 1998 .................................................................. 23
Notes to Consolidated Financial Statements ............................................................. 24-40
18
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 27, 1998 and June 28, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 27, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ferrofluidics Corporation at June 27, 1998 and June 28, 1997 and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended June 27, 1998, 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
September 23, 1998
19
FERROFLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
June 27, 1998 and June 28, 1997
ASSETS 1998 1997
- ------ ---- ----
Current Assets:
Cash and cash equivalents $ 1,516,000 $ 883,000
Accounts receivable - trade, less allowance
of $329,000 ($199,000 in 1997) 12,083,000 13,609,000
Inventories 13,855,000 15,263,000
Advances to suppliers 578,000 1,341,000
Prepaid and other current assets 783,000 474,000
----------- -----------
Total Current Assets 28,815,000 31,570,000
----------- -----------
Property, plant and equipment, at cost, net
of accumulated depreciation of $12,462,000 ($10,961,000 in 1997) 8,826,000 8,377,000
Cash value of life insurance, net 1,921,000 1,751,000
Deferred income taxes, net 3,154,000 1,815,000
Other assets, net 1,303,000 1,488,000
----------- -----------
TOTAL ASSETS $44,019,000 $45,001,000
=========== ===========
LIABILITIES
- -----------
Current Liabilities:
Bank notes payable $ 9,710,000 $ 6,781,000
Accounts payable 3,860,000 5,126,000
Customer deposits 2,777,000 2,426,000
Accrued expenses and other current liabilities 4,286,000 3,914,000
----------- -----------
Total Current Liabilities 20,633,000 18,247,000
----------- -----------
Long-term debt obligations 5,000,000 5,000,000
Other liabilities 185,000 173,000
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 6,218,581 (6,178,262 in 1997) 25,000 25,000
Additional paid-in capital 36,738,000 36,477,000
Accumulated deficit (17,443,000) (13,971,000)
Currency translation adjustments (1,119,000) (950,000)
----------- -----------
Total Stockholders' Equity 18,201,000 21,581,000
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,019,000 $45,001,000
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
20
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 27, 1998, and June 28, 1997 and June 30, 1996
1998 1997 1996
---- ---- ----
Net sales $28,170,000 $25,094,000 $27,226,000
Cost of sales 15,792,000 13,232,000 14,962,000
------------ ------------ -----------
Gross profit 12,378,000 11,862,000 12,264,000
Operating expenses:
Engineering and product development expense 1,977,000 1,907,000 2,248,000
Selling, general and administrative expense 8,321,000 9,916,000 9,110,000
------------ ------------ -----------
Operating income 2,080,000 39,000 906,000
Interest income 33,000 80,000 137,000
Interest expense (634,000) (503,000) (311,000)
Other income (expense), net (67,000) (161,000) (113,000)
------------ ------------- -----------
Income (loss) from continuing operations before income taxes 1,412,000 (545,000) 619,000
Income taxes (benefit) 74,000 (448,000) 121,000
------------ ------------- -----------
Income (loss) from continuing operations 1,338,000 (97,000) 498,000
Discontinued operations--Note K:
Income (loss) from operations of discontinued
Systems Division, less applicable
income taxes (benefit) of $(1,339,000) in 1998; $(727,000)
in 1997; and $366,000 in 1996 (4,810,000) 1,769,000 3,322,000
------------ ----------- -----------
Net income (loss) $ (3,472,000) $ 1,672,000 $ 3,820,000
============ =========== ===========
Per Share:
Income (loss) from continuing operations:
Basic $ 0.22 $(0.02) $0.08
Diluted $ 0.21 $(0.02) $0.08
Income (loss) from discontinued operations:
Basic $(0.78) $0.29 $0.55
Diluted $(0.77) $0.29 $0.53
Net income (loss):
Basic $(0.56) $0.27 $0.63
Diluted $(0.56) $0.27 $0.61
Weighted average common shares outstanding:
Basic 6,198,603 6,116,176 6,019,201
Diluted 6,232,429 6,116,176 6,256,065
The accompanying notes are an integral part of the consolidated financial
statements.
21
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 27, 1998, and June 28, 1997 and June 30, 1996
Common Stock Additional Currency
------------ Paid-In Accumulated Translation
Shares Par Value Capital Deficit Adjustments
------ --------- ------- ------- -----------
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)
--------- ------- ----------- ------------- -----------
Issuance of common stock for restricted
stock plan, charge to operations 44,531 236 287,000 -- --
Redemption of stock for taxes (4,212) (17) (26,000) -- --
Net loss -- -- -- (3,472,000) --
Current year translation adjustments -- -- -- -- (169,000)
--------- ------- ----------- ------------ -----------
Balance, June 27, 1998 6,218,581 $24,932 $36,738,000 $(17,443,000) $(1,119,000)
========= ======= =========== ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
22
FERROFLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 27, 1998, and June 28, 1997 and June 30, 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(3,472,000) $ 1,672,000 $3,820,000
Adjustments to reconcile net income (loss) to cash flow
used in operating activities:
Depreciation and amortization 1,818,000 1,602,000 1,145,000
Deferred income taxes (credits) (1,339,000) (1,200,000) --
Increase in cash surrender value (170,000) (20,000) (3,000)
Gain on sale of assets (57,000) (16,000) (9,000)
Stock-related compensation 287,000 511,000 467,000
Foreign transaction (gains) losses 94,000 217,000 (33,000)
Other 29,000 (508,000) 457,000
Changes in operating assets and liabilities:
Accounts receivable, net 1,432,000 (1,144,000) (5,663,000)
Inventories 1,326,000 (1,632,000) 134,000
Prepaid and other current assets 451,000 764,000 (900,000)
Accounts payable and accrued expenses (760,000) (463,000) 1,857,000
Customer deposits 352,000 (1,936,000) (4,073,000)
----------- ---------- -----------
Net cash used in operating activities (9,000) (2,153,000) (2,801,000)
----------- ---------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (2,399,000) (1,249,000) (2,422,000)
Proceeds from cancellation of key-man policies - -- 1,248,000
Proceeds from sales of assets 70,000 37,000 34,000
Other 90,000 -- --
----------- ----------- -----------
Net cash used in investing activities (2,239,000) (1,212,000) (1,140,000)
----------- ----------- -----------
Cash flows from financing activities:
Short-term borrowings, net 2,929,000 2,519,000 4,262,000
Exercise of stock options -- 166,000 --
Payments under capital lease obligations -- -- (76,000)
----------- ------------ -----------
Net cash provided by financing activities 2,929,000 2,685,000 4,186,000
----------- ----------- -----------
Effect of currency rate changes on cash (48,000) (138,000) (107,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 633,000 (818,000) 138,000
----------- ----------- -----------
Cash and cash equivalents at beginning of year 883,000 1,701,000 1,563,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,516,000 $ 883,000 $ 1,701,000
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
23
FERROFLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
Organization
- ------------
Ferrofluidics Corporation (the "Company") is a multinational company
engaged principally in developing, manufacturing and marketing ferrofluids
(magnetic fluids) and rotary sealing devices based on or derived from its
proprietary ferrofluid technology. Note K to these statements describes the
discontinuance of its crystal growing systems business. Information on the
Company's operations by segment and geographic area are included in Note I.
Approximately 35% of the Company's sales are attributable to the
semiconductor industry, which can experience cyclical fluctuations. A prolonged
decline in the semiconductor industry could have, and has in the past had, a
materially adverse effect on the Company's operating results.
Fiscal Year
- -----------
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 1998 and 1997 fiscal years ended June 27 and June 28, respectively, whereas
the previous fiscal year ended on June 30.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All inter-company accounts and transactions
have been eliminated.
Use of Estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist of cash on hand and money market funds
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
customers and their dispersion across many different geographical regions.
The Company has made advance payments to suppliers for inventory
aggregating $578,000 and $1,341,000 at June 27, 1998 and June 28, 1997,
respectively.
24
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories consist of the following elements at June 27, 1998 and June
28, 1997:
1998 1997
---- ----
Raw materials and purchased parts $ 6,348,000 $ 8,082,000
Work-in-process 2,650,000 2,962,000
Finished goods 4,857,000 4,219,000
----------- -----------
$13,855,000 $15,263,000
=========== ===========
The Company has purchase contracts for inventory with various suppliers
which, in some cases, extend beyond two years. At June 27, 1998 and June 28,
1997, outstanding purchase commitments pursuant to these contracts totaled
approximately $7,000,000 and $15,000,0000, respectively.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are recorded at cost. Depreciation on
machinery and equipment and furniture and fixtures is computed on a
straight-line method over estimated useful lives of three to eight years;
leasehold improvements are amortized using the straight-line method over the
lesser of the life of the lease or the estimated useful life of the
improvements. Depreciation on buildings and building improvements is computed
using the straight-line method over estimated lives of ten to thirty years.
Depreciation charges for assets begin in the month after the asset is placed in
service.
Property, plant and equipment consisted of the following at June 27, 1998
and June 28, 1997:
1998 1997
---- ----
Land and improvements $ 330,000 $ 321,000
Buildings and improvements 8,072,000 8,033,000
Machinery and equipment 5,730,000 5,399,000
Furniture, fixtures and vehicles 5,597,000 5,408,000
Construction in process 1,559,000 177,000
----------- -----------
21,288,000 19,338,000
Less: Accumulated depreciation and amortization 12,462,000 10,961,000
----------- -----------
$ 8,826,000 $ 8,377,000
=========== ===========
Intangible Assets
- -----------------
At June 27, 1998, the Company had recorded goodwill in an amount of
$1,023,000, which is included on the accompanying balance sheet with other
assets, resulting from the acquisition in fiscal 1989 of AP&T. This amount is
being amortized over a 16 year life on a straight line basis. Accumulated
amortization as of June 27, 1998 and June 28, 1997 amounted to $578,000 and
$514,000, respectively.
All other intangible assets, including patents and trademarks, are recorded
at cost and amortized on a straight-line basis over their estimated useful
lives, generally ten years.
Income Taxes
- ------------
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. As of June 27, 1998, those subsidiaries each
had an accumulated loss.
Revenue Recognition
- -------------------
The Company recognizes revenue upon shipment of products to the customer.
25
Product Development Expenses
- ----------------------------
Product development expenditures are charged to expense when first
incurred. The Company incurred $890,000, $685,000 and $782,000 in product
development during 1998, 1997 and 1996, respectively, from continuing
operations.
Translation of Foreign Currencies
- ---------------------------------
The Company translates the assets and liabilities of its foreign
subsidiaries whose functional currency is other than the U.S. dollar at the
exchange rates in effect at the balance sheet date. Income statement amounts are
translated at average exchange rates for the period. Translation gains and
losses are accumulated as a separate component of stockholders' equity. In
addition, the Company recognizes, in current income, gains or losses from the
remeasurement of transactions denominated in currencies other than the Company's
functional currencies.
Foreign Exchange Contracts
- --------------------------
The Company, from time to time, enters into forward foreign exchange
contracts to hedge against adverse exchange losses on certain assets or
liabilities denominated in a foreign currency. Market value gains and losses are
recognized, with the resulting credit or debit offsetting foreign exchange gains
or losses on those instruments. At June 27, 1998, there were three foreign
exchange contracts outstanding in which there was no material exchange gain or
loss.
Stock-Based Compensation
- ------------------------
The Company has stock-based compensation programs and has elected to
account for them in accordance with Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and, accordingly, except for
restricted stock awards, recognizes no compensation expense for the stock option
grants (see Note H).
Earnings Per Share
- ------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings per Share, which is required to be adopted for
financial statements issued for periods ending after December 15, 1997. In
accordance with this statement, the Company changed the method previously used
to compute earnings per share and restated all prior periods presented. Basic
earnings per share is calculated based on the weighted average of common shares
outstanding. Diluted earnings per share includes the effect of dilutive stock
options and non-vested restricted stock awards.
Statement of Cash Flows
- -----------------------
For the years ended June 27, 1998, June 28, 1997 and June 30, 1996, cash
payments for income taxes amounted to $20,000, $473,000 and $290,000,
respectively. Cash payments for interest in each of the three years amounted to
$1,092,000, $795,000 and $421,000, 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 non-cash transaction (see
Notes B 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 June 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.
In March 1998, the Accounting Standards Executive Committee issued SOP
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1, which must be adopted by the Company in fiscal year
1999, requires capitalization of certain costs to develop or obtain internal-use
software.
26
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.
Fourth Quarter Adjustments
- --------------------------
The Company made adjustments to its financial statements in the fourth
quarter ended June 27, 1998, which included approximately $500,000 in valuation
reserves for anticipated field costs resulting from the delivery of new
equipment and a $430,000 accrual for purchase contract cancellation charges.
These adjustments related to the discontinued operations of the Systems
Division.
B. 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 27, 1998 and June 28, 1997, the remaining two policies on the life
of the former CFO had an aggregate cash value of $2,075,000 and $1,931,000,
respectively, against which the Company had $2,064,000 and $1,908,000,
respectively, in loans and accrued interest outstanding at an interest rate
of 8%.
In addition, the Company has recorded its interest in the value of other
key man life insurance policies under split-dollar agreements with the
aforementioned former CEO of $1,910,000 and $1,728,000 at June 27, 1998 and
June 28, 1997, respectively. This former CEO's estate is the principal
beneficiary of the aggregate face value of these policies of approximately
$8,000,000, from which the Company will receive, upon death or surrender, an
amount equal to the premiums paid by the Company plus interest at the rate
of 6%.
C. Income Taxes
Income (loss) from continuing operations before income taxes for the years
ended June 27, 1998 and June 28, 1997 and June 30, 1996 was taxed in the
following jurisdictions:
1998 1997 1996
---- ---- ----
Domestic $1,304,000 $(157,000) $ (49,000)
Foreign 108,000 (388,000) 668,000
---------- --------- ---------
Total $1,412,000 $(545,000) $619,000
========== ========= =========
Significant components of the provision for income taxes (benefit) from
continuing and discontinued operations are as follows:
1998 1997 1996
---- ---- ----
Continuing operations $ 74,000 $ (448,000) $121,000
Discontinued operations (1,339,000) (727,000) 366,000
----------- ----------- --------
Total $(1,265,000) $(1,175,000) $487,000
=========== =========== ========
27
The components of the provision for income taxes (benefit) attributable to
continuing operations are as follows:
1998 1997 1996
---- ---- ----
Current:
Federal $ -- $ -- $ --
State -- -- --
Foreign 74,000 19,000 121,000
------- --------- --------
Total current 74,000 19,000 121,000
------- --------- --------
Deferred:
Federal -- (467,000) --
State -- -- --
Foreign -- -- --
-------- --------- --------
Total deferred -- (467,000) --
------- --------- --------
Total income taxes $74,000 $(448,000) $121,000
======= ========= ========
The following is a reconciliation between the statutory provision for federal
income taxes and the effective income taxes from continuing operations for the
years ended June 27, 1998, June 28, 1997 and June 30, 1996:
1998 1997 1996
---- ---- ----
Income tax expense (benefit) at federal statutory rate $480,000 $(185,000) $210,000
Change in valuation allowance (562,000) (73,000) (139,000)
Foreign income taxes at differing
statutory rates 138,000 (24,000) 17,000
Other 18,000 (166,000) 33,000
-------- ---------- --------
Income tax expense (benefit) $ 74,000 $(448,000) $121,000
======== ========= ========
The components of the net deferred tax asset as of June 27, 1998 and June 28,
1997 were as follows:
1998 1997
---- ----
Deferred tax assets:
Net operating loss carryforwards $11,408,000 $10,443,000
Capital loss carryforward 1,821,000 1,821,000
Compensation related items 276,000 167,000
Investment writedowns -- 631,000
Valuation allowances 142,000 210,000
Inventories 1,446,000 1,155,000
Research & development credits 150,000 150,000
Alternative minimum tax credits 186,000 186,000
Other 613,000 207,000
----------- -----------
Total deferred tax assets 16,042,000 14,970,000
Valuation allowance for deferred tax assets (12,217,000) (12,027,000)
----------- -----------
Net deferred tax assets 3,825,000 2,943,000
Deferred tax liabilities:
Depreciable assets (461,000) (965,000)
Other (210,000) (163,000)
----------- -----------
Total deferred tax liabilities (671,000) (1,128,000)
----------- -----------
Net deferred tax assets $ 3,154,000 $ 1,815,000
=========== ===========
28
FASB Statement No. 109, Accounting for Income Taxes, requires a valuation
allowance against deferred tax assets if it is more likely than not that some or
all of the deferred tax assets will not be realized. Due to the uncertainty
about the Company's ability to realize the benefit of the entire deferred tax
asset, a valuation allowance in the amount of $12,217,000 has been established
at June 27, 1998.
As of June 27, 1998, the Company had remaining net operating loss
carryforwards for Federal income tax purposes of approximately $28,276,000, and
for foreign income tax purposes of approximately $3,508,000, which can be used
to offset future taxable income. The net operating loss carryforwards for
Federal income tax purposes will expire at various dates through 2013. Included
in the loss carryforward, for income tax purposes, is approximately $16,800,000
of tax deductions resulting from the excess of the market price over the
exercise price on the date of exercise of the Company's stock purchase options
and warrants which were exercised during 1993 and prior years. The tax benefit
to be realized upon utilization of the $16,800,000 of loss carryforwards will
result in a decrease in current income taxes payable and an increase to
additional paid-in capital.
D. Short-Term Borrowings and Other Debt Obligations
As of June 27, 1998 and June 28, 1997, the Company and its subsidiaries
have the following debt obligations outstanding:
1998 1997
---- ----
Revolving line of credit $ 7,749,000 $ 6,170,000
1984 Industrial Revenue Bond 5,000,000 5,000,000
Bank notes 1,961,000 611,000
----------- -----------
14,710,000 11,781,000
Less: current portion of debt obligations 9,710,000 6,781,000
----------- -----------
Long-term debt obligations $ 5,000,000 $ 5,000,000
=========== ===========
In fiscal 1985, the Company secured long-term financing in the form of a
$5,000,000 Variable Rate Industrial Revenue Bond ("VRIRB"). The VRIRB is subject
to a variable rate of interest generally keyed to short-term nontaxable rates,
and has a seven day call feature. The interest rate at June 27, 1998 was 4.25%.
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, 1999) 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, the credit facility
was amended and increased in December 1996. The stand-by letter of credit has a
one-year term which expires in August 1999 and has a fee of 1% per year. The
revolving line of credit bears interest at the bank's prime rate plus 1% with a
fee of 1/8% on the unused portion. The credit facility is collateralized by
substantially all of the assets of the Company.
In December 1996, the bank agreed to increase the Company's revolving line
of credit agreement from $2,500,000 to $8,500,000. Interest on the line is at
prime plus 1% (9.5% at June 27, 1998). 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 27,
1998, there was approximately $7,749,000 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. Subsequent to the shipment of the systems, the
letter of credit was rewritten into a 90-day promissory
29
note. The $1,500,000 promissory note, which was renewed on June 30, 1998, bears
interest at the same rate as the revolving credit line.
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 27, 1998, the balance on this note was $461,000.
In addition, the Company, through its wholly owned foreign subsidiaries,
has various short-term financing arrangements with local banks totaling
approximately $835,000 at June 27, 1998. Approximately $110,000 and $329,000 was
borrowed against one of these facilities during fiscal 1998 and 1997,
respectively, and repaid prior to the end of the fiscal year. The weighted
average interest rates during the year on these facilities ranged from 7.0% to
10.2% and the interest rates at June 27, 1998 ranged from 7.0% to 10.5%.
On September 23, 1998, in connection with the sale of the Systems Division,
the Company used a portion of the cash proceeds to pay off the then outstanding
balance of the line of credit and the $1,500,000 promissory note. As a result of
this sale, the Company and its bank agreed to reduce the maximum available
borrowings under the line of credit agreement from $8,500,000 to $2,000,000.
The present line of credit agreement expires in November 1998. See Note K to the
Consolidated Financial Statements for additional discussion of the sale of the
Systems Division.
E. 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
1998 amount to: $576,000 in 1999; $128,000 in 2000; $102,000 in 2001; $70,000 in
2002; and $62,000 in 2003. Rent expense under operating leases amounted to
$446,000 in 1998, $489,000 in 1997 and $459,000 in 1996.
During 1997, the Company terminated its agreement to lease to a third party
approximately 11,000 square feet of its headquarters office in Nashua in
exchange for payment to the tenant of $100,000, which was charged to operations
during fiscal 1997. The Company received total lease payments of $28,000 in 1997
from this third party.
In connection with the sale 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 ((pound)) 300,000 guarantee, over the
next ten years, for a new tenant under the lease, allowing AF to vacate the
premises and relocate to a less expensive location. On July 2, 1992, the Company
deposited (pound)300,000 into an escrow account, which currently earns interest
at a rate of 2.55%, pursuant to the terms of the guarantee. The Company would be
relieved of this obligation before the ten-year expiration date if the new
tenant were to attain certain minimum 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 the Company
has therefore made no additional provision.
At June 27, 1998, the Company had possible indemnification liabilities to
its former CFO in connection with the single premium, paid-up life insurance
policies described in Note B. The unrecorded portion of this contingent
liability ranges from a nominal amount to $150,000.
30
F. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
1998 1997 1996
---- ---- ----
Numerator:
Income (loss) from continuing operations $ 1,338,000 $ (97,000) $ 498,000
Income (loss) from discontinued operations (4,810,000) 1,769,000 3,322,000
----------- ---------- ----------
Net income (loss) $(3,472,000) $1,672,000 $3,820,000
=========== ========== ==========
Denominator:
Denominator for basic earnings per share --
weighted average shares 6,198,603 6,116,176 6,019,201
Effect of dilutive securities:
Employee stock options 1,763 -- 116,111
Non-vested restricted stock awards 32,063 -- 120,753
----------- ---------- ----------
Dilutive potential common shares 33,826 -- 236,864
----------- ---------- ----------
Denominator for diluted earnings per share --
adjusted weighted average shares 6,232,429 6,116,176 6,256,065
=========== ========== ==========
Per Share:
Income (loss) from continuing operations:
Basic $0.22 $(0.02) $0.08
Diluted $0.21 $(0.02) $0.08
Income (loss) from discontinued operations:
Basic $(0.78) $0.29 $0.55
Diluted $(0.77) $0.29 $0.53
Net income (loss):
Basic $(0.56) $0.27 $0.63
Diluted $(0.56) $0.27 $0.61
At June 27, 1998, June 28, 1997 and June 30, 1996, options and warrants to
purchase 443,259 shares at prices ranging from $6.13 to $13.50 per share,
688,987 shares at prices ranging from $9.00 to $15.25 per share and 258,950
shares at prices ranging from $13.25 to $15.63 per share, respectively, of
common stock were anti-dilutive and therefore were excluded from the computation
of diluted earnings per share.
G. Common Stock
At June 27, 1998, an aggregate of 553,085 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.
31
The rights currently are not exercisable and are attached to and trade with
the outstanding shares of common stock. Under the Rights Agreement, the Rights
become exercisable (i) if a person becomes an "acquiring person" by acquiring
15% or more of the outstanding shares of common stock, (ii) if a person who owns
10% or more of the common stock is determined to be an "adverse person" by the
Board of Directors, or (iii) if a person commences a tender offer that would
result in that person owning 15% or more of the common stock. In the event that
a person becomes an "acquiring person" or is declared an "adverse person" by the
Board, each holder of a Right (other than the acquiring person or the adverse
person) would be entitled to acquire such number of shares of the Company's
preferred stock which are equivalent to such number of shares of common stock
having a value of twice the then-current exercise price of the Right. If the
Company is acquired in a merger or other business combination transaction after
any such event, each holder of a Right would then be entitled to purchase, at
the then-current exercise price, shares of the acquiring company's common stock
having a value of twice the exercise price of the Right.
Until a Right is exercised, the holder will have no rights as a stockholder
of the Company (beyond those as an existing stockholder), including the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders or to the Company, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for Units, other securities of the Company, other consideration or
for common stock of an acquiring company.
H. Employee Benefit Plans
Restricted Stock Plan
- ---------------------
In 1994, the Board of Directors adopted, and the stockholders approved, the
Ferrofluidics Corporation 1994 Restricted Stock Plan (the "Restricted Stock
Plan"). Persons eligible to participate in the Restricted Stock Plan are those
full or part-time officers and other employees of the Company and its
subsidiaries who are responsible for or contribute to the management, growth or
profitability of the Company and its subsidiaries. Under the Restricted Stock
Plan, the maximum number of shares of common stock that may be reserved and
authorized for issuance by the Board of Directors may not exceed five percent of
the total number of outstanding shares of common stock at the time of any award
of restricted stock. Upon adoption of the plan, the Board of Directors initially
reserved and authorized 271,000 shares of common stock for issuance, which
represented not more than five percent of the outstanding shares of common stock
as of the date of adoption. The grants are valued at the fair market value of
the common stock on the date of grant and generally vest at a rate of 33-1/3%
per year beginning one year from the date of grant. The charge to operations in
connection with these restricted stock awards for the years ended June 27, 1998
and June 28, 1997 and June 30, 1996 amounted to $287,000, $511,000 and $467,000,
respectively.
A summary of the changes in outstanding shares of restricted stock for the
years ended June 27, 1998 and June 28, 1997 and June 30, 1996 is set forth
below:
Weighted
Shares Average Price
------ -------------
Outstanding, June 30, 1995 179,351 $5.60
Granted 40,000 9.75
Forfeited (3,400) 5.00
Vested (70,878) 5.50
-------
Outstanding, June 30, 1996 145,073 $6.80
Granted 10,000 12.50
Forfeited (2,454) 8.87
Vested (93,762) 6.56
-------
Outstanding, June 28, 1997 58,857 $8.06
Granted -- --
Forfeited (4,500) 11.28
Vested (44,531) 7.37
-------
Outstanding, June 27, 1998 9,826 $9.75
=======
32
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 1996,
1997 and 1998 is set forth below:
Weighted Average
Shares Exercise Price
-------------------------------------------------------------- ------------------------
"1995
"1984 Plan" "1995 Plan" Incentive Plan" Total
--------------------------------------------------------------
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
Granted
Granted -- -- 115,000 115,000 4.68
Canceled/expired (96,375) (2,063) (125,000) (223,438) 12.63
Exercised -- -- -- -- --
--------------------------------------------------------------
Outstanding, June 27,1998 -- 58,499 470,260 528,759 $ 8.73
==============================================================
33
The following table summarizes information about stock options outstanding
at June 27, 1998:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------- ------------------------------------
Weighted Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Prices Shares Life (in years) Exercise Price Shares Exercise Price
--------------- ------ --------------- -------------- ------ --------------
$ 3.50 - $ 7.63 160,210 9.42 $ 5.51 30,165 $ 7.63
$ 9.00 - $ 13.50 368,549 6.79 $10.13 187,155 $10.30
------- -------
$ 3.50 - $ 13.50 528,759 7.59 $ 8.73 217,320 $ 9.93
======= =======
As of June 27, 1998 and June 28, 1997 and June 30, 1996, options to
purchase 217,320, 367,572 and 326,729 shares were exercisable at a weighted
average exercise price of, $9.93, $11.51 and $11.08 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 27, 1998, June 28, 1997 and June 30, 1996, 14,500
shares, 97,000 shares and 259,829 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:
S h a r e s
- --------------------------------------------------------------
June 27, 1998 June 28, 1997 June 30, 1996 Price Expiration Date
- -------------------------- ------------- ------------- ----- ---------------
--
-- -- 3,000 14.50 September 29, 1996
-- -- 37,329 5.00 October 10, 1996
-- -- 17,500 14.00 February 4, 1997
-- -- 17,500 14.50 February 24, 1997
-- -- 40,000 15.60 February 24, 1997
-- -- 47,500 15.63 June 18, 1997
-- 62,500 62,500 11.75 August 31, 1997
-- 20,000 20,000 11.00 October 27, 1997
14,500 14,500 14,500 9.75 October 10, 2000
------ ------ -------
14,500 97,000 259,829
====== ====== =======
A summary of the changes in outstanding stock purchase warrants for the
three years ended June 27, 1998 is set forth below:
Weighted Average
Shares Exercise Price
------ --------------
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
Granted -- --
Canceled/expired (82,500) 11.57
Exercised -- --
----------
Outstanding, June 27, 1998 14,500 $ 9.75
=========
At June 27, 1998, all 14,500 warrants were exercisable at a price of $9.75.
34
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):
1998 1997 1996
-------- -------- --------
Net income (loss), as reported $(3,472) $1,672 $3,820
Pro-forma net income (loss) (3,607) 603 2,938
Net income (loss) per share, as reported -- basic $(0.56) $0.27 $0.63
Net income (loss) per share, as reported -- diluted (0.56) 0.27 0.61
Pro-forma net income (loss) per share -- basic (0.58) 0.10 0.49
Pro-forma net income (loss) per share -- diluted (0.58) 0.10 0.47
The fair value of each option and warrant is estimated on the date of grant
using the following weighted-average assumptions in fiscal 1998, 1997, and 1996:
1998 1997 1996
---- ---- ----
Risk-free interest rate 5.57% 6.12% 6.08%
Expected stock price volatility 60.0% 60.0% 60.0%
Expected life of options and warrants (years) 2.0 4.3 4.1
The weighted average fair value of options granted during the years ended
June 27, 1998, June 28, 1997, and June 1996 were $1.62, $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 $10,000 (for calendar 1998) per year (subject to annual adjustments
based on increases in the consumer price index over the 1988 base year). In
December 1993, the Board of Directors approved an annual Company match,
effective January 1, 1994, of 50% of an employee's contribution of up to 4% of
the employee's salary. In fiscal 1998, 1997 and 1996, the Company made matching
contributions to the Plan, and corresponding charges to operations, in the
amounts of $105,000, $155,000 and $208,000, respectively. The 401-k Plan
consists of four equity funds, a fixed income fund, a balanced fund and a money
market fund, and participants may choose to split their investments among funds.
35
I. Industry Segment and Geographical Area Information
The Company's operations, after the effects of the discontinuation of the
Systems Division, are conducted in two industry segments: component products
utilizing ferrofluid technology, including ferrofluids for audio loudspeakers
and nondestructive testing and sensing, rotary sealing devices and bearings
(collectively, "components"); and thin film deposition products manufactured
and/or distributed by AP&T. Sales among segments and geographic enterprises are
accounted for at cost plus a reasonable profit. See Note K for a further
discussion regarding discontinued operations.
Segment operating profit (loss) includes all costs and expenses directly
related to the segment. General corporate expenses principally represent the
costs associated with managing all industry segments and cannot be specifically
identified with a particular industry segment. General corporate assets consist
primarily of cash and cash equivalents, deferred income tax assets, certain
fixed assets, and other non-current assets, including cash surrender value of
life insurance, net of loans, at June 27, 1998 and June 28, 1997, respectively.
36
The following table presents financial information for the Company's
industry segments from continuing operations for the years ended June 27, 1998,
June 28, 1997, and June 30, 1996. All amounts are expressed in thousands of
dollars.
Thin Film
Components Deposition Consolidated
---------- ---------- ------------
Year ended June 27, 1998:
- -------------------------
Sales to unaffiliated customers $18,780 $9,390 $28,170
=======
Segment operating profit 5,653 281 $ 5,934
General corporate expenses (3,854)
-------
Operating Income $2,080
=======
Net identifiable assets, continuing operations 15,099 3,557 $18,656
Net identifiable assets, discontinued operations 17,200
General corporate assets 8,163
-------
Total Assets $44,019
=======
Depreciation and amortization 1,289 268
Capital expenditures 551 157
Year ended June 28, 1997:
- -------------------------
Sales to unaffiliated customers $16,685 $8,409 $25,094
=======
Segment operating profit 3,699 (35) $ 3,664
General corporate expenses (3,625)
-------
Operating Income $ 39
=======
Net identifiable assets, continuing operations 17,641 2,854 $20,495
Net identifiable assets, discontinued operations 18,247
General corporate assets 6,259
-------
Total Assets $45,001
=======
Depreciation and amortization 1,193 161
Capital expenditures 919 125
Year ended June 30, 1996:
- -------------------------
Sales to unaffiliated customers $18,827 $8,399 $27,226
=======
Segment operating profit 2,854 387 $ 3,241
General corporate expenses (2,335)
-------
Operating Income $ 906
=======
Net identifiable assets, continuing operations 15,843 2,777 $18,620
Net identifiable assets, discontinued operations 19,018
General corporate assets 5,791
-------
Total Assets $43,429
=======
Depreciation and amortization 794 179
Capital expenditures 1,790 218
37
The following is a summary of certain financial data by geographic areas:
United States European Japanese
Operations Operations Operations Eliminations Total
---------- ---------- ---------- ------------ -----
Year ended June 27, 1998:
- ------------------------
Sales to unaffiliated domestic customers $11,650 $ -- $ -- $ -- $11,650
Sales to unaffiliated foreign customers 1,756 13,801 963 -- 16,520
Sales to subsidiaries 3,702 -- - (3,702) --
------- ------ ----- ------ -------
Total net sales and revenues 17,108 13,801 963 (3,702) $28,170
=======
Geographic operating profit (loss) 5,443 870 (358) (21) $ 5,934
General corporate expenses (3,854)
-------
Operating Income $ 2,080
=======
Net identifiable assets, continuing operations 15,342 4,973 2,875 (4,534) $18,656
Net identifiable assets, discontinued operations 17,200
General corporate assets 8,163
-------
Total Assets $44,019
=======
Year ended June 28, 1997:
- ------------------------
Sales to unaffiliated domestic customers $10,914 $ -- $ -- $ -- $10,914
Sales to unaffiliated foreign customers 962 11,979 1,239 -- 14,180
Sales to subsidiaries 4,434 -- -- (4,434) --
------- ------ ----- ------ -------
Total net sales and revenues 16,310 11,979 1,239 (4,434) $25,094
=======
Geographic operating profit (loss) 4,033 174 (544) 1 $ 3,664
General corporate expenses (3,625)
-------
Operating Income $ 39
=======
Net identifiable assets, continuing operations 16,219 4,416 2,388 (2,528) $20,495
Net identifiable assets, discontinued operations 18,247
General corporate assets 6,259
-------
Total Assets $45,001
=======
Year ended June 30, 1996:
- -------------------------
Sales to unaffiliated domestic customers $12,285 $ -- $ -- $ -- $12,285
Sales to unaffiliated foreign customers 1,820 12,702 419 -- 14,941
Sales to subsidiaries 3,922 - -- (3,922) --
------- ------ ----- ------ -------
Total net sales and revenues 18,027 12,702 419 (3,922) $27,226
=======
Geographic operating profit (loss) 3,160 587 (487) (19) $ 3,241
General corporate expenses (2,335)
-------
Operating Income $ 906
=======
Net identifiable assets, continuing operations 14,375 4,208 1,450 (1,413) $18,620
Net identifiable assets, discontinued operations 19,018
General corporate assets 5,791
-------
Total Assets $43,429
=======
38
J. Litigation
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 had violated or
caused the Company to violate the federal securities laws. Among the areas of
inquiry identified in the order was whether publicity about the Company,
including research reports, was published without fully disclosing consideration
given or received therefore. The order also indicated that the inquiry would
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. Prior to fiscal 1997, the Company
made cash payments under this agreement totaling $512,000.
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 B).
Other
- -----
From time to time, as a normal incidence of the nature of the Company's
business, various claims, charges or litigation are or may be asserted or
commenced against the Company relating to, among other things, contractual
matters, patent disputes, environmental matters and product liability. While
there can be no assurance that the Company will prevail in all these matters,
the Company does not believe that these matters will have a material adverse
effect on the Company's consolidated financial position or results of
operations. However, an adverse resolution of one or more of such matters could
have an adverse effect on the Company's consolidated results of operations in a
quarter in which such matters might be resolved.
39
K. Discontinued Operations
On September 23, 1998, the Company sold certain assets of the Systems
Division to General Signal Technology Corporation ("General Signal") for
$10,800,000 in cash.
The Systems Division represented a separate line of business and,
accordingly, its net operating results have been reported, net of applicable
income taxes, as discontinued operations for all periods presented. The Company
expects to record a net gain on the disposal of the Systems Division in the
first quarter of fiscal 1999. The Sale, as structured, did not include any
Systems Division liabilities, which remain with the Company. The sale did not
include the obligation by the Company to complete approximately $18,433,000 in
Systems Division backlog, which obligation remains with the Company, or
approximately $5,873,000 in inventory on hand, all of which is needed to fulfill
existing backlog. The terms of the sale of the Systems Division provide that,
generally, any backlog existing on December 31, 1998, will be transferred to
General Signal. The backlog includes a purchase order from a customer for nine
machines representing approximately $7,658,000. The Company believes that the
customer is seeking to modify the terms of the order, including its potential
cancellation. However, the Company believes that the purchase order remains
legally valid, and that under its terms, the customer is obligated to pay the
Company the costs incurred up to cancellation of the order. In connection with
these machines, the Company has inventory of approximately $3,104,000 on hand
and approximately $2,471,000 in parts on order at vendors. If the Company is
unable to recover these cancellation charges from the customer, the Company may
be required to take a material write-down of the inventory relating to the
purchase order.
The sale of the Systems Business also did not include approximately
$6,472,000 in accounts receivable which were outstanding as of the closing of
the sale. The Company believes that it will be able to collect these receivables
within established reserves but, there can be no assurance that the sale of the
Systems Business will not adversely affect their collectibility.
The Company allocated approximately $726,000, $833,000 and $573,000 of
general corporate expenses and $459,000, $352,000 and $269,000 of interest
expense to the Systems Division in determining income (loss) from discontinued
operations for the years ended June 27, 1998, June 28, 1997 and June 30, 1996,
respectively. General corporate expenses were allocated based on the actual
amounts incurred on behalf of the Systems Division. In addition, certain
expenses for Corporate officers (salaries, travel, etc) and Accounting
Department personnel (salaries) were allocated on the basis of the estimated
time and expense incurred on behalf of the Systems Division. Interest expense
was allocated based on the proportionate share of the Systems Division's net
identifiable assets to the total net assets of the Company.
The operating results of the discontinued Systems Division are summarized
as follows (000's omitted):
1998 1997 1996
---- ---- ----
Net sales $24,530 $42,691 $45,741
======= ======= =======
Income (loss) from operations
before income taxes $(6,149) $1,042 $3,688
Income taxes (benefit) (1,339) (727) 366
--------- -------- --------
Income (loss) from operations $(4,810) $1,769 $3,322
======== ====== ======
The net assets at June 27, 1998 of the discontinued Systems Division are
summarized as follows (000's omitted)
Current assets $17,986
Property, plant and equipment, net 1,893
Other non-current assets, net 98
Current liabilities (2,777)
-------
Net assets of the discontinued Systems Division $17,200
=======
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information Regarding Directors
Set forth below is certain information regarding the Directors of the
Company, including the two Class III Directors who have been nominated for
election at the Annual Meeting, based on information furnished by them to the
Company.
Director
Name Age Since
- ----------------------------------------------------------------------------------------------
Class I
Stephen B. Hazard..................................................... 53 1994
Dennis R. Stone....................................................... 51 1994
Class II
Howard F. Nichols..................................................... 70 1979
Robert P. Rittereiser................................................. 60 1989
Class III
Dean Kamen*........................................................... 47 1989
Paul F. Avery, Jr.*................................................... 69 1998
- -----------------
* Nominee for election.
Mr. Avery has been the President, Chief Executive Officer and Chairman of
the Board of Directors of the Company since June 3, 1998. He also served as the
Chief Executive Officer of the Company from October 1, 1993 until June 25, 1996,
President of the Company from October 1, 1993 until January 1, 1995 and Chairman
of the Board and Treasurer of the Company from October 1, 1993 until May 1,
1997. He is also President of P.F. Avery Corporation, a management consulting
firm, a position he has held since 1983. From 1967 to 1983 he was President and
Treasurer of C.E. Avery, a wholly owned subsidiary of Combustion Engineering,
Inc., and President and Chief Executive Officer of CE-KSB Pump Company, Inc.
Both companies were involved in the design and fabrication of pumps and reactor
internals for the utility industry. Mr. Avery is also general partner of a 3MW
hydroelectric facility in Nashua, New Hampshire, and serves as a director of
several privately held companies and as a trustee of New Hampshire Public Radio,
WEVO.
Mr. Hazard is founder and managing partner of the law firm of Pepe &
Hazard, Hartford, Connecticut. He is a director of First New England Capital,
L.P., a closely held small business investment company. He is also a trustee and
a member of the executive committee of the Kingswood-Oxford School.
Mr. Kamen is the founder and Chairman and Chief Executive Officer of DEKA
Research and Development Corporation, which develops highly specialized medical
equipment. Mr. Kamen in the founder and, from 1976 to 1982, was the Chief
Executive Officer of Auto-Syringe, Inc., a manufacturer of medical devices that
was acquired by Baxter Healthcare Corporation. He is a member of the Board of
Directors of Sander's Prototype, Inc. and Zero Emissions Technology. He also
serves as a director of several privately held companies.
41
Mr. Nichols is a consultant. Until July 1989, he was a Vice President of
The First National Bank of Boston, Trust Department. He is also a member of the
Board of Directors of Doble Engineering Co., Bemir Associates, Inc., Weymouth
Art Leather Co., McCullough & Eldudger Insurance, Inc. and Seamann Supply Co.
Mr. Rittereiser has been the Chairman of the Board of Directors and Chief
Executive Officer of Gruntal Financial L.L.C., an investment services firm based
in New York City, and its wholly-owned subsidiary Gruntal & Co., L.L.C., since
1995. He is also the Chairman of the Board of Directors of Yorkville Associates
Corp., a private investment and financial concern since its formation in 1989.
He served as Trustee of the DBL Liquidating Trust from April 1992 to April 1996.
He served as Director in 1990, as Chairman in November 1992 and as President and
Chief Executive Office from March 1993 until February 1995 of Nationar, a
banking services corporation. He is also a member of the Board of Directors of
Cendant Corporation and Interchange Financial Services Corp.
Mr. Stone is a stockholder and director of the accounting firm of Nathan
Wechsler & Company, Professional Association, Portsmouth, New Hampshire. From
1989 to 1997 he was a principal in the firm of Dennis R. Stone, CPA, Portsmouth,
New Hampshire. From 1989 to 1991 he also served as Executive Vice President and
Chief Financial Officer of The Blake Insurance Group, Inc., Portsmouth, New
Hampshire. Mr. Stone serves as an investigative auditor for the New Hampshire
Supreme Court Professional Conduct Committee. He is a member of the Board of
Directors of Odyssey House, Inc.
Information Regarding Executive Officers
The names and ages of all executive officers of the Company and principal
occupation and business experience during at least the last five years for each
are set forth below.
Name Age Position
- -----------------------------------------------------------------------------------------------------
Paul F. Avery, Jr. 69 President, Chief Executive Officer and Chairman of the
Board
Alvan F. Chorney 53 Vice President and General Manager--Components Division
William B. Ford 58 Vice President, Chief Financial Officer and Treasurer
Thomas J. Uhlig 48 Vice President and General Manager--Systems Division
Mr. Avery has held the positions of President, Chief Executive Officer and
Chairman of the Board of the Company since June 3, 1998. Mr. Avery also served
as Chief Executive Officer of the Company from October 1, 1993 until June 25,
1996, President of the Company from October 1, 1993 until January 1, 1995 and
Chairman of the Board and Treasurer of the Company from October 1, 1993 until
May 1, 1997. See "Information Regarding Directors" above.
Mr. Chorney has held the position of Vice President and General
Manager--Components Division since April 19, 1996. Prior to that, Mr. Chorney
served as Senior Vice President of the Company from November 1991 to April 19,
1996. Mr. Chorney was also a Director of the Company from 1986 to April 1994.
42
Mr. Ford has held the position of Treasurer of the Company since May 19,
1997 and the position of Vice President and Chief Financial Officer of the
Company since September 23, 1996. From November 1993 until April 1995, Mr. Ford
was Vice President and Chief Financial Officer of Versyss Incorporated, a
software developer and distributor of integrated hardware and software systems
for medical practice management and other small business applications. From 1987
to November 1993, he was a Director in the Financial Advisory Services
consulting practice of Coopers & Lybrand L.L.P.
Mr. Uhlig held the position of Vice President and General Manager--Systems
Division from April 22, 1996 until April 30, 1998, at which time Mr. Uhlig
resigned. Before then, he served as President of Johnstown America Corporation,
a manufacturer of railroad freight cars and components, from 1993 until April
1996. From 1992 to 1993, he was Director of Manufacturing of The Timken Company,
a manufacturer of tapered roller bearings, and before that he was President of
MPB Corporation, a subsidiary of The Timken Company, a manufacturer of precision
ball and roller bearings.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company's Directors, executive officers and beneficial owners of more
than 10% of its Common Stock are required under Section 16(a) of the Securities
Exchange Act of 1934, as amended, to file reports of ownership and changes in
ownership with the SEC. Copies of those reports must also be furnished to the
Company. Based solely on a review of the copies of reports furnished to the
Company and written representations that no other reports were required, the
Company believes that during the fiscal year ended June 27, 1998 ("fiscal
1998"), no person who was a Director, executive officer or greater than 10%
beneficial owner of the Company's Common Stock failed to file on a timely basis
all reports required by Section 16(a).
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
Directors who are officers or employees of the Company receive no
compensation for their service as Directors. Directors who are not officers or
employees of the Company receive such compensation for their services as the
Board of Directors may from time to time determine. Non-employee Directors each
receive an annual retainer of $16,000, payable quarterly. In addition,
non-employee Directors receive $1,000 for each Board of Directors meeting or
committee meeting attended or $600 for attending each committee meeting that is
held on the same day as a Board of Directors meeting or meeting of another
committee on which such Director serves.
Pursuant to the Ferrofluidics Corporation Amended and Restated 1995 Stock
Option and Incentive Plan (the "1995 Incentive Plan"), eligible non-employee
Directors are entitled to receive options to purchase shares of Common Stock in
accordance with the formula provisions thereof. Under the 1995 Incentive Plan,
eligible non-employee Directors automatically receive an option to purchase
3,000 shares of Common Stock on the fifth business day after each annual meeting
of stockholders of the Company, commencing with the 1995 Annual Meeting.
Accordingly, on November 25, 1997, each of Messrs. Hazard, Stone, Nichols,
Rittereiser and Kamen were granted an option to purchase 3,000 shares of Common
Stock at an exercise price of $6.125. All such options vested and became
immediately exercisable upon grant and have an exercise price equal to 100% of
the fair market value of a share of Common Stock on the grant date.
Compensation of Executive Officers
The following sections set forth and discuss the compensation paid or
awarded during the last three years to the Company's Chief Executive Officer and
the four most highly compensated executive officers who earned in excess of
$100,000 during fiscal 1998.
43
Summary Compensation Table
The following table shows for the fiscal years ended June 30, 1996, June
28, 1997 and June 27, 1998, the annual compensation paid by the Company to the
Chief Executive Officer and the four most highly compensated executive officers
who earned in excess of $100,000 during fiscal 1998.
Long Term Compensation
-------------------------------------------
Annual Compensation Awards Payouts
--------------------------------------------- -------------------------------- ----------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Restricted Underlying
Name and Salary Other Annual Stock Warrants/ LTIP All Other
Principal Position Year ($)(3) Bonus ($) Compensation($) Award($) Options (#) Payouts($) Compensation
- ------------------- ----- ------ --------- --------------- ---------- ------------ ---------- -------------
Paul F. Avery, Jr. ....
President, Chief 1998 19,230(4) -- 1,111(5) -- 75,000(8) -- 120,450(9)
Executive Officer and 1997 183,814(4) -- 3,615(5) -- -- -- 19,350(10)
Chairman of the
Board(1) 1996 223,931 -- 8,774(5) -- 65,000(8) -- 16,400(11)
Salvatore J.
Vinciguerra............ 1998 279,303 -- 2,750 -- -- -- --
Chief Executive
Officer(2) 1997 255,961 -- 5,043(5) -- -- -- --
1996 202,938 -- 6,839(5) -- 50,000(8) -- --
Alvan F.
Chorney ............... 1998 183,974 1,720 1,000(6) -- -- -- --
Vice President and 1997 170,223 5,156 1,000(6) -- -- -- --
General Manager --
Components Division 1996 164,097 5,152 1,000(6) -- -- -- 2,099(12)
William B. Ford .......
Vice President, 1998 150,365 -- -- -- -- -- 5,832(12)
Chief Financial 1997 112,223(4) -- -- -- 30,000(8) -- --
Officer and 1996 -- -- -- -- -- -- --
Treasurer
Thomas J. Uhlig........ 1998 139,839(4) 1,650 -- -- -- -- --
Vice President and 1997 160,154 4,688 2,308(5) -- -- -- --
General Manager--
Systems 1996 28,846(4) -- 962(5) 125,000(7) 15,000(8) -- --
Division
(1) Mr. Avery became the President, Chief Executive Officer and Chairman of
the Board of the Company on June 3, 1998.
(2) Mr. Vinciguerra was the Chief Executive Officer of the Company from June
26, 1996 until June 1, 1998.
(3) Includes all voluntary pre-tax contributions to the Ferrofluidics
Corporation Tax Savings and Deposit and Investment Plan.
(4) This amount represents less than a full year's salary.
(5) This amount represents an automobile allowance.
(6) This amount represents an allowance for medical and health expenses
incurred by Mr. Chorney in excess of amounts covered by the Company's
group health plan.
(7) Represents 10,000 shares of restricted stock which had a market value as
of the date of grant of $125,000. Seventy-five percent (75%) of the
shares were vested on April 22, 1998. In connection with Mr. Uhlig's
resignation from the position of Vice President and General
Manager--Systems Division on April 30, 1998, and pursuant to the
provisions of the Company's 1994 Restricted Stock Plan, the remaining
2,500 restricted shares held by Mr. Uhlig were forfeited.
(8) Represents stock options.
(9) This amount includes the full dollar value of insurance premiums paid by
the Company on behalf of Mr. Avery with respect to term life insurance in
the amount of $10,450 and payments made to Mr. Avery pursuant to a
consulting agreement with the Company in the amount of $110,000. See
"Employment Agreements" below.
44
(10) This amount includes the full dollar value of insurance premiums paid by
the Company on behalf of Mr. Avery with respect to term life insurance in
the amount of $9,350 and payments made to Mr. Avery pursuant to a
consulting agreement with the Company in the amount of $10,000. See
"Employment Agreements" below.
(11) This amount represents the full dollar value of insurance premiums paid
by the Company on behalf of Mr. Avery with respect to term life
insurance.
(12) These amounts represent reimbursement by the Company to Mr. Ford and Mr.
Chorney of expenses incurred in connection with their relocation to New
Hampshire.
Option Grants in Last Fiscal Year
- ---------------------------------
The following table sets forth each grant of stock options during fiscal
1998 to the Chief Executive Officer and each other executive officer named in
the Summary Compensation Table. No stock appreciation rights ("SARs") have been
granted.
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term(5)
----------------------------------------------------------------- -------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options Employees in Base Price
Name Granted(#)(3) Fiscal Year(4) ($/Sh) Expiration Date 5% ($) 10%($)
- ---- ------------- -------------- ------ --------------- ------ ------
Paul F. Avery, Jr.(1) 75,000(6) 78.95% $4.09 6/3/2008 192,913 488,880
Salvatore J. Vinciguerra(2) -- -- -- -- -- --
Alvan F. Chorney -- -- -- -- -- --
William B. Ford -- -- -- -- -- --
Thomas J. Uhlig -- -- -- -- -- --
- ------------------
(1) Mr. Avery became the President, Chief Executive Officer and Chairman of
the Board of the Company on June 3, 1998.
(2) Mr. Vinciguerra was the Chief Executive Officer of the Company from June
26, 1996 until June 1, 1998.
(3) All options were granted pursuant to the 1995 Incentive Plan.
(4) Percentages are based on a total of 95,000 shares of Common Stock
underlying all options granted to employees of the Company in fiscal
1998.
(5) Represents the value of the options granted at the end of the option
terms if the price of the Company's Common Stock were to appreciate
annually by 5% and 10% respectively. There is no assurance that the stock
price will appreciate at the rates shown in the table. If the stock price
appreciates, the value of stock held by all shareholders will increase.
(6) Such option became fully vested and immediately exercisable on the date
of grant, June 3, 1998.
45
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Values
- --------------------------------------------------------------------------
The following table sets forth the shares acquired and the value realized
upon exercise of stock options during fiscal 1998 by the Chief Executive Officer
and each other executive officer named in the Summary Compensation Table and
certain information concerning the number and value of unexercised stock
options. There are currently no outstanding SARs.
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Options/Warrants FY-END(#) Warrants at FY-End(#)(3)
Shares
Acquired on Value
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ----------- ----------- ------------- ----------- -------------
Paul F. Avery, Jr. (1) -- -- 205,000 -- -- --
Salvatore J.
Vinciguerra (2) -- -- 50,000 50,000 -- --
Alvan F. Chorney -- -- 18,750 6,250 -- --
William B. Ford -- -- 7,500 22,500 -- --
Thomas J. Uhlig -- -- -- -- -- --
- ------------------
(1) Mr. Avery became the President, Chief Executive Officer and Chairman of
the Board of the Company on June 3, 1998.
(2) Mr. Vinciguerra was the Chief Executive Officer of the Company from June
26, 1996 until June 1, 1998.
(3) Equal to the market value of shares covered by in-the-money options on
June 27, 1998, less the aggregate options exercise price. Options are
in-the-money if the market value of the shares covered thereby is greater
than the exercise price of the options.
Report of the Compensation Committee of the Board of Directors on Executive
Compensation
The members of the Compensation Committee of the Board of Directors of the
Company, whose names are set forth below, have prepared the following report on
the Company's executive compensation policies and philosophy for fiscal 1998.
General
The Compensation Committee consists of Mr. Rittereiser and Mr. Hazard, both
of whom are non-employee Directors. The Compensation Committee is generally
responsible for developing the Company's executive and management compensation
policies, including awards of equity-based compensation. The Company's executive
compensation program is designed to provide competitive levels of compensation,
reward above-average individual performance and assist the Company in attracting
and retaining qualified management. Where applicable, the Compensation Committee
takes into account employment agreements between an executive officer and the
Company. See "Employment Agreements" below. Mr. Vinciguerra, the Chief Executive
Officer of the Company from June 26, 1996 until June 1, 1998 made, and Mr.
Avery, the Chief Executive Officer of the Company since June 3, 1998, makes
general recommendations to and reviews with the Compensation Committee salary
increases and bonus compensation of executive officers and employees other than
himself.
46
Compensation Policy Review
During the fiscal year ended June 30, 1995, the Compensation Committee,
together with certain members of management and the Board of Directors,
completed a review of the Company's policies regarding executive compensation.
The Compensation Committee's primary objectives in evaluating the Company's
executive compensation philosophy were to (i) review base salaries, cash bonuses
and short-term and long-term incentives for executive officers based upon a
survey of compensation for executive officers in a group of comparable
high-technology companies, and (ii) to develop an appropriate methodology for
structuring long-term incentive awards to ensure that such awards more closely
align the interests of the executive officers with those of the Company's
stockholders.
To accomplish the aforementioned objectives and goals, the Compensation
Committee retained an independent compensation consulting firm (the
"Consultant") which conducted a survey of executive compensation levels and
practices of companies within a proxy peer group (the "Peer Group") of companies
of similar size to the Company. The Peer Group consisted of seven companies in
the specialty machinery industry having annual revenues of $30 million to $50
million. Based upon the results of the Consultant's survey, the Compensation
Committee has made certain adjustments to the Company's compensation policies
during fiscal 1998 which are discussed below.
Compensation Policies for Executive Officers
Base Salary. The annual base salary and base salary adjustments for
executive officers are determined by the Compensation Committee in its
discretion and are targeted according to the salaries of executives holding
similar offices and having similar responsibilities within the Company's
industry segment. The Compensation Committee also considers factors such as
industry experience and executive retention. Annual salary adjustments for
executive officers are determined by evaluating the competitive marketplace, the
performance of the Company, the performance of the executive officer and any
change in the responsibilities assumed by the executive officer. Salary
adjustments are normally determined and made on an annual basis. The base
salaries of Salvatore J. Vinciguerra, the Chief Executive Officer of the Company
from June 26, 1996 until June 1, 1998, and Paul F. Avery, Jr., the current Chief
Executive Officer of the Company, were established pursuant to employment
agreements with the Company, which are described below in "Employment
Agreements", and were based on the foregoing criteria.
Cash Bonuses. As a result of the Compensation Committee's review of
executive compensation policies, the Compensation Committee recommended that the
Company adopt a cash incentive program (the "Cash Incentive Plan") to better
align the Company's total cash compensation for its executives with the median
of the Consultant's survey of the Peer Group. The Cash Incentive Plan, which
became effective on July 1, 1995, is intended to encourage, recognize and reward
performance by executives by providing cash compensation based upon the
achievement of a pre-determined annual operating budget and a combination of
quantitative and qualitative measures (the relative weights of which are
determined in the sole discretion of the Compensation Committee when it performs
its performance review), including orders received (for marketing managers),
percent defect rate (for production managers), timeliness and quality of monthly
reporting (for accounting managers) and effectiveness of improvement projects
(for all managers). The annual operating budget is determined by the
Compensation Committee and the Board of Directors prior to the beginning of the
fiscal year and the total pool from which cash incentives may be awarded under
the plan is formed based upon the achievement of the operating profits contained
in the annual operating budget. The Chief Executive Officer is eligible to
receive up to 35% of his respective base salary depending upon the extent to
which the operating profits contained in the annual operating budget are
achieved, while executive officers other than the Chief Executive Officer are
eligible to receive up to either 20% or 25% of their respective base salaries
depending upon the extent to which the operating profits contained in the annual
operating budget are achieved.
Based upon the foregoing criteria, no executive officers of the Company
received a cash bonus under the Cash Incentive Plan for fiscal 1998 performance.
Although cash bonuses generally are awarded pursuant to the Cash Incentive Plan,
the Compensation Committee, in its discretion, may award a cash bonus to an
executive officer for outstanding performance based upon individual performance
reviews (which may or may not take into account specific performance measures
relative to that executive officer), retention considerations and general
industry practice. During fiscal 1998, the Compensation Committee exercised its
discretion and awarded cash bonuses outside of the Cash Incentive Plan in the
amount of $1,720 to Mr. Chorney and $1,650 to Mr. Uhlig in view of their
individual performances in fiscal 1998.
47
Equity and Equity-Based Incentives. Equity and equity-based incentive
awards are designed to attract and retain executives who can make significant
contributions to the Company's success, reward executives for such significant
contributions and give executives a longer-term incentive to increase
shareholder value. The size and frequency of equity and equity-based incentive
awards are determined by the Compensation Committee in its discretion, taking
into account individual performance and responsibilities, but without any
specific performance measures. The Compensation Committee also may grant stock
options for executive retention purposes, taking into account, among other
things, general industry practice. To ensure that high levels of performance
occur over the long-term, stock options granted to executives typically vest
over a period of time. All outstanding options have been granted with an
exercise price equal to 100% of the fair market value of the Company's Common
Stock on the grant date.
The 1995 Incentive Plan is the principal vehicle by which the Company
intends to achieve the executive compensation policy objective of providing
long-term incentives to executive officers that will more closely align the
interests of such executives with those of the Company's stockholders. Pursuant
to the 1995 Incentive Plan, the Compensation Committee may grant a variety of
long-term incentive awards based on the Common Stock of the Company, including
stock options (both incentive options and non-qualified options), SARs,
restricted stock, unrestricted stock, performance shares and dividend equivalent
rights. In fiscal 1998, Paul F. Avery, Jr., was granted an option to purchase
75,000 shares of Common Stock. This option became fully vested and immediately
exercisable on the date of grant, June 3, 1998. The Compensation Committee
granted this award to Mr. Avery in connection with his election to the positions
of President, Chief Executive Officer and Chairman of the Board of the Company.
At its discretion, under the Ferrofluidics Corporation Amended and Restated
1994 Restricted Stock Plan (the "1994 Restricted Stock Plan"), the Compensation
Committee may also award restricted stock bonuses to executive officers and
other key employees. Shares of restricted stock granted to executive officers
under the 1994 Restricted Stock Plan vest over a period of time and are subject
to forfeiture in the event an officer's employment with the Company terminates
prior to vesting. Shares of restricted stock are not transferable prior to
vesting. During fiscal 1998, no executive officers of the Company received an
award of restricted stock.
Any value received by an executive officer from a stock option grant and
any increase in the value of stock received as a bonus depends entirely on
increases in the price of the Company's Common Stock.
Other Compensation. The Company provides executive officers and management
with health, retirement and other benefits under plans that are generally
available to the Company's employees.
Compensation of the Chief Executive Officer
Mr. Salvatore J. Vinciguerra, former Chief Executive Officer. Mr.
Vinciguerra, who was Chief Executive Officer of the Company from June 26, 1996
until June 1, 1998, had an employment agreement with the Company, the terms of
which are described below under "Employment Agreements." Mr. Vinciguerra's base
salary was established pursuant to the criteria described above in "Base
Salary."
Mr. Paul F. Avery, Jr., current Chief Executive Officer. Mr. Avery, who
became the Chief Executive Officer of the Company on June 3, 1998, has an
employment agreement with the Company, the terms of which are described below
under "Employment Agreements." Mr. Avery's base salary was established pursuant
to the criteria described above in "Base Salary." In connection with his
election to the position of Chief Executive Officer, President and Chairman of
the Board of the Company, the Compensation Committee awarded Mr. Avery an option
to purchase 75,000 shares of Common Stock which became fully vested and
immediately exercisable on the date of grant, June 3, 1998.
48
Federal Tax Regulations Applicable to Executive Compensation
As a result of Section 162(m) of the Internal Revenue Code (the "Code"),
the Company's deduction of executive compensation may be limited to the extent
that a "covered employee" (i.e., the chief executive officer or one of the four
highest compensated officers who is employed on the last day of the Company's
taxable year and whose compensation is reported in the summary compensation
table) receives compensation in excess of $1,000,000 in such taxable year of the
Company (other than performance-based compensation that otherwise meets the
requirements of Section 162(m) of the Code). The Company intends to take
appropriate action to comply with such regulations, if applicable, in the
future.
Robert P. Rittereiser, Chairman Stephen B. Hazard
Compensation Committee Interlocks and Insider Participation
Mr. Vinciguerra, the Chief Executive Officer and President of the Company
from June 26, 1996 until June 1, 1998, made and Mr. Avery, the Chief Executive
Officer of the Company since June 3, 1998, makes general recommendations to and
reviews with the Compensation Committee the salary increases and bonus
compensation of executives and management other than himself.
Employment Agreements
Avery Employment Agreement
--------------------------
On June 3, 1998, the Company and Mr. Avery entered into an employment
agreement (the "Avery Employment Agreement") that provided for Mr. Avery's
employment as President, Chief Executive Officer and Chairman of the Board of
the Company for one year (the "Initial Term") at a salary of $250,000 per year
subject to (a) a one-year extension upon the written consent of Mr. Avery and
the Company (the "Subsequent Term") and (b) earlier termination for death,
disability, cause, upon 60 days' written notice by either Mr. Avery or the
Company. Pursuant to the Avery Employment Agreement, the Company is required to,
among other things, (i) reimburse Mr. Avery for all reasonable business expenses
incurred by Mr. Avery in the performance of his duties, (ii) provide Mr. Avery
with an automobile for business and personal use and pay or reimburse Mr. Avery
for all expenses associated therewith, and (iii) maintain insurance on Mr.
Avery's life in the amount of $1,000,000, payable as directed by Mr. Avery,
until the expiration of the Initial Term or the Subsequent Term, as applicable,
unless Mr. Avery is terminated by the Company for cause. Pursuant to the Avery
Employment Agreement, Mr. Avery received an option to purchase 75,000 shares,
which option became fully vested and immediately exercisable on the date of
grant, June 3, 1998. In addition, Mr. Avery is entitled to participate in the
health, welfare, retirement and other fringe benefit plans which the Company
makes available to management from time to time.
Pursuant to the Avery Employment Agreement, Mr. Avery may terminate his
employment at any time upon 60 days written notice to the Company and the
Company may terminate Mr. Avery's employment other than for cause (as defined in
the Avery Employment Agreement) at any time upon 60 days' written notice to Mr.
Avery. If Mr. Avery is terminated for cause, he is entitled to any earned but
unpaid salary at the date of termination and the contribution by the Company to
the cost of Mr. Avery's participation in the Company's group medical and dental
insurance plans as permissible under applicable law and plan terms. If the
Company undergoes a change in control (as defined in the Avery Employment
Agreement), and Mr. Avery is terminated, voluntarily or involuntarily, other
than for cause after the date such change in control occurs, Mr. Avery is
entitled to receive an amount equal to the aggregate base salary which Mr. Avery
would have received had he been employed by the Company through (a) the last day
of the Initial Term if such termination occurs during the Initial Term or (b)
the last day of the Subsequent Term if such termination occurs during the
Subsequent Term (the "General Severance Benefits"). If Mr. Avery's employment is
terminated for reasons other than for cause, a change in control of the Company
or voluntary termination by Mr. Avery, Mr. Avery is entitled to receive the
General Severance Benefits as described above. If Mr. Avery dies or becomes
disabled during the term of the Avery Employment Agreement, Mr. Avery's
employment immediately terminates and he is entitled to any earned but unpaid
salary.
49
Under the terms of the Avery Employment Agreement, upon the termination of
Mr. Avery's employment by the Company other than for cause or the expiration of
the Initial Term or the Subsequent Term, as applicable, the Company and Mr.
Avery shall immediately enter into an agreement pursuant to which Mr. Avery
shall be engaged as a consultant to the Company. Upon the engagement of Mr.
Avery as a consultant as provided by the foregoing, the Company may also request
that Mr. Avery continue to serve as Chairman of the Board. If the Company so
requests, and if Avery agrees to so serve, the Company shall pay Mr. Avery an
annual retainer of $50,000 for such service for so long as Mr. Avery serves in
such position. Such retainer shall be in addition to any and all payments to be
made to Avery with respect to his consultancy. The terms an conditions of such
consultancy shall be identical to those set forth in the Consulting Agreement
dated May 1, 1997 between the Company and Mr. Avery (the "Avery Consulting
Agreement"), which terminated upon Mr. Avery's engagement by the Company as
President, Chief Executive Officer and Chairman on the Board of Directors on
June 3, 1998. The relevant provisions of the Avery Consulting Agreement are
described below.
On May 1, 1997, the Company and Mr. Avery entered into the Avery Consulting
Agreement, pursuant to which Mr. Avery performed such consulting, advisory and
related services for the Company as were reasonably requested by the Company
form time to time for a consulting fee of $10,000 per month for a term of three
years, which term could be extended upon mutual written agreement. Pursuant to
the Avery Consulting Agreement, all shares of restricted stock granted to Mr.
Avery became fully vested as of the date of the Avery Consulting Agreement and
all options to purchase stock of the Company granted to Mr. Avery and held by
Mr. Avery as of the date of the Avery Consulting Agreement became fully vested
and exercisable until the expiration of such options. Pursuant to the Avery
Consulting Agreement, the Company was required to reimburse Mr. Avery for all
reasonable business expenses incurred by Mr. Avery in the performance of his
duties. Mr. Avery was entitled to participate in and enjoy the benefit of the
Company's retirement plans, but was not entitled to participate in the health,
welfare, retirement and other fringe benefit plans, which the Company made
available to management from time to time, except as his own expense.
Pursuant to the Avery Consulting Agreement, Mr., Avery could terminate his
consultancy at any time upon 60 days notice to the Company and the Company could
terminate Mr. Avery's consultancy other than for cause (as defined in the Avery
Consulting Agreement) at any time upon 60 days written notice to Mr. Avery. If
Mr. Avery was terminated for cause, he would have been entitled to any earned
but unpaid consulting fees at the date of termination. If Mr. Avery died or
became disabled during the term of the Avery Consulting Agreement, Mr. Avery's
consultancy would have immediately terminated. If Mr. Avery's employment was
terminated for reasons other than for cause or due to death or disability, the
Company would have continued to pay Mr. Avery his consulting fees for the
duration of the term of the Avery Consulting Agreement.
Vinciguerra Employment Agreements
---------------------------------
On April 1, 1995, the Company and Mr. Vinciguerra, who became President and
Chief Operating Officer of the Company on January 1, 1995, entered into an
employment agreement (the "Vinciguerra Employment Agreement") that provides for
Mr. Vinciguerra's employment as President and Chief Operating Officer of the
Company at a salary of $185,000 per year, subject to an increase to $200,000 per
year upon six (6) months of satisfactory performance, as determined by the Chief
Executive Officer. Pursuant to the Vinciguerra Employment Agreement, Mr.
Vinciguerra received 75,000 shares of restricted stock on January 1, 1995, which
vest ratably over three years beginning January 1, 1996. Pursuant to the
Vinciguerra Employment Agreement, the Company is required to reimburse Mr.
Vinciguerra for all reasonable business expenses incurred by Mr. Vinciguerra in
the performance of his duties. In addition, Mr. Vinciguerra is entitled to
participate in the health, welfare, retirement and other fringe benefit plans
which the Company makes available to management from time to time.
Pursuant to the Vinciguerra Employment Agreement, Mr. Vinciguerra may
terminate his employment upon 60 days written notice to the Company and the
Company may terminate Mr. Vinciguerra's employment at any time other than for
cause (as defined in the Vinciguerra Employment Agreement) upon notice to Mr.
Vinciguerra. If the Company terminates Mr. Vinciguerra's employment other than
for cause, he is entitled to a severance payment of six months' salary if he was
employed for less than six months and twelve months' salary if he was employed
for more than six months and the Company will continue pay Mr. Vinciguerra the
salary and other benefits under the Vinciguerra Employment Agreement to the end
of its term. If Mr. Vinciguerra dies or becomes disabled during the term of the
Vinciguerra Employment Agreement, Mr. Vinciguerra's employment immediately
terminates and he is
50
entitled to any earned but unpaid salary. If the Company undergoes a change in
control (as defined in the Vinciguerra Employment Agreement) and Mr. Vinciguerra
(i) is terminated by the Company or its successor for any reason other than
death, disability or cause, or (ii) resigns because (A) there occurs a
significant change in the nature or scope of Mr. Vinciguerra's responsibilities,
authorities, powers, functions or duties as compared to the responsibilities,
authorities, powers, functions or duties exercised by Mr. Vinciguerra prior to
the change in control, (B) Mr. Vinciguerra is required to relocate outside of
his current county of residence in order to maintain his employment after the
change in control or (C) there is a decrease in the total annual compensation
payable to Mr. Vinciguerra after the change in control, then Mr. Vinciguerra is
entitled to an amount equal to eighteen months' base salary at the rate then in
effect under the Vinciguerra Employment Agreement. If Mr. Vinciguerra is
terminated for cause, he is entitled to any earned but unpaid salary at the date
of termination and the contribution by the Company to the cost of Mr.
Vinciguerra's participation in the Company's group medical and dental insurance
plans as permissible under applicable law and plan terms.
On May 17, 1996, the Company and Mr. Vinciguerra entered into an Amended
and Restated Employment Agreement (the "Amended and Restated Vinciguerra
Employment Agreement") which amended and restated the Vinciguerra Employment
Agreement. Pursuant to the Amended and Restated Vinciguerra Employment
Agreement, Mr. Vinciguerra was named as the Chief Executive Officer of the
Company, but is no longer the Chief Operating Officer of the Company. In
addition, pursuant to the Amended and Restated Vinciguerra Employment Agreement,
Mr. Vinciguerra received an option to purchase 50,000 shares of the Company's
Common Stock at an exercise price of $13.00, which option vests and becomes
exercisable ratably over four years beginning on May 17, 1998. If Mr.
Vinciguerra's employment is terminated by reason of death or by the Company for
any reason other than for cause (as defined in the Company's 1994 Restricted
Stock Plan or 1995 Stock Option and Incentive Plan, as appropriate), any
restricted stock held by Mr. Vinciguerra shall become fully vested and any
option held by Mr. Vinciguerra shall become fully vested and exercisable and may
thereafter be exercised by Mr. Vinciguerra or Mr. Vinciguerra's legal
representative or legatee until the expiration date of such option. If Mr.
Vinciguerra's employment is terminated by the Company for cause, any shares of
restricted stock that shall have not vested as of the date of such termination
shall either be repurchased by the Company or forfeited by Mr. Vinciguerra, and
any such option held by Mr. Vinciguerra shall immediately terminate and be of no
further force and effect. If Mr. Vinciguerra terminates his employment for any
reason other than death, any shares of restricted stock that shall have not
vested as of the date of such termination shall either be repurchased by the
Company or forfeited by Mr. Vinciguerra and any such option held by Mr.
Vinciguerra may thereafter be exercised, to the extent it was exercisable on the
date of such termination, for a period of three months or until the expiration
date of such option, whichever is longer. All other provisions of the
Vinciguerra Employment Agreement remain in effect.
On June 1, 1998, Mr. Vinciguerra resigned as President and Chief Executive
Officer of the Company. Accordingly, the Amended and Restated Vinciguerra
Employment Agreement was terminated on that day.
Ford Employment Agreement
-------------------------
On September 23, 1996, the Company and Mr. Ford entered into an employment
agreement (the "Ford Employment Agreement") that provides for Mr. Ford's
employment as Vice President and Chief Financial Officer of the Company at a
salary of $140,000 per year, subject to annual salary reviews by the
Compensation Committee or the President of the Company, as appropriate. Pursuant
to the Ford Employment Agreement, Mr. Ford received an option to purchase 30,000
shares of the Company's common stock at an exercise price of $9.38, which option
vests and becomes exercisable ratably over four years beginning on September 23,
1997. Pursuant to the Ford Employment Agreement, the Company reimbursed Mr. Ford
for all reasonable moving expenses in connection with Mr. Ford's relocation to
New Hampshire and is required to reimburse Mr. Ford for all reasonable business
expenses incurred by Mr. Ford in the performance of his duties. In addition, Mr.
Ford is entitled to participate in the health, welfare, retirement and other
fringe benefit plans which the Company makes available to management from time
to time.
Pursuant to the Ford Employment Agreement, the Company or Mr. Ford may
terminate Mr. Ford's employment at will upon one year's written notice. If the
Company undergoes a change of control (as defined in the Ford Employment
Agreement) and Mr. Ford is terminated by the Company other than for cause within
12 months after such change of control occurs, Mr. Ford shall be entitled to an
amount equal to 12 months' salary at the rate then in effect. If Mr. Ford dies
or becomes disabled during the term of the Ford Employment Agreement, Mr. Ford's
employment automatically terminates and he is entitled to any earned but unpaid
salary. If Mr. Ford is
51
terminated for cause (as defined in the Ford Employment Agreement), he is
entitled to any earned but unpaid salary at the date of termination and the
contribution by the Company to the cost of Mr. Ford's participation in the
Company's group medical and dental insurance plans as permissible under
applicable law and plan terms.
Chorney Severance Agreement
---------------------------
The Company has an agreement with Mr. Chorney, dated October 1, 1993, that
provides Mr. Chorney with certain severance benefits in the event that his
employment is terminated by the Company other than by reason of death,
disability or cause. Pursuant to this agreement, if Mr. Chorney's employment is
terminated other than for any of the aforementioned reasons, he is entitled to
receive for a period of eighteen months an aggregate amount equal to the greater
of (i) $225,000 and (ii) the annual base salary which he would have received
over an eighteen-month period commencing on the date of such termination.
Stockholder Return Performance Graph
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total stockholder return on the Company's Common Stock, based on
the market price of the Company's Common Stock and assuming reinvestment of
dividends, with the cumulative total return of companies within the NASDAQ Stock
Market and the companies within the Dow Jones Industrial Technology Index. The
calculation of total cumulative return assumes a $100 investment in the
Company's Common Stock, the NASDAQ Stock Market and the Dow Jones Industrial
Technology Index on July 1, 1993. The comparisons in this table are historical
and are not intended to forecast or be indicative of possible future performance
of the Common Stock of the Company.
52
Stockholder Return Performance Graph
Ferrofluidics
Performance Graph Plot Points
27-Jun-98
June 30, 93 June 30, 94 June 30, 95 June 30, 96 June 28, 97 June 27, 98
----------- ----------- ----------- ----------- ----------- -----------
DJIA 100 108.41 154.42 152.71 164.1 144.09
NASDAQ 100 100.96 134.77 173.03 210.38 277.61
FERRO 100 38.89 71.3 100 62.04 30.79
53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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.
The following table sets forth, to the best knowledge and belief of the
Company, certain information regarding the beneficial ownership of the Company's
Common Stock as of October 1, 1998 by (i) each person known by the Company to be
the beneficial owner of more than 5% of the outstanding Common Stock, (ii) each
of the Company's Directors and nominees, (iii) each of the named executive
officers in the Summary Compensation Table and (iv) all of the Company's
executive officers and Directors as a group.
Shares
Directors, Executive Officers Beneficially Percent of
and 5% Stockholders Owned(1) Class(2)
- ----------------------------------------------------------------------- ------------ ----------
Pioneering Management Corporation...................................... 401,000(3) 6.45%
60 State Street
Boston, MA 02114
Paul F. Avery, Jr...................................................... 242,000(4) 3.89%
Salvatore J. Vinciguerra............................................... 145,000(5) 2.33%
Alvan F. Chorney....................................................... 18,750(6) *
William B. Ford........................................................ 22,000(7) *
Thomas J. Uhlig........................................................ 6,609 *
Howard F. Nichols...................................................... 22,725(8) *
Dean Kamen............................................................. 15,850(9) *
Robert P. Rittereiser.................................................. 15,850(10) *
Stephen B. Hazard...................................................... 12,000(11) *
Dennis R. Stone........................................................ 14,100(12) *
All directors and executive officers
as a group (10 persons).............................................. 514,884(13) 8.28%
- --------------------------
* Less than 1%.
(1) Beneficial share ownership is determined pursuant to Rule 13d-3 under the
Securities Exchange Act of 1934, as amended. Accordingly, a beneficial
owner of a security includes any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship or
otherwise has or shares the power to vote such security or the power to
dispose of such security. The amounts set forth above as beneficially
owned include shares of Common Stock owned, if any, by spouses and
relatives living in the same home as to which beneficial ownership may be
disclaimed. The amounts set forth above as beneficially owned also
include shares of Common Stock which such persons had the right to
acquire within 60 days of October 1, 1998 pursuant to stock options.
54
(2) Percentages are calculated on the basis of 6,218,207 shares of Common
Stock outstanding as of October 1, 1998, together with applicable stock
options for each stockholder.
(3) Based on Amendment No. 4 to Schedule 13G filed with the SEC on January 6,
1998 and other information available to the Company. Pioneering
Management Corporation has sole voting power with respect to all 401,000
shares.
(4) Includes 205,000 shares of Common Stock which Mr. Avery may acquire upon
the exercise of stock options, within 60 days of October 1, 1998.
(5) Includes 50,000 shares of Common Stock which Mr. Vinciguerra may acquire
upon the exercise of stock options, within 60 days of October 1, 1998.
(6) Includes 18,750 shares of Common Stock which Mr. Chorney may acquire upon
the exercise of stock options, within 60 days of October 1, 1998.
(7) Includes 15,000 shares of Common Stock which Mr. Ford may acquire upon
the exercise of Stock Options, within 60 days of October 1, 1998.
(8) Includes 17,350 shares of Common Stock which Mr. Nichols may acquire upon
the exercise of stock options, within 60 days of October 1, 1998.
(9) Includes 15,100 shares of Common Stock which Mr. Kamen may acquire upon
the exercise of stock options, within 60 days of October 1, 1998.
(10) Includes 15,100 shares of Common Stock which Mr. Rittereiser may acquire
upon the exercise of stock options, within 60 days of October 1, 1998.
(11) Includes 9,000 shares of Common Stock which Mr. Hazard may acquire upon
the exercise of stock options within 60 days of October 1, 1998.
(12) Includes 9,000 shares of Common Stock which Mr. Stone may acquire upon
the exercise of stock options within 60 days of October 1, 1998.
(13) Includes shares of Common Stock which may be acquired by such persons
upon the exercise of stock options, within 60 days of October 1, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Robert Rittereiser, a Director of the Company, is the Chairman of the Board
of Directors and Chief Executive Officer of Gruntal & Co., L.L.C. In connection
with the Sale, Gruntal & Co., L.L.C., billed the Company approximately $280,600
for its services as investment banker to the Company.
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 27, 1998 and June 28, 1997 and June 30, 1996
Page
----
Schedule II - Valuation and Qualifying Accounts 61
55
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 27, 1998.
(c) Exhibits
--------
3.1 Restated Articles of Organization of the Registrant (incorporated by
reference to Exhibit 2.1 to the Registrant's Registration Statement on
Form S-18 (Registration No. 2-72394-B), filed May 19, 1981 (the "1981
Registration Statement").
3.2 Articles of Amendment, filed November 19, 1980, increasing the authorized
shares of Common Stock (incorporated by reference to Exhibit 2.2 to the
1981 Registration Statement).
3.3 Articles of Amendment, filed February 19, 1981, further increasing the
authorized shares of Common Stock (incorporated by reference to Exhibit
2.3 to the 1981 Registration Statement).
3.4 Articles of Amendment, filed November 21, 1985, further increasing the
authorized shares of Common Stock (incorporated by reference to Exhibit
4E to the Registrant's Registration Statement on Form S-2 (Registration
No. 33-1000), filed October 18, 1985).
3.5 Articles of Amendment, filed November 25, 1987, eliminating certain
liabilities of directors and reducing the vote required to effect certain
corporate actions (incorporated by reference to Exhibit 4E to the
Registrant's Form 10-K for the year ended 6/30/88).
3.6 Articles of Amendment, filed November 14, 1989, effecting reverse stock
split and amending terms of Preferred Stock (incorporated by reference to
Exhibit 3.6 to the Registrant's Registration Statement on Form S-3
(Registration No. 33-33736), filed March 5, 1990 (the "1990 Registration
Statement").
3.7 By-Laws of the Registrant (incorporated by reference to Exhibit 4G to the
Registrant's Form 10K for the year ended 6/30/90).
3.8 Certificate of Vote of Directors Establishing the Series A Junior
Participating Cumulative Preferred Stock, par value $.001 per share,
dated August 3, 1994.(1)
4.1 Shareholder Rights Agreement, dated as of August 3, 1994, between the
Registrant and American Stock Transfer and Trust Company (incorporated by
reference to Exhibit 4.1 to Registrant's current report on Form 8-K dated
August 3, 1994).(1)
10.1 Revolving Loan and Security Agreement, dated June 30, 1994, by and among
the Registrant and Bank of New Hampshire.
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)
56
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)
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)
57
10.26 Employment Agreement, dated September 23, 1996, between the Registrant
and William B. Ford.(4)
10.27 First Amendment to Note and Loan Agreement, dated December 3, 1996, by
and between the Registrant and Bank of New Hampshire.(4)
10.28 Amended Master Term Note, dated December 3, 1996, by and between the
Registrant and Bank of New Hampshire.(4)
10.29 Amendment to Mortgage, dated December 3, 1996, by and between the
Registrant and Bank of New Hampshire.(4)
10.30 Amendment to Assignment of Leases, dated December 3, 1996, by and between
the Registrant and Bank of New Hampshire.(4)
10.35 Form of Stock Purchase Agreement between the Registrant and certain
Selling Stockholders (incorporated by reference to Exhibit 10.53 to
Amendment No. 1, filed April 9, 1992, to the Registrant's Registration
Statement on Form S-3 (Registration No. 33-46888), filed April 1, 1992
(the "April 1992 Registration Statement").
10.36 Form of Stock Purchase Agreement between the Registrant and certain
Selling Stockholders (incorporated by reference to Exhibit 10.54 to
Amendment No. 2, filed April 30, 1992, to the April 1992 Registration
Statement).
10.37 Form of Stock Purchase Agreement between the Registrant and certain
Selling Stockholders (incorporated by reference to Exhibit 10.55 to
Amendment No. 2 to the April 1992 Registration Statement).
10.55 Termination Agreement, dated November 25, 1993, between Registrant and
Fuji Seiki, Inc. for the purpose of termination of The Patent, Technical
Information and Trademark License Agreement, dated March 30, 1993,
between the Registrant and Fuji Seiki, Inc.(4)
10.56 Preferred Vendor Agreement, dated November 30, 1993, between the
Registrant and Fuji Seiki, Inc.(4)
10.57 Patent, Technical Information and Trademark License Agreement, dated
November 30, 1993, between the Registrant and Fuji Seiki, Inc.(4)
10.58 Agreement, dated March 8, 1993, among the Registrant, Fuji Seiki, Inc.,
VSE Austria GmbH, and AP&T GmbH for the purchase of 80% of VSE GmbH by
AP&T GmbH.(4)
10.59 Letter Agreement, dated September 15, 1993, between the Registrant and
Dr. Ronald Moskowitz concerning Dr. Moskowitz' retirement from
Ferrofluidics.(4)
10.62 Indemnification Agreement, dated October 1, 1993, between the Registrant
and Alvan F. Chorney.(4)
10.63 Indemnification Agreement, dated October 1, 1993, between the Registrant
and Stephen P. Morin.(2)
10.64 Severance Agreement dated October 1, 1993, between the Registrant and
Alvan F. Chorney.(4)
10.66 Amended and Restated Insurance Loan Agreement, dated June 30, 1991,
between the Registrant and Ronald Moskowitz (incorporated by reference to
Exhibit 10R to the Registrant's Form 10-K for the year ended 6/30/91).
10.67 Amended and Restated Insurance Loan Agreement, dated May 31, 1989,
between the Registrant and Frank Bloom (incorporated by reference to
Exhibit 10.37 to the 1990 Registration Statement).
58
10.68 Form of Common Stock Purchase Warrant -- directors and key employees
(incorporated by reference to Exhibit 10T to the Registrant's Form 10-K
for the year ended 6/30/88).
10.69 Form of Common Stock Purchase Warrant -- employees (incorporated by
reference to Exhibit 10U to the Registrant's Form 10-K for the year ended
6/30/88).
10.70 1984 Non-Qualified Stock Option Plan, as amended through December 15,
1992.(4)
10.71 1983 Employee Stock Purchase Plan, as amended through December 14, 1990
(incorporated by reference to Exhibit 4 to Post-Effective Amendment No.
1, filed January 23, 1991, to the Registrant's Registration Statement on
Form S-8 (Registration No. 2-95090)).
10.72 Settlement Agreement and Release, dated June 30, 1993, between Nippon
Ferrofluidics Corporation, Akira Yamamura, Koichi Goto, Yoshitada
Akahori, Tadao Ishizawa, Atsumi Nakamura, Nobuo Yamamura, past and
present members of NFC's Board of Directors and the Registrant.(4)
10.73 Stock Subscription Agreement, dated June 30, 1993 between the Registrant
and Nippon Ferrofluidics Corporation pursuant to the acquisition of
Nippon Ferrofluidics Corporation Common Stock by Ferrofluidics.(4)
10.74 Superseding 1993 Fluids License Agreement, dated June 30, 1993, between
the Registrant and Nippon Ferrofluidics Corporation.(4)
10.75 Asset Purchase Agreement, dated September 23, 1998, by and between the
Registrant and General Signal Technology Corporation.(5)
10.76 Employment Agreement, dated June 3, 1998, between the Registrant and Paul
F. Avery, Jr.(5)
21 Subsidiaries of the Registrant(5)
23 Consent of Ernst & Young LLP(5)
27.1 Financial Data Schedule for 1998(5)
27.2 Financial Data Schedule for 1997, as restated(5)
27.3 Financial Data Schedule for 1996, as restated(5)
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 Incorporated by reference to the designated exhibit of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 28, 1997.
5 Filed herewith.
59
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 8th day of
October, 1998.
Ferrofluidics Corporation
By: /s/ Paul F. Avery, Jr.
--------------------------------------
Paul F. Avery, Jr.
President, Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
Signatures Title Dated signed
- ---------- ----- ------------
/s/ Paul F. Avery, Jr. President, Chief Executive Officer and 10/8/98
- ------------------------------- Chairman of the Board (Principal
Paul F. Avery, Jr. Executive Officer)
/s/ William B. Ford Vice President and Chief Financial 10/8/98
- ------------------------------- Officer (Principal Financial Officer)
William B. Ford
/s/ Stephen B. Hazard Director 10/8/98
- -------------------------------
Stephen B. Hazard
/s/ Dean Kamen Director 10/8/98
- -------------------------------
Dean Kamen
/s/ Howard F. Nichols Director 10/8/98
- -------------------------------
Howard F. Nichols
/s/ Robert P. Rittereiser Director 10/8/98
- -------------------------------
Robert P. Rittereiser
/s/ Dennis R. Stone Director 10/8/98
- -------------------------------
Dennis R. Stone
60
FERROFLUIDICS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS Years Ended
June 27, 1998, June 28, 1997 and June 30, 1996
Balance at Charges Balance at
Beginning To Deductions End of
of Period Expenses And Other (1) Period
--------- -------- ------------- ----------
1998
Reserve for doubtful accounts - trade $199,000 $185,000 $55,000 $329,000
========= ======== ======== ========
1997
Reserve for doubtful accounts - trade $320,000 $50,000 $171,000 $199,000
========= ======== ======== ========
1996
Reserve for doubtful accounts - trade $357,000 $28,000 $65,000 $320,000
========= ======== ======== ========
(1) Uncollectible accounts written off, net of recoveries.
61